New River Management Co. v. Henry Schein, Inc.

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
NEW RIVER MANAGEMENT COMPANY, 
L.L.C.,
Plaintiff-Appellee,
v.  No. 00-1946
HENRY SCHEIN, INCORPORATED,
Defendant-Appellant.

Appeal from the United States District Court
for the Western District of Virginia, at Roanoke.
James C. Turk, District Judge.
(CA-00-212-7)
Argued: April 3, 2001
Decided: May 25, 2001
Before WIDENER, WILKINS, and LUTTIG, Circuit Judges.
Affirmed by unpublished per curiam opinion.
COUNSEL
ARGUED: Anthony Francis Troy, MAYS & VALENTINE, L.L.P.,
Richmond, Virginia, for Appellant. Harry Margerum Johnson, III,
HUNTON & WILLIAMS, Richmond, Virginia, for Appellee. ON
BRIEF: James C. Roberts, Alan D. Wingfield, MAYS & VALEN-
TINE, L.L.P., Richmond, Virginia, for Appellant. Jennifer L. McClel-
lan, HUNTON & WILLIAMS, Richmond, Virginia, for Appellee.
2 NEW RIVER MANAGEMENT v. SCHEIN
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).
OPINION
PER CURIAM:
Appellee New River Management Company ("New River") filed
suit against appellant Henry Schein, Inc. ("Schein") for breach of a
stock purchase agreement. Schein now appeals the district court’s
denial of its motion to stay the litigation pending arbitration. We
affirm on the reasoning of the district court.
I.
Schein entered into an agreement (the "Agreement") to acquire
stock in a distributor of pharmaceutical products, Biological & Popu-
lar Culture, Inc., from New River and a third party, Chiron Corpora-
tion ("Chiron"). Schein paid $65 million in "Initial Consideration" to
New River and Chiron, and also agreed to pay up to $75 million in
"Contingent Consideration" over five years.
Section 2.06(a) of the Agreement sets forth a formula for calculat-
ing the contingent consideration due annually, based solely on "the
Gross Profit Percentage, the Threshold Gross Profits and the Current
Year Gross Profits of [Schein] for the immediately preceding fiscal
year." J.A. 30. The Agreement requires Schein to pay seventy percent
of the total contingent consideration to New River and thirty percent
to Chiron on March 15 of each of the five years following the transac-
tion. In addition, Schein is required to provide statements of the fig-
ures used to calculate the contingent consideration, work papers
showing the calculations, and certification by an accounting firm that
the contingent consideration has been computed in accordance with
the formula in Section 2.06(a).
Schein’s first contingent consideration payment was due on March
15, 2000. Schein calculated that it owed approximately $1.2 million
in contingent consideration to Chiron and $2.8 million to New River.
NEW RIVER MANAGEMENT v. SCHEIN 3
In accordance with the Agreement, Schein paid the contingent consid-
eration owed to Chiron and attached the appropriate paperwork sup-
porting the computation. However, believing it had a $10 million
indemnification claim against New River for alleged misrepresenta-
tions in the Agreement, Schein offset New River’s contingent consid-
eration payment by the amount of the indemnification claim, and
accordingly paid no contingent consideration to New River. Schein
claims that the offset was justified because Section 9.03(d) of the
Agreement provides that "any indemnification . . . shall be deemed to
be an adjustment of the Purchase Price," which, in turn, is defined in
Section 1.67 to "consist of the Initial Consideration and the Contin-
gent Consideration." J.A. 12, 56.
New River filed suit alleging that Schein breached the Agreement
by failing to pay contingent consideration or provide the required
paperwork on March 15, 2000. Schein moved to stay the litigation,
arguing in the district court, as it does on appeal, that the Agreement
requires arbitration of any dispute regarding the amount of contingent
consideration due. The district court denied Schein’s motion, and this
appeal followed.
II.
The Federal Arbitration Act, 9 U.S.C. § 1 et seq., "embodies a fed-
eral policy favoring arbitration" of disputes. Drews Distrib., Inc. v.
Silicon Gaming, Inc., No. 00-1643, 2001 WL 305659 (4th Cir. Mar.
29, 2001). Nevertheless, "arbitration is a matter of contract and a
party cannot be required to submit to arbitration any dispute which he
has not agreed so to submit." AT&T Techs. v. Communications Work-
ers of Am., 475 U.S. 643, 648 (1986) (internal citations omitted).
Thus, "the first task of a court" asked to stay litigation pending arbi-
tration of a dispute "is to determine whether the parties agreed to arbi-
trate that dispute." Mitsubishi Motors Corp. v. Soler Chrysler-
Plymouth, Inc., 473 U.S. 614, 626 (1985).
Schein argues that an arbitration clause governing the instant dis-
pute is found in Section 2.06(b), which provides, in pertinent part:
On or before March 15 of each of 2000, 2001, 2002, 2003
and 2004, the Purchaser shall prepare and deliver to the
4 NEW RIVER MANAGEMENT v. SCHEIN
Sellers a statement (showing in reasonable detail the calcu-
lations) of the Gross Profits Percentage, the Threshold Gross
Profits and the Current Year Gross Profits of the Purchaser
for the immediately preceding fiscal year and the amount of
the Contingent Consideration payable in respect of such
year, together with a certificate from the Purchaser’s chief
financial officer and a confirmation from BDO Seidman
LLP or another nationally recognized independent account-
ing firm to the effect that such statements have been pre-
pared and such amount computed in accordance with this
Agreement including Section 2.06 and Schedule 1.27. . . .
If either Seller shall have any objection to either of such
statements, New River . . . shall deliver to Purchaser a writ-
ten notice describing in detail its objection within 30 days
after receiving such statements. If New River does not
deliver such notice to the Purchaser within such 30-day
period, the Purchaser’s statement . . . [of the] Contingent
Compensation then payable shall be final and binding. The
Purchaser and the Sellers’ Representative shall use their rea-
sonable best efforts to resolve any such objections. If a final
resolution of such objections is not achieved within 15 days
after the Purchaser has received a notice of objections, the
Purchaser and the Sellers’ Representative will jointly select
a nationally recognized independent accounting firm mutu-
ally acceptable to them to resolve any remaining objections.
. . . The accounting firm so selected shall, upon a review of
the statements and work papers presented by the Purchaser
and New River’s objections thereto, resolve in accordance
with this Section 2.06 and Schedule 1.27 any such objec-
tions that have not been resolved by the Purchaser and the
Sellers’ Representative in writing as promptly as practica-
ble after such firm’s selection and in any event within 45
days of its selection. . . .
J.A. 29-30 (emphasis added).
The district court held that Section 2.06(b) constitutes an enforce-
able arbitration clause because it calls for an independent accountant
to "resolve any . . . objections" to the computation of contingent con-
sideration due. J.A. 181 (emphasis added). See also McDonnell Doug-
NEW RIVER MANAGEMENT v. SCHEIN 5
las Fin. Corp. v. Pennsylvania Power & Light Co., 858 F.2d 825, 830
(2d Cir. 1988) (explaining that a provision constitutes an arbitration
clause if its language "manifests an intention by the parties to submit
certain disputes to a specified third party for binding resolution");
Butler Prods. Co. v. Unistrut Corp., 367 F.2d 733, 734-36 (7th Cir.
1966) (treating as an arbitration clause a provision that required the
submission of disputes to an accounting firm for resolution). More-
over, the district court concluded that Section 2.06(c) makes the reso-
lution of the accountant final and binding since it requires the
contingent consideration to be paid within "five days after resolution
of the objections pursuant to Section 2.06(b)." J.A. 30.
Despite holding that Section 2.06(b) is an arbitration clause, how-
ever, the district court denied Schein’s motion to stay this litigation
because it concluded that Section 2.06, by its terms and structure, pro-
vides for arbitration only of disputes over the computation of contin-
gent consideration pursuant to the formula in Section 2.06(a). The
arbitration clause at issue is not the type of broad provision that "re-
fer[s] all disputes arising out of a contract to arbitration." McDonnell
Douglas, 858 F.2d at 832 (discussing the difference between broad
and narrow arbitration clauses and explaining that a court interpreting
a narrow clause must "consider whether the [dispute at] issue is on its
face within the purview of the clause"). Rather, the narrow scope of
the arbitration clause confines the role of the accountant to "review-
[ing] the statements and work papers presented by [Schein]" and "re-
solv[ing] in accordance with this Section 2.06 and Schedule 1.27 any
. . . objections" raised by New River to the calculation made pursuant
to Section 2.06(a). J.A. 30. Neither the materials submitted to the
accountant for review nor the provisions of the Agreement governing
the accountant’s resolution of disputes contain any reference at all to
indemnification. Thus, the district court held that the arbitration
clause does not compel the arbitration of this case, the resolution of
which depends not on the proper computation under Section 2.06(a),
but on an indemnification claim. J.A. 185.
After reviewing the parties’ briefs and the applicable law, and hav-
ing had the benefit of oral argument, we conclude that the district
court correctly denied the motion to stay, and we affirm on the rea-
soning of the district court. See New River Mgm’t Co. v. Henry
Schein, Inc., No. CA-00-212-7 (W.D. Va. June 27, 2000).
6 NEW RIVER MANAGEMENT v. SCHEIN
CONCLUSION
For the reasons stated herein, we affirm the judgment of the district
court.
AFFIRMED