Of the Federal Circuit, sitting by designation. *

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
-2-

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
JJI's unincorporated Medical Caribbean division and several 1

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).

-3-

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. That court referred the case to a 1

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 . . . .
The magistrate judge issued a definitive order (rather than 2

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).

-4-

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, requiring Next Step to submit all its 2

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 shortcircuited 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
-5-

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.,
-6-

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
-7-

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
Puerto Rico appears not to recognize actions for emotional 3

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).

-8-

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; but if the 3

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.
-9-

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
Section 22 makes Dávila a "party to," for example, section 4

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."

-10-

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." By virtue of section 22, Dávila 4

therefore appears to be a "party to" the arbitration clause even

though the clause refers only to the "Distributor." Next Step
-11-

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
-12-

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.