Applied Energetics v. Newoak

10-5107-cv
Applied Energetics v. Newoak
UNITED STATES COURT OF APPEALS 1
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FOR THE SECOND CIRCUIT 3
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August Term, 2010 7
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(Argued: April 13, 2011 Decided: July 13, 2011) 9
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Docket No. 10-5107-cv 11
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APPLIED ENERGETICS, INCORPORATED, 15
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Petitioner-Appellant, 17
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NEWOAK CAPITAL MARKETS, LLC, 21
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Respondent-Appellee. 23
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Before: KEARSE and CHIN, Circuit Judges, and 27
RAKOFF, District Judge. *
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Appeal from a final order and judgment of the United States 30
District Court for the Southern District of New York compelling 31
arbitration under 9 U.S.C. § 4. Reversed. 32
CLIFFORD THAU (Hilary L. Preston, on the 33
brief), Vinson & Elkins LLP, New York, NY for 34
Petitioner-Appellant. 35
36
LEANNE M. SHOFI (Joseph M. Pastore III, on 37
the brief), Fox Rothschild, LLP, New York, NY 38
, for Respondent-Appellee. 39
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* The Honorable Jed S. Rakoff, United States District Judge
for the Southern District of New York, sitting by designation.
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RAKOFF, District Judge: 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. 8
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 Dealers 1 . . . 24
in New York City. 25
26
1 The National Association of Securities Dealers is one of
the predecessors of FINRA.
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However, the Engagement Agreement also specifically contemplated 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
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allegations that, between May 4, 2005 and May 10, 2006, Applied 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
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parties to arbitrate. Applied Energetics, Inc. v. NewOak Capital 1
Markets, LLC, No. 10 Civ. 1669, 2010 WL 4968186, *1 (S.D.N.Y. 2
Dec. 3, 2010) (“Applied II”). This appeal followed. 3
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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 24
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district court granted NewOak’s motion and compelled the parties 1
to arbitrate NewOak’s claims. 2
We disagree with the district court’s conclusion that the 3
Engagement Agreement’s arbitration clause and the Placement 4
Agreement’s court-adjudication clause can reasonably be read as 5
complementary. Rather, this case falls within the alternative 6
scenario, also contemplated by Bank Julius, where contracting 7
parties are free to revoke an earlier agreement to arbitrate by 8
executing a subsequent agreement the terms of which plainly 9
preclude arbitration. See 424 F.3d at 284. 10
A close reading of Bank Julius is instructive. In Bank 11
Julius, the parties, like those in the instant case, initially 12
agreed to arbitrate “any . . . dispute” arising out of their 13
contractual relationship and, likewise, subsequently entered into 14
an agreement that omitted any mention of arbitration. Id. at 15
282. The subsequent agreement included, however, a non-exclusive 16
forum selection clause that read as follows: 17
Without limiting the right of the [plaintiff] to bring any 18
action or proceeding against [the defendant] . . . in the 19
courts of other jurisdictions, [the defendant] hereby 20
irrevocably submits to the jurisdiction of any New York 21
State or Federal court sitting in New York City, and . . . 22
hereby irrevocably agrees that any Action may be heard and 23
determined in such New York State court or in such Federal 24
court. 25
26
424 F.3d at 282 (emphasis omitted). Furthermore, the subsequent 27
agreement, although containing a merger clause, also provided 28
that “the rights and remedies provided [herein] are cumulative 29
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and not exclusive of any rights or remedies provided under any 1
other agreement.” Id. 2
Under these circumstances, the Court in Bank Julius 3
concluded that the forum selection clause in the subsequent 4
agreement could be read as complementary, rather than 5
contradictory, to the parties’ initial agreement to arbitrate: 6
the forum selection clause would operate to provide New York 7
courts with (non-exclusive) jurisdiction over ancillary 8
proceedings -- such as to enforce an arbitral award or to 9
challenge the validity of the arbitration agreement -- but the 10
merits of any dispute would be resolved in the first instance by 11
arbitration. See id. at 284-85 While other readings were 12
possible, the presumption in favor of arbitration made this 13
reading the preferred interpretation. Id. 14
The case at bar is different. Here, the Placement 15
Agreement’s language that “[a]ny dispute” between the parties 16
“shall be adjudicated” by specified courts stands in direct 17
conflict with the Engagement Agreement’s parallel language that 18
“any dispute . . . shall be resolved through binding 19
arbitration.” Both provisions are all-inclusive, both are 20
mandatory, and neither admits the possibility of the other. 21
Moreover, use of the word “adjudicate[]” in the Placement 22
Agreement’s clause is a clear and unmistakable reference to 23
judicial action. See Black’s Law Dictionary 47, 922 (9th ed. 24
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2009) (defining “adjudicate” as “[t]o rule upon judicially,” and 1
defining judicial as “[o]f, relating to, or by the court or a 2
judge”). Similarly, the clause’s use of the obligatory verb 3
“shall” precludes the resolution of the parties’ disputes by any 4
means other than their “adjudicat[ion]” by a court of law. See 5
Phillips v. Audio Active Ltd., 494 F.3d 378, 386-87 (2d Cir. 6
2007) (forum selection clause using obligatory language precludes 7
parties from bringing an action arising thereunder in forums 8
other than those enumerated therein). Accordingly, the Placement 9
Agreement’s adjudication clause “specifically precludes” 10
arbitration, see Bank Julius, 424 F.3d at 284 (internal quotation 11
marks omitted), and, by operation of the merger clause, 1
12
displaces the Engagement Agreement’s arbitration clause. Under 13
the express terms of the Placement Agreement, the parties’ 14
instant disputes must therefore be heard in the first instance by 15
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.
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either the New York State Supreme Court for New York County or 1
the federal district court for the Southern District of New York. 2
Even assuming, as the district court found, that the 3
provisions in the two agreements could reasonably be read as 4
complementary, we conclude that the district court erred in 5
applying the presumption in favor of arbitration. As the Supreme 6
Court reaffirmed in Granite Rock Co. v. International Brotherhood 7
of Teamsters, “in FAA and in labor cases” the presumption in 8
favor of arbitrability should only be applied “where a validly 9
formed and enforceable arbitration agreement is ambiguous about 10
whether it covers the dispute at hand.” 130 S. Ct. 2847, 2858-59 11
(2010). In other words, while doubts concerning the scope of an 12
arbitration clause should be resolved in favor of arbitration, 13
the presumption does not apply to disputes concerning whether an 14
agreement to arbitrate has been made. See, e.g., Vera v. Saks & 15
Co., 335 F.3d 109, 116 (2d Cir. 2003). “[A] party cannot be 16
required to submit to arbitration any dispute which [it] has not 17
agreed so to submit.” Id. (internal quotation marks and brackets 18
omitted). Here, because the parties dispute not the scope of an 19
arbitration clause but whether an obligation to arbitrate exists, 20
the presumption in favor of arbitration does not apply. 21
Finally, in deciding whether a contractual obligation to 22
arbitrate exists, “courts should generally apply state-law 23
principles that govern the formation of contracts.” Mehler v. 24
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Terminix Int’l Co., 205 F.3d 44, 48 (2d Cir. 2000). Under New 1
York law, “[i]t is well established that a subsequent contract 2
regarding the same matter will supersede the prior contract.” 3
Barnum v. Millbrook Care Ltd. P’ship, 850 F.Supp 1227, 1236 4
(S.D.N.Y.) (citing Coll. Auxiliary Servs. Of State Univ. Coll., 5
Inc. v. Slater Corp., 456 N.Y.S.2d 512 (3d Dep’t 1382)), aff’d 43 6
F.3d 1458 (2d Cir. 1994). Here, for the reasons set forth above, 7
we conclude, as a matter of law, that the Placement Agreement 8
superseded the Engagement Agreement. 9
For the foregoing reasons, the order of the district court 10
compelling arbitration is reversed and the matter is remanded 11
with direction to grant the petition to stay the FINRA 12
arbitration and to take such other action as is consistent with 13
this Opinion. 14
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