Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-arwd-6_04-cv-06157/USCOURTS-arwd-6_04-cv-06157-1/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1332 Diversity-Breach of Contract

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IN THE UNITED STATES DISTRICT COURT

WESTERN DISTRICT OF ARKANSAS

HOT SPRINGS DIVISION

PRM ENERGY SYSTEMS, INC. PLAINTIFF

v. Civil No. 04-6157

PRIMENERGY, L.L.C., an

Oklahoma limited liability

company, and individuals DON

R. MELLOTT and W.N. (BILL)

SCOTT DEFENDANTS

and

ENERGY PROCESS TECHNOLOGIES, 

INC., an Oklahoma Corporation,

and PRIMENERGY, L.L.C., an

Oklahoma Limited Liability 

Company PLAINTIFFS

v.

PRM ENERGY SYSTEMS, INC.,

an Arkansas Corporation DEFENDANT

and

PRM ENERGY SYSTEMS, INC. COUNTER PLAINTIFF

v.

ENERGY PROCESS TECHNOLOGIES, INC.,

HEATER SPECIALISTS, INC., and

MOHAWK FIELD SERVICES, INC. (all

Oklahoma corporations) COUNTER DEFENDANTS

and

PRM ENERGY SYSTEMS, INC.,

an Arkansas Corporation PLAINTIFF

v.

KOBE STEEL LTD. DEFENDANT

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O R D E R

Now on this 19th day of June, 2006, come on for consideration

the following motions:

* Motion Of Individual Defendants Mellott And Scott For

Judgment On Pleadings (document #56);

* Kobe Steel, Ltd.’s Motion For Judgment On The Pleadings

(document #63); and

* Motion To Dismiss Of “Counter Defendant” Energy Process

Technologies, Inc. And “Third Party Defendants” Heater

Specialists, Inc. And Mohawk Field Services, Inc.

(document #65), 

and from said motions, and the responses thereto, the Court finds

and orders as follows:

1. The parties in this case are involved in a variety of

business disputes arising out of certain contracts between PRM

Energy Systems, Inc. (“PRM”), an Arkansas corporation in the

business of licensing patents and technology relating to the

gasification of biomass materials into gaseous forms of energy,

and Primenergy, L.L.C. (“Primenergy”), an Oklahoma corporation

which develops and builds gasification technology. 

There are five interlocking contracts relevant to the

disputes between the parties and the pending motions. Those

contracts are identified as the General Agreement, the Territorial

License Agreement, the Confidentiality Agreement, the Consulting

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Agreement, and the Option To Expand Territory. As a group, the

contracts are referred to as “the 1999 Agreements.”

The General Agreement contains an Arbitration Clause

providing that “[a]ll disputes under the General Agreement that

cannot be resolved by the parties shall be decided by

arbitration.” Each of the other four contracts contains a

provision which makes it a part of the General Agreement, and thus

subject to the Arbitration Clause of the General Agreement.

Pursuant to the Arbitration Clause, various disputes sounding

in contract between PRM and Primenergy were submitted to

arbitration. An arbitral award (the “Award”) was issued and has

been confirmed by this Court. Left pending were those claims

sounding in tort against all defendants.

By Order dated November 15, 2005, the Court found that those

claims asserted by PRM against Primenergy which had not been

litigated - and which were not barred by the doctrine of res

judicata - had to be resolved by arbitration, and that the Court

was “precluded from taking cognizance of any claims raised, as

between PRM and Primenergy, except to the extent that it has been,

or will be, asked to confirm, vacate, or modify an Arbitration

Award.”

2. The moving parties on the motions now under

consideration contend that they, too, are entitled to enforce the

Arbitration Clause as against PRM, and that any claims asserted by

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PRM as against them can only be resolved by arbitration. They

further contend that all such claims are barred by res judicata or

collateral estoppel as a result of the previous arbitration, and

that they are, therefore, entitled to dismissals.

The legal underpinning of these motions is CD Partners, LLC

v. Grizzle, 424 F.3d 795 (8th Cir. 2005). In CD Partners, the

Eighth Circuit held that 

[a] nonsignatory can enforce an arbitration clause

against a signatory to the agreement in several

circumstances. One is when the relationship between the

signatory and nonsignatory defendants is sufficiently

close that only by permitting the nonsignatory to invoke

arbitration may evisceration of the underlying

arbitration agreement between the signatories be

avoided. Another is when the signatory to a written

agreement containing an arbitration clause must rely on

the terms of the written agreement in asserting [its]

claims against the nonsignatory. When each of a

signatory’s claims against a nonsignatory makes

reference to or presumes the existence of the written

agreement, the signatory’s claims arise out of and

relate directly to the written agreement, and

arbitration is appropriate.

424 F.3d at 798 (internal citations and quotation marks omitted).

Each moving party asserts that it comes within one or the

other - or both - of these categories. These assertions will be

taken up individually, inasmuch as the movants are differently

situated, but the Court will first examine the basic defense

raised by PRM to all the motions here under consideration.

3. PRM’s defense consists largely of asking the Court to

reconsider its November 15, 2005, ruling that its tort claims are

arbitrable. It relies heavily on Volt Information Sciences, Inc.

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v. Board of Trustees of the Leland Stanford Junior University, 489

U.S. 468 (1989), wherein the Supreme Court affirmed a Court of

Appeals decision applying California law - which conflicted with

the Federal Arbitration Act (“FAA”) - to an arbitration where the

parties had agreed that the arbitration would be governed by

California law. PRM contends that Volt requires the Court to

follow the Uniform Arbitration Act of Arkansas (“UAAA”) - which

would not allow arbitration of tort claims - because the 1999

Agreements provide that they will be governed by Arkansas law. 

The problem with PRM’s argument is that a provision that a

contract will be governed by Arkansas law, and a provision that

arbitration under that contract will be governed by Arkansas law,

are not precisely the same thing. In Mastrobuono v. Shearson

Lehman Hutton, Inc., 514 U.S. 52 (1995), wherein the contract

providing for arbitration was governed by New York law, the Supreme

Court held that:

the best way to harmonize the choice-of-law provision

with the arbitration provision is to read “the laws of

the State of New York” to encompass substantive

principles that New York courts would apply, but not to

include special rules limiting the authority of

arbitrators. Thus, the choice-of-law provision covers

the rights and duties of the parties, while the

arbitration clause covers arbitration; neither sentence

intrudes upon the other. In contrast, respondents’

reading sets up the two clauses in conflict with one

another: one foreclosing punitive damages, the other

allowing them. This interpretation is untenable.

514 U.S. at 63-64.

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PRM’s contention that the choice of Arkansas law to govern

the contracts would prohibit arbitration of tort claims sets up a

conflict with the arbitration provisions of the 1999 Agreements,

which provide for arbitration of all disputes “under this General

Agreement.” PRM’s position is thus “untenable” under Mastrobuono,

and the Court continues to reject it.

4. Defendants Mellott and Scott are principals in

Primenergy. Mellott owns 100% of the stock of Energy Process

Technology Inc. (“EPTI”), the corporation which owns Primenergy.

Scott is Primenergy’s President. Mellott and Scott are alleged to

have committed the torts of fraud, conspiracy, tortious

interference with business expectancy, and misappropriation of

trade secrets, all in connection with Primenergy’s dealings with

PRM.

The Court found, in its November 15, 2005, Order, that the

tort claims against Mellott and Scott arise in the context of

their employment by Primenergy, and that PRM’s disputes with

Primenergy were required to be arbitrated. It follows under CD

Partners that Mellott and Scott are entitled to enforce the

arbitration provisions of the contracts between PRM and

Primenergy, in order to use an arbitral forum to resolve the

claims that PRM has brought against them in this case.

5. Defendant Kobe Steel, Ltd. (“Kobe”) stands in a

different relationship to PRM. It is alleged to have engaged in

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negotiations - with both PRM and Primenergy - for the use of the

gasification technology at the heart of the disputes between PRM

and Primenergy. PRM alleges that Kobe committed the torts of

conspiracy and tortious interference with contract in the course

of Kobe’s business dealings with Primenergy, which was at the time

a licensee of PRM’s gasification technology.

Kobe contends that the allegation that it is a co-conspirator

of Primenergy, said to have induced Primenergy to breach its

contracts with PRM, empowers it - under the rationale of CD

Partners - to compel arbitration of PRM’s claims. 

In MS Dealer Service Corp. v. Franklin, 177 F.3d 942 (11th

Cir. 1999), the Eleventh Circuit offered the following explanation

for allowing an alleged conspirator to compel arbitration under an

arbitration provision applicable to the plaintiff and its alleged

co-conspirator:

Although arbitration is a contractual right that is

generally predicated on an express decision to waive the

right to trial in a judicial forum, this court has held

that the lack of a written arbitration agreement is not

an impediment to arbitration. This is because there are

certain limited exceptions, such as equitable estoppel,

that allow nonsignatories to a contract to compel arbitration. A

second exception exists when, under agency or related principles,

the relationship between the signatory and nonsignatory defendants

is sufficiently close that only by permitting the nonsignatory to

invoke arbitration may evisceration of the underlying arbitration

agreement between the signatories be avoided.

* * *

Existing case law demonstrates that equitable estoppel

allows a nonsignatory to compel arbitration in two

different circumstances. First, equitable estoppel

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applies when the signatory to a written agreement

containing an arbitration clause must rely on the terms

of the written agreement in asserting [its] claims

against the nonsignatory. When each of a signatory’s

claims against a signatory makes reference to or

presumes the existence of the written agreement, the

signatory’s claims arise[] out of and relate[] directly

to the [written] agreement, and arbitration is

appropriate. Second, application of equitable estoppel

is warranted . . . when the signatory [to the contract

containing the arbitration clause] raises allegations of

. . . substantially interdependent and concerted

misconduct by both the nonsignatory and one or more of

the signatories to the contract. Otherwise, the

arbitration proceedings [between the two signatories]

would be rendered meaningless and the federal policy in

favor of arbitration effectively thwarted.

177 F.3d at 947 (internal citations and quotation marks omitted).

The court in MS Dealer then examined the claims asserted by a

signatory of a contract containing an arbitration clause against

a nonsignatory, and concluded that the nonsignatory could compel

arbitration of those claims.

Given that CD Partners quotes from and relies on this passage

in MS Dealer, the Court believes that it is of precedential value

in this Circuit. When applied to plaintiff’s First Amended

Complaint Against Kobe Steel, Ltd. (document #52), the Court

believes that the reasoning of CD Partners and MS Dealer lead to

the conclusion that Kobe can force PRM to arbitrate its disputes

with Kobe. In the “Facts Specific To Kobe” section of that First

Amended Complaint, PRM makes the following allegations against

Kobe that make reference to or presume the existence of the 1999

Agreements:

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* that Kobe “induced Primenergy to breach the 1999

Agreements by making proposals for projects in Japan”;

* that Kobe “induced Primenergy into a conspiracy to deny

PRM its rights to license the Gasification Technology in Japan”;

* that Kobe “induced Primenergy into attempting to

terminate all royalty provisions of the Territorial License

Agreement”;

* that Kobe and Primenergy entered into an “‘exclusive

collaboration’ agreement” that was “in breach of Primenergy’s

territorial restrictions under the Territorial License Agreement”;

and 

* that Primenergy, Mellott, Scott, and Kobe agreed that

Primenergy would engage in arbitration with PRM in an attempt to

force PRM to lower royalty rates and broaden territory for the

license of the technology.

The foregoing allegations are repeated in the various Counts

of the First Amended Complaint, and the relief requested is stated

in terms of injunctions that would protect PRM’s alleged

intellectual property rights under the 1999 Agreements. 

Because all of PRM’s claims against Kobe either make

reference to or presume the existence of the 1999 Agreements, and

allege “substantially interdependent and concerted misconduct by

both the nonsignatory and one or more of the signatories to the

contract” the Court concludes that Kobe can force PRM to arbitrate

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the dispute between them.

6. EPTI, Heater Specialists, Inc. (“Heater Specialists”)

and Mohawk Field Services, Inc. (“Mohawk”), collectively the “EPTI

Affiliates,” make essentially the same arguments as Mellott and

Scott, differing primarily in that these defendants are

organizations, rather than natural persons, affiliated with

Primenergy. While conceding that they have no Eighth Circuit case

law directly on point, the EPTI Affiliates reason that CD Partners

is logically applicable, and they cite case law from other

jurisdictions dealing with affiliated entities in a like context.

The Court agrees that the reasoning of CD Partners applies to

the EPTI Affiliates. In its Counterclaim Against Energy Process

Technologies, Inc., Heater Specialists, Inc., And Mohawk Field

Services, Inc., PRM relies heavily on the terms of the 1999

Agreements. For example, it alleges:

* that Primenergy, “individually and with its affiliates,

EPTI, Mohawk and HSI, willfully breached the 1999 Agreements” in

various ways;

* that EPTI engaged in a variety of fraudulent acts with

Primenergy, Mellott and Scott, designed to defraud PRM of rights

under the 1999 Agreements; 

* that the EPTI Affiliates, along with Primenergy,

Mellott, Scott, and Kobe, “combined to accomplish some purpose,

not itself unlawful, oppressive or immoral, by unlawful,

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Kobe also contends that principles of collateral estoppel apply to the claims 1

asserted against it by PRM. While that may be true, collateral estoppel, or issue

preclusion, looks at much smaller aspects of a dispute than the overall “claim,” and the

Court believes it must be left to the arbitrator to determine in which specifics, if

any, collateral estoppel may be applicable.

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oppressive or immoral means, to injure PRM by unlawfully withhold

[sic] information that rightly belonged to PRM under the 1999

Agreements”; and

* that the EPTI Affiliates misappropriated trade secrets

of PRM in violation of the 1999 Agreements.

Because PRM’s claims against the EPTI Affiliates either make

reference to or presume the existence of the 1999 Agreements,

PRM’s claims arise out of and relate directly to 1999 Agreements,

and arbitration of those claims is appropriate.

7. Movants also contend that PRM’s claims against them are

barred by res judicata, given that those claims are subject to

arbitration and the arbitration between PRM and Primenergy has

been concluded . The Court disagrees. 1

Res judicata bars relitigation of claims which were actually

litigated in a previous suit, and those which could have been

litigated. Banks v. International Union of Electronic, Technical,

Salaried and Machine Workers, 390 F.3d 1049 (8th Cir. 2004);

Barclay v. Waters, 357 Ark. 386, 182 S.W.3d 91 (2004). It is not

at all clear that PRM could have forced any of the movants into

arbitration, and thus not clear that PRM’s claims against the

movants could have been arbitrated when it engaged in arbitration

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with Primenergy. The circumstances under which a signatory can

force a nonsignatory into arbitration are much narrower than those

under which a nonsignatory can force a signatory into arbitration.

See Thomson-CSF, S.A. v. American Arbitration Association, 64 F.3d

773 (2nd Cir. 1995). It is not shown that any of these

circumstances obtains in this case. The Court, therefore,

concludes that principles of res judicata do not justify dismissal

of PRM’s claims against movants.

8. As an alternative to outright dismissal, movants ask

that, if the Court determines that arbitration is the appropriate

method to resolve the claims asserted against them by PRM, this

case be stayed until such arbitration is complete. 

PRM, for its part, contends that the moving parties have not

actually asked the Court to compel arbitration of PRM’s claims

against them, but only want to use the CD Partners analysis to

obtain a dismissal of those claims. 

The Court believes that a fair reading of the motions now

under consideration reflects a request on the part of the movants

that the Court compel arbitration of PRM’s claims against them if

they do not succeed in having those claims dismissed, and that a

stay pending the conclusion of such arbitration is appropriate. 

IT IS THEREFORE ORDERED that the Motion Of Individual

Defendants Mellott And Scott For Judgment On Pleadings (document

#56) is granted in part and denied in part. The motion is denied

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insofar as it seeks dismissal of PRM’s claims against Don R.

Mellott and W.N. (Bill) Scott, and granted insofar as it seeks to

compel arbitration of those claims and a stay of these proceedings

pending the outcome of such arbitration.

IT IS FURTHER ORDERED that Kobe Steel, Ltd.’s Motion For

Judgment On The Pleadings (document #63) is granted in part and

denied in part. The motion is denied insofar as it seeks

dismissal of PRM’s claims against Kobe Steel, Ltd., and granted

insofar as it seeks to compel arbitration of those claims and a

stay of these proceedings pending the outcome of such arbitration.

IT IS FURTHER ORDERED that the Motion To Dismiss Of “Counter

Defendant” Energy Process Technologies, Inc. And “Third Party

Defendants” Heater Specialists, Inc. And Mohawk Field Services,

Inc. (document #65) is is granted in part and denied in part. The

motion is denied insofar as it seeks dismissal of PRM’s claims

against Energy Process Technologies, Inc., Heater Specialists,

Inc., and Mohawk Field Services, Inc., and granted insofar as it

seeks to compel arbitration of those claims and a stay of these

proceedings pending the outcome of such arbitration.

IT IS FURTHER ORDERED that this matter is administratively

terminated, subject to being reopened by any party for further

proceedings upon the conclusion of arbitration.

IT IS SO ORDERED.

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 /s/ Jimm Larry Hendren 

JIMM LARRY HENDREN

UNITED STATES DISTRICT JUDGE

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