Opinion
1784CV03350-BLS2
03-08-2018
CHARLIE’S PROJECT LLC and Anna K. Hernandez v. T2B LLC, Brandon McDaniel, and Nicole McDaniel
MEMORANDUM AND ORDER DENYING DEFENDANTS’ MOTION TO COMPEL ARBITRATION AND DISMISS
Kenneth W. Salinger, Justice of the Superior Court
Charlie’s Project LLC (" CP" ) and its founder Anna Hernandez have sued T2B LLC for allegedly breaching two contracts that concern the sale and delivery by T2B of clothes designed by Ms. Hernandez. Plaintiffs also claim that T2B, its founder Brendon McDaniel, and his spouse Nicole McDaniel have engaged in unfair and deceptive acts or practices in violation of G.L. c. 93A, that all three Defendants misappropriated CP’s designs, logos, marketing materials, and name, and that T2B and Nicole McDaniel have defamed Plaintiffs.
Defendants have moved to dismiss this action. Their main argument is that all of Plaintiffs’ claims are subject to a mandatory arbitration clause contained in a third contract among T2B, Hernandez, and others. They also assert, in the alternative, that this action must be filed in Delaware under an allegedly mandatory forum selection clause in the LLC Agreement.
The Court will DENY the motion to dismiss. The question whether the parties’ dispute must be arbitrated is for the Court to resolve. Though the parties to the third contract adopted the American Arbitration Association’s rules, and thereby agreed that the arbitrability of disputes arising under that contract must be decided by an arbitrator, that provision is not implicated here. Hernandez never agreed that the arbitrability of disputes arising under or out of the first two contracts would be decided by an arbitrator. Nor did she agree to arbitrate claims under those contracts, neither of which contains an arbitration provision. Finally, Defendants’ arguments regarding choice of forum are unavailing because the forum selection clause in the LLC Agreement does not apply here and, in any case, it is permissive not mandatory.
1. Factual Background. In 2012 Ms. Hernandez started a business that she called " Charlie’s Project." Her aims, on behalf of her son Charlie, were to design and sell children’s and women’s clothing that would help raise awareness about autism and Down syndrome, and to support charitable organizations with proceeds from selling such clothing. Although Hernandez did business under the name " Charlie’s Project" for several years, she did not form the corporate entity Charlie’s Project LLC (" CP" ) until January 17, 2017, shortly after entering into the contracts at issue here.
1.1. The Distribution and Services Agreements. In the fall of 2016, Branden McDaniel proposed that he help distribute Charlie’s Project products. Ms. Hernandez agreed. Mr. McDaniel and two other people formed defendant T2B LLC as a Delaware limited liability company on December 1, 2016.
Three days later T2B and Hernandez entered into two written contracts concerning the sale and distribution of clothing designed by Hernandez.
Both of these contracts are agreements between Ms. Hernandez individually and T2B. Although these contracts are styled as being between " Charlie’s Project" and T2B, and Hernandez signed them on behalf of " Charlie’s Project," in fact there was no corporate entity called " Charlie’s Project" at that time. Hernandez was doing business under a trade name and executed the contract under that name. She is therefore bound by and may be held liable under these two contracts to the same extent as if she had expressly signed on her own behalf. See Falls Rubber Co. of Akron v. Applebaum, 286 Mass. 18, 21 (1934).
In the Distribution Agreement, Hernandez appointed T2B as the " exclusive wholesale distributor" of Charlie’s Project products. This contract provided that Hernandez could continue to sell her products through " existing online methods" and through non-profit entities. The Distribution Agreement also provided that all of the Charlie’s Project merchandise, prototypes, designs, sketches and other intellectual property was confidential information that belonged to Hernandez and could only be used by T2B to provide distribution services pursuant to this contract.
In the Services Agreement, T2B assumed responsibility for fulfilling orders that Hernandez generated on her own. T2B agreed to store inventory and to ship Charlie’s Project products to customers. The Service Agreement provides that any such products delivered to T2B remain " the sole and exclusive property of CP," " are bailed to T2B solely for storage and distribution," and that T2B " has no right, title or interest" in them.
1.2. The LLC Agreement . On January 18, 2017, Ms. Hernandez became a member of T2B. She paid $50,000 to acquire a minority stake in the company. Hernandez, T2B, Mr. McDaniel, and the two other original members of T2B executed a First Amended and Restated Limited Liability Company Agreement for T2B LLC (the " LLC Agreement" ). That contract provides that T2B was to be managed by a Board of Directors (the " Board" ) consisting of Mr. McDaniel and two other people.
This contract includes a mandatory arbitration provision (§ 14.23). Under this provision, any claim or dispute between or among T2B, its Board, or any of its " unitholders" (i.e. members or shareholders) " concerning any issue relating to the interpretation or enforcement of this Agreement or relating to [any] rights or liabilities ... under this Agreement ... shall be exclusively determined and settled by arbitration...." The LLC Agreement specifies that the Commercial Arbitration Rules and Mediation Procedures of the American Arbitration Association (the " AAA" ) would govern any such arbitration.
The LLC Agreement also included a provision titled " Rights Relating to Work Products" (§ 10.5). It provides that " all inventions, improvements, discoveries, technical developments and works of authorship" that " relate or pertain in any way to the business of the Company" would " become and remain the Company’s sole and exclusive property. The contract stated that the business of T2B would be to " distribute various materials to commercial and retail customers," including but not limited to " clothing items." T2B has never been in the business of designing clothing.
This contract also provided (in § 14.20) that any action " arising out of or in connection with" the LLC Agreement would be governed by Delaware law, and that each of the parties " irrevocably consents to the jurisdiction of such courts" over any such action. The Court construes the reference to " such courts" as a reference to Delaware courts.
2. Request for Arbitration. Defendants say they are entitled to compel arbitration of all claims in this action under the mandatory arbitration clause in the LLC Agreement. The parties dispute not only whether Plaintiffs’ claims are subject to mandatory arbitration, but also whether this question of arbitrability should be decided by the Court or by an arbitrator.
The Court concludes that under the circumstances of this case it must decide whether the parties’ dispute is arbitrable. On the merits, it concludes that the parties never agreed that any of Plaintiffs’ claims must be arbitrated.
2.1. The LLC Agreement’s Arbitration Clause Does Not Apply to Plaintiffs’ Claims. " Arbitration is strictly ‘a matter of consent,’ ... and thus ‘is a way to resolve those disputes- but only those disputes - that the parties have agreed to submit to arbitration’ " (emphasis in original). Granite Rock Co. v. International Broth. of Teamsters, 561 U.S. 287, 299 (2010), quoting Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior Univ., 489 U.S. 468, 479 (1989) (" matter of consent" ), and First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943 (1995) (" only those disputes" ).
The threshold issue of whether parties to a contract have agreed to arbitrate a particular dispute, often called a question of " arbitrability," " is ordinarily for a court to decide, and courts will not defer that issue to arbitration absent ‘clea[r] and unmistakabl[e] evidence’ that the parties agreed to do so" (bracket in original). Merrimack College v. KPMG LLP, 88 Mass.App.Ct. 803, 808, review denied, 473 Mass. 1112 (2016), quoting Massachusetts Highway Dept. v. Perini Corp., 83 Mass.App.Ct. 96, 100-01, rev. denied, 465 Mass. 1107 (2013), and First Options of Chicago, 514 U.S. at 944. Thus, when it comes to questions of arbitrability, " the usual presumption in favor of arbitration is reversed." Perini Corp., supra .
The parties to the LLC Agreement agreed to binding arbitration, under the AAA’s commercial arbitration rules, of any dispute regarding the interpretation, enforcement, or any rights or liabilities arising under the LLC Agreement.
The AAA rules, in turn, state that " the arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim." See AAA Comm’l Arb. R. 7(a).
By quoting this rule in its memorandum, Defendants are implicitly asking the Court to take judicial notice of this rule. Plaintiffs similarly refer to Rule 7(a) in their opposition memorandum. The AAA publishes its commercial arbitration rules on its website. See www.adr.org/sites/default/files/commercial_rules.pdf .The Court will take judicial notice of this AAA rule because it is " capable of accurate and ready determination by resort to resources whose accuracy cannot reasonably be questioned." Commonwealth v. Greco, 76 Mass.App.Ct. 296, 301 n.9, rev. denied, 457 Mass. 1106 and 458 Mass. 1105 (2010), quoting Mass. Guide Evid. § 201(b)(2); accord Robbins v. B and B Lines, Inc., 830 F.2d 648, 651 (7th Cir. 1987) (taking notice of AAA Commercial Arbitration Rules pursuant to Fed.R.Evid. 201 because they were incorporated by reference in pension fund’s rules that were in evidence and were " referred to by both parties in their briefs" ); Boston Public Health Comm’n v. Boston Emergency Medical Services-Boston Police Patrolmen’s Ass’n, no. 13-P-1114, 2014 WL 2776854, at *2 n.6 (Mass.App.Ct. 2014, unpublished) (taking judicial notice of the AAA’s Labor Arbitration Rules).
By incorporating AAA Rule 7(a) into the LLC Agreement, the parties clearly and unmistakably agreed that an arbitrator must decide whether a particular dispute that arguably is covered by that contract’s arbitration clause is in fact arbitrable. See Awuah v. Coverall North America, Inc., 554 F.3d 7, 9-12 (1st Cir. 2009) (applying Federal Arbitration Act). It appears that every other United States Courts of Appeals to address the issue has reached the same conclusion as the First Circuit. See Contec Corp. v. Remote Solution Co., 398 F.3d 205, 208 (2d Cir. 2005); Simply Wireless, Inc. v. T-Mobile US, Inc., 877 F.3d 522, 527-528 (4th Cir. 2017); Petrofac, Inc. v. DynMcDermott Petroleum Operations Co., 687 F.3d 671, 675 (5th Cir. 2012); Fallo v. High-Tech Inst., 559 F.3d 874, 878 (8th Cir. 2009); Brennan v. Opus Bank, 796 F.3d 1125, 1130-1131 (9th Cir. 2015); Belnap v. Iasis Healthcare, 844 F.3d 1272, 1281-1284 (10th Cir. 2017); Terminix Int’l Co. v. Palmer Ranch LP, 432 F.3d 1327, 1332 (11th Cir. 2005); Republic of Arg. v. BG Grp. PLC, 665 F.3d 1363, 1371 (D.C. Cir. 2012); Qualcomm Inc. v. Nokia Corp., 466 F.3d 1366, 1373 (Fed. Cir. 2006). The Court agrees with this persuasive federal precedent. Cf. Commonwealth v. Pon, 469 Mass. 296, 308 (2014) (Massachusetts courts " give respectful consideration to such lower Federal court decisions as seem persuasive" ) (quoting Commonwealth v. Hill, 377 Mass. 59, 61 (1979).
Nonetheless, the arbitrator " would still not have the authority to decide the arbitrability of the plaintiffs’ claims that are clearly outside the scope of the arbitration clause." Turi v. Main St. Adoption Servs., LLP, 633 F.3d 496, 507 (6th Cir. 2011). In other words, if " the claim of arbitrability is wholly groundless" then a court should not compel arbitration, even where the parties clearly and unmistakably delegated questions of arbitrability to an arbitrator. Simply Wireless, 877 F.3d at 528, quoting Local No. 358, Bakery & Confectionary Workers Union v. Nolde Bros., Inc., 530 F.2d 548, 553 (4th Cir. 1975), aff’d, 430 U.S. 243 (1977); accord Douglas v. Regions Bank, 757 F.3d 460, 464 (5th Cir. 2014); Qualcomm, 466 F.3d at 1371 (Fed. Cir.); but see Belnap, 844 F.3d at 1286 (declining " to adopt the ‘wholly groundless’ approach" ); Jones v. Waffle House, Inc., 866 F.3d 1257, 1269 (11th Cir. 2017) (same).
The Massachusetts Appeals Court recently adopted and applied this principle in a case governed by the Federal Arbitration Act, although it did not use the phrase " wholly groundless" or refer to this federal precedent. See Merrimack College v. KPMG, 88 Mass.App.Ct. at 808. That case concerned a dispute between Merrimack College and its outside auditor. Their 2005 engagement letter included a mandatory arbitration clause providing that " [a]ny issue concerning the extent to which any dispute is subject to arbitration ... shall be ... resolved by the arbitrators." Id. The college and auditor disputed whether the 2005 arbitration clause governed claims that KPMG had been negligent in performing earlier audits under prior contracts that did not contain arbitration provisions.
The Appeals Court rejected KPMG’s assertion that this question of arbitrability had to be decided by the arbitrator. It reasoned that " KPMG has not presented clear and unmistakable evidence that Merrimack ever agreed that only arbitrators could resolve whether disputes that arose under prior agreements nevertheless were subject to the arbitration provision in the 2005 engagement letter, because the plain language of the parties’ contracts made clear that " Merrimack never agreed that earlier disputes were subject to the new dispute resolution provision" and it therefore " follows that the procedures spelled out in" the 2005 contract " never came into play." Id.
This case is indistinguishable from Merrimack . Ms. Hernandez’s contract claims seek to enforce the Distribution Agreement and the Services Agreement, which have no arbitration clause. The claims by Hernandez and CP under c. 93A, for misappropriation of property, and for defamation all arise from the performance of those two contracts. The arbitration clause in the separate LLC Agreement says that it applies only to claims arising under or from that contract. It does not say that the parties were also agreeing to arbitrate disputes arising under or from the Distribution or Services Agreements. Since none of Plaintiffs’ claims seeks to enforce or arises from the LLC Agreement, the plain language of that contract makes clear that the procedures spelled out in the AAA rules never came into play with respect to any of Plaintiffs’ claims, just as in Merrimack .
Although the parties’ three contracts are interrelated, that does not help Defendants. The arbitration clause appears only in the LLC Agreement. It specifies that the parties only agreed to arbitrate disputes arising under or concerning that contract. It therefore does not encompass disputes arising under or concerning the Distribution Agreement or the Services Agreement. See Fit Tech, Inc. v. Bally Total Fitness, 374 F.3d 1, 9-10 (1st Cir. 2004) (holding that arbitration clause in one agreement did not cover claims made under related contract, even though related contract referenced prior agreement that contained the arbitration clause).
For these reasons, the Court concludes that the arbitration clause in the LLC Agreement is not implicated here, Defendants have not presented clear and unmistakable evidence that Plaintiffs ever agreed that only arbitrators could decide whether disputes concerning or arising from performance of the Distribution Agreement and Services Agreement could only be decided by an arbitrator, and Defendants’ arbitration demand is wholly groundless.
It necessarily follows that the question of arbitrability must be decided by the Court, and also that Defendants’ motion to compel arbitration is without merit.
2.2. The LLC Agreement’s Assignment of Intellectual Property Clause Does Not Apply. Defendants’ creative attempt to tether Plaintiffs’ claims to the LLC Agreement is also without merit. Defendants argue that in § 10.5 of the LLC Agreement Ms. Hernandez assigned all of her intellectual property rights- including the Charlie’s Project name and branding as well as all of her clothing designs- to T2B, that T2B therefore has a defense to Plaintiffs’ claims under the LLC Agreement, and it necessarily follows that the arbitration clause of the LLC Agreement is implicated here. This argument is unavailing because it is inconsistent with the plain language of the parties’ written contracts.
Interpretation of the parties’ unambiguous written contracts, all of which provide that they are governed by Delaware law, is a question of law to be decided by the Court. See, e.g., Gershen, ; Strougo v. Hollander, 111 A.3d 590, 594 (Del. Ch. 2015); Allied Capital Corp. v. GC-Sun Holdings, L.P., 910 A.2d 1020, 1030 (Del. Ch. 2006). " Contract language is not ambiguous merely because the parties dispute what it means." Alta Berkeley VI C.V. v. Omneon, Inc., 41 A.3d 381, 385 (Del. 2012). To the contrary, " [a] determination of whether a contract is ambiguous is a question for the court to resolve as a matter of law." Kelly v. Blum, 2010 WL 629850, at *7 n.43 (Del. Ch. 2010), quoting HIFN, Inc. v. Intel Corp., 2007 WL 2801393, at *9 (Del. Ch. 2007).
These choice of law provisions are enforceable. See Hodas v. Morin, 442 Mass. 544, 549-550 (2004) (" As a rule, ‘[w]here the parties have expressed a specific intent as to the governing law, Massachusetts courts will uphold the parties’ choice as long as the result is not contrary to public policy.’ " ) (quoting Steranko v. Inforex, Inc., 5 Mass.App.Ct. 253, 260 (1977) ).
To make sense of § 10.5, the Court must consider the contracts as a whole and construe this provision in context, not in isolation. Stonewall Ins. Co. v. E.I. du Pont de Nemours & Co., 996 A.2d 1254 (Del. 2010). Furthermore, since Ms. Hernandez and T2B were parties to all three contracts, the contracts were executed at around the same time, and they deal with related matters, they should be read together. See, e.g., Ashall Homes Ltd. v. ROK Entertainment Group Inc., 992 A.2d 1239, 1250 (Del. Ch. 2010); Crown Books Corp. v. Bookstop Inc., 1990 WL 26166, at *1 (Del. Ch. 1990).
And the Court must construe the parties’ contracts in manner that gives them effect as rational business agreements, as the parties presumably intended. When construing a business contract, a court must not " be blind to the general business context in which a given contract was negotiated." Pharmaceutical Prod. Dev., Inc. v. TVM Life Sci. Ventures VI, L.P., 2011 WL 549163, at *4 n.24 (Del. Ch. 2011). " Business contracts must be construed with business sense as they naturally would be understood by intelligent persons of affairs, ... and not according to forced and refined interpretations which are intelligible only to lawyers." Id., quoting 17A Am.Jur.2d Contracts § 386; accord Lowber v. Bangs, 69 U.S. (2 Wall.) 728 (1864) (" All mercantile contracts ought to be construed according to their plain meaning, to men of sense and understanding, and not according to forced and refined constructions, which are intelligible only to lawyers, and scarcely to them." ) (quoting Crookewit v. Fletcher, 1 Hurlstone & Norman 893, 912 (Ct. of Exchequer 1857) ).
The assignment of intellectual property rights under the LLC Agreement is very limited in scope and does not apply to Ms. Hernandez’s intellectual property in her Charlie’s Project business, products, or clothing designs. The owners of T2B, including Hernandez, agreed in § 10.5 that any of their work product during the term of the LLC Agreement that " relate or pertain in any way to the business of the Company," i.e. T2B, would " become and remain the Company’s sole and exclusive property." As noted above, however, the business of T2B is and was the distribution of materials and products. Nothing in the parties’ contracts, their pleadings, or the evidence presented by Defendants suggests that T2B has ever been in the business of designing clothing.
Defendants’ proposed gloss on § 10.5 also makes no business sense. In December 2016, in the Distribution Agreement, T2B specifically agreed that Hernandez’s clothing products and designs belonged to Hernandez and could only be used by T2B to carry out its obligations as the exclusive wholesale distributor of Hernandez’s products. Six weeks later, Hernandez paid $50,000 to buy a minority stake in T2B. There is no reason to believe that this was a discounted price, with the difference in value to be made up by Hernandez agreeing to transfer all of her Charlie’s Project intellectual property to T2B. Quite simply, nothing in the LLC Agreement suggests that its limited intellectual property provision was intended to or had the effect of superseding the " confidential information" provision in the prior Distribution Agreement.
3. Attempt to Invoke Forum Selection Clause . Defendants argue in the alternative that this action must be brought in Delaware. They rely upon the forum selection clause in the LLC Agreement, which provides that each party " irrevocably consents to the jurisdiction" of the Delaware courts to hear and decide actions to enforce or arising out of the LLC Agreement.
The Court concludes that the forum selection clause in the LLC Agreement does not require Plaintiffs to bring this lawsuit in Delaware, for several reasons.
First, by its terms this forum selection clause only applies to claims brought to enforce or arising under the LLC Agreement. As explained above, Defendant claims seek to enforce or arise under the Distribution and Services Agreements, not the LLC Agreement. As a result, the forum selection clause would not apply here even if required any covered suit to be brought in Delaware, which it does not.
Second, in any case, this provision permits but does not require lawsuits among the parties to be brought in Delaware courts.
As a general rule, " [a] ‘threshold question in interpreting a forum selection clause is whether the clause at issue is permissive or mandatory. " Permissive forum selection clauses, often described as ‘consent to jurisdiction’ clauses, authorize jurisdiction and venue in a designated forum, but do not prohibit litigation elsewhere.... In contrast, mandatory forum selection clauses contain clear language indicating that jurisdiction and venue are appropriate exclusively in the designated forum." ‘ " Boland v. George S. May Intern. Co., 81 Mass.App.Ct. 817, 824 (2012), quoting Rivera v. Centro Medico de Turabo, Inc., 575 F.3d 10, 17 (1st Cir. 2009), quoting 14D Wright, Miller, & Cooper, Federal Practice and Procedure § 3803.1 (3d ed.1998).
The meaning and effect of this provision must be decided by applying Delaware law, because the LLC Agreement specifies that it shall be " governed by the laws of the State of Delaware." See Melia v. Zenhire, 462 Mass. 164, 168 (2012); accord Jacobson v. Mailboxes Etc. U.S.A., Inc., 419 Mass. 472, 575 (1995).
Delaware distinguishes between mandatory and permissive forum selection clauses in the manner described above. If parties to a contract wish to mandate that actions to enforce or arising under a contract must be brought in a particular jurisdiction, they " must use express language clearly indicating the forum selection clause excludes all other courts before which those parties could otherwise properly bring an action." Eisenbud v. Omnitech, 1996 WL 162245, at *1 (Del. Ch.), appeal refused, 676 A.2d 805 (Del. 1996). " [A]bsent clear language, a court will not interpret a forum selection clause to indicate the parties intended to make jurisdiction exclusive." Id.
The forum selection clause allows for suits to enforce or concerning the LLC Agreement to be brought in Delaware, because the parties to that contract all gave their irrevocable consent to the jurisdiction of Delaware courts. But the parties did not use any language that clearly reflects an intent to make jurisdiction exclusive in Delaware.
Such a " consent to jurisdiction clause ... is permissive, not mandatory." McWane, Inc. v. Lanier, 2015 WL 399582, at *6 (Del. Ch. 2015).
ORDER
Defendants’ motion to compel arbitration and dismiss this action is DENIED. Counsel shall appear for a Rule 16 scheduling conference on May 3, 2018, at 2:00 p.m.