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Aliments Krispy Kernels, Inc. v. Nichols Farms

United States Court of Appeals, Third Circuit

March 21, 2017

ALIMENTS KRISPY KERNELS, INC., Appellant
v.
NICHOLS FARMS a/k/a NICHOLS FAMILY FARMS a/k/a NICHOLS PISTACHIOS

          Submitted Pursuant to Third Circuit L.A.R. 34.1(a) November 18, 2016

         On Appeal from the United States District Court for the District of New Jersey (D.C. Civ. No. 3:13-cv-5995) District Judge: The Honorable Peter G. Sheridan

          Andrea L. D'Ambra, Esq. John F. Tully, Esq., Jami M. Vibbert, Esq. Counsel for Appellant

          Samuel Feldman, Esq. Orloff Lowenbach Stifelman & Siegel Counsel for Appellee

          Before: AMBRO, SHWARTZ, and FUENTES, Circuit Judges

          OPINION

          FUENTES, Circuit Judge.

         The plaintiff, Aliments Krispy Kernels, brought this suit to enforce an arbitration award it received against the defendant, Nichols Farms, in a contract dispute. The award, based on an alleged breach of contract, was in the sum of $222, 100. Claiming that the parties never agreed to arbitrate, Nichols Farms did not attend the arbitration. Aliments filed a petition to confirm the arbitration award and Nichols cross-petitioned to vacate it. The District Court denied Aliments' petition to confirm and granted Nichols's petition to vacate. Because we find that an issue of material fact exists as to whether the parties agreed to arbitrate, we will vacate the District Court's judgment and remand for further proceedings.

         I. Background

         In August 2012, Aliments, a Canadian snack purveyor, contacted its American broker, Sterling Corporation, to purchase thousands of pounds of raw pistachios. Sterling, in turn, contacted Pacific/Atlantic Crop Exchange, another agricultural commodities broker. Learning of Aliments' interest in purchasing pistachios, Pacific called Nichols, a pistachio grower in California. Nichols agreed to the proposed quantity and price. One month later, in September 2012, Sterling contacted Pacific with a second order of pistachios from Aliments. Pacific reached out to Nichols once again. Nichols agreed to the proposed quantity and price of this second order.

         To confirm the two orders, Sterling issued sales confirmations for the August and September orders and sent copies to Aliments and Pacific. Pacific did not forward the Sterling sales confirmations to Nichols, however, and instead issued its own set of sales confirmations, which were sent to Nichols and Sterling. [1] Neither Aliments nor Nichols was aware that two sets of sales confirmations existed. The two sets contained the same terms, including a thirty-day credit term. However, while Sterling's sales confirmations contained arbitration clauses, it appears that some but not all of the sales confirmations generated by Pacific contained arbitration clauses.[2]

         Aliments evidently believed that the Sterling sales confirmations, though unsigned by either party, represented a binding contract to purchase pistachios from Nichols, on credit with payment due thirty days from delivery, "as usual."[3] Nichols, on the other hand, thought that the thirty-day credit term was but a placeholder, as were all the terms in the Pacific sales confirmations except for the price and quantity terms. In support, the president of Nichols submitted a declaration explaining that "[w]hen Nichols receives a request from a customer to purchase product on credit, [it] obtain[s] a credit report and then [he, the president of Nichols, is] the one who makes the decision about whether to sell product on credit and on what terms and conditions."[4]The president of Pacific corroborated this practice, and submitted a separate declaration, stating that he had no authority from Nichols "to commit to any credit terms or to bind Nichols to any credit terms." [5] He avers that he created the sales confirmations based on a "template, " changing only the amount and price to reflect this particular transaction, leaving "product description, packaging, addresses, and terms" as-is from a prior transaction.[6] "Based on [his] many years in the commodity brokerage business, " the president of Pacific "understood that Nichols, in response to [Aliments'] offer, had the right to perform a credit check on [Aliments], and require security or advance payment if it thought it to be necessary."[7]

         After the sales confirmations were created, Nichols requested, and Aliments submitted, a credit application. This credit application was denied due to Aliments' previous late payments to Nichols, its involvement in a lawsuit with another farmer, and the increased difficulty of collection with any foreign corporation. In short, Nichols would not deliver its pistachios until it received payment from Aliments first.

         Aliments protested that advance payment is a highly irregular request that is inconsistent with Nichols's past practices with Aliments and with industry standards. Nonetheless, it continued to attempt to work with Nichols to come to an amiable resolution. However, the parties were ultimately unable to come to an agreement on a payment method. Finally, Aliments bought pistachios from another vendor at a higher price. Seeking to recoup the extra cost, Aliments initiated arbitration proceedings in accordance with the arbitration clauses contained in the Sterling sales confirmations that were unseen and unsigned by Nichols.

         Despite being notified of the arbitration, Nichols elected not to attend. Aliments was awarded $222, 100 in damages against Nichols by the arbitration panel. Sent a copy of this award, Nichols refused to satisfy it. Finally, Aliments filed a petition to confirm the arbitration award in the District of New Jersey. In response, Nichols cross-petitioned to vacate the arbitration award.

         After months of discovery, the District Court denied Aliments' petition and granted Nichols's cross-petition to vacate because no genuine issue of material fact existed as to whether the parties failed to enter into "an express unequivocal agreement" to arbitrate.[8] We disagree, and for the reasons set forth below we will vacate and remand for further proceedings.[9]

          II. Discussion

         On appeal, Aliments argues that the District Court made two legal errors: first, the Court "erred in using a legal standard requiring 'an express unequivocal agreement' to arbitrate prior to binding a party to arbitration";[10] and second, it erred in finding, as a matter of law, that the parties did not enter into such an agreement to arbitrate. We will address each of these arguments in turn.

         A. Legal Standard

         The parties' dispute regarding the proper legal standard for determining whether the parties have made an agreement to arbitrate is the result of courts' changing attitude towards the Federal Arbitration Act ("FAA"). In 1980, we held in Par-Knit Mills, Inc. v. Stockbridge Fabrics Co. that "[b]efore a party to a lawsuit can be ordered to arbitrate and thus be deprived of a day in court, there should be an express, unequivocal agreement to that effect."[11] In 1994, we reiterated this standard in Kaplan v. First Options.[12] That case was appealed to the Supreme Court; and, in a decision affirming on other grounds, the Court held that, "[w]hen deciding whether the parties agreed to arbitrate a certain matter . . ., courts generally . . . should apply ordinary state- law principles that govern the formation of contracts."[13]Though the Court's holding appears to be a departure from our express and unequivocal standard, that standard was never expressly overruled.

         Over a decade later, we reexamined the express and unequivocal standard in Century Indemnity Company v. Certain Underwriters at Lloyd's, London.[14] We reviewed how we have used the express and unequivocal standard in the past, and acknowledged that the express and unequivocal language has been used, confusingly, to establish two different standards:

On the one hand, we have stated the "express" and "unequivocal" requirement to explain that genuine issues of fact as to whether there is an agreement to arbitrate preclude compelling a party to submit to arbitration; on the other, we have used this language to state a substantive standard that applies to the determination of an arbitration agreement's enforceability as a general matter.[15]

         In Century Indemnity, we held that the latter use of express and equivocal as a substantive standard is no longer valid after the Supreme Court's decision in First Options of Chicago, Inc. v. Kaplan held that courts should generally look to the relevant state contract law to determine whether a valid agreement to arbitrate exists.[16] But we did not strike down the use of the express and unequivocal requirement to the extent that it "requires that there not be a genuine issue of material fact as to an arbitration agreement's existence before a district court may determine whether the agreement exists as a matter of law."[17] Furthermore, in Century Indemnity, we repeatedly made clear that, despite the express and unequivocal language, "when determining whether there is a valid agreement to arbitrate between the parties . . . we apply ordinary state-law principles of contract law, " and no more.[18]

         Here, the District Court clearly used the express and unequivocal standard to explain that it will decide the petition to confirm the arbitration award and motion to vacate as a matter of law only if there is no "genuine issue of fact concerning the formation of the contract."[19] Therefore, to the extent that the District Court meant to impose no more stringent standard on the arbitration agreement than that permissible under state law, it did not err. However, Aliments' confusion on this matter is understandable, and we recommend that district courts avoid using the "express and unequivocal" language. The legal standard is simply that we apply the relevant state contract law to questions of arbitrability, which may be decided as a matter of law only if there is no genuine issue of material fact when viewing the facts in the light most favorable to the nonmoving party.[20]

         Having established that the District Court, despite unclear language, used the correct standard, we turn next to Aliments' second question on appeal: whether the District Court correctly determined that the parties did not enter into an agreement to arbitrate as a matter of law.

         B. Analysis

         As previously stated, the ultimate inquiry of whether the parties agreed to arbitrate is governed by the applicable state law. In this case, the question of which state law should apply is muddled. Aliments is a Canadian company seeking to confirm an arbitration award issued in New Jersey by an arbitration panel that used New York law against Nichols Farms, a California company, for breach of a contract to deliver goods in California that was largely negotiated by a broker based in Georgia and a broker based in California. Before the District Court, Aliments argued for New York law to apply, and Nichols argued for California law to apply. The District Court, however, made no findings about which state law applied. Instead, based solely on general principles of contract law, it granted Nichols's petition to vacate the arbitration award due to "a lack of evidence that any agreement or sales confirmation was ever entered, " and because "there is nothing to demonstrate that Nichols Farms intended to arbitrate the matter."[21] We disagree with this terse analysis.

         Because we look to applicable state law to determine whether the parties agreed to arbitrate, we begin with a choice-of-law analysis. To determine the applicable state law, we use the forum state's choice-of-law rule. The first step in any choice-of-law inquiry under New Jersey law requires the court to determine whether there is an actual conflict between the laws of the potential forums.[22] "That is done by examining the substance of the potentially applicable laws to determine whether there is a distinction between them."[23] If there is no actual conflict, "the inquiry is over and, because New Jersey would apply its own law in such a case, a federal court sitting in diversity must do the same."[24]If there is an actual conflict, then the court must determine "which forum has the most significant relationship with the parties and the contract."[25]

          On appeal, the parties continue to rely on different state laws: Aliments relies on New York law and Nichols relies on New Jersey law.[26] Both parties, however, agree that there is no actual conflict between New York law and New Jersey ...


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