In re Tyco Int’l Ltd. MDL (03-1342) MD-02-1335-B 12/29/03
UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE
In re Tyco International, Ltd. Multidistrict Litigation (MDL 1335 MDL DOCKET NO. 02-1335-B TYCO-PLAINTIFF ACTIONS Case N o . 03-1342-B Opinion N o . 2003 DNH 228
MEMORANDUM AND ORDER
Tyco International, Ltd. fired its former General Counsel,
Mark Belnick, and sued him for fraud and breach of fiduciary
duty. One of the complaint’s several counts seeks a declaratory
judgment that Belnick fraudulently induced Tyco to enter into a
“Retention Agreement” that guaranteed Belnick substantial
benefits if he was terminated. The Retention Agreement contains
an arbitration clause which provides that “[a]ny dispute or
controversy under this agreement shall be settled exclusively by
arbitration in accordance with the rules of the American
Arbitration Association then in effect.” Belnick claims in a
motion to compel arbitration that all of Tyco’s claims are
subject to the arbitration clause. I.
The first question presented by Belnick’s motion is whether
Tyco is required to arbitrate its fraudulent inducement claim.
Tyco argues that the Retention Agreement’s arbitration clause
only requires the parties to arbitrate disputes that concern the
interpretation or implementation of the agreement. Thus, it
argues that a fraudulent inducement claim is not “a dispute or
controversy under” the agreement because the claim is based on
misconduct that predates the adoption of the agreement. Belnick
counters by arguing that the fraudulent inducement claim is
“under” the agreement because it attacks the agreement’s
validity.
I cannot resolve this dispute using only New York’s general
principles of contract interpretation because the arbitration
clause is ambiguous and neither party has identified any
extrinsic evidence that might eliminate the ambiguity.1 In other
words, having only the language of the clause itself as a guide,
I cannot say with any degree of certainty which of the two
1 I look preliminarily to New York law because the Retention Agreement contains a choice of law clause specifying that it will be construed using New York law.
-2- proposed interpretations better reflects the parties’ objectively
manifested intentions. Fortunately, federal law provides a
default rule for resolving such disputes. As the Supreme Court
has recognized, “[t]he [Federal] Arbitration Act establishes
that, as a matter of federal law, any doubts concerning the scope
of arbitrable issues should be resolved in favor of arbitration .
. . .” Moses H . Cone Mem’l Hosp. v . Mercury Constr. Corp., 460
U.S. 1 , 24-25 (1983). The presumption of arbitrability seemingly
resolves the issue in cases such as this where the arbitration
clause plausibly can be construed to encompass the dispute that
is before the court.
Tyco nevertheless invokes the Second Circuit’s decision in
In the Matter of the Petition of Kinoshita & Co., 287 F.2d 951
(2d Cir. 1961), to support its position. In that case, the court
held that a fraudulent inducement claim was not arbitrable under
a clause that required the parties to arbitrate “[i]f any dispute
or difference should arise under this Charter.” Id. at 952.
Tyco argues that Kinoshita is a binding precedent and is
indistinguishable because there is no real difference between
clauses that require the arbitration of disputes that “arise
under” a contract and those that require the arbitration of
-3- disputes “under” the contract, as is the case here. I reject
Tyco’s argument because Kinoshita is neither binding nor
indistinguishable.
Kinoshita is not a binding precedent because, as the
transferee court in a multidistrict litigation case, I am not
obligated to follow unpersuasive federal law precedents issued by
the circuit court of the transferor court. See In re Korean Air
Lines Disaster of September 1 , 1983, 829 F.2d 1171, 1174 (D.C.
Cir. 1987). Kinoshita is unpersuasive because it was decided
prior to the enactment of the Federal Arbitration Act and thus
does not recognize the presumption of arbitrability that is now a
well established part of federal arbitration law. Equally
important, the decision is inconsistent with controlling Supreme
Court and First Circuit precedents which have held that
fraudulent inducement claims were arbitrable under arbitration
clauses similar to the one at issue here. See Prima Paint Corp.
v . Flood & Conklin Mfg. Co., 388 U.S. 395 (1967); Lummus C o . v .
Commonwealth Oil Ref. Co., 280 F.2d 915, 931 (1st Cir. 1960); see
also Unionmutual Stock Life Ins. C o . of Am. v . Beneficial Life
Ins. Co., 774 F.2d 5 2 4 , 528 (1st Cir. 1985) (rescission claim).
-4- Tyco’s contention that Kinoshita is indistinguishable also
is unpersuasive. Kinoshita has been strictly limited to its
precise facts. See, e.g., S.A. Mineracao Da Trindade-Samitri v .
Utah Int’l, Inc., 745 F.2d 1 9 0 , 194 (2d Cir. 1984); Genesco, Inc.
v . T . Kakiuchi & Co., 815 F.2d 8 4 0 , 855 (2d Cir. 1987); ACE
Capital Re Overseas Ltd. v . Cent. United Life Ins. Co., 307 F.3d
2 4 , 33-34 (2d Cir. 2002). The case apparently survives only out
of a concern that litigants may have relied on its holding in
drafting arbitration clauses. See S.A. Mineracao Da Trindade-
Samitri, 745 F.2d at 194. This concern is not present here
because the Retention Agreement’s arbitration clause is not
identical to the clause at issue in Kinoshita. Thus, I would
reach the same result even if I were required to resolve the
dispute using Second Circuit law.
II.
Tyco also asserts that Belnick breached fiduciary duties he
owed to the company and committed other fraudulent acts that are
unrelated to the Retention Agreement. Belnick argues that these
claims either should be referred for arbitration along with the
fraudulent inducement claim or stayed pending the outcome of the
-5- arbitration because they are intertwined with the fraudulent
inducement claim.
I have found no support for the proposition that a party may
be compelled to arbitrate otherwise nonarbitrable claims simply
because they are intertwined with arbitrable claims. To the
contrary, the case law recognizes that piecemeal resolutions of
arbitrable and nonarbitrable claims are to be expected under the
Federal Arbitration Act. See Moses H . Cone Mem’l Hosp., 460 U.S.
at 2 0 . For this reason, and because Belnick makes little effort
to develop the argument on his own, I do not deem it to merit
extensive analysis. Instead, I merely note that Tyco’s remaining
claims do not concern the implementation or interpretation of the
Retention Agreement.
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In re Tyco Int’l Ltd. MDL (03-1342) MD-02-1335-B 12/29/03
UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE
In re Tyco International, Ltd. Multidistrict Litigation (MDL 1335 MDL DOCKET NO. 02-1335-B TYCO-PLAINTIFF ACTIONS Case N o . 03-1342-B Opinion N o . 2003 DNH 228
MEMORANDUM AND ORDER
Tyco International, Ltd. fired its former General Counsel,
Mark Belnick, and sued him for fraud and breach of fiduciary
duty. One of the complaint’s several counts seeks a declaratory
judgment that Belnick fraudulently induced Tyco to enter into a
“Retention Agreement” that guaranteed Belnick substantial
benefits if he was terminated. The Retention Agreement contains
an arbitration clause which provides that “[a]ny dispute or
controversy under this agreement shall be settled exclusively by
arbitration in accordance with the rules of the American
Arbitration Association then in effect.” Belnick claims in a
motion to compel arbitration that all of Tyco’s claims are
subject to the arbitration clause. I.
The first question presented by Belnick’s motion is whether
Tyco is required to arbitrate its fraudulent inducement claim.
Tyco argues that the Retention Agreement’s arbitration clause
only requires the parties to arbitrate disputes that concern the
interpretation or implementation of the agreement. Thus, it
argues that a fraudulent inducement claim is not “a dispute or
controversy under” the agreement because the claim is based on
misconduct that predates the adoption of the agreement. Belnick
counters by arguing that the fraudulent inducement claim is
“under” the agreement because it attacks the agreement’s
validity.
I cannot resolve this dispute using only New York’s general
principles of contract interpretation because the arbitration
clause is ambiguous and neither party has identified any
extrinsic evidence that might eliminate the ambiguity.1 In other
words, having only the language of the clause itself as a guide,
I cannot say with any degree of certainty which of the two
1 I look preliminarily to New York law because the Retention Agreement contains a choice of law clause specifying that it will be construed using New York law.
-2- proposed interpretations better reflects the parties’ objectively
manifested intentions. Fortunately, federal law provides a
default rule for resolving such disputes. As the Supreme Court
has recognized, “[t]he [Federal] Arbitration Act establishes
that, as a matter of federal law, any doubts concerning the scope
of arbitrable issues should be resolved in favor of arbitration .
. . .” Moses H . Cone Mem’l Hosp. v . Mercury Constr. Corp., 460
U.S. 1 , 24-25 (1983). The presumption of arbitrability seemingly
resolves the issue in cases such as this where the arbitration
clause plausibly can be construed to encompass the dispute that
is before the court.
Tyco nevertheless invokes the Second Circuit’s decision in
In the Matter of the Petition of Kinoshita & Co., 287 F.2d 951
(2d Cir. 1961), to support its position. In that case, the court
held that a fraudulent inducement claim was not arbitrable under
a clause that required the parties to arbitrate “[i]f any dispute
or difference should arise under this Charter.” Id. at 952.
Tyco argues that Kinoshita is a binding precedent and is
indistinguishable because there is no real difference between
clauses that require the arbitration of disputes that “arise
under” a contract and those that require the arbitration of
-3- disputes “under” the contract, as is the case here. I reject
Tyco’s argument because Kinoshita is neither binding nor
indistinguishable.
Kinoshita is not a binding precedent because, as the
transferee court in a multidistrict litigation case, I am not
obligated to follow unpersuasive federal law precedents issued by
the circuit court of the transferor court. See In re Korean Air
Lines Disaster of September 1 , 1983, 829 F.2d 1171, 1174 (D.C.
Cir. 1987). Kinoshita is unpersuasive because it was decided
prior to the enactment of the Federal Arbitration Act and thus
does not recognize the presumption of arbitrability that is now a
well established part of federal arbitration law. Equally
important, the decision is inconsistent with controlling Supreme
Court and First Circuit precedents which have held that
fraudulent inducement claims were arbitrable under arbitration
clauses similar to the one at issue here. See Prima Paint Corp.
v . Flood & Conklin Mfg. Co., 388 U.S. 395 (1967); Lummus C o . v .
Commonwealth Oil Ref. Co., 280 F.2d 915, 931 (1st Cir. 1960); see
also Unionmutual Stock Life Ins. C o . of Am. v . Beneficial Life
Ins. Co., 774 F.2d 5 2 4 , 528 (1st Cir. 1985) (rescission claim).
-4- Tyco’s contention that Kinoshita is indistinguishable also
is unpersuasive. Kinoshita has been strictly limited to its
precise facts. See, e.g., S.A. Mineracao Da Trindade-Samitri v .
Utah Int’l, Inc., 745 F.2d 1 9 0 , 194 (2d Cir. 1984); Genesco, Inc.
v . T . Kakiuchi & Co., 815 F.2d 8 4 0 , 855 (2d Cir. 1987); ACE
Capital Re Overseas Ltd. v . Cent. United Life Ins. Co., 307 F.3d
2 4 , 33-34 (2d Cir. 2002). The case apparently survives only out
of a concern that litigants may have relied on its holding in
drafting arbitration clauses. See S.A. Mineracao Da Trindade-
Samitri, 745 F.2d at 194. This concern is not present here
because the Retention Agreement’s arbitration clause is not
identical to the clause at issue in Kinoshita. Thus, I would
reach the same result even if I were required to resolve the
dispute using Second Circuit law.
II.
Tyco also asserts that Belnick breached fiduciary duties he
owed to the company and committed other fraudulent acts that are
unrelated to the Retention Agreement. Belnick argues that these
claims either should be referred for arbitration along with the
fraudulent inducement claim or stayed pending the outcome of the
-5- arbitration because they are intertwined with the fraudulent
inducement claim.
I have found no support for the proposition that a party may
be compelled to arbitrate otherwise nonarbitrable claims simply
because they are intertwined with arbitrable claims. To the
contrary, the case law recognizes that piecemeal resolutions of
arbitrable and nonarbitrable claims are to be expected under the
Federal Arbitration Act. See Moses H . Cone Mem’l Hosp., 460 U.S.
at 2 0 . For this reason, and because Belnick makes little effort
to develop the argument on his own, I do not deem it to merit
extensive analysis. Instead, I merely note that Tyco’s remaining
claims do not concern the implementation or interpretation of the
Retention Agreement. Nor do they directly attack the validity of
the agreement. While several of Tyco’s claims overlap factually
with its fraudulent inducement claim, the overlap is not
sufficient to bring the claims within the scope of the Retention
Agreement’s arbitration clause.
Belnick is on somewhat firmer ground in seeking to stay the
litigation of the nonarbitrable claims until the fraudulent
inducement claim is resolved. The First Circuit has recognized
that a district court has the discretionary power to stay the
-6- litigation of nonarbitrable claims until related arbitrable
claims are resolved when such a stay serves in the interests of
efficiency and judicial economy. See Sevinor v . Merrill Lynch,
Pierce, Fenner & Smith, Inc., 807 F.2d 1 6 , 20-21 (1st Cir. 1986).
Moreover, as the Second Circuit has recognized, a stay may be
particularly appropriate “if the arbitrable claims predominate
the lawsuit and the nonarbitrable claims are of questionable
merit.” See Genesco, 815 F.2d at 856.
While I acknowledge Tyco’s contention that there will be
evidentiary overlap between the arbitration of Tyco’s fraudulent
inducement claim and the litigation of its nonarbitrable claims,
I am not convinced that allowing the arbitration to proceed will
significantly impair my ability to oversee and efficiently
resolve the nonarbitrable claims. Further, the fraudulent
inducement claim is not the predominate claim in this litigation
and I am not prepared at this early stage of this complicated
case to pass judgment on the merit of Tyco’s other claims.
Finally, the public has a strong interest in seeing that this
case is resolved expeditiously and I am unwilling to risk the
additional delay that will result from a stay of Tyco’s
-7- nonarbitrable claims. Accordingly, I decline to stay the
litigation of the nonarbitrable claims.
III.
For the reasons set forth in this Memorandum and Order, I
grant Belnick’s Motion to Compel Arbitration of Tyco’s fraudulent
inducement claim and otherwise deny its request to either compel
arbitration of Tyco’s remaining claims or to stay the litigation
of those claims until the fraudulent inducement claim is resolved.2
SO ORDERED.
Paul Barbadoro Chief Judge
December 2 9 , 2003
cc: All Counsel of Record
2 Tyco’s cross-motion to stay the arbitration (doc. n o . 7 ) is also denied. I have rejected Tyco’s contention that only the court can resolve Tyco’s fraudulent inducement claim. Moreover, a stay of the arbitration proceeding simply is not required to preserve Tyco’s interest in litigating the nonarbitrable claims. See Dean Witter Reynolds, Inc. v . Byrd, 470 U.S. 213, 222 (1985).
-8-