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D.C. TAYLOR, CO. v. DYNAMIT NOBEL OF AMERICA

July 21, 1982

D.C. TAYLOR, CO., PLAINTIFF,
v.
DYNAMIT NOBEL OF AMERICA, INC., HALM BUILDING SPECIALTIES OF IOWA, INC., A/K/A JOE HALM BUILDING SUPPLIES, AND THE AMERICAN ARBITRATION ASSOCIATION, DEFENDANTS.



The opinion of the court was delivered by: Getzendanner, District Judge.

MEMORANDUM OPINION AND ORDER

The parties to this litigation are plaintiff D.C. Taylor Co. ("DCT") and defendants Dynamit Nobel of America ("DNA"), Halm Building Specialties of Iowa, Inc. ("Halm"), and the American Arbitration Association ("AAA"). DCT is an Iowa corporation in the business of installing roofs. DNA is a New Jersey corporation, doing business in the Northern District of Illinois, that manufactures polyvinylchloride (PVC) membrane roofing materials under the brand name "Trocal." Halm, an Illinois corporation, is DNA's exclusive Midwest distributor. From 1974 until 1978 or 1979, DCT was an authorized applicator of DNA's roofing materials.

DCT's Amended Complaint has eight counts. Counts I-III allege violations of the federal antitrust laws and Counts IV-VII allege pendent state law claims of retaliatory discharge, tortious interference with prospective business relationships, defamation, negligence and fraud. In Count VIII, DCT seeks to enjoin or stay arbitration of its disputes with DNA. This is the only count involving the AAA.

The matter is before the court on DNA's motion to stay these proceedings pending arbitration and DCT's motion to enjoin or stay arbitration. The motions raise two issues: whether there is a valid arbitration agreement between DCT and DNA; and, if so, whether the court should stay arbitration pending judicial resolution of the anti-trust claims in Counts I-III under the permeation doctrine.

I. Validity of the Arbitration Agreement

DCT alleges that in mid-1978 it began offering a membrane roof system manufactured by a competitor of DNA, while continuing to offer DNA's product. DCT further alleges that in retaliation DNA terminated DCT as an authorized Trocal applicator. In March, 1979, the parties signed a "Termination Agreement" to wind-up their affairs in an orderly fashion. See Exhibit IX to the Amended Complaint.

Paragraph 19 of the Agreement states, in relevant part:

  Any dispute or controversy arising out of the
  construction of, performance or breach of this
  agreement shall be determined by arbitration . . .
  and any award rendered shall be enforceable in any
  competent court of jurisdiction.

In December, 1980, DNA filed a demand for arbitration pursuant to this paragraph, claiming that DCT, in violation of the agreement, failed to install Trocal roofing materials in a workmanlike manner and in compliance with DNA's standard practices and specifications. DNA listed 250 roof projects with alleged installation defects in a rider to its demand.

DCT filed an answer to this demand in which it contested the scope of the disputes subject to arbitration. DCT's position is that the Termination Agreement only applies to the 99 roofing jobs specifically listed as Exhibit A to the agreement and that the other 151 jobs submitted by DNA are not subject to arbitration. DCT's answer also raised a number of affirmative defenses to DNA's claims. It did not, however, challenge the validity of the Termination Agreement.

In February, 1981, DCT filed its own demand for arbitration, asserting five counterclaims "without waiver of the objections raised in [its] Answer." In April, 1981, DCT filed its original complaint in this action. As previously mentioned, Count VIII of the Amended Complaint challenges the validity of the arbitration agreement and seeks to enjoin the arbitration.

DCT argues that there is no valid arbitration agreement and therefore that arbitration should be enjoined.*fn1 DCT points to the Federal Arbitration Act, 9 U.S.C. § 1-14, which provides that a written arbitration provision "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract," 9 U.S.C. § 2, and contends that the common law contract defenses of duress, unconscionability, mistake and fraud render this agreement invalid. DCT also demands an evidentiary hearing on these defenses pursuant to 9 U.S.C. § 4.*fn2 DNA counters that, accepting DCT's allegations as true for purposes of this motion, DCT has not alleged facts establishing its asserted defenses as a matter of law, and therefore that an evidentiary hearing is not required prior to denying the motion to enjoin arbitration.

While it is correct that the Federal Arbitration Act requires a federal court to resolve any issue involving the making of an arbitration agreement, the Supreme Court has made it clear that such an agreement is separable from any contract in which it may be contained. In Prima Paint Corp. v. Flood & Conklin Manufacturing Co., 388 U.S. 395, 402-04, 87 S.Ct. 1801, 1805-1806, 18 L.Ed.2d 1270 (1967), the issue before the Court was "whether a claim of fraud in the inducement of the entire contract is to be resolved by the federal court, or whether the matter is to be referred to the arbitrators." Id. at 402, 87 S.Ct. at 1805. The Court held:

  [I]f the claim is fraud in the inducement of the
  arbitration clause itself — an issue which goes to the
  "making" of the agreement to arbitrate — the federal
  court may proceed to adjudicate it. But the statutory
  language does not permit the federal court to
  consider claims of fraud in the inducement of the
  contract generally.

Id. at 403-04, 87 S.Ct. at 1806-1807. Where the contractual language of the arbitration agreement is broad enough to include a defense to the contract, such an issue must be submitted to arbitration.*fn3

With these principles in mind, the court turns to an examination of DCT's asserted defenses.

Duress

In its complaint and in its memorandum in opposition to defendants' motion to stay these proceedings, DCT alleged that it was coerced into signing the Termination Agreement by DNA's wrongful withholding of roof guarantees, which DCT needed in order to be paid by its customers. This argument speaks to the validity of the Termination Agreement generally and under the reasoning in Prima Paint may not be considered by this court as a defense to the arbitration agreement.

To circumvent this problem, in its later memorandum in support of its motion to stay arbitration, DCT argues that the inclusion of the arbitration clause was the result of "a separable duress," citing Paragraph 17 of the affidavit of DCT's counsel, Forrest Rosser. Accepting the assertions in the affidavit as true for purposes of this motion, DNA first brought up the subject of a general arbitration clause late at night after several hours ...


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