In the
United States Court of Appeals
For the Seventh Circuit
No. 09-4051
L UMBERMENS M UTUAL C ASUALTY C OMPANY,
Plaintiff-Appellee,
v.
B ROADSPIRE M ANAGEMENT S ERVICES, INC. and
P LATINUM E QUITY, LLC,
Defendants-Appellants.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 07 C 00386—Harry D. Leinenweber, Judge.
A RGUED M AY 19, 2010—D ECIDED O CTOBER 13, 2010
Before O’C ONNOR, Associate Justice, and W ILLIAMS
and S YKES, Circuit Judges.
W ILLIAMS, Circuit Judge. This appeal involves a debate
over the arbitrability of four purchase price disputes
arising out of a transaction between Lumbermens
The Honorable Sandra Day O’Connor, Associate Justice
(Retired) of the United States Supreme Court, sitting by designa-
tion
2 No. 09-4051
Mutual Casualty Company (“Lumbermens”) and
Broadspire Management Services, Inc. (“Broadspire”).
Lumbermens sold Broadspire an insurance administra-
tion business in 2003 pursuant to a purchase agreement
which provided that certain kinds of price disputes
stemming from the transaction would be referred to an
accounting or appraisal firm for arbitration. Four such
price disputes arose, and Lumbermens sought to
resolve them under the purchase price dispute procedure.
Broadspire refused, asserting that Lumbermens had
failed to satisfy certain necessary preconditions set forth
in the purchase agreement; specifically, that Lumber-
mens’ written notices stating its disagreements with
Broadspire’s price determinations lacked the requisite
detail. The issue before us is whether the court or the
arbitrator should decide this question of whether the
necessary preconditions to arbitration have been satis-
fied. The district court concluded that the question
was for the arbitrator, and we agree, because the issue
of whether Lumbermens has adequately disputed
Broadspire’s price reports is a procedural question
about a condition precedent to arbitration. We affirm.
I. BACKGROUND
In July 2003, Lumbermens sold Broadspire1 an insur-
1
We use the term “Broadspire” to include Defendant-Appel-
lant Platinum Equity, LLC as well. Platinum’s role in the
transaction is not discussed by the parties in their briefs, but
it is characterized in a district court pleading as Broadspire’s
(continued...)
No. 09-4051 3
ance administration business pursuant to a written Pur-
chase Agreement (the “Agreement”). No cash was ex-
changed at the time of the closing. Instead, the purchase
price was to be based on a series of annual “earnout” and
“lump sum” payments to be made by Broadspire over
the four years following the transaction, which the
parties defined as the “earnout period.” Earnout pay-
ments would be based on the financial performance of
the purchased business each year during the earnout
period. Lump sum payments would be made if
Broadspire sold off any parts of the purchased company
during the earnout period, based on an estimate of the
expected performance of the sold asset over the
remainder of the four years.
Article III of the Agreement, titled “Purchase Price,”
set forth the methodology and procedures for deter-
mining the amount of the payments due each year.
Broadspire had to calculate the amounts owed pursuant
to a formula set forth in the Agreement, and prepare
and deliver reports to Lumbermens setting forth in
“reasonable detail” the calculations and assumptions on
which its determinations were based. See generally Agree-
ment § 3.3. Upon receiving a report from Broadspire,
1
(...continued)
“former owner.” Platinum sought to have itself dismissed
from the case before the district court, but the court rejected
that motion and held that the question of whether Platinum
is a proper party is for the arbitrator. That aspect of the
district court’s ruling was not specifically appealed, nor does
Platinum make any separate arguments from those made
by Broadspire.
4 No. 09-4051
Lumbermens had 90 days to review it, during which
time Broadspire had to make available to Lumbermens
any books and records relevant to the review. If
Lumbermens decided that it agreed with Broadspire’s
determination, it would send an “Acceptance Notice”
so indicating, or do nothing at all, and the amount
Broadspire had set forth would become the binding
payment amount for that year. But if Lumbermens dis-
agreed with Broadspire’s determination, it had to send
Broadspire a “Disagreement Notice” saying so within
the 90-day period. A Disagreement Notice has to “set[]
forth in reasonable detail the basis for such disagree-
ment and [Lumbermens’] determination of the payment
required to be paid to [Lumbermens] under this Sec-
tion 3.3.” Agreement § 3.3(g).
A. The Purchase Price Dispute Arbitration Clause
If Lumbermens submitted a timely Disagreement
Notice to Broadspire indicating disagreement with a
given earnout or lump sum report, the parties first had
30 days to try and resolve the differences themselves.
Failing that, the dispute would be submitted to an ac-
counting or appraisal firm for arbitration:
Purchase Price Disputes. If a party delivers a
Disagreement Notice to the other party in a
timely manner, then Buyer and Seller shall
attempt in good faith to resolve such dispute
within 30 days from the date of such notice. If
Buyer and Seller cannot reach agreement . . . then
the dispute shall be promptly referred to an inde-
No. 09-4051 5
pendent accounting or appraisal firm of national
reputation mutually acceptable to Buyer
and Seller, or if the parties are unable to agree
on such a firm within 10 days . . . to
PricewaterhouseCoopers LLP (the “Account-
ing/Appraisal Firm”) for binding resolution.
The Accounting/Appraisal Firm may conduct
such proceedings as the Accounting/Appraisal
Firm, in its sole discretion, determines will assist
in resolving the dispute and shall, within 60
days . . . deliver . . . a written report setting forth
its determination of all disputed amounts . . . and
its determinations will be conclusive and binding
upon the parties.
Agreement § 3.4.
B. The General Arbitration Clause
In addition to the § 3.4 arbitration procedure intended
specifically for Article III price disputes, the Agreement
also contains a catch-all arbitration provision for all
other disputes. It provides:
Dispute Resolution. Except as otherwise provided
for in Article III, the following shall constitute
the exclusive procedures and remedies for all
disputes arising out of or relating to this Agree-
ment.
Agreement § 14.11. Section 14.11 requires that the parties
attempt in good faith to resolve disputes arising out of the
6 No. 09-4051
Agreement, but if they cannot, it provides for binding
arbitration by a three-arbitrator panel in accordance
with the International Institute for Conflict Prevention
& Resolution (“CPR”) Rules for Non-Administered Arbi-
tration, and governed by the Federal Arbitration Act,
9 U.S.C. § 1 et seq. (“FAA”).
C. The Four Purchase Price Disputes
The full history of the transaction and dispute between
the parties is somewhat complex, but all of those details
are not necessary to resolve question before us. At
issue here are disputes over four price reports—three
lump sum reports dated December 7, 2005, March 16,
2006, and October 16, 2006, and one earnout report
dated June 22, 2006—that Broadspire provided to
Lumbermens under the above-described process and
Lumbermens then timely disputed. On each occasion,
Lumbermens sent a Disagreement Notice regarding
Broadspire’s price determination.2 Each was relatively
general. Broadspire disputed the sufficiency of the Dis-
2
Our use of the term “Disagreement Notice” in referring to
Lumbermens’ objections should not be taken as reflecting
any conclusion as to their sufficiency. As we explain herein,
that is a question for the § 3.4 arbitrator. Clearly, however,
Lumbermens meant for them to be Disagreement Notices;
the first objection was obviously disputing Broadspire’s De-
cember 7, 2005 price report and made reference to Agree-
ment § 3.3(g), and each of the latter three actually bore the
heading “Disagreement Notice.”
No. 09-4051 7
agreement Notices, arguing that they did not meet
§ 3.3(g)’s requirement that they contain (1) “reasonable
detail” and (2) Lumbermens alternative “determination
of the payment required.” Lumbermens claimed that it
could not provide the requisite level of detail called
for by § 3.3(g), because Broadspire’s price reports
were themselves lacking in details that would enable
Lumbermens to do so. Lumbermens also claimed in its
Disagreement Notices that it had not been given suf-
ficient access to the books and records necessary to prop-
erly evaluate Broadspire’s determinations.
Lumbermens sought arbitration of each of these
four disputes under the Purchase Price Dispute pro-
cedures set forth in § 3.4 of the Agreement, but
Broadspire refused to arbitrate on the basis that
Lumbermens had not met the precondition of filing
adequate Disagreement Notices. Instead, Broadspire
sought to commence panel arbitration of the disputes
under the more general § 14.11 procedures. Eventually,
on January 19, 2007, Lumbermens filed a Petition in
Aid of Arbitration in the United States District Court
for the Northern District of Illinois, seeking to compel
arbitration under the § 3.4 provision and to compel
Broadspire to produce certain documents and informa-
tion to which it had not given Lumbermens access.
The district court ruled in favor of Lumbermens. With
regard to which arbitration clause governed the dispute,
§ 3.4 or the broader § 14.11, the district judge con-
cluded that “Lumbermens is clearly right” and that the
Article III purchase price dispute procedure applied. The
8 No. 09-4051
court concluded that the question of whether Lum-
bermens’ Disagreement Notices were adequate was
“certainly within the purview of the arbitrator” and that
the question was one that was “peculiarly within the
competence” of an accounting/appraisal firm. The
district judge ordered the parties to arbitrate the
disputes under the § 3.4 procedures, and to each submit
within ten days of his ruling the names of two
potential accounting or appraisal firms to act as
arbitrator to replace PricewaterhouseCoopers, which
was already acting as an arbitrator in an unrelated
Article III price dispute arbitration.3 The court also
ordered Broadspire to produce certain documents.
Broadspire appealed.
II. ANALYSIS
The question before us is whether a court or an
arbitrator should decide the question of whether the
parties’ disputes are arbitrable under § 3.4 of the Agree-
ment. Broadspire contends that Lumbermens did not
file valid Disagreement Notices and has thus failed to
satisfy a necessary precondition to bringing the
3
At the time, the parties were in § 3.4 arbitration regarding
a fifth price dispute, over Broadspire’s 2004 Earnout Report.
That report is not at issue in this litigation. We do note, how-
ever, that Broadspire did not challenge the arbitrability of
that dispute, despite the fact that Lumbermens’ Disagree-
ment Notice for that report arguably had the same flaws
Broadspire found in the later notices.
No. 09-4051 9
dispute within the scope of § 3.4 arbitration, and that
a court, not the § 3.4 arbitrator, should determine
whether this is in fact the case.4 Lumbermens responds
that the § 3.4 procedure encompasses all disputes
relating to purchase price, including any disputes over
the sufficiency of Disagreement Notices themselves, and
that it is for the § 3.4 arbitrator, not a court, to
evaluate their sufficiency. Like the district court, we
agree with Lumbermens and conclude that the
sufficiency of the Disagreement Notices is a question to
be answered by the § 3.4 arbitrator.
We review a district court’s decision to compel arbitra-
tion de novo, and any findings of fact for clear error.
Zurich Am. Ins. Co. v. Watts Indus., Inc., 466 F.3d 577, 580
(7th Cir. 2006). “Whether or not [a] company [is] bound
to arbitrate, as well as what issues it must arbitrate, is
a matter to be determined by the court on the basis of
the contract entered into by the parties.” John Wiley & Sons,
Inc. v. Livingston, 376 U.S. 543, 547 (1964) (citations omit-
ted). In ruling on a motion to compel arbitration,
we “determine whether the parties’ grievance belongs
in arbitration, not rule on the potential merits of the
underlying dispute between the parties.” Zurich Am. Ins.
Co., 466 F.3d at 581.
4
Although it argued it before the district court, Broadspire
does not take the position on appeal that the § 14.11 arbitra-
tion procedure should apply instead.
10 No. 09-4051
A. The Howsam Framework
The Supreme Court’s decision in Howsam v. Dean
Witter Reynolds, Inc., 537 U.S. 79, 84 (2002), clarified the
division of labor between arbitrators and judges in
cases like this one and provides the framework for our
analysis. In Howsam, the Court determined that the ques-
tion of whether a grievance has been brought with-
in a time period set by a National Association of
Securities Dealers rule is a “gateway procedural dispute”
for the arbitrator, not a court, to decide. 537 U.S. at 85.
The Court held that “procedural questions which grow
out of the dispute and bear on its final disposition are
presumptively not for the judge, but for an arbitrator,
to decide. So, too, the presumption is that the
arbitrator should decide allegations of waiver, delay, or
a like defense to arbitrability.” Id. at 84-85 (emphasis
in original) (internal citations and quotations omit-
ted). The Howsam Court noted that the Revised Uniform
Arbitration Act (“RUAA”), which “incorporate[s] the
holdings of the vast majority of state courts and the law
that has developed under the FAA” supported its con-
clusion. Howsam, 537 U.S. at 84-85 (citing RUAA § 6(c)
and comment 2). The RUAA provides that “an
arbitrator shall decide whether a condition precedent
to arbitrability has been fulfilled.” RUAA § 6(c). Under
Howsam, questions such as whether prerequisites to
arbitration have been met, or questions of waiver, delay,
or other defenses to arbitrability, should be determined
by the arbitrator. See Howsam, 537 U.S. at 84-85; see also
John Wiley, 376 U.S. at 557 (arbitrator, not court, should
decide whether the party seeking arbitration had
No. 09-4051 11
properly completed grievance procedure that was pre-
requisite to arbitration under parties’agreement); Moses H.
Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25
(1983) (“waiver, delay, or a like defense” are questions
for arbitrator).
Our circuit has followed Howsam in distinguishing
between “substantive” and “procedural” arbitrability
questions, and in holding that the latter are presump-
tively for an arbitrator to decide. In Employers Insurance
Co. of Wausau v. Century Indemnity Co., 443 F.3d 573, 581
(7th Cir. 2006), for example, we held that the question
of whether an arbitration agreement forbade consoli-
dated arbitration was a procedural one for the arbitrator
to answer, noting that “[t]he Supreme Court made
clear in Howsam that procedural issues are presump-
tively for the arbitrator to decide.” (citation omitted). And
in Zurich American Insurance Co., we found that questions
about the preclusive effect of a California state judg-
ment on the scope of the parties’ arbitrable disputes
were similarly an issue for the arbitrator. 466 F.3d at 581.
We concluded that because the issue of preclusion was
being raised by a party as a defense to arbitration, it was
a procedural question under Howsam that fell to the
arbitrator to decide. Id.
B. The Disagreement Notice Dispute Is a Question
for the Arbitrator
Just like the questions in Howsam, Zurich American,
or Employers Insurance, the adequacy of Lumbermens’
12 No. 09-4051
Disagreement Notices is a procedural question about a
condition precedent to arbitration under § 3.4 of the
parties’ agreement and is for the arbitrator to address.
See Howsam, 537 U.S. at 84-85; Zurich Am. Ins. Co., 466 F.3d
at 581; Employers Ins., 443 F.3d at 577. Lumbermens’ and
Broadspire’s disagreements over whether the precondi-
tions have been met grow out of the dispute between
the parties and bear directly on the arbitrator’s final
disposition of what the purchase price should be. See
John Wiley, 376 U.S. at 557. In determining whether a
Disagreement Notice contains sufficient detail, the § 3.4
arbitrator will be examining the same documents and
assessing the same issues relevant to the actual substan-
tive resolution of the parties’ price dispute. It would
be strange to divide these largely overlapping tasks be-
tween the court and the arbitrator. See id. (“It would be a
curious rule which required that intertwined issues . . .
growing out of a single dispute and raising the same
questions on the same facts had to be carved up between
two different forums, one deciding after the other.
Neither logic nor considerations of policy compel such a
result.”). This is particularly true in a case like this one,
when the determination being made is one within the
particular expertise of the arbitrator, not a court. See
Howsam, 537 U.S. at 85 (law assumes “expectation that
aligns (1) decisionmaker with (2) comparative expertise”);
see also JPD, Inc. v. Chronimed Holdings, Inc., 539 F.3d 388,
393 (6th Cir. 2008) (accounting firm “undoubtedly pos-
sesses greater expertise in determining how much dis-
closure an EBITDA audit requires”). In evaluating
whether Lumbermens’ Disagreement Notices provide
No. 09-4051 13
the “reasonable detail” required by § 3.3(g), the arbitrator
will necessarily be engaging in a fact-intensive,
specialized inquiry very similar to the inquiry it would
undertake in order to actually determine what the
proper purchase price should be.
“In certain contexts, it is appropriate to presume
that parties that enter into an arbitration agreement
implicitly authorize the arbitrator to adopt such pro-
cedures as are necessary to give effect to the parties’
agreement. Stolt-Nielsen S.A. v. Animalfeeds Int’l Corp., - - -
U.S. - - - -, 130 S. Ct. 1758, 1775 (2010) (citing Howsam,
537 U.S. at 84). The Agreement here presents one such
context. It is appropriate to presume that the parties
have implicitly authorized the § 3.4 arbitrator to adopt
procedures necessary to give effect to their agreement.
Section 3.4 itself provides that the arbitrator may “con-
duct such proceedings as [it] . . . determines will assist
in resolving the dispute. . . .” Determining the adequacy of
Disagreement Notices logically falls within this grant
of authority. Indeed, evaluating such documents is inex-
tricably related to the core function that the arbitrator
performs under the Agreement—reaching a conclusion
as to “all disputed amounts” at issue. Agreement § 3.4.
An analogous case from the Sixth Circuit buttresses
our conclusion here. In JPD, Inc. v. Chronimed Holdings,
Inc., the parties signed a purchase agreement for the sale
of a pharmacy that involved a price dispute arbitration
process nearly identical to the one set forth in Article III
here. 539 F.3d at 392-93. The purchaser, Chronimed, had
to send an earnings before interest, taxes, depreciation,
14 No. 09-4051
and amortization (“EBITDA”) calculation to the seller,
DiCello, for the purposes of determining an “additional
purchase price payment” to be made to DiCello after
the transaction based on the pharmacy’s 2006 earnings.
Id. at 390. If DiCello disagreed with the calculation, he
had to file an objection setting forth in “reasonable de-
tail” the basis for his disagreement, and if the parties
could not settle the dispute in good faith, it would be
referred to an accounting firm for resolution just as
in the case before us. See id. DiCello did object to
Chronimed’s EBITDA calculation, but instead of
pursuing arbitration, sued for an accounting and dam-
ages. Id. Chronimed moved to stay the suit and
compel arbitration, which the district court denied
on a waiver theory. Id. On appeal, DiCello argued that
arbitration before the accounting firm was not proper
because Chronimed had failed to sufficiently document
its EBITDA calculation, thus waiving its right to
arbitrate the dispute under the purchase agreement. Id.
at 391-92. Applying Howsam, the Sixth Circuit vacated
the district court’s ruling, concluding, inter alia, that the
question of whether Chronimed had sufficiently docu-
mented the pharmacy’s finances was “exactly the type
of condition [] precedent to an obligation to arbitrate
that Howsam presumptively allocated to the arbitrator.”
Id. at 392-93 (internal quotation omitted). The same con-
clusion is appropriate here. Just as questions over the
sufficiency of an EBITDA calculation were issues about
a condition precedent allocated to the arbitrator in
JPD, questions over the sufficiency of Lumbermens’
Disagreement Notices—similarly a condition precedent
No. 09-4051 15
to price dispute arbitration—are questions for the § 3.4
arbitrator here. See id.; see also Dealer Computer Servs., Inc. v.
Old Colony Motors, Inc., 588 F.3d 884, 887 (5th Cir. 2009)
(payment of fees is question of procedural condition
precedent to arbitration that is for arbitrator, not a court,
to decide).
Broadspire cites our decision in R.J. Corman Derail-
ment Services, LLC v. International Union of Operating
Engineers, 422 F.3d 522, 528 (7th Cir. 2005), in support of
its argument to the contrary, but that case is inapposite.
In Corman, the parties disputed whether a grievance
was timely under the terms of an expired collective
bargaining agreement. 422 F.3d at 527. The dispute in-
volved a question of “whether there was an agreement
to arbitrate this set of grievances at all,” a fundamental
question of arbitrability properly answered by a court.
Id.; see Howsam, 537 U.S. at 84. The dispute in this case
is different, and falls on the other side of the Howsam
divide for a key reason. Here, there is no dispute as to
the existence of an agreement to arbitrate itself. Instead,
this is a procedural dispute over preconditions to that
arbitration. See Employers Ins., 443 F.3d at 577 (procedural
question of arbitrability was for arbitrator because it
“does not involve whether Wausau and Century are
bound by an arbitration clause or whether the arbitra-
tion clause covers the Aqua-Chem policies.”); see also
Dealer, 588 F.3d at 887. For us to accept Broadspire’s
argument “would require a court to delve too deeply
into questions of the parties’ compliance with the terms
of the agreement, which are more properly for the ar-
bitrator.” Corman, 422 F.3d at 528.
16 No. 09-4051
III. CONCLUSION
The district court’s ruling is A FFIRMED.
10-13-10