Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—S.D. Tex.: Claim to enjoin termination of distributorship must be arbitrated, (Nov 6, 2014)

By Linda O’Brien, J.D., LL.M.

An industrial equipment distributor’s action to permanently enjoin a manufacturer from terminating its distributorship agreement had to be submitted to arbitration, the federal district court in Houston has decided (DXP Enterprises, Inc. v. Goulds Pumps, Inc., November 4, 2014, Rosenthal, L.).

Goulds Pumps is a manufacturer of pumps, parts, and accessories for a wide range of industries. In 2010, Goulds entered into a distributor agreement with DXP Enterprises, an industrial equipment dealer, which gave DXP the right to sell and promote certain lines of Goulds products, including API oil and gas pumps. The agreement contained an arbitration clause that allowed either party to apply to a court for equitable relief “notwithstanding” the requirement to arbitrate all claims under the agreement. In 2013, Goulds informed DXP that it would begin selling its API oil and gas products directly to customers. In response to DXP’s objections, Goulds removed its API oil and gas products from the distributor agreement and agreed to allow DXP to sell competing API products.

After DXP purchased a company that made API oil and gas pumps, Goulds informed DXP that the purchase violated the distributor agreement. Goulds then demanded arbitration and requested an award to terminate the agreement. In response, DXP sued Goulds, seeking a permanent injunction preventing Goulds from terminating the distributor agreement and claiming that its action violated the Texas Dealers Act. Goulds moved to dismiss DXP’s claim for a permanent injunction on the ground that the claim must be arbitrated.

The court determined that the arbitration provision in the distributor agreement, which allowed the parties to pursue equitable relief, did not allow DXP to avoid arbitrating its claim for a permanent injunction. The Federal Arbitration Act (FAA) requires district courts to direct parties to arbitrate issues covered by a valid arbitration agreement. Since the provision did not explicitly except claims for equitable relief from the scope of the broad arbitration clause, the court was required to read the clause as a whole to give effect to all of its provisions.

DXP’s argument that the term “notwithstanding” indicated that claims seeking an injunction in court were excluded from the obligation to arbitrate was rejected as an overly expansive reading of the FAA. The court noted a number of courts have ruled that language similar to the clause in the distributor agreement allows parties to pursue temporary injunctive relief to maintain the status quo pending arbitration but not to request permanent injunctive relief that requires the court to decide the merits of the arbitrable claim.

Moreover, the arbitration provision did not strongly indicate the parties’ intent to litigate all claims for injunctive relief even when the merits of the underlying claims were pending in arbitration. The strong policy and presumption in favor of arbitration weighed against attempts to displace the pending arbitration by allowing DXP to litigate on the merits through a claim for a permanent injunction. Therefore, DXP’s claim for a permanent injunction must be submitted to arbitration, the court concluded.

The case is No. H-14-1112.

Attorneys: Alistair B. Dawson (Beck Redden & Secrest LLP), and Laura A. Brenner (Reinhart Boerner Van Deuren, SC) for DXP Enterprises, Inc. Lucas Thomas Elliot (Morgan Lewis & Bockius), and Michael J. Aprahamian (Foley & Lardner LLP) for Goulds Pumps, Inc.

Companies: DXP Enterprises, Inc.; Goulds Pumps, Inc.

Cases: FranchisingDistribution TexasNews