Opinion
B332067
07-29-2024
LFG PAYMENTS, INC, Plaintiff and Respondent, v. CHRISTIAN SMITH, Defendant and Appellant.
Smith, Gambrell &Russell, Gregg A. Rapoport for Defendant and Appellant. Venable, Ryan M. Lapine, Rodney S. Lasher for Plaintiff and Respondent.
NOT TO BE PUBLISHED
APPEAL from an order of the Superior Court of Los Angeles County No. 22STCV35450 Jon R. Takasugi, Judge. Reversed.
Smith, Gambrell &Russell, Gregg A. Rapoport for Defendant and Appellant.
Venable, Ryan M. Lapine, Rodney S. Lasher for Plaintiff and Respondent.
KELLEY, J. [*]
Christian Smith appeals from an order denying his motion to compel arbitration of a fraud action brought against him by LFG Payments, Inc. (LFG), which employed Smith to write technical materials. LFG alleges Smith falsified timesheets and accepted payment for work not performed. Smith contends the trial court should have compelled arbitration under the terms of an arbitration agreement between LFG and Gun.io, a staffing agency that placed Smith with LFG. Although Smith is not a party to the arbitration agreement, we conclude he may nevertheless enforce it under the doctrine of equitable estoppel. We therefore reverse the order.
BACKGROUND
Smith is a researcher and software developer. LFG is a software development company.
Gun.io is a company that contracts with professionals, including software engineers, and then places them with clients such as LFG who need to scale their engineering teams.
In March 2022, Gun.io arranged for Smith to interview with LFG, potentially to work as a technical writer.
On April 15, 2022, LFG entered into an agreement with Gun.io pursuant to which LFG agreed to pay Gun.io $350 an hour for 80 hours per month, in advance of each month, "for the Services of Christian Smith." Section 12 of the Subscription Agreement provided that LFG's relationship with Smith gave it control only over Smith's services, "and no other activities," and made it clear that Gun.io was to be responsible for "all compensation paid to (Smith)." It was also made clear that Gun.io "retain[ed] full responsibility and authority to respond to (Smith's) issues and concerns and [could] discipline, reassign, or terminate (Smith) as needed in Gun.io's sole discretion."
On May 11, 2022, Gun.io and LFG executed a modified agreement which provided for LFG to pay Gun.io for 120 hours per month for Smith's services. (We refer to the two agreements collectively as "the Subscription Agreement.") The Subscription Agreement identified no other consultant whose services would be provided to LFG pursuant to its terms.
The Subscription Agreement provided 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 ...." (Italics added.) The only parties who executed the Subscription Agreement were Gun.io and LFG, although, as noted above, Smith was the only consultant whose services were mentioned in it. The Subscription Agreement provided it would be governed by Delaware law.
On April 19, 2022, Gun.io entered into a separate agreement with Smith (the Consultant Agreement), pursuant to which Gun.io agreed to compensate Smith for work he performed as a consultant for Gun.io's clients.
Smith worked for LFG, recording and logging his time with Gun.io. Gun.io sent billings to LFG.
In November 2022, LFG sued Smith for affirmative fraud, fraud by concealment, unjust enrichment, and violation of Business and Professions Code section 17200. LFG alleged that on April 18, 2022, it "engaged" Smith to write a technical paper, but by mid-June 2022 he had performed no significant work. LFG alleged Smith submitted false invoices setting forth 187 hours worked and failed to advise LFG of his lack of progress. As a result, LFG paid nearly $100,000 for a body of work it alleged could have been performed by anyone in less than an hour. LFG's complaint avoided any mention of Gun.io, asserting for example that Smith submitted false timesheets to LFG and that LFG paid him (not Gun.io) in reliance on those time records.
Smith moved to compel arbitration under the Subscription Agreement between Gun.io and LFG. He argued that even as a nonsignatory to that agreement, he was entitled to compel arbitration based on theories of third party beneficiary and equitable estoppel. Smith argued LFG was equitably estopped from avoiding the arbitration provision in the Subscription Agreement because its claims against him were inextricably intertwined with that agreement. LFG opposed the motion. After a hearing, the trial court found that LFG's claims were not inextricably intertwined with the Subscription Agreement because "[t]here is nothing in the Subscription Agreement which will . . . shed light on what [Smith] was obligated to do, or what he was owed." The court therefore rejected Smith's equitable estoppel theory (and his third party beneficiary theory) and denied his motion to compel arbitration.
DISCUSSION
According to its terms, the Subscription Agreement required arbitration only of disputes between the parties to the agreement. Although Smith did not execute that agreement, he argues he is nevertheless entitled to compel arbitration under it based on theories of equitable estoppel, third party beneficiary, and agency.
Because the material facts are undisputed, we review de novo whether the trial court correctly denied LFG's motion to compel arbitration. (Soltero v. Precise Distribution, Inc. (June 18, 2024, D083308) ___ Cal.App.5th ___ [2024 Cal.App. Lexis 383, at *7] (Soltero); Ford Motor Warranty Cases (2023) 89 Cal.App.5th 1324, 1331.)
I. Equitable Estoppel
"Private arbitration (also called contractual or nonjudicial arbitration) 'is a procedure for resolving disputes which arises from contract; it only comes into play when the parties to the dispute have agreed to submit to it.'" (Toal v. Tardif (2009) 178 Cal.App.4th 1208, 1218.) "By agreeing to arbitration, parties anticipate a relatively speedy, inexpensive and final resolution, one that may be based on 'broad principles of justice,' rather than strictly the rule of law. [Citation.] Consequently, 'as a general rule courts will indulge every reasonable intendment to give effect to arbitration proceedings.'" (Ibid.) But "a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." (Atkinson v. Sinclair Refining Co. (1962) 370 U.S. 238, 241; see also Victoria v. Superior Court (1985) 40 Cal.3d 734, 744 [there is no policy compelling anyone to accept arbitration of controversies which they have not agreed to arbitrate].) "Because arbitration is a matter of contract, the basic rule is that one must be a party to an arbitration agreement to be bound by it or invoke it-with limited exceptions." (Soltero, supra, Cal.App.5th [Lexis 383 at p. *5].)
One exception is the doctrine of equitable estoppel, which precludes a party from asserting rights they otherwise would have had against another when their own conduct renders assertion of those rights inequitable. (Goldman v. KPMG, LLP (2009) 173 Cal.App.4th 209, 220 (Goldman).) In the arbitration context, "if a plaintiff relies on the terms of an agreement to assert his or her claims against a nonsignatory defendant, the plaintiff may be equitably estopped from repudiating the arbitration clause of that very agreement. In other words, a signatory to an agreement with an arbitration clause cannot . . . 'on the one hand, seek to hold the non-signatory liable pursuant to duties imposed by the agreement, which contains an arbitration provision, but, on the other hand, deny arbitration's applicability because the defendant is a non-signatory.'" (Ibid.) "[T]he sine qua non for application of equitable estoppel as the basis for allowing a nonsignatory to enforce an arbitration clause is that the claims the plaintiff asserts against the nonsignatory must be dependent upon, or founded in and inextricably intertwined with, the underlying contractual obligations of the agreement containing the arbitration clause." (Goldman, supra, 173 Cal.App.4th at pp. 217-218; see also Jones v. Jacobson (2011) 195 Cal.App.4th 1, 20 ["The doctrine focuses on the 'nature of the claims asserted by the plaintiff against the nonsignatory defendant.' [Citation.] 'Claims that rely upon, make reference to, or are intertwined with claims under the subject contract are arbitrable' "].) "This requirement comports with, and indeed derives from, the very purposes of the doctrine: to prevent a party from using the terms or obligations of an agreement as the basis for his claims against a nonsignatory, while at the same time refusing to arbitrate with the nonsignatory under another clause of that same agreement." (Goldman, at p. 221.)
Delaware law is to the same effect. (See Wilcox &Fetzer, Ltd. v. Corbett &Wilcox, No. Civ.A 2037-N, 2006 WL 2473665, at *5 (Del. Ch. Aug. 22, 2006) ["equitable estoppel applies when the signatory to a written agreement containing an arbitration clause must rely on the terms of the written agreement in asserting its claims against the nonsignatory"] italics omitted.)
Applying these principles, we conclude the trial court incorrectly declined to compel arbitration based on the doctrine of equitable estoppel.
LFG sued Smith for his alleged fraudulent billing, i.e., misrepresenting his work, concealing that he did no work, and nevertheless accepting pay for hours he did not work. However, the source of any expectation LFG had for Smith to perform work, including the volume and quality of that work and the amount LFG was induced to pay for Smith's conduct, is rooted in the Subscription Agreement with Gun.io. Therefore, LFG sought "to hold the non-signatory liable pursuant to duties imposed by the agreement." (Goldman, supra, 173 Cal.App.4th at p. 220.)
Reviewing the elements for LFG's causes of action illuminates how they depend on the obligations arising from the Subscription Agreement. For example, the elements of affirmative fraud are" '(a) misrepresentation (false representation, concealment, or nondisclosure); (b) knowledge of falsity (or "scienter"); (c) intent to defraud, i.e., to induce reliance; (d) justifiable reliance; and (e) resulting damage.'" (Lazar v. Superior Court (1996) 12 Cal.4th 631, 638.) "[T]he elements of an action for fraud based on concealment are: (1) the defendant must have concealed or suppressed a material fact, (2) the defendant must have been under a duty to disclose the fact to the plaintiff, (3) the defendant must have intentionally concealed or suppressed the fact with the intent to defraud the plaintiff, (4) the plaintiff must have been unaware of the fact and would not have acted as he did if he had known of the concealed or suppressed fact, and (5) as a result of the concealment or suppression of the fact, the plaintiff must have sustained damage." (Marketing West, Inc. v. Sanyo Fisher (USA) Corp. (1992) 6 Cal.App.4th 603, 612-613; see also Civ. Code, § 1710 ["A deceit . . . is . . . [¶] . . . [¶] [t]he suppression of a fact, by one who is bound to disclose it ...."].)
Here, for Smith to be liable for affirmative fraud, LFG must have had some reason to rely on his representation that he performed work for the software developer which justified compensation. And to determine the amount of LFG's damages, it is necessary to know the quantum of work it reasonably expected and the amount it agreed to pay. But Smith's duty to perform work for LFG, and the measure of what LFG could reasonably expect to pay for that work, arose only from his "engagement" by LFG, which came only under the Subscription Agreement. Similarly, to be liable for fraud by concealment, Smith must have been under a duty to disclose some fact to LFG. But Smith's only duty to do so arose from the engagement founded upon the Subscription Agreement.
LFG's complaint is crafted to avoid any mention of Gun.io, asserting for example that Smith submitted false time sheets to LFG and that LFG paid him (not Gun.io) in reliance on these false time records. However, the facts are undisputed that LFG was to pay Gun.io, not Smith, and to do so in advance of each month. It is also the case that Smith recorded and logged his time with Gun.io, and it was Gun.io which sent billings to LFG. The Subscription Agreement (§ 12) also provided that LFG's relationship with Smith gave it control only over Smith's services, "and no other activities," and this same provision made it clear that Gun.io was to be responsible for "all compensation paid to (Smith)." It was also made clear that Gun.io "retain[ed] full responsibility and authority to respond to (Smith's) issues and concerns and [could] discipline, reassign, or terminate (Smith) as needed in Gun.io's sole discretion." Given all of these facts, the fraud claims asserted by LFG clearly arise from the relationship created and defined in the Subscription Agreement.
LFG's causes of action for unjust enrichment and violation of Business and Professions Code section 17200 are similarly bound to the Subscription Agreement: To determine the extent to which Smith's acceptance of payment from LFG was unjust and unfair requires understanding the terms of that agreement.
Accordingly, LFG's complaint is "inextricably bound up with the obligations imposed by the agreement containing the arbitration clause." (Goldman, supra, 173 Cal.App.4th at p. 219, italics omitted.) LFG thus seeks to impose liability on Smith based on the terms of its Subscription Agreement with Gun.io while simultaneously avoiding the arbitration clause of that same agreement. This would be inequitable.
LFG argues it does not seek to enforce the terms of its Subscription Agreement with Gun.io against Smith, as that agreement is only a "tangential" fact that provides background to LFG's and Smith's relationship. Even if the contract did not exist, LFG argues, it would have the exact same claims against Smith related to his misrepresentations based on a solely quasi-contractual or implied-in-fact agreement reflected by the parties' course of conduct. The trial court essentially accepted this argument when it concluded that LFG's claims were not inextricably intertwined with the Subscription Agreement because "[t]here is nothing in the Subscription Agreement which will . . . shed light on what [Smith] was obligated to do, or what he was owed."
We find this analysis unpersuasive-the Subscription Agreement is central, not tangential, to LFG's claims. Had Smith not reached his agreement with Gun.io to provide consulting services, the Subscription Agreement would have been a nullity because the only services it contemplated were to be provided by Smith. No other consultant was mentioned. LFG's own allegations assert that it "engaged" Smith, and as the description above makes clear, the essential terms of that engagement were found not in some unwritten understanding or course of dealing between Smith and LFG, but instead were specified only in the Subscription Agreement. And, when LFG wanted to increase Smith's hours (from 80 to 120 per month), that circumstance led not only to a change in the parties' dealings but also to a modified Subscription Agreement with Gun.io (which modification also included an arbitration clause).
It is perhaps true that if there had been no written agreement of any kind, and Smith and LFG had entered into a consulting arrangement and then conducted themselves in the manner alleged, that LFG might have a quasi-contractual claim against Smith. But this speculation ignores the fact that Smith would not have worked for LFG absent the Subscription Agreement, so there would have been no course of conduct between the parties untethered to a writing that provided for disputes "relating in any way" to Smith's services to "be resolved via arbitration." It also ignores LFG's own complaint, where it alleges that it and Smith entered into an "engagement," under which Smith was obligated to provide work for which LFG was obligated to pay. We cannot squint away the fact that those obligations arose in the first instance in the Subscription Agreement, not the parties' course of conduct.
This interconnectedness between the Subscription Agreement and the substance of LFG's claims makes it inequitable for LFG to avoid arbitration. "[T]he '" 'fundamental point'"' of using equitable estoppel to compel arbitration is to prevent a party from taking advantage of a contract's substantive terms while avoiding those terms requiring arbitration [citation]." (Ford Motor Warranty Cases, supra, 89 Cal.App.5th at p. 1336.) Here, LFG's claims are all founded upon the substantive terms of the Subscription Agreement. That agreement defined who would provide the services (Smith), as well as the quantity of his work to be provided (80 and later 120 hours per month) and the value of those services as reflected in the amount LFG would pay to receive them ($350 per hour). LFG cannot embrace all of those substantive terms of the Subscription Agreement in support of its claims against Smith yet avoid the arbitration provision in that agreement.
The trial court therefore erred in denying Smith's motion to compel arbitration.
II. Other Theories
Given our conclusion that LFG's claims against Smith should be arbitrated under the Subscription Agreement based on equitable estoppel, we have no reason to address the merits of the two other bases asserted by Smith and contested by LFG. We do note, however, that one of these theories (agency) was not raised below and thus would not properly be grounds for reversal in any event. (Premier Medical Management Systems, Inc. v. California Ins. Guarantee Assn. (2008) 163 Cal.App.4th 550, 564.)
III. Agency
Smith argues for the first time on appeal that he may enforce the arbitration as Gun.io's agent. An agency relationship is another exception to the general rule that only a party to an arbitration agreement may enforce it. (Soltero, supra, ___ Cal.App.5th ___ [Lexis 383 at p. *17].) The exception applies, and a defendant may enforce the arbitration agreement, when the defendant acted as an agent of a party to an arbitration agreement. (See ibid.)
However, we ordinarily do not consider claims made for the first time on appeal which could have been but were not presented to the trial court. (Premier Medical Management Systems, Inc. v. California Ins. Guarantee Assn., supra, 163 Cal.App.4th at p. 564.) Here, Smith did not argue below that he was entitled to enforce the Subscription Agreements arbitration clause as Gun.io's agent. We therefore deem the point forfeited.
DISPOSITION
The order denying Smith's motion to compel arbitration is reversed. Smith is to receive his costs on appeal.
We concur: ROTHSCHILD, P. J., WEINGART, J
[*] Judge of the San Luis Obispo County Superior Court, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.