Hallmark Industries v. First Systech

Hallmark Industries, L. L.C. v. First Systech International, Inc.
When several claims arising from multiple, related contracts ar e intertwined, with some subject
to arbitration and others not, does the so-called “intertwining doctrine” preclude arbitr ation of any
of the claims?
IN THE COURT OF APPEALS
STATE OF ARIZONA
DIVISION TWO
HALLMARK INDUSTRIES, L. L.C., an ) 2 CA-CV 2001-0186
Arizona limited liability company, ) DEPARTMENT B
)
Plaintiff/Appellant, ) OPINION
)
v. )
)
FIRST SYSTECH INTERNATIONAL, )
INC. , a cor poration; FRIEDMAN )
CORPORATION, a corporation, )
)
Defendants/Appellees. )
)
APPEAL FROM THE SUPERIOR COURT OF PIMA COUNTY
Cause No. C20010883
Honorable Michael J. Brown, Judge
AFFIRMED
Law Offices of George J. Feulner, Esq.
By George J. Feulner Tucson
Attorney for Plaintiff/ Appellant
John E. Karow Scottsdale
Attorney for Defendant/Appellee First Systech
Jennings, Strouss and Salmon, PLC
By Gordon Lewis Tucson
and
Gray Cary Ware & Freidenrich LLP
By Guillermo Marrero San Diego
2
Attorneys for Defendant/Appellee
Friedman Cor poration
P E L A N D E R, Judge.
¶1 This contractual dispute arises from plaintiff/appellant Hallmark Industries’
purchase, pursuant to four separate contracts, of a computer system, including hardware,
software, and related support services, from defendant/appellee First Systech International, Inc.
(Systech). The trial court granted Systech’s application to compel arbitration of disputes arising
from three of the contracts between the parties but denied that application as to any disputes
arising from the fourth contract. 1 Hallmark appeals, contending that because the disputes arising
from each contract are inextricably interrelated, the tr ial court should have applied the so-called
“inter twining doctrine” and denied Systech’s application to compel arbitration as to all four
contracts. Because we find the intertwining doctrine inapplicable and incompatible with Arizona
law, we affir m.
BACKGROUND
¶2 Within less than one month, Hallmark and Systech entered into three software,
support, and license contracts and one equipment sale contract. All four of the contracts contained
arbitration clauses that state in pertinent par t:
[A]ny controversy or claim arising out of or relating to this
Agreement or the breach thereof will be settled by arbitration before
three arbitrators in accordance with the Rules of the American
1
At some point, appellee F riedman Corpor ation (Friedman) acquired Systech. Although
Friedman did not specifically join below in Systech’s application to compel arbitration, Friedman
has filed an answering brief in support of the tr ial court’s judgment.
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Arbitration Association (“AAA” ) then in effect, and judgement
upon the award render ed by the arbitrator s may be entered in any
court having jurisdiction.
Hallmark and Systech representatives signed each of the three software contracts below the
arbitration clauses. The equipment sale contract, however, was signed only on the front page and
not on that contract’s reverse side, which contained the arbitration clause.
¶3 Hallmark filed a complaint against Systech and Friedman, alleging various theories
of recovery for disputes that had arisen from the four contracts. Thereafter, Systech filed an
application to compel arbitration pursuant to the arbitration clauses. The trial court ordered
arbitration for the disputes arising out of the three softwar e contracts. Because the parties had not
signed the reverse side of the equipment sale contract, however, the court ruled that they had not
agreed to arbitrate any disputes arising from that contract. 2 Accordingly, the trial court denied
Systech’s application as to the equipment sale contract disputes.
¶4 The trial court denied Hallmark’s subsequent motion for reconsideration and, upon
finding no just reason for delay, entered a final judgment compelling arbitration of the disputes
arising from the three software contracts. See Ariz. R. Civ. P. 54(b), 16 A.R. S., Pt. 2. This
2
The trial court found no agreement to ar bitrate despite the following language on the front
of the equipment sale contract immediately above the contracting parties’ signatures: “The terms
and conditions . . . on the r everse side are par t of this agreement.” Based on that language,
Systech argues the trial court also should have ordered the parties to arbitrate the disputes arising
from the equipment contract. Cf. Kalil Bottling Co. v. Burroughs Corp., 127 Ariz. 278, 281, 619
P.2d 1055, 1058 (App. 1980) (terms and conditions on reverse side of parties’ contract applied
regardless of how contract was character ized). Because resolution of this issue is not necessary
for our determination of this case and because Systech has not filed a cross-appeal, we do not
address it. See Ariz. R. Civ. App. P. 13(b)(3), 17B A. R.S.; see also Bills v. Arizona State Bd.
of Educ., 169 Ariz. 366, 369-70, 819 P.2d 952, 955-56 (App. 1991) (appellee may not raise issue
attacking judgment in absence of a cross-appeal).
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appeal followed. We have jur isdiction pursuant to A.R.S. § 12-2101. See Southern California
Edison Co. v. Peabody Western Coal Co., 194 Ar iz. 47, ¶¶16, 18, 23, 977 P.2d 769, ¶ ¶16, 18,
23 (1999) (order compelling arbitration appealable if trial court certifies the order pur suant to Rule
54(b), Ar iz. R. Civ. P.).
DISCUSSION
¶5 Hallmark contends the trial court erred in compelling arbitration of disputes arising
from the three software contracts. Because those disputes are inextricably interr elated with the
non-arbitrable equipment sale contract disputes, Hallmark argues, the trial court should have
applied the intertwining doctrine and denied Systech’s application to compel arbitration.
According to Hallmark, that doctrine “ requires that where, as here, several claims are
‘intertwined, ’ with some subject to court jurisdiction and others subject to arbitration, the court
should retain jurisdiction of all of them. ” Whether a trial court may apply the intertwining
doctrine to avoid a valid arbitration agreement is an issue of first impression in Arizona. And,
it is an issue of law that we review de novo. Burnette v. Bender, 184 Ar iz. 301, 304, 908 P.2d
1086, 1089 (App. 1995).
¶6 The intertwining doctrine is an outgrowth of Wilko v. Swan, 346 U.S. 427, 74
S. Ct. 182, 98 L. Ed. 168 (1953), overruled by Rodriguez De Quijas v. Shearson/ American
Express, Inc., 490 U.S. 477, 109 S. Ct. 1917, 104 L. Ed. 2d 526 (1989). Wilko involved a
federal securities claim under 15 U.S.C. § 77l(2). The Supreme Court concluded that that statute
created a “special r ight . . . enfor ceable in any court of competent jurisdiction.” Wilko, 346 U.S.
at 431, 74 S. Ct. at 184, 98 L. Ed. at 173. And, because 15 U. S.C. § 77n precluded the waiver
of any provision of the Securities Act of 1933, including 15 U.S.C. § 771(2), the Supreme Court
5
held that an agreement to arbitrate 15 U.S.C. § 77l(2) claims was void. Id. at 428 n. 1, 430 n. 6,
438, 74 S. Ct. at 183 n.1, 184 n.6, 188-89, 98 L. Ed. at 172 n.1, 173 n.6, 177. Thus, the court
essentially determined that 15 U.S.C. §§ 77l(2) and 77n trumped both an agreement to arbitr ate
securities claims and the federal arbitration act, which specifically declared arbitration agr eements
enforceable. See 9 U.S.C. §§ 2, 3.
¶7 Following Wilko, in cases involving both non-arbitrable federal securities claims
and related, arbitrable state law claims, the Fifth, Ninth, and Eleventh Circuit Courts of Appeals
adopted the intertwining doctrine.3 Byrd v. Dean Witter Reynolds, Inc., 726 F.2d 552, 554 (9th
Cir. 1984), rev’d, 470 U.S. 213, 105 S. Ct. 1238, 84 L. Ed. 2d 158 (1985); Belke v. Merrill
Lynch, Pierce, Fenner & Smith, 693 F .2d 1023, 1026 (11th Cir. 1982); Miley v. Oppenheimer
& Co., Inc., 637 F.2d 318, 335 (5th Cir. 1981). Under that doctrine, if the non-arbitrable federal
securities claims and the related arbitrable claims “are so related that severance is ‘impractical if
not impossible,’” the court “ should deny arbitration as to the arbitrable claims.” Belke, 693 F.2d
at 1026, quoting Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Haydu, 675 F .2d 1169, 1172
(11th Cir. 1982). A primary purpose of the intertwining doctrine was to preserve the special
statutory right, recognized in Wilko, to pur sue federal securities claims in the judicial system.
Miley, 637 F.2d at 335. In adopting the doctrine, the Fifth Circuit stated that allowing the
arbitrable claims to proceed to arbitration could render that special statutory r ight “totally
3
In contrast, the Sixth, Seventh, and Eighth Circuit Cour ts of Appeals have rejected the
doctrine of intertwining. See Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 217, 105 S. Ct.
1238, 1240-41, 84 L. Ed. 2d 158, 163 (1985).
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meaningless” because “an ar bitrator could, in effect, r esolve the merits of a federal securities
claim during the course of arbitrating pendent state claims.” Id.
¶8 In Dean Witter Reynolds, the Supreme Court reversed the Ninth Circuit’s decision
in Byrd and specifically rejected the intertwining doctrine. 470 U.S. at 217, 105 S. Ct. at 1241,
84 L. Ed. 2d at 163. Relying on 9 U.S.C. § 2, which states that arbitration agreements “ shall be
valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the
revocation of any contract, ” the Cour t concluded that the federal arbitration act conferred no
discretion on trial courts to decline to enforce valid arbitration agreements. Id. at 218, 105 S. Ct.
at 1241, 84 L. Ed. 2d at 163.
¶9 In view of that background, even assuming arguendo that a court could apply the
intertwining doctrine to avoid a valid arbitration agreement, the doctr ine does not apply to this
case. As noted above, a primary purpose of the doctrine was to preserve a special statutory right
to seek judicial relief. Miley, 637 F .2d at 335. Hallmark’s claims do not involve any such special
statutory right. Thus, Hallmark cannot avoid the force and effect of the software contracts’
arbitration clauses based on the intertwining doctrine.
¶10 That conclusion is supported by three additional reasons. Fir st, A.R.S. § 12-1501,
in language virtually identical to 9 U. S.C. § 2, states:
A written agreement to submit any existing controversy to
arbitration or a provision in a written contract to submit to
arbitration any controversy thereafter arising between the parties is
valid, enforceable and irrevocable, save upon such grounds as exist
at law or in equity for the revocation of any contract.
Like the Supreme Court in the Dean Witter Reynolds case, we conclude that this language does
not confer discretion on a trial court to ignore a valid arbitration agreement merely because a case
7
involves related arbitr able and non-arbitrable claims, even if the claims are factually related and
difficult to separate.
¶11 Second, our legislature has prescribed the applicable procedure when cases involve
both arbitrable and non-ar bitrable claims. Section 12-1502(D), A. R.S. , states:
Any action or proceeding involving an issue subject to arbitration
shall be stayed if an order for arbitration or an application therefor
has been made under this section or, if the issue is severable, the
stay may be with respect thereto only. When the application is
made in such action or proceeding, the order for arbitration shall
include such stay.
Nothing in § 12-1502(D) permits a court to refuse to enforce an arbitration agreement. Rather,
if an action or proceeding involves multiple, inseparable claims, only some of which are
arbitrable, the court action must be stayed pending the arbitration. Although the phrase “[a]ny
action or proceeding” is broad, the last sentence of § 12-1502(D) makes clear that the stay may
only be granted in the court pr oceedings, as an application to compel arbitration may only be made
in court. See § 12-1502(A) (court shall order ar bitration upon party’s application showing
existence of arbitration agreement). Accordingly, we disagree with a Colorado case on which
Hallmark relies wherein the court concluded, based on statutory language essentially identical to
§ 12-1502(D), that the intertwining doctrine “ remains viable and must be used in determining the
arbitrability of claims arising from the same facts, where one of those claims is non-arbitrable. ”
Lawrence Street Partners, Ltd. v. Lawrence Street Venturers, 786 P.2d 508, 511 (Colo. Ct. App.
1989); see also Colo. Rev. Stat. Ann. § 13-22-204(4) (West 2002).
¶12 Third, to some extent the intertwining doctrine runs counter to Arizona law that
clearly “favor s arbitration, both statutorily, see A.R. S. § 12-1501, and by the courts as a matter
8
of public policy.” Foy v. Thorp, 186 Ariz. 151, 153, 920 P.2d 31, 33 (App. 1996); see also
Einhorn v. Valley Medical Specialists, P. C., 172 Ar iz. 571, 572, 838 P.2d 1332, 1333 (App.
1992). Permitting a party to avoid ar bitration of disputes arising from three contracts with clear,
enforceable arbitration clauses because of the alleged non-arbitrability of disputes arising from a
fourth, albeit related, contract would circumvent that policy.
¶13 We acknowledge that having a court and arbitrators resolve the same factual issues
is not a particularly efficient allocation of resources, may be somewhat impractical, and
theoretically could lead to inconsistent results. See generally Anthony G. Buzbee, When
Arbitrable Claims Are Mixed with Nonarbitrable Ones: What’s A Court To Do?, 39 S. Tex. L.
Rev. 663 (June 1998); B. Judson Hennington, III, Unravelling the Intertwining Doctrine: Dean
Witter Reynolds, Inc. v. Byrd, 37 Ala. L. Rev. 457 (Winter 1986). The primary pur pose of our
arbitrations statutes, however, is to “validate arbitration agreements” and “make the ar bitration
process effective.” Prefatory Note to Uniform Arbitration Act, 7 U.L.A. pt. 1 at 2 (1997); see
Historical and Statutory Notes to § 12-1501 (“This section is similar to § 1 of the Uniform
Arbitration Act.” ); see also Dean Witter Reynolds Inc., 470 U.S. at 217, 219, 105 S. Ct. at 1241,
1242, 84 L. Ed. 2d at 163, 164 (the federal arbitration act “r equires district courts to compel
arbitration of pendent arbitrable claims when one of the parties files a motion to compel, even
where the result would be the possibly inefficient maintenance of separate proceedings in different
forums; purpose of act “ was to ensure judicial enforcement of privately made agreements to
arbitrate” ). Any inefficiency or risk of inconsistent results is a consequence of the parties’
bargaining. Under our arbitration statutes, we are requir ed to enforce those bargains despite their
potential shortcomings.
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DISPOSITION
¶14 The trial court’s judgment is affirmed. The r equests of Systech and Friedman for
an award of reasonable attorney’s fees on appeal pur suant to A. R.S. § 12-341.01 ar e granted upon
their compliance with Rule 21, Ariz. R. Civ. App. P. , 17B A. R.S.
_______________________________________
JOHN PELANDER, Judge
CONCURRING:
_______________________________________
PHILIP G. ESPINOSA, Chief Judge
_______________________________________
JOSEPH W. HOWARD, Judge
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