Court Opinion

ID: 3001279
Source: CourtListenerOpinion
Date Created: 2015-09-24 20:14:53.601933+00
Date Added: 2024-06-11T12:46:25.841974
License: Public Domain

In the
 United States Court of Appeals
              For the Seventh Circuit
                         ____________

No. 07-1784
CPL, INCORPORATED,
                                             Plaintiff-Appellant,
                                v.

FRAGCHEM CORPORATION,
                                            Defendant-Appellee.
                         ____________
           Appeal from the United States District Court
      for the Northern District of Illinois, Eastern Division.
         No. 06-C-1352—Charles R. Norgle, Sr., Judge.
                         ____________
  ARGUED DECEMBER 5, 2007—DECIDED JANUARY 9, 2008
                   ____________

 Before FLAUM, EVANS, WILLIAMS, Circuit Judges.
   FLAUM, Circuit Judge. CPL and Fragchem do business
in the chemicals industry, but their commercial chemistry
is now questionable. The two companies began their
relationship under an exclusive Supply Agreement,
terminated this agreement years later, and then resumed
conducting transactions soon thereafter. In April of 2004,
Fragchem received a shipment of chemicals from CPL
but refused to submit payment. CPL filed a complaint
with the district court, and Fragchem responded by
filing a motion to dismiss under Federal Rule of Civil
Procedure 12(b)(7) for failure to join a necessary party.
Instead of deciding this motion on the merits, the district
court dismissed the lawsuit sua sponte on the basis of
2                                             No. 07-1784

improper venue on the grounds that the Supply Agree-
ment between the two parties contained an agreement
to arbitrate. For the reasons set forth in this opinion, we
reverse the ruling of the district court.

                    I. Background
  CPL is a corporation engaged in the sale of chemicals
used in the manufacture of generic pharmaceutical
products. It is organized under the laws of Missouri, with
its principal place of business in Gaithersburg, Maryland.
Its parent company, Cadila, is registered under the
Indian Companies Act, conducting business under the
laws of India with its Registered Office located in
Ahmedabad, Gujarat, India. This case arises out of a
dispute between Cadila/CPL and Fragchem, a corporation
that is engaged in the import and export of chemicals.
Fragchem is organized under the laws of Illinois with
its principal place of business in Niles, Illinois.
  On May 9, 1997, Cadila and Fragchem entered into an
exclusive Supply Agreement. Under the terms of this
agreement, Cadila was required to manufacture and
supply certain chemicals exclusively to Fragchem, in
exchange for which Fragchem was to transfer details of
the processes and technical data to enable Cadila to
develop and manufacture those chemicals. In particular,
Fragchem provided technical specifications, the gen-
eral process for manufacturing Chlorhexidine Base,
Chlorhexidine HCL, and Chlorhexidine Gluconate 20%
solution (the “C Products”), information regarding raw
materials, and processing details. Cadila’s end of the
deal was that it agreed to manufacture and supply C
Products exclusively for Fragchem using the informa-
tion and technology it supplied. The Supply Agreement
also stipulated that Fragchem was to purchase C
Products exclusively from Cadila.
No. 07-1784                                                 3

  Several months after the agreement was signed, Cadila
began shipping C Products to Fragchem. Fragchem
initially made its payments directly to Cadila, but in
2000, Cadila informed Fragchem that it should start
submitting purchase orders and payments for C Products
to its subsidiary, CPL, which it indicated was also bound
by the terms of the Supply Agreement. Fragchem ulti-
mately agreed to submit its subsequent payments to CPL.
  The Supply Agreement, which is at the heart of this
case, contained an agreement to arbitrate that read:
    Any controversy arising under this Agreement, or any
    breach thereof, shall be referred to and finally settled
    pursuant to Arbitration in accordance with the provi-
    sions of Arbitration and Conciliation Proceedings
    prevalent in India, and judgment upon this award
    may be entered in any court having jurisdiction.
    However, such Arbitration proceedings shall take
    place in Ahmedabad (Gujarat) in India and the lan-
    guage of such arbitration shall be English.
In addition, with respect to amendment and assignment,
the Supply Agreement provided as follows:
    The agreement may not be amended, waived, dis-
    charged, or terminated orally, but only by an instru-
    ment in writing signed by the party against which
    enforcement . . . is sought. This agreement shall be
    binding upon the respective parent, subsidiaries,
    affiliates, successors, and assigns of CPL and
    Fragchem. This agreement may not be assigned by any
    party without the written consent of the other parties.
The Supply Agreement itself had an initial term of five
years, and could be terminated upon written notice
given at least 180 days before expiration of the initial five-
year term. In accordance with this provision, Cadila
gave Fragchem written notice on November 7, 2001 that
4                                             No. 07-1784

it was terminating the supply agreement effective May 8,
2002. Fragchem acknowledged this termination by let-
ter dated May 6, 2002:
    By your notice of termination dated November 7, 2001,
    you have expressed your will to terminate the above
    referred supply agreement at the end of the
    first contract period ending by May 8, 2002 . . . . Now
    that through your notice referred above, our above
    referred understanding “agreement” will come to
    an end . . . .
This same letter also admonished CPL that it “. . . shall
not manufacture and/or sell Chlorhexidine Base and its
salts after May 8, 2002 . . . .”
  In an about-face one month later, on June 3, 2002,
Fragchem’s Secretary, Kirit Parikh, sent another letter
to Cadila’s chairman:
    I am confident that we will soon reach a new agree-
    ment to serve as the basis for moving forward for the
    benefit of all parties involved. Until that time, let’s
    do business just as we had been doing prior to the
    termination of the Supply Agreement.
There is no evidence of a written response from CPL,
though Parikh submitted an affidavit that indicates that
it is his belief that Cadila and Fragchem agreed to con-
tinue doing business under the Supply Agreement.
   Regardless, Fragchem and CPL continued to do business
from June 2002 to March 2004. Fragchem contends that
these deals were done pursuant to the Supply Agreement.
CPL contends that these purchases were made on an
individualized basis, sometimes pursuant to a written
purchase order from Fragchem, and more often orally.
CPL asserts that to the extent that these purchases
were made pursuant to any identifiable agreement,
it would have been their standard terms and conditions
form, which states:
No. 07-1784                                                  5

    All sales are subject to and expressly conditioned upon
    the terms and conditions contained herein. No varia-
    tion of these terms and conditions will be binding
    upon seller unless agreed to in writing by an autho-
    rized representative of seller.
Notably, CPL’s standard terms and conditions form does
not contain an arbitration provision.
  In April of 2004, Fragchem placed an order for 4,000
kilograms of CH Base from CPL.1 Fragchem disputes
that it had actually placed the April order, but admits
that it received the product and never paid the $131,000
owed to CPL. The record reflects that Fragchem has
withheld payment from CPL because it believes that
Cadila owes it commissions for C Product sales made
by Cadila to other customers.
  In response, CPL filed a complaint against Fragchem on
March 10, 2006, asserting claims for breach of contract
arising out of Fragchem’s failure to make payment
after the April delivery. Fragchem countered by filing
a motion to dismiss pursuant to Federal Rule of Civil
Procedure 12(b)(7) on the ground that Cadila was a
necessary party to the action since the shipment was
made pursuant to the Supply Agreement between Cadilla
and Fragchem. CPL argued that the Supply Agreement
had been terminated at the time of the April 2004 ship-
ment at issue, and Cadila was therefore not a necessary
party to the suit. At the initial presentment of the mo-
tion to dismiss, the trial judge inquired as to the propriety
of venue in the Northern District of Illinois given the
arbitration provision in the Supply Agreement. CPL
responded that any disputes between Cadila and Fragchem

1
  The record is not clear on whether this order was made orally
or through a written purchase order.
6                                                 No. 07-1784

were subject to arbitration in India and that Cadila would
not waive arbitration.
  The district court issued its order on March 19, 2007.
Instead of deciding the motion to dismiss for failure to
join a necessary party, the court dismissed CPL’s law-
suit sua sponte for improper venue based on Federal
Rule of Civil Procedure 12(b)(3). In its analysis, the dis-
trict court did not examine the issue of whether the
Supply Agreement was still in effect at the time of the
April 2004 shipment. It assumed that the arbitration
provision contained in the Supply Agreement applied to
the dispute in this case, and concluded that the proper
venue is arbitration in India as opposed to litigation in
the Northern District of Illinois. Because the district
court also found that CPL is bound by the Supply Agree-
ment as a subsidiary of Cadila, it denied Fragchem’s
motion to dismiss as moot and dismissed the case.

                      II. Discussion
  This Court’s recent decision in Automobile Mechanics
Local 701 Welfare & Pension Funds v. Vanguard Car
Rental USA, Inc., 502 F.3d 740 (7th Cir. 2007), is control-
ling. In that case, we reversed an order, issued sua sponte
by the district court, dismissing a lawsuit for lack of
venue pursuant to Federal Rule of Civil Procedure 12(b)(3)
on the basis of a contractual arbitration clause. We
reasoned there, as we do here, that a sua sponte order of
dismissal of this nature is improper because an objection
to venue can be waived or forfeited. American Patriot Ins.
v. Mutual Risk Management, Ltd., 364 F.3d 884, 887 (7th
Cir. 2004). To be sure, “[d]ismissal on the court’s own
initiative is particularly ill-conceived as an effort to enforce
a contractual arbitration clause” because, like many other
contractual rights, it may be waived. Automobile Mechan-
ics, 502 F.3d at 747. The district court here “offered no
No. 07-1784                                                  7

reason why it had either the right or the duty to reject
such a waiver,” given that neither party had moved to
enforce the arbitration agreement and dismiss on the
grounds of improper venue. Id.
  Fragchem tries to distinguish this case from Automobile
Mechanics in two ways, and each one is unavailing.
First, it argues that the Court in Automobile Mechanics
did not believe there was an arbitration agreement be-
tween the two parties in the case. While there was a lack
of factual clarity on this point, this Court neverthe-
less stated that its conclusion would hold “[e]ven if the
agreement to arbitrate between the employer and the
union somehow carried over to the Funds . . . .” Id. Second,
Fragchem contends that it is significant that in Auto-
mobile Mechanics, both parties agreed that dismissal by
the lower court was improper. This is a red herring. It
is of no moment that Fragchem actually now agrees
with what the district court did here—what matters is
that neither party filed a motion to dismiss based on
improper venue nor did they file a motion to compel
arbitration, thereby leaving open the possibility of waiver.2
  Because the district court dismissed the case sua sponte
for improper venue based on the arbitration clause con-
tained in the Supply Agreement, it did not address the
key issue here of whether the parties are still bound by
the agreement. On appeal, both parties agree that the
Supply Agreement terminated two years before the sale
at issue in this lawsuit. However, Fragchem argues that

2
  CPL did claim at the initial presentment before the district
court that it believed that Cadila would not waive arbitration.
However, because Cadila is not yet a party to the suit here,
this statement by itself is not enough to counter the view that
both parties here could still have waived their agreement
to arbitrate prior to the district court’s ruling.
8                                               No. 07-1784

Kirit Parikh’s letter dated June 3, 2002, coupled with
Cadila/CPL’s continued manufacture and sale of C Prod-
ucts, indicates that the Supply Agreement was still in
full force. CPL, however, relies on this Court’s twin
decisions in Nissan North America, Inc. v. Jim M’Lady
Oldsmobile, Inc., 307, F.3d 601 (7th Cir. 2002), and Nissan
North America, Inc. v. Jim M’Lady Oldsmobile, Inc., 486
F.3d 989 (7th Cir. 2007), for the proposition that an
agreement to arbitrate does not survive if the written
agreement between two parties expired, and there was
no subsequent written agreement governing the parties’
relationship that contained an arbitration clause. While
there are questions of law here, there are also questions
of fact, and so the issue of whether the Supply Agree-
ment covered the April 2004 transaction is better left to
the district court as a matter of first impression. See
International Financial Services Corp. v. Chromas Tech-
nologies Canada, Inc., 356 F.3d 731, 740 (“Whether veil-
piercing is appropriate depends on a host of considera-
tions that this court is ill-positioned to weigh as a matter
of first impression.”); Turner v. J.V.D.B. Assocs., Inc., 330
F.3d 991, 998 (7th Cir. 2003) (refusing to direct the entry
of summary judgment in favor of one party when the
district court had not yet made a ruling on the issue, in
part because of the state of the record). What we have
ruled here is that it was improper for the district court
to dismiss the lawsuit sua sponte on the grounds of
improper venue based on an arbitration agreement
between the parties when neither party explicitly or
effectively indicated that it would not waive arbitration.
Nevertheless, even if on remand one of the parties
moves to compel arbitration, the district court will still
have to grapple with the question of whether the
Supply Agreement applies to the transaction at issue.
No. 07-1784                                           9

                  III. Conclusion
  For the foregoing reasons, we REVERSE the district
court’s sua sponte order dismissing the lawsuit.

A true Copy:
      Teste:

                     ________________________________
                     Clerk of the United States Court of
                       Appeals for the Seventh Circuit

                 USCA-02-C-0072—1-9-08