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Art Etc. LLC v. Angel Gifts

July 27, 2012

ART ETC. LLC, APPELLEE,
v.
ANGEL GIFTS, INC.; DONALD SCHMIT, APPELLANTS.



Appeal from the United States District Court for the Southern District of Iowa.

The opinion of the court was delivered by: Colloton, Circuit Judge.

Submitted: January 10, 2012

Before MURPHY, BYE, and COLLOTON, Circuit Judges.

Art Etc., LLC, sought a declaratory judgment in the district court that the sale of inventory purchased from Angel Gifts, Inc. ("Angel Gifts") and Donald Schmit would amount to copyright infringement, in violation of the United States Copyright Act, 17 U.S.C. § 101 et seq. Angel Gifts and Donald Schmit moved to stay the proceedings pending arbitration. The district court denied the motion. The movants *fn1 appeal the denial. We have jurisdiction under 9 U.S.C. § 16(a)(1)(A), and we affirm.

I.

Art Etc. entered into an asset purchase agreement with Angel Gifts and Donald Schmit on March 28, 2007. Under the agreement, Angel Gifts agreed to sell art prints to Art Etc. On April 10, 2007, the parties executed a promissory note for a portion of the purchase price. The asset purchase agreement made no mention of the April note, and the April note was not made an exhibit to the agreement. The agreement included an integration clause that said the agreement and the exhibits to the agreement contained the entire understanding of the parties, and that the agreement may be amended only by written instrument.

In October 2008, Art Etc. and Schmit executed two more documents: an amendment to the asset purchase agreement and a revised promissory note (the "October note"). Paragraph 6 of the amendment to the agreement explains that the parties will execute a new promissory note, and the note is Exhibit A to the amendment. The revised note reduced the amount owed by Art Etc. because some of the goods were damaged. The note contains a provision for arbitration.

Art Etc. thought it could sell the art images that it purchased from Angel Gifts and Schmit. But when Art Etc. started to sell some of the original images or copies thereof, the company began to receive notices of copyright infringement. According to Art Etc., it discovered that 44 percent of the approximately 2500 art images that it purchased did not have the necessary "consents" that would allow Art Etc. to sell the images in compliance with the copyright laws. Art Etc. alleges that the problem affects approximately 70 percent of the most popular images.

Art Etc. then sued Angel Gifts and Schmit, claiming that the art inventory was supposed to have "a proper inventory of consents" to permit resale, and that Angel Gifts and Schmit failed to obtain them. Art Etc. seeks a declaratory judgment that the sale of these works would violate the Copyright Act, 17 U.S.C. § 101 et seq. Art Etc. also alleges that Angel Gifts and Schmit breached the asset purchase agreement by failing to obtain the necessary consents, and that they made fraudulent misrepresentations in connection with the agreement. Art Etc. seeks damages or, alternatively, rescission of the asset purchase agreement.

Angel Gifts and Schmit moved to stay the proceedings pending arbitration, invoking the arbitration clause contained in the October note. The district court, adopting the report and recommendation of a magistrate judge, concluded that the arbitration provision applies only when Art Etc. seeks to offset its obligations under the note. The court determined that Art Etc. does not seek to offset its obligations under the October note in this action, and that Art Etc.'s claims thus do not fall within the scope of the arbitration provision.

Angel Gifts and Schmit appeal, arguing that the district court erred in denying the motion to stay proceedings. They also contend that Angel Gifts is entitled to enforce the arbitration provision, even though it is not a signatory to the October note.

II.

The Federal Arbitration Act, 9 U.S.C. § 4, states that a party aggrieved by the failure of another to arbitrate under a written agreement may petition the district court for an order compelling arbitration. Arbitration is a matter of contract, however, "and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." United Steelworkers v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582 (1960). We review de novo the district court's denial of a motion to stay pending arbitration when that ruling is based on the interpretation of a contract. Suburban Leisure Ctr., Inc. v. AMF Bowling Prods., Inc., 468 F.3d 523, 525 (8th Cir. 2006). "We apply ordinary state-law contract principles to decide whether parties have agreed to arbitrate a particular matter, giving healthy regard for the federal policy favoring arbitration." Asia Pac. Indus. Corp. v. Rainforest Cafe, Inc., 380 F.3d 383, 385 (8th Cir. 2004).

The parties agree that Iowa law applies. The parties also agree that the October note includes a valid agreement to arbitrate certain matters. The fighting issue is whether the subject matter of this ...


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