United States Court of Appeals
For the First Circuit
No. 09-2077
NEXT STEP MEDICAL CO., INC.; JORGE IVÁN DÁVILA-NIEVES,
Plaintiffs, Appellants,
v.
JOHNSON & JOHNSON INTERNATIONAL, d/b/a J&J MEDICAL CARIBBEAN;
XYZ INSURANCE COMPANIES; XYZ CORPORATIONS; JOHN DOE,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Francisco A. Besosa, U.S. District Judge]
Before
Boudin, Dyk* and Thompson,
Circuit Judges.
Benjamín Morales-del Valle with whom Morales-Morales Law
Offices was on brief for appellants.
Raúl M. Arias-Marxuach with whom McConnell Valdés LLC was on
brief for appellees.
August 30, 2010
*
Of the Federal Circuit, sitting by designation.
BOUDIN, Circuit Judge. Next Step Medical Co. ("Next
Step") distributes certain medical devices supplied by Johnson &
Johnson Medical Caribbean--an unincorporated division of Johnson &
Johnson International ("JJI")--for the treatment of spinal
disorders. Next Step's right to serve as JJI's exclusive
distributor in Puerto Rico was terminated by JJI, and this
litigation followed. The facts can be briefly stated; the
procedural history is more complicated.
In May 2005, Next Step (continuing a relationship begun
with a business acquired by JJI) entered into a contract with JJI
making it the exclusive distributor in Puerto Rico for those JJI
medical products listed in the agreement. In January 2008, JJI
sent Next Step a letter purporting to terminate its exclusive
distributorship because, JJI asserted, Next Step was not complying
with its sales quota obligations under the contract. JJI said it
would continue to supply Next Step the specified products but on a
non-exclusive basis.
Negotiations failing, Next Step and its president, Jorge
Iván Dávila-Nieves ("Dávila"), sued JJI in Puerto Rico Superior
Court in January 2009. Next Step sought a preliminary injunction
under the Puerto Rico Dealers Act of 1964, P.R. Laws Ann. tit. 10,
§ 278b-1 (2009) ("Law 75"), to require JJI to continue Next Step as
its exclusive distributor in Puerto Rico and to provide Next Step
with JJI's newest line of products. Next Step also sought damages
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for breach of contract and Dávila sought damages in tort for the
pain and suffering that the contract dispute allegedly caused him.
JJI removed the case to the federal district court based
on diversity jurisdiction.1 That court referred the case to a
magistrate judge to make a report and recommendation on the
requested preliminary injunction and to resolve "all
non-dispositive motions." After a two-day hearing on the
preliminary injunction request on March 26-27, 2009, the
magistrate judge on April 17, 2009, recommended that a preliminary
injunction be denied. Next Step filed timely objections to that
recommendation.
JJI also filed a motion on March 17, 2009, to compel the
parties to arbitrate Next Step's claims. The contract included a
section on "Disputes and Arbitration" that reads in relevant part:
[A]ny dispute, controversy or claim between
[Next Step] and [JJI] . . . arising out of or
relating in any way to the business
relationship between [JJI] and [Next Step]
shall first be attempted to be resolved
amicably. Any such dispute that has not been
amicably resolved shall be referred to
non-binding mediation . . . . Any dispute
that has not been resolved in mediation, shall
then be settled by arbitration . . . .
1
JJI's unincorporated Medical Caribbean division and several
John Does were also named as defendants but diversity
jurisdiction--existing because Next Step is a Puerto Rico company
and JJI is not--is unaffected by the presence of an unincorporated
division, Breitman v. May Co. Cal., 37 F.3d 562, 564 (9th Cir.
1994), or the presence of John Doe defendants, 28 U.S.C. §
1441(a)(2006); Universal Commc'n Sys., Inc. v. Lycos, Inc., 478
F.3d 413, 426 n.10 (1st Cir. 2007).
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In its motion to compel, JJI also requested that Dávila's separate
tort claim be dismissed without prejudice or stayed during
arbitration. Next Step responded that the arbitration clause was
unenforceable under Puerto Rico law, but it did not mention
Dávila's tort claim or JJI's requested disposition.
On June 10, 2009, the magistrate judge granted JJI's
motion to compel,2 requiring Next Step to submit all its
claims--including both the preliminary injunction request and
Dávila's tort claim--to arbitration. Although Next Step was
entitled to seek review in the district court, 28 U.S.C. §
636(b)(1)(A); Fed. R. Civ. P. 72(a), the district court short-
circuited any such effort by dismissing--on the same day as the
magistrate judge's order--all of Next Step's claims with prejudice,
citing the magistrate judge's order compelling arbitration.
Next Step sought reconsideration of the district court's
order, urging the court to grant the preliminary injunction and
protesting the court's dismissal with prejudice of Dávila's tort
claim. The district court denied the motion, stating briefly that
Dávila's tort claim was waived because Next Step had not "raised
2
The magistrate judge issued a definitive order (rather than
a report and recommendation) as permitted under 28 U.S.C. §
636(b)(1) (2006) where the district judge delegates disposition of
non-dispositive orders. In this circuit, motions to compel
arbitration are non-dispositive motions. See Power Share, Inc. v.
Syntel, Inc., 597 F.3d 10, 14 (1st Cir. 2010).
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any argument as to why [Dávila's] tort claim is proper." Next Step
appealed the district court's actions to this court.
Immediate appellate review of a district court order
compelling arbitration is limited where the district court merely
stays the court action but permitted where the district court
dismisses the case. 9 U.S.C. § 16(a)(3) (2006); Green Tree Fin.
Corp. v. Randolph, 531 U.S. 79, 86-87 (2000). As it happens, Next
Step does not ask for review of the reference to arbitration of the
underlying dispute with JJI; rather, it contests (1) the lack of
preliminary injunctive relief and (2) the dismissal of Dávila's
tort claim "with prejudice." We address these claims in order.
The district court did not consider on the merits the
recommended denial of preliminary injunctive relief, even though
the magistrate judge wrote an extensive report analyzing the pros
and cons of the request; Next Step complains of this lapse and
also attacks the magistrate judge's report and recommendation. But
the district court likely believed that the magistrate judge's
subsequent order--that the entire case be arbitrated--effectively
superseded the recommended denial of injunctive relief. That
belief, although rather hastily implemented, was correct--with two
possible qualifications to which we now turn.
Arbitrators normally have the power to grant interim
relief unless the parties specify otherwise in the contract. 1 M.
Domke, Domke on Commercial Arbitration § 35:2 (3d ed. 2003); e.g.,
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Charles Constr. Co. v. Derderian, 586 N.E.2d 992, 994 (Mass. 1992).
Anyway, the arbitration clause in this case requires the parties to
use the Commercial Arbitration Rules of the American Arbitration
Association, which empower an arbitrator to "take whatever interim
measures he or she deems necessary, including injunctive relief .
. . ." Am. Arbitration Ass'n, Commercial Arbitration Rules and
Mediation Procedures, at R-34 (2009), available at
http://www.adr.org/sp.asp?id=22440.
Thus, when the district judge saw that the magistrate
judge had ordered--not recommended--arbitration of all disputes, it
doubtless appeared to the judge that it was up to the arbitrator to
decide about preliminary relief. Of course--this is the first
qualification--the parties' conduct might have been treated as
abandoning arbitration on preliminary relief, see Restoration Pres.
Masonry, Inc. v. Grove Eur. Ltd., 325 F.3d 54, 61 (1st Cir. 2003),
but since JJI had sought an order of arbitration and gotten one
directed to the whole controversy, the district judge was entitled
to rely upon the order, unless Next Step persuaded a court to
overturn it.
The district judge initially gave Next Step no time to
assert such a challenge (why is not clear), but Next Step did in
fact seek reconsideration of the district court's dismissal of the
case. In doing so, it chose not to argue that the magistrate judge
misread the arbitration agreement in finding it to cover all claims
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by Next Step against JJI, nor to pursue a claim that arbitration
was unavailable because of Puerto Rico law. Nor does it make such
an argument to us.
It remains true--and this is the second qualification to
address--that even where preliminary relief is for the arbitrator,
a district court retains power to grant an interim preliminary
injunction, where otherwise justified, for the interval needed to
resort to the arbitrator--that is, for the period between the time
the district court orders arbitration and the time the arbitrator
is set up and able to offer interim relief itself. Teradyne, Inc.
v. Mostek Corp., 797 F.2d 43, 51 (1st Cir. 1986).
But Next Step never sought this very limited relief;
Teradyne was first mentioned on appeal only by JJI. Further,
interim relief under Teradyne assumes a showing of some short-term
emergency that demands attention while the arbitration machinery is
being set in motion. Next Step has never made such a showing;
indeed, a year has passed since the district court judgment and
Next Step made no effort to secure preliminary relief from the
arbitrator, for example, by relying on the extensive record already
developed before the magistrate judge.
There remains one loose end concerning injunctive relief.
Next Step's counsel said in oral argument (there is nothing in the
record on this point) that JJI now has diverted so much of Next
Step's revenue that Next Step cannot afford a full-scale
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arbitration proceeding. But it agreed to arbitration in the
contract, and it was free from the outset to seek preliminary
relief from the arbitrator well before its revenues were impaired.
It chose not to do so in the teeth of the arbitration clause.
This brings us to the second issue raised on appeal:
whether the district court was correct to dismiss Dávila's tort
claim "with prejudice." That there is a plausible tort claim based
on breach of contract here may be open to doubt;3 but if the
district court had sought to extinguish Dávila's opportunity to
present such a claim in an improper forum, we would indeed be
concerned. A more careful assessment, which requires some legal
background, banishes the concern.
Where one side is entitled to arbitration of a claim
brought in court, in this circuit a district court can, in its
discretion, choose to dismiss the law suit, if all claims asserted
in the case are found arbitrable. Bercovitch v. Baldwin Sch.,
Inc., 133 F.3d 141, 156 & n.21 (1st Cir. 1998); see 9 U.S.C. § 3.
But see Lloyd v. HOVENSA, LLC, 369 F.3d 263, 268-69 (3d Cir. 2004).
If some claims are non-arbitrable, the district court cannot
dismiss the entire case. Cf. Bercovitch, 133 F.3d at 156 n.21.
3
Puerto Rico appears not to recognize actions for emotional
distress stemming from breach of contract, except where such
distress "could have been foreseen at the time the obligation was
constituted and [was] a necessary consequence of the breach of
contract." Soc. de Ganaciales v. Velez & Asoc., 145 P.R. Dec. 508,
523 (1998).
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Here, the magistrate judge found all of the claims were arbitrable,
including Dávila's tort claim.
So when the district court said that all of the claims
were dismissed "with prejudice" in light of the arbitration
requirement, this meant only that they could not be pursued as
free-standing court claims but were remitted to arbitration--from
which they could always end up back in court on a challenge to the
arbitrator's ultimate disposition. This is a peculiar use of the
phrase "with prejudice," but not without precedent. E.g., Alford
v. Dean Witter Reynolds, Inc., 975 F.2d 1161, 1164 (5th Cir. 1992).
Anyway, the tort claim has not been extinguished but
merely left to the arbitrator. The district judge may have muddied
the waters by saying on reconsideration that Next Step waived the
tort claim because it had not "raised any argument as to why
[Dávila's] tort claim is proper," but whatever the district judge
meant (and he may have meant "proper in this court"), the
magistrate judge ordered Dávila's tort claim, as well as the claims
by Next Step, to go to arbitration and that disposition remains in
force unless overturned.
Next Step does argue briefly that Dávila's tort claim is
not arbitrable, saying, first, that the arbitration agreement was
only between JJI and Next Step, not JJI and Dávila; and, second,
that JJI itself is content to have Dávila's tort claim dismissed
without prejudice. However, this brief argument does not begin to
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grapple with the language of the contract in question and could be
treated as perfunctory (and so waived) or--as we choose to view it-
-merely as unpersuasive in the abbreviated form presented.
Generally speaking, "a party cannot be required to submit
to arbitration any dispute which he has not agreed so to submit."
AT&T Techs., Inc. v. Commc'ns Workers of Am., 475 U.S. 643, 648
(1986) (quoting United Steelworkers of Am. v. Warrior & Gulf
Navigation Co., 363 U.S. 574, 582 (1960)). And the arbitration
clause specifically embraces disputes "between Distributor and
Company"; elsewhere in the contract "Distributor" is defined as
Next Step (the corporation), "Company" is defined as JJI and
"Principal" is defined separately to refer to Dávila.
However, a separate provision--section 22, labeled
"Status of Principal"--specifies that "the Principal [(Dávila)] is
a party to this agreement solely for the purposes" of a number of
other sections in the contract, including section 19--the section
on "Disputes and Arbitration."4 By virtue of section 22, Dávila
therefore appears to be a "party to" the arbitration clause even
though the clause refers only to the "Distributor." Next Step
4
Section 22 makes Dávila a "party to," for example, section
15(B), which reads: "Distributor will not, during the term of this
Agreement design, manufacture, represent, sell, distribute, market,
promote or solicit sales in the Territory of any products which
directly competes with any Product with regard to surgical
procedures and technology."
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simply ignores this provision and certainly does not refute its
apparent application.
As for subject matter, the arbitration clause is not
limited to contract disputes; it broadly covers "any dispute,
controversy or claim . . . arising out of or relating in any way to
the business relationship between [JJI] and [Next Step]." Dávila's
tort claim--a claim arising out of and relating to the breakdown of
business relationships between JJI and Next Step--is covered by
this broadly worded arbitration clause so long as section 22 makes
Dávila a party to the arbitration clause.
Dávila acted for Next Step in signing the agreement but,
as its executive, was free also to bind himself; in fact, Dávila
signed the contract twice--both as Next Step's President and in his
personal capacity as the "Principal." There is nothing surprising
about imposing responsibilities upon him insofar as certain of his
actions could affect the business relationship between the two
primary parties. Nor is it surprising that an arbitration clause
should embrace claims by or against an executive relating to the
main transaction.
We need not resolve all of the possible arguments,
because Dávila on appeal has not objected to the scope of the order
to compel arbitration, even though in passing he has argued
unpersuasively that the contract on its face does not bind him to
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arbitrate. Nor does JJI's belated consent to dismissal of the
Dávila's tort claim without prejudice invalidate an order of the
magistrate judge referring all claims to arbitration--an order
prompted by JJI's own request for arbitration and which JJI did not
seek to narrow by an appeal to the district court or to us.
Affirmed.
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