Judge Kerry Bensinger, Case Number: 24STCV11277, Date: 2024-10-02 Tentative Ruling

In 2011, Landon Hamilton (Hamilton) and Cameron Speck (Speck) (collectively, Plaintiffs), founded a mobile fitness application called Fitplan. In 2016, Fitplan launched its fitness creator platform. Within the first month of its launch, Fitplan was a top grossing fitness application in the United States. In 2021, MVMNT, Inc. (MVMNT) acquired Fitplan. The terms of the sale were memorialized in an Arrangement Agreement. Under the Arrangement Agreement, Plaintiffs were entitled to the payment of sums certain and to information about the updated organizational structure chart, subsidiary details, ownership and control of subsidiaries, among other information. The parties also entered into Option Agreements for the exercise of stock options for MVMNT.

In July 2023, after MVMNT acquired Fitplan, Hamilton entered into a Consulting Agreement and General Release (the Consulting Agreement) with FitPlan Technologies, Inc., a wholly owned subsidiary of Fitplan. The Consulting Agreement has an arbitration clause.

On May 6, 2024, Plaintiffs filed a Complaint against MVMNT dba Fitlab, Inc. for (1) Breach of Contract (Arrangement Agreement); (2) Breach of Contract (Option Agreements); (3) Intentional Misrepresentation; (4) Negligent Misrepresentation; and (5) Declaratory Relief. Plaintiffs allege MVMNT breached the Arrangement Agreement by failing to pay certain sums and providing certain information required by the agreement. Plaintiffs also allege MVMNT breached the Option Agreements by ignoring Plaintiffs’ requests to exercise their options.

On July 24, 2024, MVMNT filed this motion to compel arbitration of Hamilton’s claims and to stay the matter as to Speck’s claims pending the outcome of arbitration.

California law incorporates many of the basic policy objectives contained in the Federal Arbitration Act, including a presumption in favor of arbitrability. (Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 971-72.) Under both the FAA and California law, arbitration agreements are valid, irrevocable, and enforceable, except on such grounds that exist at law or equity for voiding a contract. (Winter v. Window Fashions Professions, Inc. (2008) 166 Cal.App.4th 943, 947.) The petitioner bears the burden of proving the existence of a valid arbitration agreement by a preponderance of the evidence, the party opposing the petition then bears the burden of proving by a preponderance of the evidence any fact necessary to demonstrate that there should be no enforcement of the agreement, and the trial court sits as a trier of fact to reach a final determination on the issue. (Rosenthal v. Great Western Financial Securities Corp. (1996) 14 Cal.4th 394, 413.) Pursuant to Code of Civil Procedure section 1281.2, the court can compel parties to an arbitration agreement to arbitrate their dispute.

MVMNT moves to compel arbitration of Hamilton’s claims pursuant to the arbitration clause in the Consulting Agreement. Further, MVMNT seeks a stay of the matter as to Speck’s claims pending resolution of arbitration.

Plaintiffs do not dispute there is an arbitration clause in the Consulting Agreement. It is further undisputed Hamilton signed the agreement. Nonetheless, Plaintiffs oppose arbitration for the following reasons: (1) MVMNT cannot compel arbitration because it is not a signatory to the Consulting Agreement; (2) because Speck did not sign the Consulting Agreement, arbitration of Hamilton’s claims would create conflicting rulings of law; (3) the arbitration clause does not cover Hamilton’s claims; and (4) the arbitration clause is unconscionable. The court addresses each argument in turn.

Plaintiffs argue MVMNT cannot compel arbitration because MVMNT is not a party to the Consulting Agreement.

MVMNT contends it may do so because, as an “affiliate” of Fitplan Technologies, Inc. (FTI), a signatory to the agreement, MVMNT is a third-party beneficiary.

MVMNT’s contention has merit. “There are exceptions to the general rule that a nonsignatory to an agreement cannot be compelled to arbitrate and cannot invoke an agreement to arbitrate, without being a party to the arbitration agreement.” (JSM Tuscany, LLC v. Superior Ct. (2011) 193 Cal.App.4th 1222, 1236-37.) For instance, a nonsignatory may compel arbitration as a third-party beneficiary to the arbitration agreement. (Ronay Family Ltd. Partnership v. Tweed (2013) 216 Cal.App.4th 830, 838; see also Civ. Code, § 1559 (“A contract, made expressly for the benefit of a third person, may be enforced by him at any time before the parties thereto rescind it.”).]

Here, the arbitration clause expressly covers “all claims regarding any aspect of [Hamilton]’s employment and consulting with [Fitplan Technologies, Inc.] or any of its subsidiaries or affiliates.” (Consulting Agreement, § 18(k)(ii).) “Covered claims also include, but are not limited to, claims for: … breach of any contract or covenant, express or implied[.]” (Id.) MVMNT and Fitplan Technologies, Inc. are affiliates because MVMNT is the parent company of FTI. (See Collins v. BMW of North America, LLC (S.D. Cal. Jan. 25, 2021) No. 20CV1635-GPC (AGS), 2021 WL 242938, at *3 [concluding BMW of North America was a third-party beneficiary an arbitration agreement because it was the parent company of the signatory to the arbitration agreement]; see also Iqbal v. Ziadeh (2017) 10 Cal.App.5th 1, 9-10 [Citing Black’s Law Dictionary to define the word “affiliate” as “[a] corporation that is related to another corporation by shareholdings or other means of control; a subsidiary, parent, or sibling corporation.”].) MVMNT, as the parent corporation of FTI has standing to enforce the arbitration clause.

Plaintiffs argue the arbitration clause covers a narrow class of claims—specifically, those that arise from or relate to Hamilton’s Consulting Agreement. Not so. As detailed above, the language of the arbitration clause is broad. It extends to cover “all claims regarding any aspect of [Hamilton]’s employment and consulting with [Fitplan Technologies, Inc.] or any of its subsidiaries or affiliates.” (Consulting Agreement, § 18(k)(ii), emphasis added.) “Covered claims also include, but are not limited to, claims for: … breach of any contract or covenant, express or implied; … personal, physical or emotional injury; fraud, misrepresentation, defamation, and any other tort claims[.]” (Id., emphasis added.)

Here, Hamilton brings claims for breach of contract and misrepresentation. These claims are expressly covered by the arbitration clause. Hamilton cannot avoid arbitration on these grounds.

Hamilton and Speck assert identical claims. For this reason, Plaintiffs argue the court should exercise its discretion under Code of Civil Procedure section 1281.2, subdivision (c) to deny the motion to compel because there is a possibility of conflicting rulings on a common issue of law or fact if Hamilton’s claims proceed in arbitration and Speck’s claims remain is state court.

“Code of Civil Procedure section 1281.2, subdivision (c) permits a trial court, under specified circumstances, to stay arbitration pending the outcome of related litigation.” (Cronus Invs., Inc. v. Concierge Servs. (2005) 35 Cal.4th 376, 380 (Cronus) (footnote omitted).) A trial court may also properly deny a motion to compel arbitration where there is a possibility of conflicting rulings on common issues of law or fact if claims against some defendants proceed in arbitration while claims against other defendants proceed in a court action. (Birl v. Heritage Care, LLC (2009) 172 Cal.App.4th 1313, 1321.) In instances where the arbitration clause provides it is to be construed and enforced in accordance with the laws of California, the Federal Arbitration Act (FAA) does not preempt Code of Civil Procedure section 1281.2, subdivision (c). (Cronus, supra, 35 Cal.4th at pp. 387, 394.)

Here, the arbitration clause expressly provides that the Consulting Agreement is to be enforceable under the FAA. (Consulting Agreement, § 18(k)(v).) In other words, the FAA and not California law governs the enforcement of the arbitration clause. The court therefore does not have discretion to deny MVMNT’s motion pursuant to Code of Civil Procedure section 1281.2, subdivision (c).

As the High Court noted in AT&T Mobility LLC v. Concepcion (2011) 563 U.S. 333, 339 (Concepcion), “the final phrase of § 2 [of the FAA], however, permits arbitration agreements to be declared unenforceable ‘upon such grounds as exist at law or in equity for the revocation of any contract.’ This saving clause permits agreements to arbitrate to be invalidated by ‘generally applicable contract defenses, such as fraud, duress, or unconscionability,’ but not by defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.” Thus, under the FAA, state courts may “decline to enforce arbitration clauses on the basis of generally applicable contract defenses, such as fraud, duress or unconscionability.” (Erickson v. Aetna Health Plans of California, Inc. (1999) 71 Cal.App.4th 646, 650-651 [cleaned up].)¿

Plaintiffs raise the contractual defense of unconscionability.¿ “The party resisting arbitration bears the burden of proving unconscionability.” (Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US), LLC (2012) 55 Cal.4th 223, 247 (Pinnacle Museum).) In general, the doctrine of unconscionability refers to “an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party.”¿ (Sonic-Calabasas A, Inc. v. Moreno (2013) 57 Cal.4th 1109, 1133 (Sonic) (cleaned up).)¿ In other words, the doctrine consists of procedural and substantive components, “the former focusing on oppression or surprise due to unequal bargaining power, the latter on overly harsh or one-sided results.” (Ibid.)¿¿

If unconscionable, the arbitration agreement is not a valid contract and therefore is unenforceable ¿ (Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 114 (Armendariz).)¿ Although both components of unconscionability must be present to invalidate an arbitration agreement, they need not be present in the same degree.¿ (Id.)¿ “ ‘Essentially a sliding scale is invoked which disregards the regularity of the procedural process of the contract formation, that creates the terms, in proportion to the greater harshness or unreasonableness of the substantive terms themselves.¿ In other words, the more substantively unconscionable the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.’ ”¿ (Ibid.)¿¿

Procedural unconscionability focuses on the elements of oppression and surprise. (Pinnacle Museum, supra, 55 Cal.4th at p. 247.)¿ “Oppression arises from an inequality of bargaining power which results in no real negotiation and an absence of meaningful choice….¿ Surprise involves the extent to which the terms of the bargain are hidden in a ‘prolix printed form’ drafted by a party in a superior bargaining position.” (Davis v. TWC Dealer Group, Inc. (2019) 41 Cal.App.5th 662, 671.)

A “contract of adhesion” creates some amount of procedural unconscionability – the term signifies a standardized contract, which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it.¿ (Neal v. State Farm Ins. Cos. (1961) 188 Cal.App.2d 690, 694.)¿ In addition, a lack of effort to highlight the presence of an arbitration provision, such as through bold lettering, larger font, or capitalization, has been found to indicate procedural unconscionability.¿ (See Higgins v. Superior Court (2006) 140 Cal.App.4th 1238.)¿¿However, when there is no other indication of oppression other than the adhesive aspect of an agreement, the degree of procedural unconscionability is low.¿ (Serpa v. California Surety Investigations, Inc. (2013) 215 Cal.App.4th 695, 704.)¿¿¿¿

“[T]he fact that the arbitration agreement is an adhesion contract does not render it automatically unenforceable as unconscionable.¿ Courts have consistently held that the requirement to enter into an arbitration agreement is not a bar to its enforcement.”¿ (Serafin v. Balco Properties Ltd., LLC (2015) 235 Cal.App.4th 165, 179.)

Here, Plaintiffs argue the agreement is procedurally unconscionable because Hamilton had limited time to review and consider the Consulting Agreement; felt pressure to sign the agreement to preserve his right to stock options that had a deadline, and that MVMNT was delaying placing Plaintiffs in a “take it or leave it” position. (See Opp., p. 7.)

The arguments are not well taken. Plaintiffs do not present any evidence of an adhesion contract. There is no supporting declaration attesting to the foregoing points. Indeed, Plaintiffs do not present any evidence at all in opposition to MVMNT’s motion. Moreover, the Consulting Agreement expressly provides that Hamilton “acknowledges that the Company has advised [him] to consult with independent legal counsel of [his] choosing prior to executing this Agreement. [Hamilton] acknowledges that he has had the time and opportunity to be represented by independent legal counsel during the negotiation and execution of this Agreement, and that he has either been represented to his satisfaction or has chosen not to be represented.” (Consulting Agreement, § 18(i).) The opposition does not dispute Hamilton had the assistance of independent counsel during the negotiation and execution of the Consulting Agreement. The court is hard pressed to find a contract of adhesion where, as here, the party opposing an arbitration agreement attested to have time to review and the assistance of counsel (or at least had the opportunity to engage independent counsel) during the negotiation and execution of the agreement. And even if the Consulting Agreement were a contract of adhesion, the requirement to enter into an arbitration agreement is not a bar to the agreement’s enforcement.¿ (Serafin v. Balco Properties Ltd., LLC (2015) 235 Cal.App.4th 165, 179.)

Plaintiffs also argue the Consulting Agreement was a surprise to Hamilton because the agreement is “entirely one sided and does not specify that Defendant also agrees to submit any claims it has pursuant to the same arbitration requirements that Hamilton is allegedly bound by.” (Opp., p. 7.) Not so. The arbitration agreement is bilateral. It includes claims for “breach of any duty owed to [Hamilton] by the Company or to the Company by [Hamilton].” (Consulting Agreement, § 18(k)(ii).) And, it bears repeating, any claim of surprise or confusion is undermined by the language of the Consulting Agreement which attests that Hamilton had time to review the agreement and had legal representation during its negotiation and execution. (Consulting Agreement, § 18(i).) Plaintiffs do not demonstrate the agreement to arbitrate is procedurally unconscionable.

Assessing substantive unconscionability, courts generally focus on the terms of the agreement and look for terms that are overly harsh or one-sided such that they shock the conscience. (Nyulassy v. Lockheed Martin Corp. (2004) 120 Cal.App.4th 1267, 1281 (Nyulassy); see also Sanchez v. Valencia Holding Co., LLC (2015) 61 Cal.4th 899, 910-911 (clarifying various definitions—e.g., “shocks the conscience,” “unduly oppressive,” “unreasonable favorable” mean same thing).)¿ The “paramount consideration” is mutuality of the obligation to arbitrate.¿ (Nyulassy, 120 Cal.App.4th at pp. 1281, 1287.)¿¿¿

“Substantively unconscionable terms may take various forms, but may generally be described as unfairly one-sided. One such form, as in Armendariz, is the arbitration agreement’s lack of a modicum of bilaterality, wherein the employee’s claims against the employer, but not the employer’s claims against the employee, are subject to arbitration. [Citation.] Another kind of substantively unconscionable provision occurs when the party imposing arbitration mandates a post-arbitration proceeding, either judicial or arbitral, wholly or largely to its benefit at the expense of the party on which the arbitration is imposed. [Citation.] In determining unconscionability, our inquiry is into whether a contract provision was unconscionable at the time it was made. [Citation.]”¿ (Sonic, supra, 57 Cal.4th at pp. 1133-34 [cleaned up].)¿ “To state it simply: it is substantively unconscionable to require a consumer to give up the right to utilize the judicial system, while imposing arbitral forum fees that are prohibitively high.”¿ (Id. at pp. 1144-45.)¿

Here, Plaintiffs argue (1) the agreement is one-sided and (2) contains a waiver of unwaivable claims at Section 5 of the Consulting Agreement which exposes the agreement to special scrutiny. (Opp., pp. 9-10.)

First, as discussed above, the arbitration agreement is not one-sided. It covers claims that FTI, or MVMNT (as an affiliate) may bring against Hamilton.

Second, Section 5 also states that its provisions “do not release claims that cannot be released as a matter of law.” Thus, to the extent the Consulting Agreement encompasses the waiver of unwaivable claims, the agreement expressly excepts such claims from the waiver.

In sum, Plaintiffs do not point to any terms of the agreement that are “overly harsh”, “one-sided”, or that “shocks the conscience.”¿ Plaintiff does not demonstrate a lack of mutuality as in Armendariz “wherein the employee’s claims against the employer, but not the employer’s claims against the employee, are subject to arbitration.”¿ (Armendariz, supra, 24 Cal.4th at p. 119.)¿ Nor is this a case where MVMNT, as the party imposing arbitration, is requiring a post-arbitration proceeding, wholly or largely to MVMNT’s benefit and at Hamilton’s expense.¿ (Little v. Auto Steigler, Inc. 29 Cal.4th 1064, 1071-72 .)¿

Because both substantive and procedural components must be present, Plaintiffs fail to demonstrate the agreement is unconscionable.

If a court of competent jurisdiction, whether in this State or not, has ordered arbitration of a controversy which is an issue involved in an action or proceeding pending before a court of this State, the court in which such action or proceeding is pending shall, upon motion of a party to such action or proceeding, stay the action or proceeding until an arbitration is had in accordance with the order to arbitrate or until such earlier time as the court specifies.¿¿

¿¿ Here, the court will order this action to arbitration.¿ Thus, MVMT’s motion to stay the action pending arbitration is granted.¿¿¿

The Motion to Compel Arbitration is GRANTED. The matter is stayed pending resolution of the arbitration proceedings.

Kerry Bensinger

Judge of the Superior Court