NATURE OF PROCEEDINGS: Hearing on Defendants' Motion to Compel Arbitration

 

Defendants' Motion to Compel Arbitration is granted in part and denied in part.

 

BACKGROUND

Plaintiffs Bordan Shoe Company, Inc. (Bordan), Bernardo & Associates Shoe Company, Inc., (Bernardo) and Pacific Mountain, Inc (Pacific Mountain) (collectively “Plaintiffs”) filed this action against AT&T, Inc. and AT&T Enterprises, LLC (collectively “Defendants” or “AT&T”), alleging Defendants acted fraudulently and incompetently to retain their business.

The causes of action are: (1) Breach of Contract (by Bordan and Bernardo against AT&T Enterprises); (2) Fraud (by Bordan and Bernardo against Defendants); (3) Negligent Interference with Prospective Economic Advantage (by Bordan and Bernardo Against Defendants); (4) and Unfair Competition Under Business and Professions Code section 17200 (by Plaintiffs against Defendants).

 

Defendants filed a Motion to Compel Arbitration. Plaintiffs filed an Opposition.

 

LEGAL STANDARD

“On petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party to the agreement refuses to arbitrate that controversy, the court shall order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists….” Code Civ. Proc. § 1281.2. “The party seeking arbitration bears the burden of proving the existence of an arbitration agreement, and the party opposing arbitration bears the burden of proving any defense, such as unconscionability.” Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US), LLC (2012) 55 Cal.4th 223, 236 (Pinnacle). A party meets its initial burden simply by reciting the terms of the governing provision, or by attaching a copy of the provisions. Sprunk v. Prisma LLC (2017) 14 Cal.App.5th 785, 793. Once the petitioner meets its burden, “the burden shifts to the party opposing the motion to compel, who may present any challenges to the enforcement of the agreement and evidence in support of those challenges.” Baker v. Italian Maple Holdings, LLC (2017) 13 Cal.App.5th 1152, 1160.

 

ANALYSIS

Here, it is uncontested that Bernardo entered into two contracts with AT&T, one for phone services and the other for internet services, on August 27, 2024. These contracts incorporate and are governed by the terms of the AT&T Multi-Service Agreement (MSA), which contains the following arbitration provision:

ARBITRATION: ALL CLAIMS AND DISPUTES ARISING FROM THIS AGREEMENT SHALL BE SETTLED BY BINDING ARBITRATION ADMINISTERED BY THE AMERICAN ARBITRATION ASSOCIATION UNDER ITS COMMERCIAL ARBITRATION RULES (SUBJECT TO THE REQUIREMENTS OF THE FEDERAL ARBITRATION ACT). ANY JUDGMENT ON ANY AWARD RENDERED MAY BE ENTERED AND ENFORCED IN A COURT HAVING JURISDICTION. THE ARBITRATOR SHALL NOT HAVE THE AUTHORITY TO AWARD ANY DAMAGES DISCLAIMED BY THIS AGREEMENT OR IN EXCESS OF THE LIABILITY LIMITATIONS IN THIS AGREEMENT, SHALL NOT HAVE THE AUTHORITY TO ORDER PRE-HEARING DEPOSITIONS OR DOCUMENT DISCOVERY, BUT MAY COMPEL ATTENDANCE OF WITNESSES AND PRODUCTION OF DOCUMENTS AT THE HEARING. THE PARTIES WAIVE ANY RIGHT TO TRIAL BY JURY AND WAIVE ANY RIGHT TO PARTICIPATE IN OR INITIATE CLASS ACTIONS; IF THE PARTIES CANNOT WAIVE THESE RIGHTS, THIS ENTIRE PARAGRAPH IS VOID.

Rubio Decl. Ex. C. at p. 9.

Plaintiffs do not dispute that the MSA is binding as to Bernardo and Bordan, but dispute that it is binding as to Pacific Mountain. Additionally, Plaintiffs argue that the final sentence of the arbitration provision renders it void, and even if it is not void, it does not apply to most of Plaintiffs’ claims.

I. Poison Pill Clause

The arbitration provision at issue here contains what other courts have referred to as a “poison pill” clause. See e.g. DeMarinis v. Heritage Bank of Commerce, (2023) 98 Cal.App.5th 776, 781. Here, the poison pill is a non-severability clause at the end of the arbitration provision that states, “THE PARTIES WAIVE ANY RIGHT TO TRIAL BY JURY AND WAIVE ANY RIGHT TO PARTICIPATE IN OR INITIATE CLASS ACTIONS; IF THE PARTIES CANNOT WAIVE THESE RIGHTS, THIS ENTIRE PARAGRAPH IS VOID.” Rubio Decl. Ex. C. at p. 9.

“‘In determining whether an arbitration agreement applies to a specific dispute, the court may examine only the agreement itself and the complaint filed by the party refusing arbitration ….’” Rice v. Downs (2016) 248 Cal.App.4th 175, 185 (Rice) (quoting Weeks v. Crow (1980) 113 Cal.App.3d 350, 353). “The ordinary rules of contract interpretation apply to arbitration agreements.” Ibid.

“‘The fundamental goal of contractual interpretation is to give effect to the mutual intention of the parties.’ ‘Such intent is to be inferred, if possible, solely from the written provisions of the  contract.” ‘If contractual language is clear and explicit, it governs.’ ‘“The ‘clear and explicit’ meaning of these provisions, interpreted in their ‘ordinary and popular sense,’ unless ‘used by the parties in a technical sense or a special meaning is given to them by usage’ controls judicial interpretation.”’” State of California v. Continental Ins. Co. (2012) 55 Cal.4th 186, 195 (citations omitted). “‘The whole of a contract is to be taken together, so as to give effect to every part, if reasonably practicable, each clause helping to interpret the other. ‘“A court must view the language in light of the instrument as a whole and not use a ‘disjointed, single-paragraph, strict construction approach.’”’ An interpretation that leaves part of a contract as surplusage is to be avoided.” Rice, supra, 248 Cal.App.4th at p. 186.

In Grafton Partners v. Superior Court (2005) 36 Cal.4th 944, 967 (Grafton Partners), the California Supreme Court held, “governing California constitutional and statutory provisions do not permit predispute jury waivers ….” Because a pre-dispute agreement may not waive the right to a jury trial, Plaintiffs argue that the entire arbitration provision is void.

However, while pre-dispute jury waivers are unenforceable in isolation, whether express or implied, they are among the “package of trial rights” that arbitration agreements waive. See Grafton Partners, supra, 36 Cal.4th at p. 964; see also Madden v. Kaiser Foundation Hospitals (1976) 17 Cal.3d 699, 714 (“When parties agree to submit their disputes to arbitration they select a forum that is alternative to, and independent of, the judicial—a forum in which, as they well know, disputes are not resolved by juries.”). Accordingly, whether the jury waiver provision is enforceable or not depends on whether it is limited to the arbitration agreement.

Similarly, California law generally prohibits the enforcement of class waivers in consumer arbitration agreements as unconscionable if the agreement is in an adhesion contract, disputes between the parties are likely to involve small amounts of damages, and the party with inferior bargaining power alleges a deliberate scheme to defraud. Discover Bank v. Superior Court (2005) 36 Cal.4th 148, 163. However, as applied to arbitration, the “Discover Bank rule is pre-empted by the FAA.” AT&T Mobility LLC v. Concepcion (2011) 563 U.S. 333, 352. Therefore, like the jury waiver (assuming for now that the Discover Bank criteria are met), whether the class action waiver is enforceable also depends on whether it goes beyond the arbitration agreement.

Plaintiffs argue that the arbitration agreement only applies to “CLAIMS AND DISPUTES ARISING FROM THIS AGREEMENT” but that the jury and class waivers contain no such limiting language, such that the parties waived their right to a jury trial or to participate in a class action regarding any claims. Opp. at p. 8:20-28.

The Court disagrees. Plaintiffs’ interpretation fails to read the waivers and poison pill clause in context of the broader arbitration provision. As the Court reads it, the jury and class waivers are intended to clarify the parties’ agreement to arbitrate and are coextensive with it. While it is unnecessary to include an express waiver of the right to a jury trial in an arbitration agreement, the parties’ decision to do so is best understood as a belt-and-suspenders approach to avoid such an argument. See Madden v. Kaiser Foundation Hospitals (1976) 17 Cal.3d 699, 713 (rejecting appellant’s argument that arbitration agreements must contain express jury waivers”).

“‘“As a general rule of construction, the parties are presumed to know and to have had in mind all applicable laws extant when an agreement is made. These existing laws are considered part of the contract just as if they were expressly referred to and incorporated.” Existing law includes the common law of the state.’” Rice, supra, 248 Cal.App.4th at p. 189 (quoting Progressive West Ins. Co. v. Superior Court (2005) 135 Cal.App.4th 263, 281) (citation omitted).

Under Plaintiffs’ interpretation, the parties signed an arbitration agreement that was void when it was signed and would only be enforceable if California law governing jury and class waivers changed. The Court fails to see, and Plaintiffs do not explain, why the parties would make a change in the validity of the waivers a condition precedent to the otherwise enforceable arbitration agreement, particularly if the waivers and arbitration agreement cover different claims. Conversely, it is reasonable that the parties sought to avoid a situation in which a change in law and the subsequent failure of either waiver allowed for parallel judicial and arbitral proceedings. Cf. Westmoreland v. Kindercare Education LLC (2023) 90 Cal.App.5th 967, 979 (“[T]hat the arbitration agreement is ‘invalid’ if the ‘Waiver of Class and Collective Claims’ is ‘found to be unenforceable’… is an unambiguous expression of the parties’ intent to avoid parallel litigation before an arbitrator and before a court.”) Accordingly, the arbitration agreement is not facially void.

II. Scope of the Arbitration Provision

Next, Plaintiffs argue that the arbitration provision is narrow and does not apply to most of their claims. Opp. at p. 9.

“‘[T]he decision as to whether a contractual arbitration clause covers a particular dispute rests substantially on whether the clause in question is “broad” or “narrow.”’” Rice, supra, 248 Cal.App.4th at p. 186. (quoting Bono v. David (2007) 147 Cal.App.4th 1055, 1067). “‘A “broad” clause includes those using language such as “any claim arising from or related to this agreement”’ or ‘arising in connection with the [a]greement.’” Ibid (citations omitted). “Broad arbitration clauses are interpreted to apply to extracontractual disputes between the contracting parties, ‘so long as they have their roots in the relationship between the parties which was created by the contract.’” Howard v. Goldbloom (2018) 30 Cal.App.5th 659, 664 (quoting Khalatian v. Prime Time Shuttle, Inc. (2015) 237 Cal.App.4th 651, 660) (internal quotation marks omitted).

“[C]lauses requiring arbitration of a claim, dispute, or controversy ‘arising from’ or ‘arising out of’ an agreement, i.e., excluding language such as ‘relating to this agreement’ or ‘in connection with this agreement,’ are “generally considered to be more limited in scope than would be, for example, a clause agreeing to arbitrate ‘ “any controversy ... arising out of or relating to this agreement,” ’ which might thus cover misconduct arising out of the agreement as well as contractual issues.’” Rice, supra, 248 Cal.App.4th at pp. 186-187 (quoting Cobler v. Stanley, Barber, Southard, Brown & Associates (1990) 217 Cal.App.3d 518, 530).

Plaintiffs argue that their causes of action for Fraud, Negligent Interference with Prospective Economic Advantage, and Unfair Competition are not subject to the MSA’s narrow arbitration provision because they do not arise from the agreement.

While Plaintiff is correct that the “arising from this agreement” language makes this a narrow arbitration agreement, that is not the end of the analysis. See Rice, supra, 248 Cal.App.4th at p.187 (“The issue is not resolved simply by determining whether the arbitration clause is narrow or broad, whether the arbitration clause could encompass tort claims, or even whether the claims in issue sound in tort, not contract. The issue is whether the particular claims in issue are controversies ‘arising out of’ the operating agreements.”).

A. Fraud

Plaintiffs’ fraud claim alleges that AT&T made knowingly false promises to induce Bordan and Bernardo to enter into the phone and internet service contracts. Compl. ¶¶ 53, 54. These promises included (1) that AT&T would consolidate all services into one account; (2) that AT&T would reduce Bordan’s consolidated bill to a total of $689.32 per month; (3) that AT&T would repay the overcharges that Bernardo and Bordan had been billed during the period after the initial contract had expired; (4) AT&T would immediately switch service to all fiber optic cable; and (5) AT&T would provide a cell phone with a business unlimited plan at no additional charge. Compl. ¶¶ 53, 56. These promises are identical to the alleged breaches of contract. Compl. ¶ 42. While AT&T’s promises predate the execution of the contracts, they were made in anticipation of them. Moreover, the resolution of Plaintiffs’ fraud claim is inextricably linked to whether AT&T performed under the contract. Accordingly, the Court concludes that the fraud claim arises from the agreement.

B. Negligent Interference with Prospective Economic Advantage

Plaintiffs allege that on December 6, 2024, all of Bordan’s landlines died. Compl. ¶ 69. AT&T negligently interfered with Bordan and Bernardo’s prospective economic advantage by failing to act with reasonable care in providing service to Bordan and by failing to transition all of Bordan’s services to fiber optic cable. As with Plaintiffs’ fraud claim, the core of this claim is that AT&T failed to meet its contractual obligations. Accordingly, Plaintiffs’ Negligent Interference with Prospective Economic Advantage Claim arises from the agreement.

C. Unfair Competition

Regarding Bordan and Berardo, Plaintiff’s Unfair Competition claim asserts substantially the same facts as the fraud claim. For the same reasons, the Court concludes that it arises from the agreement. However, Plaintiffs additionally allege that Pacific Mountain switched from AT&T to Spectrum and that AT&T has refused to assist it with porting its business numbers to Spectrum, violating FCC regulations. Compl. ¶ 76. Pacific Mountain’s claim does not depend on the existence of the agreement with AT&T and specifically alleges that its contract with AT&T expired. Compl. ¶ 37. Defendants provide no evidence that assisting with transfer of phone numbers is fundamentally a contractual issue. Therefore, Pacific Mountain’s claim for unfair competition does not arise from the agreement.

Additionally, Defendants have not met their burden of showing that Pacific Mountain was subject to the MSA. Defendants only provide evidence that Bernardo entered into the MSA and do not show that Pacific Mountain received AT&T services through Bernardo’s account. Rubio Decl. ¶¶ 4-5. Accordingly, the motion is granted as to Bernardo and Bordan and denied as to Pacific Mountain.

 

CONCLUSION

Defendants' Motion to Compel Arbitration is granted as to Bernardo and Bordan and denied as to Pacific Mountain.