Fyrnetics Ltd v. Quantum Group Inc ( 2002 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 01-1318
FYRNETICS (HONG KONG) LIMITED and
WALTER KIDDE PORTABLE EQUIPMENT, INC.,
Plaintiffs-Appellants,
v.
QUANTUM GROUP, INC.,
Defendant-Appellee.
____________
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 99-CV-04704—Matthew F. Kennelly, Judge.
____________
ARGUED SEPTEMBER 6, 2001—DECIDED JUNE 18, 2002
____________
Before COFFEY, KANNE, and EVANS, Circuit Judges.
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 de-
fective 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 sub-
sequently entered judgment dismissing FHK and Kidde’s
2 No. 01-1318
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, Cal-
ifornia that manufactures CO detectors using a biomimetic
sensor that it developed and patented. In June 1996, Quan-
tum entered into a license agreement effective January 1,
1997 with Fyrnetics.1 Pursuant to this agreement, Fyrnetics
was licensed to “make, have made, use, import, export, sell
or offer to sell” CO detectors containing Quantum’s pat-
ented 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 tech-
nology. Pursuant to the manufacturing agreement, the fin-
ished 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 Fyr-
netics, or had common ownership with Fyrnetics. At all
1
In 1998, Fyrnetics was merged with Kidde and subsequently
dissolved as a separate corporate entity.
No. 01-1318 3
relevant times, Fyrnetics and FHK were considered “Affili-
ates” 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 re-
mained “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 de-
fective CO sensors to FHK. Kidde and FHK sounded their
complaint in tort, alleging that Quantum committed mis-
representation 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 dam-
ages 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 agree-
ment2 and provisions in the Quantum-Fyrnetics license
agreement mandated the stay in favor of arbitration. The
2
The district court found that manufacturing agreement to be
irrelevant to the present dispute.
4 No. 01-1318
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’ relation-
ship. 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 agree-
ment 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 de-
tectors for resale to Fyrnetics. Therefore, Russo asserted
that in late 1997 and early 1998, when the allegedly de-
fective 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 multi-
ple 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 ex-
plained 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 exe-
No. 01-1318 5
cuted a share purchase agreement that specifically dis-
closed 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 de-
nied 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 on its behalf pursuant to the license agree-
ment.
On August 7, 2000, the district court dismissed FHK and
Kidde’s complaint in favor of arbitration. The district court
explained that “[e]ven though Russo testified, and the
plaintiffs maintain, that the License Agreement was a dead
letter, documents confirm that [Fyrnetics] was treating the
Agreement as alive and well as late as June 1997.” More-
over, the district court explained that the fact that the
royalty rate paid by Fyrnetics and then by Kidde to Quan-
tum was the same as the rate set out in the license agree-
ment (two and one-half percent) further supported its con-
clusion that the parties were acting pursuant to the license
agreement. The district court determined that the license
agreement permitted Fyrnetics to sublicense any “Affiliate,”
and that the license agreement passed to Kidde as part of
Kidde’s acquisition of Fyrnetics. Thus, the district court
concluded “that in purchasing the CO sensors and other
components from Quantum for use in the CO detectors sold
to Fyrnetics and Kidde, FHK was acting as Fyrnetics’ sub-
6 No. 01-1318
licensee under the license agreement,” which contains the
arbitration clause.
In January 2001, the district court denied FHK and
Kidde’s subsequent motion for reconsideration and reaf-
firmed its order dismissing FHK and Kidde’s claims. In
this denial, the district court further explained that it
“rejected as lacking in credibility the testimony of Thomas
Russo . . . that in purchasing the CO sensors, FHK was
acting pursuant to a verbal understanding with Quantum
rather than pursuant to the written [license] agreement.”
II. Analysis
FHK and Kidde present several arguments on appeal.
First, they contend that the district court erred when it
disregarded their version of the events. They continue to
insist that the license agreement was abandoned or, al-
ternatively, never went into effect and that an alleged oral
agreement controlled the parties’ relationship. Second,
they argue that even if the license agreement was effec-
tive, neither Kidde nor FHK can be bound by it because
neither of them was party to the license agreement. Fi-
nally, they contend that even if the license agreement is
binding upon them, the current dispute should not be gov-
erned by the license agreement as it does not arise in
connection with or pursuant to a claimed breach of the
license agreement.
A. Standard of Review
To the extent we review the actual language of an ar-
bitration provision, we will review the district court’s
determinations de novo; however, “to the extent that the
district court’s order is based upon factual findings, our
review is guided by the clearly erroneous standard.”
Nordin v. Nutri/System, Inc., 897 F.2d 339, 344 (8th Cir.
1990).
No. 01-1318 7
B. The License Agreement
On appeal, FHK and Kidde initially assert that the dis-
trict court erred when it determined that the parties were
acting pursuant to the license agreement, rather than the
alleged oral agreement. By means of an evidentiary hear-
ing, the district court determined that no oral agreement
existed. In making this determination, the district court
relied on the correspondence between the parties, the ex-
istence of a written license agreement between the parties,
and the fact that both Fyrnetics and Kidde paid a two
and one-half percent royalty to Quantum as set out in the
written license agreement. In contrast, the only evidence
presented that supported FHK and Kidde’s oral agreement
theory was Russo’s testimony, and the district court de-
termined that that testimony was incredible. In reviewing
the district court’s factual determination, we will apply a
clearly erroneous standard of review, and if the district
court’s account of the evidence “is plausible in light of the
record viewed in its entirety,” we will not reverse the
district court even if we are convinced that had we been
sitting as the trier of fact, we would have weighed the
evidence differently. Anderson v. Bessemer City, 470 U.S.
564, 573-74, 105 S. Ct. 1504, 84 L. Ed. 2d 518 (1985). More-
over, special deference will be given to the district court’s
“findings based upon credibility determinations, which can
virtually never be clear error.” United State v. Hickok, 77
F.3d 992, 1007 (7th Cir. 1996) (quotation omitted).
With respect to the existence of an oral contract, the dis-
trict court did not believe Russo’s contention that after
the execution of an 18-page license agreement, Goldstein
would orally agree to sell Quantum’s patented biomimetic
sensor technology. While on appeal FHK and Kidde argue
that there is evidence to the contrary, the trial court be-
lieved Quantum’s version of the events. Given the written
agreement, the correspondence between the parties, the
royalty payments, and the district court’s determination
8 No. 01-1318
that Russo’s testimony was lacking in credibility, we believe
that the district court correctly concluded that there was no
oral agreement.
Similarly, in McMahon Food Corp. v. Burger Dairy Co.,
103 F.3d 1307, 1313 (7th Cir. 1996), the trial court con-
cluded that McMahon Food failed to act in good faith, a
finding of fact reversed only for clear error. On appeal, Mc-
Mahon Food argued that it presented evidence to the
contrary to the trial court. See id. Affirming the trial court,
this court explained that McMahon Food’s argument
“amount[ed] to nothing more than an argument that the
trial court should have believed [McMahon Food’s] version
of events rather than [the opposing party’s version].” Id.
There, “the trial court specifically found that McMahon
[Food’s] testimony was less credible than the testimony of
[the opposing party].” Id. Similarly, here, the trial court
found that Russo’s testimony was less credible than Gold-
stein’s testimony.
FHK and Kidde also contend that the district court’s
rationale for finding that the license agreement was ef-
fective and not abandoned was baseless. Supporting the
district court’s conclusion are communications from 1997
and 1998 between the parties that suggest that the license
agreement controlled the parties’ relationship. For example,
on November, 24, 1997, Russo wrote to Goldstein express-
ing a concern that Quantum was violating the license
agreement by selling in one of the markets designated to
Fyrnetics. While this allegation proved unfounded, the fact
that Russo wrote to Goldstein in November 1997 on behalf
of Fyrnetics and referenced the license agreement solidifies
the district court’s finding that the license agreement was
effective and not abandoned. Russo did not dispute the
existence of the communications between the parties, but
rather offered alternative interpretations of and explana-
tions for them. However, the district court believed Gold-
stein’s version of the events. Given this evidence demon-
No. 01-1318 9
strating the plausibility of Goldstein’s version of the events,
we cannot say that the district court clearly erred by
concluding that no oral agreement existed, and that the
license agreement was effective and not abandoned. See
Anderson, 470 U.S. at 574 (“Where there are two permissi-
ble views of the evidence, the factfinder’s choice between
them cannot be clearly erroneous.”).
C. Binding a Non-signatory
Next, FHK and Kidde contend that even if the license
agreement was effective at the time the defective sensors
were sold to FHK, FHK and Kidde cannot be bound by the
arbitration provision in the license agreement because
neither party signed the license agreement.
1. Kidde
With respect to Kidde, we believe that the district court
correctly determined that Kidde’s claims, in essence, were
derivative of Fyrnetics’, a signatory to the license agree-
ment, because Kidde was Fyrnetics’ successor. The alleged-
ly defective sensors were sold during late 1997 and ear-
ly 1998, and Fyrnetics existed as a separate corporate en-
tity during this time period. As the district court correctly
explained, in June 1998, “[w]hen Kidde caused Fyrnetics
to be merged into Kidde and then dissolved, Kidde volun-
tarily assumed the obligation of Fyrnetics’ license agree-
ment. . . . Kidde, which is making claims that are partly
those of Fyrnetics, cannot escape application of the license
agreement’s arbitration requirement by effectively legislat-
ing Fyrnetics out of existence.”
2. FHK
With respect to FHK, the district court correctly ex-
plained that there are several ways that a non-signatory
10 No. 01-1318
can be bound by a contract, such as through the doctrines
of assumption, agency, equitable estoppel, veil piercing, and
incorporation by reference. See Am. Bureau of Shipping v.
Tencara Shipyard S.P.A., 170 F.3d 349, 352 (2d Cir. 1999).
Relying on the doctrine of assumption, the district court
explained that FHK evidenced its assumption of the license
agreement through its payment of royalties to Quantum at
the two and one-half percent rate as set out in the license
agreement. As FHK highlights on appeal, however, no evi-
dence was presented to the district court that FHK actually
paid any royalties to Quantum. Rather, the parties pre-
sented evidence that Fyrnetics and then Kidde, but not
FHK, paid the two and one-half percent royalty rate. Fur-
ther, the district court relied solely on this incorrect factual
determination to bind FHK to the license agreement, and
the record is devoid of other evidence supporting this con-
clusion. The district court clearly erred in making this fac-
tual determination and therefore, in the absence of other
factual findings to support the district court’s conclusion
that FHK assumed the license agreement, we must re-
mand to the district court to further reexamine this issue.
Through further findings, FHK might prove to have as-
sumed the license agreement or prove to be bound through
one of the other alternative theories for binding a non-
signatory. See id. (discussing theories).
D. Arising Under the License Agreement
Finally, Kidde argues that even if the license agreement
is in effect, their claims are not governed by the license
agreement because their claims do not arise in connection
with the license agreement or with a claimed breach of the
license agreement. We will address this issue of contract
interpretation de novo. See Keifer Specialty Flooring, Inc. v.
Tarkett, Inc., 174 F.3d 907, 909 (7th Cir. 1999). As we con-
sider Kidde’s contention, we bear in mind that “once it is
No. 01-1318 11
clear the parties have a contract that provides for arbitra-
tion of some issues between them, any doubts concerning
the scope of the arbitration clause are resolved in favor of
arbitration.” Miller v. Flume, 139 F.3d 1130, 1136 (7th Cir.
1998). Moreover, “a court may not deny a party’s request to
arbitrate an issue unless it may be said with positive assur-
ance that the arbitration clause is not susceptible of an
interpretation that covers the asserted dispute.” Keifer, 174
F.3d at 909 (quotation omitted).
The arbitration provision in this case contemplated that
“[a]ny claim or controversy arising between the parties
hereto in connection with this Agreement . . . shall be
determined by arbitration.” This court has characterized
similar provisions as extremely broad and capable of an
expanse reach. See id. at 909-10. In Keifer, the relevant ar-
bitration provision stated that “[a]ny controversy or claims
arising out of or relating to [the Agreements] shall be set-
tled by arbitration in accordance with the Commercial
Arbitration Rules of the American Arbitration Associa-
tion.” Id. at 909. There, we noted that “[b]road arbitration
clauses . . . necessarily create a presumption of arbitra-
bility.” Id. at 910. We believe that such a presumption
arises in this case given the expansive language of the
arbitration provision in the Quantum-Fyrnetics license
agreement and its similarity to the provision in Keifer.
Kidde seems to imply that because its claims arose ex-
clusively from Quantum’s allegedly tortious conduct, its
claims arise in tort and therefore should not be bound by
contract terms. It is nonsensical for Kidde to argue that
its claims are not arising “in connection with the license
agreement.” The license agreement specifically permitted
Fyrnetics and then Kidde “to make, have made, use, import,
export, sell, or offer to sell” products containing Quantum’s
CO sensor. Fyrnetics sold CO detectors using CO sensors
that Kidde now alleges were defective. The fact that Kidde
cast its complaint in tort does not allow it to avoid its
12 No. 01-1318
contractual obligation to arbitrate. See Sweet Dreams
Unlimited, Inc. v. Dial-A-Mattress Int’l, Ltd., 1 F.3d 639,
643 (7th Cir. 1993) (“We have routinely held that a party
may not avoid a contractual arbitration clause merely by
‘casting its complaint in tort.’ ”).
III. Conclusion
For the foregoing reasons, we AFFIRM the district court in
part and we REMAND in part for findings with respect to
the issue of whether FHK, a non-signatory to the license
agreement, is bound to arbitrate.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-97-C-006—6-18-02