Donaldson Company, Inc. v. Burroughs Diesel, Inc. ( 2009 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________
No. 08-2705
___________
Donaldson Company, Inc., *
*
Plaintiff – Appellee, *
* Appeal from the United States
v. * District Court for the
* Eastern District of Missouri.
Burroughs Diesel, Inc., *
*
Defendant – Appellant. *
___________
Submitted: March 13, 2009
Filed: July 20, 2009
___________
Before SMITH, GRUENDER, and BENTON, Circuit Judges.
___________
BENTON, Circuit Judge.
Donaldson Company, Inc., a nonsignatory, seeks to compel arbitration against
Burroughs Diesel, Inc., a signatory to an agreement with an arbitration clause. The
district court ordered arbitration. Burroughs appeals. Jurisdiction being proper under
28 U.S.C. § 1291, this court reverses.
I.
In 1999, Burroughs signed a Dealer Full Service Agreement with Western Star
Truck Sales, Inc. Western Star manufactured trucks that it sold to Burroughs for
resale. A third party, Donaldson, supplied two parts of the air intake system in the
trucks. The Dealer Agreement did not mention Donaldson. It contained an arbitration
provision that
any controversy or claim arising out of or in connection with this
Agreement, its construction, interpretation, effect, performance, non-
performance, termination, or consequences thereof, or any transaction
contemplated hereby, however characterized as a matter of law (whether
in contract, tort or otherwise), . . . shall be settled by arbitration in St.
Louis County, Missouri . . . .
Dealer Agreement ¶ 31. The Agreement provided that it “shall be governed by and
construed in accordance with the laws of the state in which Dealer’s principal place
of business, as designated in Paragraph 6 hereof, is located, and such laws shall be
applied and control any arbitration conducted pursuant to Paragraph 31 hereof.” Id.
¶ 34.1
The engines failed in several trucks purchased from Burroughs. In November
2001, the buyers sued Donaldson, “Western Star Trucks,” and Burroughs in
Mississippi state court. In February 2002, Burroughs cross-claimed against
Donaldson and Western Star. The cross-claim, referring to Donaldson and Western
Star collectively as “Cross-Defendants,” did not distinguish between them in terms of
the misconduct alleged. Western Star answered the cross-claim, raising arbitration as
an affirmative defense, and serving a copy on Donaldson.
Two days later, Western Star sued, in the U.S. District Court for the Eastern
District of Missouri, to compel arbitration. Neither Burroughs nor Western Star
notified Donaldson of the arbitration proceedings in Missouri.
1
Paragraph 6 says that Laurel, Mississippi, is Burroughs’s principal place of
business.
-2-
In Mississippi, Donaldson answered the cross-claims, conditionally raising an
arbitration defense: “If there is an arbitration agreement between Western Star Trucks
and Burroughs, then the cross-claim is barred by that agreement and the cross claim
should be dismissed and all issues should be resolved by arbitration.” Donaldson
raised other affirmative defenses, including “lack of privity” and the lack of a “legal,
contractual, or other relationship” between Donaldson and Burroughs.
In December 2002, the Missouri district court granted Western Star’s motion
to compel arbitration, relying on the arbitration clause in the Dealer Agreement. See
Western Star Truck Sales, Inc. v. Burroughs Diesel, Inc., No. 4:02-cv-457, slip op.
at 9 (E.D. Mo. Dec. 2, 2002). Burroughs then dismissed its Mississippi cross-claim
against Western Star.
In August 2007, Burroughs moved to schedule trial on its cross-claim against
Donaldson in Mississippi. Soon thereafter, Donaldson alleges, it first learned of the
Missouri arbitration order. In October 2007, Donaldson moved to compel Burroughs
to arbitrate in the Missouri district court, citing that court’s 2002 arbitration order in
the Western Star-Burroughs case.
In Missouri, Donaldson argued that, although it was not a party to the Dealer
Agreement, arbitration was required because: 1) Burroughs’s claim was premised on
and presumed the existence of the Agreement; and 2) Burroughs previously alleged
that Western Star and Donaldson acted in concert. Burroughs responded by moving
for summary judgment, which was denied. The district court granted Donaldson’s
motion to compel arbitration, enjoining Burroughs from proceeding in Mississippi
court.2
2
In February 2008, the plaintiff-buyers settled with Burroughs, Western Star,
and Donaldson, dismissing their claims. The only claim pending in Mississippi is
Burroughs’s cross-claim against Donaldson.
-3-
II.
This court reviews “de novo a district court’s grant of a motion to compel
arbitration.” 3M Co. v. Amtex Sec., Inc., 542 F.3d 1193, 1198 (8th Cir. 2008). “A
court must grant a motion to compel arbitration if a valid arbitration clause exists
which encompasses the dispute between the parties.” Id. The parties agree that
paragraph 31 of the Agreement is a valid arbitration clause. They dispute whether
Donaldson’s claim is within its scope. Donaldson was not a party to the Agreement,
and must rely on the doctrine of equitable estoppel in the arbitration context. See, e.g.,
Dominium Austin Partners, LLC v. Emerson, 248 F.3d 720, 728 (8th Cir. 2001).
A.
Burroughs argues that Mississippi law, not federal law, should apply based on
the choice-of-law provision in the Agreement. “This court reviews a district court’s
choice of law determination de novo.” Am. Home Assurance Co. v. L & L Marine
Serv., Inc., 153 F.3d 616, 618 (8th Cir. 1998). “When deciding whether the parties
agreed to arbitrate a certain matter . . ., courts generally . . . should apply ordinary
state-law principles that govern the formation of contracts.” Hudson v. Conagra
Poultry Co., 484 F.3d 496, 500 (8th Cir. 2007), quoting First Options of Chicago,
Inc. v. Kaplan, 514 U.S. 938, 944 (1995). Thus, state law determines questions
“concerning the validity, revocability, or enforceability of contracts generally.” Perry
v. Thomas, 482 U.S. 483, 493 n.9 (1987).
The Federal Arbitration Act “create[s] a body of federal substantive law or
arbitrability, applicable to any arbitration agreement within the coverage of the Act.”
Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983). In
Finnie v. H&R Block Financial Advisors, Inc., this court considered whether an
arbitration provision applied to an employment discrimination complaint by an
employee against her former employer and supervisor. No. 07-3526, 2009 WL 56971,
-4-
at *1 (8th Cir. Jan. 12, 2009) (per curiam) (unpublished). The employer was a
signatory to the employment document with the arbitration clause, but the supervisor
was not. Applying Missouri law instead of federal law, the district court concluded
the arbitration provision was not enforceable by the nonsignatory supervisor. This
court reversed, “conclud[ing] that the district court erred in applying Missouri law to
determine whether [the nonsignatory supervisor] could enforce the arbitration
agreement. Id. at *2, citing Moses H. Cone, 460 U.S. at 24. See UHC Mgmt. Co.,
Inc. v. Computer Scis. Corp., 148 F.3d 992, 996-97 (8th Cir. 1998) (applying federal
law); Dominium Austin Partners, 248 F.3d at 728 (same); Hudson, 484 F.3d at 502-
03 (same).
Other circuits also apply the federal substantive law of arbitrability to resolve
this issue. See, e.g., Washington Mut. Fin. Group, LLC v. Bailey, 364 F.3d 260, 267
n.6 (5th Cir. 2004); International Paper Co. v. Schwabedissen Maschinen &
Anlagen GMBH, 206 F.3d 411, 417-18 (4th Cir. 2000); Grigson v. Creative Artists
Agency LLC, 210 F.3d 524, 527 (5th Cir. 2000); Thomson-CSF, S.A. v. Am.
Arbitration Ass’n, 64 F.3d 773, 778 (2d Cir. 1995); Sunkist Soft Drinks, Inc. v.
Sunkist Growers, Inc., 10 F.3d 753, 756-58 (11th Cir. 1993); Hughes Masonry Co.,
Inc. v. Greater Clark County Sch. Bldg. Corp., 659 F.2d 836, 838-39 (7th Cir. 1981).
But see Motorola Credit Corp. v. Uzan, 388 F.3d 39, 50-51 (2d Cir. 2004) (applying
Swiss law between transnational parties); Fleetwood Enters., Inc. v. Gaskamp, 280
F.3d 1069, 1074-75 (5th Cir. 2002) (applying Texas law to determine whether a
particular nonsignatory was bound by an arbitration agreement).
The issue in this case is whether Donaldson, a nonsignatory, can enforce the
arbitration provision in the Agreement. This court concludes that the federal
substantive law of arbitrability applies.
-5-
B.
“A nonsignatory can enforce an arbitration clause against a signatory to the
agreement in several circumstances.” CD Partners v. Grizzle, 424 F.3d 795, 798 (8th
Cir. 2005). “One is when ‘the relationship between the signatory and nonsignatory
defendants is sufficiently close that only by permitting the nonsignatory to invoke
arbitration may evisceration of the underlying arbitration agreement between the
signatories be avoided.’” Id., quoting MS Dealer Serv. Corp. v. Franklin, 177 F.3d
942, 947 (11th Cir. 1999). Another is “when the signatory to a written agreement
containing an arbitration clause must rely on the terms of the written agreement in
asserting [its] claims against the nonsignatory.” Grizzle, 424 F.3d at 798 (internal
citations omitted). “When each of a signatory’s claims against a nonsignatory makes
reference to or presumes the existence of the written agreement, the signatory’s claims
arise out of and relate directly to the written agreement, and arbitration is appropriate.”
Id. This second circumstance is derived from the “intertwined claims” doctrine, that
a nonsignatory may enforce an arbitration provision where the signatory alleges
“substantially interdependent and concerted misconduct” by the nonsignatory and one
or more of the signatories. See, e.g., Grigson, 210 F.3d at 527; MS Dealer, 177 F.3d
at 947. Donaldson argues that both circumstances apply.
1.
First, Donaldson argues that its relationship is sufficiently close to Burroughs
that it is entitled to enforce the arbitration provision. Donaldson cites Ingstad v. Grant
Thornton, LLP, which held that a “‘close relationship’ . . . may be found in the
structure of the [plaintiff’s] complaint.” No. 3:05-cv-98, 2006 WL 3751204, at *6
(D.N.D. Dec. 19, 2006). Donaldson misreads that case. Ingstad relies on Denney v.
BDO Seidman, which applies the intertwined-claims test rather than the sufficiently-
close standard:
-6-
We have previously indicated that signatories to an arbitration agreement
can be compelled to arbitrate their claims with a non-signatory where a
careful review of the relationship among the parties, the contracts they
signed . . ., and the issues that had arisen among them discloses that the
issues the nonsignatory is seeking to resolve in arbitration are
intertwined with the agreement that the stopped party has signed.
412 F.3d 58, 70 (2d Cir. 2005) (internal citations omitted) (emphasis added). Unlike
the intertwined-claims test, which looks to the claims asserted, the close-relationship
test analyzes the relationship between the signatory and nonsignatory parties “under
agency or related principles.” MS Dealer, 177 F.3d at 947. Donaldson cannot
establish a sufficiently close relationship to Burroughs – Donaldson’s pleadings stated
a “lack of privity between Donaldson and Burroughs,” and the lack of any “legal,
contractual, or other relationship.”
2.
Second, as to the intertwined-claims doctrine, Donaldson argues that
Burroughs’s cross-claims relied on the Agreement. As a parts supplier for the
Western Star trucks sold to Burroughs under the Agreement, Donaldson claims it is
entitled to enforce the arbitration provision under Grizzle.
In Grizzle, C.D. Warehouse, Inc. (CDWI) and C.D. Partners signed franchise
agreements with identical arbitration clauses. 424 F.3d at 797. C.D. Partners sued
CDWI’s chief executive officer, chief financial officer, and chief operating officer,
charging negligence, negligent misrepresentation, and fraudulent misrepresentation
arising out of the franchise agreements. Although the defendant-officers were not
parties to the franchise agreements, they moved to compel arbitration. This court
ordered arbitration based on the relationship of the parties, and C.D. Partners’
allegations:
-7-
This case involves an ongoing relationship where signatory CDWI’s
promises could only be fulfilled by the future conduct of its corporate
officers, employees, and agents. The current dispute between signatory
C.D. Partners and nonsignator[y officers] arises out of and relates
directly to the contractual agreement between the signatories, where the
core of the dispute is the conduct of the three nonsignatories in fulfilling
signatory CDWI’s promises.
Id. at 799.
In this case, Burroughs cross-claimed against Western Star and Donaldson for:
negligence, breach of fiduciary duty, breach of good faith and fair dealing, fraudulent
misrepresentation, fraudulent concealment, and implied warranty of fitness for a
particular purpose. Burroughs’s allegations did not refer to the Agreement, and did
not arise out of Donaldson’s conduct in circumstances similar to the parties in Grizzle.
First, the Grizzle court emphasized that the CDWI officers were within the “ambit of
the arbitration clause” because the agreement specifically conferred rights upon the
“Franchisor’s officers, directors, and employees.” See id. at 800. The Agreement in
the present case does not specifically confer any rights on Donaldson.
Second, the Grizzle court noted that the signatory’s duties “could only be
fulfilled by the future conduct of its corporate officers, employees, and agents.” Id.
In equitable estoppel cases, arbitration provisions apply in agency, suretyship, and
close affiliation situations. See Sokol Holdings, Inc. v. BMB Munai, Inc., 542 F.3d
354, 358-62 (2d Cir. 2008) (listing cases); Finnie, 2009 WL 56971, at *2 (a
nonsignatory may enforce an arbitration provision because he was a supervisor with
the signatory-defendant). In this case, there is no such agency, suretyship, or close
affiliation relationship. Donaldson has no relationship to Western Star or Burroughs
other than supplying parts for the trucks at issue. Donaldson’s interpretation of
Grizzle would allow any supplier to enforce an arbitration provision if the
manufacturer agreed to arbitration. This court declines to extend this interpretation
of Grizzle to the present case.
-8-
This case is similar to Brantley v. Republic Mortgage Insurance Co., 242 F.3d
392 (4th Cir. 2005). There, the plaintiffs bought and financed a home. Their
mortgage lender, SouthStar Funding, required them to obtain private mortgage
insurance. The plaintiffs obtained it from Republic Mortgage, but later sued Republic
for charging excessive premiums. Republic sought to compel arbitration because the
“insurance contract is so intertwined with the mortgage and arbitration contracts
between the plaintiffs and SouthStar.” Id. at 395. The court rejected the argument:
“the mere existence of a loan transaction requiring plaintiffs to obtain mortgage
insurance cannot be the basis for finding their federal statutory claims, which are
wholly unrelated to the underlying mortgage agreement, to be intertwined with that
contract.” Id. at 396.
In this case, like Brantley, the supply-chain relationship is not sufficient to
conclude that Donaldson is intertwined with a party to the Agreement such that it
could enforce the arbitration agreement. See also Denney, 412 F.3d at 70 (“The
question . . . [is] whether plaintiffs’ claims against the [nonsignatory defendants] are
so ‘intimately founded in’ or ‘intertwined with’ the underlying obligations of the [ ]
agreements as to allow the non-signatory [party] to compel arbitration.”). Donaldson
has failed to demonstrate that Burroughs’s cross-claim arises out of or relates to the
Agreement.
Donaldson also asserts that Burroughs’s allegations presume the existence of
the Agreement. Burroughs does not allege that the Agreement has been breached.
More importantly, Burroughs’s cross-claim would have a basis for recovery against
Donaldson even if there were no Agreement. Cf. MS Dealer, 177 F.3d at 947-48
(compelling arbitration because “each of [the plaintiff’s] fraud and conspiracy claims
depends entirely upon her contractual obligation . . . for the service contract”);
Sunkist, 10 F.3d at 758 (“Although [the signatory] does not rely exclusively on the
license agreement to support its claims, each claim presumes the existence of such an
-9-
agreement.”). This court concludes that Burroughs’s cross-claim did not presume the
existence of the Agreement, or necessarily rely on its terms in asserting its claims.
Donaldson also argues that the cross-claim itself satisfies the intertwined-claims
test by alleging “substantially interdependent and concerted misconduct” by Western
Star and Donaldson. “[T]he focus of our inquiry should be on the nature of the
underlying claims asserted by [the signatory] against [the nonsignatory] to determine
whether those claims fall within the scope of the arbitration clause.” Sunkist, 10 F.3d
at 757-58; accord MS Dealer, 177 F.3d at 947.
The cases applying the concerted-misconduct test establish that the plaintiff
must specifically allege coordinated behavior between a signatory and a nonsignatory.
In MS Dealer, Franklin, a car buyer, signed a Buyers Order to purchase a car from Jim
Burke Motors, Inc. 177 F.3d at 944-47. The Order incorporated by reference a Retail
Installment Contract, which obligated the buyer to a service contract through MS
Dealer Service Corporation. The Order contained an arbitration clause. When the
buyer had problems with the car, she sued Burke and MS Dealer. According to her
complaint, Burke and MS Dealer “improperly cooperated, conspired, and otherwise
colluded” to charge an excessive amount for the service contract. MS Dealer sought
to compel arbitration, which the district court denied because MS Dealer was not a
signatory to the Order. The Eleventh Circuit reversed, concluding “that Franklin’s
claims against Jim Burke and MS Dealer ‘are based on the same facts and are
inherently inseparable.’” Id. at 948. The court emphasized that the buyer “specifically
alleges that MS Dealer worked hand-in-hand with Jim Burke and Chrysler Credit
Corporation in this alleged fraudulent scheme.” Id.
In Denney, the plaintiffs claimed that they were recruited by two accounting
firms to participate in a fraudulent tax scheme, Currency Options Bring Reward
Alternatives (COBRA). The plaintiffs’ “consulting agreements” with the firms
contained broad arbitration clauses. The firms, along with Deutsche Bank, advised and
executed an illegal plan where plaintiffs manufactured losses from partnerships
-10-
engaged in foreign currency option transactions. The plaintiffs sued; defendants
sought to compel arbitration. The district court held that the consulting agreements
were “mutually fraudulent” and unenforceable, and denied a motion to compel
arbitration. The Second Circuit reversed and remanded for consideration whether
Deutsche Bank, a nonsignatory, could enforce the arbitration provision. The court
noted, “[h]aving alleged . . . that the Deutsche Bank and BDO defendants acted in
concert to defraud plaintiffs . . . plaintiffs cannot now escape the consequence of those
allegations . . . .” Id. at 70. In particular, the court noted that the complaint alleged
that the “Defendants knowingly acted in concert to market and implement the
fraudulent and illegal COBRA tax shelter transaction.” Id. (emphasis added). See
also Ingstad, 2006 WL 3751204, at *5 (following Denney).
In the present case, Burroughs’s cross-claim stated that “Cross-Defendants
concealed and misrepresented the fact that Western Star Heritage model truck was
designed, manufactured and sold with an allegedly defective intake system.” The
pleading also said that “Cross-Defendants conduct was intentional and/or done with
gross negligence.” Although Burroughs’s cross-claim made common allegations
against Western Star and Donaldson, it did not make any allegations suggesting that
Western Star and Donaldson “knowingly acted in concert,” “improperly cooperated,”
or “worked hand-in-hand.” The concerted-misconduct test requires allegations of
“pre-arranged, collusive behavior” demonstrating that the claims are “intimately
founded in and intertwined with” the agreement at issue. MS Dealer, 177 F.3d at 948.
This court concludes that Burroughs’s cross-claim does not rise to the level of
“substantially interdependent and concerted misconduct” required by the case law.
III.
The order compelling arbitration is reversed, and the case remanded for further
proceedings consistent with this opinion.
______________________________
-11-