Judge: Armen Tamzarian, Case: 24STCV03458, Date: 2024-10-30 Tentative Ruling

Case Number: 24STCV03458    Hearing Date: October 30, 2024    Dept: 52

Tentative Ruling:

Defendants David C. Smith and Third Law Productions, LLC’s Motion to Compel Arbitration, Dismiss Claims, and Stay Action

Defendants David C. Smith and Third Law Productions, LLC, a California limited liability company (Third Law CA), move to compel arbitration of this action by plaintiffs M. Shawn Lawler and DrivingPlates.com, LLC. 

Remaining Causes of Action

            Plaintiffs’ first amended complaint alleged 13 causes of action.  After defendants filed this motion, plaintiffs requested dismissal of the 6th through 13th causes of action.  The remaining claims are: (1) unfair competition, (2) misappropriation of trade secrets, (3) conversion, (4) civil theft, and (5) trade libel.

The Settlement Agreement

            In 2021, plaintiff Lawler and defendant Smith entered a settlement agreement.  (Willey Decl., Ex. A.)  The agreement resolved “disputes related to the ownership of three companies: DrivingPlates.com LLC, a Washington Limited Liability Company …, DrivingPlates.com UK Ltd., a private limited company of the United Kingdom …, and Third Law Productions, LLC, a Washington Limited Liability Company.”  (Id., ¶ A.)  The agreement allocated various assets to DrivingPlates.Com, including: “The Intellectual Property of Driving Plates, including the complete library of Driving Plates footage stored on the Server and available for license by third parties at any of the websites listed in this paragraph, and any and all originals, copies or backups of same on any type of media.”  (Id., ¶ 7.)  The agreement provides that it “shall be governed by and construed and interpreted in accordance with the laws of the State of Washington.”  (Id., ¶ 22.) 

The agreement includes the following arbitration provision: “Dispute Resolution.  In the event a dispute arises among the Parties concerning this Settlement Agreement, the terms of the membership/share transfers or assignments, or the terms of the licensing agreement, such dispute shall be resolved by expedited arbitration before the Hon. John Edick (ret.) as arbitrator.”  (Willey Decl., Ex. A, ¶ 19.)

Scope of Agreement

            Plaintiffs argue the arbitration agreement does not apply to their first through fifth causes of action.  “The arbitrability of a dispute is determined by examining the arbitration agreement between the parties.  [Citation.]  If the reviewing court ‘can fairly say that the parties’ arbitration agreement covers the dispute, the inquiry ends because Washington strongly favors arbitration.’  [Citations.]  Any doubts regarding the applicability of an arbitration agreement ‘should be resolved in favor of coverage.’ ”  (In re Marriage of Pascale (Wash. Ct. App. 2013) 173 Wash.App. 836, 842.)  “[A]ll questions upon which the parties disagree are presumed to be within the arbitration provisions unless negated expressly or by clear implication.”  (Heights at Issaquah Ridge, Owners Ass’n v. Burton Landscape Group, Inc. (Wash. Ct. App. 2009) 148 Wash.App. 400, 405.)  Generally, “ ‘[a] party’s characterization of the theory of recovery is not binding on the court.  It is the nature of the claim that controls.’ ”  (Hurley v. Port Blakely Tree Farms L.P. (Wash. Ct. App. 2014) 182 Wash.App. 753, 771.)

1st to 4th Causes of Action

The arbitration agreement applies to plaintiffs’ first four causes of action.  The first cause of action alleges defendant Third Law CA violated the unfair competition law “by using Driving Plates’ non-marketing materials, inclusive of its business plans, customer lists, curated contact information, and designs and methods of doing business unique to Driving Plates in conducting the business of Defendant Plate Pros.”  (FAC, ¶ 29.)  The second cause of action alleges defendant Third Law CA misappropriated “trade secrets” that consist of the same “non-marketing” items.  (¶ 34.) The third cause of action alleges defendants converted the same “property” (¶ 40), the “non-marketing materials” (¶ 39).  The fourth cause of action alleges defendants committed civil theft by stealing plaintiffs’ “non-marketing materials.”  (¶ 47.)

            The court can fairly say that the parties’ arbitration agreement covers the dispute. The settlement agreement requires arbitration “[i]n the event a dispute arises among the Parties concerning this Settlement Agreement.”  (Willey Decl., Ex. A, ¶ 19.)  The agreement allocated “The Intellectual Property of Driving Plates, including the complete library of Driving Plates footage stored on the Server and available for license by third parties at any of the websites listed in this paragraph, and any and all originals, copies or backups of same on any type of media.”  (Willy Decl., Ex. A, ¶ 7.)  The agreement does not limit the allocated property to the “library of Driving Plates footage.”    

One can reasonably interpret this provision as applying to plaintiffs’ “business plans, customer lists, curated contact information, and designs and methods of doing business.”  (FAC, ¶ 29.)  Black’s Law Dictionary defines “intellectual property” as: “1. A category of intangible rights protecting commercially valuable products of the human intellect. • The category comprises primarily trademark, copyright, and patent rights, but also includes trade-secret rights, publicity rights, moral rights, and rights against unfair competition.  2. A commercially valuable product of the human intellect, in a concrete or abstract form, such as a copyrightable work, a protectable trademark, a patentable invention, or a trade secret.”  This definition fairly applies to the “non-marketing” materials that defendants allegedly stole from plaintiffs.  With respect to the second cause of action, intellectual property generally includes trade secrets.  (See Kewanee Oil Co. v. Bicron Corp. (1974) 416 U.S. 470, 478; InteliClear, LLC v. ETC Global Holdings, Inc. (9th Cir. 2020) 978 F.3d 653, 662; State v. Komok (1989) 113 Wash.2d 810, 815, fn. 3.)  One can thus reasonably interpret each cause of action as “a dispute aris[ing] among the Parties concerning [the] Settlement Agreement” (Willey Decl., Ex. A, ¶ 19) with respect to the allocation of intellectual property to plaintiffs.

Moreover, the first amended complaint alleges defendants acquired the “non-marketing materials” in a manner that may have violated the settlement agreement.  Plaintiffs allege: “[A]fter the Settlement Agreement was executed by Smith on December 24, 2021 and Driving Plates became solely the property of Lawler, more specifically on December 30 and 31, 2021, Smith accessed the Driving Plates website and Google drive, obtaining considerable sales and other Driving Plates confidential and/or trade secret information.  This included marketing materials, but more particularly, also included business plans, customer lists, contact information, and designs and methods of doing business unique to Driving Plates.  The investigation into the full scope of this theft is ongoing.  This was not learned by Lawler until in 2022, after Smith turned over control of the Driving Plates website to Lawler as part of implementing the Settlement Agreement.”  (¶ 26.)

As the final sentence quoted above states, transferring control of the website (including the confidential information it contained) was part of the settlement.  The agreement required Smith to “deliver to Lawler the credentials for access to and management of the Driving Plates website and domain … between December 27, 2021, and December 31, 2021.”  (Willey Decl., Ex. A, ¶ 6.a.)  It further required Smith to “deliver to Lawler any other web account credentials … for Driving Plates” during that period.  (Id., ¶ 6.b.)  As for Driving Plates’ “Google drive” (FAC, ¶ 26), the agreement required Smith to “transfer to Lawler user credentials or data backups for all software subscription services currently used by Driving Plates,” including “Google G-Suite.”  (Willey Decl., Ex. A, ¶ 6.h(z).) 

Plaintiffs thus allege Smith copied and misappropriated confidential information acquired from the accounts that the settlement required him to transfer to Lawler.  The phrase “a dispute aris[ing] among the Parties concerning [the] Settlement Agreement” (Willey Decl., Ex. A, ¶ 19) applies to all causes of action arising from those allegations.

5th Cause of Action for Trade Libel         

The settlement agreement applies to plaintiffs’ cause of action for trade libel.  The settlement agreement includes the following provision: “Non-disparagement.  Each Party and its agents, including but not limited to their counsel, agrees it will refrain from disparaging the other Party.  Each Party will advise all representatives, employees and partners who are aware of the dispute that it has been resolved to the mutual satisfaction of both Parties, and that the Parties have agreed to mutual non-disparagement, and that this non-disparagement term must be honored.  If a Party learns any representative, employee or partner is disparaging the other Party, it will take reasonable steps to rectify and prevent further disparagement.  Non-disparagement is a material term of this Agreement.”  (Willey Decl., Ex. A, ¶ 21.)           

Plaintiffs’ opposition argues they “are not suing on the non-disparagement clause, and the elements of a trade libel claim are different—first and foremost, trade libel requires a false claim, not merely a statement that casts Plaintiffs in a negative light.”  (Opp., p. 5.)  Neither plaintiffs nor defendants cite any authority on the elements of trade libel in Washington.  In California, trade libel requires disparagement.  “Trade libel is an intentional disparagement of the quality of services or product of a business that results in pecuniary damage to the plaintiff.”  (J-M Manufacturing Co., Inc. v. Phillips & Cohen LLP (2016) 247 Cal.App.4th 87, 97.)  Plaintiffs’ first amended complaint expressly alleges defendants engaged in trade libel because they made statements that “disparaged the quality of Driving Plates’s product or service.”  (FAC, ¶ 52.) 

The phrase “a dispute aris[ing] among the Parties concerning [the] Settlement Agreement” (Willey Decl., Ex. A, ¶ 19) applies to the fifth cause of action for trade libel.    

Enforcement Against Non-Signatory Plaintiff

The opposition argues the arbitration agreement does not apply to plaintiff DrivingPlates.com, LLC, a Washington limited liability company because it did not sign the agreement.  DrivingPlates.com, LLC did sign the agreement.  Plaintiff Lawler signed the agreement “individually and as shareholder/member of DrivingPlates.Com, LLC.”  (Willey Decl., Ex. A, p. 11.)  Defendant Smith signed “individually; as shareholder/member of DrivingPlates.Com, LLC.”  (Ibid.)  The agreement provides that Lawler and Smith each owned “50% shares in Driving Plates.”  (Id., ¶ 5.a.)  The first amended complaint also alleges “Smith was … an equal (50-50) owner with Lawler.”  (FAC, ¶ 10.)  Their signatures thus represent 100% of the ownership of DrivingPlates.Com, LLC signing as “shareholder/member” of the company.  Plaintiffs give no reason why this agreement does not bind plaintiff DrivingPlates.Com, LLC.

Even if DrivingPlates.Com, LLC did not sign the agreement, defendants may enforce the agreement against it under the doctrine of equitable estoppel.  “As a general rule, nonsignatories are not bound by arbitration clauses.”  (Townsend v. Quadrant Corp. (2012) 173 Wash.2d 451, 460.)  But “equitable estoppel may require a nonsignatory to arbitrate a claim if that person, despite never having signed the agreement, ‘ “ ‘knowingly exploits’ ” ’ the contract in which the arbitration agreement is contained.”  (Ibid.) 

Plaintiff DrivingPlates.Com, LLC’s first amended complaint seeks to knowingly exploit the settlement agreement.  That contract was made “to resolve” the individuals’ “disputes related to the ownership of three companies,” including “DrivingPlates.com LLC, a Washington limited liability company.”  (Willey Decl., Ex. A, ¶ A.)  The first amended complaint alleges the first four causes of action on behalf of both plaintiffs.  (FAC, pp. 5-7.)  Those claims allege defendants misappropriated property that, pursuant to the settlement agreement, belongs to DrivingPlates.Com.  The fifth cause of action for trade libel alleges defendants made false publications including “that Driving Plates is no longer doing the same type or quality of work since Smith’s departure.”  (Id., ¶ 52.)  The settlement agreement was the instrument by which Smith departed from DrivingPlates.Com, LLC. 

Enforcement by Non-Signatory Defendant

Similarly, plaintiffs argue Third Law CA cannot enforce the agreement because it did not sign the agreement and did not exist at the time.  The agreement resolved a dispute over ownership of “Third Law Productions, LLC, a Washington Limited Liability Company,” not the California LLC.  (Willey Decl., Ex. A, ¶ A.)  Like DrivingPlates.Com, the individuals each owned 50% of Third Law Productions, LLC (id., ¶ 5.a) and each signed “as shareholder/member” of the LLC (id., p. 11). 

Plaintiffs rely on the theory that the Washington LLC dissolved instead of properly converting to Third Law CA, thereby making the latter a new and separate entity.  The evidence in the record shows they are the same entity.  On July 27, 2022, Third Law filed “articles of organization with statement of conversion” with the Secretary of State.  (Willey Decl., Ex. E.)  That document indicates Third Law Productions, LLC describes it as a “converting entity,” a “nonqualified out-of-state limited liability company” that was “formed in Washington.”  (Ibid.)  Plaintiffs also present a screenshot from the California Secretary of State’s website showing Third Law Productions, LLC was “formed in” the State of Washington.  (Derby Decl., Ex. 1.)  Plaintiffs provide no basis for concluding Third Law CA is a distinct legal entity from Third Law Productions, a Washington Limited Liability Company. 

Moreover, even if Third Law CA is not a party to the agreement, it may enforce the agreement under equitable estoppel.  The “ ‘doctrine applies when a party has signed an agreement to arbitrate but attempts to avoid arbitration by suing nonsignatory defendants for claims that are “based on the same facts and are inherently inseparable” from arbitrable claims against signatory defendants.’ ”  (David Terry Investments, LLC-PRC v. Headwaters Development Group Limited Liability Company (Wash. Ct. App. 2020) 13 Wash.App.2d 159, 171.) 

The claims against Third Law CA are based on the same facts and inseparable from the claims against Smith.  The first amended complaint alleges, “[E]ach of the Defendants, at all times relevant to this Complaint, was and is the alter ego, agent, employee, servant, partner, member, associate, or representative of each of the remaining Defendants, and in doing or failing to do the acts alleged herein, was acting within the course and scope of the agency, employment, service, partnership, association, and/or representative relationship described herein, and with knowledge and consent of their respective principals, employees, masters, and/or parent entities of the other Defendant.”  (¶ 8.)  The third, fourth, and fifth causes of action are each alleged jointly against all defendants.  (FAC, pp. 7-8.)     

Attorney Fees

            Defendants argue the court should award them an unspecified amount of attorney fees for prevailing on this motion.   The settlement agreement’s arbitration provision states, “The arbitrator shall award reasonable attorney fees and costs to the prevailing party in any such arbitration.”  (Willey Decl., Ex. A, ¶ 19.)  It does not provide that a court shall award attorney fees to a party who prevails in compelling arbitration.

            Defendants also rely on the attorney fee provisions in two separate agreements: the mutual use agreement (Willey Decl., Ex. B, ¶ 10) and the patent license agreement (id., Ex. C, ¶ 7.03).  Defendants have not shown they are the prevailing parties entitled to attorney fees under those agreements.  “In Washington, the prevailing party is the one who receives judgment in that party’s favor.”  (Blair v. Washington State University (1987) 108 Wash.2d 558, 571.)  Defendants did not prevail in compelling arbitration of the claims arising from those two agreements.  They did not prevail in moving to enforce forum selection clauses as to those claims.  Plaintiffs voluntarily dismissed the claims arising from the mutual use agreement and patent license agreement.  The court has not entered judgment in defendants’ favor. 

Disposition

            Defendants David C. Smith and Third Law Productions, LLC’s motion to compel arbitration is granted.  The court hereby orders plaintiffs M. Shawn Lawler and DrivingPlates.Com, LLC to arbitrate all remaining causes of action alleged in their first amended complaint against defendants.  The court hereby stays the entire action pending resolution of the arbitration proceeding.