UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
March 3, 1986
INTERNATIONAL TALENT GROUP, INC., Plaintiff, against COPYRIGHT MANAGEMENT, INC., Defendant
The opinion of the court was delivered by: EDELSTEIN
EDELSTEIN, District Judge:
OPINION AND ORDER
Defendant has moved to stay this diversity action and to compel arbitration of the claims. Defendant's motion is hereby granted.
Plaintiff, International Talent Group, Inc. ("ITG") is in business of booking concert tours. Defendant Copyright Management, Inc. ("CMI") is a computer systems consultant. During the latter part of 1983 ITG and CMI discussed the installation of a new computer system at ITG. According to ITG, there were two agreements between ITG and CMI: an oral agreement to provide consulting services on the purchase of computer hardware ("hardware contract") and a written agreement relating to the licensing and design of software ("software contract"). The written "software contract" contains an arbitration clause.
The complaint contains four claims. The first claim alleges a breach of the "hardware contract" by CMI. The second claim alleges fraud by CMI in obtaining the "hardware contract." The third and fourth claims seek rescission of the "software contract" based on CMI's possession of ITG trade secrets.
Defendant has moved to stay this action and compel arbitration of the four claims based on the arbitration clause in the "software contract."
SOFTWARE CONTRACT CLAIMS
Plaintiff seeks to invoke the court's equitable jurisdiction asserting in claims three and four that it is entitled to rescission of the "software contract." The precise basis of these claims is unclear. Plaintiff alleges that defendant is in possession of ITG trade secrets as a result on the contract. Plaintiff also asserts that there has been a substantial, material and willful breach of the software agreement. Plaintiff seeks rescission to place it in the same position it held prior to entering the contract.
The inclusion of trade secret allegations in the complaint is puzzling. Wayne Forte, president of ITG, asserted that the equitable remedy of rescission is sought to "ensure the safeguarding of our proprietary procedures." Affidavit of Wayne Forte dated January 3, 1986 at P 20. While equity may provide a remedy to prevent the disclosure of trade secrets in the form of an injunction, rescission would not appear to be an appropriate remedy for plaintiff's claims insofar as they involve trade secrets. See Bridge C.A.T. Scan Associates v. Technicare Corp., 710 F.2d 940, 946 (2d Cir. 1983); N.V. Maatschappij Voor Industriele Waarden v. A. O. Smith Corp., 532 F.2d 874, 875 (2d Cir. 1976). See also Timely Products Corp. v. Arron, 523 F.2d 288, 304 (2d Cir. 1975) (damages awarded for unauthorized disclosure of trade secret). Plaintiff has not alleged facts such as the imminent disclosure of confidential information that would warrant the exercise of the court's equitable powers to prevent the dissemination of alleged confidential information.
If the claim for rescission is based on the breach of the agreement itself, the court's equitable jurisdiction would still not be called upon. Rather, plaintiff may seek rescission "at law" which would be within the scope of the arbitration agreement. Rescission "at law" is appropriate where the plaintiff has been defrauded or for simple contract breach. See D. Dobbs, Handbook on the Law of Remedies § 4.3, at 255 and § 4.8, at 293 & n.6 (1973).
When viewed in their basic terms, plaintiff's claims regarding the "software contract" are for breach of contract and fraud, see TAC Travel America Corp. v. World Airways, Inc., 443 F. Supp. 825, 828 (S.D.N.Y. 1978) (examination of factual issues presented to determine whether claim labeled as a tort claim was in reality a breach of contract claim and therefore subject to arbitration); the same claims made regarding the "hardware contract" in claims one and two.
These contract based claims would clearly be within the scope of the arbitration contract. Therefore claims three and four are stayed and all contract based disputes regarding the "software contract" are referred to arbitration.
HARDWARE CONTRACT CLAIMS
CMI asserts that the first and second claims which relate to the "hardware contract" are arbitrable because they are not part of a separate agreement, but are in fact part of the "software contract." Plaintiff asserts that the "hardware contract" and the "software contract" constitute two separate agreements so that the arbitration clause of the "software contract" would not apply.
Defendant seeks to bring the "hardware agreement" within the scope of the "software agreement" arbitration provision based on a merger clause contained in the "software contract." The merger clause provides that the agreement "constitutes the entire agreement between the parties. There are no other representations express or implied between the licensee [ITG] and licensor [CMI] with respect to the above identified program products to be furnished hereunder." The "Terms and Conditions" rider to the contract provides:
This contract constitutes the entire and exclusive Agreement and supersedes all previous communications, representations or agreements, either oral or written between Licensor and Licensee. No representations or statements of any kind made by any representative of Licensor, which are not stated herein, shall be binding on Licensor.
If, in fact, the two arguments are separate, a merger clause in one contract would not incorporate all prior dealings between the parties, but rather only those relating to the subject matter of the contract containing the merger clause. The court need not, however, determine whether the software and hardware contracts are separate. The "software contract" arbitration clause applies to "[a]ny and all proceedings relation [sic] to the subject matter hereof." Thus, even if they are separate, the hardware contract would be subject to the arbitration provision in the "software contract" if it relates to the subject matter of the "software contract." Defendant contends that the "hardware contract" does relate to the subject matter of the "software contract."
An arbitration clause covering claims "relating to" a contract is broader than a clause covering claims "arising out of" a contract. See Mobile Oil Indonesia, Inc. v. Asamera Oil (Indonesia) Ltd., 487 F. Supp. 63, 65 (S.D.N.Y. 1980); see also Acevedo Maldonado v. PPG Industries, 514 F.2d 614, 616 (1st Cir. 1975). The court must determine whether the "hardware contract" dispute relates to the subject matter of the "software contract."
The facts alleged by plaintiff and the claims contained in the complaint themselves must be examined to determine if a relationship exits between the claims. The "software contract" and the "hardware contract" involve the same overall word processing, communications and bookkeeping system at ITG. See Affidavit of Wayne Forte dated January 3, 1986 at PP 5, 8. The software described in the software licensing agreement was intended to be used in the hardware purchased as a result of the consultation provided for in the "hardware contract." See Id. P 8. Finally, Plaintiff's claims relate to the inadequacy of the system as a whole to satisfy their needs. See, e.g., Complaint PP 6, 7, 9, 11, 13, 14, 19, 20, 21, 35, 40. Consequently, the claims regarding the two agreements are intertwined. For example, the inadequacies in the system may be caused by the hardware or the software or both. Thus, it is not clear that the two agreements, if in fact separate, can be separated for purposes of resolving the claims raised in the complaint.
Finally, in determining whether a particular dispute is covered by an arbitration agreement, "questions of arbitrability must be addressed with a healthy regard for the federal policy favoring arbitration . . . . The Arbitration Act establishes that, as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration." Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24-25, 74 L. Ed. 2d 765, 103 S. Ct. 927 (1983).
At the very least, the claims regarding the hardware's inadequacy "relate" to the software and therefore fall within the scope of the arbitration agreement. Claims one and two are therefore also stayed and referred to arbitration.
Defendant's motion to stay this action and refer the matter to arbitration is granted.