1 UNITED STATES COURT OF APPEALS 2 3 FOR THE SECOND CIRCUIT 4 5 ------------- 6 7 August Term, 2010 8 9 (Argued: April 13, 2011 Decided: July 13, 2011) 10 11 Docket No. 10-5107-cv 12 13 - - - - - - - - - - - - - - - - - - - - - - X 14 15 APPLIED ENERGETICS, INCORPORATED, 16 17 Petitioner-Appellant, 18 19 - v - 20 21 NEWOAK CAPITAL MARKETS, LLC, 22 23 Respondent-Appellee. 24 25 - - - - - - - - - - - - - - - - - - - - - - X 26 27 Before: KEARSE and CHIN, Circuit Judges, and 28 RAKOFF, District Judge.* 29 30 Appeal from a final order and judgment of the United States 31 District Court for the Southern District of New York compelling 32 arbitration under 9 U.S.C. § 4. Reversed.
33 CLIFFORD THAU (Hilary L. Preston, on the 34 brief), Vinson & Elkins LLP, New York, NY for 35 Petitioner-Appellant. 36 37 LEANNE M. SHOFI (Joseph M. Pastore III, on 38 the brief), Fox Rothschild, LLP, New York, NY 39 , for Respondent-Appellee. 40
41 RAKOFF, District Judge:
* The Honorable Jed S. Rakoff, United States District Judge for the Southern District of New York, sitting by designation.
-1- 1 Petitioner-Appellant Applied Energetics, Inc. (“Applied”)
2 appeals the district court’s final order and judgment compelling
3 arbitration of the claims of Respondent-Appellee NewOak Capital
4 Markets, LLC (“NewOak”) before the Financial Industry Regulatory
5 Authority (“FINRA”). Because we find that the parties expressly
6 agreed to adjudicate their disputes before a court, we reverse,
7 and remand to the district court for further proceedings.
9 BACKGROUND
10 Applied is a developer and manufacturer of military
11 technology. On September 28, 2005, NewOak, an independent broker
12 dealer, entered into a preliminary letter agreement with Applied
13 (the “Engagement Agreement”), by which NewOak agreed to act as
14 Applied’s exclusive placement agent in an anticipated $20 million
15 private offering of Applied securities to finance Applied’s
16 anticipated development of a “field-deployable vehicle.” The
17 Engagement Agreement contained an arbitration clause that
18 provided that:
19 Each of [NewOak] and [Applied] agrees that any dispute 20 arising out of or relating to this letter, the Indemnity 21 Agreement and/or the transactions contemplated hereby or 22 thereby . . . shall be resolved through binding arbitration 23 before the National Association of Securities Dealers1 . . . 24 in New York City. 25 26 However, the Engagement Agreement also specifically contemplated
1 The National Association of Securities Dealers is one of the predecessors of FINRA.
-2- 1 that the parties would enter into a subsequent, more formal
2 agreement setting forth “the terms and conditions contained [in
3 the Engagement Agreement] as well as those customarily contained
4 in agreements of such character.” On October 24, 2005, NewOak
5 and Applied signed that subsequent agreement (the “Placement
6 Agreement”), which, though embodying much of the substance of the
7 Engagement Agreement, omitted any reference to arbitration.
8 Instead, the Placement Agreement expressly provided that the
9 agreement would be governed by New York law and that:
10 Any dispute arising out of this Agreement shall be 11 adjudicated in the Supreme Court, New York County or in the 12 federal district court for the Southern District of New 13 York. 14 15 The Placement Agreement also contained a merger clause,
16 which provided that the Placement Agreement and certain other
17 documents related to the transaction -- namely, the Purchase
18 Agreement, the Registration Rights Agreement, the Escrow
19 Agreement, and the Warrant -- “constitute the entire
20 understanding and agreement between the parties” with respect to
21 NewOak’s placement of Applied securities, and that “there are no
22 [other] agreements or understandings” that apply. The Engagement
23 Agreement was not among the documents listed in the Placement
24 Agreement’s merger clause.
25 On January 14, 2010, NewOak initiated arbitration against
26 Applied with FINRA, asserting various claims pursuant to its
27 allegations that, between May 4, 2005 and May 10, 2006, Applied
-3- 1 “knowingly disseminated materially false and misleading
2 information about the development and production capability” of
3 the field-deployable vehicle, as well as about “the status of
4 [its] real or potential sales.” NewOak further alleged that
5 Applied’s officers and directors collectively sold 1.5 million
6 shares of their personal Applied securities holdings during the
7 time that the company’s securities were artificially inflated as
8 a result of the company’s misrepresentations. In response,
9 Applied filed a petition in the Supreme Court of the State of New
10 York seeking to stay the FINRA arbitration on the ground that the
11 mandatory court-adjudication provision of the Placement Agreement
12 superseded the parties’ earlier agreement to arbitrate their
13 disputes. NewOak timely removed the petition to the Southern
14 District of New York, and then moved to compel arbitration under
15 the arbitration clause of the Engagement Agreement and § 4 of the
16 FAA.
17 In a Report and Recommendation dated October 5, 2010, the
18 Magistrate Judge to whom the matter was initially referred
19 recommended that the district court grant the petition and deny
20 arbitration. Applied Energetics, Inc. v. NewOak Capital Markets,
21 LLC, No. 10 Civ. 1669, 2010 WL 3860386, at *1 (S.D.N.Y. Oct. 5,
22 2010) (“Applied I”). But in a written opinion dated December 3,
23 2010, the district court granted NewOak’s motion and ordered the
24 parties to arbitrate. Applied Energetics, Inc. v. NewOak Capital
-4- 1 Markets, LLC, No. 10 Civ. 1669, 2010 WL 4968186, *1 (S.D.N.Y.
2 Dec. 3, 2010) (“Applied II”). This appeal followed.
4 DISCUSSION
5 We review de novo the district court’s order compelling
6 arbitration. See Chelsea Square Textiles, Inc. v. Bombay Dyeing
7 & Mfg. Co. Ltd., 189 F.3d 289, 295 (2d Cir. 1999).
8 The district court, relying primarily on this Court’s
9 decision in Bank Julius Baer & Co., Ltd. v. Waxfield Ltd., 424
10 F.3d 278 (2d Cir. 2005), concluded that the Engagement
11 Agreement’s arbitration clause and the Placement Agreement’s
12 adjudication clause “may be read as complementary” to one
13 another. Applied II, at *3. The district court reasoned that,
14 because arbitration awards “may only be enforced by subsequent
15 judicial action,” Bank Julius, 424 F.3d at 284, the Engagement
16 Agreement’s arbitration clause could be construed as requiring
17 arbitration of the parties’ disputes in the first instance, with
18 the Placement Agreement’s adjudication clause merely designating
19 that any action to enforce or dispute an arbitral award must
20 occur in the courts enumerated therein. See Applied II, at *3.
21 Since the Bank Julius Court provided that “if there is a reading
22 of the various agreements that permits the Arbitration Clause to
23 remain in effect, we must choose it,” 424 F.3d at 284, the
-5- 1 district court granted NewOak’s motion and compelled the parties
2 to arbitrate NewOak’s claims.
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1 UNITED STATES COURT OF APPEALS 2 3 FOR THE SECOND CIRCUIT 4 5 ------------- 6 7 August Term, 2010 8 9 (Argued: April 13, 2011 Decided: July 13, 2011) 10 11 Docket No. 10-5107-cv 12 13 - - - - - - - - - - - - - - - - - - - - - - X 14 15 APPLIED ENERGETICS, INCORPORATED, 16 17 Petitioner-Appellant, 18 19 - v - 20 21 NEWOAK CAPITAL MARKETS, LLC, 22 23 Respondent-Appellee. 24 25 - - - - - - - - - - - - - - - - - - - - - - X 26 27 Before: KEARSE and CHIN, Circuit Judges, and 28 RAKOFF, District Judge.* 29 30 Appeal from a final order and judgment of the United States 31 District Court for the Southern District of New York compelling 32 arbitration under 9 U.S.C. § 4. Reversed.
33 CLIFFORD THAU (Hilary L. Preston, on the 34 brief), Vinson & Elkins LLP, New York, NY for 35 Petitioner-Appellant. 36 37 LEANNE M. SHOFI (Joseph M. Pastore III, on 38 the brief), Fox Rothschild, LLP, New York, NY 39 , for Respondent-Appellee. 40
41 RAKOFF, District Judge:
* The Honorable Jed S. Rakoff, United States District Judge for the Southern District of New York, sitting by designation.
-1- 1 Petitioner-Appellant Applied Energetics, Inc. (“Applied”)
2 appeals the district court’s final order and judgment compelling
3 arbitration of the claims of Respondent-Appellee NewOak Capital
4 Markets, LLC (“NewOak”) before the Financial Industry Regulatory
5 Authority (“FINRA”). Because we find that the parties expressly
6 agreed to adjudicate their disputes before a court, we reverse,
7 and remand to the district court for further proceedings.
9 BACKGROUND
10 Applied is a developer and manufacturer of military
11 technology. On September 28, 2005, NewOak, an independent broker
12 dealer, entered into a preliminary letter agreement with Applied
13 (the “Engagement Agreement”), by which NewOak agreed to act as
14 Applied’s exclusive placement agent in an anticipated $20 million
15 private offering of Applied securities to finance Applied’s
16 anticipated development of a “field-deployable vehicle.” The
17 Engagement Agreement contained an arbitration clause that
18 provided that:
19 Each of [NewOak] and [Applied] agrees that any dispute 20 arising out of or relating to this letter, the Indemnity 21 Agreement and/or the transactions contemplated hereby or 22 thereby . . . shall be resolved through binding arbitration 23 before the National Association of Securities Dealers1 . . . 24 in New York City. 25 26 However, the Engagement Agreement also specifically contemplated
1 The National Association of Securities Dealers is one of the predecessors of FINRA.
-2- 1 that the parties would enter into a subsequent, more formal
2 agreement setting forth “the terms and conditions contained [in
3 the Engagement Agreement] as well as those customarily contained
4 in agreements of such character.” On October 24, 2005, NewOak
5 and Applied signed that subsequent agreement (the “Placement
6 Agreement”), which, though embodying much of the substance of the
7 Engagement Agreement, omitted any reference to arbitration.
8 Instead, the Placement Agreement expressly provided that the
9 agreement would be governed by New York law and that:
10 Any dispute arising out of this Agreement shall be 11 adjudicated in the Supreme Court, New York County or in the 12 federal district court for the Southern District of New 13 York. 14 15 The Placement Agreement also contained a merger clause,
16 which provided that the Placement Agreement and certain other
17 documents related to the transaction -- namely, the Purchase
18 Agreement, the Registration Rights Agreement, the Escrow
19 Agreement, and the Warrant -- “constitute the entire
20 understanding and agreement between the parties” with respect to
21 NewOak’s placement of Applied securities, and that “there are no
22 [other] agreements or understandings” that apply. The Engagement
23 Agreement was not among the documents listed in the Placement
24 Agreement’s merger clause.
25 On January 14, 2010, NewOak initiated arbitration against
26 Applied with FINRA, asserting various claims pursuant to its
27 allegations that, between May 4, 2005 and May 10, 2006, Applied
-3- 1 “knowingly disseminated materially false and misleading
2 information about the development and production capability” of
3 the field-deployable vehicle, as well as about “the status of
4 [its] real or potential sales.” NewOak further alleged that
5 Applied’s officers and directors collectively sold 1.5 million
6 shares of their personal Applied securities holdings during the
7 time that the company’s securities were artificially inflated as
8 a result of the company’s misrepresentations. In response,
9 Applied filed a petition in the Supreme Court of the State of New
10 York seeking to stay the FINRA arbitration on the ground that the
11 mandatory court-adjudication provision of the Placement Agreement
12 superseded the parties’ earlier agreement to arbitrate their
13 disputes. NewOak timely removed the petition to the Southern
14 District of New York, and then moved to compel arbitration under
15 the arbitration clause of the Engagement Agreement and § 4 of the
16 FAA.
17 In a Report and Recommendation dated October 5, 2010, the
18 Magistrate Judge to whom the matter was initially referred
19 recommended that the district court grant the petition and deny
20 arbitration. Applied Energetics, Inc. v. NewOak Capital Markets,
21 LLC, No. 10 Civ. 1669, 2010 WL 3860386, at *1 (S.D.N.Y. Oct. 5,
22 2010) (“Applied I”). But in a written opinion dated December 3,
23 2010, the district court granted NewOak’s motion and ordered the
24 parties to arbitrate. Applied Energetics, Inc. v. NewOak Capital
-4- 1 Markets, LLC, No. 10 Civ. 1669, 2010 WL 4968186, *1 (S.D.N.Y.
2 Dec. 3, 2010) (“Applied II”). This appeal followed.
4 DISCUSSION
5 We review de novo the district court’s order compelling
6 arbitration. See Chelsea Square Textiles, Inc. v. Bombay Dyeing
7 & Mfg. Co. Ltd., 189 F.3d 289, 295 (2d Cir. 1999).
8 The district court, relying primarily on this Court’s
9 decision in Bank Julius Baer & Co., Ltd. v. Waxfield Ltd., 424
10 F.3d 278 (2d Cir. 2005), concluded that the Engagement
11 Agreement’s arbitration clause and the Placement Agreement’s
12 adjudication clause “may be read as complementary” to one
13 another. Applied II, at *3. The district court reasoned that,
14 because arbitration awards “may only be enforced by subsequent
15 judicial action,” Bank Julius, 424 F.3d at 284, the Engagement
16 Agreement’s arbitration clause could be construed as requiring
17 arbitration of the parties’ disputes in the first instance, with
18 the Placement Agreement’s adjudication clause merely designating
19 that any action to enforce or dispute an arbitral award must
20 occur in the courts enumerated therein. See Applied II, at *3.
21 Since the Bank Julius Court provided that “if there is a reading
22 of the various agreements that permits the Arbitration Clause to
23 remain in effect, we must choose it,” 424 F.3d at 284, the
-5- 1 district court granted NewOak’s motion and compelled the parties
2 to arbitrate NewOak’s claims.
3 We disagree with the district court’s conclusion that the
4 Engagement Agreement’s arbitration clause and the Placement
5 Agreement’s court-adjudication clause can reasonably be read as
6 complementary. Rather, this case falls within the alternative
7 scenario, also contemplated by Bank Julius, where contracting
8 parties are free to revoke an earlier agreement to arbitrate by
9 executing a subsequent agreement the terms of which plainly
10 preclude arbitration. See 424 F.3d at 284.
11 A close reading of Bank Julius is instructive. In Bank
12 Julius, the parties, like those in the instant case, initially
13 agreed to arbitrate “any . . . dispute” arising out of their
14 contractual relationship and, likewise, subsequently entered into
15 an agreement that omitted any mention of arbitration. Id. at
16 282. The subsequent agreement included, however, a non-exclusive
17 forum selection clause that read as follows:
18 Without limiting the right of the [plaintiff] to bring any 19 action or proceeding against [the defendant] . . . in the 20 courts of other jurisdictions, [the defendant] hereby 21 irrevocably submits to the jurisdiction of any New York 22 State or Federal court sitting in New York City, and . . . 23 hereby irrevocably agrees that any Action may be heard and 24 determined in such New York State court or in such Federal 25 court. 26 27 424 F.3d at 282 (emphasis omitted). Furthermore, the subsequent
28 agreement, although containing a merger clause, also provided
29 that “the rights and remedies provided [herein] are cumulative
-6- 1 and not exclusive of any rights or remedies provided under any
2 other agreement.” Id.
3 Under these circumstances, the Court in Bank Julius
4 concluded that the forum selection clause in the subsequent
5 agreement could be read as complementary, rather than
6 contradictory, to the parties’ initial agreement to arbitrate:
7 the forum selection clause would operate to provide New York
8 courts with (non-exclusive) jurisdiction over ancillary
9 proceedings -- such as to enforce an arbitral award or to
10 challenge the validity of the arbitration agreement -- but the
11 merits of any dispute would be resolved in the first instance by
12 arbitration. See id. at 284-85 While other readings were
13 possible, the presumption in favor of arbitration made this
14 reading the preferred interpretation. Id.
15 The case at bar is different. Here, the Placement
16 Agreement’s language that “[a]ny dispute” between the parties
17 “shall be adjudicated” by specified courts stands in direct
18 conflict with the Engagement Agreement’s parallel language that
19 “any dispute . . . shall be resolved through binding
20 arbitration.” Both provisions are all-inclusive, both are
21 mandatory, and neither admits the possibility of the other.
22 Moreover, use of the word “adjudicate[]” in the Placement
23 Agreement’s clause is a clear and unmistakable reference to
24 judicial action. See Black’s Law Dictionary 47, 922 (9th ed.
-7- 1 2009) (defining “adjudicate” as “[t]o rule upon judicially,” and
2 defining judicial as “[o]f, relating to, or by the court or a
3 judge”). Similarly, the clause’s use of the obligatory verb
4 “shall” precludes the resolution of the parties’ disputes by any
5 means other than their “adjudicat[ion]” by a court of law. See
6 Phillips v. Audio Active Ltd., 494 F.3d 378, 386-87 (2d Cir.
7 2007) (forum selection clause using obligatory language precludes
8 parties from bringing an action arising thereunder in forums
9 other than those enumerated therein). Accordingly, the Placement
10 Agreement’s adjudication clause “specifically precludes”
11 arbitration, see Bank Julius, 424 F.3d at 284 (internal quotation
12 marks omitted), and, by operation of the merger clause,1
13 displaces the Engagement Agreement’s arbitration clause. Under
14 the express terms of the Placement Agreement, the parties’
15 instant disputes must therefore be heard in the first instance by
1 NewOak argues that “‘a merger clause acts only to require full application of the parol evidence rule to the writing in question.’” Appellee’s Br. 17 (quoting Bank Julius, 424 F.3d at 283). While this may be true of a “general merger provision,” see Primex Int’l Corp. v. Wal-Mart Stores, Inc., 89 N.Y.2d 594, 599 (N.Y. 1997), the merger clause in the Placement Agreement went beyond merely stating that the agreement “represents the entire understanding between the parties.” See id. It further stated that “there are no agreements or understandings with respect to the subject matter hereof” and specifically identified the agreements that were in force (i.e., the Placement Agreement, Purchase Agreement, Registration Rights Agreement, Escrow Agreement, and Warrant). Thus, the merger clause here, by its own terms, clears the path for the Placement Agreement’s adjudication clause to displace the Engagement Agreement’s arbitration clause.
-8- 1 either the New York State Supreme Court for New York County or
2 the federal district court for the Southern District of New York.
3 Even assuming, as the district court found, that the
4 provisions in the two agreements could reasonably be read as
5 complementary, we conclude that the district court erred in
6 applying the presumption in favor of arbitration. As the Supreme
7 Court reaffirmed in Granite Rock Co. v. International Brotherhood
8 of Teamsters, “in FAA and in labor cases” the presumption in
9 favor of arbitrability should only be applied “where a validly
10 formed and enforceable arbitration agreement is ambiguous about
11 whether it covers the dispute at hand.” 130 S. Ct. 2847, 2858-59
12 (2010). In other words, while doubts concerning the scope of an
13 arbitration clause should be resolved in favor of arbitration,
14 the presumption does not apply to disputes concerning whether an
15 agreement to arbitrate has been made. See, e.g., Vera v. Saks &
16 Co., 335 F.3d 109, 116 (2d Cir. 2003). “[A] party cannot be
17 required to submit to arbitration any dispute which [it] has not
18 agreed so to submit.” Id. (internal quotation marks and brackets
19 omitted). Here, because the parties dispute not the scope of an
20 arbitration clause but whether an obligation to arbitrate exists,
21 the presumption in favor of arbitration does not apply.
22 Finally, in deciding whether a contractual obligation to
23 arbitrate exists, “courts should generally apply state-law
24 principles that govern the formation of contracts.” Mehler v.
-9- 1 Terminix Int’l Co., 205 F.3d 44, 48 (2d Cir. 2000). Under New
2 York law, “[i]t is well established that a subsequent contract
3 regarding the same matter will supersede the prior contract.”
4 Barnum v. Millbrook Care Ltd. P’ship, 850 F.Supp 1227, 1236
5 (S.D.N.Y.) (citing Coll. Auxiliary Servs. Of State Univ. Coll.,
6 Inc. v. Slater Corp., 456 N.Y.S.2d 512 (3d Dep’t 1382)), aff’d 43
7 F.3d 1458 (2d Cir. 1994). Here, for the reasons set forth above,
8 we conclude, as a matter of law, that the Placement Agreement
9 superseded the Engagement Agreement.
10 For the foregoing reasons, the order of the district court
11 compelling arbitration is reversed and the matter is remanded
12 with direction to grant the petition to stay the FINRA
13 arbitration and to take such other action as is consistent with
14 this Opinion.
-10-