Exothermics, Inc. v. P Ernst & Young U.S. LLP & Ernst & Young LLP

2025 DNH 013

• Court: District Court, D. New Hampshire
• Decided: February 6, 2025
• Docket: 24-cv-00290-LM
• Status: Published

Opinion

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE

Exothermics, Inc.

v. Civil No. 24-cv-00290-LM Opinion No. 2025 DNH 013 P Ernst & Young U.S. LLP & Ernst & Young LLP

ORDER

Plaintiff Exothermics, Inc. (“Exothermics”) brings this suit against

defendants Ernst & Young U.S. LLP and Ernst & Young LLP (“Ernst & Young”)1

alleging that Ernst & Young wrongfully claimed ownership of a technology that

Exothermics developed. Ernst & Young moves to compel arbitration under the

Federal Arbitration Act pursuant to an arbitration clause contained in a contract

between the parties. Doc. no. 19. Exothermics objects. Doc. no. 24. For the following

reasons, Ernst & Young’s motion (doc. no. 19) is granted.

STANDARD OF REVIEW

District courts apply the summary judgment standard to decide motions to

compel arbitration under the Federal Arbitration Act. Air-Con, Inc. v. Daikin

Applied Latin America, LLC, 21 F.4th 168, 175 (1st Cir. 2021). A movant is entitled

to arbitration where he shows no “genuine issue of fact exists regarding the parties’

1 The court refers to Ernst & Young in the singular throughout even though

there are two separate Ernst & Young entities named as defendants. agreement to arbitrate.” Id. at 175-176. In reviewing the record, the court construes

all facts and reasonable inferences in the light most favorable to the nonmovant. Id.

at 175.

BACKGROUND2

Exothermics is a New Hampshire-based engineering and manufacturing

company that specializes in vacuum-testing technologies primarily for use in the

defense and aerospace industries. Ernst & Young is a global audit and consulting

firm that advises clients on a wide range of matters, including manufacturing

efficiency. Ernst & Young’s clients include numerous distilleries that age drinks or

food products in wooden barrels.

On October 20, 2020, Ernst & Young contacted Exothermics for help with a

manufacturing problem it had identified for their distillery clients. Ernst & Young

explained that when liquids such as scotch, bourbon, or soy sauce age in wooden

barrels, a significant amount of the liquid is absorbed by the barrel. The absorbed

liquid remains in the barrel when it is drained for bottling, blending or transfer.

This lost liquid, according to Ernst & Young, could generate significant revenue for

distilleries if it could be effectively recovered from the wood. Ernst & Young

proposed that Exothermics use its vacuum technology expertise to develop a

solution that would extract the absorbed liquid. Exothermics maintains that—

during the October 2020 meeting—Ernst & Young proposed a partnership: if

2 The background facts are taken from Exothermics’ complaint. The facts pertaining to the motion to compel arbitration are not in dispute. 2 Exothermics could develop the technology, Ernst & Young would market the

product to its distillery clients.

Exothermics agreed to try and design such a product. Ultimately their

scientists, according to the complaint, were able to conceive, develop, and build an

extraction system without help from Ernst & Young. Ernst & Young provided

barrels from its clients to test the product’s efficacy. The tests were successful, so

Exothermics built a prototype. Exothermics continued testing and refining the

prototype with barrels provided by Ernst & Young’s clients through 2021.

Exothermics spent $625,000 to invent, develop, and test the device. Exothermics

alleges they only developed the prototype upon belief that Ernst & Young would

provide the necessary contacts in the distilling industry to make the effort

profitable.

On December 1, 2021, Ernst & Young asked representatives from

Exothermics if they would meet with patent attorneys from Ernst & Young to

discuss the vacuum prototype and its design. Ernst & Young also inquired as to

whether Exothermics would consider “co-inventorship” for purposes of a patent

application. It is not clear from the record whether Exothermics ultimately agreed

to this meeting or to co-inventorship.

On January 18, 2022, Ernst & Young filed a provisional patent application

for “Systems and Methods of Liquid Extraction from Empty Barrels.”3 It filed two

3 U.S. Provisional Patent Application No. 63/3000,425.

3 related patent applications later in 2022.4 Each patent application listed Zachary

Hagan (the Ernst & Young employee who had been liaising with Exothermics) as

the sole inventor. Ernst & Young did not tell Exothermics about any of the patent

applications prior to their filing.

On May 4, 2023, Exothermics signed a nondisclosure agreement with Ernst

& Young (“NDA”) to discuss their potential partnership for the development and

commercialization of the liquid extraction product. The NDA included an

arbitration clause, which reads in full:

Except as provided herein, the Parties agree that any dispute or controversy arising out of or relating to any interpretation, construction, performance, or breach of this Agreement shall be settled by arbitration to be held in the State of Delaware in accordance with the Commercial Arbitration Rules then in effect for the American Arbitration Association. The arbitrator may grant injunctions or other relief in such dispute or controversy. In the event of arbitration, the Parties may undertake a reasonable amount of discovery. The decision of the arbitrator shall be final, conclusive and binding on the parties to the arbitration. Judgment may be entered on the arbitrator’s decision in any court having jurisdiction.

Doc. no. 19-7 at 5. The NDA allowed Exothermics to view the patent applications

filed by Ernst & Young relating to the development and commercialization of a

liquid extraction product. After reviewing the Ernst & Young patent applications,

Exothermics came to believe Ernst & Young wrongfully claimed ownership of the

vacuum-extraction system Exothermics had developed.

U.S. Patent Application No. 18/155,308 and PCT Application No. 4

PCT/US23/60739. 4 Exothermics filed the instant action on September 16, 2024, seeking

injunctive relief correcting inventorship and reassigning ownership of the patent

applications as well as damages.5 Ernst & Young now moves to compel arbitration

of Exothermics’ claims pursuant to the arbitration clause in the NDA.

DISCUSSION

To compel arbitration the movant must show: (1) the existence of a valid

arbitration clause; (2) that they may invoke the clause; (3) that the other party is

bound by the clause; and (4) that the claims brought are within the scope of the

clause. Bossé v. N.Y. Life Ins. Co., 992 F.3d 20, 27 (1st Cir. 2021). Courts must

“rigorously enforce” arbitration agreements according to their terms. Bossé, 992

F.3d at 27 (quoting Am. Express Co. v. Italian Colors Rest., 570 U.S. 228, 233

(2013)).

In this case, the parties’ dispute centers around prong four: whether

Exothermics’ claims fall within the scope of the arbitration clause. Exothermics

argues that the motion to compel should be denied because the dispute does not

arise out of or relate to the NDA. However, the parties’ dispute has an additional

layer: Ernst & Young argues that the question of whether these claims fall within

the scope of the arbitration clause must itself be decided by the arbitrator.

5 Specifically, Exothermics brings four claims against Ernst & Young: correction of inventorship as to all three disputed patents and patent applications (Count I); unjust enrichment (Count II); violation of New Hampshire’s Consumer Protection Act for their promise of future benefits from a joint venture (Count III); negligent misrepresentation for their promise of a joint venture that led Exothermics to develop a vacuum-extraction system (Count IV). 5 A district court has no power to determine threshold questions of

arbitrability, including questions of scope under prong four, where the parties’

arbitration agreement delegates such questions to the arbitrator. See Henry Schein,

Inc. v. Archer and White Sales, Inc., 586 U.S. 63, 67-68 (2019); Biller v. S-H OpCo

Greenwich Bay Manor, LLC, 961 F.3d 502, 509 (1st Cir. 2020). This is true even

where the argument made in favor of arbitrability appears “wholly groundless.”

Henry Schein, 586 U.S. at 68.

“Courts should not assume that the parties agreed to arbitrate arbitrability

unless there is clear and unmistakable evidence that they did so.” First Options of

Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995); see also Henry Schein, 586 U.S.

at 69; Bossé, 992 F.3d at 27. But where there is such “clear and unmistakable”

intent, the court must send questions of arbitrability to the arbitrator. Bosse, 992

F.3d at 28.

Here, it is unmistakably clear that the parties intended to delegate questions

of arbitrability to the arbitrator. The arbitration clause states that all disputes are

governed by the rules of the American Arbitration Association’s Commercial

Arbitration Rules, and those rules contain a delegation clause.6 And the First

Circuit holds that mere “incorporation of the [American Arbitration Association’s]

6 Here, the relevant rule contains the following delegation clause: “The arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim, without any need to refer such matters first to a court.” American Arbitration Association, Commercial Arbitration Rules and Mediation Procedures, Rule 7(a) (2022). 6 arbitration rules constitutes clear and unmistakable evidence of the parties’ intent

to delegate arbitrability.” Bossé, 992 F.3d at 29.

Because the arbitration clause contains a valid delegation clause, the

arbitrator must decide any questions of arbitrability. Id. at 28. Thus, the arbitrator

will decide whether Exothermics is correct that — because this lawsuit has nothing

to do with the NDA — it should not be subject to arbitration. Each argument

Exothermics makes in its effort to stave off arbitration invokes the question of

whether this case is arbitrable, and each must ultimately be decided by an

arbitrator.

Exothermics first argues that the arbitration clause cannot apply because the

contract in which it appears (the NDA) has been terminated. However, the First

Circuit holds that whether an arbitration clause within a contract survives the

contract’s termination is itself a question of scope. See Biller, 961 F.3d at 512-13

(finding that the court could determine whether the arbitration clause survived

termination of the contract only because the parties had not delegated arbitrability

to the arbitrator). Exothermics must therefore put this question to the arbitrator.

Exothermics also argues that the NDA (and therefore the arbitration clause)

does not apply to any of the claims presented in the complaint. Again, this is a

question of scope that must be decided by the arbitrator. See Bossé, 992 F.3d at 28

(classifying the question of whether the arbitration agreement and delegation

clause apply to particular claims as one of arbitrability).

7 Exothermics’ final argument is that the arbitration clause cannot apply to

Counts I and II (relating to the provisional patent applications) because federal

patent law does not allow for the arbitration of any claims except invalidity. This is

a question of arbitrability and it, too, must be arbitrated. See Henry Schein, 586

U.S. at 69-70; Biller, 961 F.3d. at 509-10; Bossé, 992 F.3d at 27-28.

In short, the court’s hands are tied. The parties must arbitrate the question

of whether they must arbitrate. Because the language of the arbitration clause

shows Exothermics and Ernst & Young delegated questions of arbitrability to the

arbitrator, the court cannot consider Exothermics’ arguments as to the arbitrability

of the claims—no matter their merit.

CONCLUSION

Ernst & Young’s motion to compel arbitration (doc. no. 19) is granted. The

case is stayed pending arbitration.

So ordered.

__________________________ Landya McCafferty United States District Judge

February 6, 2025

cc: Counsel of Record