Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca8-03-03831/USCOURTS-ca8-03-03831-0/pdf.json

Parties Involved:
CD Developers
Appellee
CD Partners
Appellee
Jerry W. Grizzle
Appellant
Gary Johnson
Appellant
Doyle E. Motley
Appellant

Document Text:

United States Court of Appeals

FOR THE EIGHTH CIRCUIT

___________

No. 03-3831

___________

CD Partners, LLC; *

CD Developers, LP, *

*

Appellees, *

*

v. *

*

Jerry W. Grizzle, acting in scope of his *

employment as Chief Executive Officer * Appeal from the United States

of CDWI [CD Warehouse, Inc.]; * District Court for the

Doyle E. Motley, acting within the * Southern District of Iowa.

scope of his employment as Chief *

Financial Officer of CDWI [CD *

Warehouse, Inc.]; Gary Johnson, *

acting within the scope of his *

employment as Chief Operating Officer *

of CDWI [CD Warehouse, Inc.], *

*

Appellants. *

___________

Submitted: March 14, 2005

Filed: September 23, 2005

___________

Before MURPHY, BYE, and SMITH, Circuit Judges.

___________

BYE, Circuit Judge.

Appellate Case: 03-3831 Page: 1 Date Filed: 09/23/2005 Entry ID: 1955306
1

The four franchise agreements relate to retail stores in Iowa City, Iowa; Cedar

Rapids, Iowa; Waterloo, Iowa; and Maryland Heights, Missouri. 

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Jerry Grizzle, Doyle Motley and Gary Johnson, three principals in a

corporation called C.D. Warehouse, Inc. (CDWI), appeal the district court's order

denying their motion to compel arbitration of the tort lawsuit C.D. Partners, L.L.C.,

filed against them. The lawsuit accuses the three of negligence, negligent

misrepresentation, and fraudulent misrepresentation arising out of four franchise

agreements between CDWI (franchisor) and C.D. Partners (franchisee). The district

court denied the motion on the grounds the three principals were not signatories to

the franchise agreements between the two corporations, and the tort lawsuit was not

covered by the agreements' arbitration clauses. We reverse and remand for further

proceedings.

I

Between 1997 and 1999, CDWI and C.D. Partners signed four franchise

agreements1

 to operate retail stores under the name CD Warehouse. The purpose of

the agreements was to sell new and used music compact discs (CDs). Each franchise

agreement contained an identical arbitration clause which stated, in relevant part:

"Except as provided in this Agreement, Franchisor and Franchisee agree that any

claim, controversy or dispute arising out of or relating to Franchisee's operation of the

Franchised business under the Agreement . . . which cannot be amicably settled shall

be referred to Arbitration in accordance with the Rules of the American Arbitration

Association." In addition, each franchise agreement provided "nothing in this

Agreement is intended, nor shall be deemed, to confer upon any Person or legal entity

other than Franchisee, Franchisor, Franchisor's officers, directors, and employees .

. . any rights or remedies under or by reason of this Agreement." In each instance, the

agreements were signed by David Gott on behalf of C.D. Partners and Jerry Grizzle

on behalf of CDWI.

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In April 2000, a contractual dispute arose between the two corporations. C.D.

Partners filed suit against CDWI in Iowa state court. CDWI removed the action to

federal district court, where it was subsequently stayed pending arbitration pursuant

to the arbitration clauses in the parties' franchise agreements. The arbitration was

never held, however, because CDWI filed for bankruptcy.

In May 2003, C.D. Partners filed this suit in Iowa state court. Whereas the first

suit sounded in contract and was brought directly against the corporation CDWI, the

second suit sounded in tort and was brought directly against the three individuals who

comprised CDWI's primary management – Jerry Grizzle, its president and Chief

Executive Officer (CEO); Doyle Motley, its Chief Financial Officer (CFO); and Gary

Johnson, its Chief Operating Officer (COO). The complaint alleged negligence,

negligent misrepresentation, and fraudulent misrepresentation. 

The complaint alleged Grizzle was negligent in nine specific ways, all related

to the operation of the franchises (for example, failing to protect the exclusive

territories under the franchise agreements, failing to make improvements to point-ofsale software, failing to provide suitable and timely financing for capital

improvements to the stores). Similarly, the negligence allegations against Motley and

Johnson all related to the operation of the franchises. The negligent

misrepresentation count alleged all three defendants provided C.D. Partners with false

information to influence the franchise transactions between the parties, which caused

damage to C.D. Partners. The fraudulent misrepresentation count alleged all three

defendants knew certain representations they made were false, and that they intended

to deceive C.D. Partners.

The three principals removed the case to federal district court and filed a

motion to compel arbitration pursuant to the franchise agreements between C.D.

Partners and CDWI. They argued they could enforce the arbitration clauses between

the two corporations – notwithstanding the fact they were not signatories to the

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agreement – because the tort allegations against them arose from the contractual

relationship between the two corporations, and the claims against them arose from the

duties they performed while acting as officers of the signatory, CDWI. C.D. Partners

resisted the motion, contending the three principals could not enforce the arbitration

clauses because they were not signatories and the tort claims against the officers did

not fall within the scope of the arbitration clauses.

The district court denied the motion to compel arbitration concluding "neither

the claims nor damages sought in this case are the same as those sought against the

corporation in that earlier lawsuit." Grizzle, Motley and Johnson filed this timely

appeal.

II

We review de novo the denial of a motion to compel arbitration. Telectronics

Pacing Sys., Inc. v. Guidant Corp., 143 F.3d 428, 430 (8th Cir. 1998). "[A]ny doubts

raised in construing contract language on arbitrability 'should be resolved in favor of

arbitration.'" Id. at 430-31 (quoting Moses H. Cone Mem'l Hosp. v. Mercury Constr.

Corp., 460 U.S. 1, 24-25 (1983)). Grizzle, Motley and Johnson contend they can

enforce the arbitration clauses in the franchise agreements between CDWI and C.D.

Partners despite their status as nonsignatories. We agree.

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." MS Dealer Serv. Corp. v. Franklin,

177 F.3d 942, 947 (11th Cir. 1999) (quoting Boyd v. Homes of Legend, Inc., 981 F.

Supp. 1423, 1432 (M.D. Ala. 1997)). Another is "when the signatory to a written

agreement containing an arbitration clause 'must rely on the terms of the written

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agreement in asserting [its] claims' against the nonsignatory." Id. (quoting Sunkist

Soft Drinks, Inc. v. Sunkist Growers, Inc., 10 F.3d 753, 757 (11th Cir. 1993)). "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." Id. (internal

quotations omitted). 

We believe both circumstances are present here. The relationship between

signatory CDWI and the nonsignatory appellants is a close one. The tort allegations

against the three appellants all arise out of their conduct while acting as officers of

CDWI. Evisceration of the underlying arbitration agreement will be avoided only by

allowing the three principals to invoke arbitration. Similarly, C.D. Partners's claims

against the three appellants rely upon, refer to, and presume the existence of the

written agreement between the two corporations. Thus, arbitration is appropriate.

The authority cited by C.D. Partners is inapposite. For example, Flink v.

Carlson, 856 F.2d 44 (8th Cir. 1988), involved a signatory attempting to force a

nonsignatory into arbitration. See id. at 46-47 (affirming district court's stay of

arbitration of a brokerage house's claims against the individual representative who

was not a signatory to the agreements in question); see also Merrill Lynch Inv.

Managers v. Optibase, Ltd., 337 F.3d 125, 131-32 (2d Cir. 2003) (affirming district

court's grant of a preliminary injunction enjoining an investor from proceeding with

arbitration against fund advisor who had not agreed to arbitration).

 

This is not such a case. This is a case where a nonsignatory with a close

relationship to a signatory wants the other signatory to arbitrate a claim. The test for

determining whether a nonsignatory can force a signatory into arbitration is different

from the test for determining whether a signatory can force a nonsignatory into

arbitration:

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[I]t matters whether the party resisting arbitration is a signatory or not.

. . . [A] willing nonsignatory seeking to arbitrate with a signatory that is

unwilling may do so under what has been called an alternative estoppel

theory which takes into consideration the relationships of persons,

wrongs, and issues, [b]ut a willing signatory seeking to arbitrate with a

non-signatory that is unwilling must establish at least one of the five

theories described in [Thomson-CSF, S.A. v. Am. Arbitration Ass'n, 64

F.3d 773, 776 (2d Cir. 1995)].

Merrill Lynch, 337 F.3d at 131 (internal citations and quotations omitted). The courts

clearly recognize a nonsignatory's ability to force a signatory into arbitration under

the "alternative" estoppel theory when the relationship of the persons, wrongs and

issues involved is a close one. See, e.g., Astra Oil Co. v. Rover Navigation, Ltd., 344

F.3d 276, 279-80 (2d Cir. 2003) (holding a nonsignatory may compel arbitration

against a signatory to an arbitration agreement because of nonsignatory's close

affiliation with the other signatory party to the agreement).

The dissent relies upon a case not cited by C.D. Partners, McCarthy v. Azure,

22 F.3d 351(1st Cir. 1994), arguing it is better reasoned than the cases we have cited

and on point. We respectfully disagree McCarthy is on point. McCarthy turned

primarily on the fact the agreement at issue was a purchase agreement, a "one-shot

transaction" where the only act the nonsignatory performed for the corporate

signatory was that of signing the purchase agreement itself. 22 F.3d at 357. The First

Circuit specifically distinguished such an instance from those instances in which the

contracting parties "contemplate[] an ongoing relationship in which the [signatory's]

promises only can be fulfilled by future (unspecified) acts of its employees or agents

stretching well into an uncertain future." Id. (distinguishing Pritzker v. Merrill

Lynch, Pierce, Fenner & Smith, 7 F.3d 1110, 1121 (3d Cir. 1993) (allowing

nonsignatories to enforce an arbitration clause for a dispute arising out of an ongoing

service contract); Roby v. Corp. of Lloyd's, 996 F.2d 1353, 1360 (2d Cir. 1993)

Appellate Case: 03-3831 Page: 6 Date Filed: 09/23/2005 Entry ID: 1955306
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(same); Letizia v. Prudential Bache Sec., Inc., 802 F.2d 1185, 1188 (9th Cir. 1986)

(same)). 

Here, we do not have "a one-shot transaction in which the purchaser's

obligations are specified and are, essentially, performed in full at the closing, or soon

thereafter." Id. This case involves an ongoing relationship where signatory CDWI's

promises could only be fulfilled by the future conduct of its corporate officers,

employees, and agents. The current dispute between signatory C.D. Partners and

nonsignatories Grizzle, Motley, and Johnson arises out of and relates directly to the

contractual agreement between the signatories, where the core of the dispute is the

conduct of the three nonsignatories in fulfilling signatory CDWI's promises. Thus,

the situation here is inapposite to the one addressed in McCarthy, and similar to the

situations addressed in Pritzker, Roby, and Letizia, where the courts allowed

nonsignatories to enforce an arbitration clause. 

The dissent also implies the franchise agreements involved here were not

drafted skillfully enough to include CDWI's officers within the ambit of the

arbitration clause. We respectfully disagree. Each agreement's arbitration clause was

drafted broadly to cover every "claim, controversy or dispute arising out of" the

operation of the franchise. Each agreement further provided nothing in the agreement

would be deemed to confer rights or remedies upon anyone "other than Franchisee,

Franchisor, Franchisor's officers, directors, and employees, . . .." By necessary

implication, then, each agreement intended to confer its rights or remedies – including

the right to arbitrate – upon "Franchisor's officers, directors, and employees." Under

the circumstances involved in this case, it is clearly appropriate to allow the

nonsignatories to enforce the arbitration agreement against signatory C.D. Partners.

Appellate Case: 03-3831 Page: 7 Date Filed: 09/23/2005 Entry ID: 1955306
2

Citing Lee v. Chica, 983 F.2d 883 (8th Cir. 1993), the dissent contends P &

P Industries is inapposite on the issue whether "arising out of" language in an

arbitration clause is broad enough to cover tort claims because P & P Industries

involved the confirmation of an arbitration award rather than a motion to compel

arbitration. We respectfully disagree. The distinction made in Chica between

compelling arbitration and confirming an arbitration award addressed whether state

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III

Grizzle, Motley and Johnson further contend the tort suit filed against them by

C.D. Partners is covered by the arbitration clauses in the franchise agreements

between CDWI and C.D. Partners. We agree.

The arbitration clauses in the franchise agreements are worded broadly to cover

"any claim, controversy or dispute arising out of or relating to Franchisee's operation

of the Franchised business under the Agreement." There is a strong national policy

in favor of arbitration. Dobbins v. Hawk's Enters., 198 F.3d 715, 717 (8th Cir. 1999).

As a consequence, doubts about whether an arbitration clause should be construed to

cover a particular dispute are generally resolved in favor of arbitration. Telectronics,

143 F.3d at 430. Broadly worded arbitration clauses such as the ones at issue here

are generally construed to cover tort suits arising from the same set of operative facts

covered by a contract between the parties to the agreement.

 

For example, in P & P Industries v. Sutter Corp., 179 F.3d 861 (10th Cir.

1999), the Tenth Circuit addressed an arbitration clause in an exclusive agency

agreement between a manufacturer and marketer. The arbitration clause provided

"[a]ny controversy, claim, or breach arising out of or relating to this Agreement" shall

be arbitrable. Id. at 871. The court held the arbitration clause was broad enough to

encompass tort claims where the marketer's allegations of improper conduct against

the manufacturer were limited to actions taken in connection with the manufacturer's

decision to terminate the agreement. Id.2

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or federal law applies when deciding if a party has standing to challenge the validity,

revocability, or enforceability of an arbitration clause. Chica, 983 F.2d at 886 (citing

Perry v. Thomas, 482 U.S. 483, 492 n.9 (1987)). In this case, we have already

determined Grizzle, Motley, and Johnson have standing to enforce the arbitration

clause. Chica does not stand for the proposition we apply different rules of contract

interpretation to an arbitration clause when we have already determined a dispute is

arbitrable.

3

The dissent contends our reliance upon Gregory v. Electro-Mechanical Corp.

and Kroll v. Doctor's Associates is misplaced because those cases did not involve a

nonsignatory. Once again, we respectfully disagree. The issue whether

nonsignatories can enforce an arbitration clause is entirely separate and distinct from

the issue whether the phrase "arising hereunder" is broad enough to encompass tort

claims arising from the same set of operative facts covered by a contract employing

that phrase in its arbitration clause. Thus, Gregory and Kroll do not have to involve

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Similarly, in Gregory v. Electro-Mechanical Corp., 83 F.3d 382 (11th Cir.

1996), the Eleventh Circuit addressed a provision in a stock purchase agreement

which provided for arbitration of all disputes "arising hereunder." The court held the

arbitration clause required arbitration not only of the seller's contract claims, but of

all claims asserted in the seller's complaint – including fraud, fraudulent inducement,

deceit, misrepresentation, conversion, breach of good faith and fair dealing, and

outrage – because all the tort claims were "disputes that originate[d] out of or ha[d]

a connection with th[e] underlying agreement." Id. at 383; see also Kroll v. Doctor's

Assocs., 3 F.3d 1167, 1170 (7th Cir. 1994) ("[A] plaintiff may not avoid an otherwise

valid arbitration provision merely by casting its complaint in tort. The touchstone of

arbitrability in such situations is the relationship of the tort alleged to the subject

matter of the arbitration clause.") (internal quotations and citations omitted); Acevedo

Maldonado v. PPG Indus., 514 F.2d 614, 616 (1st Cir. 1975) ("The contracts provide

for arbitration of 'any controversy or claim arising out of or relating to this Agreement

or the breach thereof'. Broad language of this nature covers contract-generated or

contract-related disputes between the parties however labeled: it is immaterial

whether claims are in contract or in tort[.]").3

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a nonsignatory to be persuasive. 

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In this case, the tort claims against the three appellants had their genesis in,

arose out of, and related to C.D. Partners's operation of the franchises under the

franchise agreements. Thus, the tort claims stated in this lawsuit are subject to the

arbitration clauses.

IV

Finally, the arbitration clauses provide the "[a]rbitration shall take place at

Franchisor's principal place of business in Oklahoma County, Oklahoma."

Notwithstanding its agreement to the contrary, C.D. Partners contends the arbitration

should take place in Iowa because Section 4 of the Federal Arbitration Act (FAA)

provides the "hearings and proceedings, under such agreement, shall be within the

district in which the petition for an order directing such arbitration is filed." 9 U.S.C.

§ 4. C.D. Partners therefore requests us to require the district court on remand to

order the arbitration to take place in Iowa rather than Oklahoma.

The district court did not require the parties to undergo arbitration, so there is

no order compelling the arbitration to take place in either Iowa or Oklahoma. Thus,

this issue is not ripe for our review at this time, and we leave it to the district court

to address in the first instance on remand.

V

We reverse the district court's order denying the motion to compel arbitration

and remand for further proceedings.

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SMITH, Circuit Judge, dissenting.

I believe that the district court properly refused to compel arbitration in C.D.

Partner's case against Jerry Grizzle, Doyle Motley, and Gary Johnson, and, therefore,

respectfully dissent. First, I note that this circuit has yet to decide whether, or under

what circumstances, non-signatories to a contractual agreement can enforce an

arbitration clause. The majority does not rely on any controlling Eighth Circuit

precedent, and cites no other factually similar case. The Eleventh Circuit precedent

relied on by the majority invokes the doctrine of equitable estoppel, a theory not

argued here; and in MS Dealer Serv. Corp. v. Franklin, 177 F.3d 942, 948 n.4 (11th

Cir. 1999), the court noted that the arbitration clause at issue specifically included

claims arising out of the tort of fraud. The arbitration clause at issue in this case does

not have such language and is specifically limited to claims arising under the

Agreement. Indeed, the majority notes that the relationship necessary to apply the

Eleventh Circuit precedent is "a close one." 

I agree that there is a strong national policy in favor of arbitration. However

P & P Indus., Inc. v. Sutter Corp., 179 F.3d 861 (10th Cir. 1999), relied on by the

majority, involved the confirmation of an arbitration award, and, therefore, is

inapposite. See Lee v. Chica, 983 F.2d 883 (8th Cir. 1993) (explaining that being

compelled to arbitrate differs from confirming an arbitration award). Likewise, the

majority's reliance on Gregory v. Electro-Mechanical Corp., 83 F.3d 382, 383 (11th

Cir. 1996), which merely interpreted the phrase "arising hereunder," is misplaced as

it did not involve a non-signatory. See also Kroll v. Doctor's Assocs., Inc., 3 F.3d

1167 (7th Cir. 1993) (situation did not involve a non-signatory). 

I find the factually similar case of McCarthy v. Azure, 22 F.3d 351 (1st Cir.

1994), to rest on a stronger foundation with better reasoning. In McCarthy, the First

Circuit held that a corporate officer, who signed an agreement containing an

arbitration clause in his official capacity, could not compel arbitration of claims

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lodged against him as an individual. McCarthy, Id. at 363. McCarthy rightfully

encourages skillful drafting of agreements as the proper means for including officers

in the ambit of an arbitration clause. "A corporation that wishes to bring its agents

and employees into the arbitral tent can do so by writing contracts. . . that will specify

the desired result." Id. at 360. McCarthy is on point and well reasoned.

I respectfully dissent. 

______________________________

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