Court Opinion

ID: 220834
Source: CourtListenerOpinion
Date Created: 2011-07-13 14:37:55+00
Date Added: 2024-06-11T12:26:08.015525
License: Public Domain

1                    UNITED STATES COURT OF APPEALS
 2
 3                        FOR THE SECOND CIRCUIT
 4
 5                               -------------
 6
 7                             August Term, 2010
 8
 9      (Argued: April 13, 2011              Decided: July 13, 2011)
10
11                         Docket No. 10-5107-cv
12
13   - - - - - - - - - - - - - - - - - - - - - - X
14
15                   APPLIED ENERGETICS, INCORPORATED,
16
17                         Petitioner-Appellant,
18
19                                   - v -
20
21                     NEWOAK CAPITAL MARKETS, LLC,
22
23                         Respondent-Appellee.
24
25   - - - - - - - - - - - - - - - - - - - - - - X
26
27   Before:   KEARSE and CHIN, Circuit Judges, and
28             RAKOFF, District Judge.*
29
30        Appeal from a final order and judgment of the United States
31   District Court for the Southern District of New York compelling
32   arbitration under 9 U.S.C. § 4. Reversed.

33                       CLIFFORD THAU (Hilary L. Preston, on the
34                       brief), Vinson & Elkins LLP, New York, NY for
35                       Petitioner-Appellant.
36
37                       LEANNE M. SHOFI (Joseph M. Pastore III, on
38                       the brief), Fox Rothschild, LLP, New York, NY
39                       , for Respondent-Appellee.
40

41   RAKOFF, District Judge:

          *
           The Honorable Jed S. Rakoff, United States District Judge
     for the Southern District of New York, sitting by designation.

                                      -1-
 1        Petitioner-Appellant Applied Energetics, Inc. (“Applied”)

 2   appeals the district court’s final order and judgment compelling

 3   arbitration of the claims of Respondent-Appellee NewOak Capital

 4   Markets, LLC (“NewOak”) before the Financial Industry Regulatory

 5   Authority (“FINRA”).   Because we find that the parties expressly

 6   agreed to adjudicate their disputes before a court, we reverse,

 7   and remand to the district court for further proceedings.

 8

 9                               BACKGROUND

10        Applied is a developer and manufacturer of military

11   technology.   On September 28, 2005, NewOak, an independent broker

12   dealer, entered into a preliminary letter agreement with Applied

13   (the “Engagement Agreement”), by which NewOak agreed to act as

14   Applied’s exclusive placement agent in an anticipated $20 million

15   private offering of Applied securities to finance Applied’s

16   anticipated development of a “field-deployable vehicle.”    The

17   Engagement Agreement contained an arbitration clause that

18   provided that:

19        Each of [NewOak] and [Applied] agrees that any dispute
20        arising out of or relating to this letter, the Indemnity
21        Agreement and/or the transactions contemplated hereby or
22        thereby . . . shall be resolved through binding arbitration
23        before the National Association of Securities Dealers1 . . .
24        in New York City.
25
26   However, the Engagement Agreement also specifically contemplated

          1
            The National Association of Securities Dealers is one of
     the predecessors of FINRA.

                                     -2-
 1   that the parties would enter into a subsequent, more formal

 2   agreement setting forth “the terms and conditions contained [in

 3   the Engagement Agreement] as well as those customarily contained

 4   in agreements of such character.”    On October 24, 2005, NewOak

 5   and Applied signed that subsequent agreement (the “Placement

 6   Agreement”), which, though embodying much of the substance of the

 7   Engagement Agreement, omitted any reference to arbitration.

 8   Instead, the Placement Agreement expressly provided that the

 9   agreement would be governed by New York law and that:

10        Any dispute arising out of this Agreement shall be
11        adjudicated in the Supreme Court, New York County or in the
12        federal district court for the Southern District of New
13        York.
14
15        The Placement Agreement also contained a merger clause,

16   which provided that the Placement Agreement and certain other

17   documents related to the transaction -- namely, the Purchase

18   Agreement, the Registration Rights Agreement, the Escrow

19   Agreement, and the Warrant -- “constitute the entire

20   understanding and agreement between the parties” with respect to

21   NewOak’s placement of Applied securities, and that “there are no

22   [other] agreements or understandings” that apply.   The Engagement

23   Agreement was not among the documents listed in the Placement

24   Agreement’s merger clause.

25        On January 14, 2010, NewOak initiated arbitration against

26   Applied with FINRA, asserting various claims pursuant to its

27   allegations that, between May 4, 2005 and May 10, 2006, Applied

                                    -3-
 1   “knowingly disseminated materially false and misleading

 2   information about the development and production capability” of

 3   the field-deployable vehicle, as well as about “the status of

 4   [its] real or potential sales.”    NewOak further alleged that

 5   Applied’s officers and directors collectively sold 1.5 million

 6   shares of their personal Applied securities holdings during the

 7   time that the company’s securities were artificially inflated as

 8   a result of the company’s misrepresentations.   In response,

 9   Applied filed a petition in the Supreme Court of the State of New

10   York seeking to stay the FINRA arbitration on the ground that the

11   mandatory court-adjudication provision of the Placement Agreement

12   superseded the parties’ earlier agreement to arbitrate their

13   disputes.   NewOak timely removed the petition to the Southern

14   District of New York, and then moved to compel arbitration under

15   the arbitration clause of the Engagement Agreement and § 4 of the

16   FAA.

17          In a Report and Recommendation dated October 5, 2010, the

18   Magistrate Judge to whom the matter was initially referred

19   recommended that the district court grant the petition and deny

20   arbitration.   Applied Energetics, Inc. v. NewOak Capital Markets,

21   LLC, No. 10 Civ. 1669, 2010 WL 3860386, at *1 (S.D.N.Y. Oct. 5,

22   2010) (“Applied I”).    But in a written opinion dated December 3,

23   2010, the district court granted NewOak’s motion and ordered the

24   parties to arbitrate.    Applied Energetics, Inc. v. NewOak Capital

                                       -4-
 1   Markets, LLC, No. 10 Civ. 1669, 2010 WL 4968186, *1 (S.D.N.Y.

 2   Dec. 3, 2010) (“Applied II”).    This appeal followed.

 3

 4                               DISCUSSION

 5        We review de novo the district court’s order compelling

 6   arbitration.   See Chelsea Square Textiles, Inc. v. Bombay Dyeing

 7   & Mfg. Co. Ltd., 189 F.3d 289, 295 (2d Cir. 1999).

 8        The district court, relying primarily on this Court’s

 9   decision in Bank Julius Baer & Co., Ltd. v. Waxfield Ltd., 424

10   F.3d 278 (2d Cir. 2005), concluded that the Engagement

11   Agreement’s arbitration clause and the Placement Agreement’s

12   adjudication clause “may be read as complementary” to one

13   another.   Applied II, at *3.   The district court reasoned that,

14   because arbitration awards “may only be enforced by subsequent

15   judicial action,” Bank Julius, 424 F.3d at 284, the Engagement

16   Agreement’s arbitration clause could be construed as requiring

17   arbitration of the parties’ disputes in the first instance, with

18   the Placement Agreement’s adjudication clause merely designating

19   that any action to enforce or dispute an arbitral award must

20   occur in the courts enumerated therein.   See Applied II, at *3.

21   Since the Bank Julius Court provided that “if there is a reading

22   of the various agreements that permits the Arbitration Clause to

23   remain in effect, we must choose it,” 424 F.3d at 284, the

                                      -5-
 1   district court granted NewOak’s motion and compelled the parties

 2   to arbitrate NewOak’s claims.

 3          We disagree with the district court’s conclusion that the

 4   Engagement Agreement’s arbitration clause and the Placement

 5   Agreement’s court-adjudication clause can reasonably be read as

 6   complementary.   Rather, this case falls within the alternative

 7   scenario, also contemplated by Bank Julius, where contracting

 8   parties are free to revoke an earlier agreement to arbitrate by

 9   executing a subsequent agreement the terms of which plainly

10   preclude arbitration.   See 424 F.3d at 284.

11          A close reading of Bank Julius is instructive.   In Bank

12   Julius, the parties, like those in the instant case, initially

13   agreed to arbitrate “any . . . dispute” arising out of their

14   contractual relationship and, likewise, subsequently entered into

15   an agreement that omitted any mention of arbitration.    Id. at

16   282.   The subsequent agreement included, however, a non-exclusive

17   forum selection clause that read as follows:

18          Without limiting the right of the [plaintiff] to bring any
19          action or proceeding against [the defendant] . . . in the
20          courts of other jurisdictions, [the defendant] hereby
21          irrevocably submits to the jurisdiction of any New York
22          State or Federal court sitting in New York City, and . . .
23          hereby irrevocably agrees that any Action may be heard and
24          determined in such New York State court or in such Federal
25          court.
26
27   424 F.3d at 282 (emphasis omitted).    Furthermore, the subsequent

28   agreement, although containing a merger clause, also provided

29   that “the rights and remedies provided [herein] are cumulative

                                      -6-
 1   and not exclusive of any rights or remedies provided under any

 2   other agreement.”   Id.

 3        Under these circumstances, the Court in Bank Julius

 4   concluded that the forum selection clause in the subsequent

 5   agreement could be read as complementary, rather than

 6   contradictory, to the parties’ initial agreement to arbitrate:

 7   the forum selection clause would operate to provide New York

 8   courts with (non-exclusive) jurisdiction over ancillary

 9   proceedings -- such as to enforce an arbitral award or to

10   challenge the validity of the arbitration agreement -- but the

11   merits of any dispute would be resolved in the first instance by

12   arbitration.    See id. at 284-85    While other readings were

13   possible, the presumption in favor of arbitration made this

14   reading the preferred interpretation.       Id.

15        The case at bar is different.        Here, the Placement

16   Agreement’s language that “[a]ny dispute” between the parties

17   “shall be adjudicated” by specified courts stands in direct

18   conflict with the Engagement Agreement’s parallel language that

19   “any dispute . . . shall be resolved through binding

20   arbitration.”   Both provisions are all-inclusive, both are

21   mandatory, and neither admits the possibility of the other.

22        Moreover, use of the word “adjudicate[]” in the Placement

23   Agreement’s clause is a clear and unmistakable reference to

24   judicial action.    See Black’s Law Dictionary 47, 922 (9th ed.

                                         -7-
 1   2009) (defining “adjudicate” as “[t]o rule upon judicially,” and

 2   defining judicial as “[o]f, relating to, or by the court or a

 3   judge”).   Similarly, the clause’s use of the obligatory verb

 4   “shall” precludes the resolution of the parties’ disputes by any

 5   means other than their “adjudicat[ion]” by a court of law.      See

 6   Phillips v. Audio Active Ltd., 494 F.3d 378, 386-87 (2d Cir.

 7   2007) (forum selection clause using obligatory language precludes

 8   parties from bringing an action arising thereunder in forums

 9   other than those enumerated therein).   Accordingly, the Placement

10   Agreement’s adjudication clause “specifically precludes”

11   arbitration, see Bank Julius, 424 F.3d at 284 (internal quotation

12   marks omitted), and, by operation of the merger clause,1

13   displaces the Engagement Agreement’s arbitration clause.   Under

14   the express terms of the Placement Agreement, the parties’

15   instant disputes must therefore be heard in the first instance by

          1
            NewOak 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,”
     see Primex 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.” See id. 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-
 1   either the New York State Supreme Court for New York County or

 2   the federal district court for the Southern District of New York.

 3        Even assuming, as the district court found, that the

 4   provisions in the two agreements could reasonably be read as

 5   complementary, we conclude that the district court erred in

 6   applying the presumption in favor of arbitration.   As the Supreme

 7   Court reaffirmed in Granite Rock Co. v. International Brotherhood

 8   of Teamsters, “in FAA and in labor cases” the presumption in

 9   favor of arbitrability should only be applied “where a validly

10   formed and enforceable arbitration agreement is ambiguous about

11   whether it covers the dispute at hand.”   130 S. Ct. 2847, 2858-59

12   (2010).   In other words, while doubts concerning the scope of an

13   arbitration clause should be resolved in favor of arbitration,

14   the presumption does not apply to disputes concerning whether an

15   agreement to arbitrate has been made.    See, e.g., Vera v. Saks &

16   Co., 335 F.3d 109, 116 (2d Cir. 2003).    “[A] party cannot be

17   required to submit to arbitration any dispute which [it] has not

18   agreed so to submit.”   Id. (internal quotation marks and brackets

19   omitted).   Here, because the parties dispute not the scope of an

20   arbitration clause but whether an obligation to arbitrate exists,

21   the presumption in favor of arbitration does not apply.

22         Finally, in deciding whether a contractual obligation to

23   arbitrate exists, “courts should generally apply state-law

24   principles that govern the formation of contracts.”   Mehler v.

                                     -9-
 1   Terminix Int’l Co., 205 F.3d 44, 48 (2d Cir. 2000).   Under New

 2   York law, “[i]t is well established that a subsequent contract

 3   regarding the same matter will supersede the prior contract.”

 4   Barnum v. Millbrook Care Ltd. P’ship, 850 F.Supp 1227, 1236

 5   (S.D.N.Y.) (citing Coll. Auxiliary Servs. Of State Univ. Coll.,

 6   Inc. v. Slater Corp., 456 N.Y.S.2d 512 (3d Dep’t 1382)), aff’d 43

 7   F.3d 1458 (2d Cir. 1994).   Here, for the reasons set forth above,

 8   we conclude, as a matter of law, that the Placement Agreement

 9   superseded the Engagement Agreement.

10        For the foregoing reasons, the order of the district court

11   compelling arbitration is reversed and the matter is remanded

12   with direction to grant the petition to stay the FINRA

13   arbitration and to take such other action as is consistent with

14   this Opinion.

                                    -10-