Court Opinion

ID: 201096
Source: CourtListenerOpinion
Date Created: 2011-02-07 05:07:36+00
Date Added: 2024-06-11T09:13:30.677187
License: Public Domain

United States Court of Appeals
                        For the First Circuit

No. 03-2622

      FIT TECH, INC.; PLANET FITNESS CENTER OF MAINE, INC.;
PLANET FITNESS CENTER, INC.; PLANET FITNESS CENTER OF DARTMOUTH,
INC.; PLANET FITNESS CENTER OF SALEM, INC.; PLANET FITNESS CENTER
       OF BRIGHTON, INC.; STRATFORD FITNESS CENTER, INC.;
                 DAVID B. LAIRD; SCOTT G. BAKER,

                        Plaintiffs, Appellees,

                                  v.

               BALLY TOTAL FITNESS HOLDING CORPORATION;
                       HOLIDAY UNIVERSAL, INC.,

                       Defendants, Appellants.
                              __________

                           JOHN H. WILDMAN,

                              Defendant.

             APPEAL FROM THE UNITED STATES DISTRICT COURT

                  FOR THE DISTRICT OF MASSACHUSETTS

            [Hon. Morris E. Lasker,* U.S. District Judge]
                        ____________________

                                Before

                         Boudin, Chief Judge,

                Torruella and Howard, Circuit Judges.

     Juliet A. Davison with whom Howard M. Cooper and Todd & Weld
LLP were on brief for appellants.

    *
        Of the Southern District of New York, sitting by designation.
     Deborah L. Thaxter, P.C. with whom Jonathan Sablone, Stephen
M. LaRose and Nixon Peabody LLP were on brief for appellees.

                          July 1, 2004
          BOUDIN, Chief Judge.   This appeal, presenting issues of

contract law and appellate jurisdiction, arises out of the sale of

a business.   The principal plaintiffs in the district court, David

Laird and Scott Baker, previously owned and operated eight health

and fitness centers in New England doing business under several

names (e.g., "Planet Fitness"; "Fit Tech").     On April 19, 2002,

Laird and Baker executed an "Asset Purchase Agreement" effective as

of March 14, 2002, by which defendant Bally--a major owner of such

fitness facilities--acquired plaintiffs' centers.1

          The purchase agreement fixed the purchase price at $14.7

million payable at closing but provided that the total amount could

be increased by a maximum of $12 million depending on earnings of

the eight centers in the two years following the closing.      The

formula for computing the extra payment depended primarily on

earnings of the centers before corporate overhead, interest, taxes,

depreciation and amortization; this figure is defined in the

purchase agreement and called "EBITDA".     The purchase agreement

sets out both procedures for calculating the amount and a time

table.

          Specifically, Bally was required to provide Laird and

Baker quarterly reports setting forth Bally's calculation of the

EBITDA.   An initial (75 percent) payment by Bally, based on the

     1
      The principal defendants are Bally Total Fitness Holding
Corporation and its subsidiaries, Holiday Universal, Inc. We refer
to them collectively as "Bally."

                                 -3-
"advance earn-out schedule," was to be determined within 90 days

after the first anniversary of the closing date (i.e., by mid-July,

2003).   The final calculation of the full supplemental amount,

designated   the   "earn-out   schedule,"   was   due   on   the   second

anniversary of the closing.    Section 3.5 of the purchase agreement

then set out a process for dealing with disputes as to the

schedules:

          (e) Protest Notice.    Within sixty (60) days
          after delivery to the Sellers of the Advance
          Earn-Out Schedule or the Earn-Out Schedule, as
          applicable, the Sellers may deliver written
          notice (each, a "Protest Notice") to the Buyer
          of any objections, and the basis therefor,
          which the Sellers may have to the Advance
          Earn-Out Schedule or the Earn-Out Schedule, as
          applicable.   Any such Protest Notice shall
          specify the basis for the objection, as well
          as the amount in dispute. The failure of the
          Sellers to deliver a protest notice within the
          prescribed time period will constitute the
          Sellers' acceptance of the Advance Earn-Out
          Schedule and the Earn-Out Schedule set forth
          therein, as applicable.

          (f) Resolution of the Sellers' Protest.     If
          the Buyer and the Sellers are unable to
          resolve any disagreement with respect to the
          Advance Earn-Out Schedule or the Earn-Out
          Schedule within twenty (20) days following the
          Buyer's receipt of any Protest Notice, then
          the items in dispute will be referred to the
          Accountants for final determination within
          forty-five (45) days, which determination
          shall be final and binding on all of the
          parties hereto.    The Accountants shall be
          engaged by the Sellers and the Buyer regarding
          the Advance Earn-Out Schedule or the Earn-Out
          Schedule, as applicable, based upon the
          written submissions of the Sellers and the
          Buyer, and the Accountants may, but shall not
          be required to, audit the Advance Earn-Out

                                 -4-
            Schedule or the Earn-Out Schedule or any
            portion thereof.       The Advance Earn-Out
            Schedule   and   the   Earn-Out   Schedule as
            ultimately    prepared    and   finalized  in
            accordance with this Section 3.5(f) shall
            thereafter be deemed to be and constitute the
            "Advance Earn-Out Schedule" and the "Earn-Out
            Schedule" respectively, for all purposes.

            Elsewhere         in    the   agreement,       PriceWaterhouseCoopers

(“Price Waterhouse”) was designated as the accountants.                     A choice

of law provision specified that the purchase agreement was to be

governed by Illinois law.

            The purchase agreement also provided that Laird and Baker

would    each    sign   an    "Employment       Agreement,"    making    them    area

directors       to   manage   and    operate     Bally's    New   England    fitness

centers.    The employment agreement, unlike the purchase agreement,

contained a standard arbitration clause providing that "[a]ny

controversy or claim arising out of or relating to this employment

agreement, or the breach thereof, shall be settled by arbitration"

pursuant to the rules of the American Arbitration Association or a

similar organization selected by Bally.

            Laird and Baker began to serve pursuant to the employment

agreements, but disagreements soon developed between them and

Bally.     In February 2003, Laird and Baker brought this diversity

action     against      Bally       in    the   federal      district    court     in

Massachusetts, charging Bally primarily with breach of contract and

of an implied covenant of good faith and fair dealing.                  Claims were

also made under the Massachusetts statute governing unfair and

                                          -5-
deceptive   trade   practices,      Mass.    Gen.    Laws   ch.    93A,   and   a

counterpart Illinois statute, 815 Ill. Comp. Stat. 505/2.

            The complaint included extensive factual allegations of

improper conduct by Bally.     The district court essentially grouped

these   alleged   wrongful   acts    in     two   categories.       The   first,

comprising what we will call “accounting violations,” alleged that

Bally in its initial EBITDA calculations had improperly calculated

earnings contrary to applicable accounting principles so as to

reduce the extra purchase price that would be due.                 For example,

Bally was alleged to have spread revenues from new memberships over

the projected 22-month expected life while accruing the entire

commission expense of the agent in the month that the membership

was sold.

            The second category consisted of numerous alleged actions

taken by Bally that Laird and Baker said were wrongfully designed

to reduce the extra earnings that would boost the purchase price.

For instance,     the   complaint    charged      that   Bally    had   used   its

computer system to direct phone inquiries away from the former

Laird-Baker centers and toward Bally's pre-existing New England

facilities and that Bally had provided the centers products unfit

for sale.      These and acts like them we will call “operating

violations.”

            On March 21, 2003, Bally moved to dismiss the complaint,

relying inter alia on the purchase agreement's requirement that

                                     -6-
claims be submitted to "binding alternative dispute resolution" by

the accountant under the purchase agreement. Bally did not mention

the employment agreement's arbitration clause. On August 21, 2003,

the   district    court   concluded   that   certain   of    the   factual

allegations raised matters within the purview of the accountants

under section 3.5(f) but that the majority--concerning Bally’s

allegedly improper operation of the businesses--did not and that

those latter claims were properly reserved for disposition by the

district court.

          Bally then filed a motion to reconsider or clarify,

asking the court to identify more clearly which claims were to be

submitted to the accountant and also arguing that new events

warranted reconsideration of the district court's decision to

retain any of the claims for its own consideration.         The new events

concerned a traditional arbitration proceeding that Bally had begun

against Laird in Chicago on June 30, 2003, under the arbitration

clause in Laird's employment agreement.

          In the Chicago proceeding, Bally sought a ruling that it

was entitled to terminate Laird's employment for cause; later it

asked for a declaration that both Laird and Baker were subject to

restrictive non-compete covenants in their respective employment

agreements. Laird and Baker then counterclaimed in the arbitration

to seek monetary compensation for Bally's own alleged breaches of

                                  -7-
the employment agreement, including four alleged episodes that had

also been listed in Laird and Baker’s federal complaint.

          Bally argued that these overlapping claims should be

dismissed because Laird and Baker "have elected to submit these

claims to arbitration" in Chicago.            More broadly, Bally contended

that all of the issues retained by the district court for its own

resolution     were    properly     subject    to    arbitration    under   the

employment agreement.        By order entered on November 6, 2003, the

district court clarified its apportionment of issues as between the

court and the accountant, but it declined to refer any of the

claims (overlapping or not) to the Chicago arbitration.

          Bally has now filed an interlocutory appeal.               It argues

that the district court should not have retained any of the

plaintiffs' claims; Bally says that all must be submitted to Price

Waterhouse     or,    in   the    alternative,      subject   to   the   Chicago

arbitration.     At the very least (says Bally), the district court

should not proceed to address the overlapping claims that are being

presented both in the federal complaint and in Laird's and Baker's

answer and counterclaim in the Chicago arbitration.

             Jurisdiction.       At the outset Laird and Baker say that we

lack jurisdiction over Bally's appeal.                 The challenge to our

jurisdiction arises because the district court’s refusal either to

dismiss the case or to leave all of the issues to Price Waterhouse

or the Chicago arbitration is not a “final order” disposing of all

                                       -8-
claims against all parties.   Thus, it is not appealable as a final

judgment under 28 U.S.C. § 1291 (2000), and our jurisdiction must

be based on one of the several statutory or case law exceptions to

the final judgment requirement.

          Section 16 of the Federal Arbitration Act, 9 U.S.C. §

16(a)(1)(B) (2000), explicitly permits an immediate appeal from a

district court order “denying a petition under section 4 of this

title to order arbitration to proceed.”      See also Colón v. R.K.

Grace & Co., 358 F.3d 1, 4 (1st Cir. 2003).        We think that the

district court’s orders are appealable under this section insofar

as the district court refused to send all of the issues to the

Chicago   arbitration   proceedings    and–-this   is   the   trickier

jurisdictional issue–-as to the court's refusal to send them all to

Price Waterhouse.

          We start with Bally’s request to refer the issues to the

Chicago arbitration.    This request was made only in the motion for

reconsideration following the district court’s original August 21,

2003, order but the delay is not a bar:   the district court did not

decline to address the request as forfeited by failure to make it

earlier but instead decided on the merits that a reference to the

Chicago arbitrator was not required.    Bally’s explicit request for

a reference to the Chicago arbitrator was effectively a request for

an order to arbitrate under section 4, 9 U.S.C. § 4 (2000), which

                                 -9-
is   immediately      appealable   under      section   16,   9   U.S.C.   §   4,

16(a)(1)(B).

            For two separate reasons, the refusal to send all the

claims to Price Waterhouse is more difficult to equate with a

refusal to order arbitration.          One reason is that, as plaintiffs

point out, Bally’s request was not for a stay pending submission to

Price Waterhouse or an order to arbitrate but for dismissal of the

case because of the Price Waterhouse remedy.            So far as pertinent,

section 16 allows an interlocutory appeal only from an order

denying a petition to compel arbitration; or from the denial of a

stay pending such an arbitration.            9 U.S.C. §§ 3, 4, 16 (2000).

            The courts are divided as to whether a request to dismiss

a case based on an arbitration clause should be treated as a

request for an order compelling arbitration.2             Circumstances vary

and one rule may not suit all cases.           But here Bally clearly argued

to   the   district    court   that   under    the   purchase     agreement    the

accountant had sole authority to resolve all issues.                If that was

right and Bally wanted the accountant to decide the issues, then

      2
      Several courts have treated requests to dismiss on this
ground as equivalent to a petition for an order compelling
arbitration.   E.g., Thomassen & Drijver-Verblifa N.V. v. Sardee
Indus., Inc., NO. 88 C 4271, 1988 WL 102258, at *1 (N.D. Ill. Sept.
28, 1988); Interstate Sec. Corp. v. Siegel, 676 F. Supp. 54, 55
(S.D.N.Y. 1988). The District of Columbia Circuit held otherwise
but suggested that the aggravated facts made a difference.
Bombardier Corp. v. National R.R. Passenger Corp., 333 F.3d 250,
252-54 (D.C. Cir. 2003). See also Harrison v. Nissan Motor Corp.
in U.S.A., 111 F.3d 343, 347-49 (3d Cir. 1997)(noting the problem
without deciding).

                                      -10-
the proper remedy would have been to stay the court proceeding and

order   arbitration--assuming   that   the   accounting   remedy   is

arbitration.

          If Bally had wanted a dismissal but no decision by the

arbitrator, then we would refuse to entertain an appeal by Bally to

provide a reference that Bally had not sought and did not want.

But in this case Bally clearly is invoking the accountant dispute

resolution remedy, even if a stay rather than dismissal ensues.

Since no one has been prejudicially misled by Bally’s request for

an over-favorable remedy of dismissal, its request for dismissal in

favor of the accountant remedy can be treated as encompassing the

lesser alternative remedy of a stay and reference.

          This brings us to Bally’s second hurdle, namely, to the

question whether the accountant remedy is arbitration at all.      If

it is not arbitration, then remedies under the Federal Arbitration

Act, including an interlocutory appeal, would be unavailable.      The

Act itself does not define "arbitration", see Harrison v. Nissan

Motor Corp. in U.S.A., 111 F.3d 343, 350 (3d Cir. 1997).     Whether

the accountant remedy is “arbitration” under the federal statute is

a characterization issue, which in our view is governed by federal

law.

          That a uniform federal definition is required is obvious

to us. True, the substance of the purchase agreement-–who promised

to do what--is governed by state law (here, the parties agree, by

                                -11-
Illinois law), but whether what has been agreed to amounts to

“arbitration” under the Federal Arbitration Act depends on what

Congress meant by the term in the federal statute.       Assuredly

Congress intended a "national" definition for a national policy.

Analogous cases are numerous.3

          Curiously, there is a Ninth Circuit case to the contrary,

Wasyl, Inc. v. First Boston Corp., 813 F.2d 1579, 1582 (9th Cir.

1987), followed by Hartford Lloyd's Ins. Co. v. Teachworth, 898

F.2d 1058, 1061-63 (5th Cir. 1990), but Wasyl assumed without real

analysis that state law governed, and the Wasyl decision itself was

rightly criticized by a more recent Ninth Circuit panel when forced

to follow the earlier case.   See Portland Gen. Elec. Co. v. United

States Bank Trust Nat. Ass'n as Tr. for Trust No. 1, 218 F.3d 1085,

1091 (9th Cir. 2000) (Tashima, J., concurring); id. at 1091-92

(McKeown, J., specially concurring).

          Whether the accounting remedy is “arbitration” under the

federal statute is the more interesting question.   The answer does

not depend on the nomenclature used in the agreement, see AMF Inc.

v. Brunswick Corp., 621 F. Supp. 456, 460 (E.D.N.Y. 1985); rather,

     3
      See, e.g., Taylor v. United States, 495 U.S. 575, 590-92
(1990) (definition of "burglary" in 18 U.S.C. § 924(e) providing
sentencing enhancement for possession of a firearm); NLRB v. Hearst
Publ'ns, 322 U.S. 111, 120-123 (1944) (definition of "employee"
under the National Labor Relations act); Jerome v. United States,
318 U.S. 101, 104-05 (1943)(definition of "felony" under the Bank
Robbery Act); cf. Rankin v. Allstate Ins. Co., 336 F.3d 8, 12 n.3
(1st Cir. 2003)(waiver issues involving the Federal Arbitration Act
to be determined by federal, not state, law).

                                 -12-
the question is how closely the specified procedure resembles

classic    arbitration     and   whether   treating   the   procedure   as

arbitration serves the intuited purposes of Congress. For example,

other circuits (defensibly, in our view) have declined to treat an

agreement for non-binding arbitration as "arbitration" within the

meaning of the Act.      See Dluhos v. Strasberg, 321 F.3d 365, 371 (3d

Cir. 2003); Harrison, 111 F.3d at 349-52. But see Wolsey, Ltd. v.

Foodmaker, Inc., 144 F.3d 1205, 1208-09 (9th Cir. 1998).

           By contrast, in our case, the purchase agreement makes

the Price Waterhouse remedy “final” (whether any more final than

ordinary arbitration is doubtful but need not be decided now), and

other common incidents of arbitration of a contractual dispute are

present:    an independent adjudicator, substantive standards (the

contractual terms of the pay-out), and an opportunity for each side

to present its case.      See General Motors Corp. v. Pamela Equities

Corp., 146 F.3d 242, 246 (5th Cir. 1998); Harrison, 111 F.3d at

350; AMF Inc., 621 F. Supp. at 460.        To us, this is arbitration in

everything but name.4

           In one respect, the accounting remedy departs from a

common feature of many arbitrations. The district court found that

     4
      Selecting an expert to handle arbitration is by no means
uncommon.   E.g., Rosenberg v. Merrill Lynch, Pierce, Fenner &
Smith, Inc., 170 F.3d 1, 8 n.4 (1st Cir. 1999); Merit Ins. Co. v.
Leatherby Ins. Co., 714 F.2d 673, 679 (7th Cir.), cert. denied 464
U.S. 1009 (1983).

                                    -13-
the   purchase    agreement       refers   to    Price     Waterhouse      for   its

resolution only the accounting issues and not the operational

disputes that affect the pay-out.              So, unlike many arbitrations,

this limited reference cannot resolve the whole, or even the

greater   part,       of   the   controversy     between    the     parties.      In

consequence,      a    reference    does   not     fully    spare    the    court’s

resources, and it creates a two-track proceeding even as to claims

of breach of contract.

           Yet arbitrations sometimes do cover only a part of the

over-all dispute between the parties.              E.g., Coady v. Ashcraft &

Gerel, 223 F.3d 1, 4 (1st Cir. 2000); McDonnell Douglas Fin. Corp.

v. Pa. Power & Light Co., 858 F.2d 825, 831-33 (2d Cir. 1988).                   If

this adds to the procedural complexity, it may still provide a

swifter (and depending on the arbitrator a more expert) answer to

the questions that are arbitrated.              References to agencies under

the somewhat analogous primary jurisdiction doctrine sometimes

comprise only a single narrow issue referred to the agency before

the federal law suit goes forward.              See, e.g., U.S. Pub. Interest

Research Group v. Atl. Salmon of Me., LLC,                 339 F.3d 23, 34 (1st

Cir. 2003); Mass. v. Blackstone Valley Elec. Co., 67 F.3d 981, 992

(1st Cir. 1995).5

      5
      Our conclusion makes it unnecessary to consider Bally's
alternative argument that the failure to order resort to the
accountant is appealable under 28 U.S.C. § 1292(a)(1)(2000), giving
appellate jurisdiction over "orders that grant or deny injunctions
and orders that have the practical effect of granting or denying

                                      -14-
          Arbitrability   of   the   issues.   Having   confirmed   our

jurisdiction over the appeal, we turn next to the question whether

the district court correctly construed the purchase agreement when

it referred to Price Waterhouse only the accounting issues and

retained the remaining misconduct charges for itself. The district

court’s bifurcation might at first surprise a reader given to

literalism; but it rests on a realistic parsing of the purchase

agreement and is ultimately correct.

          The pertinent language of the purchase agreement, quoted

more fully above, says that "any disagreement with respect to the

Advance Earn-Out Schedule or the Earn-Out Schedule" will, if

unresolved after the protest notice, be referred to the accountants

for a "final" determination.     The operational misconduct could,

just like ordinary accounting errors, alter the figures in the two

schedules and reduce the pay-out.       So, Bally seemingly argues,

whether operational misconduct occurred is for the accountants to

decide.

injunctions and have 'serious, perhaps irreparable, consequence.'"
Gulfstream Aerospace Corp. v. Mayacamas Corp., 485 U.S. 271, 287-
288 (1988)(quoting Carson v. Am. Brands, Inc., 450 U.S. 79, 84,
(1981)).   The case law on this subject is complicated.         See
generally Gulfstream Aerospace Corp., 485 U.S. at 279-88; Tejidos
de Coamo, Inc. v. Int'l Ladies' Garment Workers' Union, 22 F.3d 8,
10-11 (1st Cir. 1994). Compare Kan. Gas & Elec. Co. v. Westinghouse
Elec. Corp., 861 F.2d 420, 422 (4th Cir. 1988), and Nordin v.
Nutri/System, Inc., 897 F.2d 339, 342 (8th Cir. 1990) (appealable
under 28 U.S.C. § 1292(a)(1)), with DSMC Inc. v. Convera Corp., 349
F.3d 679, 682 (D.C. Cir. 2003), and Cent. States v. Cent. Cartage
Co., 84 F.3d 988, 990-92 (7th Cir.), cert. denied, 519 U.S. 912
(1996) (not appealable).

                                 -15-
          Absent admissible extrinsic evidence bearing upon intent,

a court in interpreting disputed contract language asks what

reasonable persons in the position of the parties would ordinarily

have intended by using the words in question in the circumstances.

2 Farnsworth on Contracts §§ 7.9, 7.10 (3d ed. 2004), a view

followed in Illinois; Horbach v. Kaczmarek, 988 F. Supp. 1126, 1129

(N.D. Ill. 1997); Tatar v. Maxon Constr. Co., 294 N.E.2d 272 (Ill.

1973).   By this test, referring the operational issues to the

accountants makes no sense.

          The phrase "any disagreement" refers to earning schedules

whose components are defined in detail in the purchase agreement in

accounting terms: specifically, the EBITDA formula for earnings of

the eight centers before certain other costs (e.g., interest,

taxes, depreciation) are taken into account.        And, the unresolved

disagreements are to be referred to "accountants."       In context, it

therefore makes most sense to read "any disagreements" as referring

to   disagreements   about    accounting   issues     arising   in   the

calculations that underpin the schedules.

          Conversely, it makes no sense to assume that accountants

would be entrusted with evaluating disputes about the operation of

the business in question.     Yes, operational misconduct may well

affect the level of earnings and therefore the schedules, but the

misconduct itself would not be a breach of proper accounting

standards.   Nor would one expect accountants to have special

                                 -16-
competence in deciding whether business misconduct unrelated to

accounting conventions was a breach of contract or any implied duty

of fair dealing.

          Thus, the accounting treatment of new membership sales

was correctly regarded by the district court as an issue properly

reserved for Price Waterhouse; but whether Bally had manipulated

the phone system to divert calls from the eight centers to other

Bally centers involves not an accounting question but contract

interpretation and judgments about reasonable business practices.

Whether specific issues fall on one side or the other of the

dividing line could be disputed; but on this appeal Bally has

attacked only the district court's general bifurcation approach and

not its classification of particular misconduct claims.

          The district court's reading is supported by at least

four different cases in which clauses directing certain disputes to

accountants were read as implicitly limited to accounting issues.6

In two of the cases, the precise phrasing of the clauses made this

conclusion even easier to reach than it is in the present case, see

Blutt v. Integrated Health Servs., Inc., No. 96 CIV. 3612 LLS.,

1996 WL 389292, at *2 (S.D.N.Y. July 11, 1996); United Steelworkers

     6
      Blutt v. Integrated Health Servs., Inc., No. 96 CIV. 3612
LLS., 1996 WL 389292 (S.D.N.Y. July 11, 1996); Powderly v.
MetraByte Corp., 866 F. Supp. 39 (D. Mass. 1994); United
Steelworkers of Am. v. Nat'l Roll Co., No. 89-1491, 1990 WL
10043689 (W.D. Pa. May 3, 1990); Parker v. Twentieth Century-Fox
Film Corp., 173 Cal. Rptr. 639 (Cal. Ct. App. 1981).

                               -17-
of Am. v. Nat'l Roll Co., No. 89-1491, 1990 WL 10043689, at *2 n.1

(W.D. Pa. May 3, 1990), but the other two decisions are not very

far from our own.     In all events, if the Red Sox' sports announcer

says that the batter hit the ball out of the park, everyone knows

that a baseball is implied.

             Bally relies principally upon Mayfair Constr. Co. v.

Waveland Assocs. Phase I Ltd. P'ship, 619 N.E.2d 144 (Ill. App. Ct.

1993).    There the court read contract language as requiring the

submission     to    an   architect     (essentially     for   non-binding

arbitration)    of   disputes   about   schedule   extensions    and    cost

increases in the construction of a building.           Id. at 146-53.   The

case gives Bally a bit of support but not too much.

             The need for extensions of time for construction and

resulting cost effects of delay are arguably matters within the

normal competence of an architect.       Further, the clause in Mayfair

explicitly directed that the architect "will be the interpreter of

the requirements of the Contract Documents and the initial judge of

the performance thereunder by both the Owner and Contractor. . . .

In his capacity as interpreter and judge, he will endeavor to

secure faithful performance by both the Owner and Contractor." Id.

at 147.   Mayfair is thus quite distinguishable.

             This brings us to Bally's alternative claim, in its

petition for reconsideration to the district court, that the

Chicago arbitration alters the situation and calls for deferral of

                                  -18-
the court-retained claims in favor of the Chicago proceeding.

Bally has two versions of this argument.        In the "strong" version,

Bally argues that the general arbitration clause in the employment

agreement covers the claims made by Laird and Baker in the court

case.   The short answer is that it does not.

           The arbitration clause says that "[a]ny controversy or

claim arising out of or relating to this Employment Agreement, or

the breach thereof, shall be settled by arbitration" as specified

in the agreement.         The "arising out of" language is plainly

inapplicable; the complaint itself makes clear that all of the

claims in the district court case arise out of supposed breaches of

the purchase agreement, its implied covenant of fair dealing and

associated statutory duties.

           The "relating to" language is more vague, and therefore

potentially broader, but if no proceedings had been begun in

Chicago, no one would claim that district court case involved a

claim "relating to" the employment agreement.           It would be a far

more normal use of words to say that such a claim was related to

the purchase agreement whose alleged breach is the umbrella cause

of action in the district court.          That the same misconduct could

also play a role in the Chicago arbitration is a different matter

to which we return below.

           Bally   says    that   the     distinction   between   the   two

agreements is artificial.         It points out that the employment

                                   -19-
agreements were referenced in, and required by, the purchase

agreement; that the earn-out opportunities provided by the latter

were related to the plaintiffs' continued employment; and that the

integration clause in the purchase agreement refers to the purchase

agreement    and   documents   referred    to   in   it   as   comprising    the

complete and exclusive agreement between the parties.

            These inter-relationships are real but the juxtaposition

of the two documents hurts Bally more than it helps it.                 The two

agreements do comprise understandings related to the same business

sale and, in interpreting the documents, one provides context for

the other.    But the two documents deal with different aspects of

the sale (asset purchase and subsequent employment).               No one can

seriously argue that clauses can be plucked at random from one

agreement and inserted into the other.

            The    general   arbitration   clause    appears     only   in   the

employment agreements and refers to disputes arising under or

related to that agreement.        Further, not only is such a clause

omitted from the purchase agreement (although it would have been

child's play to insert it there) but the purchase agreement has

instead a different, and narrower, dispute resolution process

relying on the accountants; that process would be redundant--

indeed, inconsistent--if the same matter were covered by the

general arbitration clause in the employment agreement.

                                    -20-
              The   Rosenblum   decision    is    more    or   less   on   point,

Rosenblum v. Travelbyus.com Ltd., 299 F.3d 657 (7th Cir. 2002).

There a business sale and employment agreement were paired and,

when the seller sued under the sale agreement for failure to pay,

the   buyer    invoked   the    arbitration      clause   of   the    employment

agreement.      Id. at 659-665.      The Seventh Circuit rejected the

attempt.      In language no less applicable here, the court said:

              "Generally, one instrument may incorporate
              another instrument by reference." Turner
              Constr. Co. v. Midwest Curtainwalls, Inc., 543
              N.E.2d 249, 251 (Ill. App. Ct. 1989).      "The
              contract must show an intent to incorporate
              the other document and make it part of the
              contract itself."     Id.     "When determining
              under Illinois law whether something is
              incorporated into a contract, we limit our
              inquiry to the four corners of the contract."
              Atl. Mut. Ins. Co. v. Metron Eng'g & Constr.
              Co., 83 F.3d 897, 901 (7th Cir. 1996). . . .
              None of the [] provisions relied upon by the
              district court incorporates the Employment
              Agreement by reference.      There is no doubt
              that the Acquisition Agreement refers to the
              Employment   Agreement,    but   there  is   no
              "intention to incorporate the document and
              make it a part of the contract" on the face of
              the Acquisition Agreement itself. . . . A
              merger clause does not incorporate other
              contracts by reference, rather, a merger
              clause   negates   the    impact    of  earlier
              negotiations and contract drafts, and states
              that the written contract is the complete
              expression of the parties' agreement.

Id. at 664-65.

              A pair of Fifth Circuit cases invoked by Bally did

transpose arbitration clauses among contemporaneously executed

                                     -21-
related contracts, but the cases are distinguishable, especially

because in our case each agreement has its own dispute resolution

process.   Personal Sec. & Safety Sys. Inc. v. Motorola Inc., 297

F.3d 388, 392-93 (5th Cir. 2002); Neal v. Hardee's Food Systems,

Inc., 918 F.2d 34, 36-37 (5th Cir. 1990).        Further, both the

Seventh and Fifth Circuits said they were applying state law in

construing the scope of their respective contracts, Rosenblum v.

Travelbyus.com Ltd., 299 F.3d at 662 n.2; Neal, 918 F.2d at 37 &

n.5, and as between Illinois and Texas law, the former is the

governing law in our own case so far as the substance of the

agreement is concerned.

           Alternatively (this is the “weak” version of Bally's

argument), Bally says that, even if its incorporation argument

fails, Laird and Baker have affirmatively "elected" arbitration as

to those misconduct issues that they have themselves raised in the

Chicago proceeding by answer and counterclaim.   These include some

but not all of the issues retained by the district court.      The

district court said briefly in its order on reconsideration that

the plaintiffs' answer and counterclaim in the Chicago arbitration

proceeding was not a waiver of their right to proceed in the

district court.

           The terms “election” and “waiver” are used in various

ways by the cases, in different contexts, and are often used for

conclusion rather than analysis. In some recurring situations, the

                               -22-
labels are easy to apply–-for example, one who has an option to

arbitrate or sue and chooses to arbitrate ordinarily makes an

election that cannot be rescinded after an unfavorable result.

E.g., Kiernan v. Piper Jaffray Cos., 137 F.3d 588, 594 (8th Cir.

1998).   The present case is less straightforward.

            Laird and Baker did not initiate the arbitration:               the

Chicago proceeding was begun by Bally after the court case had

started and was directed at a different agreement than was the

court case.      Still, plaintiffs have sought to make certain of the

misconduct claims in the court case do double duty as defenses or

counterclaims in the arbitration.           This overlap, which is the

source of several problems, is the linchpin of the Bally’s election

or waiver argument.

            To   the   extent    that   Laird   and   Baker   could    without

prejudice to their interests in the arbitration have withheld these

misconduct allegations from the Chicago proceeding, their choice to

assert them in the arbitration might be treated by a court as an

election or waiver of the right to present them in court.              But to

the extent that failing to assert them meant that arguable defenses

in the arbitration would be foregone, or possible damage claims for

breach of     the   employment    contract would      be   precluded   in   the

arbitration, the answer and counterclaim were compelled by Bally’s

own choice to pursue arbitration.

                                    -23-
           To us, it seems likely that any defense to Bally’s claims

in arbitration would have to be presented there or be forfeit;

whether   plaintiffs    were   also    effectively   compelled    to   assert

matching counterclaims is less clear. But given the breadth of the

arbitration clause, the start of arbitration by Bally, and the

opportunity for Laird and Baker to assert their damage claims in

arbitration, it would have been a foolish lawyer who told them that

they could safely withhold the misconduct charges from their answer

and counterclaim.

             This threat of prejudice would not necessarily preclude

treating the defense and counterclaim as an election of arbitration

over the court suit; we are dealing with judicial policy not self-

executing labels.      But it is less clear what judicial policy ought

to be where, as here, a misconduct issue turns out to be common

both to an arbitrable dispute (as to one agreement) and to a

judicial dispute (as to another) that was never the subject of an

arbitration     agreement.     The     Federal   Arbitration     Act   favors

arbitration; but only as to what the parties have agreed to

arbitrate.     Restoration Pres. Masonry, Inc. v. Grove Europe Ltd.,

325 F.3d 54, 60 (1st Cir. 2003).

             Nor is it clear that economy would be served by deferring

to arbitration as to the overlapping issues.         For several reasons,

arbitration is less likely to yield findings that resolve common

issues under res judicata doctrine; arbitrators do not always make

                                      -24-
explicit findings and whether findings by an arbitrator bind a

court faced with the same issue and parties but a different claim

is less than crystal clear.     See generally 18B Wright, Miller, and

Cooper, Federal Practice and Procedure § 4475.1 (2d ed. 2002).

             Bally cites two cases to support its claim of waiver or

election but both can readily be distinguished.        In both cases the

party seeking to litigate had initially elected arbitration and

only sought to bring the case to court when the arbitration seemed

to be going against them. Kiernan, 137 F.3d at 594; Nghiem v. NEC

Elec., Inc., 25 F.3d 1437, 1440 (9th Cir.), cert. denied, 513 U.S.

1044 (1994).     There, the policies supporting waiver or election

apply with full force; in our case they do not.

             To sum up, on these facts we think that the argument for

waiver or election is weak and the district court was right to

reject it.    The court case was filed first, plaintiffs were more or

less forced to answer and counterclaim in the arbitration, and the

fact that only some of the issues overlap makes two proceedings

inevitable.     In these circumstances--and without prejudice to the

authority of the trial judge to manage the case before him--we do

not see why the arbitration should have an invincible and automatic

priority in the decision of common issues.

             Absent more help and reflection, we decline to lay down

general rules for situations where a court case and an arbitration

address   distinct   legal   claims   but   common   issues   of   fact   or

                                  -25-
characterization.      The range of possible situations is great and

the   precedents   bearing   on   the   overlap   problem   scarce.   More

experience may generate useful rules, but for now an ad hoc

judgment based on the circumstances of this peculiar case will have

to do.

           Affirmed.

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