Utopia Studios, Ltd., a New York corporation, retained Earth Tech, Inc., a California corporation with offices worldwide, to provide engineering and consulting services in connection with the development of a property. The parties’ relationship was governed by a Master Services Consulting Agreement (“MSA”) that included, among other terms, a broad arbitration provision. The MSA further provided that the scope of Earth Tech’s services would be set forth in various Task Orders. Each Task Order incorporated by reference the terms of the MSA.

A dispute arose between the parties concerning the work performed by Earth Tech. Pursuant to the MSA, Earth Tech demanded arbitration under the American Arbitration Association rules. Thereafter, Utopia moved in the New York State Supreme Court, Kings County, for a stay of the arbitration. Earth Tech removed the action to the U.S. District Court for the Eastern District of New York. Utopia then moved to remand the action on the grounds that the Court lacked diversity jurisdiction under 28 U.S.C. § 1332, arguing that Earth Tech’s principal place of business was in New York and the amount in controversy was less than $75,000. Earth Tech opposed Utopia’s motions and cross-moved for an order compelling arbitration pursuant to the MSA and Task Orders.

The court denied Utopia’s motion to remand, finding that it had subject matter jurisdiction over the dispute under 28 U.S.C. § 1332. With respect to diversity, the court rejected Utopia’s argument that Earth Tech’s principal place of business was in New York, applying the so-called “nerve center” test. The court found that although Utopia’s business dealings with Earth Tech occurred in New York, Earth Tech’s business policies originated from California where it was headquartered and where most of its employees worked, including its CEO, CFO, General Counsel and the company’s marketing, corporate and human resources departments. Further, the court found that the monetary requirement for diversity jurisdiction was satisfied, since the amount Earth Tech sought in the arbitration exceeded $75,000.

The court also rejected Utopia’s argument that it was not bound by the arbitration provision in the MSA because that agreement was allegedly never signed by Utopia, an issue that Earth Tech disputed. The court found that it need not resolve this factual issue, since there was no dispute that Utopia signed and agreed to the terms of the Task Orders, which expressly incorporated the MSA by reference. Relying upon case law in the Second Circuit, the court held that a nonsignatory to a particular agreement can be bound by an arbitration clause in that agreement where the nonsignatory enters into a separate contract that incorporates the arbitration provision. Accordingly, the court granted Earth Tech’s motion to compel.

A copy of the court’s decision, Utopia Studios Ltd. v. Earth Tech Inc., No. 08-cv-3515 (E.D.N.Y. Apr. 20, 2009) is attached here.