INNOTEC LLC, Plaintiff, v. VISIONTECH SALES, INC., et al., Defendants. VISIONTECH SALES, INC., Counterclaim Plaintiff, v. INNOTEC, et al., Counterclaim Defendants.
Civil Action No. 3:17CV00007
IN THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF VIRGINIA CHARLOTTESVILLE DIVISION
JUL 20 2018
Hon. Glen E. Conrad, Senior United States District Judge
MEMORANDUM OPINION
This case is presently before the court on the defendants’ motion for partial judgment on the pleadings, partial summary judgment, or, in the alternative, to compel arbitration as to Count I of the plaintiff‘s complaint. For the following reasons, the court concludes that Count I must be arbitrated. Accordingly, the court will grant the defendants’ motion to compel arbitration and deny without prejudice its motion for partial judgment on the pleadings or for partial summary judgment with respect to that count.
Background
I. The Parties
Plaintiff Innotec LLC (“Innotec“) is a Colorado limited liability comрany based in Lafayette, Colorado that manufactures and supplies electrical and mechanical components. Allen Ting, a Colorado resident, is the managing member of Innotec. Defendant Visiontech
II. Innotec‘s Complaint and the Agreement on which Count I is Based
On February 1, 2017, Innotec filed the instant action against Visiontech, VSG HK, and Perrault, seeking to obtain payment for products ordered from Innotec. The complaint contains five counts: (1) “Breach of Contract by Visiontech — For the sale of goods pursuant to the Exclusivity Agreement“; (2) “Breach of Contract by Visiontech — Unpaid invoices for the sale of goods and open purchase orders“; (3) “Unjust Enrichment against Visiontech“; (4) “Breach of Contract by VSG HK“; and (4) “Personal Liability against Owners of Visiontech and VSG HK.” Compl. 8-12, Docket No. 1.
The first count is the subject of the instant motion. In Count I, Innotec alleges that Visiontech breached the terms of an Exclusivity Agreement by failing to pay two invoices issued by Innotec for goods sold under the agreement:
In the Exclusivity Agreement, Visiontech, as “Buyer,” and Innotec, as “Seller,” agreed to enter into an exclusive agreement for the purchase of all Vivoplay Charge Adapters . . . . The terms of such purchases are to be in accordance with the Seller‘s quotation dated March 28, 2013. Payment is required by wire or by check to the order of Innotec as further set forth therein. Should the Buyer fail to pay for the goods when due, the Seller has the option to treat such failure as a material breach of the Exclusivity Agreement, and seek legal remedies.
The Exclusivity Agreement also provides that in the event of a dispute related to the agreement, the unsuccessful party shall pay to the successful party, in additional to all sums that either party
may be called on to pay, a reasonable sum for the successful party‘s attorney fees . . . . In reliance on the Exclusivity Agreement, Visiontech made two orders of Vivoplay Charger Adapters from Innotec. Innotec filled such orders, and delivered such goods to Visiontech, and they were accepted by Visiontech without protest and are conforming in all material respects. Innotec has in turn delivered twо invoices for payment . . . .
Notwithstanding the above facts and obligations, Visiontech has failed to make payment of the invoices, and is therefore in breach of contract, including the terms of the Exclusivity Agreement.
Id. at ¶¶ 14-17. Based on the foregoing allegations, Innotec seeks to recover the amounts due under the invoices, as well as “its attorneys’ fees incurred herein.” Id. at 9.
Innotec submitted a copy of the Exclusivity Agreement as an exhibit to the complaint. The Exclusivity Agreement indicates that it was “made effective as of March 28, 2013, between Innotec Energy Systems LLC . . . (‘Seller‘), and Visiontech Sales, Inc. . . . (‘Buyer‘).” Compl. Ex. B at 1, Docket No. 1-2. Thе agreement later identifies the “Seller” as “Innotec Advance Energy Systems LLC” (“Innotec AES“). Id. at 4. Allen Ting, who is identified in the Exclusivity Agreement as the General Manager of Innotec AES, signed the agreement on behalf of that entity. Richard Perrault signed the agreement on behalf of Visiontech.
The Exclusivity Agreement includes an arbitration clause on which the pending motion to compel is based. The clause provides, in pertinent part, that “[a]ny controversies or disputes arising out of or relating to this Agreement shall be resolved by binding arbitration in accordance with the then-current Commercial Arbitration Rules of the American Arbitration Association.” Id. at 3. The clause further provides that “[t]he agreement to arbitration shall be specifically enforceable under the prevailing arbitration law,” that “[t]he decision rendered by the arbitrator(s) shall be final and binding on the parties,” and that “judgment may be entered in conformity with the decision in any court having jurisdiction.” Id.
On March 16, 2017, the defendants answered Innotec‘s complaint, and Visiontech filed a counterclaim against Innotec and Ting. Although the defendants denied certain allegations underlying Count I in their answer, they did not raise arbitration as an affirmative defense to Count I. Nor did they assert as a defense that Innotec cannot recover under the Exclusivity Agreement because it was not a party to that particular contract.
Innotec and Ting subsequently moved to dismiss the counterclaim filed by Visiontech. The parties appeared before the court for a hearing on the motion on September 21, 2017. During the hearing, the defendants, through counsel, expressed the desire to amend the answer, defenses, and counterclaim. By order entered September 22, 2017, the court referred the pending motion to dismiss to United States Magistrate Judge Joel C. Hoppe, pursuant to
Lack of Standing.
Plaintiff Innotec, LLC is not a party to or a signatory to the so-called Exclusivity Agreement and has no standing to assert any claims or defenses based on or arising under the Exclusivity Agreement.
Arbitration.
The Exclusivity Agreement contains a binding, mandatory arbitration clause requiring private, binding arbitration of all disputes arising under or relating to that Agreement.
Proposed Am. Defenses ¶¶ 11-12, Docket No. 53-2.2
The defendants did not comply with Judge Hoppe‘s February 12, 2018 order. They maintained that compliance was no longer necessary because the parties reached an oral settlement agreement on February 21, 2018, the day before their discovery responses were due. On March 2, 2018, the defendants moved to enforce the alleged oral settlement agreement and to stay further proceedings, including discovery, until the court ruled on the defendants’ motion. That same day, Innotec moved for sanctions, including involuntary dismissal of Visiontech‘s counterclaim, based on the defendants’ failure to comply with the discovery order. In response, the defendants argued that sanctions were unwarranted because the case had settled. On May 18, 2018, the court issued a memorandum opinion and order in which it declined to enforce the alleged oral settlement agreement and therefore denied the defendants’ motion. The court also denied without prejudice Innotec‘s motion for sanctions. The defendants have since filed supplemental responses to Innotec‘s discovery requests in accordance with Judge Hoppe‘s February 12, 2018 order. See Defs.’ Suppl. Responses to Feb. 12, 2018 Disc. Order, Docket No. 128.
Discussion
I. Motion to Compel Arbitration of Count I
Under existing caselaw, the court must first consider the defendants’ motion to compel arbitration as to Count I of the complaint. The Federal Arbitration Act (“FAA“),
In deciding a motion to compel arbitration, the court‘s “role is strictly limited to determining arbitrability and enforcing agreements to arbitrate, leaving the merits of the claim and any defenses to the arbitrator.” Republic of Nicaragua v. Standard Fruit Co., 937 F.2d 469, 478 (9th Cir. 1991). “Thus, after a motion to compel arbitration has been filed, the court must ‘refrain from further action’ until it determines arbitrability.” Silfee v. Auto. Data Processing, Inc., 696 F. App‘x 576, 577 (3d Cir. 2017) (quoting Sharif v. Wellness Int‘l Network, Ltd., 376 F.3d 720, 726 (7th Cir. 2004)). The court “may not alter this sequencing,” Id. (citing Dean Witter Reynolds, 470 U.S. at 218), even if the motion is made in the alternative. See id. (holding that the district court erred in ruling on a defendant‘s motion to dismiss before resolving its motion to compel arbitration); Hawkins v. Fishbeck, No. 3:17-cv-00032, 2017 U.S. Dist. LEXIS 170678, *8 (W.D. Va. Oct. 16, 2017) (Moon, J.) (noting that the court “must consider the motion to compel arbitration before ruling on the motion to dismiss“) (citations omitted). For these reasons, the court will first consider the defendants’ motion to compel arbitration of Count I.
The United States Court of Appeals for the Fourth Circuit has held that a party can compel arbitration under the FAA if it establishes four elements: “(1) the existence of a dispute between the parties, (2) a written agreement that includes an arbitration provision which purports to cover the dispute, (3) the relationship of the transaction, which is evidenced by the agreement, to interstate or foreign commerce, and (4) the failure, neglect or refusal of the [plaintiff] to
A. Enforceability of the Arbitration Provision
In its first argument, which is somewhat difficult to follow, Innotec appears to suggest that by asserting that Innotec lacks standing to sue under the Exclusivity Agreement, the defendants are barred from enforcing the agreement‘s arbitration provision against Innotec. This argument is without merit for at least three reasons. First, “[e]ven if arbitration were inconsistent with other defenses [raised by the defendants], Rule 8(d)(3) provides that a ‘party may state as many separate claims or defenses as it has, regardless of consistency.‘” Traxys N. Am. LLC v. Evraz Claymont Steel, Inc., No. 1:09-cv-00684, 2011 U.S. Dist. LEXIS 52041, at *4 (D. Del. May 16, 2011) (quoting
Second, the Supreme Court has made clear that “a party‘s challenge to another provision of the contract, or to the contract as a whоle, does not prevent a court from enforcing a specific agreement to arbitrate.” Rent-A-Center, W., Inc. v. Jackson, 561 U.S. 63, 70 (2010). The court must “treat an arbitration clause as severable from the contract in which it appears and enforce it according to its terms unless the party resisting arbitration specifically challenges the enforceability of the arbitration clause itself.” Granite Rock Co. v. Int‘l Bhd. of Teamsters, 561 U.S. 287, 301 (2010). Here, rather than contesting the validity of the arbitration clause itself, Innotec cites to the defendants’ own arguments challenging Innotec‘s ability to enforce other provisions of the Exclusivity Agreement. Such arguments, however, which bear on the final
Third, under the circumstances presented, the fact that Innotec is not a signatory to the Exclusivity Agreement does not preclude Visiontech from enforcing the arbitration clause against Innotec. “While a contract cannot bind parties to arbitrate disputes they have not agreed to arbitrate, ‘it does not follow . . . that under the [Federal Arbitration] Act an obligation to arbitrate attaches only to one who has personally signed the written arbitration provision.‘” Int‘l Paper Co. v. Schwabedissen Maschinen & Anlagen GMBH, 206 F.3d 411, 416 (4th Cir. 2000) (alteration in original) (quoting Fisser v. Int‘l Bank, 282 F.2d 231, 233 (2d Cir. 1960)). Instead, “[w]ell-established common law principles dictate that in an appropriate case a nonsignatory can enforce, or be bound by, an arbitration provision within a contract executed by other parties.” Id. at 416-17 (emphasis added).
One such situation exists when a nonsignatory is equitably estopped from arguing that it is not a party to the arbitration clause. “Equitable estoppel precludes a party from asserting rights
Applying these concepts, the Fourth Circuit has “held more specifically that ‘[a] nonsignatory is estopped from refusing to comply with an arbitration clause when it [is seeking or] receives a direct benefit from a contract containing an arbitration clause.‘” R.J. Griffin & Co. v. Beach Club II Homeowners Ass‘n, Inc., 384 F.3d 157, 161 (4th Cir. 2004) (alteration in original) (quoting Int‘l Paper Co., 206 F.3d at 418). This test “recognizes that a nonsignatory should be estopped from denying that it is bound by an arbitration clause when its claims against the signatory ‘arise[] from’ the contract containing the arbitration clause.” Am. Bankers Ins. Grp. v. Long, 453 F.3d 623, 628 (4th Cir. 2006) (quoting R.J. Griffin, 384 F.3d at 162). “A nonsignatory‘s claims ‘arise from’ a contract containing an arbitration provision when the claims seek to enforce rights contained in that contract.” Thomas v. Progressive Leasing, No. 1:17-cv-01249, 2017 U.S. Dist. LEXIS 176515, at *8 (D. Md. Oct. 25, 2017); see also Int‘l Paper Co., 206 F.3d at 418 (holding that the plaintiff could not seek to enforce rights provided under a contract and avoid the contract‘s arbitration clause). Because the test examines the nature of the nonsignatory‘s allegations against the signatory, the court must examine the underlying complaint to determine whether estoppel should apply. Am. Bankers Ins. Grp., 453 F.3d at 627.
In this case, it is clear from the complaint that the claims for breach of contract asserted in Count I arise from the Exclusivity Agreement containing the arbitration provision. The count is labeled “Breach of Contract by Visiontech — For the sale of goods pursuant to the Exclusivity
Despite having sued to enforce various terms of the Exclusivity Agreement, Innotec now contends that it should not be bound by the arbitration provision, which broadly covers “[a]ny controversies or disputes arising out of or relating to this Agreement.” Compl. Ex. B at 3; see also Pl.‘s Br. in Opp‘n 13-14 (suggesting that the Exclusivity Agreement is “immaterial” to this dispute and that its arbitration provision should not apply). Such an attempt to “claim the benefit of the contract and simultaneously avoid its burdens” is the very situation that the doctrine of
To the extent that Innotec also argues that the arbitration provision, if binding on it, does not cover the claims asserted in Count I, the court is unable to agree. The court‘s conclusion that the claims asserted in Count I arise from the Exclusivity Agreement forecloses any argument that the claims do not fall within the scope of the arbitrаtion provision. Am. Bankers Ins. Grp., 453 F.3d at 630; see also Am. Recovery Corp. v. Computerized Thermal Imaging, Inc., 96 F.3d 88, 93 (4th Cir. 1996) (noting that a similarly-worded arbitration provision encompassed “all disputes having a significant relationship to the consulting agreement” in which the provision was contained).
B. Waiver
Innotec alternatively argues that the defendants waived any right they had to enforce the arbitration provision contained in the Exclusivity Agreement. While this argument presents somewhat of a closer question, the court ultimately concludes that it is without merit.
“Under the FAA, a party may lose its right to compel arbitration if it ‘is in default in proceeding with such arbitration.‘” Rota-McLarty v. Santander Consumer USA, Inc., 700 F.3d 690, 702 (4th Cir. 2012) (quoting
1. The amount of the delay
Turning first to the amount of the delay, the defendants filed their motion to compel arbitration of Count I approximately thirteen months after Innotec filed its complaint.3 The Fourth Circuit has previously held that “a delay of several months, without more, is insufficient to demonstrate the opposing party suffered actual prejudice.” Id. at 703 (describing the six-and-half-month delay in the casе before it as “relatively short” in comparison to other cases involving the issue). Although the length of delay in this case is somewhat longer than the period at issue in several cases in which the Fourth Circuit has found no inherent prejudice, see id. (collecting cases), it is significantly shorter than the length of delay in two previous cases in which the Fourth Circuit concluded that litigants had waived the right to arbitration. See, e.g., Forrester,
Moreover, nothing in the record suggests that the thirteen-month delay, in and of itself, caused Innotec to suffer actual prejudice. The Fourth Circuit has made clear that “[m]ere delay, without more, will not suffice to constitute waiver.” Maxum, 779 F.2d at 982; see also In re Mercury Constr. Corp., 656 F.2d 933, 939 (4th Cir. 1981) (en banc) (“It is only when this delay results in actual prejudice that it may amount to ‘default’ within the Act.“). Accordingly, the length of the delay itself is not sufficient to meet Innotec‘s heavy burden of proving default.
2. The nature and extent of the defendants’ litigation activities
The second factor in the prejudice inquiry looks to the nature and extent of the moving party‘s litigation activities. See Rota-McLarty, 700 F.3d at 704. “[A]s is the case with delay, the movant‘s participation in litigation activity alone will not suffice, as the dispositive question ‘is whether the party objecting to arbitration has suffered actual prejudice.‘” Patten, 380 F.3d at 206 (emphasis in original) (quoting MicroStrategy, Inc. v. Lauricia, 268 F.3d 244, 249 (4th Cir. 2001)).
Initially, the court must reject Innotec‘s reliance on the fact that both sides fully briefed its motion to dismiss Visiontech‘s counterclaim before the defendants moved to compel arbitration. See Pl.‘s Br. in Opp‘n 15. As the Fourth Circuit explained in Patten, it is inappropriate to consider “activity that the moving party did not initiate in assessing thаt party‘s default.” Patten, 380 F.3d at 206. Because the referenced motion was filed by Innotec, rather
Likewise, the court finds no prejudice arising from the filing of an answer and counterclaim by the defendants. The Fourth Circuit has previously held that a party‘s filing of an answer or compulsory counterclaim is “not neсessarily inconsistent with an intent to pursue arbitration.” Patten, 380 F.3d at 206. That is especially true in a case such as this, in which only some, but not all, of the plaintiff‘s claims are subject to arbitration. Moreover, as in Patten, Innotec “makes no showing of prejudice arising from this aspect of [the defendants‘] pre-trial activity.” Id.
Innotec‘s reliance on the discovery conducted in this case is also unavailing. Although the record reveals that the parties have engaged in extensive written discovery and litigated a number of discovery disputes, “mere participation in discovery is not sufficient to indicate default.” Rota-McLarty, 700 F.3d at 704. Moreover, the discovery requested by both sides covered a multitude of issues other than those related to the Exclusivity Agreement. In the absence of any assertion that the defendants improperly benefited from conducting discovery prior to filing the instant motion, the court is unable to conclude that the defendants’ use of the discovery process caused Innotec to suffer the prejudice required to support a finding of default. See id. (emphasizing that the plaintiff failed to explain how the discovery conducted “would be to [the defendant‘s] advantage, or unavailable, in arbitration“); Patten, 380 F.3d at 207 (observing that the plaintiff demonstrated “no resulting disadvantage” from the discovery conducted in the case).
For these reasons, the court concludes that the arbitration provision of the Exclusivity Agreement is enforceable against Innotec, that the claims asserted in Count I fall within the scope of the provision, and that the defendants did not waive the right to compel arbitration. Accordingly, the court will grant the defendants’ motion to compel arbitration of Count I of the complaint and stay further judiciаl proceedings with respect to that count. See Choice Hotels Int‘l, Inc. v. BSR Tropicana Resort, Inc., 252 F.3d 707, 709 (4th Cir. 2001) (“[T]he FAA
II. Remaining Claims
The defendants have not moved to compel arbitration as to any other count in the complaint, and neither party has argued or suggested that any of the remaining claims or counterclaims would be subject to arbitration. The Fourth Circuit has recognized that “[e]nforcement of agreements to arbitrate under the Federal Arbitration Act may require piecemeal litigation, and the decision to stay the litigation of non-arbitrable claims or issues is a matter largely within the district court‘s discretion to control its docket.” Am. Recovery Corp., 96 F.3d at 97; see also Chorley Enters., Inc. v. Dickey‘s Barbecue Rests., Inc., 807 F.3d 553, 558 (4th Cir. 2015) (“We recognize that requiring the parties to litigate in two different forums may be inefficient, and could lead to conflicting results. But this outcome is mandated by the Federal Arbitration Act, which requires piecemeal litigation where, as here, the agreements call for arbitration of some claims, but not others . . . . We leave it to the district court‘s discretion whether to stay the franchisеes’ [other] claims pending conclusion of the arbitration.“).
Because neither side has addressed how the remaining claims should proceed in the event that the court required arbitration of Count I, the court will permit the parties to submit additional briefing on this issue. Specifically, the parties shall have until August 3, 2018 to file simultaneous briefs addressing the issue of whether the remaining claims should be stayed pending the resolution of the arbitration proceedings related to Count I. See, e.g., Trouard v. Dickey‘s Barbecue Rests., Inc., No. 8:14-cv-01703, 2016 U.S. Dist. LEXIS 20134, at *3 (D. Md. Feb. 19, 2016) (addressing whether to stay non-arbitrable claims after having the parties brief the issue).
Conclusion
For the reasons stated, the defendants’ motion to compеl arbitration as to Count I will be granted, and their motion for judgment on the pleadings or for summary judgment with respect to that count will be denied without prejudice.
The Clerk is directed to send copies of this memorandum opinion and the accompanying order to all counsel of record.
DATED: This 20th day of July, 2018.
Glen E. Conrad
Senior United States District Judge