Field Intelligence Inc. v. Xylem Dewatering Solutions Inc.

49 F.4th 351

FIELD INTELLIGENCE INC

v.XYLEM DEWATERING SOLUTIONS INC, Appellant

No. 21-2087

United States Court of Appeals, Third Circuit.

Argued on January 11, 2022

Opinion filed: September 13, 2022

Christopher Larus, Benjamen C. Linden, Rajin S. Olson, David A. Prange (Argued), Robins Kaplan, 800 LaSalle Avenue, 2800 LaSalle Plaza, Minneapolis, MN 55402, Counsel for Appellant

Aaron M. Frankel (Argued), Kramer Levin Naftalis & Frankel, 1177 Avenue of the Americas, New York, NY 10036, Counsel for Appellee

Before: AMBRO, BIBAS, and ROTH, Circuit Judges

OPINION OF THE COURT

AMBRO, Circuit Judge

Two companies, Xylem Dewatering Solutions and Field Intelligence, entered into two contracts. The first contained an arbitration provision; the second required the parties to litigate their disputes. As sure as Camille coughing in the first scene and dying of consumption in the last, a conflict arose between the businesses. Field Intelligence filed suit in federal court alleging a breach of their second agreement. Xylem, unconvinced that Field Intelligence's lawsuit did not implicate the parties' first contract, filed an arbitration demand and moved to stay the federal litigation pending the outcome of the arbitration.

Field Intelligence protested. It asked the District Court to hold that the parties' second contract superseded the first such that the arbitration provision contained in that earlier agreement was no longer in effect. While disputing this interpretation of the contracts, Xylem responded that Field Intelligence's supersession challenge could, per the first contract's arbitration provision, only be decided by an arbitrator. The Court disagreed. It held, first, that it had authority to decide the supersession issue and, second, that the parties' later agreement did supersede their earlier contract, thereby eliminating any duty to arbitrate. Xylem appeals both rulings.

We agree with the District Court that it was authorized to determine whether the parties' second agreement superseded, and hence replaced, their first. But we disagree that the first agreement was superseded. We therefore reverse in part, vacate in part, and remand for further proceedings.

I. Background

Xylem is a water technology company that manufactures and sells large-capacity water pumps. It wanted a better way for its customers to monitor those pumps remotely. In 2012 it called on Field Intelligence to develop a custom telematics solution that would consist of hardware built to interface with the pumps ("Hardware Units" or "Units"), and computer software and support services for monitoring and controlling the equipment.

Two contracts followed. The first, in 2013, was a "Non-Disclosure Agreement." It governed the disclosure and protection of "certain information and related materials" that the parties considered to be "confidential and secret and in which each has a proprietary interest" in connection with their "development of a custom telematics solution." Appx. 531. Significantly, the agreement contained an arbitration provision requiring that any "dispute, controversy or claim arising out of or in connection with this Agreement, or the breach, termination or invalidity thereof," be "settled by arbitration in accordance with the Rules of the American Arbitration Association." Id. at 533.

The parties launched the first-generation Hardware Units shortly thereafter. Second-generation Units became available around December 2014. Xylem purchased them from Field Intelligence via written Purchase Orders. It also purchased monthly subscriptions that permitted Xylem's customers to access and use Field Intelligence's software via satellite or cellular networks, thereby allowing them to monitor and control their Xylem pumps using the Hardware Units.

There was no written agreement governing Xylem's software subscription purchases until 2017, when the parties signed the second contract relevant to this dispute: the "Software Subscription Service Agreement." It states that Field Intelligence is "the owner of certain proprietary computer software" and "sells subscriptions for subscribers to access and use" that software. Id. at 535. The contract allowed Xylem to access the software via a Field Intelligence-hosted website and provided subscription terms and monthly fees based on the number of Hardware Units actively deployed in the field.

The 2017 agreement also contained an "integration clause" (known also as a "merger clause") stating that "[t]his Agreement constitutes the entire agreement between the parties with respect to its subject matter, and supersedes any and all prior or contemporaneous understandings or agreements whether written or oral." Id. at 540. And, unlike its predecessor, the 2017 contract contained no arbitration provision, instead requiring any "action under or concerning" that contract to be litigated in a state or federal court in New Jersey. Id. at 539.

Eventually, Xylem began building its own hardware. Suspecting Xylem had developed its product by reverse-engineering the Units, Field Intelligence sued it for breach of the 2017 contract, among other things. Per that contract's forum-selection provision, Field Intelligence filed its action in the U.S. District Court for the District of New Jersey. Its complaint did not mention the 2013 contract, let alone allege any breach of that first agreement.

Xylem moved to dismiss on the following rationale: Field Intelligence could not maintain its breach-of-contract claim because, even if Xylem had reverse-engineered the Hardware Units, the 2017 agreement did not bar it from doing so. The District Court rejected that interpretation of the contract and denied Xylem's motion to dismiss in part.

The parties then moved to discovery. Xylem sent Field Intelligence an interrogatory request asking if it intended to rely on the parties' 2013 contract to support any of its claims. Field Intelligence responded that

Xylem breached the provisions [of the 2013 contract] by copying the design and functionality of the [Hardware Units], modifying [them], using [them] to test and develop Xylem's knock off designs, sending [them] to APD&M for purposes of developing Xylem's knock off designs, and not taking reasonable precautions to protect the[ir] confidentiality ....

Id. at 827.

A month later, Xylem filed an arbitration demand with the American Arbitration Association seeking various forms of declaratory relief, including a determination that it did not breach the 2013 contract. It then moved to stay the federal litigation pending resolution of the arbitration. It argued that Field Intelligence's interrogatory response revealed for the first time its intent to rely on the 2013 agreement as requiring Xylem to maintain the confidentiality of the Hardware Units. Xylem disputed this interpretation, as it maintained that these questions of contract scope and meaning were not for the District Court to decide but instead delegated to an arbitrator under the 2013 contract's arbitration provision.

Field Intelligence opposed and cross-moved to enjoin the arbitration. Its claim was that the 2017 agreement superseded the 2013 contract such that the earlier agreement to arbitrate ceased. The District Court agreed. It held first that it—rather than an arbitrator—needed to determine whether the 2013 contract was still in effect. Second, it ruled that the 2017 agreement did replace the parties' 2013 contract, thereby eliminating any arbitration obligation contained in the prior agreement. The Court enjoined the arbitration and denied as moot Xylem's motion to stay the federal litigation. This appeal followed.

II. Jurisdiction and Standard of Review

The District Court had jurisdiction under 28 U.S.C. §§ 1331 and 1332. Our jurisdiction is under 9 U.S.C. § 16(a)(1)(A), which allows us to consider an order refusing a stay pending arbitration. We review anew (or de novo ) the District Court's denial of Xylem's motion to stay proceedings pending arbitration. MZM Constr. Co. v. N.J. Bldg. Laborers Statewide Benefit Funds , 974 F.3d 386, 395 (3d Cir. 2020) (fresh review where district court has denied a party's "asserted right to have [an] issue submitted to arbitration").

III. Discussion

Congress enacted the Federal Arbitration Act, 9 U.S.C. § 1 et seq. , "to reverse the longstanding judicial hostility to arbitration agreements" and place them on "the same footing as other contracts," Spinetti v. Serv. Corp. Int'l , 324 F.3d 212, 218 (3d Cir. 2003) (quoting Gilmer v. Interstate/Johnson Lane Corp. , 500 U.S. 20, 24, 111 S.Ct. 1647, 114 L.Ed.2d 26 (1991) ). It "reflects the fundamental principle that arbitration is a matter of contract." Rent-A-Ctr., W., Inc. v. Jackson , 561 U.S. 63, 67, 130 S.Ct. 2772, 177 L.Ed.2d 403 (2010). Arbitration agreements are thus "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. If a court is "satisfied that the making of the agreement for arbitration ... is not in issue," it must send the parties to an arbitrator. Id. § 4.

Parties may refer more than the merits of their disputes to arbitration. They may also agree to delegate to an arbitrator " ‘gateway’ questions of ‘arbitrability,’ such as whether the parties have agreed to arbitrate or whether their agreement covers a particular controversy." Henry Schein, Inc. v. Archer & White Sales, Inc. , ––– U.S. ––––, 139 S. Ct. 524, 529, 202 L.Ed.2d 480 (2019) (quoting Rent-A-Ctr. , 561 U.S. at 68–69, 130 S.Ct. 2772 ). This appeal involves such a threshold question: whether Field Intelligence is bound by the arbitration provision in the parties' 2013 contract, or whether the 2017 agreement superseded that contract completely, thereby eliminating its duty to arbitrate.

Two issues stem from this gateway concern. First, who should decide whether the second contract replaced the first, a court or an arbitrator? Second, if a court, rather than an arbitrator, should decide, does the parties' 2...