CPL, Incorporated v. Fragchem Corporation ( 2008 )


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  •                             In the
    United States Court of Appeals
    For the Seventh Circuit
    ____________
    No. 07-1784
    CPL, INCORPORATED,
    Plaintiff-Appellant,
    v.
    FRAGCHEM CORPORATION,
    Defendant-Appellee.
    ____________
    Appeal from the United States District Court
    for the Northern District of Illinois, Eastern Division.
    No. 06-C-1352—Charles R. Norgle, Sr., Judge.
    ____________
    ARGUED DECEMBER 5, 2007—DECIDED JANUARY 9, 2008
    ____________
    Before FLAUM, EVANS, WILLIAMS, Circuit Judges.
    FLAUM, Circuit Judge. CPL and Fragchem do business
    in the chemicals industry, but their commercial chemistry
    is now questionable. The two companies began their
    relationship under an exclusive Supply Agreement,
    terminated this agreement years later, and then resumed
    conducting transactions soon thereafter. In April of 2004,
    Fragchem received a shipment of chemicals from CPL
    but refused to submit payment. CPL filed a complaint
    with the district court, and Fragchem responded by
    filing a motion to dismiss under Federal Rule of Civil
    Procedure 12(b)(7) for failure to join a necessary party.
    Instead of deciding this motion on the merits, the district
    court dismissed the lawsuit sua sponte on the basis of
    2                                             No. 07-1784
    improper venue on the grounds that the Supply Agree-
    ment between the two parties contained an agreement
    to arbitrate. For the reasons set forth in this opinion, we
    reverse the ruling of the district court.
    I. Background
    CPL is a corporation engaged in the sale of chemicals
    used in the manufacture of generic pharmaceutical
    products. It is organized under the laws of Missouri, with
    its principal place of business in Gaithersburg, Maryland.
    Its parent company, Cadila, is registered under the
    Indian Companies Act, conducting business under the
    laws of India with its Registered Office located in
    Ahmedabad, Gujarat, India. This case arises out of a
    dispute between Cadila/CPL and Fragchem, a corporation
    that is engaged in the import and export of chemicals.
    Fragchem is organized under the laws of Illinois with
    its principal place of business in Niles, Illinois.
    On May 9, 1997, Cadila and Fragchem entered into an
    exclusive Supply Agreement. Under the terms of this
    agreement, Cadila was required to manufacture and
    supply certain chemicals exclusively to Fragchem, in
    exchange for which Fragchem was to transfer details of
    the processes and technical data to enable Cadila to
    develop and manufacture those chemicals. In particular,
    Fragchem provided technical specifications, the gen-
    eral process for manufacturing Chlorhexidine Base,
    Chlorhexidine HCL, and Chlorhexidine Gluconate 20%
    solution (the “C Products”), information regarding raw
    materials, and processing details. Cadila’s end of the
    deal was that it agreed to manufacture and supply C
    Products exclusively for Fragchem using the informa-
    tion and technology it supplied. The Supply Agreement
    also stipulated that Fragchem was to purchase C
    Products exclusively from Cadila.
    No. 07-1784                                                 3
    Several months after the agreement was signed, Cadila
    began shipping C Products to Fragchem. Fragchem
    initially made its payments directly to Cadila, but in
    2000, Cadila informed Fragchem that it should start
    submitting purchase orders and payments for C Products
    to its subsidiary, CPL, which it indicated was also bound
    by the terms of the Supply Agreement. Fragchem ulti-
    mately agreed to submit its subsequent payments to CPL.
    The Supply Agreement, which is at the heart of this
    case, contained an agreement to arbitrate that read:
    Any controversy arising under this Agreement, or any
    breach thereof, shall be referred to and finally settled
    pursuant to Arbitration in accordance with the provi-
    sions of Arbitration and Conciliation Proceedings
    prevalent in India, and judgment upon this award
    may be entered in any court having jurisdiction.
    However, such Arbitration proceedings shall take
    place in Ahmedabad (Gujarat) in India and the lan-
    guage of such arbitration shall be English.
    In addition, with respect to amendment and assignment,
    the Supply Agreement provided as follows:
    The agreement may not be amended, waived, dis-
    charged, or terminated orally, but only by an instru-
    ment in writing signed by the party against which
    enforcement . . . is sought. This agreement shall be
    binding upon the respective parent, subsidiaries,
    affiliates, successors, and assigns of CPL and
    Fragchem. This agreement may not be assigned by any
    party without the written consent of the other parties.
    The Supply Agreement itself had an initial term of five
    years, and could be terminated upon written notice
    given at least 180 days before expiration of the initial five-
    year term. In accordance with this provision, Cadila
    gave Fragchem written notice on November 7, 2001 that
    4                                             No. 07-1784
    it was terminating the supply agreement effective May 8,
    2002. Fragchem acknowledged this termination by let-
    ter dated May 6, 2002:
    By your notice of termination dated November 7, 2001,
    you have expressed your will to terminate the above
    referred supply agreement at the end of the
    first contract period ending by May 8, 2002 . . . . Now
    that through your notice referred above, our above
    referred understanding “agreement” will come to
    an end . . . .
    This same letter also admonished CPL that it “. . . shall
    not manufacture and/or sell Chlorhexidine Base and its
    salts after May 8, 2002 . . . .”
    In an about-face one month later, on June 3, 2002,
    Fragchem’s Secretary, Kirit Parikh, sent another letter
    to Cadila’s chairman:
    I am confident that we will soon reach a new agree-
    ment to serve as the basis for moving forward for the
    benefit of all parties involved. Until that time, let’s
    do business just as we had been doing prior to the
    termination of the Supply Agreement.
    There is no evidence of a written response from CPL,
    though Parikh submitted an affidavit that indicates that
    it is his belief that Cadila and Fragchem agreed to con-
    tinue doing business under the Supply Agreement.
    Regardless, Fragchem and CPL continued to do business
    from June 2002 to March 2004. Fragchem contends that
    these deals were done pursuant to the Supply Agreement.
    CPL contends that these purchases were made on an
    individualized basis, sometimes pursuant to a written
    purchase order from Fragchem, and more often orally.
    CPL asserts that to the extent that these purchases
    were made pursuant to any identifiable agreement,
    it would have been their standard terms and conditions
    form, which states:
    No. 07-1784                                                  5
    All sales are subject to and expressly conditioned upon
    the terms and conditions contained herein. No varia-
    tion of these terms and conditions will be binding
    upon seller unless agreed to in writing by an autho-
    rized representative of seller.
    Notably, CPL’s standard terms and conditions form does
    not contain an arbitration provision.
    In April of 2004, Fragchem placed an order for 4,000
    kilograms of CH Base from CPL.1 Fragchem disputes
    that it had actually placed the April order, but admits
    that it received the product and never paid the $131,000
    owed to CPL. The record reflects that Fragchem has
    withheld payment from CPL because it believes that
    Cadila owes it commissions for C Product sales made
    by Cadila to other customers.
    In response, CPL filed a complaint against Fragchem on
    March 10, 2006, asserting claims for breach of contract
    arising out of Fragchem’s failure to make payment
    after the April delivery. Fragchem countered by filing
    a motion to dismiss pursuant to Federal Rule of Civil
    Procedure 12(b)(7) on the ground that Cadila was a
    necessary party to the action since the shipment was
    made pursuant to the Supply Agreement between Cadilla
    and Fragchem. CPL argued that the Supply Agreement
    had been terminated at the time of the April 2004 ship-
    ment at issue, and Cadila was therefore not a necessary
    party to the suit. At the initial presentment of the mo-
    tion to dismiss, the trial judge inquired as to the propriety
    of venue in the Northern District of Illinois given the
    arbitration provision in the Supply Agreement. CPL
    responded that any disputes between Cadila and Fragchem
    1
    The record is not clear on whether this order was made orally
    or through a written purchase order.
    6                                                 No. 07-1784
    were subject to arbitration in India and that Cadila would
    not waive arbitration.
    The district court issued its order on March 19, 2007.
    Instead of deciding the motion to dismiss for failure to
    join a necessary party, the court dismissed CPL’s law-
    suit sua sponte for improper venue based on Federal
    Rule of Civil Procedure 12(b)(3). In its analysis, the dis-
    trict court did not examine the issue of whether the
    Supply Agreement was still in effect at the time of the
    April 2004 shipment. It assumed that the arbitration
    provision contained in the Supply Agreement applied to
    the dispute in this case, and concluded that the proper
    venue is arbitration in India as opposed to litigation in
    the Northern District of Illinois. Because the district
    court also found that CPL is bound by the Supply Agree-
    ment as a subsidiary of Cadila, it denied Fragchem’s
    motion to dismiss as moot and dismissed the case.
    II. Discussion
    This Court’s recent decision in Automobile Mechanics
    Local 701 Welfare & Pension Funds v. Vanguard Car
    Rental USA, Inc., 
    502 F.3d 740
    (7th Cir. 2007), is control-
    ling. In that case, we reversed an order, issued sua sponte
    by the district court, dismissing a lawsuit for lack of
    venue pursuant to Federal Rule of Civil Procedure 12(b)(3)
    on the basis of a contractual arbitration clause. We
    reasoned there, as we do here, that a sua sponte order of
    dismissal of this nature is improper because an objection
    to venue can be waived or forfeited. American Patriot Ins.
    v. Mutual Risk Management, Ltd., 
    364 F.3d 884
    , 887 (7th
    Cir. 2004). To be sure, “[d]ismissal on the court’s own
    initiative is particularly ill-conceived as an effort to enforce
    a contractual arbitration clause” because, like many other
    contractual rights, it may be waived. Automobile Mechan-
    
    ics, 502 F.3d at 747
    . The district court here “offered no
    No. 07-1784                                                  7
    reason why it had either the right or the duty to reject
    such a waiver,” given that neither party had moved to
    enforce the arbitration agreement and dismiss on the
    grounds of improper venue. 
    Id. Fragchem tries
    to distinguish this case from Automobile
    Mechanics in two ways, and each one is unavailing.
    First, it argues that the Court in Automobile Mechanics
    did not believe there was an arbitration agreement be-
    tween the two parties in the case. While there was a lack
    of factual clarity on this point, this Court neverthe-
    less stated that its conclusion would hold “[e]ven if the
    agreement to arbitrate between the employer and the
    union somehow carried over to the Funds . . . .” 
    Id. Second, Fragchem
    contends that it is significant that in Auto-
    mobile Mechanics, both parties agreed that dismissal by
    the lower court was improper. This is a red herring. It
    is of no moment that Fragchem actually now agrees
    with what the district court did here—what matters is
    that neither party filed a motion to dismiss based on
    improper venue nor did they file a motion to compel
    arbitration, thereby leaving open the possibility of waiver.2
    Because the district court dismissed the case sua sponte
    for improper venue based on the arbitration clause con-
    tained in the Supply Agreement, it did not address the
    key issue here of whether the parties are still bound by
    the agreement. On appeal, both parties agree that the
    Supply Agreement terminated two years before the sale
    at issue in this lawsuit. However, Fragchem argues that
    2
    CPL did claim at the initial presentment before the district
    court that it believed that Cadila would not waive arbitration.
    However, because Cadila is not yet a party to the suit here,
    this statement by itself is not enough to counter the view that
    both parties here could still have waived their agreement
    to arbitrate prior to the district court’s ruling.
    8                                               No. 07-1784
    Kirit Parikh’s letter dated June 3, 2002, coupled with
    Cadila/CPL’s continued manufacture and sale of C Prod-
    ucts, indicates that the Supply Agreement was still in
    full force. CPL, however, relies on this Court’s twin
    decisions in Nissan North America, Inc. v. Jim M’Lady
    Oldsmobile, Inc., 307, F.3d 601 (7th Cir. 2002), and Nissan
    North America, Inc. v. Jim M’Lady Oldsmobile, Inc., 
    486 F.3d 989
    (7th Cir. 2007), for the proposition that an
    agreement to arbitrate does not survive if the written
    agreement between two parties expired, and there was
    no subsequent written agreement governing the parties’
    relationship that contained an arbitration clause. While
    there are questions of law here, there are also questions
    of fact, and so the issue of whether the Supply Agree-
    ment covered the April 2004 transaction is better left to
    the district court as a matter of first impression. See
    International Financial Services Corp. v. Chromas Tech-
    nologies Canada, Inc., 
    356 F.3d 731
    , 740 (“Whether veil-
    piercing is appropriate depends on a host of considera-
    tions that this court is ill-positioned to weigh as a matter
    of first impression.”); Turner v. J.V.D.B. Assocs., Inc., 
    330 F.3d 991
    , 998 (7th Cir. 2003) (refusing to direct the entry
    of summary judgment in favor of one party when the
    district court had not yet made a ruling on the issue, in
    part because of the state of the record). What we have
    ruled here is that it was improper for the district court
    to dismiss the lawsuit sua sponte on the grounds of
    improper venue based on an arbitration agreement
    between the parties when neither party explicitly or
    effectively indicated that it would not waive arbitration.
    Nevertheless, even if on remand one of the parties
    moves to compel arbitration, the district court will still
    have to grapple with the question of whether the
    Supply Agreement applies to the transaction at issue.
    No. 07-1784                                           9
    III. Conclusion
    For the foregoing reasons, we REVERSE the district
    court’s sua sponte order dismissing the lawsuit.
    A true Copy:
    Teste:
    ________________________________
    Clerk of the United States Court of
    Appeals for the Seventh Circuit
    USCA-02-C-0072—1-9-08