Cara's Notions, Inc. v. Hallmark Cards, Inc. ( 1998 )


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  • PUBLISHED
    UNITED STATES COURT OF APPEALS
    FOR THE FOURTH CIRCUIT
    CARA'S NOTIONS, INCORPORATED,
    d/b/a Cara's Hallmark,
    Plaintiff-Appellee,
    v.                                                                  No. 97-1696
    HALLMARK CARDS, INCORPORATED;
    HALLMARK MARKETING CORPORATION,
    Defendants-Appellants.
    Appeal from the United States District Court
    for the Western District of North Carolina, at Charlotte.
    Robert D. Potter, Senior District Judge.
    (CA-97-18-3-P)
    Argued: January 28, 1998
    Decided: March 31, 1998
    Before MURNAGHAN, NIEMEYER, and MOTZ, Circuit Judges.
    _________________________________________________________________
    Reversed by published opinion. Judge Murnaghan wrote the opinion,
    in which Judge Niemeyer and Judge Motz joined.
    _________________________________________________________________
    COUNSEL
    ARGUED: Thomas Dean Myrick, SMITH, HELMS, MULLISS &
    MOORE, L.L.P., Charlotte, North Carolina, for Appellants. Charles
    Henry Rabon, Jr., KILPATRICK STOCKTON, L.L.P., Charlotte,
    North Carolina, for Appellee. ON BRIEF: Jackson N. Steele, KIL-
    PATRICK STOCKTON, L.L.P., Charlotte, North Carolina, for
    Appellee.
    OPINION
    MURNAGHAN, Circuit Judge:
    Cara's Notions, Inc., operates two Hallmark stores. The first store
    is the subject of a "Trademark License Agreement" between Hallmark
    Cards, Inc., and Betty and Jerald Gibson, the owners and officers of
    Cara's Notions. The second store is the subject of an "Account Agree-
    ment" between Hallmark Cards, Inc. and Hallmark Marketing Corpo-
    ration (collectively "Hallmark"), and Cara's Notions, Inc., itself. We
    are called upon in this case to determine whether a broad arbitration
    clause in the Account Agreement mandates arbitration of a dispute
    between Cara's Notions, as plaintiff, and Hallmark, as defendant,
    regarding the first store.
    The district court denied Hallmark's motion to compel arbitration
    because there was no arbitration clause in the first contract. In so
    doing, the district court failed to recognize that the parties to the two
    contracts differ, neglected to consider the actual language of the arbi-
    tration clause when interpreting the contracts and declined to defer to
    the strong federal policy favoring arbitration of disputes. We reverse.
    I.
    In 1984, Roberta Gibson was given permission by Hallmark to
    become a Hallmark retailer. In November of 1984, Roberta Gibson
    opened Cara's Hallmark Shop at Town Center Shopping Center in
    Charlotte, North Carolina ("Store I").
    In 1990, Betty Gibson and her husband Jerald Gibson ("the Gib-
    sons"), bought Store I from Roberta Gibson. Hallmark approved the
    Gibsons as the new owners of Store I. Hallmark Cards, Inc. signed a
    "Trademark License Agreement" with the Gibsons ("Contract I").
    Contract I provided that Betty and Jerald Gibson could use the "Hall-
    mark" trademark without paying royalties and that the Gibsons would
    abide by certain guidelines for the trademark use. The contract made
    no mention of arbitration of any disputes.
    At some point in the next few years, the Gibsons incorporated
    Cara's Notions, Inc., the plaintiff. The Gibsons jointly owned Cara's
    2
    Notions; Betty served as president and Jerald as secretary and trea-
    surer. The record does not reflect when Cara's Notions was incorpo-
    rated or whether there was any novation substituting Cara's Notions
    for the Gibsons as parties to Contract I.
    In 1994, the Gibsons wanted to purchase a second Hallmark shop,
    in Concord, North Carolina ("Store II"). The Gibsons completed an
    application on behalf of Cara's Notions, Inc. In May of 1994, Hall-
    mark and Cara's Notions entered into a "Hallmark Account Agree-
    ment" ("Contract II"), permitting Cara's Notions to operate the second
    Hallmark store in Concord. Contract II detailed Hallmark's and
    Cara's Notions' responsibilities regarding the sale and display of
    Hallmark products. Contract II also contained an arbitration clause
    which provided:
    Any controversy or claim arising out of or relating to this
    Agreement, or the breach thereof, or any aspects of the rela-
    tionship between Hallmark and Retailer,1 or the termination
    thereof, shall be settled by binding arbitration under the
    United States Arbitration Act in accordance with the Com-
    mercial Arbitration Rules of the American Arbitration Asso-
    ciation, and judgment upon the award may be entered in any
    court having jurisdiction thereof.
    Since then Cara's Notions, Inc., has operated both Store I and Store
    II.
    In early 1995, the landlord at Store I notified the Gibsons that they
    would have to move the store because a grocery store in the shopping
    center intended to expand into its space. The Gibsons claim that Hall-
    mark promised that it would help them find a new location for their
    Store I. The Gibsons further claim that they suggested a new location
    to Hallmark, in a shopping center called "The Village at University
    Place." According to the Gibsons, Hallmark representatives inspected
    the center and decided it was a favorable location for a Hallmark
    store, but instead of helping the Gibsons get a lease at that location
    as it had promised, Hallmark negotiated a lease at the Village at Uni-
    versity Place for itself.
    _________________________________________________________________
    1 The "Retailer" was defined as Cara's Notions, Inc.
    3
    In December of 1996, Cara's Notions filed a complaint in state
    court against Hallmark, alleging that Hallmark's taking of the new
    location for itself breached the duty of good faith and fair dealing,
    was an unfair and deceptive trade practice, usurped an opportunity of
    the principal and was an illegal misrepresentation. Cara's Notions
    sought actual and punitive damages against Hallmark. Hallmark
    removed the case to federal court and moved to compel arbitration,
    asserting that the arbitration agreement in Contract II covered this dis-
    pute between the parties.
    Believing that matters regarding Store I were governed only by
    Contract I and that matters regarding Store II were governed only by
    Contract II, the district court denied the motion to compel arbitration.
    The court held that "[b]ecause Contract I does not contain an arbitra-
    tion clause, this matter regarding Store I is not subject to arbitration."
    The district court held that the arbitration clause in Contract II did not
    modify the relationship created by Contract I because it believed that
    the first contract's merger clause required any modification to be "in
    writing with a specific reference to Store I." It further held that the
    arbitration clause in Contract II did not apply directly to matters
    regarding Store I because "the boilerplate contract [II], in its introduc-
    tion, specifically states that the contract is in reference to Store II,"
    and because the merger clause in Contract II uses the singular term
    "a Hallmark account" instead of a plural term such as "accounts," thus
    "specifically limit[ing] its scope to Store II." Significantly, the district
    court did not address the language of the arbitration clause itself in
    denying its effect in this case.
    Hallmark has appealed the dismissal of its Motion to Compel Arbi-
    tration and its Motion to Dismiss or in the Alternative to Stay Pro-
    ceeding Pending Arbitration.
    II.
    A.
    The Arbitration Act requires a federal court to grant a motion to
    stay a proceeding pending the arbitration of "any issue referable to
    arbitration under an agreement in writing for such arbitration." 9
    U.S.C. § 3. Because the examination of the scope of an arbitration
    4
    agreement is primarily a task of contract interpretation, we review a
    district court's determination of the arbitrability of a dispute de novo.
    See Summer Rain v. Donning Co./Publishers, Inc., 
    964 F.2d 1455
    ,
    1459-60 (4th Cir. 1992). However, "in applying general state-law
    principles of contract interpretation to the interpretation of an arbitra-
    tion agreement within the scope of the [Arbitration] Act, due regard
    must be given to the federal policy favoring arbitration, and ambigui-
    ties as to the scope of the arbitration clause itself resolved in favor of
    arbitration." Volt Info. Sciences, Inc. v. Board of Trustees of Leland
    Stanford Jr. Univ., 
    489 U.S. 468
    , 475-76 (1989) (quoted in Summer
    
    Rain, 964 F.2d at 1460
    ).
    B.
    A straightforward examination of the two contracts reveals that the
    district court erred in refusing to compel arbitration of this dispute.
    The plaintiff in the case is Cara's Notions, not the Gibsons. The only
    contract between Cara's Notions and Hallmark is Contract II, which
    contains an extremely broad arbitration clause:"Any controversy or
    claim arising out of or relating to . . . any aspects of the relationship
    between Hallmark and Retailer . . . shall be settled by binding arbitra-
    tion . . . ." The "Retailer" is defined in the contract as Cara's Notions.
    The instant conflict certainly relates to an aspect of the relationship
    between Hallmark and Cara's Notions. Therefore Contract II man-
    dates arbitration of this dispute.
    C.
    The district court concluded otherwise, however. In defense of the
    district court's decision, Cara's Notions asserts that Contract II was
    intended to apply only to claims or controversies regarding Store II,
    not those regarding Store I. Cara's Notions further asserts that the
    instant conflict arose solely out of the relationship between Hallmark
    and Store I, and therefore is governed by Contract I (which contains
    no arbitration clause).2 Cara's Notions points out that a court may not
    _________________________________________________________________
    2 This claim might not help Cara's Notions, however; because Cara's
    Notions was not a party to Contract I, it may have no standing to pursue
    the Gibsons' claim. The district court appears not to have noticed the dif-
    5
    require a party to "submit to arbitration any dispute which he has not
    agreed so to submit," AT&T Technologies, Inc. v. Communications
    Workers of America, 
    475 U.S. 643
    , 648 (1986) (quoting United Steel-
    workers of America v. Warrior & Gulf Navigation Co. , 
    363 U.S. 574
    ,
    582 (1960)) (internal quotation marks omitted), and argues that
    because Hallmark chose to deal with each of its stores separately and
    assigned them each a different account number, it may not "bootstrap"
    the requirement to arbitrate found in Contract II into the present dis-
    pute, arising from Contract I.
    In determining "whether the arbitration clause in Contract II
    applies to matters regarding Contract I," the district court exhaus-
    tively analyzed numerous parts of the two contracts, but did not
    address the language of the arbitration clause itself. First the district
    court analyzed the merger clause found in Contract I. That clause pro-
    vides that:
    This agreement supersedes all prior oral or written represen-
    tations and constitutes the entire understanding between
    Licensee and Hallmark with respect to the use of the HALL-
    MARK trademark; [sic] in connection with licensee's opera-
    tion of the shop and may be modified only in writing.
    The district court claimed that this clause "specifically provide[s] that
    any modification of the agreement concerning Store I must be in writ-
    ing with a specific reference to Store I." Cara's Notions also argues
    that Contract I "can only be modified in a writing making specific ref-
    erence to that shop [Store I]." Those arguments are baseless. It is
    _________________________________________________________________
    ference in parties between Contract I and Contract II. Perhaps it was
    presented with some evidence of a novation, but no such evidence
    appears in our record nor was either attorney at oral argument aware of
    any such evidence.
    To avoid a dismissal on this basis, the Plaintiff/Appellee's attorney
    asserted at oral argument that at some point (he did not know when)
    Cara's Notions obtained the license rights to Store I from the Gibsons.
    On remand, the district court should first determine whether Cara's
    Notions even has standing to assert the underlying claims before pro-
    ceeding to the merits of the case.
    6
    clear that Contract I can only be modified in writing, but Contract II
    is in writing. Nothing in the merger clause or anywhere else in either
    contract provides any support for the assertion that that writing must
    specifically refer to Store I.
    Second, the district court observed that the introduction to Contract
    II specifically refers only to Store II. Contract II begins with a series
    of "whereas" clauses, one of which identifies the location of the store
    premises where Cara's Notions desired to open Store II. None men-
    tions the location (or even existence) of Store I. This does suggest that
    Contract II focuses on Store II. It does not mean, however, that no
    term of Contract II can have altered the general relationship between
    Cara's Notions and Hallmark. It is possible that, even though Contract
    II focuses on Store II, the parties intended certain terms of the con-
    tract to apply to all of the dealings between the parties.
    Third, the district court argued that the merger clause in Contract
    II, by use of the singular term "account" instead of the plural term
    "accounts," suggests that Contract II was only meant to apply to Store
    II. The merger clause in Contract II provides:
    This agreement supersedes all prior oral or written represen-
    tations and constitutes the entire understanding between
    Retailer and Hallmark with respect to Retailer's status as a
    Hallmark Account and may only be modified by written
    agreement of Hallmark and Retailer.
    The district court concluded that the "reference to an account in the
    singular, as opposed to the plural, can only mean that [Contract II]
    referred to the specific account number that was the subject of the
    contract [Store II]." Had the parties intended the contract to apply to
    both stores, the district court observed, they could have used the plu-
    ral term "accounts."
    It may be true that the use of the singular "account" further sug-
    gests that Contract II was focused on Store II. 3 On the other hand, the
    _________________________________________________________________
    3 In fact, the very existence of a merger clause claiming that the agree-
    ment supersedes all earlier representations and constitutes the entire
    7
    clause's reference to the "Retailer's status as a Hallmark account"
    could have been meant to encompass the retailer's ownership of one
    or many accounts. Of course, the merger clause could also have been
    written to refer to the "Retailer's status as an owner of Hallmark
    accounts." Such speculation does not get us very far.
    Fourth, the district court noted that no one from Hallmark told the
    Gibsons that Contract II would have anything to do with Store I, and
    Cara's Notions argues that, partially for this reason, it would be unfair
    now to hold that a conflict regarding Store I must be arbitrated. Betty
    Gibson complained in her affidavit that no one from Hallmark went
    over with her any provisions of the forms that she and her husband
    signed in order to be considered as a Hallmark retailer in Store II. No
    one from Hallmark attempted to point out any differences between
    these forms and the earlier forms they had signed regarding Store I
    or ever stated that the forms were intended to affect any part of the
    relationship between the Gibsons and Hallmark regarding the first
    store.
    We are unmoved. The Gibsons are sophisticated business people
    and Cara's Notions, Inc., dealt with Hallmark at arm's length. Both
    parties to such a commercial contract have a duty to read the contract
    carefully and are presumed to understand it.4 See Sanger v. Yellow
    Cab Co., 
    486 S.W.2d 477
    , 481 (Mo. 1972) (en banc); Harris v.
    _________________________________________________________________
    understanding between the retailer and Hallmark can be understood as
    supporting the district court's view that Contract II was not intended to
    refer to both stores, but only to refer to Store II. After all, neither party
    believes that Contract II abrogated Contract I, which would be the logical
    conclusion if Contract II's merger clause were given broad and literal
    effect. However, the force of this argument is substantially undermined
    by the fact that Contracts I and II were between different parties. It is
    perfectly consistent to say that Contract II represents the entire under-
    standing between Hallmark and Cara's Notions and that Contract I repre-
    sents the entire understanding between Hallmark and the Gibsons.
    4 The very last line of Contract II before the signatures read, in all capi-
    tal letters, "THIS AGREEMENT CONTAINS A BINDING ARBITRA-
    TION PROVISION WHICH MAY BE ENFORCED BY THE PARTIES
    (PARA. 10)."
    8
    Bingham, 
    97 S.E.2d 453
    , 454 (N.C. 1957).5 A corporation desirous of
    running multiple businesses ought to consult with an attorney if its
    president and secretary/treasurer cannot understand the contracts into
    which it intends to enter. Unsurprisingly, Cara's Notions cites no
    legal authority for the proposition that a corporation may avoid its
    contractual obligations if it misunderstood them or did not read them
    carefully enough.6
    The arguments made by Cara's Notions and by the district court to
    support the judgment that the underlying claim need not be submitted
    to arbitration suffer from one common flaw: none of them addresses
    the language of the arbitration clause itself. That language was con-
    spicuously noted and is very broad. The arbitration clause in Contract
    II applies to "[a]ny controversy or claim" relating to "any aspects of
    the relationship" between Hallmark and Cara's Notions. We will not
    interpret the phrase "any aspects of the relationship" to mean "only
    those aspects involving one store." The breadth of the language
    clearly establishes that the arbitration clause was intended to apply to
    all conflicts between the parties and not only to conflicts regarding
    Contract II in particular. Cf. CB Commercial Real Estate Group, Inc.
    v. Equity Partnerships Corp., 
    917 S.W.2d 641
    , 646 (Mo. Ct. App.
    1996) ("When the language is unambiguous, the intent of the parties
    is reflected within the language of the contract and the court will
    determine the parties' intent from the four corners of the document
    itself."); Walton v. City of Raleigh, 
    467 S.E.2d 410
    , 411 (N.C. 1996)
    (same). Because the parties to Contract II are the litigants, the arbitra-
    tion clause in Contract II applies to this suit between those parties.
    _________________________________________________________________
    5 The contracts specify that they are to be interpreted in accordance
    with Missouri law, where Hallmark Cards, Inc., is incorporated. The
    stores are located, and Cara's Notions is incorporated, in North Carolina.
    Because the applicable contract law is the same under either Missouri or
    North Carolina law, we need not decide which state's law must be
    applied to this case.
    6 Cara's Notions also argues that"Hallmark's present effort to cre-
    atively utilize the May 18, 1994 Hallmark Account Agreement [Contract
    II] to avoid the requirement that the 1990 account agreement [Contract
    I] for the University City store [Store I] can only be modified in writing
    is barred by the parol evidence rule" and that there was no consideration
    in Contract II to support an application of the arbitration clause to con-
    flicts arising from Store I. Both arguments are meritless.
    9
    D.
    Finally, even if the arbitration clause had been ambiguous as to its
    scope, our decision would be guided by the strong federal policy
    favoring arbitrability, based on the Arbitration Act and repeatedly rec-
    ognized by the Supreme Court and this Circuit. In AT&T Technolo-
    gies, Inc., the Supreme Court explained that presumption favoring
    arbitrability in the context of a labor dispute:
    Finally, it has been established that where the contract con-
    tains an arbitration clause, there is a presumption of arbitra-
    bility in the sense that "[a]n order to arbitrate the particular
    grievance should not be denied unless it may be said with
    positive assurance that the arbitration clause is not suscepti-
    ble of an interpretation that covers the asserted dispute.
    Doubts should be resolved in favor of 
    coverage." 475 U.S. at 650
    (quoting United Steelworkers of America v. Warrior
    & Gulf Navigation Co., 
    363 U.S. 574
    , 582-83 (1960)).
    This policy is not limited to labor contracts. In Mitsubishi Motors
    Corp. v. Soler Chrysler-Plymouth, Inc., 
    473 U.S. 614
    (1985), the
    Supreme Court explained that when determining whether parties have
    agreed to arbitrate a dispute, a court is to apply the "federal substan-
    tive law of arbitrability, applicable to any arbitration agreement
    within the coverage of the Act," 
    id. at 626
    (quoting Moses H. Cone
    Mem'l Hosp. v. Mercury Constr. Corp., 
    460 U.S. 1
    , 24 (1983)) (inter-
    nal quotation marks omitted). The Supreme Court explained that:
    [T]hat body of law counsels "that questions of arbitrability
    must be addressed with a healthy regard for the federal pol-
    icy favoring arbitration. . . . The Arbitration Act establishes
    that, as a matter of federal law, any doubts concerning the
    scope of arbitrable issues should be resolved in favor of
    arbitration, whether the problem at hand is the construction
    of the contract language itself or an allegation of waiver,
    delay, or a like defense to arbitrability."
    
    Id. (quoting Moses
    H. Cone Mem'l Hosp. , 460 U.S. at 24-25) (omis-
    sion in original). "Thus, as with any other contract, the parties' inten-
    10
    tions control, but those intentions are generously construed as to
    issues of arbitrability." Id.; Summer Rain v. Donning Co./Publishers,
    Inc., 
    964 F.2d 1455
    , 1460 (4th Cir. 1992). These principles direct us
    to order arbitration here.
    III.
    The Appellee, Cara's Notions, argues that its claims should not be
    submitted to arbitration despite Mitsubishi's command. Cara's
    Notions may have the luxury of disagreeing with the Supreme Court,
    but that is a luxury denied to us. The district court should either have
    dismissed the case for lack of standing or granted Hallmark's Motion
    to Compel Arbitration and Motion for Stay of Proceeding Pending
    Arbitration. The district court's decision otherwise is hereby reversed,
    and the case is remanded for further proceedings not inconsistent with
    this opinion.
    REVERSED
    11