- 1 WO 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA 8 9 Quantum Fluids LLC, No. CV-20-02287-PHX-DWL 10 Plaintiff, ORDER 11 v. 12 Kleen Concepts LLC, 13 Defendant. 14 15 INTRODUCTION 16 This case, which arises from a seemingly straightforward business dispute between 17 Plaintiff Quantum Fluids LLC (“Quantum”) and Defendant Kleen Concepts LLC 18 (“Kleen”), has spawned a flurry of chaotic and procedurally irregular motions and litigation 19 maneuvers. 20 Last year, when the dispute first arose, the parties appeared to be addressing it in a 21 professional manner—their attorneys traded emails and discussed mediation. Things 22 escalated, however, when Quantum sought a no-notice TRO against Kleen (even though 23 the TRO request addressed one of the topics the parties were actively attempting to resolve 24 informally). Separately, Kleen filed a motion to compel Quantum to arbitrate pursuant to 25 the ADR clause in the parties’ contract. And before that motion became fully briefed, 26 Kleen initiated a parallel arbitration proceeding against Quantum, prompting Quantum to 27 file a motion to stay that proceeding. What a mess. 28 Kleen’s motion to compel and Quantum’s motion to stay are now both fully briefed. 1 For the following reasons, the former is granted, the latter is denied, and this action is 2 stayed pending the resolution of the arbitration proceeding. 3 BACKGROUND 4 I. Underlying Facts 5 Quantum and Kleen “do business in the antimicrobial sector.” (Doc. 11 ¶ 7.) In 6 July 2020, Quantum and Kleen entered into an agreement, the Master Supply Agreement 7 (“MSA”), pertaining to the manufacture of hand sanitizer. (Id. ¶¶ 14-15, 17.) Under the 8 MSA, Quantum would supply Kleen with a proprietary ingredient, Kleen would 9 manufacture hand sanitizer by blending Quantum’s proprietary ingredient with certain 10 other raw materials, and Quantum would “be the labeler/relabeler responsible for the 11 branding and marketing of” the resulting product. (Id.) 12 Under the MSA, Kleen was considered the “Seller” of the finished hand sanitizer 13 and Quantum was considered the “Buyer.” (Id. ¶ 18.) The contemplated purchase process 14 was that Quantum would request a quote from Kleen, Kleen would provide a quote, and 15 Quantum could then accept the quote by issuing a purchase order to Kleen. (Id. ¶ 19.) 16 The parties entered into four purchase orders. (Id. ¶ 22.) However, Kleen only 17 completed delivery as to two of those orders. (Id.) When Quantum received those 18 deliveries, it determined that the finished sanitizer “did not seem to conform with the 19 parameters for the requested ethanol to be used.” (Id. ¶ 25.) Quantum then conducted 20 testing at a third-party laboratory, which allegedly “showed that the products were unfit to 21 be marketed to, sold to or consumed by the purchasing public.” (Id. ¶ 27.) When Quantum 22 attempted to return the product, Kleen “instructed Quantum not to ship the goods back.” 23 (Id. ¶ 30.) Kleen also indicated that it would destroy the remaining raw materials in its 24 possession. (Id. ¶ 32.) 25 … 26 … 27 … 28 … 1 II. The MSA 2 The MSA contains a mediation and arbitration clause (the “ADR Clause”) that 3 provides as follows: 4 Dispute Resolution. In the event of any dispute, controversy, or claim arising 5 out of or relating to this Agreement, or the breach, termination or invalidity hereof (each, a “Dispute”), the parties hereto shall first attempt in good faith 6 to resolve any Dispute by negotiation and consultation between themselves, 7 including, without limitation, not fewer than three (3) negotiation sessions. If the parties hereto cannot resolve any Dispute after such negotiation 8 sessions, either party may submit the Dispute to a mutually agreed mediation 9 service for mediation administered in Scottsdale, Arizona by providing to the mediation service a joint, written request for mediation, setting forth the 10 subject of the dispute and the relief requested. The parties covenant that they 11 will use commercially reasonable efforts in participating in the mediation. If the parties hereto cannot resolve the dispute after sixty (60) days from the 12 commencement of mediation, then either party may submit the Dispute to 13 arbitration administered in Scottsdale, Arizona by the American Arbitration Association under its Commercial Arbitration Rules. The award rendered by 14 the arbitrator shall be final and binding on the parties and may be entered and enforced in any court having jurisdiction. Any breaching party shall be 15 responsible for the attorneys’ fees of the non-breaching party in any 16 arbitration proceeding with respect to this Agreement. 17 (Doc. 1-2 at 8-9.) 18 III. Pre-Litigation Correspondence 19 On October 23, 2020, Quantum’s counsel sent an email to Kleen stating that 20 Quantum was dissatisfied with the hand sanitizer that had been manufactured and delivered 21 by Kleen. (Doc. 8-1 at 8-9; Doc. 9-1 ¶ 17.) 22 That same day, a Kleen representative sent a response email defending the quality 23 of the delivery and noting that Quantum had previously approved a sample. (Doc. 8-1 at 24 8-9; Doc. 9-1 ¶ 19.) 25 On October 26, 2020, a Kleen representative sent another email that requested a 26 response to certain questions by October 30, 2020. (Doc. 8-1 at 7-9; Doc. 9-1 ¶ 20.) 27 On November 2, 2020, a Kleen representative sent an email stating that Kleen was 28 interpreting Quantum’s conduct as “effectively canceling” the outstanding orders that had 1 not yet been shipped. (Doc. 8-1 at 7; Doc. 9-1 ¶¶ 21-22.) This email further stated that 2 Kleen was “currently incurring costs associated with this order including but not limited to 3 storage fees” and thus asked Quantum to “let us know if you would like the purchased parts 4 shipped to you (prepaid or Quantum arranged) as we will be moving forward with 5 dispositioning the materials for this order starting November 5th 2020.” (Id.) 6 That same day, Quantum’s counsel sent a response email that, among other things, 7 requested that Kleen move the leftover materials to an off-site storage facility. (Doc. 8-1 8 at 5-6.) 9 Between November 3-5, 2020, the parties exchanged additional emails. (Doc. 8-1 10 at 2-5.) 11 On November 5, 2020, Quantum’s counsel sent an email stating that “Quantum is 12 no longer willing to engage in this continued exchange of emails with Kleen” because “it 13 is obvious that our attempts at good-faith negotiation and consultation have proven 14 unsuccessful.” (Doc. 8-1 at 2; Doc. 9-1 ¶ 24.) The email continued: “Under Section 12.15 15 of the MSA, the next step is for both parties to submit the matter to a mutually-agreed 16 mediation service.” (Id.) 17 On November 9, 2020, Kleen’s counsel sent a response email verifying that “Kleen 18 hereby joins in Quantum’s request to submit the parties’ dispute to a mutually agreed 19 mediation service for mediation administered in Scottsdale, Arizona” and identifying, by 20 name, three proposed mediators. (Doc. 8-2 at 2-3; Doc. 9-1 ¶ 25.) 21 That same day, Quantum’s counsel sent a response email that expressed 22 appreciation for “Kleen’s cooperation on this matter,” stated that Quantum “look[ed] 23 forward to reaching a mutually-beneficial resolution,” and clarified that Quantum would 24 be proposing its own list of mediators “in the next few days.” (Doc. 8-1 at 2.) 25 Between November 17-23, 2020, the parties’ counsel engaged in additional email 26 and telephonic correspondence about the dispute. (Doc. 1-2 at 12-13; Doc. 9-1 ¶¶ 26-30.) 27 On November 23, 2020, Kleen’s counsel sent an email stating that Kleen would 28 dispose of the remaining materials unless Quantum paid the outstanding balance for the 1 cancelled orders. (Doc. 1-2 at 11; Doc. 9-1 ¶ 32.) 2 IV. Procedural History 3 On November 24, 2020, Quantum initiated this action by filing a complaint (Doc. 4 1) and requested a no-notice TRO to prevent Kleen from destroying the materials (Doc. 2). 5 On November 25, 2020, the Court ordered Quantum to file an amended complaint 6 properly alleging the parties’ citizenship. (Doc. 6.) The Court ordered the Clerk of Court 7 to dismiss this case for lack of subject matter jurisdiction if Quantum failed to timely file 8 an amended complaint. (Id.) Kleen’s counsel appeared later that day. (Doc. 7.) 9 On November 30, 2020, Kleen filed a motion to compel mediation and arbitration 10 and to dismiss the complaint. (Doc. 8.) 11 On December 1, 2020, Kleen filed a response to Quantum’s TRO request. (Doc. 9.) 12 That same day, the Court issued an order noting that Quantum “still ha[d] not filed 13 an amended complaint containing allegations sufficient to establish subject matter 14 jurisdiction” and that “the Court remain[ed] without authority to take action.” (Doc. 10.) 15 The Court “encourage[d] the parties to meet and confer before taking future action, 16 particularly in light of [Kleen’s] contention that [Quantum’s] claims are subject to 17 mediation and arbitration.” (Id.) 18 On December 3, 2020, Quantum filed an amended complaint. (Doc. 11.) 19 On December 4, 2020, the Court held a hearing on Quantum’s TRO request. (Doc. 20 13.) The Court denied Quantum’s request but ordered Kleen to provide notice to Quantum 21 at least 72 hours before destroying the raw materials at issue. (Id.) At the hearing, both 22 parties suggested that they were willing to consider proceeding to arbitration, prompting 23 the Court to note that, if the parties decided to go that route, they could file a joint statement 24 that the motion to compel arbitration could be granted. 25 On December 15, 2020 (and unbeknownst to the Court), Kleen initiated arbitration 26 proceedings by submitting a demand to the American Arbitration Association (“AAA”). 27 (Doc. 19-1 at 2.) 28 On December 16, 2020, the Court issued an order noting that Quantum had failed 1 to timely respond to Kleen’s motion to compel and clarifying that Kleen’s motion would 2 be summarily granted unless Quantum filed a response by the close of business on 3 December 17, 2020. (Doc. 16.) 4 On December 17, 2020, Quantum filed a response. (Doc. 18.) 5 On December 18, AAA notified the parties that it would be initiating arbitration 6 proceedings. (Doc. 19-1 at 1-2.) 7 On December 21, 2020, Quantum filed a motion to stay the arbitration proceedings. 8 (Doc. 19.) 9 On December 23, 2020, Kleen filed a reply in support of its motion to compel. (Doc. 10 20.) 11 On January 4, 2021, Kleen filed a response to Quantum’s motion to stay. (Doc. 22.) 12 On January 6, 2020, AAA notified the parties of its awareness that the issue of 13 arbitrability had been raised in this Court, stated that it would “abide by any court order,” 14 and clarified that the parties could either “agree to await the court’s ruling or, absent 15 agreement, the issue would go to the arbitrator if filing requirements are met.” (Doc. 26-1 16 at 79.) 17 On January 11, 2021, Quantum filed a reply in support of its motion to stay. (Doc. 18 25.) 19 On January 13, 2021, the Court struck Quantum’s reply because it exceeded the 11- 20 page limit for replies. (Doc. 25.) The Court permitted Quantum to re-file a compliant brief 21 by January 15, 2021. (Id.) 22 On January 15, 2021, Quantum filed a reply within page limits. (Doc. 26.)1 23 … 24 … 25 … 26 … 27 1 Quantum requested oral argument in its motion to stay (Doc. 19) but this request is denied because the issues are fully briefed and oral argument will not aid the Court’s 28 decision. See Fed. R. Civ. P. 78(b) (courts may decide motions without oral hearings); LRCiv 7.2(f) (same). 1 DISCUSSION 2 I. Legal Standard 3 The Federal Arbitration Act (“FAA”) applies to contracts “evidencing a transaction 4 involving commerce.” 9 U.S.C. § 2. The parties do not appear to dispute that the FAA 5 applies to the MSA. 6 The FAA provides that written agreements to arbitrate disputes “shall be valid, 7 irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the 8 revocation of any contract.” Id. Thus, absent a valid contractual defense, the FAA “leaves 9 no place for the exercise of discretion by a district court, but instead mandates that district 10 courts shall direct the parties to proceed to arbitration on issues as to which an arbitration 11 agreement has been signed.” Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 218 (1985) 12 (emphasis omitted). 13 In general, a district court’s role under the FAA is “limited to determining (1) 14 whether a valid agreement to arbitrate exists and, if it does, (2) whether the agreement 15 encompasses the dispute at issue.” Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d 16 1126, 1130 (9th Cir. 2000). These two issues are sometimes referred to as the “gateway” 17 questions of arbitrability. Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63, 68-69 (2010). 18 Although the gateway questions are ordinarily resolved by the court, the parties may agree 19 to arbitrate one or both of the gateway issues by including a delegation clause in the 20 arbitration agreement. “An agreement to arbitrate a gateway issue is simply an additional, 21 antecedent agreement the party seeking arbitration asks the federal court to enforce, and 22 the FAA operates on this additional arbitration agreement just as it does on any other.” Id. 23 at 70. The evidence of the parties’ intent to delegate such issues to the arbitrator must be 24 “clear and unmistakable.” Brennan v. Opus Bank, 796 F.3d 1125, 1130 (9th Cir. 2015). 25 II. Analysis 26 Kleen seeks to compel arbitration of Quantum’s claims while Quantum seeks to stay 27 the parallel arbitration proceeding that has now been initiated by Kleen. In a nutshell, 28 Quantum seeks to avoid arbitration because (1) the MSA is unconscionable (or otherwise 1 unenforceable) and (2) Kleen has failed to go through all of the ADR Clause’s antecedent 2 steps to arbitration (i.e., negotiation and then mediation). Kleen, on the other hand, argues 3 that the ADR Clause delegates all arbitrability questions to the arbitrator and that Quantum 4 has waived its ability to avoid arbitration. 5 As explained below, the Court agrees with Kleen that the ADR Clause delegates 6 arbitrability questions to the arbitrator and will thus compel arbitration. 7 A. Whether This ADR Clause Is Mandatory 8 A threshold issue implicated by the parties’ motions is whether the ADR Clause in 9 this action is mandatory, in the sense that it may be invoked by one party to compel the 10 other to participate in the ADR process. This issue arises due to the somewhat unusual 11 wording of the ADR Clause—it does not mandate binding arbitration, but instead provides 12 that either party “may” submit the dispute to mediation and, if that fails, then either party 13 “may” submit the dispute to binding arbitration. (Doc. 1-2 at 8-9.) Kleen argues the ADR 14 Clause is nevertheless mandatory. (Doc. 8 at 7 n.4.) Although Quantum does not seem to 15 dispute this point—as noted, Quantum’s primary defenses are that the MSA is 16 unenforceable and/or that Kleen hasn’t satisfied all of the ADR Clause’s prerequisites to 17 arbitration—the Court will clarify that Kleen’s interpretation is correct. The ADR Clause 18 does, in fact, potentially permit one party to compel the other to arbitrate. See, e.g., Am. 19 Italian Pasta Co. v. Austin Co., 914 F.2d 1103, 1104 (8th Cir. 1990) (granting motion to 20 compel arbitration, where agreement provided that “[i]f both parties agree that a dispute 21 . . . cannot be settled . . . , then such dispute or disagreement may be submitted to 22 arbitration,” because “[t]here would be no reason for the arbitration language . . . if the 23 parties intended it to be permissive”); Deaton Truck Line, Inc. v. Local Union 612, 314 24 F.2d 418, 421 (5th Cir. 1962) (“Appellant argues that the use of the word ‘may’ in the 25 contract prevents arbitration from being compulsory or obligatory. Clearly, however, 26 ‘may’ should be construed to give either aggrieved party the option to require arbitration.”); 27 Realty Execs. Int’l Servs. LLC v. Devonshire W. Can. Ltd., 2019 WL 4259767, *1-2 (D. 28 Ariz. 2019) (“REI also argues that the arbitration provision [requiring informal discussion, 1 mediation, and binding arbitration] is not mandatory because it states that ‘either party may 2 submit’ to arbitration. But this merely means that the parties are not required to arbitrate 3 every dispute—they may choose to forego resolution of some disagreements. But if either 4 side seeks to assert a claim arising out of or related to the 2003 Agreement, the arbitration 5 provision is ‘the sole and exclusive procedure[] for the resolution of disputes.’”) 6 (alterations in original) (citation omitted). 7 B. Delegation Of Gateway Questions 8 As noted, although the two gateway questions of arbitrability—(1) whether a valid 9 agreement to arbitrate exists and (2) whether the agreement encompasses the dispute at 10 issue—are ordinarily resolved by the court, the parties may agree to arbitrate one or both 11 of those issues by including a delegation clause in the arbitration agreement. Rent-A- 12 Center, 561 U.S. at 68-70. Here, the parties disagree about whether the ADR Clause 13 delegates those questions. Kleen argues that, because the ADR Clause incorporates the 14 AAA Commercial Arbitration Rules, the parties agreed to arbitrate the gateway questions. 15 (Doc. 20 at 3-5; Doc. 22 at 2-3.) Quantum responds that the Court, not an arbitrator, must 16 decide the gateway questions because the MSA is unconscionable and was fraudulently 17 induced (Doc. 18 at 6-8, 11-13; Doc. 26 at 7) and because the ADR Clause does not clearly 18 and unmistakably delegate arbitrability to an arbitrator (Doc. 26 at 6-12). 19 As an initial matter, the Court must determine whether it can consider Kleen’s 20 delegation argument. Kleen first raised the issue of delegation in its reply in support of its 21 motion to compel. (Doc. 20 at 3-5.) This was arguably too late. Collaborative Continuing 22 Educ. Council, Inc. v. Starks Realty Grp., Inc., 2017 WL 5714727, *1 (D. Ariz. 2017) 23 (“Generally, this Court will not consider arguments raised for the first time in a reply. 24 There are some exceptions to this general rule, including replies to arguments presented by 25 opposing counsel in their response.”) (citations omitted). However, Kleen also raised the 26 issue of delegation in its response to Quantum’s motion to stay (Doc. 22 at 2-3), and 27 Quantum thereafter had the opportunity to—and did—respond to the argument (Doc. 26 at 28 6-12). Accordingly, and given the intertwined nature of the parties’ motions, the delegation 1 issue is properly before the Court. Cf. Eberle v. City of Anaheim, 901 F.2d 814, 818 (9th 2 Cir. 1990) (court may consider issue first raised in reply brief if “the appellee has not been 3 misled and the issue has been fully explored”) (internal quotation marks omitted). 4 On the merits, the Court agrees with Kleen that the ADR Clause’s incorporation of 5 the AAA Commercial Arbitration Rules constitutes a clear and unmistakable expression of 6 the parties’ intent to delegate the gateway questions to an arbitrator. Although Quantum 7 urges the Court to reach a different conclusion for policy reasons, because “following such 8 a rule (the ‘Arbitral Incorporation Rule’) would reach an obscene and unjust result” (Doc. 9 26 at 6), it is not this Court’s job to make such freewheeling policy judgments. Instead, 10 this Court must follow Ninth Circuit law, which firmly establishes that “incorporation of 11 the AAA rules constitutes clear and unmistakable evidence that contracting parties agreed 12 to arbitrate arbitrability.” Brennan, 796 F.3d at 1130-31. See also Oracle Am., Inc. v. 13 Myriad Grp. A.G., 724 F.3d 1069, 1074 (9th Cir. 2013) (“Virtually every circuit to have 14 considered the issue has determined that incorporation of the [AAA] arbitration rules 15 constitutes clear and unmistakable evidence that the parties agreed to arbitrate 16 arbitrability.”). Quantum also cites cases for the proposition that “a bare reference to the 17 AAA rules is insufficient to establish delegation” (Doc. 26 at 9-10), but the parties’ contract 18 does not contain a “bare reference” to the AAA rules—it expressly adopts and incorporates 19 them. Cf. Brennan, 796 F.3d at 1128 (contract language that disputes would be settled “by 20 binding arbitration in accordance with the Rules of the [AAA]” incorporated the AAA 21 Rules).2 Finally, Quantum also notes that some courts have “reserved judgment on the 22 question whether the incorporation rule applied to contracts involving unsophisticated 23 parties” (Doc. 26 at 11), but those cases generally involved individual consumers. 24 Quantum has not explained, other than by ipse dixit, how a commercial hand sanitizer 25 2 The Ninth Circuit recently decided there was not “clear and unmistakable evidence 26 that the parties intended to delegate [a] gateway issue” when “arbitration before the AAA [was] but the final option in the dispute procedure that the Clause outline[d].” Shivkov v. 27 Artex Risk Sols., Inc., 974 F.3d 1051, 1069 (9th Cir. 2020). Shivkov is easily distinguishable because the clause in that case did “not incorporate the AAA Rules,” so the 28 rule set out in Brennan did not apply. Id. at 1068. As noted, the ADR Clause here expressly incorporates the AAA Rules. 1 distributor that has entered into six-figure commercial transactions could be deemed an 2 unsophisticated party. In any event, the Ninth Circuit has “not foreclose[d] the possibility 3 that this rule could also apply to unsophisticated parties or to consumer contracts. Indeed, 4 the vast majority of the circuits that hold that incorporation of the AAA rules constitutes 5 clear and unmistakable evidence of the parties’ intent do so without explicitly limiting that 6 holding to sophisticated parties or to commercial contracts.” Brennan, 796 F.3d at 1130- 7 31. 8 Alternatively, Quantum requests a stay pending the Supreme Court’s decision in 9 Henry Schein, Inc. v. Archer & White Sales, Inc., No. 19-963, which Quantum argues will 10 rule on an “almost identical issue to the one at bar.” (Doc. 26 at 8.) But earlier today, the 11 Supreme Court dismissed the grant of certiorari in Henry Schein as improvidently granted.3 12 Because the parties agreed to delegate the gateway questions, it follows that 13 Quantum cannot avoid arbitration based on its claims of unconscionability and fraud in the 14 inducement. “There are two types of validity challenges under [9 U.S.C.] § 2: One type 15 challenges specifically the validity of the agreement to arbitrate, and [t]he other challenges 16 the contract as a whole, either on a ground that directly affects the entire agreement (e.g., 17 the agreement was fraudulently induced), or on the ground that the illegality of one of the 18 contract’s provisions renders the whole contract invalid.” Rent-A-Center, 561 U.S. at 70 19 (second alteration in original) (internal quotation marks omitted). “[O]nly the first type of 20 challenge is relevant to a court’s determination whether the arbitration agreement at issue 21 is enforceable.” Id. The Supreme Court “require[s] the basis of challenge to be directed 22 specifically to the agreement to arbitrate before the court will intervene,” so “unless 23 [Quantum] challenged the [ADR Clause] specifically, [the Court] must treat it as valid 24 3 Even if the Supreme Court hadn’t taken this step, Quantum’s request for a stay 25 would have been denied. The narrow question on which the Supreme Court originally granted certiorari in Henry Schein was “[w]hether a provision in an arbitration agreement 26 that exempts certain claims from arbitration negates an otherwise clear and unmistakable delegation of questions of arbitrability to an arbitrator,” Brief for Petitioner at (I), Henry 27 Schein, No. 19-963, 2020 WL 529195, *I (January 2020). But the ADR Clause in this case doesn’t contain such a carve-out—it applies without qualification to “any dispute, 28 controversy, or claim arising out of or relating to this Agreement, or the breach, termination or invalidity hereof.” (Doc. 1-2 at 8-9.) 1 under § 2, and must enforce it under §§ 3 and 4, leaving any challenge to the validity of 2 the Agreement as a whole for the arbitrator.” Id. at 71-72. 3 Here, Quantum’s claims of unconscionability are directed to the MSA as a whole, 4 not to the ADR Clause specifically. In the FAC, Quantum alleges that the “MSA was 5 entirely one-sided to the extent that it is and was unconscionable” and that the “MSA was 6 so one-sided, it was void ab initio.” (Doc. 11 ¶¶ 35-36, emphases added. See also id. ¶ 55 7 [“Kleen drafted an imbalanced contract . . . .”].) Quantum then clarifies that its claim of 8 unconscionability is premised on the following “three instances in which the contract was 9 imbalanced . . . creating an unconscionable agreement”: (1) “section 7.3 makes the buyer 10 responsible for all defects in the certificate of analysis even when the seller is providing 11 the raw materials”; (2) “Section 4.3 gives seller sole discretion to determine if goods are 12 non-conforming”; and (3) “Section 8.1 severely limits the warranty on goods manufactured 13 by seller so that the buyer has no protection.” (Id. ¶ 54.) None of those challenges is 14 directed toward the ADR Clause specifically—instead, they represent theories for 15 challenging the validity of the overall contract. Finally, Quantum’s arguments in its 16 briefing4 again concern the MSA as a whole: “Defendant’s MSA is both procedurally and 17 substantively unconscionable and the entire Dispute Resolution/arbitration provision 18 should be deemed enforceable as well.” (Doc. 18 at 12, emphases added.) 19 Similarly, as for Quantum’s fraud in the inducement argument, Quantum argues it 20 was “coerced into a business deal with Defendant that it never intended to consummate.” 21 (Id. at 13, emphasis added.) Once again, these arguments do not challenge the ADR Clause 22 specifically, so the validity of the MSA is a gateway question that has been delegated to 23 4 Quantum’s briefing does mention the ADR Clause on a few occasions, but nowhere 24 does Quantum assert a challenge to the ADR Clause divorced from its challenge to the MSA. (Doc. 18 at 12 [“[T]he first Purchase Order was bottled and shipped to Quantum 25 prior to execution of the MSA. The MSA was sent via docusign to Quantum for signature, after the parties had been operating in business with no conversation regarding arbitrability. 26 Thus, the arbitration agreement is procedurally unconscionable.”], emphases added.) In other instances, Quantum does not make specific challenges at all, instead choosing to 27 make conclusory assertions: “Some arbitration clauses may contain terms that are ‘bizarre or oppressive . . . .’ Kleen’s Dispute Resolution clause is not run-of-the-mill. As discussed 28 above [in relation to the MSA], it is so one-sided as to be substantively unconscionable.” (Id. at 12-13, citation omitted.) 1 the arbitrator. Cf. Rent-A-Center, 561 U.S. at 73 (“[W]e need not consider [the 2 unconscionability] claim because none of Jackson’s substantive unconscionability 3 challenges was specific to the delegation provision. First, he argued that the Agreement’s 4 coverage was one sided . . . . This one-sided-coverage argument clearly did not go to the 5 validity of the delegation provision.”); Prima Paint Corp. v. Flood & Conklin Mfg. Co., 6 388 U.S. 395, 404 n.12 (1967) (“To immunize an arbitration agreement from judicial 7 challenge on the ground of fraud in the inducement would be to elevate it over other forms 8 of contract . . . .”).5 9 Finally, Quantum’s response to the motion to compel contains a passing argument 10 that “this action is outside of the arbitration agreement because it arises from (1) breaches 11 of Federal Regulations and (2) consumer protection laws, not from disputes arising from 12 the MSA itself.” (Doc. 18 at 8.) And in its motion to stay, Quantum argues that its claims 13 in this action aren’t governed by the ADR Clause because the MSA “was not even signed 14 prior to the execution of three (3) of the four (4) purchase orders at issue.” (Doc. 19 at 3, 15 formatting omitted). These arguments fail because they implicate the second gateway 16 question (i.e., whether the agreement encompasses the dispute at issue) and the parties have 17 agreed to delegate that issue to the arbitrator, too. 18 C. Failure To Satisfy Contractual Prerequisites To Arbitration 19 Quantum also contends that Kleen cannot compel arbitration because it skipped “the 20 mandatory steps outlined in its own Dispute Resolution clause.” (Doc. 18 at 8.) Kleen 21 5 Quantum also contends that, because it has “raised the fact issues of 22 unconscionability and fraud in the inducement with regard to the MSA, it is entitled to at least limited discovery to either determine the issue on summary judgment or at trial” under 23 9 U.S.C. § 4. (Doc. 18 at 10-11.) This argument lacks merit. Under the FAA, if “the making of the arbitration agreement . . . be in issue, the court shall proceed summarily to 24 the trial thereof.” 9 U.S.C. § 4. “As the party resisting arbitration, [Quantum] has the burden of showing that [it] is entitled to a jury trial under § 4 . . . .” Bhatia v. Johnston, 25 818 F.2d 418, 422 (5th Cir. 1987). See also Dillard v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 961 F.2d 1148, 1154 (5th Cir. 1992) (“A party to an arbitration agreement 26 cannot obtain a jury trial merely by demanding one.”). Quantum has not met this burden because, as discussed above, Quantum has not put the making of the ADR Clause itself at 27 issue—Quantum more broadly challenges the MSA. This issue is arbitrable, which means Quantum is not entitled to a trial under § 4. Bhatia, 818 F.2d at 422 (“[T]he Supreme 28 Court’s holding in Prima Paint dictates that Bhatia’s claim that the contract itself is invalid must be referred to arbitration.”). 1 responds that it has “diligently sought to negotiate and mediate this matter but to no avail” 2 and that it was “Quantum who has waived any opposition to arbitration” by “affirm[ing] 3 the enforceability of the arbitration provisions of the MSA in its complaints” and leading 4 “the Court and Kleen to believe that it was agreeable to arbitration during the TRO 5 hearing.” (Doc. 20 at 5.) 6 The Court need not decide whether Kleen satisfied, or should be excused from 7 satisfying, all of the ADR Clause’s prerequisites to arbitration (i.e., engaging in at least 8 three negotiation sessions and then engaging in mediation) because that issue has been 9 delegated to the arbitrator to decide in the first instance.6 The Ninth Circuit has held that 10 the “question whether a party waived its right to arbitrate on the basis of its litigation 11 conduct is a question of arbitrability and is in the first category of gateway issues.” Martin 12 v. Yasuda, 829 F.3d 1118, 1123 (9th Cir. 2016). Although the Ninth Circuit has also stated 13 that this question is “presumptively for a court and not for an arbitrator to decide,” id., 14 “[c]ourts distinguish between waiver-through-conduct, which may be considered by a 15 court, and contractual waiver, which is presumptively for the arbitrator. Contractual waiver 16 concerns whether the party seeking to arbitrate waived its right to insist on arbitration by 17 failing to satisfy contractual prerequisites to arbitration. Waiver-through-conduct concerns 18 whether the party seeking to enforce arbitration acted in a manner ‘completely inconsistent’ 19 with the right to arbitrate.” Altela Inc. v. Ariz. Sci. & Tech. Enters. LLC, 2016 WL 20 4539949, *5 n.3 (D. Ariz. 2016) (citations omitted). 21 Here, Quantum’s argument is best categorized as a contractual waiver argument. 22 Quantum argues that Kleen cannot pursue arbitration because it “skipp[ed] the mandatory 23 steps outlined in its own Dispute Resolution clause.” (Doc. 18 at 8-10. See also Doc. 26 24 at 7 [“Kleen did not engage in the three negotiation sessions outlined in the MSA despite 25 26 6 Although neither party addressed the delegation issue specifically as it pertains to compliance with the ADR Clause’s negotiation and mediation requirements, Kleen did 27 argue that the delegation provision “delegated all questions of arbitrability . . . to the arbitrator” and that the incorporation of the AAA Rules meant that the “parties delegated 28 the ‘gateway’ questions of arbitrability to the arbitrator, not the court.” (Doc. 22 at 2, emphasis added.) 1 Quantum’s requests to do so, [and] did not submit the dispute to a mediator . . . . Quantum 2 has objected from the outset to Kleen’s complete disregard for the process it outlined in 3 the MSA and its arbitration clause.”].) Because this argument relies on Kleen’s alleged 4 failure to “satisfy contractual prerequisites” (three negotiation sessions and then mediation) 5 and is not based on Kleen’s actions in litigation, it is presumptively one for the arbitrator 6 and is a question of arbitrability that has been delegated to the arbitrator. Mitchell v. 7 Corelogic, Inc., 2019 WL 6481306, *3-4 (C.D. Cal. 2019) (holding that a contract 8 containing an arbitration clause incorporating AAA rules was “clear and unmistakable 9 evidence that the parties agreed to arbitrate arbitrability,” so the “arbitrator [had] to 10 determine whether CoreLogic has waived arbitrability”); Bank Leumi, USA v. Miramax 11 Distrib. Servs., LLC, 2018 WL 7568361, *7 n.6 (C.D. Cal. 2018) (concluding that Martin 12 was limited to waiver-by-conduct and holding that an agreement “gave the arbitrator 13 authority to determine questions of arbitrability based on the broad language of the 14 arbitration agreement and the incorporation by reference of the AAA rules”). See also 15 AAA, Commercial Arbitration Rules and Mediation Procedures (Oct. 2013), 16 https://adr.org/sites/default/files/Commercial%20Rules.pdf (“The arbitrator shall have the 17 power to rule on his or her own jurisdiction, including . . . the arbitrability of any claim or 18 counterclaim.”) (emphasis added). 19 D. Whether To Stay Or Dismiss The Action 20 When compelling arbitration, a court must decide whether to stay or dismiss the 21 underlying action. Johnmohammadi v. Bloomingdales, Inc., 755 F.3d 1072, 1074 (9th Cir. 22 2014). Kleen seeks dismissal because all of Quantum’s claims are subject to arbitration. 23 (Doc. 20 at 6-7.)7 Quantum prefers a stay. (Doc. 18 at 14.) 24 The Court will exercise its discretion to stay proceedings pending a final decision 25 7 Quantum also requests leave to add allegations and counts to its complaint. (Doc. 26 18 at 14-15.) Because the arbitrability of all of Quantum’s claims—including the additional claims it would like to assert—have been delegated to the arbitrator, Quantum’s 27 request is denied. Realty Execs., 2019 WL 4259767, at *2 (stating that the Court “may deny leave to amend if the new claims are subject to arbitration” and collecting cases). “If 28 [Quantum] seeks to assert claims arising out of or related to [the MSA], it must do so under the process established in that agreement.” Id. by the arbitrator because the “arbitration provision delegates the gateway question of arbitrability to the arbitrator,” so “if the arbitrator decides that not all of Plaintiff's claims 3|| are subject to arbitration, then this litigation can proceed in this Court on those non- 4|| arbitrable claims.” ROI Props. Inc. v. Burford Cap. Ltd., 2019 WL 1359254, *7 (D. Ariz. 5 || 2019). 6 Accordingly, 7 IT IS ORDERED that: 8 (1) — Kleen’s motion to compel arbitration (Doc. 8) is granted. 9 (2) Quantum’s motion to stay arbitration proceedings (Doc. 19) is denied. 10 (3) This action is stayed pending arbitration. 11 (4) The parties must file a joint notice every six months concerning the status of || the arbitration proceeding and file a joint notice within 10 days of when the arbitration 13 || proceeding concludes. The first joint notice shall be filed six months from the date of this Order. 15 Dated this 25th day of January, 2021. 16 17 Am ee 18 i CC —— Dominic W. Lanza 19 United States District Judge 20 21 22 23 24 25 26 27 28 -16-
Document Info
Docket Number: 2:20-cv-02287
Filed Date: 1/25/2021
Precedential Status: Precedential
Modified Date: 6/19/2024