The opinion of the court was delivered by: Jose A. Cabranes, Circuit Judge:
Ipcon Collections LLC v. Costco Wholesale Corp.
Argued: September 21, 2012
Before: LEVAL, CABRANES, and KATZMANN, Circuit Judges.
Ipcon Collections LLC ("Ipcon") appeals from an August 25, 2011 judgment of the United States District Court for the Southern District of New York (Vincent L. Briccetti, Judge) granting the motion to dismiss of Costco Wholesale Corp. ("Costco"). We affirm the judgment granting Costco's motion to dismiss because Ipcon's claim―that Costco never intended to honor the relevant sales contracts―is a claim for fraud in the inducement, and thus--under the terms of the contracts and the Federal Arbitration Act, 9 U.S.C. § 1 et seq.--must be considered by an arbitrator and not a district court. Costco appeals from the District Court's judgment denying sanctions under Federal Rule of Civil Procedure 11. Because a district court has broad discretion both in finding whether a party has violated Rule 11 and in deciding whether to impose sanctions, we affirm the District Court's denial of Rule 11 sanctions. We also deny Costco's motion for sanctions under Federal Rule of Appellate Procedure 38. 1
This appeal arises out of a contract dispute between Costco and ES Electrosales Leadsinger, Co., Ltd. ("Leadsinger"), a company that sold, inter alia, karaoke systems. Between October 2005 and September 2008, Leadsinger and Costco entered into a series of agreements by which Costco agreed to sell Leadsinger's goods on a consignment basis. Each agreement contained a clause obliging the parties to arbitrate any dispute arising out of the agreements. Costco allegedly did not perform its obligations under these contracts, and Leadsinger's business eventually failed.
Ipcon, the successor-in-interest to Leadsinger, brought suit against Costco on December 2, 2010, alleging that Costco induced Leadsinger to consign its products to Costco, while never intending to honor its agreements to pay Leadsinger for its products. Ipcon's complaint alleged six counts:
(1) fraud; (2) fraudulent returns and misaccounting; (3) conversion; (4) negligent bailment; (5) unfair trade practices--fraud; and (6) fraud in the inducement.*fn1
Costco then initiated arbitration proceedings and, on May 16, 2011, moved "pursuant to Federal Rule of Civil Procedure 12(b), and the Federal Arbitration Act," to dismiss the action as barred by the arbitration clause in each contract. Costco then requested sanctions against Ipcon pursuant to Federal Rule of Civil Procedure 11 ("Rule 11"). Ipcon, pointing to Costco's purported fraud, argued that the arbitration clauses were ineffective because the parties had never formed valid contracts in the first place. On this basis, Ipcon also cross-moved to stay arbitration.*fn2
On August 24, 2011, the District Court held that Ipcon had not presented a valid defense to arbitration and dismissed the action in favor of the pending arbitration proceeding. Specifically, the Court determined that Ipcon could not defeat the otherwise-valid arbitration clauses because its "complaint allege[d] a claim for fraud in the inducement insofar as [it] assert[ed] [that Costco] lied and misrepresented its intentions to induce Leadsinger to enter into the agreements." Joint App'x 277. Having dismissed Ipcon's suit, the District Court then denied Costco's motion for sanctions, although it noted that Ipcon's "submissions to the Court ha[d] not rested on the strongest precedent or arguments." Id. at 281.
On appeal, Ipcon argues that Costco fraudulently induced Leadsinger to deliver goods under purported contracts when Costco never had any intention to perform its obligations under those contracts. Ipcon thus argues that the entire contracts--including the relevant arbitration clauses--are invalid, and therefore the District Court should have granted Ipcon's motion to stay arbitration and denied Costco's motion to dismiss. On cross-appeal, Costco argues that the District Court should have granted Rule 11 sanctions against Ipcon, and requests that we order sanctions in the first instance pursuant to Rule 38 of the Federal Rules of Appellate Procedure ("Rule 38").
We review de novo a district court's dismissal of an action in favor of arbitration. See Contec Corp. v. Remote Solution Co., 398 F.3d 205, 208 (2d Cir. 2005). As the Supreme Court explained in Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S 440 (2006), challenges to a contract containing an arbitration clause fall into two categories: those that challenge the contract as a whole, and those that challenge the arbitration clause in particular. Id. at 444. If the challenge is to "'the arbitration clause itself―an issue which goes to the making of the agreement to ...