Discovery Resources, Inc. v. Ernst & Young U.S. L.L.P.

[Cite as Discovery Resources, Inc. v. Ernst & Young U.S. L.L.P., 2016-Ohio-1283.]
STATE OF OHIO ) IN THE COURT OF APPEALS
)ss: NINTH JUDICIAL DISTRICT
COUNTY OF LORAIN )
DISCOVERY RESOURCES, INC. C.A. No. 15CA010723
Appellant
v. APPEAL FROM JUDGMENT
ENTERED IN THE
ERNST & YOUNG U.S. LLP, et al. COURT OF COMMON PLEAS
COUNTY OF LORAIN, OHIO
Appellees CASE No. 14CV183094
DECISION AND JOURNAL ENTRY
Dated: March 28, 2016
HENSAL, Judge.
{¶1} Appellant, Discovery Resources, Inc., appeals from a judgment of the Lorain
County Court of Common Pleas, adopting the Magistrate’s decision and granting Appellees’,
Ernst & Young U.S. LLP and Scherzer International Corp., motion to compel arbitration and to
stay the proceedings. For the following reasons, we affirm.
I.
{¶2} Appellant, Discovery Resources, Inc. (“DRI”), and Appellee, Ernst & Young U.S.
LLP (“E&Y”),1 entered into a Services Agreement in September 2006 wherein DRI agreed to
provide certain investigatory services to E&Y. Relevant to this appeal, the Services Agreement
contained an arbitration provision requiring mediation or arbitration for “[a]ny dispute or claim
between the parties arising out of or relating to the Services or this Agreement[.]” It also
1
This Court will refer to both Ernst & Young U.S. LLP and Ernst & Young LLP as
“E&Y” given the parties’ prior agreement that references to one would be deemed a reference to
the other.
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contained a delegation provision, which provided that “[a]ny issue concerning the extent to
which any dispute is subject to arbitration * * * shall be governed by the Federal Arbitration Act
and resolved by the arbitrators.”
{¶3} In 2011, E&Y informed DRI that E&Y would no longer send business to DRI.
In January 2012, however, the parties extended the Services Agreement through December 31,
2012, and E&Y continued to send DRI business. There is no dispute that nothing obligated E&Y
to request DRI’s services and, correspondingly, nothing obligated DRI to provide its services to
E&Y. The Services Agreement terminated by its own terms on December 31, 2012.
{¶4} E&Y eventually began using the investigatory services of Appellee Scherzer
International Corp. (“Scherzer”), a competitor of DRI. Notwithstanding the arbitration provision
contained in the Services Agreement, DRI filed a complaint against E&Y and Scherzer in the
United States District Court for the Northern District of Ohio, Eastern Division, asserting claims
for tortious interference, civil conspiracy, misappropriation of trade secrets, unjust enrichment,
conversion, and unfair business practices. DRI subsequently voluntarily dismissed its federal-
court action, conceding that the court lacked jurisdiction.
{¶5} The following month, DRI filed a complaint against E&Y and Scherzer in the
Lorain County Court of Common Pleas, asserting the same claims. Five months later, DRI filed
an amended complaint wherein it withdrew its claims for conversion, misappropriation of trade
secrets, and unjust enrichment. In summary, DRI’s amended complaint alleged that E&Y and
Scherzer conspired with each other to put DRI out of business in order to benefit Scherzer.
{¶6} Shortly after DRI filed its original complaint, E&Y filed a motion under the
Federal Arbitration Act (“FAA”), 9 U.S.C. 1 et seq., to compel arbitration pursuant to the
Services Agreement, and to stay the proceedings. In the alternative, it moved the trial court to
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dismiss the complaint. That same day, Scherzer joined E&Y’s motion, requesting that the trial
court either compel arbitration, or dismiss DRI’s complaint.
{¶7} DRI filed a brief in opposition to Appellees’ motions, arguing that: (1) the
Services Agreement is illusory and, therefore, unenforceable; (2) it is for a court, not the
arbitrators, to decide whether the Services Agreement is illusory; (3) even if the Services
Agreement is enforceable, its claims are not arbitrable because they are outside the scope of the
arbitration provision; and (4) its claims against Scherzer – a non-signatory to the Services
Agreement – are not subject to arbitration. After a hearing on the matter, the Magistrate issued
his decision, concluding that: (1) the arbitrators, not the court, must decide the issues of
enforceability and arbitrability in light of the arbitration and delegation clauses contained in the
Services Agreement; (2) even if the delegation clause had not made the issue of arbitrability an
issue for the arbitrators, DRI’s claims fall within the broad scope of the arbitration clause and,
therefore, must be arbitrated; (3) even if the delegation clause had not designated the issue of
enforceability as an issue for the arbitrators, the Services Agreement is enforceable and,
therefore, DRI’s claims must be arbitrated; (4) the Services Agreement is not illusory and, at any
rate, illusoriness is an issue for the arbitrators; and (5) DRI must arbitrate its claims against
Scherzer given DRI’s allegation of conspiracy. The Magistrate, therefore, recommended that the
trial court grant Appellees’ motion to compel arbitration and to stay the proceedings.
{¶8} DRI filed objections to the Magistrate’s decision, which the trial court rejected
because DRI failed to submit a transcript of the proceedings before the Magistrate in accordance
with Civil Rule 53(D)(3)(b)(iii). It, therefore, accepted the Magistrate’s findings of fact and
limited its review to the Magistrate’s conclusions of law based upon those facts. After
conducting an independent review of the Magistrate’s conclusions of law, the trial court adopted
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the Magistrate’s decision and granted Appellees’ motion to compel arbitration and to stay the
proceedings. DRI has appealed, raising four assignments of error for our review. For ease of
consideration, we have combined DRI’s second and third assignments of error.
II.
ASSIGNMENT OF ERROR I
THE TRIAL COURT ERRED AS A MATTER OF LAW BY HOLDING THAT
EXHIBIT 1 WAS NOT AN ILLUSORY AGREEMENT.
{¶9} In its first assignment of error, DRI argues that the trial court erred by finding that
the Services Agreement is not illusory. Appellees, on the other hand, argue that the trial court
properly found that the validity of the Services Agreement is an issue for the arbitrators, not the
court, to decide. In the alternative, they argue that even if the validity of the Services Agreement
is an issue for the court, the trial court properly found that the agreement is not illusory.
{¶10} Generally, “[w]e review a trial court’s decision to stay proceedings and order the
matter to arbitration for an abuse of discretion.” Koch v. Keystone Pointe Health & Rehab., 9th
Dist. Lorain No. 11CA010081, 2012-Ohio-5817, ¶ 7. “That standard of review[, however,] must
yield when an issue of law is implicated.” Id. To the extent that DRI challenges the trial court’s
conclusions of law, we apply a de novo standard of review. Morris v. Andros, 9th Dist. Summit
Nos. 21861, 21867, 2004-Ohio-4446, ¶ 18.
{¶11} Before compelling arbitration under the FAA, courts must determine: (1) whether
a valid agreement to arbitrate exists; and (2) whether the disputed issue falls within the
substantive scope of that agreement. Javitch v. First Union Secs., Inc., 315 F.3d 619, 624 (6th
Cir.2003), citing AT&T Technologies, Inc. v. Communications Workers of Am., 475 U.S. 643,
649 (1986). DRI’s first assignment of error relates to the first prong of this test, that is, the
validity of the agreement.
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{¶12} The Supreme Court has held that there are two types of validity challenges under
the FAA: (1) a challenge to the agreement as a whole; and (2) a challenge to the agreement to
arbitrate. Rent-A-Ctr., W., Inc. v. Jackson, 561 U.S. 63, 70 (2010). Importantly, “a challenge to
the validity of a contract as a whole, and not specifically to the arbitration clause, must go to the
arbitrator.” Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 449 (2006).
{¶13} As the Magistrate’s decision points out, “DRI never argued that the arbitration or
delegation clauses in the Services Agreement themselves are unenforceable.” Instead, it argued
below that the Services Agreement itself is illusory and, therefore, unenforceable. Thus, under
Supreme Court precedent, the validity of the agreement as a whole is an issue for the arbitrators
to decide, and the trial court did not err in reaching this conclusion. Cardegna, 546 U.S. at 449.
To the extent that DRI challenges the validity of the arbitration and delegation provisions on
appeal, we decline to address its arguments because they were not raised below. State v.
Schwarz, 9th Dist. Medina No. 02CA0042-M, 2003-Ohio-1294, ¶ 14, citing Belvedere
Condominium Unit Owners’ Assn. v. R.E. Roark Cos., Inc., 67 Ohio St.3d 274, 279 (1993)
(“Courts have consistently held that arguments which are not raised below may not be
considered for the first time on appeal.”). Additionally, we decline to address DRI’s argument
regarding the trial court’s alternative ruling that the Services Agreement is not illusory given our
determination that the validity of the Services Agreement is an issue for the arbitrators to decide.
Accordingly, DRI’s first assignment of error is overruled.
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ASSIGNMENT OF ERROR II
THE TRIAL COURT ERRED BY HOLDING AS A MATTER OF LAW THAT
THE ARBITRABILITY OF APPELLANT’S CLAIMS WAS AN ISSUE TO BE
DECIDED BY AN ARBITRATOR.
ASSIGNMENT OF ERROR III
THE TRIAL COURT ERRED IN COMPELLING ARBITRATION OF
APPELLANT’S AMENDED COMPLAINT EVEN THOUGH THE
ALLEGATIONS IN THE AMENDED COMPLAINT DO NOT RELATE IN
ANY WAY TO EXHIBIT 1 OR THE SERVICES PROVIDED UNDER
EXHIBIT 1.
{¶14} In summary, DRI’s second and third assignments of error challenge the trial
court’s findings regarding the arbitrability of the claims DRI asserted in its amended complaint.
More specifically, in its second assignment of error, DRI argues that the trial court erred by
holding that the arbitrability of its claims was an issue for the arbitrators to decide. In its third
assignment of error, DRI argues that the trial court erred by compelling arbitration because its
claims do not relate to the Services Agreement.
{¶15} Regarding DRI’s second assignment of error, Appellees argue that the Services
Agreement expressly provides that issues concerning the arbitrability of claims shall be governed
by the FAA and resolved by the arbitrators. Regarding DRI’s third assignment of error,
Appellees argue that if the arbitrability of DRI’s claims is an issue for the court, then the trial
court properly found that DRI’s claims fall within the broad scope of the arbitration clause.
{¶16} The FAA embodies a “liberal federal policy favoring arbitration,” and “reflects
the overarching principle that arbitration is a matter of contract.” (Citation omitted.) AT&T
Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011); Am. Express Co. v. Italian Colors
Restaurant, ___ U.S. ___, 133 S.Ct. 2304, 2309 (2013). Courts, therefore, “must ‘rigorously
enforce’ arbitration agreements according to their terms[.]” Italian Colors Restaurant, 133 S.Ct.
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at 2309, quoting Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 221 (1985). “When deciding
whether the parties agreed to arbitrate [the issue of arbitrability], courts generally * * * should
apply ordinary state-law principles that govern the formation of contracts.” First Options of
Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995). Here, the Services Agreement provides that
it is to be governed by, and construed in accordance with, the laws of the State of New York.
{¶17} We will first address DRI’s argument that the trial court erred by holding that the
arbitrability of its claims was an issue for the arbitrators to decide. The Supreme Court has stated
that “the question ‘who has the primary power to decide arbitrability’ turns upon what the parties
agreed about that matter.” (Citation omitted.) Id. at 943. “Unless the parties clearly and
unmistakably provide otherwise, the question of whether the parties agreed to arbitrate is to be
decided by the court, not the arbitrator.” (Emphasis added.) AT&T Technologies, Inc., 475 U.S.
at 649.
{¶18} Given the choice-of-law provision contained in the Services Agreement, we apply
New York contract law principles to the issue of whether the Services Agreement “clearly and
unmistakably” provides that the arbitrators shall decide the issue of arbitrability. See
PaineWebber Inc. v. Bybyk, 81 F.3d 1193, 1198-99 (2d Cir.1996), citing Kaplan, 514 U.S. at 944(stating that “the arbitrability of a given issue is a question for the court unless there is ‘clear and
unmistakable’ evidence from the arbitration agreement, as construed by the relevant state law,
that the parties intended that the question of arbitrability shall be decided by the arbitrator.”)
(Second emphasis added.).
{¶19} Under New York law, “[w]ords and phrases [in an agreement] are given their
plain meaning” and, “[r]ather than rewrite an unambiguous agreement, a court should enforce the
plain meaning of that agreement[.]” Am. Express Bank Ltd. v. Uniroyal, Inc., 562 N.Y.S.2d 613,
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614 (1990). “Exhibit E” to the Services Agreement provides that “[a]ny issue concerning the
extent to which any dispute is subject to arbitration * * * shall be governed by the Federal
Arbitration Act and resolved by the arbitrators.” Guided by New York contract law principles,
we find that this language “clearly and unmistakably” provides that the arbitrators shall decide
the issue of arbitrability. See Bybyk, 81 F.3d at 1196 (applying New York contract law and
stating that a provision indicating that “any and all controversies” shall be submitted to
arbitration “evince[d] the parties’ intent to submit issues of arbitrability to the arbitrators.”); In re
Liverpool Pub. Library, 899 N.Y.S.2d 707, 708 (2010) (provision stating that an arbitrator shall
rule on the question of arbitrability evidenced a “clear and unmistakable” agreement to arbitrate
arbitrability); see also Moses H. Cone Mem. Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25
(1983) (“The Arbitration Act establishes that, as a matter of federal law, any doubts concerning
the scope of arbitrable issues should be resolved in favor of arbitration[.]”).
{¶20} We, therefore, find no merit in DRI’s claim that the trial court erred by holding
that the arbitrability of its claims was an issue for the arbitrators to decide. Because arbitrability
is an issue for the arbitrators to decide, we decline to address DRI’s third assignment of error
wherein it argues that its claims do not fall within the scope of the arbitration provision. See
App.R. 12(A)(1)(c). Accordingly, DRI’s second and third assignments of error are overruled.
ASSIGNMENT OF ERROR IV
THE TRIAL COURT [ERRED] AS A MATTER OF LAW WHEN IT
ORDERED APPELLANT’S CLAIMS AGAINST SCHERZER STAYED
PENDING ARBITRATION EVEN THOUGH NO ARBITRATION
AGREEMENT EXISTS BETWEEN DRI AND SCHERZER.
{¶21} In its fourth assignment of error, DRI argues that, regardless of whether this Court
finds that DRI’s claims against E&Y are subject to arbitration, the trial court erred by staying its
claims against Scherzer. In support of its argument, DRI asserts that there is no arbitration
9
agreement between DRI and Scherzer, and that neither DRI nor Scherzer can be compelled to
arbitrate absent an agreement to do so. Further, DRI argues that E&Y is not a necessary or
indispensable party to DRI’s claims against Scherzer.
{¶22} In response, Appellees argue that DRI’s claims against them are interdependent
and that an arbitration clause may be enforced for claims against non-signatories under the
doctrine of equitable estoppel. Further, Appellees argue that DRI cannot separately pursue its
claims against Scherzer because E&Y is a necessary and indispensable party to those claims.
{¶23} As the Magistrate’s decision notes, the “application of equitable estoppel is
warranted . . . when the signatory [to the contract containing the arbitration clause] raises
allegations of . . . substantially interdependent and concerted misconduct by both the
nonsignatory and one or more of the signatories to the contract.” (Internal quotations and
citations omitted.) Liedtke v. Frank, 437 F.Supp.2d 696, 699 (N.D.Ohio 2006); see Javitch, 315
F.3d at 629 (noting that non-signatories may be compelled to arbitrate under the doctrine of
estoppel). In its merit brief, DRI summarized its claims against Appellees as follows: “In the
simplest of terms, E&Y and [Scherzer] conspired with each other to put DRI out of business.”
There can be no question that DRI’s claim for conspiracy “raises allegations of . . . substantially
interdependent and concerted misconduct” between E&Y and Scherzer. Liedtke at 699; Kruse v.
AFLAC Intern., Inc., 458 F.Supp.2d 375, 383 (E.D.Ky.2006) (“Where a party alleges that a
nonsignatory engaged in a conspiracy with a signatory, the nonsignatory may compel
arbitration.”). We, therefore, hold that the trial court did not err by staying DRI’s claims against
Scherzer. Accordingly, DRI’s fourth assignment of error is overruled.
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III.
{¶24} Discovery Resources, Inc.’s assignments of error are overruled. The judgment of
the Lorain County Court of Common Pleas is affirmed.
Judgment affirmed.
There were reasonable grounds for this appeal.
We order that a special mandate issue out of this Court, directing the Court of Common
Pleas, County of Lorain, State of Ohio, to carry this judgment into execution. A certified copy of
this journal entry shall constitute the mandate, pursuant to App.R. 27.
Immediately upon the filing hereof, this document shall constitute the journal entry of
judgment, and it shall be file stamped by the Clerk of the Court of Appeals at which time the
period for review shall begin to run. App.R. 22(C). The Clerk of the Court of Appeals is
instructed to mail a notice of entry of this judgment to the parties and to make a notation of the
mailing in the docket, pursuant to App.R. 30.
Costs taxed to Appellant.
JENNIFER HENSAL
FOR THE COURT
SCHAFER, J.
CANNON, J.
CONCUR.
(Cannon, J., of the Eleventh District Court of Appeals, sitting by assignment.)
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APPEARANCES:
TIMOTHY A. SHIMKO, Attorney at Law, for Appellant.
DONALD S. SCHERZER and AMANDA M. KNAPP, Attorneys at Law, for Appellee.
DAVID A. SCHAEFER, Attorney at Law, for Appellee.
STANLEY J. PARZEN, Attorney at law, for Appellee.