Court Opinion

ID: 8206047
Source: CourtListenerOpinion
Date Created: 2022-09-13 17:00:26.555683+00
Date Added: 2024-06-11T16:41:12.689528
License: Public Domain

PRECEDENTIAL

    UNITED STATES COURT OF APPEALS
         FOR THE THIRD CIRCUIT

                  No. 21-2087

          FIELD INTELLIGENCE INC

                       v.

   XYLEM DEWATERING SOLUTIONS INC,

                                     Appellant

   Appeal from the United States District Court
            for the District of New Jersey
      (D.C. Civil Action No. 1-19-cv-20590)
  District Judge: Honorable Joseph H. Rodriguez

           Argued on January 11, 2022

Before: AMBRO, BIBAS, and ROTH, Circuit Judges

       (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

                           _________

                 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,

                                2
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to hold that the parties’ second contract superseded the first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agreement was no longer in effect.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

                               3
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

                               4
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

                               5
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

                                6
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 (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 (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.

                                7
        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., 139 S. Ct. 524, 529 (2019) (quoting Rent-
A-Ctr., 561 U.S. at 68–69). 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’ 2017 contract in fact
supersede their earlier agreement? Field Intelligence also asks
us to consider a third issue: whether Xylem waived any right
to seek arbitration under the 2013 contract by participating in
this federal litigation. We address each in turn.

                                A.

        To the first issue, we hold that the parties’ supersession
dispute is for a court, not an arbitrator, to decide. That
conclusion flows necessarily from a first principle of
arbitration law: that “arbitration is strictly a matter of consent.”
Lamps Plus, Inc. v. Varela, 139 S. Ct. 1407, 1415 (2019)
(alteration adopted) (quoting Granite Rock Co. v. Teamsters,
561 U.S. 287, 299 (2010)). An arbitrator’s authority is limited
to those claims that “the parties have agreed to submit to
arbitration.” First Options of Chi., Inc. v. Kaplan, 514 U.S.

                                 8
938, 943 (1995); AT&T Techs., Inc. v. Commc’ns Workers of
Am., 475 U.S. 643, 648–49 (1986). So before sending parties
to an arbitrator, a court must decide whether they agreed to
resolve their dispute in that forum, First Options, 514 U.S. at
943, which in turn requires it to determine “whether an
arbitration agreement exists at all,” Williams v. Medley Opp.
Fund II, LP, 965 F.3d 229, 237 n.7 (3d Cir. 2020) (quoting
Lloyd’s Syndicate 457 v. FloaTEC, L.L.C., 921 F.3d 508, 515
n.4 (5th Cir. 2019)); Henry Schein, 139 S. Ct. at 530 (“[B]efore
referring a dispute to an arbitrator, the court determines
whether a valid arbitration agreement exists.”). Because the
substance of the parties’ supersession dispute is “whether there
is an agreement to arbitrate,” Jaludi v. Citigroup, 933 F.3d 246,
255 (3d Cir. 2019), the District Court rightly declined to send
it to an arbitrator.

       Xylem asks us to view this case differently. It points to
the general rule, referenced above, that parties may delegate
threshold arbitrability issues to an arbitrator provided there is
“clear and unmistakable” evidence they agreed to do so. First
Options, 514 U.S. at 944 (alterations adopted) (internal
quotation marks omitted). The 2013 contract’s arbitration
provision, it says, contains such clear and unmistakable
evidence, as it expressly delegates arguments over its
“termination or invalidity” to an arbitrator. Appx. 533. Hence
that person, not a court, must decide the supersession dispute.

       Were this fight simply about whether the 2013
agreement had terminated or was invalid, we might agree. But
the question here is whether, by the later contract, the parties
intended to extinguish their prior agreement and litigate any
disputes between them moving forward. Put another way, if

                               9
Field Intelligence is correct that the 2017 contract superseded
the 2013 agreement, then there is no arbitration agreement for
us to enforce. And “it can hardly be said that contracting
parties clearly and unmistakably agreed to have an arbitrator
decide the existence of an arbitration agreement when one of
the parties has put the existence of that very agreement in
dispute.” 1 MZM, 974 F.3d at 401; see also McKenzie v.
Brannan, 19 F.4th 8, 18–20 (1st Cir. 2021) (contract delegating
arbitrability issues to an arbitrator cannot provide “clear and
unmistakable” evidence of the parties’ intent if alleged to be
superseded by a later agreement).

        Xylem’s arguments to the contrary are unpersuasive. It
alludes to the so-called “severability” doctrine, under which an
arbitration provision (including a provision delegating
arbitrability issues to an arbitrator) is severable from the
contract in which it is contained and may be enforced despite
an assertion that the container contract is invalid. Prima Paint

1
  Xylem argues that the 2013 agreement’s incorporation of
American Arbitration Association rules further indicates an
intent to arbitrate gateway arbitrability issues. Although
“virtually every circuit to have considered the issue has
determined that incorporation of the AAA arbitration rules
constitutes clear and unmistakable evidence that the parties
agreed to arbitrate arbitrability,” we have yet to decide it in this
context. Chesapeake Appalachia, LLC v. Scout Petroleum,
LLC, 809 F.3d 746, 763 (3d Cir. 2016) (alterations adopted)
(quoting Oracle Am., Inc. v. Myriad Grp. A.G., 724 F.3d 1069,
1074 (9th Cir. 2013)). We save it again for another day
because, as we explain below, even assuming the 2013
contract’s arbitration provision delegates arbitrability issues to
an arbitrator, it does not govern this dispute.

                                10
Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403–04
(1967); Rent-a-Ctr., 561 U.S. at 70–71. But we have held that
this doctrine “presumes an underlying, existent[] agreement.”
Sandvik AB v. Advent Int’l Corp., 220 F.3d 99, 106 (3d Cir.
2000). It does not apply where, as here, the existence of the
parties’ arbitration agreement has been challenged.

        We recently reaffirmed this holding in MZM, a case
that, like this one, involved a contractual provision purporting
to delegate arbitrability issues to an arbitrator. The dispute
there arose from a one-page, short-form agreement hurriedly
signed between MZM Construction Co. and a local labor
union. 974 F.3d at 392. The short-form agreement
incorporated a separate agreement requiring MZM to make
contributions to the New Jersey Building Laborers’ Statewide
Benefit Funds (the “Funds”). Id. That incorporated agreement
contained an arbitration provision. Id. at 393. When the Funds
learned years later that MZM likely was not contributing the
required amount (which MZM denied), they indicated they
would be submitting the dispute to an arbitrator per that
provision. Id.

        MZM sued to enjoin the arbitration. Id. Its claim was
fraud in the execution—that the union misrepresented the
substance of the short-form agreement to obtain MZM’s
consent. Id. at 393–94. Because of this misrepresentation,
MZM argued that agreement was void. Id. The Funds
countered that the Court lacked authority to decide the fraud-
in-the-execution claim under the incorporated agreement’s
arbitration provision, which entitled an arbitrator “to decide
whether an Agreement exists, where that is in dispute.” Id.

                              11
        We disagreed. Because the Federal Arbitration Act
requires courts to compel arbitration only when “satisfied that
the making of the agreement for arbitration . . . is not in issue,”
id. at 397 (alteration in original) (quoting 9 U.S.C. § 4), they—
rather than arbitrators—must “decide questions about the
formation or existence of an arbitration agreement, namely the
element of mutual assent,” id. at 397–98. No doubt parties
may, as a general matter, delegate arbitrability questions to an
arbitrator. But “the legal effect of the delegation must come
from an ‘independent source’ outside the contract whose
formation or existence is being disputed.” Id. at 402 (quoting
Sandvik, 220 F.3d at 108). “[C]ourts retain the primary power
to decide questions of whether the parties mutually assented to
a contract containing or incorporating a[n arbitration]
delegation provision.” Id.

        Granted, MZM dealt with issues of contract formation
rather than contract supersession. Our parties, by contrast, do
not dispute that the 2013 agreement was valid when executed.
But we think the distinction deserves little weight in this
context. Like a formation dispute, Field Intelligence’s
supersession challenge places the parties’ mutual assent
directly at issue. Its contention is that the parties agreed, by
their 2017 contract, not to submit the dispute before us to an
arbitrator. A court should rule on that issue before referring a
case to arbitration.

       To hold otherwise would foster passing strange results.
Xylem asks us to enforce the arbitration provision contained in
the parties’ 2013 contract despite the assertion that it was
extinguished and that the parties instead redefined their
relationship in the 2017 agreement not to include an arbitration

                                12
obligation. Were we to do so, parties would never be able to
execute a superseding agreement to rid themselves of a prior
agreement to arbitrate arbitrability. They would forever be
bound by that agreement even if their later dealings show an
intent to avoid it. That in turn would undermine our guiding
principle in the arbitration context: that “no arbitration may be
compelled in the absence of an agreement to arbitrate.”
Sandvik, 220 F.3d at 107–08. We decline to reach such an odd
outcome and instead conclude that the District Court was right
to resolve the supersession issue itself rather than send it to an
arbitrator.
                                B.

       Because a court, rather than an arbitrator, must decide
whether the parties’ 2017 contract superseded their 2013
agreement, we move now to that issue. They agree that New
Jersey law governs our analysis. Under that law, supersession
is a question of the parties’ intent as discerned “from the
contracts themselves.” Rosenberg v. D. Kaltman & Co., 101
A.2d 94, 96 (N.J. Super. Ct. Ch. Div. 1953). A later contract
does not supersede an earlier one unless both concern “the
same subject matter” and the later agreement is so
“inconsistent” with the former “that the two cannot stand
together.” Id.; accord Doyle v. Northrop Corp., 455 F. Supp.
1318, 1332 (D.N.J. 1978).

       According to Field Intelligence, the parties intended the
2017 contract to replace completely their prior agreement, such
that the arbitration obligation imposed by that earlier contract
no longer exists. It relies primarily on the 2017 contract’s
merger provision, which (to repeat) states: “This Agreement
constitutes the entire agreement between the parties with
respect to its subject matter, and supersedes any and all prior

                               13
or contemporaneous understandings or agreements whether
written or oral.” Appx. 540. But that statement expressly
limits its effect to prior agreements concerning the same
subject matter as the 2017 contract. So it alone cannot resolve
the parties’ supersession dispute; rather, we must first
determine whether the 2013 and 2017 agreements involve
identical subject matter.

        We cannot say they do. The 2013 contract is a “Non-
Disclosure Agreement” that applies to the parties’ exchange of
confidential and proprietary information during their
“development of a custom telematics solution.” Appx. 531.
The 2017 contract, by contrast, is a “Software Subscription
Service Agreement,” entered after the telematics solution was
developed, to provide Xylem and its customers access to Field
Intelligence’s software for “monitor[ing] the status and
operation of remotely located machinery.” Appx. 535. And
while that later agreement, like the 2013 one, includes
protections for Field Intelligence’s confidential information,
those protections do not extend to information exchanged
between the parties prior to their execution of the 2017
contract.

       Neither are the two agreements so “inconsistent” that
they “cannot stand together.” See Rosenberg, 101 A.2d at 96.
The only potential inconsistency between these documents is
their differing dispute-resolution provisions, one of which
provides for arbitration while the other provides for litigation.
But those provisions are reconcilable. Each is expressly
limited to the subject matter of its agreement: the 2013 contract
requires arbitration of disputes “arising out of or in connection
with this Agreement,” Appx. 533 (emphasis added), whereas
the 2017 contract requires litigation of disputes arising “under

                               14
or concerning this Agreement,” Appx. 539 (emphasis added).
The result: claims involving the first agreement are heard by
an arbitrator, while claims involving the second are heard in
court.

       One last note. The 2013 contract states that it “may be
modified or waived only by an express amendment and waiver
in writing signed by the Parties.” Appx. 533. Thus, if they
meant to supersede that contract and its arbitration obligation,
we would expect to see some specific language to that effect in
the 2017 agreement. But there is none. The 2017 contract does
not even mention its predecessor, let alone expressly indicate
any intent to replace that earlier agreement. And with no
indication in the 2017 agreement that the parties intended to
replace the 2013 contract, we cannot say it was superseded.
Accordingly, the 2013 contract’s arbitration provision is still
in effect, and Xylem was entitled to arbitrate claims tied to that
agreement.
                              C.

        In a final effort to avoid arbitration, Field Intelligence
submits Xylem lost its right to seek such relief by engaging in
the federal litigation. We disagree.
        A party can waive its ability to arbitrate a claim by
litigating it in court. 2 Gray Holdco, Inc. v. Cassady, 654 F.3d

2
  There is a distinction between waiver and forfeiture.
“Whereas forfeiture is the failure to make the timely assertion
of a right, waiver is the intentional relinquishment or
abandonment of a known right.” United States v. Brito, 979
F.3d 185, 189 (3d Cir. 2020) (internal quotation marks
omitted) (quoting United States v. Olano, 507 U.S. 725, 733
(1993)). We note that this may well be a forfeiture dispute, as

                               15
444, 451 (3d Cir. 2011). But, given the “strong preference” for
“enforc[ing] private arbitration agreements,” waiver is not
lightly inferred. Id. The “touchstone” of the inquiry is
prejudice, Ehleiter v. Grapetree Shores, Inc., 482 F.3d 207,
222 (3d Cir. 2007) (quoting Hoxworth v. Blinder, Robinson &
Co., 980 F.2d 912, 925 (3d Cir. 1992)), which we assess using
several factors, including the timeliness of the party’s
arbitration demand and the extent to which it has contested the
merits of (and engaged in discovery with respect to) its
arbitrable claims, see Gray Holdco, 654 F.3d at 451;
Hoxworth, 980 F.2d at 926–27 (detailing prejudice inquiry).

        There was no prejudice here. Field Intelligence brought
its claims under the 2017, not the 2013, agreement. It did not
indicate any intent to raise claims under the earlier contract
until responding to Xylem’s discovery requests. When Xylem
asked if Field Intelligence planned to rely on the parties’ 2013
agreement to support any of its claims, the latter responded by
citing several sections of the 2013 agreement which, in its
view, required Xylem to keep confidential and not copy the
Hardware Units’ design. Following this admission, Xylem did
not delay in asserting its rights under that prior agreement: it
filed its arbitration demand the next month.

        Given that Field Intelligence framed its suit around the
2017 agreement, Xylem did not waive its right to pursue
arbitration for claims arising under the 2013 contract merely
by engaging in this litigation. See Forby v. One Techs., L.P.,

we have no evidence Xylem intentionally abandoned its
arbitration rights. Still, because the distinction does not bear
on our analysis, we proceed based on how the parties have
framed the issue.

                              16
13 F.4th 460, 465 (5th Cir. 2021) (“For waiver purposes, ‘a
party only invokes the judicial process to the extent it litigates
a specific claim it subsequently seeks to arbitrate.’” (emphasis
in original) (quoting Subway Equip. Leasing Corp. v. Forte,
169 F.3d 324, 328 (5th Cir. 1999))). Field Intelligence asserts
harm caused by Xylem’s belated arbitration demand, but as its
lawsuit focuses on an entirely different contract, it can hardly
claim prejudice as to any claims Xylem may bring under the
2013 agreement.
                         *     *      *

        In sum, while we agree with the District Court that it,
and not an arbitrator, was required to determine whether the
parties’ first agreement was superseded by their second, we do
not agree that the earlier agreement was in fact superseded.
Because the 2013 agreement still exists, Xylem was entitled to
enforce its arbitration provision as to what that contract covers.
We therefore reverse the Court’s judgment enjoining the
arbitration proceedings. We vacate its judgment as to Xylem’s
motion to stay the federal litigation while arbitration is pending
and remand for it to consider the merits of that motion in light
of our opinion.

                               17