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OPTOPICS LABS. CORP. v. NICHOLAS

December 4, 1996

OPTOPICS LABORATORIES CORP. and NUTRAMAX PRODUCTS, INC., Plaintiffs,
v.
FRANK C. NICHOLAS, JEFFREY H. NICHOLAS, SCOTT H. NICHOLAS, PETER K. NICHOLAS, and LILEX PARTNERS, Defendants.



The opinion of the court was delivered by: IRENAS

OPINION

 IRENAS, District Judge:

 After purchasing defendants' controlling shares in Optopics Laboratories Corporation ("Optopics"), plaintiffs instituted this action alleging fraudulent misrepresentations in connection with the transaction. Defendants deny these claims and seek to submit them to arbitration pursuant to a clause in their merger agreement. Plaintiffs assert their claims fall outside of the contractual provision and oppose defendants' motion to compel arbitration. The matter is further complicated by this Court's lack of authority to compel arbitration outside of its district in the contractually chosen forum of Philadelphia. Because the Court finds counts one and two of plaintiffs' complaint arbitrable but cannot compel arbitration in Philadelphia, it will decide the arbitrability issue, stay counts one and two pending the completion of arbitration, and transfer the case to the Eastern District of Pennsylvania. Because the Court finds that the Philadelphia arbitration will likely resolve plaintiffs' third count, it will stay that count as well.

 I. BACKGROUND

 On June 7, 1993, Nutramax Acquisition Corporation ("Nutramax Acquisition") acquired Optopics pursuant to a 103-page merger agreement dated March 2, 1993 ("Merger Agreement"). In exchange for their controlling shares of Optopics, defendants received shares of stock in Nutramax Acquisition's parent company, Nutramax Products, Inc. ("Nutramax Products"). *fn1" Twenty-five percent of defendants' proceeds from the sale were placed in escrow to be dispersed to them in scheduled installments following the closing. See Merger Agreement at § 4(d).

 As would be typical in this type of transaction, the Merger Agreement contemplated a period of time between signing and closing, not only to permit the parties to take the steps necessary to effectuate the transaction, but also to permit Nutramax time to investigate Optopics's affairs "in order to verify the accuracy and the compliance of Optopics with the provisions of this Agreement." Id. § 11. If it was "dissatisfied" with the results, Nutramax had the absolute right to terminate the Merger Agreement. Id. However, Nutramax's right of investigation did not limit the effect of any representation, warranty, or obligation defendants made in the Merger Agreement. See id.

 As sellers of a going business, defendants made thirty-five pages of representations and warranties concerning almost every conceivable aspect of Optopics's business. See id. § 6. These representations and warranties are contained in thirty-six subsections, many of which contain numerous subparts. Financial statements, business operations, employee benefits, water supply, environmental compliance, tax returns, corporate authority, intellectual property, employment practices, pending or threatened litigation, insurance coverage, and government permits are just a few of the subjects covered. These representations and warranties did not merge into the conveyance documents at closing but rather survived for the shorter of three years or the applicable statute of limitations (except for six specific warranties which survived closing without limitation). See id. § 21. Furthermore, because defendants would continue to operate the business between the Merger Agreement's signing and the closing, the Merger Agreement also contained eight pages of covenants by defendants designed to insure that the business Nutramax purchased in March would be the same business conveyed in June.

 In Section 13(a) of the Merger Agreement, defendants agreed to indemnify and hold Nutramax harmless "from, against, for and in respect of any and all damages (other than consequential damages, including but not limited to lost profits), losses, obligations, liabilities, claims, lawsuits [uninsured] . . . suffered, sustained incurred or required to be paid" by Nutramax after the closing "by reason of or in connection with, or arising out of" six different events. The first three include any misrepresentation or breach of warranty made "in or pursuant to" the Merger Agreement, any breach of any covenants to be performed by defendants prior to closing, and a broad provision covering claims, debts, liabilities, or obligations not properly disclosed in the Merger Agreement. Id. § 13(a)(i)-(iii). Like the representations and warranties themselves, the indemnification obligation survives the closing. See Merger Agreement at § 13(h).

 The Merger Agreement establishes the mechanics of resolving indemnity disputes and providing for payment of valid claims. See id. § 13(e)-(f). Subsection (f) provides that the indemnitor "shall pay" the amount of such claims in cash or by certified check. If such payment is not made as required, Nutramax can set off the amount of the claim against defendants' stock in escrow, and the escrow agent may sell the shares to raise the necessary cash. If the proceeds from the escrow prove insufficient to satisfy the claim, "Nutramax shall have the right to pursue any and all other remedies available to it." Id. § 13(e). If defendants choose to contest such a set-off, they must serve a "Contest Notice" within fifteen days, and an arbitration to be held in Philadelphia will settle the "contested set-off." Id. Section 13 also sets forth procedures to govern the selection of arbitrators and makes their determination "final, binding and conclusive." Id. § 13(e)(iii). The "any and all other remedies" language quoted above is the lynchpin on which plaintiffs hang their non-arbitrability argument.

 By letter dated June 27, 1994, Nutramax's corporate counsel and drafter of the Merger Agreement, Eugene M. Schloss, Jr., Esq. ("Schloss"), formally informed defendants that plaintiffs were asserting an indemnification claim pursuant to § 13 of the Merger Agreement and that they intended to set off against defendants' remaining escrowed shares. See Defendants' Ex. 2. Specifically, Schloss alleged that defendants misrepresented the following:

 
1. Optopics's ability to sell sixteen-ounce bottles of saline solution;
 
2. Optopics's ability to sell Naphoptic-A (a generic prescription product);
 
3. The availability of 38mm caps for sixteen- and thirty-two-ounce bottles of eye wash;
 
4. Alleged patent infringement pertaining to hypotonic ...

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