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Powers Distrubuting Co. Inc. v. Grenzebach Corp.

United States District Court, E.D. Michigan, Southern Division

November 9, 2016

POWERS DISTRIBUTING COMPANY, INC. Plaintiff,
v.
GRENZEBACH CORPORATION, Defendant.

          OPINION AND ORDER DENYING DEFENDANT'S MOTION TO DISMISS (DKT. 3)

          TERRENCE G. BERG UNITED STATES DISTRICT JUDGE.

         I. INTRODUCTION

         Defendant Grenzebach Corporation moves to dismiss this case for lack of subject matter jurisdiction pursuant to Federal Rule of Civil Procedure 12(b)(1) on the ground that the parties' dispute must be arbitrated. The Court finds that Plaintiff's claims relate to contracts with arbitration provisions. But because Plaintiff asked at oral argument for permission to amend its complaint, Defendant's motion is DENIED WITHOUT PREJUDICE.

         II. FACTUAL AND PROCEDURAL HISTORY

         This is a breach of contract case. Plaintiff is a beer distributor. Dkt. 5, Pg. ID 132. Defendant is a company that provides automated systems for businesses. Id. In September of 2013, Plaintiff purchased an automated system for locating and retrieving products in a distribution center (a “case-picking system”) from Material Handling Technologies (MHT). Id. at Pg. ID 133. The contract for the purchase of this system did not contain an arbitration provision. Id. at Pg. ID 135. Six months later, MHT informed Plaintiff that Defendant had acquired MHT's entire case-picking line of business and that Plaintiff should send future payments for the system to Defendant, not MHT. Id. In June of 2014, Defendant offered Plaintiff an update to the system that would give the system new capabilities. Id. at Pg. IDs 135-36. Defendant's offer was eventually memorialized in two purchase orders, one for a software upgrade and one for a hardware upgrade. Dkt. 5, Exs. C and D. Both purchase orders contained the following arbitration provision:

Arbitration Except as specifically provided herein, any dispute, controversy or claim arising out of or in relation to or in connection with this agreement, or in the operations carried out under this agreement, including without limitation any dispute as to the construction, validity, interpretation, enforceability or breach of this agreement, shall be exclusively and finally settled by arbitration, and any party or party affiliate may submit such a dispute, controversy or claim to arbitration. Unless otherwise expressly provided in this agreement or agreed in writing by the parties or party affiliate to the arbitration proceeding, the arbitration proceedings shall be held in Atlanta, Georgia, in accordance with the Commercial Arbitration Rules of the American Arbitration Association (*ARAAA*), as amended from time to time. However, any Arbitration Award (as defined by ARAAA) may be entered in any court having jurisdiction over the party, or party affiliate against which enforcement is sought. Each party shall pay its own attorneys' fees and costs, Other costs of arbitration, such as arbitrator(s)' fee, shall be borne equally by the parties. Consequential, punitive, or other similar damages shall not be allowed.
The arbitration proceedings shall be conducted in the English language and the arbitrators) shall be fluent in the English language. Where the parties are of more than one nationality, the single arbitrator or the presiding arbitrator, as the case may be, shall not be of the same nationality as any of the parties or their ultimate parent entities.

Id.; see also Dkt. 3, Exs. 1 and 2. Plaintiff accepted Defendant's offer. Dkt. 3, Ex. 4.

         Installation of the upgrades took six months. Dkt. 5, Pg. ID 137. When the installation was finally complete, Plaintiff tested the upgrades. Id. The results were subpar. Id. The system passed only half of the tests, and much of it had to be reverted to the original version because of system failures. Id. Plaintiff only approved the system for the tests that it passed, but deemed the upgrade unworkable in its entirety. Id. Plaintiff and Defendant then agreed that Plaintiff would have the option to purchase the next upgrade for $25, 000, and that, if Plaintiff chose to purchase the upgrade, Defendant would install the upgrade no later than December of 2016. Id.

         That upgrade never came. In November of 2015, Defendant fired the only technician who could support the system. Dkt. 5, Pg. ID 137. Two months later, Defendant informed Plaintiff that instead of providing the promised upgrade to the existing system, Defendant planned to rewrite the entire system. Id. at Pg. ID 138. The parties exchanged emails discussing how the rewrite would affect the agreement the parties reached after the first upgrade failed testing. Id. at Pg. IDs 138-40. Defendant then emailed Plaintiff with the news that Defendant had decided not to rewrite the system after all, and that it was cutting support for the original system from 24-hours-a-day to weekdays from 8:00 a.m. to 5:00 p.m. Id. at Pg. ID 140.

         At that point Plaintiff still had the original system it purchased from MHT, but needed to support the system itself because Defendant no longer employed anyone who could provide support. Dkt. 5, Pg. ID 140. On June 16, 2016, Plaintiff sued Defendant in Oakland County Circuit Court, alleging Breach of Contract, Breach of Express and Implied Warranties, Innocent Misrepresentation, Negligent Misrepresentation, Silent Fraud, and Indemnification. Dkt. 1. Defendant removed the case to this Court, id., and now seeks dismissal based on the arbitration clauses in the purchase orders. Dkt. 3.

         III. ANALYSIS

         A. Standard of Review

         Courts in the Sixth Circuit are split on whether a motion to dismiss based on an arbitration agreement should be brought under Federal Rule of Civil Procedure 12(b)(1) (lack of subject matter jurisdiction) or Rule 12(b)(6) (failure to state a claim). Some courts have found that such motions should be raised under Rule 12(b)(1).[1]Others have concluded that they arise under Rule 12(b)(6).[2]

         Whether to proceed under one rule or the other turns on concerns about, on one hand, whether evidence outside the pleadings is being used and whether the case should be dismissed with prejudice under Rule 12(b)(6), and, on the other, whether the term “jurisdiction” (as in “lack of subject matter jurisdiction”) is being used with precision under Rule 12(b)(1). When analyzing a factual attack to subject matter jurisdiction under Rule 12(b)(1), a court may consider any evidence properly before it. See Morrison v. Circuit City Stores, Inc., 70 F.Supp.2d 815, 819 (S.D. Ohio 1999). The typical result of a Rule 12(b)(1) dismissal is that no obstacle prevents a plaintiff from litigating her claims in a different forum. See Dalton, 979 F.Supp. at 1192. A court dismissing a case because of an arbitration agreement “does not prevent a plaintiff from litigating the merits of his or her claim . . . [but] merely transfers the forum in which the litigation on the merits will occur.” Id. These aspects of how Rule 12(b)(1) functions in the arbitration context suggest that a motion to dismiss based on an arbitration agreement falls within Rule 12(b)(1) rather than within Rule 12(b)(6).

         But under the Federal Arbitration Act, a court retains authority to stay a case pending arbitration and then afterward enter judgment on the award. See 9 U.S.C. §§ 3, 9. So, technically, when a court compels arbitration it still retains jurisdiction over the dispute. And the Sixth Circuit has cautioned courts to be more precise when analyzing challenges phrased as attacks on “jurisdiction.” See Primax Recoveries, Inc. v. Gunter, 433 F.3d 515, 518-19 (6th Cir. 2006). This aspect of how Rule 12(b)(1) functions in the arbitration context-dismissing a case for “lack of subject matter jurisdiction” when the court in fact has and retains jurisdiction-suggests that a motion to dismiss based on an arbitration agreement falls within Rule 12(b)(6) rather than within Rule 12(b)(1).

         Here, Defendant brings its motion under Rule 12(b)(1). Dkt. 3. Plaintiff does not argue that the Court should analyze the motion under Rule 12(b)(6), and instead responds within the confines of Rule 12(b)(1). Dkt. 5, Pg. IDs 141-150. Because the choice of Rules does not affect the outcome of the Court's analysis, and because the parties address the question similarly, the Court will treat the motion as one to dismiss under Rule 12(b)(1).

         A Rule 12(b)(1) motion attacks a complaint either facially or factually. United States v. Ritchie, 15 F.3d 592, 598 (6th Cir. 1994). A facial attack challenges the sufficiency of the complaint itself, which requires a court to take as true all material allegations in the complaint and to construe those allegations in the light most favorable to the plaintiff. Id. at 598. A factual attack, however, challenges the factual existence of subject matter jurisdiction. A court analyzing a factual attack therefore need not accept as true the complaint's factual allegations, but instead must weigh any evidence properly before it. See Ohio Nat'l Life Ins. Co. v. United States, 922 F.2d 320, 325 (6th Cir. 1990); Rogers v. Stratton Indus., Inc., 798 F.2d 913, 918 (6th Cir. 1986). Defendant argues that arbitration is the appropriate forum in which to settle this dispute. The complaint itself stands for Plaintiff's allegation that a court of law is the appropriate forum in which to settle this dispute. Thus Defendant's motion here is a factual attack questioning the factual existence of subject matter jurisdiction.

         B. Discussion

         “A written agreement to arbitrate disputes arising out of a transaction in interstate commerce ‘shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.'” Javitch v. First Union Sec., Inc., 315 F.3d 619, 624 (6th Cir. 2003) (quoting 9 U.S.C. § 2). The Federal Arbitration Act “is at bottom a policy guaranteeing the enforcement of private contractual agreements” arising from a “liberal federal policy favoring arbitration agreements.” Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 625 (1985) (quoting Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1 (1983)). Accordingly, “when asked by a party to compel arbitration under a contract, a federal court must determine whether the parties have agreed to arbitrate the dispute at issue.” Great Earth Cos., Inc. v. Simons, 288 F.3d 878, 889 (6th Cir. 2002). When making this determination, there are two important considerations: the language in the arbitration agreement and the claims of the lawsuit. Here, both parties focus too much on the former and not enough on the latter.

         Defendant argues that the language “any dispute, controversy or claim arising out of or in relation to or in connection with this agreement” mandates that any dispute between the parties must go to arbitration. Dkt. 3, Pg. ID 55. Plaintiff responds that the arbitration provisions in the purchase orders were not intended to and should not retroactively apply to the agreement between it and MHT. Dkt. 5, Pg. IDs 141-46. Both parties agree that the Court must examine “which agreement determines the scope of the contested obligations.” Nestle Waters N. Am., Inc. v. Bollman, 505 F.3d 498, 504 (6th Cir. 2007). Defendant touts the upgrade agreements (with the arbitration clauses) and Plaintiff trumpets its agreement with MHT (without such clauses), but neither party connects those agreements to the specific obligations at issue in each cause of action.

         Plaintiff has asserted six causes of action:

■ Breach of Contract;
■ Breach of Express and Implied Warranties;
■ Innocent Misrepresentation;
■ Negligent ...

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