Circuit considered an
arbitration provision covering disputes "arising out of" the Agreement.
While the Seventh Circuit did not adhere to the reasoning of Kinoshita
and Mediterranean, it did not explicitly reject it either. Instead, the
Seventh Circuit stated, "[t]here is no need to disagree with the Second
and Ninth Circuits that `arising under' may denote a dispute somehow
limited to the interpretation and performance of the contract itself."
Id. at 642. It further noted, "[a]s a matter of `precise fact,'
Kinoshita deals with the effect of `arising under' language." Id.
At least one district court in the Seventh Circuit has declined to
follow the reasoning of the Ninth Circuit in Mediterranean Enterprises.
See Nemrow v. VMS/Stout Joint Venture, 1989 WL 153541 (N.D.Ill. 1989)
(Wllliams, J.) ("Finally although the Ninth Circuit advised reading an
`arising under' clause narrowly in Mediterranean Enterprises (citation
omitted), other circuits have not followed this reasoning, and this court
declines to do so as well.")
At least three other circuits have rejected the reasoning of Kinoshita
and Mediterranean Enterprises. In Battaglia v. McKendry, 233 F.3d 720,
724 (3rd Cir. 2000). the Third Circuit considered whether an arbitration
provision stating "any controversy [that] arises hereunder" applied to a
counterclaim that the agreement was the product of duress. The Third
Circuit found that the provision was not limited to disputes involving
the interpretation and performance of the settlement agreement but also
covered disputes regarding the formation of the agreement.
The Fourth Circuit has also refused to take the restrictive approach of
Kinoshita and Mediterranean Enterprises. In Peoples Security Life
Insurance Co. v. Monumental Life Insurance Co., 867 F.2d 809, 813 (4th
Cir. 1989), the Fourth Circuit found that a claim of fraudulent
inducement fell within the scope of an arbitration clause that provided
for arbitration of any issue "believed to constitute a breach or
violation" of the agreement.
Similarly, in Gregory v. Electro-Mechanical Corp., 83 F.3d 382, 285
(11th Cir. 1996), the 11th Circuit was asked to determine whether a claim
of fraudulent inducement fell within the ambit of an arbitration
provision providing for arbitration of "any dispute . . . which may arise
hereunder." The 11th Circuit concluded that, regardless of the
plaintiffs' characterization of the claims, the claim for fraudulent
inducement arose under the agreement and was therefore covered by the
Plaintiffs' Counts I, II, and III based on fraudulent inducement
constitute disputes "under the terms" of the Agreement.
Arbitration of Claim against Defendant Hedge
Plaintiffs argue that their Count I based on fraudulent inducement
against Michael Hedge in his individual capacity is not subject to
arbitration since Hedge was not a party to the merger agreement or its
mandatory arbitration provision.
"An agreement containing an arbitration clause covers non-signatories
under common law contract and agency principles." Messing v. Rosenkrantz
& EMSA, 872 F. Supp. 539, 540 (N.D. Ill. 1995) (Gettleman, J.). In
addition, an agent may invoke an arbitration agreement entered into by
its principal. Morgan v. Kobrin Securities, Inc., 649 F. Supp. 1023,
1032-3 (N.D.Ill. 1986) (Moran, J.).
In the instant case, Plaintiffs' Count I alleges that Defendant Hedge
made misrepresentations "with reckless disregard for their truth in order
to induce . . . the Principal CWI Stockholders to enter into the Merger
Agreement." (A.Compl. 9). Plaintiffs do not allege that Hedge acted
outside the scope of his role as agent for
Focus in making these
representations. In fact, Plaintiffs allege that Focus is liable for
these same representations in Counts II and III. Since Plaintiffs' claim
against Hedge as an agent for Focus is substantively the same as his
claims brought against Focus, Defendant Hedge is entitled to invoke the
arbitration provision entered into by his principal, Focus.
Right of Successor in Interest to Enforce Arbitration Clause
Lastly, Plaintiffs have sought to have the pending arbitration
dismissed or stayed since they have discovered that a corporate entity
known as "Pursuit Associates, LLC" claims to be the successor-in-interest
to Defendant Focus. Plaintiffs argue (1) that they never agreed to
arbitrate disputes with Pursuit, and (2) Section 10.5 of the Agreement
required Focus to obtain the consent of plaintiffs before any assignments
to a third-party.
Neither argument is persuasive in light of the Seventh Circuit's
holdings in Elzinga & Volkers, Inc. v. LSSC Corp., 47 F.3d 879 (7th Cir.
1995). In that case, the Seventh Circuit rejected the argument that a
Plaintiff could avoid a mandatory arbitration provision by arguing that
its obligation to arbitrate was limited to the Defendant's corporate
predecessor with which it signed the arbitration provision. The Seventh
Circuit further found that the issue of whether a party had breached its
duty to obtain consent before assignment of the contract at issue was a
controversy subject to arbitration.
It would be inappropriate to dismiss the arbitration on the grounds
cited by Plaintiffs since the issues they raise constitute "disputes
under the terms of the agreement" more appropriately considered as part
of the arbitration.
For the reasons stated herein, Defendants' Motions to Vacate the Minute
Order Dated 03/26/01 [28-2] and Motion to Stay the Litigation  are
GRANTED. All remaining Motions [28-3], [28-4], [20-1], [20-2], [22-1],
and [22-2] are DENIED.
IT IS SO ORDERED.
© 1992-2003 VersusLaw Inc.