Air-Con Inc. is a Puerto Rico corporation that specializes in the sale and distribution of air conditioners in Puerto Rico and the Caribbean. A dispute arose between Air-Con and its supplier, Daikin Applied Latin America LLC. Daikin moved to compel arbitration after Air-Con filed suit in a Puerto Rican court. The district court of Puerto Rico granted Daikin’s request, finding that Air-Con and Daikin had operated pursuant to the terms of an agreement between Air-Con and Daikin’s parent company since the inception of their distribution relationship and the arbitration provision of the agreement between Air-Con and Daikin’s parent applied to the dispute. In addition, the district court read certain allegations from Air-Con’s complaint as admitting that its written agreement with Daikin’s parent applied to the dispute.
The First Circuit reversed. Initially, the court determined that, in light of section 4 of the FAA’s direction that the court “hear the parties” with regard to a motion to compel, the summary judgment standard should apply. The court reasoned that section 4’s command appears to contemplate the submission and consideration of evidentiary materials in support of and opposition to the motion. Given that a court should evaluate a motion to compel arbitration against the summary judgment standard, the court determined that it should review the court’s order de novo.
Applying Puerto Rican law, the court determined that the district court erred in applying the arbitration clause contained in Air-Con’s contract with Daikin’s parent to Air-Con’s dispute with Daikin. The court noted that the parent company is “an entity separate and distinct” from its subsidiary. In concluding that the contract should apply, the district court impermissibly put the burden of disproving the existence of a valid arbitration agreement on Air-Con, the non-moving party. The district court’s decision noted that Air-Con “failed to show” that the agreement between Air-Con and the parent company did not apply, but the focus should instead have been on whether Daikin affirmatively demonstrated the existence of a binding agreement to arbitrate.
In addition, the district court erred by construing allegations in Air-Con’s initial complaint as an admission that the arbitration provision of Air-Con’s agreement with the parent company applied. Daikin did not offer any evidence in support of its motion to compel arbitration but rather relied solely on the uncontroverted allegations from the complaint. In such a case, the court should review the motion like a motion to dismiss and therefore should draw all reasonable inferences in favor of the non-moving party (i.e., Air-Con). The district court erred by improperly construing the allegations of the complaint against Air-Con.
Without the district court’s misallocation of the burden of proof and improper construal of the complaint’s allegations against Air-Con, the First Circuit was left with the language of the agreement, which named Air-Con and Daikin’s parent company as the parties to the contract and further contained a non-assignability clause. That clause provided that the rights and obligations of the parties could not be assigned or otherwise transferred without the written consent of the other party. No such consent was entered into evidence. As the parent company was a separate entity from Daikin, and no written consent to an assignment was in the record, the district court erred by compelling Air-Con to arbitrate its dispute with Daikin.
Air-Con, Inc. v. Daikin Applied Latin America, LLC, No. 19-2248 (1st Cir. Dec. 20, 2021).
