Air-Con, Inc. v. Daikin Applied Latin Am., LLC

• Decision Date: 20 December 2021
• Docket Number: No. 19-2248,19-2248
• Citation: 21 F.4th 168
• Parties: AIR-CON, INC., Plaintiff, Appellant, v. DAIKIN APPLIED LATIN AMERICA, LLC, Defendant, Appellee, Technical Distributors, Inc., Defendant.
• Court: U.S. Court of Appeals — First Circuit

21 F.4th 168

AIR-CON, INC., Plaintiff, Appellant,

v. DAIKIN APPLIED LATIN AMERICA, LLC, Defendant, Appellee,Technical Distributors, Inc., Defendant.

No. 19-2248

United States Court of Appeals, First Circuit.

December 20, 2021

Rafael M. Santiago-Rosa, Guaynabo, PR, with whom Vanessa Medina-Romero, Guaynabo, PR, and Marichal, Hernandez, Santiago & Juarbe, LLC were on brief, for appellant.

Mauricio Oscar Muñiz-Luciano, with whom Valerie Blay-Soler and Marini Pietrantoni Muñiz LLC were on brief, for appellee.

Before Howard, Chief Judge, Lipez and Thompson, Circuit Judges.

LIPEZ, Circuit Judge.

In the lawsuit that initiated these proceedings, appellant Air-Con, Inc. contends that appellee Daikin Applied Latin America, LLC ("Daikin Applied") engaged in practices that unlawfully impaired the parties' exclusive distribution relationship. Daikin Applied moved to compel arbitration under the Federal Arbitration Act based on the terms of a written distribution agreement that Air-Con signed with Daikin Applied's parent company, Daikin Industries, LTD. The district court granted Daikin Applied's request and ordered the parties to arbitrate their dispute. Air-Con appeals. We reverse, concluding that the district court erred in compelling arbitration.

I.

We draw the relevant facts from the complaint and exhibits attached to the complaint.¹

A. Factual Background

Air-Con is a Puerto Rico corporation specializing in the sale and distribution of air conditioners in Puerto Rico and the Caribbean. Daikin Applied is a Miami-based wholesaler for its parent company, Daikin Industries, LTD, a Japan-based company that "develop[s], manufacture[s], assembl[es,] and s[ells] ... various models of air conditioning and refrigeration equipment."

In January 2000, Air-Con signed a written distribution agreement with Daikin Industries to be a "non-exclusive authorized distributor," in Puerto Rico and the Virgin Islands, of "new and unused air conditioning and refrigeration equipment manufactured by or for [Daikin Industries]." Daikin Industries did not counter-sign the written distribution agreement.

The written agreement contained an arbitration provision that required the parties to arbitrate in Osaka, Japan, "[a]ny dispute, controversy or difference which may arise between the parties out of, in relation to or in connection with th[e distribution agreement]." The agreement also contained a non-assignability clause stating that the agreement "and all rights[,] duties and obligations described [t]herein, are personal to each party and may not be assigned or otherwise transferred in whole or part without written consent of the other party." Any assignment by one party not authorized by the other party in writing is "null and void."

Air-Con also established in early 2000 a distribution relationship with Daikin Applied, the appellee in this case. AirCon contends that its distribution relationship with Daikin Applied was not governed by its distribution agreement with Daikin Industries. Instead, Air-Con asserts that the parties entered into a separate distribution relationship, not memorialized by any written document in the record, for "the exclusive sale and distribution of air conditioners and related equipment marketed under the Daikin brand for the territories of Puerto Rico and the Caribbean."² Second Am. Compl. ¶ 6.³

The distribution relationship between Air-Con and Daikin Applied continued without incident until sometime in 2015. Then, the relationship deteriorated. Air-Con contends that, despite what it claims was an "exclusive" distribution relationship, Daikin Applied sold Daikin products to other Puerto Rico-based distributors and did so at a significantly lower price than it offered to Air-Con. Some of those other distributors were also allowed to re-brand Daikin products and sell them to their own customers at a lower price. Air-Con further contends that Daikin Applied arbitrarily raised prices for products sold to Air-Con by twenty-five to twenty-eight percent without explanation or prior notice. The price discrimination was apparently "so dramatic" that other distributors were able to sell Daikin products at a price lower than Air-Con was able to purchase those same products from Daikin Applied.

Air-Con also claims that, around the same time, it began experiencing serious problems with the delivery of inventory and parts. Deliveries were suspended, the waiting period for deliveries was increased by more than fifty percent, and Daikin Applied was nonresponsive to inquiries and requests for technical support. Air-Con also complains that Daikin Applied abruptly stopped offering certain products to Air-Con without notice or explanation.

B. Procedural History

In July 2018, Air-Con filed suit in the Commonwealth Court of Puerto Rico against Daikin Applied, seeking injunctive relief and damages under Puerto Rico's Dealer Protection Act, P.R. Laws Ann. tit. 10, §§ 278 - 278e ("Law 75").⁴ Daikin Applied removed the case to federal court based on diversity of citizenship. See 28 U.S.C. § 1332(a).

Shortly after removal, Daikin Applied filed a motion to compel arbitration,⁵ arguing that the written distribution agreement between Air-Con and Daikin Industries governed Daikin Applied's distribution relationship with Air-Con and, pursuant to that agreement, the parties were bound to arbitrate Air-Con's claims. Alternatively, Daikin Applied argued that even if the written agreement is inapplicable or unenforceable, Air-Con still agreed to arbitrate all claims relating to the purchase and distribution of Daikin products in Puerto Rico by signing several purchase and sale agreements for specific shipments.

Air-Con opposed arbitration, arguing that the written agreement it signed was only a draft, not a final contract, as evidenced by Daikin Industries' failure to counter-sign the document. But even if the distribution agreement is deemed a final contract, Air-Con argued, it binds only Air-Con and Daikin Industries, not Daikin Applied. Invoking the agreement's non-assignability clause, Air-Con also argued that any purported assignment of the agreement from Daikin Industries to Daikin Applied without Air-Con's written consent is null and void. Thus, according to Air-Con, because Daikin Applied was neither a party to the written agreement nor a proper assignee, Daikin Applied has no right to invoke the arbitration clause.

The district court agreed with Daikin Applied. It held that the distribution agreement was an enforceable contract between Air-Con and Daikin Applied. Without getting into the assignability issue, the court found that Daikin Applied and Air-Con had been operating pursuant to the terms of that agreement since the inception of their distribution relationship during the same year that the written agreement was signed. Moreover, the district court read allegations in Air-Con's complaint as admitting that the written agreement governed its relationship with Daikin Applied. Applying the terms of that agreement, the district court concluded that Air-Con's claims were within the scope of the arbitration clause and, on that basis, granted Daikin Applied's motion to compel arbitration.

Air-Con moved unsuccessfully to alter or amend the judgment pursuant to Federal Rule of Civil Procedure 59(e). It then timely appealed.

II.

While our precedent makes clear that the party seeking to compel arbitration bears the burden of proving "that a valid agreement to arbitrate exists," Rivera-Colón v. AT&T Mobility P.R., Inc., 913 F.3d 200, 207 (1st Cir. 2019) (quoting Soto-Fonalledas v. Ritz-Carlton San Juan Hotel Spa & Casino, 640 F.3d 471, 474 (1st Cir. 2011) ), we have not clarified what evidence, if any, the parties may submit in support of or opposition to a motion to compel arbitration. Nor have we affirmatively stated the standard of review that the trial court applies to the resolution of such a motion.⁶

We take this opportunity to resolve these open questions to aid future consideration by the district courts. To facilitate our discussion, we briefly summarize the relevant details of the FAA.

A. The Federal Arbitration Act

The FAA provides that a "written provision in ... a contract ... to settle by arbitration a controversy thereafter arising out of such contract ... shall be valid, irrevocable, and enforceable." 9 U.S.C. § 2. The FAA reflects Congress's intent to create a "liberal federal policy favoring arbitration." AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 346, 131 S.Ct. 1740, 179 L.Ed.2d 742 (2011) (quoting Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983) ). In passing the FAA, Congress sought to "place arbitration agreements ‘upon the same footing as other contracts.’ "

Scherk v. Alberto-Culver Co., 417 U.S. 506, 511, 94 S.Ct. 2449, 41 L.Ed.2d 270 (1974) (quoting H.R. Rep. No. 68-96, at 1 (1924)). Hence, the FAA requires courts to treat arbitration as "a matter of contract" and enforce agreements to arbitrate "according to their terms." Henry Schein, Inc. v. Archer & White Sales, Inc., ––– U.S. ––––, 139 S. Ct. 524, 529, 202 L.Ed.2d 480 (2019) ; see also 9 U.S.C. § 4 (authorizing a party aggrieved by another party's noncompliance with a written arbitration agreement to petition in federal court for an order compelling arbitration).

As a consequence of the FAA's contract-based philosophy, its liberal policy favoring arbitration "is only triggered when the parties actually agreed to arbitrate." Rivera-Colón, 913 F.3d at 207. The court's first step in determining whether to compel arbitration is to identify a valid and enforceable agreement to arbitrate between the parties. Id. at 207; Nat'l Fed. of the Blind v. The Container Store, Inc., 904 F. 3d 70, 80 (1st Cir. 2018). The party seeking to compel arbitration bears the burden of demonstrating "that a valid agreement to arbitrate exists, that the movant is entitled to invoke the arbitration clause, that the other party is bound by that clause, and...