Cd Partners, LLC Cd Developers, Lp v. Jerry W. Grizzle, Acting in Scope of His Employment as Chief Executive Officer of Cdwi [Cd Warehouse, Inc.] Doyle E. Motley, Acting Within the Scope of His Employment as Chief Financial Officer of Cdwi [Cd Warehouse, Inc.] Gary Johnson, Acting Within the Scope of His Employment as Chief Operating Officer of Cdwi [Cd Warehouse, Inc.]

Citations: 424 F.3d 795; 2005 U.S. App. LEXIS 20394Docket: 03-3831

Court: Court of Appeals for the Eighth Circuit; September 23, 2005; Federal Appellate Court

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Jerry Grizzle, Doyle Motley, and Gary Johnson, principals of CD Warehouse, Inc. (CDWI), appeal the district court's decision denying their motion to compel arbitration in a tort lawsuit filed by C.D. Partners, L.L.C. The lawsuit alleges negligence and misrepresentation related to four franchise agreements between CDWI and C.D. Partners. The district court ruled against the motion, stating the appellants were not signatories to the franchise agreements and that the lawsuit did not fall under the arbitration clauses of those agreements. The franchise agreements, executed between 1997 and 1999, included an arbitration clause mandating arbitration for disputes related to the operation of the franchised business. Each agreement specified that only the franchisor and franchisee, along with their officers and employees, had rights under the agreement. A prior contractual dispute led C.D. Partners to file suit against CDWI, which was stayed for arbitration that was never conducted due to CDWI's bankruptcy. In 2003, C.D. Partners initiated a new lawsuit in Iowa state court against the individual executives of CDWI, asserting tort claims distinct from the earlier contract-based litigation. The appeals court has reversed the district court's decision and remanded for further proceedings.

Grizzle was accused of negligence in nine specific areas related to franchise operations, including failing to protect exclusive territories, improve point-of-sale software, and provide timely financing for capital improvements. Similar negligence claims were made against Motley and Johnson. Additionally, all three defendants faced allegations of negligent misrepresentation, claiming they provided false information to C.D. Partners, resulting in damages. The fraudulent misrepresentation claims asserted that the defendants knowingly made false statements to deceive C.D. Partners.

The defendants removed the case to federal court and moved to compel arbitration based on the franchise agreements, arguing that their tort allegations stemmed from the contractual relationship, despite not being signatories. C.D. Partners opposed this motion, contending that the defendants could not enforce the arbitration clauses due to their nonsignatory status and that the claims did not fall under the arbitration provisions.

The district court denied the motion, concluding that the claims and damages in this case differed from those in a prior lawsuit against the corporation. Subsequently, Grizzle, Motley, and Johnson appealed. The appellate court reviewed the denial de novo, emphasizing that doubts regarding arbitration should favor its use. The court found that nonsignatories can enforce arbitration clauses under certain circumstances, especially when the relationship between the signatory and nonsignatory is closely tied to the agreement, and the claims against the nonsignatories directly relate to the written agreement. Both criteria were deemed present in this case, justifying the enforcement of arbitration.

C.D. Partners' cited authority is not applicable to the current case. In Flink v. Carlson, the Eighth Circuit ruled that a signatory could not compel a nonsignatory into arbitration, affirming a stay on arbitration claims against a nonsignatory. Similarly, Merrill Lynch Inv. Managers v. Optibase confirmed that a nonsignatory could not be forced into arbitration. This case differs as a willing nonsignatory seeks to compel arbitration with an unwilling signatory. The legal framework for compelling arbitration varies depending on whether the resisting party is a signatory or nonsignatory. A willing nonsignatory can invoke alternative estoppel to compel arbitration based on the interconnected relationships and issues involved. In contrast, a signatory must prove one of five established theories to compel an unwilling nonsignatory. Courts recognize the ability of a nonsignatory to compel a signatory into arbitration under the alternative estoppel theory when there is a close relationship between the involved parties, as seen in Astra Oil Co. v. Rover Navigation. The dissent’s reliance on McCarthy v. Azure is misplaced, as that case involved a one-time transaction with no ongoing relationship, unlike the current situation, which features an ongoing relationship where the conduct of the nonsignatories is directly tied to the obligations of the signatory. Thus, this case aligns more closely with precedents allowing nonsignatories to enforce arbitration clauses.

The franchise agreements include broadly worded arbitration clauses that encompass all claims, controversies, or disputes arising from the operation of the franchise. The agreements specify that rights or remedies are conferred upon the Franchisor's officers, directors, and employees, thereby allowing these nonsignatories to enforce the arbitration provision against C.D. Partners. The tort claims filed by C.D. Partners against Grizzle, Motley, and Johnson fall within the scope of these arbitration clauses, as they arise from the same operative facts of the franchise agreements. This aligns with a national policy favoring arbitration, which dictates that ambiguities regarding the applicability of arbitration clauses are resolved in favor of arbitration. C.D. Partners' argument for arbitration to occur in Iowa instead of Oklahoma is based on a provision of the Federal Arbitration Act, which states that arbitration should take place in the district where the petition for arbitration is filed.

The district court did not compel arbitration for the parties involved, leaving the issue unripe for review; the court will address it upon remand. The appellate court reversed the district court’s denial of the motion to compel arbitration and remanded for further proceedings. The case involves four franchise agreements for retail stores in Iowa and Missouri. The dissenting opinion argues against the majority's reliance on certain precedents regarding non-signatories enforcing arbitration clauses, asserting that relevant case law does not provide controlling guidance on the matter. The dissent criticizes the majority for not citing specific Eighth Circuit precedent and highlights that the arbitration clause in question is limited to claims arising under the agreement, unlike cases invoking equitable estoppel. Additionally, the dissent references a First Circuit case, McCarthy v. Azure, emphasizing that a corporate officer could not compel arbitration of claims against them personally unless the contract explicitly includes such provisions. The dissent underscores the importance of precise drafting in arbitration agreements to encompass all intended parties.