UNITED STATES COURT OF APPEALS 1 2 FOR THE SECOND CIRCUIT 3 4

------------- 5 6 August Term, 2010 7 8 (Argued: April 13, 2011 Decided: July 13, 2011) 9 10 Docket No. 10-5107-cv 11 12 - - - - - - - - - - - - - - - - - - - - - - X 13 14 APPLIED ENERGETICS, INCORPORATED, 15 16 Petitioner-Appellant , 17 18 - v - 19 20 NEWOAK CAPITAL MARKETS, LLC, 21 22 Respondent-Appellee

. 23 24 - - - - - - - - - - - - - - - - - - - - - - X 25 26 Before: KEARSE and CHIN, Circuit Judges , and 27 RAKOFF, District Judge

. * 28 29 Appeal from a final order and judgment of the United States 30 District Court for the Southern District of New York compelling 31 arbitration under 9 U.S.C. § 4. Reversed. 32 CLIFFORD THAU (Hilary L. Preston, on the 33 brief), Vinson & Elkins LLP, New York, NY for 34 Petitioner-Appellant

. 35 36 LEANNE M. SHOFI (Joseph M. Pastore III, on 37 the brief), Fox Rothschild, LLP, New York, NY 38 , forRespondent-Appellee

. 39 40 RAKOFF, District Judge : 41

* The Honorable Jed S. Rakoff, United States District Judge for the Southern District of New York, sitting by designation. -1-Petitioner-Appellant Applied Energetics, Inc. (“Applied”) 1 appeals the district court’s final order and judgment compelling 2 arbitration of the claims of Respondent-Appellee NewOak Capital 3 Markets, LLC (“NewOak”) before the Financial Industry Regulatory 4 Authority (“FINRA”). Because we find that the parties expressly 5 agreed to adjudicate their disputes before a court, we reverse, 6 and remand to the district court for further proceedings. 7 8
BACKGROUND 9 Applied is a developer and manufacturer of military 10 technology. On September 28, 2005, NewOak, an independent broker 11 dealer, entered into a preliminary letter agreement with Applied 12 (the “Engagement Agreement”), by which NewOak agreed to act as 13 Applied’s exclusive placement agent in an anticipated $20 million 14 private offering of Applied securities to finance Applied’s 15 anticipated development of a “field-deployable vehicle.” The 16 Engagement Agreement contained an arbitration clause that 17 provided that: 18 Each of [NewOak] and [Applied] agrees that any dispute 19 arising out of or relating to this letter, the Indemnity 20 Agreement and/or the transactions contemplated hereby or 21 thereby . . . shall be resolved through binding arbitration 22 before the National Association of Securities Dealers 1

. . . 23 in New York City. 24 25 However, the Engagement Agreement also specifically contemplated 26

1The National Association of Securities Dealers is one of the predecessors of FINRA. -2-that the parties would enter into a subsequent, more formal 1 agreement setting forth “the terms and conditions contained [in 2 the Engagement Agreement] as well as those customarily contained 3 in agreements of such character.” On October 24, 2005, NewOak 4 and Applied signed that subsequent agreement (the “Placement 5 Agreement”), which, though embodying much of the substance of the 6 Engagement Agreement, omitted any reference to arbitration. 7 Instead, the Placement Agreement expressly provided that the 8 agreement would be governed by New York law and that: 9 Any dispute arising out of this Agreement shall be 10 adjudicated in the Supreme Court, New York County or in the 11 federal district court for the Southern District of New 12 York. 13 14 The Placement Agreement also contained a merger clause, 15 which provided that the Placement Agreement and certain other 16 documents related to the transaction -- namely, the Purchase 17 Agreement, the Registration Rights Agreement, the Escrow 18 Agreement, and the Warrant -- “constitute the entire 19 understanding and agreement between the parties” with respect to 20 NewOak’s placement of Applied securities, and that “there are no 21 [other] agreements or understandings” that apply. The Engagement 22 Agreement was notamong the documents listed in the Placement 23 Agreement’s merger clause. 24 On January 14, 2010, NewOak initiated arbitration against 25 Applied with FINRA, asserting various claims pursuant to its 26 allegations that, between May 4, 2005 and May 10, 2006, Applied 27
-3-“knowingly disseminated materially false and misleading 1 information about the development and production capability” of 2 the field-deployable vehicle, as well as about “the status of 3 [its] real or potential sales.” NewOak further alleged that 4 Applied’s officers and directors collectively sold 1.5 million 5 shares of their personal Applied securities holdings during the 6 time that the company’s securities were artificially inflated as 7 a result of the company’s misrepresentations. In response, 8 Applied filed a petition in the Supreme Court of the State of New 9 York seeking to stay the FINRA arbitration on the ground that the 10 mandatory court-adjudication provision of the Placement Agreement 11 superseded the parties’ earlier agreement to arbitrate their 12 disputes. NewOak timely removed the petition to the Southern 13 District of New York, and then moved to compel arbitration under 14 the arbitration clause of the Engagement Agreement and § 4 of the 15

FAA. 16 In a Report and Recommendation dated October 5, 2010, the 17 Magistrate Judge to whom the matter was initially referred 18 recommended that the district court grant the petition and deny 19 arbitration. Applied Energetics, Inc. v. NewOak Capital Markets, 20
LLC , No. 10 Civ. 1669, 2010 WL 3860386, at *1 (S.D.N.Y. Oct. 5, 21 2010) (“Applied I”). But in a written opinion dated December 3, 22 2010, the district court granted NewOak’s motion and ordered the 23 parties to arbitrate. Applied Energetics, Inc. v. NewOak Capital 24

-4-Markets, LLC , No. 10 Civ. 1669, 2010 WL 4968186, *1 (S.D.N.Y. 1 Dec. 3, 2010) (“Applied II”)

. This appeal followed. 2
3

DISCUSSION 4 We review de novothe district court’s order compelling 5 arbitration. SeeChelsea Square Textiles, Inc. v. Bombay Dyeing 6 & Mfg. Co. Ltd. , 189 F.3d 289, 295 (2d Cir. 1999). 7 The district court, relying primarily on this Court’s 8 decision in Bank Julius Baer & Co., Ltd. v. Waxfield Ltd. , 424 9 F.3d 278 (2d Cir. 2005), concluded that the Engagement 10 Agreement’s arbitration clause and the Placement Agreement’s 11 adjudication clause “may be read as complementary” to one 12 another. Applied II, at *3. The district court reasoned that, 13 because arbitration awards “may only be enforced by subsequent 14 judicial action,” Bank Julius , 424 F.3d at 284, the Engagement 15 Agreement’s arbitration clause could be construed as requiring 16 arbitration of the parties’ disputes in the first instance, with 17 the Placement Agreement’s adjudication clause merely designating 18 that any action to enforce or dispute an arbitral award must 19 occur in the courts enumerated therein. SeeApplied II, at *3. 20 Since the Bank JuliusCourt provided that “if there is a reading 21 of the various agreements that permits the Arbitration Clause to 22 remain in effect, we must choose it,” 424 F.3d at 284, the 23

-5-district court granted NewOak’s motion and compelled the parties 1 to arbitrate NewOak’s claims. 2 We disagree with the district court’s conclusion that the 3 Engagement Agreement’s arbitration clause and the Placement 4 Agreement’s court-adjudication clause can reasonably be read as 5 complementary. Rather, this case falls within the alternative 6 scenario, also contemplated by Bank Julius , where contracting 7 parties are free to revoke an earlier agreement to arbitrate by 8 executing a subsequent agreement the terms of which plainly 9 preclude arbitration. See424 F.3d at 284. 10 A close reading of Bank Juliusis instructive. In Bank 11 Julius , the parties, like those in the instant case, initially 12 agreed to arbitrate “any . . . dispute” arising out of their 13 contractual relationship and, likewise, subsequently entered into 14 an agreement that omitted any mention of arbitration. Id.at 15 282. The subsequent agreement included, however, a non-exclusive 16 forum selection clause that read as follows: 17 Without limiting the right of the [plaintiff] to bring any 18 action or proceeding against [the defendant] . . . in the 19 courts of other jurisdictions, [the defendant] hereby 20 irrevocably submits to the jurisdiction of any New York 21 State or Federal court sitting in New York City, and . . . 22 hereby irrevocably agrees that any Action may be heard and 23 determined in such New York State court or in such Federal 24 court. 25 26 424 F.3d at 282 (emphasis omitted). Furthermore, the subsequent 27 agreement, although containing a merger clause, also provided 28 that “the rights and remedies provided [herein] are cumulative 29

-6-and not exclusive of any rights or remedies provided under any 1 other agreement.” Id. 2 Under these circumstances, the Court in Bank Julius 3 concluded that the forum selection clause in the subsequent 4 agreement could be read as complementary, rather than 5 contradictory, to the parties’ initial agreement to arbitrate: 6 the forum selection clause would operate to provide New York 7 courts with (non-exclusive) jurisdiction over ancillary 8 proceedings -- such as to enforce an arbitral award or to 9 challenge the validity of the arbitration agreement -- but the 10 merits of any dispute would be resolved in the first instance by 11 arbitration. Seeid.at 284-85 While other readings were 12 possible, the presumption in favor of arbitration made this 13 reading the preferred interpretation. Id. 14 The case at bar is different. Here, the Placement 15 Agreement’s language that “[a]ny dispute” between the parties 16 “shall be adjudicated” by specified courts stands in direct 17 conflict with the Engagement Agreement’s parallel language that 18 “any dispute . . . shall be resolved through binding 19 arbitration.” Both provisions are all-inclusive, both are 20 mandatory, and neither admits the possibility of the other. 21 Moreover, use of the word “adjudicate[]” in the Placement 22 Agreement’s clause is a clear and unmistakable reference to 23 judicial action. SeeBlack’s Law Dictionary 47, 922 (9th ed. 24

-7-2009) (defining “adjudicate” as “[t]o rule upon judicially,” and 1 defining judicial as “[o]f, relating to, or by the court or a 2 judge”). Similarly, the clause’s use of the obligatory verb 3 “shall” precludes the resolution of the parties’ disputes by any 4 means other than their “adjudicat[ion]” by a court of law. See 5 Phillips v. Audio Active Ltd. , 494 F.3d 378, 386-87 (2d Cir. 6 2007) (forum selection clause using obligatory language precludes 7 parties from bringing an action arising thereunder in forums 8 other than those enumerated therein). Accordingly, the Placement 9 Agreement’s adjudication clause “specifically precludes” 10 arbitration, seeBank Julius , 424 F.3d at 284 (internal quotation 11 marks omitted), and, by operation of the merger clause, 1 12 displaces the Engagement Agreement’s arbitration clause. Under 13 the express terms of the Placement Agreement, the parties’ 14 instant disputes must therefore be heard in the first instance by 15

1NewOak argues that “‘a merger clause acts only to require full application of the parol evidence rule to the writing in question.’” Appellee’s Br. 17 (quoting Bank Julius , 424 F.3d at 283). While this may be true of a “general merger provision,” seePrimex Int’l Corp. v. Wal-Mart Stores, Inc. , 89 N.Y.2d 594, 599 (N.Y. 1997), the merger clause in the Placement Agreement went beyond merely stating that the agreement “represents the entire understanding between the parties.” Seeid.It further stated that “there are no agreements or understandings with respect to the subject matter hereof” and specifically identified the agreements that were in force (i.e. , the Placement Agreement, Purchase Agreement, Registration Rights Agreement, Escrow Agreement, and Warrant). Thus, the merger clause here, by its own terms, clears the path for the Placement Agreement’s adjudication clause to displace the Engagement Agreement’s arbitration clause.

-8-either the New York State Supreme Court for New York County or 1 the federal district court for the Southern District of New York. 2 Even assuming, as the district court found, that the 3 provisions in the two agreements could reasonably be read as 4 complementary, we conclude that the district court erred in 5 applying the presumption in favor of arbitration. As the Supreme 6 Court reaffirmed in Granite Rock Co. v. International Brotherhood 7 of Teamsters , “in FAA and in labor cases” the presumption in 8 favor of arbitrability should only be applied “where a validly 9 formed and enforceable arbitration agreement is ambiguous about 10 whether it covers the dispute at hand.” 130 S. Ct. 2847, 2858-59 11 (2010). In other words, while doubts concerning the scope of an 12 arbitration clause should be resolved in favor of arbitration, 13 the presumption does not apply to disputes concerning whether an 14 agreement to arbitrate has been made. See, e.g. , Vera v. Saks & 15
Co. , 335 F.3d 109, 116 (2d Cir. 2003). “[A] party cannot be 16 required to submit to arbitration any dispute which [it] has not 17 agreed so to submit.” Id.(internal quotation marks and brackets 18 omitted). Here, because the parties dispute not the scope of an 19 arbitration clause but whether an obligation to arbitrate exists, 20 the presumption in favor of arbitration does not apply. 21 Finally, in deciding whether a contractual obligation to 22 arbitrate exists, “courts should generally apply state-law 23 principles that govern the formation of contracts.” Mehler v. 24

-9-Terminix Int’l Co. , 205 F.3d 44, 48 (2d Cir. 2000). Under New 1 York law, “[i]t is well established that a subsequent contract 2 regarding the same matter will supersede the prior contract.” 3 Barnum v. Millbrook Care Ltd. P’ship , 850 F.Supp 1227, 1236 4 (S.D.N.Y.) (citing Coll. Auxiliary Servs. Of State Univ. Coll., 5 Inc. v. Slater Corp. , 456 N.Y.S.2d 512 (3d Dep’t 1382)), aff’d43 6 F.3d 1458 (2d Cir. 1994). Here, for the reasons set forth above, 7 we conclude, as a matter of law, that the Placement Agreement 8 superseded the Engagement Agreement. 9 For the foregoing reasons, the order of the district court 10 compelling arbitration is reversed and the matter is remanded 11 with direction to grant the petition to stay the FINRA 12 arbitration and to take such other action as is consistent with 13 this Opinion. 14

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