Opinion
3:22-cv-301-JR
07-11-2022
JOHN MORRIS III, Plaintiff, v. BIOTRONIK, INC.; JOHN DOES 110; JANE DOES 1-10; DOE PARTNERSHIPS 1-10; DOE CORPORATIONS 1-10; DOE "NONPROFIT" CORPORATIONS 1-10; and DOE GOVERNMENTAL ENTITIES 1-10, Defendants.
FINDINGS AND RECOMMENDATION
Jolie A. Russo United States Magistrate Judge
Plaintiff, John Morris, brings this action alleging defendant, Biotronik, Inc., breached an authorized independent sales representative agreement between the parties and violated Hawaii public policy by terminating the agreement on September 14, 2021. Plaintiff initiated the case in the First Circuit Court of the State of Hawaii. On December 27, 2021, defendant removed the case to the United States District for the District of Hawaii. On February 23, 2022, the Hawaii District Court granted defendant's motion to transfer venue to this Court based on a forum selection clause in the agreement. Defendant now moves to compel arbitration and dismiss this case or, alternatively, to stay the proceedings in this court. For the reasons stated below, the motion to compel arbitration should be granted.
ALLEGATIONS
Plaintiff began operating as an independent sales representative for defendant on November 1, 2015, selling cardiac medical devices to medical facilities and physicians within the State of Hawaii. Complaint (ECF 1-2) at ¶ 4.
On August 1, 2020, plaintiff executed an Authorized Independent Sales Representative Agreement with defendant to work as an authorized independent sales representative of defendant's, continuing to sell cardiac medical devices in Hawaii. Id. at ¶ 5. Plaintiff agreed to take all commercially reasonable actions necessary or appropriate to sell products to customers in the territory and devote sufficient time and effort to providing services such that plaintiff's aggregate unit sales of all existing and future products increase each calendar year over the prior calendar year in exchange for compensation. Id. at ¶ 7.
Plaintiff alleges he developed a close relationship with one particular physician in order to maintain or increase sales by attending events with him and inviting him to his home. Id. at ¶¶ 1112. However, plaintiff asserts the physician would often consume alcohol to excess and become abusive. Id. ¶ 13. Plaintiff alleges defendant's employee witnessed such behavior. Id. at ¶ 14.
Plaintiff alleges that on the evening of September 3, 2021, plaintiff and his wife were invited to this physician's home for dinner and during dinner the physician consumed alcohol, started a verbal altercation with plaintiff, stood up to berate plaintiff and sprayed saliva from his mouth onto plaintiff. Id. at ¶ 16-18. Plaintiff alleges he feared exposure to CO VID 19 and struck the physician with a closed fist on the chest. Id. at ¶ 19. The physician informed defendant and on September 24, 2021, defendant terminated plaintiff for violating the terms of the agreement. Id. at ¶ 22-23.
Plaintiff asserts he had complied with the terms of the agreement and that defendant breached the agreement by prematurely terminating his authorized representation. Plaintiff further alleges breach of the covenant of good faith and fair dealing, and termination of a contract in violation of Hawaii public policy.
DISCUSSION
Defendant seeks to compel arbitration pursuant to the agreement.
Under the Federal Arbitration Act (FAA), 9 U.S.C. §§ 1-4, any arbitration agreement within its scope is enforceable and district courts must direct parties to proceed to arbitration on issues covered by a signed arbitration agreement. Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1130 (9th Cir. 2000). The Court's role under the FAA is therefore limited to determining (1) whether a valid agreement to arbitrate exists and if it does; (2) whether the agreement encompasses the dispute at issue. Id.
The independent sales agreement between the parties provides:
15.5 This Agreement will be governed by and construed in accordance with the internal laws of the State of Oregon without giving effect to any choice or conflict of law provision or rule. Each party irrevocably submits to the exclusive jurisdiction and venue of the federal and state courts located in the District of Oregon and/or Clackamas County Oregon, respectively, in any suit, action, or proceeding arising out of or based upon this Agreement or the Services.
15.6 Notwithstanding Section 15.5, all claims, demands, controversies, and disputes of any nature that relate in any way to this Agreement will be resolved by arbitration by the Arbitration Service of Portland in Portland, Oregon. The award of the arbitrator will be final and binding and may be entered in any court.
15.7 The prevailing party in any dispute arising out of or relating to this Agreement will be entitled to recover all attorneys' fees and other expenses reasonably incurred in such dispute.Authorized Independent Sales Agreement (ECF 38 Ex A) at ¶¶ 15.5 - 15.7.
Plaintiff does not dispute that the agreement to arbitrate covers the claims raised in his complaint. Rather, plaintiff asserts the arbitration clause is unconscionable and therefore unenforceable.
To determine enforceability of the clause, the Court applies ordinary state-law principles that govern the formation of contracts. See First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995). Plaintiff contends the arbitration agreement contains an unreasonable fee shifting provision. Plaintiff estimates that, in accordance with the arbitration rules for the Arbitration Service of Portland, the arbitrator's time would likely cost $20,000 and require that he deposit about $10,000 to arbitrate his claim at the outset of the case. Plaintiff notes that if he loses, in addition to paying the other half of the arbitrator's fee, he would be responsible for defendant's attorney fees as well. Plaintiff argues such prohibitive expenses render the agreement unconscionable given his inability to fund the required deposit at this time.
Whether the facts support a determination of unconscionability is a question of law to be decided based on the facts in existence at the time the contract was made. Best v. U.S. National Bank, 303 Or. 557, 560, 739 P.2d 554, 556 (1987). The party asserting unconscionability bears the burden of demonstrating that the provision in question is unconscionable. W.L. May Co. v. Philco-Ford Corp., 273 Or. 701, 707, 543 P.2d 283, 286 (1975).
The test for unconscionability has both procedural and substantive components. Procedural unconscionability refers to the conditions of contract formation and two factors: oppression and surprise. Oppression exists when there is inequality in bargaining power between the parties, resulting in no real opportunity to negotiate the terms of the contract and the absence of meaningful choice. Vasquez-Lopez v. Beneficial Oregon, Inc., 210 Or.App. 553, 567, 152 P.3d 940, 948 (2007). Substantive unconscionability focuses on whether the substantive terms unfairly favor the party with greater bargaining power. Id.
The primary focus ... appears to be relatively clear: Substantial disparity in bargaining power, combined with terms that are unreasonably favorable to the party with the greater power may result in a contract or contractual provision being unconscionable. Unconscionability may involve deception, compulsion, or lack of genuine consent, although usually not to the extent that would justify rescission under the principles applicable to that remedy. The substantive fairness of the challenged terms is always an essential issue.Carey v. Lincoln Loan Co., 203 Or.App. 399, 422-23, 125 P.3d 814, 828 (2005).
In this case, plaintiff does not assert procedural unconscionability. Instead, plaintiff focuses on the fee shifting provision along with the inclusion of the Arbitration Service rules asserting that the result is a prohibitive expense unfairly favoring defendant. Cf. Jensen v. Fisher Commc'ns, Inc., 2014 WL 6851952, at *9 (D. Or. Dec. 3, 2014):
The Court notes that in this case, there is not an employer/employee relationship. Plaintiff is an independent contractor and there is no suggestion in the record that there was substantial disparity in bargaining power when entering into the independent contractor agreement.
An example of a substantively unconscionable fee-sharing provision can be found in Vasquez-Lopez. 210 Or. App, at 574-75. There, the arbitration agreement in Plaintiff's mortgage provided: (1) the lender-defendant would pay the first $100.00 of arbitration filing costs; (2) the remaining filing costs would be divided equally among the parties; (3) arbitration costs exceeding the claimant's loan amount were to be paid by the claimant; and (4) the arbitrator's fees for the first day of hearings would be divided equally among the parties, but the cost for subsequent days of hearings would be borne only by the party requesting arbitration. Id. at 572. The court determined that the precise language of the fee-sharing agreement removed any speculation about the costs associated with the plaintiffs' anticipated arbitration. Id. at 574. Further, the court reasoned that, “by the second hour of the second day of arbitration, [plaintiffs] would owe $1,000 in arbitration fees and that, with their current earnings and expenses, they would need six months to save that amount of money.” Id. at 572. Thus, according to the Oregon Court of Appeals, the arbitration clause at issue was substantively unconscionable and unenforceable. Id. at 574-75.
The fee-shifting provision in the Employment Agreement is not substantively unconscionable. The Employment Agreement provides that “[t]he arbitrator's fees and costs of arbitration shall be borne equally by the parties,” but “[t]he arbitrator shall have the power to award monetary damages, costs, and reasonable attorneys' fees to the prevailing party,” (Tamerlano Decl. Ex. D at 7.)
However, it goes on to state that “arbitration costs which are prohibitively expensive for the Employee may be borne by the Company, including such costs as the arbitration filing fee and the arbitrator's expenses.” (Tamerlano Decl. Ex. D at 7.) Like the Green Tree fee-shifting provision, the wording of the present agreement leaves the court to speculate as to (1) the amount of fees likely necessary to fully arbitrate the matter; (2) whether the arbitrator will award fees and costs to the prevailing party; and (3) whether the cost truly will be prohibitively expensive for Jensen. Further, the agreement specifically provides that, if the costs of arbitration are prohibitively expensive, the costs will be borne by Fisher.
Plaintiff asserts he has established the prohibitive costs beyond speculation and that the agreement does not include a provision giving the arbitrator power to nullify the prohibitive expense to an employee. However, plaintiff merely offers his tabulation of likely costs based on his own assessment that the arbitration hearing will last at least four days and then adds his estimate of how much time that would require of the arbitrator. Plaintiff also includes defendant's attorney fees in his cost tabulation for which he would be responsible in the event he loses the case. However, that cost would be borne by plaintiff in a court proceeding as well and plaintiff provides no estimate of whether that amount would be different if litigated in federal court. In addition, in the absence of evidence that the fee-shifting provision, in fact, results in the arbitration forum not providing a reasonable alternative forum for this plaintiff, the fee-shifting provision is not substantively unconscionable. Livingston v. Metro. Pediatrics, LLC, 234 Or.App. 137, 155, 227 P.3d 796, 808 (2010).
More importantly, the Court must assess unconscionability and thus the purported prohibitive costs associated with arbitration at the time the contract is made. Thus, even if plaintiff offered an estimate of costs that did not include speculation as to how long the case will take to resolve, the Court still must speculate that associated costs would be prohibitively expensive at the time the contract was made. Because it cannot be known what the nature of any dispute would be at that time, such computation is not possible. In addition, at the time the contract was made, even plaintiff notes he was “highly compensated.” (ECF 40) at p. 7. Thus, at the time, it does not appear the purported $10,000 upfront costs was prohibitively expensive and plaintiff appears to have genuinely consented to such possibility. Accordingly, the motion to compel arbitration should be granted.
The Court is aware that the Vasquez-Lopez Court appears to have taken into account the current financial condition of the plaintiff in assessing the prohibitive costs associated with arbitration, but the Court also specifically stated “Whether [the undisputed facts] constitute unconscionability is a question of law to be assessed on the basis of facts in existence at the time the contract was made. Vasquez-Lopez v. Beneficial Oregon, Inc., 210 Or.App. 553, 566, 152 P.3d 940, 948 (2007). There, the parties did not have equal bargaining power and in this case, there is no evidence of unequal bargaining power. Indeed, the Vasquez-Lopez Court found the contract in that case represented a classic contract of adhesion and that the plaintiffs were misled about the arbitration provision. Id. at 567, 568, 152 P.3d at 948, 949.
Because all of the claims are subject to arbitration, the Court should dismiss this action. See Johnmohammadi v. Bloomingdale's, Inc., 755 F.3d 1072, 1074 (9th Cir. 2014) (notwithstanding the language of 9 U.S.C. § 3, a district court may either stay the action or dismiss it outright when it determines that all of the claims raised in the action are subject to arbitration).
CONCLUSION
Defendant's motion to compel arbitration (ECF 37) should be granted. In addition, because all claims are subject to arbitration, the Court should dismiss this action and deny defendant's previous motion to dismiss (ECF 13) as moot. A judgment should enter.
This recommendation is not an order that is immediately appealable to the Ninth Circuit Court of Appeals. Any notice of appeal pursuant to Rule 4(a)(1), Federal Rules of Appellate Procedure, should not be filed until entry of the district court's judgment or appealable order. The parties shall have fourteen (14) days from the date of service of a copy of this recommendation within which to file specific written objections with the court. Thereafter, the parties shall have fourteen (14) days within which to file a response to the objections. Failure to timely file objections to any factual determination of the Magistrate Judge will be considered as a waiver of a party's right to de novo consideration of the factual issues and will constitute a waiver of a party's right to appellate review of the findings of fact in an order or judgment entered pursuant to this recommendation.