Opinion
DOCKET NO. A-0567-15T4
06-20-2016
CASE MEDICAL, INC., Plaintiff-Respondent, v. ADVANCED STERILIZATION PRODUCTS SERVICES, INC., Defendant-Appellant.
Stephen R. Long argued the cause for appellant (Drinker Biddle & Reath, attorneys; Mr. Long and Diego J. Rosado, on the brief). Kelsi Brown Corkran (Orrick, Herrington & Sutcliffe) of the District of Columbia bar, admitted pro hac vice, argued the cause for respondent (Cohn Lifland Pearlman Herrman & Knopf and Ms. Corkran, attorneys; David J. Bloch, Stephen G. Foresta (Orrick, Herrington & Sutcliffe) of the New York bar, admitted pro hac vice and Douglas S. Mintz (Orrick, Herrington & Sutcliffe) of the District of Columbia and New York bars, admitted pro hac vice, on the brief).
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION Before Judges Fuentes, Koblitz and Gilson. On appeal from Superior Court of New Jersey, Law Division, Bergen County, Docket No. L-2005-15. Stephen R. Long argued the cause for appellant (Drinker Biddle & Reath, attorneys; Mr. Long and Diego J. Rosado, on the brief). Kelsi Brown Corkran (Orrick, Herrington & Sutcliffe) of the District of Columbia bar, admitted pro hac vice, argued the cause for respondent (Cohn Lifland Pearlman Herrman & Knopf and Ms. Corkran, attorneys; David J. Bloch, Stephen G. Foresta (Orrick, Herrington & Sutcliffe) of the New York bar, admitted pro hac vice and Douglas S. Mintz (Orrick, Herrington & Sutcliffe) of the District of Columbia and New York bars, admitted pro hac vice, on the brief). PER CURIAM
Defendant Advanced Sterilization Products Services, Inc. (ASP), appeals as of right, R. 2:2-3(a)(3), from the September 18, 2015 order denying its motion to dismiss plaintiff Case Medical, Inc.'s (CM) complaint for tortious interference in favor of arbitration. We agree with ASP that this dispute arises out of the distribution contract between the parties and thus is subject to its broad arbitration clause. We therefore reverse.
We granted a stay of the trial proceedings on December 21, 2015.
According to CM's complaint, CM "is a developer and manufacturer of sterilization systems and products for instrument processing for the medical industry." "One of [CM]'s most successful and innovative products is its line of SteriTite containers . . . [that] provide a simple and effective system for the sterilization of medical instrumentation and devices, such as operating room instruments." ASP is a distributor to healthcare facilities, providing "sterilization equipment and accessories such as containers and trays, as well as biological indicators for sterility monitoring."
In 2010, the two large, commercial entities entered into a "Distribution Agreement" (Agreement) in which CM agreed to sell ASP SteriTite containers intended for distribution to healthcare facilities. The Agreement expressly references a "Quality Agreement," which specifies the governing standards and regulations for the parties' commercial relationship.
Paragraph 12 of the Agreement, entitled "Limitation of Liability," stated that "neither party shall be liable" for any loss "arising out of, in connection with and/or related to this Agreement," including "loss of business opportunity, whether based on breach of contract, tort (including negligence) or any other theory upon which one party may seek remedies against the other." The Agreement also contained an arbitration clause in paragraph 13, providing that "[a]ny controversy or claim arising out of or relating to this Agreement shall be resolved by arbitration." The parties agreed in paragraph 15.5 of the Agreement that these two provisions survive the expiration of the Agreement.
In May 2011, one of ASP's employees, Dr. Wu Su Syin, conducted a half-cycle test on the SteriTite containers. According to Dr. Wu's report, a SteriTite container model failed to achieve sterility during the test. In 2013, the results of Dr. Wu's test were directed to ASP's Risk Escalation Board. In the interim, however, ASP continued to purchase the containers from CM.
On September 20, 2013, ASP notified the Food and Drug Administration (FDA) of its voluntary removal of the SteriTite containers from the market. Around the same time, ASP initiated a recall of the product by notifying SteriTite customers of Dr. Wu's test results.
In January 2014, ASP retested the SteriTite containers in an independent laboratory and determined that they passed the half-cycle sterility test. Later that month, the parties attempted to resolve their dispute and continue their business relationship, but these efforts were unsuccessful, and the Agreement expired on March 31, 2014.
In November of that year, CM filed a demand for arbitration with the American Arbitration Association against ASP, alleging violations of the Agreement and claiming in excess of $20,000,000 in damages. ASP filed an answer, relying on paragraphs 12 and 13 of the Agreement, which bar the recovery of consequential damages, lost revenues, and lost profits. Shortly thereafter, CM withdrew its arbitration demand.
The following February, CM filed a single-count complaint in the Law Division alleging tortious interference with prospective economic advantage, repeating substantially the allegations in the arbitration demand, but without reference to the Agreement. ASP filed a motion to dismiss the complaint for failure to state a claim pursuant to Rule 4:6-2(e), arguing although an intentional tort was alleged, the dispute in fact related to a contract dispute covered by the limitation of liability provision of the Agreement. This motion was denied in July 2015.
The motion judge stated that, pursuant to the Rule, he was considering only the complaint and not any other documents. He stated, "The fact that, according to the plaintiff, the defendant used its contractual relationship to harm the plaintiff in future dealings can hardly be [said] as a matter of law at this stage to be arising out of the contractual agreement." Analogizing the claim to an "economic defamation claim," the judge found defendants were not "immunize[d]" from "intentional conduct meant to . . . sabotage its economic relationship with third parties."
The following month, ASP filed an answer and a motion to dismiss in favor of arbitration, which was denied in September by a second judge, relying on the reasons expressed by the first judge in the prior denial.
We review an appeal from a denial of a motion to compel arbitration de novo. Hirsch v. Amper Fin. Servs., LLC, 215 N.J. 174, 186 (2013); see also Manalapan Realty, L.P. v. Twp. Comm. of Manalapan, 140 N.J. 366, 378 (1995) ("A trial court's interpretation of the law and the legal consequences that flow from established facts are not entitled to any special deference.").
Although CM now disputes that the Agreement incorporates the "Quality Agreement," it admitted as much in its withdrawn arbitration demand. Paragraph 1.1 of the Agreement states that the parties shall perform "on the terms described in this Agreement . . . and the quality procedures as set forth in the Quality Agreement to be executed by both parties on or before the effective date of this Agreement."
ASP contends that CM's claim relates to the Agreement because the parties intended that ASP would perform certain product testing and validation, subject to industry regulations. It further argues that CM's claim relates to the Agreement as CM "admitted" that this was so in its prior arbitration demand.
The parties agree that the Agreement permitted ASP to perform certain product testing and validation, subject to industry regulations. They disagree, however, as to the characterization of the allegations in the complaint. ASP argues "the allegations are that we did exactly what we were supposed to do, the wrong way," including flawed lab testing and failure to notify CM of the test results. CM contends that the allegations in its complaint do not pertain to ASP's failure to abide by specific provisions of the "Quality Agreement," although ASP may have violated its contractual obligation. CM argues that its tortious interference claim does not require reference to the parties' underlying agreements because ASP's conduct constituted a tortious wrong extraneous to the contract.
Section 8 of the "Quality Agreement" provides, "[r]ecall decision[s will] be made jointly," but in the event either party makes any "other field action decision (e.g., customer notification)," that party must notify the other within five days of its decision. Similarly, section 31 requires ASP to inform CM of any "aberrant or suspect result[s]" obtained during product efficacy testing. Thus the "Quality Agreement" specifically addresses what ASP should have done with regard to testing, notification and reporting.
In Hirsch, supra, our Supreme Court held that when reviewing an arbitration agreement, a court must: (1) determine whether a valid agreement exists and (2) evaluate whether the particular claims at issue are covered by that agreement. 215 N.J. at 187-88. The parties agree that the arbitration agreement is valid, but disagree about whether the agreement covers the claim.
Whether a particular claim is arbitrable "depends not upon the characterization of the claim, but upon the relationship of the claim to the subject matter of the arbitration clause." Wasserstein v. Kovatch, 261 N.J. Super. 277, 286 (App. Div.) (quoting In re Oil Spill by the "Amoco Cadiz", 659 F.2d 789, 794 (7th Cir. 1981)), certif. denied, 133 N.J. 440 (1993). Common law claims, like those asserted here, "have been held arbitrable when they relate to the making or performance of a contract with an arbitration clause." Id. at 286-87. Under this formulation, a dispute must require "reference to the underlying contract" in order to relate to it. Griffin v. Burlington Volkswagen, Inc., 411 N.J. Super. 515, 520 (App. Div. 2010) ("[F]or a tort claim to be subject to arbitration under a broad arbitration clause, it must raise some issue the resolution of which requires reference to or construction of some portion of the parties' contract." (quoting Estate of Athon v. Conseco Fin. Servicing Corp., 88 S.W.3d 26, 30 (Mo. Ct. App. 2002))).
"The public policy of this State favors arbitration as a means of settling disputes that otherwise would be litigated in a court." Badiali v. N.J. Mfrs. Ins. Grp., 220 N.J. 544, 556 (2015); see also Alfano v. BDO Seidman, LLP, 393 N.J. Super. 560, 575 (App. Div. 2007) ("As a general rule, courts have construed broadly worded arbitration clauses to encompass tort, as well as contract claims."); Hojnowski ex rel. Hojnowski v. Vans Skate Park, 375 N.J. Super. 568, 575-76 (App. Div. 2005) ("The fact that the claim arises in tort, not contract, is immaterial."), aff'd, 187 N.J. 323 (2006).
For example, in Garfinkel v. Morristown Obstetrics & Gynecology Associates, P.A., the plaintiff appealed from an order granting the defendants' "Motion to Dismiss [the complaint] and Compel Arbitration." 333 N.J. Super. 291, 294 (App. Div. 2000) (alteration in original), rev'd on other grounds, 168 N.J. 124 (2001). The plaintiff argued that his tort claims, including tortious interference and defamation, were not subject to arbitration. Id. at 302. Focusing on the broad language in the arbitration agreement, we affirmed, finding that the plaintiff "elected to arbitrate 'any controversy arising out of or relating to' the employment contract." Id. at 302-06. "An arbitration provision covering claims 'relating to' a contract is broader than one which covers claims merely arising out of a contract." Yale Materials Handling Corp. v. White Storage & Retrieval Sys., Inc., 240 N.J. Super. 370, 375 (App. Div. 1990) (quoting Int'l Talent Grp., Inc. v. Copyright Mgmt., Inc., 629 F. Supp. 587, 592 (S.D.N.Y. 1986)).
The language in the arbitration provision of the Agreement is couched in similar broad terms as in Garfinkel. The Agreement provides, in relevant part, "[a]ny controversy or claim arising out of or relating to this Agreement shall be resolved by arbitration before a single arbitrator in accordance with the Commercial Arbitration Rules of the American Arbitration Association."
CM argues that its tort claim is unrelated to the Agreement because ASP's conduct constituted an intentional wrong that is extraneous to the parties' contract. The complaint alleges that ASP wrongfully and intentionally interfered with CM's economic expectancy by conducting a flawed lab test of the SteriTite containers, failing to notify CM of the test results, refusing to retest the product prior to taking market action, and initiating a product recall with the FDA without prior notice to CM. The complaint further alleges that ASP interfered with CM's economic expectancy to undercut CM's market share so that it could gain a competitive advantage for its competing product.
Contrary to CM's position, as stated above, arbitrability of a particular claim depends on "the relationship of the claim to the subject matter of the arbitration clause," not the characterization that the moving party ascribes to such claim. Wasserstein, supra, 261 N.J. Super. at 286 (quoting In re Oil Spill, supra, 659 F.2d at 794). A party is not permitted to avoid the broad language of an arbitration clause by casting its claim in tort. Garfinkel, supra, 333 N.J. Super. at 303 (citing Altshul Stern & Co. v. Mitsui Bussan Kaisha, Ltd., 385 F.2d 158, 159 (2d Cir. 1967)). Rather, a claim is arbitrable when it relates to—or, requires reference to—the underlying contract. Griffin, supra, 411 N.J. Super. at 520-21.
CM's allegations relate directly to the commercial enterprise between the parties controlled by the Agreement. CM alleges that ASP intentionally interfered with its economic advantage by conducting a flawed, biased test of the SteriTite containers with the purpose of initiating a recall with the FDA that ASP knew would be damaging to CM's business. This claim stems from the Agreement, which governs the rights and obligations of the parties. The dispute relates to the terms of the business relationship between the parties, not some other factor tangential to that relationship.
A contract violation that may also constitute an intentional tort must be arbitrated under broad arbitration language. See Alfano, supra, 393 N.J. Super. at 575 (finding arbitration appropriate for intentional tort claims of fraud and civil conspiracy where they relate directly to the contractual relationship between the parties). Adoption of CM's argument would be to ignore this State's strong public policy in favor of arbitration, as well as precedent indicating that broadly worded arbitration clauses cover intentional tort as well as contract claims.
Reversed and remanded to enter an order dismissing the complaint in favor of arbitration. We do not retain jurisdiction. I hereby certify that the foregoing is a true copy of the original on file in my office.
The Arbitrator will be free to decide all issues and is not bound by the July 2015 denial of ASP's motion to dismiss. --------
CLERK OF THE APPELLATE DIVISION