In re Tyco (Kozlowski 03-1343)

2004 DNH 048

• Court: District Court, D. New Hampshire
• Decided: March 16, 2004
• Docket: MD-02-1335-B
• Status: Published

Opinion

In re Tyco (Kozlowski 03-1343) MD-02-1335-B 03/16/04

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 . 03-1343-B

Opinion N o . 2004 DNH 048

MEMORANDUM AND ORDER

Tyco International, Ltd. has sued its former Chief Executive

Officer L . Dennis Kozlowski for fraud and breach of fiduciary

duty. One of the complaint’s several counts seeks a declaratory

judgment that Kozlowski fraudulently induced Tyco to enter into a

“Retention Agreement” that guaranteed Kozlowski 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.” Kozlowski moves to

compel arbitration based on his assertion that all of Tyco’s claims are subject to the arbitration clause. In the

alternative, Kozlowski moves to dismiss the eighth cause of

action, a breach of contract claim, and the twelfth cause of

action, a contribution claim.

I.

Kozlowski first argues that I cannot determine which, if

any, of Tyco’s claims are arbitrable because the Retention

Agreement reserves such questions for the arbitrator. Because

Kozlowski’s argument runs counter to the presumption that the

court should resolve arbitrability issues, I will accept his

argument only if the Retention Agreement “clearly and

unmistakably” provides that arbitrability issues should be

resolved by an arbitrator rather than the court. Howsam v . Dean

Witter Reynolds, Inc., 537 U.S. 7 9 , 83 (2002)(quoting AT & T

Techs., Inc. v . Communications Workers, 475 U.S. 643, 649 (1986).

Kozlowski bases his argument on the Retention Agreement’s

arbitration clause, which states that “[a]ny dispute or

controversy under this Agreement shall be settled exclusively by

2 arbitration in accordance with the rules of the American

Arbitration Association then in effect.” (Mot. of Def. to

Dismiss or Stay & Compel Arb. Ex. A ¶ 18.) He then cites Rule 8

of the applicable American Arbitration Association (“AAA”) rules,

which provides that “the arbitrator shall conduct an Arbitration

Management Conference with the parties . . . to explore and

resolve matters that will expedite the arbitration proceedings.

The specific matters to be addressed include: (i) the issues to

be arbitrated . . . .” (Mot. of Def. to Dismiss or Stay & Compel

Arb. Ex. B ¶ 8.) Because the Retention Agreement incorporates an

AAA rule that requires the arbitrator to discuss the “issues to

be arbitrated” at an Arbitration Management Conference, Kozlowski

claims that the Retention Agreement clearly and unmistakably

requires arbitrability questions to be resolved by the

arbitrator. I disagree.

Rule 8 requires the arbitrator to convene an Arbitration

Management Conference “[a]s soon as possible” after the

arbitrator is appointed. The stated purpose of the conference is

“to explore and resolve matters that will expedite the

3 arbitration proceedings.” The rule then lists 12 specific

matters to be discussed at the conference, including “the issues

to be arbitrated.”1 Kozlowski views Rule 8 as a grant of

authority to the arbitrator to resolve all arbitrability

questions as well as to control the other matters identified in

the rule. A review of the rule in context, however, reveals that

it merely identifies issues that must be discussed at the

conference without granting the arbitrator any additional power

that she does not otherwise have under the Retention Agreement

itself or other AAA rules.

Although Rule 8 lists items to be discussed at the

Arbitration Management Conference, the arbitrator’s authority

over each of the identified items is established by a counterpart

elsewhere in the rules. Two examples illustrate the point. Rule

1 The 12 matters to be discussed include (i) the issues to be arbitrated; (ii) the date, time, place, and duration of the hearings; (iii) the resolution of outstanding discovery issues; (iv) the applicable rules of evidence and burdens of proof; (v)the exchange of stipulations; (vi) witness names and scope of their testimony; (vii) bifurcation of the proceedings into liability and damages phases; (viii) the need for a stenographic record; (ix) the need for oral argument; (x) the form of the award; (xi) any other issues relating to the subject or conduct of the arbitration; and (xii) the allocation of attorney’s fees.

4 8 requires the arbitrator to discuss outstanding discovery issues

at the conference but the arbitrator’s power to control discovery

is found in Rule 7 , which provides in pertinent part that

“[t]he arbitrator shall have the authority to order such

discovery . . . as the arbitrator considers necessary . . . .”

Similarly, Rule 8 requires the arbitrator to discuss “the date,

time, place and estimated duration of the hearing” but the

arbitrator’s power to determine disputes concerning these matters

is found in Rule 10 which provides that “[t]he arbitrator shall

have the authority to set the date and time of the hearing in

consultation with the parties.” Each of the other items listed

in Rule 8 has a similar counterpart elsewhere in the rules that

explicitly defines the arbitrator’s authority with respect to that item.2

2 The authority to allow a new or different claim or counterclaim after the appointment of the arbitrator is set out in Rule 5 ; to determine the date, time, and place of the hearing is in Rule 9 and 1 0 ; to resolve discovery issues is in Rule 7 ; to determine the standards of proof, applicable law, witness names and scope of their testimony, and to exercise authority over the presentation of evidence is in Rule 2 2 ; to determine to bifurcate the proceedings is in Rule 2 4 ; to set oral argument is in rule 3 0 ; to determine the form of the award is in Rule 34(d); to set the rules of conduct for the proceedings is in Rule 2 2 ; and to award attorney’s fees is in Rule 34(e).

5 Rule 5 is the counterpart to Rule 8’s listing of “the issues

to be arbitrated” as an issue to be discussed at the Arbitration

Management Conference. It describes the procedures that the

parties must follow when amending arbitration claims and gives

the arbitrator the power to reject new or different claims that

are filed after the arbitrator is appointed. Nowhere do the

rules grant the arbitrator the exclusive power to resolve other

arbitrability disputes. Thus, while Rule 8 requires the

arbitrator to discuss the issues to be arbitrated at the

conference, the power to resolve arbitrability questions, apart

from the power to reject claims that are filed after the

arbitrator is appointed, must be found in the parties’ agreement

to arbitrate. Because the Retention Agreement does not clearly

and unmistakably give such power to the arbitrator, I reject

Kozlowski’s claim that the arbitrator must resolve the

arbitrability issues that his motion to compel presents.

II.

Kozlowski alternatively argues that I should determine that

all of Tyco’s claims are subject to arbitration. I have

6 previously considered identical arguments supporting Mark

Belnick’s request for arbitration under an identical arbitration

clause. See In re Tyco Int’l Inc. Multidistrict Litig., Opinion

N o . 2003 DNH 228. Rather than repeat my analysis, I find that

Tyco’s fraudulent inducement claim is arbitrable but that its

remaining claims are not for the reasons I articulated in that

Order. I also reject Kozlowski’s request to stay the litigation

of the nonarbitrable claims.3

3 Tyco makes a waiver argument that is slightly more developed here than in the prior Belnick proceeding and so I address it briefly. The crux of Tyco’s argument is that Kozlowski’s delay in seeking arbitration for sixteen months from the time of his employment termination, and a delay of over a year since Tyco first filed this suit against him, waives his rights under the arbitration agreement. I disagree. In determining whether a party has waived its arbitration rights I must be mindful that any doubts as to arbitrability “should be resolved in favor of arbitration, whether the problem at hand is . . . an allegation of waiver, delay, or a like defense to arbitrability.” Moses H . Cone Mem’l Hosp. v . Mercury Constr. Corp., 460 U.S. 1 , 25 (1983)(“‘[W]aiver is not to be lightly inferred, and mere delay in seeking [arbitration], without some resultant prejudice to a party cannot carry the day’” (citing Rush v . Oppenheimer & Co., 779 F.2d 885 (2d Cir. 1985)); Page v . Moseley, Hallgarten, Estabrook & Weeden, Inc., 806 F.2d 2 9 1 , 293 (1st Cir. 1986); see also Creative Solutions Group, Inc. v . Pentzer Corp., 252 F.3d 28 (1st Cir. 2001). Tyco fails to assert any prejudice caused by Kozlowski’s delay in seeking arbitration and therefore fails to establish that Kozlowski waived his arbitration rights. Given the slow progress of litigation in the civil proceedings to date, Tyco would be

7 III.

Kozlowski’s next argument challenges the sufficiency of

Tyco’s breach of contract claim under Fed. R. Civ. P. 12(b)(6).

Kozlowski contends that the complaint merely asserts that he

breached the Company’s Key Employee Loan (“KEL”) Program, and

does not allege that he breached a valid contract. Again, I

disagree.

In considering a Rule 12(b)(6) motion, I “must accept as

true the well-pleaded factual allegations of the complaint, draw

all reasonable inferences therefrom in the plaintiff’s favor, and

determine whether the complaint, so read, limns facts sufficient

to justify recovery on any cognizable theory.” LaChapelle v .

Berkshire Life Ins. Co., 142 F.3d 5 0 7 , 508 (1st Cir. 1998). The

pleadings must give the defendant fair notice of what the claims

are and the grounds on which they rest. E.g., Persson v . Scotia

hard pressed to establish that a delay of only sixteen months has produced sufficient prejudice to warrant a waiver of Kozlowski’s arbitration rights. See Restoration Pres. Masonry, Inc. v . Grove Eur. Ltd., 325 F.3d 5 4 , 61 (1st Cir. 2003) (“The length of delay must be evaluated in the context of litigation activities engaged in during that time.”). For these reasons, I reject Kozlowski’s waiver argument.

8 Prince Cruises, Ltd., 330 F.3d 2 8 , 34 (1st Cir. 2003). With this

in mind, I evaluate Tyco’s breach of contract claim.

In order to establish a breach of contract, the complaint

“must allege (1) the existence of a valid and binding contract;

(2) that plaintiff has complied with the contract and performed

his own obligations under i t ; and (3) breach of the contract

causing damages.” Id. The complaint alleges these exact

requirements. Tyco alleges that Kozlowski bound himself to the

terms of a loan program by accepting the loans and breached those

terms by not repaying the loans upon the termination of his

employment. In other words, the complaint argues that a valid

and binding contract existed whereby Kozlowski agreed to repay

any outstanding loans made by Tyco under the program upon the end

of his employment. Tyco gave Kozlowski the loans, thereby

fulfilling its obligation under the contract, and Kozlowski

breached the contract by not repaying the loans, resulting in

damages to Tyco in the amount of the unpaid loans. The complaint

directs Kozlowski to the appropriate loan agreement, the KEL

Program, and the amount of unpaid loans ($43,840,461). The

complaint asserts enough to easily satisfy Rule 12(b)(6) by

9 alleging a breach of contract, even if Tyco does not call the

breached agreement a contract per s e . See, e.g., Carroll v .

Kahn, N o . 03-CV-0656, 2003 WL 22327299, at *4 (N.D.N.Y. Oct. 9,

2003) (complaint found sufficient that asserted an agreement had

been made and then breached without referring to it as a contract

per s e ) . I therefore deny Kozlowski’s motion to dismiss the

breach of contract claim under Rule 12(b)(6).

IV.

Kozlowski also argues that Tyco’s contract claim is unripe

because it is contingent upon the outcome of the ERISA,

Securities, and Derivative Actions pending against i t . I

A federal court may entertain only claims that involve

actual justiciable controversies. See Ala. Fed’n of Labor v .

McAdory, 325 U.S. 4 5 0 , 461 (1945). These controversies must be

“definite and concrete, touching the legal relations of parties

having adverse legal interests. [They must be controversies]

admitting of specific relief through a decree of a conclusive

character, as distinguished from an opinion advising what the law

10 would be upon a hypothetical state of facts.” Aetna Life Ins.

C o . v . Haworth, 300 U.S. 2 2 7 , 240-41 (1937). Therefore, the

“disagreement [between the litigants] must not be nebulous or

contingent but must have taken on fixed and final shape so that a

court can see what legal issues it is deciding, what effect its

decision will have on the adversaries, and some useful purpose to

be achieved in deciding them.” Pub. Serv. Comm’n v . Wycoff Co.,

344 U.S. 2 3 7 , 244 (1952).

The Court has gone even further by declaring that the issue

of ripeness turns on “the fitness of the issues for judicial

decision and the hardship to the parties of withholding court

consideration.” Pac. Gas & Elec. C o . v . State Energy Res.

Conservation & Dev. Comm’n, 461 U.S. 1 9 0 , 201 (1983) (internal

quotations omitted). The ripeness inquiry, however, is case

specific, “and the various integers that enter into the ripeness

equation play out quite differently from case to case.” Ernst &

Young v . Depositors Econ. Prot. Corp., 45 F.3d 5 3 0 , 535 (1st Cir.

1995) (“The ripeness inquiry is often sui generis.”).

This circuit has held in a similar circumstance that a

contribution claim is ripe, even if it is contingent on a

11 separate finding of liability, as it is here. D’Onofrio Constr.

C o . v . Recon Co., 255 F.2d 904 (1st Cir. 1958). In D’Onofrio,

the court stated:

But if the event has already occurred out of which a common liability may be asserted to have arisen, and if the injured party has already commenced an action against one of the possible joint tortfeasors, one cannot deny that a case or controversy in a constitutional sense has already come into existence as between the defendant sued and the other possible joint tortfeasor who is under a contingent obligation to make contribution.

Id. at 909. While D’Onofrio dealt with joint tortfeasors and a

contingent contribution claim, its principle applies equally to

Tyco’s contingent contribution claim against Kozlowski.

Likewise, in Lehman v . Revolution Portfolio LLC, the First

Circuit held that impleading a third-party defendant on theories

of indemnification and contribution presented justiciable claims

even though the claims were contingent upon the defendant being

found liable to the plaintiff in the underlying suit. 166 F.3d

389 (1st Cir. 1999). In so far as a claim for contribution

against an impleaded third-party defendant is ripe, that same

claim is also ripe outside the impleader context.

12 I agree with Tyco that its claim for contribution is a

“real, immediate and concrete controversy among true adversaries

which is ripe for resolution.” Avemco Ins. C o . v . Pond, N o . 94-

CV-073-B, 1994 WL 516449, at *2 (D.N.H. Sept. 2 0 , 1994). Tyco

currently faces multiple lawsuits for extraordinary damages

stemming, arguably, from Kozlowski’s alleged breach of fiduciary

duties. The facts underlying Kozlowski’s alleged liability for

contribution will be developed in the present litigation and Tyco

and Kozlowski are clearly adverse parties. With this in mind,

Tyco’s contribution claim against Kozlowski is fit for judicial

review.4

CONCLUSION

For the reasons set forth in this Memorandum and Order, I

grant Kozlowski’s request 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

4 damage award on the contribution claim can always be A until Tyco’s liability in the underlying suits is deferred finally established, if in fact it ever i s . See Oxford Shipping C o . v . N.H. Trading Corp., 697 F.2d 1 , 8 (1st Cir. 1982).

13 claim is resolved (doc. n o . 6 ) . I also deny Kozlowski’s motion

to dismiss the breach of contract and contribution claims.

SO ORDERED.

Paul Barbadoro Chief Judge March 1 6 , 2004

cc: Counsel of Record