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Madrigal v. New Cingular Wireless Services

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF CALIFORNIA


August 17, 2009

ANAMIRIA MADRIGAL, INDIVIDUALLY AND DOING BUSINESS AS ATZEK AND ATZEK CELLULAR,INC. CELLULAR, A SOLE PROPRIETORSHIP; PLAINTIFFS,
v.
NEW CINGULAR WIRELESS SERVICES, INC., A CORPORATION; AND AT&T MOBILITY, LLC, A CORPORATION DEFENDANTS.

The opinion of the court was delivered by: Oliver W. Wanger United States District Judge

ORDER RE: MEMORANDUM DECISION AND DEFENDANTS' MOTION TO COMPEL ARBITRATION

I. INTRODUCTION

Before the court is a motion to compel arbitration pursuant to the Federal Arbitration Act ("FAA"), 9 U.S.C. § 4, brought by Defendants New Cingular Wireless Services, Inc. and AT&T Mobility, LCC (collectively "Defendants"). Defendants contend that the four claims asserted by Plaintiffs Anamiria Madrigal and her company Atzek Cellular, Inc. ("Plaintiffs") in the First Amended Complaint ("FAC"), and the counterclaims asserted by Defendants in their responsive pleading, are subject to an arbitration clause in an Exclusive Dealer Agreement executed between the parties.

The following background facts are taken from the parties' submissions in connection with the motion and other documents on file in this case.

II. BACKGROUND

A. The Dealer Agreement

On or about April 1, 2002, Plaintiff Anamiria Madrigal and AT&T Wireless Services, Inc. entered into an Exclusive Dealer Agreement ("Dealer Agreement"). (Doc. 13 at 3; Doc. 16 at 10.)*fn1 The terms of the Dealer Agreement authorized Madrigal to market wireless products and services to customers of AT&T Wireless. (Doc. 13 at 3.)

Madrigal opened and operated several retail stores under the name "Aztek Cellular." (Doc. 13 at 3; Doc. 16 at 10.) After "Atzek Cellular" incorporated, on August 8, 2002, Madrigal assigned her rights under the Dealer Agreement to Atzek Cellular, Inc. (Woosley Decl. ¶ 5, Ex. C.) The term of the Dealer Agreement was two years with automatic one-year extensions if not terminated by either party. (Doc. 13 at 4; Doc. 16 at 10.) The Dealer Agreement was renewed in 2004 and 2005. (Doc. 13 at 4; Doc. 16 at 10.)

During the term of the Dealer Agreement, Plaintiffs experienced considerable financial success while operating nine retail stores. (Doc. 13 at 4.)

B. The Switch From AT&T To Cingular And The Commission Dispute

In 2004, Cingular Wireless acquired AT&T Wireless after which AT&T Wireless was renamed New Cingular Wireless Services, Inc. (Doc. 13 at 2.) As part of the conversion from AT&T Wireless to Cingular, Plaintiffs were offered "Special Promotional Incentives Funds" ("SPIFs"). (Doc. 13 at 5.) For former AT&T Wireless customers Plaintiffs successfully transferred to Cingular and/or sold additional data features, Plaintiffs earned SPIFs (or commissions) as incentive compensation. (Id.)

By the fall of 2005, Plaintiffs calculated that they were owed more than $2,000,000 in unpaid and improperly calculated commissions. (Doc. 13 at 5; Doc. 16 at 4-5.) However, calculations of SPIFs were complicated and Cingular contested the unpaid amount claimed by Plaintiffs. (Doc. 13 at 5.) Plaintiffs were offered $475,000 in settlement. (Doc. 13 at 5; Doc. 16 at 5.) Plaintiffs rejected the offer and alleged that Cingular's calculations were erroneous. (Doc. 13 at 5; Doc. 16 at 5.) Plaintiffs maintain that Cingular "had no accounting reflecting their own calculations were in error." (Doc. 13 at 5; Doc. 16 at 5.) Cingular then reduced its offer to $435,000, without providing supporting documentation. (Doc. 13 at 5; Doc. 16 at 5.)

After Plaintiffs refused to compromise, on December 24, 2005, Defendants served Plaintiffs with a 90-day written notice of termination of the Dealer Agreement. (Doc. 13 at 4; Doc. 16 at 10.) On or about April 1, 2006, the Dealer Agreement terminated. (Doc. 13 at 8; Doc. 16 at 10.) Cingular made a final attempt to settle the disputed commissions for $149,275. (Doc. 13 at 5; Doc. 16 at 5.) Plaintiffs rejected the offer.

Subsequently, Plaintiffs, through counsel, requested mediation or, in the alternative, arbitration of the commission dispute. (Swingle Decl. Ex. A.) The parties agreed to mediate (Swingle Decl. Exs. B-C), but the mediation never occurred. After retaining new counsel, Plaintiffs requested arbitration of the commission claims. (Cornwell Decl. Exs. A-B.)

A couple months later, apart from the commission claims, Plaintiff Madrigal filed a state-court complaint asserting statutory claims arising from termination of the Dealer Agreement.

C. Procedural History

On November 18, 2008, Plaintiff Madrigal filed a complaint in Fresno County Superior Court alleging four statutory causes of action. On January 7, 2009, the action was removed to federal court on diversity of citizenship grounds. On March 5, 2009, Plaintiffs*fn2 filed a FAC alleging the same four statutory causes of action, which are: (1) a violation of the California Fair Dealership Law, Civil Code §§ 80-86; (2) a violation of the California Franchise Relations Act, Bus. & Prof. Code § 20000 et seq.; (3) a violation of the New York Franchise Law, N.Y. Gen. Bus. Law § 680; and (4) a violation of the California Unfair Competition Law, Bus. & Prof. Code § 17200 et seq. All of these claims allege, among other things, that the termination of the Dealer Agreement was unlawful and part of a scheme to put pressure on Plaintiffs to settle the commission dispute on terms adverse to Plaintiffs.

Defendants have demanded that Plaintiffs arbitrate their claims in this lawsuit. (De Liberty Decl. Ex. D.) Plaintiffs have resisted arbitration of their statutory claims despite their willingness to arbitrate the dispute over the commissions. (Cornwell Decl. Ex. B.)

III. ARBITRATION UNDER THE FAA

The FAA represents a "liberal federal policy favoring arbitration agreements." Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 24 (1991) (internal quotation marks omitted). The "central purpose of the [FAA] [is] to ensure that private agreements to arbitrate are enforced according to their terms." Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 53-54 (1995). The "preeminent concern of Congress in passing the [FAA] was to enforce private agreements into which parties had entered, a concern which requires that [courts] rigorously enforce agreements to arbitrate." Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 625-26 (1985) (internal quotation marks omitted).

In pertinent part, section 2 of the FAA provides that a "written" arbitration provision in any "contract evidencing a transaction involving commerce" is "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. The term "involving commerce" in section 2 is the "functional equivalent of the more familiar term 'affecting commerce' -- words of art that ordinarily signal the broadest permissible exercise of Congress' Commerce Clause Power." Citizens Bank v. Alafabco, Inc., 539 U.S. 52, 56 (2003) (per curiam). The FAA "provides for the enforcement of arbitration agreements within the full reach of the Commerce Clause." Id. (internal quotation marks omitted). To fall within the FAA, the "contract evidencing a transaction involving commerce," in which an arbitration agreement is embedded, need not be one "within the flow of interstate commerce," nor one that, "taken alone," has "a substantial effect on interstate commerce." Id. (internal quotation marks omitted). "Congress' Commerce Clause power may be exercised in individual cases without showing any specific effect upon interstate commerce if in the aggregate the economic activity in question would represent a general practice... subject to federal control." Id. 56-57 (internal quotation marks omitted).

Defendants engage in cellular business throughout the United States, entering into dealership agreements across the country. (Woosley Decl. ¶¶ 9-11.) The Dealer Agreement here, reached between parties from different states, involves the provision of cellular services to end customers over a significant period of time. The Dealer Agreement represents a transaction "involving commerce," and even if there were "any... doubt about the magnitude of the impact on interstate commerce caused by the particular" Dealer Agreement in this case, "that doubt would dissipate upon consideration of the "general practice th[at] transaction[] represent[s]." Citizens Bank, 539 U.S. at 57-58. "No elaborate explanation is needed to make evident the broad impact [cellular services have] on the national economy." Id. at 58. The written arbitration agreement here is embedded in a contract evidencing a transaction involving commerce within the meaning of the FAA.

Section 4 of the FAA "authorizes a federal district court to issue an order compelling arbitration if there has been a 'failure, neglect, or refusal' to comply with the arbitration agreement." Shearson/Am. Express, Inc. v. McMahon, 482 U.S. 220, 226 (1987) (quoting 9 U.S.C. § 4).

When a party brings a motion to compel arbitration under section 4, a threshold inquiry is whether an "arbitration" agreement exists. See Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1130 (9th Cir. 2000). No party disputes that the Dealer Agreement contains an arbitration agreement.*fn3

The next inquiry deals with the scope of the arbitration agreement. "[A]rbitration is simply a matter of contract between the parties; it is a way to resolve those disputes-but only those disputes-that the parties have agreed to submit to arbitration." First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 943 (1995). "Accordingly, the [next] task of a court asked to compel arbitration of a dispute is to determine whether the parties agreed to arbitrate that dispute." Mitsubishi Motors Corp., 473 U.S. at 626.

In opposition to the motion to compel arbitration, Plaintiffs contend that the scope of the arbitration agreement does not encompass the statutory claims in the FAC. Alternatively, Plaintiffs argue that even if the statutory claims fall within the scope of the arbitration agreement, the arbitration agreement is unconscionable (under California law) and thus invalid. Finally, Plaintiffs argue that even if the arbitration agreement encompasses the statutory claims and is not unconscionable, Defendants waived their right to enforce the arbitration agreement. For the reasons that follow, Plaintiffs' first and second challenge to the arbitration agreement as to its scope and validity are disputes that the parties agreed to arbitrate. Plaintiffs' third challenge (on waiver grounds), which the court can decide, lacks merit.

IV. DISCUSSION

A. Scope Of The Arbitration Agreement

Under the FAA any doubts regarding the scope of arbitrable issues should be resolved in favor of arbitration. Moses H. Cone Mem'l. Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983). The arbitration clause (section 10.2.1) in haec verba reads:

Except as stated in section 10.2.4 claims (including counterclaims and cross-claims) and of this Agreement, all submission to binding disputes between Dealer and Company must be resolved by disputes to the office of the American arbitration. The parties must Arbitration Association ("AAA") nearest to Dealer within submit any such the Area, to be decided under the then current AAA commercial arbitration rules. (Woolsey Decl. Ex. B at 12)(emphasis added).*fn4 Plaintiffs argue that the statutory causes of action in their FAC do not fall within the scope of the arbitration provision because they are neither "claims" nor "disputes" (both of which are undefined terms in the agreement). To support their argument, Plaintiffs cite to section 10.1 of the Dealer Agreement, which immediately precedes the section on arbitration. Section 10.1 specifies:

dispute it may have regarding the Agreement Dealer must notify Company in writing of any grievance or relationship with Company within 120 days of the date the or its dealer became aware of this grievance or dispute. (Emphasis added.) According to Plaintiffs, each one of their statutory causes of action is a "grievance" (which is also an undefined term). Because the arbitration agreement applies to "claims" and "disputes" but does not mention "grievances," Plaintiffs contend they need not arbitrate their statutory causes of action. Regardless of whether Plaintiffs' contention has merit, the parties have agreed to arbitrate the scope of the arbitration agreement.

Normally, whether a particular dispute falls within the scope of an arbitration agreement is a question for the court to resolve. "The question whether the parties have submitted a particular dispute to arbitration" is considered a "question of arbitrability." Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002) (emphasis removed). As a matter of federal law under the FAA, a "question of arbitrability" presents "an issue for judicial determination [u]nless the parties clearly and unmistakably provide otherwise." Id. (emphasis added) (alteration in original) (internal quotation marks omitted); see also First Options, 514 U.S. at 944. In other words, questions of arbitrability are presumptively for a court to decide. This presumption is overcome in this case.

The arbitration agreement calls for arbitration by the AAA, "to be decided under the then current AAA commercial arbitration rules." See section 10.2.1. In their moving papers, Defendants attached a copy of the AAA commercial arbitration rules. (De Liberty Decl. Ex. A.) In their briefing, Plaintiffs concede that these are the operative AAA rules. (See Doc. 20 at 17 & n.7.)

Rule 7 of the AAA commercial arbitration rules provides: The arbitrator shall have the power to rule on own jurisdiction, including any objections with respect his or her to the existence, scope agreement. or validity of the arbitration Rule R-7(a) (emphasis added).

Numerous courts have examined the language in Rule 7 and concluded that, when incorporated into an arbitration agreement, it clearly and unmistakable evidences the parties' intent to arbitrate the scope of the arbitration agreement, i.e., to arbitrate whether a claim or claims fall(s) within the scope of the arbitration agreement. See Awuah v. Coverall N. Am., Inc., 554 F.3d 7, 11 (1st Cir. 2009) (stating that Rule 7 "says plainly that the arbitrator may 'rule on his or her own jurisdiction' including any objection to the 'existence, scope or validity of the arbitration agreement.' This is about as 'clear and unmistakable' as language can get...."); Fallo v. High-Tech Inst., 559 F.3d 874, 878 (8th Cir. 2009) (concluding that Rule 7 "constitutes a clear and unmistakable expression of the parties' intent to leave the question of arbitrability to an arbitrator"); Qualcomm Inc. v. Nokia Corp., 466 F.3d 1366, 1373 (Fed. Cir. 2006) (concluding that identical language in another AAA rule "clearly and unmistakably shows the parties' intent to delegate the issue of determining arbitrability to an arbitrator"); Contec Corp. v. Remote Solution Co., 398 F.3d 205, 208 (2d Cir. 2005) (concluding that Rule 7 "serves as clear and unmistakable evidence of the parties' intent to delegate" "issues of arbitrability" "to an arbitrator"); Clarium Capital Mgmt. LLC v. Choudhury, Nos. C 08-5157SBA, O6-5255, 2009 WL 331588, at *5 (N.D. Cal. Feb. 11, 2009) (concluding that Rule 1 of Article 15 of the AAA rules on international dispute resolution, which contains language identical to Rule 7 of the commercial arbitration rules, represents "'clear and unmistakable' evidence of the parties' intent to delegate the issue of arbitrability to the arbitrator"); Clyde Bergemann, Inc. v. Sullivan, Higgins & Brion, PPE LLC, No. 08-162-KI, 2008 WL 2116908, at *2-3 (D. Or. May 14, 2008) (concluding that a rule in the employment dispute resolution rules of the AAA, which contains language identical to Rule 7, "clearly and unmistakably showed the parties' intent to delegate the issue of determining arbitrability to an arbitrator"); VISA USA, Inc. v. Maritz Inc., No. C 07-05585 JSW, 2008 WL 744832, at *5 (N.D. Cal. Mar. 18, 2008) (concluding that the incorporation of Rule 7 shows that the parties "clearly and unmistakenly agreed that questions of arbitrability would be submitted to arbitration for resolution"); Grynberg v. BP P.L.C., 585 F. Supp. 2d 50, 55 (D.D.C. 2008) (concluding that another AAA rule, which contains language identical to Rule 7, "constitutes clear and unmistakable evidence that the parties intended to submit the threshold question of arbitrability to the arbitrator himself"); Rodriguez v. Am. Techs. Inc., 136 Cal. App. 4th 1110, 1123 (2006) (concluding that by incorporating Rule 8 of the AAA's construction industry rules, which contains language identical to Rule 7, "the parties clearly and unmistakably agreed to have the arbitrator determine the scope of the arbitration clause"); see also Ariza v. Autonation, Inc., 317 F. App'x 662, 664 (9th Cir. Mar. 5, 2009) (citing Rodriquez with approval on this point and using it for analogical support); Aceves v. Autonation, Inc., 317 F. App'x 665, 666-67 (9th Cir. Mar. 5, 2009) (same).

Here the arbitration agreement specifies that "all claims" and "disputes" are subject to arbitration by the AAA, and it explicitly states that the "AAA commercial arbitration rules" govern. Rule 7 is one of those rules.*fn5 Consistent with the great weight of authority, by incorporating the language of Rule 7 of the AAA commercial arbitration rules into their arbitration agreement, the parties clearly and unmistakably expressed their intent to have the arbitrator decide disputes over the scope of the arbitration agreement. Accordingly, Defendants' motion to compel arbitration is GRANTED. The arbitrator, not the court, must decide whether the claims in this lawsuit fall within the scope of the arbitration agreement.*fn6

B. Validity Of Arbitration Agreement -- Unconscionability

Arbitration agreements are subject to normal contract defenses arising under state law such as fraud, duress, and unconscionability. Doctor's Assocs. v. Casarotto, 517 U.S. 681, 687 (1996). Plaintiffs argue that the arbitration agreement is unconscionable given certain of its features, e.g., it places limits on discovery and requires the payment of arbitration fees which Plaintiffs believe are excessive.

Assuming, without deciding, that the court can determine whether Plaintiffs' claims fall within the scope of the arbitration agreement, and further assuming, without deciding, that they do, Plaintiffs' challenge to the validity of the arbitration agreement on unconscionability grounds cannot be judicially determined. The parties have clearly and unmistakably provided that arbitrator is empowered to determine the "validity of the arbitration agreement" (as well as its scope). Rule 7.

Courts have recognized that "the validity of an arbitration clause is itself a matter for the arbitrator where the agreement so provides." Awuah, 554 F.3d at 11; see also Terminix Int'l Co. v. Palmer Ranch Ltd. P'ship, 432 F.3d 1327, 1332 (11th Cir. 2005) (concluding that by incorporating the AAA commercial arbitration rules into their arbitration agreement, and specifically the rule which provides that the "arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement," the "parties clearly and unmistakably agreed that the arbitrator should decide whether the arbitration clause is valid"); Monex Deposit Co. v. Gilliam, 616 F. Supp. 2d 1023, 1026 (C.D. Cal. 2009). By incorporating Rule 7 of the AAA commercial arbitration rules into their arbitration agreement, the parties clearly and unmistakably expressed their intent to have the arbitrator decide disputes over the validity of the arbitration agreement. Referring Plaintiffs' dispute over the validity of the arbitration agreement to the arbitrator, which is what the parties provided for, is consistent with the FAA.

The "central purpose of the [FAA] [is] to ensure that private agreements to arbitrate are enforced according to their terms." Mastrobuono, 514 U.S. at 53-54 (emphasis added). Section 4 of the FAA authorizes a district court to compel arbitration when the court is "satisfied" that "the making of the agreement for arbitration" is "not in issue." 9 U.S.C. § 4. In cases where the making of the agreement to arbitrate is at issue, the court should decide whether an arbitration agreement was ever concluded. See Prima Pain Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403-04 (1967) ("[I]f the claim is fraud in the inducement of the arbitration clause itself-an issue which goes to the 'making' of the agreement to arbitrate-the federal court may proceed to adjudicate it."). There is no such dispute here.

Plaintiffs' unconscionability challenge assumes the existence and making of the arbitration agreement. Contending the arbitration agreement is unconscionable, Plaintiffs dispute the validity of the agreement made, not that they ever made an arbitration agreement to begin with.*fn7 Accordingly, § 4 does not preclude an order compelling Plaintiffs to comply with their agreement to arbitrate their dispute as to the validity of the arbitration agreement. Even though an arbitrator may ultimately conclude that the arbitration agreement is invalid and that Plaintiffs need not arbitrate their statutory claims, this does not eviscerate the presently operative and more limited provision that the arbitrator must decide disputes over the validity of the arbitration agreement in the first instance. See Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 448 (2006) (recognizing that, under the FAA, a court may "enforce an arbitration agreement in a contract that the arbitrator later finds to be void" even though this would also render the arbitration provision void); PacifiCare Health Sys., Inc. v. Book, 538 U.S. 401, 407 (2003) (concluding that the arbitration agreements at issue were initially enforceable and compelling arbitration even though the arbitrator may interpret the arbitration agreements in such a manner as to "render the parties' [arbitration] agreements unenforceable"); see also Green Tree Fin. Corp v. Bazzle, 539 U.S. 444, 452 (2003) (plurality opinion with Stevens, J., concurring in judgment) (noting that "in the absence of clea[r] and unmistakabl[e] evidence to the contrary," "in certain limited circumstances, courts assume the parties intended courts, not arbitrators, to decide" certain "gateway matters, such as whether the parties have a valid arbitration agreement at all") (emphasis added) (alterations in original) (internal quotation marks omitted).

Submitting Plaintiffs dispute over the validity of the arbitration agreement, as the parties have provided, is also reasonable in light of the nature of Plaintiffs' challenge. Plaintiffs argue that the arbitration agreement is unconscionable because, among other things, the face of the arbitration agreement purports to limit discovery (the agreement provides for four depositions, one document request and one interrogatory). Plaintiffs also argue that the arbitration agreement is unconscionable because it requires Plaintiffs to pay allegedly "e[]xorbitant" arbitration fees. The merits of these arguments are directly linked to an interpretation and understanding of the AAA commercial arbitration rules.

The commercial arbitration rules specifically provide that the arbitrator, "[a]t the request of any party or at the discretion of the arbitrator," "may direct" "the production of documents and other information." Rule 21. Moreover, as specified in the "Introduction" section of the AAA commercial arbitration rules, if the parties proceed under the additional rules of AAA commercial arbitration for "Large, Complex Cases," the arbitrator is given "broad" "authority to order and control discovery, including depositions." Accordingly, Plaintiffs' argument that the arbitration agreement is unconscionable because it unduly limits discovery can be properly analyzed by taking into account the extent to which parties can obtain discovery under the AAA rules. This determination, however, involves an interpretation of the AAA rules, something which arbitrators, not courts, are better equipped to provide. See Howsam, 537 U.S. at 85 ("Moreover, the NASD arbitrators, comparatively more expert about the meaning of their own rule, are comparatively better able to interpret and to apply it."). The AAA rules themselves, which the parties have incorporated into their agreement, provide that the arbitrator is empowered to "interpret and apply these rules" as they relate to his "powers and duties." Rule 53.

Similarly, as to Plaintiffs' argument that the "arbitration fees" are excessive and thus render the agreement unconscionable, this argument also implicates AAA rules. For example, under Rule 49 of the AAA commercial arbitration rules, the AAA can "defer or reduce" administrative fees in the event of "extreme hardship." Moreover, Rule 49 also states that the "filing fee" is "subject to final apportionment by the arbitrator in the award." See also Rule 43(c) (providing that, in the final award, the "arbitrator may apportion" the "fees, expenses, and compensation among the parties in such amounts as the arbitrator determines appropriate"). Under what circumstances and the extent to which a party can obtain a reduction of fees or an apportionment thereof under the AAA rules is something which arbitrators, not courts, are in a better position to evaluate.*fn8

For the foregoing reasons, Defendants' motion to compel arbitration is GRANTED. The arbitrator, not the court, must determine the validity of the arbitration agreement in light of Plaintiffs' arguments.

C. Enforceability Of Arbitration Agreement -- Waiver

Plaintiffs argue that even if the arbitration agreement covers their statutory claim and is not unconscionable, Defendants have nonetheless waived their right to arbitrate. "[A]llegation[s] of waiver, delay, or a like defense to arbitrability" are presumptively for the arbitrator to decide. Moses H Cone, 460 U.S. at 24-25. Notwithstanding this rule, federal courts (not arbitrators) often decide whether a party's pre-motion to compel conduct amounts to a waiver of the right to arbitrate. See, e.g., Chappel v. Laboratory Corp. of Am., 232 F.3d 719, 724 (9th Cir. 2000). Rule 7 of the AAA commercial arbitration rules does not address this issue. Rule 7 empowers the arbitrator to decide the "scope" and "validity" of the arbitration agreement. A perfectly valid arbitration agreement may cover a particular substantive claim, but the party seeking enforcement of the arbitration agreement may have waived its right to arbitrate. Accordingly, Rule 7 does not resolve Plaintiffs' waiver argument.

To resolve Plaintiffs' waiver argument, the applicable law must be determined. The Dealer Agreement contains a choice of law provision that states: "Except to the extent governed by federal laws or regulations, the entire relationship of the parties based on this Agreement is governed by the substantive laws of the State of New York, without reference to its choice of law rules." (Woolsey Decl. Ex. B at § 11.1) (emphasis added.)

Federal courts in diversity cases look to the law of the forum state in making choice of law determinations. Fields v. Legacy Health Sys., 413 F.3d 943, 950 (9th Cir. 2005). Courts in California and New York, however, have recognized that when the FAA applies, whether a party has waiver a right to arbitrate is a matter of federal law not state substantive law. See Aviation Data, Inc. v. Am. Express Travel Related Servs. Co., 152 Cal. App. 4th 1522, 1535 (2007) (recognizing that "it is federal law, not state, that governs the inquiry into whether a party has waived its right to arbitration" and noting that "waiver of the right to compel arbitration is not viewed as a question of substantive contract law"); Singer v. Jefferies & Co., 78 N.Y.2d 76, 84 (1991) (stating that with respect to waiver "it appears that Federal law is controlling"); Danny's Constr. Co. v. Birdair, Inc., 136 F. Supp. 2d 134, 142 (W.D.N.Y. 2000) ("[I]t is federal law, not state, that governs the inquiry into whether a party has waived its right to arbitration.") (citing Graphic Scanning Corp. v. Yampol, 850 F.2d 131, 133 (2nd Cir. 1988)). Accordingly, the federal law on waiver is applicable.

Under federal law, a party seeking to prove waiver of a right to arbitrate must demonstrate "(1) knowledge of an existing right to compel arbitration; (2) acts inconsistent with that existing right; and (3) prejudice to the party opposing arbitration resulting from such inconsistent acts." Brown v. Dillard's, Inc., 430 F.3d 1004, 1012 (9th Cir. 2005); United States v. Park Place Assocs., Ltd., 563 F.3d 907, 921 (9th Cir. 2009).*fn9 The "waiver of the right to arbitrate is disfavored because it is a contractual right, and thus any party arguing waiver of arbitration bears a heavy burden of proof." Park Place Assocs., Ltd., 563 F.3d at 921 (internal quotation marks omitted); see also Thyssen, Inc. v. Calypso Shipping Corp., 310 F.3d 102, 104-05 (2d Cir. 2002) ("[T]here is a strong presumption in favor of arbitration[, and] waiver of the right to arbitration is not to be lightly inferred." (alterations in original) (internal quotation marks omitted); Saint Agnes Med. Ctr., 31 Cal. 4th at 1195 ("[W]aivers" of the right to arbitrate "are not to be lightly inferred and the party seeking to establish a waiver bears a heavy burden of proof").

Defendants conceded they knew of the right to arbitrate, establishing the first element. As to the second element, according to Plaintiffs, Defendants acted inconsistently with the right to arbitrate in multiple respects. First, Defendants pursued mediation of the commission claims and delayed the mediation efforts instead of proceeding with arbitration. Second, Defendants removed Plaintiffs' state-court complaint and filed an answer with counterclaims instead of promptly moving to compel arbitration of Plaintiffs' claims.

1. Mediation-Related Activity

The argument that Defendants' agreement to mediate is an act inconsistent with their right to arbitrate is unpersuasive. It was Plaintiffs who initially proposed mediation instead of arbitration. On May 15, 2006, through their counsel, Plaintiffs wrote to Defendants about the dispute over the unpaid commissions and stated that they wanted to mediate the matter:

We are hopeful that regarding this matter. However, should Cingular Wireless a meeting of the minds can be reached be unwilling to meet that mediation within the next sixty (60) days would be Ms. Madrigal's demand, we believe consider this letter as a demand for arbitration pursuant be unwilling to submit this matter advisable to avoid further legal action. Should Cingular to mediation please to the contractual agreement between Cingular and Atzek Cellular, Inc. (Swingle Decl. Ex. A.) Because Plaintiffs specifically proposed mediation in the first place, Plaintiffs cannot fault Defendants for agreeing to mediate instead of pursuing arbitration. See also Walker v. J.C. Bradford & Co., 938 F.2d 575, 578 (5th Cir. 1991) ("Attempts at settlement, however, are not inconsistent with an inclination to arbitrate and do not preclude the exercise of a right to arbitration."); Langfitt v. Jackson, 644 S.E.2d 460, 464 (Ga. Ct. App. 2007) ("Mediation is designed to resolve disputes without litigation, and thus is not inconsistent with the purposes of arbitration.").

Plaintiffs also contend that Defendants' delay in getting the mediation on track, or Defendants' stalling of the mediation efforts, was inconsistent with their right to arbitrate.

Shortly after Plaintiffs proposed mediation, on June 2, 2006, Defendants agreed to "non-binding mediation." (Swingle Decl. Ex. B.) At that time, Defendants stated that they would contact Plaintiffs "regarding the details and coordination of the mediation." (Id.) On June 12, 2006, Plaintiffs sent a correspondence to Defendants indicating that they (Plaintiffs) had not heard back from Defendants. (Swingle Decl. Ex. C.) Plaintiffs stated that although the parties "are agreeable to mediating this matter," this does not "invalidate our previous demand for binding arbitration." (Id.) Plaintiffs proposed a specific mediator and stated that they looked forward "to your prompt response." (Id.)

According to Plaintiffs, as late as September 2006, they were still trying to get a commitment from Defendants about a date for mediation. (Swingle Decl. ¶ 6.) Plaintiffs contacted the office of the proposed mediator and obtained dates of his availability. (Swingle Decl. Ex. D.) On September 13, 2006, Plaintiffs sent Defendants a correspondence listing three days in October 2006 the mediator had available. (Id.) On September 26, 2006, Defendants wrote back that they were unavailable on those dates and requested to be advised of dates in November and December when Plaintiffs and the mediator would be available. (Swingle Decl. Ex. E.) Subsequently, on October 5, 2006, Defendants proposed December 4 and December 18, 2006, as dates for the mediation. (Swingle Decl. Ex. F.) Plaintiffs wrote back on October 9, 2006, to confirm that the mediation would go forward on December 4. (Swingle Decl. Ex. G.) Defendants, however, later requested that the mediation take place on December 22 and Plaintiffs agreed. (Swingle Decl. ¶ 8, Ex. H.) Ultimately, after further correspondence between the parties, the mediation never occurred. (Swingle Decl. Ex. J.)

One weakness in Plaintiffs' delay argument -- that Defendants' delay in proceeding with mediation is inconsistent with their right to arbitrate -- is that only the commission claims were a part of the mediation efforts. The statutory claims were not a part of the mediation efforts -- they were asserted in the original state-court complaint filed November 18, 2008, and again in the FAC filed March 5, 2009. The commission claims, which are not asserted in the original complaint or the FAC, are not a part of this lawsuit and Defendants' motion to compel does not cover them. Whatever delay in mediation is attributable to Defendants, it is not necessarily inconsistent with their right to arbitrate the statutory claims which were asserted by Plaintiffs well after efforts to mediate the commission claims failed.

Assuming, arguendo, that Defendants' delay in mediation of the commission claims is inconsistent with their right to arbitrate the statutory claims (or any others), Plaintiffs have not demonstrated prejudice from this delay. Plaintiffs contend that they suffered prejudice from Defendants delay in mediation because it ultimately caused their claims to be barred by the contractual limitations period in the arbitration agreement.

Plaintiffs point to an e-mail correspondence from Defendants dated December 11, 2006, days before the scheduled mediation. (Swingle Decl. Ex. H.) In this e-mail, Defendants took the position that "all" of Plaintiffs claims were time-barred:

in commissions for customers that Atzek subscribed to It appears that Atzek contends Cingular owes it over $2M Cingular's service as far back as 2004. Bradley's letter [on May 15, 2006] also contains an arbitration demand.

Cingular's contention that under Section 10.2.2. Attached is a copy of the Atzek Dealer Agreement. It is arbitration by demanding the same in writing 'not later barred as this section requires Limitations of Actions, all of Atzek's claims are time Atzek to initiate the claim or dispute occurred.' If Atzek fails to do so, than 180 days after the act or omission giving rise to its claims are time barred. below Section 10.2.2. in its entirety. Arbitrators in

For your convenience, I quote between Cingular and its dealers have 2006, letter the only written arbitration demand that similar disputes upheld and enforced Section 10.2.2. Bradley's May 15, Atzek has served on Cingular. Accordingly, if this is claims would be time barred and matter is submitted to arbitration, I believe Atzek's for Cingular. the arbitrator would find (Id.) Section 10.2.2 of the Dealer Agreement provides:

be submitted to arbitration by initiating All claims and disputes covered by this section 10 must not later than 180 days after the act or omission giving the arbitration to rise to the claim or dispute occurred... The failure absolute bar to initiate arbitration institution within the period constitutes an on such act or omission. The aggrieved party must the of any proceedings based written initiate arbitration under this section 10 by sending parties. The notice notice of anmust contain a description of the intention to arbitrate to all dispute, the amount involved, and the remedy sought.

Notwithstanding Defendants' argument in their December 11 e-mail that all of Plaintiffs' claims were time-barred by section 10.2.2., in hopes of "resolving this matter before the scheduled mediation," Defendants requested information from Plaintiffs including the date the claimed compensation was earned, the amount of the claimed compensation, and the nature of the claimed compensation. (Swingle Decl. Ex. H.) On December 12, 2006, Plaintiffs responded. (Swingle Decl. Ex. I.) Plaintiffs stated that they wanted to proceed with mediation and would provide Defendants, in advance of the mediation, with documentation and their "forensic accountant's report" substantiating their commission claims. (Id.) Later that day, Defendants wrote back asking to reschedule the mediation for some time in the next four weeks to provide adequate time to review Plaintiffs' forensic accountant report and supporting documentation. (Swingle Decl. Ex. J.) The mediation was taken off schedule and there is no indication in the submissions that Plaintiffs ever provided the forensic accountant's report and documentation to Defendants. Ultimately, the mediation never occurred.

Plaintiffs' prejudice argument is premised on the theory that Defendants' delay in mediation pushed their claims beyond the 180-day limit in section 10.2.2, i.e., that Defendants' caused Plaintiffs' non-compliance with the 180-day time limit in section 10.2.2. This contention is erroneous.

As of (and prior to) May 15, 2006, Plaintiffs were represented by counsel and on May 15, 2006, Plaintiffs had the ability to initiate arbitration of their statutory claims in accordance with the arbitration agreement. Nothing Defendants did prevented Plaintiffs from complying with section 10.2.2. As of May 15, 2006, when Plaintiffs' wrote Defendants that they wanted to mediate the commission claims instead of arbitrating them, Plaintiffs could have initiated arbitration of the statutory claims. That Plaintiffs failed to do so is not Defendants' fault.

All of the statutory claims in the FAC (like the original complaint) are based on the alleged wrongful termination of the Dealer of the Agreement (see Doc. 13 at 6, 8-11), claimed to be unlawful under different statutes. The Dealer Agreement terminated effective April 1, 2006. (Doc. 13 at 8; Doc. 16 at 10.) On December 24, 2005, Defendants notified Plaintiffs that the Dealer Agreement would be terminated. (Doc. 13 at 4; Doc. 16 at 10.) Whether the date the Dealer Agreement was terminated (April 1, 2006) or the date of notification (December 24, 2005) is considered the date of the "act or omission" giving rise to the statutory claims, when Plaintiffs' counsel proposed mediation of the commission claims on May 15, 2006, 180 days had not passed following the termination of the Dealer Agreement or the notification of termination. At that time and for some time thereafter, Plaintiffs could have raised and initiated arbitration of their statutory claims. Any delay in Defendants' mediation efforts did not affect Plaintiffs' ability and unilateral right to commence arbitration of their statutory claims. Nor did delay in mediation impinge in any way Plaintiffs' ability to initiate arbitration of the commission claims.*fn10 Plaintiffs were not prejudiced by Defendants' delay in mediation -- Defendants conduct did not cause any of Plaintiffs' claims to fall outside the 180-day limit.*fn11

Plaintiffs suggest that they did not pursue arbitration because they were "lull[ed]" into mediation. (Doc. 20 at 15.) However, Plaintiffs, who proposed mediation themselves and who were represented by counsel, were well aware that mediation is not always successful. The parties were not required to reach a settlement, and no enforceable promises or representations were made that a settlement would be reached in mediation. Defendants agreed to "non-binding" mediation. No conduct by Defendants prevented Plaintiffs from complying with section 10.2.2 to preserve their claims if the mediation failed.

As to other forms of potential prejudice, Plaintiffs do not contend, and there is no evidence, that through agreeing to mediate and delaying the process, Defendants were able to gain documents or information that they would not have been otherwise able to obtain in arbitration. Cf. Saint Agnes Med. Ctr., 31 Cal. 4th at 1204 ("[C]courts have found prejudice where the petitioning party used the judicial discovery processes to gain information about the other side's case that could not have been gained in arbitration."). There is no evidence that by agreeing to mediate and delaying mediation, Defendants caused Plaintiffs to incur excessive fees. Id. at 1203 (stating that "[b]ecause merely participating in litigation, by itself, does not result in a waiver, courts will not find prejudice where the party opposing arbitration shows only that it incurred court costs and legal expenses"); Thyssen, Inc., 310 F.3d at 105 (finding no waiver of arbitration where the party claiming waiver "did not face excessive costs.").

Defendants' agreement to mediate and their delay in getting the mediation on track was not inconsistent with their right to arbitrate Plaintiffs' statutory claims, which were asserted only after the mediation efforts failed, and Plaintiffs did not suffer the requisite prejudice. Defendants did not prevent Plaintiff from complying with section 10.2.2., did not gain documents or information from the failed mediation attempt that they would not have been able to obtain in arbitration, and did not cause Plaintiffs to incur excessive fees in the process. Defendants' agreement to mediate and their delay in mediating is not a waiver of their right to arbitrate. This conclusion is further supported by the fact that well after the mediation efforts failed, Plaintiffs specifically requested that Defendants arbitrate the commission claims, acknowledging the continuing vitality of the arbitration agreement. (Corwell Decl. Ex. A.)

2. Lawsuit-Related Activity

Plaintiffs argue that Defendants acted inconsistently with their right to arbitrate by removing Plaintiffs state-court complaint and filing an answer and counterclaims instead of promptly moving to compel arbitration. Plaintiffs' argument is not persuasive.

At no point prior to Plaintiffs' filing their state-court complaint did Plaintiffs ever demand arbitration of their statutory claims. The statutory claims were raised in Plaintiffs' state-court complaint. Defendants' exercise of their right to remove the state-court action to federal court and filing an answer with counterclaims (without litigating them) is not sufficiently inconsistent with their right to arbitrate. See Halim v. Great Gatsby's Auction Gallery, Inc., 516 F.3d 557, 562 (7th Cir. 2008) (concluding that removal does not constitute a waiver); PPG Indus., Inc. v. Webster Auto Parts Inc., 128 F.3d 103, 107 (2d Cir. 1997) (concluding that "a party waives its right to arbitration when it engages in protracted litigation that prejudices the opposing party") (emphasis added); Great W. Mortgage Corp. v. Peacock, 110 F.3d 222, 233 (3d Cir. 1997) ("Indeed, a party waives the right to compel arbitration only in the following circumstances: when the parties have engaged in a lengthy course of litigation, when extensive discovery has occurred, and when prejudice to the party resisting arbitration can be shown." (emphasis added)); Creative Telecomms., Inc v. Breeden, 120 F. Supp. 2d 1225, 1232 (D. Haw. 1999) ("Courts have found that the filing of a complaint, an answer, a counterclaim or a third-party complaint does not waive the right to pursue arbitration."); Saint Agnes Med. Ctr., 31 Cal. 4th at 1203 ("[M]erely participating in litigation, by itself, does not result in a waiver" of arbitration). A party can move to compel arbitration in both state and federal court. In their answer Defendants specifically asserted that Plaintiffs were in violation of the arbitration clause (Doc. 13 at 7), and Defendants filed a motion to compel arbitration. Invoking federal jurisdiction, asserting the arbitrability of the dispute in an answer, and pleading (without litigating) counterclaims does not constitute a waiver.*fn12

Even assuming, arguendo, that Defendants' removal, answer and counterclaims are facially inconsistent with their right to arbitrate, Plaintiffs have suffered no prejudice.

The statutory claims Plaintiffs assert were raised in their state-court complaint filed November 18, 2008. Defendants' timely removed the action in January 2009 after being served with the complaint. Defendants filed their responsive pleading shortly thereafter (January 12, 2009) asserting that Plaintiffs violated the mandatory arbitration provision. In February 2009, Defendants' counsel wrote to Plaintiffs' counsel to demand arbitration; Plaintiffs refused. Defendants filed their motion to compel arbitration in April 2009, less than four months after removing this action to federal court, less than six months after the state-court action was filed, and just over two months after their formal demand for arbitration.

Plaintiffs have not shown sufficient prejudice arising from Defendants' removal and filing of a responsive pleading, or Defendants' "delay" in moving to compel arbitration. The record does not reflect that Defendants have litigated their counterclaims, engaged in significant discovery (or any discovery), or caused Plaintiffs to incur excessive fees due to any "delay" in seeking to compel arbitration. See Brown, 430 F.3d at 1012 ("Unsurprisingly, courts are reluctant to find prejudice to the plaintiff who has chosen to litigate, simply because the defendant litigated briefly (e.g., by filing a motion to dismiss or requesting limited discovery) before moving to compel arbitration."); Thyssen, Inc., 310 F.3d at 105 (finding no waiver of arbitration where the party claiming waiver "did not face excessive costs," and further noting that even "[t]hough there was a significant length of time between the filing of the complaint and the assertion of [defendant's] right to arbitrate, there was no evidence of extensive discovery or substantive motions by [defendant]".); Lake Commc'ns, Inc. v. ICC Corp., 738 F.2d 1473, 1477 (9th Cir. 1984) (finding no prejudice where "only limited discovery has occurred," including one deposition)*fn13; Saint Agnes, 31 Cal. 4th at 1203-04.

Plaintiffs have not met their burden to establish waiver.

Plaintiffs have not shown that Defendants' conduct in removing Plaintiffs' action and filing an answer with counterclaims, instead of moving immediately to compel arbitration of Plaintiffs' claims, constitutes a waiver.*fn14 These acts were not sufficiently inconsistent with Defendants' right to arbitrate and even if they were, Plaintiffs have not shown the requisite prejudice. Defendants did not waive their right to arbitrate.

D. Plaintiffs' Request For Jury Trial

Plaintiffs have filed a one-paragraph demand for jury trial (Doc. 21.) Plaintiffs argue that the FAA "provides that a party alleged to be in default of arbitration agreement may demand a jury trial of the issue. 9 U.S.C. § 4." (Id.) Plaintiffs note that in the answer to the FAC, Defendants have alleged that Plaintiffs are in violation of the contractual arbitration agreement.

When a party brings a motion to compel arbitration under section 4 of the FAA, The court shall hear the parties, and upon being arbitration or the satisfied that the making of the agreement for failure to comply therewith is not in, the court to shall arbitration make an in order accordance with the directing the issue parties to proceed... the making of the or refusal arbitration agreement or terms of the agreement. If the failure, neglect, the court shall proceed demanded by the party alleged to be in default, or court matter in dispute is within admiralty jurisdiction, the if the shall hear and determine such issue. Where such an issue is raised, the party alleged to be in default may, of the notice of application, except in cases of admiralty, on or before the return day demand a jury trial issue, and upon such demand the court shall make an order of such referring the issue or issues to a jury in the manner provided by the Federal Rules specially call a jury for that purpose. If the jury find of Civil Procedure, or may to perform the same be in issue summarily to the trial thereof. If no jury trial be that no agreement in that there is for arbitration was made or proceeding shall be dismissed. no default in proceeding thereunder, the writing 9 U.S.C. § 4 (emphasis added). Plaintiffs' demand for jury trial rests on the flawed premise that their "failure, neglect, or refusal" to comply with the arbitration agreement is "in issue."

Defendants have demanded and Plaintiffs have resisted arbitration of their statutory claims, arguing, among other things, that the arbitration agreement does not encompass their statutory claims and it is invalid on unconscionability grounds. The parties agreed, however, to have their disputes over the scope and validity of the arbitration agreement decided by an arbitrator, and this has not yet occurred. The FAA "authorizes a federal district court to issue an order compelling arbitration if there has been a failure, neglect, or refusal to comply with the arbitration agreement." Shearson/Am. Express, Inc., 482 U.S. at 226. It is apparent that Plaintiffs have not complied with the arbitration agreement -- there is no need for a jury to make this determination. Their "failure, neglect, or refusal to comply" is not "in issue," i.e., there is no triable issue of fact that Plaintiffs have not complied and will not comply unless ordered to do so. Plaintiffs' request for a jury trial is DENIED.

V. CONCLUSION

Upon granting a motion to compel arbitration a court must issue an "order directing the parties to proceed to arbitration in accordance with the terms of the [arbitration] agreement." 9 U.S.C. § 4. For the foregoing reasons, Defendants' motion to compel arbitration is GRANTED.

Plaintiffs and Defendants shall proceed to arbitration in accordance with the terms of their arbitration agreement and arbitrate their dispute over: (1) whether the claims in this lawsuit, or any of them, fall within the scope of the arbitration agreement, and (2) whether the arbitration agreement is valid; and if so, the parties shall arbitrate all such claims.

Although Defendants' motion seeks a broader order compelling the parties to proceed to arbitration of Plaintiffs' statutory claims and Defendants' counterclaims, the arbitrator must fist determine the scope and validity of the arbitration agreement.

IT IS SO ORDERED.


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