Future Energy Overseas Group v. Entravision Communications Corp. CA2/4 ( 2021 )

Filed 9/24/21 Future Energy Overseas Group v. Entravision Communications Corp. CA2/4
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS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
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IN THE COURT OF APPEAL OF THE STATE OF
CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION FOUR
FUTURE ENERGY OVERSEAS B308533
GROUP, INC.,
(Los Angeles County
Plaintiff and Respondent, Super. Ct. No.
20STCV04768)
v.
ENTRAVISION
COMMUNICATIONS CORP. et
al.,
Defendants and Appellants.
APPEAL from an order of the Superior Court of Los
Angeles County, Maureen Duffy-Lewis, Judge. Vacated and
remanded with directions.
King & Spalding and Arwen R. Johnson; Boies Schiller
Flexner, Eric Brenner and Julian Beach for Defendants and
Appellants.
Eisner, Jeremiah Reynolds, Ashlee N. Lin, Benjamin
G. Kassis and Rosie Cole for Plaintiff and Respondent.
_____________________________________________________
INTRODUCTION
Appellant Entravision Communications Corp.
purchased a digital-media advertising business from
respondent Future Energy Overseas Group, Inc. and others,
with Future Energy serving as the sellers’ representative.1
As part of the transaction, the parties executed an
“Earn-Out” agreement, under which Entravision was to pay
the sellers additional sums if the business met certain
performance thresholds during defined periods. Under the
agreement, Entravision was to provide periodic Earn-Out
statements setting forth its calculations of the business’s
performance and the sellers’ entitlement to an earn-out
payment, if any, for the relevant period. If the sellers
disagreed, they were to submit their “Disputed Items” to
Entravision. An alternative dispute resolution (ADR)
1 Entravision made this acquisition through its subsidiary,
appellant Headway Spain Digital Technology Services, S.L.U.
For the sake of simplicity, we refer to both entities as
Entravision.
2
provision in the agreement instructed that unresolved
Disputed Items be submitted to an accounting firm.
Disputes subsequently arose between the parties
regarding the sellers’ entitlement to Earn-Out payments.
Future Energy submitted 17 Disputed Items challenging
Entravision’s Earn-Out statement for one of the relevant
periods, but the parties could not resolve their differences.
Future Energy then filed this action in its capacity as the
sellers’ representative, seeking maximum Earn-Out
payments for all periods, alongside other relief. Among
other things, it alleged that Entravision had breached an
“oral and implied” agreement regarding the treatment of
certain operating expenses for purposes of the Earn-Out
payment calculations.
Entravision then moved to compel ADR as to the
Disputed Items under the Earn-Out agreement and to stay
the litigation. After determining that the agreement’s ADR
provision was not an arbitration clause in the traditional
sense, and that the action involved many non-accounting
issues that were not subject to the ADR provision, the trial
court denied Entravision’s motion to compel, providing that
non-arbitrable claims would be litigated first, and remaining
accounting issues could then be referred to the parties’
accounting firm. The court did not specify the issues it
determined were subject to the ADR provision.
Entravision challenges the court’s ruling on appeal. It
claims the court erroneously ruled the Earn-Out agreement’s
ADR provision unenforceable. While Future Energy
3
contends the court merely delayed the ADR process under
Code of Civil Procedure section 1281.2 pending the litigation
of non-arbitrable claims in court, Entravision asserts the
court could not have exercised discretion under the statute
without first distinguishing between arbitrable and non-
arbitrable issues.2 Finally, Entravision claims that even if
the court acted within its discretion in delaying the ADR
process, it erred by failing to identify the issues subject to
ADR and by failing to stay court proceedings as to those
issues.
We conclude the trial court properly recognized that
the parties’ ADR provision was enforceable, but exercised its
discretion under section 1281.2 to delay the ADR process
pending adjudication of the non-arbitrable issues. However,
we agree that the court was required to identify the issues
subject to ADR, and to grant the motion to compel ADR and
stay court proceedings as to those issues. We therefore
reverse the court’s denial of Entravision’s motion to compel
ADR and remand the matter to the trial court with
instructions to perform these necessary tasks.
2 Undesignated statutory references are to the Code of Civil
Procedure.
4
BACKGROUND
A. The Parties’ Transaction and the Earn-Out
Agreement
In 2017, Entravision acquired a group of affiliated
companies that provided digital-media advertising services
from several individuals and corporate affiliates. One of the
sellers, Future Energy, was designated as the sellers’
representative, authorized to represent the sellers in
matters relating to the transaction’s governing documents.
As part of the transaction, the parties executed the Earn-Out
agreement, under which Entravision was to pay the sellers
additional sums for each year in 2017-2019 (referred to in
the agreement as “Periods” 1-3) in which the acquired
companies achieved specified financial targets. If the
acquired companies reached certain performance thresholds
for the entire three-year period, the agreement provided for
an “Overachievement Bonus.”
Under the Earn-Out agreement, Entravision was to
provide a yearly statement setting forth its calculations of
the business’s performance and the earn-out payment to
which it believed the sellers were entitled. If Future Energy
disagreed with this statement, it was to submit a list of
“‘Disputed Items’” to Entravision, specifying the basis for
each item. If the parties could not come to an agreement,
remaining Disputed Items would be submitted to ADR
before an accounting firm. Section 2(c) of the agreement
stated: “If the parties are unable to resolve any Disputed
Items . . . , then such Disputed Items shall be submitted to
5
[an] Accounting Firm . . . which shall be jointly engaged by
[Entravision] and [Future Energy] and shall act as an expert
in accounting and not an arbitrator to promptly review the
Earn-Out Statement and resolve the Disputed Items. . . . In
resolving any Disputed Item, the Accounting Firm . . . will
base its determination solely on written materials submitted
by [Entravision] and the [Future Energy] (and not on any
independent review).”
B. The Parties’ Disputes and Future Energy’s
Complaint
A series of disputes later arose about the sellers’
entitlement to Earn-Out payments. After Period 1, the
parties agreed that the sellers were entitled to the maximum
earn-out payment, and Entravision made a partial payment
of that amount. However, in May 2019, Entravision claimed
it had discovered undisclosed accounting deficiencies that
caused it to conclude that the sellers were not entitled to
Earn-Out payments for Periods 1 and 2 (Period 3 was still in
progress). Entravision provided an Earn-Out statement for
Period 2, reflecting its determination that the acquired
companies had not met the performance thresholds. Future
Energy responded with 17 Disputed Items challenging
Entravision’s Earn-Out statement for Period 2.3 Among
other things, the Disputed Items contested Entravision’s
3 Future Energy initially submitted 16 Disputed Items, to
which Entravision subsequently added an additional item.
6
adjustments relating to allegedly duplicated invoices and
certain uncollected invoices (Item No. 1), overstatement of
accounts receivable balances (Item No. 5), value-added tax
obligations (Item No. 6), unrecorded sums owed to clients
(Item No. 12), and foreign currency losses (Item No. 17).
In February 2020, after the parties failed to resolve
their differences, Future Energy, in its capacity as the
sellers’ representative, filed this action against Entravision
and others.4 The complaint asserted breach of contract and
fraudulent misrepresentation, among other claims, and
sought the remainder of the Earn-Out payment for Period 1,
the maximum payments for Periods 2 and 3, and the
maximum overachievement bonus, among other prayers for
relief. Future Energy alleged, inter alia, that the acquired
companies had met the performance thresholds for all three
periods and the overachievement bonus. The complaint
included many allegations that were not based on accounting
principles. For example, Future Energy asserted that at a
November 2018 meeting, the parties entered into an “oral
and implied contract” regarding the treatment of certain
operating expenses for purposes of the Period 2 Earn-Out
4 The parties initially sought to resolve their dispute through
mediation and selected an accounting firm in case the mediation
proved unsuccessful. In January 2020, before the mediation
could take place, Entravision filed a complaint against the sellers
in federal court, seeking, inter alia, rescission of the parties’
agreement as to the Period 1 Earn-Out payment. It later
voluntarily dismissed its federal action. After the mediation
failed, Future Energy brought this action.
7
calculation, including that Entravision would exclude
amounts owed in value-added taxes and expenses related to
foreign currency losses. It claimed Entravision had breached
this contract. Additionally, Future Energy asserted that if
the sellers were not entitled to the Period 2 Earn-Out
payment, Entravision had knowingly or recklessly
misrepresented that they would be and used those
misrepresentations in extracting certain concessions from
the sellers.
C. Entravision’s Motion to Compel ADR and the
Trial Court’s Ruling
In response to Future Energy’s complaint, Entravision
moved to compel ADR as to the Period 2 Disputed Items and
to stay the litigation.5 Future Energy opposed this motion,
contending, inter alia, that the Earn-Out agreement’s ADR
provision covered only accounting issues and thus reached
only three Disputed Items: No. 1, involving allegedly
duplicated invoices and the accounting treatment of certain
uncollected invoices; No. 5, concerning the treatment of
5 Entravision’s motion addressed Period 3 and the
overachievement bonus only to assert that they were not yet ripe
for resolution, as Entravision had not yet issued its Earn-Out
statement for Period 3. Entravision later issued the Period 3
Earn-Out statement, determining that the sellers were not
entitled to an Earn-Out payment, and Future Energy disputed
Entravision’s calculations. However, Entravision did not file a
new motion to compel ADR targeting Period 3 issues, and the
Disputed Items for that period are not in the record on appeal.
8
overstated accounts receivable balances; and No. 12,
concerning the treatment of unrecorded sums owed to
clients.
The remaining issues, it contended, were legal in
nature, and thus not subject to the ADR process. Future
Energy claimed than the court should allow the litigation to
proceed as to non-arbitrable issues. In its reply, Entravision
asserted that the ADR provision mandated that all 17
Disputed Items be resolved by an accounting firm,
regardless of their nature. Alternatively, Entravision
claimed that the Disputed Items all presented issues within
an accounting firm’s expertise.
The trial court held a hearing on Entravision’s motion
to compel ADR in September 2020. After hearing the
parties’ arguments, the court stated it intended to deny the
motion: “There’s no clear-cut arbitration clause in the
agreement. At most, in this court’s view, there’s a clause
that directs the parties to an expert accounting. But that’s
not an arbitrator, so to speak, in the classic term. And I find
that this case is more than just a simple appraisal. There
could be many actionable claims for which damages could be
more than an accounting. And I don’t know if that’s true or
not at this time, but that’s the benefit of litigation. . . .
[W]hen those claims are litigated and dismissed or subjected
to some form of adjudication . . . or denied at trial, then the
court could send any remaining issues of appraisal to an
expert accounting firm.” The court later issued a minute
order denying Entravision’s motion to compel ADR, stating:
9
“There is no arbitration clause in the Agreement. [¶]
Further, there are many actionable claims for which the
damages could be more than an accounting. Those claims to
be litigated first; then the court can refer remaining issues of
appraisal to the expert accounting firm.”6 The court did not
address Entravision’s request to stay the litigation of issues
subject to ADR. This appeal followed.
DISCUSSION
On appeal, Entravision challenges the trial court’s
order on its motion to compel ADR, arguing that the court
erroneously ruled the Earn-Out agreement’s ADR provision
unenforceable. In response to Future Energy’s contention
that the court merely delayed the ADR process pending the
litigation of non-arbitrable claims in court, Entravision
contends that such a ruling would be similarly erroneous
because the court was first required to distinguish between
arbitrable and non-arbitrable issues. Finally, Entravision
claims that even if the court acted within its discretion in
delaying the ADR process, it erred by failing to identify the
arbitrable issues and stay court proceedings as to those
issues.
6 Following the trial court’s ruling, Entravision filed a cross-
complaint seeking, inter alia, a declaration that the parties’
agreement as to the Period 1 Earn-Out payment was
unenforceable and that the sellers’ entitlement to it should be
determined in ADR.
10
As discussed below, we conclude the court properly
recognized that the parties’ ADR provision was enforceable,
but validly exercised its discretion under section 1281.2 to
delay the ADR process pending adjudication of the non-
arbitrable issues. However, we agree with Entravision that
the court was required to identify the issues subject to ADR
and to grant a stay of litigation as to those issues.
A. Governing Principles
Section 1281.2 requires a court to order arbitration of a
particular controversy if it determines that an agreement to
arbitrate it exists. (Ibid.) The statute embraces not only
traditional arbitrations -- involving any issue arising out of a
particular controversy -- but also alternative forms of
dispute resolution, such as valuations, appraisals, and
audits, in which an independent expert resolves specific
accounting questions. (Coopers & Lybrand v. Superior Court
(1989) 212 Cal.App.3d 524, 534.) While a court is generally
required to grant a motion to compel arbitration if it
concludes that an enforceable agreement to arbitrate exists,
section 1281.2 affords courts discretion to delay the
arbitration if the adjudication of the non-arbitrable claims in
court “may make the arbitration unnecessary.” (§ 1281.2.)7
When a trial court orders arbitration of an issue
involved in an action or proceeding pending before the court,
7 The parties mistakenly cite this provision as subdivision (d)
of section 1281.2.
11
it “shall, upon motion of a party . . . , stay the action or
proceeding until the arbitration is had . . . .” (§ 1281.4, par.
1.) If the issue subject to arbitration is severable, the court
may limit the stay to that issue. (§ 1281.4, par. 3.) Thus,
“[w]hen a party brings a motion to compel arbitration under
circumstances in which there may be arbitrable and
nonarbitrable issues, the trial court should ‘first determine[ ]
the arbitrable and nonarbitrable claims alleged in the
complaint, order[ ] all of the arbitrable claims to arbitration,
and stay[ ] all such claims pending arbitration.’”
(Association for Los Angeles Deputy Sheriffs v. County of Los
Angeles (2015) 234 Cal.App.4th 459, 468, quoting RN
Solution, Inc. v. Catholic Healthcare West (2008) 165
Cal.App.4th 1511, 1521 (RN Solution).)
“We review the scope of an arbitration provision de
novo when, as here, that interpretation does not depend on
conflicting extrinsic evidence.” (RN Solution, supra, 165
Cal.App.4th at 1522.) In construing the agreement’s
language, we must “give effect to every part [of it], if
reasonably practicable, each clause helping to interpret the
other.” (Civ. Code, § 1641.)
B. The Trial Court Properly Recognized that the
ADR Provision was Enforceable and Exercised its
Discretion to Delay the ADR Process Under
Section 1281.2
Entravision contends the trial court erroneously
determined that the Earn-Out agreement’s ADR was
12
unenforceable. Alternatively, Entravision suggests it was
error to delay the ADR process pending the litigation of
issues that fell outside its scope. We disagree.
Initially, the trial court recognized that the
agreement’s ADR provision was enforceable, providing in its
order that following the litigation of non-accounting issues,
remaining accounting issues would be referred to the parties’
accounting firm. Thus, the court merely delayed, rather
than precluded, the ADR process.
Entravision highlights the court’s statement that the
agreement contained “no arbitration clause.” When viewed
in context, however, this statement referred only to the scope
of the ADR provision: the court correctly determined that
unlike a traditional arbitration clause, the parties’ ADR
provision encompassed only accounting issues, noting at the
hearing on Entravision’s motion that the provision
“direct[ed] the parties to an expert accounting [firm],” rather
than to an arbitration in “the classic” sense.8
8 Relying on the ADR provision’s instruction that that
unresolved Disputed Items “shall be submitted to the Accounting
Firm,” Entravision contends this provision encompassed all
unresolved Disputed Items, no matter whether they involved
accounting or legal issues. But this contention ignores the
provision’s further instructions that the accounting firm “shall
act as an expert in accounting and not an arbitrator” and “will
base its determination solely on written materials submitted by
Buyer and the Seller Representative.” Read as a whole, the ADR
provision was clear that the firm was to address only those issues
that could be resolved through the application of accounting
principles.
13
Moreover, we conclude the trial court’s decision to
delay the ADR process was within its discretion under
section 1281.2. Future Energy contends, and Entravision
does not dispute, that section 1281.2 authorizes courts to
delay arbitration if non-arbitrable issues may narrow the
issues subject to ADR. It is likewise undisputed that Future
Energy’s complaint included issues not subject to ADR. At
least one of those non-arbitrable issues had the potential to
significantly narrow the issues subject to ADR: the
complaint alleged that in late 2018, the parties entered into
an “oral and implied contract” regarding the treatment of
certain operating expenses for purposes of determining the
sellers’ eligibility for the Period 2 Earn-Out payment. If
enforceable, the contract would control the accounting firm’s
treatment of the relevant expenses in the ADR process,
rendering the firm’s resolution of those issues unnecessary.
For example, the alleged 2018 contract would require
Entravision to exclude foreign currency losses from its Earn-
Out calculation, thus resolving Disputed Item No. 17,
without regard to otherwise applicable accounting principles.
Entravision maintains the trial court could not have
exercised discretion under the statute, asserting that the
court never distinguished between arbitrable and non-
arbitrable issues and that this was a precondition for any
exercise of the court’s discretion. We are unpersuaded.
While the statement in the court’s minute order that there
were many claims for which “the damages could be more
than an accounting” was imprecise, we read it to mean that
14
there were many issues that did not involve accounting
questions and thus were not subject to the Earn-Out
agreement’s ADR provision. At the hearing on Entravision’s
motion, the court made clear its determination that
litigation of non-arbitrable issues could moot issues subject
to ADR: “when those claims [i.e., the non-arbitrable claims]
are litigated and dismissed or subjected to some form of
adjudication . . . or denied at trial, then the court could send
any remaining issues of appraisal to an expert accounting
firm.” (Italics added.) To the extent Entravision contends
an on-the-record classification of each issue as either
arbitrable or non-arbitrable was a prerequisite to the
exercise of the court’s discretion, it cites no authority
supporting this proposition, and we are aware of none.9
Accordingly, we find no error in the court’s decision to delay
the ADR process.
C. The Trial Court Failed to Follow the Statutory
Procedures as to the Issues Subject to ADR
We agree with Entravision that the trial court was
required to identify the issues subject to ADR and stay the
litigation as to those issues. When faced with a motion to
compel arbitration in an action involving both arbitrable and
9 As discussed below, we conclude the court was required to
specify the issues subject to the ADR in ruling on Entravision’s
motion. That obligation, however, was not a prerequisite to the
court’s exercise of discretion to delay the ADR process.
15
non-arbitrable issues, the court must determine the
arbitrable and non-arbitrable issues raised by the complaint,
order all arbitrable issues to arbitration, and stay those
issues pending arbitration. (RN Solution, supra, 165
Cal.App.4th at 1521.) The court’s authority to delay
arbitration, where applicable, does not absolve it of these
responsibilities: litigation as to arbitrable issues must be
stayed. (See § 1281.4, pars. 1 & 3; Heritage Provider
Network, Inc. v. Superior Court (2008) 158 Cal.App.4th 1146,
1153 [single arbitrable issue requires stay of litigation, at
least as to that issue].) Without identifying and staying the
litigation of arbitrable issues, court proceedings could
encroach on the arbitration’s domain and render it
ineffective. (Id. at 1152.)
Citing Parker v. Twentieth Century-Fox Film Corp.
(1981) 118 Cal.App.3d 895 (Parker), Future Energy contends
the trial court need not identify the issues subject to ADR at
this time, but instead may do so at some point during the
litigation.10 Parker does not support this position.
10 Indeed, at oral argument, Future Energy suggested the
issues subject to ADR cannot be identified at this point, because
the litigation of non-arbitrable issues could render the ADR
process unnecessary as to otherwise arbitrable issues. This
contention misses the mark. That a certain issue is arbitrable
simply means that it is governed by the ADR provision,
regardless of whether arbitration of the issue ultimately proves
unnecessary. Nothing prevented the trial court from identifying
the issues subject to ADR at the time of its ruling.
16
In Parker, the parties executed a joint venture
agreement containing an ADR provision, which required
that controversies relating to receipts and proceeds from the
joint venture be submitted to an accountant. (Parker, supra,
118 Cal.App.3d at 898-899.) After the plaintiffs filed a
complaint asserting numerous causes of action, the trial
court denied the defendant’s request to send the entire
action to arbitration. (Ibid.) According to the Court of
Appeal’s “paraphrase and summar[y]” of the trial court’s
findings (id. at 901), the lower court concluded that most of
the complaint’s causes of action -- including claims
concerning usury, fraud, rescission, and winding up of the
joint venture -- were not arbitrable (id. at 901-902). The
trial court also concluded that some issues involved financial
questions, but that “the causes of action [went] beyond mere
financial questions” and the ADR provision was “far too
narrow to encompass the issues.” (Id. at 902.)
On appeal, the defendant in Parker contended that the
principal issues in the action must be decided through an
accounting, that the accountant should decide which issues
were arbitrable, and thus that the entire action should be
referred to the accountant. (Parker, supra, 118 Cal.App.3d
at 902, 904.) The plaintiffs, on the other hand, argued that
the lower court could disregard the parties’ ADR clause and
appoint its own accountant, as necessary. (Parker, supra, at
906, fn. 8.)
The Court of Appeal rejected both positions. It
concluded that the trial court “was required” to determine
17
whether there was an enforceable ADR provision, “and if so,
its scope and application to issues raised by the complaint.”
(Parker, supra, 118 Cal.App.3d at 901.) It further concluded
that the trial court correctly identified non-arbitrable issues
and noted the court’s authority to delay the ADR process if
non-arbitrable issues could render it unnecessary. (Id. at
905.) However, the Parker court explained that to the extent
an accounting was necessary, the trial court could not
disregard the ADR provision, as the plaintiffs maintained it
could. In that context, the Court of Appeal stated that “[t]he
timing and the scope of the accounting will be subject to the
court’s determination.” (Id. at 906.)
Future Energy points to Parker’s statement regarding
the timing and scope of the accounting as establishing that a
trial court need not distinguish between arbitrable and non-
arbitrable issues at the outset of the litigation. Yet the
Court of Appeal was clear that the lower court “was
required,” in ruling on the defendant’s petition to compel
arbitration, to determine the ADR clause’s application to the
issues in the complaint. (Parker, supra, 118 Cal.App.3d at
901.) In context, the Parker court’s subsequent reference to
the trial court’s determination of the scope of the accounting
referred to the necessity of the accounting, rather than to the
identification of arbitrable issues. And unlike Entravision,
the defendant in Parker made no complaint that the trial
court had failed to identify sufficiently the arbitrable issues
or to stay the litigation as to them. It was therefore
unnecessary for the Court of Appeal to elaborate on the
18
timing of the trial court’s obligation to specify which issues
would be subject to ADR.
Here, the trial court did not follow the statutory
procedures with respect to the issues subject to ADR. (See
§ 1281.4, pars. 1 & 3.) We therefore remand the matter with
instructions that it perform these necessary tasks. On
remand, the court should identify those Disputed Items (or
portions thereof) that raise accounting issues and are thus
subject to the ADR provision. The court should then stay the
litigation as to those issues, while allowing the litigation of
non-arbitrable issues to proceed in accordance with the
court’s decision to delay the ADR process. For example, if
Disputed Item No. 6, pertaining to value-added tax
obligations, raises accounting issues subject to ADR, the
court should identify it as such and stay it, to prevent the
parties from attempting to litigate those accounting issues in
court. The litigation could then proceed as to non-arbitrable,
legal issues, including whether the alleged November 2018
implied contract precluded Entravision’s inclusion of
amounts owed in value-added taxes. As discussed above, the
litigation of non-arbitrable issues may render certain
arbitrable issues moot.11
11 Any issues relating to Period 3 are not properly before us.
19
DISPOSITION
The trial court’s denial of Entravision’s motion to
compel ADR of the 17 Disputed Items is vacated, and the
matter is remanded to the trial court with instructions to
enter an order (1) identifying the issues subject to ADR,
(2) granting Entravision’s motion to compel ADR as to those
issues and staying court proceedings as to them, and
(3) delaying the ADR process pending litigation of non-
arbitrable issues. Each party shall bear its own costs on
appeal.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
MANELLA, P. J.
We concur:
COLLINS, J.
CURREY, J.
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