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PAS-EBS v. GROUP HEALTH

April 12, 1977.

PAS-EBS, a joint venture, Plaintiff,
v.
GROUP HEALTH, INC., Defendant.



The opinion of the court was delivered by: WERKER

MEMORANDUM DECISION

WERKER, District Judge.

This is an action brought by PAS-EBS, a joint venture consisting of Professional Automated Services, Inc., hereinafter "PAS," and E.B.S. Data Processing, Inc., hereinafter "EBS," for breach of contract by the defendant Group Health Incorporated, hereinafter "GHI."

 Plaintiff has set forth the following facts in the complaint. Plaintiff and its predecessor in interest, PAS, are the owners of a computer program and software package hereinafter referred to as the System.On February 20, 1973 PAS entered into a written contract, hereinafter the "Agreement," with GHI which granted to GHI an exclusive franchise and licensing rights for the System in the states of New York and New Jersey. In return for the granting of such rights GHI agreed to compensate PAS by paying royalties in amounts to be finally determined by a formula included in the Agreement. In addition, the Agreement committed PAS to provide several ancillary services to GHI relating to the operation of the System, and GHI was to compensate PAS for these services on the basis of other formulae contained in the Agreement.

 The essence of plaintiff's claim is that although it has performed as promised, the defendant has breached the Agreement by failing to make the required royalty payments for each month from January 1975 through June 1976, and in addition by failing to pay for the ancillary services. Accordingly, plaintiff seeks a declaration that defendant has breached the Agreement as well as other declaratory and injunctive relief which it believes necessary to protect its rights, and damages of at least $39,349.26.

 Jurisdiction of plaintiff's action is based on diversity of citizenship. Plaintiff alleges that the defendant is a New York Not-for-Profit corporation having its principal place of business in the State of New York, that PAS is a Florida corporation having its principal place of business in the State of Florida, and that EBS is a Delaware corporation having its principal place of business in the State of California.

 In the complaint plaintiff has included a copy of the Agreement. Paragraph 14 thereof contains the following arbitration clause:

 "Should any dispute arise between the parties concerning the interpretation or application of the terms and provisions herein, such dispute shall be submitted to arbitration in the City of New York, pursuant to the rules and regulations of the American Arbitration Association then in effect."

 GHI has moved under the Federal Arbitration Act, 9 U.S.C. §§ 3, 4 (1970), hereinafter the "Act," for an order staying this action pending arbitration and directing plaintiff to arbitrate separate but related claims upon which defendant had demanded arbitration on August 31, 1976, subsequent to the filing of this complaint on June 24, 1976.

 The basis for defendant's motion is its assertion that the arbitration clause contained in the Agreement encompasses plaintiff's claim, and that therefore under § 3 of the Federal Arbitration Act, 9 U.S.C. § 1, et seq., this court should stay the proceedings pending arbitration of this dispute. Further, GHI claims that the breaching party is the plaintiff rather than itself. This is based on its contention that the contract between the parties consists not only of the Agreement, but also of a subsequent written modification of said Agreement embodied in a handwritten memorandum entitled "Amendment to GHI-PAS Franchise Contract of March 1973," hereinafter the "Amendment." GHI asserts that plaintiff's breaches of the contract as amended consist of the fact that: (a) PAS has transmitted proprietary rights to the System without complying with paragraph 15 of the Agreement, *fn1" and (b) payments due to it under the Amendment have not been made. GHI has set forth a copy of a Demand for Arbitration, which it caused to be issued to PAS on August 31, 1976, which indicates that GHI has sought to arbitrate the above alleged breaches. GHI seeks an order under § 4 of the Act compelling plaintiff to arbitrate these claims.

 At the onset we should make clear those matters which are not at issue. There is no dispute that the contract, regardless of what it is alleged to consist of, is one which evidences a transaction involving interstate commerce and which contains a written arbitration clause. Moreover, the existence of a valid basis for diversity jurisdiction is unquestioned. Consequently, it is clear that the issues raised on this motion are to be resolved on the basis of the Act. Most specifically involved in this decision are §§ 2, 3 and 4 of the Act. *fn2"

 Stay Pending Arbitration Under § 3

 The sole issue to be resolved is one of arbitrability, that is, whether the claim that plaintiff seeks to litigate is one which is properly referable to arbitration under the arbitration clause contained in the contract. The inquiry must be conducted in light of a federal policy favoring arbitration rather than judicial determination of disputes. In fact,

 "... in interpreting the scope of an arbitration clause, that is, in endeavoring to determine what the parties intended would be arbitrable federal courts are not to apply the traditional rules of construction, but rather a federal rule that seemingly requires a clearly expressed intent not to arbitrate an issue before such issue can be ruled one for ...


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