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January 28, 1985


The opinion of the court was delivered by: GLASSER


GLASSER, United States District Judge:

 This is a diversity action brought by Wren Distributors, Inc. ("Wren") and a related company, Innovative Marketing Concepts, Inc. ("IMC"), which arises out of business transactions between plaintiffs and defendant Phone-Mate, Inc. ("Phone-Mate"). Phone-Mate has moved this Court for an order compelling plaintiffs to arbitrate this action pursuant to 9 U.S.C. § 4, *fn1" and/or to stay this action pending arbitration pursuant to 9 U.S.C. § 3. *fn2" Since the filing of this motion, IMC has consented to arbitrate its claims against Phone-mate, and to stay its claims in this Court pending arbitration. Therefore, the only questions remaining before me are whether Wren can be compelled to arbitrate its claims against defendant, and if not, whether Wren's claims against defendant may be stayed pending arbitration of IMC's claims against defendant. For the reasons set forth below, Phone-Mate's motion to compel Wren to arbitrate its claims is denied, as is Phone-Mate's request that Wren's claims in this case be stayed pending completion of the IMC/Phone-Mate arbitration.


 Defendant Phone-Mate is a California corporation which designs, engineers and markets various telecommunications products throughout the United Sttaes for use in homes and in small businesses. In addition to its own personnel, defendant utilizes firms which act as distributors of its products as well as separate manufacturer representative firms ("sales reps" or "reps") to carry out its business. As detailed in both plaintiffs' and defendant's motion papers, the functions and methods of operation of the distributor and sales rep differ considerably. *fn3"

 The sales rep, who is active in the marketing and advertising of Phone-Mate's product, acts as an agent for Phone-mate. The rep arranges sales of Phone-Mate products to different accounts, and earns a 5% commission on sales to direct customers and 3% on sales to distributors such as Wren. Unlike the sales rep, the Phone-Mate distributor takes title to the company's products and resells them to direct accounts. The distributor is compensated by receiving the margin of profit between the price paid to Phone-Mate and the price charged to the customer. The distributor is not an agent of Phone-Mate. Phone-Mate alleges that its policy has been to use separate firms as sales reps for and distributors of its products.

 In the context of this action, Wren acted as distributor for Phone-Mate in the New York regional sales market from 1974 through August 1983. The parties transacted business informally, without a written contract. Prior to May 1983, Phone-Mate had engaged companies unrelated to plaintiffs as sales reps for their merchandise. In early 1983, however, plaintiffs and defendant worked out a plan under which Wren would form a separate sales rep organization so that it could, in effect, function as both sales rep and distributor for Phone-mate. That sales rep "arm" of Wren is the other plaintiff in this action, IMC.

 As stated above, Phone-mate had a policy of utilizing separate organizations to function as sales reps and distributors. Therefore, defendant alleges, the following factors were important to its decision to use Wren as both distributor and sales rep:

 (1) that Wren would form a separate sales rep organization to function as Phone-mate's rep; (2) that this organization would eb adequately staffed to perform the duties of a sales rep; and (3) that this separate organization would not function as sales rep for any companies that competed with Phone-Mate.

 Affidavit of Larry Kloman (Vice President of Sales, Phone-Mate) ("Kloman Aff.") P14. It was hoped by Wren and Phone-Mate that by using Wren as master distributor of Phone-Mate products in the New York area and using IMC as the sales rep, the overall market for Phone-Mate products would grow "because Wren/IMC would control both the marketing arm as sales rep and the supply side as distributor." Kloman Aff. P15.

 As a result of negotiations between Wren and Phone-mate, Wren developed an organizational chart for a separate sales rep organization, IMC, and conveyed to Phone-Mate assurances that IMC would be adequately staffed to meet Phone-Mate's sales rep needs. Phone-Mate appointed IMC as its sales rep effective May 1, 1983, by a contract which was memorialized in a written Sales Representative Agreement ("the Agreement") between those parties on June 3, 1983. Wren was not a party to the Agreement.The Agreement contained both an arbitration clause *fn4" and a provision for termination of the contract by either party on thirty days' written notice. Phone-Mate uses such Sales Representative Agreements when it contracts with sales reps throughout the country. Kloman Aff. P19.

 IMC acted as Phone-Mate's sales rep until August 30, 1983, when Phone-Mate terminated the Agreement effective September 30, 1983. See Kloman Aff., Exh. D. Although the parties disagree as to how the distributor relationship between Wren and Phone-Mate was terminated, *fn5" it is clear that the distributorship arrangement ended on or about September 1983.

 In November 1983, plaintiffs instituted this action against Phone-Mate, in which Wren alleges three claims for damages as follows: (1) damages due to excess inventory which defendant required Wren to purchase and which Wren could not sell due to the allegedly inferior quality of the goods; (2) defendant tortiously interfered with Wren's relationship with its customers by conveying various misrepresentations to those customers and by committing theft of Wren's customers; and (3) defendant refused to credit Wren for allegedly defective or unusable products returned to defendant by Wren.

 Unlike Wren's claims against defendant, IMC's two claims against Phone-mate refer specifically to the Sales Representative Agreement. IMC alleges (1) that defendant refused to pay IMC commissions due under the Agreement, and (2) defendant caused IMC to lose valuable business opportunities as a ...

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