Opinion
Civil Action No. 3:01-CV-1515-D
October 29, 2001
MEMORANDUM OPINION AND ORDER
In this action by plaintiffs AA Global Industries, Inc. ("AA") and AA Global Industries of Texas, Inc. ("AA Texas") against defendants Kevin Wolfe ("Wolfe") and Kay Lynn Wolfe (collectively, "the Wolfes"), Kidz Zone, Inc. ("Kidz Zone"), and Clayton Parker ("Parker"), defendants move to stay the proceedings and to compel arbitration. The court grants one motion and grants in part and denies in part the other.
I A
Plaintiff AA is a manufacturer and distributor of bulk vending machines and supplies. Through its Koko's Confectionery division, AA manufactures and sells a variety of candy products. AA Texas is a wholly-owned subsidiary of AA that is engaged in manufacturing and selling the Koko's product line. Kidz Zone is a company that has in the past manufactured and sold confectionery and novelty products both domestically and internationally. Parker founded Kidz Zone and, before a corporate name change, it operated under the name Loboz Enterprises, Inc. Plaintiffs allege that Wolfe played a key role in the day-to-day operations of Kidz Zone. He located suppliers, manufacturers, and distributors for Kidz Zone's products, designed and acquired product packaging and artwork, sold product as national sales manager, coordinated exports, and participated in the acquisition of equipment. In 2000 AA Texas purchased all the assets of Kidz Zone related to the confectionery business. See Ps App. 4. Among the assets it acquired were the trademark and trade dress rights in the following marks: KA-BLUEY, WURMZ DURT, CD'S DIGITAL GUM, KOOKY CHEW, and CONFETTI FUN MIX. An assignment reflecting the transfer of rights in each of these marks has been recorded with the United States Patent and Trademark Office. See Ps. App. 66-68. The asset purchase agreement contained a covenant not to compete executed by Steven A. Kovens ("Kovens"), Executive Vice President of AA Texas, Parker, as president of Kidz Zone, Parker individually, and Wolfe individually. See Ps. App. 48, 53-54. The asset purchase agreement also contained the following arbitration clause:
The factual allegations of the complaint form the basis for determining whether the court should compel arbitration under the arbitration clause. See Ford v. Nylcare Health Plans of the Gulf Coast Inc., 141 F.3d 243, 250 (5th Cir. 1998). In summarizing the relevant allegations, the court suggests no view concerning their truth.
Any controversy or claim arising out of or relating to this agreement or the breach thereof shall be settled by arbitration in accordance with the rules of the American Arbitration Association to be held in Dallas/Fort Worth, Texas, and judgment upon any award rendered by the arbitrators may be entered in any court of competent jurisdiction.
Ps. App. 52.
In connection with AA Texas' acquisition of Kidz Zone's assets, it hired Wolfe as a manager. Plaintiffs regard Wolfe as having been the most senior operations person at AA Texas. See Ps. App. 5. He reported directly to Kovens, AA's Executive Vice President. Plaintiffs assert that Wolfe was hired due to his manufacturing and sales experience in the confectionery and novelty business and his familiarity with Kidz Zone's product lines, suppliers, manufacturers, and customers.
The nine counts of plaintiffs* complaint are based primarily on activities that Wolfe allegedly undertook after consummation of the asset sale. Plaintiffs assert that he surreptitiously and without their consent associated himself with several personal contacts in the confectionery industry in order to engage in a scheme to distribute, produce, and sell candy and gum under a counterfeit KA-BLUEY mark. See Ps. App. 6. Plaintiffs maintain that the group engaged in this activity includes Wolfe, John Wilkinson, and Rana Wilkinson of Australian International Traders Pty. Ltd. of Australia, distributor Steven Ware, of Traders International Pty. Ltd. of New Zealand, and manufacturers Teobaldo Fumero of Costa Rica and Manuel Ruiz of Mexico. See id.
Plaintiffs sue Wolfe for trademark infringement, under 15 U.S.C. § 1125(a) (count two); trade dress infringement, under 15 U, S.C. § 1125(a) (count three); tortious interference with business expectations (count four); breach of the asset purchase contract (count six); conversion of artwork belonging to AA (count seven); and injury to business reputation or mark, under Tex Bus. Com. Code Ann. § 16.29 (Vernon Supp. 2001) (count nine). Two counts of the complaint are asserted jointly against the Wolfes: violation of the Racketeer Influenced and Corrupt Organizations ("RICO") Act, 18 U.S.C. § 1962(c) (count one), and breach of fiduciary duty and civil conspiracy (count five). In count eight, plaintiffs assert a single claim against Kidz Zone and Clayton Parker for breach of the asset purchase agreement.
II
The court first addresses the motion by Kidz Zone and Parker to stay the present proceedings and compel arbitration.The court must initially determine the scope of the relief sought. Kidz Zone and Parker are named only in count eight of the complaint, which alleges breach of the asset purchase agreement. In their brief they request "the Court to stay this proceeding and compel the arbitration of plaintiffs' claims against Kidz Zone and Parker in accordance with the arbitration clause of the Asset Purchase Agreement." Parker Br. 3. The court interprets this to mean that Kidz Zone and Parker request that these proceedings be stayed and arbitration compelled only with respect to the claims asserted against them, and not as to those brought solely against Wolfe or against the Wolfes jointly. The scope of the relief that Kidz Zone and Parker seek is made somewhat ambiguous by language in their brief and in their proposed order that suggests that they are seeking a stay and compulsory arbitration of the present action in toto.
Plaintiffs indicate in their brief that they do not object to the extent that Kidz Zone and Parker seek to stay these proceedings and compel arbitration solely with respect to the single claim asserted against them. See Ps. Br. at 2 ("Plaintiffs admit that the claim against Kidz Zone, Inc. and Clayton Parker is properly subject to arbitration. However, Plaintiffs deny that all claims against the remaining defendants are arbitrable and request that this Court deny Defendants' Motion to the extent it requests that this entire proceeding be stayed subject to arbitration."). Given the parties' agreement on this point and the plain language of the applicable arbitration clause ("Any controversy or claim arising out of or relating to this Agreement or the breach thereof shall be settled by arbitration"), the court holds that the claim asserted against Kidz Zone and Parker in count eight is subject to compulsory arbitration. Because the only cause of action brought against these defendants is subject to binding arbitration, plaintiffs' action against Kidz Zone and Parker is stayed.
III A
The Wolfes move to stay and to compel arbitration of the remaining claims that plaintiffs allege. Plaintiffs do not contest part of this motion. They state that they "agree that the Breach of Contract claim against Kevin Wolfe (Count Six of Plaintiffs' Original Complaint) and the Breach of Fiduciary Duty and Civil Conspiracy Claim against Kevin Wolfe and Kay Lynn Wolfe (Count Five of Plaintiffs' Original Complaint) are properly subject to arbitration pursuant to the Asset Purchase Agreement." Ps. Br. at 2. The parties disagree, however, as to whether the remaining claims asserted in plaintiffs' complaint — counts one, two, three, four, seven, and nine — are subject to compulsory arbitration as claims "arising out of or relating to [the asset purchase agreement] or the breach thereof[.]"
B
The scope of an arbitration agreement is a question of law. See Certain Underwriters at Lloyd's of London v. Celebrity, Inc., 950 S.W.2d 375, 377 (Tex.App. 1996, writ dism'd w.o.j.). The party seeking to avoid arbitration must show that the claims asserted are not within the scope of the agreement. See Prudential Secs., Inc. v. Marshall, 909 S.W.2d 896, 900 (Tex. 1995). The test to determine whether a claim falls within the scope of an arbitration agreement under the Federal Arbitration Act, 9 U.S.C §§ 1- 16, is whether the dispute touches matters covered by the agreement. See Pennzoil Exploration Prod. Co. v. Ramco Energy Ltd, 139 F.3d 1061, 1068 (5th Cir. 1998). The Texas Arbitration Act, Tex. Civ. Prac. Rem. Code Ann. § 171.001-171.098 (Vernon 1997 Pamp. Supp. 2001), provides a similar test: in determining whether a claim is subject to compulsory arbitration, the relevant inquiry is whether the claim is so interwoven with the underlying contract that it could not stand alone, that is, whether the claim is actionable without reference to the underlying contract. See Fridl v. Cook, 908 S.W.2d 507, 511 (Tex.App. 1995, writ dism'd w.o.j.). The Fifth Circuit has stated that there is no perceptible difference between the two standards. See Ford v. Nylcare Health Plans of the Gulf Coast Inc., 141 F.3d243, 250 n. 7 (5th Cir. 1998) ("We agree with the HMOs that there is no perceptible difference between the federal and Texas standards in this respect. Whether described as `touch[ing] matters covered by' the agreement, or ` interwoven with' the agreement, a tort claim is ` related to' the agreement only if reference to the agreement is required to maintain the action. This is true notwithstanding the fact that the tort claim may implicate the agreement as a factual matter." (citations omitted)).
The Wolfes have moved to "stay these proceedings and compel arbitration pursuant to the Federal Arbitration Act, 9 U.S.C. § 1 et seq., and/or the Texas General Arbitration Act, Tex. Civ. Prac. Rem. Code Ann. § 171.001 et. seq. (Vernon 1997 Supp. 2001)." Wolfes Br. at 2. Because the standard for determining the scope of the arbitration clause at issue is the same under both statutes, the court need not determine at this juncture which statute controls.
The Ford test demands scrutiny of the factual allegations in the complaint, "not to identify whether the facts in support of the action will implicate the agreement as an item of evidence, but to uncover whether an action formally labeled a tort is in essence a breach of contract claim based on a breach of contract." Id. at 250 (citing Valero Energy Corp. v. Wagner Brown, 777 S.W.2d 564, 566 (Tex.App. 1989, writ denied)). The court must therefore examine the facts that give rise to each of the claims asserted to determine "whether the action `could be maintained without reference to the contract.'" Id. (quoting Valero, 777 S.W.2d at 566).
C 1
In counts two and three of the complaint, plaintiffs allege that Wolfe committed trademark and trade dress infringement in violation of the Lanham Act, 15 U.S.C. § 1125(a). Wolfe contends
The Lanham Act claims and the other tort claims in this case relate to the Asset Purchase Agreement because reference to the Asset Purchase Agreement is required to maintain the actions. Those claims are dependent upon whether or not Plaintiffs acquired the Australian trademark for Ka-bluey pursuant to the Asset Purchase Agreement.
Wolfes Br. at 3. The court notes initially that plaintiffs' Lanham Act claims do not solely relate to the Australian trademark for KA-BLUEY. Indeed, the complaint refers to the U.S. trademark for KA-BLUEY, and a copy of the assignment relating to the U.S. trademark is included with the complaint. See Ps. App. 5, 66. More important, regardless of the validity of the assignment purportedly made by the asset purchase agreement, reference to the agreement is required only as an evidentiary matter (for instance, to show the source of plaintiffs' ownership of the trademark on which they sue), not as a legal matter in order for plaintiffs to maintain their Lanham Act claim. Ford itself affirmed the denial of arbitration of a Lanham Act claim on this basis where the relevant language of the arbitration clause was identical to that at issue here. See Ford, 141 F.3d at 246, 252 (affirming denial of motion to compel arbitration of Lanham Act claim where arbitration clause called for arbitration of "[a]ny controversy or claim arising out of or relating to this Agreement[.]"). For these reasons, the court holds that counts two and three of plaintiffs' complaint are not subject to compulsory arbitration under the asset purchase agreement.
2
For similar reasons, Wolfe may not compel arbitration of count nine of plaintiffs' complaint, which alleges a cause of action under Tex. Bus. Com. Code Ann. § 16.29 (Vernon Supp. 2001) for injury to plaintiffs' business reputation. This statutory section, often referred to as an "anti-dilution" statute, states:
A person may bring an action to enjoin an act likely to injure a business reputation or to dilute the distinctive quality of a mark registered under this chapter or Title 15, U.S.C. or a mark or trade name valid at common law, regardless of whether there is competition between the parties or confusion as to the source of goods or services.Id. Although to recover under this statute, plaintiffs must establish ownership of a distinctive mark, see E. J. Gallo Winery v. Spider Webs Ltd., 129F. Supp.2d 1033, 1037 (S.D. Tex. 2001), reference to the asset purchase agreement need only be made, if at all, solely as an evidentiary matter to indicate the origin of plaintiffs' ownership of the mark. Because reference to the agreement is not required as a legal matter to maintain the action under § 16.29, the court concludes that count nine is not subject to compulsory arbitration.
3
Plaintiffs allege in count four a state-law claim against Wolfe for tortious interference with business expectations. This cause of action is based on allegations that, while serving as the manager of AA Texas, Wolfe intentionally undermined negotiations between AA and an Australian distributor known as Mike Jack Pty. ("Mike Jack"), relating to the possibility of Mike Jack's serving as the Australian distributor for AA Texas, in order to preserve that territory for his own exploitation via clandestine sales of allegedly counterfeit KA-BLUEY products. Although Wolfe's actions might have been alleged to have been a breach of his covenant not to compete, plaintiffs' tortious interference action may be maintained without reference to any part of the asset purchase agreement. Therefore, count four is not subject to compulsory arbitration.
4
In count seven plaintiffs allege that after Wolfe was terminated he unlawfully retained on a personal computer certain digitized artwork owned by AA Texas. This conversion claim seeks damages as well as return of the property. To maintain a conversion action, plaintiffs must show that (1) they own the artwork, (2) Wolfe has assumed and exercised dominion and control over the artwork, and (3) he has refused plaintiffs' demand for its return. See Akin v. Santa Clara Land Co., 34 S.W.3d 334, 344 (Tex.App. 2000, pet. denied). Because this cause of action may be maintained without reference to the asset purchase agreement, count seven is not subject to compulsory arbitration.
5
In count one plaintiffs allege that the Wolfes participated in the activities of a RICO enterprise engaged in the production and sale of counterfeit KA-BLUEY products. As discussed above in relation to plaintiffs' Lanham Act and anti-dilution claims, reference to the asset purchase agreement may be necessary as an evidentiary matter in order for plaintiffs to prove that the activities of the RICO enterprise violated plaintiffs' trademark and trade dress rights. But this type of reliance is the sort that the Fifth Circuit held in Ford was insufficient to trigger compulsory arbitration under an arbitration clause covering "[a]ny controversy or claim arising out of or relating to" the agreement. See Ford, 141 F.3d at 246, 250. The Wolfes' sole argument in favor of compelling arbitration of plaintiffs' civil RICO claim is that it
directly implicates the Asset Purchase Agreement because Plaintiffs acquired whatever rights they have regarding the use of Ka-Bluey by virtue of the Asset Purchase Agreement and Defendants retained whatever rights they have regarding the use of Ka-Bluey by virtue of the Asset Purchase Agreement.
Wolfes Rep. at 3. Because this relationship between the asset purchase agreement and plaintiffs' ability to maintain their civil RICO action has been held to provide an insufficient basis to compel arbitration, the court holds that count one is not subject to compulsory arbitration.
* * *
The court grants the motion of Kidz Zone and Parker. Plaintiffs must arbitrate their breach of contract claim against these defendants as set forth in count eight. This claim is stayed pending completion of arbitration. The court grants in part and denies in part the Wolfes' motion. Plaintiffs must arbitrate their breach of contract claim against Wolfe (count six) and their breach of fiduciary duty and civil conspiracy claims against the Wolfes (count five), and this part of plaintiffs' action against the Wolfes is stayed. The Wolfes' motion is otherwise denied.