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Ennis Inc v. Gildan Activewear SRL

United States District Court, N.D. Texas, Dallas Division

July 9, 2019

ENNIS, INC., Plaintiff,
v.
GILDAN ACTIVEWEAR SRL, Defendant.

          MEMORANDUM OPINION AND ORDER

          ED KINKEADE, UNITED STATES DISTRICT JUDGE

         Before the Court are Ennis, Inc.'s Motion to Vacate Arbitration Award (the “Motion to Vacate”) (Doc. No. 16) and Defendant's Motion to Confirm Arbitration Award and Response to Plaintiff's Motion to Vacate Arbitration Award (the “Motion to Confirm, ” and, collectively with the Motion to Vacate, the “Motions”) (Doc. No. 21). After considering the Motions, briefs in support, responses, and replies, the Court DENIES the Motion to Vacate and GRANTS the Motion to Confirm. Because Ennis, Inc. has not carried its burden to prove that the arbitrator exceeded his powers in issuing his arbitration award, the Court must confirm the arbitration award pursuant to 9 U.S.C. § 9 (2012). As to Gildan Activewear SRL's request for its attorneys' fees and costs incurred in responding to the Motion to Vacate, the Court defers ruling on this request and ORDERS Gildan Activewear SRL to file supplemental briefing in support of its request for attorneys' fees and costs.

         I. Factual and Procedural Background

         The dispute between the parties involves an arbitrator's interpretation of a contract that provided for a payment to a former employee if that employee was terminated shortly before, during, or shortly after a change in control of a company. Since arbitration, the parties have conceded that they do not dispute any of the material facts underlying the contract dispute. Furthermore, a court's deferential review of an arbitration award means that a court will generally not replace the arbitrator's factual findings with its own. See Delek Ref., Ltd. v. Local 202, United Steel, 891 F.3d 566, 570 (5th Cir. 2018) (“This deference means that even if we believe the arbitrator seriously erred in his fact finding or contract interpretation, we will uphold a decision that is rationally inferable from the purpose of the CBA.” (citation omitted)). Therefore, the factual background is less important to the Court's analysis in this Order, at least as compared to the arbitration proceeding, and the Court adopts the arbitrator's factual findings.

         The primary contract at issue in this case is the Amended and Restated Executive Employment Agreement (the “Employment Agreement”) originally entered into by Plaintiff Ennis, Inc. (“Ennis”) and a former employee of Ennis, Irshad Ahmad (“Ahmad”). The Employment Agreement provided that if Ennis experienced a “Change of Control Event”-a term defined in the Employment Agreement that encompasses events where the ownership or leadership of Ennis changes significantly-and Ahmad's employment was terminated within a certain period of time before, during, or after the Change of Control Event, then Ennis would owe Ahmad a severance payment. Ennis was Ahmad's employer at the time the two entered into the Employment Agreement, and Ahmad served as an executive within Alstyle Apparel, LLC (“Alstyle”), a subsidiary of Ennis.

         In late 2015 or early 2016, Ennis sought to sell Alstyle. Ahmad and another investor were originally interested in acquiring Alstyle, so, after Ennis, Ahmad, and the other investor reached a potential agreement, Ennis agreed to assign the Employment Agreement to A AND G, Inc. (“A&G”), a wholly owned subsidiary of Alstyle. Ennis and A&G signed the Assignment and Assumption Agreement (the “Assignment”) on April 1, 2016. The Assignment stated that Ennis “assigned, granted, conveyed and transferred to [A&G] all of [Ennis's] right, title and interest in and to the . . . Employment Agreement, and [A&G] accepted such assignment and assumed all of [Ennis's] duties and obligations under the . . . Employment Agreement.”

         The sale of Alstyle to Ahmad and his investor-partner never occurred because Defendant Gildan Activewear SRL (“Gildan”) made a superior offer to Ennis. Ennis exercised its right to terminate the transaction with Ahmad and his investor-partner, and Ennis then entered into the Unit Purchase Agreement (the “Purchase Agreement”) with Gildan. Gildan acquired Alstyle through the Purchase Agreement for $110 million.

         Recognizing the liability that a potential severance payment to Ahmad might pose if Gildan chose to terminate Ahmad within the relevant timeframe after its acquisition of Alstyle, Gildan and Ennis contracted for such issues in Section 5.10 of the Purchase Agreement, which is entitled “Irshad Ahmad.” Section 5.10(b) of the Purchase Agreement provides that Ennis would indemnify Gildan for liabilities related to the Employment Agreement that might arise within one year of the closing date for the sale of Alstyle to Gildan. Such indemnification was subject to the procedures of Section 8.05(a) of the Purchase Agreement, which provides, inter alia, for notice to Ennis as part of the indemnification process.

         The last relevant contract that accompanied the sale of Alstyle to Gildan was the Escrow Agreement, which provided that $2 million would be held in escrow in case any potential liability related to Ahmad arose.

         Gildan terminated Ahmad within the relevant timeframe that, under the Employment Agreement, would entitle Ahmad to his severance payment. Gildan paid just over $2 million to Ahmad and then applied for reimbursement of almost $2 million from the escrow funds. Gildan did not provide Ennis notice prior to its payment of Ahmad. Upon application for reimbursement, Ennis objected, and arbitration between Ennis and Gildan commenced.

         Ennis took three positions in arbitration. The first, and primary, position was that Gildan was not entitled to reimbursement from the escrow funds because no “Change of Control Event” occurred, and, consequently, Ahmad was not entitled to the severance payment due under the Employment Agreement. The second and third positions Ennis took in arbitration relate to its first position. Ennis's second position was that it was prejudiced by Gildan's failure to provide notice that Ahmad made a claim for his severance payment upon his termination, as Ennis could have contested Ahmad's claim to the severance payment had it received notice. Finally, Ennis argued that Gildan was not entitled to the escrow funds as reimbursement for the severance payment made to Ahmad because a condition precedent under the Escrow Agreement for release of the funds to Gildan had not occurred.

         Ennis's argument for why a “Change of Control Event” did not occur is a dispute of contractual interpretation concerning the Employment Agreement. Ennis's argument to the arbitrator proceeded as follows: The Employment Agreement defines “Company” to mean “Ennis.” A “Change of Control Event” involves defined types of changes to the ownership or leadership of the “Company”-i.e., Ennis. By the terms of the Assignment, A&G assumed all of Ennis's duties and obligations under the Employment Agreement. While A&G is responsible for the duties and obligations Ennis formerly owed Ahmad under the Employment Agreement, the definition of “Company” (Ennis) under the Employment Agreement did not change, at least for purposes of what constitutes a “Change of Control Event, ” because an assignment only changes who benefits from or performs an obligation, not the nature of the obligation itself. Therefore, Ennis argued that Gildan's acquisition of Alstyle, of which A&G is a wholly owned subsidiary, did not constitute a “Change of Control Event” because the ownership or leadership of Ennis did not change. As such, Ahmad was not entitled to his severance payment when he was terminated after Gildan's acquisition of Alstyle.

         Gildan took a different position. Gildan recognized that the Assignment neither enlarges nor restricts any of the obligations owed by A&G, but because A&G should be the relevant “Company” throughout the Employment Agreement, the Employment Agreement (which uses the term “Company” more than 150 times) provides that a “Change of Control Event” for A&G results in Ahmad's entitlement to a severance payment. Gildan argued that such an interpretation of the Employment Agreement gives consistency to the term “Company” throughout the Employment Agreement and provides that the same entity whose acquisition would trigger a “Change of Control Event” would also be financially responsible for the severance payment.

         In his Partial Final Award, the arbitrator first found that Ennis was obligated to reimburse Gildan for the severance payment because the acquisition of Alstyle (and, by virtue of being a wholly owned subsidiary, A&G) by Gildan constituted a “Change of Control Event.” Second, the arbitrator found that Gildan's failure to notify Ennis of Ahmad's claim to the severance payment did not preclude Gildan from prevailing. Under Section 8.05(a) of the Purchase Agreement, Gildan's failure to give notice relieves Ennis of its indemnification obligations only to the extent Ennis forfeits rights or defenses because of the failure to give notice. Because arbitration provided Ennis an opportunity to argue its position concerning the lack of a “Change of Control Event, ” Gildan's failure to provide notice did not preclude an arbitration award in Gildan's favor. Finally, in the separate Final Award, the arbitrator found that Gildan was entitled to the escrow funds because the ...


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