CB Sullivan v. Graham Webb 07-CV-170-SM 01/28/08 UNITED STATES DISTRICT COURT

DISTRICT OF NEW HAMPSHIRE

C.B. Sullivan Company, Inc., Plaintiff

v. Civil No. 0 7-cv-l7 0-SM Opinion No.

Graham Webb International. Inc.. Defendant

O R D E R

In January of 2007, defendant, Graham Webb International

("GWI"), notified plaintiff, C.B. Sullivan Company ("Sullivan"),

that it no longer required Sullivan's services as a distributor

of its products and, therefore, was terminating the parties'

contractual relationship, effective April 1, 2007. Sullivan

filed suit against GWI in the New Hampshire Superior Court,

advancing three state law claims, each of which arises out of

GWI's allegedly wrongful conduct relating to that termination.

Invoking this court's diversity jurisdiction, GWI removed

the case here, and now moves to dismiss each of Sullivan's three

claims, saying they are subject to the parties' various

arbitration agreements. Sullivan objects. For the reasons set

forth below, GWI's motion to dismiss is granted in part and

denied in p a r t . Background

GWI is a manufacturer of beauty supply products, including

hair, personal care, and fragrance products. Sullivan is a

distributor of beauty supply products in New England and operates

more than two dozen wholesale beauty supply stores in that

region. In February of 1998, the parties entered into a

distribution agreement, pursuant to which GWI granted Sullivan

the exclusive right to sell its products to professional stores

in New Hampshire, Vermont, and Maine, and to sell its products to

both professional stores and salons in Massachusetts (the

"Sullivan Distribution Agreement" or the "SDA"). Exhibit 2 to

Affidavit of Jack B. Middleton (document no. 7-5). Among other

things, the SDA provided that "[a]11 disputes and claims relating

to or arising under or out of this Agreement shall be fully and

finally settled by arbitration." Rl. at para. 22.

The Sullivan Distribution Agreement (as extended by the

parties) expired on May 31, 2003. See Exhibit A to Affidavit of

Charles B. Sullivan (document no. 9-2). Nevertheless, the

parties continued their relationship under the same terms and

conditions as had governed that relationship when the SDA was

still in force.

2 Approximately two-and-one-half years later, in November of

2005, another of GWI's regional distributors - Kaleidoscope/BOA,

Inc. - assigned to Sullivan all of its "right, title, and

interest under the Kaleidoscope Distribution Agreement [with GWI]

dated August 16, 2004, save and except the right to distribute

Graham Webb Classic line products to salons in the territory."

Assignment/Sale of Distributorship (document no. 7-8) at 2 (the

"Assignment Agreement"). GWI assented to that assignment.

By acquiring an assignment of Kaleidoscope's rights under

its distribution agreement with GWI, Sullivan obtained the

exclusive right to distribute GWI products to professional salons

in Maine, New Hampshire, and Vermont (previously, it had the

exclusive right to distribute GWI products only to professional

stores in those states). Like the original distribution

agreement between GWI and Sullivan, both the distribution

agreement between Kaleidoscope and GWI (the rights under which

were assigned to Sullivan) and the agreement evidencing that

assignment contained arbitration provisions. See Assignment

Agreement (document no. 7-8) at 3; Domestic Distribution

Agreement between GWI and Kaleidoscope (the "Kaleidoscope

Distribution Agreement") (document no. 7-6) at para. 23.

3 Despite the fact that the Sullivan Distribution Agreement

had expired, the Assignment Agreement specifically references

that document, describing the parties' respective rights and

obligations and noting that the SDA will have to be amended to

take into account Sullivan's newly expanded distribution rights.

The parties' reference to the Sullivan Distribution Agreement in

the Assignment Agreement provides strong evidence that, although

the SDA agreement had expired, the parties were continuing their

business relationship pursuant to its terms.

A little more than a year later, by letter dated January 31,

2007, GWI notified Sullivan of its intention to terminate its

distribution relationship with Sullivan, effective April 1, 2007.

In that letter, GWI specifically invoked the termination

provisions contained in both the Sullivan Distribution Agreement

and the Kaleidoscope Distribution Agreement. When Sullivan was

unable to persuade GWI to change its mind, it filed this suit

alleging that GWI breached its implied contractual obligation to

act fairly and in good faith, engaged in unfair and deceptive

trade practices, and tortiously interfered with Sullivan's

advantageous contractual relations with its customers.

4 GWI moves to dismiss Sullivan's three state law claims,

asserting that each relates to, or arises under or out of: (1)

the original Sullivan Distribution Agreement; (2) the

Kaleidoscope Distribution Agreement, which was assigned to

Sullivan; and/or (3) the Assignment Agreement - all of which

contain comprehensive arbitration provisions. Sullivan objects,

asserting that the arbitration provision in the Assignment

Agreement is not relevant to this dispute and claiming that it is

not bound by the arbitration provisions in the Kaleidoscope

Distribution Agreement. It also says that because its original

distribution agreement with GWI expired on May 31, 2003, GWI

cannot now seek to enforce that agreement's arbitration

provisions. The court disagrees.

Discussion

I. General Legal Principles.

As the Supreme Court has made clear, "[w]hen deciding

whether the parties agreed to arbitrate a certain matter

(including arbitrability), courts generally . . . . should apply

ordinary state-law principles that govern the formation of

contracts." First Options of Chicago. Inc. v. Kaplan.

(1995). Under New Hampshire law, "a contractual

provision creating a right to arbitration [is] subject to the

5 traditional principles of contract law, and its interpretation

and construction is therefore a question of law for the court."

Demers Nursing Home v. R.C. Foss & Son.

(1982).

See also J. Dunn & Sons v. Paragon Homes of New England.

(1970) ("It is well settled law here and elsewhere that

the scope of an arbitration clause in a contract presents a

question of law for the court. Such a clause is to be

interpreted so as to make it speak the intention of the parties

at the time it was made bearing in mind its purpose and policy.")

(citations and internal punctuation omitted).

It is, then, the court's obligation to determine whether the

parties, by their written agreements and through their course of

dealings, evidenced an intention to submit their current disputes

to arbitration. They did.

II. The Original Distribution Agreement.

Notwithstanding the fact that the parties' written contract

- the Sullivan Distribution Agreement - expired in 2003, Sullivan

is bound by that agreement's arbitration provisions. The

arbitration clause contained in that contract provides:

All disputes and claims relating to or arising under or out of this Agreement shall be fully and finally settled by arbitration in Minneapolis, Minnesota

6 pursuant to the rules of commercial arbitration of the American Arbitration Association and the terms of the Federal Arbitration Act. The decision of the arbitrator or arbitrators shall be final and may be enforced by any court of competent jurisdiction. The foregoing paragraph of this Section shall survive any termination of this Agreement.

Sullivan Distribution Agreement (document no. 7-5) at para. 22

(emphasis supplied). Plainly, then, the parties contemplated

that any disputes arising out of their commercial relationship

and relating to Sullivan's distribution of GWI's products in New

England would be submitted to binding arbitration - even those

that might arise after the agreement expired or the parties

terminated their relationship. Equally plain is the fact that

Sullivan's state law claims arise directly out of GWI's decision

to terminate Sullivan as its exclusive distributor of GWI

products in this region. Those claims are, then, properly

subjected to arbitration. See, e.g.. Gaston Andrev of

Framingham. Inc. v. Ferrari of N. America. Inc..

(D. Mass. 1997) ("There is no doubt here that the parties

had agreed in their written franchise agreement to submit to

arbitration 'any and all disputes arising out of or in connection

with this Agreement.' Whether the obligation to arbitrate

endured as the parties continued their business relationship

without a renewed written franchise agreement is a dispute

'arising out of or in connection with' the last written agreement

7 they had.") (citations omitted). See also Providence Journal Co.

v. Providence Newspaper Guild.

(1st Cir. 2002)

("The expiration of a collective bargaining agreement does not

necessarily extinguish a party's obligation to arbitrate

grievances. In fact, a presumption favors arbitration in such

circumstances.").

Even if the SDA did not specifically provide that its

arbitration provisions survived termination of the contract,

Sullivan would still be obligated to arbitrate its current claims

against GWI. Because the parties allowed the SDA to expire, but

continued a course of dealing prescribed by that contract, they

were operating under what is typically viewed as a contract

implied-in-fact. See, e.g.. Lorenz v. N.H. Admin. Office of the

Courts.

(2005) ("A contract implied in fact is

based on a promise manifested in language, conduct, silence or by

implication from the circumstances, including a course of dealing

or course of performance." (citing Restatement (Second) of

Contracts § 4 at 3 (1981)). See also Newfield House. Inc. v.

Mass. Dep't of Public Welfare.

(1st Cir. 1981)

("Our task in such matters is one of resolving the obviously

unanticipated problem that has arisen in a way that effectuates

the parties' contractual intent or, if it is clear that the parties had no meaningful intent as to the matter, as one of

construing their dealings so as to give them the most appropriate

legal effect. Put another way, we look here first to the

intended terms of what we discern as an actual implied-in-fact

contract between the parties and then to the terms imposed in any

event by the constructive quasi-contract implied in law between

them......... In supplying a term omitted from the implied actual

contract, our focus must be on what it is likely that the parties

would have agreed upon had they focused on the problem.")

(citations and footnote omitted).

Although the parties allowed the SDA to lapse without

further extension, they continued to conduct their business

relationship in accordance with the terms and conditions set

forth in the SDA and even referenced the SDA several times in the

later Assignment Agreement. So, by their ongoing course of

dealings, the parties plainly manifested an intention to have

their conduct governed by the terms of the SDA - including its

arbitration provisions.

III. The Kaleidoscope Distribution Agreement and the Assignment.

Despite the fact that the Kaleidoscope Distribution

Agreement contains a broad arbitration provision, Sullivan says

9 it did not agree to be bound by that provision when it took the

assignment of Kaleidoscope's rights under that agreement.

Accordingly, says Sullivan, it is not required to arbitrate

disputes arising out of distribution rights acquired from

Kaleidoscope. Again, the court disagrees.

In support of its position, Sullivan asserts that, "While it

is true that in 2005 CB Sullivan agreed to purchase ■'certain

assets' of Kaleidoscope and to accept an /assign[ment] [of]

portions of Kaleidoscope's distribution agreement,' CB Sullivan

never agreed to become a party to that agreement or otherwise to

be bound by the arbitration clause therein." Plaintiff's

objection (document no. 8) at 3. But, Sullivan's intent at the

time, as expressed in the Assignment Agreement, suggests

otherwise.

Under the Assignment Agreement, Sullivan acquired "all of

Kaleidoscope's right, title, and interest under the Kaleidoscope

Distribution Agreement dated August 16, 2004, save and except the

right to distribute Graham Webb Classic line products to salons

in the territory." Assignment Agreement (document no. 7-8) at 2,

para. 1. Accordingly, as to any rights or remedies against GWI,

Sullivan stood in Kaleidoscope's shoes. That is, it acquired

10 only those rights possessed by Kaleidoscope, so its "right" to

assert claims against Sullivan arising out of their relationship

was constrained by the limitations imposed on Kaleidoscope by the

Kaleidoscope Distribution Agreement. See generally City of Hope

Nat'l Med. Ctr. v. HealthPlus, Inc..

(1st Cir.

1998) ("It is generally understood that /the assignee acquires

rights similar to those of the assignor, and is put in the same

position with reference to those rights as that in which the

assignor stood at the time of assignment.') (quoting 3 Samuel

Williston & Walter H.E. Jaeger, A Treatise on the Law of

Contracts § 404, at 5 (3d ed. 1960)). See also Smith v.

Cumberland Group.

,

(Pa. Super. 1997) ("Where an assignment is effective, the

assignee stands in the shoes of the assignor and assumes all of

his rights. Among these rights are the remedies the assignor

once possessed. Conversely, an assignee's right against the

obligor is subject to all of the limitations of the assignor's

right, to all defenses thereto, and to all set-offs and

counterclaims which would have been available against the

assignor had there been no assignment, provided that these

defenses and set-offs are based on facts existing at the time of

the assignment."). Consequently, absent evidence that the

parties specifically intended otherwise, Sullivan would, as the

11 assignee of all of Kaleidoscope's rights under the Kaleidoscope

Distribution Agreement, be bound by that agreement's arbitration

provisions.

Even if GWI and Sullivan understood (and agreed) that

Sullivan would not be bound by the specific arbitration

provisions in the Kaleidoscope Distribution Agreement when it

took an assignment of Kaleidoscope's rights (a point for which

Sullivan has provided no evidence), the parties still evidenced

an intention to arbitrate any disputes arising out of, or

relating to, that contract. In the Assignment Agreement, GWI and

Sullivan specifically acknowledged that they would amend both the

Sullivan Distribution Agreement and the Kaleidoscope Distribution

Agreement to reflect Kaleidoscope's assignment of various rights

to Sullivan.

To complete this transaction, it will be necessary to make certain amendments to the distribution agreements to reflect the change in distribution rights. In this regard, we will need to amend the CB Sullivan Distribution Agreement to include salon rights for Maine, Vermont, and New Hampshire; in the case of the Kaleidoscope Distribution Agreement, we will need to amend the distribution agreement to delete the salon sales rights for all brands except the Graham Webb Classic Line. The parties agree to execute such amendments, and sign such other documents as may be necessary to complete this transaction.

12 I d . at 3. That language suggests two things. First, as noted

above, it reveals that, although the Sullivan Distribution

Agreement had lapsed, the parties were plainly behaving as though

it still remained in effect, governing all of their respective

rights and obligations.

Second, the Assignment Agreement's language quoted above

plainly demonstrates that the parties intended Sullivan's newly-

acquired distribution rights to be governed by the Sullivan

Distribution Agreement (or the implied-in-fact contract that

replaced it upon the SDA's expiration) - including, of course,

the SDA's arbitration provisions. That is, the parties

unmistakably contemplated amending Sullivan's existing

distribution agreement with GWI to include the newly-acquired

distribution rights. Consequently, any disputes relating to, or

arising under or out of, Sullivan's distribution of GWI products

in the New England region would be governed by the SDA. That, in

turn, would require that any such disputes be arbitrated. This

case involves just such a dispute.

Finally, to the extent there is any confusion about what the

parties intended when they executed the Assignment Agreement,

that, too, must be arbitrated. See i d . at 3 ("In the event of

13 any dispute arising from or pertaining to this agreement, the

parties agree to submit such dispute to binding arbitration

before the American Arbitration Association in accordance with

its rules for commercial matters.").

Conclusion

Each of Sullivan's three state law claims against GWI

arises out of the parties' business relationship and GWI's

decision to terminate that relationship. And, each of the

contracts governing the terms and conditions of that relationship

contains a comprehensive arbitration provision, one of which -

the Sullivan Distribution Agreement - specifically provides that

the obligation to arbitrate any disputes between the parties

shall survive termination of the agreement itself. Thus, GWI and

Sullivan have plainly and consistently evidenced a desire to

submit any and all disputes arising out of their business

relationship to arbitration.

In light of the foregoing, and for the reasons set forth in

GWI's memoranda, GWI's motion to dismiss (document no. 7) is

granted in part and denied in part. It is granted to the extent

it seeks an order of the court remanding this case for

arbitration in accordance with the parties' agreements. In all

14 other respects, that motion is denied. The Clerk of the Court

shall administratively close the case, subject to reopening upon

motion of either party after Sullivan's claims have been fully

arbitrated.

SO ORDERED.

Steven J./McAuliffe Chief Judge

January 28, 2008

cc: Steven E. Grill, Esq. Joanne e. Caruso, Esq. Michael L. Resch, Esq. Scott H. Harris, Esq. Coleen M. Penacho, Esq

15