Opinion
No. 61598-0-I.
March 30, 2009.
Appeal from a judgment of the Superior Court for King County, No. 08-2-02989-1, Douglas D. McBroom, J., entered March 31, 2008.
Reversed by unpublished opinion per Lau, J., concurred in by Agid and Leach, JJ.
UNPUBLISHED OPINION
This case arises from a dispute between Global Hydrofuels Technology, Inc. (GHTI) and Hydrogen Power, Inc. (HPI) concerning the ownership of hydrogen fuel technology. GHTI appeals the trial court's denial of its motion to stay trial court proceedings pending arbitration of the technology ownership issue. A stay of nonarbitrable claims is appropriate where the arbitrable claims predominate or where the outcome of the nonarbitrable claims will depend upon the arbitrator's decision. Because the trial court applied the incorrect legal standard in denying the stay and because the outcome of the litigation depends largely on the arbitrator's decision regarding ownership, we reverse.
FACTS
GHTI is a Canadian corporation, and HPI is a Delaware corporation with its principal place of business in Seattle. Dilbagh Gujral is the controlling shareholder of GHTI. Virendra Chaudhary was a director of GHTI and later became a director of HPI. Ricky Gujral was the president of HPI and was also an officer of GHTI. Gurinder Dilawari was another director of HPI.
In a 2003 license agreement, the University of British Columbia (UBC) granted GHTI an exclusive worldwide license to certain rights in hydrogen fuel technology. GHTI, HPI, and UBC subsequently entered into a sublicense agreement granting HPI exclusive rights to use, market, and distribute the technology, as well as a nonexclusive right to "develop, modify, enhance and improve the Technology." The sublicense agreement provided that "HPI acknowledges and agrees that developments, enhancements, modifications or improvements to the Technology developed, modified, enhanced, or improved by HPI shall be owned by GHTI Canada. . . ." It also contained a mandatory arbitration clause stating, "Any and all disputes arising out of, under, or in connection with this Agreement, including without limitation the validity, interpretation, performance and breach thereof, shall be settled by arbitration. . . ."
In 2005, HPI merged with Equitex, a publicly traded financial services company. As part of the merger, Equitex contributed approximately $5 million as capital to develop and market the hydrogen fuel technology for commercial applications. The "new HPI" succeeded to the rights of the "old HPI" under the sublicense. HPI then performed hydrogen fuel technology research. The resulting data, lab notebooks, and patent applications comprise the "disputed technology."
HPI quickly became insolvent. On December 18, 2007, GHTI terminated the sublicense agreement with HPI for nonpayment and demanded that HPI transfer the disputed technology to GHTI. HPI did not comply.
On January 15, 2008, certain creditors and shareholders of HPI filed a complaint in King County Superior Court against GHTI, HPI, Dilbagh and Ricky Gujral, Chaudhary, and Dilawari. The complaint alleged (1) fraud, (2) misappropriation of corporate opportunity, (3) fraudulent conveyance, and (4) breach of fiduciary duty. The complaint also sought the appointment of a receiver to protect and preserve the assets of HPI and injunctive relief preventing any transfer of HPI's property or assets to GHTI or the other defendants. The trial court appointed Diana Carey as receiver for HPI.
On April 14, 2008, the receiver filed a motion to intervene, join as co-plaintiff, and realign the parties "with respect to all claims that are derivative of HPI's rights or which allege harm to HPI." On May 8, 2008, the court granted the receiver's motion. Accordingly, the receiver became a co-plaintiff for the fraud claim and the sole plaintiff for the other three claims.
These requests were denominated as the plaintiffs' fifth and sixth causes of action in the complaint.
On February 19, 2008, GHTI served HPI with a demand to arbitrate their dispute concerning ownership of the disputed technology. GHTI defined the nature of the dispute as follows:
Global Hydrofuels Technology, Inc. ("GHTI") brings this action for breach of contract and for declaration of ownership and recovery of intellectual property and intangible assets belonging to GHTI following termination of a sublicense agreement with Hydrogen Power, Inc. The assets in question relate to methods for processes for creating hydrogen fuel from water.
The following day, GHTI moved for an order "staying all proceedings in this case relating to the ownership of any hydrofuels technology and any issues arising from the Sublicense Agreement . . . pending arbitration." On March 28, 2008, the trial court denied GHTI's motion, stating, "[T]he claims asserted by the Plaintiffs in this action are not subject to the arbitration provision contained in the Sublicense Agreement dated March 15, 2004 between GHTI and defendant Hydrogen Power, Inc."
On May 30, 2008, the trial court granted GHTI's motion to compel arbitration and ordered HPI "and/or any successor claiming an interest to the rights of [HPI] in the sublicense between GHTI and HPI to arbitration concerning the ownership of the Hydrogen Fuels Technology under the sublicense including lab research, computerized data and patent applications. . . ." The trial court, however, struck the phrase "and all related issues" from GHTI's proposed order.
The United States District Court previously dismissed without prejudice GHTI's petition to compel arbitration pursuant to the Federal Arbitration Act. GHTI then refiled it in superior court.
GHTI filed a notice of appeal seeking review of the March 28 order and an emergency motion to stay the superior court action. Plaintiffs and the receiver moved to dismiss the appeal. On June 11, a commissioner of this court ruled that given the order compelling arbitration, the March 28 order was subject only to discretionary review. GHTI moved for discretionary review, and the plaintiffs and receiver moved to dismiss. On July 14, the commissioner stayed the arbitration and all trial court proceedings pending further order of the appellate court. The receiver moved to modify the commissioner's ruling.
Meanwhile, "HPI Partners," a secured creditor of HPI, sought to strictly foreclose on HPI's assets. On May 5, the trial court granted the receiver's motion for an order approving the secured claim of HPI Partners and authorizing the receiver to consent to strict foreclosure. GHTI argued that strict foreclosure was not proper and that no sale of HPI's assets should take place prior to arbitration of the ownership dispute. On June 12, 2008, "in light of matters pending before the Court of Appeals to give the Court of Appeals an opportunity to rule," the trial court issued an order authorizing the receiver to conduct a public sale of the assets of HPI on July 31, 2008, "and if there is no ruling by July 31, 2008, the sale will go forward."
On July 31, 2008, we granted discretionary review of the trial court's March 28 order, denied the plaintiffs' and receiver's joint motion to dismiss the appeal, and denied the receiver's motion to modify the commissioner's July 14 ruling staying court proceedings. Regarding the receiver's efforts to liquidate HPI's assets, we ruled,
GHTI has also filed under a separate cause number, No. 61994-2-I, a notice for discretionary review of the trial court's June 12 order authorizing the Receiver for HPI to conduct a public sale of HPI's assets on July 31, 2008. Although the case is not before us, it appears that the practical effect of this order is to moot review of the June 12 order in cause number 61994-2-I, which may be dismissed unless within 15 days GHTI files a motion for discretionary review demonstrating why the Court should further consider that matter separately.
Accordingly, we ordered "that trial court proceedings are hereby stayed pending review but the arbitration may proceed and the Receiver for HPI may sell assets other than the disputed intellectual property subject to arbitration. . . ."
GHTI now appeals the trial court's March 28, 2008 order denying a stay of trial court proceedings pending arbitration of the dispute between GHTI and HPI regarding ownership of the disputed technology.
ANALYSIS
Order Denying Stay of Litigation Pending Arbitration
GHTI argues that all of the claims in the complaint are presumptively arbitrable under the sublicense agreement because they arose out of, under, or in connection with the sublicensing agreement between GHTI and HPI. Because section 3 of the Federal Arbitration Act (FAA) mandates a stay of litigation concerning matters referable to arbitration under a written arbitration agreement, GHTI contends the trial court had no discretion to deny its request for a stay of all trial court proceedings pending arbitration of the ownership dispute. GHTI further argues that even if some of the claims are nonarbitrable, the trial court should have stayed those claims because the ownership issue permeates and is dispositive of them.
Section 3 of the FAA provides, "If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement. . . ."
Respondents agree that the sublicense requires GHTI and HPI to arbitrate their dispute regarding ownership of the disputed technology. But they argue that the FAA's mandatory stay provision does not apply because none of the claims in the complaint is arbitrable. They further argue that resolution of the single arbitrable claim — the technology ownership issue — has no bearing on the claims in the complaint. They therefore contend that the trial court properly exercised its discretion not to stay the claims pending arbitration of the ownership dispute.
Respondents include the receiver for HPI and the plaintiffs who originally filed the complaint.
Arbitrability is a judicial question unless the parties clearly and unmistakably provide otherwise. AT T Techs. v. Communications Workers of Am., 475 U.S. 643, 649, 106 S. Ct. 1415, 89 L. Ed. 2d 648 (1986); Stein v. Geonerco, Inc., 105 Wn. App. 41, 45, 17 P.3d 1266 (2001). GHTI did not appeal the trial court's order compelling GHTI and HPI to arbitrate the technology ownership dispute but striking its request to compel arbitration of "all related issues." Thus, we need not address whether the claims in the complaint are arbitrable. We need only consider whether the trial court properly denied GHTI's motion to stay trial court proceedings pending arbitration of the technology ownership dispute.
"When confronted with litigants advancing both arbitrable and nonarbitrable claims . . . courts have discretion to stay nonarbitrable claims." Klay v. All Defendants, 389 F.3d 1191, 1204 (11th Cir. 2004). "[C]ourts generally refuse to stay proceedings of nonarbitrable claims when it is feasible to proceed with the litigation." Id. But "[e]xpanding the stay, so as to encompass all of the nonarbitrable claims in the case, is appropriate where the arbitrable claims predominate, or where the outcome of the nonarbitrable claims will depend upon the arbitrator's decision." Simitar Entm't, Inc. v. Silva Entm't, Inc., 44 F. Supp. 2d 986, 997 (D. Minn. 1999). A trial court's denial of a motion to stay litigation of nonarbitrable claims is reviewed under an abuse of discretion standard. Klay, 389 F.3d at 1203. A trial court abuses its discretion when its decision is manifestly unreasonable or exercised on untenable grounds or for untenable reasons. Mayer v. Sto Indus., Inc., 156 Wn.2d 677, 684, 132 P.3d 115 (2006). "An abuse of discretion is found if the trial court relies on unsupported facts, takes a view that no reasonable person would take, applies the wrong legal standard, or bases its ruling on an erroneous view of the law." Gildon v. Simon Prop. Group, Inc., 158 Wn.2d 483, 494, 145 P.3d 1196 (2006).
We conclude that the trial court abused its discretion in denying GHTI's motion to stay trial court proceedings pending arbitration of the technology ownership issue. The court denied the motion for a stay because "the claims asserted by the Plaintiffs in this action are not subject to the arbitration provision contained in the Sublicense Agreement." This is an erroneous standard. Rather, the trial court should have considered whether the ownership issue predominated or whether the outcome of the claims in the complaint would depend upon resolution of the ownership issue.
Applying the correct standard, we conclude that a stay is appropriate because the outcome of the plaintiffs' claims depends to some degree upon resolution of the technology ownership issue.
The fraud claim in the first cause of action alleges that the defendants induced the former Equitex shareholders to merge with old HPI by misrepresenting the commercial viability and value of the sublicensed technology. The defendants then allegedly engaged in a fraudulent and self-dealing plan to loot HPI of its money, cancel the sublicense, and transfer HPI's assets to GHTI. HPI's assets include materials related to the disputed technology such as laboratory notebooks and computerized data. If an arbitrator determined that ownership of the disputed technology reverted from HPI to GHTI under the sublicense agreement, then the plaintiffs' fraud claim would be limited.
The second cause of action alleges that the defendants misappropriated HPI's corporate opportunities by claiming control of HPI's board of directors, taking the commercially viable hydrogen fuel technology developed by HPI, and transferring it to GHTI. This claim is entirely dependent on the outcome of the arbitration regarding ownership of the disputed technology.
The third cause of action for fraudulent conveyance asserts that the defendants caused the transfer of HPI's assets to GHTI for less than fair value or no value whatsoever, as well as causing HPI to make monetary payments to GHTI and Ricky Gujral. HPI's assets include the disputed technology. If GHTI owns those assets, then they could not have been fraudulently conveyed.
Finally, the fourth cause of action — breach of fiduciary duty — involves allegations that the defendants failed to preserve the assets and business of HPI for the benefit of HPI and its creditors and shareholders. Again, this claim would be limited by a favorable arbitration outcome for GHTI.
Liquidation or Foreclosure of Disputed Technology
GHTI argues that the scope of the stay should include all trial court proceedings relating to or affecting ownership of the disputed technology, including any attempt by the receiver or the plaintiffs to liquidate or foreclose on the disputed technology pending arbitration. GHTI contends that (1) resolution of the ownership issue must precede any sale because the receiver has no authority to liquidate assets HPI does not own and (2) if the receiver liquidates the disputed technology via public auction, GHTI will be irreparably harmed in many ways.
The respondents argue that (1) this issue is not properly before the court because it was not raised below and was not part of the March 28 order being appealed, (2) GHTI's request for a stay of the sale of the disputed technology is unnecessary because the trial court ordered HPI "and/or any successor claiming an interest to the rights to HPI" to arbitrate ownership of the disputed technology with GHTI, (3) GHTI assumed the risk that any related confidential information might come into the hands of a third party when it permitted HPI to grant a security interest in it and used the collateral for a loan from which GHTI financially benefited, and (4) a stay would prejudicially affect the rights of the secured creditor seeking foreclosure.
GHTI did file a notice for discretionary review of the trial court's June 12, 2008 order authorizing the receiver to conduct a public sale of HPI's assets on July 31, 2008. Because we stated that the practical effect of our July 31, 2008 order granting discretionary review was to moot review of the June 12 order, GHTI withdrew its appeal of the June 12 order. The order also stayed the trial court proceedings, ordered that the arbitration go forward, and permitted the receiver to sell assets other than the disputed technology. Accordingly, GHTI did not pursue its request for discretionary review of the June 12 order and review was terminated. Under these circumstances, the issue of whether a stay of trial court proceedings should include any attempts by the receiver to liquidate or foreclose on the disputed technology is properly before us.
We agree with GHTI and conclude that the stay should encompass any attempt to liquidate the disputed technology. First, any purchaser could refuse to arbitrate on the ground that it is not bound by the sublicense agreement. Second, confidentiality will be irretrievably lost. Third, any third party's control over the patent applications could result in their cancellation. Fourth, GHTI could be forced to litigate to compel arbitration or to obtain an injunction preventing the purchaser from taking any actions detrimental to the value of the disputed technology pending arbitration. A stay on liquidation preserves the status quo pending arbitration of the ownership claim.
For the reasons above, the trial court abused its discretion in denying GHTI's motion to stay all trial court proceedings pending arbitration of the ownership question. Accordingly, we reverse and grant GHTI's motion to stay all trial court proceedings pending arbitration of the technology ownership question, including efforts to liquidate the disputed technology. But the receiver for HPI may liquidate assets other than the disputed technology.