United States District Court, Eastern District of Pennsylvania
February 11, 2000
AUDIO VIDEO CENTER, INC.
FIRST UNION NAT'L BANK, ET AL.
The opinion of the court was delivered by: Bartle, J.
Plaintiff Audio Video Center ("Audio Video") brings this diversity
action against defendants First Union National Bank and NOVA
Information Systems (collectively "defendants") alleging breach of
contract, fraud, violation of civil rights, and other state law
claims. Before the court is defendants' motion to compel
arbitration and to dismiss Counts V (intentional interference with
contractual relations) and VI (deprivation of civil rights) of
plaintiff's first amended complaint.
Arbitration is a matter of contract. It is for the court, and not
the arbitrator, to decide if the parties agreed to arbitrate the
claims in dispute. AT&T Tech., Inc. v. Communications Workers,
475 U.S. 643, 648 (1986) (citations omitted); Par-Knit Mills, Inc. v.
Stockbridge Fabrics Co., 636 F.2d 51, 54 (3rd Cir. 1980). Under the
Federal Arbitration Act, "if the making of the arbitration
agreement or the failure, neglect, or refusal to perform the same
be in issue, the court shall proceed summarily to the trial
thereof." 9 U.S.C. § 4. Of course, if there is no genuine issue of
material fact, giving the non-moving party "the benefit of all
reasonable doubts and inferences that may arise," the court may
decide the issue of arbitrability without a trial. Par-Knit Mills,
636 F.2d at 54.
In support of their motion to compel arbitration, defendants rely
on the written contract between the parties, which admittedly
contains an arbitration clause. Audio Video argues in opposition
that the contract is the product of fraud in the execution which
vitiates the arbitration provision.
In Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395
(1967), the Supreme Court had before it the question whether it
was the arbitrator or the court that should decide if the
plaintiff had been induced by fraud to enter into a contract
containing an arbitration clause. The Supreme Court held that the
role of the courts was a limited one:
If the claim is fraud in the inducement of the arbitration
clause itself — an issue which goes to the "making" of
the agreement to arbitrate — the federal court may
proceed to adjudicate it. But the statutory language does
not permit the federal court to consider claims of fraud in
the inducement of the contract generally.
Id. at 403-04.
Thus, where fraud in the inducement is at issue, we must defer to
the arbitrator except where the alleged fraud was directed
specifically to the arbitration clause itself, rather than
generally to the contract of which the arbitration clause is
merely a part. When it is alleged that the object of the fraud is
the arbitration clause, the court will decide the issue because it
goes to the heart of whether the parties agreed to arbitrate.
The Supreme Court in Prima Paint, however, did not speak on the
question whether the court's role is similarly limited where the
fraud is in connection with the execution of the contract.
"`[F]raud in the execution' arises when a party executes an
agreement `with neither knowledge nor reasonable opportunity to
obtain knowledge of its character or its essential terms.'"
Connors v. Fawn Mining Corp., 30 F.3d 483, 490 (3rd Cir. 1994)
(quoting Southwest Admin'rs, Inc. v. Rozay's Transfer,
791 F.2d 769, 774 (9th Cir. 1986) (other citations and internal quotation
marks omitted)). The law traditionally has distinguished between
fraud in the inducement which makes a contract voidable and fraud
in the execution of the contract which negates its very existence.
If no contract is made, there of course can be no contract to
arbitrate. The question of whether the parties made a contract to
arbitrate is for the court to determine. Consequently, when a
party contends that fraud in the execution of the contract
occurred, the court must consider the circumstances surrounding
the making of the putative contract as a whole and not simply the
arbitration provision. Cancanon v. Smith Barney, Harris, Upham &
Co., 805 F.2d 998, 999-1000 (11th Cir. 1986); Dougherty v.
Mieczkowski, 661 F. Supp. 267, 274-75 (D.Del. 1987); see also,
Par-Knit Mills, 636 F.2d at 54-55.
In order to be able to resolve whether the parties here made a
contract, we directed the parties to conduct limited discovery on
the issue of fraud. The evidence, taken in the light most
favorable to Audio Video, is as follows. On July 30, 1997, Marc
Kadoch ("Kadoch"), an officer and authorized agent of Audio Video,
signed an "Application for Merchant Bank Card Services." The
Application, which is the front side of a sheet of paper folded
vertically,*fn1 incorporated by reference the Merchant Processing
Agreement ("Agreement") in which defendants agreed to provide
Audio Video with certain services in connection with credit card
purchases at Audio Video's store. The Agreement is printed on both
sides of the interior of the folded paper. The Application
contains handwritten insertions of the basic information about
Audio Video and its business. It also includes rate information*fn2
printed warranty provision which states in relevant part:
Each undersigned owner/officer of merchant represent[s] and
warrant[s] that he/she has read and understands the Merchant
Processing Agreement, accepts and agrees to abide by all the
terms of such Merchant Processing Agreement, accepts and
agrees to abide by all the terms of such Merchant Processing
Agreement (including and without limitation, the provisions
of Section 32, enclosed herein by reference).
The arbitration clause, which is paragraph 25 of the Agreement,
Arbitration. Any and all claims, demands, disputes, or
controversies of every kind or nature between the parties
hereto arising out of or related to this Agreement, as to the
existence, applicability, construction, validity,
interpretation, performance or non-performance, enforcement,
operation, or breach thereof, which is not otherwise settled
by agreement of the parties, shall be submitted to, determined
and decided by arbitration, held in Atlanta, Georgia in
accordance with the rules of the American Arbitration
Kadoch initialed the rate information and signed the Application,
incorporating the Agreement. The parties agree, however, that
Kadoch did not read the terms on the inside, which included the
arbitration clause of the Agreement.
Audio Video does not assert that Kadoch's signature is a forgery.
See Gregory v. Interstate/Johnson Lane Corp., NO. 98-1840, 1999
WL 674765, at *9 (4th Cir. Aug. 31, 1999). On the contrary, it
concedes that Kadoch knowingly signed and initialed the document
on the front. Kadoch's signature is located directly below the
warranty provision acknowledging that he "has read and understands
the Merchant Processing Agreement and accepts and agrees to abide
by all . . . [its] terms, . . . including Section 32 enclosed herein
by reference." Although this language does not explicitly tell the
reader that the Agreement can be found inside, a cursory
inspection reveals that Section 32, a personal guarantee, is not
located on the page being executed. Kadoch, an experienced
businessman who had signed similar contracts in the past, simply
choose not to look for Section 32 or other paragraphs of the
Agreement. Kadoch admits that Charles Ernst, the defendants'
representative, did not prevent him from picking up the Agreement,
opening it, and reading the entire contract. Instead, Kadoch "just
signed it." Plaintiff's claim that Kadoch felt rushed by Ernst and
signed the Agreement in haste does not create fraud with respect
to the execution of the Agreement or its arbitration clause,
especially in light of the fact that Kadoch could have examined
the terms and conditions of the Agreement if he had chosen to do
so. In sum, the record is devoid of evidence that defendants made
any material misrepresentation or engaged in any acts of deceit
with respect to the contract in general or the arbitration clause
Section 4 of the Federal Arbitration Act allows for a jury trial
to determine the existence of fraud if the making of the
arbitration agreement "be in issue" and if the "party in default"
requests one. 9 U.S.C. § 4. In this case, no genuine issue of
material fact exists. No reasonable juror could find that
defendants committed fraud in the execution of the instant
contract. Thus, we have no need to conduct a jury trial on this
issue. We hold, as a matter of law, that neither the Agreement nor
the arbitration clause was the subject of fraud in the execution
and that therefore the arbitration provision in the Agreement is
Defendants also move to dismiss plaintiff's claims of intentional
interference with contractual relations (Count V) and deprivation
of civil rights under 42 U.S.C. § 1981
(Count VI) for failure to state claims upon which relief can be
granted. Audio Video, in its first amended complaint, clearly
ties these two claims to the alleged breach of contract. These
claims, along with the remainder of plaintiff's causes of action,
fall within the scope of the Agreement's broad arbitration clause
and are for the arbitrator to resolve. See Seus v. John Nuveen
& Co., Inc., 146 F.3d 175, 182-83 (3rd Cir. 1998);
see generally AT&T Tech., 475 U.S. at 649-51.
Accordingly, defendants' motion to compel arbitration will be
granted as to all claims, and defendants' motion to dismiss Counts
V and VI will be denied. We will stay this action pending
arbitration of plaintiff's claims in accordance with the terms of
the Agreement. See 9 U.S.C. § 3.
AND NOW, this day of February, 2000, for the reasons set forth in
the accompanying Memorandum, it is hereby ORDERED that:
(1) the motion of defendants to compel arbitration is GRANTED. The
parties are directed to proceed to arbitration in accordance with
the terms of their July 30, 1997 Agreement;
(2) the motion of defendants to dismiss Counts V and VI of
plaintiff's first amended complaint is DENIED; and
(3) this action is STAYED pending completion of the arbitration.