Hallmark Industries, L. L.C. v. First Systech International, Inc.

When several claims arising from multiple, related contracts ar e intertwined, with some subject
to arbitration and others not, does the so-called “intertwining doctrine” preclude arbitr ation of any
of the claims?
                              IN THE COURT OF APPEALS
                                  STATE OF ARIZONA
                                    DIVISION TWO


HALLMARK INDUSTRIES, L. L.C., an                    )          2 CA-CV 2001-0186
Arizona limited liability company,                  )          DEPARTMENT B
                                                    )
                         Plaintiff/Appellant,       )          OPINION
                                                    )
                    v.                              )
                                                    )
FIRST SYSTECH INTERNATIONAL,                        )
INC. , a cor poration; FRIEDMAN                     )
CORPORATION, a corporation,                         )
                                                    )
                     Defendants/Appellees.          )
                                                    )


             APPEAL FROM THE SUPERIOR COURT OF PIMA COUNTY

                                    Cause No. C20010883

                             Honorable Michael J. Brown, Judge

                                         AFFIRMED


Law Offices of George J. Feulner, Esq.
 By George J. Feulner                                                                       Tucson
                                                                  Attorney for Plaintiff/ Appellant

John E. Karow                                                                          Scottsdale
                                                    Attorney for Defendant/Appellee First Systech

Jennings, Strouss and Salmon, PLC
 By Gordon Lewis                                                                           Tucson

   and

Gray Cary Ware & Freidenrich LLP
 By Guillermo Marrero                                                                   San Diego

                                                2
                                                                Attorneys for Defendant/Appellee
                                                                           Friedman Cor poration


P E L A N D E R, Judge.


¶1              This contractual dispute arises from plaintiff/appellant Hallmark Industries’

purchase, pursuant to four separate contracts, of a computer system, including hardware,

software, and related support services, from defendant/appellee First Systech International, Inc.

(Systech). The trial court granted Systech’s application to compel arbitration of disputes arising

from three of the contracts between the parties but denied that application as to any disputes

arising from the fourth contract. 1 Hallmark appeals, contending that because the disputes arising

from each contract are inextricably interrelated, the tr ial court should have applied the so-called

“inter twining doctrine” and denied Systech’s application to compel arbitration as to all four

contracts. Because we find the intertwining doctrine inapplicable and incompatible with Arizona

law, we affir m.

                                          BACKGROUND

¶2              Within less than one month, Hallmark and Systech entered into three software,

support, and license contracts and one equipment sale contract. All four of the contracts contained

arbitration clauses that state in pertinent par t:

                [A]ny controversy or claim arising out of or relating to this
                Agreement or the breach thereof will be settled by arbitration before
                three arbitrators in accordance with the Rules of the American


        1
         At some point, appellee F riedman Corpor ation (Friedman) acquired Systech. Although
Friedman did not specifically join below in Systech’s application to compel arbitration, Friedman
has filed an answering brief in support of the tr ial court’s judgment.

                                                     3
               Arbitration Association (“AAA” ) then in effect, and judgement
               upon the award render ed by the arbitrator s may be entered in any
               court having jurisdiction.

Hallmark and Systech representatives signed each of the three software contracts below the

arbitration clauses. The equipment sale contract, however, was signed only on the front page and

not on that contract’s reverse side, which contained the arbitration clause.

¶3             Hallmark filed a complaint against Systech and Friedman, alleging various theories

of recovery for disputes that had arisen from the four contracts. Thereafter, Systech filed an

application to compel arbitration pursuant to the arbitration clauses. The trial court ordered

arbitration for the disputes arising out of the three softwar e contracts. Because the parties had not

signed the reverse side of the equipment sale contract, however, the court ruled that they had not

agreed to arbitrate any disputes arising from that contract. 2 Accordingly, the trial court denied

Systech’s application as to the equipment sale contract disputes.

¶4             The trial court denied Hallmark’s subsequent motion for reconsideration and, upon

finding no just reason for delay, entered a final judgment compelling arbitration of the disputes

arising from the three software contracts. See Ariz. R. Civ. P. 54(b), 16 A.R. S., Pt. 2. This



       2
         The trial court found no agreement to ar bitrate despite the following language on the front
of the equipment sale contract immediately above the contracting parties’ signatures: “The terms
and conditions . . . on the r everse side are par t of this agreement.” Based on that language,
Systech argues the trial court also should have ordered the parties to arbitrate the disputes arising
from the equipment contract. Cf. Kalil Bottling Co. v. Burroughs Corp., 127 Ariz. 278, 281, 619
P.2d 1055, 1058 (App. 1980) (terms and conditions on reverse side of parties’ contract applied
regardless of how contract was character ized). Because resolution of this issue is not necessary
for our determination of this case and because Systech has not filed a cross-appeal, we do not
address it. See Ariz. R. Civ. App. P. 13(b)(3), 17B A. R.S.; see also Bills v. Arizona State Bd.
of Educ., 169 Ariz. 366, 369-70, 819 P.2d 952, 955-56 (App. 1991) (appellee may not raise issue
attacking judgment in absence of a cross-appeal).

                                                  4
appeal followed. We have jur isdiction pursuant to A.R.S. § 12-2101. See Southern California

Edison Co. v. Peabody Western Coal Co., 194 Ar iz. 47, ¶¶16, 18, 23, 977 P.2d 769, ¶ ¶16, 18,

23 (1999) (order compelling arbitration appealable if trial court certifies the order pur suant to Rule

54(b), Ar iz. R. Civ. P.).

                                           DISCUSSION

¶5             Hallmark contends the trial court erred in compelling arbitration of disputes arising

from the three software contracts. Because those disputes are inextricably interr elated with the

non-arbitrable equipment sale contract disputes, Hallmark argues, the trial court should have

applied the intertwining doctrine and denied Systech’s application to compel arbitration.

According to Hallmark, that doctrine “ requires that where, as here, several claims are

‘intertwined, ’ with some subject to court jurisdiction and others subject to arbitration, the court

should retain jurisdiction of all of them. ” Whether a trial court may apply the intertwining

doctrine to avoid a valid arbitration agreement is an issue of first impression in Arizona. And,

it is an issue of law that we review de novo. Burnette v. Bender, 184 Ar iz. 301, 304, 908 P.2d

1086, 1089 (App. 1995).

¶6             The intertwining doctrine is an outgrowth of Wilko v. Swan, 346 U.S. 427, 74

S. Ct. 182, 98 L. Ed. 168 (1953), overruled by Rodriguez De Quijas v. Shearson/ American

Express, Inc., 490 U.S. 477, 109 S. Ct. 1917, 104 L. Ed. 2d 526 (1989). Wilko involved a

federal securities claim under 15 U.S.C. § 77l(2). The Supreme Court concluded that that statute

created a “special r ight . . . enfor ceable in any court of competent jurisdiction.” Wilko, 346 U.S.

at 431, 74 S. Ct. at 184, 98 L. Ed. at 173. And, because 15 U. S.C. § 77n precluded the waiver

of any provision of the Securities Act of 1933, including 15 U.S.C. § 771(2), the Supreme Court

                                                  5
held that an agreement to arbitrate 15 U.S.C. § 77l(2) claims was void. Id. at 428 n. 1, 430 n. 6,

438, 74 S. Ct. at 183 n.1, 184 n.6, 188-89, 98 L. Ed. at 172 n.1, 173 n.6, 177. Thus, the court

essentially determined that 15 U.S.C. §§ 77l(2) and 77n trumped both an agreement to arbitr ate

securities claims and the federal arbitration act, which specifically declared arbitration agr eements

enforceable. See 9 U.S.C. §§ 2, 3.

¶7             Following Wilko, in cases involving both non-arbitrable federal securities claims

and related, arbitrable state law claims, the Fifth, Ninth, and Eleventh Circuit Courts of Appeals

adopted the intertwining doctrine.3 Byrd v. Dean Witter Reynolds, Inc., 726 F.2d 552, 554 (9th

Cir. 1984), rev’d, 470 U.S. 213, 105 S. Ct. 1238, 84 L. Ed. 2d 158 (1985); Belke v. Merrill

Lynch, Pierce, Fenner & Smith, 693 F .2d 1023, 1026 (11th Cir. 1982); Miley v. Oppenheimer

& Co., Inc., 637 F.2d 318, 335 (5th Cir. 1981). Under that doctrine, if the non-arbitrable federal

securities claims and the related arbitrable claims “are so related that severance is ‘impractical if

not impossible,’” the court “ should deny arbitration as to the arbitrable claims.” Belke, 693 F.2d

at 1026, quoting Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Haydu, 675 F .2d 1169, 1172

(11th Cir. 1982). A primary purpose of the intertwining doctrine was to preserve the special

statutory right, recognized in Wilko, to pur sue federal securities claims in the judicial system.

Miley, 637 F.2d at 335. In adopting the doctrine, the Fifth Circuit stated that allowing the

arbitrable claims to proceed to arbitration could render that special statutory r ight “totally




       3
        In contrast, the Sixth, Seventh, and Eighth Circuit Cour ts of Appeals have rejected the
doctrine of intertwining. See Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 217, 105 S. Ct.
1238, 1240-41, 84 L. Ed. 2d 158, 163 (1985).

                                                  6
meaningless” because “an ar bitrator could, in effect, r esolve the merits of a federal securities

claim during the course of arbitrating pendent state claims.” Id.

¶8             In Dean Witter Reynolds, the Supreme Court reversed the Ninth Circuit’s decision

in Byrd and specifically rejected the intertwining doctrine. 470 U.S. at 217, 105 S. Ct. at 1241,

84 L. Ed. 2d at 163. Relying on 9 U.S.C. § 2, which states that arbitration agreements “ shall be

valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the

revocation of any contract, ” the Cour t concluded that the federal arbitration act conferred no

discretion on trial courts to decline to enforce valid arbitration agreements. Id. at 218, 105 S. Ct.

at 1241, 84 L. Ed. 2d at 163.

¶9             In view of that background, even assuming arguendo that a court could apply the

intertwining doctrine to avoid a valid arbitration agreement, the doctr ine does not apply to this

case. As noted above, a primary purpose of the doctrine was to preserve a special statutory right

to seek judicial relief. Miley, 637 F .2d at 335. Hallmark’s claims do not involve any such special

statutory right. Thus, Hallmark cannot avoid the force and effect of the software contracts’

arbitration clauses based on the intertwining doctrine.

¶10            That conclusion is supported by three additional reasons. Fir st, A.R.S. § 12-1501,

in language virtually identical to 9 U. S.C. § 2, states:

               A written agreement to submit any existing controversy to
               arbitration or a provision in a written contract to submit to
               arbitration any controversy thereafter arising between the parties is
               valid, enforceable and irrevocable, save upon such grounds as exist
               at law or in equity for the revocation of any contract.

Like the Supreme Court in the Dean Witter Reynolds case, we conclude that this language does

not confer discretion on a trial court to ignore a valid arbitration agreement merely because a case

                                                  7
involves related arbitr able and non-arbitrable claims, even if the claims are factually related and

difficult to separate.

¶11             Second, our legislature has prescribed the applicable procedure when cases involve

both arbitrable and non-ar bitrable claims. Section 12-1502(D), A. R.S. , states:

                Any action or proceeding involving an issue subject to arbitration
                shall be stayed if an order for arbitration or an application therefor
                has been made under this section or, if the issue is severable, the
                stay may be with respect thereto only. When the application is
                made in such action or proceeding, the order for arbitration shall
                include such stay.

Nothing in § 12-1502(D) permits a court to refuse to enforce an arbitration agreement. Rather,

if an action or proceeding involves multiple, inseparable claims, only some of which are

arbitrable, the court action must be stayed pending the arbitration. Although the phrase “[a]ny

action or proceeding” is broad, the last sentence of § 12-1502(D) makes clear that the stay may

only be granted in the court pr oceedings, as an application to compel arbitration may only be made

in court.   See § 12-1502(A) (court shall order ar bitration upon party’s application showing

existence of arbitration agreement). Accordingly, we disagree with a Colorado case on which

Hallmark relies wherein the court concluded, based on statutory language essentially identical to

§ 12-1502(D), that the intertwining doctrine “ remains viable and must be used in determining the

arbitrability of claims arising from the same facts, where one of those claims is non-arbitrable. ”

Lawrence Street Partners, Ltd. v. Lawrence Street Venturers, 786 P.2d 508, 511 (Colo. Ct. App.

1989); see also Colo. Rev. Stat. Ann. § 13-22-204(4) (West 2002).

¶12             Third, to some extent the intertwining doctrine runs counter to Arizona law that

clearly “favor s arbitration, both statutorily, see A.R. S. § 12-1501, and by the courts as a matter


                                                  8
of public policy.” Foy v. Thorp, 186 Ariz. 151, 153, 920 P.2d 31, 33 (App. 1996); see also

Einhorn v. Valley Medical Specialists, P. C., 172 Ar iz. 571, 572, 838 P.2d 1332, 1333 (App.

1992). Permitting a party to avoid ar bitration of disputes arising from three contracts with clear,

enforceable arbitration clauses because of the alleged non-arbitrability of disputes arising from a

fourth, albeit related, contract would circumvent that policy.

¶13            We acknowledge that having a court and arbitrators resolve the same factual issues

is not a particularly efficient allocation of resources, may be somewhat impractical, and

theoretically could lead to inconsistent results.     See generally Anthony G. Buzbee, When

Arbitrable Claims Are Mixed with Nonarbitrable Ones: What’s A Court To Do?, 39 S. Tex. L.

Rev. 663 (June 1998); B. Judson Hennington, III, Unravelling the Intertwining Doctrine: Dean

Witter Reynolds, Inc. v. Byrd, 37 Ala. L. Rev. 457 (Winter 1986). The primary pur pose of our

arbitrations statutes, however, is to “validate arbitration agreements” and “make the ar bitration

process effective.” Prefatory Note to Uniform Arbitration Act, 7 U.L.A. pt. 1 at 2 (1997); see

Historical and Statutory Notes to § 12-1501 (“This section is similar to § 1 of the Uniform

Arbitration Act.” ); see also Dean Witter Reynolds Inc., 470 U.S. at 217, 219, 105 S. Ct. at 1241,

1242, 84 L. Ed. 2d at 163, 164 (the federal arbitration act “r equires district courts to compel

arbitration of pendent arbitrable claims when one of the parties files a motion to compel, even

where the result would be the possibly inefficient maintenance of separate proceedings in different

forums; purpose of act “ was to ensure judicial enforcement of privately made agreements to

arbitrate” ). Any inefficiency or risk of inconsistent results is a consequence of the parties’

bargaining. Under our arbitration statutes, we are requir ed to enforce those bargains despite their

potential shortcomings.

                                                 9
                                         DISPOSITION

¶14            The trial court’s judgment is affirmed. The r equests of Systech and Friedman for

an award of reasonable attorney’s fees on appeal pur suant to A. R.S. § 12-341.01 ar e granted upon

their compliance with Rule 21, Ariz. R. Civ. App. P. , 17B A. R.S.



                                                 _______________________________________
                                                 JOHN PELANDER, Judge

CONCURRING:



_______________________________________
PHILIP G. ESPINOSA, Chief Judge



_______________________________________
JOSEPH W. HOWARD, Judge




                                                10
