Judge Wesley L. Hsu, Case 22PSCV00967 2023-04-20 Tentative Ruling

Plaintiff Glorious Sky, LLC’s and Cross-Defendant Ke Gao’s Motion to Compel Binding

Plaintiff Glorious Sky, LLC (“Glorious Sky”) alleges as follows: On May 3, 2022, a written

agreement was made between Glorious Sky and Defendant MT Hermon LLC (“MT”) for bitcoin

On September 12, 2022, Glorious Sky filed a First Amended Complaint, asserting causes of action against MT, Mike Tian (“Mike”), Chris Tian (“Chris”) and Does 1-50 for:

On October 18, 2022, MT filed a cross-complaint, asserting causes of action against Glorious Sky, Ke Gao (“Gao”) and Roes 1-10 for:

“A proceeding to compel arbitration is in essence a suit in equity to compel specific performance of a contract.” (Freeman v. State Farm Mutual Auto Insurance Co. (1975) 14 Cal.3d 473, 479.) Such enforcement may be sought by a party to the arbitration agreement. (Code Civ. Proc., § 1281.2.)

The party seeking to compel arbitration bears the burden of proving the existence of a valid arbitration agreement by the preponderance of the evidence. (Hotels Nevada v. L.A. Pacific Center, Inc. (2006) 144 Cal.App.4^th 754, 761.) The burden then shifts to the opposing party to prove by a preponderance of the evidence a defense to enforcement (e.g., fraud, unconscionability, etc.) (Id.) “In these summary proceedings, the trial court sits as a trier of fact, weighing all the affidavits, declarations, and other documentary evidence, as well as oral testimony received at the court’s discretion, to reach a final determination.” (Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4^th 951, 972.)

Glorious Sky and Gao move the court for an order compelling binding arbitration and staying the proceedings pending the outcome of the arbitration.

Glorious Sky and Gao seek to compel arbitration of this case pursuant to Paragraph 10.2 in a “Hosting and Security Agreement” (“Agreement”). (Opperwall Decl., ¶ 5, Exh. 1.) The aforementioned paragraph reads as follows:

“10.2. Alternative Dispute Resolution. Except as set forth in this Section 9, any

and all disputes, complaints, controversies, claims and grievances arising under,

accordance with the Commercial Arbitration Rules of the American Arbitration Association. The obligation to arbitrate shall extend to any affiliate, subsidiary,

parties hereto and said decision and award may be entered as a final judgment in

any court of competent jurisdiction. Notwithstanding said Rules, any arbitration

before one (1) arbitrator who shall be an attorney who has substantial experience

accordance with, and the rights of the parties shall be governed by, the laws of the

neither Party shall institute an arbitration, or any other proceeding to resolve such disputes between the parties before that Party has sought to resolve disputes through direct negotiation with the other Party. If disputes are not resolved within three (3)

weeks after a demand for direct negotiation, the parties shall attempt to resolve

disputes through mediation conducted in California state. If the parties do not agree

Arbitration Association to appoint a mediator who shall be an attorney who has substantial experience in commercial law issues. If the mediator is unable to

facilitate a settlement of disputes within forty-five (45) days, the mediator shall

issue a written statement to the parties to that effect and the aggrieved Party may

then seek relief through arbitration as provided above. The fees and expenses of the mediator shall be split and paid equally by each of the parties. In the event of any arbitration between the parties hereto involving this Agreement or the respective

rights of the parties hereunder, the Party who does not prevail in such arbitration

shall pay all the prevailing Party's reasonable attorneys' and experts' fees, costs and expenses incurred by the prevailing Party in resolving said matter. As used herein

the term 'prevailing Party' shall include, but not be limited to, a Party who obtains

legal counsel or brings an action against the other by reason of the other's breach or default and obtains substantially the relief sought whether by compromise,

settlement, or judgment. execution of this Agreement, the parties consent to the jurisdiction of the American Arbitration Association and waive any objection

MT and Mike do not dispute the existence of the Agreement or Paragraph 10.2 therein but contend that arbitration cannot be compelled because Mike is not a party or signatory to same. The court rejects this argument, however, inasmuch as Paragraph 10.2 expressly binds “any affiliate, subsidiary, officer, employee, shareholder, principal, agent, trustee in bankruptcy or guarantor of a party making or defending any claim hereunder.” Glorious Sky has alleged, and Mike has not disputed, that Mike is MT’s agent. (FAC, Attachment 9, P. 4, ¶ 3.)

MT and Mike next argue that the arbitration clause is unenforceable on the basis that Glorious Sky and Gao have not satisfied requirements identified in the Agreement prior to seeking to compel arbitration, that Glorious Sky waived its right to compel arbitration, and that the arbitration clause is substantively unconscionable.[1]

The court agrees with MT’s and Mike’s first two arguments. Again, Paragraph 10.2 reads, in relevant part, that “neither Party shall institute an arbitration, or any other proceeding to resolve such disputes between the parties before that Party has sought to resolve disputes through direct negotiation with the other Party. If disputes are not resolved within three (3) weeks after a demand for direct negotiation, the parties shall attempt to resolve disputes through mediation conducted in California state. If the parties do not agree on a mediator within ten (10) days, either Party may request the American Arbitration Association to appoint a mediator who shall be an attorney who has substantial experience in commercial law issues. If the mediator is unable to facilitate a settlement of disputes within forty-five (45) days, the mediator shall issue a written statement to the parties to that effect and the aggrieved Party may then seek relief through arbitration as provided above.”

The parties have engaged in “direct negotiation” to resolve this matter; however, these efforts appear to have occurred, at least in substantial part, subsequent to Glorious Sky’s September 1, 2022 filing of the original complaint. (Opperwall Decl., ¶¶ 7, 8, 11 and 12; Gao Decl., ¶¶ 2-3.) This “direct negotiation” was intended to precede the institution of any arbitration “or any other proceeding to resolve such disputes between the parties,” such as the filing of a lawsuit. Further, the Agreement required the parties to attempt to resolve any disputes through mediation in the event direct negotiations were unsuccessful before seeking arbitration “or any other proceeding,” which was not done here. The Agreement also plainly states that, if the parties could not agree on a mediator, either party could request the appointment of a mediator though the American Arbitration Association, which does not appear to have been done. The Agreement provides that, if the mediator is unable to informally resolve the matter with the parties, the mediator is to issue a written statement and only then may the aggrieved party seek relief through arbitration. Here, although Glorious Sky made a “formal demand for mediation followed by binding arbitration” on January 15, 2023, this demand was months after it had already filed this lawsuit.

Additionally, the court finds that Glorious Sky has waived its right to compel arbitration at this juncture. (Code Civ. Proc., § 1281.2, subd. (a).) “In determining waiver, a court can consider (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.” (St. Agnes Medical Center v. Pacificare of California (2003) 31 Cal.4^th 1187, 1196.)

Here, Glorious Sky not only filed its original complaint and FAC, answered the cross-complaint, filed a case management statement and posted jury fees, but also propounded three sets of full written discovery (including form and special interrogatories, requests for admissions and requests for documents) on “defendants” and obtained responses to same in addition to seeking provisional relief via an application for writ of attachment. (Shtofman Decl., ¶ 5.) MT’s and Mike’s counsel Robert Scott Shtofman (“Shtofman”) represents that, with respect to the written discovery, Glorious Sky’s counsel Stephen Opperwall refused to provide defendants more time to respond to the subject discovery and “threatened to file motions to compel.” (Shtofman Decl., ¶ 5). The court finds that these actions, in addition to Glorious Sky’s and Gao’s non-compliance with the procedure articulated in Paragraph 10.2 of the Agreement, constitute, at a minimum, “actions. . . inconsistent with the right to arbitrate.”

[1] Incidentally, the court rejects MT’s and Mike’s unconscionability argument. Unconscionability is analyzed as having a procedural and a substantive element.” (Kinney v. United HealthCare Services, Inc. (1999) 70 Cal.App.4^th 1322, 1329 [emphasis added].) “Both procedural and substantive unconscionability must be present before a court can refuse to enforce an arbitration provision based on unconscionability. However, the two elements need not be present in the same degree.” (O’Hare v. Municipal Resource Consultants (2003) 107 Cal.App.4^th 267, 273 [emphasis added].) “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.” (Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4^th 83, 114 [quotation marks and citation omitted].) “The burden of proving unconscionability rests upon the party asserting it.” (OTO, L.L.C. v. Kho (2019) 8 Cal.5^th 111, 126.) MT and Mike have failed to address procedural unconscionability whatsoever; since both procedural and substantive unconscionability must be present, their failure to note any procedural unconscionability renders their argument incomplete.