Opinion
B196852
4-22-2008
EMPIRE FILM PRODUCTIONS, INC., Plaintiff and Respondent, v. ARENAS ENTERTAINMENT, et al., Defendants and Appellants.
Weissmann Wolff Bergman Coleman Grodin & Evall, Julie B. Ephraim and Anjani Mandavia for Defendant and Appellant NBC Universal, Inc. Ropers, Majeski, Kohn & Bentley, Richard L. Charnley and Terry Anastassiou for Defendants and Appellants Arenas Entertainment and Santiago Pozo. Costa Abrams & Coate and Charles M. Coate for Plaintiff and Respondent.
NOT TO BE PUBLISHED
INTRODUCTION
Arenas Entertainment (Arenas), Santiago Pozo (Pozo), and NBC Universal, Inc. (Universal), appeal from orders denying their motions to compel arbitration against Empire Film Productions (Empire). We reverse.
Empire entered into an agreement with Arenas by which Arenas purchased the worldwide distribution rights to a motion picture owned by Empire, and agreed to pay Empire a share of the distribution proceeds. The Empire-Arenas agreement contains the arbitration clause at issue. Pozo, a principal of Arenas, signed the agreement on behalf of Arenas, but is not personally a party to the agreement. Likewise, Universal is not a party to the Empire-Arenas agreement. Rather, it is a party to a separate contract with Arenas under which Universal assumed Arenass duty to account to Empire.
On appeal, Arenas and Pozo contend that the trial court erred in finding that they waived the right to compel arbitration by engaging in conduct inconsistent with the desire to arbitrate. Universal contends that the trial court erred by deciding the waiver issue itself rather than referring it to an arbitrator to decide. Universal also contends that the trial court should have granted its motion to compel arbitration based on principles of equitable estoppel which prevent Empire from avoiding arbitration with Universal even though Universal is not a party to the arbitration agreement.
We conclude, first, that the trial court properly determined the waiver issue as to Arenas and Pozo in the first instance rather than referring the issue to an arbitrator. Second, we conclude that Empire failed to introduce substantial evidence to meet its heavy burden of proving Arenas and Pozo waived the right to compel arbitration. Third, based on the recent decision in Rowe v. Exline (2007) 153 Cal.App.4th 1276 (Rowe), which occurred after the trial courts ruling, we conclude that the doctrine of equitable estoppel requires Empire to arbitrate with Universal. Therefore, we reverse the judgment, and remand the case to the trial court with directions to vacate its prior orders denying Arenas, Pozo, and Universals motions to compel arbitration, and to enter a new order granting those motions.
FACTUAL AND PROCEDURAL BACKGROUND
The Empire-Arenas Agreement
Empire is a New York corporation involved in motion picture production and acquisition. In April 2002, Empire entered into an agreement (the Agreement) with Arenas, a California limited liability company, by which Arenas purchased the worldwide distribution rights to a motion picture entitled "Empire" (the movie). As a principal of Arenas, Pozo signed the agreement on behalf of Arenas.
Under the Agreement, Empire was to receive guaranteed payments of a defined share of the domestic and international revenues generated by distribution of the movie. Arenas was to issue accountings to Empire regarding the calculation and payment of Empires share of the receipts.
The Agreement permitted Arenas to transfer its rights and duties to a third party. Exercising this authority, Arenas entered a separate contract with Universal, whereby Universal undertook the worldwide distribution of the movie and the responsibility to account to Empire directly.
The Agreements Audit Requirement and Limitation Period
Under the Agreement, Empire had 24 months after each accounting statement was issued within which to deliver written notice of objection to Arenas or its subdistributor, Universal. Any objection would be deemed waived unless Empire instituted "action based thereon" within six months following expiration of the 24-month period. However, before Empire could "institute legal action" based on an accounting statement, Empire first had to "conduct[] an audit of the books of account for Arenas or its subdistributor with respect to the Picture."
Thus, in substance, in order to take any legal action based on a dispute over its share of distribution proceeds as reflected in an accounting statement, Empire had to: (1) give written notice of the dispute; (2) conduct an audit; and (3) institute the action within six months after the expiration of 24 months following issuance of the statement.
The Agreements Dispute Resolution, Arbitration, and Choice-of-Law Clauses
Through dispute resolution and arbitration provisions, the Agreement limited the type of action either party could take in the event of a dispute. Paragraph 6.09 of the Agreement governed resolution of "[a]ny controversy, claim, or dispute arising out of or related to this Agreement or the interpretation, performance, or breach hereof." As here relevant, it required a three-step procedure. First, it required the parties to "meet[] and attempt[] in good faith to reach a negotiated resolution." Second, if the parties were unable to negotiate a resolution, it provided that "such Dispute(s) shall first be mediated by a retired judge or justice of any California state or federal court." Third, if the parties could not resolve the dispute by mediation, then either party could "initiate arbitration of such Dispute(s). The arbitration shall be initiated and conducted according to the JAMS/Endispute Comprehensive Arbitration Rules and Procedure in effect as of the date hereof . . . (the `Arbitration Rules). The arbitration shall be conducted in Los Angeles County before a single neutral arbitrator appointed in accordance with the Arbitration Rules."
Paragraph 6.09 provided in full: "(a) Any controversy, claim, or dispute arising out of or related to this Agreement or the interpretation, performance, or breach hereof, including but not limited to alleged violations of state or federal statutory or common law rights or duties (a `Dispute) shall be resolved according to the procedures set forth in this paragraph which shall constitute the sole dispute resolution mechanism hereunder. In the event that the parties are unable to resolve any Dispute after meeting and attempting in good faith to reach a negotiated resolution, such Dispute(s) shall first be mediated by a retired judge or justice of any California state or federal court. If the parties are unable to agree upon a mediator, either party may apply to the Los Angeles office of JAMS/Endispute, or its successor (`JAMS) for the appointment of a mediator from a panel of retired judges and justices maintained by that organization.
"(b) If the parties are unable to resolve one or more Dispute(s) by mediation, then either party may initiate arbitration of such Dispute(s). The arbitration shall be initiated and conducted according to the JAMS/Endispute Comprehensive Arbitration Rules and Procedure in effect as of the date hereof, including the Optional Appeal Procedure provided for in such rules (the `Arbitration Rules). The arbitration shall be conducted in Los Angeles County before a single neutral arbitrator appointed in accordance with the Arbitration Rules. Any appeal shall be heard and decided by a panel of three neutral arbitrators. The neutral arbitrator and the members of any Appeal Panel shall be retired judges or justices of any California state or federal court. If either party refuses to perform any or all of its obligations under the final arbitration award (following appeal, if applicable) within thirty (30) days of such award being rendered, then the other party may enforce the final award in any court of competent jurisdiction in Los Angeles County.
"(c) Any Dispute or portion thereof, or any claim for a particular form of relief (not otherwise precluded by any other provision of this Agreement), that may not be arbitrated pursuant to applicable state or federal law may be heard in a court of competent jurisdiction in Los Angeles County."
The Agreement further provided in paragraph 6.10, in relevant part, as follows: "Should Article 6.09 of this Agreement be invalid, illegal or unenforceable, Producer and Purchaser each: (i) hereby irrevocably submits itself to the jurisdiction of the state courts of the State of California and to the jurisdiction of the United States District Court for the Central District of California, for the purpose of any suit, action or other proceeding arising out of or based upon this Agreement or the subject matter hereof or thereof brought by either party or the successors or assigns of each."
With respect to any dispute or claim that "may not be arbitrated pursuant to applicable state or federal law," paragraph 6.09 provided that the dispute or claim "may be heard in a court of competent jurisdiction in Los Angeles County." The paragraph further provided: "If a party believes in good faith that all or part of a Dispute, or any claim for relief or remedy sought, is not subject to arbitration under then-prevailing law, then that party may seek a determination to that effect from an appropriate court. If the court determines that the matter is not arbitrable or that the remedy sought is not available in arbitration, then the specific matter or request for remedy in question may be resolved by the court. All other matters and claims for relief shall be subject to arbitration as set forth above."
Finally, the Agreement also contained a general choice-of law provision, paragraph 6.02, which stated as follows: "This Agreement shall be construed in accordance with and be governed by the laws of the State of California."
The Dispute
In late February 2005, Empire sent Universal and Arenas a notice of intent to conduct an audit of the profit participation accountings issued to Empire. The audit commenced in late April 2005.
In November 2005, Empires counsel requested that Universal and Arenas engage in a good faith meeting with Empire to resolve a dispute over Empires access to the distribution agreement between Universal and Arenas and various other documents. However, counsel for Universal and Arenas did not respond to the meeting request.
The audit report was sent to Universal and Arenas in late May 2006. Empires counsel proposed that the parties proceed directly to mediation. Universal replied that the request for mediation was premature, and stated that it would hold an internal meeting and then meet with Empire. On behalf of Arenas, Pozo met with Empire on August 4, 2006. Universal later met with Empire on August 24, 2006. The meetings did not resolve the issues in dispute.
Additional factual details regarding the parties conduct in attempting to resolve the dispute are set forth in the first section of the discussion, below.
Having not resolved the dispute through good-faith negotiation, Empire repeatedly demanded mediation as required by paragraph 6.09 of the Agreement. However, counsel for Universal and Arenas insisted that mediation was premature because they were still willing to attempt to resolve the dispute informally.
In early October 2006, Empires counsel stated that if defendants did not agree to mediate by mid-October 2006, he would consider any obligation to mediate the dispute to have been waived. Universal and Arenas continued to maintain that mediation was premature. In late October 2006, Empires counsel informed Arenas and Universal in writing that he considered any contractual obligation to mediate the dispute to have been waived.
The Complaint
On November 14, 2006, ten days before expiration of the time period set forth in the Agreement for Empire to "institute legal action" regarding the accounting statement at issue, Empire filed its complaint in superior court against Universal, Arenas, and Pozo. In the complaint, Empire alleged that Pozo and Universal are members of Arenas, and that Pozo is the sole manager and registered agent of Arenas. Empire also alleged that Pozo and Universal are the alter egos of Arenas. Empire alleged causes of action against the defendants for breach of the distribution agreement, promissory estoppel, accounting, fraud, and declaratory relief.
The Motions to Compel Arbitration
Arenas and Universal filed separate motions to compel arbitration. Universal argued that because the Agreement was between a New York corporation (Empire) and a California limited liability company (Arenas), and involved the worldwide distribution of the movie, the arbitration provision in the Agreement was governed by the Federal Arbitration Act (FAA) (9 U.S.C. §§ 1-16). Universal disputed that it had waived its right to arbitrate by using dilatory tactics, and further argued that under the FAA the question of waiver was one for the arbitrator and not the court to decide.
In opposition to the motions to compel, Empire argued that the choice of law provision in the Agreement compelled application of California procedural rules governing arbitration, not federal rules. Empire further argued that because Universal and Pozo, as non-signatories to the Agreement, were not subject to arbitration, compelling arbitration risked the possibility of conflicting rulings. Empire contended that all of the defendants had waived the right to arbitrate by employing dilatory tactics, namely by preferring that a full accounting be completed before submitting the dispute to mediation. Empire also argued that it was prejudiced by the delay because it was forced to file the complaint to avoid the running of the statute of limitations provided for in the Agreement.
The Ruling
The court heard argument on both motions to compel arbitration on February 8, 2007. As to Universal, the trial court concluded that because the Agreement contained a California choice of law provision, the FAA did not apply. Under the FAA, Empire would be estopped from resisting Universals motion to compel arbitration, but Empire was not estopped under California law.
As to Arenas, the trial court recognized that Universal and Pozo wanted to arbitrate, and therefore no potential existed for inconsistent rulings. The court found, however, that Arenas had waived its right to compel arbitration by engaging in conduct inconsistent with the exercise of that right. The court found that Empire had suffered prejudice by filing its complaint, and would "have to start over again in another forum" if arbitration were compelled. The court made no finding whether Universal waived its right to compel arbitration.
Universal and Arenas filed timely notices of appeal from the trial courts order denying their motions to compel arbitration.
Entry of Pozos Default
On January 9, 2007, Empire had requested that the clerk of the Superior Court enter Pozos default. As a result, Pozos default was entered on January 11, 2007.
Pozo filed a motion to set aside the default on January 24, 2007, on the ground that counsel for Arenas had filed a motion to compel arbitration on December 27, 2006, thus staying the action pending hearing on the motion to compel.
On March 7, 2007, the trial court set aside Pozos default.
Thereafter, Pozo filed a motion to compel arbitration. It was denied, based on a finding of waiver. Pozo filed a notice of appeal from the order denying arbitration on May 17, 2007. We ordered that Pozos appeal be consolidated with the appeals filed by Universal and Arenas.
DISCUSSION
I. The Court Properly Decided the Waiver Issue
Universal contends that the trial court lacked the authority to rule on whether defendants waived the right to arbitrate. According to Universal, the Agreement is governed by the FAA, and under the FAA the waiver question must be submitted to the arbitrator. We conclude, based on the language contained in the Agreement, that the parties incorporated California procedural rules governing arbitration, including Code of Civil Procedure section 1281.2, subdivision (a), and therefore the trial court properly decided the waiver issue.
All undesignated section references are to the Code of Civil Procedure.
Under section 1281.2, subdivision (a), a provision of the California Arbitration Act (CAA; § 1280, et seq.), the court decides whether the party petitioning to compel arbitration has waived the right to arbitrate. (See Wagner Construction Co. v. Pacific Mechanical Corp. (2007) 41 Cal.4th 19, 28.) By contrast, where the FAA applies, waiver issues must be decided by the arbitrator unless the question is one of arbitrability or is based on conduct related to the judicial process, i.e., litigation conduct, in which case the waiver issue is decided by the court. (See Howsam v. Dean Witter Reynolds, Inc. (2002) 537 U.S. 79, 84, 123 S.Ct. 588, 592; Thorup v. Dean Witter Reynolds, Inc. (1986) 180 Cal.App.3d 228, 234.)
Section 1281.2 provides: "On petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party thereto refuses to arbitrate such controversy, the court shall order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists, unless it determines that: [¶] (a) The right to compel arbitration has been waived by the petitioner." (Code Civ. Proc., § 1281.2, subd. (a), boldface emphasis added.)
In the instant case, the grounds on which the trial court found that Arenas and Pozo had waived the right to compel arbitration did not relate to litigation conduct. Rather, it involved their conduct in resisting mediation of the dispute. Therefore, if the FAA applies to the instant case, the trial court improperly decided the waiver issue in the first instance, and should have left it to the arbitrator. We conclude, however, that California law applies.
"[F]ederal law governs arbitration under contracts `involving interstate commerce unless the parties agree otherwise." (Italics added.) (Knight et al., Cal. Practice Guide: Alternative Dispute Resolution (The Rutter Group 2007) ¶ 5:44, pp. 5-32 to 5-33.) Here, it is undisputed that the Agreement involves interstate commerce. However, the parties to the Agreement, Arenas and Empire, agreed in paragraph 6.02 that: "This Agreement shall be construed in accordance with and be governed by the laws of the State of California."
In discerning the effect of this choice-of-law provision, we rely primarily on prior decisions of the United States Supreme Court and California Supreme Court to conclude that the parties incorporated California procedural rules governing arbitration, including section 1281.2, subdivision (a), into the Agreement.
Volt Info. Sciences v. Leland Stanford Jr. U. (1989) 489 U.S. 468 [109 S.Ct. 1248, 103 L.Ed.2d 488] (Volt), involved a choice of law provision very similar to the one at issue here. The precise issue in Volt did not involve interpretation of that clause; rather, it involved whether section 1281.2, subdivision (c), which permits trial courts to stay arbitration pending resolution of a related judicial proceeding, was pre-empted by the FAA. Although the Supreme Court in Volt deferred to the state courts interpretation of the choice of law clause, we find the Supreme Courts discussion instructive.
The contract at issue in Volt "contained an agreement to arbitrate all disputes between the parties `arising out of or relating to this contract or the breach thereof." (Volt, supra, 489 U.S. at p. 470.) It also contained a general choice-of-law clause providing that "`[t]he Contract shall be governed by the law of the place where the Project is located," which was the State of California. (Id. at p. 470.) The parties agreed that the contract at issue involved interstate commerce. (Id. at p. 476.)
The high court began its discussion by deferring to the California Court of Appeals construction of the choice of law clause as incorporating the California rules of arbitration into the agreement. The Supreme Court noted that the construction of the language of a contract is a matter of state law. (Volt, supra, 489 U.S. at pp. 473-474.) On the precise issue presented, the Supreme Court in Volt held that application of section 1281.2, subdivision (c), permitting a court to stay arbitration pending resolution of related litigation, does not undermine the goals and policies of the FAA, and therefore is not pre-empted by the FAA. (Volt, supra, 489 U.S. at pp. 477-478.)
"[S]tate law may . . . be pre-empted to the extent that it actually conflicts with federal law—that is, to the extent that it `stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress. [Citation.]" (Volt, supra, 489 U.S. at p. 477.)
In so holding, the Court observed that "[section] 4 of the FAA does not confer a right to compel arbitration of any dispute at any time; it confers only the right to obtain an order directing that `arbitration proceed in the manner provided for in [the parties] agreement. 9 U.S.C. § 4 (emphasis added)." (Volt, supra, 489 U.S. at pp. 474-475.) The Court continued: "There is no federal policy favoring arbitration under a certain set of procedural rules; the federal policy is simply to ensure the enforceability, according to their terms, of private agreements to arbitrate. Interpreting a choice-of-law clause to make applicable state rules governing the conduct of arbitration—rules which are manifestly designed to encourage resort to the arbitral process—simply does not offend the rule of liberal construction set forth in Moses H. Cone [Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24-25, 103 S.Ct. 927, 941-942, 74 L.Ed.2d 765], nor does it offend any other policy embodied in the FAA. [Fn. 5.]" (Volt, supra, 489 U.S. at p. 476, italics added.) In footnote 5, the Supreme Court stated that "the California arbitration rules which the parties have incorporated into their contract generally foster the federal policy favoring arbitration." (Ibid.)
Section 4 of the FAA provides in relevant part: "A party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court . . . for an order directing that such arbitration proceed in the manner provided for in such agreement."
We discern the following lessons from Volt: the parties are free to agree that state procedural rules govern their arbitration agreement, and interpretation of a generic choice of law provision (one substantially similar to the clause in the instant case) to incorporate California procedural rules governing arbitration does not, as a general matter, violate the FAA.
Following the decision in Volt, the California Supreme Court considered very similar issues in Cronus Investments, Inc. v. Concierge Services (2005) 35 Cal.4th 376 (Cronus), including interpretation of a generic choice-of-law provision. In Cronus, the choice-of-law clause in the parties contract stated: "`This agreement shall be construed and enforced in accordance with and governed by the laws of the State of California, without giving effect to the conflict of laws provisions thereof." (Id. at p. 381.) However, it also contained an arbitration clause stating that "`The designation of a situs or specifically a governing law for this agreement or the arbitration shall not be deemed an election to preclude application of the [FAA], if it would be applicable." (Ibid.) "The parties agreed that . . . the scope of the choice of law provision [was] `specifically limited by applicable provisions of the FAA and [was] nullified `only where the FAAs provisions are inconsistent with the CAA." (Id. at p. 387.) The parties disagreed, however, as to whether they intended that section 1281.2, subdivision (c) procedures would govern enforcement of the arbitration provision.
The California Supreme Court concluded that the choice-of-law clause ("[t]his agreement shall be construed and enforced in accordance with and governed by the laws of the State of California"), which it remarked was substantially similar to the one in Volt, incorporated Californias rules of arbitration into the contract. (Cronus, supra, 35 Cal.4th at p. 387.) The Cronus court then proceeded to find, as did the high court in Volt, that section 1281.2, subdivision (c) does not conflict with the FAA. "Our opinion does not preclude parties to an arbitration agreement to expressly designate that any arbitration proceeding should move forward under the FAAs procedural provisions rather than under state procedural law. We simply hold that the language of the arbitration clause in this case, calling for the application of the FAA `if it would be applicable, should not be read to preclude the application of 1281.2(c), because it does not conflict with the applicable provisions of the FAA and does not undermine or frustrate the FAAs substantive policy favoring arbitration." (Cronus, supra, 35 Cal.4th at p. 394.)
The Cronus court also relied on the decision in Mount Diablo Medical Center v. Health Net of California, Inc. (2002) 101 Cal.App.4th 711 (Mount Diablo), in which a choice-of-law provision stating that "`[t]he validity, construction, interpretation and enforcement of this Agreement" shall be governed by California law, was held to incorporate California state arbitration rules, and specifically section 1281.2, subdivision (c). (Id. at p. 716.) In Mount Diablo, the Court of Appeal noted that "[t]he explicit reference to enforcement reasonably includes such matters as whether proceedings to enforce the agreement shall occur in court or before an arbitrator. Chapter 2 (in which § 1281.2 appears) of title 9 of part III of the California Code of Civil Procedure is captioned `Enforcement of Arbitration Agreements. An interpretation of the choice-of-law provision to exclude reference to this chapter would be strained at best." (Mount Diablo, supra, 101 Cal.App.4th at p. 722, cited with approval in Cronus, supra, 35 Cal.4th at p. 387.)
Universal attempts to distinguish the choice-of-law provision in the case now before us from those in Cronus and Mount Diablo by noting that it does not refer to "enforcement" of the Agreement. As we explain, we conclude that the choice-of-law provision, read in the context of the Agreement as a whole, makes entirely clear that the parties intended that California rules of arbitration were to apply to the Agreement, even absent reference to "enforcement."
Applying Volt and Cronus here, the starting point in interpreting the choice-of-law provision is the language itself. (See Mount Diablo, supra, 101 Cal.App.4th at p. 722.) The choice-of-law provision, that "[the] Agreement shall be construed in accordance with and be governed by the laws of the State of California," is categorical, unconditional, and unqualified by any other provision in the Agreement. (Cf. Cronus, supra, 35 Cal.4th at p. 387; and also Mount Diablo, supra, 101 Cal.App.4th at p. 724 [clause in arbitration provision stated "`the arbitrator shall be bound by applicable state and federal law"].) On its face, it provides that the entire contract, including the arbitration provisions, are controlled by California law, and, hence, it necessarily incorporates California procedural rules governing enforcement of arbitration as codified in section 1280 et seq.
Paragraph 6.09, subdivision (c) states in relevant part: "Any Dispute or portion thereof, or any claim for a particular form of relief (not otherwise precluded by any other provision of this Agreement), that may not be arbitrated pursuant to applicable state or federal law may be heard in a court of competent jurisdiction in Los Angeles County." This clause merely recognizes that both state and federal law might preclude arbitration of some types of relief, in which case a court may decide that portion of the dispute. The clause does not alter the provision in paragraph 6.02 that California state law invariably governs the Agreement.
The Agreement provides in paragraph 6.09, subdivision (b) that "[t]he arbitration shall be initiated and conducted according to the JAMS/Endispute Comprehensive Arbitration Rules and Procedure." However, there is no indication in the record that the JAMS rules have anything to say regarding whether the court or the arbitrator decides waiver issues.
To the extent there is any ambiguity as to whether the choice-of-law clause incorporates section 1281.2, subdivision (a) into the Agreement, we conclude that that statutory provision does not in any way undermine or frustrate the FAAs substantive policy favoring arbitration. (See Volt, supra, 489 U.S. at pp. 476-478; Cronus, supra, 35 Cal.4th at p. 394.) Whether decided by a court or by an arbitrator, the legal standards for deciding the waiver issue are essentially the same under both federal and California state law. (See St. Agnes Medical Center v. PacifiCare of California (2003) 31 Cal.4th 1187, 1195-1196 (St. Agnes); Britton v. Co-op Banking Group (9th Cir. 1990) 916 F.2d 1405, 1412.) Thus, there is nothing substantively inimical to the federal policy favoring arbitration, a policy shared by California state law, in section 1281.2, subdivision (a)s requirement that the court is to decide the waiver issue, rather than the arbitrator.
Further, paragraph 6.09 of Agreement specifically provides that "[i]f a party believes in good faith that all or part of a Dispute, or any claim for relief or remedy sought, is not subject to arbitration under then-prevailing law, then that party may seek a determination to that effect from an appropriate court." Obviously, a dispute is not subject to arbitration under prevailing law if the party seeking to invoke arbitration has waived the right to arbitrate. Paragraph 6.09 therefore contemplates that the waiver issue will be determined by a court, not an arbitrator.
We note, also, that the issue before us here is distinguishable from the one considered by the high court in Mastrobuono v. Shearson Lehman Hutton, Inc. (1995) 514 U.S. 52 (Mastrobuono). As explained by our Supreme Court in Cronus, supra: "[In Mastrobuono], the high court . . . reached a result which, at first blush, might appear to be inconsistent with Volt, but is not. Applying the Moses H. Cone principle, it found that the generic choice-of-law clause in that case incorporated the state substantive law, but not state arbitration rules. Mastrobuono involved the interpretation of a standard form contract between a securities brokerage firm and its customers, requiring arbitration. The choice-of-law provision provided that the contract `"shall be governed by the laws of the State of New York." ([Mastrobuono, supra, 514 U.S. 52] at p. 53.) The arbitration provision contained no express reference to claims for punitive damages. New York decisional law allowed courts, but not arbitrators, to award punitive damages (the Garrity rule [Garrity v. Lyle Stuart, Inc. (1976) 40 N.Y.2d 354 [386 N.Y.S.2d 831, 353 N.E.2d 793]). [Fn.] A panel of arbitrators awarded punitive damages, but a federal district court and federal Court of Appeal disallowed the award. (Mastrobuono, supra, at pp. 54-55.)
"The petitioners argued that the FAA preempted the Garrity rule, while the respondents relied on Volt, arguing that the choice-of-law provision incorporated state arbitration rules, including the Garrity rule. The high court responded: `At most, the choice-of-law clause introduces an ambiguity into an arbitration agreement that would otherwise allow punitive damage awards. As we pointed out in Volt, when a court interprets such provisions in an agreement covered by the FAA, "due regard must be given to the federal policy favoring arbitration, and ambiguities as to the scope of the arbitration clause itself resolved in favor of arbitration." [Citations.] (Mastrobuono, supra, 514 U.S. at p. 62.) `We think the best way to harmonize the choice-of-law provision with the arbitration provision is to read "the laws of the State of New York" to encompass substantive principles that New York courts would apply, but not to include special rules limiting the authority of arbitrators. Thus, the choice-of-law provision covers the rights and duties of the parties, while the arbitration clause covers arbitration; neither sentence intrudes upon the other. (Id. at pp. 63-64, italics added.)" (Cronus, supra, 35 Cal.4th at pp. 392-393.)
Accordingly, the Cronus court concluded: "Unlike the Garrity rule addressed in Mastrobuono, section 1281.2(c) is not a special rule limiting the authority of arbitrators. . . . Moreover, `[s]ection 1281.2(c) is not a provision designed to limit the rights of parties who choose to arbitrate or otherwise to discourage the use of arbitration. Rather, it is part of Californias statutory scheme designed to enforce the parties arbitration agreements, as the FAA requires." (Cronus, supra, 35 Cal.4th at p. 393, quoting Mount Diablo, supra, 101 Cal.App.4th at p. 726.)
The same is true of section 1281.2, subdivision (a): it is not a provision designed to limit the rights of parties who choose to arbitrate or otherwise to discourage the use of arbitration. It is simply a part of the California scheme for enforcement of arbitration agreements, and designates that the court decides waiver issues, rather than the arbitrator. The same legal standard is applied, whether it is the court or the arbitrator making the determination. Accordingly, the Agreements designation of California state law, including its rules of arbitration, is not pre-empted by the FAA.
Finally, the recent decision in Preston v. Ferrer (2008) ___ U.S. ___ supports our analysis. There, the United States Supreme Court determined that a California state law, which lodged primary jurisdiction over certain issues in an administrative agency, was superseded by the FAA where the parties agreed to arbitrate all questions arising under their contract. The Supreme Court explained Volt in part as a decision in which state procedural law was "the gap filler" on an issue not specifically addressed in the arbitration agreement — "the order of proceedings when pending litigation with third parties presented the prospect of inconsistent rulings." (___ U.S. ___ [128 S.Ct. ___].) Similarly, in the instant case, the arbitration agreement does not specifically address the question whether the court or the arbitrator is to decide the waiver issue. It does, however, provide that the court, not the arbitrator, will decide any partys claim that a dispute is not arbitrable under then-prevailing law. With respect to the question whether that provision encompasses the waiver issue, the general choice-of-law provision in the Agreement incorporating California law is "the gap filler" in the same manner as in Volt, providing that the California procedural rule will govern.
In short, considering the instant choice-of-law provision in light of prior relevant authorities, we conclude that the parties incorporated section 1281.2, subdivision (a) into their agreement along with the other California procedural rules, and that, therefore, the trial court had the authority to decide the waiver issue in the first instance.
II. Waiver of the Right to Compel Arbitration
Having concluded that the trial court properly considered the waiver issue, we now consider whether its finding that Arenas and Pozo waived the right to compel arbitration is supported by substantial evidence. Given the strong policy favoring arbitration and the legal requirements for finding a waiver, we conclude that Empire failed to introduce sufficient evidence to sustain the waiver finding.
Factual Background
Empire sent both Universal and Arenas a notice of intent to conduct an audit in late February 2005. Empire hired an auditing firm to conduct the audit, and the audit commenced in late April 2005. Empire contends that its auditing firm encountered considerable delays because defendants denied or delayed access to relevant files.
In November 2005, before the audit was completed, Empires counsel requested that Universal and Arenas engage in a good faith meeting with Empire to resolve disputes over access to the agreement between Universal and Arenas, as well as other documentation. Arenass counsel inquired, by letter dated December 7, 2005, why the Universal-Arenas agreement would be relevant to the audit; otherwise, Arenas did not respond to the request for a good faith meeting. Universal did not respond.
Universal and Arenas received the audit report in late May 2006. In a letter accompanying the audit report, Empires counsel stated that the audit had been conducted with great difficulty because of Universals and Arenass lack of cooperation in providing documentation to support their claimed charges. He suggested that the parties immediately proceed to mediation because his request for a good faith meeting in November 2005 had been ignored. Counsel stated that, "[a]s to conducting a good faith meeting at this late date, due to the unreasonable passage of time, we can only assume that the parties refuse to engage in such a good faith meeting." Counsel said Empire was amenable to mediating the dispute, and suggested four mediators (JAMS Neutrals Neal, Wayne, Chernick or Wisot).
The report was dated February 1, 2006, but was not delivered until late May 2006. Nonetheless, Arenas knew it had not provided the requested documents or scheduled a meeting to discuss the matter.
Paragraph 6.09 of the Agreement provided, in relevant part: "In the event that the parties are unable to resolve any Dispute after meeting and attempting in good faith to reach a negotiated resolution, such Dispute(s) shall first be mediated by a retired judge or justice of any California state or federal court. If the parties are unable to agree upon a mediator, either party may apply to [JAMS] for the appointment of a mediator from a panel of retired judges and justices. . . . [¶] (b) If the parties are unable to resolve one or more Dispute(s) by mediation, then either party may initiate arbitration of such Dispute(s). The arbitration shall be initiated and conducted according to the JAMS/Endispute Comprehensive Arbitration Rules and Procedure."
Grant Gullickson, Universals Vice President of Legal Affairs, promptly agreed in early June 2006 to review the audit and then schedule a meeting, and also agreed that the six-month period to initiate arbitration would begin to run on May 24, 2006, the date on which defendants had received the audit report. Arenas executed a similar tolling agreement on July 24, 2006.
Empires counsel replied that he was encouraged, but maintained that a promptly scheduled mediation was needed. He asked for feedback on the list of mediators, and again pointed out he had not been given a copy of the Universal-Arenas agreement and therefore it was unclear whether all or certain of Arenass obligations had been assumed by Universal. Pozo, on behalf of Arenas, responded that he was available to meet at any time.
In correspondence dated June 17, 2006, Empires counsel asked if Arenas and Universal were willing to meet "over the next few weeks," but also requested a response to Empires request to mediate and to Empires proposed list of mediators.
On June 20, 2006, Universal indicated that, in keeping with industry custom and practice, it had scheduled an internal meeting for June 21, 2006, after which Universal would be prepared to schedule a settlement conference at their earliest mutual convenience. Accordingly, Universal took the position that Empires demands for mediation were premature, citing paragraph 6.09 of the Agreement.
Empires counsel then proposed several dates to meet, and again asked for responses to the list of mediators in the event the informal meeting failed to resolve the outstanding issues. Arenas proposed a meeting date in late July 2006. Arenass counsel stated she could not understand why Empire would want to mediate without having first discussed the matter, but indicated that if Empire wanted to pay a mediator, Arenass choice would be Chernick. Arenass counsel also agreed to provide to Empire the portions of the Universal/Arenas contract granting Universal the distribution rights, and in which Universal agreed to take on the responsibility of accounting directly to Empire. Thereafter, it was decided that Universal and Arenas would not meet with Empire at the same time.
Arenas and Empire conducted a good faith settlement meeting on August 4, 2006. Universal and Empire held a good faith meeting on August 24, 2006. Empire acknowledged that certain issues were "narrow[ed]" as a result of the meeting, but the meetings failed to resolve the issues in dispute. Indeed, on October 4, 2006, Empires counsel indicated that information revealed at the meetings had called into question whether certain expenditures "were truly arms length transactions," given that Arenas is a limited liability company in which an Arenas entity controlled by Pozo and Universal are constituent members. Empires counsel stated that because Universal and Arenas were unwilling to provide further documentation, Empire would like to proceed with mediation. He pointed out that Chernick, his proposed mediator, had dates available in early November, and stated that if he did not receive a response by October 13, 2006, he would assume defendants were no long interested in mediating the dispute, and Empire would consider any contractual obligation to mediate the dispute to have been waived.
Gullickson spoke with Empires counsel by telephone on October 11, 2006, and communicated by e-mail on October 13, 2006. He stated that it was his understanding that Empires counsel was to review the most recent accounting statement, of which counsel was unaware during the prior meeting. Universal had scheduled an internal conference for October 24, 2006, and shortly thereafter Universal would schedule a follow-up conference with Empire. Gullickson stated that Universal was continuing in good faith to attempt to amicably settle the audit, and therefore Universal did not consider Empires claims to be ripe for mediation. Counsel for Arenas concurred with Universals position that mediation was premature; however, she invited Empires counsel to contact her if he still wanted to mediate.
Empire did not request, and the parties did not discuss, an extension of the contractual deadline for initiating an action regarding the profit participation accounting statements. Universals standard practice purportedly was to grant such requests, but at no time did Gullickson suggest an extension of the deadline.
On October 26, 2006, Empires counsel notified defendants that because they had refused all reasonable efforts to mediate the matter and to check with Chernicks calendar to secure a date for mediation, Empire considered any contractual obligation to mediate the dispute to have been waived. Empire then filed its complaint on November 14, 2006, ten days before the six-month deadline, as defined in the Agreement and as agreed to by the parties, was to expire.
Applicable Law
Although a court may deny a petition to compel arbitration on the ground of waiver (§ 1281.2, subd. (a)), waivers are not to be lightly inferred and the party seeking to establish a waiver bears a heavy burden of proof. (Christensen v. Dewor Developments (1983) 33 Cal.3d 778, 782; see also Doers v. Golden Gate Bridge etc. Dist. (1979) 23 Cal.3d 180, 189.) "Both state and federal law emphasize that no single test delineates the nature of the conduct that will constitute a waiver of arbitration. [Citations.] `"In the past, California courts have found a waiver of the right to demand arbitration in a variety of contexts, ranging from situations in which the party seeking to compel arbitration has previously taken steps inconsistent with an intent to invoke arbitration [citations] to instances in which the petitioning party has unreasonably delayed in undertaking the procedure. [Citations.] The decisions likewise hold that the `bad faith or `wilful misconduct of a party may constitute a waiver and thus justify a refusal to compel arbitration. [Citations.]" (Engalla [v. Permanente Medical Group, Inc. (1997)] 15 Cal.4th [951] at p. 983, quoting Davis v. Blue Cross of Northern California (1979) 25 Cal.3d 418, 425-426.)" (St. Agnes, supra, 31 Cal.4th at pp. 1195-1196.)
A party seeking to prove waiver of a right to arbitration must demonstrate (1) knowledge of an existing right to compel arbitration, (2) acts inconsistent with that existing right, and (3) prejudice to the party opposing arbitration. (Britton v. Co-op Banking Group, supra, 916 F.2d at p. 1412.)
"Generally, the determination of waiver is a question of fact, and the trial courts finding, if supported by sufficient evidence, is binding on the appellate court. (Platt Pacific, Inc. v. Andelson [(1993)] 6 Cal.4th [307] at p. 319; see also Engalla, supra, 15 Cal.4th at p. 983.) `When, however, the facts are undisputed and only one inference may reasonably be drawn, the issue is one of law and the reviewing court is not bound by the trial courts ruling. (Platt Pacific, Inc. v. Andelson, supra, 6 Cal.4th at p. 319.)" (St. Agnes, supra, 31 Cal.4th at p. 1196.)
Analysis
In this case, the facts regarding the waiver question are essentially undisputed. On this undisputed evidence, we conclude that Empire failed to sustain its heavy burden of demonstrating that Arenas and Pozo waived the right to compel arbitration.
First, while arguably Arenas and Pozos conduct was inconsistent with the contractual requirement of mediation, it was not necessarily inconsistent with the contractual requirement of arbitration as expressed in the Agreement. True, mediation was a contractual precondition to submitting the dispute to arbitration. But given Californias strong policy favoring arbitration, the appropriate remedy for an unreasonable refusal to mediate was not institution of an action at law in the superior court. Rather, it was a petition to compel arbitration on the ground that Arenas and Pozo had waived the contractual mediation requirement so that the parties should be required to proceed directly to arbitration, which was the ultimate means of dispute resolution provided for in the Agreement. Any doubts regarding whether a party has waived the right to compel arbitration should be resolved in favor of arbitration. (St. Agnes, supra, 31 Cal.4th at p. 1195.) Resolving such doubts here leads to the conclusion that Empires remedy for delay in mediation was to compel arbitration, not to avoid it.
In reviewing the facts underlying the courts finding of waiver by Arenas and Pozo, we must also discuss Universals actions. Universal, rather than Arenas and Pozo, actually performed the Agreement, and it was Universals documents that were audited. While Arenas and Pozo certainly played a role in the negotiations to resolve the dispute, Universal necessarily played the primary role, and Arenas generally followed its lead.
Second, even if Arenass and Pozos conduct was inconsistent with the intent to arbitrate, Empire failed to introduce sufficient evidence of prejudice. Empires only claim of prejudice in the trial court and on appeal relates to delay in resolving the dispute and the related costs of litigation. However, "[b]ecause merely participating in litigation, by itself, does not result in a waiver, courts will not find prejudice where the party opposing arbitration shows only that it incurred court costs and legal expenses. [Citations.] [¶] Rather, courts assess prejudice with the recognition that Californias arbitration statutes reflect `"a strong public policy in favor of arbitration as a speedy and relatively inexpensive means of dispute resolution" and are intended `"to encourage persons who wish to avoid delays incident to a civil action to obtain an adjustment of their differences by a tribunal of their own choosing." (Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 9.) Prejudice typically is found only where the petitioning partys conduct has substantially undermined this important public policy or substantially impaired the other sides ability to take advantage of the benefits and efficiencies of arbitration." (St. Agnes, supra, 31 Cal.4th at pp. 1203-1204.)
Here, Empire `s evidence falls far short of the type of showing made in prior cases in which prejudice has been found. "[C]ourts have found prejudice where the petitioning party used the judicial discovery processes to gain information about the other sides case that could not have been gained in arbitration (e.g., Berman v. Health Net (2000) 80 Cal.App.4th 1359, 1366; Guess?, Inc. v. Superior Court (2000) 79 Cal.App.4th 553, 558; Davis v. Continental Airlines, Inc., [(1997)] 59 Cal.App.4th [205] at p. 215); where a party unduly delayed and waited until the eve of trial to seek arbitration (e.g., Sobremonte v. Superior Court [(1998)] 61 Cal.App.4th [980] at pp. 995-996); or where the lengthy nature of the delays associated with the petitioning partys attempts to litigate resulted in lost evidence (e.g., Christensen v. Dewor Developments, supra, 33 Cal.3d at p. 784)." (St. Agnes, supra, 31 Cal.4th at p. 1204.) Empire has shown no prejudice comparable to such examples.
Thus, because Empires proper remedy was to enforce the contractual arbitration requirement despite the failure to mediate, and because Empire failed to demonstrative legally cognizable prejudice, we conclude that the trial courts finding of waiver must be reversed.
III. Principles of Equitable Estoppel Compel Arbitration as to Universal
Universal contends on appeal that although it was not a signatory to the Agreement, it can nonetheless compel arbitration because the claims asserted against it by Empire are entirely based upon and intertwined with the Agreement. Universal cites in support of this proposition Rowe v. Exline, supra, 153 Cal.App.4th 1276, a case decided after the trial courts ruling. We agree that Rowe controls.
In the absence of case law applying equitable estoppel principles based on California state law, the trial court declined to apply those principles here, based on authority applying only federal law.
In Rowe, supra, 153 Cal.App.4th 1276, Rowe filed a complaint against a corporation and two individuals, alleging breach of contract and related causes of action, arising out of an agreement that contained an arbitration clause. All three defendants filed a motion to compel arbitration and to stay the court proceedings pending the arbitration, despite the fact that the corporation was the only defendant signatory to the agreement at issue. Rowe contended that only the signatory could enforce the arbitration clause, because he had not agreed to arbitrate disputes against the two individuals. (Id. at p. 1281.) The trial court found that Rowe was obligated to arbitrate his claims against the corporation pursuant to the agreement at issue, but he was not obligated to arbitrate his claims against the two individuals. (Id. at pp. 1281-1282.) However, because allowing arbitration to proceed against the corporation would create a risk of conflicting rulings, the trial court exercised its discretion under section 1281.2, subdivision (c) to refuse to enforce the arbitration agreement, and ordered the matter to be tried in superior court. (Id. at p. 1282.)
The contract specified that it was to be construed and interpreted in accordance with California law. (Id. at p. 1280.)
The Court of Appeal reversed, finding principles of equitable estoppel required Rowe to arbitrate his claims against the individual defendants, as well as the corporation. (Rowe, supra, at pp. 1286-1290.) The Rowe court agreed with other courts that had previously held (albeit applying federal law) that a signatory plaintiff who sues on a written contract containing an arbitration clause may be estopped from denying arbitration if he or she sues nonsignatories as related or affiliated persons with the signatory entity, asserting claims that rely upon, make reference to, or are intertwined with claims under a contract containing an arbitration clause. (Id. at pp. 1287-1288, citing Turtle Ridge Media Group, Inc. v. Pacific Bell Registry (2006) 140 Cal.App.4th 828, 833; Boucher v. Alliance Title Co., Inc. (2005) 127 Cal.App.4th 262 (Boucher); Metalclad Corp. v. Ventana Environmental Organizational Partnership (2003) 109 Cal.App.4th 1705.)
Without question, the causes of action asserted in Empires complaint rely upon, make reference to, and are intertwined with claims arising out of the Agreement. It is the nature of the claims made by the plaintiff, as a matter of law, that govern whether equitable estoppel will be found to apply. (Rowe, supra, 153 Cal.App.4th at p. 1288, fn. 5, & p. 1289: ["the estoppel doctrine in this context does not require a conscious or subjective intent to avoid arbitration, but turns upon the nexus between the contract and the causes of action asserted"], citing Boucher, supra, 127 Cal.App.4th at p. 272.) In short, we conclude that principles of equitable estoppel apply which require that Empire arbitrate its dispute with Universal. Furthermore, we note that forcing arbitration of Empires claims against Arenas and Pozo, but not against Universal, would give rise to the possibility of conflicting rulings, the problem sought to be avoided by section 1281.2, subdivision (c). Thus, we reverse the order denying Universals motion to compel arbitration, and direct the trial court to enter a new order granting the motion.
DISPOSITION
The judgment is reversed and the cause is remanded to the trial court to vacate its prior orders denying Universals, Arenass, and Pozos motions to compel arbitration, and to enter a new order granting those motions. Costs on appeal are awarded to appellants.
We concur:
MANELLA, J.
SUZUKAWA, J.