Anhui Powerguard Tech. Co. v. DRE Health Corp.

95 F.4th 1146

ANHUI POWERGUARD TECHNOLOGY COMPANY, LIMITED, Plaintiff - Appellee v. DRE HEALTH CORPORATION, Defendant - Appellant

No. 23-1820

United States Court of Appeals, Eighth Circuit

Submitted: January 9, 2024

Filed: March 14, 2024

Appeal from United States District Court for the Western District of Missouri - Kansas City

Counsel who presented argument on behalf of the appellant and appeared on the appellant's brief, was George Edgar James, of Kansas City, MO.

Counsel who presented argument on behalf of the appellee and appeared on the appellee's brief, was Andrew J. Ennis, of Kansas City, MO. The following attorney(s) also appeared on the appellee's brief; Jennifer J. Eng, of Kansas City, MO

Before SMITH, Chief Judge,¹ GRUENDER and SHEPHERD, Circuit Judges.

SHEPHERD, Circuit Judge.

Anhui Powerguard Technology Company, Limited, filed a breach-of-contract action alleging that DRE Health Corporation failed to remit payment for over $9 million in purchase orders that Anhui had fulfilled. The district court² denied DRE Health's motion to stay litigation and compel arbitration under the Federal Arbitration Act (FAA). DRE Health appeals that order. Having jurisdiction under 9 U.S.C. § 16(a)(1)(B), we find that the parties did not agree to submit their dispute to arbitration and accordingly affirm.

I.

Anhui is a Chinese manufacturer that produces personal protective equipment (PPE), including disposable gloves.³ DRE Health, a PPE wholesaler, contracted with Anhui in December 2020 to import bulk shipments of disposable gloves with the intention of reselling the goods in the United States. By March 2021, Anhui had fulfilled four purchase orders totaling more than $9 million, but DRE Health was unable to pay down its debt. The parties subsequently executed a novation in which Anhui agreed to reduce the amount DRE Health owed by approximately $3.1 million in exchange for DRE Health's promise to purchase additional shipments of gloves. The agreement set forth an installment schedule for the remaining $5.9 million balance pursuant to which DRE Health was required to remit $1.97 million within five business days of June 23, 2021, $1.965 million before July 21, 2021, and an additional $1.965 million before August 21, 2021. The agreement also provided:

AFTER THE INITIAL PAYMENT OF $1,970,000.00 USD AND IN CONSIDERATION OF FUTURE PAYMENT COMMITMENTS, ANHUI POWERGUARD AGREES TO RELEASE DRE Health FROM ALL LEGAL CLAIMS (GRANTED DRE COMPLETES INSTALLMENT PAYMENTS), AGREE THAT THE VENUE FOR ANY FUTURE DISPUTES SHALL BE BINDING ARBITRATION WITH HONG KONG INTERNATIONAL ARBITRATION CENTRE (HKIAC) UNDER THE TERMS OF ORIGINAL PO, AND AGREE TO DELIVER NITRILE GLOVES TO DRE Health . . .

In June 2022, Anhui filed a diversity action in federal court alleging that DRE Health breached the agreement by remitting only a single $1 million payment on September 11, 2021. DRE Health responded with a motion to stay litigation and compel arbitration pursuant to the agreement's arbitration clause. The district court denied the motion upon finding that the prefatory phrase, "AFTER THE INITIAL PAYMENT OF $1,970,000.00 USD," served as a condition precedent to the three obligations enumerated in the agreement, including Anhui's agreement to submit any future disputes to binding arbitration. Because DRE Health did not complete the initial $1.97 million installment payment, there consequently was no contract between the parties to arbitrate. The district court also found that the inclusion of the prefatory phrase in the agreement vitiated any "clear and unmistakable" evidence that the parties intended to submit the threshold issue of arbitrability to an arbitrator. DRE Health now appeals.

II.

"On appeal, we review de novo the denial of a motion to compel arbitration." Duncan v. Int'l Mkts. Live, Inc., 20 F.4th 400, 402 (8th Cir. 2021) (per curiam). "Arbitration agreements are favored by federal law and will be enforced as long as a valid agreement exists 'and the dispute falls within the scope of that agreement.' " Shockley v. PrimeLending, 929 F.3d 1012, 1017 (8th Cir. 2019) (citation omitted). "But despite arbitration's 'favored status,' " Duncan, 20 F.4th at 402 (citation omitted), "a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit," Parm v. Bluestem Brands, Inc., 898 F.3d 869, 873 (8th Cir. 2018) (quoting Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83, 123 S.Ct. 588, 154 L.Ed.2d 491 (2002)). The threshold inquiry, therefore, is whether the parties contractually agreed to arbitrate their dispute. Shockley, 929 F.3d at 1017. DRE Health, as the party seeking to compel arbitration, bears the burden of proving that such an agreement exists and is enforceable. Id. Further, "state contract law governs the threshold question of whether an enforceable arbitration agreement exists between litigants; if an enforceable agreement exists, the federal substantive law of arbitrability governs whether the litigants' dispute falls within the scope of the arbitration agreement." Donaldson Co. v. Burroughs Diesel, Inc., 581 F.3d 726, 731 (8th Cir. 2009). Anhui and DRE Health agree that Missouri law applies.

A.

"The FAA places arbitration agreements on an equal footing with other contracts, and courts will examine arbitration agreements in the same light as they would examine any contractual agreement." Triarch Indus., Inc. v. Crabtree, 158 S.W.3d 772, 776 (Mo. 2005) (en banc). Thus, "in determining whether the parties have entered into a valid agreement to arbitrate," Missouri courts apply "the usual rules of state contract law and canons of contract interpretation." Id. The parties here do not dispute that the prefatory phrase in the agreement, "AFTER THE INITIAL PAYMENT OF $1,970,000.00 USD," is a condition precedent. See Lowery v. Air Support Int'l, Inc., 982 S.W.2d 326, 329 (Mo. Ct. App. 1998) ("A condition precedent is a condition which must be fulfilled before the duty to perform an existing contract arises. . . . '[N]o promise based upon a condition can be enforced as such until the contingency upon which it depends has happened.' " (citation omitted) (alteration in original)). Their disagreement, rather, centers on the reach of the prefatory phrase to the three distinct obligations that the agreement imposes: (1) Anhui agrees to release DRE Health from all legal claims provided that DRE Health remits the three installment payments; (2) Anhui agrees to submit any future dispute to arbitration; and (3) Anhui agrees to deliver additional shipments of gloves to DRE Health.

DRE Health contends that the prefatory phrase functions as a condition precedent only to Anhui's obligation to release all legal claims. That is, the parties intended to create alternative methods of dispute resolution, such that the failure of DRE Health to complete the initial $1.97 million installment payment would relieve Anhui of its duty to release DRE Health from its legal obligations but would not impact the parties' independent agreement to arbitrate. Anhui, on the other hand, submits that the prefatory phrase extends to all three obligations, and DRE Health's failure to remit the initial installment payment relieves Anhui of its duty to submit the dispute to arbitration. We find that Anhui's interpretation accords with the logical and most natural reading of the agreement.

The series-qualifier canon guides our analysis. See generally Antonin Scalia & Bryan A. Garner, Reading Law: The Interpretation of Legal Texts 147 (2012). It instructs: "When there is a straightforward, parallel construction that involves all nouns or verbs in a series, a prepositive . . . modifier normally applies to the entire series." State v. Champagne, 561 S.W.3d 869, 873 (Mo. Ct. App. 2018) (citation omitted); see also United States v. Loyd, 886 F.3d 686, 688 (8th Cir. 2018) ("The series-qualifier canon 'requires a modifier to aptrailply to all items in a series when such an application would represent a natural construction.' " (citation omitted)). The Supreme Court has found that the canon "generally reflects the most natural reading of a sentence," Facebook, Inc. v. Duguid, 592 U.S. 395, 141 S. Ct. 1163, 1169, 209 L.Ed.2d 272 (2021), and this Court has noted that it can "reinforce[ ]" plain meaning, United States v. Wilkins, 25 F.4th 596, 600 (8th Cir. 2022).

Here, the verbs "agrees" or "agree" precede all three obligations in the contract, which indicates a parallel construction. See Parallel, Meriam-Webster's Collegiate Dictionary (11th ed. 2020) (defining "parallel" as "similar, analogous," "readily compared," "having identical syntactical elements in corresponding positions"). Moreover, the three obligations form a series because they pertain to a common subject matter: the business relationship between the parties. Cf. Jama v. Immig. & Customs Enf't, 543 U.S. 335, 344 n.4, 125 S.Ct. 694, 160 L.Ed.2d 708 (2005) (using "receives, possesses, or transports" to illustrate the concept of an "integrated list" (citation omitted)); Lockhart v. United States, 577 U.S. 347, 352, 136 S.Ct. 958, 194 L.Ed.2d 48 (2016) ("A reader intuitively applies 'of the United States' to 'the laws,' 'the treaties' and 'the constitution' because (among other things) laws, treaties, and the Constitution are often cited together, because readers are used to seeing 'of the United States' modify each of them, and because the listed items are simple and parallel without unexpected internal modifiers or structure.").

The agreement also contains other syntactical elements that counsel in favor of Anhui's interpretation. First, a comma separates each obligation rather than a period or semicolon; while the latter two punctuation marks could suggest that each item within the series should be construed separately, the use of commas implies the opposite. Alpern v. Ferebee, 949 F.3d 546, 550 (10th Cir. 2020) (holding that the terms "along roads or trailsides" modified the entire series of...