Jpd, Inc. v. Chronimed Holdings, Inc.

• Decision Date: 22 August 2008
• Docket Number: No. 07-4427.,07-4427.
• Citation: 539 F.3d 388
• Parties: JPD, INC., d/b/a Northland Medical Pharmacy; James P. DiCello, Individually and on behalf of his minor child Nicholas DiCello; Alicia DiCello; Gina DiCello, Plaintiffs-Appellees, v. CHRONIMED HOLDINGS, INC., Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

539 F.3d 388

JPD, INC., d/b/a Northland Medical Pharmacy; James P. DiCello, Individually and on behalf of his minor child Nicholas DiCello; Alicia DiCello; Gina DiCello, Plaintiffs-Appellees, v. CHRONIMED HOLDINGS, INC., Defendant-Appellant.

No. 07-4427.

United States Court of Appeals, Sixth Circuit.

Argued: April 24, 2008.

Decided and Filed: August 22, 2008.

ARGUED: Richard A. Cirillo, King & Spalding, New York, New York, for Appellant. James D. Curphey, Porter, Wright, Morris & Arthur, Columbus, Ohio, for Appellees. ON BRIEF: Richard A. Cirillo, King & Spalding, New York, New York, Alexander M. Andrews, Rebecca B. Jacobs, Ulmer & Berne, Columbus, Ohio, for Appellant. James D. Curphey, Kyle T. Shaw, Porter, Wright, Morris & Arthur, Columbus, Ohio, for Appellees.

Before: SUHRHEINRICH, CLAY, and COOK, Circuit Judges.

OPINION

COOK, Circuit Judge.

In late 2005, Defendant Chronimed Holdings bought Northland Pharmacy from Plaintiff James P. DiCello. Chronimed paid DiCello twelve million dollars up front and promised additional cash if Northland's earnings over the next year hit a benchmark. The parties agreed to arbitrate any dispute over the "calculation" of Northland's earnings and "all issues having a bearing on such dispute."

When Chronimed later informed DiCello that it would not pay the added cash because Northland's earnings failed to reach the benchmark, DiCello sued, claiming that Chronimed owed the additional payment because the earnings target would have been met had Chronimed operated the business as the contract promised. Chronimed promptly moved the district court to compel arbitration, but the district court held that Chronimed waived that contractual right through its pre-litigation conduct. Because we disagree, and because we find that DiCello's claims fall within the scope of the contract's arbitration clause, we vacate and remand with instructions to compel arbitration.

I

In the early 1980s, DiCello, through his company, JPD Inc., opened Northland Medical Pharmacy in Columbus, Ohio. As a "specialty pharmacy," Northland differed from the average drugstore in that it specialized in selling drugs and injectable therapies needed to treat chronic, complex diseases such as cancer and multiple sclerosis. After twenty years of growth, Northland's sales in 2004 exceeded twenty million dollars.

Around that time, Northland caught the eye of Chronimed Holdings, which operates a national network of specialty pharmacies. Seeking to augment its network, Chronimed entered into talks with DiCello to purchase Northland.

In October 2005, the parties struck a deal. Principally in exchange for twelve million dollars, Chronimed acquired full ownership of Northland. But Chronimed did not want DiCello to merely turn over the keys and leave, taking with him his valuable operations expertise. Instead, it negotiated an employment agreement that kept DiCello at Northland for two years after the sale. DiCello agreed to help run Northland until the end of 2006 and planned to transition to an informal business-development role afterwards.

To align their interests during DiCello's holdover tenure, and as part of arriving at a fair purchase price, Chronimed agreed to pay DiCello an "additional purchase price payment" based on Northland's 2006 earnings. Specifically, Chronimed promised DiCello that if Northland's EBITDA— earnings before interest, taxes, depreciation, and amortization—exceeded $2.7 million, DiCello would receive the excess. To ensure DiCello a fair shot at earning the additional payment, Chronimed also committed to maintaining Northland's prior business and employment practices, as well as expanding investment in some areas.

The mechanics of the contract worked as follows: Chronimed promised to promptly calculate Northland's earnings at the end of 2006. It was to then send DiCello its EBITDA calculation for the year, accompanied by financial statements, supporting documents, and an audit certificate. If DiCello disagreed with Chronimed's calculation, he had the right to lodge an objection within fifteen days, setting forth "in reasonable detail" the basis for his disagreement. At that point, the parties would undertake a good-faith effort to resolve the dispute. If DiCello continued to "disagree with [Chronimed's] calculation of [Northland's] EBITDA," the parties agreed to refer the dispute, and all related issues, to an "accounting referee"—the accounting firm KPMG.

Relations between the parties soured soon after the sale. DiCello chafed at Chronimed's operating decisions that he felt hurt Northland's performance (and his ability to earn the additional payment). For example, DiCello believed that Chronimed's reduction of Northland's sales and marketing budget, in violation of its promise to increase it, crippled his push to boost HIV-and transplant-drug profits.

At year's end, Chronimed notified DiCello that Northland—with $1.6 million in EBITDA, by its calculation—fell short of the earnings target. Using the arbitration procedure set forth in § 2.3(b) of the Purchase Agreement, DiCello objected to Chronimed's calculation, complaining that Chronimed depressed Northland's earnings by shortchanging some aspects of the operations and poor decision-making.

Chronimed's response letter to DiCello of July 6, 2007, disputed his allegations and took the position that his objection failed to contest the company's EBITDA calculation in sufficient detail. See Purchase Agreement § 2.3(b) (requiring DiCello's objection to "be set forth in reasonable detail"). Nonetheless, the company invited DiCello to meet to "discuss this matter with a view toward an amicable resolution."

A few days later, DiCello sued Chronimed, demanding an accounting plus damages, claiming breach of contract, promissory estoppel, and unjust enrichment. Chronimed moved the district court to stay the suit and compel arbitration. The district court denied that request, finding that Chronimed waived its right to invoke arbitration by its July 6 response letter to DiCello. With a stay from the district court, Chronimed now appeals the denial of its motion. See 9 U.S.C. § 16 (authorizing immediate appeals from denials of motions to compel arbitration).

II

A

Although the district court's decision grounded on waiver assumed that this dispute is arbitrable, our de novo review requires that we first confirm arbitrability determining whether "a valid agreement to arbitrate exists between the parties and that the specific dispute falls within the substantive scope of the agreement." Javitch v. First Union Sec., Inc., 315 F.3d 619, 624 (6th Cir.2003) (citing AT & T Techs. v. Commc'ns Workers of Am., 475 U.S. 643, 649, 106 S.Ct. 1415, 89 L.Ed.2d 648 (1986)).

The Purchase Agreement at § 2.3(b) reads:

If Sellers [DiCello and family's] Representative disagrees with Buyer [Chronimed's] calculation of the Company [Northland's] EBITDA, Sellers' Representative shall advise the Buyer in writing. ... In the event Buyer and Sellers' Representative are unable to resolve such dispute within 15 Business Days after delivery of the Objection Notice ... such dispute shall be submitted to, and all issues having a bearing on such dispute shall be resolved by the Accounting Referee.... The Accounting Referee's resolution of such dispute shall be final, conclusive and binding on the parties.

Because the parties agree this is a valid arbitration agreement, we need answer only one arbitrability question: do DiCello's claims against Chronimed fall within the agreement's scope?

Seeking to avoid arbitration, DiCello urges us to answer no. As he sees it, § 2.3(b) covers only disputes over Chronimed's actual calculation of Northland's earnings, not complaints regarding failed contractual commitments to maximize earnings, including Chronimed's failing "to [reasonably] maintain the staffing of the company" and to "hire an additional salesperson to support the growth of Northland Pharmacy." Purchase Agreement §§ 6.7, Annex IV. Because his claims do not center on Chronimed's math, DiCello argues that arbitration is inappropriate.

We would find DiCello's argument convincing, except that § 2.3(b) covers not only disputes over Chronimed's EBITDA calculation, but also "all issues having a bearing on such dispute." Given the structure of the parties' agreement, that extra language is pivotal. All of DiCello's claims seek but one thing: the additional purchase price payment. The right to receive that additional payment hinged solely on Chronimed's bottom line—the EBITDA calculation. To the extent that Chronimed's business practices depressed Northland's EBITDA, as DiCello alleges, those practices "ha[d] a bearing on" Chronimed's EBITDA calculation. Fairly read, the arbitration provision encompasses DiCello's business-practice complaints, as well as those focused on pure accounting issues. While we agree that this interpretation is not the only plausible one, the law requires us to resolve ambiguity "concerning the scope of arbitrable issues ... in favor of arbitration." NCR Corp. v. Korala Assocs., 512 F.3d 807, 813 (6th Cir.2008) (internal citation and quotation marks omitted). Because we cannot say with "assurance" that the arbitration clause here does not cover the claims DiCello's complaint raises, we must agree with Chronimed that this dispute is arbitrable. Masco Corp. v. Zurich Am. Ins. Co., 382 F.3d 624, 627 (6th Cir.2004).

B

Having decided that DiCello's claims fall within the scope of the parties' agreement to arbitrate, we turn to his alternative argument to avoid the arbitration clause: Chronimed waived its right to invoke arbitration. We read DiCello's waiver posture as having two distinct prongs: 1) Chronimed failed to satisfy a contractual precondition to arbitration and 2) Chronimed's conduct frustrated DiCello's pre-litigation efforts to arbitrate their dispute.

Failure to Satisfy Contractual Precondition to Arbitration. DiCello first contends that...