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finding a stay appropriate where "the claims in the instant action and those being adjudicated in arbitration arise out of the same series of alleged acts"
Summary of this case from Wecare Holdings, LLC v. Bedminster Intl. LimitedOpinion
00 Civ. 4730 (AGS).
December 19, 2000.
OPINION AND ORDER
Plaintiff filed the instant action on June 26, 2000 seeking damages arising out of defendants' alleged infringement of plaintiffs rights as the exclusive licensee of certain designs, pursuant to a contract with third party defendant. Currently before the Court is defendants' motion to stay litigation and compel arbitration. For the reasons set forth below, the motion is granted in part and denied in part. The Court declines to compel arbitration of the claims in this litigation, but stays all claims pending the outcome of the ongoing arbitration before the American Arbitration Association ("AAA").
Defendants Nambe Mills, Inc. and Target Corporation have filed one motion; Third Party Defendant Eva Zeisel has filed a separate motion in which she "adopts and incorporates by reference the arguments set forth in the memorandum of law submitted by the two defendants." (Memorandum of Law in Support of Eva Zeisel's Motion to Stay Litigation and Compel Arbitration at 1; Reply Memorandum of Law In Support of Eva Zeisel's Motion to Stay Litigation and Compel Arbitration at 1.)
The relevant facts discussed herein are drawn from the allegations of the Complaint or Third Party Complaint, and the exhibits thereto, or are otherwise reflected in the record.
A. Parties
Plaintiff The Orange Chicken LLC ("Orange") is a New York limited liability company in the business of selling antique and high quality current production home furnishings to retail and wholesale customers. (Complaint ("Compl.") ¶¶ 4, 5.) Defendant and Third Party Plaintiff Nambe Mills, Inc. ("Nambe"), a New Mexico corporation located in Santa Fe, New Mexico, manufactures and sells cookware and dinnerware, using for the most part a special metal alloy that combines the appearance of silver with the durability of iron. (Third Party Compl. ¶ 2; Defendants' Memorandum of Law In Support of Motion to Stay Litigation and to Compel Arbitration ("Defs.' Mem.") at 3.) Defendant and Third Party Plaintiff Target Corporation, a Minnesota corporation located in Minneapolis, Minnesota, is a mass merchandiser operating through its Target discount stores, and its Dayton's, Hudson's, and Marshall Field's department stores. (Third Party Compl. ¶ 3; Defs.' Mem. at 3.) Target sells products manufactured by Nambe, including products designed by Third Party Defendant Eva Zeisel ("Zeisel"). (Third Party Compl. ¶ 14; Defs.' Mem. at 4, 6.) Zeisel, an individual residing in New York, is an industrial designer known for her dinnerware designs, candlesticks, vases, and furniture. (Third Party Compl. ¶ 4; Defs.' Mem. at 3.)
Although they are not co-defendants, for ease of reference in this Opinion, Nambe, Target, and Zeisel are also collectively referred to as "defendants."
The issues in this action center on the business relationships linking the four parties, and on the operation of two agreements that Zeisel entered into with Nambe and Orange, respectively.
B. Nambe-Zeisel Agreement
Under the agreement between Nambe and Zeisel (the "Nambe-Zeisel Agreement"), entered into in October 1998 and still in force and effect, Zeisel granted to Nambe "the exclusive right to produce and market" certain products based on Zeisel's designs. (Nambe-Zeisel Agreement ¶ 5.) Zeisel submits designs to Nambe, and where Nambe deems it appropriate, it develops such designs into products. (Id. ¶ 3.) Nambe has the "exclusive right for ninety (90) days from the submission of each [design] to select such [design] for development and sale." (Id.) Because many designs for products are similar, the parties agreed that they would identify periodically the products derived from Zeisel's designs, called "Eva Zeisel Products." (Id. ¶ 5.) Further, the Agreement provides that Nambe owns each design it selects for production and marketing, including the right to register a copyright in the design in Nambe's name, and all of the products based on the designs are the exclusive property of Nambe (Id. ¶ 13.) Zeisel receives an advance royalty and subsequent royalty payments based on the sales of the products in question. (Id. ¶ 4, 9-11.) Finally, the Agreement contains an arbitration clause stating that "all disputes and differences of any kind whatsoever arising under th[e] Agreement . . . should be determined by arbitration between the parties . . . in any jurisdiction agreed upon by the parties . . ." (Id. ¶ 15.) "The decision of the arbitral tribunal shall be final and binding and may be enforced by any court of competent jurisdiction." (Id.)
C. Orange-Zeisel Agreement
In February 1999, subsequent to the execution of the Nambe-Zeisel Agreement, Zeisel entered into an agreement with Orange (the "Orange-Zeisel Agreement"). Under the terms of this Agreement, which has a five-year term, Zeisel licensed to Orange the "exclusive right to manufacture and sell" certain pre-existing Zeisel designs, which Orange refers to as Zeisel's "historic designs." (Orange-Zeisel Agreement ¶¶ 1, 12; Plaintiffs Memorandum of Law in Opposition to Defendants' Motion to Stay Litigation and Compel Arbitration ("Pl.'s Mem.") at 3.) Orange "agree[d] to assume all expenses relating to the manufacture, development, licensing and sale" of the products covered by the Agreement. (Orange-Zeisel Agreement ¶ 8.)
With respect to designs existing at the time of the Agreement, Orange has the right to select for production and sale any such design; however, if Zeisel indicates that a design "may be of interest to a third party," Orange has 30 days to select the design, failing which the design may be licensed by Zeisel to a third party. (Id. ¶ 5(b).) The Agreement also specifies that any existing designs not selected by Orange could be selected by either of two other licensees, Nambe or the Museum of Modem Act. (Id.)
The Agreement also specifically excludes from its coverage those designs "which relate or are intended to form part of an agreement entered into by Zeisel with the Nambe Company." (Id. ¶ 4.) As to new designs not encompassed by the Nambe-Zeisel Agreement, Orange is entitled to a right of first refusal, and those designs that Orange declines to select revert to Zeisel. (Id. ¶ 5(a).) Zeisel receives a royalty of 10 percent of the wholesale price of all products sold under the Agreement. (Id. ¶ 9.)
Further, the Agreement contains an arbitration clause providing that "[a]ny disputes arising out of this agreement shall be submitted to Arbitration before the [AAA] in New York City before a single arbitrator . . ." (Id. ¶ 15.) The decision of the arbitrator shall be "final and binding" and may be entered as a judgment in "the appropriate Court of law." (Id.)
D. Instant Action
The instant dispute originated in late March 2000, when Orange complained to Nambe that the latter had been advertising itself as the exclusive supplier of Zeisel designs in which Orange had been given an exclusive license. (Letter from Thomas V. Marino to Nambe Company dated Mar. 23, 2000, Ex. E to Compl.) Nambe and Zeisel responded that their actions were well within their rights under the Nambe-Zeisel Agreement, and that in any event, the Orange-Zeisel Agreement had been terminated. (Letter from H. Kent Howard to Thomas V. Marino dated Mar. 27, 2000; Letter from Michael J. Striker to Thomas V. Marino dated Apr. 14, 2000, Ex. E to Compl.) In late April 2000, Orange complained to Target that Target had sold products in its Marshall Field's stores, supplied to it by Nambe, in which Orange held an exclusive license, and that Target had falsely advertised itself as the exclusive source of certain products for which Orange was the exclusive licensee. (Letter from Thomas V. Marino to Linda Ahlers dated Apr. 27, 2000, Ex. F. to Compl.; Compl. ¶ 61.) Further communications between counsel for Orange and Target followed, but no agreement was reached. (Pl.'s Mem. at 5; Ex. F to Compl.) On May 3, 2000, Zeisel sent to Orange a "notice of immediate termination" of the Orange-Zeisel Agreement, on account of Orange's alleged failure to pay minimum royalties, issue timely royalty reports, or use its best efforts to market the products subject to the Agreement. (Letter from Michael J. Striker to Thomas V. Marino dated May 3, 2000, Defendants' and Third-Party Plaintiffs' Memorandum of Law in Reply to Plaintiffs Opposition to Defendants' Motion to Stay Litigation and Compel Arbitration ("Defs.' Rep."), Ex. 2(I).)
On June 9, 2000, in light of the disputes that had surfaced, Zeisel commenced an arbitration with the Commercial Arbitration Tribunal of the AAA in New York City, pursuant to the arbitration clause contained in the Orange-Zeisel Agreement. Zeisel's amended statement of claim purportedly seeks a declaration that the Agreement has been terminated, an accounting for unpaid royalties, and damages for breach of contract and tortious interference with existing and prospective contractual relations with third parties. (Pl.'s Mem. at 8.) Orange's amended counterclaims allege, inter alia, that Zeisel conspired with Nambe to undermine Orange's exclusive rights under the Orange-Zeisel Agreement. (Amended Answer to Amended Statement of Claim and Counterclaims ("Amended Counterclaims") ¶¶ 46-60.)
On June 26, 2000, Orange filed the instant action in this Court asserting claims against Nambe and Target for false advertising and "disparagement" under Section 43(a) of the Lanham Act, 15 U.S.C. § 1125(a), and common law claims for tortious interference with contract, unfair competition, unjust enrichment, and for an accounting. (Compl. ¶¶ 77-109.) On August 15, 2000, Nambe and Target filed a Third Party Complaint against Zeisel for breach of contract, and for indemnity and contribution. (Third Party Compl. ¶¶ 16-26.) The essence of Nambe's and Target's claims is that "[i]f, as [Orange] alleges, any of the products sold by [Nambe or Target] infringe [Orange's] rights under the [Orange-Zeisel Agreement], the liability for Plaintiffs claims must be shifted to Zeisel since Zeisel expressly or impliedly warranted, covenanted, and represented in entering into the [Nambe-Zeisel] Agreement and thereafter that she had all the necessary rights to the relevant designs . . ." (Id. ¶ 15.)
Orange also seeks an injunction barring Nambe and Target from manufacturing, marketing, or selling Zeisel's designs in contravention of Orange's exclusive rights. (Compl. ¶ 1.)
Also on August 15, 2000, Zeisel notified Nambe that it would refer the claims of the third party action to arbitration, pursuant to paragraph 15 of the Nambe-Zeisel Agreement, and Nambe thereafter consented, reserving all rights, to join in the arbitration between Orange and Zeisel currently before the AAA. (Letter from Mia Higgins to Philip Gottfried dated August 15, 2000, Ex. 6. to Defendants' Bound Exhibits; Defs.' Mem. at 8, 19 n. 9.) The instant motion followed.
Orange states that Zeisel has added Nambe as a respondent in the ongoing arbitration, seeking a declaration that Zeisel neither breached the Nambe-Zeisel Agreement nor owes any indemnity or contribution. (Pl.'s Mem. at 8.) Accepting this as true, the breach of contract claim will presumably be determined by the arbitrator, but the indemnity and contribution claims must await the determination of this Court as to Nambe's liability, if any, to Orange.
II. Discussion
A. FAA Mandate
In enacting the Federal Arbitration Act ("FAA" or the "Act"), Congress created national substantive law governing all questions of the validity and enforceability of arbitration agreements within its scope. See Genesco. Inc. v. T. Kakiuchi Co., Ltd., 815 F.2d 840, 845 (2d Cir. 1987) (citing Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth. Inc., 473 U.S. 614, 626 (1985)); see also Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983). Hence, whether Orange is bound to arbitrate its claims against Nambe and Target on the basis of the arbitration clause in either the Orange-Zeisel or Nambe-Zeisel Agreements is a matter of federal law, which incorporates generally accepted principles of contract law. See Genesco, supra, 815 F.2d at 845 (citing Prima Paint Corp. v. Flood Conklin Mfg. Co., 388 U.S. 395, 404-05 (1967)).
The FAA provides that written agreements to arbitrate disputes "shall be valid, irrevocable, and enforceable," which reflects the strong federal policy favoring rigorous enforcement of arbitration agreements. 9 U.S.C. § 2; see Perry v. James, 482 U.S. 483, 490 (1987). The Act "mandates that district courts shall direct the parties to proceed to arbitration on issues as to which an arbitration agreement has been signed," Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 218 (1985), and to stay proceedings while the arbitration is pending. 9 U.S.C. § 3, 4. The factors that courts weigh in determining whether to compel arbitration pursuant to the FAA are: (i) whether the parties agreed to arbitrate; (ii) the scope of the arbitration agreement; (iii) if federal statutory claims are at issue, whether Congress intended those claims to be nonarbitrable; and (iv) whether to stay the balance of the proceedings pending arbitration if some, but not all, of the claims in the action are arbitrable. See Genesco. Inc. v. T. Kakiuchi Co., 815 F.2d 840, 844 (2d Cir. 1987); Norcom Elecs. Corp. v. CIM USA Inc., 104 F. Supp.2d 198, 202 (S.D.N.Y. 2000).
B. Limits on Ability of Nonsignatories to Compel Arbitration
In considering whether to compel arbitration of a particular dispute, the Court must first decide whether the parties agreed to arbitrate. See Chelsea Square Textiles. Inc. v. Bombay Dyeing Mfg. Co., 189 F.3d 289, 294 (2d Cir. 1999). Clearly there are agreements to arbitrate between Orange and Zeisel, and between Nambe and Zeisel. (Orange-Zeisel Agreement ¶ 15; Nambe-Zeisel Agreement ¶ 15.) However, on the instant motion, defendants ask the Court to compel arbitration between Orange and Nambe and Target based on the Orange-Zeisel Agreement, to which only Orange and Zeisel are parties. Therefore, the Court must consider whether to infer an agreement to arbitrate between Orange, a signatory, and nonsignatories Nambe and Target.
Arbitration is contractual by nature. "[A] party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." Thomson-CSF. S.A. v. Am. Arbitration Assoc., 64 F.3d 773, 776 (2d Cir. 1995) (citing United Steelworkers of Am. v. Warrior Gulf Navigation Co., 363 U.S. 574, 582 (1960)). While there is a liberal federal policy favoring arbitration, arbitration agreements must not be so broadly construed as to encompass claims and parties that were not intended by the original contract. "It does not follow, however, that under the [FAA] an obligation to arbitrate attaches only to one who has personally signed the written arbitration provision." Id. (citing Fisser v. Int'l Bank, 282 F.2d 231, 233 (2d Cir. 1960)). The Second Circuit has made clear that a nonsignatory may be bound to an arbitration agreement if so dictated by the "ordinary principles of contract and agency."Id.; see also Smith/Enron Cogeneration Ltd. Partnership v. Smith Cogeneration Int'l. Inc., 198 F.3d 88, 97 (2d Cir. 1999).
The Second Circuit has recognized five theories for binding nonsignatories to arbitration agreements: (i) incorporation by reference; (ii) assumption; (iii) agency; (iv) veil-piercing/alter ego; and (v) estoppel. See Thompson, supra, 64 F.3d at 776. Defendants contend that Orange should be obligated to arbitrate its claims against Nambe and Target, based on the estoppel and incorporation by reference theories. (Defs.' Rep. at 10-11.) The Court examines these theories in turn.
1. Estoppel
The Second Circuit has recognized two branches of estoppel cases. The first, "more typical" case, "arises when a signatory to an arbitration agreement seeks to bind a non-signatory to it."Smith/Enron, supra, 198 F.3d at 98. Under these circumstances, a "non-signatory may be compelled to arbitrate when it has derived other benefits under the agreement containing the arbitration clause." Id. (citing Am. Bureau of Shipping v. Tencara Shipyard S.p.A., 170 F.3d 349, 353 (2d Cir. 1999)). This first branch of the estoppel theory is inapplicable here because nonsignatories Nambe and Target are attempting to compel Orange, a signatory, to arbitrate. Under the second branch of the estoppel theory, the Second Circuit has "been willing to estop a signatory from avoiding arbitration with a nonsignatory when the issues the nonsignatory is seeking to resolve in arbitration are intertwined with the agreement that the estopped party has signed." Thomson, supra 64 F.3d at 779 (citing Sunkist Soft Drinks, Inc. v. Sunkist Growers. Inc., 10 F.3d 753, 757-58 (11th Cir. 1993); J.J. Ryan Sons, Inc. v. Rhone Poulenc Textile. S.A., 863 F.2d 315, 320-21 (4th Cir. 1988)). In determining whether the claims brought against the nonsignatory are sufficiently related to the underlying agreement in order to compel arbitration, courts examine (i) the relationship of the entities involved, and (ii) the relationship of the alleged wrongs to the nonsignatory's obligations and duties under the agreement at issue. See Fluor Daniel Intercontinental, Inc. v. General Electric Co., No. 98 Civ. 7181, 1999 WL 637236, at *6 (citing Sunkist, supra, 10 F.3d at 757-58). Where courts of this Circuit have compelled a signatory to arbitrate claims brought against a nonsignatory, the parties have been linked by "ordinary principles of contract and agency." Thomson, supra, 64 F.3d at 780. Specifically, the nonsignatory was either linked contractually to the signatory it wished to compel to arbitrate and/or was engaged in a corporate relationship with the other signatory. Further, the claims against the nonsignatory clearly arose out of the agreement containing the arbitration clause. See. e.g., Sunkist, supra, 10 F.3d at 758 (compelling signatory plaintiff to arbitrate claims against nonsignatory parent company because (i) parent's subsidiary was other signatory, and (ii) plaintiffs claims arose out of the parent's conduct under an Agreement with its subsidiary containing an arbitration clause); Norcom Elecs., supra, 104 F. Supp.2d at 203-04 (compelling signatory plaintiff to arbitrate with nonsignatory defendant where (i) nonsignatory was a wholly-owned subsidiary of signatory defendant and (ii) the claims against the subsidiary were directly linked to the actions of its parent under the agreement containing the arbitration clause); Fluor Daniel, supra, 1999 WL 637236, at *6-*7 (compelling signatory plaintiff to arbitrate with nonsignatory suppliers where (i) there was a close corporate relationship among all defendants, (ii) suppliers were linked contractually to plaintiff through the signatory prime contractor, and (iii) plaintiffs claims against the suppliers arose out of agreements signed by the prime contractor containing an arbitration clause);E.G.L. Gem Lab Ltd. v. Gem Quality Inst. Inc., No 97 Civ. 7102, 1998 WL 314767, at *3 (S.D.N.Y. June 15, 1998) (compelling signatory plaintiff to arbitrate with corporate president of signatory defendant where (i) the president executed the agreement containing the arbitration clause, and (ii) the claims against the president arose directly out of his actions under the agreement in question).
In this case, the issues that Nambe and Target seek to resolve arise out of the Nambe-Zeisel Agreement, which, in concert with the Orange-Zeisel Agreement, sets forth the parameters of Zeisel's licensing activity. As the parties point out, the Orange-Zeisel Agreement makes specific reference to the Nambe-Zeisel Agreement. (Defs.' Mem. at 5-6, 24; Pl.'s Mem. at 7, 11; Orange-Zeisel Agreement ¶¶ 4,5.) Nambe, but not Target, is also indirectly implicated in the ongoing arbitration, as Orange alleges that Zeisel and Nambe conspired to deprive Orange of rights and revenue with respect to certain designs for which Orange has an exclusive license. (Amended Counterclaims ¶¶ 46-60.) Thus, the determination of Zeisel's liability in the context of her alleged licensing and marketing of designs to Nambe are clearly relevant to, and as noted infra, could be dispositive of, Nambe's, and in turn Target's, liability.
However, despite the presence of interrelated issues between the instant action and the ongoing arbitration, Orange's claims against Nambe are not so "intimately founded in and intertwined with" the Orange-Zeisel Agreement in order to compel arbitration of those claims. First, Orange and Nambe have no contractual or business relationship, and Orange's claims against Nambe are grounded in trademark infringement and tort, not in contract. Nambe and Zeisel are engaged only in an arms-length business relationship. Target is not contractually linked to either Orange or Nambe. In sum, absent from this case is the type of close relationship from which an agreement to arbitrate could be implied, or imposed on Orange with respect to Nambe and/or Target. Second, Nambe's alleged wrongs stem from its rights, duties and obligations under the Nambe-Zeisel Agreement, and only indirectly relate to Zeisel's actions under the Orange-Zeisel Agreement. Target's alleged violations arise under neither Agreement. These facts distinguish this case from Norcom, Fluor Daniel, and E.G.L., referenced supra, where the nonsignatory's liability is directly linked to its own conduct and/or that of a signatory defendant under the agreement containing the arbitration clause. Finally, Orange brought this suit against Nambe and Target, not against Zeisel; then Nambe and Target brought in Zeisel and Zeisel filed for arbitration. Thus, Orange has not sought to exploit the Orange-Zeisel Agreement for one purpose (e.g. this suit) and avoid it for another (e.g. arbitration), which, if true, would militate in favor of compelling arbitration. See Norcom, supra, 104 F. Supp.2d at 203;Fluor Daniel, supra, 1999 WL 637236, at *6-*7.
Because there is only a loose nexus between Orange's claims against Nambe and Target in this action and the Orange-Zeisel Agreement, the Court declines to estop Orange from pursuing its claims here. See Thomson, supra, 64 F.3d at 780 (reversing district court, which compelled arbitration based on the interrelatedness of issues, because a request to compel must be dictated "by some accepted theory under agency or contract law");Cosmotek Mumessillik Ve Ticaret Ltd. Sirkketi v. Cosmotek USA. Inc., 942 F. Supp. 757, 760 n. 3 (D. Conn. 1996) (stating that interrelatedness of issues alone is not sufficient to compel a signatory to arbitrate with a nonsignatory).
The fact that the Nambe-Zeisel Agreement may be construed in the arbitration increases the importance of the arbitration to the outcome of this action, and supports a stay of this action,see infra but does not favor compelling arbitration.
2. Incorporation by Reference
Defendants contend that incorporation by reference favors compelling arbitration "either as an independent theory or as an additional factor which tightens the nexus between the arbitration clause in the [Orange-Zeisel Agreement] and the litigation claims asserted by [Orange] against the Defendants." (Defs.' Mem. at 17.) In particular, defendants argue that the Nambe-Zeisel Agreement, including its arbitration clause, was incorporated by reference into the Orange-Zeisel Agreement. (Defs.' Rep. at 11 n. 2.) In the alternative, defendants assert that the Nambe-Zeisel Agreement is "sufficiently incorporated into the [Orange-Zeisel Agreement] so that the dispute between Nambe and [Orange] as to rights to Zeisel designs easily falls under the broad arbitration clause of the [Orange-Zeisel Agreement]." (Id.) They state that "it must have been within the contemplation of [Orange] that disputes concerning the rights of [Orange] vis-avis Nambe to Zeisel's designs would be the subject of arbitration." (Id. at 7.)
Defendants' contentions are unavailing because they do not fall within the parameters of the incorporation by reference theory as set forth by the courts of this Circuit. Under this theory, a nonsignatory may compel arbitration against a party to an arbitration agreement when that party has entered into a separate contractual relationship with the nonsignatory which incorporates the existing arbitration clause. See Thomson, supra, 6 F.3d at 777 (citing Import Export Steel Corp. v. Mississippi Valley Barge Line Co., 351 F.2d 503, 505-506 (2d Cir. 1965) (finding that separate agreement with nonsignatory expressly "assum[ing] all the obligations and privileges of [signatory party] under the . . . subcharter" constitutes grounds for enforcement of arbitration clause by nonsignatory")); see also Upstate Shredding. LLC v. Carloss Well Supply Co., 84 F. Supp.2d 357, 365-67 (N.D.N.Y. 2000); Matter of Arbitration Between Keystone Shipping Co. and Texport Oil Co., 782 F. Supp. 28, 31 (S.D.N Y 1992). In this case, there is no contractual agreement between Orange and Nambe and/or Target, and thus no document that may imply these parties' agreement to arbitrate. The incorporation by reference theory is therefore inapplicable here.
Defendants' reference to Upstate Shredding, supra, 84 F. Supp.2d at 366-67, to support the incorporation of Nambe into the arbitration as a necessary party, and only as to certain claims, is misplaced, as this case does not support such a proposition. Moreover, such partial participation is not prescribed by any of the theories pursuant to which nonsignatories may be bound to an arbitration agreement.
Further, defendants' argument that the broad language of the Orange-Zeisel arbitration clause encompasses the instant dispute with Nambe is also unavailing because the Court must determine that the parties agreed to arbitrate before proceeding to an analysis of scope; here, as noted supra, defendants have not established that the parties agreed to arbitrate. See Fluor Daniel, supra, 1999 WL 637236, at *7
The Court therefore declines to find that the parties agreed to arbitrate the instant dispute, and declines to estop Orange from pursuing its claims against Nambe and Target in this forum. Accordingly, the other factors employed by courts to determine whether to compel arbitration under the FAA need not be considered. See supra. However, in light of the interrelated issues raised by this action and the ongoing AAA arbitration, the Court shall consider whether this litigation should be stayed pending the outcome of the arbitration.
C. Stay of the Action
Defendants move, in the alternative, for a stay of this action pending the outcome of the arbitration between Orange and Zeisel, which may also incorporate, at least in part, Nambe's and Target's third party claims against Zeisel. Defendants contend that a stay is justified because Orange's trademark claims against Nambe and Target "are closely connected to, and dependent upon, the rights granted by Zeisel to [Orange] under the [Orange-Zeisel Agreement]." (Defs.' Rep. at 4.)
1. FAA-Mandated Stay
Section 3 of the FAA, 9 U.S.C. § 3, directs district courts to "stay proceedings if satisfied that the parties have agreed in writing to arbitrate an issue or issues underlying the district court proceeding." McMahan Securities Co. L.P. v. Forum Capital Markets L.P., 35 F.3d 82, 85 (2d Cir. 1994). However, the Second Circuit has explicitly held that Section 3 relief is not available to nonparties to the agreement providing for arbitration. See Citrus Marketing Bd. of Israel v. J. Lauritzen A.S., 943 F.2d 221, 224-25 (2d Cir. 1991) (citing Sierra Rutile Ltd. v. Katz, 937 F.2d 743, 748 (2d Cir. 1991), reaffirming the holding of Nederlanse Erts-Tankersmaatchappij v. Isbrandtsen Co., 339 F.2d 440, 441 (2d Cir. 1964)); cf. Downing v. Merrill Lynch. Pierce. Fenner Smith. Inc., 725 F.2d 192, 194 (2d Cir. 1984) ("[S]ince [plaintiff] has no present right to compel arbitration, [he] is not entitled to a stay under Section 3."). The Citrus Marketing court discussed McCowan v. Sears Roebuck and Co., 908 F.2d 1099, 1107 (2d Cir. 1990), relied on by defendants, (Defs.' Rep. at 12), which reserved the question of whether a nonparty was entitled to a Section 3 stay, and overruled it to the extent that it indicated that a "commonsense reading" of Section 3 would call for a stay "if there is a federal action 'upon' an 'issue referable to arbitration,'" whether or not the movant seeking the stay was a party to the relevant arbitration agreement. See Citrus Marketing, supra, 943 F.2d at 224 (citing McCowan, supra, 908 F.2d at 1106) Thus, the Court declines to stay the action pursuant to Section 3 of the FAA.
The Citrus Marketing court also declined to follow Morrie Mages and Shirlee Mages Foundation v. Thrift Corp., 916 F.2d 402, 405-08 (7th Cir. 1990), also relied on by defendants, (Defs.' Rep. at 11-12), which ruled that a nonparty is entitled to a Section 3 stay where the relevant issues are in arbitration between parties to the arbitration agreement, specifically adopting the "commonsense reading" of Section 3 articulated inMcCowan to reach that result. See Citrus Marketing, supra, 943 F.2d at 224 n. 6.
A stay would be available under Section 3 as to the third party action between Nambe and Target and Zeisel, as the claims involved there are plainly subject to arbitration. However, because the Court stays these claims pursuant to its inherent powers, this issue is irrelevant for Section 3 purposes. See infra.
2. Stay Pursuant to the Court's Inherent Powers
In rejecting a nonsignatory's ability to stay proceedings under Section 3 of the FAA, the Citrus Marketing court pointed out that district courts have the inherent power to grant a stay requested by a nonsignatory to an arbitration agreement. See Citrus Marketing, supra, 943 F.2d at 225 (citing Nederlanse, supra, 339 F.2d at 441). This power follows from the "power inherent in every court to control the disposition of the cases on its docket with economy of time and effort for itself, for counsel, and for litigants." Id. (quoting Landis v. North Am. Co., 299 U.S. 248, 254 (1936) (internal quotations omitted)). "It is appropriate . . . to grant a stay 'where the pending proceeding is an arbitration in which issues involved in the case may be determined.'" Sierra Rutile, supra, 937 F.2d at 750 (quotingNederlanse, supra, 339 F.2d at 441). The issuance of such a stay is entirely within the discretion of the Court. See Moses H. Cone, supra, 460 U.S. at 19-21.
The movant for a stay must first establish that "there are issues common to the arbitration and the courts, and that those issues will finally be determined by the arbitration." Am. Shipping Line. Inc. v. Massan Shipping Indus., Inc., 885 F. Supp. 499, 502 (S.D.N.Y. 1995) (citing Sierra Rutile, supra, 937 F.2d at 750). If this test is met, the moving party has the burden of showing that it will not hinder the arbitration, that the arbitration will be resolved within a reasonable time, and that such delay that may occur will not cause undue hardship to the non-moving party. See id. Stays are also particularly appropriate where they "promote judicial economy, avoidance of confusion and possible inconsistent results." Acquaire v. Canada Dry Bottling, 906 F. Supp. at 819, 838 (E.D.N.Y. 1995); see also Gen. Textile Printing Processing Corp. v. Expromtorg Int'l Corp., 891 F. Supp. 946, 954-55 (S.D.N.Y. 1995).
The Court hereby stays the action as to Orange's claims against Nambe and Target pending the outcome of the arbitration between Orange and Zeisel, and Nambe and Zeisel, before the AAA. The Court also stays the prosecution of the third party claims against Zeisel, because Nambe's and Target's indemnity and contribution claims are derivative of Orange's underlying claims, and, in any event, Nambe and Zeisel have agreed to arbitrate all of the claims between them, and such determination which is equally dispositive of Target's claims.
A stay is particularly appropriate in this case. Defendants have established that the claims in the instant action and those being adjudicated in arbitration arise out of the same series of alleged acts, namely Zeisel's licensing of certain designs to Orange and to Nambe, and Nambe's and Target's subsequent marketing and sale of products derived from Nambe's licensed designs. These acts implicate Zeisel's obligations under both the Orange-Zeisel and Nambe-Zeisel Agreements. Accordingly, binding arbitration of the claims related to the Orange-Zeisel Agreement will likely provide significant insight into, if not actually resolve, the claims asserted in this action. See Acquaire, supra, 906 F. Supp. at 838; General Media. Inc. v. Shooker, No. 97 Civ. 510, 1998 WL 401530, at *11 (S.D.N.Y. July 16, 1998); Home Life Ins. Co. v. Kaufman, 547 F. Supp. 833, 835-36 (S.D.N.Y. 1982) (staying action where prompt arbitration of claims may clarify and simplify issues for the court proceeding); see also Am. Home Assurance Co. v. Vecco Concrete Construction Co., 629 F.2d 961, 964 (4th Cir. 1980) (staying entire court action where pending arbitration might resolve questions of fact common to lawsuit). First, one of the central issues in this action is the scope of rights granted by Zeisel to Orange and Nambe, respectively. By focusing on the continued validity of the Orange-Zeisel Agreement and the scope of Orange's rights thereunder, the arbitration will further clarify the rights granted to Nambe under the Nambe-Zeisel agreement. Second, Orange's counterclaims in the arbitration allege a conspiracy between Zeisel and Nambe to undermine Orange's exclusive rights to produce and sell products based on certain of Zeisel's designs. The arbitration's examination of Zeisel's licensing practices pursuant to its agreements, particularly with Nambe, and its ultimate determination of Zeisel's liability, will directly implicate Orange's claims against Nambe and Target in this action. Moreover, the direct assessment of Nambe's liability for such conduct, if that occurs, would also implicate Orange's allegations in this action, and could be dispositive thereto. Thus, a stay of the instant action is warranted in the interests of the parties and judicial economy, and in order to avoid possible inconsistent results.
Beyond the risk of inconsistent results, any issues determined by this Court could have collateral estoppel effect in the arbitration. See McCowan, supra, 908 F.2d at 1107 (citing cases)
Orange argues against a stay on the grounds that (i) the "only thing that the [Orange-Zeisel and Nambe-Zeisel Agreements] have in common is that Zeisel is a signatory to both," and that "there is absolutely no linkage or relationship among Zeisel, [Orange], and Nambe except for being parties to this litigation," (ii) the damages Orange seeks in the instant action differ from those it seeks on its counterclaims against Zeisel in arbitration, and (iii) the stay would "create undue hardship to plaintiff' because its discovery of relevant information would be hampered. (Pl.'s Mem. at 18-21.) These arguments are unavailing. First, Orange's comparison of the terms of the relevant Agreements or the abstract linkage between the parties misses the mark; as Orange itself acknowledges, the stay analysis is based on common issues.See Sierra Rutile, supra, 937 F.2d at 750. Moreover, as notedsupra, the record reflects that there are significant common issues between this litigation and the ongoing arbitration. Second, the details of Orange's damages is irrelevant to the stay analysis; when a stay is issued, the two proceedings remain distinct. Orange's damages allegations will be considered by the Court in due course if and when this action goes forward. Finally, as defendants point out, Orange's allegation of undue hardship is grounded in its inability to depose Zeisel and the urgency to preserve oral evidence because its claims "do not arise out of documentary evidence." (Defs.' Rep. at 14; Pl.'s Mem. at 20.) Orange's concerns as to Zeisel are moot, as the Court has authorized Orange to depose Zeisel. (Orders dated Sept. 19, 2000 and Nov. 9, 2000.) The Court's stay order does not supersede the Court's previous orders regarding Zeisel's deposition, and the Court directs that the deposition of Ms. Zeisel go forward as scheduled.
Orange's reference to Wren Distribs., Inc. v. Phonemate, 600 F. Supp. 1576, 1582 (E.D.N.Y. 1985) for the proposition that differing damage requests would militate against a stay is misplaced. In Wren, the court's denial of a stay was based in part on the fact that one plaintiff distributor's claim for damages arose out of different facts than the other plaintiffs claim. The court's analysis was based on the lack of common facts between the claims, rather than the nature of the requested damages themselves. See id.
In this respect, Orange's request to "preserve Zeisel's testimony in a deposition" in the event of a stay is granted. (Pl.'s Mem. at 2-3, 21.) The Court has been informed that Zeisel's deposition has been partially completed. By separate order also issued today, the Court has set a schedule governing the completion of questioning.
Orange's concern about preserving evidence is, in essence, a concern about the prospect of undue delay, which is a central consideration in granting a stay. See Nederlanse, supra, 339 F.2d at 442; Chang v. Lin, 824 F.2d 219, 222 (2d Cir. 1987). Given Zeisel's initiation of the arbitration and defendants' representation that those proceedings are in progress and will timely conclude, (Defs.' Rep. at 14), the Court finds that hindrance of the arbitration is unlikely and that no prejudicial delay will be caused to Orange. Defendants' vigorous pursuit of their motion to compel also indicates they will make every effort necessary to reach a speedy disposition of this dispute. Moreover, because many, if not all, of the issues in the action will be touched on in the arbitration, there is little risk that the evidence supporting Orange's case "may grow stale, become unavailable, or be lost." (Pl.'s Mem. at 20, quoting Cosmotek, supra, 942 F. Supp. at 760 n. 4); cf. Chang, supra, 824 F.2d at 222 (noting that such hardship is particularly acute in disputes of an international nature). However, Orange may seek leave of the Court to vacate the stay if the arbitration is not completed within six months of the date of this Opinion. See Nederlanse, supra, 339 F.2d at 442; Cosmotek, supra, 942 F. Supp. at 760;Home Life, supra, 547 F. Supp. at 836; Societe Nationale v. General Tire Rubber Co., 430 F. Supp. 1332, 1335 (S.D.N Y 1977).
Defendants have advised the Court that a meeting with an AAA arbitrator was held on December 15, 2000, at which hearing dates were set for March, 2000. (Letter of Mia Higgins to the Court dated Dec. 18, 2000 at 1 n. 1).
III. Conclusion
For the foregoing reasons, the Court denies the portion of defendants' motion seeking to compel arbitration of the claims in this litigation, but grants the portion of their motion requesting a stay of all claims pending the outcome of the ongoing arbitration before the AAA. It also orders that the deposition of Zeisel be completed according to the schedule set by the Court. The Clerk of the Court is ordered to place the action on the suspense docket.
Defendants' request to stay litigation pending a decision on this motion is denied as moot. (Defs.' Mem. at 9 n. 6.)
SO ORDERED.