Pellitteri v. Wellquest CA2/2 ( 2016 )

Filed 2/1/16 Pellitteri v. Wellquest CA2.2
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
or ordered published for purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION TWO
MARCIA PELLITTERI, B264094
Plaintiff and Respondent, (Los Angeles County
Super. Ct. No. BC490541)
v.
WELLQUEST INTERNATIONAL, INC.,
et al.,
Defendants and Appellants.
APPEAL from an order of the Superior Court of Los Angeles County.
Mark V. Mooney, Judge. Affirmed.
Quinn Emanuel Urquhart & Sullivan, Steven G. Madison, Prashanth
Chennakesavan for Defendants and Appellants.
Krane & Smith, Jeremy D. Smith, Daniel L. Reback for Plaintiff and Respondent.
___________________________________________________
Appellants contend that the trial court abused its discretion by staying arbitration
of arbitrable claims while nonarbitrable claims are litigated. We find there was ample
basis for the trial court to determine that litigation should proceed prior to arbitration.
Accordingly, we affirm.
FACTUAL AND PROCEDURAL BACKGROUND
Plaintiff Marcia Pellitteri filed this action in August 2012. Her first amended
complaint (FAC), filed in August 2013, names as defendants Wellquest International,
Inc. (WQ), Edward Mishan, Michael Ackerman, Knott Direct, Inc., Emson, Inc., and
E. Mishan & Sons, Inc. Pellitteri alleges that all defendants are interrelated, and that each
is the agent, principal, alter ego, and/or representative of the other. She further alleges
she is a successor in interest to and assignee of Progressive Consulting Services, Inc.
(PCS).
According to the FAC, Pellitteri is in the business of developing new products and
advertising the products by, among other methods, television infomercials. In 2002,
Pellitteri agreed with Mishan and Ackerman to introduce third parties who developed
various products so that Mishan and Ackerman could produce, package, and market the
products. Mishan and Ackerman and affiliated entities were to pay Pellitteri and her
affiliated entities royalties based on sales of the products. Along those lines, PCS entered
into a written agreement with WQ in September 2002, whereby WQ would pay PCS
royalties based on sales of third parties’ products.
The FAC alleges that from 2002 to 2011 Pellitteri and/or PCS received
compensation from defendants. In 2011, however, Pellitteri discovered that defendants
breached their obligations by failing to pay royalties, by misrepresenting sales of
products, by entering into undisclosed arrangements with third parties to circumvent the
agreements between plaintiff and defendants, and by misappropriating plaintiff’s
intellectual property and product designs. The FAC contains a total of 11 causes of
action against defendants relating to this alleged misconduct.
Following service of the FAC, defendants moved to compel arbitration and stay
the litigation, contending that arbitration was mandated by the written agreement between
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WQ and PCS. Pellitteri opposed the motion, arguing that the arbitration clause was
narrow and did not apply to any of the FAC’s claims. The trial court denied defendants’
motion in February 2014, finding that the arbitration provision applied only to claims
relating to an “Audit Clause” in the agreement, and because Pellitteri had not exercised
her rights under the Audit Clause, none of her claims were subject to arbitration.1
Defendants appealed the denial of the motion to compel arbitration. In an
unpublished opinion, Marcia Pellitteri v. Wellquest International, Inc., et al., case No.
B255062 (filed January 29, 2015), we found that certain claims were related to the Audit
Clause, and therefore were arbitrable. These matters were defendants’ alleged failure to
pay royalties or other required compensation to Pellitteri, and their alleged failure to
provide accurate reporting and accounting of profits and sales. Other disputes, however,
1 Paragraph 9 of the agreement was labeled “Audit Rights” and provided: “PCS
shall have the right to designate a certified public accountant(s), to audit WQ’s records
for The Product and Additional Products, no more than twice per calendar year . . . to
ascertain the accuracy of each royalty compensation report. If the auditor discovers a
discrepancy between the amount of royalties/compensation reported and WQ’s records,
the auditor shall promptly notify both PCS and WQ of the perceived discrepancy together
with a detailing of the asserted discrepancy. . . . Should the auditor find a discrepancy
and WQ disputes the discrepancy, WQ and/or WQ’s designated accountant shall at it’s
[sic] own cost provide PCS’s auditor within five (5) business days of discovery of the
discrepancy with a breakdown as to why the discrepancy is not accurate. At that point
WQ and/or WQ’s accountant and PCS’s auditor shall either agree or disagree. If they
agree WQ shall pay the discrepancy upon the parties agreeing to such and if WQ and/or
PCS does not agree, the parties shall use an arbitrator as outlined in Paragraph 26 of this
Agreement to arbitrate only for this purpose and to resolve the matter between them.”
Paragraph 26, which was labeled “Arbitration,” stated: “Any controversy or claim
arising out of or relating to the Audit Clause of this agreement, or the breach thereof,
shall be settled by arbitration . . . and judgment upon the award rendered by the Arbitrator
may be entered in any court having jurisdiction thereof. The arbitration shall be
conducted in Los Angeles, California by a single, neutral, impartial arbitrator,
independent of the parties, who shall be an accountant . . . . The Arbitrator shall have no
power to alter or modify any express provision of this Agreement, or to make any award
which by the terms effects any such alteration or modification. Nothing herein contained
shall prevent any party from seeking injunctive or other equitable relief from a court of
competent jurisdiction.”
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were not related to the Audit Clause and not subject to arbitration—allegations that
defendants entered into secret third party arrangements to avoid their obligations,
misappropriated plaintiff’s intellectual property and product designs, and used third
parties as shell companies to circumvent the agreement. In remanding the matter to the
trial court, we instructed: “The trial court is to enter an order compelling arbitration and
staying court proceedings on all matters other than claims that defendants (i) entered into
secret third party arrangements to avoid their obligations, (ii) misappropriated plaintiff’s
intellectual property and product designs, and (iii) used third parties as shells to
circumvent the agreement. The trial court may decide whether the arbitration order
should be delayed pursuant to Code of Civil Procedure section 1281.2, subdivision (c),
or, upon any motion brought pursuant to Code of Civil Procedure section 1281.4, the trial
court may stay litigation of the nonarbitrable claims pending arbitration. Alternatively,
the trial court may order that arbitration proceed simultaneously with litigation of the
nonarbitrable claims.”
Following remand, Pellitteri filed a motion to stay arbitration pending litigation of
the nonarbitrable claims pursuant to Code of Civil Procedure section 1281.2, subdivision
(c).2 The same day, defendants filed a motion to stay litigation pending arbitration
pursuant to section 1281.4. The trial court granted Pellitteri’s motion and denied
defendants’, allowing litigation to proceed before arbitration.
Defendants appealed.
DISCUSSION
I. The order is appealable
Section 1294, subdivision (a), provides for appeal from an order denying a petition
to compel arbitration. It does not expressly allow an appeal from an order staying
arbitration. Case law, however, has read into section 1294 a right to appeal from such an
order. (Henry v. Alcove Investment, Inc. (1991) 233 Cal.App.3d 94, 98 (Henry); The
2 Unless otherwise noted, all further statutory references are to the Code of Civil
Procedure.
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Energy Group, Inc. v. Liddington (1987) 192 Cal.App.3d 1520, 1528-1529; MKJA, Inc.
v. 123 Fit Franchising, LLC (2011) 191 Cal.App.4th 643, 653-655.) This is because an
order staying arbitration is the “functional equivalent” of an order denying arbitration.
(Henry, at p. 99.) A party to a valid arbitration agreement has a right to have its dispute
resolved quickly and inexpensively, and an order staying arbitration can frustrate this
goal, just like an order refusing to compel arbitration. (Id. at pp. 99-100.)
Pellitteri argues that no appeal lies from the trial court’s order here because
defendants already appealed the denial of their prior motion to compel arbitration. We
disagree. First, defendants are not appealing the same issue. In the prior appeal,
defendants’ request to compel arbitration had been denied entirely. Now, arbitration may
occur, just not in the sequence that defendants prefer. Second, the concerns expressed in
Henry and similar authority apply. Generally, a party entering into an arbitration
agreement can expect that any dispute subject to the agreement will be resolved
efficiently and relatively inexpensively through arbitration. The trial court’s order (if it
was incorrect) would potentially thwart this expectation. Appeal from the order delaying
arbitration is therefore proper.
II. The trial court did not abuse its discretion
The third paragraph of section 1281.2, subdivision (c), provides: “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.” Pursuant to this provision, a trial court may order that litigation of
nonarbitrable claims be completed prior to commencement of arbitration, but only if
determination of the nonarbitrable claims might make arbitration unnecessary. (Ibid.; RN
Solution, Inc. v. Catholic Healthcare West (2008) 165 Cal.App.4th 1511, 1521 (RN
Solution).)
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Defendants contend the trial court erred by staying arbitration. According to
defendants, Pellitteri’s arbitrable claims—that defendants failed to pay royalties and
provide accurate accountings—will need to be arbitrated regardless of the outcome of the
litigation, so litigation will not make arbitration unnecessary.
We review the trial court’s order granting the motion to stay arbitration for an
abuse of discretion. (Henry, supra, 233 Cal.App.3d 94, 101.) “Thus, the trial court’s
order will not be disturbed on appeal unless it exceeds the bounds of reason.” (Ibid.)
We find that the trial court did not abuse its discretion. In providing for a delay of
arbitration, the third paragraph of section 1281.2, subdivision (c), does not require a
conclusive finding that arbitration will be rendered unnecessary by litigation. Instead, in
ordering a stay of arbitration, the trial court need only find that determination of
nonarbitrable issues “may” make arbitration unnecessary. (Ibid.; see also RN Solution,
supra, 165 Cal.App.4th 1511, 1521.) The trial court had a reasonable basis to make such
a finding here. Each of Pellitteri’s causes of action incorporates and is based on
allegations that must be litigated—that defendants entered into secret third party
arrangements to avoid their obligations, misappropriated Pellitteri’s intellectual property
and product designs, and used third parties as shells to circumvent the agreement. It is
entirely possible that Pellitteri will be unable to prove any of these claims, and that the
evidence (or lack of evidence) relevant to these allegations will demonstrate that Pellitteri
has no viable claims—arbitrable or not—against defendants. The trial court, therefore,
did not abuse its discretion in granting Pellitteri’s motion to stay arbitration.
Moreover, the limited scope of the arbitration provision provides further
justification for the trial court’s decision. The only matters subject to arbitration are
defendants’ alleged failures to pay royalties or other required compensation and to
provide accurate reporting and accounting of profits and sales. According to the
agreement, these are matters for the parties’ respective accountants to determine, and any
dispute is to be resolved by an accountant arbitrator.
Doan v. State Farm General Ins. Co. (2011) 195 Cal.App.4th 1082 (Doan)
examined a similarly narrow arbitration requirement, one involving the appraisal process
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described in Insurance Code section 2071. The limited function of the appraiser
arbitrator was to determine an amount of damage, not to resolve questions of coverage or
policy interpretation. (Doan, at p. 1094.) The appellate court found that, under section
1281.2, subdivision (c), the trial court had discretion to stay the appraisal proceeding
pending resolution of legal issues. (Id. at p. 1099.) Allowing litigation to proceed first
would provide the advantages of informing the appraisal process and promoting judicial
economy. (Id. at pp. 1103-1104; see also Alexander v. Farmers Ins. Co., Inc. (2013) 219
Cal.App.4th 1183, 1196 [following Doan in finding that a judicial determination could
inform the appraisal process and aid judicial efficiency].)
At least one of these benefits is likely to accrue here. As explained above, if
Pellitteri’s claims are found unmeritorious in litigation, a subsequent arbitration may not
be necessary. If arbitration were held first, however, litigation would almost certainly be
required since the accountant arbitrator would have no authority to adjudicate the
nonarbitrable claims. And a subsequent, second arbitration might then be necessary to
determine royalties or compensation owed on the nonarbitrable claims. Thus, the trial
court’s order promotes judicial economy. Furthermore, under the trial court’s order,
litigation is likely to inform the arbitration (if it is necessary) because it will draw the
lines of royalties and compensation to be calculated. For example, if Pellitteri proves that
defendants misappropriated intellectual property but does not prove any of her other
claims, then the arbitrator’s scope of determination will be comparatively narrow.
Therefore, the trial court did not err in granting Pellitteri’s motion to stay
arbitration pending litigation. It follows that the court properly denied defendants’
motion to stay litigation.
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DISPOSITION
The trial court’s order staying arbitration of arbitrable claims and denying a stay of
litigation of nonarbitrable claims is affirmed.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS.
BOREN, P.J.
We concur:
CHAVEZ, J.
HOFFSTADT, J.
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