Archer and White Sales, Inc. v. Henry Schein, Inco

Case: 16-41674 Document: 00514283638 Page: 1 Date Filed: 12/21/2017
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
Fifth Circuit
No. 16-41674 FILED
December 21, 2017
Lyle W. Cayce
ARCHER AND WHITE SALES, INC., Clerk
Plaintiff-Appellee
v.
HENRY SCHEIN, INC., DANAHER CORPORATION,
INSTRUMENTARIUM DENTAL INC., DENTAL EQUIPMENT LLC, KAVO
DENTAL TECHNOLOGIES LLC, AND DENTAL IMAGING
TECHNOLOGIES CORPORATION,
Defendants-Appellants
Appeals from the United States District Court
for the Eastern District of Texas
Before HIGGINBOTHAM, GRAVES, and HIGGINSON, Circuit Judges.
PATRICK E. HIGGINBOTHAM, Circuit Judge:
Sued by a competitor for antitrust violations, Defendants-Appellants
sought to enforce an arbitration agreement. The magistrate judge granted the
motion to compel arbitration, holding that the gateway question of the
arbitrability of the claims belonged to an arbitrator. The district court
reversed, holding it had the authority to rule on the question of arbitrability
and the claims at issue were not arbitrable. We now affirm.
I.
Five years ago, Plaintiff-Appellee Archer and White Sales, Inc.
(“Archer”), a distributor, seller, and servicer for multiple dental equipment
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manufacturers, brought this suit against Defendant-Appellants Henry Schein,
Inc. and Danaher Corporation, allegedly the largest distributor and
manufacturer of dental equipment in the United States, and certain wholly-
owned subsidiaries of Danaher.
The suit alleges violations of Section 1 of the Sherman Antitrust Act and
the Texas Free Enterprise and Antitrust Act, contending that the Defendants’
activities occurred over the preceding four years and are “continuing”
violations, and seeking both damages (“estimated to be in the tens of millions
of dollars”) and injunctive relief. 1 The district court referred the case to a
United States Magistrate Judge.
Defendants moved to compel arbitration pursuant to a clause in a
contract between Archer and Pelton & Crane, allegedly a Defendant’s
predecessor-in-interest (the “Dealer Agreement”). The arbitration clause reads
as follows:
Disputes. This Agreement shall be governed by the
laws of the State of North Carolina. Any dispute
arising under or related to this Agreement (except for
actions seeking injunctive relief and disputes related
to trademarks, trade secrets, or other intellectual
property of Pelton & Crane), shall be resolved by
binding arbitration in accordance with the arbitration
rules of the American Arbitration Association [(AAA)].
1 Archer alleges that Defendants conspired “to fix prices and refuse to compete with
each other” and to “force their common supplier Danaher and its various subsidiaries to
terminate and/or reduce the distribution territory of their price-cutting distributor Archer
Dental.” It also alleges that the Defendants “carried out their conspiracy through a series of
unlawful activities, including, but not limited to agreements not to compete, agreements to
fix prices, and boycotts.”
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The place of arbitration shall be in Charlotte, North
Carolina.
Following a hearing, the magistrate judge issued a Memorandum Order
holding that: (1) the incorporation of the AAA Rules in the arbitration clause
clearly evinced an intent to have the arbitrator decide questions of
arbitrability; (2) there is a reasonable construction of the arbitration clause
that would call for arbitration in this dispute; and (3) the Grigson equitable
estoppel test, which both sides agree is controlling in their dispute, required
arbitration against both signatories and non-signatories to the Dealer
Agreement. 2
The district court vacated the magistrate judge’s order and held that the
court could decide the question of arbitrability, and that the dispute was not
arbitrable because the plain language of the arbitration clause expressly
excluded suits that involved requests for injunctive relief. The court declined
to reach the question of equitable estoppel. 3
Defendants appealed. 4
II.
We review a ruling on a motion to compel arbitration de novo. 5
“Enforcement of an arbitration agreement involves two analytical steps.” 6
First, a court must decide “whether the parties entered into any arbitration
2 Archer & White Sales, Inc. v. Henry Schein, Inc., No. 2:12-cv-572-JRG-RSP, 2013 WL
12155243 (E.D. Tex. May 28, 2013), vacated, 2016 WL 7157421 (E.D. Tex. Dec. 7, 2016).
3 Archer & White Sales, Inc. v. Henry Schein, Inc., No. 2:12-cv-572-JRG, 2016 WL
7157421, at *9 (E.D. Tex. Dec. 7, 2016).
4 Defendants filed an interlocutory appeal pursuant to 9 U.S.C. § 16(a)(1)(C). See Al
Rushaid v. Nat’l Oilwell Varco, Inc., 757 F.3d 416, 419 (5th Cir. 2014) (“Title 9 U.S.C. section
16(a)(1)(C) provides that a party may seek interlocutory review of an order . . . denying an
application . . . to compel arbitration.”) (internal quotation marks omitted).
5 Kubala v. Supreme Prod. Servs., Inc., 830 F.3d 199, 201 (5th Cir. 2012) (citing Carey
v. 24 Hour Fitness, USA, Inc., 669 F.3d 202, 205 (5th Cir. 2012)).
6 Kubala, 830 F.3d at 201 (5th Cir. 2012).
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agreement at all.” 7 This inquiry is one of pure contract formation, and it looks
only at whether the parties “form[ed] a valid agreement to arbitrate some set
of claims.” 8 The next step is to determine “whether [the dispute at issue] is
covered by the arbitration agreement.” 9 Before this step, however, the court
must answer a third question: “[w]ho should have the primary power to decide’
whether the claim is arbitrable.” 10 This question turns on “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.’” 11
This determination begins the two-step inquiry adopted in Douglas v.
Regions Bank. 12 First, whether the parties “clearly and unmistakably”
intended to delegate the question of arbitrability to an arbitrator. 13 If so, “the
motion to compel arbitration should be granted in almost all cases.” 14 But not
“[i]f the argument that the claim at hand is within the scope of the arbitration
agreement is ‘wholly groundless.’” 15 So Douglas’s second step asks whether
there is a plausible argument for the arbitrability of the dispute. Where there
is no such plausible argument, “the district court may decide the ‘gateway’
issue of arbitrability despite a valid delegation clause.’” 16
7 Id.
8 IQ Prods. Co. v. WD-40 Co., 871 F.3d 344, 348 (5th Cir. 2017).
9 Kubala, 830 F.3d at 201.
10 Id. at 202 (quoting First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 942 (1995)).
11 IQ Prods., 871 F.3d at 348 (quoting Kubala, 830 F.3d at 202).
12 757 F.3d 460, 464 (5th Cir. 2014).
13 “[C]ourts 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
(citing AT&T Technologies, Inc. v. Commc’n Workers of Am., 475 U.S. 643, 649 (1986)).
14 Kubala, 830 F.3d at 202.
15 Douglas, 757 F.3d at 464.
16 IQ Prods., 871 F.3d at 349.
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The parties agree that the Dealer Agreement contained an arbitration
provision, though not whether the arbitration provision applies here. 17
Specifically, they disagree on whether the court or an arbitrator should decide
the gateway question of arbitrability—and relatedly, whether the underlying
dispute is arbitrable at all. We turn to the two-step Douglas test.
A.
We first ask if the parties “clearly and unmistakably” delegated the issue
of arbitrability. 18 Absent a delegation, “the question of whether the parties
agreed to arbitrate is to be decided by the court, not the arbitrator.” 19 “Just as
the arbitrability of the merits of a dispute depends upon whether the parties
agreed to arbitrate that dispute, so the question ‘who has the primary power
to decide arbitrability’ turns upon what the parties agreed about that
matter.’” 20
A contract need not contain an express delegation clause to meet this
standard. An arbitration agreement that expressly incorporates the AAA Rules
“presents clear and unmistakable evidence that the parties agreed to arbitrate
arbitrability.” 21 Under AAA Rule 7(a), “the arbitrator shall have the power to
17 Archer states that, because the Dealer Agreement “unambiguously divides disputes
into two categories”—those within the carve-out and all other disputes—there is no valid
agreement to arbitrate. This argument misconstrues the very first analytical step in
enforcement of an arbitration agreement, which asks “whether the parties entered into any
arbitration agreement at all.” Archer does not appear to argue that there was no arbitration
agreement regarding claims outside the scope of the carve-out. Instead, Archer contends that
the Dealer Agreement is “best construed to express the parties’ intent not to arbitrate this
action seeking injunctive relief.” Thus, we treat Archer’s arguments to this effect as going to
whether the parties agreed to arbitrate this particular dispute.
18 AT&T, 475 U.S. at 649.
19 Id.
20 First Options, 514 U.S. at 943 (internal citations omitted). See also Rent-A-Center,
W., Inc. v. Jackson, 561 U.S. 63, 68–69 (2010) (holding that parties may delegate arbitrability
through an express delegation clause).
21 Petrofac, Inc. v. DynMcDermott Petroleum Operations Co., 687 F.3d 671, 675 (5th
Cir. 2012).
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rule on his or her own jurisdiction, including any objections with respect to the
existence, scope or validity of the arbitration agreement.” 22
By the Dealer Agreement, “[a]ny dispute arising under or related to this
Agreement (except for actions seeking injunctive relief and disputes related to
trademarks, trade secrets, or other intellectual property of [the predecessor]),
shall be resolved by binding arbitration in accordance with the arbitration rules
of the American Arbitration Association.” The parties dispute the relationship
between the carve-out clause—“except for actions seeking injunctive relief and
[intellectual property] disputes”—and the incorporation of the AAA Rules.
The magistrate judge saw three separate parts to the arbitration
provision: (1) a general rule compelling arbitration for any dispute related to
the agreement, (2) an exemption from arbitration for actions seeking injunctive
relief, and (3) a clause incorporating the AAA Rules. 23 On this reading, the
AAA Rules would apply to all disputes arising under the contract, including
those eventually found to fall within the Dealer Agreement’s carve-out. The
district court disagreed, holding that the carve-out clause removed the disputes
from the ambit of both arbitration and the AAA Rules. The district court
distinguished Petrofac, where the agreement at issue “did not contain any
exclusions[;] [r]ather, it was a standard broad arbitration clause.” 24
Defendants argue that Petrofac controls; that, by holding otherwise, the
district court conflated the issue of whether the dispute is arbitrable with the
issue of who decides arbitrability; and that, under the plain language of the
clause, disputes about arbitrability do not fall within the carve-out and thus
22 This version of Rule 7(a) was in effect when the parties signed their agreement. AM.
ARBITRATION ASS’N, COMMERCIAL ARBITRATION RULES AND MEDIATION PROCEDURES (2007),
https://www.adr.org/sites/default/files/Commercial%20Arbitration%20Rules%20and%20Me
diation%20Procedures%20Sept.%201%2C%202007.pdf.
23 Archer, 2013 WL 12155243 at *1.
24 Archer, 2016 WL 7157421, at *7.
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belong to the arbitrator. This court has previously applied Petrofac to
arbitration provisions containing carve-out provisions. In Crawford, we
examined an agreement that incorporated the AAA Rules and preserved the
parties’ ability to seek injunctive relief in the courts. 25 We held—without
directly addressing the relevance of its carve-out provision—that the Crawford
agreement’s incorporation of the AAA Rules constituted “clear and
unmistakable evidence that the parties to the [] Agreement agreed to arbitrate
arbitrability, and so . . . whether the Plaintiffs’ claims are subject to arbitration
must be decided in the first instance by the arbitrator, not a court.” 26
Archer responds that the agreement in Petrofac did not include a carve-
out provision, and the Crawford agreement is distinguishable because it
contained separate clauses incorporating the AAA Rules and creating a carve-
out excluding claims for injunctive relief—specifically, the agreement stated
that the AAA Rules would apply to “[a]ny and all disputes in connection with
or arising out of the Provider Agreement,” and contained a carve-out in a
25 Crawford Prof’l Drugs, Inc. v. CVS Caremark Corp., 748 F.3d 249, 256 (5th Cir.
2014). In that case, the Provider Agreement read, in relevant part:
Any and all disputes in connection with or arising out of the Provider
Agreement by the parties will be exclusively settled by arbitration before a
single arbitrator in accordance with the Rules of the American Arbitration
Association. The arbitrator must follow the rule of Law, and may only award
remedies provided for in the Provider Agreement. . . . Arbitration shall be the
exclusive and final remedy for any dispute between the parties in connection
with or arising out of the Provider Agreement; provided, however, that nothing
in this provision shall prevent either party from seeking injunctive relief for
breach of this Provider Agreement in any state or federal court of law . . . .
Id.
26 Id. at 263. Defendants also point to Oracle, where the Ninth Circuit addressed an
arbitration clause that adopted the UNCITRAL Rules (which also delegate arbitrability
issues to the arbitrator) and a carve-out for certain types of claims. The court rejected the
argument that the carve-out provision bore on the question of arbitrability, stating that such
an argument “conflates the scope of the arbitration clause . . . with the question of who decides
arbitrability.” Oracle Am., Inc. v. Myriad Group A.G., 724 F.3d 1069, 1072–76 (9th Cir. 2013).
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subsequent sentence stating that nothing in the agreement would prevent a
suit seeking injunctive relief in a court of law. 27
Archer argues that, in contrast, the structure of the specific carve-out at
issue here leads to the natural reading that the AAA Rules only apply to the
category of cases that are subject to binding arbitration under the Dealer
Agreement—namely, those outside of the contract’s express carve-out. Archer
further notes that Defendants’ predecessor-in-interest drafted the Dealer
Agreement, and that North Carolina law requires that “[p]ursuant to well[-
]settled contract law principles, the language of [an] arbitration clause should
be strictly construed against the drafter of the clause.” 28
There is a strong argument that the Dealer Agreement’s invocation of
the AAA Rules does not apply to cases that fall within the carve-out. It is not
the case that any mention in the parties’ contract of the AAA Rules trumps all
other contract language. Here, the interaction between the AAA Rules and the
carve-out is at best ambiguous. On one reading, the Rules apply to “[a]ny
dispute arising under or related to [the] Agreement.” On another, the provision
expressly exempts certain disputes and the Rules apply only to the remaining
disputes. We need not decide which reading to adopt here because Douglas
provides us with another avenue to resolve this issue: the “wholly groundless”
inquiry.
B.
Regardless of whether an agreement clearly and unmistakably delegates
the question of arbitrability, the second step in Douglas provides a narrow
27 Crawford, 748 F.3d at 256.
28 T.M.C.S., Inc. v. Marco Contractors, Inc., 780 S.E.2d 588, 597 (N.C. Ct. App. 2015).
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escape valve. If an “assertion of arbitrability [is] wholly groundless,” the court
need not submit the issue of arbitrability to the arbitrator. 29
We have cautioned that the “wholly groundless” exception is a narrow
one and that it “is not a license for the court to prejudge arbitrability disputes
more properly left to the arbitrator pursuant to a valid delegation clause.” 30
“An assertion of arbitrability is not ‘wholly groundless’ if ‘there is a legitimate
argument that th[e] arbitration clause covers the present dispute, and, on the
other hand, that it does not.’” 31 If a court can find “a ‘plausible’ argument that
the arbitration agreement requires the merits of the claim to be arbitrated,”
the wholly groundless exception will not apply. 32
The magistrate judge issued his order before Douglas, and therefore he
did not address the “wholly groundless” exception directly. Instead, he found
that while “[o]n the most superficial level, this lawsuit is clearly an action
seeking injunctive relief since it does seek that relief,” there was also “a
plausible construction [of the Dealer Agreement] calling for arbitration.” 33
Thus, he concluded that “the question of whether the exception for actions
seeking injunctive relief should be limited to actions for an injunction in aid of
arbitration or to enforce an arbitrator’s award should properly be left for the
arbitrator to decide.” 34
The district court, now with Douglas at hand, found the Defendants’
arguments for arbitrability wholly groundless. The court first stated that the
wholly groundless inquiry “necessarily requires the courts to examine and, to
29 Douglas, 757 F.3d at 463 (quoting Agere Systems, Inc. v. Samsung Elecs. Co., 560
F.3d 337, 340 (5th Cir. 2009)).
30 Kubala, 830 F.3d at 202 n.1.
31 IQ Prods., 871 F.3d at 350 (quoting Douglas, 871 F.3d at 463).
32 Kubala, 830 F.3d at 202 n.1.
33 Archer, 2013 WL 12155243, at *1–2.
34 Id. at *2.
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a limited extent, construe the underlying agreement.” 35 It then noted that the
Dealer Agreement’s carve-out language “differs from the standard arbitration
clause suggested by [AAA],” 36 and found that “the phrase ‘except actions
seeking injunctive relief’ is clear on its face—any action seeking injunctive
relief is excluded from mandatory arbitration.” 37 Thus, the provision’s plain
language includes all actions seeking injunctive relief, not a more limited
category of cases. The court declined to “re-write the terms of the Parties’
agreement to accommodate a party—notably the party that drafted the
agreement—that could have negotiated for more precise language,” 38 and held
that the arguments for arbitrability were “wholly without merit based on the
plain language of the arbitration clause itself” and fell squarely within the
Douglas exception. 39
Defendants suggest a limited reading of the “wholly groundless”
exception that would only apply when the contract containing the arbitration
provision has “nothing to do with” the dispute before the court. 40 In Douglas,
35 Archer, 2016 WL 7157421, at *8 (quoting Douglas, 757 F.3d at 463) (internal
quotation marks omitted). This limited inquiry allows the parties to avoid jumping through
hoops to begin arbitration only to be sent directly back to the courthouse. See Douglas, 757
F.3d at 464 (“When [plaintiff] signed the arbitration agreement containing a delegation
provision, did she intend to go through the rigmaroles of arbitration just so the arbitrator can
tell her in the first instance that her claim has nothing whatsoever to do with her arbitration
agreement, and she should now feel free to file in federal court? Obviously not.”).
36 The district court claimed that “[s]uch an intentional drafting effort” deserves
notice. Archer, 2016 WL 7157421, at *5.
37 Id.
38 Id. at *6.
39 Archer, 2016 WL 7157421, at *9. The district court also rejected arguments from
Defendants that Archer failed to “plead” a claim for injunctive relief based on the fact that
Archer had not made any showing on the factors articulated by the Supreme Court in eBay
Inc. v. MercExchange, L.L.C., 547 U.S. 388, 394 (2006). The court held first that the eBay
factors are not pleading requirements, and that in any event, the proper vehicle to argue the
plaintiff is not entitled to relief would be a motion to dismiss under Rule 12. We do not address
the underlying merits of Archer’s claim here because, as Defendants concede, “the issue here
is not whether Archer’s injunctive relief claim fails on the merits.”
40 Douglas, 757 F.3d at 461.
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the plaintiff had signed an agreement with an arbitration provision when she
opened a checking account with Regions Bank that closed less than one year
later. Years later, the plaintiff was involved in an automobile accident, and she
received a $500,000 settlement in subsequent litigation. She then alleged that
her attorney, who banked with Regions, had embezzled that money, and she
brought suit against the bank for negligence and conversion on the theory that
the bank had notice of the embezzlement and failed to report it. Regions moved
to compel arbitration pursuant to the agreement that the plaintiff signed when
she opened the now-closed checking account. This court held that “[t]he mere
existence of a delegation provision in the checking account’s arbitration
agreement . . . cannot possibly bind [the plaintiff] to arbitrate gateway
questions of arbitrability in all future disputes with the other party, no matter
their origin.” 41
Defendants argue that applying the “wholly groundless” exception here
would allow the court to construe the bounds of an arbitration clause before an
arbitrator can do so—effectively obviating the entire purpose of delegating the
gateway question to the arbitrator in the first place; that their arbitrability
arguments are not wholly groundless, pointing to the magistrate judge’s
finding of plausible readings of the arbitration clause that would not exclude
the suit from arbitration; and that doubts about the arbitrability of a claim
should be resolved in favor of arbitration, pursuant to settled federal law.
Defendants urge that “[t]he correct reading of this arbitration clause is
that the parties may come to court seeking injunctive relief at any time . . . but
still must arbitrate any claim for damages.” Defendants further urge the court
should send the damages clause to arbitration, even if it results in “piecemeal
litigation.” In their view, “[t]he correct reading of this arbitration clause is that
41 Id. at 462, 464.
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the parties may come to court seeking injunctive relief at any time . . . but still
must arbitrate any claim for damages.”
Archer counters that the plain language of the clause makes clear that
the parties did not agree to arbitrate actions that involve a request for
injunctive relief, and that any argument to the contrary is wholly groundless.
Archer emphasizes that arbitration agreements are “as enforceable as other
contracts, but not more so,” 42 and states that under North Carolina law, “when
the terms of a contract are plain and unambiguous, there is no room for
construction. The contract is to be interpreted as written and enforced as the
parties have made it.” 43 Archer says the Dealer Agreement clearly
contemplates two categories of disputes—those involving “actions seeking
injunctive relief” and certain intellectual property disputes, and all other
disputes—and that only the latter category must be subject to arbitration.
Archer contends that the clause’s incorporation of “action” prohibits any
piecemeal litigation because “action,” as distinct from “claim,” pertains to all
of the claims in a given case. 44
While Douglas is a recent case, with contours of the “wholly groundless”
exception not yet fully developed, if the doctrine is to have any teeth, it must
apply where, as here, an arbitration clause expressly excludes certain types of
disputes. The arbitration clause creates a carve-out for “actions seeking
injunctive relief.” It does not limit the exclusion to “actions seeking only
injunctive relief,” nor “actions for injunction in aid of an arbitrator’s award.”
Nor does it limit itself to only claims for injunctive relief. Such readings find
no footing within the four corners of the contract. “When the language of a
42See Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 404 n.12 (1967).
43State v. Phillip Morris USA Inc., 685 S.E.2d 85, 91 (N.C. 2009) (internal quotation
marks omitted) (internal citations omitted).
44 An action is “[a] civil or criminal judicial proceeding,” which is “nearly if not quite
synonymous” with suit. BLACK’S LAW DICTIONARY 28–29 (7th ed. 1999).
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contract is clear and unambiguous, effect must be given to its terms, and the
court, under the guise of construction, cannot reject what the parties inserted
or insert what the parties elected to omit.” 45 We see no plausible argument
that the arbitration clause applies here to an “action seeking injunctive relief.”
The mere fact that the arbitration clause allows Archer to avoid arbitration by
adding a claim for injunctive relief does not change the clause’s plain meaning.
“While ambiguities in the language of the agreement should be resolved in
favor of arbitration, we do not override the clear intent of the parties, or reach
a result inconsistent with the plain text of the contract, simply because the
policy favoring arbitration is implicated.” 46
III.
Defendants argue in the alternative that, even if the district court was
correct to decide the issue of arbitrability, it erred in determining that the
complaint was not subject to the arbitration clause. Because we find that
Defendants’ arguments for arbitrability are wholly groundless, we affirm the
district court’s holding that the claims are not arbitrable. Having concluded
that this action is not subject to mandatory arbitration, we need not reach the
question of whether the third parties to the arbitration clause in this case can
enforce such an arbitration clause.
We affirm the district court’s order denying the motions to compel
arbitration.
45 Procar II, Inc. v. Dennis, 721 S.E.2d 369, 371 (N.C. Ct. App. 2012).
46 E.E.O.C. v. Waffle House, 534 U.S. 279, 294 (2002) (emphasis added).
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