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BioMagic, Inc. v. Dutch Brothers Enterprises

May 25, 2010

BIOMAGIC, INC., PLAINTIFF,
v.
DUTCH BROTHERS ENTERPRISES, LLC; AGRAKEY SOLUTIONS, LLC; AND JOHN REITSMA, DEFENDANTS.



The opinion of the court was delivered by: Andrew J. Guilford United States District Judge

AND RELATED ACTIONS

ORDER DENYING "MOTION TO STAY [A] PENDING ARBITRATION"

We are often reminded that our national policy favors arbitration. See, e.g., Southland Corp. v. Keating, 465 U.S. 1, 10 (1984). The Federal Arbitration Act ("FAA") "foreclose[s] state legislative attempts to undercut the enforceability of arbitration agreements." Id. at 16. "[A]ny doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration . . . ." Moses H. Cone Hosp. v. Mercury Cosntr. Corp., 460 U.S. 1, 24-25 (1983). "[Q]uestions of arbitrability [are] addressed with a healthy regard for the federal policy favoring arbitration." Id. at 24. And so on.

Though there are trends against arbitration in some areas, the FAA still applies with full force. See Nina Yadava, Note: Can You Hear Me Now? The Courts Send a Stronger Signal Regarding Arbitration Class Action Waivers in Consumer Telecommunications Contracts, 41 Colum. J.L. & Soc. Probs. 547 (2008). But arbitration is a matter of choice. When drafting agreements to arbitrate, parties may choose for arbitration to be governed by state law rules instead of the FAA. Wolsey, Ltd. v. Foodmaker, Inc., 144 F.3d 1205, 1211 (9th Cir. 1998).

In this case, the Court must determine whether the parties have made such a choice. The California Arbitration Act has a provision that the FAA lacks. It lets courts, in certain circumstances, stay an arbitration while related litigation is ongoing. Cal. Code Civ. Proc. § 1281.2(c) ("Section 1281.2(c)"); see Cronus Invs., Inc. v. Concierge Servs., 35 Cal. 4th 376, 380 (2005). Here, the Court is asked, under Section 1281.2(c), to stay an arbitration related to this case.

Thus, the Court must determine whether the parties to an arbitration agreement chose for Section 1281.2(c) to govern their agreement. The specific question presented is this: do parties intend to be bound by Section 1281.2(c) when they enter into a contract with (1) an arbitration provision, and (2) a separate choice of law clause specifying that the agreement will be construed under California law? The answer is "no."

Plaintiff and Counter-Defendant BioMagic, Inc. ("Plaintiff") filed this lawsuit for patent infringement. Earlier, it had demanded arbitration for breach of a License Agreement. Defendants and Counterclaimants Dutch Brothers Enterprises, LLC ("Dutch Brothers"), AgraKey Solutions, LLC ("AgraKey"), and John Reitsma ("Reitsma") (collectively "Defendants") now seek to stay that arbitration by filing a "Motion to Stay Pending Arbitration" ("Motion") under Section 1281.2(c). The Motion's title is ambiguous. Motions to "stay pending arbitration" generally seek to stay a lawsuit until an arbitration is resolved, but here the Motion actually seeks to stay a pending arbitration until this lawsuit is resolved.

Semantics aside, the Court finds that a stay of arbitration is not appropriate. The Motion is DENIED.

BACKGROUND

Since at least 2001, Plaintiff has produced a product used to "control odors." (Declaration of John Reitsma ¶¶ 3-4.) In 2001, Reitsma bought Plaintiff's product and used it to treat his crop fields. (Id. ¶ 4.) A few months later, he states, he discovered "a substantial increase in crop production." (Id.)

According to Reitsma, he co-founded Dutch Brothers in 2004 "for the purpose of purchasing the product from [Plaintiff] and reselling it to dairy farmers for odor control and crop enhancement purchases." (Id. ¶ 5.) In 2005, Dutch Brothers and Plaintiff entered into a License Agreement where, among other things, Dutch Brothers paid Plaintiff royalties for permission to sell the product. (Id. ¶ 6.) In mid-2009, Defendants stopped making royalty payments under the License Agreement, and gave written notice of termination of the License Agreement. (Id. ¶¶ 12-13.)

The License Agreement is the focus of this Motion, and two of its terms are worth quoting. There is an arbitration provision that states, "the parties agree to submit any disputes arising form this agreement to final and binding arbitration in a location mutually decided between the parties under the rules of the American Arbitration Association." (Declaration of David C. Watt ("Watt Decl."), Ex. A ¶ 13.1.) And there is a choice of law clause that states, "[t]his Agreement shall be construed, and the legal relations between the parties hereto shall be determined, in accordance with the law of the State of California, and any actions to enforce this agreement shall take place in California." (Id. ¶ 10.1.)

In November 2009, Plaintiff filed a demand for arbitration, alleging that Defendants breached the License Agreement by, among other things, not making royalty payments. (Declaration of Brent A. Johnson ¶ 16.) In March 2010, a Patent issued for Plaintiff's product, and Plaintiff filed this lawsuit for patent infringement.

ANALYSIS

1. SECTION 1281.2(c)

Defendants filed this motion, arguing that the arbitration should be stayed pending this case under Section 1281.2(c). This provision states that, if an agreement to arbitrate a controversy exists, on petition of a party a court shall order arbitration unless:

A party to the arbitration agreement is also a party to a pending court action or special proceeding with a third party, arising out of the same transaction or series of related transactions and there is a possibility of conflicting rulings on a common issue of law or fact. . . .

If the court determines that there are other issues between the petitioner and the respondent which are not subject to arbitration and which are the subject of a pending action or special proceeding between the petitioner and the respondent and that a determination of such issues may make the arbitration unnecessary, the court may delay its order to arbitrate until the determination of such other issues or until such earlier time as the court specifies.

Cal. Code Civ. Proc § 1281.2. This language has been interpreted to let courts stay arbitrations that are already underway. See Henry v. Alcove Inv., Inc., 233 Cal. App. 3d 94 (1991).

This California rule on arbitration differs from federal arbitration law enshrined in the FAA. There is no FAA counterpart to Section 1281.2(c). Under the FAA, if there's a chance of conflicting rulings in an arbitration and litigation, the court may not stay the arbitration. See 9 U.S.C. § 3 ("If any suit or proceeding by brought in any of the courts of the United States upon any issue referable to arbitration" under a written agreement, on application of a party the court "shall . . . stay the trial of the action until such arbitration has been had . . . .").

But parties may agree to be bound by California's arbitration rules instead of the FAA. The FAA does not require parties to arbitrate "under any specific set of procedural rules." Cronus, 35 Cal. 4th at 385. "[P]arties are generally free to structure their arbitration agreements as they see fit. Just as they may limit by contract the issues which they will arbitrate . . . , so too may they specify by contract the rules under which that arbitration will be conducted." Id. (citation and quotation marks omitted); Wolsey, 144 F.3d at 1211 ("[W]here the parties have agreed to abide by state rules of arbitration, enforcing those rules according to the terms of the agreement is fully consistent with the goals of the FAA, even if the result is that the arbitration is stayed where the Act would ...


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