     Case: 16-20595    Document: 00514155047     Page: 1   Date Filed: 09/13/2017




        IN THE UNITED STATES COURT OF APPEALS
                 FOR THE FIFTH CIRCUIT
                                                               United States Court of Appeals
                                                                        Fifth Circuit

                                  No. 16-20595                        FILED
                                                              September 13, 2017
                                                                 Lyle W. Cayce
IQ PRODUCTS COMPANY,                                                  Clerk

              Plaintiff - Appellant

v.

WD-40 COMPANY,

              Defendant - Appellee




                 Appeal from the United States District Court
                      for the Southern District of Texas


Before HIGGINBOTHAM, GRAVES, and HIGGINSON, Circuit Judges.
STEPHEN A. HIGGINSON, Circuit Judge:
      Plaintiff-Appellant IQ Products Co. sued Defendant-Appellee WD-40
Co., and WD-40 filed a motion to compel arbitration. Over IQ’s objections, the
district court granted the motion, finding that the parties intended to arbitrate
the “gateway issue” of whether their claims were arbitrable. After prevailing
in arbitration, WD-40 filed a motion to confirm its award. IQ filed a motion to
vacate the award on the ground that the arbitrators had exceeded their
authority because the claims were not arbitrable. The district court denied IQ’s
motion to vacate and granted WD-40’s motion to confirm. IQ appealed, and we
now affirm.
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                                       I
      WD-40 is a widely used household lubricant often packaged in aerosol
cans. WD-40 Company produces a lubricant concentrate and develops
specifications for the chemical formulas, packaging, and manufacturing of its
products, but uses independent contract packagers to manufacture the
products according to those specifications. In 1992, IQ Products Company, a
longtime manufacturer of aerosol and non-aerosol consumer products, began
serving as a contract packager for WD-40 branded products.
      In 1996, WD-40 began to develop a new WD-40 formula using carbon
dioxide as the propellant rather than propane/butane. Around the same time,
WD-40 proposed that it and IQ enter into a written contract concerning WD-
40 products. IQ had concerns about engineering challenges associated with
replacing the low-pressure propane/butane propellant with a high-pressure
carbon–dioxide propellant. IQ described its concerns in a letter from IQ’s Chief
Executive Officer, Yohanne Gupta, about negotiation of the proposed
agreement:
      As I am not aware of the extent of research and development work
      which WD-40 may have conducted already for the new formula, or
      the research and development work which WD-40 intends to
      conduct henceforth, and as I am not aware of the new
      specifications for the WD-40 product, I suggest that this
      Agreement be executed after this information is established.
      Otherwise, my agreeing to the Agreement at present will clearly
      not include the scope of work, cost of product, and IQ’s
      responsibilities for the new formula WD-40 products.

IQ requested that the parties meet to discuss IQ’s concerns.
      At the parties’ meeting on April 10, 1996, IQ agreed to execute the
Manufacturing and License and Product Purchase Agreement (the “1996
Agreement”), but added a handwritten notation expressly limiting the
definition of the “Product” to which the agreement applied to “a penetrating,

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lubricating spray     product identified and      labeled    ‘WD-40’   based    on
propane/butane-propelled formulation and specifications.” This revision was
initialed by both parties and dated April 10, 1996, the same date the 1996
Agreement was executed.
      The 1996 Agreement is the only contract between the parties that
contains an arbitration clause. This clause provides:
      Any controversy or claim arising out of, or related to this
      Agreement, or any modification or extension thereof, shall be
      settled by arbitration in accordance with the Arbitration Rules of
      the American Arbitration Association . . . .

      The 1996 Agreement also includes an integration clause, which states
that the agreement “may be amended or modified only by a written instrument
signed by an officer of both parties.”
      After receiving WD-40’s assurances that it had performed extensive
testing of the carbon dioxide-based formula, IQ began manufacturing WD-40
products with that formula and new specifications. The parties did not consider
executing any other written agreement until 2011.
      In 2011, WD-40 issued a Request for Proposal (RFP) to restructure its
supply-chain business model and asked its packagers—including IQ—to bid
for long-term supply agreements. WD-40 selected IQ’s bid in July 2011, and
gave written notice of its intent to terminate the 1996 Agreement to allow the
parties to negotiate a new long-term agreement.
      During the parties’ negotiations of the new long-term agreement, IQ
informed WD-40 that an internal audit had revealed a problem with WD-40’s
packaging specifications. IQ recommended that WD-40 address the alleged
problem by revising its design and specifications. IQ also expressed concerns
about WD-40’s quality control specifications and told WD-40 that it would need
to raise prices to account for increased costs and expenses.


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      WD-40 did not agree with IQ’s recommendations or proposed price
increases, and negotiations over the long-term agreement broke down. In May
2012, WD-40 terminated the parties’ business relationship.
                                        II
      IQ sued WD-40 on May 31, 2012 seeking over $40 million. The operative
complaint alleged breach of contract and multiple tort claims in connection
with WD-40’s terminating the parties’ business relationship. Specifically, IQ
claimed that WD-40 breached the “Long-Term Agreement”—which IQ alleged
the parties entered into when WD-40 accepted IQ’s RFP bid in July 2011.
      WD-40 filed an answer that included counterclaims and a motion to
compel arbitration pursuant to the 1996 Agreement’s arbitration clause. Over
IQ’s objections, the district court determined that the parties agreed to have
the issue of arbitrability of the parties’ dispute decided by the arbitrator and
compelled arbitration, staying the case pending the arbitrator’s decision on
arbitrability.
      An independent arbitrator determined that both parties’ claims were
arbitrable, and a three-arbitrator panel denied IQ’s request for a
redetermination of arbitrability. However, the panel allowed the parties to
present evidence regarding arbitrability during the hearing and reserved the
right to consider its jurisdiction in the final decision. Several months later, the
arbitration panel issued an interim order and again concluded that all of the
parties’ claims were arbitrable. The panel issued a final arbitration award in
favor of WD-40 on November 6, 2015.
      WD-40 moved to confirm the arbitration award in the district court. IQ
filed a response and a motion to vacate the arbitration award, arguing that the
arbitration panel lacked jurisdiction to arbitrate its claims. The district court
granted WD-40’s motion to confirm the arbitration award and denied IQ’s


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motion to vacate. IQ appealed from both the January 10, 2013 order compelling
arbitration and the August 25, 2016 final judgment.
                                       III
      We review de novo a district court’s ruling on a motion to compel
arbitration. Janvey v. Alguire, 847 F.3d 231, 240 (5th Cir. 2017); Kubala v.
Supreme Prod. Servs. Inc., 830 F.3d 199, 201 (5th Cir. 2016). Likewise, we also
review de novo a district court’s confirmation of an arbitration award. Petrofac,
Inc. v. DynMcDermott Petroleum Operations Co., 687 F.3d 671, 674 (5th Cir.
2012). The district court’s factual findings, however, are reviewed for clear
error. First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 947–49 (1995);
Janvey, 847 F.3d at 240.
                                       IV
      IQ argues that the district court erred in granting the motion to compel
arbitration on the issue of arbitrability. According to IQ, the district court
should have decided arbitrability and none of the claims at issue in this dispute
is arbitrable.
                                        A
      In Kubala v. Supreme Production Services, Inc., we outlined the
framework for determining whether to submit the issue of arbitrability to
arbitration. 830 F.3d at 201–02; see also Reyna v. Int’l Bank of Commerce, 839
F.3d 373, 378 (5th Cir. 2016). First, the court must determine “whether the
parties entered into any arbitration agreement at all.” Kubala, 830 F.3d at 201.
This first step is a question of contract formation only—did the parties form a
valid agreement to arbitrate some set of claims. Id. at 201–02. If the court finds
there is a valid agreement to arbitrate, the second step is limited: the court
must determine 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.” Id. at 202. “Although there is a strong federal policy
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favoring arbitration, ‘this federal policy favoring arbitration does not apply to
the determination of whether there is a valid agreement to arbitrate between
the parties.’” Will-Drill Res., Inc. v. Samson Res. Co., 352 F.3d 211, 214 (5th
Cir. 2003) (quoting Fleetwood Enters. Inc. v. Gaskamp, 280 F.3d 1069, 1073
(5th Cir. 2002)). “Courts 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 (alterations in original) (quoting AT & T
Techs., Inc. v. Commc’ns Workers, 475 U.S. 643, 649 (1986)).
      If the court finds that there is “clear and unmistakable” evidence that
the parties intended to arbitrate arbitrability, and, thus, that there is a valid
delegation clause, “the motion to compel arbitration should be granted in
almost all cases.” Kubala, 830 F.3d at 202. In some cases, however, the
argument that a particular dispute is covered by the arbitration agreement
will be so untenable that the district court may decide the “gateway” issue of
arbitrability despite a valid delegation clause. Douglas v. Regions Bank, 757
F.3d 460, 462–63 (5th Cir. 2014). Accordingly, in Douglas v. Regions Bank, this
court adopted a two-step test stating that the issue of arbitrability must be
submitted to arbitration if (1) the parties “clearly and unmistakably” intended
to delegate the power to decide arbitrability to an arbitrator; and (2) the
assertion of arbitrability is not “wholly groundless.” Id. at 462, 463. Stated
differently, “even if the court finds that the parties’ intent was clear and
unmistakable that they delegated arbitrability decisions to an arbitrator, the
court may make a second more limited inquiry to determine whether a claim
of arbitrability is ‘wholly groundless.’” Id. at 463 (quoting InterDigital
Commc’ns, LLC v. Int’l Trade Comm’n, 718 F.3d 1336, 1346–47 (Fed. Cir.
2013), vacated as moot, 134 S. Ct. 1876 (2014)); see also Kubala, 830 F.3d at
202 & n.1 (explaining that the “wholly groundless” inquiry is a “narrow


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                                       No. 16-20595
exception” to the general rule that a valid delegation clause means that
arbitrability must be arbitrated).
       Here, there is no dispute at the first step in the Kubala framework: the
1996 Agreement contains an arbitration clause, and IQ acknowledges that this
arbitration clause covers some set of claims. The next step is to apply the two-
prong Douglas test.
                                              B
       The first prong of the Douglas test asks whether the parties clearly and
unmistakably intended to delegate the issue of arbitrability to the arbitrator.
Here, IQ waived its challenge to the district court’s conclusion on this prong by
conceding it before the district court. In its motion to vacate the arbitration
award, IQ noted that the district court “considered [the delegation issue] at
length,” and that “IQ does not challenge that aspect of the decision.” Similarly,
in its objections to the magistrate judge’s recommendation on the motion to
vacate, IQ stated that “[s]ince there was a clear delegation of the arbitrability
determination in Douglas, as there is here, the outcome turned on the second
step in the Douglas analysis.” IQ may not argue on appeal what it conceded to
the district court. See Keenan v. Tejeda, 290 F.3d 252, 262 (5th Cir. 2002). 1




       1 Notwithstanding the existence of a delegation provision, IQ argues on appeal that in
determining whether the parties clearly and unmistakably intended to delegate arbitrability
to the arbitrator, “a court must first rule on whether the arbitration clause applies to the
parties’ particular dispute.” IQ focuses on language in the Supreme Court’s opinion in First
Options of Chicago, Inc. v. Kaplan, where the Court explained that “the question ‘who has
the primary power to decide arbitrability’ turns upon what the parties agreed about that
matter.” 514 U.S. at 943 (emphasis in original). IQ argues that the Court’s emphasis on “that”
“indicates that every possible dispute between the parties is not subject to a ruling on
arbitrability by an arbitrator. If a contract does not apply to a particular matter, an
arbitration clause cannot apply to a dispute that does not involve that subject.” IQ’s reliance
on First Options is misplaced. Further context from that opinion makes clear that the phrase
“that matter” refers to the matter of arbitrability, not the particular merits claims. See 514
U.S. at 943 (observing that the question of who decides arbitrability is answered by looking
to whether the parties agreed to submit the question of arbitrability to arbitration). First
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                                            C
      At the second step of the Douglas test, the court must determine whether
the assertion of arbitrability is “wholly groundless.” 757 F.3d at 463–64. 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.” Id. at 463 (quoting Agere Systems, Inc. v.
Samsung Elecs. Co., 560 F.3d 337, 340 (5th Cir. 2009)). If the court finds the
assertion of arbitrability to be wholly groundless, however, the court should
not enforce the delegation clause. Kubala, 830 F.3d at 202 n.1.
      The inquiry at the second step is limited, and cases in which an assertion
of arbitrability is wholly groundless are rare:
      Such cases are exceptional, and the rule in Douglas is not a license
      for the court to prejudge arbitrability disputes more properly left
      to the arbitrator pursuant to a valid delegation clause. So long as
      there is a “plausible” argument that the arbitration agreement
      requires the merits of the claim to be arbitrated, a delegation
      clause is effective to divest the court of its ordinary power to decide
      arbitrability.

Id. Still, even though the inquiry at the second step is “limited,” it “necessarily
requires the courts to examine and, to a limited extent, construe the underlying
agreement.” Douglas, 757 F.3d at 463 (citation omitted).
      The parties agree that the 1996 Agreement is governed by California law
and that the panel should apply that state’s contract law in its “limited”
analysis of the scope of the arbitration provision. See First Options, 514 U.S.
at 944. Under California law, “it is fundamental that a contract must be so
interpreted as to give effect to the intent of the parties at the time the contract
was entered into, and that whenever possible, that intention is to be


Options, therefore, does not support IQ’s argument that the court should consider the scope
of the arbitration agreement at the first step of the Douglas test.

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ascertained from the writing alone.” Oakland-Alameda Cty. Coliseum, Inc. v.
Oakland Raiders, Ltd., 243 Cal. Rptr. 300, 304 (Ct. App. 1988) (citing Cal. Civ.
Code §§ 1636, 1639).
      The test of admissibility of extrinsic evidence to explain       the
      meaning of a written instrument is not whether it appears to     the
      court to be plain and unambiguous on its face, but whether       the
      offered evidence is relevant to prove a meaning to which         the
      language of the instrument is reasonably susceptible.

Pac. Gas & Elec. Co. v. G. W. Thomas Drayage & Rigging Co., 442 P.2d 641,
644 (Cal. 1968).
      The first recital in the 1996 Agreement—which includes the handwritten
insertion—defines the “Product” as “a penetrating, lubricating spray product
identified and labeled ‘WD-40’ based on propane/butane-propelled formulation
and specifications.” The agreement grants IQ “a non-exclusive right to
manufacture the Product” and details the parties’ rights and obligations in
connection with manufacturing and packaging the Product. The arbitration
clause is expressly limited to claims “arising out of, or related to” the 1996
Agreement. “[E]ven under a very broad arbitration provision such as ‘any
controversy or claim arising out of or relating to this agreement,’ . . . claims
must ‘have their roots in the relationship between the parties which was
created by the contract.’” Rice v. Downs, 203 Cal. Rptr. 3d 555, 565 (Ct. App.
2016) (emphasis added) (citation omitted); see also Berman v. Dean Witter &
Co., Inc., 119 Cal. Rptr. 130, 133 (Ct. App. 1975). IQ argues that this language
indicates that the parties intended to arbitrate disputes “arising out of or
relating to” only propane/butane-propelled products. Because the claims in this
litigation relate to carbon dioxide-propelled products, IQ contends that the
arbitration provision cannot possibly apply to this dispute.
      IQ additionally points to the March 12 letter in which IQ expressed
concerns about the development of the carbon dioxide-propelled product and
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                                  No. 16-20595
appeared to condition executing the 1996 Agreement on limiting its scope to
propane/butane-propelled products. IQ argues that this letter proves that the
parties specifically negotiated for the 1996 Agreement to cover only
propane/butane-propelled products.
      On the other hand, WD-40 points to the parties’ subsequent conduct as
proof that the parties continued to operate under the 1996 Agreement after
WD-40 replaced the propane/butane-propelled products with carbon dioxide-
propelled products. IQ and WD-40 agree that the parties continued to produce
propane/butane-propelled products for only a few months after executing the
1996 Agreement and then transitioned to carbon dioxide-propelled products.
The 1996 Agreement specifies that it shall be ongoing until terminated, and
the parties continued their business relationship after the formula transition
without discussing the execution of another agreement.
      WD-40 further points to correspondence between the parties referencing
the ongoing validity of the 1996 Agreement. In a July 9, 2011 letter to IQ
confirming the award of business, WD-40 gave “formal notice to terminate the
[1996 Agreement] between the parties as laid out in Section 13 of said
agreement to allow us to re-negotiate the terms and conditions of the contract
to reflect the future state of business between the parties.” There is no evidence
that IQ objected to the ongoing validity of the 1996 Agreement at this time.
After negotiation of the long-term agreement began to break down in 2012,
WD-40 sent several letters that again stated its understanding that the 1996
Agreement governed the parties’ business relationship and that termination
would proceed according to the 1996 Agreement’s procedures. In response, IQ
pointed to the handwritten revision in the 1996 Agreement, which IQ
maintained limited the scope of the agreement.




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      Considering all the “objective manifestations of the parties’ intent”
properly before the district court, 2 “including the words used in the [1996
Agreement], as well as extrinsic evidence of such objective matters and the
surrounding circumstances under which the parties negotiated [and] entered
into the contract; the object, nature and subject matter of the contract; and the
subsequent conduct of the parties,” see People v. Shelton, 125 P.3d 290, 294
(Cal. 2006), there is a plausible argument that the parties intended for the
1996 Agreement, or an “extension” of it, to govern manufacturing and
packaging carbon dioxide-propelled products after WD-40 transitioned
formulas.
      Therefore, WD-40’s assertion that the parties’ dispute “aris[es] out of, or
relat[es] to [the 1996 Agreement]” is not wholly groundless. In light of the
“exceptional” nature of the wholly groundless test and the competing, plausible
interpretations of the 1996 Agreement’s meaning and scope, we conclude that
WD-40’s assertion of arbitrability is not wholly groundless. Accordingly, we
affirm the district court’s order compelling arbitration.
                                            V
      IQ also argues that the district court erred in confirming the arbitration
award and that the arbitration award should be vacated under 9 U.S.C. §
10(a)(4) because the arbitrators “exceeded their powers” by concluding that the
dispute was arbitrable. In support, IQ reiterates its arguments against
submitting the issue of arbitrability to arbitration. As explained above, the
parties clearly and unmistakably delegated the gateway issue of arbitrability
to arbitration, and the assertion of arbitrability was not wholly groundless.



      2  IQ argues that WD-40’s argument improperly relies on evidence that was not before
the district court when the court decided the motion to compel. We have considered only
materials in the record at the time the district court compelled arbitration in determining
whether the assertion of arbitration is wholly groundless.
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Thus, the arbitrators acted within their authority in deciding that the dispute
was arbitrable, and the district court was correct to deny IQ’s motion to vacate
the award under § 10(a)(4).
                                      VI
      For the foregoing reasons, we AFFIRM the district court’s order
compelling arbitration and final judgment.




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