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Fyrnetics Limited v. Quantum Group

June 18, 2002


Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 99-CV-04704--Matthew F. Kennelly, Judge.

Before Coffey, Kanne, and Evans, Circuit Judges.

The opinion of the court was delivered by: Kanne, Circuit Judge


Fyrnetics Hong Kong ("FHK") and Walter Kidde Portable Equipment Inc. ("Kidde") sued Quantum Group, Inc., alleging that Quantum sold FHK defective carbon monoxide ("CO") sensors, thereby causing Kidde to recall CO detectors made using the allegedly defective sensors. Quantum filed a motion to dismiss the complaint, or in the alternative to stay the action under 9 U.S.C. § 3, asserting that various agreements between the parties required the stay in favor of arbitration. The district court held an evidentiary hearing on the matter and subsequently entered judgment dismissing FHK and Kidde's claims in favor of arbitration pursuant to one agreement. We affirm in part and remand in part.

I. Background

Quantum is a technology firm based in San Diego, California that manufactures CO detectors using a biomimetic sensor that it developed and patented. In June 1996, Quantum entered into a license agreement effective January 1, 1997 with Fyrnetics. *fn1 Pursuant to this agreement, Fyrnetics was licensed to "make, have made, use, import, export, sell or offer to sell" CO detectors containing Quantum's patented sensor technology. In return for this license, Fyrnetics agreed to pay to Quantum royalties of two and one-half percent of its gross CO detector sales. Around the same time, Quantum entered into a manufacturing agreement with FHK whereby FHK manufactured Quantum's brand of CO detectors using Quantum's patented CO sensor technology. Pursuant to the manufacturing agreement, the finished CO detectors were to be sold by FHK exclusively to Quantum for resale to Quantum's clients.

In relevant part, the license agreement between Fyrnetics and Quantum provided that "[a]ny claim or controversy arising between the parties hereto in connection with this Agreement . . . shall be determined by arbitration to be held in accordance with the rules of the American Arbitration Association . . . ." The license agreement also granted Fyrnetics "the right to sublicense its Affiliates . . . [e]ach Affiliate so sublicensed shall be bound by the terms and conditions of this Agreement." The term "Affiliate" was defined as entities that control or were controlled by Fyrnetics, or had common ownership with Fyrnetics. At all relevant times, Fyrnetics and FHK were considered "Affiliates" pursuant to the terms of the license agreement. This is so because when the license agreement was first entered into both Fyrnetics and FHK were owned by the same holding company, Management Investment & Technology International, Inc. ("MIT"). Later, FHK and Fyrnetics remained "Affiliates" when Williams Holding (International) Limited ("Williams") purchased the stock of FHK, and Kidde, a subsidiary of Williams, purchased the stock of Fyrnetics.

In July 1999, FHK and Kidde filed a complaint, alleging that during late 1997 and early 1998, Quantum sold defective CO sensors to FHK. Kidde and FHK sounded their complaint in tort, alleging that Quantum committed misrepresentation and negligence and that Quantum breached certain warranties with regard to the sensors. Additionally, FHK and Kidde alleged that FHK sold to Fyrnetics CO detectors made using the defective sensors, and Fyrnetics in turn resold the detectors in Canada and the United States. Because of the allegedly defective sensors, Kidde claimed that many of the CO detectors that Fyrnetics sold in the United States and Canada failed. Consequently, Kidde was forced to engage in a costly recall of the faulty CO detectors. Thus, in their complaint Kidde and FHK sought to recoup all compensatory and consequential damages suffered as a result of Quantum's allegedly tortious actions.

Quantum moved to dismiss FHK and Kidde's complaint or to stay the action under 9 U.S.C. § 3, arguing that provisions in the Quantum-FHK manufacturing agreement *fn2 and provisions in the Quantum-Fyrnetics license agreement mandated the stay in favor of arbitration. The district court denied Quantum's motion to dismiss, finding that an issue of fact existed as to whether the parties were acting pursuant to either the manufacturing agreement, the license agreement, or an alleged oral agreement, which FHK and Kidde asserted controlled the parties' relationship. The district court then held an evidentiary hearing to decide this issue.

At the evidentiary hearing, FHK and Kidde called Thomas Russo to testify. In 1996, when Quantum and Fyrnetics entered into their license agreement, Russo was the president and CEO of Fyrnetics. During this same time period, Russo was also the managing director of FHK. Russo testified that the Quantum-Fyrnetics license agreement either never went into effect or was abandoned.

According to Russo, in December 1996, he and Dr. Mark Goldstein, President and CEO of Quantum, reached an oral agreement, allowing FHK to purchase CO sensors from Quantum directly and then to manufacture CO detectors for resale to Fyrnetics. Therefore, Russo asserted that in late 1997 and early 1998, when the allegedly defective sensors were sold to FHK, Quantum and FHK were acting pursuant to this oral agreement and not the license agreement, which contained the arbitration provision.

On cross-examination, Russo was confronted with multiple memoranda and letters between the parties referencing the license agreement. For example, on January 7, 1997, Quantum's attorney, Peter Leal, wrote Kidde's attorney, Byron Gregory, and stated that if Fyrnetics were sold to Kidde, Quantum would require that Kidde agree to be bound by the license agreement. Gregory responded and explained that the transactions were being structured as a sale of stock. Therefore, he further explained, because no sale of business or asset transaction would be occurring, it was unnecessary for Kidde to attain Quantum's consent to use Quantum's patented sensor technology. As a second example, on January 24, 1997, Kidde and Fyrnetics executed a share purchase agreement that specifically disclosed to Kidde the license agreement as a current asset of Fyrnetics. No evidence was presented at the evidentiary hearing by FHK or Kidde to corroborate Russo's testimony about the existence of an oral contract.

Goldstein testified on behalf of Quantum, stating that at all relevant times, the parties' business relationship and the sale of CO sensors to FHK was governed by the license agreement. Goldstein asserted that there was not another agreement that gave either FHK or Fyrnetics the right to use Quantum's patented technology. Goldstein further denied reaching an oral agreement with Russo and denied agreeing to any abandonment of the license agreement.

Rather, Goldstein explained that in late 1997 and early 1998, when the allegedly defective senors were sold to FHK, Fyrnetics was allowing its affiliate, FHK, to manufacture the CO detectors ...

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