General Power Prods., LLC v. MTD Prods., Inc.

Issue Discussed: Arbitrability/Scope of Arbitration

Submitted by Eric Haab, Kathryn Wycoff

Date Promulgated: March 26, 2007

Issue Decided: Did defendant, who was a nonsignatory to the plaintiff’s agreement containing an arbitration clause, have standing to compel arbitration of the claims against it, and did the scope of the arbitration agreement encompass the plaintiff’s claims?

In General Power Prods., LLC v. MTD Prods., Inc., the United States District Court for the Southern District of Ohio denied MTD Products’ (“MTD”) motion to direct arbitration and dismiss the action. In this non-insurance case, the court held that MTD, a non-signatory to an arbitration agreement, had standing to enforce that agreement, but that the arbitration clause was not broad enough to cover the dispute before the court.

General Power Products, LLC (“GPP”) designed and manufactured outdoor power equipment. In March 2004 GPP entered into an agreement with Zongshen, a Chinese engine manufacturer, to sell Zongshen engines with GPP improvements added. This agreement was documented in a “Memorandum for Cooperation,” which included an arbitration provision. This provision stated in part:

The Parties shall negotiate in good faith and attempt to resolve disputes arising in the performance of the Memorandum. If the Parties are unable to resolve a dispute hereunder, any Party can submit to arbitration to the International Chamber of Commerce, Singapore, and the dispute will be resolved in accordance with the International Arbitration Rules. . . .

GPP alleged that MTD, another designer and manufacturer of outdoor power equipment, asked GPP to design a specialized Zongshen engine for MTD, but before finalizing a purchase contract MTD approached Zongshen about purchasing the engines directly from Zongshen. In October 2004 Zongshen terminated its agreement with GPP, and GPP alleged that Zongshen began selling engines with GPP improvements to MTD.

GPP sued MTD in Ohio state court for: 1) tortious interference with a business relationship and contract; 2) trade secret misappropriation; 3) unfair competition; and 4) unjust enrichment. The state court ordered Zongshen joined as a necessary party, and Zongshen removed the case to Federal court.

Although it was not a signatory to the Memorandum containing the arbitration provision, MTD brought a Motion to Direct Arbitration and Dismiss Action under the Memorandum between GPP and Zongshen.

The district court first held that MTD had standing to compel arbitration under the Memorandum. The court reiterated the rule previously articulated inOrcutt v. Kettering Radiologists, Inc., 199 F.Supp.2d 746 (S.D. Ohio 2002), that a nonsignatory to an arbitration clause may assert arbitration under the principle of equitable estoppel when a signatory to the agreement containing the arbitration clause “must rely on the terms of the written agreement in asserting its claims against the nonsignatory.” Id. at 947 (internal quotations omitted). The court then found that MTD had standing because GPP was a signatory to the Memorandum, and GPP directly or indirectly referred to the Memorandum in each of its claims against MTD. (The court expressed some reservations with this holding, noting that GPP’s claim was “less dependant” upon the terms of a written agreement than had been the claims in other cases where equitable estoppel was found applicable.)

Ultimately, however, the district court denied MTD’s motion. The court found that the language of the arbitration clause was narrow, and showed only an agreement to arbitrate disputes regarding the interpretation of the contract itself. The court concluded that none of GPP’s four claims required any interpretation of the Memorandum.

Only the first claim, tortious interference with business relations or contract, required any reference the Memorandum. As to that claim, the court stated that “[w]hile the existence of the Memorandum and even the breach of the Memorandum may form the factual basis for GPP’s tortious interference claim,” it was “not necessary for GPP to prove a breach of the Memorandum in order to sustain the claim.”

*Eric Haab is a partner in Lovells Reinsurance Dispute Resolution Practice. Kathryn Wycoff is an association in Lovells Reinsurance Dispute Resolution Practice. Both lawyers represent ceding companies and reinsurers in a wide array of reinsurance disputes.