Judge: Armen Tamzarian, Case: 24STCV13658, Date: 2024-10-03 Tentative Ruling
Case Number: 24STCV13658 Hearing Date: October 3, 2024 Dept: 52
Tentative Ruling:
Defendants’
Motion to Compel Arbitration and Stay Action
Defendants
Ilya Rachman and Immix Biopharma, Inc. (Immix) move to compel arbitration of
this action by plaintiffs Ryan Witt and Asclepius Enterprises Inc.
(Asclepius).
The
Arbitration Agreement
In 2015, plaintiff Witt and
defendant Immix entered an agreement they refer to as an “Offer Letter.” (Rachman Decl., ¶¶ 7-8, Ex. C.) It includes an arbitration provision: “To
ensure the rapid and economical resolution of disputes that may arise in
connection with your employment with the Company [Immix], you and the Company
agree that any and all disputes, claims, or causes of action, in law or equity,
including but not limited to statutory claims, arising from or relating to the
enforcement, breach, performance, or interpretation of this offer letter, your
employment with the Company, or the termination of your employment, shall be
resolved, to the fullest extent permitted by law, by final, binding and
confidential arbitration in San Mateo county, California conducted by JAMS or
its successor, under JAMS’ then applicable rules and procedures for employment
disputes. You acknowledge that by
agreeing to this arbitration procedure, both you and the Company waive the
right to resolve any such dispute through a trial by jury or judge or
administrative proceeding.” (Id.,
Ex. C, § 6.)
Fraudulent
Inducement
Plaintiffs argue defendants cannot
enforce this arbitration provision because they fraudulently induced the
agreement. He contends, “The equity compensation
stated in the Offer Letter was a material term of the agreement between the
parties. The Offer Letter provided for
equity compensation consisting of stock options to be governed by the company’s
2015 equity incentive plan and a grant agreement, at the fair market value as
of the date of execution of the offer letter, with a vesting schedule based on
certain milestones. This representation
was false – the options pool did not exist at the time the Offer Letter was
presented to Witt. There was no 2015
equity incentive plan.” (Opp., p. 8.)
Whether defendants fraudulently
induced Witt to enter the agreement based on a false promise of stock options
is irrelevant. “[F]raud in the inducement relating to other
contractual terms does not render the arbitration agreement unenforceable, even
when it might justify rescission of the contract as a whole. By entering into the arbitration agreement,
the parties established their intent that disputes coming within the agreement’s
scope be determined by an arbitrator rather than a court; this contractual
intent must be respected even with regard to claims of fraud in the inducement
of the contract generally.” (Rosenthal
v. Great Western Fin. Securities Corp. (1996) 14 Cal.4th 394, 416.) “In the absence of a contrary agreement,
parties to a predispute arbitration agreement are presumed to have intended
arbitration of controversies, including allegations of fraud in the inducement
of the contract generally, that may allow rescission or reformation of the
contract or part of it.” (Id. at
p. 417.)
Plaintiffs
do not contend (or present any evidence) that defendants committed fraud in the
execution or inception of the contract.
Plaintiffs only argue fraud in the inducement based on the purportedly
false promise related to a term separate from the arbitration provision.
Assuming
fraudulent inducement would prohibit defendants from enforcing it, plaintiffs
do not meet their burden of showing defendants fraudulently induced the
agreement. Fraudulent inducement of a
contract requires “ ‘(a) misrepresentation (false representation,
concealment, or nondisclosure); (b) knowledge of falsity (or “scienter”);
(c) intent to defraud, i.e., to induce reliance; (d) justifiable reliance; and
(e) resulting damage.’ ” (Lazar v. Superior Court (1996) 12 Cal.4th 631, 638.)
In
this “summary proceeding” to
enforce an arbitration agreement (Espejo
v. Southern California Permanente Medical Group (2016) 246 Cal.App.4th
1047, 1057), plaintiffs do not meet their burden of showing the element of
justifiable reliance. The
offer letter provides: “Subject to approval by the Company’s Board of Directors
(the ‘Board’), the Company anticipates granting you an option to purchase a
number shares of the Company’s Common Stock equivalent to 3.5% of the Company’s
stock at the time of the writing of this offer letter, inclusive of this
proposed grant, at the fair market value as determined by the Board as of the
date of this offer letter’s execution (the ‘Option’). The anticipated Option will be governed by the
terms and conditions of the Company’s 2015 Equity Incentive Plan (the ‘Plan’)
and your grant agreement, and will include a vesting schedule, under which 0.5%
will vest immediately after the vesting commencement date, 0.5% will vest upon
the next company financing, 1.25% will invest upon the first patient being
dosed in Immix first Phase 1 trial and the remaining 1.25% upon the first
patient being dosed in Immix first Phase 1b/2a/2 trial.” (Rachman Decl., Ex. C, § 3.)
The
contract thus expressly provided that these stock options were “Subject to
approval” and were “anticipate[d].” Plaintiffs
do not show that Witt’s reliance on uncertain promises about future events was
justifiable or otherwise actionable.
Unconscionability
Plaintiffs argue the agreement is unconscionable. “Both procedural and substantive
unconscionability must be shown for the defense to be established, but ‘they
need not be present in the same degree.’ ”
(OTO, L.L.C. v. Kho (2019) 8 Cal.5th 111, 125 (OTO).) “The
burden of proving unconscionability rests upon the party asserting it.” (Id. at p. 126.) Plaintiffs do not meet their burden of proving
unconscionability.
Plaintiffs show zero procedural unconscionability. “ ‘The procedural element addresses the
circumstances of contract negotiation and formation, focusing on oppression or
surprise due to unequal bargaining power.’ ”
(OTO, 8 Cal.5th at p. 125.) The “analysis ‘begins with an inquiry into
whether the contract is one of adhesion.’
[Citation.] An adhesive contract
is standardized, generally on a preprinted form, and offered by the party with
superior bargaining power ‘on a take-it-or-leave-it basis.’ ” (Id. at p. 126.) For an adhesive contract, the court must consider
“whether circumstances of the contract’s formation created such oppression or
surprise that closer scrutiny of its overall fairness is required.” (Ibid.) “ ‘ “ ‘Oppression occurs where a
contract involves lack of negotiation and meaningful choice, surprise
where the allegedly unconscionable provision is hidden within a prolix printed
form.’ ” ’ ” (Id. at p. 126.)
“ ‘The circumstances relevant to establishing
oppression include, but are not limited to (1) the amount of time the party is
given to consider the proposed contract; (2) the amount and type of pressure
exerted on the party to sign the proposed contract; (3) the length of the
proposed contract and the length and complexity of the challenged provision;
(4) the education and experience of the party; and (5) whether the party’s
review of the proposed contract was aided by an attorney.’ ” (OTO, 8 Cal.5th at pp. 126-127.) “With respect to preemployment
arbitration contracts, … ‘the economic pressure exerted by employers on all but
the most sought-after employees may be particularly acute, for the arbitration
agreement stands between the employee and necessary employment, and few
employees are in a position to refuse a job because of an arbitration
requirement.’ ” (Id. at p. 127.)
Plaintiffs do not establish the threshold element
that the contract was adhesive.
Plaintiffs’ opposition argues the agreement was adhesive because “[t]he
formal Offer Letter was presented to [Witt] after he had accepted the job offer
and negotiated compensation consisting of salary plus equity.” (Opp., p. 10.) Plaintiffs offer no evidence or any
explanation of why, after negotiating the compensation, Witt no longer had the
power to negotiate other terms including the arbitration provision.
Moreover, the record shows the agreement was drafted
by an attorney with whom Witt had a preexisting relationship. (Rachman Decl., ¶ 6.) On June 27, 2015, Witt wrote an email to
Rachman and attorney Josh Seidenfeld of Cooley LLP stating, “Josh, please meet
Ilya Rachman MD PhD and MBA - CEO of Immix BioPharma Inc. He’s looking for legal counsel at Immix,
specifically needing guidance on structuring their next financing which is
getting a lot of heat/inquiries. Ilya,
please meet Josh Seidenfeld (https://www.linkedin.com/in/joshuaseidenfeld). Josh is our counsel at H4Y and is fantastic!” (Id., Ex. A, pp. 3-4.)
Before Immix sent the Offer Letter to Witt, Witt
asked Rachman for permission to ask Seidenfeld to prepare the letter: “Ilya,
can I send this to Josh? [¶] Josh, I signed on to Ilya’s company. Can you help with an offer letter to me based
on the below compensation?” (Rahman
Decl., Ex. B, p. 2.) Rachman replied,
“All sound good, except we nixed the rental stipend idea per our convo with the
cpa.” (Ibid.) Witt then sent the email he drafted to
Seidenfeld. (Id. at pp.
1-2.) Seidenfeld replied, “Of
course. I will get this prepared. Welcome aboard!” (Id. at p. 1.)
Based on this record, Witt was at least as
responsible as defendants for drafting the offer letter. Defendants did not draft and present it to
him as a take-it-or-leave it deal.
Even if the contract were adhesive, none of the
other factors show the agreement was oppressive or unfair. For example, rather than a typical worker who
cannot afford to refuse a job, plaintiffs contend Witt was the more
sophisticated and powerful party. The
complaint alleges that “immediately prior to” working at Immix, Witt was
“serving as the second full-time employee and as a key executive of a digital
health company funded by the founder of one of the largest cancer-focused biopharmaceutical
companies wherein this company received a fresh term sheet from an investor.” (Comp., ¶ 11.) “Despite being part of a very connected team
and a freshly funded company, Witt’s mission was to be part of developing a
cure for cancer after watching his grandfather die of the disease. At this time, Immix was a startup with
cofounders who were all part-time, no employees, no one who had ever raised
venture financing on the team, and only pre-clinical data for its lead product
(akin to an academic-stage spinout).” (Ibid.) Plaintiffs thus allege Witt chose to leave his
secure employment to instead work on a speculative passion project. He did not experience the typical economic
pressure to accept the job despite an unfair arbitration provision.
Because plaintiffs show no procedural
unconscionability, the court need not and does not consider whether the
agreement is substantively unconscionable.
Plaintiff
Asclepius
Plaintiffs contend the agreement cannot be enforced
against nonsignatory Asclepius. “A nonsignatory plaintiff can
be compelled to arbitrate a claim even against
a nonsignatory defendant, when the claim is itself based on, or
inextricably intertwined with, the contract containing the arbitration clause.” (JSM Tuscany, LLC v. Superior Court (2011)
193 Cal.App.4th 1222, 1241.)
Asclepius’s claims are based
on and inextricably intertwined with the offer letter. Aside from the caption and a paragraph
alleging Asclepius is a California corporation, the complaint only mentions
Asclepius once: “In or around May 2019, Rachman and Witt agreed to switch Witt
from working for Immix as a W2 to working for Immix as a 1099 contractor
through Asclepius for the same compensation from Immix and in the same capacity.” (Comp., ¶ 23.) Both plaintiffs jointly allege all 14 causes
of action, including claims under the Labor Code. They allege, for example, “Witt worked for
Defendants as an employee, and then while working for them was misclassified
but continued to work for and perform services for Defendants.” (¶¶ 98, 105.)
Plaintiffs thus allege Asclepius was merely a vehicle to continue the
same employment relationship that began with the offer letter.
Scope of Agreement
Finally,
plaintiffs argue some of their claims fall outside the scope of the arbitration
provision. “The party opposing
arbitration has the burden of showing that the agreement, as properly
interpreted, does not apply to the dispute.”
(Molecular Analytical Systems v. Ciphergen Biosystems, Inc.
(2010) 186 Cal.App.4th 696, 705.) “In
light of California’s strong public policy in favor of arbitration,
‘broad contractual provisions for arbitration are to be
liberally construed.’
[Citation.] ‘Doubts as to whether
an arbitration clause applies to a particular dispute are to be resolved in favor
of sending the parties to arbitration.
The court should order them to arbitrate unless it is clear that the
arbitration clause cannot be interpreted to cover the dispute.’ ” (Bigler v. Harker School (2013)
213 Cal.App.4th 727, 738.) “It is the
dispute, not the named cause of action, that is the focus of inquiry.” (Id. at p. 739.) When the plaintiff alleges tort claims, the
court must determine “whether the tort claims ‘have their roots in the
relationship between the parties which was created by the contract.’ ” (Ibid.)
Plaintiffs
do not meet their burden of showing the arbitration clause does not apply to
any cause of action. The offer letter requires
arbitration of “any and all disputes, claims, or causes of
action, in law or equity, including but not limited to statutory claims,
arising from or relating to the enforcement, breach, performance, or
interpretation of this offer letter, your employment with the Company, or the
termination of your employment.” (Rahman
Decl., Ex. C, § 6.) “The phrase ‘[a]ny
and all’ undoubtedly is usually and ordinarily understood to be expansive and
all-encompassing.” (Bunker Hill Park
Ltd. v. U.S. Bank National Assn. (2014) 231 Cal.App.4th 1315, 1327.)
Every
cause of action has its roots in the relationship between Witt and Immix
created by the contract. Plaintiffs
allege that, after the offer letter, the parties entered separate unwritten
contracts in 2018 (Comp., ¶ 22) and 2022 (¶ 42). Both contracts, however, concern Witt’s
employment with Immix. In each cause of
action, plaintiffs seek to recover damages or other remedies that they
allegedly suffered because defendants did not pay plaintiffs for their services
or otherwise did not honor their promises made as the bargained exchange for
plaintiffs’ services.
Plaintiffs
contend he agreement does not apply to “side projects” between Witt and
Rachman. The complaint alleges, “In
addition to his duties for Immix, over the next several years Witt worked in partnership
with Defendant Rachman on various side projects independent of Immix, due to
the uncertain outcome of Immix’ research. These projects included a new company (Emerson
Scientific), Covid diagnostic testing, medical office buildings, joint ventures
with Dubai and Uzbekistan, real estate projects, among others.” (Comp., ¶ 16.) The complaint, however, does not allege any
disputes over those projects separate from the disputes arising out of the
offer letter.
The
complaint further alleges that, in 2018, “Rachman additionally promised Witt
that, for all new projects, he and Witt would be equal partners in such
projects. Witt accepted the offer and
agreed to this arrangement and, in reliance on this agreement, he continued to
provide services for Immix for the next several years with no other additional
equity as part of his compensation package from Immix.” (¶ 22.)
The consideration for this agreement about other projects was
plaintiffs’ continued services for Immix.
Any dispute over those projects arises from or is related to Witt’s
employment with Immix.
Disposition
Defendants Ilya Rachman and Immix
Biopharma, Inc.’s motion to compel arbitration is granted. Plaintiffs Ryan Witt and Asclepius
Enterprises Inc. are ordered to arbitrate this action against defendants. The
court hereby stays the entire action pending resolution of the
arbitration proceeding.