Sixth Circuit: Some claims relating to license agreement with arbitration clause not arbitrableJanuary 21, 2008

In a recent decision, the Sixth Circuit considered the scope a mandatory arbitration clause in a software license agreement, and specifically whether the clause mandated arbitration of certain copyright infringement and other claims arguably related to the agreement. The district court entered an order compelling arbitration.The Sixth Circuit partially reversed. According to the court, given the broadly-worded nature of the arbitration clause, the key question was whether the cause of action could be maintained without reference to the contract. If no reference to the contract was required to maintain the claim, it did not fall under the mandatory arbitration agreement; if reference was required, the claim must be arbitrated.The court held that while many of the claims contained similar factual allegations, only some of the claims must be arbitrated. Those claims that required reference to the agreement in order to determine which of the defendant's actions were arguably authorized had to be arbitrated, whereas those claims relating to similar subject matter as the agreement, but did not require any reference to the agreement, were not arbitrable.More detail of NCR Corp. v. Korala Assocs. Ltd. after the jump.NCR is one of the largest providers in the world of ATMs and related software. Two specific software programs used with the ATMs are XFS software and the S4i software. In 1998, NCR and Korala Associates, Ltd. (KAL) entered into a software license agreement for KAL to develop software for use in the NCR ATMs. To facilitate the development, NCR provided to KAL certain computer hardware and software, including an NCR ATM having NCR's copyrighted XFS software. NCR also alleges that KAL obtained or accessed other NCR ATMs having the S4i software, which could not be operated without authorization from NCR.In 2004, NCR filed suit against KAL, and KAL moved to compel arbitration in accordance with the arbitration clause of the 1998 agreement. The arbitration clause read:

22.2 Any controversy or claim arising out of or relating to this contract, or breach thereof, shall be settled by arbitration and judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. The arbitrator shall be appointed upon the mutual agreement of both parties failing which both parties will agree to be subject to any arbitrator that shall be chosen by the President of the Law Society.

The district court granted KALs motion to compel arbitration, finding the arbitration clause broad enough to encompass all of NCR's claims. NCR appealed.The question of arbitrability is reviewed de novo. Here, the parties did not dispute that a valid agreement existed. The issue was whether NCR's claims fall within the substantive scope of the agreement.The Sixth Circuit acknowledged a strong presumption in favor of arbitration in Supreme Court cases. However, a party cannot be required to submit to arbitration a dispute which it has not agreed to submit to arbitration. The district court concluded that the arbitration clause of the party's 1998 agreement encompasses all claims which touch upon matters covered by the agreement. The Sixth Circuit held it was legal error to apply the "touch upon matters" standard, despite apparent Supreme Court support in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc. The Sixth Circuit noted that the Mitsubishi "touch matters" language is narrow in context, and reiterated that the standard to apply in determining whether a claim or dispute falls within the scope of an arbitration clause is "if an action can be maintained without reference to the contract or relationship at issue, the action is likely outside the scope of the arbitration agreement." Thus, bearing in mind the presumption of arbitrability, the cornerstone of the inquiry rests upon whether the case can be resolved without reference to the agreement containing the arbitration clause. If reference to the agreement "is not necessary to resolution of a claim, then compelled arbitration is inappropriate, unless the intent of the parties indicates otherwise."The Sixth Circuit then reviewed each count and concluded as follows:

  1. The XFS copyright infringement claim falls within the scope of the arbitration agreement, since the 1998 agreement must be referenced;
  2. Infringement of the S4i software does not require reference to the 1998 agreement such that this count falls outside the arbitration clause, even though there are similar factual allegations, in both the XFS and S4i software claims;
  3. Contributory copyright infringement claims for XFS and S4i software can be maintained without reference to the 1998 agreement, such that these claims are not arbitrable, even though the agreement may be implicated, since the court would not need to examine, construe, or interpret the terms of the agreement as it would for a direct infringement claims;
  4. The tortuous interference claim would not need reference to the 1998 agreement to establish the elements of the cause of action, such that this claim is not arbitrable;
  5. Illegal importation of infringing XFS and S4i software have the same analysis as the direct infringement counts, such that importation of the XFS software is arbitrable while importation of the S4i software is not arbitrable; and
  6. Common law unfair competition relates to the confidentiality provisions of the 1998 agreement, which would require a court to examine and interpret the terms of the agreement, such that this count is arbitrable.

This case is a reminder to parties to ensure that arbitration clauses are clear. Otherwise, the issue of whether claims related to an agreement are arbitrable may end up in litigation anyway, thereby at least partially eliminating the cost and time savings that are the reason many parties choose to agree to arbitration in the first place.To read the full decision in NCR Corp. v. Korala Assocs. Ltd., click here.

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