(Contra Costa County Super. Ct. No. MSC-07-01382) Trial judge: Hon. Judith Craddick.
The opinion of the court was delivered by: Needham, J.
CERTIFIED FOR PUBLICATION
Sean Agahi, James B. Luippold, and Anthony Ortale (Agahi Defendants) appeal from an order denying their motion to compel arbitration and request for a stay of proceedings. They contend the court erred in (1) ruling that respondent John Valentine's dispute with appellants was not subject to mandatory arbitration under the rules of the Financial Industry Regulatory Authority (FINRA) and (2) refusing to stay proceedings pending arbitration. We will affirm the order.
I. FACTS AND PROCEDURAL HISTORY
Respondent John Valentine is the founder and president of Valentine Capital Asset Management, Inc. (VCAM) and Valentine Wealth Management, Inc. (VWM). It is alleged that VCAM offers ―private portfolio management or institutional-style management to individual investors,‖ including ―the benefits of ‗the private banking' arrangements enjoyed by institutional investors.‖ VWM allegedly ―offers a combination of financial/investment advice, accounting/tax services and estate planning.‖*fn1
VCAM and VWM are investment advisor entities regulated by the Securities and Exchange Commission (SEC). Neither VCAM nor VWM is a member of FINRA, the self-regulatory organization for securities broker-dealers and successor to the National Association of Securities Dealers (NASD).*fn2 John Valentine is subject to FINRA rules and regulations, not by virtue of his relationship to VCAM or VWM, but through his affiliation with FINRA member Geneos Wealth Management, Inc. (Geneos). It is not alleged that VCAM and VWM are affiliated with Geneos.
Appellants Agahi, Luippold and Ortale (Agahi Defendants) previously worked for John Valentine's companies, VCAM and VWM. Agahi began working there in 1997, and Luippold joined them in 1998. While they worked together, John Valentine developed business leads and turned them over to Agahi, Luippold and others to follow up, develop a client relationship, and provide services to those clients. In January 2007, Ortale began working for John Valentine's companies as well.
At the time they worked for John Valentine's companies, Agahi and Luippold, like John Valentine, were registered representatives of Geneos, but it is not alleged that their work for VCAM or VWM required their registration: Agahi initially handled data entry before he became a sales representative, and Luippold was a receptionist, moved to data entry, and also became a sales representative. Ortale was hired as an office manager.
Later in 2007, all of the Agahi Defendants left the Valentine companies and, soon thereafter, became part of a competing firm. Ortale resigned his affiliation with Valentine in May 2007. Agahi's affiliation with Valentine ended in June 2007 and, a few days later, Luippold left Valentine as well. Agahi formed Horizon Wealth Group, LLC (Horizon) and registered it as an investment advisor, in competition with VCAM. Luippold and Ortale joined Agahi at Horizon. Like VCAM and VWM, Horizon is not a member of FINRA. Each of the Agahi Defendants purports to be under the jurisdiction of FINRA, not by virtue of their relationship with Horizon, but as associated persons of FINRA-member First Allied Securities, Inc. (First Allied). There is no allegation that Horizon and First Allied are related entities.
After the departure of the Agahi Defendants, John Valentine allegedly discovered that Agahi, while working for the Valentine companies, had emailed the client database to Ortale. John Valentine also found that files and emails had been deleted from the computer Agahi used at work, and that Agahi was attempting to persuade clients of the Valentine companies to move their assets to Agahi and Horizon.
A. VCAM and VWM Sue Agahi, Luippold and Ortale
In June 2007, VCAM and VWM sued the Agahi Defendants. The complaint alleged that the Agahi Defendants stole trade secrets from VCAM or VWM (Valentine), breached their contracts with Valentine by unlawfully soliciting Valentine's clients, converted Valentine's property, made defamatory statements about Valentine's alleged failure to comply with laws and regulations, and disparaged Valentine's business and relations with employees. Neither Geneos, First Allied, nor any other FINRA-member firm was a party to the action.
Valentine sought a temporary restraining order, which was issued in modified form on July 5, 2007. After some formal discovery, VCAM and VWM filed an application for a preliminary injunction in late August 2007. A preliminary injunction was issued in October 2007.
B. Valentine Plaintiffs' First Amended Complaint
Meanwhile, on September 19, 2007, John Valentine joined VCAM and VWM (collectively, Valentine Plaintiffs) as a plaintiff in a first amended complaint. The Valentine Plaintiffs alleged that the Agahi Defendants misappropriated the Valentine Plaintiffs' trade secrets, including their customer list, and made libelous and defamatory statements. Abandoning their contract claims, the Valentine Plaintiffs asserted causes of action for misappropriation of trade secrets, conversion, intentional interference with contractual relations, intentional interference with prospective economic advantage, trade libel, slander, common law unfair competition, statutory unfair competition under Business and Professions Code section 17200, and violation of Penal Code section 502, subdivision (c), against all defendants. Like the original complaint, the first amended complaint did not mention Geneos (the FINRA firm with which John Valentine was associated) or allege wrongdoing by First Allied (the FINRA firm with which the Agahi Defendants were associated).
C. Agahi Defendants' Answer and Cross-Complaint
The Agahi Defendants answered the first amended complaint on October 19, 2007. As their twentieth affirmative defense, they alleged that the Valentine Plaintiffs' claims were barred in the litigation because ―plaintiffs‖ (VCAM, VWM, and John Valentine), as ―members‖ of FINRA, had agreed to submit all disputes to arbitration under FINRA rules.*fn3
On the same date, the Agahi Defendants filed a cross-complaint against the Valentine Plaintiffs and two other individuals. The Agahi Defendants alleged they had been independent contractors with VCAM, VWM and predecessor entities, and that by June 2007 their affiliation with VCAM and VWM ended, Agahi formed Horizon, and Luippold and Ortale joined him there. Further, they alleged, in 2002 Agahi entered into a written agreement with John Valentine (signed on behalf of one of Valentine's companies), a copy of which was purportedly attached to the cross-complaint, by which Agahi acquired an ownership interest in John Valentine's investment advisory business (under the name of his business entity) in exchange for Agahi's transfer of his clients to John Valentine and his business entity. Luippold allegedly entered into a similar oral agreement. According to the cross-complaint, the Valentine Plaintiffs breached these contracts. In addition, the Agahi Defendants alleged, the Valentine Plaintiffs slandered them in communications with brokerage firm clients and prospective clients and engaged in acts of unfair competition. The Agahi Defendants asserted causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, common counts, libel and slander, intentional interference with prospective economic advantage, and violation of Business and Professions Code section 17200.
Despite asserting the affirmative defense based on the FINRA arbitration rules, the Agahi Defendants did not at that time move to compel arbitration or seek a stay of the litigation. In fact, more than 10 days after filing their answer and cross-complaint, the Agahi Defendants filed a case management statement that lacked any mention of the dispute being subject to arbitration under FINRA or any arbitration agreement.
The parties proceeded to invest substantial energy and court time in battles over the scope, interpretation, and enforcement of the preliminary injunction. In January 2008, the Valentine Plaintiffs served extensive written discovery upon the Agahi Defendants, noticed their depositions, and issued subpoenas to third parties. The Agahi Defendants' counsel decided it was time to seek arbitration.
D. Agahi Defendants' Pursuit of Arbitration and Request for Stay of Proceedings
On February 21, 2008, some five months after John Valentine had joined the litigation, counsel for the Agahi Defendants asked counsel for the Valentine Plaintiffs to submit the dispute to arbitration under FINRA. The Agahi Defendants claimed that FINRA rules required the arbitration because John Valentine, as well as Agahi and Luippold, were subject to FINRA rules due to their association with FINRA members Geneos and First Allied, neither of whom were involved in the dispute. The Valentine Plaintiffs did not agree to arbitrate.
On February 29, 2008, the Agahi Defendants filed a motion to compel arbitration of all claims in the first amended complaint and the Agahi Defendants' cross-complaint, and to stay the trial court proceedings pending completion of the arbitration. The Agahi Defendants reiterated their contention that arbitration under FINRA was required by federal and California arbitration statutes because they and John Valentine were associated persons of FINRA-member firms. (See 9 U.S.C. § 1 et seq. [Federal Arbitration Act] (FAA); Code Civ. Proc., § 1280 et seq. [California Arbitration Act]).
Evidence submitted in connection with the motion indicated that, as mentioned above, at all relevant times John Valentine was a registered representative of FINRA member Geneos, Agahi and Luippold were formerly registered representatives of Geneos, and all the Agahi Defendants had become registered representatives of FINRA-member First Allied. Plaintiffs VCAM and VMW were not members of FINRA.*fn4
The Valentine Plaintiffs opposed the Agahi Defendants' motion, contending essentially that the Agahi Defendants had waived their right to arbitrate and that the disputes in the ...