Opinion
CIVIL ACTION NO. 02-1122, SECTION "R" (1).
May 23, 2003.
ORDER AND REASONS
Before the Court is the motion of defendant, Mitch Crusto, to compel arbitration and to stay all proceedings pending arbitration. For the following reasons, the Court GRANTS defendant's motion.
I. Background
On January 23, 2000, a severe hail storm caused significant roof damage to Orleans Parish schools. The Orleans Parish School Board ("OPSB") contracted with Mitch Crusto d/b/a/ Angelic Asset Management, Inc. to adjust the insurance claims for the roof damage with OPSB's insurer, Travelers Insurance Company, and to contract on an emergency basis to repair the damaged roofs. Crusto contracted with Butch Threadgill and Tom Weems through their business, General Contracting and Consulting Services, LLC, to prepare bids and estimates for loss and damage to the schools' roofs. Crusto entered into two contracts with Threadgill, Weems and General Contracting and Consulting Services, both of which provide that "[a]ny conflicts or disputes will be submitted to binding arbitration." (Crusto's Mot. to Compel Arbitration, Exs. A and B.)
On April 15, 2002, plaintiffs — Threadgill, Weems and General Contracting and Consulting Services — filed this lawsuit against Crusto and OPSB. (Rec. Doc. 1 in Civil Action 02-1122.) Crusto bears the brunt of the complaint. Plaintiffs allege that they submitted repair estimates and bid proposals to Crusto that were copyrighted to Tom Weems, all rights reserved, and that Crusto violated copyright law by distributing the bids to OPSB as his own for approval. Plaintiffs further allege that Crusto unlawfully displayed the copyrighted work on his website. In addition, plaintiffs allege several state law causes of action against Crusto, including breach of contract, fraud and violations of the Louisiana Unfair Trade Practices Act. Plaintiffs allege that Crusto violated the Unfair Trade Practices Act by interfering with their ability to contract with OPSB for the work of repairing the roofs. Plaintiffs' causes of action against OPSB consist of a violation of the Unfair Trade Practices Act for interfering with their ability to contract for the work of repairing the roofs, and a claim that OPSB knew or should have known that the information being used by Crusto was copyrighted material.
Plaintiffs filed a second lawsuit on May 10, 2002, naming as defendants Crusto and the City of New Orleans. (Rec. Doc. 1 in Civil Action 02-1460). The claims plaintiffs raise against Crusto in the second complaint are virtually identical to those raised in the first. Plaintiffs' claims against the City of New Orleans mirror the claims alleged against OPSB in the first complaint. Plaintiffs' two actions — Civil Action 02-1122 (against Crusto and OPSB) and Civil Action 02-1460 (against Crusto and the City of New Orleans) — were consolidated. (Rec. Doc. 31.)
Crusto answered both complaints, made a Reconventional Demand against Threadgill, Weems and General Contracting and Consulting Services, and made a third party demand against Orleans Sheet Metal Works and Roofing, Inc ("Orleans Roofing"). Orleans Roofing has not made an appearance in this lawsuit, and Crusto represented to the Court at oral argument that he will move to dismiss the third-party demand against Orleans Roofing.
OPSB answered plaintiffs' complaint and filed a cross-claim against Crusto. The cross-claim alleges that Crusto's contract with plaintiffs is void as a matter of public policy. In addition, OPSB challenges its own contract with Crusto. OPSB alleges that when Crusto signed his contract with OPSB he was not a licensed contractor and did not possess insurance as required by Louisiana law.
Crusto moves the Court to compel arbitration and to stay all proceedings, including litigation of claims involving non-signatories to the arbitration agreement, pending arbitration.
II. Motion to Compel Arbitration
Whether a controversy is arbitrable under a contract is decided by the Court upon examination of the contract. Associated Builders Corp. v. Ratcliffe Construction Co., 823 F.2d 904, 905 (5th Cir. 1987). The Court finds that the Federal Arbitration Act ("FAA"), which applies to contracts "evidencing a transaction involving interstate commerce," governs this determination. See 9 U.S.C. § 1-16. The FAA expresses a strong national policy favoring arbitration of disputes. Primerica Life Insurance Co. v. Brown, 304 F.3d 469, 471 (5th Cir. 2002). The Court therefore must resolve all doubts concerning the arbitrability of claims in favor of arbitration. Id. The Court's determination of whether the controversy is arbitrable involves a two-pronged inquiry. First, the Court must determine whether the parties agreed to arbitrate the dispute. Second, it must consider whether any federal statute or policy renders the claims nonarbitrable. Id. This two-pronged analysis does not involve a consideration of the merits of the underlying action. Id.
Crusto provided ample evidence of the contract's interstate dimensions, including plaintiffs' representation that the insurance policy underlying this dispute is with an out-of-state insurer. (Compl. ¶ 2.) — Plaintiffs do not challenge Crusto's assertion that the contract involves interstate commerce.
The Court begins its analysis as to the first prong with a determination of whether there exists a valid agreement to arbitrate. Clearly such an agreement exists here. Two contracts between plaintiffs and Crusto provide that "[a]ny conflicts or disputes will be submitted to binding arbitration." (Def.'s Mot. to Compel Arbitration, Exs. A and B.) Plaintiffs assert that the contracts are invalid due to fraud in the inducement. The FAA, however, "`does not permit the federal court to consider claims of fraud in the inducement of the contract generally.'" Primerica, 304 F.3d at 472 (quoting Prima Paint Corp. v. Flood Conklin Mfg. Co., 388 U.S. 395, 403-404, 87 S.Ct. 1801 (1967)). Rather, a federal court may consider only a challenge specifically directed to the agreement to arbitrate. Id. Plaintiffs do not challenge the making of the agreement to arbitrate. Instead, plaintiffs attack the validity of the contract in its entirety, making an allegation of fraud in the inducement that would require the Court to delve into the merits of the underlying dispute. This allegation must be submitted to the arbitrator. Id. The Court therefore concludes that a valid agreement to arbitrate exists.
The Court further notes that the sweeping language of the arbitration clause covers plaintiffs' state and federal claims against Crusto, as well as Crusto's claims against plaintiffs. Subway Equipment Leasing Corp. v. Forte, 169 F.3d 324, 327 (5th Cir. 1999). Each of the these claims relates either to the making or the performance of the contracts containing the agreements to arbitrate. Moreover, the Court must resolve any ambiguity as to the scope of the arbitration clause in favor of arbitration. That is because the Fifth Circuit distinguishes "broad" arbitration clauses from "narrow" clauses. A clause containing "any dispute" language, such as the arbitration clause before the Court, is a broad clause. Complaint of Hornbeck Offshore Corp. v. Coastal Carriers Corp., 981 F.2d 752, 754-55 (5th Cir. 1993). If the clause is broad, the arbitrators are permitted to decide whether the dispute falls within the clause. Id. The Court therefore concludes that there exists a valid agreement to arbitrate that encompasses the dispute between plaintiffs and Crusto. This meets the first prong of the Primerica analysis.
The second prong requires the Court to determine whether any federal statute or policy renders the claims nonarbitrable. Plaintiffs do not argue that any claim is nonarbitrable for this reason. OPSB, a non-party to the arbitration agreement, does. Specifically, OPSB asserts that federal statutes and policy bar Crusto and plaintiffs from arbitrating a dispute about the validity of the copyright. Even assuming that OPSB has standing to challenge the agreement to arbitrate between Crusto and plaintiffs, the Court finds OPSB's argument unavailing. The FAA clearly establishes a federal policy favoring arbitration. Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 226, 107 S.Ct. 2332, 2337 (1987). Although a contrary command from Congress may override the FAA's mandate, OPSB — the party opposing arbitration — bears the burden of showing that Congress intended to preclude a waiver of judicial remedies. Id. Congressional intent "will be deducible from [the statute's] text or legislative history, or from an inherent conflict between arbitration and the statute's underlying purposes." Id. at 227, 107 S.Ct. at 2337-38.
OPSB does not point to the text of any federal statute that prohibits arbitrating the issue of copyright validity. Nor does OPSB cite to any legislative history stating such an intent. Rather, OPSB asks the Court to infer Congressional intent from Congress's decision to confer exclusive jurisdiction on the federal courts to resolve copyright disputes. 28 U.S.C. § 1338. In addition, OPSB notes that Congress has explicitly provided that copyright disputes pertaining to negotiated music licenses are arbitrable, see 17 U.S.C. § 112(e)(4) and 115(c)(3)(D), and that disputes over negotiated licenses for music played on jukeboxes are arbitratable, 17 U.S.C. § 116. Further, the Court notes (though OPSB did not) that Congress has expressly provided that parties may arbitrate disputes as to the validity of a patent. 35 U.S.C. § 294. The question presented is whether the Court may infer from Congress's explicit approval of arbitration in these settings that Congress intended that copyright validity disputes be nonarbitrable.
OPSB has failed to meet its burden of establishing Congressional intent. The Court cannot infer clear Congressional intent on this issue from silence. Congress's willingness to allow patent validity disputes to go to arbitration may indicate that Congress is willing also to allow copyright validity disputes to go to arbitration. In addition, OPSB cites no case law supporting its position, and multiple courts have signaled that disputes as to the validity of copyrights are arbitrable. The Ninth Circuit has assumed that copyright validity is arbitrable. Lorber Industries of California v. Los Angeles Printworkers, Corp., 803 F.2d 523, 525 (9th Cir. 1986). In Saturday Evening Post Company v. Rumbleseat Press, Inc., 816 F.2d 1191, 1198-99 (7th Cir. 1987), Rumbleseat Press argued that Congress's decision to give federal courts exclusive jurisdiction over copyright disputes implicitly precludes arbitrating disputes as to the validity of a copyright. The Seventh Circuit rejected this argument, noting that state courts may decide questions of copyright validity if raised as a defense to a state law claim for breach of a licensing agreement. Id. More recently, the Second Circuit rejected an argument that copyright disputes — including a dispute as to copyright validity — are "unsuitable" for arbitration. McMahan Securities Co. v. Forum Capital Markets, 35 F.3d 82, 89 (2d Cir. 1994). Accordingly, given that Congress has expressed a strong policy in favor of arbitration, that Congress has remained silent on whether parties may be arbitrate disputes over copyright validity, and that several circuit courts have held or implied that such claims are arbitrable, the Court finds that plaintiffs' dispute with Crusto is arbitrable, even though it involves an issue of copyright validity.
OPSB also challenges the arbitration agreement by asserting that the Court should find the contract between plaintiffs and Crusto absolutely null on the grounds that the contract violates a rule of public order. See LA. CIV. CODE. ANN. art. 2029. Although neither of the parties to the contract raises this argument, it may be raised by any party or by the Court on its own initiative. Id. In this case, making such an inquiry would require the Court to delve into the merits of the underlying action. OPSB cites no case law permitting a third party to impede arbitration by raising a claim that the parties to the arbitration agreement do not make. The Court finds OPSB's standing to challenge the arbitrability of this dispute on these grounds to be highly questionable. Further, OPSB has made no showing that the arbitration will prevent it from raising its argument in this Court when the arbitration is complete. Because OPSB is not a party to the arbitration, claim preclusion will not bar OPSB from raising the issue here. Allen v. McCurry, 449 U.S 90, 94, 101 S.Ct. 411, 414 (1980). Issue preclusion will not apply because it does not appear that either plaintiffs or Crusto will raise the issue in arbitration. See Southmark Corporation v. Coopers Lybrand, 163 F.3d 925, 932 (5th Cir. 1999) (noting that issue preclusion applies only when (1) the issue at stake is identical to the one involved in the prior action, (2) the issue was actually litigated, and (3) the determination of the issue was a part of the judgment in that earlier action). Indeed, even if the parties do raise the issue in arbitration, OPSB will not be precluded from raising it here. OPSB attacks the contract on public policy grounds in its cross-claim against Crusto. Crusto cannot invoke collateral estoppel in defense of the allegation because OPSB did not lose on the same claim in an earlier suit. Cf. Blonder-Tongue Laboratories, Inc. v. University of Illinois Foundation, 402 U.S. 313, 329, 91 S.Ct. 1434, 1443 (1971) (a defendant in a second suit may invoke collateral estoppel against a plaintiff who lost on the same claim in an earlier suit). Accordingly, the Court finds that OPSB's challenge to the contract between plaintiffs and Crusto does not bar those parties from arbitrating their dispute.
In summary, the Court finds that plaintiffs and Crusto entered into a valid arbitration agreement. It appears that the dispute between plaintiffs and Crusto is within the scope of the arbitration agreement but, regardless, a determination to the contrary is in the province of the arbitrator. No federal statute or policy renders the claims nonarbitrable. The Court therefore GRANTS Crusto's motion to compel arbitration.
III. Motion to Stay
The FAA requires this Court to stay proceedings as to those claims referred to the arbitrator:
If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.9 U.S.C. § 3 (emphasis added). The Court must therefore stay plaintiffs' claims against Crusto and Crusto's claims against plaintiffs. In addition, Crusto moves to stay the rest of the claims involved in this lawsuit — plaintiffs' claims against the City of New Orleans, plaintiffs' claims against OPSB, and OPSB's claims against Crusto. Claims involving OPSB and the City of New Orleans, non-signatories to the arbitration agreement, cannot be referred to the arbitrator.
Whether the Court should stay litigation of claims involving non-parties to the arbitration agreement is a different question. On this issue, the Fifth Circuit holds that circumstances may warrant a stay:
[I]f a suit against a nonsignatory is based upon the same operative facts and is inherently inseparable from the claims against a signatory, the trial court has discretion to grant a stay if the suit would undermine the arbitration proceedings and thwart the federal policy in favor of arbitration.Hill v. G.E. Power Systems, Inc., F.3d 343, 347 (5th Cir. 2002); see also Grigson v. Creative Artists Agency, L.L.C., 210 F.3d 524, 526 (5th Cir. 2000) (citing Subway, 169 F.3d at 329); Harvey v. Joyce, 199 F.3d 790, 795 (5th Cir. 2000) (entitling a non-signatory defendant to stay because its liability derived from conduct of co-defendant signatory arbitrating "inherently inseparable" claims based on the same operative facts). This is in part because, in light of the strong federal policy in favor of arbitration, Section 3 of the FAA prefers the preservation of the arbitration rights of the signatory defendant over the speedy resolution of claims against non-signatories. Hill, 282 F.3d at 347. The Court need not stay proceedings on claims involving non-signatories if such claims "will be largely if not wholly unaffected by the outcome of the arbitration." Coastal (Bermuda) Ltd. v. E.W. Saybolt Co., Inc., 761 F.2d 198, 204 (5th Cir. 1985).
OPSB is the only non-signatory to the arbitration agreement to file an opposition to Crusto's motion to stay. In its opposition, OPSB does not challenge Crusto's assertion that all claims involving non-signatories are intertwined with the claims going to arbitration. OPSB essentially concedes as much, noting that part of its cross-claim against Crusto and part of plaintiffs' case against it are "derivative" of plaintiffs' claims against Crusto. Further, OPSB seeks to invalidate the same contract that plaintiffs are trying to enforce against Crusto. OPSB's argument is that its interest in the issues being arbitrated will not be represented by either plaintiffs or Crusto and that the FAA cannot operate to the detriment of a non-party to the arbitration agreement. In support of this argument, OPSB cites EEOC v. Waffle House, Inc., 534 U.S. 279, 294, 122 S.Ct. 754, 764 (2002), in which the Supreme Court noted that a non-signatory to an arbitration agreement is not bound to arbitrate. The Court finds OPSB's reliance on Waffle House, a case involving whether an employment contract requiring arbitration bars the Equal Employment Opportunity Commission from pursuing victim-specific judicial relief, to be off the mark. First, Waffle House does not stand for the proposition that plaintiffs and Crusto — signatories to the arbitration agreement — should not arbitrate their dispute. Second, Waffle House does not speak to whether a claim involving a non-signatory should be stayed pending resolution of the arbitration.
The Court therefore concludes that the claims involving non-signatories to the arbitration agreement are based on the same operative facts' and are inherently inseparable from those that plaintiffs and Crusto will arbitrate. Hill, 282 F.3d at 347. Accordingly, the Court grants Crusto's motion to stay proceedings pending arbitration of his dispute with plaintiffs.
IV. Conclusion
For the foregoing reasons, the Court GRANTS defendant's motion to compel arbitration. All proceedings in this matter are hereby STAYED pending arbitration.