Opinion
No. 00-4909-CIV-KING
February 28, 2001
ORDER DENYING DEFENDANTS' PETITION FOR ORDER COMPELLING ARBITRATION AND DEFENDANTS' MOTION TO STAY ACTION PENDING ARBITRATION
THIS CAUSE comes before this Court upon Defendants' Petition for Order Compelling Arbitration Pursuant to 9 U.S.C. § 2 and 4 and Motion to Stay Action Pending Arbitration Pursuant to 9 U.S.C. § 3 filed January 17, 2001. Plaintiff filed a Response to Defendants' Petition for Order Compelling Arbitration and Motion to Stay Pending Arbitration on January 31, 2001. On February 9, 2001, Defendants filed a Consolidated Reply to Plaintiff's Responses. This Court heard oral argument on Defendant's Motions and Plaintiff's Responses thereto on February 14, 2001.
I. BACKGROUND
In 1997, Defendants B. Braun Medical, Inc. ("BMI") and B. Braun of America, Inc. (collectively "Defendants") brought McGaw, Inc. ("McGaw"), a subsidiary of Plaintiff IVAX Corporation ("IVAX") for 320 million dollars plus up to an additional amount of 80 million dollars, depending on the Adjusted Combined Operating Income ("ACOI") of McGaw and BMI. Section 2.5(a) of the Stock Purchase Agreement (the "Agreement") set forth procedures in which the parties must follow to resolve disputes over the Contingent Payments. In relevant part, Section 2.5(a) of the Stock Purchase Agreement states that:
In the event as a result of any examination by SELLER [IVAX] pursuant to this Scction 2.5 SELLER [IVAX] determines that it has not been paid amounts due it under Section 2.4 of this Agreement with respect to any preceding fiscal year, SELLER [IVAX] may provide notice to PURCHASER [Defendants] in writing of such determination, which notice shall set forth in reasonable detail the basis for such determination and SELLER's [IVAX] specific objection(s) to PURCHASER's [Defendant] Statement with respect to such fiscal years. PURCHASER [Defendants] and its Accountants shall thereafter be entitled to examine the relevant working papers of SELLER's [IVAX] Accountants (excluding the proprietary materials of SELLER's [IVAX] Accountants) and the procedures carried out in connection with their examination. PURCHASER [Defendants] and SELLER [IVAX] and their respective Accountants shall have thirty (30) days from the date PURCHASER [Defendants] receives notification of SELLER's [IVAX] determination and objection(s) to negotiate in good faith a resolution of their dispute. If such dispute cannot be resolved within such thirty (30) day period, then either PURCHASER [Defendants] or SELLER [IVAX] may cause such dispute to be submitted for determination to the Arbitrator, who shall as soon as practicable, but in any event no later than thirty (30) days thereafter, determine the disputed items using such procedures and factual investigations and determinations as the Arbitrator may reasonably deem appropriate; provided, however, that the Arbitrator shall be instructed to resolve such disputed items in accordance and in a manner consistent with that described in Section 2.4 thereof The Arbitrator's determination of the disputed items shall be "final" and binding upon both PURCHASER and SELLER [parties] and shall be nonappealable.
Section 1.9 of the Stock Purchase Agreement defines an Arbitrator as "any mutually acceptable Accountants" (Compl, Attach Ex., Agreement at 2.)
(Compl. Attach. Ex. A., the Agreement at 19.)
On June 18, 1999, IVAX provided notice to Defendants that it would begin examination of their books and records as well the work papers of Defendants' accountants PricewaterhouseCoopers for the fiscal year 1998. (See Compl ¶ 41.) Thereafter, IVAX selected Arthur Andersen LLP ("AA") as the accountant firm to perform the examination. (See Pl's Resp. Defs.' Mot. Order Compel Arbitration Mot. Stay Action Pending Arbitration ¶ 16.)
In July 1999, Arthur Andersen LLP began performing an examination of Defendants' books and records to determine whether proper accountings and payments were made to IVAX by Defendants pursuant to Section 2.4 of the Stock Purchase Agreement. On December 29, 1999. IVAX provided Defendants with a notice that it would begin examination of their books and records and PricewaterhouseCoopers' work papers for the fiscal year 1999. (See id. ¶ 47.) In April 2000, Defendants denied Arthur Andersen LLP access to certain books and records on the ground that they were not required to disclosure certain materials. Defendants refused to allow Arthur Andersen LLP to continue examination of their books and records until Arthur Andersen LLP signed an agreement of confidentiality. (See Compl. ¶ 52.) Defendants and Arthur Andersen LLP entered into a Confidentiality Agreement on June 8, 2000, which set forth the terms and conditions of Arthur Andersen LLP's examination. This limited the rights set forth in the Stock Purchase Agreement between IVAX and Defendants, providing that IVAX's accountants would have access to "examine the relevant books and records of Purchaser [Defendants]". (See Neil Flanzraich's Aff. Attach. Ex. A., Confidentiality Agreement; Compl. Attach. Ex A, the Agreement at 19.) After Arthur Andersen LLP and Defendants entered into this new Confidentiality Agreement, Arthur Andersen LLP resumed examination of the Defendants' books and records.
Arthur Andersen LLP had not completed its examination, nor had it been given complete access to all Defendants' books and records as specified by the Stock Purchase Agreement, when IVAX provided Defendants with additional notices on November 21, 2000 and November 29, 2000, respectively for the fiscal years 1998 and 1999. IVAX put Defendants on notice that it was IVAX's position that Defendants had not paid the accurate amount of Contingent Payments. (See Defs. Pet. Order Compel Arbitration ¶ 11.) On December 11, 2000, in accord with Section 2.5(a) of the Stock Purchase Agreement, IVAX allowed Defendants access to its accountants' work papers. (See id. ¶ 13.)
The original Stock Purchase Agreement provided for arbitration in Section 2.5(a) and required the parties to "negotiate in good faith a resolution of their dispute" within thirty (30) days from the day the Defendants receive notice of IVAX's objections to the ACOI statements. (Compl. Attach. Ex. A, the Agreement at 19.) On December 18, 2000. the parties agreed to meet in Chicago, Illinois on December 21, 2000 to discuss the disputes over the Contingent Payments. December 21, 2000 and December 29, 2000 were the last days in which the parties could have met "to negotiate in good faith a resolution of their dispute" over the ACOI respectively for the fiscal years 1998 and 1999 in accord with arbitration in Section 2.5(a) of the Stock Purchase Agreement. (See Compl. Attach. Ex., the Agreement 19.) However, at the December 21, 2000 scheduled meeting in Chicago, only representatives from IVAX were present. Instead, the Defendants' representatives participated in the meeting by telephone. The parties disagree over whether they met in good faith to resolve their disputes, whether the prerequisites for the thirty (30) days for commencing a meeting between the parties were met or what events caused the termination of the meeting. (See Aff. M. Sean McMillan, Ex. P, Q.) This meeting ended without any resolution between the parties regarding the Contingent Payments. On December 20, 2000, Defendants filed a six count lawsuit against Arthur Andersen LLP in the Court of Common Pleas of Lehigh County, Pennsylvania based on alleged breaches of the Confidentiality Agreement and on alleged Arthur Andersen LLP's misrepresentations. IVAX was not joined as a party to this suit by Defendants.
On December 21, 2000, IVAX filed this instant action for alleged breach of contract. (See Compl.) In this proceeding, this Court conducted an emergency hearing, considered the briefs and arguments of all and ordered that the parties to file under seal Arthur Andersen LLP's reports, information and work product with this Court until it can be determined what information IVAX should have access to, pursuant to the Stock Purchase Agreement and enjoined the Defendants from seeking relief in the Pennsylvania state court action which would deprive IVAX of its rights under the Stock Purchase Agreement. (See Court's January 24, 2000 Order.) The parties have complied with this Court's January 24, 2000 Order.
Defendants moved on January 17, 2001 to compel arbitration of the disputed Contingent Payments as provided by the Stock Purchase Agreement. In response, Plaintiff contends that (1) arbitration is permissive; (2) its breach of contract claim is beyond the scope of the arbitration clause; and (3) the Defendants waived their right to arbitration by their consistent resistance to meaningful disclosures of their books and accounting records as contemplated by the parties in the Stock Purchase Agreement. This Court not need decide whether arbitration is permissive or mandatory under the arbitration clause or whether IVAX's breach of contract claim falls within the scope of the arbitration agreement because the Court finds the Defendants have waived their right of arbitration. See S H Contractors, Inc. v. A. J. Coal Co., Inc., 906 F.2d 1507, 1514 (11th Cir. 1990) (finding that the district court did not need to resolve the issue whether the arbitration clause was void under state law because the plaintiff waived its right of arbitration).
II. DISCUSSION
The Federal Arbitration Act ("FAA") 9 U.S.C. § 1 et seq. authorizes and requires federal courts to enforce valid arbitration agreements. The FAA reflects a strong federal policy favoring arbitration of issues upon which the parties agreed to arbitrate. See Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24-25, 103 S.Ct. 927, 941-942, 74 L.Ed.2d 765 (1983). Under the FAA, a federal court can order a "stay of litigation in any case raising a dispute referable to arbitration, 9 U.S.C. § 3, and an affirmative order to engage in arbitration, § 4." Moses H. Cone, 460 U.S. at 22, 103 S.Ct. at 940. When a party seeks for a Court to compel arbitration, it must first determine whether a valid arbitration agreement exists and then determine whether the issue to be arbitrated falls within the scope of the arbitration agreement. "[A]ny doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration". Moses H. Cone, 460 U.S., at 24-25, 103 S.Ct., at 941. However, the right to arbitrate like any other contractual right is not absolute and may be waived. See S H Contractors, Inc., 906 F.2d 1507, 1514 (11th Cir. 1990), cert. denied, 498 U.S. 1026 (1991) (concluding that a party may waive the right of arbitration by its conduct); E.C. Ernst. Inc. v. Manhattan Constr. Co., 559 F.2d 268, 269(5th Cir. 1977)(same); Cornell Co. Inc. v. Barber Ross Co., 360 F.2d 512, 513(D.C. Cir. 1966)(same).
A party waives its right of arbitration when under the totality of circumstances that party's conduct is inconsistent with the right of arbitration and the other party has been prejudiced by such conduct. See S H Contractors, Inc., 906 F.2d at 1514; National Found. for Cancer Research v. A.G. Edwards Sons, 821 F.2d 772, 774 (D.C. Cir. 1987); 9 U.S.C. § 2 (An arbitration agreement "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract."); See also Usher Syndicate Ltd., Inc. v. Figgie Int'l., 1987 WL 19840 (S.D.Fla.) (concluding that a "waiver can occur by participation in litigation or "`other action inconsistent with that right.'")Id. at * 2) (quoting Cornell, 360 F.2d at 513); NCR Credit Corp. v. Reptron Elecs., Inc., 863 F. Supp. 1561 (M.D.Fla. 1994) (holding that for a party to prove the right of arbitration was waived it must show "1. knowledge of an existing right to compel arbitration; 2. acts inconsistent with that existing right; and 3. prejudice to the party opposing arbitration resulting from such inconsistent acts.") (Id. at 1564) (citing Fisher v. A.G. Becker Paribas. Inc., 791 F.2d 691, 694 (9th Cir. 1986).
Defendants argue the standard for determining whether a party waived its right of arbitration is narrower than the "totality of circumstances" standard. Defendants cite Morewitz v. West of England Ship Owners Mut. Protection Indem. Ass'n, 62 F.3d 1356, 1365 (11th Cir. 1995) to supports their argument. In Morewitz, the Eleventh Circuit held that a waiver occurs when "the party seeking arbitration substantially participates in litigation to a point inconsistent with an intent to arbitrate and this participation results in prejudice to the opposing party." Id. at 1365. However, the Eleventh Circuit, in Morewitz, did hold that a waiver of the right of arbitration only occurs from participation in litigation by the party seeking arbitration. Such a narrow application of the standard to determine whether a waiver has occurred would frustrate the waiver doctrine and a court's equitable powers. See Midwest Window Systems. Inc. v. Amcor Indus. Inc., 630 F.2d 535, 537 (7th Cir. 1980) ("The waiver of the right to arbitration cannot be determined by the application of some inflexible rule."); Burton-Dixie Corp. v. Timothy McCarthy Construction Co., Inc., 436 F.2d 405, 408 (5th Cir. 1971) ("There is no set rule, however, as to what constitutes a waiver or abandonment of the arbitration agreement.") A court must examine the facts of each case to determine whether a party has waived its right of arbitration. See id. at 408.
IVAX argues that the Defendants waived arbitration by (a) filing and participating in the Pennsylvania state action against Arthur Andersen LLP in which Defendants attempted to prevent IVAX's accountants from access to essential accounting information as permitted by Section 2.5(a) of the Stock Purchase Agreement, (b) failing to maintain complete and accurate books and records, (c) frustrating the arbitration process by constantly limiting IVAX's examination of their books and records and (d) by not negotiating in good faith to resolve the dispute over the Contingent Payments based on the ACOI. (See Tr. Hr'g Mot. Transfer Mot. Compel at 33 and 43.)
Under the circumstances of the instant case, the Court concludes that the Defendants have waived arbitration. The arbitration clause in Section 2.5(a) of the Stock Purchase Agreement is limited in its scope. The arbitration clause only covers disputes over the Contingent Payments based on the ACOI. Section 2.5(a) of the Agreement set forth the procedures including the manner and time in which the parties will solve their disputes through alternative dispute resolution. However, Defendants, by filing suit in a Pennsylvania state court seeking to prevent disclosure by Arthur Andersen LLP of the results of their audit, a day before their scheduled December 21, 2000 Chicago meeting with IVAX is an indication of Defendants intent to prevent IVAX from implementing the steps required under Section 2.5(a) of the Stock Purchase Agreement to obtain arbitration. The acts of the Defendants are inconsistent with good faith intent to arbitrate. As the Court held in its January 24, 2001 Order,
Defendants' Pennsylvania state court action has the real potential of undermining this Court determination of discovery matters by determining IVAX's access to information even though IVAX is not a party to that proceeding. Even though Arthur Andersen LLP is not a party to the Agreement between IVAX and the Defendants, this Court concludes that the Defendants participation in the Pennsylvania state court action is inconsistent with the right of arbitration. Defendants would invalidate Section 2.5 of the Agreement by preventing IVAX from obtaining information it has contractual rights under the Agreement.
(Id. at 11.) Further, the conduct of Defendants in limiting and eventually refusing Arthur Andersen LLP's access to their books and records as well as PricewaterhouseCoopers' books and records is inconsistent with a good faith intent to arbitration.
IVAX has been prejudiced by acts of the Defendants to prevent IVAX's accountants from examining Defendants' books and record thus making it impossible for IVAX to present timely, reasonable and detailed objections as required by the Section 2.5(a) of the Stock Purchase Agreement to the Defendants' ACOI statements. The Defendants' conduct has delayed the arbitration process as proscribed in Section 2.5(a) of the Stock Purchase Agreement and cost IVAX additional expenses by delaying the examination. This Court finds that Defendants did not act in the good faith envisioned by the parties and mandated by Section 2.5(a) of the Stock Purchase Agreement. The Defendants have, by their conduct, waived their right to compel arbitration.
IVAX claims that it has spent "over 1.5 million on accounting fees, and has dedicated a year and half to attempting to conduct a full examination of Defendants' books and records" for work performed thus far by Arthur Andersen LLP. (Pl's Emergency Mot. T.R.O., Order Show Cause, Protective Order, Other Appropriate Relief at 15; See also Tr. Hr'g Mot. Transfer Mot. Compel at 44.)
III. CONCLUSION
Accordingly, after a careful review of the record, and the Court being otherwise fully advised, it is
ORDERED, ADJUDGED and DECREED that Defendants' Petition for Order Compelling Arbitration and Staying this Action be, and the same are hereby DENIED.