Iq Prods. Co. v. WD-40 Co.

• Decision Date: 13 September 2017
• Docket Number: No. 16-20595.,16-20595.
• Citation: 871 F.3d 344
• Parties: IQ PRODUCTS COMPANY, Plaintiff–Appellant v. WD–40 COMPANY, Defendant–Appellee
• Court: U.S. Court of Appeals — Fifth Circuit

871 F.3d 344

IQ PRODUCTS COMPANY, Plaintiff–Appellant

v.WD–40 COMPANY, Defendant–Appellee

No. 16-20595.

United States Court of Appeals, Fifth Circuit.

Filed September 13, 2017

Nicholas A. Gravante, Jr., Esq., David A. Barrett, Karen Chesley, Boies, Schiller & Flexner, L.L.P., New York, NY, Warren W. Harris, Bracewell, L.L.P., Houston, TX, for Plaintiff–Appellant.

David J. Noonan, Esq., Ethan Thomas Boyer, Esq., Genevieve Marie Ruch, Noonan Lance Boyer & Banach, L.L.P., San Diego, CA, Robin C. Gibbs, Jennifer Horan Greer, Gibbs & Bruns, L.L.P., Houston, TX, Carl D. Kulhanek, Jr., Esq., Hagans, Montgomery & Rustay, P.C., Houston, TX, David Wayne Medack, Heard & Medack, Houston, TX, for Defendant–Appellee.

Before HIGGINBOTHAM, GRAVES, and HIGGINSON, Circuit Judges.

STEPHEN A. HIGGINSON, Circuit Judge:

Plaintiff–Appellant IQ Products Co. sued Defendant–Appellee WD–40 Co., and WD–40 filed a motion to compel arbitration. Over IQ's objections, the district court granted the motion, finding that the parties intended to arbitrate the "gateway issue" of whether their claims were arbitrable. After prevailing in arbitration, WD–40 filed a motion to confirm its award. IQ filed a motion to vacate the award on the ground that the arbitrators had exceeded their authority because the claims were not arbitrable. The district court denied IQ's motion to vacate and granted WD–40's motion to confirm. IQ appealed, and we now affirm.

I

WD–40 is a widely used household lubricant often packaged in aerosol cans. WD–40 Company produces a lubricant concentrate and develops specifications for the chemical formulas, packaging, and manufacturing of its products, but uses independent contract packagers to manufacture the products according to those specifications. In 1992, IQ Products Company, a longtime manufacturer of aerosol and non-aerosol consumer products, began serving as a contract packager for WD–40 branded products.

In 1996, WD–40 began to develop a new WD–40 formula using carbon dioxide as the propellant rather than propane/butane. Around the same time, WD–40 proposed that it and IQ enter into a written contract concerning WD–40 products. IQ had concerns about engineering challenges associated with replacing the low-pressure propane/butane propellant with a high-pressure carbon–dioxide propellant. IQ described its concerns in a letter from IQ's Chief Executive Officer, Yohanne Gupta, about negotiation of the proposed agreement:

As I am not aware of the extent of research and development work which WD–40 may have conducted already for the new formula, or the research and development work which WD–40 intends to conduct henceforth, and as I am not aware of the new specifications for the WD–40 product, I suggest that this Agreement be executed after this information is established. Otherwise, my agreeing to the Agreement at present will clearly not include the scope of work, cost of product, and IQ's responsibilities for the new formula WD–40 products.

IQ requested that the parties meet to discuss IQ's concerns.

At the parties' meeting on April 10, 1996, IQ agreed to execute the Manufacturing and License and Product Purchase Agreement (the "1996 Agreement"), but added a handwritten notation expressly limiting the definition of the "Product" to which the agreement applied to "a penetrating, lubricating spray product identified and labeled ‘WD–40’ based on propane/butane-propelled formulation and specifications." This revision was initialed by both parties and dated April 10, 1996, the same date the 1996 Agreement was executed.

The 1996 Agreement is the only contract between the parties that contains an arbitration clause. This clause provides:

Any controversy or claim arising out of, or related to this Agreement, or any modification or extension thereof, shall be settled by arbitration in accordance with the Arbitration Rules of the American Arbitration Association ....

The 1996 Agreement also includes an integration clause, which states that the agreement "may be amended or modified only by a written instrument signed by an officer of both parties."

After receiving WD–40's assurances that it had performed extensive testing of the carbon dioxide-based formula, IQ began manufacturing WD–40 products with that formula and new specifications. The parties did not consider executing any other written agreement until 2011.

In 2011, WD–40 issued a Request for Proposal (RFP) to restructure its supply-chain business model and asked its packagers—including IQ—to bid for long-term supply agreements. WD–40 selected IQ's bid in July 2011, and gave written notice of its intent to terminate the 1996 Agreement to allow the parties to negotiate a new long-term agreement.

During the parties' negotiations of the new long-term agreement, IQ informed WD–40 that an internal audit had revealed a problem with WD–40's packaging specifications. IQ recommended that WD–40 address the alleged problem by revising its design and specifications. IQ also expressed concerns about WD–40's quality control specifications and told WD–40 that it would need to raise prices to account for increased costs and expenses.

WD–40 did not agree with IQ's recommendations or proposed price increases, and negotiations over the long-term agreement broke down. In May 2012, WD–40 terminated the parties' business relationship.

II

IQ sued WD–40 on May 31, 2012 seeking over $40 million. The operative complaint alleged breach of contract and multiple tort claims in connection with WD–40's terminating the parties' business relationship. Specifically, IQ claimed that WD–40 breached the "Long–Term Agreement"—which IQ alleged the parties entered into when WD–40 accepted IQ's RFP bid in July 2011.

WD–40 filed an answer that included counterclaims and a motion to compel arbitration pursuant to the 1996 Agreement's arbitration clause. Over IQ's objections, the district court determined that the parties agreed to have the issue of arbitrability of the parties' dispute decided by the arbitrator and compelled arbitration, staying the case pending the arbitrator's decision on arbitrability.

An independent arbitrator determined that both parties' claims were arbitrable, and a three-arbitrator panel denied IQ's request for a redetermination of arbitrability. However, the panel allowed the parties to present evidence regarding arbitrability during the hearing and reserved the right to consider its jurisdiction in the final decision. Several months later, the arbitration panel issued an interim order and again concluded that all of the parties' claims were arbitrable. The panel issued a final arbitration award in favor of WD–40 on November 6, 2015.

WD–40 moved to confirm the arbitration award in the district court. IQ filed a response and a motion to vacate the arbitration award, arguing that the arbitration panel lacked jurisdiction to arbitrate its claims. The district court granted WD–40's motion to confirm the arbitration award and denied IQ's motion to vacate. IQ appealed from both the January 10, 2013 order compelling arbitration and the August 25, 2016 final judgment.

III

We review de novo a district court's ruling on a motion to compel arbitration. Janvey v. Alguire , 847 F.3d 231, 240 (5th Cir. 2017) ; Kubala v. Supreme Prod. Servs. Inc. , 830 F.3d 199, 201 (5th Cir. 2016). Likewise, we also review de novo a district court's confirmation of an arbitration award. Petrofac, Inc. v. DynMcDermott Petroleum Operations Co. , 687 F.3d 671, 674 (5th Cir. 2012). The district court's factual findings, however, are reviewed for clear error. First Options of Chi., Inc. v. Kaplan , 514 U.S. 938, 947–49, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995) ; Janvey , 847 F.3d at 240.

IV

IQ argues that the district court erred in granting the motion to compel arbitration on the issue of arbitrability. According to IQ, the district court should have decided arbitrability and none of the claims at issue in this dispute is arbitrable.

A

In Kubala v. Supreme Production Services, Inc. , we outlined the framework for determining whether to submit the issue of arbitrability to arbitration. 830 F.3d at 201–02 ; see also Reyna v. Int'l Bank of Commerce , 839 F.3d 373, 378 (5th Cir. 2016). First, the court must determine "whether the parties entered into any arbitration agreement at all ." Kubala , 830 F.3d at 201. This first step is a question of contract formation only—did the parties form a valid agreement to arbitrate some set of claims. Id. at 201–02. If the court finds there is a valid agreement to arbitrate, the second step is limited: the court must determine whether the agreement contains a valid delegation clause—"that is, if it evinces an intent to have the arbitrator decide whether a given claim must be arbitrated." Id. at 202. "Although there is a strong federal policy favoring arbitration, ‘this federal policy favoring arbitration does not apply to the determination of whether there is a valid agreement to arbitrate between the parties.’ " Will–Drill Res., Inc. v. Samson Res. Co. , 352 F.3d 211, 214 (5th Cir. 2003) (quoting Fleetwood Enters. Inc. v. Gaskamp , 280 F.3d 1069, 1073 (5th Cir. 2002) ). "Courts should not assume that the parties agreed to arbitrate arbitrability unless there is ‘clea[r] and unmistakabl[e]’ evidence that they did so." First Options, 514 U.S. at 944, 115 S.Ct. 1920 (alterations in original) (quoting AT & T Techs., Inc. v. Commc'ns Workers , 475 U.S. 643, 649, 106 S.Ct. 1415, 89 L.Ed.2d 648 (1986) ).

If the court finds that there is "clear and unmistakable" evidence that the parties intended to arbitrate arbitrability, and, thus, that there is a valid delegation clause, "the motion to compel arbitration should be granted in almost all cases." Kubala , 830 F.3d at 202. In some cases, however, the argument that a particular dispute is covered by the arbitration agreement will be so untenable that the district court may decide the "gateway" issue of arbitrability despite a valid delegation clause. Douglas v. Regions Bank , ...