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Onvoy, Inc. v. Shal

September 25, 2003

ONVOY, INC., APPELLANT,
v.
SHAL, LLC, RESPONDENT (C7-02-621), DEFENDANT (C7-02-702), WALTER S. CLAY, ET AL., DEFENDANTS (C7-02-621), RESPONDENTS (C7-02-702), ROBERT K. EDDY, RESPONDENT (C7-02-702), DARREL WESTRUM, RESPONDENT (C7-02-702).



SYLLABUS BY THE COURT

1. Minnesota courts must apply the Federal Arbitration Act, 19 U.S.C. §§ 1-16 (2003), and federal case law interpreting that act, to any arbitration clause in a contract that involves interstate commerce.

2. Allegations that a contract is void may be heard by a court, even if not specifically directed to the arbitration clause, while allegations that a contract is voidable, if not directed to the arbitration clause, must be sent to arbitration.

3. Because it was not outside the authority of the board of directors of Onvoy to enter into the lease and Minn. Stat. § 302A.165 (2002) presumes contracts are valid, we conclude that Onvoy's claim that the lease is ultra vires, even if proven, would not be sufficient to void the lease, and therefore must be arbitrated.

4. On remand if the district court determines that the lease is void under Minn. Stat. § 302A.255 (2002), Onvoy's interested-director claim shall be heard by the district court instead of an arbitrator.

5. If SHAL can compel arbitration of Onvoy's claims against it, the individual defendants can also compel arbitration of Onvoy's claims against them if they are agents of SHAL, because to do otherwise would be to subvert the intent of the signatories.

Reversed and remanded.

Heard, considered, and decided by the court en banc.

The opinion of the court was delivered by: Meyer, Justice.

Court of Appeals Meyer, J.

Concurring, Anderson, Paul H., J.

Concurring in part and dissenting in part, Gilbert, J.

Took no part, Hanson, J.

OPINION

We are asked to decide whether a corporation may escape an arbitration clause in a contested contract and obtain court jurisdiction by claiming that the contract is void as the result of an interested-director transaction or ultra vires transaction. In addition, the parties dispute whether nonsignatories to the contract may compel arbitration of claims brought by signatories. The court of appeals held that the claims must be arbitrated. We reverse.

Appellant Onvoy, Inc. (Onvoy) is a privately held Minnesota telecommunications company, formerly known as Minnesota Equal Access Network Services, Inc., or MEANS. Sixty-five local telephone service providers founded Onvoy in 1988 to give the providers better access to long distance service. Respondent SHAL, LLC (SHAL) is a Minnesota company comprised of three local telephone service providers, all of whom are also shareholders of Onvoy. SHAL constructs and maintains fiber-optic telecommunication transport facilities, mostly for the companies who own it. SHAL is also a "segment provider" for Onvoy, meaning it provides one segment of the transmission capacity that Onvoy needs to transfer long distance traffic from local providers to Onvoy.

In 1997 and 1998, Onvoy planned a new fiber network with two routes within Minnesota, one of which extended from Plymouth to Moorhead. Onvoy planned to lease the fiber network if leasing would cost less than constructing, owning, and operating the fiber network itself. Onvoy invited segment providers to submit bids for Onvoy to lease portions of the new network from the providers.

Onvoy's Network Committee developed the "cost benchmark"—the estimated cost of building and owning the Plymouth-Moorhead route—the cost below which segment providers had to bid to receive a leasing contract. In May of 1999, Onvoy requested bids from 50 local telephone service providers. SHAL bid on the Plymouth-Moorhead route. Onvoy's board of directors approved the negotiation of a contract with SHAL and executed a ten-year lease with SHAL on October 25, 1999. The lease is signed by the president of SHAL on one side, and the president of Network Technologies, a working group within Onvoy, on the other side. The lease contained a clause mandating arbitration under the rules of the American Arbitration Association and elected Minnesota law under a choice-of-law provision.

The individually-named defendants, respondents here, all had close affiliations with both SHAL and Onvoy during the negotiation of the lease in question. Walter Clay was a member of both corporations' boards of directors, and also served on Onvoy's Finance and Audit Committee. Robert Eddy was a member of both corporations' boards of directors, and additionally served on Onvoy's Network Committee. Darrel Westrum was an employee of SHAL, and served on Onvoy's Network Committee. Tom Dahl is the general manager of one of the three telephone service providers in SHAL, and served on Onvoy's Network Committee.

At the same time that Onvoy was receiving bids on its new fiber optic routes, it was also seeking investors in this new venture. In September of 1999, two investment companies of George Soros combined to purchase 50,000 shares of convertible preferred stock in Onvoy for $50,000,000. As part of that deal, Onvoy shareholders amended Onvoy's articles of incorporation on September 1, 1999, giving the Soros shareholders the right to elect three members of Onvoy's board of directors and requiring that at least one of the Soros directors approve certain types of corporate actions, including contracting with affiliates and entering into or amending any material contract.

Neither Onvoy nor SHAL offers much information about what transpired between the execution of the lease in October of 1999 and Onvoy's filing of the complaint in this action in August of 2001.*fn1 SHAL notes that during that time Onvoy used the fiber optic network and paid SHAL in accordance with the lease. In May of 2001, Onvoy convened an independent committee to look into the lease's terms and circumstances and subsequently filed its complaint in Hennepin County District Court seeking reformation of the lease, among other relief. Onvoy then amended its complaint in November of 2001 and sought rescission.

In its amended complaint, Onvoy alleged that the SHAL lease is several times more expensive than the market price. Onvoy asked for a declaratory judgment that the lease is unlawful and subject to rescission, injunctive relief, damages in excess of $50,000, and attorney fees incurred. Against SHAL, Onvoy first alleged the lease between SHAL and ONVOY is an interested-director transaction, prohibited by Minn. Stat. § 302A.255 (2002). Second, Onvoy alleged that the lease is an ultra vires transaction (one without authority), because the board of directors did not approve it under the amended articles of incorporation, which required a vote by at least one of the Soros directors. Onvoy also alleged SHAL has been unjustly enriched, and conspired with the individual defendants to commit tortious conduct. In multiple counts against the individual defendants, Onvoy alleged that defendants Clay, Eddy, Westrum, and Dahl breached fiduciary duties and/or duties of loyalty to Onvoy, made material misrepresentations that induced Onvoy to enter into the lease, and negligently misrepresented the terms of the lease and bidding process.

The district court denied motions by SHAL and the individual defendants to dismiss plaintiff's complaint and compel arbitration. The district court concluded that Onvoy was not compelled to arbitrate the dispute under Minnesota law, citing Atcas v. Credit Clearing Corp., 292 Minn. 334, 197 N.W.2d 448 (1972), because the arbitration clause did not encompass the claims and arbitration is not appropriate when one party seeks to rescind the contract. The district court also concluded that federal arbitration law does not preempt Minnesota law. The district court did not discuss whether the individual defendants could compel arbitration.

The court of appeals reversed. After concluding that federal arbitration law did not preempt Minnesota law, because "Minnesota arbitration law favors arbitration on these facts," the court of appeals applied Minnesota contract law. The court decided that Onvoy must arbitrate its claims because its complaint sought monetary damages and not mere rescission of the contract. The court did not address whether individual defendants could compel arbitration. We granted Onvoy's petition for further review.

I.

This court has de novo review when reviewing arbitration clauses. See Johnson v. Piper Jaffray, Inc., 530 N.W.2d 790, 795 (Minn. 1995). Whether Onvoy may be compelled to arbitrate its claims depends in large measure on the language of the arbitration clause and other lease terms between SHAL and Onvoy. In analyzing arbitration clauses, courts should "enforce privately negotiated agreements to arbitrate, like other contracts, in accordance with their terms." Volt Info. Sciences, Inc. v. Leland Stanford Jr. Univ., 489 U.S. 468, 478 (1989); see also Johnson, 530 N.W.2d at 795.

The party opposing arbitration bears the burden of proving that the dispute is outside the scope of the agreement, and that party bears an especially high burden if they drafted the arbitration agreement. See Green Tree Financial Corp.-Alabama v. Randolph, 531 U.S. 79, 91-92 (2000); ...


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