Applied Energetics, Inc. v. NewOak Capital Markets, LLC
Justia.com Opinion Summary: This case stemmed from an Engagement Agreement entered into by petitioner, a developer and manufacturer of military technology, with respondent, an independent broker dealer, by which respondent agreed to act as petitioner's exclusive placement agent in an anticipated $20 million private offering of petitioner's securities to finance its anticipated development of a field-deployable vehicle. Petitioner subsequently appealed the district court's final order and judgment compelling arbitration of the claims of respondent before the Financial Industry Regulatory Authority. The court held that because the parties expressly agreed to adjudicate their disputes before a court, the court reversed and remanded the judgment of the district court.
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10-5107-cv Applied Energetics v. Newoak 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT ------------August Term, 2010 (Argued: April 13, 2011 Decided: July 13, 2011) Docket No. 10-5107-cv - - - - - - - - - - - - - - - - - - - - - - X APPLIED ENERGETICS, INCORPORATED, Petitioner-Appellant, - v NEWOAK CAPITAL MARKETS, LLC, Respondent-Appellee. - - - - - - - - - - - - - - - - - - - - - - X Before: KEARSE and CHIN, Circuit Judges, and RAKOFF, District Judge.* Appeal from a final order and judgment of the United States District Court for the Southern District of New York compelling arbitration under 9 U.S.C. § 4. Reversed. 33 34 35 36 37 38 39 40 CLIFFORD THAU (Hilary L. Preston, on the brief), Vinson & Elkins LLP, New York, NY for Petitioner-Appellant. LEANNE M. SHOFI (Joseph M. Pastore III, on the brief), Fox Rothschild, LLP, New York, NY , for Respondent-Appellee. * The Honorable Jed S. Rakoff, United States District Judge for the Southern District of New York, sitting by designation. -1- 1 2 RAKOFF, District Judge: Petitioner-Appellant Applied Energetics, Inc. (“Applied”) 3 appeals the district court’s final order and judgment compelling 4 arbitration of the claims of Respondent-Appellee NewOak Capital 5 Markets, LLC (“NewOak”) before the Financial Industry Regulatory 6 Authority (“FINRA”). 7 agreed to adjudicate their disputes before a court, we reverse, 8 and remand to the district court for further proceedings. Because we find that the parties expressly 9 10 11 BACKGROUND Applied is a developer and manufacturer of military 12 technology. 13 dealer, entered into a preliminary letter agreement with Applied 14 (the “Engagement Agreement”), by which NewOak agreed to act as 15 Applied’s exclusive placement agent in an anticipated $20 million 16 private offering of Applied securities to finance Applied’s 17 anticipated development of a “field-deployable vehicle.” 18 Engagement Agreement contained an arbitration clause that 19 provided that: 20 21 22 23 24 25 26 On September 28, 2005, NewOak, an independent broker The Each of [NewOak] and [Applied] agrees that any dispute arising out of or relating to this letter, the Indemnity Agreement and/or the transactions contemplated hereby or thereby . . . shall be resolved through binding arbitration before the National Association of Securities Dealers1 . . . in New York City. 1 The National Association of Securities Dealers is one of the predecessors of FINRA. -2- 1 However, the Engagement Agreement also specifically contemplated 2 that the parties would enter into a subsequent, more formal 3 agreement setting forth “the terms and conditions contained [in 4 the Engagement Agreement] as well as those customarily contained 5 in agreements of such character.” 6 and Applied signed that subsequent agreement (the “Placement 7 Agreement”), which, though embodying much of the substance of the 8 Engagement Agreement, omitted any reference to arbitration. 9 Instead, the Placement Agreement expressly provided that the 10 11 12 13 14 15 16 On October 24, 2005, NewOak agreement would be governed by New York law and that: Any dispute arising out of this Agreement shall be adjudicated in the Supreme Court, New York County or in the federal district court for the Southern District of New York. The Placement Agreement also contained a merger clause, 17 which provided that the Placement Agreement and certain other 18 documents related to the transaction -- namely, the Purchase 19 Agreement, the Registration Rights Agreement, the Escrow 20 Agreement, and the Warrant -- “constitute the entire 21 understanding and agreement between the parties” with respect to 22 NewOak’s placement of Applied securities, and that “there are no 23 [other] agreements or understandings” that apply. 24 Agreement was not among the documents listed in the Placement 25 Agreement’s merger clause. 26 27 The Engagement On January 14, 2010, NewOak initiated arbitration against Applied with FINRA, asserting various claims pursuant to its -3- 1 allegations that, between May 4, 2005 and May 10, 2006, Applied 2 “knowingly disseminated materially false and misleading 3 information about the development and production capability” of 4 the field-deployable vehicle, as well as about “the status of 5 [its] real or potential sales.” 6 Applied’s officers and directors collectively sold 1.5 million 7 shares of their personal Applied securities holdings during the 8 time that the company’s securities were artificially inflated as 9 a result of the company’s misrepresentations. NewOak further alleged that In response, 10 Applied filed a petition in the Supreme Court of the State of New 11 York seeking to stay the FINRA arbitration on the ground that the 12 mandatory court-adjudication provision of the Placement Agreement 13 superseded the parties’ earlier agreement to arbitrate their 14 disputes. 15 District of New York, and then moved to compel arbitration under 16 the arbitration clause of the Engagement Agreement and § 4 of the 17 FAA. 18 NewOak timely removed the petition to the Southern In a Report and Recommendation dated October 5, 2010, the 19 Magistrate Judge to whom the matter was initially referred 20 recommended that the district court grant the petition and deny 21 arbitration. 22 LLC, No. 10 Civ. 1669, 2010 WL 3860386, at *1 (S.D.N.Y. Oct. 5, 23 2010) (“Applied I”). 24 2010, the district court granted NewOak’s motion and ordered the Applied Energetics, Inc. v. NewOak Capital Markets, But in a written opinion dated December 3, -4- 1 parties to arbitrate. Applied Energetics, Inc. v. NewOak Capital 2 Markets, LLC, No. 10 Civ. 1669, 2010 WL 4968186, *1 (S.D.N.Y. 3 Dec. 3, 2010) (“Applied II”). This appeal followed. 4 5 DISCUSSION 6 We review de novo the district court’s order compelling 7 arbitration. See Chelsea Square Textiles, Inc. v. Bombay Dyeing 8 & Mfg. Co. Ltd., 189 F.3d 289, 295 (2d Cir. 1999). 9 The district court, relying primarily on this Court’s 10 decision in Bank Julius Baer & Co., Ltd. v. Waxfield Ltd., 424 11 F.3d 278 (2d Cir. 2005), concluded that the Engagement 12 Agreement’s arbitration clause and the Placement Agreement’s 13 adjudication clause “may be read as complementary” to one 14 another. 15 because arbitration awards “may only be enforced by subsequent 16 judicial action,” Bank Julius, 424 F.3d at 284, the Engagement 17 Agreement’s arbitration clause could be construed as requiring 18 arbitration of the parties’ disputes in the first instance, with 19 the Placement Agreement’s adjudication clause merely designating 20 that any action to enforce or dispute an arbitral award must 21 occur in the courts enumerated therein. 22 Since the Bank Julius Court provided that “if there is a reading 23 of the various agreements that permits the Arbitration Clause to 24 remain in effect, we must choose it,” 424 F.3d at 284, the Applied II, at *3. The district court reasoned that, -5- See Applied II, at *3. 1 district court granted NewOak’s motion and compelled the parties 2 to arbitrate NewOak’s claims. 3 We disagree with the district court’s conclusion that the 4 Engagement Agreement’s arbitration clause and the Placement 5 Agreement’s court-adjudication clause can reasonably be read as 6 complementary. 7 scenario, also contemplated by Bank Julius, where contracting 8 parties are free to revoke an earlier agreement to arbitrate by 9 executing a subsequent agreement the terms of which plainly 10 Rather, this case falls within the alternative preclude arbitration. 11 See 424 F.3d at 284. A close reading of Bank Julius is instructive. In Bank 12 Julius, the parties, like those in the instant case, initially 13 agreed to arbitrate “any . . . dispute” arising out of their 14 contractual relationship and, likewise, subsequently entered into 15 an agreement that omitted any mention of arbitration. 16 282. 17 forum selection clause that read as follows: Id. at The subsequent agreement included, however, a non-exclusive 18 19 20 21 22 23 24 25 26 27 Without limiting the right of the [plaintiff] to bring any action or proceeding against [the defendant] . . . in the courts of other jurisdictions, [the defendant] hereby irrevocably submits to the jurisdiction of any New York State or Federal court sitting in New York City, and . . . hereby irrevocably agrees that any Action may be heard and determined in such New York State court or in such Federal court. 424 F.3d at 282 (emphasis omitted). 28 agreement, although containing a merger clause, also provided 29 that “the rights and remedies provided [herein] are cumulative -6- Furthermore, the subsequent 1 and not exclusive of any rights or remedies provided under any 2 other agreement.” 3 Id. Under these circumstances, the Court in Bank Julius 4 concluded that the forum selection clause in the subsequent 5 agreement could be read as complementary, rather than 6 contradictory, to the parties’ initial agreement to arbitrate: 7 the forum selection clause would operate to provide New York 8 courts with (non-exclusive) jurisdiction over ancillary 9 proceedings -- such as to enforce an arbitral award or to 10 challenge the validity of the arbitration agreement -- but the 11 merits of any dispute would be resolved in the first instance by 12 arbitration. 13 possible, the presumption in favor of arbitration made this 14 reading the preferred interpretation. 15 See id. at 284-85 While other readings were The case at bar is different. Id. Here, the Placement 16 Agreement’s language that “[a]ny dispute” between the parties 17 “shall be adjudicated” by specified courts stands in direct 18 conflict with the Engagement Agreement’s parallel language that 19 “any dispute . . . shall be resolved through binding 20 arbitration.” 21 mandatory, and neither admits the possibility of the other. 22 Both provisions are all-inclusive, both are Moreover, use of the word “adjudicate” in the Placement 23 Agreement’s clause is a clear and unmistakable reference to 24 judicial action. See Black’s Law Dictionary 47, 922 (9th ed. -7- 1 2009) (defining “adjudicate” as “[t]o rule upon judicially,” and 2 defining judicial as “[o]f, relating to, or by the court or a 3 judge”). 4 “shall” precludes the resolution of the parties’ disputes by any 5 means other than their “adjudicat[ion]” by a court of law. 6 Phillips v. Audio Active Ltd., 494 F.3d 378, 386-87 (2d Cir. 7 2007) (forum selection clause using obligatory language precludes 8 parties from bringing an action arising thereunder in forums 9 other than those enumerated therein). Similarly, the clause’s use of the obligatory verb See Accordingly, the Placement 10 Agreement’s adjudication clause “specifically precludes” 11 arbitration, see Bank Julius, 424 F.3d at 284 (internal quotation 12 marks omitted), and, by operation of the merger clause,1 13 displaces the Engagement Agreement’s arbitration clause. 14 the express terms of the Placement Agreement, the parties’ 15 instant disputes must therefore be heard in the first instance by 1 Under 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. -8- 1 either the New York State Supreme Court for New York County or 2 the federal district court for the Southern District of New York. 3 Even assuming, as the district court found, that the 4 provisions in the two agreements could reasonably be read as 5 complementary, we conclude that the district court erred in 6 applying the presumption in favor of arbitration. 7 Court reaffirmed in Granite Rock Co. v. International Brotherhood 8 of Teamsters, “in FAA and in labor cases” the presumption in 9 favor of arbitrability should only be applied “where a validly 10 formed and enforceable arbitration agreement is ambiguous about 11 whether it covers the dispute at hand.” 12 (2010). 13 arbitration clause should be resolved in favor of arbitration, 14 the presumption does not apply to disputes concerning whether an 15 agreement to arbitrate has been made. 16 Co., 335 F.3d 109, 116 (2d Cir. 2003). 17 required to submit to arbitration any dispute which [it] has not 18 agreed so to submit.” 19 omitted). 20 arbitration clause but whether an obligation to arbitrate exists, 21 the presumption in favor of arbitration does not apply. 22 As the Supreme 130 S. Ct. 2847, 2858-59 In other words, while doubts concerning the scope of an See, e.g., Vera v. Saks & “[A] party cannot be Id. (internal quotation marks and brackets Here, because the parties dispute not the scope of an Finally, in deciding whether a contractual obligation to 23 arbitrate exists, “courts should generally apply state-law 24 principles that govern the formation of contracts.” -9- Mehler v. 1 Terminix Int’l Co., 205 F.3d 44, 48 (2d Cir. 2000). 2 York law, “[i]t is well established that a subsequent contract 3 regarding the same matter will supersede the prior contract.” 4 Barnum v. Millbrook Care Ltd. P’ship, 850 F.Supp 1227, 1236 5 (S.D.N.Y.) (citing Coll. Auxiliary Servs. Of State Univ. Coll., 6 Inc. v. Slater Corp., 456 N.Y.S.2d 512 (3d Dep’t 1382)), aff’d 43 7 F.3d 1458 (2d Cir. 1994). 8 we conclude, as a matter of law, that the Placement Agreement 9 superseded the Engagement Agreement. 10 Under New Here, for the reasons set forth above, For the foregoing reasons, the order of the district court 11 compelling arbitration is reversed and the matter is remanded 12 with direction to grant the petition to stay the FINRA 13 arbitration and to take such other action as is consistent with 14 this Opinion. -10-