     Case: 17-50613   Document: 00514586744     Page: 1   Date Filed: 08/06/2018




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

                                                                           FILED
                                                                       August 6, 2018
                                 No. 17-50613                           Lyle W. Cayce
                                                                             Clerk

HEBBRONVILLE LONE STAR RENTALS, L.L.C.; SAMUEL G. LOVETT;
LESLIE M. LOVETT,

             Plaintiffs - Appellees

v.

SUNBELT RENTALS INDUSTRIAL SERVICES, L.L.C.,

             Defendant - Appellant




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


Before HIGGINBOTHAM, DENNIS, and COSTA, Circuit Judges.
GREGG COSTA, Circuit Judge:
      Hebbronville Lone Star Rentals, L.L.C. sold its assets, customer lists,
and customer contracts to another equipment rental business, Sunbelt Rentals
Industrial Services, L.L.C. The sales price included a $25 million upfront
payment as well as three future contingent payments sometimes called
earnouts. The idea behind the contingent payments was to incentivize the
owner of Lone Star, Sam Lovett, to help Sunbelt retain and grow the revenue
from Lone Star’s customer base. The more business Sunbelt received from
former Lone Star customers, the higher the contingent payments would be.
The agreement provided a mechanism for Sunbelt to calculate this figure. If
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Lone Star disagreed with the figure, it could propose an adjustment. Such a
dispute arose, so the parties invoked their agreement for an arbitrator to
resolve the “dispute over Seller's proposed adjustments to [the] Revenue
Calculation.” The arbitrator agreed with Lone Star’s upward judgment to the
revenue attributable to its former customers. But he did something else. He
reformed the contract after concluding that the parties had made a mutual
mistake when their agreement listed the revenue target for the former Lone
Star clients. We decide whether the arbitrator had this authority to reform
the parties’ agreement.
                                       I.
      This dispute involves the first contingency payment. In the words of the
“earnout” name this pricing structure is sometimes given, the seller has to earn
these future payments based on the revenues the buyer realizes from the
purchase.   So a contingency payment is due only if Sunbelt’s revenues from
certain preclosing customers of Lone Star during the nine-month period meet
or exceed a target. The agreement refers to the target as the “Threshold” or
“Contingent Payment Threshold.” The threshold is $36,265,141.50 for the first
contingency period. The parties arrived at that number by adding Lone Star’s
and Sunbelt’s preclosing revenues for specified “Business Customers” of Lone
Star. If the revenues from these customers for the first contingency period
meet or exceed the threshold, Sunbelt pays Lone Star an additional $7 million.
If revenue meets at least 90% of the threshold, Lone Star receives the
corresponding percentage of the contingency payment.        In other words, if
revenue comes in at 94% of the target, Sunbelt pays Lone Star 94% of the $7
million. If, however, revenues are less than 90% of the threshold, Lone Star is
shut out; no contingent payment is due.




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      Soon after the end of the first contingency period, Sunbelt sent its
revenue calculation to Lone Star. It concluded that revenues came in $1.3
million below the critical 90%.
      Lone Star disagreed, arguing that Sunbelt had omitted revenue for two
customers. For the first customer, COG Operating LLC, Sunbelt had excluded
more than $2 million from its revenue calculation on the ground that some of
its accounts listed COG under a slightly different name—COG Operating,
LLC. If you missed the difference, it is the existence of a comma prior to “LLC.”
Sunbelt included the revenues of COG-without-a-comma, which were
negligible at a little under $55,000, but not the much greater revenues of COG-
with-a-comma. Sunbelt justified that exclusion on the ground that the asset
purchase agreement does not list COG-with-a-comma as a Business Customer.
Lone Star pointed out in response that, despite the slightly different names,
there is one COG company with a single invoicing address that refers to itself
both as COG-with-a-comma and COG-without-a-comma. Sunbelt also raised
an alternative argument to support the exclusion: because its presale revenues
for COG-with-a-comma had not been included in calculating the Threshold
Amount, revenues corresponding to the same account should not be included
in calculating revenues during the contingency period.
      For the second customer, BHP Billiton, Sunbelt had completely excluded
its revenues. Lone Star objected, as BHP had recently acquired Petrohawk
Energy LLC, and Petrohawk was an identified Business Customer. So Lone
Star argued that the BHP Billiton revenues attributable to the former
Petrohawk entity should have been included.
      After Lone Star sought these adjustments, the parties were unable to
resolve the dispute and submitted it to an accounting firm per an arbitration
clause in their agreement. The engagement letter stated that the arbitrator
was to resolve “their disagreement as to whether the threshold amount for the
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first Contingent Payment Period has been met, and, if the threshold amount
has been met, the amount of the First Contingent Payment.”
      The first part of the arbitrator’s decision is unchallenged in this lawsuit.
He agreed with Lone Star that COG is a single entity, so concluded that
revenue from the accounts under both names, with and without a comma,
should be included in revenue. 1 He also held that the revenue should include
the percentage of BHP revenues attributable to Petrohawk.                 With these
changes, the total revenue from Business Customers for the first period rose
above the 90% mark to $34,820,837.22. Had the decision ended there, Lone
Star would have been entitled to a payment of $6,440,000.
      But the new revenue calculation did not end the arbitration.                The
arbitrator reasoned that “one of the ‘remaining dispute[s]’ under Section 3.5 of
the Agreement is whether the Contingent Payment Threshold has been met.
That question necessarily turns on whether Section 3.5(a) . . . can be reformed
due to mutual mistake of the Parties.” He then found that the parties made a
mutual mistake in calculating the threshold without including revenues of
COG Operating LLC. Because the parties intended the threshold to be the
twelve-month trailing revenues of all the identified customers, the arbitrator
concluded that the revenues from COG-with-a-comma should have been
included in the threshold. 2 Otherwise, the arbitrator explained, Lone Star
would receive a “windfall” because the Sunbelt accounts for COG-with-a-
comma would be included in the postacquisition revenue but not the
preacquisition revenue. He believed that result was inconsistent with the
parties’ intention for a comparison of the pre- and postsale revenue for the


      1 As to the revenue attributable to COG-with-a-comma, the arbitrator agreed with
Sunbelt that it was $2,046,846.48 rather than the higher figure Lone Star sought.
      2 Lone Star’s preacquisition revenues for COG-with-a-comma, which were negligible

at $40,918, were included in the threshold amount. But Sunbelt’s much greater
preacquisition revenues listed under that account name ($4.5 million) were not.
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same customers.      Reforming the agreement to fix the mutual mistake
increased the threshold for the first period to $39,606,349. This meant that
even the adjusted revenue from the first period represented only 88% of the
reformed threshold amount, so no payment was due.
      Lone Star sued in federal court seeking (1) to confirm the part of the
arbitration award that agreed with its revenue adjustment, but (2) to vacate
the reformation of the contract which resulted in the new threshold. The
district court, adopting the recommendation of a magistrate judge, agreed with
Lone Star on both counts. As to the latter issue that is the sole one on appeal,
the court found that the arbitrator had exceeded his limited authority in
deciding Sunbelt’s claim of mutual mistake.
                                        II.
      Whatever the outcome of this appeal, someone will decide the question
of mutual mistake. If we affirm the district court and vacate the arbitrator’s
reformation, Sunbelt has filed a counterclaim in district court asking it to
decide whether the parties made a mutual mistake. So this appeal involves
only the issue of who will decide, not what will be decided. But the question of
who decides—which we often see in the form of a choice between a federal or
state court, a federal court in one district versus another, or this question of an
arbitrator or a court—can be as hotly disputed as the merits of a case. That is
the case here.
      Whether an arbitrator is the one who decides is a matter of contract.
First Option of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943 (1995) (explaining
that arbitration is “simply a matter of contract between the parties; it is a way
to resolve those disputes—but only those disputes—that the parties have
agreed to submit to arbitration”); AT&T Techs., Inc. v. Commc’ns Workers of
Am., 475 U.S. 643, 648–49 (1986) (“[A]rbitrators derive their authority to
resolve disputes only because the parties have agreed in advance to submit
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such grievances to arbitration.”).    When parties enter into an arbitration
agreement, there is a presumption that the clause covers a dispute because of
the policy favoring arbitration that courts have attributed to the Federal
Arbitration Act. AT&T Techs., 475 U.S. at 650; Hous. Ref., L.P. v. United Steel,
Paper & Forestry, Rubber, Mfg., 765 F.3d 396, 412 (5th Cir. 2014). But as with
all issues of contract interpretation, unambiguous language controls when the
question is the scope of an arbitrator’s power. Smith v. Transp. Workers Union
of Am., AFL-CIO Air Transport Local 556, 374 F.3d 372, 375 (5th Cir. 2004).
The principle that arbitration clauses should be read broadly thus applies, like
other tiebreaking rules of contract interpretation, when there are “[d]oubts”
about coverage. AT&T Techs., 475 U.S. at 650. “[T]he policy that favors
resolving doubts in favor of arbitration ‘cannot serve to stretch a contractual
clause beyond the scope intended by the parties . . . .’” Smith, 374 F.3d at 375.
      That stretching occurred here as the relevant arbitration clause is
limited to a “dispute over Seller's proposed adjustments” to the Revenue
Calculation.   Here is Section 3.5 of the asset purchase agreement in its
entirety:
      Buyer and Seller will negotiate in good faith to resolve any dispute
      over Seller's proposed adjustments to a Revenue Calculation,
      provided that if any such dispute is not resolved within twenty (20)
      days following receipt by Buyer of the proposed adjustments,
      Buyer and Seller jointly will select the Accounting Firm to resolve
      any remaining dispute over Seller's proposed adjustments in
      accordance with this Agreement, which resolution will be final;
      provided, however, the Accounting Firm will not be entitled to
      resolve any dispute regarding the existence of New Customers or
      Growth Customers. Buyer shall provide the Accounting Firm with
      access to the Books and Records of the Buyer Business necessary
      to enable the Accounting Firm to complete its assignment. The
      Accounting Firm will be instructed to deliver its written
      determination within thirty (30) days. The Accounting Firm will
      address only those items in dispute and may not assign a value
      greater than the greatest value for such item claimed by either
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       party or smaller than the smallest value for such item claimed by
       either party. The fees and expenses of the Accounting Firm will be
       shared by the parties equally.
       Various features of this clause show it is limited to the first part of what
the arbitrator did: resolving the parties’ dispute about the Revenue
Calculation. First, Section 3.5 refers only to the revenue calculation, it says
nothing about the threshold amount. Unlike the revenue calculation, which as
a future event was one the parties anticipated might be disputed, the threshold
amount is an exact figure defined earlier in the agreement and thus not
contemplated for reexamination.               Even with respect to the Revenue
Calculation, Section 3.5 does not allow for full-scale reconstruction.                    The
arbitrator is to resolve only “any remaining dispute over Seller’s proposed
adjustments to a Revenue Calculation” (emphasis added). 3 Because only Lone
Star’s disagreement with Sunbelt’s Revenue Calculation can give rise to a
Section 3.5 arbitration, Sunbelt surely could not have used that clause to seek
arbitration of its reformation claim had the parties agreed on revenue. We do
not see why that door is opened because Lone Star disputed the revenue
calculation.
       Other courts examining similar arbitration provisions have reached the
same conclusion about their limited scope. The Sixth Circuit recently read a
clause requiring arbitration of any “Disagreement with [an] Earn-out
Statement” to mean “the parties agreed to arbitrate only disputes over the
calculation of the Earn-out Payments; they did not agree to arbitrate all
disputes between the parties that might somehow affect Biscayne’s



       3 In identifying his authority to decide reformation, the arbitrator quoted the language
that comes later in Section 3.5(c) discussing the selection of an accounting firm “to resolve
any remaining dispute over Seller’s proposed adjustments.” This reasoning overlooked that
the dispute submitted to arbitration must be the type mentioned at the beginning of the
clause: one “over Seller's proposed adjustments to a Revenue Calculation.”
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entitlement to Earn-out Payments.” Smith v. Altisource Sols., 726 F. App’x
384, 391 (6th Cir. 2018); see also Bratt Enterprises, Inc. v. Noble Int’l Ltd., 338
F.3d 609, 611–13 (6th Cir. 2003) (not allowing arbitrator to decide breach of
contract and related mistake claim when the arbitration agreement only
covered disagreements about “amounts included in the Closing Balance
Sheet”); Orrico v. Alliant Foodservice, Inc., 119 F. App’x 899, 902 (9th Cir.
2004) (holding that arbitration provision only extended to calculation of
earnout payment and not damages for breach of contract). Pureworks, Inc. v.
Unique Software Solutions, Inc., 554 F. App’x 376 (6th Cir. 2014), on which
Sunbelt relies, involved a broader arbitration clause than these cases and ours.
The Pureworks agreement “provided broadly for arbitration of ‘disputes
regarding the [e]arn-out [r]eport,’” so the court concluded that arbitration was
required for “operational disagreements affecting the earn-out report.” Id. at
378. Section 3.5 of the Lone Star-Sunbelt agreement does not extend to any
dispute “regarding,” or to use another broad term “arising out of,” the Revenue
Calculation; it covers only a “dispute over Seller’s proposed adjustments to a
Revenue Calculation.”          See Smith, 726 F. App’x at 392 (distinguishing
Pureworks because of the broad “regarding” language).
       Looking to the asset purchase agreement as a whole reinforces the
limited nature of a Section 3.5 arbitration. The agreement has three other
arbitration clauses, each of which covers disputes arising from other
postclosing accounting responsibilities of the parties. 4 The agreement (Section
9.10) then provides that any disputes not falling within the scope of the four
arbitration clauses will be resolved in court:


       4  Section 3.3 provides for arbitration of “any dispute over Seller’s proposed
adjustments to Buyer’s Closing Computations.” Section 3.4 provides for arbitration “of any
dispute over Seller’s proposed adjustments to the [Closing Date Accounts Receivable and the
Earned Not Billed Revenues].” Section 3.6 provides for arbitration to “finalize the allocation
of the Purchase Price among the Acquired Assets.”
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      Except for disputes resolved as set forth in Sections 3.3, 3.4, 3.5
      and 3.6, the Parties hereby irrevocably submit to the exclusive
      jurisdiction of the federal or state courts of the State of Texas over
      any Proceeding arising out of or relating to this Agreement or any
      of the Transactions and each Party hereby irrevocably agrees that
      all claims in respect of such Proceeding may be heard and
      determined in such courts. The Parties hereby irrevocably waive
      any objection which they may now or hereafter have to the laying
      of venue of any Proceeding brought in such courts or any claim that
      such Proceeding brought in such courts has been brought in an
      inconvenient forum.
      Sunbelt tries to minimize the role of this clause, classifying it as nothing
more than a forum selection clause. It is true that even an all-encompassing
arbitration clause may coexist with a forum selection clause. “[L]awsuits often
precede arbitration (when a court may be asked to decide the validity, scope,
and enforceability of an arbitration clause) or follow arbitration (when a court
may be asked to enforce or set aside an arbitration award),” so selecting a
judicial forum does not negate an intent to arbitrate. Sharpe v. AmeriPlan
Corp., 769 F.3d 909, 916 (5th Cir. 2014). But Section 9.10 goes well beyond the
standard forum-selection clause. Id. (contrasting a clause like Section 9.10 in
which the parties agreed to “irrevocably submit[] to the non-exclusive
jurisdiction” of state and federal courts with a simple forum selection
agreement that “any action brought on matters related to this Agreement shall
be maintained in Dallas”). It is an agreement that other than the four types of
disputes subject to arbitration, courts in Texas will resolve disputes “arising
out of or relating to this Agreement.” That is much broader language than the
four discrete arbitration clauses. The district court correctly treated Sunbelt’s
reformation argument, which seeks a significant rewriting of the parties’
agreement, as such a claim “relating to” the Agreement that should be resolved
in court.



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                                      III.
      Even if the arbitration clause in Section 3.5 was not an agreement to
have the accounting firm decide reformation, Sunbelt contends that the
engagement letter was. Because arbitration is just a matter of the parties’
agreement, that meeting of the minds can also take place when the parties
submit the dispute to the arbitrator. Executone Inform. Sys., v. Davis, 26 F.3d
1314, 1323 (5th Cir. 1994); Piggly Wiggly Operators’ Warehouse, Inc. v. Piggly
Wiggly Operators’ Warehouse Indep. Truck Drivers Union, Local No. 1, 611
F.2d 580, 584 (5th Cir. 1980). Submission letters, like other agreements to
arbitrate, should be given a broad construction. 1 DOMKE ON COMMERCIAL
ARBITRATION § 8:4. Indeed, at oral argument Sunbelt emphasized the letter
over the contract as the source of the arbitrator’s power to reform.
      This is what the relevant part of the engagement letter said:
      [T]he Parties are submitting to the Arbitrator, for resolution, their
      disagreement as to whether the threshold amount for the first
      Contingent Payment Period has been met, and, if the threshold
      amount has been met, the amount of the First Contingent
      Payment.
Sunbelt latches onto the reference to “whether the threshold amount for the
first Contingent Payment Period has been met,” which it contends requires
figuring out what the threshold amount should be. It notes that “threshold” is
lower case, in contrast to the defined term “Contingent Payment Threshold.”
But it puts too much weight on the lower-case “t” to read it as giving the
arbitrator discretion to recompute the threshold rather than as a shorthand
reference to the amount the parties agreed to. The engagement letter asks the
arbitrator to decide not what the threshold amount should be, but whether it
“has been met.”
      The arbitration procedures detailed in the engagement letter are also
inconsistent with Sunbelt’s view that it expanded the scope of that proceeding

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beyond what the parties agreed to in the asset purchase agreement. The
parties provided the accounting firm only with access to the financial books
and records necessary to calculate revenue. The engagement letter provided
for no discovery except for the production of certain invoices in connection with
the threshold amount and any documentation reasonably requested by the
arbitrator. And there would be no witnesses at the arbitration hearing, which
itself was optional.    None of these procedures reflects that the parties
contemplated a decision about mutual mistake, which is a fact-intensive
inquiry often requiring testimony from those who negotiated the contract.
Williams v. Glash, 789 S.W.2d 261, 264 (Tex. 1990). The arbitrator recognized
that a claim of mistake allows for consideration of parol evidence, and
considered drafts of the parties’ agreements. But allowing evidence beyond the
contract itself would also typically include testimony which the arbitration did
not permit.
      The final indication that the parties did not ask the arbitrator to decide
reformation is the consequence of that decision.        The engagement letter
repeatedly limits the dispute to the calculation of the “First Contingent
Payment.” But the finding of mutual mistake would seemingly impact the
second and third payments; reformation would also increase the threshold for
those later periods to include the accidentally omitted COG revenues. We do
not find any shared intent of the parties to allow an arbitrator to make the
reformation decision that has significance beyond resolving Lone Star’s
disagreement with the revenue calculation for the first period.
                                     ***
      Because the parties did not agree in either the asset purchase agreement
or the engagement letter to have the arbitrator decide reformation, a court
must decide that issue. The judgment of the district court is AFFIRMED and
the case is REMANDED for consideration of the mutual mistake claim.
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