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U.S. Nutraceuticals, LLC v. Cyanotech Corp.

United States Court of Appeals, Eleventh Circuit

October 30, 2014

U.S. NUTRACEUTICALS, LLC, a Florida limited liability corporation, d.b.a. Valensa International, Plaintiff-Appellee,
v.
CYANOTECH CORPORATION, a Nevada corporation, Defendant-Appellant

Appeal from the United States District Court for the Middle District of Florida. D.C. Docket No. 5:12-cv-00266-WTH-TRL.

For U.S. NUTRACEUTICALS, LLC, Plaintiff - Appellee: Robert W. Thielhelm, Jr., James Vincent Etscorn, Joe Lee Fore, Jr., Baker & Hostetler, LLP, ORLANDO, FL.

For CYANOTECH CORPORATION, Defendant - Appellant: William Aaron Daniel, Kula & Samson, LLP, AVENTURA, FL; Elliot Burt Kula, Kula & Associates, PA, NORTH MIAMI, FL; John Armando Boudet, Roetzel & Andress, LPA, ORLANDO, FL.

Before WILSON, WILLIAM PRYOR and ROSENBAUM, Circuit Judges. WILSON, Circuit Judge, dissenting.

OPINION

WILLIAM PRYOR, Circuit Judge

We must decide in this appeal whether a district court erred when it denied a motion to compel arbitration even though

Page 1309

the parties expressly stated that the rules of the American Arbitration Association governed their arbitration agreement. Cyanotech Corporation, a company that develops natural products made with microalgae, moved to compel arbitration after Valensa, its competitor, sued Cyanotech for tortious interference with contract and breach of a confidentiality agreement. Cyanotech argued that Valensa had to arbitrate, not litigate, those allegations based on arbitration provisions contained in two contracts between the parties. But the district court denied that motion. Because the parties clearly and unmistakably incorporated the rules of the Association into their arbitration provisions, the district court erred when it refused to allow an arbitrator to decide whether their dispute is arbitrable under one of the parties' contracts. See Terminix Int'l Co. v. Palmer Ranch Ltd. P'ship, 432 F.3d 1327, 1332 (11th Cir. 2005). We reverse and remand for the district court to compel arbitration.

I. BACKGROUND

Valensa and Cyanotech entered into two contracts, in which they agreed that Cyanotech would sell a species of algae called Haematococcus pluvialis to Valensa. Valensa used that algae to extract an antioxidant compound, astaxanthin, which is a central ingredient of its nutritional supplements. On November 2, 2007, the two entered into the first contract, which was effective through November 2, 2010. Then on November 1, 2010, they entered into the second contract, which was effective through December 31, 2012.

Both contracts contained nearly identical confidentiality provisions that forbade either party from disclosing confidential and proprietary information without the other party's consent. But the confidentiality provision in the 2010 contract added an additional provision, which allowed a party to litigate any breach of the confidentiality agreement:

Each Party to this Agreement recognizes that disclosure of the other Party's confidential and proprietary information may cause irreparable damage to the non-disclosing Party. Unauthorized disclosure of a Party's confidential information shall constitute a material breach of this Agreement and is cause for termination of the Agreement by the non-disclosing Party. The non-disclosing Party may seek all remedies available by law, including injunctive relief, and may pursue any such action in a court of competent jurisdiction . . . .

Both contracts also contained arbitration provisions that required the arbitration of certain disputes under the rules of the Association, but these arbitration provisions differed in one significant respect. The arbitration provision in the 2007 contract mandated the arbitration of any dispute that arose under that contract:

The parties agree to resolve any dispute, controversy or claim that arises hereunder through good faith discussions and written correspondence, each in good faith attempting to understand the other's position and to resolve the matter amicably. If thereafter, a party at its sole discretion determines that any such dispute cannot thus be resolved, such dispute shall be subject to binding arbitration in Los Angeles, CA under the auspices and rules of the American Arbitration Association by a single arbitrator.

But the arbitration provision in the 2010 contract contained a carve-out for any dispute that related to the breach of confidentiality provision:

The Parties agree to resolve any dispute, controversy or claim that arises hereunder through good faith discussions

Page 1310

and written correspondence, each in good faith attempting to understand the other's position and to resolve the matter amicably. If thereafter, a Party at its sole discretion determines that any such dispute cannot be so resolved, the dispute, other than a dispute relating to breach of the confidentiality provision of this Agreement, shall be subject to final and binding, arbitration by a single arbitrator in the State of Washington under the auspices and rules of the American Arbitration Association.

At some point after Cyanotech and Valensa executed the first contract, but before executing the second, Valensa initiated another lucrative business relationship with a third company, Mercola. In October 2010, the chief executive officer of Valensa and a principal of Mercola appeared together in YouTube videos that discussed nutritional supplements. That same month, Valensa and Mercola announced a licensing and supply agreement for a health product containing astaxanthin. Valensa then began supplying Mercola with a different astaxanthin product containing another ingredient, perilla, in March 2011.

Cyanotech also had dealings with Mercola. In September 2010, the Vice President of Sales and Marketing at Cyanotech sent an email to Mercola discussing its microalgae products, including astaxanthin. He offered to supply astaxanthin to Mercola and sent " a care package with samples and literature" to Mercola.

In February 2012, Mercola informed Valensa that it planned to end its relationship with Valensa and would instead purchase the astaxanthin product directly from Cyanotech. Mercola explained that Cyanotech offered lower prices, and Valensa now contends that Cyanotech approached Mercola and offered Mercola discounted prices if it purchased directly from Cyanotech. Valensa sent a letter to Cyanotech and requested that Cyanotech cease any business dealings with Mercola. When Cyanotech failed to do so, Valensa sued Cyanotech in federal court.

Valensa's complaint alleged two causes of action against Cyanotech: tortious interference with its business relationship with Mercola and breach of the confidentiality agreement in the 2010 contract. The complaint alleged that Cyanotech interfered with the Valensa-Mercola relationship by coaxing Mercola to buy directly from Cyanotech after Cyantoech revealed confidential information that it had learned during its dealings with Valensa. Although the complaint alleged that Cyanotech and Valensa had a business relationship beginning in 2007, it referenced only the 2010 contract and not the 2007 contract.

Cyanotech moved to compel arbitration, but the district court denied that motion. Cyanotech filed a reply brief supporting its motion to compel arbitration, in which Cyanotech cited our precedent in Terminix International Co. But in its order denying the motion to compel arbitration, the district court failed to acknowledge that precedent and reasoned that the carve-out in the 2010 arbitration provision exempted Valensa from arbitrating its dispute.

II. STANDARD OF REVIEW

We review de novo the denial of a motion to compel arbitration by a district court. Bess v. Check Express, 294 F.3d 1298, 1302 (11th Cir. 2002).

III. DISCUSSION

We agree with Cyanotech that the district court should have sent this dispute to arbitration for an arbitrator to decide the question of arbitrability. " [A]rbitrators

Page 1311

derive their authority to resolve disputes only because the parties have agreed in advance to submit their grievances to arbitration." AT & T Tech., Inc. v. Commc'ns Workers of Am., 475 U.S. 643, 648-49, 106 S.Ct. 1415, 1418, 89 L.Ed.2d 648 (1986). " [A]rbitration is a matter of contract," United Steelworkers of Am. v. Warrior & Gulf Nav. Co., 363 U.S. 574, 582, 80 S.Ct. 1347, 1353, 4 L.Ed.2d 1409 (1960), and ordinarily, " the question of arbitrability . . . is undeniably an issue for judicial determination[ ] [u]nless the parties clearly and unmistakably provide otherwise . . . ." AT & T Tech., Inc., 475 U.S. at 649, 106 S.Ct. at 1418. But when parties incorporate the rules of the Association into their contract, they " clearly and unmistakably agree[] that the arbitrator should decide whether the arbitration clause [applies]." Terminix Int'l Co., 432 F.3d at 1332.

Valensa attempts to distinguish our decision in Terminix by arguing that the arbitration clause in that appeal was a broad provision requiring arbitration of all disputes " arising out of or relating to" the contract, id. at 1329 n.1, and here the 2010 arbitration clause contains a carve-out provision for disputes about the breach of the confidentiality provision. Valensa contends that because the arbitration clause in the 2010 contract clearly exempts any claim about breach of confidentiality from arbitration, we would thwart the intent of the parties if we hold that, under Terminix, an arbitrator--and not a court--must decide whether such a claim is arbitrable. We disagree.

Terminix is dispositive. When the parties incorporated into the 2007 contract the rules of the Association, they clearly and unmistakably contracted to submit questions of arbitrability to an arbitrator. Id. at 1332. And here, it cannot be " said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers" this dispute. AT & T Tech., Inc., 475 U.S. at 650, 106 S.Ct. at 1419 (quoting Warrior & Gulf Nav. Co., 363 U.S. at 582-83, 80 S.Ct. at 1353). That is, Cyanotech presented evidence that the alleged wrongdoing began as early as September 2010, during the term of the 2007 contract and not the 2010 contract, which means that the arbitration clause is " susceptible of an interpretation that covers" the dispute. When the district court announced that Valensa could not rely on anything that occurred during the term of the 2007 contract it recognized that the arbitration clause in the 2007 contract is " susceptible of an interpretation ...


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