Opinion
00 Civ. 0267 (DC).
December 7, 2000.
BERLACK, ISRAELS LIBERMAN LLP, By: Emilio A. Galvin, Esq. New York, New York, Attorneys for Plaintiff
BIVONA COHEN, P.C. By: Bruce A. Feldman, Esq. New York, New York, Attorneys for Defendants.
MEMORANDUM DECISION
In this diversity action, plaintiff Deer Stags, Inc. ("Deer Stags") asserts breach of contract and fraud claims against defendants Garrison Industries, Inc. ("Garrison") and Gary Miller ("Miller"). Both defendants move to compel arbitration and for a more definite statement pursuant to Fed.R.Civ.P. 9(b). In addition, Miller moves, pursuant to Fed.R.Civ.P. 12(b)(2) and 12(b)(6), to dismiss the action against him for lack of personal jurisdiction and failure to state a claim.
For the reasons set forth below, Miller's motion to dismiss for lack of personal jurisdiction is denied and defendants' motion to compel arbitration is granted. The remaining motions are denied as moot.
BACKGROUND
A. The Facts
Taken in the light most favorable to Deer Stags, the facts are as follows: Deer Stags, a New York corporation with its principal place of business in New York, manufactures footwear. (Compl. ¶¶ 6, 12). Miller is the President and Chief Executive Officer of Garrison Industries, a New Jersey corporation with its principal place of business in New Jersey. (Id. ¶¶ 7, 8). Deer Stags and defendants began a business relationship in February 1998, and during the course of 1998 and early 1999, entered into a series of transactions whereby defendants were to procure boots for Deer Stags from factories in China. (Muskat Decl. ¶ 4; Miller Reply Aff. ¶¶ 6-8). As part of these transactions, Deer Stags forwarded purchase orders (the "Purchase Orders") to defendants and defendants forwarded sales confirmations (the "Sales Confirmations") to Deer Stags. (Id. ¶ 7). The Sales Confirmations state, in small but legible typeface:
This order is subject to the terms herein stated and those on the reverse side, including provisions for arbitration, and shall become a contract only when signed by Buyer and accepted in writing by Seller, or when Buyer has retained possession hereof for a period of 10 days from date of receipt, or when Buyer has accepted of all or any part of the goods herein described. No modification shall be enforced unless in writing signed by the Seller.
(Def. Br. Ex. 3; Def. Br. at 2). In addition, many, but not all, of the Sales Confirmations delivered to Deer Stags bore the following language on the reverse:
In their "Memorandum in Support of Motion to Compel Arbitration," defendants aver that all Sales Confirmations contained the aforementioned "terms and conditions" clause, but do not provide any factual support for this allegation. (Def. Br. at 2). Although Deer Stags does not dispute defendants' statement, the Sales Confirmations attached by defendants as exhibits do not all bear the "terms and conditions" clause. (Def. Br. Exh. 3 at 4-6).
Any and all controversies arising out of or relating to this contract, or any modification, breach or cancellation thereof, shall be settled by arbitration in the City of New York in accordance with the Rules then obtaining of the AMERICAN ARBITRATION ASSOCIATION, and the parties thereto consent to the jurisdiction of the Supreme Court of the State of New York for all purposes in connection therewith, including enforcement of the provision for arbitration, and for entry of the judgment award . . .
(Def. Br. Ex. 3; Muskat Decl. ¶ 8).
According to Miller, approximately 22 Sales Confirmations in 1998 and 37 of 62 Sales Confirmations in 1999 contained the arbitration clause on the reverse side. (Miller Reply Aff. ¶ 7). Michael Muskat, the President of Deer Stags, acknowledges that, of the "voluminous collection of [Sales C]onfirmations," a "substantial percentage" included the arbitration clause. (Muskat Decl. ¶ 8).
In or around May 1999, Deer Stags negotiated and entered into an oral contract (the "Oral Agreement") with Miller, acting on behalf of Garrison Industries, whereby defendants were to arrange for the manufacture, in China, of boots that would be sold in the United States under the name "Deer Stags." (Compl. ¶ 12). Under the terms of the oral agreement, defendants agreed to deliver approximately 72,000 pairs of boots to Deer Stags during the months of June to September 1999. (Id.). During the course of these negotiations, Deer Stags informed defendants that it needed these boots for the Fall 1999 season, and obtained assurances from Miller that the boots would be delivered within the requested time frame. (Id. ¶ 13). Defendants specifically assured Deer Stags that the factory in China would be able to meet Deer Stags's deadline. (Id. ¶ 15). After entering into the Oral Agreement with defendants, Deer Stags entered into contracts for the sale of the boots to footwear retailers and other customers. (Id. ¶ 14).
In a memorandum dated May 17, 1999, Deer Stags informed defendants that it preferred not to provide letters of credit for the parties' transaction, and instead proposed that the transaction proceed on the basis of "delivery against payment" or "documentary purchase orders." (Id. ¶ 16). Defendants responded to this memorandum by indicating that the proposed payment terms would not present any problems. (Id. ¶ 17). Defendants also told Deer Stags that they would engage a financially secure factory in China that would not need a letter of credit. (Id. ¶ 17).
Delivery against payment and documentary purchase orders provide for payment by a buyer upon receipt of certain shipping documents, such as a bill of lading. (Compl. ¶ 16).
Thereafter, Deer Stags submitted purchase orders for the boots to defendants. (Id. ¶ 19; Def. Br. Ex. 2). Rather than filling out and returning the purchase orders, defendants sent Sales Confirmations to Deer Stags. (Muskat Decl. ¶ 7; Def. Br. Ex. 3).
Deer Stags does not provide a copy of these orders. Defendants, however, have attached to their brief three documents that purport to be Purchase Orders sent by Deer Stags to Garrison in August 1998 and January 1999, well before the parties entered into the Oral Agreement. (Def. Br. Ex. 2). These documents each provide as follows:
"This order is subject to the terms and conditions appearing hereon and upon the reverse side hereof, and the Seller agrees to be bound thereby. No modifications or additions will be binding upon the buyer unless expressly consented to in writing." (Id.).
The Purchase Orders submitted by defendants do not include the reverse side; there is thus no record of the provisions contained on the reverse side of the Purchase Orders. In their reply memorandum of law, defendants claim they do not have a copy of the reverse side of the Purchase Orders because Deer Stags only faxed them the front side. (Def. Reply Br. at 3).
Before Deer Stags received the first delivery of boots, defendants informed Deer Stags that the manufacturer in China would not be able to deliver the initial shipment of boots by Deer Stags's due date. (Compl. ¶ 19). Alarmed at these delays, Deer Stags sought further assurances from defendants that the orders would be filled on time. (Id. ¶ 20). Defendants responded by telling Deer Stags that if the boots were not shipped on time, Miller would have the boots delivered by air, rather than by boat. (Id.).
Problems with the deliveries continued. After the initial shipment of boots, Deer Stags was forced to pay for all airfreight charges in later shipments. (Id. ¶ 21). At some point, Deer Stags became unable to obtain Miller's assistance with the delays, and had to send its own representative to China to rectify the situation. (Id. ¶ 22). Once in China, Deer Stags's representative discovered that defendants had hired not one, but four, factories in China to fill the boot orders, and that none of the factories had the capital necessary to fill the orders. (Id. ¶ 23). Due to the imminence of its deadlines, Deer Stags was not able to find alternate boot suppliers, and had to provide the factories with a letter of credit so that the boots could be manufactured. (Id. ¶ 24). Despite these efforts, Deer Stags did not receive all the boots it had ordered; of those that did arrive, many were late, damaged, or dirty. (Id. ¶ 25). As a result, Deer Stags was unable to supply boots to many of its customers. (Id. ¶ 27).
B. Prior Proceedings
Deer Stags commenced this action against Garrison and Miller on January 13, 2000. These motions followed.
DISCUSSION
A. MOTION TO DISMISS
As an initial matter, I first address Miller's contention that this Court does not have personal jurisdiction over him. Section 302(a)(1) of the C.P.L.R. provides for the exercise of jurisdiction over a non-domiciliary who transacts any business within the state if the cause of action arises from such acts. See N.Y. C.P.L.R. § 302(a)(1) (McKinney 1990).
Applying this standard, I hold that the Court does have personal jurisdiction over Miller in this case. Miller visited Deer Stags's office in New York City numerous times during the course of their business relationship. (Muskat Decl. ¶¶ 5, 9). During several of those visits, Miller displayed samples of Garrison products in an attempt to solicit business from Deer Stags; this solicitation eventually gave rise to the agreements in dispute here. (Id. ¶¶ 5, 6). Because Miller's purposeful transaction of business within New York bears a "substantial relationship" to the fraud and breach of contract claims advanced by Deer, he is subject to personal jurisdiction in New York. See Kreutter v. McFadden Oil Corp., 71 N.Y.2d 460, 467 (1988); see also PDK Labs, Inc. v. Friedlander, 103 F.3d 1105, 1109 (2d Cir. 1997); Paramount Adjustment Co., v. Home Ins. Co., 267 A.D.2d 151 (1st Dep't 1999). The fact that Miller's acts were made on Garrison's behalf (and not, therefore, made by Miller in his individual capacity) does not compel a different conclusion. See Kreutter, 71 N.Y.2d at 472 (holding that the fiduciary shield doctrine is not available to defeat long-arm jurisdiction in New York). Accordingly, I proceed to defendants' remaining motions.
B. MOTION TO COMPEL ARBITRATION
1. Legal Standards
The Federal Arbitration Act (the "FAA"), 9 U.S.C. § 2, applies whenever a contract "evidences a transaction involving commerce." 9 U.S.C. § 2; see also Barbier v. Shearson Lehman Hutton Inc., 948 F.2d 117, 120 (2d Cir. 1991). Because the agreement at issue in this case involves the delivery of boots from China to the United States, it clearly comes within the FAA.
In resolving a motion to compel arbitration under the FAA a court must: (1) determine whether the parties agreed to arbitrate; (2) ascertain the scope of the agreement to see if the claims raised in the lawsuit fall within its terms; (3) if federal statutory claims are asserted, decide whether Congress has deemed those claims to be nonarbitrable; and (4) if some but not all claims are to be arbitrated, determine whether to stay the balance of the proceedings pending arbitration. See Oldroyd v. Elmira Sav. Bank, FSB, 134 F.3d 72, 75-76 (2d Cir. 1998).
Because the FAA embodies Congress's strong preference for arbitration, "any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability." Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983).
2. Application
In this case, the parties differ as to the first element of the FAA analysis — whether the parties agreed to arbitrate. Defendants claim that this case is governed by the Sales Confirmations, and that the parties' present dispute must be submitted to arbitration in accordance with the arbitration clause contained on the back of most of the Sales Confirmations.
In contrast, Deer Stags alleges that the shoe shipments were made pursuant to the Oral Agreement the parties entered into in May 1999. The Sales Confirmations, Deer Stags contends, were merely sent as confirmation of purchase orders submitted by Deer Stags, and should not bind Deer Stags to arbitration.
Generally, courts look to state law contract principles to determine whether parties have agreed to arbitrate a particular matter. See Russell v. Terminix Int'l Co., 205 F.3d 44, 48 (2d Cir. 2000). To the extent that state law "treats arbitration agreements differently from any other contracts," however, it is preempted by § 2 of the FAA, and will not apply to an agreement governed by the federal statute. Chelsea Square Textiles, Inc. v. Bombay Dyeing and Mfg. Co., 189 F.3d 289, 295 (2d Cir. 1999).
The dispute between Deer Stags and defendants is a classic illustration of a "battle of the forms." Under section 2-207 of the New York Uniform Commercial Code ("UCC"), a written confirmation sent within a reasonable time of an oral agreement operates as an acceptance even if it includes additional terms.
See N.Y. U.C.C. § 2-207(a) (McKinney 1993); see also Bayway Ref. Co. v. Oxygenated Mktg. Trading A.G., 215 F.3d 219, 223 (2d Cir. 2000); I. K. Bery, Inc. v. Irving R. Boody Co., 99 Civ. 10968 (SAS), 2000 U.S. Dist. LEXIS 1872, at *15 (S.D.N.Y. Feb. 23, 2000). When both parties to the agreement are merchants, the additional terms become part of the contract unless the offer expressly limits acceptance to its terms; the additional terms materially alter the agreement; or the accepting party objects to the terms within a reasonable time. See N.Y. U.C.C. § 2-207(2).
Michael Muskat, in his declaration in opposition to Garrison's motions, acknowledges that defendants responded to Deer Stags's purchase orders by delivering Sales Confirmations to Deer Stags. (Muskat Decl. ¶ 7). Muskat further admits that "a substantial percentage of [the Sales Confirmations] include an arbitration clause," but insists that Deer Stags was not aware of the arbitration clause until defendants made the instant motion. (Id. ¶ 7, 8). In light of these statements, it is clear that Deer Stags never objected to the arbitration clause. By accepting the Sales Confirmations and failing to object to the arbitration clause, Deer Stags accepted the Sales Confirmations "in [their] entirety, including the terms and conditions on the reverse side of the document[s]." Infinity Indus., Inc. v. Rexall Sundown, Inc., 71 F. Supp.2d 168, 172 (E.D.N.Y. 1999); see also Chelsea Square, 189 F.3d at 296. Citing Marlene Indus. Corp. v. Carnac Textiles, Inc., 45 N.Y.2d 327, 333 (1978), Deer Stags contends that the arbitration clause in the sales confirmations materially altered the parties' existing agreement. "[I]n a 'battle of the forms' case governed by N.Y. U.C.C. § 2-207(2)(b), the party opposing the inclusion of an additional term bears the burden of proving that the term works a material alteration." Bayway Ref., 215 F.3d at 222. Deer Stags has failed to meet this burden. Its reliance on Marlene is entirely misplaced. The Second Circuit has held that the rule announced in Marlene — requiring an "express, unequivocal [arbitration] agreement" before a party will be compelled to arbitrate — is preempted by the FAA because it treats arbitration agreements differently than other contracts. See Progressive Cas. Ins. Co. v. C.A. Reaseguradora Nacional de Venezuela, 991 F.2d 42, 46 (2d Cir. 1993) (quoting Marlene Indus. Corp. v. Carnac Textiles, Inc., 45 N.Y.2d at 333); see also Chelsea Square, 189 F.3d at 295 n. 5. Rather, an agreement to arbitrate must be treated as any other additional term, and will be held to constitute a material alteration if its inclusion in the contract would "result in surprise or hardship if incorporated without express awareness by the other party." Bayway Ref., 215 F.3d at 224 (quoting N.Y. U.C.C. § 2-207 cmt. 4); I. K. Bery, 2000 U.S. Dist. LEXIS 1872, at *18; Hatzlachh Supply Inc. v. Moishe's Elecs., Inc., 828 F. Supp. 178, 183 (S.D.N.Y. 1993), vacated on other grounds, 848 F. Supp. 25 (S.D.N.Y. 1994)).
Applying this standard, I hold that the arbitration clause does not materially alter the contract. Arbitration of the dispute between Deer Stags and defendants would not result in surprise or hardship to Deer Stags. The parties engaged in more than fifty transactions over a period exceeding more than twelve months. See Infinity Industries, 71 F. Supp.2d at 172 (holding that eight purchases over seven months were sufficient to bind party to arbitration agreement). Deer Stags is thus bound by the arbitration clause.
The parties dispute whether arbitration is an established practice in the shoe industry. (Miller Aff. ¶ 3; Pl. Br. at 7). Although the finding of such a practice would further support my decision, for the purposes of this motion, I assume that no such practice exists. "While New York law allows an arbitration to rest on evidence of trade usage. . ., th[is] factor[is] not dispositive." Infinity Industries, 71 F. Supp.2d at 172 (quoting Leadertex Inc. v. Morganton Dyeing Finishing Corp., 67 F.3d 20, 25 (2d Cir. 1995)) (internal quotation marks omitted).
Because I find that the parties agreed to arbitrate, the next issue is whether Deer Stags's claims come within the scope of the arbitration clause. Upon review of the clause, it is clear that both the breach of contract and fraud claims arise out of the contracts embodied by the Sales Confirmations. (Def. Br., Exh. 3). Deer Stags raises no federal statutory claims; therefore, the third FAA prong is inapplicable. As to the final prong — whether to stay proceedings pending arbitration — both of Deer Stags's claims (fraud and breach of contract) are arbitrable, and none remain to be resolved by this Court. See Mahant v. Lehman Bros., 99 Civ. 4421(MBM), 2000 U.S. Dist. LEXIS 16966, at *9 (S.D.N.Y. Nov. 22, 2000). Significantly, although some of the Sales Confirmations do not contain the arbitration language, Deer Stags has not argued in its papers that these transactions should be treated differently. In any event, if the claims based on these Sales Confirmations are not resolved in the arbitration proceedings, Deer Stags may pursue the claims in supplemental proceedings here. Accordingly, this action is dismissed without prejudice to reinstatement within sixty days after the completion of arbitration proceedings in the event further proceedings in this Court are necessary.
CONCLUSION
For the reasons stated herein, Miller's motion to dismiss for lack of personal jurisdiction is denied and defendants' motion to compel arbitration is granted. Miller's motion to dismiss for failure to state a claim and defendants' motion for a more definite statement are denied as moot. Deer Stags's claims are dismissed without prejudice to the commencement of arbitration proceedings and without prejudice to reinstatement within sixty days after completion of the arbitration proceedings. The Clerk of the Court is directed to enter judgment accordingly and to close this case.
SO ORDERED.