Opposition Brief — Maxim Pharmaceuticals, Inc. v. Crosspoint Venture Partners 1997, L. P.

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Suprane Coon. US

Leen

@) AUG 2 - 2005

No. 04-1590

—— Cae pe

~~

IN THE

Supreme Court of the United States

MAXIM PHARMACEUTICALS, INC.,

LARRY STAMBAUGH and KURT GEHLSEN,

Petitioners,

v.

CROSSPOINT VENTURE PARTNERS 1997, L.P., et al.,

Respondents.

ON PETITION FOR A WRIT OF CERTIORARI TO THE

Court OF APPEAL OF CALIFORNIA,

FoOuRTH APPELLATE DISTRICT

tere sen arm

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BRIEF IN OPPOSITION

PSO AEA MEP A! SORES ERT IC cecal

ee A sn RIE ce a vane 2

}

KATHRYN E. KARCHER 5 ER

Counsel of Record

RosBert W. BROWNLIE

Terry D. Ross

Linpsay A. Grust

DLA Pier RUDNICK

Gray Cary US LLP

401 B Street, Suite 1700

San Diego, CA 92101-4297

(619) 699-4750

195772 g

COUNSE’ PRESS

(800) 274-3321 * (B00) 359-6859

i

QUESTIONS PRESENTED

1. In an unpublished opinion, a California appellate

court applied settled Ninth Circuit law to find that the scope

of a narrow arbitration provision precluded compelled

arbitration of tort claims that arose before the contract was

formed. It decided no federal question nor did it create any

conflict in federal law. Did the state court err in ruling under

Ninth Circuit law that the scope of the narrow arbitration

provision precludes compelled arbitration of tort claims that

arose before the contract was formed?

2. Respondents held shares in Cytovia, Inc. (Cytovia),

which was a party to the contract at issue in this case.

The contract enumerates its three parties, and does not include

respondents. Beyond that (with the exception of two specific

provisions not pertinent here) the contract expressly provides

that there are no third party beneficiaries. If this Court was

otherwise inclined to grant the petition, does respondents’

Status as mere incidental beneficiaries to the contract—

against which the arbitration provision could not be enforced

in any event—-render this case an inappropriate one to decide

the first question?

ll

TABLE OF CONTENTS

Questions Presented

Table of Contents

A. Maxim’s Fraud to Obtain Approval of the

B. The Merger and Merger Agreement. .......

C. Procedural Summary.

The Petition Fails to Meet the Criteria for Certiorari

A. Nothing in This Case Fits Within the Rule

10 Criteria for Review of State Court Cases.

The California Court of Appeal’s

Decision Did Not Create a Conflict in

Authority on an Important Federal

er ae era ower

The Court of Appeal Did Not Decide an

Important Federal Question. .........

iti

Contents

Page

B. The California Appellate Court Correctly

Decided that the Cytovia Stockholders’ Fraud

Claims Were Not Arbitrable.............. 7

C. Alternative Grounds Support the Judgment

of the Court of Appeal and Thus This Court’s

Denial of the Petition, Specifically, the

Merger Agreement’s Express Terms

Demonstrate that the Cytovia Stockholders

by ke Oe reo 12

1. The Cytovia Stockholders Cannot Be

Compelled to Arbitrate Their Claims and

Give Up Their Jury Trial Rights Under

an Agreement to Which They Were Not

PO onde ss ih aa ede ee eee eek 13

2. The Cytovia Stockholders Are Not

Bound to the Agreement as Non-

ER ee Pee res ree rr ee 14

3. The Cytovia Stockholders Are Not

Intended Third Party Beneficiaries Under

the Merger Agreement as a Matter of

I a a te ete Sg eta 19

Appendix — Excerpts Of Agreement And Plan Of

Merger And Reorganization ................. la

iv

TABLE OF CITED AUTHORITIES

Cases:

Bancomer, S.A. v. Superior Court,

44 Cal. App. 4th 1450 (1996)

Banner Entertainment, Inc. v. Superior Court,

62 Cal. App. 4th 348 (1998)

Bell v. Cendant Corp.,

293 F.3d 563 (2d Cir. 2002)

Benasra v. Marciano,

92 Cal. App. 4th 987 (1992)

Britton v. Co-op Banking Group,

4 F.3d 742 (9th Cir. 1993)

Cal. Emergency Physicians Med. Group

v. PacifiCare of Cal.,

111 Cal. App. 4th 1127 (2003)

Eng’rs & Architects Ass’n v. Cmty. Dev. Dept.,

30 Cal. App. 4th 644 (1994)

Ericksen, Arbuthnot, McCarthy,

Kearney & Walsh, Inc. v. 100 Oak Street,

35 Cal. 3d 312 (1983)

First Options of Chicago, Inc. v. Kaplan,

514 U.S. 938 (1995)

Cited Authorities

Freeman v. State Farm Mut. Auto. Ins. Co..,

14 Cal. 3d 473 (1975)

Hess v. Ford Motor Cce.,

27 Cal. 4th 516 (2002)

In re Kinoshita & Co..,

287 F.2d 951 (2d Cir. 1961)

Jones v. Aetna Casualty & Surety Co.,

26 Cal. App. 4th 1717 (1994)

Mariani v. Price Waterhouse,

70 Cal. App. 4th 685 (1999)

Mayhew v. Benninghoff,

53 Cal. App. 4th 1365 (1997)

Mediterranean Enters., Inc. v. Ssangyong Corp.,

708 F.2d 1458 (9th Cir. 1983)

Mormile v. Sinclair,

21 Cal. App. 4th 1508 (1994)

NORCAL Mutual Ins. Co. v. Newton,

84 Cal. App. 4th 64 (2000)

Nationwide Mutual Ins. Co. v. Home Ins. Co.,

150 F.3d 545 (6th Cir. 1998)

vi

Cited Authorities

Paracor v. Fin., Inc.

v. General Electric Capital Corp.,

96 F.3d 1151 (9th Cir. 1996)

Prima Paint Corp. v. Flood & Conklin Mfg. Co.,

388 U.S. 395 (1967)

S.A. Mineracao Da Trindade-Samitri

v. Utah Int’l., Inc.,

745 F.2d 190 (2d Cir. 1984)

Thomson-CSF, §.A. v. Am. Arbitration Ass’n,

64 F.3d 773 (2d Cir. 1995)

Titan Group, Inc.

v. Sonoma Valley County Sanitation Dist.,

164 Cal. App. 3d 1122 (1985)

United Steel Workers

v. Warrior & Gulf Navigation Co.,

363 U.S. 574 (1960)

Statutes:

Cal. Civ. Code § 1559

Cal. Civ. Code § 1639

Cal. Civ. Code § 1641

Vil

Cited Authorities

Miscellaneous:

Restatement (Second) of Contracts, § 302 (1981) ....

Restatement (Second) of Contracts, § 315 (1981) ....

Ca]. Rules of Court, Rule 977(a)-(b)(1)

l

Crosspoint Venture Partners 1997, L.P., et al. (Cytovia

Stockholders) urge that the petition for certiorari be denied.

In this opposition brief, “petitioners” or “Maxim” refers to

Maxim Pharmaceuticals, Inc., Kurt R. Ghelsen, and Larry

Stambaugh, unless otherwise indicated.

STATEMENT OF THE CASE

A. Maxim’s Fraud to Obtain Approval of the Merger.'

Cytovia was a San Diego-based, privately-held

biotechnology company. (Petitioner’s Appendix [Pet. App.]}

4a.) In June 2000, Maxim, a publicly-traded company,

acquired Cytovia through a merger in which Cytovia

stockholders received Maxim stock in exchange for their

Cytovia stock. (/d.)

Central to the merger was Maxim’s representations of

extremely positive Phase III clinical trial results in March

2000 for Maxamine, a new drug that Maxim touted as its

most promising one. (/d.) Maxim represented that when

Maxamine was used with another drug, Maxamine resulted

in a Statistically significant increase in survival for patients

with metastatic melanoma. (/d.)

The Phase III clinical trial was so critical to the merger

discussions that in April 2000 Cytovia Stockholders hired a

consultant to review the information provided by Maxim

concerning it. (1 Appellants’ Appendix [A.A.] 7.) In early

May 2000, Maxim issued a press release announcing very

_———

‘ This summary, as the court of appeal’s opinion notes, is based

primarily on the Cytovia Stockholders’ complaint. (Pet. App.4a.)

2

positive results from the Phase III clinical trials.:

(1 A.A. 7; 2 A.A. 245.)

The Cytovia Stockholder’s consultant, Cytovia’s founder,

and other board members met with Maxim’s Chief Scientist

Gehlsen (among others). (1 A.A. 8.) The consultant asked—

more than once—for Maxim’s entire regulatory file

concerning the Phase III clinical trial and specifically all Food

& Drug Administration (FDA) correspondence. (/d. at 7-8.)

Gehlsen gave the consultant a file with 15 to 20 pages in it.

(Id. at 8.) The file contained no negative comments from the

FDA about the clinical trial. (/d.) When the consultant asked

Gehisen if he could review the original data from the clinical

trial, Gehlsen said there was no need, and misrepresented

(among other things) that the clinical trial was randomized,

the treatment arms of the study were homogeneous, and that

there were no discordances or skewedness between them.

(/d.)

Finally, in early June 2000, to induce the Cytovia

Stockholders to approve the proposed merger, Maxim issued

another false press release making misrepresentations similar

to those described above. (1 A.A. 9; 2 A.A. 253.)

A week later, Maxim distributed to Cytovia Stockholders an

Information Statement that reiterated its misrepresentations

about the March 2000 Phase III clinical trial of Maxamine

as a treatment for malignant melanoma. (1 A.A. 9-10; 2 A.A.

258, 265.)

B. The Merger and Merger Agreement.

In June 2000, in reliance on Maxim’s misrepresentations

and omissions, the Cytovia Stockholders approved the

merger. (Pet. App. 4a-5a, 12a; 1 A.A. 9-10.)

3

The Merger Agreement (Merger Agreement or

Agreement) expressly recited that its parties were Maxim,

Maxim’s acquisition company M-80 Acquisition Corp.

(M-80), and Cytovia. (Pet. App. 4a-5a.) The Merger

Agreement also expressly addressed the rights of third parties

such as the Cytovia Stockholders. Section 10.14 provided

that “[e]xcept for the provisions of Sections 1.5 and 1.6, none

of the provisions is intended to provide any rights or remedies

to any Person other than the parties hereto.” (/d. at 5a.)

The Agreement’s arbitration clause required “the parties” to

arbitrate disputes that related to “the interpretation or

performance of” the Agreement. (/d. at 5a.)

Six months after the merger in December 2000, in a rare

unanimous vote, the FDA deniea Maxim’s new drug

application for Maxamine. (Pet. App. 5a; 1 A.A. 10; 2 A.A.

332, 402-03.) The FDA strongly criticized Maxim’s Phase

III clinical trial. (2 A.A. 337-43.) It described in detail a

history of written and oral communications between the FDA

and Maxim dating to April 1997 in which the FDA was highly

critical of the clinical trial and which showed Maxim’s

application was doomed to fail. (1 A.A. 14; 2. A.A. 337-43.)

None of these communications had been provided to the

Cytovia Stockholders or their consultant. (1 A.A. 14, 15.)

FDA statistical analyses also showed the trial failed to

demonstrate a statistically significant increase in patient

survival—directly contradicting Maxim’s representations in

press releases and the Information Statement. (2 A.A. 425-

27; compare with 265.)

C. Procedural Summary.

In October 2001, the Cytovia Stockholders filed their

complaint in California state court against Maxim,

Stambaugh, and Gehlsen for fraud and negligent

misrepresentation. (Pet. App. 5a.) The Cytovia Stockholders

did not allege any contract-based claims. (/d.; 1 A.A. 1-21.)

Maxim petitioned the trial court to compel the Cytovia

Stockholders to arbitration, contending they were bound by

the arbitration provision even though they did not sign it.

(Pet. App. 6a.) The Cytovia Stockholders argued in

Opposition that they were not parties to the Agreement nor

were they its third party beneficiaries and, alternatively, that

their tort claims did not relate to the interpretation or

performance of the agreement. (/d. at 6a, 7a.) The trial court

granted the petition, finding the Cytovia Stockholders were

third party beneficiaries of the Agreement: (/d. at 6a.)

Once erroneously ordered to arbitrate their claims,

the Cytovia Stockholders included among their arbitration

claims a contract claim (over Maxim’s objection), which the

court of appeal found was merely an “effort to exhaust every

reasonable means to obtain a recovery” and not, as Maxim

asserted, a waiver of the Cytovia Stockholders’ right to a

jury trial. (Pet. App. 14a, 16a.) Ultimately, the arbitrators

found against the Cytovia Stockholders and awarded almost

a million dollars in attorneys’ fees and costs against them.

(3 A.A. 482-85.) The trial court confirmed the arbitration

award and entered judgment for Maxim. (Pet. App. 7a.)

5

Without reaching the question whether the Cytovia

Stockholders could be forced into arbitration, the court of

appeal decided that their pre-contract tort claims:

[D]o not involve a dispute relating to the

interpretation of the agreement, nor do they

involve a dispute relating to the performance of

the executed agreement. We conclude that the

claims arose from allegedly tortious conduct that

commenced before the expressly identified

parties—Maxim Pharmaceuticals, M-80, and

Cytovia—executed the agreement, and thus do not

relate to the performance of the executed

agreement.

(/d. at 13a.) Maxim petitioned the California Supreme Court

for review. Within a few days of Maxim’s filing a reply brief,

that court issued its order denying review, without indicating

that any justice had voted to grant review. Maxim’s petition

to this Court is from that order.

II. THE PETITION FAILS TO MEET THE CRITERIA

FOR CERTIORARI.

A. Nothing in This Case Fits Within the Rule 10

Criteria for Review of State Court Cases.

1. The California Court of Appeal’s Decision

Did Not Create a Conflict in Authority on

an Important Federal Question.

Supreme Court Rule 10 identifies the two types of state

court cases that can justify granting a writ of certiorari. Sup.

Ct. R. 10(b), (c). The petition fits within neither of them.

6

Supreme Court Rule 10(b) provides that decisions of

state courts of last resort that create a conflict in authority

on an important federal question might justify review on a

petition for a writ of certiorari. It is undisputed in this case

that the court of appeal’s unpublished decision creates ino

important federal conflict, for at least two reasons.

First, even if it created a conflict in federal law, the

opinion is not published and thus affects only the parties to

this case. Under California law, unpublished decisions are

not citable as precedent, except by the parties for res judicata

purposes. Cal. Rules of Court, Rule 977(a)-(b)(1).

Second, the opinion straightforwardly applies Ninth

Circuit law on the question whether a narrow arbitration

provision requiring the arbitration of parties’ claims about

the “interpretation or performance” of an agreement compels

the arbitration of tort claims arising before the agreement

was signed. This creates no federal conflict on its face,

important or unimportant.

2. The Court of Appeal Did Not Decide an

- Important Federal Question.

Supreme Court Rule 10(c ) provides that review may be

justified on a petition for a writ of certiorari when a state

court of last resort has decided an important federal question

that has not been, but should be, decided by the Supreme

Court. Again, as noted throughout this brief, the court of

appeal’s decision did nothing more than correctly apply

settled Ninth Circuit law to the dispute between these

parties—a decision that can affect no one other than the

parties.

7

This case thus does not merit review under Supreme

Court Rute-t0-on any basis. The petition tries to create a

(false) impression that this case somehow presents a question

of conflicts in circuit courts of appeals by ignoring Supreme

Court Rule 10 and by omitting two critical facts that render

this case an inappropriate vehicle for considering any such

conflict that might exist in another case. One is that the

Merger Agreement specifically limits its arbitration provision

to the named parties to the Agreement, which respondents

are not. The other is that the agreement contains a third party

beneficiary disclaimer clause, so even if (as the trial court

but not the appellate court found) respondents would

otherwise be the Agreement’s third party beneficiaries, the

parties’ intent on the face of their contract was to exclude

any such beneficiaries. In sum, the issues in the case depend

upon the specific language of the contracting parties’

Agreement and the unique factual scenario present here—a

scenario the petition scarcely adverts to, let alone addresses.

Nothing in the petition merits granting the writ petition.

B. The California Appellate Court Correctly

Decided that the Cytovia Stockholders’ Fraud

Claims Were Not Arbitrable.

The California Court of Appeal’s unpublished, unanimous

decision correctly decided the Cytovia Stockholders’ claims for

fraud and negligent misrepresentation were not arbitrable under

the narrow language of the Merger Agreement. (Pet. App. 10a.)

Under California law, the scope of an arbitration provision

rests solely upon the parties’ contract. (Pet. App. 9a;

8

see also Ericksen, Arbuthnot, McCarthy, Kearney & Walsh,

Inc. v. 100 Oak Street, 35 Cal. 3d 312, 322-23 (1983)).

Doubts about whether an arbitration clause applies to a

particular dispute are to be resolved in favor of sending the

parties to arbitration. (Pet. App. 9a.) ~ '

The appellate court correctly recognized, however, that

“(t]here is no public policy favoring arbitration of disputes

which the parties have not agreed to arbitrate.” (Jd. citing

Eng'rs & Architects Ass’n v. Cmty. Dev. Dept., 30 Cal. App.

4th 644, 653 (1994).) And, despite California’s and the FAA’s

strong policies favoring arbitration, the “substantial right of

a litigant to pursue claims in a judicial forum is not lightly

deemed waived,” and the general policies favoring arbitration

cannot control over express contractual language showing

parties have not elected to arbitrate a dispute. (Pet. App. 9a

(citing Mayhew v. Benninghoff, 53 Cal. App. 4th 1365, 1371

(1997)).)

The Cytovia Stockholders do not dispute that scope

clauses are generally construed liberally. The California

appellate court properly applied Ninth Circuit law in

determining the Cytovia Stockholders’ tort claims are not

arbitrable. (Pet. App. 10a—13a.) In Mediterranean Enters.,

Inc. v. Ssangyong Corp., 708 F.2d 1458 (9th Cir. 1983), the

court examined an arbitration clause providing that “any

disputes arising hereunder or following the formation of joint

venture shall be settled through binding arbitration.” /d. at

1461 (finding “arising hereunder” synonymous with the

narrow “arising under the agreement” language covering only

disputes relating to interpretation and performance of the

contract). The Mediterranean court, itself applying and

9

interpreting California law, held that disputes regarding

“interpretation and performance” of the contract itself are

expressly “intended to cover a much narrower scope of

disputes.” /d. at 1464. The court distinguished narrower

clauses from those defining as arbitrable disputes “arising

out of or relating to” an agreement—the standard language

recommended by the American Arbitration Association

(AAA). The court classified such language as “broad” and

subject to more liberal application. /d.

The Mediterranean court found that omitting the broad

language, as the Merger Agreement does, to be “significant.”

Id. Thus, notwithstanding the strong presumption in favor

of arbitrating disputes, “arbitration is a matter of contract

and a party cannot be required to submit to arbitration any

dispute which he has not agreed to submit.” Jd. at 1463, citing

United Steel Workers v. Warrior & Gulf Navigation Co., 363

U.S. 574, 582 (1960). Accordingly, Mediterranean concluded

that the conspiracy and inducement claims alleged activity

outside the scope of the arbitration clause. Mediterranean

Enters., Inc., 708 F.2d at 1464-65.

Maxim relies heavily on Prima Paint Corp. v. Flood &

Conklin Mfg. Co., 388 U.S. 395, 396 (1967), citing it for the

proposition that, in interpreting the scope of a “broad”

arbitration provision, this Court expressly recognized that

fraudulent inducement claims should be arbitrated when

“there is no evidence that the contracting parties intended to

hold that issue from arbitration.” (Maxim Pet. at 7, 11.)

Maxim attempts to create conflict where none exists. The

clause here does not contain “arising under” or “arising out

of” language found in Prima Paint. Rather, the language of

sections 10.18 and 10.19 of the Merger Agreement is both

plain and precise—requiring “the parties” to arbitrate only

10

disputes “relating to interpretation or performance of [the

Agreement].” (Pet. App. 9a (emphasis by appellate court).)

Contrary to Maxim’s contentions, neither Prima Paint

nor California law favor arbitration of the tort claims at issue

here. To reach the conclusion that the Cytovia Stockholders’

claims are arbitrable, Maxim relies on several cases

examining whether the language “arising out of” or “arising

under” requires that fraudulent inducement claims be

arbitrated. (Maxim Pet. at 13-14 n.3, and 15.) Maxim

effectively redrafts the Agreement to read that “any and all

disputes between the parties to the Agreement and the Cytovia

Stockholders” are subject to arbitration. But the clause does

not contain the “arising out of” or “arising under” language.

Rather, it explicitly states that only claims relating to

interpretation or performance of the Agreement are subject

to arbitration, and only the parties’ claims. (Pet. App. 9a.)

Thus, the appellate court expressly found the Merger

Agreement’s clause is narrow—not broad—and determined

clear evidence in the contractual language indicates the

parties intended to exclude the Cytovia Stockholders’ claims

from arbitration. (/d. at 10a-13a.)

In the state court actions, the Cytovia Stockholders

asserted no claims based on respondents’ breach of or failure

to perform under the Agreement, nor did they assert a claim

based on the breach of contractual representations or

warranties. (/d. at lla.) Instead, they alleged Maxim

defrauded them before they approved the merger.

(Id. at lla-12a.) The appellate court also noted that the

Cytovia Stockholders’ allegations related to false statements

in press releases Maxim issued which induced the Cytovia

Stockholders to support the proposed merger. (/d. at 12a.)

1]

After reviewing the complaint’s allegations in detail, the

appellate court concluded that the factual allegations

demonstrated the Cytovia Stockholders’ tort claims against

Maxim involve a dispute relating to a series of fraudulent

representations and omissions that began before the Cytovia

Stockholders approved the Merger and before the parties

executed the Agreement. (/d. at 13a.) The appellate court

therefore concluded that the Cytovia Stockholders’ claims

exist apart from any contractual theories and are outside the

scope of the Agreement’s narrow arbitration clause, as the

claims do not involve a dispute relating to interpretation or

performance of the parties’ Agreement. (/d. at 13a—14a.)

See Bancomer, S.A. v. Superior Court, 44 Cal. App. 4th 1450,

1461-62 (1996); see also Britton v. Co-op Banking Group,

4 F.3d 742, 748 (9th Cir. 1993) (finding that “subsequent,

independent acts of fraud, unrelated to any provision or

interpretation of the contract’).

The court of appeal’s decision is consistent with settled

law at the time the parties to the Merger Agreement—-Maxim,

M80, and Cytovia—agreed to their contract. These parties

expressly relied on the law at the time when interpreting the

provisions and agreeing to be bound. As the Second Circuit

has repeatedly recognized in declining to overrule Jn re

Kinoshita & Co., 287 F.2d 951 (2d Cir. 1961)—doing so

would undermine the contracting parties’ intent and result

in a miscarriage of justice to change the law on which the

parties relied and thereby change the meaning of the contract

provisions. See S.A. Mineracao Da Trindade-Samitri v. Utah

Int’l., Inc., 745 F.2d 190, 194 (2d Cir. 1984).

12

C. Alternative Grounds Support the Judgment of

the Court of Appeal and Thus This Court’s Denial

of the Petition, Specifically, the Merger

Agreement’s Express Terms Demonstrate that the

Cytovia Stockholders Were Not Parties to It.

The appellate court elected to “assume without deciding

[whether] the Cytovia Stockholders were either parties to or

intended third party beneficiaries of the Agreement,” and,

based on its de novo review, held that in any event their claims

were outside the scope of the arbitration clause. (Pet. App.

10a—1 1a.) Nonetheless, the court specifically noted that only

Maxim, M80, and Cytovia were parties to the Merger

Agreement. (/d. at 13a; Resp. App. 1.) An agreement to

arbitrate is a creature of contract, and the ultimate question

of whether a litigant agreed to arbitrate is determined by state

law. Bell v. Cendant Corp., 293 F.3d 563, 566 (2d Cir. 2002);

Paracor v. Fin., Inc. v. General Electric Capital Corp.,

96 F.3d 1151, 1165 (9th Cir. 1996) (“an arbitration clause, is

a contractual right and generally may not be invoked by one

who is not a party to the contract in which it appears”’).

Maxim argues that the Cytovia Stockholders, as

nonsignatories and nonparties, are bound to the Agreement.

(Maxim Pet. at 10.) As noted above, the trial court found

that the Cytovia Stockholders were third party beneficiaries

of the Agreement. (Pet. App. 6a n.4.) Although the appellate

court decided the issue of arbitrability based on the

Agreement’s scope, the decision can be upheld on

independent grounds—that the Cytovia Stockholders were

not parties to the Agreement and thus not parties to the

Agreement’s arbitration clause, nor were they third party

beneficiaries to the Agreement.

13

The Cytovia Stockholders Cannot Be

Compelled to Arbitrate Their Claims and

Give Up Their Jury Trial Rights Under an

Agreement to Which They Were Not Parties.

The premise of Maxim’s argument is that any doubts

about whether a dispute is arbitrable must be resolved in

favor of compelling arbitration. Maxim, however, incorrectly

concludes that the Cytovia Stockholders are “parties” to the

Agreement, and therefore applies the presumption in favor

of arbitration. (Maxim Pet. at 8-9.) “A proceeding to compel

arbitration is in essence a suit in equity to compe! specific

performance of a contract.” Freeman v. State Farm Mut. Auto.

Ins. Co., 14 Cal. 3d 473, 479 (1975). Thus, the Cytovia

Stockholders cannot be compelled to arbitrate their claims

unless they are parties to the Agreement or third party

beneficiaries to it—the sole source of any agreement to

arbitrate. See Banner Entertainment, Inc. v. Superior Court,

62 Cal. App. 4th 348, 356 (1998) (court order compelling

arbitration simply compels specific performance of a

contract).

The Merger Agreement expressly identifies its parties

as: Maxim, M80 (a wholly owned subsidiary of Maxim) and

Cytovia. (Resp. App. 1.) The Agreement cannot be so broadly

construed as to encompass parties that were not intended by

the express contractual language. Thomson-CSF, S.A. v. Am.

Arbitration Ass’n, 64 F.3d 773, 77576 (2d Cir. 1995). The

Agreement further expressly limits the scope of its arbitration

clause to only those disputes “aris[ing] between the parties.”

(See Pet. App. 9a—10a n.7 (emphasis added).) The express

contractual provisions thus compel a finding that the Cytovia

Stockholders are not “parties” to the Agreement and thus are

14

not bound to its arbitration provisions. Benasra v. Marciano,

92 Cal. App. 4th 987, 991-92 (1992). To hold otherwise

would rewrite the contract’s express terms.

2. The Cytovia Stockholders Are Not Bound to

the Agreement as Non-Signatories.

Maxim also contends the Cytovia Stockholders, as

nonsignatories, are estopped from claiming the arbitration

clause does not apply to their claims. (Maxim Pet. at 10

(citing NORCAL Mutual Ins. Co. v. Newton, 84 Cal. App.

4th 64 (2000)).) In NORCAL, the court held that a

nonsignatory spouse who accepted a defense from her

husband’s medical malpractice insurer and demanded that

the insurer pay to settle claims against her was bound by the

policy’s arbitration provision. NORCAL’s rationale is that a

person cannot demand contract performance when it benefits

him or her, and.then try to avoid the contract’s arbitration

provision. NORCAL, 84 Cal. App. 4th at 84. Unlike the

spouse in NORCAL, the Cytovia Stockholders demanded

nothing under the Merger Agreement in suing appellants for

fraud, and they: received only what sections 1.5 and 1.6

specifically provided (stock exchange provisions) subject to

express provisions that the Agreement’s terms could not be

invoked by or enforced against them. (Resp. App. La-4a.)

3. The Cytovia Stockholders Are Not Intended

Third Party Beneficiaries Under the Merger

Agreement as a Matter of Law.

Under California contract law, a party cannot be

compelled to arbitrate its claims as a third party beneficiary

unless the parties to the contract: (1) intended and

(2) expressly provided the third party is a beneficiary.

15

Cal. Civ. Code § 1559 (permitting a litigant to be an intended

third party beneficiary only if the contract is “made expressly

for the benefit of a third person”). Further, only intended

third party beneficiaries can invoke or be obligated

under provisions of a contract to which they were not parties.

See Hess v. Ford Motor Co., 27 Cal. 4th 516, 524 (2002).

The distinguishing characteristic of third party

beneficiaries is their “legal right to enforce contracts to which

they are not a party.” Nationwide Mutual Ins. Co. v. Home

Ins. Co., 150 F.3d 545, 550 (6th Cir. 1998). Without clear

intent and express contractual provisions to the contrary, third

parties to a contract are at most incidental beneficiaries

without any rights or obligations who cannot be forced to

comply with an arbitration clause. See Jones v. Aetna

Casualty & Surety Co., 26 Cal. App. 4th 1717, 1725 (1994);

Mariani v. Price Waterhouse, 70 Cal. App. 4th 685, 704

(1999); Restatement (Second) of Contracts, §§ 302, 315

(1981). California law governing contract interpretation’

determines whether the Cytovia Stockholders are intended

third party beneficiaries of the Agreement. Hess, 27 Cal. 4th

at 524.

? “When a contract is reduced to writing, the intention of the

parties is to be ascertained from the writing alone.” Cal. Civ. Code

§ 1639. “The whole of [the] contract is to be taken together, so as to

give effect to every part, if reasonably practicable, each clause

helping to interpret the other.” Cal. Civ. Code § 1641. The parties’

intent must appear “‘on the terms of the contract.’” Cal. Emergency

Physicians Med. Group v. PacifiCare of Cal., 111 Cal. App. 4th 1127,

1138 (2003) (quoting Jones, 26 Cal. App. 4th at 1724). The objective

intent of the contracting parties, as evidenced by the express language

of the contract, not the subjective intent of one party, controls the

interpretation. Titan Group, Inc. v. Sonoma Valley County Sanitation

Dist., 164 Cal. App. 3d 1122, 1127 (1985); accord First Options of

Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995).

16

Here, the Agreement’s express language in section 10.14

explicitly barred the Cytovia Stockholders from claiming any

rights under any provisions of the Agreement, other than the

stock exchange provisions under sections 1.5 and 1.6. (Resp.

App. la-3a.) Thus, in addition to the language of sections

10.18 and 10.19 governing arbitration between the “parties”

to the Agreement, section 10.14 contains an express third

party beneficiary disclaimer which precludes the Cytovia

Stockholders from obtaining any rights other than exchanging

their Cytovia stock for Maxim stock under sections 1.5 and

1.6. ([d.) Most probative of the parties’ intent is their express

exclusion of non-signatories as parties and the limitations

of the Cytovia Stockholders’ rights and remedies under

section 10.14. (/d. at 4a.) Because no language in the

Agreement suggests an intent to confer a direct benefit on

the Cytovia Stockholders other than sections 1.5 and 1.6,

which are expressly carved out of the third party beneficiary

disclaimer in section 10.14, the Agreement’s covenants and

conditions run only to the parties (Maxim, M80, and

Cytovia). Cal. Civ. Code § 1559. The provisions of the

Agreement cannot be invoked by or against the Cytovia

Stockholders. (Resp. App. la, 4a; see also Hess, 27 Cal. 4th

at 524.)

Despite the express contractual language precluding the

Cytovia Stockholders from being bound to the Merger

Agreement’s arbitration clause, Maxim relies on Mormile v.

Sinclair, 21 Cal. App. 4th 1508, 1511 (1994), in arguing that

the Cytovia Stockholders are bound to the Agreement as non-

signatories under a third party beneficiary theory. Mormile’s

facts and rationale are inapplicable.

In Mormile, a patient who signed the operative arbitration

clause sued her doctor for malpractice. Her husband (a non-

17

signatory) asserted a loss of consortium claim. Mormile,

21 Cal. App. 4th at 1510. The arbitration clause provided:

“All Claims Must Be Arbitrated: It is the intention of the

parties that this agreement bind all parties whose claims may

arise out of or related to the treatment or services provided

by the physician, including any spouse or heirs of the patient.”

Id. (emphasis added). The court reasoned that this language

was broadly drafted to include all claims arising out of the

services for which the signatory spouse contracted.

Id. at 1513. The court concluded that ordering the husband’s

claims arbitrated was consistent with the statutory goal of

stemming escalating malpractice insurance costs and was

essential to furthering the preference for joining claims for

loss of consortium and negligence. /d. at 1511-12, 1515. The

most important factor in the court’s ordering the non-

Signatory spouse to arbitration, however, was the plaintiff/

patient’s right to privacy, which would be violated by a

separate jury trial of a third party’s claims. Jd. at 1512, 1515.

In contrast to the Cytovia Stockholders, the husband in

Mormile was explicitly recognized as a third party beneficiary

in his wife’s agreement. Mormile also concerned a specific

Statutory scheme and its particular policy concerns, which

are absent here. Indeed, the public policy here is against

depriving non-parties to arbitration agreements of their jury

trial rights unless their waiver is clear and unmistakable.

Benasra, 92 Cal. App. 4th at 992. Thus, where, as here, the

contract language precludes third party beneficiaries, and the

Cytovia Stockholders as non-contracting parties clearly

disclaim third party beneficiary status, there is a strong policy

against compelled arbitration in deference to the fundamental

right to a jury trial. /d. at 990.

18

The Agreement’s express language compels the

conclusion that the Cytovia Stockholders are not bound to

arbitrate; indeed, it would violate public policy to compel

them to do so. If non-signatory stockholders of a company

are bound to arbitration provisions of a merger agreement,

despite express third party beneficiary disclaimer clauses,

then all stockholders involved in corporate mergers which

include an arbitration clause would be forced to arbitrate their

claims. This result would unfairly deprive stockholders of

their jury trial rights even where, as here, third party

beneficiary status under the operative agreement is expressly

disclaimed.

19

CONCLUSION

Maxim incorrectly assumes that the issue raised in its

petition is presented in this case. The petition arises from an

unpublished state court decision that binds only the parties.

Even if the Court were inclined to review the issue, this is

not the proper case to do so. Respondents are neither parties

to nor intended third party beneficiaries to the contract that

includes the arbitration clause of which Maxim seeks

interpretation.

Respectfully submitted,

KATHRYN E. KARCHER

Counsel of Record

Rosert W. BROWNLIE

Terry D. Ross

Linpsay A. GiusT

DLA Prrer RupNICK

Gray Cary US LLP

401 B Street, Suite 1700

San Diego, CA 92101-4297

(619) 699-4750