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Simply Fit of North America, Inc. v. Poyner

September 26, 2008

SIMPLY FIT OF NORTH AMERICA, INC. D/B/A SIMPLY FIT OF THE NORTHEAST, PLAINTIFF,
v.
CORT L. POYNER, ROBERT L. COX, ISHMAEL GONZALEZ, DANIEL MINAHAN, SIMPLY FIT HOLDINGS GROUP, INC., AND SIMPLY FIT HOLDINGS, L.L.C DEFENDANTS.



The opinion of the court was delivered by: Spatt, District Judge

MEMORANDUM OF DECISION AND ORDER

The plaintiff Simply Fit North America, Inc. d/b/a Simply Fit of the Northeast ("Northeast") commenced this action on December 28, 2007, alleging inter alia fraud and breach of contract against Cort L. Poyner, Robert L. Cox, Ishmael Gonzalez, Daniel Minahan, Simply Fit Holdings Group, Inc. ("Holdings"), and Simply Fit Holdings, L.L.C., (collectively, the "defendants"). The action arises from an exclusive distributorship agreement for the distribution of the defendants' wellness-drink product, "Simply-Fit." Presently before the Court is the defendants' motion to dismiss this action in favor of arbitration. The plaintiff, Northeast, is a New York corporation having its principal offices in Melville, New York 11747. The defendant, Holdings, is a Florida corporation having its principal offices in Lauderhill, Florida.

I. BACKGROUND

1. Procedural History

On January 30, 2008, the defendants filed a motion to dismiss the action in favor of arbitration, and alternatively, for failure to state a claim directed to the plaintiff's RICO, breach of contract, and tortious interference with a contract claims.

On March 26, 2008, the plaintiff filed a first amended complaint. On April 18, 2008, the defendants filed a second motion to dismiss for failure to state a claim, once again directed to the plaintiff's RICO, breach of contract, and tortious interference with a contract claims, and additionally disputing the viability of the plaintiff's fraud claims.

The defendants recognized that the portion of their original motion seeking dismissal for failure to state a claim pursuant to Fed. R. Civ. P. 12(b)(6) was rendered moot by the first amended complaint and withdrew that portion of the motion. Upon filing a motion to dismiss in response to the amended complaint, the defendants stated that the part of their motion seeking dismissal in favor of arbitration remained pending before the Court. On July 30, 2008, the plaintiff petitioned the Court for permission to file supplemental briefing in opposition to the defendant's second motion to dismiss. The Court granted that petition and authorized additional briefing and declarations by each party. Accordingly, the present decision addresses only that portion of the defendants' motion directed to the dismissal of the action in favor of arbitration.

2. The Present Motions The following facts are derived from the amended complaint and the parties' submissions on the motion.

On or about July 13, 2007, Northeast and Holdings entered into a distributorship agreement (the "Distribution Agreement") whereby Northeast was to be the exclusive distributor of Holdings' product within a designated territory, defined as the "Northeast United States." Paragraph 11.8 of the Distribution Agreement is entitled "Governing Law" and provides:

This Agreement shall be governed by and construed in accordance with the laws of the State of Florida applicable to contracts executed and performed in such State, without giving effect to conflicts of laws principles. All controversies, claims and matters of difference arising between the parties under this Agreement shall be submitted to binding arbitration in Palm Beach County, Florida under the Commercial Arbitration Rules of the American Arbitration Association ("the AAA") from time to time in force (to the extent not in conflict with the provisions set forth herein). This agreement to arbitrate shall be specifically enforceable under applicable law in any court of competent jurisdiction. Notice of the demand for arbitration shall be filed in writing with the other parties to this Agreement and with the AAA.

Once the arbitral tribunal has been constituted in full, a hearing shall be held and an award rendered as soon as practicable. The demand for arbitration shall be made within a reasonable time after the claim, dispute or other matter in question has arisen, and the parties are not making progress toward a resolution. In no event shall it be made after the date when institution of legal or equitable proceedings based on such claim, dispute or other matter would be barred by the applicable contractual or other statutes of limitations.

The parties shall have reasonable discovery rights as determined by the arbitration. The award rendered by the arbitrators shall be final and judgment may be entered in accordance with applicable law and in any court having jurisdiction thereof. The decision of the arbitrators shall be rendered in writing and shall state the manner in which the fees and expenses of the arbitrators shall be borne.

Subsequently, in August 2007, Holdings and Northeast entered into an "Extension Agreement" whereby Northeast obtained non-exclusive rights to distribute Holdings' product in areas outside of the originally designated territory. Paragraph 6 of the Extension Agreement provides that "[t]his Agreement supercedes all previous agreements with respect to this subject matter and embodies the entire agreement between the parties." Paragraph 8 of the Extension Agreement sets for the Governing Law/Forum Selection as follows:

Any and all actions, claims or controversies of any kind arising out of this Agreement shall be governed by the laws of the State of Florida, without regard to any choice of law principles that may apply. The parties agree to submit to jurisdiction of the Courts of the State of Florida or the federal district courts within the territorial boundaries of the State of Florida.

Further, on August 31, 2007, the parties exchanged an e-mail communication memorializing a memorandum of understanding setting forth proposed changes to the Distribution Agreement.

Thereafter, a dispute arose regarding the performance of the Distribution Agreement. Specifically, the complaint alleges that Holdings used the contract with Northeast as leverage in its efforts to obtain financing from third parties and that such funds were earmarked by Holdings to enrich its shareholders without ever having been intended to meet the financial needs and commitments of Holdings. (Compl. ¶ 4). In addition, the plaintiff alleges that after Northeast objected to Holdings' activities, Holdings "sent an agent into Northeast's exclusive territory to surreptitiously negotiate with distributors and retailers Northeast had been negotiating with or [was] about to contract with." (Compl. ¶ 6). Finally, the plaintiff contends that Holdings, through the individual defendants, made many false representations regarding its intention to market and support, and even supply its "Simply-Fit" product pursuant to the Distribution Agreement. (Compl. ¶¶ 22--27). The plaintiff contends that it was injured in reliance on the defendants' fraudulent misrepresentations.

The defendants contend that the broad arbitration provision of the Distribution Agreement requires the submission of any claims arising from or "touching on" the Agreement to the American Arbitration Association (the "AAA") in Florida. Further, the defendants contend that the incorporation of the Commercial Arbitration Rules of the AAA in the agreement means that even the issue of arbitrability must to be submitted to an arbitrator. The defendants assert that because the plaintiff's claims rest upon the Distribution Agreement as a whole, nothing in the choice of law clause of the Extension Agreement is inconsistent with the arbitration provision of the Distribution Agreement. The defendants also contend that Northeast's claims against the other defendants should be stayed in favor of arbitration because (1) all of those claims are "inextricably intertwined" with its claims against Simply Fit Holdings Group, Inc., and (2) Northeast itself alleges that the individual defendants are Holdings' officers and agents and acted as such in connection with the alleged events from which the claims arise.

In opposition, the plaintiff contends that:

[c]entral to the fraud and defendants' efforts to conceal the fraud was the negotiation of an arbitration clause in the contract with Plaintiff. The sole purpose of such clause was to evade public scrutiny of its efforts to defraud Plaintiff and move illicit gains from other frauds into [Holdings], until the defendants decided it was time to "squeeze out" Plaintiff without the consequence from any evidence that could be developed in a public forum, such as a Court, and handed over to the SEC, IRS or The Justice Department.

(Compl. ¶ 33).

In addition, the plaintiff contends that the arbitration clause is part and parcel of a larger stock fraud scam committed by defendants Cox, Poyner, and Minahan, and as such it is unenforceable. The plaintiff argues that the securities fraud in which the individual defendants diverted monies from other illicit ventures to Holdings was in place before the contract between the parties was created and the defendants used the contract as an instrumentality of that fraud. The plaintiff contends that the fraud perpetrated in connection with the Distribution Agreement invalidates the entire contract, including the arbitration clause. Also, the plaintiff argues that it is for the Court to determine whether the Distribution Agreement was fraudulently induced or is otherwise unenforceable.

Further, the plaintiff argues that the arbitration provision is not nearly as broad as the defendants assert and that it is limited to matters arising between the parties under their agreement, not to collateral or even related controversies. As the plaintiff's claims extend beyond the defendants' alleged breach of contract to fraud, RICO, unfair competition, and tortious interference, the plaintiff contends that the present controversy is beyond the scope of reasonably "arising out" of the contract between the parties, and therefore, the arbitration provision should not apply.

In addition, the plaintiff contends that the defendants' purpose in including the arbitration clause was not limited to dispute resolution, but was designed to conceal the larger fraud activity. The plaintiff states that because the plaintiff's principals were the only parties who could link defendant Poyner to Holdings based on their personal dealings with him, forcing the conflict to arbitration would keep that link out of court and out of the public record. Further, the plaintiff states that even if the arbitration provision was valid and enforceable, defendant Poyner cannot compel arbitration because he is not a legitimate officer or employee of Holdings and has not held himself out as such.

Finally, the plaintiff contends that neither the Extension Agreement and a later amendment to the Distribution Agreement mention arbitration, so arbitration is not mandatory. Instead, the plaintiff argues, the Extension Agreement expressly provides for judicial jurisdiction.

II. DISCUSSION

1. As to the Defendants' Motion to Dismiss or Stay the Action in Favor of Arbitration

The Federal Arbitration Act creates a strong federal policy favoring arbitration, and any doubts concerning the scope of arbitrable issues are resolved in favor of arbitration. Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 25, 111 S.Ct. 1647, 114 L.Ed.2d 26 (1991); Opals on Ice Lingerie v. Body Lines, Inc., 320 F.3d 362, 369 (2d Cir. 2003). The Act provides that arbitration agreements "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. Indeed, the Act "'leaves no place for the exercise of discretion by the 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. v. Armstrong, 129 F.3d 71, 75 (2d Cir. 1997) (quoting Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 218, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985)).

A. As to Enforceability of the Arbitration Provision

At the outset, the Court finds that the Extension Agreement's failure to expressly incorporate the terms of the arbitration provision in the Distribution Agreement does not vitiate the applicability of the arbitration provision to the present controversy. First, the sole apparent purpose of the Extension Agreement was to extend the distribution region in which Northeast would operate. The parties did not expressly manifest an intention to substitute or replace the Distribution Agreement. The Extension Agreement purports only to extend the plaintiff's distribution rights outside of its originally defined territory, modifying those terms of the Distribution Agreement.

Further, nothing in the Extension Agreement is inconsistent with the arbitration provision or suggests invalidity of that provision. The Extension Agreement provides that the "parties agree to submit to the jurisdiction of the Courts of the State of Florida or the federal district court within the territorial boundaries of the State of Florida." At a maximum, the effect of such a provision is to select Florida courts as the forum to hear claims arising from the Extension Agreement, such as the plaintiff's claims that the defendants did not honor the "extra-territorial accounts and contacts plaintiff brought to [Holdings]." Finally, the e-mail ...


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