Opinion
D071394
10-30-2017
PRISTINE ENVIRONMENTS INC., Plaintiff and Respondent, v. SIGNET JEWELERS LIMITED et al., Defendants and Appellants.
Snell & Wilmer, Keith M. Gregory, Patrick W. Kelly and Todd E. Lundell for Defendants and Appellants. Cappello & Noel, A. Barry Cappello, Lawrence J. Conlan and Wendy D. Welkom for Plaintiff and Respondent.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Super. Ct. No. 37-2016-00016348-CU-FR-CTL) APPEAL from an order of the Superior Court of San Diego County, Judith F. Hayes, Judge. Reversed with directions. Snell & Wilmer, Keith M. Gregory, Patrick W. Kelly and Todd E. Lundell for Defendants and Appellants. Cappello & Noel, A. Barry Cappello, Lawrence J. Conlan and Wendy D. Welkom for Plaintiff and Respondent.
Signet Jewelers Limited, Signet Group Services US Inc. (collectively Signet), and Joseph Albanese (together Defendants) appeal from an order denying their motion to compel arbitration. Defendants contend the trial court erroneously determined that (1) court, not arbitration, is the appropriate forum for determining whether this action is within the scope of the parties' arbitration provision; and (2) the action is not arbitrable. We conclude the court correctly decided the first issue, but not the second, and therefore reverse with directions to grant Defendants' motion to compel arbitration.
FACTUAL AND PROCEDURAL BACKGROUND
A. The Contract for Repair and Maintenance Services
Signet operates approximately 3,500 retail jewelry stores, including Kay Jewelers and Zales, in the United States and elsewhere. Pristine Environments Inc. (Pristine) provides facility maintenance services to retail businesses.
In January 2015 Signet solicited proposals from several companies, including Pristine, to provide repair and maintenance services for all of Signet's United States stores. One of Signet's proposed terms, entitled "Governing Law," provided that the contract "shall be governed by and construed in accordance with the laws of the State of Ohio," and "any and all disputes arising under this Agreement . . . shall be determined through binding arbitration . . . ."
Signet awarded Pristine the contract. Signet and Pristine entered into a three-year "Master Services Agreement" (Agreement) under which Pristine was to provide repair and maintenance services for Signet's stores in exchange for approximately $10.5 million for fiscal year 2017 (and $5.74 million for the remainder of fiscal 2016).
Under the Agreement, Pristine agreed to operate a call center to process calls from Signet stores requesting repairs. Pristine contracted with local service providers to perform the requested services. Pristine also agreed to provide scheduled preventative maintenance. The Agreement contains the same governing law and arbitration provision as stated in the request for proposal.
B. Disputes Arise
Disputes quickly arose. In August 2015 Pristine complained it was receiving an unexpectedly high volume of service calls—about 300 calls per day instead of the 100 calls Signet forecasted during contract negotiations. In March 2016 Pristine stated it had incurred about $8.9 million in obligations to third-party vendors for completed work under the Agreement—while Signet's payments to Pristine under the Agreement were only $5.1 million. Pristine asserted that "call volumes have been far in excess of forecast every month to date." However, Signet's position was Pristine's problems were self-inflicted, stemming from Pristine's poor performance, and not the result of an excessive number of service calls. In March 2016 Pristine terminated its performance under the Agreement.
C. Arbitration
In March 2016 Signet served Pristine with a demand for arbitration. As amended in April 2016, the demand alleges, among other things, that Pristine caused an increased volume of repair service calls by (1) issuing multiple work orders for the same repair request; (2) performing incomplete repairs, resulting in several work orders for the same issue; (3) not performing preventative maintenance as agreed. Signet alleges it made all legally obligated payments to Pristine under the Agreement, and Pristine repudiated the Agreement.
D. Litigation
In May 2016 Pristine responded by filing a lawsuit against Signet and Albanese, a Signet officer. Pristine alleges that Defendants fraudulently induced Pristine to enter into the Agreement by misrepresenting the number of service calls Pristine could reasonably expect to receive. Pristine alleges causes of action for (1) fraudulent misrepresentation, (2) fraudulent nondisclosure, (3) violation of California unfair competition law, (4) declaratory relief, and (5) unjust enrichment.
Specifically, Pristine alleges that after receiving the request for proposal, it asked Signet to estimate the volume of repair service calls that it anticipated under the Agreement. Signet initially estimated 38,400 annual repair maintenance calls. Pristine alleges that relying on that estimate, it submitted a "preliminary proposal" to Signet for approximately $15 million.
Subsequently, however, in May 2015 Albanese told Pristine the correct volume was 27,500 calls annually. Based on that revised number, Pristine agreed to a $10,506,576 fee for fiscal year 2017. Pristine alleges this call volume estimate was "false when made" and, as a result, Pristine was fraudulently induced to enter into the Agreement "and undertake the scope of work pursuant to a drastically understated budget and call volume figure," allowing Signet "to obtain more than $15 million worth of services for approximately $10.5 million."
Pristine alleges that the Agreement "expressly incorporated as 'Target Goals & Measurables' the expected volume of 27,500" repair maintenance calls, and "had Pristine known the actual figures would be closer or more than the original figures provided in the [request for proposal], i.e., 38,400, it would never have executed the . . . [Agreement], or considered making any agreement with the limited budget of only $10.5 million."
Pristine further alleges that after it began performing under the Agreement, Signet "continued to misrepresent that the [call] volume would decrease in order to keep Pristine working for it . . . ." As a result, Pristine alleges that Signet "lulled Pristine into continuing to provide services by making false promises that matters of budget overrun would be addressed, and that payment would be forthcoming." Pristine alleges that Signet stopped paying after Pristine "had incurred substantial obligations to the vendors servicing [Signet's] locations . . . ." Pristine further alleges that it was "compelled to suspend services in order to mitigate the severe financial damages flowing from [Signet's] false representations of the word order volume and their refusal to pay for the services their stores were receiving."
E. Signet's First Motion to Compel Arbitration
Defendants filed a motion to compel arbitration based on the following provision in the Agreement:
"This Agreement shall be governed by and construed in accordance with the laws of the State of Ohio without giving effect to the principles of conflicts of law thereof. Except as otherwise provided in this Section, any and all disputes arising under this Agreement that cannot otherwise be resolved as between the parties shall be determined through binding arbitration to be conducted as set forth in this Section and shall be generally conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association. . . .
"All disputes and/or claims subject to this Section shall be raised by notice to the other Party, which notice shall state with particularity the nature of the dispute and/or claim and the demand for relief,
making specific reference by article number and title to the provisions of this Agreement alleged to have given rise to the dispute. . . .
"All disputes subject to this Section shall be heard by a panel of three (3) arbitrators . . . .
"The need for and scope of formal discovery will be determined by agreement of the Parties or, if the Parties are unable to agree, the Arbitration Panel. . . . In the event of a formal hearing, each Party shall only be allowed a maximum of eight (8) hours to present evidence and/or witnesses.
"All costs of the Arbitration and the Arbitration Panel shall be borne equally by both parties. Notwithstanding the agreement to arbitrate in this Section, claims within the monetary jurisdiction of Ohio's Municipal Courts, actions for specific performance or price, and/or actions for preliminary injunctive relief may be pursued by either Party . . . in a court of competent jurisdiction in Summit County, Ohio, or pursued in arbitration as set forth above."
Pristine opposed the motion, primarily on the grounds that the Agreement only requires arbitration of disputes "arising under the Agreement." (Italics added.) Pristine asserted that language limits arbitration to disputes about contract interpretation and performance, not Pristine's claim for fraudulent inducement. Pristine also asserted that the court, rather than the arbitrator, should determine whether its claims are arbitrable.
On August 5, 2016, the court issued a tentative ruling granting the motion to compel arbitration. After conducting a hearing the same day, the court took the matter under submission.
F. Amended Complaint
On August 24, 2016—while the matter was under submission—Pristine filed a first amended complaint (Complaint), making the motion to compel arbitration moot. The Complaint is identical to Pristine's original complaint, except it adds allegations that Pristine was fraudulently induced to enter into not only the Agreement as a whole, but also the arbitration provision in particular.
G. Second Motion to Compel Arbitration
Defendants filed a motion to compel arbitration of the Complaint. After conducting a hearing, the court denied the motion. The court determined the Federal Arbitration Act (FAA) (9 U.S.C. § 1 et seq.) applied because the Agreement evidences a transaction involving interstate commerce. The court also enforced the parties' Ohio choice-of-law clause. The court ruled that the issue of arbitrability—that is, whether the Complaint was within the scope of the arbitration clause—was for the court, and not the arbitrator, to make. Next, the court determined that Pristine's fraudulent inducement claims were outside the scope of the Agreement's arbitration provision. This appeal followed.
DISCUSSION
I. THE STANDARD OF REVIEW
"There is no uniform standard of review for evaluating an order denying a motion to compel arbitration." (Robertson v. Health Net of California, Inc. (2005) 132 Cal.App.4th 1419, 1425.) "If the court's order is based on a decision of fact, then we adopt a substantial evidence standard. [Citations.] Alternatively, if the court's denial rests solely on a decision of law, then a de novo standard of review is employed." (Ibid.) "Interpreting a written document to determine whether it is an enforceable arbitration agreement is a question of law subject to de novo review when the parties do not offer conflicting extrinsic evidence regarding the document's meaning." (Avery v. Integrated Healthcare Holdings, Inc. (2013) 218 Cal.App.4th 50, 60.)
In this case, the trial court decided two distinct issues: (1) who decides whether this dispute is arbitrable, the court or the arbitrator; and (2) after deciding the court was the proper forum in which to adjudicate arbitrability, whether the dispute is arbitrable.
On the first issue, the parties did not introduce any extrinsic evidence, and therefore the de novo standard of review applies. On the second issue, the court rejected Miller's declaration as being not credible. With no admissible extrinsic evidence before it, the court decided the arbitrability issue as a matter of law based on the terms of the Agreement itself. We review the trial court's credibility ruling on Miller's declaration for abuse of discretion (see Shamblin v. Brattain (1988) 44 Cal.3d 474, 479) and its interpretation of the Agreement's terms de novo.
II. GENERAL ARBITRATION PRINCIPLES
A. The FAA
The FAA applies when a contract "evidences a transaction involving interstate commerce . . . ." (Shepard v. Edward Mackay Enterprises, Inc. (2007) 148 Cal.App.4th 1092, 1101.) The Agreement concerns services Pristine agreed to provide to approximately 3,500 stores located across the United States. The parties do not dispute that the FAA applies in this case.
"[T]he [FAA] establishes a national policy favoring arbitration when the parties contract for that mode of dispute resolution. The Act . . . calls for the application, in state as well as federal courts, of federal substantive law regarding arbitration." (Preston v. Ferrer (2008) 552 U.S. 346, 349.)
"[A]s with any other contract, the parties' intentions control, but those intentions are generously construed as to issues of arbitrability." (Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc. (1985) 473 U.S. 614, 626.) "[A]ny doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration . . . ." (Ibid.)
California also has a "'"strong public policy in favor of arbitration as a speedy and relatively inexpensive means of dispute resolution."'" (Emerald Aero, LLC v. Kaplan (2017) 9 Cal.App.5th 1125, 1137.)
III. THE COURT CORRECTLY DETERMINED THAT THE COURT, NOT THE
ARBITRATOR, SHOULD DETERMINE ARBITRABILITY
The threshold issue is who should decide whether the Complaint is within the scope of the Agreement's arbitration provision—the court or the arbitrator? Although federal policy favors arbitration agreements, the United States Supreme Court "has made clear that there is an exception to this policy: The question whether the parties have submitted a particular dispute to arbitration, i.e., the 'question of arbitrability,' is 'an issue for judicial determination [u]nless the parties clearly and unmistakably provide otherwise.'" (Howsam v. Dean Witter Reynolds, Inc. (2002) 537 U.S. 79, 83 (Howsam).)
One way for the parties to clearly and unmistakably provide for the arbitrator to decide scope issues is to have an express agreement to that effect. For example, an arbitration provision could state in part: "The parties agree to arbitrate whether the dispute or controversy is arbitrable." However, this Agreement has no such provision.
The absence of an express agreement on the subject of arbitrability does not end the issue, however, because courts have held that incorporation by reference of American Arbitration Association (AAA) arbitration rules is clear and unmistakable evidence that contracting parties agreed to arbitrate arbitrability. This is because one of the AAA rules provides that the arbitrator has the power to rule on his or her own jurisdiction. (Brennan v. Opus Bank (9th Cir. 2015) 796 F.3d 1125, 1130 (Brennan) ["[W]e hold that incorporation of the AAA rules constitutes clear and unmistakable evidence that contracting parties agreed to arbitrate arbitrability."].)
Here, the Agreement provides arbitration "shall be generally conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association." Citing Brennan, supra, 796 F.3d 1125, von Arras v. Columbus Radiology Corp., 2005-Ohio-2562 (von Arras), and Dream Theater, Inc. v. Dream Theater (2004) 124 Cal.App.4th 547 (Dream Theater), Defendants contend this is "a clear and unmistakable reference" to AAA rules that require the arbitrator to decide arbitrability.
The problem with Defendants' argument, however, is the language in the Agreement purporting to incorporate the AAA rules differs from that in the cases they cite. In all three of the cited cases, the parties incorporated by reference all of the AAA rules—whereas here, the Agreement states arbitration shall generally be conducted according to AAA arbitration rules.
For example, in Brennan, supra, 796 F.3d 1125, the arbitration agreement provided that "'any controversy or claim arising out of this [Employment] Agreement . . . shall be settled by binding arbitration in accordance with the Rules of the American Arbitration Association.'" (Id. at p. 1128.) Similarly, in von Arras, supra, 2005 Ohio App. Lexis 2429, the arbitration provision states claims "will be settled by arbitration administered by the American Arbitration Association under its Commercial Arbitration Rules." (Id. at **2.) In Dream Theater, supra, 124 Cal.App.4th 547, the parties did likewise, stating arbitration would be conducted "in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect." (Id. at p. 554.)
In sharp contrast here, the Agreement states arbitration "shall generally be conducted in accordance" with the AAA rules. (Italics added.) In legal usage, "generally" has three meanings: (1) It can mean "disregarding insignificant exceptions." For example, "The level of advocacy in this court is generally very high." (2) In other contexts, it means "in many ways." For example, "He was the most generally qualified applicant." (3) Sometimes, "generally" means "usually; most of the time." For example, "He generally left the office at five o'clock." (Garner's Dict. of Legal Usage (3d ed. 2011) p. 388.)
The parties could have reasonably intended either of the first two meanings. It may be they meant that disregarding insignificant exceptions, all of the AAA rules would apply. Or, they may have intended that most or many of the AAA rules would apply. We need not decide between these possible meanings, because inherent in both is that the parties were incorporating less than all of the AAA arbitration rules.
By providing that arbitration shall "generally be conducted in accordance" with AAA rules, the Agreement is ambiguous because it cannot be determined exactly which AAA rules are excluded. Accordingly, the trial court correctly concluded the Agreement does not "clearly and unmistakably" provide the arbitrator determines arbitrability.
Howsam, supra, 537 U.S. at p. 83.
Disagreeing with that conclusion, Defendants cite Standard Iron Works v. Globe Jewelry & Loan, Inc. (1958) 164 Cal.App.2d 108 (Standard Iron Works). That case involved a dispute about a contract for constructing a building. The contract referred to "'pre-architectural sheets 1-9 dated 1/11/56; structural sheets S.-S' dated 1/11/56 prepared by R. G. Wheeler." (Id. at p. 112.) One of the issues at trial was whether the parties agreed to construct a two-story or a three-story building. (Id. at p. 111.) These architectural sheets referred to a three-story building. (Id. at p. 113.) The court held, "[I]f the reference in a contract to the plans and specifications indicates an intention to incorporate them generally, they become a part of the contract for all purposes." (Id. at p. 117, italics added.)
Based on the use of the word "generally" in Standard Iron Works, supra, 164 Cal.App.2d at page 117, Defendants contend that by stating arbitration "shall generally be conducted" in accordance with AAA rules, the parties here intended that such rules were universally incorporated into the Agreement. This argument fails, however, because it conflates two distinct uses of the word "generally."
In the Agreement, "generally" describes in what manner arbitration will be conducted. It will be conducted generally in accord with AAA arbitration rules. However, in Standard Iron Works, supra, 164 Cal.App.2d 108, "generally" describes how the documents were incorporated into the contract. They were incorporated "generally." The way "generally" as used in Standard Iron Works does not define its very different use in the Agreement.
Defendants also contend "generally" means universally because "general" has that that meaning in several legal phrases, such as a "general power of attorney," a "general appearance," and "general jurisdiction." This argument is incorrect, however, because the word in the Agreement being analyzed is not "general," but "generally"—and general and generally have different meanings. For example, the statement, "She is an attorney general" is very different from, "She is an attorney, generally." Moreover, Defendants' premise is wrong. In legal usage, "general" does not always mean universal or total. For example, in a personal injury case general damages will usually be less than all of the plaintiff's claimed loss.
Defendants also contend other terms in the arbitration provision show the parties incorporated by reference the AAA rule granting the arbitrator the authority to decide arbitrability. They note, for example, that the arbitration provision modifies AAA rule procedures relating to the method for initiating arbitration, the time limits on presenting evidence at arbitration, the selection of arbitrators, and the time for filing an answer or counterclaims. Defendants contend that in all respects not specifically excepted, the AAA rules must therefore apply. They cite Brennan, supra, 796 F.3d at pages 1129-1130 and Oracle Am., Inc. v. Myriad Group A.G. (9th Cir. 2013) 724 F.3d 1069, 1074 (Oracle America) as supporting this argument.
However, the two cited cases are distinguishable. Brennan, supra, 796 F.3d 1125 is off point because the relevant language there was unqualified— the parties provided the arbitration would be conducted "'in accordance with the Rules of the American Arbitration Association.'" (Id. at p. 1128.) The parties in Brennan also provided that California procedural rules would apply during arbitration. However, as the Ninth Circuit noted, that is a different issue entirely from whether the AAA rules, which were fully incorporated, left the question of arbitrability to the arbitrator and not the court. (Id. at p. 1129.)
Oracle America, supra, 724 F.3d 1069 is also off point. There, the contract incorporated by reference all of the arbitration rules of the United Nations Commission on International Trade Law "as modified herein . . . ." (Id. at p. 1071.) Like AAA commercial arbitration rules, these United Nations rules gave the arbitrator the power to determine his or her own jurisdiction. (Ibid.) The parties' agreement modified some of these United Nations rules, but not the rule providing that the arbitrator decides arbitrability. (Id. at p. 1077.) Thus, the Ninth Circuit held incorporating the United Nations rules and not modifying them as to the issue of arbitrability was clear and unmistakable evidence the parties agreed to arbitrate arbitrability. (Ibid.) Oracle America is not helpful here, however, because the parties did not incorporate by reference all of the AAA arbitration rules.
Although we find these cases distinguishable, Defendants' point—that in all respects not specifically excepted in the Agreement, the AAA rules apply—is a reasonable interpretation. The problem is that it is not the only reasonable interpretation of "generally" as it is used here, and the legal standard for delegating questions of arbitrability to the arbitrator requires the parties to "clearly and unmistakably" so provide. (Howsam, supra, 537 U.S. at p. 83.)
Citing several rules of contract interpretation in the California Civil Code, Defendants further contend the Agreement should be construed to incorporate all of the AAA arbitration rules except those expressly modified elsewhere in the Agreement. They assert the trial court's interpretation should be rejected because it "makes it impossible to determine which AAA Commercial Arbitration Rules are incorporated and which are not . . . ."
This argument is forfeited. The Agreement provides it shall be "construed in accordance with the laws of the State of Ohio." By failing to cite any Ohio law on this point, Defendants have forfeited this issue. (See In re S.C. (2006) 138 Cal.App.4th 396, 408 [appellant forfeits claim of error by failing to cite authority].) Moreover, even if we were to consider the argument, we would reject it. The trial court was not asked to—and did not rule—on which AAA rules are incorporated by reference into the Agreement. The court determined that by using the word "generally" to describe which AAA rules apply, the Agreement contained no clear and unmistakable evidence the parties intended to incorporate the AAA rule delegating arbitrability issues to arbitration. We agree with that determination.
IV. PRISTINE'S CLAIM THAT IT WAS FRAUDULENTLY INDUCED
TO ENTER INTO THE AGREEMENT ARE ARBITRABLE
A. Factual Background
Having determined that court, rather than arbitration, was the proper forum for determining arbitrability, the trial court next considered whether Pristine's claim that it was fraudulently induced to enter into the Agreement is arbitrable. The court noted that under Ohio law, the test for determining arbitrability is whether "'the action could be maintained without reference to the contract or relationship at issue'"—and the court determined that under this test, Pristine's claims would be arbitrable.
However, the court also found that certain provisions in the Agreement cut the other way and indicated the parties intended to limit arbitration to disputes about contract performance, not contract formation. For example, the arbitration provision requires the party initiating arbitration to notify the other party about the dispute. The court stated that under the Agreement, these "notice provisions require specific reference to the article and title of the [Agreement] alleged to have been violated, and the [Agreement] never addresses the accuracy of the pre-contract work estimates." (Italics added.)
The Agreement also provides that at an arbitration hearing, "each Party shall only be allowed a maximum of eight (8) hours to present evidence and/or witnesses." The court believed this showed the parties intended to arbitrate only contract performance disputes and not "complex fraud claims."
The court concluded these other provisions, when juxtaposed against language in the Agreement requiring arbitration of any dispute arising under the Agreement, created an ambiguity. Applying the maxim that ambiguities should be construed against the drafter (here, Signet), the court ruled "as a matter of law . . . the arbitration clause in the [Agreement] does not cover the pre-contract tort claims at issue here."
Defendants contend there is no ambiguity and Pristine's fraudulent inducement claims are arbitrable. As explained next, we agree with that contention.
B. Under Ohio Law, "Arising Under" Encompasses Fraud in the Inducement
When deciding whether the parties agreed to arbitrate a certain matter under the FAA, courts generally apply ordinary state law principles of contract interpretation. (First Options of Chicago, Inc. v. Kaplan (1995) 514 U.S. 938, 944.) If a contract contains an arbitration agreement, there is a "presumption of arbitrability." (AT&T Technologies, Inc. v. Communications Workers of America (1986) 475 U.S. 643, 650.) This means that "'[a]n order to arbitrate the particular grievance should not be denied unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute.'" (Ibid.)
The Agreement provides that it "shall be governed by and construed in accordance with the laws of the State of Ohio . . . ." "California strongly favors enforcement of choice-of-law provisions [citation], and our courts have upheld application of other states' internal statutes, rules and laws to arbitration contracts." (Harris v. Bingham McCutchen LLP (2013) 214 Cal.App.4th 1399, 1404.)
Ohio applies the rule of Fazio v. Lehman Bros., Inc. (6th Cir. 2003) 340 F.3d 386 (Fazio) in determining whether a particular dispute is encompassed within a contractual arbitration clause. (See Acad. of Med. v. Aetna Health, Inc., 2006-Ohio-657, ¶ 30 [842 N.E.2d 488, 494] (Academy of Medicine) ["We find that the Fazio test is consistent with Ohio law."].)
In Fazio, supra, 340 F.3d 386, the court considered an arbitration provision stating, "'Any controversy arising out of or relating to any of my accounts, to transactions with you for me, or to this or any other agreement or the construction, performance or breach thereof, shall be settled by arbitration.'" (Id. at p. 392, italics added.) The court held, "A proper method of analysis here is to ask if an action could be maintained without reference to the contract or relationship at issue. If it could, it is likely outside the scope of the arbitration agreement." (Id. at p. 395.)
Because Pristine's fraudulent inducement claims could not be maintained without reference to the Agreement or its relationship with Signet, Pristine's Complaint is arbitrable under the Fazio test.
However, Pristine contends Fazio, supra, 340 F.3d 386 should not be followed because the arbitration clause there applied not only to disputes "arising out of" the parties' agreement, but also disputes "relating to" the agreement. The arbitration provision in the Agreement, which provides for arbitration of "any and all disputes arising under this Agreement" does not contain this "relating to" language. Pristine contends that without "relating to," the Agreement's arbitration clause encompasses only interpretation or performance issues, and not fraud in the inducement claims.
In this case, however, where the parties chose Ohio law to govern their Agreement, Pristine's argument fails because Sixth Circuit cases (as well as Ohio cases) have expanded Fazio to also apply to arbitration provisions like the one in the Agreement here. For example, in Highlands Wellmont Health Network, Inc. v. John Deere Health (6th Cir. 2003) 350 F.3d 568 (Highlands Wellmont), the court considered an arbitration clause—indistinguishable from the one here—that provided for arbitration of "any dispute arising out of this Agreement . . . ." (Id. at p. 571.) As here, the plaintiff in Highlands Wellmont alleged it was fraudulently induced to enter into the contract. (Id. at p. 576.) And also just as here, the plaintiff in Highlands Wellmont asserted that claim was outside the scope of the arbitration provision because the agreement only required arbitration of disputes "arising out of" the agreement and did not contain "relating to" language. (Ibid.) The Sixth Circuit rejected that assertion, holding that a fraudulent inducement claim is within the scope of the "arising out of" arbitration clause. (Id. at p. 578.)
Subsequently, in Nestle Waters North America, Inc. v. Bollman (6th Cir. 2007) 505 F.3d 498 (Nestle Waters), the Sixth Circuit considered an arbitration clause nearly identical to the one at issue here, providing for arbitration of "'any controversy or claim ("Dispute") arising out of this Agreement . . . .'" (Id. at p. 501.) Although Fazio, supra, 340 F.3d 386 involved broader language (arising out of or relating to), the Sixth Circuit held the same test for arbitrability applied; i.e., whether an action could be maintained "without reference to the contract or relationship at issue, the action is likely outside the scope of the arbitration agreement." (Nestle Waters, supra, 505 F.3d at p. 505.) The Sixth Circuit stated that "as an initial matter," the "arising out of" language was "extremely broad" and "thus, the presumption of arbitrability weighs in favor of finding this dispute covered by the arbitration clause." Applying Fazio, and because the dispute could not be determined without reference to the contract or relationship at issue, the court in Nestle Waters determined the matter was arbitrable. (Nestle Waters, supra, 505 F.3d at p. 505.)
Ohio state court cases are consistent with these Sixth Circuit cases. For example, in Roberts v. Bank of America NT&SA (1995) 107 Ohio App.3d 301 , the Ohio Court of Appeals examined an arbitration clause providing "[t]he parties shall submit any dispute hereunder to binding and final arbitration in accordance with the Rules of the [AAA]." (Id. at p. 945.) That arbitration clause did not contain any "relating to" language. Nevertheless, the Ohio appellate court stated, "Clearly, the instant arbitration clause is not limited to specific disputes, but is broadly defined." (Ibid.) The court held a contract formation issue—whether the contract failed for lack of consideration—was arbitrable. (Id. at pp. 945-946.)
Pristine asserts that instead of following Fazio, supra, 340 F.3d 386, we should follow Ninth Circuit cases—Mediterranean Enters. Ins. v. Ssangyong Corp. (9th Cir. 1983) 708 F.2d 1458, 1464 (Mediterranean), Tracer Research Corp. v. Nat'l Envtl. Servs. Co. (9th Cir. 1994) 42 F.3d 1292 (Tracer), and Cape Flattery Ltd. v. Titan Mar., LLC (9th Cir. 2011) 647 F.3d 914 (Cape Flattery). As Pristine explains, those cases hold that a provision requiring arbitration of disputes "arising under" an agreement reaches only disputes about contract interpretation or performance; to reach fraudulent inducement, the arbitration clause must also include claims "related to" the contract.
However, because this case is governed by the parties' choice of Ohio law, Pristine's reliance on these Ninth Circuit cases is simply unavailing.
Moreover, the reasoning in the Ninth Circuit cases Pristine relies on goes back to a case published more than 50 years ago, In re Petition of Kinoshita & Co. (2d Cir. 1961) 287 F.2d 951 (Kinoshita). There, the Second Circuit found that when an arbitration clause "refers to dispute or controversies 'under' or 'arising out of' the contract," arbitration is restricted to "disputes and controversies relating to the interpretation of the contract and matters of performance." (Id. at p. 953.) The Kinoshita court reasoned that the phrase "arising under" is narrower in scope than the phrase "arising out of or relating to," the standard language recommended by the AAA. (Ibid.) Accordingly, the court concluded that the arbitration clause was not "sufficiently broad to encompass a dispute or controversy about an alleged fraudulent inducement of the contract" in which the arbitration clause was included. (Ibid.)
The Ninth Circuit continues to rely on Kinoshita, supra, 287 F.2d 951 to interpret whether a particular dispute is arbitrable. In Mediterranean Enterprises, supra, 708 F.2d 1458, the Ninth Circuit explained that "arising hereunder" was synonymous with "arising under" and, relying on Kinoshita, found that the language "'arising hereunder' is intended to cover . . . only [disputes] relating to the interpretation and performance of the contract itself." (Mediterranean Enterprises, at p. 1464.) The Ninth Circuit again applied this narrow interpretation of "arising under" language in Tracer, supra, 42 F.3d at page 1295 [citing Kinoshita] and Cape Flattery, supra, 647 F.3d at p. 923 [continuing to follow Kinoshita].)
Significantly, however, the Second Circuit has subsequently changed course and, although not expressly overruling Kinoshita, supra, 287 F.2d 951, has severely confined its holding to "its precise facts," noting that Kinoshita is inconsistent with the federal policy favoring arbitration. (See ACE Capital Re Overseas Ltd. v. Cen. United Life Ins. Co. (2d Cir. 2002) 307 F.3d 24, 33.)
The Sixth Circuit has declined to follow Kinoshita, supra, 287 F.2d 951, noting that "[t]he Second Circuit itself has recognized that the authority of Kinoshita . . . is highly questionable even in the Second Circuit." (Highlands Wellmont, supra, 350 F.3d at p. 577.) The Sixth Circuit's view is particularly relevant here because (1) Pristine and Signet provided the Agreement is to be governed and construed in accordance with Ohio law, a state within the Sixth Circuit; and (2) Ohio courts have stated they will "rely on a federal standard in applying Ohio law on the issue of arbitrability" and will apply Fazio, supra, 340 F.3d 386 in determining whether a particular dispute is encompassed within an arbitration clause. (Academy of Medicine, supra, 842 N.E. at pp. 492, 494.)
Additionally, the majority of federal appellate courts considering this issue also disagree with the Ninth Circuit. At least five other circuits interpret "arising under" broadly in deference to federal policy encouraging arbitration. For example, in Battaglia v. McKendry (3d Cir. 2000) 233 F.3d 720, 727, the Third Circuit stated, "[W]hen phrases such as 'arising under' and 'arising out of' appear in arbitration provisions, they are normally given broad construction, and are generally construed to encompass claims going to the formation of the underlying agreements."
In Peoples Sec. Life Ins. Co. v. Monumental Life Ins. Co. (4th Cir. 1989) 867 F.2d 809, the Fourth Circuit considered language even more limited than "arising under." There, the parties had agreed to arbitrate "[a]ny . . . breach or violation" of the terms of the agreement. (Id. at p. 810, fn. 1.) Noting the federal policy in favor of arbitration, the court broadly construed this language to include fraud in the inducement claims. (Id. at pp. 812-814.)
As already noted, the Sixth Circuit also holds "arising out of" is broad enough to include a claim for fraud in the inducement. (Highlands Wellmont, supra, 350 F.3d at p. 578.) So does the Fifth Circuit. (Mar-Len of Louisiana, Inc. v. Parsons-Gilbane (5th Cir. 1985) 773 F.2d 633, 637 [recognizing that Kinoshita is inconsistent with federal policy favoring arbitration].) The Eleventh Circuit also rejects Kinoshita as "simply . . . not being in accord with present day notions of arbitration as a viable alternative dispute resolution procedure." (Gregory v. Electro-Mechanical Corp. (11th Cir. 1996) 83 F.3d 382, 385.)
It appears that the Ninth Circuit is the only federal circuit that continues to strictly adhere to Kinoshita, supra, 287 F.2d 951. "'"Where the federal circuits are in conflict, the decisions of the Ninth Circuit are entitled to no greater weight than those of other circuits."'" (Governor Gray Davis Com. v. American Taxpayers Alliance (2002) 102 Cal.App.4th 449, 468.)
Additionally, to the extent California appellate courts have considered this issue, they too have rejected the Ninth Circuit's approach. (EFund Capital Partners v. Pless (2007) 150 Cal.App.4th 1311, 1329-1330 [stating that the Ninth Circuit approach is inconsistent with California state law and the policy of the FAA that requires a liberal reading of arbitration agreements].)
Applying Ohio law here, the causes of action in Pristine's Complaint are merely different legal theories based on the same underlying allegations that Defendants fraudulently induced Pristine to enter into the Agreement by misrepresenting the estimated repair call volume. Such claims are encompassed within the obligation to arbitrate "any and all disputes arising under this Agreement."
C. The Court Erred in Finding an Ambiguity
1. Notice provision
The trial court correctly recognized that "[w]hen read in isolation," the language requiring arbitration of "any and all disputes arising under this Agreement" includes Pristine's claims it was fraudulently induced to enter into the Agreement. However, the court noted the Agreement's arbitration provisions also contain a notice provision, which requires the party invoking arbitration to make "specific reference to the article and title of the [Agreement] alleged to have been violated . . . ." (Italics added.) The court held this notice requirement shows the parties intended to arbitrate only contract performance issues, not fraudulent inducement claims. The court also found that in this case, the Agreement "never addresses the accuracy of the pre-contract work estimates." Based on these determinations, the court believed the arbitration provision was ambiguous.
The court erred in finding the arbitration agreement to be ambiguous. Its first mistake stems from paraphrasing the notice provision rather than quoting it. The notice provision in the Agreement actually states:
"All disputes and/or claims subject to this Section shall be raised by notice to the other Party, which notice shall state with particularity the nature of the dispute and/or claim and the demand for relief,
making specific reference by article number and title to the provisions of this Agreement alleged to have given rise to the dispute." (Italics added.)
Thus, contrary to the trial court's analysis, the Agreement does not require a breach of contract—a violation—to trigger an arbitrable claim. Rather, the parties are required to identify the article number and title of the provision giving "rise to the dispute."
Here, the crux of the dispute involves alleged fraudulent misrepresentations by Defendants about the expected call volume. Section 1.1 of the Agreement states that Pristine will perform work in accordance with the "Statement of Work" attached as exhibit C to the Agreement. Page 32 of exhibit C states the estimated annual calls, including the 27,500 call estimate that Pristine alleges was a fraudulent misrepresentation.
Thus, if Pristine had initiated arbitration, it could have complied with the Agreement's notice provision by identifying article 1.1 and exhibit C as the article and provisions that are "alleged to have given rise to the dispute" as required by the notice requirement in paragraph 13.10 of the Agreement.
The notice provision is not limited to claims for breach of contract, and the trial court erred in so construing it to create an ambiguity that does not exist.
The trial court also erred in determining that the Agreement "never addresses the accuracy of the pre-contract work estimates." As noted in the text ante, exhibit C to the Agreement provides the precontract work estimates that were allegedly misrepresented to Pristine. Defendants even concede this point. Moreover, Pristine's Complaint alleges the Agreement "expressly incorporated" the 27,500 estimated call volume as "'Target Goals & Measurables.'"
2. Eight-hour time limit
The Agreement also provides that "[i]n the event of a formal [arbitration] hearing, each Party shall only be allowed a maximum of eight (8) hours to present evidence and/or witnesses." The trial court also relied on this provision in finding an ambiguity, stating that these limits "indicate the agreement was only intended to cover performance disputes, not complex fraud claims."
Defendants contend, "There is no support for the trial court's conclusion that by limiting arbitration to [eight] hours per side, the parties' intended the arbitration to only cover certain types of disputes. Indeed, such a conclusion is contrary to the very purpose of arbitration, which is to provide 'the parties with a relatively speedy and inexpensive method of conflict resolution.'"
We agree with Defendants' contention about the time limit. There is no factual basis in this record, nor in common experience, to flatly declare that contract performance and breach cases can be arbitrated in eight hours per side, but fraudulent inducement claims cannot. By its own terms, the eight-hour time limitation applies to all arbitrable disputes and seems plainly intended to make arbitration a speedy and relatively inexpensive means of dispute resolution in practice and not just in theory.
Moreover, in other parts of the arbitration provision, the parties specifically excepted from arbitration certain types of claims, such as those "within the monetary jurisdiction of Ohio's Municipal Courts, actions for specific performance or price, and/or actions for preliminary injunctive relief . . . ." As Defendants correctly assert, the parties knew how to except certain types of claims from arbitration. Had they intended to also exclude fraudulent inducement claims, they would have said so.
Although not discussed by the trial court, Pristine also contends a separate part of the Agreement, section 8, entitled "Limitations of Liability," also evidences the parties' intent to exclude fraudulent inducement claims from arbitration. However, as Defendants correctly note, nothing in section 8 indicates the phrase "under this Agreement" is limited to contract performance issues as distinguished from fraudulent inducement claims.
Because the Agreement unambiguously requires arbitration of the claims alleged in Pristine's Complaint, it is unnecessary to address whether the court also erred in determining that the ambiguity should be resolved against Signet (the drafter), rather than applying a contrary presumption that ambiguities should be resolved in favor of arbitration.
V. THE COURT CORRECTLY REJECTED PRISTINE'S CLAIM
OF FRAUDULENT INDUCEMENT IN THE ARBITRATION CLAUSE ITSELF
Although claims of fraud in the inducement of the contract itself are subject to arbitration, where a plaintiff claims that fraud induced entering into the arbitration clause itself, the matter must be resolved by the court rather than by the arbitrator. (See Johnson v. Siegel (2000) 84 Cal.App.4th 1087, 1095.)
In an apparent attempt to invoke this rule, Pristine's Complaint alleges not only that it was fraudulently induced to enter into the Agreement as a whole, but also purports to allege Defendants fraudulently induced Pristine to enter into the arbitration clause itself.
Specifically, the Complaint alleges Defendants perpetrated such fraud by "propos[ing] an arbitration clause which is understood in the industry, and by [Pristine], to be narrow in scope, and limited by its terms to specific disputes on contract performance only." The Complaint alleges that by proposing that contract language, Signet thereby "represented that the arbitration clause did not apply to non-contract claims" and "[t]he true fact" was that Signet "secretly intended to assert that the arbitration clause applied to all claims of any nature whatsoever, including [Pristine's] non-contractual fraud claims, thereby limiting [Pristine] from seeking judicial redress for Defendants' fraudulent inducement."
In opposing Defendants' motion to compel arbitration, Pristine submitted a declaration from Eric C. Miller, one of its officers. Miller stated that Signet first proposed the language in the arbitration clause, and that language was never changed during the negotiations. Miller's declaration states, "Based on my understanding of industry contracts, I believed the [Agreement's] arbitration clause was a narrow one, and would be limited to specific disputes on contract performance, only."
Miller's declaration also states he "relied on such language, which Signet had proposed, when I executed the [Agreement], and I believed that the [Agreement's] arbitration clause was narrow and only applied to specific contract performance disputes."
The trial court rejected Pristine's attempt to show it was fraudulently induced to enter into the arbitration provision itself. The court stated that Pristine "presents only a self-serving, inherently untrustworthy, declaration from [Pristine's] [c]hief [d]evelopment [o]fficer, Eric Miller, as evidence of an industry accepted definition."
In its respondent's brief, Pristine contends this ruling is erroneous because Miller's testimony was "unrebutted" and therefore binding on the trial court. Pristine contends its evidence "demonstrated that there is an industry-recognized understanding of the terms such that Signet's proposal constitutes a promise or representation that it intended to act in conformance with that industry standard as it related to arbitration."
Pristine did not appeal or cross-appeal from the order denying Defendants' motion to compel arbitration. Ordinarily, a respondent who has not appealed from an appealable judgment or order may not urge error on appeal. (Preserve Poway v. City of Poway (2016) 245 Cal.App.4th 560, 585 (Preserve Poway).) However, Defendants have not raised this point, and in the interest of addressing the merits, we assume without deciding that we have jurisdiction to consider Pristine's argument under Code of Civil Procedure section 906, which in limited circumstances allows a respondent to request the reviewing court to review an issue. (See Preserve Poway, supra, 245 Cal.App.4th at pp. 585-587.)
We disagree with Pristine's assertions. First, contrary to Pristine's assertion, the court was not required to accept Miller's declaration, even if uncontradicted. (Bazaure v. Richman (1959) 169 Cal.App.2d 218, 222.) The court may totally reject "'"the testimony of a witness, even though the witness is uncontradicted"'" so long as the rejection is not arbitrary. (Howard v. Owens Corning (1999) 72 Cal.App.4th 621, 632.) The court's credibility determination here is within the court's discretion and binding on appeal. (See Shamblin v. Brattain (1988) 44 Cal.3d 474, 479.)
Moreover, assuming for the sake of discussion the court should have credited Miller's testimony, as a matter of law the Complaint does not state a claim for fraudulent inducement of the arbitration provision itself. Even construing the Complaint liberally, Pristine merely alleges its own misunderstanding of the scope of the arbitration provision. In his declaration, Miller admits he did not rely on any representation by Defendants about the meaning or scope of the arbitration provision. Rather, he concedes that he "relied on such language" in the arbitration provision itself, and his subjective understanding that the "clause was narrow and only applied to specific contract performance disputes." Pristine's misunderstanding of the effect of applying Ohio law to the arbitration provision in the Agreement is not fraud:
"'In the interest of preserving some reasonable stability in commercial transactions, the court will not set aside contractual obligations, particularly where they are embodied in written contracts, merely because one of the parties claims to have been ignorant of, or to have misunderstood the provisions of the contract.'" (Hedging Concepts, Inc. v. First Alliance Mortgage Co. (1996) 41 Cal.App.4th 1410, 1421.)
Alternatively, Pristine contends Miller's misunderstanding constitutes a mistake that "renders the arbitration clause void." However, even accepting Miller's declaration at face value, clearly each side here placed a different interpretation on the scope of the arbitration provision—hence all parties did not make the same mistake. At most, Pristine was suffering from a unilateral mistake of law.
Pristine's citation to Kauffman v. Cugini & Capoccia Builders, Inc. (No. 00AP-871, June 28, 2001) 2001 Ohio App. LEXIS 2853, which involved mutual mistake, is inapposite. --------
However, parties dealing at arm's length, as Signet and Pristine were, have no duty to explain to each other the express and plain terms of a written contract. (Brookwood v. Bank of America (1996) 45 Cal.App.4th 1667, 1674 (Brookwood) ["No law requires that parties dealing at arm's length have a duty to explain to each other the terms of a written contract, particularly where, as here, the language of the contract expressly and plainly provides for the arbitration of disputes arising out of the contractual relationship."].) There is nothing in this record showing that Defendants had reason to know of Pristine's subjective misunderstanding or that Defendants did anything wrong that caused Pristine's misunderstanding. Miller's declaration admits the first draft of the Agreement contained the same arbitration language that is in the final version, and the arbitration clause never changed. Frank Dwyer, a Signet employee, submitted a declaration stating Pristine never discussed its interpretation of the arbitration clause with Signet. (See Selvage v. Emnett (Ohio Ct. App. 2009) 181 Ohio App.3d 371, 377 [909 N.E.2d 143, 147].)
Moreover, reliance on an alleged misrepresentation or unilateral mistake is not reasonable when a party could have ascertained the truth through the exercise of reasonable diligence. (See Brookwood, supra, 45 Cal.App.4th at p. 1674.) The Ohio choice of law clause forecloses any contention that Pristine could not have reasonably ascertained the correct scope of the arbitration provision.
DISPOSITION
The order is reversed with directions to enter an order granting Defendants' motion to compel arbitration. Defendants are entitled to costs on appeal.
NARES, J. WE CONCUR: BENKE, Acting P. J. O'ROURKE, J.