Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_06-cv-06226/USCOURTS-cand-3_06-cv-06226-0/pdf.json

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

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United States District Court

For the Northern District of California

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United States District Court

For the Northern District of California

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

GOODRICH CARGO SYSTEMS,

Plaintiff,

 v.

AERO UNION CORP.,

Defendant. /

No. C 06-06226 CRB

ORDER

Goodrich Cargo Systems (“Plaintiff”) sued Aero Union Corporation (“Defendant”) in

connection with the acquisition of a business unit (“the APS Business”) that manufactures,

among other things, systems for loading cargo onto aircraft. Now pending before the Court

is Defendant’s motion to compel arbitration. For the reasons set forth below, that motion is

hereby GRANTED in part and DENIED in part. 

BACKGROUND

On June 29, 2004, Plaintiff agreed to buy the APS Business from Defendant. To

consummate this deal, the parties executed an Asset Purchase Agreement (“APA”). The

APA is an umbrella contract that sets forth the structure of the entire transaction. Its primary

purpose is to transfer all assets of the APS Business from Defendant to Plaintiff. 

Significantly, the APA contains no comprehensive arbitration clause. It does, however,

provide that “[t]he Exhibits and Schedules hereto are an integral part of this Agreement and

are incorporated by reference herein.” APA ¶ 9.12. Similarly, it notes that “[e]ffective on

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the Closing, Seller and Buyer will enter into a Manufacturing License Agreement . . . on the

terms and conditions as further set forth in Schedule 7.” APA ¶ 7.1.

Thus, as an attachment to the APA, the parties appended a Manufacturing License

Agreement (“MLA”). The purpose of the MLA was to create a licensing arrangement such

that Defendant would continue to operate a portion of the APS Business called the Cargo

Transfer System. In other words, under the MLA, the parties agreed that Defendant would

continue to manufacture, price, and sell Cargo Transfer Systems and would pay to Plaintiff a

“royalty” of fifteen percent of revenue generated by such sales. The MLA contains a binding

arbitration clause. See MLA ¶ 15.

In this lawsuit, Plaintiff asserts five causes of action. Three of these claims arise

under the APA, one arises under the MLA, and one involves a claim for conversion that, at

least on the face of the complaint, does not clearly arise under either agreement. Defendant

filed a motion to compel arbitration, arguing that all of Plaintiff’s claims arise out “one

integrated business transaction.” Defendant contends that the case therefore must be

dismissed and the entire matter submitted to binding arbitration under the arbitration clause

contained in the MLA.

DISCUSSION

The Federal Arbitration Act provides that an agreement to submit commercial

disputes to arbitration shall be “valid, irrevocable, and enforceable.” 9 U.S.C. § 2. 

Congress’s purpose in passing the Act was to put arbitration agreements “‘upon the same

footing as other contracts,’” thereby “reversing centuries of judicial hostility to arbitration

agreements” and allowing the parties to avoid “‘the costliness and delays of litigation.’” 

Scherk v. Alberto-Culver Co., 417 U.S. 506, 510-11 (1974) (quoting H. R. Rep. No. 96, 68th

Cong., 1st Sess., 1, 2 (1924)). Thus, in applying the Act, courts have developed a “liberal

federal policy favoring arbitration agreements,” Moses H. Cone Mem’l Hosp. v. Mercury

Constr. Co., 460 U.S. 1, 24-25 (1983), and doubts about the applicability of an arbitration

clause are “resolved in favor of arbitration,” United Steelworkers of Am. v. Warrior & Gulf

Navigation Co., 363 U.S. 574, 582-83 (1960).

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At the same time, however, “arbitration is simply a matter of contract between the

parties; it is a way to resolve those disputes--but only those disputes--that the parties have

agreed to submit to arbitration.” First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943

(1995). Indeed, the Supreme Court has emphasized 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.’” AT&T Tech., Inc. v. Communications Workers of Am., 475 U.S. 643, 648

(1986) (quoting Warrior & Gulf, 363 U.S. at 582). Thus, a federal court must review the

contract at issue to determine whether the parties have each agreed to submit a particular

dispute to arbitration. See Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002)

(“The question whether the parties have submitted a particular dispute to arbitration, i.e., the

‘question of arbitrability,’ is an issue for judicial determination . . . .”); John Wiley & Sons,

Inc. v. Livingston, 376 U.S. 543, 547 (1964) (“The duty to arbitrate being of contractual

origin, a compulsory submission to arbitration cannot precede judicial determination that the

. . . agreement does in fact create such a duty.”).

Here, Defendant contends that the MLA requires arbitration of all claims set forth in

Plaintiff’s complaint. Defendant argues that the APA and the MLA were executed together

as part of an integrated business transaction and that the MLA’s binding arbitration clause

therefore encompasses any disputes related to that business transaction. See, e.g., Pers. Sec.

& Safety Sys., Inc. v. Motorola, Inc., 297 F.3d 388, 393 (5th Cir. 2002).

This Court disagrees. Just because the parties enacted multiple agreements in

connection with the acquisition of the APS Business does not mean that this Court may

ignore the fact that there are discrete agreements pertaining to different facets of the

transaction. Here, the parties executed two distinct agreements. The first agreement, the

APA, governs Plaintiff’s acquisition of certain assets owned by Defendant. The second

agreement, the MLA, governs a smaller aspect of the transaction--namely, a licensing

arrangement whereby Defendant agreed to continue operating a portion of the business unit it

sold. Only the latter agreement contains an arbitration clause, and it follows that the

arbitration clause only applies to disputes as to those aspects of the transaction that are

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actually covered by the latter agreement. See Int’l Ambassador Programs v. Archexpo, 68

F.3d 337 (9th Cir. 1995) (holding that an arbitration award did not preempt or preclude a

judgment obtained in another lawsuit between the same parties and involving the same

business relationship where “the Moscow arbitration and the Ambassador litigation [were]

two distinct disputes arising under two separate agreements, one providing for arbitration and

one not”); Rosenblum v. Tevelbyus.com Ltd., 299 F.3d 657 (7th Cir. 2002) (holding that a

purchase agreement and an employment contract enacted simultaneously by the parties

pertained to different subject matter, and that the compulsory arbitration clause contained in

the latter did not require the court to dismiss claims arising under the former). 

This conclusion is dictated by the manner in which the parties themselves structured

the transaction. Here, Plaintiff and Defendant executed an umbrella contract that

incorporated as “schedules” or “attachments” several other discrete agreements. If the

parties, who are not unsophisticated legal actors, had wanted to arbitrate any dispute arising

out of their integrated economic transaction, they should have placed an arbitration clause in

the umbrella agreement. The only logical inference to draw from the fact that the arbitration

clause appears only in one of the attachments to the APA is that the parties intended the

arbitration clause to apply to part of the transaction, and not to all of it. To hold otherwise

would not only permit the tail to wag the dog, it would effectively mean that an arbitration

clause included anywhere in a transaction must apply everywhere. The Court declines to

interpret the MLA’s arbitration clause in such an all-consuming fashion, notwithstanding

Defendant’s observation that the two agreements refer to one another and that the APA

explicitly incorporates the terms of the MLA. That the whole constitutes the sum of its

interrelated parts it obvious, but that does not mean a particular provision contained in and

confined to one part is applicable to the whole.

Furthermore, the plain language of the arbitration clause requires that this Court

confine it to the context of the MLA. The clause states that the parties must submit to

arbitration “all disputes, claims and controversies that arise under or relate in any way to this

Agreement.” MLA ¶ 15 (emphasis added). The term “this Agreement” is unambiguously

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1 Plaintiff has argued that the MLA’s arbitration clause is inconsistent with the APA. The

Court finds that argument unpersuasive. There is nothing inconsistent in the APA with the

application of an arbitration clause, even one that prohibits an award of attorneys’ fees, as the

clause in the MLA does. A clause requiring arbitration and prohibiting an award of attorney’s

fees in disputes between Plaintiff and Defendant would be perfectly consistent with, for

example, the APA’s indeminification clause, which requires Defendant to pay attorneys’ fees

that Plaintiff might incur in suits brought by third parties. In short, the Court finds nothing in

the APA that is inconsistent, as a matter of logic, with the MLA’s arbitration clause. The

problem is not that the APA is incompatible with an arbitration clause, but rather that it just does

not contain one.

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defined as the MLA itself, and not any other part of the larger business transaction between

Plaintiff and Defendant. See MLA pmbl. Thus, consistent with the most plausible view of

the language and structure of the parties’ agreement, the Court concludes that only disputes

arising under the MLA must be submitted to arbitration.1

Defendant observes that requiring arbitration of only a portion of Plaintiff’s claims

“would result in significant waste of judicial resources, unnecessary expense, and the specter

of inconsistent adjudication of common questions of law and fact.” To be sure, it does.

Conducting multiple proceedings in different tribunals about similar subject matter will

indeed produce spectacular inefficiency. Nonetheless, this Court is not entitled to rewrite a

contract merely because it commands an inefficient result. A federal court may not compel a

party to submit to arbitration unless the party has consented to it, and here, Plaintiff has not

consented to arbitrate all disputes arising under the APA. Of course, if Defendant’s chief

concern is the efficiency of dispute resolution, it remains free to repudiate the arbitration

clause it now seeks to enforce and submit the entire controversy to this Court’s jurisdiction.

CONCLUSION

The Court holds that the arbitration clause contained in the MLA applies only to

disputes arising under that particular agreement. Therefore, as to Count I, Count II, and

Count III, which all arise out of provisions in the APA, Defendant’s motion to compel

arbitration is DENIED. As to Count IV, which arises under the MLA, Defendant’s motion to

compel arbitration is GRANTED. As to Count V, which involves the alleged conversion of a

payment made to Defendant rather than to Plaintiff, the motion to compel arbitration is

DENIED. If, however, it ultimately appears that the converted payment relates to the postCase 3:06-cv-06226-CRB Document 13 Filed 12/14/06 Page 5 of 6
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G:\CRBALL\2006\6226\order re motion to compel arbitration.wpd 6

MLA sale of a Cargo Transfer System, and therefore falls within the scope of the MLA, see

MLA ¶ 7, Defendant may renew its motion to compel arbitration as to Count V.

In sum, Defendant’s motion to compel arbitration is GRANTED as to Count IV and

DENIED as to Counts I, II, III, and V. The parties shall appear before the Court for a status

conference at 8:30 a.m. on Friday, January 5, 2007.

IT IS SO ORDERED.

Dated: December 14, 2006 

CHARLES R. BREYER

UNITED STATES DISTRICT JUDGE

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