AtriCure, Inc. v. Meng

• Decision Date: 27 August 2021
• Docket Number: No. 19-4067,19-4067
• Citation: 12 F.4th 516
• Parties: ATRICURE, INC., Plaintiff-Appellee, v. Jian MENG aka Larry Meng ; Beijing Medical Scientific Co. Ltd. dba Med-Zenith, Defendants-Appellants.
• Court: U.S. Court of Appeals — Sixth Circuit

12 F.4th 516

ATRICURE, INC., Plaintiff-Appellee,

v.Jian MENG aka Larry Meng ; Beijing Medical Scientific Co. Ltd. dba Med-Zenith, Defendants-Appellants.

No. 19-4067

United States Court of Appeals, Sixth Circuit.

Decided and Filed: August 27, 2021

Rehearing En Banc Denied October 14, 2021

ON BRIEF: Erik R. Puknys, FINNEGAN, HENDERSON, FARABOW, GARRETT & DUNNER, LLP, Palo Alto, California, Daniel J. Donnellon, SEBALY, SHILLITO & DYER, Dayton, Ohio, Qingyu Yin, FINNEGAN, HENDERSON, FARABOW, GARRETT & DUNNER, LLP, Washington, D.C., for Appellants. Mark A. Nadeau, Cameron A. Fine, DLA PIPER LLP (US), Phoenix, Arizona, for Appellee.

Before: GUY, LARSEN, and MURPHY, Circuit Judges.

MURPHY, J., delivered the opinion of the court in which LARSEN, J., joined. GUY, J. (pp. 534–44), delivered a separate dissenting opinion.

MURPHY, Circuit Judge.

The Supreme Court has told lower courts to resolve some arbitration-related questions with a "healthy regard" for the Federal Arbitration Act's "federal policy favoring arbitration." 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 this appeal, the defendants argue that this pro-arbitration presumption should permit them to enforce a contract's arbitration clause even though they were not parties to, or third-party beneficiaries of, the contract. At one time, they had strong support for this view. Many circuit courts used the federal policy favoring arbitration to broadly enforce arbitration contracts in favor of (or against) nonparties under expansive readings of generic common-law concepts. See, e.g. , Arnold v. Arnold Corp. , 920 F.2d 1269, 1281–82 (6th Cir. 1990). Yet the Act's text compels states only to treat arbitration contracts the same way that they treat "any contract." 9 U.S.C. § 2. So the Supreme Court has since held that courts considering whether arbitration clauses cover nonparties should neutrally apply the relevant state law that otherwise governs. Arthur Andersen LLP v. Carlisle , 556 U.S. 624, 630–32, 129 S.Ct. 1896, 173 L.Ed.2d 832 (2009). The Court did not say that any policy favoring arbitration should influence things. We thus see no room for this federal "dice-loading" rule of construction to resolve the state-law question. Antonin Scalia, A Matter of Interpretation 28 (1997); cf. Encino Motorcars, LLC v. Navarro , ––– U.S. ––––, 138 S. Ct. 1134, 1142, 200 L.Ed.2d 433 (2018).

Instead, we must ask whether Ohio law, when fairly read, permits the defendants to enforce the arbitration clause even though they did not sign the contract. The defendants rely on two "equitable estoppel" theories and one "agency" theory as their grounds to do so. But their first estoppel theory rests on the outdated circuit decisions, which adopted a much broader estoppel test than the test applied by the Ohio Supreme Court. And the defendants forfeited their second estoppel theory. That said, the district court failed to ask the right question under Ohio law when rejecting the defendants’ agency theory. All told, then, while we agree that equitable estoppel does not apply, we remand one defendant's agency claim for further proceedings. We thus affirm in part and reverse in part the district court's order denying a stay of this suit pending arbitration.

I

AtriCure, Inc., an Ohio company, has invested millions of dollars and years of research in developing medical devices that treat a serious degenerative heart condition known as atrial fibrillation

or "Afib." The company sells these devices to hospitals throughout the world. In the mid-2000s, it sought to enter the Chinese market. To sell products in China, AtriCure needed a Chinese agent. In 2005, Dr. Jian Meng, a Chinese citizen, approached AtriCure about a partnership. AtriCure and one of Meng's companies agreed that this company would secure the required government approvals and serve as AtriCure's exclusive Chinese distributor. The parties renewed the same basic agreement each year. AtriCure eventually began to contract with Beijing ZenoMed Scientific ("ZenoMed"), a company founded by Meng, to distribute its products in China.

The relationship began to sour in 2015. AtriCure came to believe that another Chinese company founded by Meng—Beijing Medical Scientific ("Med-Zenith")—was attempting to market a dangerous knockoff medical device. After confronting Meng, AtriCure opted to continue with the relationship because of the significant time and expense required to switch to a different exclusive distributor in China.

In 2016, AtriCure and ZenoMed entered into the "Distribution Agreement" relevant to this appeal. The agreement included confidentiality and noncompete clauses protecting AtriCure's proprietary information and barring ZenoMed from competing against it. It also included an arbitration clause designating the China International Economic and Trade Arbitration Commission as the forum. The clause provided: "Any dispute, controversy or claim arising out of, in connection with or relating to this Agreement (or the interpretation, breach, termination or validity thereof) shall be resolved through arbitration." Agreement, R.1-2, PageID 47.

The relationship deteriorated further in 2017 when AtriCure claims to have learned that Med-Zenith was attempting to develop other counterfeit devices. AtriCure let the Distribution Agreement expire at the end of that year. The company demanded that ZenoMed pay for or return its inventory of AtriCure products and abide by the Distribution Agreement's confidentiality and noncompete clauses.

Receiving no response from ZenoMed, AtriCure took two remedial steps. AtriCure's first step was a federal complaint in Ohio. It brought this suit under the district court's diversity jurisdiction against Meng and Med-Zenith. (It also sued another individual who was not served.) AtriCure alleged that Meng and Med-Zenith were improperly manufacturing and selling dangerous counterfeit products based on information that they had wrongly acquired from ZenoMed. It raised state-law claims of tortious interference with contract, misappropriation of trade secrets, unfair competition, deceptive trade practices, fraud, negligent misrepresentation, "aiding and abetting," and "civil conspiracy."

AtriCure's second step was a request for arbitration in China. It invoked the Distribution Agreement's arbitration clause against ZenoMed. In its request for arbitration, AtriCure alleged that ZenoMed had breached the agreement in various ways (by, for example, failing to pay for the inventory and competing against it). AtriCure also alleged that ZenoMed had conspired with Meng and Med-Zenith to steal its intellectual property.

With AtriCure's arbitration pending against ZenoMed, Meng and Med-Zenith sought to stay the company's federal lawsuit against them under the Federal Arbitration Act. While Meng and Med-Zenith were not parties to the Distribution Agreement between AtriCure and ZenoMed, they argued that they could benefit from the agreement's arbitration clause under equitable-estoppel and agency theories. The district court denied their motion.

The court later granted a preliminary injunction barring Meng and Med-Zenith from selling products similar to AtriCure's. We have since affirmed the preliminary injunction. See AtriCure, Inc. v. Meng , 842 F. App'x 974, 979–85 (6th Cir. 2021).

This appeal concerns the antecedent arbitration question: Should the district court have stayed AtriCure's suit against Meng and Med-Zenith pending arbitration? The Federal Arbitration Act gives us jurisdiction over the court's denial of a stay. 9 U.S.C. § 16(a)(1)(A) ; Arthur Andersen LLP v. Carlisle , 556 U.S. 624, 627, 129 S.Ct. 1896, 173 L.Ed.2d 832 (2009). We generally review such a denial de novo. See Albert M. Higley Co. v. N/S Corp. , 445 F.3d 861, 863 (6th Cir. 2006). But Meng and Med-Zenith raise equitable-estoppel claims on appeal. A circuit split exists over whether courts should review the denial of such an equitable claim de novo or for an abuse of discretion. See Lenox MacLaren Surgical Corp. v. Medtronic, Inc. , 449 F. App'x 704, 707 (10th Cir. 2011) (citing cases). We need not take sides in this debate. Even under de novo review, the district court correctly rejected Meng and Med-Zenith's estoppel claims.

II

A

Meng and Med-Zenith seek to stay this suit based on the Distribution Agreement's arbitration clause. But they did not enter into the agreement. So we must consider when nonparties to a contract may nevertheless enforce its arbitration requirement. Our answer starts with basic arbitration rules. The Federal Arbitration Act requires a federal court to stay an action if a plaintiff has sued on an "issue referable to arbitration" under a written contract. 9 U.S.C. § 3. Because the availability of a stay turns on whether an enforceable arbitration contract covers the plaintiff's claims, this "stay" question implicates the Act's main provision governing the validity of arbitration contracts: 9 U.S.C. § 2. See New Prime Inc. v. Oliveira , ––– U.S. ––––, 139 S. Ct. 532, 537–38, 202 L.Ed.2d 536 (2019).

Section 2 makes covered arbitration agreements "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. This language creates "a body of federal substantive law of arbitrability[.]" 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). One might have read it to adopt a uniform federal test that uses the common law of contracts as a guide to whether a "valid" or "enforceable" arbitration agreement exists (analogous to the uniform federal test tied to the common law of agency that guides whether a person is an "employee" under a federal statute using that term). Cf. Nationwide Mut. Ins. Co. v. Darden , 503 U.S. 318, 322–23, 112 S.Ct. 1344, 117 L.Ed.2d 581 (1992). But the Court has not read § 2 ’s language in this way. It has instead held that...