PAUL A. ENGELMAYER, District Judge:
Plaintiff Variblend Dual Dispensing Systems, LLC ("Variblend") sues defendant Seidel GmbH & Co. KG ("Seidel") for alleged tortious conduct regarding proprietary trade secrets previously licensed to Seidel by Innopump, Inc., d/b/a Versadial ("Versadial"), a non-party to this action. Variblend alleges that it is the assignee of Versadial's rights under its agreement with Seidel. Seidel moves to dismiss this action and to compel arbitration in Geneva, Switzerland, in accordance with the arbitration provision contained in the agreement between Versadial and Seidel. For the following reasons, Seidel's motion to compel arbitration, under the terms of the agreement between Versadial and Seidel, is granted; and this action is stayed pending the outcome of that arbitration.
Versadial is a Nevada corporation with its principal place of business in New York, New York. Stipulation ¶ 1. Seidel is a German company with its principal place of business in Marburg, Germany. Id. Variblend is a Delaware limited liability company with its principal place of business in Montvale, New Jersey. Id.
On September 20, 2006, Versadial entered into a Manufacturing Agreement (the "Agreement") (Stipulation Ex. 1) with Seidel. Id. ¶ 2. On October 2, 2008, the two parties entered into Amendment No. 1 to the Manufacturing Agreement ("Amendment No. 1") (Stipulation Ex. 2).
The Agreement provided for Seidel to manufacture for Versadial components (called "sub-assemblies") of an invention to which Versadial possessed the exclusive rights. See Agreement; Compl. ¶ 13. That invention was embodied in U.S. Patent
The Agreement stated that Seidel would manufacture for Versadial sub-assemblies "substantially in accordance with the Specifications as provided by [Versadial]." Agreement § 2.1. It also prohibited Seidel from manufacturing any variable dual chamber dispensary device competitive with the one contemplated by the Agreement for any other person or entity, during the term of the Agreement and for two years thereafter. Id. In turn, Versadial was to purchase its requirements for these parts from Seidel, and would provide to Seidel specifications, assembly line equipment, and molds to be used by Seidel in production. Id. § 2.2. Versadial would also license its intellectual property rights to Seidel. Id.
During the first half of 2009, Seidel manufactured lipstick dispenser sub-assemblies pursuant to the Manufacturing Agreement. Stipulation ¶ 4. It sold these sub-assemblies to Versadial, which in turn sold them to Avon Products, Inc. ("Avon"). Id. For a short period of time in 2009, Avon, a major cosmetics company, sold the product as SpectraColor lipstick. Compl. ¶ 1.
Disputes subsequently arose between Versadial and Seidel. Stipulation ¶ 4. Each party sent to the other a notice of termination of the Agreement, asserting a different basis for termination and a different termination date. Versadial's notice was dated April 28, 2009, see id. Ex. 4, and Seidel's was dated December 10, 2009, see id. Ex. 3.
On August 10, 2012, Versadial entered into an Assignment and Release Agreement with Variblend. See id. Ex. 5. That document granted Variblend "all of [Versadial]'s right, title and interest in and to [Versadial]'s assets, properties and rights, whether tangible or intangible, real or personal, and specifically including ... the rights held by [Versadial] under that certain Manufacturing Agreement [with] Seidel." Id. at 1. It did not, however, assign to Variblend any of Versadial's "obligations, duties or liabilities" under the Agreement. Id. § 1.2.
On August 31, 2012, Variblend sent a letter via email to Seidel, attaching a copy of the Assignment and Release Agreement between it and Versadial and stating that Variblend would seek to "aggressively pursu[e] ownership and possession of all assets held by [Seidel] that were paid for by Versadial." See Stipulation Ex. 6. On November 16, 2012, Variblend's counsel in Germany sent another letter, again requesting equipment in Seidel's possession — specifically, an assembly table and production molds — and requesting that Seidel refrain from any and all further use of equipment and intellectual property belonging to Variblend or Versadial. Id. Ex. 8. In that letter, Variblend also asserted a claim for compensatory damages and indemnification with respect to third-party claims. Id. at 7.
On December 4, 2012, counsel for Seidel responded via letter. See Stipulation Ex. 10. Seidel objected to Variblend's request on various grounds, including that Variblend
Variblend asserts that it is "in the process of manufacturing and intends to introduce a 20 mm. lipstick dispenser similar to the Spectracolor lipstick previously sold by Avon." Compl. ¶ 21. Variblend believes that Seidel "currently is using the molds and other equipment ... built with the trade secrets disclosed to it by [Versadial], and information derived and developed from those trade secrets, to manufacture its own lipstick product, which it intends or has begun to sell. That product will compete with the one that Variblend will soon introduce." Id. ¶ 22.
On April 19, 2013, Variblend filed the Complaint. Dkt. 1. The Complaint alleges misappropriation of trade secrets and unfair competition. See Compl. passim. On June 6, 2013, Seidel filed a motion to compel arbitration of all claims asserted in the Complaint and to dismiss the action or, in the alternative, to stay it pending the outcome of arbitration, see Dkt. 4, and an accompanying memorandum of law in support of that motion, see Dkt. 5 ("Seidel Br."). On June 12, 2013, the Court held an initial conference with the parties. See Dkt. 7. On July 2, 2013, Variblend filed its opposition to Seidel's motion. Dkt. 9 ("Variblend Br."). On July 17, 2013, Seidel filed its reply. Dkt. 11 ("Seidel Reply Br."). On July 29, 2013, the Court received a letter from Variblend, asking the Court's leave to file a sur-reply in response to what it characterized as new arguments raised in Seidel's reply brief. Dkt. 12. Seidel opposed that request. See Dkt. 13. On July 30, 2013, the Court granted Variblend permission to file a sur-reply not to exceed five pages in length. See Dkt. 12. On August 5, 2013, Variblend filed its sur-reply. Dkt. 14 ("Variblend Sur-Reply").
The Federal Arbitration Act ("FAA") creates a body of federal substantive law establishing and governing the duty to honor agreements to arbitrate disputes. Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 625, 105 S.Ct. 3346, 87 L.Ed.2d 444 (1985) (quoting Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983)). The FAA was enacted to reverse "centuries of judicial hostility to arbitration agreements" and "to place arbitration agreements `upon the same footing as other contracts.'" Scherk v. Alberto-Culver Co., 417 U.S. 506, 510-11, 94 S.Ct. 2449, 41 L.Ed.2d 270 (1974) (citation omitted).
The Act accordingly provides that an arbitration agreement "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. The Act is based on Congress's powers to regulate interstate commerce and admiralty. It applies to "any maritime transaction or a contract evidencing a transaction involving commerce." Id.; see Southland Corp. v. Keating, 465 U.S. 1, 10, 104 S.Ct. 852, 79 L.Ed.2d 1 (1984); Prima Paint Corp. v. Flood & Conklin Mfg. Corp., 388 U.S. 395, 405, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967).
Notwithstanding the strong "national policy favoring arbitration" evinced by Congress's enactment of the FAA, see Southland, 465 U.S. at 10, 104 S.Ct. 852,
Also relevant where, as here, the agreement at issue is commercial and non-domestic, is Chapter 2 of the FAA, 9 U.S.C. § 201 et seq. Chapter 2 codifies the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 21 U.S.T. 2517, 330 U.N.T.S. 38 (Dec. 29, 1970), reprinted at 9 U.S.C. § 201 et seq. ("New York Convention" or "Convention").
Section 202 of the FAA delineates which disputes are covered by chapter 2:
9 U.S.C. § 202. Applying Section 202, the Second Circuit has held that where an agreement or award "involv[es] parties domiciled or having their principal place of business outside [the U.S.]," that agreement or award falls within the Convention. See Yusuf Ahmed Alghanim & Sons,
The New York Convention supplies a limitation on the FAA's ordinary standard that state-law principles determine whether an arbitral contract has been formed. Under Article II, § 1 of the Convention:
New York Convention, 21 U.S.T. 2517, 330 U.N.T.S. 38, art. II, § 1; see U.S. Titan, Inc. v. Guangzhou Zhen Hua Shipping Co., Ltd., 241 F.3d 135, 146 (2d Cir.2001). Article II, § 2 of the Convention, in turn, defines "an agreement in writing" as "an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters and telegrams." Smith/Enron, 198 F.3d at 93; see generally Kahn Lucas Lancaster, Inc. v. Lark Int'l Ltd., 186 F.3d 210, 216-18 (2d Cir.1999), partially abrogated on other grounds by Sarhank Group v. Oracle Corp., 404 F.3d 657, 660 n. 2 (2d Cir.2005) (construing the "agreement in writing" requirement).
A final background principle relevant here is that the issue of contract formation under the FAA may often be resolved at the threshold of the case, by the Court.
Section 4 of the FAA provides that "if the making of the arbitration agreement ... be in issue, the [district] court shall proceed summarily to the trial thereof." 9 U.S.C. § 4 (providing for right to jury trial in such circumstances). However, for the existence of an arbitral agreement to be "in issue" so as to necessitate a trial, there must be a genuine issue of disputed fact that is material to that issue; it is not enough for the parties to assert different legal conclusions based on common facts. See, e.g., Oppenheimer & Co., Inc. v. Neidhardt, 56 F.3d 352, 358 (2d Cir.1995) (district court acted properly in granting motion to compel arbitration on submitted papers, without trial). As the Second Circuit has explained, "[i]n the context of motions to compel arbitration brought under the [FAA], the court applies a standard similar to that applicable for a motion for summary judgment." Bensadoun v. Jobe-Riat, 316 F.3d 171, 175 (2d Cir.2003); see also Sphere Drake Ins. Ltd., 263 F.3d at 30; U.S. Titan, Inc., 241 F.3d at 145-46 (approving district court's finding of an arbitration agreement, without evidentiary hearing, where parties made extensive evidentiary submissions; the fact that parties differed "over the meaning" of the decisive telex and facsimile
Here, where there is no issue of disputed fact requiring trial, summary judgment is appropriate. As Variblend argues — and Seidel appears not to dispute — the relevant facts are not in dispute. The parties have stipulated to the existence of an agreement between Versadial and Seidel, see Stipulation ¶ 2, have provided the Agreement to the Court, and no party has asserted that Variblend was a signatory to that Agreement. The parties instead dispute, as a matter of law, whether the Agreement's arbitration provision binds Variblend. This is precisely the type of issue that is appropriate for the Court to resolve at the threshold. The Court therefore does so here.
The parties dispute what law applies to the issue whether they have in fact entered into an agreement to arbitrate. The Court begins by addressing that question.
Seidel argues that the FAA and federal common law apply here. To decide that a claim is subject to arbitration under the FAA and Chapter 2, four elements must be established: "(1) there must be a written agreement; (2) it must provide for arbitration in the territory of a signatory of the convention; (3) the subject matter must be commercial; and (4) it cannot be entirely domestic in scope." Smith/Enron Cogeneration, 198 F.3d at 92. Because there is a written agreement here providing for arbitration in Geneva, Switzerland (which is a signatory to the Convention), see Declarations and Reservations, Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 21 U.S.T. 2517, 330 U.N.T.S. 38 (Dec. 29, 1970), Seidel argues, the first two elements are met. The subject matter of the dispute is indeed commercial, arising as it does out of a dispute between a manufacturer and a seller regarding a contract and the assignment thereof, as well as claims of misappropriation of trade secrets and unfair competition. Finally, the dispute is not entirely domestic in scope: It involves a German company and a contract which involved conduct occurring in Germany. Because the requirements of the New York Convention are met here, Seidel asserts, the Court is required to "direct that arbitration be held in accordance with the agreement." 9 U.S.C. § 206.
Variblend, however, disputes that such an agreement exists as to it. Variblend points out that it did not sign the Agreement containing the arbitration clause — Versadial did. Because Variblend was not a party to the Agreement, it argues, the Court must determine whether it is bound to arbitrate by first applying state law principles of contract formation. In Variblend's view, New York contract law governs this threshold determination.
The Court agrees. The statutory presumption of arbitrability and the federal common law arising under the New York Convention do not apply to the threshold question whether a party even agreed to arbitrate in the first instance. The statutory presumption favoring arbitration applies "only where it reflects, and derives its legitimacy from, a judicial conclusion that arbitration of a particular dispute
Before it is determined whether the New York Convention applies to this case, therefore, the Court must analyze whether, under New York contract law,
Under New York law, an arbitration clause is generally held to apply to the assignee of a contract. See Lipman v. Haeuser Shellac Co., Inc., 289 N.Y. 76, 81, 43 N.E.2d 817 (1942) ("[T]he arbitration clause is an integral part of the contract and may be availed of, not only by the original parties but also by assignees."); Tanbro Fabrics Corp. v. Deering Milliken, Inc., 35 A.D.2d 469, 318 N.Y.S.2d 764, 766 (1st Dep't 1971) ("[T]he assignee of a contract acquires the rights of the assignor therein and assumes its obligations including an agreement to arbitrate."); Blum's, Inc. v. Ferro Union Corp., 36 A.D.2d 584, 318 N.Y.S.2d 414, 415 (1st Dep't 1971), aff'd, 29 N.Y.2d 689, 325 N.Y.S.2d 418, 274 N.E.2d 751 (1971) ("An assignee who has taken over the rights of an assignor is bound to an arbitration clause in the assigned contract."); In Re Lowenthal, 199 A.D. 39, 191 N.Y.S. 282, 285 (1st Dep't 1921) ("It seems to us that, where a contract is assignable, the arbitration clause is an integral part thereof, and may be availed of by either party to the contract or by his legal representatives or assigns.... If the arbitration clause of an assignable contract of sale is not available, except as to the parties to such a contract, it would then be a simple matter, if either party sought to escape the effect of such a clause, to assign the contract to a third party.").
Variblend argues, however, that because it was assigned all of Versadial's assets but disclaimed "any obligations, duties, or liabilities" of Versadial, it is not bound by Versadial's duty to arbitrate. Variblend relies on the Second Circuit's opinion in Lachmar v. Trunkline LNG Co. for the proposition that an assumption of rights, but not of obligations, liberates an assignee from the duty to arbitrate. In that case, the Second Circuit, applying New York law, held:
753 F.2d 8, 9-10 (2d Cir.1985) (citations omitted). See also Gruntal & Co., Inc. v. Ronald Steinberg, 854 F.Supp. 324 (D.N.J. 1994); United States v. Panhandle E. Corp., 672 F.Supp. 149 (D.Del.1987); Kaufman v. William Iselin & Co., Inc., 272 A.D. 578, 74 N.Y.S.2d 23 (1st Dep't 1947).
This Court, however, does not interpret Lachmar and its progeny as broadly as Variblend does. The Court instead shares the analysis of Judge Buchwald, who has convincingly explained that "Lachmar's analysis and its facts are limited to cases where factors are `passive,' i.e. sued or joined as a third-party." GMAC Commercial Credit LLC v. Springs Indus., Inc., 171 F.Supp.2d 209, 215 (S.D.N.Y.2001) (Buchwald, J.). Significantly, the party that the Lachmar court found had not assumed the duty to arbitrate had "neither sought nor was implicated in the relief at issue in the arbitration." Id. As Judge Buchwald further noted, the Kaufman case relied upon by the Lachmar court also involved a situation in which the defendant assignee had not sought to enforce his rights under the contract. Id.; see also GMAC v. Dillard Dep't Stores, 198 F.R.D. 402, 407-08 (S.D.N.Y.2001) (citing Kaufman's "important limiting language" to the effect that its holding was limited to "a situation where the assignee ha[d not] taken any affirmative action under the contract to enforce its terms" and that, in a situation where the assignee had taken such action, "it is proper to hold that having taken steps to adopt the terms of the contract[, the assignee] had assumed the obligations as well as the rights thereunder" (citation omitted)). By contrast here, of course, Variblend affirmatively seeks legal relief. It has sued its assignor's contractual counterparty, Seidel, seeking to enforce the rights that it claims to have assumed from Versadial, including rights against Seidel that arose from the agreement between Versadial and Seidel.
Lachmar is also inapposite for another reason. There, the defendant seeking to compel arbitration had consented to the assignments in a written agreement which stated that the assignment did not impose obligations or liabilities. Here, by contrast, neither party claims that Seidel consented to Variblend's assignment. See Hewson Decl. ¶ 6 ("To my knowledge, Variblend never asked Seidel to consent to the Versadial-Variblend Assignment and Release Agreement, and Seidel stated its refusal to recognize any assignment of rights from Versadial to Variblend in its lawyer's letter of December 4, 2012."); Stipulation Ex. 10 ("[Versadial] did not at any time request ... my client's approval, let alone my client having granted [sic] such approval."). Where such consent has been given, there is good reason to hold the defendant to its release of plaintiff from the arbitration provision. But Seidel did not agree to any such release. To allow the assignment of rights to a third party to vitiate an arbitration agreement between the original parties, where the agreement provided that it bound assignees and where the assignment was unconsented to by the non-assigning party, would provide an unjustified end-run around a validly-entered arbitration agreement.
The other cases applying New York law cited by Variblend are also rightly distinguished. In United States v. Panhandle Eastern, the court held that the duty to arbitrate had not been assumed, but it found it "significant[]" that the party seeking to compel arbitration had consented to the assignment and its terms. See 672 F.Supp. 149, 154 (D.Del.1987). And both First Department cases that Variblend cites, see Variblend Br. 11, present
Variblend's having disclaimed Versadial's "obligations, duties, [and] liabilities" does not change the fact that Variblend is seeking to enforce rights it assumed under Versadial's former contract with Seidel. Although Variblend contends that it "has not asserted any claim for breach of the agreement in its complaint," Variblend Sur-Reply 2, the Agreement is the operative document underlying — and is fundamental to — Variblend's suit. Variblend is correct that the "Agreement did not confer the trade secret rights that Variblend asserts; it is simply evidence of the steps taken to protect the trade secrets, of their value, and of Seidel's acknowledgement." Variblend Sur-Reply Br. 3. But Variblend ignores much of the substance of the Agreement, which explains, for example, how Seidel came to possess the materials which Variblend now seeks to recoup from Seidel. See Compl. ¶ 32(D). Variblend seeks not merely to recover the monetary compensation to which it believes, under the Agreement, it is entitled, but also asks the Court to order Seidel to return information previously provided by Versadial and to refrain from using the intellectual property rights Variblend purports to now own. Put another way, Variblend seeks to step into Versadial's shoes, vis-à-vis the Agreement, while simultaneously removing the arbitration provision that was a material element of that Agreement. That it cannot do.
Rather, as Judge Buchwald aptly put the point in Springs, it is "elementary ancient law that an assignee never stands in any better position than his assignor. An assignee is subject to all the equities and burdens which attach to the property assigned because he receives no more ... than his assignor." 171 F.Supp.2d at 215; see also Sea Spray Holdings, Ltd. v. Pali Fin. Grp., Inc., 269 F.Supp.2d 356, 362 (S.D.N.Y.2003) ("As an assignee, [plaintiff] is not entitled to any more rights than [assignor] because [assignor] cannot convey... an interest greater than that which it possessed .... This principle applies under New York law even when the restriction at issue is a commitment to arbitrate."); Richard T. Blake & Assocs., Inc. v. Aetna Cas. & Sur. Co., 255 A.D.2d 569, 681 N.Y.S.2d 73, 75 (2d Dep't 1998) ("It is well established that an assignee stands in the shoes of the assignor and takes the assignment subject to any pre-existing liabilities."). Versadial could not assign to Variblend rights that it did not have. Variblend therefore is bound by the Agreement's remedial provision requiring arbitration of disputes, notwithstanding its attempt to disclaim arbitration as an obligation, duty, or liability which it did not assume from Versadial.
In any event, even if the Court were to find that federal common law, rather than New York law, applies to the question whether Variblend assumed a
Id. at 1470 (citations omitted) (emphasis added); see also Springs, 171 F.Supp.2d at 214 ("[I]n interpreting U.C.C. 9-318(1), courts have held that arbitration is a contractual remedy, not an obligation, and cannot be abrogated through a finance assignment. The adoption of ... Article 9 of the U.C.C. means that a finance assignee suing on an assigned contract is bound by that contract's arbitration clause unless it secured a waiver from the signatory seeking to arbitrate.") (citations omitted) (emphasis in original).
Thus, if federal common law governed the threshold question here, Variblend would still be bound by the arbitration provision contained in the Agreement between Versadial and Seidel.
There appears to be little dispute between the parties that, if Variblend is so bound, the arbitration provision in the Agreement encompasses the dispute here. See Variblend Br. 5 ("The issue here is not the scope of the arbitration clause ... but whether Variblend agreed to it."). Nor could there be: The Agreement states that
Agreement § 16.4. This broad arbitration provision covers the dispute here, which arises "out of or in connection with th[e] Agreement."
In any event, all four Smith/Enron factors, as discussed supra at Section III.A, have been met, meaning that, with its having been determined that the provision applies to Variblend, any questions as to the scope of the arbitration provision or the arbitrability of particular disputes are, in such a situation, properly committed to arbitration. See VRG Linhas Aereas S.A. v. MatlinPatterson Global Opportunities Partners II L.P., 717 F.3d 322, 326 (2d Cir.2013) ("[A]n arbitration clause subjecting disputes to the rules and procedures of the ICC International Court of Arbitration clearly and unmistakably commits to arbitration any questions about the arbitrability of particular disputes."); Shaw Grp. Inc. v. Triplefine Int'l Corp., 322 F.3d 115, 124-25 (2d Cir.2003) ("[B]ecause the parties' arbitration agreement is broadly worded to require the submission of `all disputes' concerning the Representation Agreement to arbitration, and because it provides for arbitration to be conducted under the rules of the ICC, which assign the arbitrator initial responsibility to determine issues of arbitrability, we conclude that the agreement clearly and unmistakably evidences the parties' intent to arbitrate questions of arbitrability.").
Having found that Variblend is bound by the arbitration provision in the Agreement, the Court has no occasion to address Seidel's alternative arguments that Variblend is estopped from refusing to arbitrate because it has sought direct benefits from the Agreement, see Seidel Reply Br. 8-10, or that Variblend is bound by the Agreement as a "successor" and an "assign" of Versadial, see Seidel Reply Br. 10.
For the foregoing reasons, Seidel's motion to compel arbitration is granted. The case is stayed pending the outcome of arbitration before the ICC.
SO ORDERED.
