Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_07-cv-00403/USCOURTS-azd-2_07-cv-00403-0/pdf.json

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

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See Thinket Ink Information Resources, Inc. v. Sun Microsystems, Inc., 368 F.3d

1053, 1060 (9th Cir. 2004) (holding, in part, that "the district court [did not] err in dismissing

the plaintiff's claims that were subject to arbitration pursuant to Fed.R.Civ.P. 12(b)(6)" and

explaining that "[a]lthough the Federal Arbitration Act 'provides for a stay pending

compliance with a contractual arbitration clause ... a request for a stay is not mandatory.'")

(quoting Martin Marietta Aluminum, Inc. v. Gen. Elec. Co., 586 F.2d 143, 147 (9th Cir.

1978).

WO

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

Balar Equipment Corporation, an Arizona

corporation, 

Plaintiff, 

vs.

VT Leeboy, Inc., a North Carolina

corporation, fka B.R. Lee Industries, Inc.,

a North Carolina Corporation, John Does

and Jane Does I-X, inclusive; Black and

White Corporations I-X, inclusive, XYZ

Partnerships I-X, inclusive, 

Defendants. 

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No. 07-CV-403-PHX-EHC

ORDER

Pending before the Court is Defendant VT Leeboy, Inc.'s ("Leeboy") "Motion to

Dismiss Under the Federal Arbitration Act." (Dkt. 5). Because the Federal Arbitration Act

does not explicitly provide for dismissal of claims subject to arbitration, the Court interprets

Leeboy's motion as a Fed.R.Civ.P. 12(b)(6) Motion to Dismiss for Failure to State a Claim

upon Which Relief Can be Granted.1

Case 2:07-cv-00403-EHC Document 11 Filed 08/27/07 Page 1 of 7
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A. Background

This dispute arises out of an agreement entered into by Plaintiff and Defendant, in

which Plaintiff “became the exclusive Arizona dealer for specified [Defendant]-

manufactured equipment and related products.” (Dkt. 5, p. 1). The initial term of the

agreement was one year and the agreement included a provision for automatic one year

renewals if no notice of termination was given sixty days prior to the end of the current term

(Dkt. 5, p. 2). Defendant asserts that it timely notified Plaintiff of termination (Dkt. 5, p. 2).

In response to Defendant’s notice of termination, Plaintiff asserted that the agreement was

subject to the Arizona Equipment Dealers Act (“Dealers Act”), A.R.S. §44-6701 et seq, and

therefore could not be terminated absent the grounds enumerated in the Dealers Act. (Dkt.

5, p. 2). When Defendant refused to withdraw its termination notice, Plaintiff filed its

complaint in Maricopa County Superior Court, alleging that Defendant violated A.R.S. § 44-

6701, et seq (Dkt. 1, Exhibit A; Dkt. 5, p. 2). The Defendant removed the case pursuant to

28 U.S.C. § 1441(a) (Dkt. 1) and filed a "Motion to Dismiss Under the Federal Arbitration

Act." (Dkt. 5).

B. Motion to Dismiss

The Supreme Court recently retired the oft-quoted Conley v. Gibson language that

long-defined the standard district courts were to apply when deciding motions to dismiss.

See Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955, 1968 (2007). The Court, however,

reiterated that the accepted pleading standard remains unchanged: "once a claim has been

stated adequately, it may be supported by showing any set of facts consistent with the

allegations in the complaint." Id. The Court further reminded district courts weighing a

motion to dismiss to ask "not whether a plaintiff will ultimately prevail but whether the

claimant is entitled to offer evidence to support the claims." Id. at 1969 n.8 (quoting Scheuer

v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686 (1974)). "[A] well-pleaded complaint

may proceed even if it strikes a savvy judge that actual proof of those facts is improbable,

and "that a recovery is very remote and unlikely." Id. at 1965.

Case 2:07-cv-00403-EHC Document 11 Filed 08/27/07 Page 2 of 7
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While Defendant claims that A.R.S. 44-6701 et seq does not apply to Leeboy, for the

purpose of a motion to dismiss, "[n]o matter how likely it may seem that the pleader will be

unable to prove his case, he is entitled, upon averring a claim, to an opportunity to try to

prove it." Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955, 1969 (2007) (quoting Continental

Collieries, Inc. v. Shober, 130 F.2d 631, 635 (3rd Cir. 1942)).

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At dispute between the parties is the question of whether or not the "Leeboy

Dealership Agreement" contains a valid arbitration clause. Section 11.1 of the Agreement

provides, in relevant part:

[I]f a dispute arises out of or relates to this Agreement, or the breach thereof,

and if such dispute cannot be settled through negotiation, the parties agree first

to try in good faith to settle the dispute by mediation in Charlotte, North

Carolina under the Commercial Mediation Rules of the American Arbitration

Association, before resorting to arbitration, litigation, or some other dispute

resolution procedure. In the event such mediation does not result in a suitable

resolution of such dispute, then except as provided in subsection 11.2, any

dispute, controversy, difference or claim arising out of, relating to or in

connection with this Agreement, shall be finally settled by arbitration in

accordance with the Commercial Arbitration Rules of the American

Arbitration Association then in effect by three arbiters appointed in accordance

with such rules. . . . The arbiters shall have power to grant equitable

remedies in addition to imposing monetary damages. The arbiters' award shall

be final and binding.

(Dkt. 10 at 6). Defendant argues that the extensive arbitration provision in Section 11.1 is

binding, (Dkt. 5 at 3), and that the Federal Arbitration Act ("FAA") therefore "mandates that

the district courts shall direct the parties to proceed to arbitration on issues as to which an

arbitration agreement has been signed." (Dkt. 5 at 3) (quoting Dean Witter Reynolds, Inc.

v. Byrd, 470 U.S. 213, 218, 105 S.Ct. 1238, 1241 (1985)). Plaintiff counters that Section

11.1's arbitration clause is abrogated by Section 12, (Dkt. 6 at 3), which provides:

Some states have laws that give you certain rights that may vary from, or are

in addition to, those found in this Agreement. If your principal place of

business is located in one of those states, this Agreement is deemed amended

to the fullest extent necessary to provide you those rights.

(Dkt. 10 at 6). Plaintiff claims that this provision incorporates the terms of A.R.S. § 44-6701

et seq, providing Balar "the right to bring a court action for money damages if a manufacturer

wrongly terminates the dealership (A.R.S. § 44-6708) and the right to void an out-of-state

venue provision (A.R.S. § 44-6709)." (Dkt. 6 at 1-2).2

Case 2:07-cv-00403-EHC Document 11 Filed 08/27/07 Page 3 of 7
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The FAA states that 

[a] written provision in any . . . contract evidencing a transaction involving

commerce to settle by arbitration a controversy thereafter arising out of such

contract or transaction, or the refusal to perform the whole or any part thereof,

or an agreement in writing to submit to arbitration an existing controversy

arising out of such a contract, transaction, or refusal, shall be valid,

irrevocable, and enforceable, save upon such grounds as exist at law or in

equity for the revocation of any contract.

9 U.S.C. § 2. The FAA was intended "to overrule the judiciary's longstanding refusal to

enforce agreements to arbitrate," Dean Witter Reynolds, 470 U.S. at 219-20, 105 S.Ct. at

1242, and "Section 2 is a congressional declaration of a liberal federal policy favoring

arbitration agreements, notwithstanding any state substantive or procedural policies to the

contrary...." Moses H. Cone Memorial Hosp. v. Mercury Const. Corp., 460 U.S. 1, 24, 103

S.Ct., 927, 941 (1983). 

While the policy favoring arbitration agreements creates "a presumption of

arbitrability," AT & T Technologies, Inc. v. Communications Workers of America, 475 U.S.

643, 650, 106 S.Ct. 1415, 1419 (1986), the Supreme Court has repeatedly held that

"arbitration is a matter of contract and a party cannot be required to submit to arbitration any

dispute which he has not agreed so to submit." Id. at 648, at 1418 (quoting Steelworkers v.

Warrior & Gulf Navigation Co., 363 U.S. 574, 582, 80 S.Ct. 1347, 1353; citing Steelworkers

v. American Mfg. Co., 363 U.S. 564, 570-71, 80 S.Ct. 1363, 1364-65); see also Dean Witter

Reynolds, Inc. v. Byrd, 470 U.S. 213, 220, 105 S.Ct. 1238, 1242 (1985) (the "passage of the

[Arbitration] Act was motivated, first and foremost, by a congressional desire to enforce

agreements into which parties had entered...," and the Court warned against "overlook[ing]

this principal objective when construing [a] statute, or allow[ing] the fortuitous impact of the

Act on efficient dispute resolution to overshadow the underlying motivation."). Therefore,

the Federal Arbitration Act applies only to those disputes that the parties have contractually

agreed to submit to arbitration.

 "In construing an arbitration agreement, courts must 'apply ordinary state-law

principles that govern the formation of contracts.'" Wolsey, Ltd. v. Foodmaker, Inc., 144 F.3d

1205, 1210 (9th Cir. 1998) (quoting First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938,

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3

In Mastrobuono, the sentence preceding the arbitration clause in the contract at issue

stated that the entire agreement "shall be governed by the laws of the State of New York."

Mastrobuono, 514 U.S. at 58-59, 115 S.Ct. 1217.

4

The contested choice-of-law provision in Wolsey provided: "[T]his Agreement

between Foodmaker International and [Wolsey] shall be interpreted and construed under the

laws of the State of California, U.S.A." Wolsey, 144 F.3d at 1209.

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944, 115 S.Ct. 1920 (1995)). In Arizona, "[t]he courts will, if possible, so construe a contract

as to carry into effect the reasonable intention of the parties if that can be ascertained. The

intent of the parties, as ascertained by the language used, must control interpretation of the

contract." Park Central Development Co. v. Roberts Dry Goods, Inc., 11 Ariz.App. 58, 60,

461 P.2d 702, 704 (1969) (citations omitted) (emphasis added). 

Defendant urges the Court to construe Section 12 as a general choice of law provision,

similar to those at issue in Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 115

S.Ct.1212 (1995)3

 and Wolsey, Ltd. v. Foodmaker, Inc., 144 F.3d 1205 (9th Cir. 1998).4

(Dkt. 9 at 6-8). Defendant further suggests, therefore, that as in the aforementioned cases,

Section 12 should be read "to incorporate . . . only the substantive provisions of the Act, not

procedural provisions such as A.R.S. §[§] 44-6708 [and 44-]6709 upon which Balar relies."

(Dkt. 9 at 7; see also Dkt. 9 at 8); Mastrobuono, 514 U.S. at 63-64; Wolsey, 144 F.3d at 1213.

 In Mastrobuono, the Supreme Court commented that "[t]he choice-of-law provision,

when viewed in isolation, may reasonably be read as merely a substitute for the conflict-oflaws analysis that otherwise would determine what law to apply to disputes arising out of the

contractual relationship." Mastrobuono, 514 U.S. at 59,115 S.Ct. at 1217. In this case,

however, Section 12 goes beyond dictating which state's law is applicable by explicitly

amending the Agreement "to the fullest extent necessary to provide [Leeboy] those rights"

granted by state law "that may vary from, or are in addition to, those found in [the]

Agreement." (Dkt. 10, Attachment at 6). While the courts in Mastrobuono and Wolsey were

forced to reconcile state laws with conflicting contract provisions, in the Agreement at issue,

the word, "amend," removes any inconsistency between Sections 11.1 and 12, and thus the

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Defendant cites Brisco v. Meritplan Ins. Co., 132 Ariz. 72, 75, 643 P.2d 1042, 1045

(Ct. App. 1982) for the proposition that "[t]he Court will adopt such construction as will

harmonize all parts of the contract, and conflicting provisions will be reconciled by a

reasonable interpretation in view of the entire instrument." (Dkt. 9 at 4). Nonetheless, the

language of the contract is, at best, ambiguous, and in a motion to dismiss, Defendant "cannot

overcome the common-law rule of contract interpretation that a court should construe

ambiguous language against the interest of the party that drafted it." Mastrobuono, 514 U.S.

at 62, 115 S.Ct. at 1219 (citations omitted). If the contract language is, in fact, ambiguous,

Defendant "drafted an ambiguous document, and . . . cannot now claim the benefit of the

doubt." Id. at 63, at 1219.

6

See Cleary v. News Corp., 30 F.3d 1255, 1263 (9th Cir. 1994) (“The parol evidence

rule prohibits introduction of a prior or contemporaneous agreement which would vary or

contradict the clear and unambiguous language in a contract. Notwithstanding, if ‘the

language contained in the contract is ambiguous or silent as to essential terms then oral

testimony may be properly admitted into evidence.’”) (citations omitted); see also Johnson

v. Cavan, 152 Ariz. 452, 733 P.2d 649 (Ct. App. 1986) (holding, in part, that the trial court

erred in assuming “the meaning of the terms of the lease without considering evidence on the

parties’ intent and the surrounding circumstances.”)

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Court need not adopt an understanding of Section 12 similar to the courts' understandings of

the choice-of-law provisions in Mastrobuono and Wolsey.

Plaintiff alleges that the parties intended to reject the mandatory arbitration clause

provided in the Agreement. As parties are presumed to have contracted with knowledge of

existing statutes, Rhodes v. Republic Nat. Life Ins. Co., 501 F.2d 1213, 1216 (9th Cir. 1974),

such a reading is plausible. The Court, therefore, cannot conclusively determine that the

arbitration clause contained within the Agreement is valid, such that the FAA would apply.5

Therefore, while the Court finds Plaintiff’s contention that the parties intended to void the

arbitration provision to be improbable, for the purpose of a motion to dismiss, Plaintiff has

adequately stated a claim such that Plaintiff will be “entitled to offer evidence to support the

claim[].”6

 Bell Atlantic, 127 S.Ct. at 1969 n.8 (citations omitted).

Finally, regarding Defendant's preemption argument, because "[t]he FAA contains no

express pre-emptive provision, nor does it reflect congressional intent to occupy the entire

field of arbitration," Bradley v. Harris Research, Inc., 275 F.3d 884, 888 (9th Cir. 2001)

(quoting Volt Info. Scis., Inc. v. Bd. of Trs. of the Leland Stanford Jr. Univ., 489 U.S. 468,

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474, 109 S.Ct. 1248 (1989)), state law is only preempted "to the extent that it actually

conflicts with federal law-that is, to the extent that it 'stands as an obstacle to the

accomplishment and execution of the full purposes and objectives of Congress.'" Bradley,

275 F.3d at 888 (quoting Volt, 489 U.S. at 474; Hines v. Davidowitz, 312 U.S. 52, 67, 61

S.Ct. 399 (1941)). Because the plain meaning of the Agreement demonstrates that the parties

intended the Agreement to specifically incorporate the relevant state law, and for the

purposes of a motion to dismiss the Court must assume that A.R.S. § 44-6701, et seq applies,

there is no conflict between state and federal law because a) the state law does not apply

specifically to arbitration agreements, and b) the arbitration agreement is not completely

negated, but is simply not applicable when A.R.S. § 44-6701, et seq is allegedly violated.

Accordingly,

IT IS ORDERED DENYING Defendant's Motion to Dismiss under the Federal

Arbitration Act (Dkt. 5).

DATED this 24th day of August, 2007.

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