Judge: Jon R. Takasugi, Case: 22STCV35450, Date: 2023-04-17 Tentative Ruling

Case Number: 22STCV35450    Hearing Date: April 17, 2023    Dept: 17

Superior Court of California

County of Los Angeles

DEPARTMENT 17

TENTATIVE RULING

Defendant’s motion to compel arbitration is DENIED.

            On 11/8/2022, Plaintiff LFG Payments (Plaintiff) filed suit against Christian Smith (Defendant), alleging: (1) intentional misrepresentation; (2) concealment; (3) unjust enrichment; (4) violation of Business and Professions Code section 17200.

            Now, Defendant moves to compel arbitration of Plaintiff’s Complaint, and seeks a stay of proceedings pending the completion of arbitration.

Legal Standard

Where the Court has determined that an agreement to arbitrate a controversy exists, the Court shall order the petitioner and the respondent to arbitrate the controversy …unless it determines that…  grounds exist for rescission of the agreement.” (Code Civ. Proc., § 1281.2.) Among the grounds which can support rescission are fraud, duress, and unconscionability. (Tiri v. Lucky Chances, Inc. (2014) 226 Cal.App.4th 231, 239.) The Court may also decline to compel arbitration wherein there is possibility of conflicting rulings on a common issue of law or fact. (Code Civ. Proc., § 1281.2 (c).)

Factual Background 

            Plaintiff is a software development company that develops financial technology and related solutions. Plaintiff alleges that it was induced by Defendant to pay Defendant nearly $100,000 in services that Defendant did not actually perform. 

Discussion

I.                   Defendants’ Burden

The party moving to compel arbitration “bears the burden of proving [the] existence [of an arbitration agreement] by a preponderance of the evidence.” (Rosenthal v. Great Western Fin. Securities Corp. (1996) 14 Cal.4th 394, 413.) The moving party also bears the burden of demonstrating that the claims fall within the scope of the arbitration agreement. (Omar v. Ralphs Grocery Co. (2004) 118 Cal.App.4th 955, 961.)

A.    Existing Agreement

Defendant submitted evidence that Plaintiff entered into a Subscription Agreement with third-party Gun.io dated 4/15/2022, and revised on 8/11/2022, which provided:

17. DISPUTE RESOLUTION: Any and all disputes between the parties hereto arising out of this agreement or relating in any way to the Services or Work Product shall be resolved via arbitration pursuant to the Commercial Arbitration Rules of the American Arbitration Association (the “AAA”). The AAA shall appoint a sole neutral arbitrator for the purpose of presiding over and conducting such arbitration. The arbitrator shall apply, where the application of law is necessary, only the laws of the state of Delaware in conducting the arbitration. The arbitration shall be conducted in the English language and shall furthermore be conducted, on the mutual agreement of the parties, either virtually via videoconference or at a location mutually agreeable to the parties. Should the parties fail to mutually agree on the manner of conducting the arbitration, the arbitration shall be conducted virtually via videoconference. The arbitrator shall have no authority to award any damages which are inconsistent with the terms of this agreement. The arbitrator shall render their decision in writing, explaining the reasons supporting such decision. Except to the extent necessary to confirm or vacate any arbitral award or as required by law, the fact of, proceedings in, and evidence and testimony in the arbitration shall be maintained in strict confidence. The judgment of the arbitrator shall be final and binding upon the parties, and efforts to collect any award awarded pursuant to such arbitration may be pursued before any state or federal court in the United States. The costs and expenses of conducting any arbitration pursuant to this Section 17 (including, for the avoidance of doubt, those of the arbitrator) shall be shared equally by the parties to the arbitration. However, irrespective of the outcome of the arbitration or any award related thereto, each party shall be wholly and solely responsible for its own attorneys’ and, as applicable, other professionals’ fees (including all costs and expenses related solely to such professional services).

            Defendant contends that he can enforce this Agreement because: (1) despite Plaintiff’s allegations to the contrary, Defendant’s work for Plaintiff was all performed pursuant to contracts between Plaintiff and Gun.io; and (2) Defendant can enforce the agreement as both a third-party beneficiaries of the Agreement, and under a theory of equitable estoppel. In support, Defendant submitted evidence that:

-         Gun.io is a company that contracts out software development professional to work for its clients. Gun.io arranged for Defendant to interview with Plaintiff.

-         In early April 2022, LFG informed Gun.io that it had decided to retain Smith as a Consultant through Gun.io. (Smith Decl. ¶ 4; Newkirk Decl. ¶ 4.)

-         On April 15, 2022, LFG entered into a Subscription Agreement with Gun.io, and agreed therein to pay Gun.io for 80 hours per month of Smith’s services on Project Jaguar. (Newkirk Decl. ¶ 5 and Exh. A.)

-         On April 19, 2022, Gun.io entered into a Consultant Agreement with Smith for him to act as a Consultant to Gun.io clients and be compensated for hours of work he was to perform. (Smith Decl. ¶ 5; Newkirk Decl. ¶ 6 and Exh. B.)

-         On or about early May 2022, LFG asked Smith to increase his hours of services performed on Project Jaguar, which he was willing to do, and Smith so informed Gun.io. (Smith Decl. ¶ 6; Newkirk Decl. ¶ 7.) On May 11, 2022, LFG and Gun.io entered into a modified Subscription Agreement to pay Gun.io for 120 hours per month of Smith’s time on Project Jaguar. (Newkirk Decl. ¶ 8 and Exh. C.)

-         The Subscription Agreement provided that “Gun.io shall be responsible for all compensation paid to the Contractors.” (Id., Exh. A and C, ¶ 10.) Smith recorded and logged the hours of work that he performed on Project Jaguar with Gun.io, in order for them to be billed by Gun.io to LFG. Gun.io billed LFG for Smith’s time, and Smith did not bill LFG directly nor receive direct payment from LFG. (Smith Decl. ¶ 7.)

In opposition, Plaintiff argues that the arbitration provision unambiguously provides that it applies only to Gun.io and Plaintiff. Plaintiff also notes that after Plaintiff and Defendant entered into the Subscription Agreement, Defendant and Gun.io entered into the Gun.io Consultant Agreement, which Plaintiff is not a party to, does not contain an arbitration provision, and which covers such things as: (1) the timing and amounts of compensation due to Defendant from Gun.io; (2) the nature of the relationship between Defendant and Gun.io—that is, the relationship is “that of an independent contractor and not that of an employee[;] and (3) Gun.io’s “sole discretion on project assignment and staffing.” (Newkirk Decl. Ex. B.)

As such, Plaintiff contends that its claims, which concern payments provided to Defendant for services rendered, arise out of the Consultant Agreement which dictated Defendant’s payment and which did not contain an arbitration provision. As such, the question before the Court is whether or not Plaintiff’s claims arise out of the Subscription Agreement, and whether or not its claims fall within the scope of that provision.  

The Court finds that Plaintiff’s claims are not contemplated by the Subscription Agreement’s arbitration provision for several reasons.

First, the arbitration agreement provides that “[a]ny and all disputes between the parties hereto arising out of this agreement or relating in any way to the Services or Work Product shall be resolved via arbitration….” As such, the arbitration agreement itself defines its scope as applying to disputes between Plaintiff and Gun.io which concern either the underlying agreement itself or which relate in any way to the services of work product. Given that this claim is against Defendant, and not Gun.io, Plaintiff’s claims do not fall within the express scope of the agreement.

Second, Defendant did not benefit from the Subscription Agreement, but rather from the Consultant Agreement. The Subscription Agreement called for Gun.io to provide services to Plaintiff for which Plaintiff would pay Gun.io. However, the Consultant agreement provided Defendant with the manner and timing of payment for his services. As such, while the Subscription Agreement benefitted Defendant in the sense that it provided the framework for his connection to Plaintiff, the ‘mere fact that a contract results in benefits to a third party does not render that party a ‘third party beneficiary.’” (Jensen v. U-Haul Co. of Cal. (2017) 18 Cal.App.5th 295, 302.) Rather, to be an intended beneficiary, the Court must consider (1) whether the third party would in fact benefit from the contract, … (2) whether a motivating purpose of the contracting parties was to provide a benefit to the third party, and (3) whether permitting a third party to bring its own breach of contract against a contracting party is consistent with the objectives of the contract and the reasonable expectations of the contracting parties.” (Goonewardene v. ADP, LLC (2019) 6 Cal.5th 817, 829-30.) Here, the Court agrees that there is nothing in the Subscription Agreement to indicate that it was made for Defendant’s benefit or actually confers any benefit to him. Rather, the intended beneficiaries of the Subscription Agreement were Gun.io and Plaintiff. Defendant was benefitted by the Consultant Agreement which provided the material terms of his employment and which did include an arbitration provision.

Third, Defendant is not entitled to invoke the arbitration provision under a theory of equitable estoppel.  Under a doctrine of equitable estoppel, “a nonsignatory defendant may invoke an arbitration clause to compel a signatory plaintiff to arbitrate its claims when the causes of action against the nonsignatory are ‘intimately founded in and intertwined’ with the underlying contract obligations.” (DMS Servs., LLC v. Superior Court (2012) 205 Cal.App.5th 1346.) Here, as noted by Plaintiff, “the Subscription Agreement between LFG and Gun.io is a tangential fact that provides background to LFG’s relationship with Mr. Smith. Even if the contract did not exist, LFG would have the exact same claims against Mr. Smith related to Mr. Smith’s misrepresentations to LFG and based on a solely quasi-contract or implied-in-fact agreement reflected by the course of conduct. Accordingly, LFG’s claims are not inextricably intertwined with the Gun.io Subscription Agreement.” (Opp., 8:25-9:2.)

Case law supports this result. Just as in Murphy v. DirecTV, Inc. (2013) 724 F.3d 1218, 1231, Plaintiff’s claim is not relying on Defendant’s obligations under the Subscription Agreement, but rather is relying on Defendant’s alleged words and deeds in the course of their transactions. Indeed, there would be no way for Plaintiff to rely on Defendant’s duties and obligations under the Subscription Agreement to assert its claims, because Defendant is not a party to that agreement. (Murphy, supra, 724 F.3d at p. 1231) (“In short, Plaintiffs rely not on the Customer Agreement, but on Best Buy's' alleged words and deeds in the course of transactions leading to the acquisition of equipment they believed they purchased, but in fact leased. Plaintiffs do not seek to simultaneously invoke the duties and obligations of [Best Buy] under the [Customer] Agreement, as it has none, while seeking to avoid arbitration. Thus, the inequities that the doctrine of equitable estoppel is designed to address are not present.”)

None of the cases cited by Defendant compel a different result. In Garcia v. Pexco, LLC (2017) 11 Cal.App.5th 782 and Franklin v. Cmty. Reg’l Med. Ctr. (9^th Cir. 2021) 998 F.3d 867, the plaintiffs sued to recover wages that the defendants allegedly failed to properly pay. (See Garcia, 11 Cal.App.5th at 785; Franklin, 998 F.3d at 875.) Wages were the benefit of the plaintiffs’ respective employment contracts. (See Garcia, 11 Cal.App.5th at 787.) (“the governing arbitration agreement expressly includes statutory wage and hour claims); Franklin, 998 F.3d at 876 (“Franklin’s claims depend on whether she was paid the wages or overtime she was due,” and “the Assignment Contract set her hourly wage rate and overtime rate[.]”). The fact that these cases concern a staffing agency contract is not determinative here. They key factor in those cases was that the contractors were trying to enforce the terms of the contracts against non-signatories; that is not the case here. Here, Plaintiff is seeking to recover funds it contends were unjustly paid to Defendant. There is nothing in the Subscription Agreement which will resolve this question or which will shed light on what Defendant was obligated to do, or what he was owed.

In sum, the Court concludes that Defendant has not established by a preponderance of the evidence that Plaintiff’s claims against him fall within the scope of an existing arbitration agreement that he has standing to enforce. Accordingly, Defendant has not met his burden.

Based on the foregoing, Defendant’s motion to compel arbitration is denied.

It is so ordered.

Dated:  April    , 2023

   Hon. Jon R. Takasugi
   Judge of the Superior Court

Parties who intend to submit on this tentative must send an email to the court at smcdept17@lacourt.org by 4 p.m. the day prior as directed by the instructions provided on the court website at www.lacourt.org.  If a party submits on the tentative, the party’s email must include the case number and must identify the party submitting on the tentative.  If all parties to a motion submit, the court will adopt this tentative as the final order.  If the department does not receive an email indicating the parties are submitting on the tentative and there are no appearances at the hearing, the motion may be placed off calendar. 

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