Gene Badger v. Southern Farm Bureau Life Insurance Company , 486 F. App'x 786 ( 2012 )

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[DO NOT PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________
No. 11-12602
________________________
D. C. Docket No. 6:06-cv-00637-MSS-KRS
PLAINTIFFS’ SHAREHOLDERS CORPORATION, et al.,
Plaintiffs-Appellees,
versus
SOUTHERN FARM BUREAU LIFE INSURANCE COMPANY,
Defendant-Appellant.
________________________
Appeal from the United States District Court
for the Middle District of Florida
_________________________
(August 10, 2012)
Before DUBINA, Chief Judge, JORDAN, and ALARCON,* Circuit Judges.
PER CURIAM:
*
Honorable Arthur L. Alarcon, United States Circuit Judge for the Ninth Circuit, sitting by
designation.
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Southern Farm Bureau Life Insurance Company appeals the district court’s
denial of its motion to stay litigation and compel arbitration. After reviewing the
record, reading the parties’ briefs, and having the benefit of oral argument, we affirm
in part, reverse in part, and remand.
I
This case, now on appeal before this court for the second time, stems from
Southern Farm’s purchase of a debenture from Plaintiffs’ Shareholders Corporation
in 2004.1 The sale of the debenture was governed by an asset purchase agreement,
which contained an arbitration clause:
10.2 ARBITRATION. ANY CONTROVERSY OR CLAIM ARISING
OUT OF OR RELATING TO THIS AGREEMENT, OR THE BREACH
HEREOF, SHALL BE SETTLED BY BINDING ARBITRATION IN
GAINESVILLE, FLORIDA, IN ACCORDANCE WITH THE RULES
OF THE AMERICAN ARBITRATION ASSOCIATION, AND
JUDGMENT UPON THE AWARD RENDERED BY THE
ARBITRATOR(S) MAY BE ENTERED IN ANY COURT HAVING
JURISDICTION THEREOF.
R1:309, Exhibit 3 at 9.
In 2006, unsatisfied with the price PSC received for the debenture, some of
PSC’s shareholders brought this derivative action against Southern Farm, asserting
1
We write only for the parties and repeat only those facts necessary to address the issues
presented. A thoroughly detailed factual background and procedural history of this case is set forth
in our prior decision. See Badger v. Southern Farm Bureau Life Ins. Co., 612 F.3d 1334 (11th Cir.
2010).
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claims under Rule 10b-5 and § 10(b) of the Securities and Exchange Act of 1934
(Count 1) and Florida common-law fraud (Count 2). The plaintiffs alleged that
Southern Farm made material misrepresentations and omissions during the
negotiations, causing PSC to sell the debenture for less than its actual value. The case
proceeded to trial and, on March 19, 2009, the jury found Southern Farm liable on
both counts and awarded the plaintiffs $31.7 million. Southern Farm appealed.
Prior to our ruling in that appeal, on August 20, 2009, PSC initiated arbitration
against Southern Farm. PSC asserted a single claim for breach of contract based on
§ 5.5 of the asset purchase agreement:
5.5 No Omissions or Untrue Statements. No representation or
warranty made by Buyer in this Agreement, nor any statement or
certificate furnished or to be furnished by Buyer to Seller
pursuant hereto, or in connection with the transaction
contemplated hereby, contains or will contain any untrue
statement of material fact or omits or will omit to state a material
fact necessary to make the statements contained herein or therein
not misleading.
PSC sought to rely upon the doctrine of collateral estoppel and the jury’s verdict to
establish its breach of contract claim. Specifically, PSC purportedly sought to prohibit
Southern Farm from readdressing previously litigated issues—i.e., whether Southern
Farm improperly omitted material information during the negotiations and the amount
of PSC’s damages.
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Southern Farm moved to dismiss the arbitration proceeding, arguing that the
contract claim asserted was barred by the doctrine of res judicata and that PSC had
waived its right to arbitrate the claim by litigating in federal court for more than three
years. PSC opposed the motion, stating, in part, that the claims from the derivative
action (securities fraud and common law fraud) did not fall within the scope of the
arbitration provision, and therefore, it could not have waived its right to arbitrate the
breach of contract claim. The arbitration panel never ruled on Southern Farm’s
motion to dismiss because it decided to postpone hearings on all pending motions
until this court rendered its decision in the appeal from the jury verdict against
Southern Farm.
On October 6, 2010, this court reversed and vacated the judgment entered
against Southern Farm. See Badger, 612 F.3d at 1334. We held, among other things,
that the jury instructions erroneously imposed a duty on Southern Farm to disclose
material facts directly to PSC’s shareholders without finding the existence of some
fiduciary or special relationship.
On remand from our decision in Badger, the plaintiffs moved to realign PSC
as a plaintiff (up to that point PSC had been considered a nominal defendant in the
derivative action) and moved to amend its complaint. Although Southern Farm
opposed the relief requested, the district court granted PSC’s motion. The second
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amended complaint added a breach-of-contract claim against Southern Farm (a claim
similar to the one PSC asserted in the arbitration proceeding) and added allegations
that Southern Farm owed PSC’s board and shareholders a fiduciary or special duty,
allegations that were not explicitly asserted in the prior complaints.
Shortly after the second amended complaint was filed, Southern Farm moved
to stay the litigation and compel arbitration on all the claims asserted against it. PSC
opposed the motion. The district court denied Southern Farm’s motion, holding that
the filing of the second amended complaint did not revive Southern Farm’s right to
compel arbitration and that PSC and its shareholders would be prejudiced by
compelling arbitration.
Southern Farm now appeals the district court’s order denying its motion to stay
litigation and compel arbitration. First, Southern Farm contends that the district court
was not the proper tribunal to decide the issue of whether it waived its right to
arbitration, arguing that an arbitration panel should have addressed that issue. Second,
Southern Farm argues that, even if the district court properly ruled on the waiver
issue, it erred in finding that Southern Farm’s right to compel arbitration was not
revived by the filing of the second amended complaint.
II
“We review a district court’s denial of a motion to compel arbitration de novo.”
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Klay v. All Defendants, 389 F.3d 1191, 1200 (11th Cir. 2004).
A
The first issue we must address is whether the district court was the proper
tribunal to decide the merits of PSC’s waiver argument. Southern Farm contends that
the district court erred in deciding the waiver issue itself because the arbitration
provision in the asset purchase agreement evinces a clear intent by the parties to
arbitrate such disputes. We disagree.
“[A]rbitration is simply a matter of contract between the parties; it is a way to
resolve those disputes—but only those disputes—that the parties have agreed to
submit to arbitration.” First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943
(1995). Nevertheless, because it is often difficult to determine whether parties
intended to arbitrate certain threshold issues, we have developed presumptions
governing the division of labor between courts and arbitrators with respect to certain
questions. Relevant to the issue presented here, we recently held that questions
regarding waiver based on litigation conduct are presumptively for the courts—and
not the arbitrators—to decide. See Grigsby & Assocs., Inc. v. M Securities Inv., 664
F.3d 1350 (11th Cir. 2011) Thus, absent “clear and unmistakable” evidence of an
agreement to the contrary, disputes regarding conduct-based waiver are left to the
courts to decide. See First Options of Chicago, Inc., 514 U.S. at 944 (quoting AT &
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T Techs., Inc. v. Communications Workers of Am., 475 U.S. 643, 649 (1986))
(brackets omitted). “Clear and unmistakable” evidence of an agreement to arbitrate
“might include ... a course of conduct demonstrating assent ... or ... an express
agreement to do so.” Momot v. Mastro, 652 F.3d 982, 988 (9th Cir. 2011).
Southern Farm proceeds only on the theory that the arbitration clause
constitutes an express agreement to arbitrate issues of conduct-based waiver.
Although the arbitration provision does not make explicit reference to questions
regarding conduct-based waiver, Southern Farm argues that clause’s incorporation
of the rules of the American Arbitration Association, and specifically Rule 7(a),
evinces a clear intent to arbitrate such issues. AAA Rule 7(a) provides as follows:
(a) The arbitrator shall have the power to rule on his or her own
jurisdiction, including any objections with respect to the existence,
scope or validity of the arbitration agreement.
Southern Farm says that Rule 7(a) encompasses PSC’s waiver objection because that
objection is a challenge to the “validity” of the arbitration agreement itself.
Southern Farm cites to Republic of Ecuador v. Chevron Corp., 638 F.3d 384(2d Cir. 2011), for support, but we find it distinguishable. In that case, Chevron
initiated arbitration against Ecuador pursuant to Ecuador’s Bilateral Investment
Treaty with the United States, which creates a mechanism for foreign investors to
initiate arbitration against signatories to the treaty. After Chevron filed its notice of
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arbitration (the only action required to create a binding arbitration agreement under
the treaty), Ecuador petitioned the district court to stay the arbitration, arguing that
Chevron waived its right to arbitrate its claims based on its prior litigation-related
activities. In response, Chevron argued that Ecuador’s waiver claim should be
decided by an arbitration panel, and not the district court.
The Second Circuit held that the parties had agreed to arbitrate the conduct-
based waiver claim pursuant to Article 21 of the Arbitration Rules of the United
Nations Commission on International Trade Law. Article 21, which is substantially
similar to AAA Rule 7(a), provides that the arbitrator “shall have the power to rule
on objections that it has no jurisdiction, including any objections with respect to the
existence or validity of the ... arbitration agreement.” Id. at 394 (quotations omitted).
Notwithstanding the apparent similarities, Republic of Ecuador is easily
distinguishable. Ecuador argued that Chevron made prior representations to a federal
district court that prohibited it from even initiating the arbitration proceeding against
Ecuador, the action required to form a binding arbitration agreement. Thus, the
Second Circuit found that Ecuador’s waiver claim undermined the agreement itself
(i.e., its validity), as opposed to arguing that Chevron was “prevented from taking
advantage of an admittedly binding arbitration clause.” Id. at 394. Here, PSC’s waiver
argument is not a challenge to the existence of the asset purchase agreement (or its
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arbitration clause), and as a result, it does not constitute an objection to the
“validity”of the agreement as that term is used in AAA Rule 7(a).
Moreover, Southern Farm is unable to point to (and we are unable to find) any
other contractual language that would constitute clear and unmistakable evidence of
an agreement to arbitrate issues of conduct-based waiver. Accordingly, we conclude
that the district court properly addressed the waiver issue. See Grigsby & Assocs.,
Inc., 664 F.3d at 1354. See also Marie v. Allied Home Mortg. Corp., 402 F.3d 1, 15
(1st Cir. 2005) (“There are no references to waiver or similar terms anywhere in the
arbitration agreement. Neither party should be forced to arbitrate the issue of waiver
by conduct without a clearer indication in the agreement that they have agreed to do
so.”).
B
We now proceed to address whether Southern Farm’s right to compel
arbitration was revived by the plaintiffs’ filing of the second amended complaint.
Normally, “[a]rbitration should not be compelled when the party who seeks to compel
arbitration has waived that right.” Morewitz v. W. of Eng. Ship Owners Mut. Prot. &
Indem. Ass’n, 62 F.3d 1356, 1365 (11th Cir. 1995). Nonetheless, where a plaintiff
files an amended complaint that “unexpectedly changes the scope or theory of the
plaintiff’s claims,” fairness dictates that a defendant’s prior waiver of arbitration be
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nullified and the right to compel arbitration revived. See Krinsk v. Suntrust Banks,
Inc., 654 F.3d 1194, 1202 (11th Cir. 2011) (citing Gilmore v. Shearson/Am. Express
Inc., 811 F.2d 108, 113 (2d Cir. 1987)). See also Cabintree of Wis. v. Kraftmaid
Cabinetry, Inc., 50 F.3d 388, 391 (7th Cir. 1995) (“The shape of the case might so
alter as a result of unexpected developments during discovery or otherwise that it
might become obvious that the party should be relieved from its waiver and
arbitration allowed to proceed.”). Where, however, an amended complaint only makes
minor changes to the factual allegations or legal claims previously asserted, a
defendant’s right to arbitrate, if waived, will not be rejuvenated by the filing of the
pleading.
In Krinsk, for example, we held that the defendant’s previously waived right
to arbitrate was revived by the filing of an amended class-action complaint that
redefined the class, potentially expanding its scope from hundreds to tens of
thousands of members. See 654 F.3d at 1202–04. Likewise, in Brown v. E.F. Hutton
& Co., Inc., 610 F.Supp. 76 (S.D. Fla. 1985), cited with approval in Krinsk, the
plaintiff-investor’s original complaint asserted a federal securities fraud claim and
multiple state law claims against the defendant-security broker for damages allegedly
stemming from one transaction and sought $50,000 in damages. Three years later, the
plaintiff filed an amended complaint, alleging that the mismanagement of the entire
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account (as opposed to the one transaction) caused over $150,000 in damages. The
court found that the amended complaint “significantly broadened the focus of the
litigation” by “greatly expand[ing] the factual allegations” made against the defendant
and held that as a result the defendant's right to compel arbitration was revived by the
filing of the amended pleading. Id. at 78. With this framework in mind, we conclude
that Southern Farm may move to compel arbitration on the breach-of-contract claim,
but that its right to arbitrate the fraud claims was not revived by the filing of the
second amended complaint.
The addition of the breach-of-contract claim unexpectedly altered the scope
and theory of the case, and fairness dictates Southern Farm be permitted to arbitrate
that claim. Admittedly, as the plaintiffs point out, there are several similarities
between the breach-of-contract claim and the previously asserted fraud claims,
including that all the claims rely on the same alleged misrepresentations and
omissions. Notwithstanding those similarities, there are significant differences which
have the effect of significantly shifting the litigation and broadening the scope of
Southern Farm’s potential liability. For example, the damages recoverable under a
breach-of-contract claim are different than those recoverable under a fraud theory.
Thus, by adding the breach-of-contract claim, PSC is now able to pursue damages
that it was previously unable to recover legally. In addition, the two causes of action
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require different elements of proof. Significantly, a plaintiff must prove scienter to
establish fraud, but not to establish breach of a contract. The absence of the scienter
element in the plaintiffs’ newly asserted contract claim significantly alters the scope
of the litigation (and Southern Farm’s potential liability) by allowing a jury to hold
Southern Farm liable for making the same misrepresentations and omissions
supporting the fraud claims without finding that Southern Farm acted with scienter.
In contrast to our ruling on the contract claim, Southern Farm’s right to compel
arbitration on the fraud claims was not rejuvenated by the filing of the second
amended complaint. Southern Farm contends that because the plaintiffs have shifted
from a speech-based theory of fraud to a duty-based theory of fraud, the plaintiffs
have unexpectedly and significantly altered the scope of litigation. We disagree. The
issue of the possible existence of a fiduciary relationship between Southern Farm and
PSC and PSC’s shareholders, while not explicitly asserted in the prior complaints,
arose on several occasions during discovery and prior to trial. For example, the issue
of a potential fiduciary relationship between Southern Farm and PSC and PSC’s
shareholders resulting in duty to disclose material facts was raised during discovery,
was the subject of Daubert and summary judgment motions, and was preserved for
trial in the parties’ pretrial statement, where it was listed as an “issue[] of fact that
remain[s] to be litigated.” R1:111 at 17, 24–25. Therefore, although the plaintiffs
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chose not to present a fiduciary duty-based theory of fraud at trial, the explicit
assertion of the theory in the second amended complaint did not so unexpectedly alter
the litigation so as to revive Southern Farm’s previously waived right to arbitrate.
Accordingly, we conclude that Southern Farm may move to compel arbitration
on the plaintiffs’ breach-of-contract claim,2 but that its right to arbitrate the fraud
claims was not rejuvenated by the filing of the second amended complaint.
III
For the foregoing reasons, we hold that the district court was the appropriate
tribunal to rule on the waiver issue, Southern Farm’s right to compel arbitration on
the fraud claim was not revived by the filing of the second amended complaint, and
Southern Farm may compel arbitration on the breach-of-contract claim.3
AFFIRMED IN PART, REVERSED IN PART, AND REMANDED.
2
We find any contention by the plaintiffs that they would be prejudiced by being required
to arbitrate the breach-of-contract disingenuous, as PSC attempted to arbitrate the exact same claim.
3
We are aware that Southern Farm has taken the position that only seeks all-or-nothing
relief—i.e., that it would prefer to litigate all the claims asserted against it in the district court than
be required to defend itself in two fora. Our ruling does not require Southern Farm to compel
arbitration on the breach-of-contract claim; rather it merely affords Southern Farm the opportunity
to assert its right to arbitrate that claim should it so choose. If Southern Farm no longer wishes to
arbitrate the breach-of-contract claim, it can so inform the district court.
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