Opinion
23-cv-00143-CRB
10-19-2023
FBC MORTGAGE, LLC, Plaintiff, v. BRIAN SKARG, et al., Defendants.
ORDER DENYING MOTION TO COMPEL ARBITRATION AND GRANTING MOTION TO STRIKE
CHARLES R. BREYER UNITED STATES DISTRICT JUDGE
Plaintiff FBC Mortgage, LLC (“FBC”) brought suit based on the alleged misappropriation of its trade secrets by Defendant Broker Solutions, Inc. dba New American Funding (“NAF”) and former employees Defendant Brian Skarg, Defendant Amanda Benson, Defendant Ryan Gee, and Defendant Joshua Savea (former employee defendants hereinafter referred to as “Individual Defendants” or, with NAF, “Defendants”). See FAC (dkt. 7). Defendants now move to compel arbitration, and FBC separately moves to strike Defendants' affirmative defense pertaining to arbitration. See Mot. to Compel (dkt. 57); Mot. to Strike (dkt. 54). The Court finds this matter suitable for resolution without oral argument, per Civil Local Rule 7-1(b), VACATES the hearing currently set for October 27, 2023, DENIES the motion to compel arbitration, and GRANTS the motion to strike.
The Court outlined the allegations in the complaint in its Order Denying Motion to Dismiss (dkt. 32) and will not repeat them here.
FBC brought suit on January 11, 2023 and filed an amended complaint a week later. See Compl. (dkt. 1); FAC. The parties engaged “in lengthy settlement negotiations, which included various meet and confer efforts, the negotiation of a protective order, and extensive searching and production of information in an attempt to settle the underlying dispute,” Ridley Decl. (dkt. 54-1) ¶ 5. On June 16, 2023, Defendants filed a motion to dismiss FBC's trade secrets claims, causes of action nine and ten. See MTD (dkt. 19-1). They also objected to FBC's evidence. See Evidentiary Objections (dkt. 28). FBC moved for a temporary restraining order, see Pet. for TRO (dkt. 25), which Defendants opposed, see Opp'n to TRO (dkt. 32). The Court held a hearing on July 21, 2023 on the motion to dismiss and the petition for a TRO, at which Defendants appeared. See Motion Hearing (dkt. 42). The Court denied the TRO and the motion to dismiss on August 1, 2023. See Order on Motion for TRO (dkt. 44); Order on Motion to Dismiss (dkt. 43).
Following the Court's orders on those motions, Defendants on August 15, 2023 filed an Answer to the amended complaint, which did not mention arbitration. See Answer (dkt. 48). Three days later, in the course of preparing a joint case management statement, Defendants indicated for the first time that they intended to move to compel arbitration. Joint CMC (dkt. 49) at 2. On August 23, 2023, Defendants filed an amended answer, asserting as the forty-ninth affirmative defense that Defendants had the right to compel arbitration. Amended Answer (dkt. 53). FBC moved to strike that affirmative defense. See Motion to Strike. On September 20, 2023, Defendants moved to compel arbitration. Mot. to Compel.
II. LEGAL STANDARD
A. Motion to Compel Arbitration
The Federal Arbitration Act (FAA) provides that contractual arbitration agreements are “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2; Rent-A-Ctr., W., Inc. v. Jackson, 561 U.S. 63, 67-68 (2010). Private agreements to arbitrate under the FAA are enforced according to their terms. 9 U.S.C. § 4. Therefore, a party may petition a district court “for an order directing that such arbitration proceed in the manner provided for in such agreement.” Id.
“[T]here is no ‘strong federal policy favoring enforcement of arbitration agreements.' The federal policy is to treat arbitration agreements like other contracts.” Armstrong v. Michaels Stores, Inc., 59 F.4th 1011, 1014-15 (9th Cir. 2023) (citing Morgan v. Sundance, Inc., 142 S.Ct. 1708 (2022)). A party “cannot be required to submit to arbitration any dispute which he has not agreed so to submit.” AT&T Techs., Inc. v. Commc'ns Workers of Am., 475 U.S. 643, 648 (1986) (internal quotation marks omitted). Under the FAA, in assessing the enforceability of a contractual arbitration provision, a district court's role is “limited to determining (1) whether a valid agreement to arbitrate exists, and if it does, (2) whether the agreement encompasses the dispute at issue.” Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1130 (9th Cir. 2000). If the answer to both inquiries is affirmative, then the FAA requires the court to enforce the agreement in accordance with its terms. Id. “[T]he party resisting arbitration bears the burden of proving that the claims at issue are unsuitable for arbitration.” Green Tree Fin. Corp.- Ala. v. Randolph, 531 U.S. 79, 91 (2000).
B. Motion to Strike
Rule 12(f) of the Federal Rules of Civil Procedure permits a court to strike from a pleading an insufficient defense. Fed.R.Civ.P. 12(f). “[T]he function of a 12(f) motion to strike is to avoid the expenditure of time and money[, which] arise from litigating spurious issues by dispensing with those issues prior to trial....” Sidney-Vinstein v. A.H. Robins Co., 697 F.2d 880, 885 (9th Cir.1983). “Generally, Rule 12(f) motions are ‘disfavored' because they are ‘often used as delaying tactics, and because of the limited importance of pleadings in federal practice.'” Equine Solutions, Inc., v. Buntrock, No. 0704976 (CRB), 2008 WL 111237, at *2 (N.D. Cal. Jan.9, 2008) (citing Bureerong v. Uvawas, 922 F.Supp. 1450, 1478 (C.D. Cal.1996) (quotations and citations omitted)).
III. DISCUSSION
This order addresses first Defendants' motion to compel arbitration and then FBC's motion to strike the arbitration-related affirmative defense.
A. Motion to Compel Arbitration
Defendants move to compel arbitration of FBC's claims, arguing that the Individual Defendants' employment agreements “contain clear arbitration clauses requiring that any claims arising out of the Employment Agreements be submitted to binding arbitration.” Mot. to Compel at 6. They further argue that Plaintiff is aware of the arbitration provisions in the Employment Agreements, and that Plaintiff concedes that the Employment Agreements are “valid, enforceable, and binding.” Id. (quoting FAC ¶¶ 12-15). And Defendants argue that the arbitration clauses encompass the claims alleged by FBC. Id. at 11-13. FBC opposes the motion on three main grounds: first, that NAF has no basis to compel arbitration because it has no agreement to arbitrate with FBC (its competitor); second, that the Individual Defendants have waived the right to arbitrate; and third, that even if there was no waiver, the claims are outside the scope of the arbitration provisions. See Opp'n to Mot. to Compel (dkt. 63).
1. NAF
FBC's first argument, that NAF has no basis to compel arbitration, is indisputable. See Ridley Decl. ¶ 15 (“FBC has never entered into an agreement to arbitrate any dispute with [NAF].”). It is not clear why NAF joined with the Individual Defendants in bringing the motion to compel. Defendants do not even address this issue in their reply brief. See Reply re Mot. to Compel (dkt. 64). The only defendants who have any basis for moving to compel arbitration are the Individual Defendants, former employees of FBC.
2. Waiver
FBC's second argument, that those Individual Defendants have waived their right to compel arbitration, is also correct.
“[T]he test for waiver of the right to compel arbitration consists of two elements: (1) knowledge of an existing right to compel arbitration; and (2) intentional acts inconsistent with that existing right.” Hill v. Xerox Business Services, LLC, 59 F.4th 457, 468 (9th Cir. 2023). A party takes “intentional acts inconsistent with its right to arbitrate” “when a party chooses to delay his right to compel arbitration by actively litigating his case to take advantage of being in federal court.” Id. at 471 (quoting Martin v. Yasuda, 829 F.3d 1118, 1125 (9th Cir. 2016)). “[A] party's extended silence and delay in moving for arbitration may indicate a ‘conscious decision to continue to seek judicial judgment on the merits of [the] arbitrable claims,' which would be inconsistent with a right to arbitrate.” Martin, 829 F.3d at 1125 (quoting Van Ness Townhouses v. Mar Indus. Corp., 862 F.2d 754, 759 (9th Cir. 1988)). Courts are to “consider the totality of the parties' actions” in determining whether a party acted inconsistently with its right to arbitrate. Armstrong, 59 F.4th at 1015 (quoting Hill, 59 F.4th at 471).
Here, the Individual Defendants “acknowledged having notice of the arbitration clauses since at least January 11, 2023.” Ridley Decl. ¶ 16, Ex. E (9/8/23 letter from defense counsel stating that Complaint and FAC attached individual employment agreements with arbitration clauses). The first element of waiver is therefore satisfied.
As to the second element, Defendants assert somehow that they “immediately sought to compel arbitration as soon as they were permitted to file a responsive pleading in this matter.” Reply at 6-7. But that is false. FBC brought suit on January 11, 2023. Nothing prevented the Individual Defendants from filing a motion to compel arbitration immediately. The Individual Defendants might have reasonably held off on filing a motion to compel arbitration while engaging in “lengthy settlement negotiations.” See Ridley Decl. ¶ 5. Even so, they could have filed a motion to compel arbitration once those settlement discussions broke down. Instead, Defendants chose to file a motion to dismiss central claims in this case. See MTD. They also objected to FBC's evidence. See Evidentiary Objections. And they opposed FBC's petition for a TRO. See Opp'n to TRO. When Defendants failed in their motion to dismiss, they filed an Answer to the Amended Complaint, again not mentioning arbitration. See Answer. Although they referenced an intention to move to compel arbitration in the August 18, 2023 Joint CMC statement, see Joint CMC at 2, and included an affirmative defense of arbitrability in their August 23, 2023 amended answer, see Amended Answer, “[a] statement by a party that it has a right to arbitration in pleadings . . . is not enough to defeat a claim of waiver,” Hill, 59 F.4th at 471. Defendants did not move to compel arbitration until September 20, 2023. See Mot. to Compel. In all, Defendants waited over eight months, and a month and a half after receiving an adverse ruling on their motion to dismiss, before they moved to compel arbitration.
The motion to dismiss is significant. Defendants argue that “Individual Defendants have not taken advantage of judicial procedures unavailable in arbitration as the Individual Defendants' Motion to Dismiss and/or Demurrer could have been brought in arbitration.” Reply re Mot. to Compel at 7. That argument misses the point. Yes, the Individual Defendants could have challenged the FAC in arbitration. They did not. They chose to proceed in this Court, and they used this Court's resources. As the Martin court explained:
a party that signs a binding arbitration agreement and has subsequently been sued in court has a choice: it can either seek to compel arbitration or agree to litigate in court. It cannot choose both. A party may not delay seeking arbitration until after the district court rules against it in whole or in part; nor may it belatedly change its mind after first electing to proceed in what it believed to be a more favorable forum. Allowing it to do so would result in a waste of resources for the parties and the courts and would be manifestly unfair to the opposing party.Martin, 829 F.3d at 1128).
That the Individual Defendants here dragged their feet for only eight months and not longer is not dispositive. See Sywula v. Teleport Mobility, Inc., No. 21-cv-01450-BAS-SBC, 2023 WL 4630620, at *7 (S.D. Cal. July 18, 2023) (“the length of delay is just one factor that gives color to the totality of Defendants' conduct . . . and whether Defendants' acts were inconsistent with their known rights”). A court in the Southern District of California recently held that a defendant had not undertaken acts inconsistent with its right to arbitrate where-though it waited eight months to move-it raised the arbitration agreement as an affirmative defense in its answer, and “engaged in other litigation procedure only insofar as it was obligated to because of other plaintiffs who are not subject to the arbitration agreement, and filed a motion to compel arbitration without seeking any other relief on the merits.” Ashirwad v. Charter Commc'ns, LLC, No. 21-cv-2101-AJB-DDL, 2023 WL 3564938, at *3-4 (S.D. Cal. March 20, 2023). Here, Defendants waited eight months and affirmatively “engaged in other litigation procedure” to try to dismiss two of FBC's claims on the merits.
Defendants therefore took “intentional acts inconsistent with their right to arbitrate.” See Hill, 59 F.4th at 471 (quoting Martin, 829 F.3d at 1125); see also Armstrong, 59 F.4th at 1015 (“Obviously, ‘[s]eeking a decision on the merits of a key issue in a case indicates an intentional and strategic decision to take advantage of the judicial forum.'”) (quoting Newirth by & through Newirth v. Aegis Senior Cmtys., LLC, 931 F.3d 935, 944 (9th Cir. 2019)); Martin, 829 F.3d at 1126 (defendants waived right to compel arbitration where they filed “a motion to dismiss on a key merits issue”); Kelly v. Pub. Util. Dist. No. 2, 552 Fed.Appx. 663, 664 (9th Cir. 2014) (intentional acts inconsistent with the right of arbitration where parties “waited eleven months after the lawsuit was filed to demand arbitration, actively litigating the case in district court” and filing motion for preliminary injunction and motion to dismiss). The second element of waiver is therefore also satisfied.
See also id. n.4 (“when defendants move for dismissal with prejudice on a key merits issue that would preclude relief as to one or more of plaintiffs' claims . . . they are seeking a ruling on the merits.”).
Accordingly, the Individual Defendants waived their right to arbitrate.
3. Scope
Because the Court concludes that the Individual Defendants waived their right to arbitrate, the Court need not reach FBC's third argument, that its claims are outside the scope of the arbitration provisions.
4. Conclusion as to Motion to Compel
Because the Court concludes that NAF never had a right to compel arbitration, and that the Individual Defendants waived their right to compel arbitration, the Court DENIES Defendants' motion to compel arbitration.
B. Motion to Strike
In a related motion, FBC moves the Court to strike paragraph 49 of Defendants' amended answer. Mot. to Strike. That paragraph is where Defendants assert the affirmative defense of “Arbitration,” stating: “Plaintiff's causes of action, and each of them, are subject to binding arbitration pursuant to enforceable arbitration agreements between the parties.” Amended Answer ¶ 49. FBC argues that this affirmative defense is “insufficient” pursuant to Rule 12(f) of the Federal Rules of Civil Procedure because “NAF has absolutely no basis for compelling arbitration with FBC” and “Individual Defendants have waived any right to compel arbitration.” Mot. to Strike at 2. Defendants respond that “a motion to strike is not the proper mechanism to dismiss portions of a pleading,” and that FBC “fails to demonstrate that Defendants' arbitration defense is an ‘insufficient defense' per Rule 12(f).” Opp'n to Mot. to Strike (dkt. 61) at 5-6.
The motion does not seek to “dismiss” anything.
A defense is “insufficient if ‘there are no questions of fact,' ‘any questions of law are clear and not in dispute,' and ‘under no set of circumstances could the defense succeed.'” Woods v. Shaffer, No. 14-cv-1936-CW, 2018 WL 6436981, at *1 (N.D. Cal. Dec. 7, 2018) (quoting SEC v. Sands, 902 F.Supp. 1149, 1165 (C.D. Cal. 1995)). Whether or not FBC would have satisfied the 12(f) standard absent the Court's ruling on the motion to compel arbitration, the Court ruled herein that Defendants' efforts to compel arbitration cannot succeed. Accordingly, the defense of arbitrability is insufficient. The Court GRANTS the motion to strike.
IV. CONCLUSION
For the foregoing reasons, the Court DENIES the motion to compel arbitration and GRANTS the motion to strike.
IT IS SO ORDERED.