-BLM Irving v. Ebix Software India Private Limited et al, No. 3:2010cv00762 - Document 18 (S.D. Cal. 2010)
Court Description: ORDER granting in part and denying in part 6 Defendants' Motion to Dismiss: Defendants' motion is denied to the extent that it seeks to dismiss the Complaint and granted insofar as it seeks a stay. The Court stays this case as to all issu es other than the effect of the collateral agreement. Plaintiff shall file a motion for summary judgment with respect to the collateral agreement by 10/1/10. Once that motion has been decided, the Court will send the parties to arbitration with respect to the arbitrable issues noted above. Signed by Judge Janis L. Sammartino on 8/10/10. (lmt)
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-BLM Irving v. Ebix Software India Private Limited et al Doc. 18 1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA 10 11 CRAIG A. IRVING, CASE NO. 10-CV-762 JLS (BLM) Plaintiff, 12 ORDER: GRANTING IN PART AND DENYING IN PART DEFENDANTS’ MOTION TO DISMISS vs. 13 14 EBIX, INC.; EBIX SOFTWARE INDIA PRIVATE LIMITED, (Doc. Nos. 6) 15 Defendants. 16 17 18 19 20 Presently before the Court is Defendants’ motion to dismiss or stay the case. (Doc. No. 6.) Also before the Court is Plaintiff’s opposition and Defendants’ reply. (Doc. Nos. 11 & 12.) For the following reasons, Defendants’ motion is GRANTED IN PART and DENIED IN PART. 21 BACKGROUND 22 23 24 25 26 27 28 The background of this case is set forth in detail in the Court’s Order granting in part Plaintiff’s motion for a writ of attachment. (See Doc. No. 17 at 1–3.) That summary is incorporated by reference here. // // // // -1- 10cv762 Dockets.Justia.com 1 LEGAL STANDARD 2 The Federal Arbitration Act (“FAA”) governs arbitration agreements in contracts involving 3 transactions in interstate commerce. 9 U.S.C. § 1. Under the FAA, arbitration agreements “shall be 4 valid, irrevocable, and enforceable, save upon such grounds that exist at law or in equity for the 5 revocation of any contract.” 9 U.S.C. § 2. The Act’s provisions reflect a “liberal federal policy 6 favoring arbitration agreements.” Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 25 (1991) 7 (quoting Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983)). This 8 “national policy” is enforceable in both state and federal courts and preempts any state laws or policies 9 to the contrary. Preston v. Ferrer, 552 U.S. 346, 349 (2008) (quoting Southland Corp. v. Keating, 465 10 U.S. 1, 10 (1984)). 11 A court interpreting an arbitration agreement must resolve ambiguities as to the scope of the 12 arbitration clause in favor of arbitration. Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 13 62 (1995); AT&T Techs. Inc. v. Commc’n Workers of Am., 475 U.S. 643, 650 (1986) (“[I]n the absence 14 of any express provision excluding a particular grievance from arbitration . . . only the most forceful 15 evidence of a purpose to exclude the claim from arbitration can prevail.”). The FAA requires courts 16 to “rigorously enforce agreements to arbitrate” even when such agreements implicate claims arising 17 under federal statutes. Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 226 (1987). 18 Additionally, it “requires district courts to compel arbitration even where the result would be the 19 possibly inefficient maintenance of separate proceedings in different forums.” Fisher v. A.G. Becker 20 Paribas Inc., 791 F.2d 691, 698 (9th Cir. 1986). The overall mandate for arbitration is defeated only 21 where circumstances demonstrate “a contrary congressional command,” with the burden on the party 22 opposing arbitration “to show that Congress intended to preclude a waiver of judicial remedies for the 23 statutory rights at issue.” Id. 24 In determining whether to compel a party to arbitration, a district court may not review the 25 merits of the dispute; rather, a district court's role under the FAA is limited “to determining (1) 26 whether a valid agreement to arbitrate exists and, if it does, (2) whether the agreement encompasses 27 the dispute at issue.” Cox v. Ocean View Hotel, Corp., 533 F.3d 1114, 1119 (9th Cir. 2008) (citation 28 and quotation marks omitted). In construing the terms of an agreement, the Court “appl[ies] general -2- 10cv762 1 state-law principles of contract interpretation, while giving due regard to the federal policy in favor 2 of arbitration by resolving ambiguities as to the scope of arbitration in favor of arbitration.” Wagner 3 v. Stratton Oakmont, Inc., 83 F.3d 1046, 1049 (9th Cir. 1996). If the district court determines that a 4 valid arbitration agreement encompasses the dispute, then the FAA requires the court to enforce the 5 arbitration agreement according to its terms. Lifescan, Inc. v. Premier Diabetic Servs., Inc., 363 F.3d 6 1010, 1012 (9th Cir. 2004). Therefore, a district court must compel arbitration “unless it may be said 7 with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the 8 asserted dispute.” United Steelworkers of Am. v. Warrior & Gulf Navigation, 363 U.S. 574, 582–83 9 (1960). 10 11 ANALYSIS I. Existence of an Arbitration Provision 12 As stated above, ordering the parties to a case to arbitration requires that those parties have 13 contractually agreed to settle disputes through arbitration. 9 U.S.C. § 2. In this case, there is only one 14 contract at issue: the Merger Agreement. This Agreement contains a sharply limited arbitration 15 agreement which provides: 16 17 18 19 20 21 22 23 24 25 26 27 28 If the Parties are unable to agree upon the amount of any Cash Merger Consideration or any Contingent Merger Consideration due hereunder, the Parties shall promptly thereafter cause an independent accountant reasonably satisfactory to Parent and the Shareholders' Representative (the “Independent Accountant”) to review the disputed item(s) and amount(s) as set forth in the Contingent Gross Revenue Certificate Contest Notice for the purposes of calculating the applicable Contingent Merger Consideration due hereunder. In making such determination, such Independent Accountant shall consider only those items or amounts in the calculation of the Contingent Merger Consideration set forth in the Contingent Gross Revenue Certificate Contest Notice. The Independent Accountant shall deliver to Parent and the Shareholders’ Representative, as promptly as practicable (and in any event within 60 days of the Parties’ submission of the matter to the Independent Accountant), a report that explains any discrepancies and sets forth the Independent Accountant's calculation of the actual Contingent Merger Consideration due hereunder. Such report and the calculations set forth therein shall be final and binding upon the Parties, and shall not be subject to challenge in a court of law or otherwise. In the event that the Independent Accountant concludes that there was an underpayment of Cash Merger Consideration or Contingent Merger Consideration, Parent and Intermediate Parent, jointly and severally, shall immediately pay the amount by which the Cash Merger Consideration or Contingent Merger Consideration was underpaid, together with simple interest thereon at the rate of eight percent (8%) per annum. The costs and expenses of the Independent Accountant shall be initially be paid by Parent and Intermediate Parent, jointly and severally, but if the Independent Accountant concludes that there was no underpayment of the Contingent Merger Consideration, then such costs and expenses shall be paid by the Shareholders, in the form of a deduction from any future payment of Contingent Merger Consideration (with interest thereon at the -3- 10cv762 1 2 rate of eight percent (8%) per annum). (Merger Agreement § 1.2(b)(vi) (“Independent Accountant provision”).) 3 Although Plaintiff suggested at oral argument that this is not an arbitration clause, his 4 argument is without merit. A contract need not use the word “arbitration” in order to have an 5 arbitration clause. See Wolsey, Ltd. v. Foodmaker, Inc., 144 F.3d 1205, 1208 (9th Cir. 1998). It need 6 only be an agreement “‘to have third parties decide disputes.’” Id. (quoting AMF Inc. v. Brunswick 7 Corp., 621 F. Supp. 456, 460 (E.D.N.Y. 1985)). 8 9 10 Given that the agreement contains an arbitration provision, was signed by both parties, and is otherwise valid and enforceable, the Court finds that a valid agreement to arbitrate exists. II. Scope of the Arbitration Provision 11 The Court’s second task under the FAA requires it to determine “whether the agreement 12 encompasses the dispute at issue.” Cox, 533 F.3d 1119 (citing Chiron, 207 F.3d 1130). The FAA 13 represents a “liberal federal policy favoring arbitration agreements, . . . [and] establishes that, as a 14 matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor 15 of arbitration.” Moses H. Cone, 460 U.S. at 24–25. Therefore, this Court must “rigorously enforce 16 agreements to arbitrate.” Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 221 (1985). However, 17 the Court may only order arbitration of claims which the parties have agreed to arbitrate, as the FAA 18 “requires piecemeal resolution when necessary to give effect to an arbitration agreement.” Moses H. 19 Cone, 460 U.S. at 20. 20 The arbitration clause in this case applies to any disputes or disagreements over the “amount 21 of any Cash Merger Consideration or any Contingent Merger Consideration due” under the Merger 22 Agreement. (Merger Agreement § 1.2(b)(vi).) Defendants argue that Plaintiff’s only cause of action 23 falls within the arbitration provision at hand. (Memo. ISO Motion at 7.) Accordingly, Defendants 24 request that this Court dismiss Plaintiff’s complaint. (Id. at 4.) Because all of the issues raised in this 25 action are not arbitrable pursuant to the arbitration provision, the Court disagrees. 26 Generally, courts grant motions to dismiss in favor of arbitration where the arbitration 27 provision or agreement is broadly-worded and covers all the issues at hand. See Boston Telecomms. 28 Group, Inc. v. Deloitte Touche Tohmatsu, 249 F. App’x 534, 538 (9th Cir. 2007) (finding that an -4- 10cv762 1 arbitration provision was sufficiently broad in scope to cover the dispute at hand because it stated that 2 “‘[a]ny disputes arising out of the interpretation of [the] agreement” would be settled by arbitration); 3 Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1131 (9th Cir. 2000) (clause requiring 4 arbitration of any dispute “relating to” agreement is “broad and far reaching”); Simula, Inc. v. Autoliv, 5 Inc., 175 F.3d 716, 720, 726 (9th Cir. 1999) (granting a motion to dismiss where the arbitration clause 6 was broadly worded because it provided for arbitration of all disputes “arising in connection with” the 7 parties’ agreement). “In construing the scope of an arbitration clause,” courts also “‘ascertain and 8 implement the reasonable expectations of the parties.’” Luna v. Kemira Specialty, Inc., 575 F. Supp. 9 2d 1166, 1179 n.43 (C.D. Cal. 2008) (citation omitted). Because “contracting parties control their 10 own fate when it comes to deciding which disputes to consign to arbitration,” the “‘strong federal 11 policy favoring arbitration may not extend the reach of arbitration beyond the intended scope of the 12 clause providing for it.’” Id. (citation omitted). 13 In the instant case, the Independent Accountant provision does not entirely encompass the 14 dispute at issue. The provision is not broadly-worded and is instead narrow in scope. It uses no 15 language suggesting arbitration of all disputes arising in connection with the Merger Agreement. 16 Rather, the provision is narrow in that it specifies review by an independent accountant if the parties 17 are unable to agree on “the amount of any Cash Merger Consideration or any Contingent Merger 18 Consideration due.” (Merger Agreement § 1.2(b)(vi)(emphasis added).) Moreover, the provision 19 does not implicate that the parties expected a breach of contract claim or bad faith conduct to be 20 decided by an arbitrator. Instead, the language of the provision is clear that the parties’ “reasonable 21 expectation” was that disputes over the amount owed on the Contingent Merger Consideration would 22 be sent to arbitration. (See id.) 23 Plaintiff alleges a claim for breach of contract and argues that the present action involves 24 nonarbitrable issues which “go far beyond any auditing of disputed calculations contemplated by 25 Section 1.2(b)(iv) of the Merger Agreement.” (Opp. at 13.) In his opposition, Plaintiff presents the 26 following issues as ones that are beyond the scope of the arbitration provision: 1) statutory interest 27 and attorneys’ fees; 2) Defendants’ bad faith conduct; 3) evidentiary issues arising from Defendants’ 28 altering of an invoice; 4) a collateral agreement after the Merger Agreement which stipulated the -5- 10cv762 1 amount of the 2008 gross revenues in order to calculate the Second Earn Out; 5) evidentiary issues 2 over disputed receivable accounts and whether Defendants’ conduct shows that they in fact wrote 3 off the amounts as uncollectible. (Opp. at 16–19.) . 4 A. Statutory Interest and Attorneys’ Fees 5 Plaintiff’s prayer for relief includes statutory interest and attorneys’ fees. (Compl. ¶ 28.) The 6 Independent Accountant provision does not provide for the resolution of these matters. Instead, the 7 provision allows for an independent accountant to review disputed items and amounts and to calculate 8 the Contingent Merger Consideration due in the event that the parties are unable to agree on an 9 amount. (Merger Agreement § 1.2(b)(vi).) This does not contemplate arbitration of statutory interest 10 and attorneys’ fees. See Frederick Meiswinkel, Inc. v. Laborers' Union Local 261, 744 F.2d 1374, 11 1377 (9th Cir. 1984) (“[A]rbitration is a matter of contract and a party cannot be required to submit 12 to arbitration any dispute which he has not agreed so to submit.”(citation omitted)); Sammi Line Co., 13 Ltd. v. Altamar Navegacion S.A., 605 F. Supp. 72, 74 (S.D.N.Y. 1985) (finding that “arbitrators may 14 decide only issues submitted for arbitration” and that the respondent had the burden “to demonstrate 15 that an award of attorneys’ fees was included within the scope of the arbitrable issues”). Because the 16 Independent Accountant provision does not provide that an independent accountant can or will award 17 statutory interest and attorneys’ fees, these issues cannot be submitted to arbitration. 18 B. 19 Defendants argue that any alleged bad faith conduct on their part is irrelevant because the issue 20 has no bearing on damages in contract law. (Reply at 9.) Plaintiff, however, does not argue that 21 Defendants’ bad faith conduct is relevant for purposes of damages. Rather, Plaintiff argues that 22 Defendants’ conduct was a breach of Section 1.2(c) of the parties’ agreement. (Opp. at 17.) Section 23 1.2(c) of the Merger Agreement provides, “In order to provide the Shareholders with a reasonable 24 opportunity to receive the maximum Contingent Merger Consideration pursuant to this Agreement, 25 Parent, Intermediate Parent and their Affiliates . . . shall . . . be subject to an express obligation of 26 good faith and fair dealing with respect to the Shareholders, including the Shareholders’ 27 Representative.” (Merger Agreement § 1.2(b)(vi)). Determining if Defendants acted in bad faith and 28 in fact breached this provision of the Agreement is outside the scope of an Independent Accountant Bad Faith Conduct -6- 10cv762 1 provision whereby an independent accountant’s main task is to calculate “the actual Contingent 2 Merger Consideration due.” (Id.) Thus, the Court finds that the arbitration provision is too narrow 3 in scope to cover a determination as to Defendants’ bad faith conduct. This is a matter to be decided 4 by the Court. 5 C. Altered Invoice 6 Plaintiff next argues that Defendants’ altering of an invoice raises evidentiary issues to be 7 determined by the Court. (Opp. at 17.) Specifically, Plaintiff argues that Defendants improperly 8 deducted $158,333 in revenue from Defendants’ customer Republic Services and that this amount is 9 supported by an invoice issued by Defendants on October 31, 2009. (Compl. ¶ 16.) That invoice 10 “shows on its face that it is the subscription fee for the October through December 2009 fourth 11 quarter.” (Id.) Plaintiff contends that Defendants, in an attempt to justify the deduction, provided 12 Plaintiff with an altered invoice allocating a portion of the amounts to 2010 rather than 2009. (Opp. 13 at 18.) 14 In light of Generally Accepted Accounting Principles (“GAAP”), the question of whether the 15 first invoice was altered appears irrelevant. The Regulations of the Treasury Department provide that 16 “a method of accounting which reflects the consistent application of generally accepted accounting 17 principles . . . will ordinarily be regarded as clearly reflecting income.” Treas. Reg. § 1.446-1(a)(2). 18 GAAP, as described in Statement of Financial Accounting Concepts Number 5 of the Financial 19 Accounting Standards Board, provides that “revenue should not be recognized until it is realized or 20 realizable and earned.” Staff Accounting Bulletin No. 101, 64 Fed. Reg. 68,936 (Dec. 9, 1999) (“SAB 21 101"). Generally, revenue is realized or realizable and earned when four criteria are met: 1) 22 persuasive evidence of an arrangement exists; 2) delivery has occurred or services have been rendered; 23 3) the seller's price to the buyer is fixed or determinable; and 4) collectibility is reasonably assured. 24 Id. Moreover, the Ninth Circuit has emphasized that GAAP requires revenue to be “earned” before 25 it can be recognized. See In re Daou Sys., Inc., 411 F.3d 1006, 1016 (9th Cir. 2005); Provenz v. 26 Miller, 102 F.3d 1478, 1484 (9th Cir. 1996). Generally, revenues are “earned” when an entity “has 27 substantially accomplished what it must do to be entitled to the benefits represented by the revenues.” 28 SAB 101. -7- 10cv762 1 In light of these GAAP principles, the relevant questions have to do with the terms of 2 Defendants’ contract with Republic Services. And these are questions which may, and must, be 3 decided through arbitration pursuant to the Independent Accountant provision. 4 D. Collateral Agreement 5 Plaintiff also argues that Defendants made a second improper deduction that involves contract 6 interpretation and breach rather than accounting. (Opp. at 18.) Specifically, Plaintiff argues that the 7 parties entered into an agreement subsequent to the Merger Agreement whereby the parties expressly 8 stipulated the amount of the 2008 gross revenues “for the express purpose of calculating the Second 9 Earn Out.” (Id.) 10 Defendants make no argument in response to establish that the issue of the collateral agreement 11 is in fact subject to arbitration. In effect, Defendants concede that the collateral agreement issue is 12 not arbitrable. 13 That said, it is clear to the Court that the extent of Defendants’ obligations under this 14 agreement must be resolved prior to this case proceeding to arbitration. This is because the Second 15 Earn Out is calculated based off of Defendants’ 2008 gross revenues. As such, Plaintiff SHALL 16 FILE a motion for summary judgment with respect to this issue within 28 days of the date this order 17 is electronically docketed. 18 E. 19 The final issue that Plaintiff raises as outside the scope of the arbitration provision pertains to 20 an alleged third improper deduction made by Defendants. (Id. at 19.) Plaintiff argues that Defendants 21 documentation establishes that they did not in fact write-off ConfirmNet accounts receivable as 22 uncollectible in 2009. (Id.) Rather, Plaintiff argues that Defendants collected one-third of these 23 amounts before certifying the amount of the Second Earn Out and continue to collect the remaining 24 two-thirds. (Id.) Thus, Plaintiff claims that Defendants’ third deduction on the basis that the accounts 25 were uncollectible was improper. (Id.) 26 Receivable Accounts The Independent Accountant provision allows an independent accountant to consider disputed 27 items for purposes of calculating the applicable Contingent Merger Consideration. 28 Agreement § 1.2(b)(vi).) Here, the receivable accounts are “disputed” items and pertinent to -8- (Merger 10cv762 1 calculating the Contingent Merger Consideration. That is, Plaintiff argues that these items were not 2 properly excluded from revenue. (Compl. ¶ 5–6.) As such, determination of whether these accounts 3 were actually written of or whether that would, in any event, effect gross revenue is a question 4 properly before the independent accountant and within the scope of arbitration. 5 F. Conclusion 6 For all of the above reasons, the Court finds that the arbitration provision contemplated by the 7 parties is insufficiently broad to cover the entire dispute at hand. As such, dismissal of the Complaint 8 is inappropriate and the Court DENIES Defendants’ motion insofar as it seeks that relief. 9 III. CONDITION PRECEDENT 10 Plaintiff argues that the arbitration provision contemplated by the parties is subject to a 11 condition precedent. (Opp. at 8–9.) Specifically, in order for Defendants to invoke the Independent 12 Accountant provision “Defendants were required to pay the Second Earn Out ‘in no event later than’ 13 January 30, 2010, as well as provide Shareholders’ Representative with a Contingent Gross Revenue 14 Certificate ‘not later than’ January 30, 2010.” (Id. at 9 (citation omitted).) Accordingly, Plaintiff 15 requests that this Court deny Defendants’ right to compel arbitration. The Court disagrees. 16 California Civil Code § 1436 provides that “[a] condition precedent is one which is to be 17 performed before some right dependent thereon accrues, or some act dependent thereon is performed.” 18 Cal. Civ. Code § 1436. A condition precedent can be “either an act of a party that must be performed 19 or an uncertain event that must happen before the contractual right accrues or the contractual duty 20 arises.” Platt Pacific, Inc. v. Andelson, 6 Cal. 4th 307, 313 (1993) (citations omitted). There are three 21 types of conditions: “(1) express conditions-those that are determined by the intention of the parties 22 as disclosed in the agreement; (2) conditions implied in fact by the interpretation of the agreement and 23 surrounding circumstances; and (3) constructive conditions, or conditions implied by law, irrespective 24 of the parties' intent, to avoid injustice.” In re Spirtos 154 B.R. 550, 555 (B.A.P. 9th Cir. 1993) 25 (citations omitted). 26 The Merger Agreement does not “expressly” provide that Defendants can only invoke their 27 right to arbitration if they timely paid the Second Earn Out and delivered a Contingent Gross Revenue 28 Certificate. Although Section 1.2(b)(i) of the agreement provides that “[n]ot later than . . . January -9- 10cv762 1 30, 2010 (for the Second Earn Out) . . . Parent shall deliver to each Shareholder a copy of the financial 2 statements . . . and a certificate showing the calculation,” it does not state that arbitration can only be 3 invoked in the event that Section 1.2(b)(i) is satisfied. (Merger Agreement § 1.2(b)(i).) Rather, the 4 provision merely states that “[i]f the Parties are unable to agree upon the amount of any . . . Contingent 5 Merger Consideration due hereunder, the Parties shall promptly thereafter cause an independent 6 accountant . . . to review the disputed item(s) and amount(s).” (Id. § 1.2(b)(vi).) Thus, paying on time 7 and delivering a certificate is not an express condition precedent to Defendants’ contractual right to 8 arbitration under Section 1.2(b)(vi). 9 Conditions precedent can also be implied in law or in fact. Conditions are implied in fact 10 “interpretation of the agreement” or implied by law “irrespective of the parties’ intent” to avoid 11 injustice. In re Spirtos 154 B.R. at 555. Here, interpretation of the agreement does not imply that 12 Defendants could not rely on their right to arbitration if they breached another subsection of the 13 agreement. (See Merger Agreement § 1.2(b)(vi).); see also In re Spirtos 154 B.R. at 555 (finding that 14 “[c]onditions are [generally] not favored and an intent to create a condition must appear expressly or 15 by clear implication in the agreement” (citations omitted)). Finally, nothing suggests that injustice 16 will result if Defendants assert their contractual right to arbitration. Accordingly, the Court finds that 17 the Independent Accountant provision is not subject to a condition precedent that Defendants timely 18 pay and deliver a Contingent Gross Revenue Certificate. 19 The Court also rejects Plaintiff’s argument that the Independent Accountant provision has 20 no application where one of the parties breaches the Merger Agreement. (See Opp. at 11.) In order 21 to support his argument, Plaintiff relies on Section 11.9 of the Merger Agreement which allegedly 22 provides: 23 24 The Parties hereto hereby submit to the exclusive jurisdiction of any state or federal court located in the State of California over any dispute arising out of or relating to this Agreement or any of the transactions contemplated hereby, and further agree that venue for all such matters shall lie exclusively in such court. 25 (Opp. at 12 (citing Merger Agreement § 11.9) (emphasis omitted).) Although this provision may be 26 interpreted to provide for litigation, it is a “well established [principle] of contract interpretation” in 27 California that “when a general and a particular provision are inconsistent, the particular and specific 28 provision is paramount to the general provision.” Jadwin v. County of Kern 610 F. Supp. 2d 1129, - 10 - 10cv762 1 1190 (E.D. Cal. 2009) (citing Prouty v. Gores Tech. Group, 18 Cal. Rptr. 3d 178 (Cal. Ct. App. 2004) 2 and McNeely v. Claremont Mgmt. Co., 27 Cal. Rptr. 87 (Cal. Ct. App. 1962)). Moreover, California 3 courts “consider the contract as a whole and interpret the language in context, rather than interpret a 4 provision in isolation.” Am. Alternative Ins. Corp. v. Superior Court, 37 Cal. Rptr. 3d 918, 922 (Cal. 5 Ct. App. 2006) (citing Cal. Civ. Code§ 1641). 6 Here, the “specific provision” at hand is the Independent Accountant provision which 7 expressly provides for an independent accountant to calculate the Contingent Merger Consideration 8 in the event that the parties are unable to agree on the amount. (Merger Agreement § 1.2(b)(vi).) As 9 such, Section 1.2(b)(vi) qualifies Section 11.9. The general provision, Section 11.9, does not negate 10 the specific provisions of Section 1.2(b)(vi). Moreover, it is not possible to focus on an isolated 11 portion of the contract in order to argue in favor of litigation when the contract considered in its 12 entirety clearly contemplates arbitration on a given issue— disagreement over the amount due on any 13 Contingent Merger Consideration. (See id.) 14 In light of the entire contract, the Court finds that nothing suggests that Defendants may not 15 rely on the Independent Accountant provision in the event of a breach. The specific language of 16 Section 1.2(b)(vi) provides for arbitration, and Section 11.9 does not suggest that a party forfeits its 17 right to arbitration in the event that it breaches the contract. 18 IV. WAIVER 19 In his opposition, Plaintiff also argues that Defendants waived their right to compel 20 enforcement of the Independent Accountant provision by “refusing to perform their obligations under 21 the Merger Agreement.” (Opp. at 10.) The Court finds that Defendants’ actions are insufficient to 22 constitute a waiver of their contractual right to arbitrate this dispute. 23 A party may waive its right to compel arbitration, however, “waiver of a contractual right to 24 arbitration is not favored.” Fisher v. A.G. Becker Paribas Inc., 791 F.2d 691, 694 (9th Cir. 1986); see 25 also Brown v. Dillard’s, Inc., 430 F.3d 1004, 1012 (9th Cir. 2005). Rather, waiver of a right to 26 compel arbitration is analyzed in light of “the strong federal policy favoring enforcement of arbitration 27 agreements.” Fisher, 791 F.2d at 694. In order for Plaintiff to prevail on this argument, he must 28 demonstrate (1) that Defendants knew they had a right to compel arbitration, (2) that Defendants acted - 11 - 10cv762 1 in a manner inconsistent with that existing right, and (3) that Plaintiff suffered prejudice from those 2 inconsistent acts. Britton, 4 F.3d at 1412. Plaintiff, in its attempt to satisfy this standard, “bears a 3 heavy burden of proof.” Id. (citing Fisher, 791 F.2d at 694). Regardless, the Court finds that Plaintiff 4 has not demonstrated facts satisfying the waiver test. 5 Although Plaintiff does not address the first prong of the waiver test, it is clear that Defendants 6 knew they had a right to compel arbitration by citing it as the main reason for their motion to dismiss. 7 (See Memo. ISO Motion at 4.) 8 To demonstrate the second prong of the waiver test, Plaintiff argues that Defendants 9 intentionally abandoned their right to rely on the Independent Accountant provision by failing and 10 refusing to pay the Second Earn out and to provide the Contingent Gross Revenue Certificate by 11 January 30, 2010. (Opp. at 10.) According to Plaintiff, these acts were inconsistent with Defendants’ 12 right to rely on the arbitration provision. (Id.) 13 When the Ninth Circuit has found waive based on acts inconsistent with a right to arbitration, 14 it has involved situations unlike the present action. See Hoffman Const. Co. of Oregon v. Active 15 Erectors & Installers, Inc., 969 F.2d 796, 798 (9th Cir. 1992) (finding that the party acted 16 inconsistently with its right to arbitration by withdrawing its request to arbitrate and filing suit in state 17 court); Van Ness Townhouses v. Mar Indus. Corp., 862 F.2d 754, 758 (9th Cir. 1988) (holding that 18 the party acted inconsistently with its right to arbitration where the party actively litigated the claims 19 for more than two years). Moreover, the Ninth Circuit has declined to find waiver in many situations 20 given that “waiver of a contractual right to arbitration is not favored.” Fisher, 791 F.2d at 694 21 (finding that the party had not waived its arbitration rights even though the party failed to raise the 22 arbitration issue as an affirmative defense and the parties had engaged in extensive discovery); see 23 also Letizia v. Prudential Bache Securities, Inc., 802 F.2d 1185, 1186 (9th Cir. 1986) (holding that 24 defendants had not waived any right to compel arbitration even though defendants did not seek 25 arbitration until nine months after filing their answer). In this case, there was no long delay before 26 arbitration was sought. Rather, Defendants immediately raised the issue of arbitration in their Motion 27 to Dismiss. (Memo. ISO Motion at 4.) Defendants’ acts do not suggest that Defendants have waived 28 or have acted inconsistently with their contractual right to compel arbitration. - 12 - 10cv762 1 Plaintiff relies on California state law and cites a California case in order to argue that a 2 party’s failure to perform acts under an agreement may result in waiver of right to compel arbitration. 3 (See Opp. at 10 (citing Engalla v. Permanente Med. Group, 15 Cal. 4th 951 (1997)). However, the 4 Ninth Circuit has found that “the strong default presumption is that the FAA, not state law, supplies 5 the rules for arbitration.” Sovak v. Chugai Pharm. Co., 280 F.3d 1266, 1269 (9th Cir. 2002) (citations 6 omitted). Accordingly, “waiver of the right to compel arbitration is a rule for arbitration, such that 7 the FAA [rather than state law] controls.” Id. at 1270. Thus, a case decided by the California 8 Supreme Court is not dispositive here. 9 Regardless, Engalla v. Permanente Med. Group does not establish that Defendants acted 10 inconsistently with a right to arbitration. In Engalla, the California Supreme Court remanded a 11 medical malpractice case so that the lower court could decide if the defendant waived its right to 12 arbitration. Engalla, 15 Cal. 4th at 984. In its decision to remand, the court found that the defendant 13 may have waived its right to arbitration by engaging in dilatory conduct to postpone an arbitration 14 hearing until after the employee had died. Id. The court found that a bad faith delay as to arbitration 15 could constitute a waiver of the defendant’s right to arbitration. Id. Moreover, the court emphasized 16 that in order for the delay to constitute a waiver it must be “substantial, unreasonable, and in spite of 17 the claimant’s own reasonable diligence.” Id. 18 None of these facts pertain here. Defendants have not engaged in conduct with the bad faith 19 intention of delaying arbitration. To the contrary, they immediately asserted their right to arbitration 20 in their Motion to Dismiss. (Memo. ISO Motion at 4.) Any other delay asserted by Plaintiff is not 21 “substantial” or “unreasonable” in light of the fact that waiver “‘is not to be lightly inferred.’” Id. 22 (citation omitted). Thus, even if Engalla were controlling authority, the Court would still not find 23 waiver. 24 As to the third prong of the waiver test, Plaintiff argues that he was prejudiced by Defendants’ 25 withholding payment until after the January 30, 2010 deadline. (Opp. at 10.) While this might be 26 prejudice caused by Defendants’ alleged breach of the Merger Agreement, it is not clear that this is 27 prejudice as to Defendants’ acts with respect to arbitration. Even if Plaintiff were to establish 28 prejudice, he has still failed to sow that Defendants acted inconsistent with their arbitration right. - 13 - 10cv762 1 From these considerations and in light of the Ninth Circuit precedent which does not “lightly 2 find waiver of the right to arbitrate,” the Court finds that Defendants have not waived their right to 3 compel arbitration pursuant to the Independent Accounting provision in the Merger Agreement. 4 Chappel v. Laboratory Corp. of America, 232 F.3d 719, 723 (9th Cir. 2000) (citing Van Ness 5 Townhouses, 862 F.2d at 758). 6 V. Stay the Proceeding 7 In the alternative to its motion to dismiss, Defendants request that the Court order a stay 8 pending arbitration proceedings. (Memo. ISO Motion at 7.) Pursuant to 9 U.S.C. § 3, the Court may 9 order a stay “pending compliance with a contractual arbitration clause.” Martin Marietta Aluminum, 10 11 Inc. v. Gen. Elec. Co., 586 F.2d 143, 147 (9th Cir. 1978). The FAA provides, 14 If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration. 15 9 U.S.C § 3. Accordingly, there are two prerequisites to granting a stay order: 1) the issue is referable 16 to arbitration under an agreement in writing for such arbitration; and 2) the applicant for the stay is 17 not in default in proceeding with such arbitration. See 9 U.S.C § 3. 12 13 18 As noted above, the Independent Accountant provision of the Merger Agreement provides for 19 arbitration of disagreements regarding the Contingent Merger Consideration due. See Wolsey, 144 20 F.3d at 1208. Thus, the first requirement is met. 21 As to the second requirement, Defendants are the applicants for the stay. (Memo. ISO Motion 22 at 7.) Nothing suggests that Defendants are in default in proceeding with such arbitration. See Saint 23 Agnes Med. Ctr. v. PacifiCare 31 Cal. 4th 1187, 1195 (2003) (finding that although the “‘principle 24 of ‘default’ is akin to waiver, the circumstances giving rise to a statutory default are limited and, in 25 light of the federal policy favoring arbitration, are not to be lightly inferred’” (citation omitted).) 26 Given the strong federal policy favoring arbitration, the Court GRANTS Defendants’ request and 27 STAYS the case with regard to all issues save the Defendants’ obligations under the collateral 28 agreement. - 14 - 10cv762 1 CONCLUSION 2 For the reasons stated, the Court GRANTS IN PART and DENIES IN PART Defendants’ 3 motion. Defendants’ motion is DENIED to the extent that it seeks to dismiss the Complaint and 4 GRANTED insofar as it seeks a stay. The Court STAYS this case as to all issues other than the effect 5 of the collateral agreement. Plaintiff SHALL FILE a motion for summary judgment with respect to 6 the collateral agreement by October 1, 2010. Once that motion has been decided, the Court will send 7 the parties to arbitration with respect to the arbitrable issues noted above. 8 IT IS SO ORDERED. 9 10 11 12 DATED: August 10, 2010 Honorable Janis L. Sammartino United States District Judge 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - 15 - 10cv762
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