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February 22, 2000


The opinion of the court was delivered by: McAVOY, Chief Judge.


Defendant Dresser Equipment Group, Inc. d/b/a Waukesha Engine ("Waukesha") moves: (1) to dismiss Plaintiffs Upstate Shredding, LLC ("Upstate Shredding") and Ben Weitsman & Son, Inc.'s ("Weitsman") Third and Fourth Causes of Action alleging a breach of the implied warranties of merchantability and fitness, respectively, pursuant to FED.R.CIV.P. 12(b)(6); and (2) to stay the present action pending arbitration of all claims and cross-claims brought against Waukesha, pursuant to Section 3 of the Federal Arbitration Act, 9 U.S.C. § 3. The Court assumes familiarity with its prior Decision & Order in this matter. See Upstate Shredding, LLC v. Carloss Well Supply Co. et al., 99-CV-751 (Nov. 30, 1999).

I. Background

On May 12, 1999, Plaintiffs Upstate Shredding and Weitsman commenced the instant action against Defendants Carloss Well Supply Co. d/b/a Carloss Company ("Carloss") and Waukesha, alleging numerous contract-related claims in connection with Plaintiffs' purchase of the Carloss Shredder Drive System ("Shredder Drive System"). The Shredder Drive System, which was designed and manufactured by Carloss, employed gas engines designed and manufactured by Waukesha. Plaintiffs purchased the Shredder Drive System (including the Waukesha gas engines) to operate its Newell 120104 Megashredder ("Newell Megashredder"). The Shredder Drive System, however, had numerous alleged defects and design deficiencies that made Plaintiffs unable to operate the Shredder Drive System or, in turn, the Newell Megashredder.

Upon leave of this Court, Plaintiffs filed an Amended Complaint alleging claims against Carloss for: breach of contract (First Cause of Action); breach of express warranty (Second Cause of Action); breach of the implied warranty of merchantability (Third Cause of Action); breach of the implied warranty of fitness (Fourth Cause of Action); and negligent misrepresentation (Sixth Cause of Action). Plaintiffs also allege claims against Waukesha for: breach of the implied warranty of merchantability (Third Cause of Action); breach of the implied warranty of fitness (Fourth Cause of Action); and breach of express warranty (Fifth Cause of Action). See Amended Compl. (Docket No. 54). In its Answer, Carloss asserted numerous counterclaims against Plaintiffs alleging, inter alia, breach of contract and unjust enrichment and cross-claims against Waukesha for apportionment of liability and indemnification based on Waukesha's negligent misrepresentations in connection with Carloss' purchase of gas engines designed and manufactured by Waukesha that were subsequently employed in the Carloss Shredder Drive System purchased by Plaintiffs.*fn1 See Docket No. 57.

Relying on the breach of express warranty claim contained in Plaintiffs' Amended Complaint, Waukesha contends that the Express Limited Warranty ("Express Warranty") provided to Plaintiffs contains an arbitration provision that requires binding arbitration for claims arising out of the Express Warranty.*fn2 See Def. Waukesha Mem. of Law, at 11-15 (citing Express Warranty, at § VI) (attached to Amended Complaint). Notably, the Express Warranty further provides that "[t]he warranties set out above are extended to all owners in the original chain of distribution." Express Warranty, at § VI.

Similarly, Waukesha argues that Carloss' cross-claims — which arise out of the sale of Waukesha's engines — also require arbitration pursuant to the Distribution, Service and Commission Agreement ("Distribution Agreement") between Carloss and itself, and the Express Warranty, by way of the provision in the Distribution Agreement incorporating the terms and limitations contained in the Express Warranty. See id. at 15-18 (citing Distribution Agreement, at Arts. VIII and XIV) (attached to Affidavit of Richard McGuirk, Esq., at Ex. 4). Accordingly, Waukesha seeks to stay both Plaintiffs' claims and Carloss' cross-claims pending arbitration in Milwaukee, Wisconsin, the location provided for in both the Express Warranty and the Distribution Agreement.*fn3 See Distribution Agreement, at Art. XIV; Express Warranty, at § VI.

Notwithstanding express allegations contained in the Amended Complaint to the contrary, see Amended Compl. at ¶¶ 62-63, Plaintiffs contend that they cannot be bound by the arbitration provision contained in the Express Warranty because "[p]rior to the commencement of this action, plaintiffs were not aware of the existence of the Waukesha Express Limited Warranty and had not been apprized of its terms and condition[s] or its limitations and restrictions. . . ." Pl.Mem. of Law at 8. Carloss advances two grounds in opposition to Waukesha's motion for a stay pending arbitration of its cross-claims against Waukesha. First, Carloss argues that it was not a signatory to the Express Warranty and, thus, cannot be bound by the arbitration clause contained therein. See Def. Carloss Mem. of Law at 3-4. Second, Carloss argues that "the arbitration provisions relied on by Waukesha do not embrace the subjects of dispute in [its] cross-claims," id. at 5, and, thus, do not fall within the scope of the arbitration agreement.

II. Discussion

The Federal Arbitration Act ("FAA" or the "Act"), 9 U.S.C. § 1 et seq., requires courts to enforce arbitration agreements in contracts involving interstate commerce. See Oldroyd v. Elmira Sav. Bank. FSB, 134 F.3d 72, 75 (2d Cir. 1998). Section 3 of the Federal Arbitration Act, 9 U.S.C. § 3, which provides for stays of federal proceedings pending arbitration,*fn4 provides, in relevant part:

If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement.

The FAA establishes a strong federal policy in favor of arbitrating disputes. See Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626, 105 S.Ct. 3346, 87 L.Ed.2d 444 (1985) ("[The federal substantive law of arbitrability] counsels that questions of arbitrability must be addressed with a healthy regard for the federal policy favoring arbitration") (quotation omitted); Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983) ("Moses"); Progressive Cas. Ins. Co. v. C.A. Reaseguradora Nacional De Venezuela, 991 F.2d 42, 45 (2d Cir. 1993) ("Progressive"); Genesco, Inc. v. T. Kakiuchi & Co., Ltd., 815 F.2d 840, 844 (2d Cir. 1987); In re Matter of Arbitration Between S & R Co. of Kingston and Latona Trucking, Inc., 984 F. Supp. 95, 98 (N.D.N.Y. 1997), aff'd, 159 F.3d 80 (2d Cir. 1998), cert. dismissed, ___ U.S. ___, 120 S.Ct. 629, 145 L.Ed.2d 506 (1999). In accordance with that policy, "any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability." Moses, 460 U.S. at 24-25, 103 S.Ct. 927; see also Burns v. New York Life Ins. Co., 202 F.3d 616, ___ (2d Cir. 2000) ("[A]rbitration is indicated unless it can be said `with positive assurance' that an arbitration clause is not susceptible to an interpretation that covers the asserted dispute.") (citation omitted); Oldroyd, 134 F.3d at 76; Spear, Leeds & Kellogg v. Central Life Assurance Co., 85 F.3d 21, 28 (2d Cir.) (citing AT & T Techs., Inc. v. Communications Workers of Am., 475 U.S. 643, 650, 106 S.Ct. 1415, 89 L.Ed.2d 648 (1986)), cert. denied, 519 U.S. 1040, 117 S.Ct. 609, 136 L.Ed.2d 534 (1996); Collins & Aikman Prods. Co. v. Building Sys., Inc., 58 F.3d 16, 19 (2d Cir. 1995); Latona Trucking, Inc., 984 F. Supp. at 98. Consequently, "`[i]f the allegations underlying the claims `touch matters' covered by the parties' . . . agreements, then those claims must be arbitrated, whatever the legal labels attached to them.'" WorldCrisa Corp. v. Armstrong, 129 F.3d 71, 75 (2d Cir. 1997) (quoting Genesco, Inc., 815 F.2d at 846).

In determining whether a party is bound by an arbitration clause contained in an agreement, courts apply "generally accepted principles of contract law." Genesco, Inc., 815 F.2d at 845; see also WorldCrisa Corp., 129 F.3d at 74; Thomson-CSF, S.A. v. American Arbitration Ass'n, 64 F.3d 773, 776 (2d Cir. 1995) ("[A]rbitration is contractual by nature — `a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.'") (quoting United Steelworkers of Am. v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582, 80 S.Ct. 1347, 4 L.Ed.2d 1409 (1960)); Limonium Maritime S.A. v. Mizushima Marinera, S.A., 1999 WL 46721, at *4 (S.D.N.Y. Feb.1, 1999), aff'd, 201 F.3d 431, 1999 WL 1070070 (2d Cir. Nov.18, 1999). Consequently, "[t]he Act `leaves no place for the exercise of discretion by a district court, but instead mandates that district courts shall direct the parties to proceed to arbitration on issues as to which an arbitration agreement has been signed.'" WorldCrisa Corp., 129 F.3d at 74 (quoting Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 218, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985) (citing 9 U.S.C. § 3-4)); see also Oldroyd, 134 F.3d at 76 ("Where the parties to an arbitration agreement specifically have excepted a certain type of claim from mandatory arbitration, it is the duty of federal courts to enforce such limitations.") (citation omitted); Leadertex, Inc. v. Morganton Dyeing & Finishing Corp., 67 F.3d 20, 25 (2d Cir. 1995) (citing McMahan Secs. Co., L.P. v. Forum Capital Markets L.P., 35 F.3d 82, 85-86 (2d Cir. 1994)); Progressive, 991 F.2d at 45 ("[W]here a court is satisfied that a dispute before it is arbitrable, it must stay proceedings and order the parties to proceed to arbitration."); Genesco, Inc., 815 F.2d at 844; Fluor Daniel Intercontinental, Inc. v. General Elec. Co., 1999 WL 637236, at *4 (S.D.N.Y. Aug.20, 1999) ("Fluor Daniel"). Indeed, the Act requires a court to stay a proceeding in federal court or compel arbitration "even where the result would be the possibly inefficient maintenance of separate proceedings in different forums." Dean Witter Reynolds, Inc., 470 U.S. at 217, 105 S.Ct. 1238; see also Collins & Aikman Prods. Co., 58 F.3d at 20 ("`The preeminent concern of Congress in passing the [Arbitration] Act was to enforce private agreements . . . and that concern requires that we rigorously enforce agreements to arbitrate, even if the result is `piecemeal' litigation. . . .'") (quoting Dean Witter Reynolds, Inc., 470 U.S. at 221, 105 S.Ct. 1238).

"A court asked to stay proceedings pending arbitration must resolve four issues: first, it must determine whether the parties agreed to arbitrate; second, it must determine the scope of that agreement; third, if federal statutory claims are asserted, it must consider whether Congress intended those claims to be nonarbitrable; and fourth, if the court concludes that some, but not all, of the claims in the case are arbitrable, it must then decide whether to stay the balance of the proceedings pending arbitration."*fn5 Oldroyd, 134 F.3d at 75-76; see also Genesco, Inc., 815 F.2d at 844 (internal citations omitted). Other courts have reduced the question of whether a particular dispute is subject to arbitration to a two-step inquiry: "`whether the parties agreed to arbitrate, and, if so, whether the scope of that agreement encompasses the asserted claims.'" Progressive, 991 F.2d at 45 (quoting David L. Threlkeld & Co., Inc. v. Metallgesellschaft, Ltd., 923 F.2d 245, 249 (2d Cir.), cert. dismissed, 501 U.S. 1267, 112 S.Ct. 17, 115 L.Ed.2d 1094 (1991)); see also Deloitte Noraudit A/S v. Deloitte Haskins & Sells, U.S., 9 F.3d 1060, 1063 (2d Cir. 1993). The Court will address these factors in turn with respect to Plaintiffs' claims and Carloss' cross-claims against Waukesha.

A. Plaintiffs' Express Warranty Claim Against Waukesha

1. Agreement to Arbitrate

In their Amended Complaint, Plaintiffs allege knowledge of, and reliance on, the terms and conditions of the Express Warranty at the time they purchased the gas engines from Waukesha:

62. At the time of the sale of the Waukesha gas engines, as a part of such sale and as an inducement to plaintiffs to agree to purchase the Waukesha engines, defendant Waukesha expressly warranted to the plaintiffs in writing, among other things, that the gas ...

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