Bel Ray Co Inc v. Chemrite(Pty) LTD

Opinions of the United
1999 Decisions States Court of Appeals
for the Third Circuit
6-28-1999
Bel Ray Co Inc v. Chemrite(Pty) LTD
Precedential or Non-Precedential:
Docket 98-6297
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Recommended Citation
"Bel Ray Co Inc v. Chemrite(Pty) LTD" (1999). 1999 Decisions. Paper 170.
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Filed June 28, 1999
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
NO. 98-6297
BEL-RAY COMPANY, INC.
v.
CHEMRITE (PTY) LTD.; LUBRITENE (PTY) LTD.;
IVOR H. KAHN; CESARE CARBONARE; IAN ROBERTSON;
PIERRE VAN DER RIET
Lubritene (Pty) Ltd.; Ivor H. Kahn; Cesare Carbonare;
Ian Robertson; Pierre Van Der Riet,
Appellants
On Appeal From the United States District Court
For the District of New Jersey
(D.C. Civil Action No. 98-cv-00424)
District Judge: Honorable Katherine S. Hayden
Argued March 1, 1999
BEFORE: STAPLETON, RENDELL and ALDISERT,
Circuit Judges
(Opinion Filed June 28, 1999)
Sanford D. Brown (Argued)
Cerrato, Dawes, Collins, Saker
& Brown
509 Stillwells Corner Road
P.O. Box 6009
Freehold, NJ 07728
Attorney for Appellees
Louis R. Moffa, Jr. (Argued)
Edward J. McBride, Jr.
Schnader, Harrison, Segal & Lewis
220 Lake Drive East - Suite 200
Cherry Hill, NJ 08002-1165
Attorney for Appellants
OPINION OF THE COURT
STAPLETON, Circuit Judge:
Lubritene Ltd. ("Lubritene") and four of its directors and
officers appeal the District Court's order compelling them to
arbitrate claims brought against them by Bel-Ray
Company, Inc. ("Bel-Ray"). Lubritene claims the District
Court erroneously concluded that it was bound under its
predecessor's arbitration agreement. The directors and
officers contend that the District Court erred because it
lacked personal jurisdiction over them, and because they
are not bound by their corporate principal's agreement to
arbitrate. We agree that Lubritene is bound to arbitrate this
dispute and that the District Court had personal
jurisdiction over the directors and officers. We conclude,
however, that the directors and officers are not bound to
arbitrate Bel-Ray's claims against them. Accordingly, we
will affirm in part and reverse in part.
I.
Bel-Ray is a New Jersey corporation engaged in the
business of manufacturing specialty lubricants for the
international mining, industrial and consumer markets.
Bel-Ray has developed special formulas and blending
technology for its products and maintains them in the
highest confidentiality. Between 1983 and 1996, Bel-Ray
entered into a series of agreements with Chemrite (Pty.)
Ltd., a South African corporation, for the blending and
distribution of Bel-Ray products in South Africa. Ivor H.
Kahn, Cesare Carbonare, Ian Robertson, and Pierre Van
Der Riet (the "Individual Appellants") were officers or
directors, as well as shareholders, of Chemrite.
2
In January of 1996, the parties entered into the most
recent set of these agreements (the "Trade Agreements") by
executing a (i) Distributor Sales Agreement, (ii) Blending
Manufacturing License Agreement, and (iii) License
Agreement to Trade Name. The Trade Agreements allowed
Chemrite to market and sell Bel-Ray products, and to
produce and market products under Bel-Ray's trade name
in South Africa. Each agreement contains two clauses
relevant to this appeal. First, each agreement required
arbitration of "any and all disputes relating to th[e]
agreement or its breach" in Wall Township, New Jersey.
(A38; A60; A86) Arbitration was to proceed under the
American Arbitration Association rules and New Jersey
substantive law. Second, the agreements specifically require
Bel-Ray's written consent to any assignment of Chemrite's
interests under the Trade Agreements.
On August 20, 1996, Chemrite sent Bel-Ray a fax
indicating that it had changed its name to "Lubritene (Pty)
Ltd." The change became more than nominal on October
10, 1996, when Chemrite sold its lubricant business,
expressly including its rights under the Trade Agreements
to Lubritene, a newly formed business entity, and Chemrite
entered liquidation. Lubritene continued Chemrite's
lubricant business at the same location with the same
employees and management, and the Individual Appellants
became Lubritene shareholders, directors and officers.
Lubritene and Bel-Ray continued to conduct business in
the same manner under the Trade Agreements. In
November of 1996, Lubritene sent Bel-Ray a package of
documents that included the October 10th sale of assets
documents and thereby informed Bel-Ray that Lubritene
was a new and separate company.
In the Spring of 1997, the parties engaged in a series of
negotiations. These negotiations were initially motivated by
Bel-Ray's interest in acquiring a stake in Lubritene. When
it became clear that such an acquisition was not in the
cards, the negotiations turned to focus upon modifying the
Trade Agreements to add additional industrial products and
to extend their terms to six years. During negotiating
sessions in South Africa, Lubritene representatives queried
Bel-Ray representative Linda Kiefer as to whether Bel-Ray
3
believed there was a legally binding agreement between
Lubritene and Bel-Ray. According to Keifer:
[she] explained to them that, not being an attorney,
[she] could not comment on the legal enforceability of
the [Trade Agreements], but told them that Bel-Ray's
attorneys had advised [her] that technically and legally
we do have an agreement. Moreover, [she] pointed out
that both Bel-Ray and Lubritene had continued to
conduct business in the same manner without
interruption, since the agreements were signed . . .
[and] that [she] understood from Bel-Ray's attorneys
that as long as we both continued to do business
according to the terms of the existing agreements while
we discussed a possible new relationship, Bel-Ray had
an implied agreement with Lubritene on the same
terms as the existing agreements with Chemrite.
(A285). Six Lubritene affiants, however, contend that Keifer
stated that "technically and legally there is no agreement
between Lubritene and Bel-Ray" because any assignment of
the Chemrite agreement required Bel-Ray's written consent,
which had not yet been granted.
Soon after these negotiations, a former Lubritene director
brought internal corporate documents to Bel-Ray's
attention. Among these documents were the minutes of a
Lubritene board meeting held in anticipation of the Spring
1997 negotiations "to resolve the legal stance Lubritene
(Pty) Ltd must take in respect of the Bel-Ray Company Inc[.]
agreement." (A127) Lubritene's counsel advised the board at
the meeting that:
while admittedly the [Trade Agreements were]
entered into between Chemrite Southern Africa (Pty)
Ltd[.,] and Bel-Ray Company Inc.[,] after the
deregistration/liquidation of Chemrite Southern Africa
(Pty) Ltd[.], Bel-Ray still continued to deal commercially
with Lubritene (Pty) Ltd and therefore, Bel-Ray's
conduct has basically assumed that the assigned
agreements were in fact assigned to Lubritene (Pty)
Ltd.[.] However, the agreements state that the transfer
of the agreements must be approved in writing by Bel-
Ray.
4
Id. The board then resolved to (i) liquidate Chemrite; (ii)
"continue to trade with Bel-Ray Company Inc as is and not
[to] suggest any changes to the current agreement when
Linda Kiefer and Bernie Meeks visit South Africa in April";
(iii) create another new company and transfer all of
Lubritene's business other than Bel-Ray to that company
so that Lubritene "will have no assets" and"[i]f Bel-Ray
decides to take legal action against Lubritene (Pty) Ltd,
there will be nothing left in the company and hence Bel-Ray
will not recover any damages"; and (iv) when Bel-Ray seeks
to renew the Trade Agreements to inform them that the
Trade Agreements were with Chemrite, "which does not
exist anymore and that the agreements are no longer valid."
Id. The minutes end by instructing that "[i]t is vital that we
do not alert Bel-Ray to our plans and hence we must be
very cautious and circumspect when we ALL meet with
them in April." Id. (emphasis in original).
Bel-Ray alleges that these minutes and the other
documents brought to them by the former Lubritene
director reveal that Lubritene, and the Individual
Appellants as its officers and directors, conspired to
misappropriate Bel-Ray's technology and other proprietary
information and intentionally defrauded Bel-Ray by leading
it to believe that Lubritene would abide by the Trade
Agreements. Additionally, they allege that Lubritene
marketed Bel-Ray products falsely under Lubritene's trade
name, and conversely marketed inferior Lubritene products
under Bel-Ray's trade name thereby damaging Bel-Ray's
business reputation.
Bel-Ray filed this action in the United States District
Court for the District of New Jersey to compel Lubritene
and the Individual Appellants to arbitrate their claims
under the Trade Agreements' arbitration clauses. Bel-Ray
alleges that Lubritene's actions amount to the business
torts of (i) unfair competition, (ii) fraud, and (iii)
misappropriation. Bel-Ray also claims that these same
actions constitute breaches of the Trade Agreements.1
_________________________________________________________________
1. Additionally, Bel-Ray alleges that Lubritene owes it $64,532.60 for
products received but not paid for. These products were purchased
under bills of lading between Bel-Ray and Lubritene that included
arbitration clauses for disputes regarding amounts owed. The parties do
not discuss these claims in their briefs to this Court. Nonetheless, it
would appear that compelling arbitration of these claims was proper.
5
Lubritene and the Individual Appellants, jointly
represented, filed an answer asserting inter alia lack of
personal jurisdiction and counterclaims. The counterclaims
alleged that Bel-Ray had commenced related proceedings in
South Africa to enjoin Lubritene from continuing to use its
intellectual property and trade name, and requested the
District Court to either (i) stay the proceedings, or (ii) enjoin
Bel-Ray from seeking to compel arbitration because it had
waived its right to arbitrate by initiating the South African
litigation. Two months later, the Individual Appellants filed
a motion on their counterclaims requesting a stay, or
alternatively, summary judgment enjoining Bel-Ray from
seeking to compel arbitration.
The District Court denied the appellants' motion. Months
later, the Court granted Bel-Ray summary judgment and
entered an order compelling arbitration on August 10,
1998. Lubritene and the Individual Appellants appeal this
order.
II.
The District Court had jurisdiction under 9 U.S.C.S 203
because this action to compel arbitration between
international parties falls under the Convention on the
Recognition and Enforcement of Foreign Arbitral Awards.
See 9 U.S.C. SS 201-208. We have jurisdiction pursuant to
28 U.S.C. S 1291. We review the District Court's summary
judgment order compelling arbitration de novo and apply
the same test that the District Court should have applied.
Trap Rock Indus., Inc. v. Local 825, Int'l Union of Operating
Eng'rs, AFL-CIO, 982 F.2d 884, 887 (3d Cir. 1992).
"[P]ursuant to Fed. R. Civ. P. 56(c), we ask: `(1) is there no
genuine issue of material fact and (2) is one party entitled
to judgment as a matter of law?' " Id. (quoting Gray v. York
Newspapers, Inc., 957 F.2d 1070, 1078 (3d Cir.1992)).
III.
We begin with the propriety of the District Court's order
to the extent it compelled Lubritene to arbitrate Bel-Ray's
claims. Under the Federal Arbitration Act ("FAA"), a court
may only compel a party to arbitrate where that party has
6
entered into a written agreement to arbitrate that covers
the dispute. See 9 U.S.C. SS 2 & 206. The arbitration
clauses in the Trade Agreements are the only written
agreements to arbitrate offered in this case. It is
undisputed that these agreements were entered into by
Chemrite and Bel-Ray, and that Chemrite subsequently
assigned the agreements to Lubritene. If these assignments
are effective, then the District Court's order should be
affirmed. Lubritene, however, contends that the
assignments are ineffective because Bel-Ray did not
consent to the assignments in writing as the Trade
Agreements require. They therefore argue that there is no
written agreement to arbitrate and we must reverse the
District Court's order.
Thus, according to Lubritene, this case turns on the
effect to be given to the Trade Agreements' requirement that
Bel-Ray consent in writing to any assignment of Chemrite's
interest. As noted, the Trade Agreements are international
agreements between United States and South African
parties. To determine the legal effect of this provision, we
must first resolve the threshold matter of which
jurisdiction's contract law we should apply. Ordinarily, this
would require a conflict of laws analysis to determine which
state had the weightier interest in having its law apply in
resolving the relevant issue. Because of a failure of proof
discussed below, however, we will apply the law of the
forum.
Federal Rule of Civil Procedure 44.1 controls
determinations of foreign law in federal court. It provides:
A party who intends to raise an issue concerning the
law of a foreign country shall give notice by pleadings
or other reasonable written notice. The court, in
determining foreign law, may consider any relevant
material or source, including testimony, whether or not
submitted by a party or admissible under the Federal
Rules of Evidence. The court's determination shall be
treated as a ruling on a question of law.
Fed. R. Civ. P. 44.1. This rule provides courts with broad
authority to conduct their own independent research to
determine foreign law but imposes no duty upon them to do
7
so. See Carey v. Bahama Cruise Lines, 864 F.2d 201, 205
(1st Cir. 1988)("[Rule] 44.1 empowers a federal court to
determine foreign law on its own, but does not oblige it to
do so."); Bartsch v. Metro-Goldwyn-Mayer, Inc., 391 F.2d
150, 155 n.3 (2d Cir. 1968) (Friendly, J.) (same).
The parties therefore generally carry both the burden of
raising the issue that foreign law may apply in an action,
and the burden of adequately proving foreign law to enable
the court to apply it in a particular case. See Whirlpool Fin.
Corp. v. Sevaux, 96 F.3d 216, 221 (7th Cir. 1996)(holding
that party waived conflicts of law issue because it failed to
fulfill its obligation under Rule 44.1 "to provide the district
court with "reasonable notice" of his intention to raise an
issue of foreign law."); Restatement (Second) Conflict of
Laws S 136 cmt. f (1971) ("[T]he party who claims that the
foreign law is different from the local law of the forum has
the burden of establishing the content of the foreign law.").
Where parties fail to satisfy either burden the court will
ordinarily apply the forum's law. See Walter v. Netherlands
Mead N.V., 514 F.2d 1130, 1137 n.14 (3d Cir. 1975); see
also Banco de Credito Indus. v. Tesoreria General, 990 F.2d
827, 837 (5th Cir. 1993)("When the parties have failed to
conclusively establish foreign law, a court is entitled to look
to its own forum's law in order to fill any gaps."); Carey,
864 F.2d at 205 (applying forum's law where parties fail to
raise issue of foreign law's applicability); Commercial Ins.
Co. of Newark, N.J. v. Pacific-Peru Constr. Corp., 558 F.2d
948, 952 (9th Cir. 1977)(applying forum law where parties
failed to raise issue of foreign law's applicability);
Restatement (Second) Conflict of Laws S 136 cmt. h (1971)
("[W]here either no information, or else insufficient
information, has been obtained about the foreign law, the
forum will usually decide the case in accordance with its
own law, except when to do so would not meet the needs of
the case or would not be in the interests of justice.").
Lubritene claims that it cannot be bound by Chemrite's
agreement to arbitrate because, as a matter of contract law,
the written consent provision prevents it from becoming
Chemrite's assignee. Lubritene, however, has not raised the
issue of whether South African contract law applies to its
claim, nor has it provided any evidence to prove the
8
substance of that law.2 We therefore will apply the law of
the forum.
This case was brought in New Jersey. Thus, we now turn
to consider that state's contract law. The New Jersey
Supreme Court has not yet addressed the effect of
contractual provisions limiting or prohibiting assignments.
Nevertheless, we are not without guidance because the
Superior Court's Appellate Division recently addressed this
issue in Garden State Buildings L.P. v. First Fidelity Bank,
N.A., 702 A.2d 1315 (N.J. Super. Ct. App. Div. 1997).
There, a partnership had entered a loan agreement with
Midatlantic Bank for the construction of a new hotel. The
parties subsequently entered into a modification agreement
to extend the loan's maturity date, which provided that: "No
party hereto shall assign this Letter Agreement (or assign
any right or delegate any obligation contained herein)
without the prior written consent of the other party hereto
and any such assignment shall be void." Id. at 1318.
Midatlantic subsequently assigned the loan to Starwood
without obtaining the partnership's prior written consent.
The partnership acknowledged Starwood's rights under the
loan agreement by making payments to, and eventually
entering a settlement agreement with, Starwood.
Nonetheless, the partnership filed suit against Midatlantic
for damages arising from its breach of the modification
agreement's assignment clause. It argued that it was not
required to void the assignment, but could recognize its
validity while still preserving its right to sue Midatlantic for
breach of its covenant not to assign without the
partnership's written consent.
To resolve this claim the Appellate Division looked to
_________________________________________________________________
2. The only information regarding South African law that Lubritene has
provided relates to the distinct issue of successor liability. This
information relates to Lubritene's claim that, if the District Court
properly considered successor liability, it should have used South
African, not New Jersey, law on the issue. Lubritene's primary argument,
however, is that the District Court need not consider successor liability
principles because this case can be resolved as a matter of contract law.
In the course of making this argument, Lubritene does not raise the
issue of which country's contract law applies.
9
S 322 of the Restatement (Second) of Contracts, which
provides in relevant part:
(2) A contract term prohibiting assignment of rights
under the contract, unless a different intention is
manifested . . . .
(b) gives the obligor a right to damages for breach of
the terms forbidding assignment but does not render
the assignment ineffective . . .
Restatement (Second) of Contracts S 322 (1981) (emphasis
added). The Court, distinguished between an assignment
provision's effect upon a party's "power" to assign, as
opposed to its "right" to assign. A party's "power" to assign
is only limited where the parties clearly manifest a different
intention. According to the Court:
`[t]o reveal the intent necessary to preclude the power
to assign, or cause an assignment violative of
contractual provisions to be wholly void, such clause
must contain express provisions that any assignment
shall be void or invalid if not made in a certain
specified way.' Otherwise, the assignment is effective,
and the obligor has the right to damages.
Garden State, 702 A.2d at 1321 (quoting University Mews
Assoc's v. Jeanmarie, 471 N.Y.S.2d 457, 461 (N.Y. Sup. Ct.
1984)). The Court concluded that the parties had
sufficiently manifested their intent to limit Midatlantic's
power to assign the loan because the anti-assignment
clause clearly provided that assignments without the other
party's written consent "shall be void." Id. at 1322.
In adopting S 322, New Jersey joins numerous other
jurisdictions that follow the general rule that contractual
provisions limiting or prohibiting assignments operate only
to limit a parties' right to assign the contract, but not their
power to do so, unless the parties' manifest an intent to the
contrary with specificity. See Cedar Point Apartments, Ltd.
v. Cedar Point Inv. Corp., 693 F.2d 748, 754 & n.4 (8th Cir.
1982); Pro Cardiago Pronto Socorro Cardiological, S.A. v.
Trussell, 863 F. Supp. 135, 137 (S.D.N.Y. 1994); Lomas
Mortgage U.S.A., Inc. v. W.E. O'Neil Constr. Co., 812 F.
Supp. 841, 843-44 (N.D. Ill. 1993); Allhusen v. Caristo
10
Const. Corp., 103 N.E.2d 891, 893 (N.Y. 1952); Macklowe v.
42nd St. Dev. Corp., 566 N.Y.S.2d 606, 606-07 (N.Y. Sup.
Ct. App. Div. 1991); Sullivan v. International Fidelity Ins.
Co., 465 N.Y.S.2d 235, 237 (N.Y. Sup. Ct. App. Div. 1983);
University Mews Assoc's v. Jeanmarie, 471 N.Y.S.2d 457,
461 (N.Y. Sup. Ct. 1984). To meet this standard the
assignment provision must generally state that non-
conforming assignments (i) shall be "void" or "invalid," or (ii)
that the assignee shall acquire no rights or the non-
assigning party shall not recognize any such assignment.
See Garden State, 702 A.2d at 1321 ("clause must contain
express provisions that any assignment shall be void or
invalid if not made in a certain specified way"); Cedar Point,
693 F.2d at 754 n.4 (same); Allhusen, 103 N.E.2d at 893;
Sullivan, 465 N.Y.S.2d at 238; University Mews, 471
N.Y.S.2d at 461. In the absence of such language, the
provision limiting or prohibiting assignments will be
interpreted merely as a covenant not to assign, or to follow
specific procedures--typically obtaining the non-assigning
party's prior written consent--before assigning. Breach of
such a covenant may render the assigning party liable in
damages to the non-assigning party. The assignment,
however, remains valid and enforceable against both the
assignor and the assignee. See Garden State, 702 A.2d at
1321; Cedar Point, 693 F.2d at 754 n.4; Pro Cadiago, 863
F. Supp. at 137; Lomas, 812 F. Supp. at 844; Allhusen, 103
N.E.2d at 892; Sullivan, 465 N.Y.S.2d at 237.
The Trade Agreements in this case contain the following
assignment provisions: (i) the Distributor Sales Agreement
S 7.06 provides that the "Agreement and the obligations and
rights under this Agreement will not be assignable by
[Chemrite] without express prior written consent of Bel-Ray,
which may be withheld at the sole discretion of Bel-Ray";
(ii) the Blending and Manufacturing License Agreement
S 7.05 provides that the "Agreement and the obligations and
rights hereunder will not be assignable by [Chemrite]
without the express prior written consent of BEL-RAY"; and
(iii) the License Agreement to Trade Name S 6.06 provides
that the "Agreement, and the obligations and rights under
this agreement will not be assignable without the express
written consent of all Parties to this Agreement." (A39, A61,
A83). None contain terms specifically stating that an
11
assignment without Bel-Ray's written consent would be
void or invalid. Several courts have considered virtually
identical clauses and concluded that they did not contain
the necessary express language to limit the assigning
party's power to assign. See Lomas, 812 F. Supp. at 844;
Macklowe, 566 N.Y.S.2d at 606-07; Sullivan, 465 N.Y.S.2d
at 236-38.
The Trade Agreements' assignment clauses do not
contain the requisite clear language to limit Chemrite's
"power" to assign the Trade Agreements. Chemrite's
assignment to Lubritene is therefore enforceable, and
Lubritene is bound to arbitrate claims "relating to" the
Trade Agreements pursuant to their arbitration clauses. We
therefore agree with the District Court that Bel-Ray was
entitled to an order compelling Lubritene to arbitrate.
IV.
We now turn to consider whether the District Court
properly compelled the Individual Appellants to arbitrate.
The Individual Appellants contend that the District Court
erred because it lacked personal jurisdiction over them, and
because they did not individually agree to arbitrate claims
with Bel-Ray. We examine these claims in turn.
A.
The Individual Appellants first argue that the District
Court lacked personal jurisdiction over them. Bel-Ray
rejoins that appellants waived personal jurisdiction by
seeking summary judgment on their counterclaim for
affirmative injunctive relief against Bel-Ray. We agree.
"Because the requirement of personal jurisdiction
represents first of all an individual right, it can, like other
such rights, be waived." Insurance Corp. of Ir., Ltd., et al. v.
Compagnie des Bauxites de Guinee, 456 U.S. 694, 703
(1982). Moreover, the "actions of the defendant may
amount to a legal submission to the jurisdiction of the
court, whether voluntary or not." Id. at 704-705. In
particular, where a party seeks affirmative relief from a
court, it normally submits itself to the jurisdiction of the
12
court with respect to the adjudication of claims arising from
the same subject matter. Adam v. Saenger, 303 U.S. 59
(1938).
Because there "exists a strong policy to conserve judicial
time and resources," we have held that "preliminary
matters such as . . . personal jurisdiction . . . should be
raised and disposed of before the court considers the merits
or quasi-merits of a controversy." Wyrough & Loser, Inc. v.
Pelmore Lab., Inc., 376 F.2d 543, 547 (3d Cir. 1967).
Accordingly, in Wyrough we held that a defendant who
participates in the adjudication of the plaintiff's application
for a preliminary injunction without securing a
determination of his challenge to the court's personal
jurisdiction over him submits himself to the jurisdiction of
the court unless it is not reasonably feasible tofirst secure
that determination. See id. This is true even where the
defendant raises his personal jurisdiction defense at the
earliest point required by the Federal Rules. See id.
While the Individual Appellants timely raised their
personal jurisdiction defense in their answer as required by
the Federal Rules, they did far more than resist an
application for a preliminary injunction. They asked the
District Court for affirmative relief before securing a
determination on their personal jurisdiction defenses. On
May 21, 1998, three months after they had entered their
appearances before the District Court, the Individual
Appellants filed motions for summary judgment on their
counterclaim asking the Court to enjoin Bel-Ray from
seeking arbitration. They thereafter proceeded to litigate
those motions before securing a personal jurisdiction
determination. Their affidavits supporting their personal
jurisdiction defenses were not filed until a little over a
month after their motion for summary judgment was
denied. Because the record contains nothing suggesting
that it would be unfair to conclude that the Individual
Appellants thereby submitted themselves to the District
Court's jurisdiction, we so hold.
B.
Arbitration is strictly a matter of contract. If a party has
not agreed to arbitrate, the courts have no authority to
13
mandate that he do so. United Steelworkers of Am. v.
Warrior & Gulf Navigation Co., 363 U.S. 574, 582 (1960).
The Individual Appellants claim that the District Court
violated this fundamental principle because they have not
signed an agreement consenting to submit disputes
between themselves and Bel-Ray to arbitration. When
asked to enforce an arbitration agreement against a non-
signatory, we ask whether he or she is bound by that
agreement under traditional principles of contract and
agency law. Kaplan v. First Options of Chicago, Inc., 19 F.3d
1503 (3d Cir. 1994); Pritzker v. Merrill, Lynch, Pierce, Fenner
& Smith, 7 F.3d 1110, 1121 (3d Cir. 1993).
Bel-Ray insists that the Individual Appellants are bound
by the arbitration clauses in the Trade Agreements"based
on their status as [Lubritene's] agents," citing our decision
in Pritzker. Appellants' Br. at 16. Bel-Ray does not
explicate, however, what principle of agency law enabled
Lubritene to contract away the Individual Appellants' right
to litigate their personal liability on claims brought against
them. Our reading of Pritzker does not suggest such a
principle, and our research has uncovered none.
In Pritzker, the trustees of a pension plan sued the
brokerage firm which traded on behalf of the plan, the
broker in the firm that serviced the plan's account, and a
sister corporation of the brokerage firm that provided the
plan with investment advice. The arbitration clause that the
trustees sought to enforce was set forth in the Cash
Management Agreement between the trustees and the
brokerage firm; neither the broker nor the sister
corporation signed the agreement. After a dispute arose
regarding investment decisions and the trusteesfiled suit,
the defendants sought to compel arbitration. The trustees
resisted arbitration and argued that they could not be
compelled to arbitrate against the broker and the sister
corporation because they had not entered into an
arbitration agreement with those parties. We rejected this
argument.
In Pritzker, the issue was whether a signatory to an
arbitration agreement could be compelled to arbitrate
claims it had against the agents of the other party to the
agreement. As we made clear at the outset of the opinion,
14
the result turned on a construction of the arbitration clause
to which the trustees had agreed -- i.e., whether it was
broad enough in scope to encompass claims against agents
of the brokerage firm arising out of the relationship
between the brokerage firm and the trustees. We held that
by agreeing in the context of the customer's agreement to
arbitrate "all controversies which may arise between us,"
the trustees had committed themselves to arbitrate claims
against the firm and its agents arising out of the brokerage
relationship. We noted that since the brokerage could act
only through agents and employees, "an arbitration
agreement would be of little value if it did not extend to
[them]." Id. at 1122 (quoting Troll v. Paciolla, 748 F. Supp.
305, 309 (E.D. Pa. 1990). Accordingly, "[i]n keeping with
the federal policy favoring arbitration," we "extend[ed] the
scope of the arbitration clauses to agents of the party who
signed the agreements." Id. at 1122.
The issue before us, however, is not the construction of
the arbitration clauses. The relevant issue here is whether
an employee or agent who did not agree to arbitrate can be
compelled to arbitrate his personal liability on the basis of
a commitment made by the corporation he serves.
The only other cases relied upon by Bel-Ray are our
decision in Isidor Paiewonsky Assoc., Inc. v. Sharp
Properties Inc., 998 F.3d 145 (3d Cir. 1993), and the
decision of the Court of Appeals for the Ninth Circuit in
Letizia v. Prudential Bache Securities, 802 F.2d 1185 (9th
Cir. 1986). Like Pritzker, Letizia was a suit by a client
against a brokerage firm and the two firm employees who
handled the account. As in Pritzker, the employees sought
to compel the client to arbitrate his claims against them
and the result turned on construction of the arbitration
clause in the agreement between the client and thefirm.
The court concluded that "all of the individual defendants'
allegedly wrongful acts related to their handling of[the
client's] securities account" and that the firm had "clearly
indicated its intentions [in the agreement] to protect its
employees" from the expense of litigation arising from their
work activities. Id. at 1188. Accordingly, the client's claims
against the employees were held to be within the scope of
the client's commitment to arbitrate, and the employees
were held to be entitled to enforce that commitment.
15
In the Sharp case, a landlord and "head tenant" of a
shopping center had entered a master lease containing an
arbitration clause. The issue we were required to decide
was whether a subtenant, who had not signed the master
lease, was bound by an award resulting from arbitration
between the landlord and the "head tenant." The award
authorized the landlord to regain possession of the portion
of the leasehold occupied by the subtenant. We held that
the subtenant was bound, despite the fact that it was not
a party to the arbitration agreement. We first looked to
"basic principles of landlord-tenant law":
As a general matter, it is well-established that a
subtenant's interest in real property cannot exceed that
of the head tenant because the subtenant's interest in
the real property is strictly derivative of that of the
head tenant. Normally, then, if a head tenant loses its
rights to continued possession of the property in
question, so does the subtenant . . .
Thus, to the extent that common law principles of the
rights of subtenants inform our analysis here, [the
subtenant] cannot complain when its rights to
continued possession of the Bolero Building ended
upon an adverse adjudication of the rights of its
sublessor, [the head tenant].
Sharp, 998 F.2d at 154.
We then turned to the FAA and determined that none of
its provisions required a different result. Accordingly, we
enforced the award against the subtenant. While the
general approach we followed in Sharp is equally applicable
here, the ruling there provides little help in resolving this
case.
We thus conclude that Bel-Ray has tendered no
authorities supporting its position. Nor has our own
research revealed supporting authority. On the contrary,
the authority that does exist suggests to us that the District
Court erred in compelling the Individual Appellees to
arbitrate.
Generally, of course, an agent of a disclosed principal,
even one who negotiates and signs a contract for her
16
principal, does not become a party to the contract. Kaplan
v. First Options of Chicago, Inc., 19 F.3d 1503 (3d Cir.
1994); Restatement (Second) of Agency S 320 (1958).
Moreover, under traditional agency principles, the only
other way we understand that an agent can be bound by
the terms of a contract is if she is made a party to the
contract by her principal acting on her behalf with actual,
implied, or apparent authority. The record in this case will
not support a decision for Bel-Ray on any of these theories.
Thomson-CSF, S.A. v. American Arbitration Ass'n, 64 F.3d
773 (2d Cir. 1995), catalogues the various theories
recognized by the Court of Appeals for the Second Circuit
for binding non-signatories to an arbitration clause. After
noting that each theory is based on "common law principles
of contract and agency law," the court set forth the
following list:
1) incorporation by reference; 2) assumption;
3) agency; 4) veil-piercing/alter ego; and 5) estoppel.
Thomson, 64 F.3d at 776.
In Thomson, the District Court compelled a non-signatory
parent corporation to arbitrate based on an arbitration
agreement between its subsidiary and one of the
subsidiary's suppliers. The Court of Appeals reversed. After
analyzing the record before it under each of the enumerated
theories, the Court held that the District Court lacked
authority under common law contract and agency
principles to compel the parent to arbitrate even though the
claim against it arose out of the relationship between the
subsidiary and the supplier.
Having similarly compared our record with the Thomson
court's explanation of each of the five enumerated theories,
we have also concluded that each is inapposite here. As in
Thomson, the record will not support a piercing of the
corporate veil and, without disregarding the entity of
Lubritene, it is not possible to find the direct benefit
required by the estoppel cases.
Here, as in Kaplan, traditional principles of contract and
agency law do not support the conclusion that the parties
resisting arbitration are bound by an arbitration agreement
17
they did not sign. Accordingly, we hold that the District
Court erred in compelling the Individual Appellants to
arbitrate Bel-Ray's claims against them. Bel-Ray may, if it
so chooses, apply to the District Court for a stay of the
proceeding on those claims pending its arbitration with
Lubritene.
V.
The order of the District Court compelling arbitration will
be reversed and the case will be remanded to it with
instructions to enter an order compelling only Lubritene to
arbitrate.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
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