Caudle, Robert L. v. American Arbitration

In the
United States Court of Appeals
For the Seventh Circuit
No. 00-1423
Robert L. Caudle,
Plaintiff-Appellant,
v.
American Arbitration Association,
Defendant-Appellee.
Appeal from the United States District Court
for the Southern District of Illinois.
No. 99-4108-JPG--J. Phil Gilbert, Judge.
Argued September 29, 2000--Decided October 17, 2000
Before Easterbrook, Ripple, and Evans, Circuit
Judges.
Easterbrook, Circuit Judge. When Robert Caudle
became a distributor of Sears products in 1989 he
agreed to arbitrate (under the auspices of the
American Arbitration Association) any
disagreements arising out of that arrangement.
After Sears terminated the distributorship,
however, Caudle decided that he prefers
litigation to arbitration--indeed, that he
prefers lots of litigation.
Sears reorganized its distribution system in
1992, cutting out catalog centers that had been
operated by independent businesses, including
Caudle. Instead of initiating arbitration under
the contract, Caudle filed a suit seeking to
represent a class of all similar dealers. He
thought that by pursuing relief for a class he
could avoid arbitration, because the AAA does not
conduct class-wide arbitrations. But the state
courts held that Caudle’s excuse for avoiding his
promise to arbitrate--a claim that Sears had made
oral promises in addition to the written
contract--was unavailing. Caudle v. Sears,
Roebuck & Co., 245 Ill. App. 3d 959, 614 N.E.2d
1312 (5th Dist. 1993). A procedural device
aggregating multiple persons’ claims in
litigation does not entitle anyone to be in
litigation; a contract promising to arbitrate the
dispute removes the person from those eligible to
represent a class of litigants. Next in line was
a suit--also in state court, because both Caudle
and Sears are citizens of Illinois--seeking a
declaration that the arbitration clause in the
contract is unenforceable. Once again Caudle
lost. Caudle v. Sears, Roebuck & Co., 281 Ill.
App. 3d 1151, 701 N.E.2d 844 (5th Dist. 1996)
(unpublished order). After the Supreme Court
denied his petition for certiorari, 520 U.S. 1143
(1997), Caudle finally initiated arbitration--but
he did not pursue it. The AAA concluded that its
procedures call for disputes of this kind to be
heard by panels of three arbitrators, and it
directed both Caudle and Sears to prepay fees
$5,800 on top of the $3,400 assessed for a one-
arbitrator proceeding. Sears complied; Caudle did
not. He balked at paying more than $3,400; the
AAA responded by informing Caudle that, if he did
not pay in full, the proceedings would be closed.
Caudle did not pay, and after the deadline had
passed he filed this, his third lawsuit--and he
filed it in federal court against the AAA,
contending it broke a contract (one formed by
Caudle’s tender of $3,400) requiring it to
provide arbitration services at a reasonable
price.
Relying on Hawkins v. National Association of
Securities Dealers Inc., 149 F.3d 330 (5th Cir.
1998); Olson v. National Association of
Securities Dealers, 85 F.3d 381 (8th Cir. 1996),
and many equivalent decisions from other courts,
the district judge held that arbitrators (and
sponsoring organizations such as the AAA) possess
immunity from suit. Just as a litigant files an
appeal, rather than suing the judge or the court
of which the judge is a member, if he does not
like decisions by the trial court (including
calculations of filing fees and costs), so a
party to arbitration should sue to enforce or set
aside the award, naming as the adverse litigants
the other parties to the original contract.
(Applications for mandamus, to which district
judges were nominal parties before the 1996
amendment to Fed. R. App. P. 21(a), are a form of
appellate proceeding within a suit involving the
real adversaries.) Like judges, arbitrators "have
no interest in the outcome of the dispute between
[the parties to the contract], and they should
not be compelled to become parties to that
dispute." Tamari v. Conrad, 552 F.2d 778, 781
(7th Cir. 1977). It is not clear whether this
principle is properly understood as an "immunity"
rather than a conclusion that arbitrators and
organizing bodies are not the real parties in
interest. See Fed. R. Civ. P. 17(a). Suppose
Caudle had paid the full $9,200 the AAA
specified, and the Association had pocketed the
money without arbitrating the dispute; it is
unlikely that the AAA could claim "immunity" in
response to a demand for a refund (or an order to
furnish the arbitration service for which it had
been paid). Caudle contends that his grievance--
that he paid $3,400 yet has not received an
arbitration--is like this hypothetical and thus
outside the scope of arbitral immunity. We need
not decide whether that is so, because there is
a more fundamental question, one the district
judge did not mention: What is this case doing in
federal court?
As Caudle sees matters, the federal-question
jurisdiction, 28 U.S.C. sec.1331, applies because
he wants to compel the AAA to arbitrate his
dispute under 9 U.S.C. sec.4. But sec.4 is
neither a grant of jurisdiction nor the source of
an independent claim arising under federal law.
"Section 4 provides for an order compelling
arbitration only when the federal district court
would have jurisdiction over a suit on the
underlying dispute; hence, there must be
diversity of citizenship or some other
independent basis for federal jurisdiction".
Moses H. Cone Memorial Hospital v. Mercury
Construction Corp., 460 U.S. 1, 25 n.32 (1983);
see also, e.g., We Care Hair Development, Inc. v.
Engen, 180 F.3d 838, 841 (7th Cir. 1999). If
Caudle’s dispute is with the AAA, as he insists,
rather than Sears, then the parties are of
diverse citizenship (the AAA is a nonprofit
corporation with both its headquarters and its
place of incorporation in New York; see CCC
Information Services Inc. v. American Salvage
Pool Association, No. 99-3393 (7th Cir. Sept. 22,
2000)). But the amount in controversy between
Caudle and the AAA is well short of $75,000. If
Caudle ponied up the $5,800, or the AAA changed
its mind about the appropriate number of
arbitrators and settled for the $3,400 Caudle has
paid, then his dispute with the AAA would be at
an end. The maximum judgment in this suit cannot
exceed an order to arbitrate without insisting on
the remaining $5,800, and this order would not be
worth more than $5,800 from either side’s
perspective. Cf. In re Brand Name Prescription
Drugs Antitrust Litigation, 123 F.3d 599, 610
(7th Cir. 1997); McCarty v. Amoco Pipeline Co.,
595 F.2d 389 (7th Cir. 1979).
To see this, suppose Michael Jordan left his
Ferrari in a garage, which would not return the
car until he paid $10 for two hours’ parking.
Could Jordan get review in federal court of his
contention that $10 is an "unreasonably high fee"
for such a short stay by alleging that the value
of the detained car exceeds $75,000? Surely not;
the real controversy concerns the difference (if
any) between $10 and the proper fee for two
hours’ parking. By paying $10 Jordan could have
his car immediately while continuing his quest
for a refund. Caudle likewise could pay,
arbitrate, and demand some of the money back
later (and if, as Caudle insists, he cannot cover
the expense up front, he could borrow it from his
lawyer, as is customary in contingent-fee
litigation). In many commercial disputes damages
are set by the price of cover: if the seller
fails to deliver a shipment of steel for which
the contract price is $1 million, the damages are
limited to the difference between $1 million and
the price (say, $1,050,000) at which the buyer
could have obtained the product from another
seller. The amount in controversy in such a case
is $50,000, not $1 million. See Gardynski-
Leschuck v. Ford Motor Co., 142 F.3d 955 (7th
Cir. 1998). Similarly, the amount in controversy
here is $5,800, not the amount Sears may owe
Caudle (if Caudle ultimately prevails).
What Caudle wants to do is combine the stakes
of his dispute with Sears (which exceed $75,000)
with the citizenship of the AAA in order to come
within 28 U.S.C. sec.1332. That won’t work,
however; the stakes must be the amount in dispute
between the litigants. Many a suit entails a
claim that arbitration is too expensive or
otherwise inappropriate, and that a clause
requiring arbitration therefore should not be
enforced. Then the main issue would be the
location of the dispute resolution (court versus
arbitrator), the stakes would be those of the
underlying dispute, see Doctor’s Associates, Inc.
v. Hamilton, 150 F.3d 157, 160-61 (2d Cir. 1998),
and the litigants would be the parties to the
contract calling for arbitration. It is easy to
see, however, why Caudle has not pursued that
kind of claim: he already litigated it against
Sears in state court, and he lost. Sears could
use principles of preclusion to block any further
effort to get out of the promise to arbitrate.
That is why Caudle sued the AAA instead. But to
do this he must leave behind his dispute with
Sears and focus on his dispute with the AAA,
which concerns the fee it seeks to collect. This
$6,000 dispute cannot be resolved under the
diversity jurisdiction.
The judgment of the district court is vacated,
and the case is remanded with instructions to
dismiss for want of jurisdiction.