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REYN'S PASTA BELLA v. VISA U.S.A.

United States District Court, Northern District of California


April 21, 2003

REYN'S PASTA BELLA, LLC, JEFFREY LEDON DEWEESE, M.D. BARRY LEONAD, DBA CRITTER FRITTERS, HAR-IN-THE-RING, INC. DBA EDDIE RICKENBACNER'S, ON BEHALF OF THEMSELVES AND ALL OTHERS SIMILARLY SITUATED, PLAINTIFFS,
v.
VISA U.S.A. INC., MASTERCARD INTERNATIONAL, INC., BANK OF AMERICA CORPORATION, WELLS FARGO & COMPANY, U.S. BANK, N.A., A SUBSIDIARY OF U.S. BANCORP, DEFENDANTS.

The opinion of the court was delivered by: Jeffery S. White, United States District Judge

ORDER GRANTING WELLS FARGO BANK'S MOTION TO COMPEL ARBITRATION AND STAY REMANING CLAIMS
INTRODUCTION

Now before the Court is Defendant Wells Fargo Bank's Motion to Compel Plaintiff Jeffrey Deweese to arbitration and to stay Mr. Deweese's claims pending arbitration. Having carefully reviewed the parties' papers and considered their arguments and the relevant legal authority, and good cause appearing, the Court hereby GRANTS Wells Fargo Bank's Motion to Compel Arbitration of Mr. Deweese s claims and to stay Mr. Deweese's claims pending arbitration.

STATEMENT OF FACTS

On June 29, 2002, Plaintiffs, various retail and service businesses, filed their first amended class action complaint against Defendants — two credit card companies and three credit-card issuing banks, including Wells Fargo Bank. The complaint challenges the internal fee system of Visa U.S.A., Inc. ("Visa") and Mastercard International, Inc. ("Mastercard"), in particular the "deposit-fee" that merchants are assessed by their banks when depositing Visa and Mastercard charges for processing, as a violation of section 1 of the Sherman Act. According to Plaintiffs, the defendant banks who participate in this fee system obtain unreasonable and unwarranted profits by virtue of their assessment of these deposit fees on Plaintiffs and other similarly situated businesses. Plaintiffs further allege that the structure of Visa and Mastercard as a joint venture of member banks violates various provisions of the Clayton Act, 15 U.S.C. § 12 et seq., prohibiting ownership of businesses by banks. Wells Fargo Bank and the other defendant banks have, according to Plaintiffs, violated section 7 of the Clayton Act by their acquisition of membership in Visa and Mastercard. Plaintiffs also claim that the defendant banks have exceeded the permissible activities of a bank service company, 12 U.S.C. § 1861, et seq. and violated 12 U.S.C. § 1865(a) by failing to inform the appropriate federal agency that they had acquired stock in Mastercard and Visa. See 12 U.S.C. § 1861, et seq; 12 U.S.C. § 1856(a).

Plaintiffs request both damages and equitable relief. Jeffrey Deweese ("Mr. Deweese") requests damages from Wells Fargo Bank for its alleged Sherman Act violations, including treble damages and compensation for the cost of filing this suit, including reasonable attorney fees. The claims under which Mr. Deweese seeks equitable relief, which are applicable to Wells Fargo Bank, are alleged violations of the Clayton Act and the Bank Services Act, for which he requests the "systematic divestiture over a reasonable period of time of all bank proprietary interest in VISA and MASTERCARD" and that Wells Fargo Bank be ordered to "bring itself into conformity with 12 U.S.C. § 1861 et seq." (FAC at 13.)

In 1993, Mr. Deweese, a physician, decided to give his patients the option of paying for his services with Visa and Mastercard. In 1993, he applied to Wells Fargo Bank to become a "merchant" provider. In September 1993, he completed and signed a Merchant Card Services Application which stated that "by signing below, . . . merchant agrees to be bound by all the terms of those documents/contractual terms for services used or selected by merchant, as indicated below." (Def. Decl., Exh. A) In June 1993, Mr. Deweese had completed and signed a Merchant Card Services Agreement which contained an arbitration clause providing that any disputes between the merchant and the bank were to be determined according to the Federal Arbitration Act, except for claims for equitable relief, which were to be brought in front of a court of competent jurisdiction. (Def. Decl. Exh. B)

Defendant Wells Fargo Bank now moves, pursuant to the Federal Arbitration Act, 9 U.S.C. § 4, to compel Plaintiff Mr. Deweese to arbitration as dictated by the arbitration clause in the Merchant Card Services Agreement. Wells Fargo Bank further requests that this Court stay Mr. Deweese's claims pending the outcome of the arbitration.

ANALYSIS

A. Legal Standard.

Agreements to arbitrate disputes are governed by the Federal Arbitration Act (The "FAA"), 9 U.S.C. § 1 et seq. The FAA creates a body of federal substantive law governing arbitrability and establishes a federal policy favoring arbitration of commercial disputes. Such policy provides that any disputes concerning arbitrability of claims are to be determined in favor of arbitration. Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 226 (1987); Simula, Inc. v. Autoliv, Inc., 175 F.3d 716, 719 (9th Cir. 1999).

B. The Federal Arbitration Act, not California Rules of Arbitration, Applies to this Motion.
Wells Fargo Bank argues that the Federal Arbitration Act governs, while Mr. Deweese contends that California rules of arbitration, under California Code of Civil Procedure § 1280 et seq., should apply. (Br. at 4; Opp. Br. at 4-5) Under the FAA, a court must compel arbitration even when there is a pending court action arising out of the same series of events or transactions as the claims to be arbitrated. 9 U.S.C. § 3; see also, Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 216-221 (1985); Wolsey, Ltd. v. Foodmaker, Inc., 144 F.3d 1205, 1210-11 (9th Cir. 1998). Under California rules of arbitration, however, a court may stay arbitration pending resolution of related litigation. Cal. Code. Civ. Proc. § 1281.2. Because Mr. Deweese's complaint contains certain claims which are subject to arbitration under the arbitration clause in the Merchant Card Services Agreement and other claims which must be adjudicated in a proper court, it is necessary to determine whether Federal or California law applies. Under federal law, this Court must order arbitration of those claims within the scope of the arbitration agreement, while under California law this Court may stay the arbitration proceeding because there is a pending court action involving those claims not subject to the arbitration agreement. See 9 U.S.C. § 3; see also, Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 216-221 (1985); Wolsey, Ltd. v. Foodmaker, Inc., 144 F.3d 1205, 1210-11 (9th Cir. 1998); Cal. Code Civ. Proc § 1281.2; Volt Information Sciences, inc. v. Bd. of Trustees of Leland Stanford Junior Univ., 489 U.S. 468, 477-79.

The Federal Arbitration Act states that a "written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. Arbitration is defined as any agreement to submit a dispute to decision by a third party. Wolsey, 144 F.3d at 1208. "A transaction involving commerce" is construed broadly, with application to any contract affecting interstate commerce. Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 276 (1995). The FAA rules do not, however, apply to an arbitration agreement in which the parties have clearly provided otherwise, as when the parties have specified in their contract different rules under which the arbitration is to be conducted. Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Jr. Univ., 489 U.S. 468, 469 (1989). Nonetheless, the default position is that the FAA, not state law, provides the rules for arbitration and absent a clear intent by the parties to incorporate state law rules, the FAA will apply. See Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 61-62; Sovak v. Chugai Pharmaceutical Co., 280 F.3d 1266, 1269 (9th Cir. 2002) cert. den. 123 S.Ct. 114 (2002); Wolsey Ltd., 144 F.3d at 1213.

Wells Fargo Bank argues that the Federal Arbitration Act applies here because it applies to any "written arbitration provision" that is part of a "contract evidencing a transaction involving commerce." See 9 U.S.C. § 4. The Merchant Card Services Agreement, governing merchant transactions between the bank and its merchant providers, contains a written arbitration provision and clearly falls within the broad category of transactions affecting commerce. Furthermore, Wells Fargo argues, the arbitration clause itself provides that disputes "shall be determined pursuant to Title 9 of the U.S. Code," and federal policy is for courts to rigorously enforce arbitration agreements according to their own terms. See Shearson/American Express, 482 U.S. at 226. Unless the parties expressly contract around the FAA, which they did not do in this case, the FAA governs the arbitration. Mastrobuono v. Shearson Lehman Hutton, Inc. 514 U.S. 52 (1995). In Mastrobuono, the Supreme Court considered whether a general choice of law provision designating New York law as the governing law in a contract encompassed a New York law prohibiting the arbitration of punitive damages claims, or whether the FAA rules applied instead. The Court held that the choice of law provision did not encompass the New York arbitration rule because general choice of law provisions do not incorporate state rules that govern the allocation of authority between courts and arbitrators. See Mastrobuono, 514 U.S. at 63-64. Wells Fargo argues that under this reasoning, the choice of California law provision in the Merchant Card Services Agreement should not be read as encompassing California rules of arbitration, rather the FAA rules must be applied.

Mr. Deweese, however, argues that California law governs this motion because the Merchant Card Services Agreement contains a choice of law provision which specifies California Law as the governing law. The agreement provides that, "This agreement shall be governed by and construed in accordance with the laws of the State of California and the United States." Plaintiff relies on the Supreme Court's holding in Volt Information Sciences, Inc. v. Bd. of Trustees of Lelan Stanford Junior Univ., 489 U.S. 468 (1989), for the proposition that this general choice of law provision encompasses California rules of arbitration, which therefore govern this motion. In Volt, the Supreme Court affirmed a California Court of Appeal's ruling that a general choice of law provision in the parties' contract, which designated California law as governing the contract, encompassed California rules of arbitration. 489 U.S. at 477-80. Mr. Deweese argues that Volt is controlling of this case and that this court should follow its holding in finding that the choice of law provision in the Merchant Card Services Agreement encompasses California rules of arbitration.

Wells Fargo counters that a general choice of law provision designating that state substantive law is to apply to a dispute does not encompass state rules of arbitration. This court agrees with Wells Fargo that the FAA, and not California rules of arbitration, apply to this motion to compel arbitration. Volt is not controlling of this case; Mastrobuono is. Although the Supreme Court in Volt did approve of a state court of appeals' decision holding that a choice of law provision incorporated state rules of arbitration and therefore the FAA rules did not apply, the Supreme Court, in Mastrobuono, distinguished that case: "In Volt . . . we did not interpret the contract de novo. Instead, we deferred to the California Court's construction of its own State law . . . In the present case, by contrast, we review a federal court's interpretation of this contract." 514 U.S. at 60, n4. The court went on to hold that parties cannot rely on a general choice of law provisions, which apply only to state substantive law, to invoke state arbitration laws. In order to invoke state rules of arbitration instead of the FAA, parties must clearly evidence their intent to do so; a general choice of law provisions is not clear evidence of an intent to invoke state rules of arbitration, thus the FAA governs the arbitration. See Chiron Corp. v. Ortho Diagnostic Sys., Inc. 207 F.3d 1126, 1131 (9th Cir. 2000); See also Sovak, 280 F.3d at 1269.

The Ninth Circuit has recently affirmed that a general choice of law provision does not incorporate state rules of arbitration. In Wolsey, Ltd. v. Foodmaker, Inc., 144 F.3d 1205 (9th Cir. 1998), the party seeking to avoid arbitration contended that a general choice of law provision in their contract with the opposing party governed the issue of arbitrability. The Ninth Circuit disagreed, relying on Mastrobuono's holding that general choice of law clauses do not incorporate state rules for arbitration. See Wolsey, 144 F.3d at 1213. The Ninth Circuit affirmed that holding in Sovak v. Chugai Pharmaceutical Co., 280 F.3d 1266, 1269 (9th Cir. 2002) cert. den., 123 S.Ct. 114 (2002), finding that a general choice of law provision designating Illinois law as the governing law in an agreement with an arbitration clause did not encompass state law rules for arbitration and therefore the FAA applied. 280 F.3d at 1269-70.

This Court, in following these holdings, finds that the general choice of California law provision in the Merchant Card Services Agreement does not incorporate California rules of arbitration and that as a result the FAA governs this motion to compel arbitration.

c. Mr. Deweese's claims are Arbitrable.

Under the FAA, a party seeking to compel arbitration need only make two showings in order to prevail: that the arbitration agreement signed by the party opposing arbitration is valid and enforceable and that the claims seeking to be arbitrated fall within the scope of the arbitration clause. See 9 U.S.C. § 4; Simula, Inc. v. Autoliv, Inc., 175 F.3d 716, 719-20 (9th Cir. 1999); Chiron, 207 F.3d at 1130. If the moving party establishes that both of these are true, the FAA requires the court to enforce the arbitration agreement in accordance with its terms and leaves no room for the exercise of discretion by the district court. Simula, 175 F.3d at 719.

1. The Arbitration Agreement is Valid and Enforceable.

The parties to this motion agree that they are signatories to a written arbitration agreement which was part of the Merchant Card Services Agreement, but disagree as to whether or not the agreement is enforceable. Mr. Deweese argues that the Merchant Card Services agreement is procedurally and substantively unconscionable and is therefore unenforceable. Wells Fargo Bank disagrees.

In order to determine whether an agreement to arbitrate is valid, federal courts apply ordinary state-law principles of contract. Circuit City Stores v. Adams, 279 F.3d 889, 892 (9th Cir. 2002). "Generally applicable contract defenses, such as . . . inconscionability . . . may be applied to invalidate arbitration agreements . . ." Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 687 (1996). In determining revocability, federal courts look to state law principles generally applied to all contracts. See Ticknor v. Choice Hotels Int'l, Inc. (9th Cir. 2001). The Arbitration Act establishes that, as a matter of federal law, any doubts concerning the scope of arbitrable issues is to be resolved in favor of arbitration. Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-5 (1983).

Under California law, the doctrine of unconscionability has both a procedural and a substantive component. A & M Produce Co. v. FMC Corp., 135 Cal.App.3d 473, 486. Procedural unconscionability includes "opression" — an inequality in bargaining power resulting in no possibility of negotiations and an absence of meaningful choice and "surprise" — when supposedly agreed upon terms of the contract are hidden in the prolix form drafted by the party seeking to enforce the agreement. Dean Witter Reynolds, Inc. v. The Superior Court of Alameda County, 211 Cal.App.3d 758, 767. Substantive unconscionability consists of an allocation of risks or costs that is unduly harsh or one-sided and is not justified by the circumstances surrounding the agreement. Id at 768. In order for a court to find unconscionability, both procedural and substantive unconscionability must be present, however a relatively larger degree of one will compensate for a smaller degree of the other. Id.

A contract of adhesion is generally held to satisfy the procedural unconscionability requirement. Circuit City v. Adams, 279 F.3d 889., 892 (9th Cir. 2002); Flores v. Transamerica Homefirst, Inc. 93 Cal.App.4th 846, 853 (2002). A contract of adhesion is a standardized contract which is drafted by the party of superior bargaining power and which the other party has the opportunity to adhere to or reject, with no real opportunity for negotiation. Armendariz v. Foundation Health Psychare Servs, 24 Cal.4th 83, 113 (2000). Once it is proven that the agreement was an adhesive one, the court examines whether there is also a showing of substantive unconscionability such that the contract is unenforceable.

Mr. Deweese argues that the Merchant Card Services Agreement is a contract of adhesion, therefore procedural unconscionability is established. The Agreement was a standardized contract used by Wells Fargo, the party with significantly more bargaining power, and Mr. Deweese had no choice but to accept the terms of the contract or not become a merchant provider. Furthermore, the agreement is substantively unconscionable because various terms in the contract "can only benefit Wells Fargo:" Wells Fargo has the right to dispose of Mr. Deweese's deposits and personal property in certain situations without waiving its right to arbitration. This, Mr. Deweese argues, is sufficient to establish substantive unconscionability.

Wells Fargo Bank contests, for one, that the FAA, not California law, governs the unconscionability analysis. Wells Fargo Bank also argues that Mr. Deweese cannot meet the burden of showing that the Merchant Card Services Agreement was unconscionable. Wells Fargo does not dispute that the agreement is a contract of adhesion and is therefore procedurally unconscionable, but argues that there was no substantive unconscionability present in the agreement; Any one-sidedness provisions in the agreement are justified by the respective roles of the parties and Mr. Deweese did not set forth any other allegations of substantive unconscionability.

This court finds that the Merchant Card Services Agreement between Mr. Deweese and Wells Fargo Bank was not unconscionable or otherwise invalid, therefore the arbitration agreement is enforceable according to its terms. As a preliminary matter, Wells Fargo Bank is incorrect that the FAA and not state laws of contract govern the unconsionability determination. It is a well established rule that state law principles of contract determine whether or not an agreement to arbitrate is valid, therefore this court relies on California State law in deciding this issue. (See discussion, supra, at 7.) While this court agrees that Merchant Card Services Agreement is a contract of adhesion and is therefore procedurally unconscionable, this alone does not render the contract unenforceable, absent an additional showing of some degree of substantive unconscionability. See Armendariz 24 Cal.4th at 113. Mr. Deweese has failed to show that the contract is substantively unconscionable. Although it may be the case that the contract contains terms which are one-sided in favor of Wells Fargo, the Defendant correctly points out that these differences reflect the respective roles of the parties — Wells Fargo is a lender who exposes itself to the risk of consumer default and is therefore in need of collateral protection whereas the Mr. Deweese, the merchant provider, is not. This court therefore finds that any one-sidedness in the contract's terms is justified by the circumstances under which the agreement was made and therefore does not render the contract substantively unconscionable.

2. Mr. Deweese's Claims Fall Within the Scope of the Arbitration Clause.

The parties do not disagree over whether Mr. Deweese's claims fall within the scope of the arbitration clause in the Merchant Card Services Agreement. The arbitration clause states that "Merchant and Bank hereby agree that all disputes, claims, and controversies between Bank and Merchant arising from this Agreement or any related Agreements or instruments, or otherwise, including . . . contract, tort, and other claims shall be determined pursuant to" the FAA. This broad and far reaching clause clearly encompasses the antitrust claims alleged by Mr. Deweese.

3. Mr. Deweese Must be Compelled to Arbitration.

The parties to this motion dispute whether, because Mr. Deweese has requested injunctive relief, which is exempt from their arbitration agreement, the court may refuse to order arbitration of his claims. Mr. Deweese's claims for equitable relief including the prayer for divestiture, are not arbitrable according to the terms of this agreement. The arbitration clause states that "no arbitrator shall have the power to enjoin or restrain any act of either Bank or Merchant" and "Nothing in this agreement shall preclude either bank or merchant from seeking equitable relief from a court of competent jurisdiction." This disputed issue is whether this court may order arbitration of the arbitrable claims given the existence of the nonarbitrable claims for equitable relief.

Under the FAA, pending litigation involving similar issues is not grounds on which to deny a motion to compel arbitration. 9 U.S.C. § 3; See Wolsey, 144 F.3d at 1209-10; See also, Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 216-221 (1985). Rather, the court must compel arbitration of the arbitrable claims and stay the pending litigation of the nonarbitrable claims. Id.

Mr. Deweese argues that this court should stay the arbitration of the arbitrable claims pending resolution of the claims in this court. He relies on California's rules of arbitration, which grant courts the discretion to stay arbitration proceedings pending resolution of related litigation. C.C.P. § 1281.2. Wells Fargo Bank argues that the FAA applies and according to the FAA this court must order that the arbitrable claims be arbitrated.

This court has already determined that the FAA, and not California rules of arbitration, apply to this motion. (See discussion, supra, at 3-7) Therefore this court agrees with Wells Fargo that Mr. Deweese must be ordered to arbitration to resolve his First Claim for Relief, alleged violations by Wells Fargo Bank of the Sherman Act, for which he seeks damages, to be trebled according to law, reasonable attorney's fees and costs of suit.

This Court also finds that Mr. Deweese's remaining claims in this Court should be stayed pending resolution of this litigation. According to the FAA, a district court "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." 9 U.S.C. § 3; See also, Moses H. Cone, 460 U.S. at 26.

CONCLUSION

For the foregoing reasons, this Court GRANTS Defendant Wells Fargo Bank's Motion to Compel Arbitration and to Stay the Action in this court.

IT IS SO ORDERED.

20030421

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