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Eberle v. Smith

October 26, 2007


The opinion of the court was delivered by: Hon. Thomas J. Whelan United States District Judge


On March 26, 2007, Defendants Jeff Smith and dX/dY Voice Processing, Inc. filed a motion to compel arbitration of this dispute. On May 15, the court denied the motion without prejudice. Having conducted discovery on two relevant issues, the defendants now present a renewed motion to compel arbitration. Because Smith and dX/dY have not met their burden to show that a contractual arbitration provision binds Plaintiff Michael Eberle and Paramount International Telecommunications, Inc., the court will DENY the motion.

I. Background & Legal Standards

On December 11, 2006, Eberle and Paramount filed suit for breach of contract in the San Diego Superior Court. After removing the case here, Smith and dX/dY counterclaimed for breach of contract and fraud. The court denied the defendants' motion to compel arbitration for two reasons. First, a December 2005 email may have superseded the prior contract between the parties. (Order Denying Mot. to Compel Arb'n at 2--3.) Second, the agent who signed the original agreement (dated August 15, 2003: the "2003 Agreement") may have lacked authority. (Id. at 3--5.) But the court permitted limited discovery on two issues: (1) whether the parties intended to incorporate an arbitration provision in the 2005 email; and (2) whether the agent had authority to sign the 2003 Agreement.

Under the Federal Arbitration Act, courts should uphold contractual arbitration provisions wherever possible. Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983) (describing the FAA as a "declaration of a liberal federal policy favoring arbitration agreements"). Without an agreement, however, an arbitration clause has no effect. Thus, on a motion to compel arbitration, the court must decide whether the agreement to arbitrate is valid and covers the dispute. See Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1130 (9th Cir. 2000).

II. Discussion

The defendants argue that (1) the 2003 Agreement governs, and the 2005 email exchange merely modified its payment terms, or (2) alternatively, the parties' conduct created an implied contract extending an agreement dated January 1, 2002 (the "2002 Agreement") indefinitely. Both the 2002 and 2003 agreements included an arbitration provision. The plaintiffs contend that the 2005 email exchange, together with terms implied from partnership law, governed the entire relationship between the parties. Because the parties did not intend to incorporate an arbitration provision into their 2005 contract, and they effected a novation, the court will DENY the renewed motion.

A. The Terms of the 2005 Email Exchange do not Include Arbitration

To begin, the court must decide whether the parties merely modified an existing contract or substituted a new contract via the 2005 email exchange. If the 2005 email exchange was a new contract, its terms did not explicitly include mandatory arbitration. Nothing in the series of emails between Eberle and Smith evidences an intent to include such a provision by implication either. (See Defs.' Notice of Lodgment [NOL] Ex. 7.)

B. The Parties Intended to Substitute, not Modify, Contractual Obligations

Based on the 2005 emails and surrounding facts, however, the court must conclude that the 2005 email exchange substituted new contractual obligations for old-whatever those may have been. Eberle and Smith discussed their prior revenue-sharing agreement (id. at 2--3), their expense-sharing agreement (id. at 2, 4), and their joint line of credit (id. at 3--4, 6, 8). Smith initiated the exchange to remedy actual or perceived breaches of an April 13, 2005 oral agreement in New York (id. at 2, 6). Smith states and reiterates that he will "forget about" these breaches (id. at 4) but is "NOT willing to 'continue' with the way things are now-period" (id. at 7). Mainly, the text of the emails relates to Smith's proposals on "how to move forward" (id. at 3--4, 8--9), either continuing their business in a different form or ending it (id. at 7, 8).

Regardless of whether the 2003 Agreement was valid, the email exchange forecloses the argument that either party considered that agreement an essential element of a continued business relationship. Neither party mentions it, refers to it, or even indicates it crossed his mind. The sole reference to a specific prior agreement-the April 13, 2005 oral agreement in New York-does not establish that the parties intended to incorporate the arbitration clause. On the contrary, without evidence that the parties discussed arbitration during that conversation, the court must conclude that the only aspect of the prior agreement that survived the email exchange was Eberle's (unkept) promise to split the profits in half. But that is tantamount to concluding the parties agreed to forgive breaches and enter a new contract entirely.

1. Each Email Constitutes a Valid Offer and Counteroffer

Accordingly, the court rejects the defendants' argument that the December 2005 email exchange must have been a modification because it could not stand alone. (Def.'s Mem. in Supp. of Mot. to Compel at 7.) Its terms are sufficiently precise; indeed, at several points, Smith lays out three distinct options he finds agreeable for Eberle to consider. An offer does not fail simply because it requires extrinsic evidence to interpret. An offer need only confer a power of acceptance. Restatement (Second) of Contracts ยง 24 ("An offer is the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it."). Smith is abundantly clear that Eberle may choose one of several ...

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