Court Opinion

ID: 2995807
Source: CourtListenerOpinion
Date Created: 2015-09-24 19:22:36.141156+00
Date Added: 2024-06-11T15:25:43.672377
License: Public Domain

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

No. 01-4272
MICHAEL H. ROSENBLUM,
                                                   Plaintiff-Appellant,
                                  v.

TRAVELBYUS.COM LIMITED, a foreign corporation,
TRAVELBYUS INCORPORATED, a foreign corporation,
and BILL KERBY, a foreign citizen,
                                               Defendants-Appellees.
                          ____________
             Appeal from the United States District Court
        for the Northern District of Illinois, Eastern Division.
              No. 01 C 6441—Suzanne B. Conlon, Judge.
                          ____________
       ARGUED MAY 29, 2002—DECIDED AUGUST 6, 2002
                          ____________

 Before RIPPLE, DIANE P. WOOD and EVANS, Circuit Judges.
  RIPPLE, Circuit Judge. Michael H. Rosenblum sold his
travel publication business to Travelbyus.com in July 2000.
Under the terms of an employment agreement executed
at the time of the sale, Mr. Rosenblum continued to work
at his former company. The agreement governing the sale
required that a payment be made in December 2000. When
that payment was not made, Mr. Rosenblum brought this
action against Travelbyus.com, Ltd., Travelbyus.com, Inc.
2                                                     No. 01-4272
                                                  1
and Bill Kerby (collectively “Travelbyus”) for breach of
contract and fraud. The district court determined that
this dispute was governed by an arbitration clause in the
employment agreement and granted Travelbyus’ Rule
12(b)(6) motion to dismiss. Mr. Rosenblum now appeals
from that dismissal. He submits that the arbitration clause
in the employment agreement does not govern this dis-
pute because the disagreement arose solely under the ac-
quisition agreement governing the purchase and sale of
Mr. Rosenblum’s business. For the reasons set forth in the
following opinion, we reverse the judgment of the dis-
trict court and remand this case for proceedings consistent
with this opinion.

                                 I
                       BACKGROUND
A. Facts
  Michael H. Rosenblum was the principal owner of Muf-
fin Communications, Ltd. Muffin was a travel-related me-
dia business that, among other things, produced a travel
magazine. In the spring and summer of 2000, Mr. Rosen-

1
   The parties to the Acquisition Agreement are Mr. Rosenblum
and Travelbyus.com, Ltd., a Canadian corporation. Mr. Kerby
was the chief executive officer of Travelbyus.com, Ltd., at the
time Mr. Rosenblum filed his complaint. Travelbyus.com, Inc.,
is a Delaware corporation. The relationship between these par-
ties is not revealed by the record and is not material to the is-
sues in this appeal. In the district court, the defendants argued
that Mr. Kerby and the American Travelbyus.com were not
appropriate defendants in this action. Without expressing any
opinion on this issue, we shall refer to the defendants collectively
as Travelbyus.
No. 01-4272                                               3

blum negotiated the sale of Muffin to Travelbyus, a Cana-
dian corporation that operates a travel-related website.
Mr. Rosenblum agreed to sell Muffin to Travelbyus for a
total price of $7 million; this agreement was memorialized
in a contract that was executed on July 20, 2000 (“Acquisi-
tion Agreement”).
  The Acquisition Agreement provided that Mr. Rosenblum
was to receive a total of $7 million in cash and Travelbyus
stock in exchange for Muffin. Mr. Rosenblum received
$300,000 in cash at the closing and was due to receive the
balance on December 15, 2000. According to the Agree-
ment, Mr. Rosenblum was to receive one million shares of
Travelbyus stock on December 15. At the time the agree-
ment was executed, the stock was trading around $6.70
per share. The Agreement provided that, if the stock fell
below $6.70 per share, Mr. Rosenblum would receive a
combination of cash and stock equal to $6.7 million on
December 15. The contract left the precise combination of
cash and stock to Travelbyus’ discretion.
  As a condition precedent to the Acquisition Agreement,
the parties also executed the Employment Agreement on
July 20, 2000. Under the terms of that agreement, Mr.
Rosenblum agreed to work for Travelbyus in the position
of Senior Vice-President of Muffin, which continued its
corporate existence after the sale to Travelbyus. In that
capacity Mr. Rosenblum would develop travel-related
content for Travelbyus and receive a salary of $125,000 per
year. The Employment Agreement included a broad arbi-
tration clause. The arbitration clause, in pertinent part,
states: “Except for any matters for which this Agreement
expressly provides otherwise, any matter in dispute un-
der or relating to this Agreement shall . . . be finally re-
solved by binding arbitration.” R.12, Ex.B § 15.
 Both the Acquisition Agreement and the Employment
Agreement contain merger clauses. Article 1.4 of the Ac-
4                                              No. 01-4272

quisition Agreement states: “This Agreement together with
the other agreements and documents to be delivered
pursuant to this Agreement constitute the entire agreement
between the Parties pertaining to the subject matter hereof
and supersede all prior agreements . . . whether oral or
written. . . .” R.3, Ex.A art. 1.4. The Employment Agreement
provides:
    This Agreement constitutes and expresses the whole
    agreement of the parties hereto with respect to the
    employment of the Executive by the Company and with
    respect to any matters or things herein provided for or
    hereinbefore discussed or mentioned with reference to
    such employment. All promises, representations, col-
    lateral agreements and understandings relative thereto
    not incorporated herein are hereby superseded and
    cancelled by this Agreement.
R.12, Ex.B § 19. Both contracts also include noncompete
agreements, which prevent Mr. Rosenblum from compet-
ing with Travelbyus for two years after his employment
ceases.
  In the months following the execution of the contracts,
Travelbyus’ stock decreased significantly in value. On De-
cember 15, 2000, when Travelbyus was required to make
the final payment to Mr. Rosenblum, its stock was trading
at far less than the $6.70 per share price at which it was
valued in the summer of 2000. Travelbyus failed to make
any payment, and Mr. Rosenblum brought this action
alleging breach of contract and fraud.

B. District Court Proceedings
  Mr. Rosenblum’s complaint alleged that Travelbyus
breached the Acquisition Agreement and engaged in a
No. 01-4272                                                5

pattern of fraudulent conduct designed to acquire Muffin’s
business relationship with Mobile Media Entertainment.
The Acquisition Agreement was attached to the complaint.
Travelbyus responded with a Rule 12(b)(6) motion to dis-
miss the complaint for failure to state a claim upon which
relief can be granted. Travelbyus attached the Employment
Agreement to its motion and submitted that the Employ-
ment Agreement’s arbitration clause barred Mr. Rosen-
blum’s action. Travelbyus sought dismissal of the case or,
in the alternative, a stay of proceedings pending the out-
come of arbitration.
  The district court granted Travelbyus’ motion and dis-
missed the action. The court held that “the employment
agreement is incorporated by reference into the acquisi-
tion agreement, the two agreements are clearly interrelated
and are explicitly part of the ‘entire agreement.’ ” R.17,
Dist. Ct. Op. at 1. The court further concluded that “[t]he
arbitration provision here is a broad one: it covers all mat-
ters relating to the employment agreement.” Id. Thus the
court found that the dispute at issue here was covered by
the arbitration provision and dismissed Mr. Rosenblum’s
complaint.

                             II
                      DISCUSSION
A. Threshold Matters
  Mr. Rosenblum advances two interrelated procedural
arguments that must be addressed before we consider the
principal issue in this appeal. He contends that the district
court erred in considering the Employment Agreement at
all. He submits that, because the Employment Agreement
was not referenced in his complaint, the court should not
6                                                   No. 01-4272

have considered it on a Rule 12(b)(6) motion. Mr. Rosen-
blum further contends that, once the district court de-
cided to include the Employment Agreement in its delibera-
tions, it should have converted Travelbyus’ Rule 12(b)(6)
motion to a motion for summary judgment. Had it done
so, Mr. Rosenblum continues, the court should have de-
nied the motion because of Travelbyus’ failure to comply
with Local Rule 56.1 and because Mr. Rosenblum’s un-
contested Rule 56.1 statement of facts created genuine is-
sues for trial.
   As a general rule, on a Rule 12(b)(6) motion, the court
may consider only the plaintiff’s complaint. Rule 10(c) pro-
vides, however, “[a] copy of any written instrument which
is an exhibit to a pleading is a part thereof for all purposes.”
Fed. R. Civ. P. 10(c). This court’s precedent makes clear
that this rule includes a limited class of attachments to
Rule 12(b)(6) motions. “[D]ocuments attached to a motion
to dismiss are considered part of the pleadings if they are
referred to in the plaintiff’s complaint and are central to
his claim. Such documents may be considered by a district
court in ruling on the motion to dismiss.” Wright v. Assoc.
Ins. Cos. Inc., 29 F.3d 1244, 1248 (7th Cir. 1994). This excep-
tion is “aimed at cases interpreting, for example, a con-
tract.” Levenstein v. Salafsky, 164 F.3d 345, 347 (7th Cir. 1998).
“The court is not bound to accept the pleader’s allega-
tions as to the effect of the exhibit, but can independently
examine the document and form its own conclusions as
to the proper construction and meaning to be given the
material.” 5 Wright & Miller, Federal Practice & Procedure:
Civil 2d, § 1327 at 766 (1990).
  Although Mr. Rosenblum did not refer explicitly to the
Employment Agreement in his complaint, that agreement
nevertheless falls within the exception. From Travelbyus’
point of view, the contract under review is the combination
No. 01-4272                                                7

of the Acquisition Agreement and the Employment Agree-
ment. In moving to dismiss on the ground that the contract,
read in this matter, requires that the parties resort to ar-
bitration, Travelbyus is entitled to take the position that
Mr. Rosenblum has appended only a part of the relevant
instrument and to append what it contends is the remain-
der. It would have been impossible for the district court or
for this court to evaluate the disagreement between the
parties without having all of the documentation. It is im-
possible to render the necessary adjudication without ref-
erence to the Employment Agreement. See Venture Assocs.
Corp. v. Zenith Data Sys. Corp., 987 F.2d 429, 431 (7th Cir.
1993).

B. The Arbitration Clause
  We turn now to the central controversy in this appeal:
whether the Employment Agreement’s arbitration clause
governs this action for breach of the Acquisition Agree-
ment. The district court concluded that this arbitration
clause did govern a dispute under the Acquisition Agree-
ment and dismissed the case in favor of arbitration. Mr.
Rosenblum submits that, although the Employment Agree-
ment was a condition precedent to the Acquisition Agree-
ment and the two agreements were executed on the same
day, they cover different subject matter; neither agreement
is incorporated into the other. Travelbyus, however, con-
tends that the broad language of the Employment Agree-
ment’s arbitration clause, and the strong federal policy
favoring arbitration, require that the district court’s deci-
sion be affirmed. We review the district court’s grant of a
Rule 12(b)(6) motion de novo. See Help at Home, Inc. v. Med.
Capital, L.L.C., 260 F.3d 748, 752 (7th Cir. 2001).
  There is a strong federal policy favoring arbitration em-
bodied in the Federal Arbitration Act. See 9 U.S.C. §§ 1 et
8                                                   No. 01-4272

seq.; Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc.,
473 U.S. 614, 625 (1985). Nevertheless, arbitration is a mat-
ter of contract between the relevant parties; no party can
be required to arbitrate absent an agreement to do so. See
First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943
(1995). To determine whether a contract’s arbitration clause
applies to a given dispute, federal courts apply state-law
                                     2
principles of contract formation. See id. at 944. The Su-
preme Court of Illinois has written recently that: “The par-
ties to an agreement are bound to arbitrate only those is-
sues they have agreed to arbitrate, as shown by the clear
language of the agreement and their intentions expressed
in that language. An arbitration agreement will not be ex-
tended by construction or implication.” Salsitz v. Kreiss, 761
N.E.2d 724, 731 (Ill. 2001) (citations omitted).
   There are two possible sources of Mr. Rosenblum’s
obligation to arbitrate this dispute. First, if the Employ-
ment Agreement’s arbitration clause is broad enough, by
its own terms, to encompass disputes under the Acquisi-
tion Agreement, then Mr. Rosenblum is required to ar-
bitrate this dispute. Second, if the arbitration clause is not
broad enough to reach this dispute, Mr. Rosenblum still
is obligated to arbitrate if the Acquisition Agreement in-
corporates the Employment Agreement by reference. We
shall evaluate each of these possibilities. First, we shall

2
  By their terms, the contracts are governed by the laws of
Canada and of the Province of Ontario. See R.3, Ex.A art. 1.5;
R.12, Ex.B § 21. Neither party has argued that Canadian or
Ontario law differs materially from Illinois law on this issue,
and both parties have argued Illinois law to the district court
and on appeal. We therefore shall apply the law of Illinois. See
Brunswick Leasing Corp. v. Wisc. Cent., Ltd., 136 F.3d 521, 525-26
(7th Cir. 1998).
No. 01-4272                                               9

address some aspects of the documents relevant to either
of these possibilities. Then we shall address each with
more particularity.

                             1.
   At the outset of our inquiry, we think it is important
to examine the two contracts as a whole and to determine
their relationship to each other. In undertaking such an
evaluation, it becomes immediately evident (and the par-
ties do not disagree) that these agreements were both nec-
essary, but self-contained, as components of a comprehen-
sive business transaction. While the contracts are related,
they are not two sections of the same agreement; they
are separate, free-standing contracts. Each contract delin-
eates rights and duties independent of the other and that
pertain to a particular subject matter. One contract may be
fully performed while the other is breached. The employ-
ment contract deals exclusively with Mr. Rosenblum’s
employment. By contrast, the Acquisition Agreement con-
cerns the parties’ rights and duties with respect to Mr.
Rosenblum’s sale of Muffin to Travelbyus.
  Our view of the agreements’ relationship is supported
further by the internal structure of each contract. Both
agreements contain noncompete provisions. Article 11 of
the Acquisition Agreement is substantially similar to Sec-
tions 11 and 12 of the Employment Agreement. Compare
R.3, Ex.A art. 11, with R.12, Ex.B §§ 11-12. If, as the dis-
trict court held and Travelbyus argues on appeal, the
Employment Agreement is incorporated into the Acquisi-
tion Agreement, one of these provisions is wholly super-
fluous. Indeed, both contracts are complete on their own.
There are no terms missing from either contract that must
be filled in with borrowed terms from the other. Both are
10                                                 No. 01-4272

supported by consideration and meet all of the condi-
tions of a valid contract. Finally, the contracts deal with dis-
tinct subject matter and contemplate different periods of
completion. The Employment Agreement governs what
the parties intend to be an ongoing relationship, with
provisions for renewal, severance and ongoing compen-
sation. The Acquisition Agreement governs the sale of
Muffin to Travelbyus. Performance of the contract would
have been complete had Travelbyus made the required
payment to Mr. Rosenblum on December 15, 2000.
  The parties’ deal consisted of two agreements, one
covering the sale of Muffin to Travelbyus, the other concern-
ing Mr. Rosenblum’s employment with Muffin after its
acquisition by Travelbyus. The contracts are separate, and
there is no indication that the parties intended that the
terms of the Employment Agreement apply to disputes
arising under the Acquisition Agreement.

                              2.
  We now focus on the arbitration clause in the Employ-
ment Agreement to ascertain whether there is any indica-
tion that the parties intended that it apply to disagree-
ments under the Acquisition Agreement.
  The arbitration clause is contained in Section 15 of the
Employment Agreement. That section provides two mecha-
nisms for the resolution of disputes. Section 15(a) states,
in part, that “[e]ither party may at any time notify the
other party of an intention to discuss or dispute any matter
connected with this Agreement. Within five days of receiv-
ing such notification, the parties shall each appoint a
representative . . . [who] shall meet within the following five
days in an attempt to settle the matter at issue.” R.12, Ex.B
§ 15(a). Section 15(b) describes the process of binding
No. 01-4272                                                11

arbitration to which the parties must submit if the infor-
mal mediation of Section 15(a) fails. The scope of the ar-
bitration clause is defined as well by Section 15: “Except
for any matters for which this Agreement expressly pro-
vides otherwise, any matter in dispute under or relating
to this Agreement shall, unless settled in the manner pro-
vided by subsection 15(a), be finally resolved by binding
arbitration.” R.12, Ex.B § 15.
  The arbitration clause applies, by its terms, to “any matter
in dispute under or relating to this Agreement.” R.12, Ex.B
§ 15 (emphasis added). The Employment Agreement there-
fore covers all aspects of Mr. Rosenblum’s employment
relationship with Travelbyus. It simply does not purport
to cover the acquisition issues that form the basis of Mr.
Rosenblum’s claims here. The arbitration clause is not sus-
ceptible to an interpretation that includes this dispute,
which has nothing to do with Mr. Rosenblum’s employ-
ment with Travelbyus. To include Mr. Rosenblum’s claims
within the scope of this arbitration clause would expand
the operation of that clause beyond its express terms
and beyond the intent of the parties. The arbitration
clause cannot be read to include Mr. Rosenblum’s claims
under the Acquisition Agreement.

                              3.
  Finally, we explore whether the Acquisition Agree-
ment incorporates the Employment Agreement or its arbi-
tration clause. “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 some-
12                                                No. 01-4272

thing 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).
  Travelbyus invites our attention to Article 1.4 of the
Acquisition Agreement. This provision, Travelbyus con-
tends, incorporates the Employment Agreement and its
arbitration clause into the Acquisition Agreement. Article
1.4, reads:
     1.4 Entire Agreement. This Agreement together with
     the other agreements and documents to be delivered
     pursuant to this Agreement constitute the entire agree-
     ment between the Parties pertaining to the subject
     matter hereof and supersede all prior agreements, un-
     derstandings, negotiations and discussions, whether
     oral or written, of the Parties (including without limita-
     tion, the LOI) and there are no warranties, representa-
     tions or other agreements between the Parties in con-
     nection with the Transaction except as specifically set
     forth in this Agreement and any document delivered
     pursuant to this Agreement. No supplement, modifica-
     tion, waiver or termination of this Agreement shall
     be binding unless executed in writing by the Parties
     to be bound thereby.
R.3, Ex.A art. 1.4. The district court found incorporation
in two other places as well. First, the court relied on the
definitions section. The Acquisition Agreement defines
“Employment Agreement” as “the employment agreement
to be executed by the Seller and the Target [Muffin] con-
temporaneous herewith.” Id. art. 1.1; see R.17, Dist. Ct. Op.
at 1. Second, the court found support for incorporation in
Article 9.5. Article 9 is entitled “Seller’s Conditions Prece-
dent” and 9.5 states: “The Employment Agreement shall
have been executed by all parties thereto, on terms and
conditions satisfactory to the parties thereto.” R.3, Ex.A
art. 9.5.
No. 01-4272                                                      13

   None of the three provisions relied upon by the district
court incorporates the Employment Agreement by refer-
ence. There is no doubt that the Acquisition Agreement
refers to the Employment Agreement, but there is no “in-
tention to incorporate the document and make it a part
of the contract” on the face of the Acquisition Agreement
itself. Arneson v. Bd. of Tr., McKendree Coll., 569 N.E.2d 252,
256 (Ill. App. Ct. 1991). Indeed, Article 1.4 is not an incor-
                                                      3
poration clause at all; rather, it is a merger clause. A merger
clause does not incorporate other contracts by reference,
rather, a merger clause negates the impact of earlier ne-
gotiations and contract drafts, and states that the written
contract is the complete expression of the parties’ agree-
ment. See Bock, 257 F.3d at 707. “[T]he presence of a merger
clause is strong evidence that the parties intended the
writing to be the complete and exclusive agreement between
them.” L.S. Heath & Son, Inc. v. AT&T Info. Sys., Inc., 9 F.3d
561, 569 (7th Cir. 1993). A merger clause, in effect, assures
the parties that their entire agreement is memorialized in the
written contract, and permits either party to invoke the
parol evidence rule to exclude evidence of additional
                                                             4
contractual terms not included in the written agreement.

3
   See, e.g., Bock v. Computer Assocs. Int’l, 257 F.3d 700, 706-07
(7th Cir. 2001) (discussing the meaning and effect of a merger
clause); Echo, Inc. v. Whitson Co., Inc., 52 F.3d 702, 707 (7th Cir.
1995) (discussing purpose of merger clause); Betaco v. Cessna
Aircraft Co., 32 F.3d 1126, 1132-33 (7th Cir. 1994) (same); Barille
v. Sears Roebuck & Co., 682 N.E.2d 118, 122-23 (Ill. App. Ct. 1997)
(same); J & B Steel Contractors, Inc. v. C. Iber & Sons, Inc., 642
N.E.2d 1215, 1220 (Ill. 1994) (same).
4
    The Employment Agreement also contains a merger clause:
     This Agreement constitutes and expresses the whole agree-
     ment of the parties hereto with respect to the employ-
                                                 (continued...)
14                                                   No. 01-4272

  The Acquisition Agreement’s merger clause does refer-
ence “other agreements and documents to be delivered
pursuant to this Agreement”, but does not incorporate
any of them. R.3, Ex.A art. 1.4. The parties debate wheth-
er the Employment Agreement is one of those “agree-
ments and documents” referenced in Article 1.4, but their
disagreement is irrelevant. Article 1.4 does not incorporate
any of those documents by reference. Indeed, as is the
case in all merger clauses, the reference to those other
documents in Article 1.4 simply assures the continued
vitality of those documents and prevents their being merged
                                 5
into the Acquisition Agreement.
  Similarly, the two other provisions relied upon by the
district court do not indicate that the parties had any
intention to incorporate the Employment Agreement by
reference. The Acquisition Agreement’s definition of the

4
    (...continued)
       ment of the Executive by the Company and with respect
       to any matters or things herein provided for or hereinbe-
       fore discussed or mentioned with reference to such employ-
       ment. All promises, representations, collateral agreements
       and understandings relative thereto not incorporated herein
       are hereby superseded and cancelled by this Agreement.
R.12, Ex.B § 19. This clause also contains no indication that the
Employment Agreement incorporated any provision of the Ac-
quisition Agreement. Therefore, neither merger clause gives
any indication that the parties intended to incorporate either
contract into the other. The Employment Agreement’s merger
clause does not reference the Acquisition Agreement at all.
5
  Article 1.9 of the Acquisition Agreement does incorporate a
series of schedules as “integral part[s]” of the Agreement, but
that list does not include the Employment Agreement. R.3, Ex.A
art. 1.9.
No. 01-4272                                               15

Employment Agreement, which “means the employment
agreement to be executed by the Seller and the Target
contemporaneous herewith,” identifies the Employment
Agreement but does not incorporate its terms into the
Acquisition Agreement. R.3, Ex.A art 1.1. Article 9.5
makes the Employment Agreement a condition prece-
dent to the execution of the Acquisition Agreement but,
like the other provisions cited by the district court and
Travelbyus, is silent on incorporation. Mere reference to
another contract or document is not sufficient to incorpo-
rate its terms into a contract. There must be an express
intent to incorporate, and there is no such expression here.

                       Conclusion
  As a matter of law, the Employment Agreement is not
incorporated by reference into the Acquisition Agreement.
Thus, the Employment Agreement’s arbitration clause
does not apply to Mr. Rosenblum’s action for breach of
the Acquisition Agreement. Accordingly, the judgment
of the district court is reversed and the case is remanded
for further proceedings consistent with this opinion. Mr.
Rosenblum may recover his costs of this appeal.
                                 REVERSED and REMANDED

A true Copy:
       Teste:

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

                    USCA-97-C-006—8-6-02