Judge Lon F. Hurwitz, Case 21-01237081 2023-08-18 Tentative Ruling

Judge: Lon F. Hurwitz, Case: 21-01237081, Date: 2023-08-18 Tentative Ruling

1. Demurrer to Answer

2. Motion to Compel Arbitration

Demurrer to Answers to Complaint

RULING:

Balt USA, LLC’s Demurrer to Answers to Complaint by StoneWall is CONTINUED to October 13, 2023, at 1:30 p.m. in CX103, so that the Court can determine the status of StoneWall and its counsel, Mokri Vanis & Jones, LLP.

The remaining Demurrers are OFF CALENDAR as the remaining Defendants filed Amended Answers prior to the date set for hearing on the Demurrers timely pursuant to CCP Sections 472 and 1005. The current Demurrers are therefore Moot.

Clerk to give Notice.

Motion to Compel Arbitration

Moving Party: Defendants Treadstone Medical LLC; Treadstone Holdings LLC; M4D LLC; Infinity Neuro LLC (China); StoneWall; Vtail Medical LLC; David Ferrera; Dawson Le; Randall Takahashi; and Charles Yang

Responding Party: Plaintiff Balt USA, LLC

SERVICE: December 9, 2022, by electronic service

RELIEF SOUGHT: Defendants seek an order compelling arbitration of Plaintiff’s claims and staying all further proceedings.

UPCOMING EVENTS:

1. Demurrer to Answer, 8-18-2023

2. Motion for Protective Order, 8-18-2023

3. Motion for Protective Order, 8-18-2023

4. Motion to be Relieved as Counsel, 9-1-2023

FACTS/OVERVIEW: This is a business dispute. On December 17, 2021, Plaintiff Balt USA, LLC (“Balt”) filed a Complaint against Defendants Treadstone Medical LLC, Treadstone Holdings LLC, M4D LLC, Infinity Neuro LLC (China), StoneWall, Vtail Medical LLC, David Ferrera, Dawson Le, Randall Takahashi, and Charles Yang. (ROA 2). The Complaint asserts causes of action for:

1. Breach of Fiduciary Duty (Self Dealing);

2. Aiding and Abetting Breach of Fiduciary Duty;

3. Fraudulent Concealment;

4. Breach of Fiduciary Duty (Usurpation of Corporate Opportunities);

5. Aiding and Abetting Breach of Fiduciary Duty;

6. Tortious Interference with Contract;

7. Declaratory Judgment;

8. Breach of Contract (Failure to Disclose Inventions);

9. Breach of Contract (In-term Competitive Conduct); and

10. Unfair Competition

Plaintiff Balt USA is a subsidiary of Balt SAS, a French company involved in the research and development of medical devices. In or around August 2016, Balt SAS acquired Blockade Medical LLC, a company owned and operated by Defendants Ferrera, Le, Takahashi, and Yang (collectively, “Individual Defendants”). Through the acquisition, Blockade was renamed and reorganized as Plaintiff Balt USA, LLC.

After the acquisition, the Individual Defendants continued to hold high level positions as Balt. After the Individual Defendants left Balt, it was discovered that they orchestrated several self-interested transactions at Balt’s expense. It is alleged the Individual Defendants schemed to siphon money out of Balt by concealing their interests in a contractor hired by Balt, concealing development opportunities from Balt, and secretly developing competitive products while employed by Balt in violation of their respective employment contracts. The Individual Defendants allegedly conducted their wrongful activities through various holding companies—Defendants Treadstone Medical LLC, Treadstone Holdings LLC, M4D LLC, Infinity Neuro LLC, StoneWall, and Vtail Medical LLC (collectively, “Entity Defendants”), as well as non-parties RC Medical LLC and Sonorous NV, Inc.—in which the Individual Defendants held undisclosed interests during their employment with Balt.

This litigation has been quite contentious. The Court has already held two IDCs regarding 40 sets of discovery (four sets propounded on each of the 10 Defendants). In January 2022, Defendants filed a 28-page demurrer, which the Court refused to consider since no leave had been sought to exceed the page limitation. (ROA 96). Balt then moved for a protective order, but in July 2022, before Balt’s motion was heard, the parties entered into a stipulated protective order. (ROA 99). In September 2022, the parties stipulated to stay discovery, including all discovery motions, pending completion of the November 2022 mediation session. (ROA 111). However, the mediation ended without a resolution to the dispute. (ROA 117).

On December 9, 2022, the Entity Defendants and Individual Defendants (collectively, “Defendants”) filed the current Motion to Compel Arbitration and Stay Proceedings. (ROA 143). Balt opposes (ROA 399), and Defendants reply (ROA 426).

The hearing was originally scheduled for March 3, 2023. However, on February 10, 2023, while considering Balt’s motion for protective order, the Court stayed the entire matter pending appointment of a discovery referee. (ROA 228). The Court also continued the Motion to Compel Arbitration to August 18, 2023.

CONTENTIONS AND ANALYSIS:

Statement of the Law

Under Code of Civil Procedure section 1281.2, a party to an arbitration agreement may move to compel arbitration if another party to the agreement refuses to arbitrate. A party moving to compel arbitration under Section 1281.2 must prove by a preponderance of the evidence that: (1) The parties entered into a written agreement to arbitrate; and (2) one or more of the claims at issue are covered by that agreement. (Code Civ. Proc., § 1281.2; Villacreses v. Molinari (2005) 132 Cal.App.4th 1223, 1230.) If the moving party meets this burden, the burden shifts to the resisting party to prove by a preponderance of evidence a defense to enforcement of the agreement. (Id., at p. 1230.)

California law favors the enforcement of valid arbitration agreements. (Ericksen, Arbuthnot, McCarthy, Kearney & Walsh, Inc. v. 100 Oak Street (1983) 35 Cal.3d 312, 320; In re Tobacco I (2004) 124 Cal.App.4th 1095, 1103.) Any doubts to arbitration will be resolved against the party asserting a defense to arbitration, whether the issue is construction of contract language, waiver, delay or any other defense to arbitrability. (Erickson, supra, 35 Cal.3d at p. 320; In re Tobacco I, supra, 124 Cal.App.4th at p. 1103.)

Merits

Defendants contend the following four agreements between Balt and some of the Individual Defendants contain express arbitration provisions:

1. The Transition Agreement and Release – between Balt and Defendant Ferrera, dated May 29, 2020;

2. The Consulting Agreement – between Balt and Defendant Ferrera, dated May 29, 2020;

3. The Separation Agreement and Release – between Balt and Defendant Yang, dated May 28, 2019; and

4. The Consulting Agreement – between Balt and Defendant Yang, dated May 31, 2019.

[Declaration of Richard A. DiCorrado (“DiCorrado Decl.”), ¶¶ 3-6, Exhs. A-D.]

According to Defendants, these four agreements supersede some of the agreements relied upon by Balt in its Complaint. Defendants argue these subsequent agreements are unambiguous and require Balt to arbitrate any and all disputes arising out of the employment of Defendants Ferrera and Yang or the terms of their employment. In addition, Defendants note that the Transition Agreement with Ferrera and the Separation Agreement with Yang contain express waivers of the parties’ right to have disputes resolved in court.

Defendants also contend that even the defendants who are not signatories to these agreements are entitled to the benefits of the arbitration provisions under an estoppel theory. As argued by Defendants, under the doctrine of equitable estoppel, a plaintiff is estopped from avoiding arbitration by suing non-signatory defendants for claims that are inherently inseparable from arbitrable claims against signatory defendants. In support, Defendants cite to JSM Tuscany, LLC v. Superior Court (2011) 193 Cal.App.4th 1222.

Defendants note that in the Complaint, Balt’s allegations are against the Individual Defendants collectively—namely, that the Individual Defendants colluded with each other and the Entity Defendants to engage in various self-interested transactions. Defendants contend the alleged conduct arises out of employer/employee relationship between Balt and the Individual Defendants, and said relationship is governed by the four agreements identified above. As a result, Defendants contend that since it is not possible to sever the allegations as against one Defendant from another, then Balt’s claims against the non-signatory Defendants must also be compelled to arbitration under these agreements. Alternatively, Defendants argue that the non-signatory Defendants should be entitled to the benefits of arbitration through the theories of alter ego and agency.

In opposition, Balt contends that Defendants have waived the right to compel arbitration. As argued by Balt, Defendants have availed themselves of the benefits of the judicial forum, engaged in robust and continued litigation efforts, and acted in a manner inconsistent with a right to arbitrate. Balt notes that Defendants have demurred to and moved to strike portions of the Complaint, propounded numerous discovery requests between March 2022 and July 2022, noticed depositions for Balt’s Chief Operating Officer and Vice President for Finance, and attended a private mediation session. [Declaration of Dylan Byrd (“Byrd Decl.”) (ROA 403), ¶¶ 2-5, 8.] In addition, Balt notes that Defendants participated in three IDCs, agreed to the appointment of a discovery referee, served additional discovery requests, served discovery responses, sought to notice additional witness depositions, and filed motions to compel further discovery. [Byrd Decl., ¶ 13.]

In reply, Defendants contend that Balt has not demonstrated waiver. As argued by Defendants, there was approximately one year between the filing of the Complaint and the filing of the instant motion. Defendants contend that during that 12-month period, there was a stipulated stay of four months. Moreover, Defendants contend they have brought only one motion before this Court—the January 2022 demurrer. According to Defendants, the only other “litigation” events that occurred were the initial propounding of written discovery and a failed mediation. Defendants argue that once the demurrer was overruled and their Answers became due, they timely raised the existence of the arbitration agreements as an affirmative defense and in the filing of the instant motion. Defendants also contend Balt did not suffer any undue prejudice or burden by any alleged delay in moving to compel arbitration.

As a preliminary matter, it is undisputed that Defendants Ferrera and Yang have agreements with Balt that contain arbitration provisions. Defendants have also provided copies of the agreements with this motion. Therefore, the existence of those agreements is not at issue.

However, the question of whether Defendants waived their right to compel arbitration is dispositive. Waiver usually “denotes the voluntary relinquishment of a known right…,” but “it can also refer to the loss of a right as a result of a party’s failure to perform an act it is required to perform, regardless of the party’s intent to relinquish the right.” (Saint Agnes Med. Ctr. V. PacifiCare of California (2003) 31 Cal.4th 1187, 1195.) The law favors arbitration, and waiver will not be “lightly inferred.” The party claiming the other waived the right to arbitrate “bears a heavy burden of proof.” (Ibid.)

Courts have considerable flexibility to determine when waiver occurs. Generally, a defendant waives the right to compel arbitration when it acts inconsistently with an intent to arbitrate, and its conduct prejudices the plaintiff’s case. (See, e.g., Spracher v. Paul M. Zagaris, Inc. (2019) 39 Cal.App.5th 1135, 1139.) However, “no single test delineates the nature of the conduct that will constitute a waiver of arbitration.” (Saint Agnes Med. Ctr., supra, 31 Cal.4th at p. 1195.) Instead, given the “ ‘ “variety of contexts”’” in which waiver may be found, the following factors are relevant to the determination: “ ‘ “(1) whether the party’s actions are inconsistent with the right to arbitrate; (2) whether ‘the litigation machinery has been substantially invoked’ and the parties ‘were well into preparation of a lawsuit’ before the party notified the opposing party of an intent to arbitrate; (3) whether a party either requested arbitration enforcement close to the trial date or delayed for a long period before seeking a stay; (4) whether a defendant seeking arbitration filed a counterclaim without asking for a stay of the proceedings; (5) ‘whether important intervening steps [e.g., taking advantage of judicial discovery procedures not available in arbitration] had taken place’; and (6) whether the delay ‘affected, misled, or prejudiced’ the opposing party.”’” (Saint Agnes Med. Ctr., supra, 31 Cal.4th at p. 1196; see also, Quach v. California Commerce Club, Inc. (2022) 78 Cal.App.5th 470, 477-478, rev. grntd. 8/24/22 (Case No. S275121), cited for persuasive value pursuant to CRC 8.1115.) Although no one factor is predominant, prejudice has been found to be a “critical” factor under California law. (Saint Agnes Med. Ctr., supra, 31 Cal.4th at p. 1196.)

Here, under an analysis of the St. Agnes factors, Defendants waived their right to compel Balt’s claims to arbitration.

As asserted by Balt, Defendants have been consistently litigating this matter since the Complaint was filed. Defendants are correct that “only” one year elapsed between the initiation of this action and the filing of the instant motion. But, in that time, Defendants took several significant steps that are inconsistent with an intent to arbitrate. First, Defendants demurred to the entire Complaint and moved to strike portions of the Complaint. Notably, one of Defendants’ primary grounds for demurrer was that the Complaint failed to allege the existence of a May 2021 “Post-Closing Amendment” that purportedly superseded all prior agreements between the parties. Yet, Defendants do not reference this agreement in the instant motion. Moreover, although Defendants’ demurrer referenced the May 2020 “separation of employment” agreement with Ferrara, they did not argue that the matter should be compelled to arbitration. Remarkably, in light of the instant motion to compel arbitration, Defendants’ demurrer noted that before the Complaint was filed, Balt sought to demand arbitration as to its claims against Defendant Yang. But at that time, Defendants raised the existence of the Post-Closing Amendment as a defense to Balt’s arbitration demand. 9See, ROA 13, Demurrer, 13:20-22, fn. 1; see also, Declaration of Eric J. Danowitz (attached to Demurrer), ¶ 6.]

Defendants then engaged in other substantive steps that are clearly inconsistent with an intent to arbitrate. First, after conducting extensive discovery, Defendants agreed to attend private mediation in November 2022 to resolve this dispute. Defendants’ agreement to mediate the dispute is particularly inconsistent with any purported intent to arbitrate. It is noted that none of the arbitration provisions in the four agreements relied upon by Defendants contain a requirement that the parties first go to mediation before demanding arbitration. [DiCorrado Decl., Exh. A, ¶ 19; Exh. B, ¶ 9.B.; Exh. C, ¶ 16; Exh. D, ¶ 11.B.] Defendants have failed to explain why they agreed to proceed to mediation despite their ostensible intention to arbitrate. Indeed, Defendants seek to shift the blame by stating that it was Balt who voluntarily agreed to go private mediation. But Defendants ignore the fact that they—not Balt—are the ones seeking to compel this matter to arbitration. Presumably, at the time of mediation, Defendants knew they intended to compel arbitration.

Therefore, it was incumbent upon Defendants—not Balt—to decline private mediation in lieu of arbitration.

Next, after an unsuccessful mediation and just days before filing their motion to compel arbitration, Defendants advised Balt that they intended to depose several Balt employees and Balt’s Person Most Knowledgeable (PMK). [Byrd Decl., ¶ 7.] Finally, even after moving to compel arbitration, Defendants propounded additional discovery requests in February 2023.

Defendants’ discovery practice is also inconsistent with an intent to arbitrate. Indeed, it is Defendants’ discovery practice that has placed this litigation in a procedural posture that makes it difficult to compel this matter to arbitration. Before mediation, Defendants propounded several sets of discovery requests on Balt, including 56 form interrogatories, more than 2,000 special interrogatories, approximately 500 requests for production of documents, and around 400 requests for admission. [Byrd Decl., ¶¶ 3-5.] As a result, Balt has already provided hundreds of discovery responses and produced more than 6,000 documents. [Id., ¶ 6.]

Defendants propounded these extensive discovery requests without raising its right to arbitration. (See, e.g., Lewis v. Fletcher Jones Motor Cars, Inc. (2012) 205 Cal.App.4th 436, 446.) Notably, because Defendants’ discovery requests and methods were so excessive, Balt was forced to file a motion for protective order. (ROA 91). Although the parties subsequently agreed to stay discovery pending the completion of mediation, Balt’s motion for protective order ultimately resulted in the Court temporarily staying the litigation, pending the appointment of a discovery referee. (ROA 228).

In the Court-ordered stipulation, the parties agreed that the discovery referee would have the authority to: (1) hear all discovery disputes, including motions to compel, motions to quash, and motions for protective orders; (2) present to the court any recommended orders regarding discovery disputes; (3) preside over hearings, take evidence, rule on objections, and rule on motions or other requests made during the hearings; (4) direct the issuance of subpoenas; (5) preside over depositions, and rule on the propriety of questions and objections; (6) conduct in camera reviews; and (7) conduct mandatory settlement conferences regarding any discovery issues. (ROA 231).

Regarding discovery, the arbitration provisions upon which Defendants base the instant motion ostensibly give an arbitrator broad powers. Both provisions state that any arbitration would occur before JAMS pursuant to its Employment Arbitration Rules & Procedures. [DiCorrado Decl., Exh. A, ¶ 19; Exh. B, ¶ 9.B.; Exh. C, ¶ 16; Exh. D, ¶ 11.B.] In addition, both arbitration provisions state that in “applying the standards set forth under the California Code of Civil Procedure,” the arbitrator would have the power to decide any motions brought by the parties and grant injunctions or other relief. [Ibid.] The consulting agreement with Ferrara specifically states the arbitrator must apply the California Discovery Act in conducting the arbitration proceeding; the consulting agreement with Yang references the arbitrator’s compliance with the California Evidence Code. [See, DiCorrado Decl., Exh. B, ¶ 9.B.; Exh. D, ¶ 11.B.]

However, by engaging in discovery practices that caused the Court to order the appointment of a discovery referee, Defendants acted in a manner that was inconsistent with its present claim of a right to arbitrate. It is because of Defendants’ actions that significant powers have been taken away from an arbitrator, even before any arbitration proceeding commences, and given to the discovery referee. (See, e.g., Guess? Inc. v. Superior Court (2000) 79 Cal.App.4th 533, 556, 558; Adolph v. Coastal Auto Sales, Inc. (2010 184 Cal.App.4th 1443, 1451.)

Throughout this more than year-long litigation process, Defendants’ conduct has been inconsistent with an intent to arbitration. Defendants never indicated that they intended to compel Balt’s claims to arbitration. As noted above, even before this litigation was initiated, Defendants fought at least one arbitration demand by Balt. Indeed, only when Defendants filed the instant motion, and concurrently filed their respective Answers to the Complaint, did they indicate that they had a right to arbitrate some or all of Balt’s claims. Now, in the current motion, Defendants imply that their demand for arbitration is timely because their Answers are due and “the present litigation is set to commence in earnest.” [Motion (ROA 143), 2:17-20.] But this demand comes only after Defendants’ unsuccessful demurrer, participation in extensive written discovery (while never once indicating that discovery should be barred because this dispute had to go to arbitration), a failed mediation, and a stated intent to notice several depositions, including PMK depositions. Moreover, even after Defendants’ ostensible request to compel arbitration, Defendants have continued acting inconsistently with that request by continuing to propound discovery requests. [Byrd Decl., ¶ 13.] Defendants have even purportedly filed a motion to compel Balt to provide additional discovery—a motion that is currently pending before the discovery referee. [Ibid.]

For months, Defendants remained mute on the subject of arbitration while taking full advantage of the opportunity to test the validity of Balt’s claims—first, through excessive discovery requests, then through mediation. This conduct caused prejudice to Balt. Not only has Balt been exposed to the substantial expense of pretrial discovery and mediation that would possibly have been avoided had Defendants timely asserted a right to arbitrate, but now the expense of a discovery referee has been added. In addition, through Defendants’ use of the discovery and mediation process, and their delay in asserting a right to arbitrate, Balt has “lost whatever efficiencies that would otherwise have been available to it through arbitration.” (See, Guess?, supra, 79 Cal.App.4th at p. 558.)

“[A] defendant who silently acquiesces to the judicial forum notwithstanding its contractual right to compel arbitration quickly comes to share [the] responsibility” for delays attending the litigation process. (Kokubu v. Sudo (2022) 76 Cal.App.5th 1074, 1089.) “A defendant who opposes proceeding in a judicial form should do so promptly so that the time and resources of the parties and the court are not wasted.” (Ibid.) Defendants did not do so here.

RULING:

The Motion to Compel Arbitration and Stay Proceedings by Defendants Treadstone Medical LLC, Treadstone Holdings LLC, M4D LLC, Infinity Neuro LLC (China), StoneWall, Vtail Medical LLC, David Ferrera, Dawson Le Randall Takahashi, and Charles Yang (collectively, “Defendant”) is DENIED on the ground that Defendants waived their right to compel arbitration.

Clerk to give Notice.