Polyflow, L.L.C. v. Specialty RTP, L.L.C.

• Decision Date: 30 March 2021
• Docket Number: No. 20-20416,20-20416
• Citation: 993 F.3d 295
• Parties: POLYFLOW, L.L.C., Plaintiff—Appellant, v. SPECIALTY RTP, L.L.C.; John R. Wright, Jr., Defendants—Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

993 F.3d 295

POLYFLOW, L.L.C., Plaintiff—Appellant,

v.SPECIALTY RTP, L.L.C.; John R. Wright, Jr., Defendants—Appellees.

No. 20-20416

United States Court of Appeals, Fifth Circuit.

FILED March 30, 2021

Michelle Shamblin Stratton, Garland Doty Murphy, Smyser Kaplan & Veselka, L.L.P., Jeffrey Potts, AT, Baker Botts, L.L.P., Houston, TX, for Plaintiff-Appellant.

Stephen F. Schlather, John Joseph Edmonds, Edmonds & Schlather, P.L.L.C., Houston, TX, for Defendants- Appellees.

Before Jones, Clement, and Graves, Circuit Judges.

Edith Brown Clement, Circuit Judge:

Polyflow appeals the district court's order denying its motion to compel arbitration with Specialty RTP and its president John Wright. Polyflow claims that Specialty and Wright violated a 2017 Settlement Agreement between the parties, which included a clause requiring arbitration of "any action arising out of" the agreement. Nevertheless, the district court denied Polyflow's motion to compel arbitration in a single-sentence order without analysis. That was error. Applying the strong presumption in favor of arbitrability, we reverse and remand with instructions to order arbitration.

I.

A.

Polyflow manufactures a proprietary pipe called Thermoflex that it sells and installs for customers in the oil and gas industry. John Wright was Polyflow's president from the company's beginning in April 2011 until he resigned in October 2014 to form a competitor, Specialty RTP. In 2015, Polyflow sued Specialty RTP and Wright (collectively, "Specialty") for a host of abuses, including that Specialty allegedly manufactured a pipe identical to Thermoflex and derived from Polyflow's protected and confidential information. In February 2017, the parties settled that suit via the Settlement Agreement.

The meat of that agreement imposed a two-year limitation on Specialty's ability to manufacture any competing pipe of its own but allowed Specialty to purchase pipe from existing vendors. During and after that two-year manufacturing ban, the agreement imposed further limitations on Specialty's use or disclosure of Polyflow's trade secrets. So long as Specialty honored those restrictions, it remained free to independently design and manufacture a competing product. As a safeguard, the parties agreed to hire a neutral pipe expert to inspect Specialty's proposed pipe, compare it with Polyflow's, and adjudicate whether Specialty was, in fact, independently designing its own product.

The agreement specified that the parties would engage the neutral expert from the effective date of the agreement in February 2017 until Christmas Eve 2019. Then, after that end date, the parties agreed to retain the expert to mediate any disputes, unless they mutually agreed to other mediation.

The Settlement Agreement included an arbitration clause, in paragraph C.4, entitled "Governing Law, Arbitration and Jury Waiver." It said: "The sole and exclusive jurisdiction and venue for any action arising out of this Agreement shall be an arbitration in Harris County, Texas." Additionally, the section of the agreement describing the neutral pipe expert, paragraph B.5.c, also addressed arbitration. There, the parties agreed that, if the expert (or another mediator) could not resolve any dispute, an arbitrator would "render a binding, unappealable decision regarding the Parties’ dispute(s)." The agreement added: "For purposes of clarity, the Parties are agreeing that any disputes arising out of or related to this Agreement will be arbitrated and not litigated in a court of law. ..."

B.

In September 2019, Polyflow gave notice to Specialty and to the neutral pipe expert that it was "terminating immediately" the expert, and that Polyflow would "no longer work with" the expert "under the terms of the Settlement Agreement." In that termination letter, Polyflow claimed that the expert had breached his neutrality by writing a letter on behalf of Specialty that the expert knew "would be used to interfere in Polyflow's existing contractual relationship with [a] customer." Polyflow also claimed that the expert had failed to follow the process specified in the agreement in that he "never asked Polyflow for any information on prior projects submitted by Specialty."

On the same day that Polyflow sent the termination letter to the expert, it sent Wright an arbitration demand alleging fraudulent inducement, breach of the Settlement Agreement, trademark infringement, and other federal and Texas statutory and common law violations.

When Specialty resisted arbitration, Polyflow filed this lawsuit in February 2020. Polyflow's original complaint included just two counts: requests for an order compelling Specialty to arbitrate and for an order appointing an arbitrator. Polyflow followed that with a First Amended Complaint ("FAC"), which added seven substantive counts substantially like those in Polyflow's arbitration demand from the previous September. In its FAC, Polyflow said that it "primarily seeks to compel arbitration as set forth in Counts One and Two, but to the extent that the Court finds any of the affirmative causes of action should not be sent to arbitration, alternatively affirmatively asserts, as applicable, Counts Three through Nine."

Specialty moved to dismiss, and Polyflow moved to compel arbitration and to dismiss Specialty's counterclaims. The district court denied Polyflow's motion to compel arbitration without explanation, and Polyflow filed this interlocutory appeal. Our review is de novo. Bowles v. OneMain Fin. Grp. , 954 F.3d 722, 725 (5th Cir. 2020).

II.

We first consider federal court jurisdiction, which Specialty disputes for the first time on appeal. Polyflow concedes that there is no diversity jurisdiction but maintains that the case presents a federal question. See 28 U.S.C. §§ 1331 – 32. We agree.

In Vaden v. Discover Bank , 556 U.S. 49, 129 S.Ct. 1262, 173 L.Ed.2d 206 (2009), the Supreme Court explained the jurisdictional analysis in arbitrability disputes like this one. By way of background, the Court addressed a jurisdictional oddity in the Federal Arbitration Act, 9 U.S.C. §§ 1 – 16. On one hand, the Act established "a national policy favoring arbitration of claims that parties contract to settle in that matter," and § 4 of the Act created the means to enforce an arbitration demand in the federal courts. Id. at 58, 129 S.Ct. 1262 (internal quotations and citations omitted). Indeed, § 4 provides a federal-court remedy in arbitration disputes:

A party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court which, save for such agreement, would have jurisdiction under title 28, ... for an order directing that such arbitration proceed in the manner provided for in such agreement.

But Vaden then went on to point out a wrinkle. "As for jurisdiction over controversies touching arbitration, however, the Act is something of an anomaly in the realm of federal legislation: It bestows no federal jurisdiction but rather requires for access to a federal forum an independent jurisdictional basis over the parties’ dispute." Vaden , 556 U.S. at 59, 129 S.Ct. 1262 (cleaned up).

Thus, based upon the text of § 4, which instructs courts to "assume the absence of the arbitration agreement and determine whether it would have jurisdiction under title 28 without it," the Court endorsed a "look through" jurisdictional analysis. Id. at 62, 129 S.Ct. 1262. (internal quotations omitted). When an arbitration demand is predicated on federal-question jurisdiction, as in this case, the "court may ‘look through’ a § 4 petition to determine whether it is predicated on an action that ‘arises under’ federal law," as required by 28 U.S.C. § 1331. Id. That "look through" analysis does not depend upon the petition's strict language, but upon "the controversy" or "substantive conflict between the parties." Id. at 62–63, 129 S.Ct. 1262. "If ‘looking through’ to the claims involved in the underlying dispute ... shows that the dispute itself ... could have been brought in federal court, then federal jurisdiction lies over the FAA petition." Badgerow v. Walters , 975 F.3d 469, 473 (5th Cir. 2020) (quoting Vaden , 556 U.S. at 62, 129 S.Ct. 1262 ), petition for cert. filed , No. 20-1143 (Feb 12, 2021).

Under that "look through" analysis, we hold that this underlying dispute presents a federal question. Polyflow's arbitration demand included at least three federal statutory claims under the Lanham Act, 15 U.S.C. §§ 1114 and 1125. Against that fact and the Vaden analysis, Specialty's argument that Polyflow did not plead the federal claims until its FAC is unconvincing. What matters is that a federal question—the Lanham Act claims—animated the underlying dispute, not whether Polyflow listed them in its original complaint. As we have said, Vaden "rejected the standard articulation of the well-pleaded complaint rule ordinarily used to analyze federal jurisdiction," and substituted instead, "the so-called ‘look through’ approach." Quezada v. Bechtel OG & C Constr. Servs. , 946 F.3d 837, 841 (5th Cir. 2020). Satisfied of our jurisdiction, we move on.

III.

Our arbitrability analysis is well settled. "First, the court must determine whether the parties agreed to arbitrate the dispute." Will-Drill Res. v. Samson Res. , 352 F.3d 211, 214 (5th Cir. 2003) (citation omitted). That question involves two considerations: "(1) whether there is a valid agreement to arbitrate between the parties; and (2) whether the dispute in question falls within the scope of that arbitration agreement." Id. (citation omitted). If the court finds that the parties agreed to arbitrate, the court typically "must consider whether any federal statute or policy renders the claims nonarbitrable." Id. (citation omitted).

Here, though, Specialty does not dispute that there is a valid agreement. Therefore, we consider only whether the parties’ dispute is covered by the agreement. We begin with a...