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NPS Communications Inc. v. Continental Group Inc.

decided: April 29, 1985.

NPS COMMUNICATIONS, INC. AND NPS COMNETWO, INC., PLAINTIFFS-APPELLANTS,
v.
THE CONTINENTAL GROUP, INC., DEFENDANT-APPELLEE



Appeal from an order of the United States District Court for the Southern District of New York, Constance Baker Motley, Chief Judge, granting defendant's motions to stay plaintiffs' antitrust action pending arbitration of defendant's contract claims against plaintiffs and to compel arbitration of those contract claims, and denying plaintiffs' cross-motion to stay arbitration.

Mansfield, Pratt, and John W. Peck of the Sixth Circuit United States Court of Appeals, sitting by designation, Circuit Judges.

Author: Pratt

PRATT, Circuit Judge:

This is an appeal from an order of the United States District Court for the Southern District of New York, Constance Baker Motley, Chief Judge, granting defendant's motions to stay plaintiffs' antitrust action pending arbitration of defendant's contract claims against plaintiffs and to compel arbitration of those contract claims, and denying plaintiffs' cross-motion to stay that same arbitration. We affirm.

Defendant The Continental Group, Inc. ("Continental") owns and operates a long-distance telephone system, and in February, 1982, Continental sold access to its system to plaintiffs NPS Communications, Inc. and NPS Comnetwo, Inc. (collectively referred to as "NPS"). NPS, acting as a middleman, then sold long-distance telephone services to retail customers. The contract between NPS and Continental gave Continental the right to terminate all services to NPS "immediately" if NPS's monthly payment was more than 30 days overdue, gave each party the right to terminate the agreement on 270 days' notice, and provided that the parties would arbitrate "any disagreement * * * with respect to the interpretation of this agreement or the obligation of the parties hereunder".

On July 30, 1982, Continental notified NPS that it would terminate the agreement on May 1, 1983, unless NPS agreed to new terms. Although a new agreement was never reached, and despite the fact that NPS stopped paying its bills from Continental after March 1983, Continental continued to provide services to NPS until August 3, 1983. According to Continental, at the time service was terminated NPS owed Continental $3.1 million in unpaid bills.

On November 1, 1983, Continental filed notice of its intention to arbitrate its contract claims for the unpaid bills. NPS countered by bringing an action in New York state court seeking a declaratory judgment that Continental had breached its contract with NPS, and by moving for a stay of the arbitration. Continental cross-moved to compel arbitration.

The state court motions were still pending when, on December 15, 1983, NPS brought the present antitrust suit in federal court alleging that Continental had violated the Sherman Act, 15 U.S.C. §§ 1, 2, when it conspired, contracted, or combined with others to willfully destroy NPS's business by cutting off access to Continental's telecommunications system. Continental then moved under the Arbitration Act for a stay of all proceedings pending arbitration, 9 U.S.C. § 3, and for an order compelling arbitration of the contract claims, 9 U.S.C. § 4. NPS cross-moved for an order staying arbitration.

In a memorandum decision filed August 30, 1984, the state court denied NPS's application and granted Continental's cross-motion to compel arbitration. NPS Communications, Inc. v. The Continental Group, Inc., No. 91562/83 (N.Y.Sup. Ct. Aug. 30, 1984) (Schwartz, J.). In effect the state court deferred to federal authority. The decision explained that the state court "should not stay an arbitrable dispute by assessing the merits of a federal claim which is filed in another court. That action should be taken, if at all, by the Federal courts."

With the ball thus squarely in her "court", Judge Motley below decided to hold up on the antitrust case and to let the arbitration proceed. In an order filed November 2, 1984, she granted defendant's motions to stay the antitrust action pending arbitration of the contract claims and to compel arbitration of those contract claims. She also denied plaintiffs' cross-motion to stay arbitration.

On its appeal here, NPS contends that the district court should have stayed the arbitration because (1) the nonarbitrable antitrust claims permeate the entire case and have a reasonable chance of success, (2) bifurcating the dispute into an arbitration and a court suit is inefficient and a waste of resources and (3) permitting the arbitration to proceed creates a risk of collateral estoppel consequences which might affect the antitrust action.

At the time of argument our decision was to have been guided by N.V. Maatschappij Voor Industriele Waarden v. A.O. Smith Corp., 532 F.2d 874 (2d Cir. 1976), in which we held that in cases where a complaint raises both contract claims subject to arbitration and nonarbitrable antitrust claims the court, in determining whether any of the claims should be stayed pending prosecution of the others, must consider relevant factors, including (1) the extent to which the antitrust claims permeate the entire case, making it difficult to resolve the contract claims without simultaneously resolving the antitrust claims, and (2) the strength or weakness of the respective claims.

Applying the A.O. Smith analysis here, we note that NPS's antitrust claims involve allegations of a conspiracy among Continental and other unnamed "actual and potential competitors" of NPS to drive it out of the telecommunications business. The contract claims, on the other hand, involve the nature and scope of a contract between NPS and Continental, their respective obligations under that contract, and whether or not those obligations were breached. On their factual and legal issues, the claims barely overlap; certainly the antitrust issues, which begin where the contract issues end, do not "permeate the entire case". Cf. American Safety Equipment Corp. v. J.P. McGuire & Co., 391 F.2d 821, 827 (2d Cir. 1968) (stay of antitrust claims pending arbitration should not be granted where the antitrust claim is one alleging that the agreement between the parties "itself was an instrument of illegality").

Moreover, we agree with the district court that NPS's antitrust claims are "conclusory and unsupported" and did not appear strong enough to warrant a stay of arbitration. See S.A. Mineracao Da Trindade-Samitri v. Utah International, Inc., 745 F.2d 190, 196 (2d Cir. 1984). NPS's vague, unspecific, and belated claims of antitrust violations are belied by the fact that Continental continued to negotiate with NPS and provide it with services from April through August 1983, even though NPS had ceased paying its ...


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