U.S. Fifth Circuit Judge Stephen Higginson. HANDOUT

The U.S. Court of Appeals for the Fifth Circuit is refusing to let a plaintiff business slip out of an arbitration decision, rejecting its $40 million breach-of-contract claim against the makers of WD-40, the popular household lubricant packaged in blue and yellow aerosol cans.

The background to the court’s recent decision in IQ Products v. WD-40 is as follows. WD-40 produces a lubricant concentrate and develops specifications for their products but uses independent contractors to manufacture its WD-40-branded products. In 1992, IQ Products began serving as a contract packager for WD-40 products.

In 1996, WD-40 began developing a new formula for its products that used carbon dioxide for its can’s propellant rather than propane/butane. IQ had concerns about the engineering challenges associated with the propellant change, so the parties met that year and signed a manufacturing and license agreement limiting it to the propane/butane formula. That 1996 signed agreement also contained a clause providing that any claim or controversy between the parties would be settled in arbitration.

After receiving WD-40′s assurances that it had performed extensive testing of the new formula, IQ began manufacturing WD-40 products with the new formula.

In 2011, WD-40 issued a request for proposal to restructure its supply-chain business model—including IQ—to bid for long-term supply agreements. WD-40 selected IQ’s bid later that year and gave written notice of its intent to terminate the 1996 agreement to allow the parties to negotiate a new long-term agreement.

But negotiations broke down after IQ informed WD-40 that there was a problem with the packaging specifications and recommended revising its design and specifications. IQ also expressed concerns about quality control and told WD-40 that it would need to raise prices to account for increased costs and expenses.

In 2012, WD-40 terminated the parties’ business relationship. IQ later sued WD-40 in a Southern District of Texas federal court seeking over $40 million in a case alleging breach of contract—specifically that WD-40 had breached the “long term agreement” the parties entered into when WD-40 accepted IQ’s FRP bid.

But WD-40 answered with counterclaims and a motion to compel arbitration pursuant to the 1996 agreement’s arbitration clause. Over IQ’s objections, the district court compelled arbitration, staying the case pending the arbitrator’s decision on arbitrability.

An independent arbitrator later determined that both parties’ claims were arbitrable and a three-member arbitration panel ultimately issued a final arbitration award in WD-40′s favor in 2015.

WD-40 moved to confirm the arbitration award in the district court, but IQ filed a motion to vacate the award, arguing that the arbitration panel lacked jurisdiction to arbitrate the claims. The district court granted WD-40′s motion to confirm the award and denied IQ’s motion to vacate.

IQ appealed the decision to the Fifth Circuit, arguing that the district court erred by granting the motion to compel arbitration on the issue of arbitrability. IQ asserted that the district court should have decided arbitrability and none of the claims at issue in the dispute was arbitrable.

In reaching the decision on Sept. 13, Judge Stephen Higginson wrote that the Fifth Circuit looked at whether the claim that the 1996 arbitration clause agreement between the parties governed their dispute was “wholly groundless.”

Higginson wrote that both parties specifically referred to the 1996 agreement over the years and that IQ had not objected to that agreement.

“In light of the ‘exceptional’ nature of the wholly groundless test and the competing, plausible interpretations of the 1996 agreement’s meaning and scope, we conclude that WD-40′s assertion of arbitrability is not wholly groundless,” Higginson wrote.

“According, we affirm the district court’s order compelling arbitration,” Higginson wrote.

The decision also affirmed the court’s final judgment in favor of WD-40.