IN THE UNITED STATES DISTRICT OCURT FOR THE NORTHERN DISTRICT OF CALIFORNIA

No. C-02-05687 MMC

ORDER DISMISSING ACTION

On December 17, 2004, the Court issued an order to show cause why the above-titled action should not be dismissed as a result of the arbitrator's order terminating the arbitration because of plaintiff Gregory Williams' ("Williams") failure to pay the requisite arbitration fees. Williams filed a response to the order to show cause; defendants filed an opposition to Williams' response; and Williams filed a reply. For the reasons set forth below, the Court hereby DISMISSES the action.

BACKGROUND

On October 7, 2002, plaintiff filed this action in state court, alleging claims against defendants for breach of a written employment contract ("Employment Agreement") with Netstruxr, Inc. ("Netstruxr"), breach of an alleged second employment agreement with defendant Netspace, Inc., fraud, and negligent misrepresentation.(See Comp.¶¶ 29-55.) Plaintiff was a co-founder of Netstruxr in 1999, as well as Netstruxr's President, Chief Executive Officer ("CEO"), and Chairman of the Board. (See id. ¶¶ 7, 11, and Ex. A ¶ 1(a) and 1(b).)

Defendants removed the action to federal court on December 3, 2002. On December 9, 2002, defendants moved to compel arbitration and to stay the action pending arbitration. Defendants argued that they were successors in interest to NetStruxr, Inc. and, therefore, were entitled to enforce the arbitration clause in the Employment Agreement, which provides: "[A]ny dispute or controversy arising out of, relating to, or in connection with this Agreement, or the interpretation, validity, construction, performance, breach, or termination thereof shall be settled by binding arbitration to be held in San Francisco, California in accordance with the National Rules for the Resolution of Employment Disputes then in effect of the American Arbitration Association" ("AAA Rules"). (See Compl. Ex. A §15(a).)

In opposition, plaintiff argued, inter alia, that the arbitration clause in the Employment Agreement was unconscionable and, consequently, was invalid and unenforceable. (See Plaintiffs Opposition to Defendants' Motion For An Order Staying This Action and Compelling Arbitration, filed Dec. 24, 2002, at 3-11.) In particular, plaintiff argued that the Employment Agreement was a contract of adhesion that he signed under economic duress in order to obtaining financing secured by defendants, and that the terms of the arbitration clause are so one-sided as to be unconscionable. ( See id.) Plaintiff specifically argued that he had no reasonable opportunity to negotiate the terms of the Employment Agreement, and that he was offered the contract on a "take it or leave it" basis. ( See id. at 5)

After a hearing on January 17, 2003, the Court requested supplemental briefing. In a declaration submitted in connection with that supplemental briefing, plaintiff attested that he "contacted the law firm Wilson Sonsini Goodrich & Rosati to draft the employment contracts" and that "[s]everal negotiations took place with Wilson Sonsini attorneys and [defendants'] attorneys regarding the terms of [the Employment Agreement]." (See Williams Decl. in Support of Plaintiffs Brief Re Contract Two, filed Feb. 3, 2003, ¶¶ 6-7.) On March 7, 2003, following a further hearing on that date, the Court granted defendants' motion to stay the action and compel arbitration. (See Order Granting Defendants' Motion to Stay Action and Compel Arbitration, filed March 7, 2003 ("Order").)

On May 2, 2003, plaintiff submitted to the American Arbitration Association ("AAA") his demand for arbitration of his claims against defendants. (See Farnbach Decl., filed Feb. 6, 2004,¶ 2.) After plaintiff filed a financial hardship declaration with the AAA, the AAA deferred plaintiffs payment of the $4250 initial filing fee. (See Pearce Decl., filed Jan. 20, 2004, Exs. C, D.) On July 28, 2003, defendants submitted a counter-demand for arbitration, seeking to recover damages they allegedly incurred as a result of accounting fraud and conversion of company assets by plaintiff and other members of Netstruxr's management. ( See Farnbach Decl., filed Feb. 6, 2004, ¶ 3.)

On August 18, 2003, the parties jointly selected Yaroslav Sochynsky ("Arbitrator") as arbitrator. (See Farnbach Decl., filed Feb. 6, 2004, ¶ 5.) On September 19, 2003, the Arbitrator set the arbitration hearing for March 15-19, 2004. (See id.)

Under the AAA Rules, allocation of AAA fees in employment disputes depends upon whether the employment agreement was "individually negotiated" or "employer-promulgated." (See Farnbach Decl., filed Feb. 6, 2004, Ex. B, Administrative Fee Schedule.) Where an employment agreement is "employer-promulgated," the employer pays all arbitration fees, although the arbitrator may reallocate payment of the fees if the arbitrator determines that a claim "was filed for purposes of harassment or is patently frivolous." ( See id.) Where an employment agreement is "individually negotiated," arbitration fees are subject to allocation by the arbitrator in the award, unless the parties agree otherwise. (See id.) The AAA Rules permit the AAA to "require deposits in advance of any hearings such sums of money as it deems necessary to cover the expenses of the arbitration, including the arbitrator's fee, and shall render an accounting and return any unexpended balance at the conclusion of the case." (See id., Rule 41.) The AAA Rules also provide that "(a]ny questions or disagreements about whether a matter arises out of an employer-promulgated plan or an individually-negotiated agreement or contract shall be determined by the AAA and its determination shall be final." (See id. Administrative Fee Schedule.)

At some point, the AAA tentatively determined that the Employment Agreement was individually-negotiated, and on October 3, 2003, sent plaintiff an invoice for half of the estimated arbitration fees. (See Farnbach DecI., filed Feb. 6, 2004, Ex. E; Pearce Decl., filed Jan. 20, 2004, Ex. D.) The invoice indicated that payment of certain fees was deferred, and that the remainder was due upon receipt of the invoice. (See Pearce Decl., filed Jan. 20, 2004, Ex. D.) Pursuant to the invoice, the total amount billed to plaintiff was $19,375, and the amount due upon receipt was $13,500. (See id.)

On November 7, 2003, plaintiff sent a letter to defendants, requesting that they pay all of the arbitration fees. (See id. Ex. E.) By letter dated November 12, 2003, defendants responded to plaintiffs letter, setting forth defendants' opinion that plaintiff was unlikely to prevail should he file a motion with the Court to compel defendants to pay all arbitration fees. (See id. Ex. F.)

On November 13, 2003, the parties participated in a telephonic status conference with the Arbitrator. (See Farnbach Decl., filed Feb. 6, 2004, ¶ 6.) At that time, plaintiffs counsel indicated that shortly after the status conference, he would file a motion with the Court seeking an order that defendants be required to pay all arbitration fees, and that the motion would be heard in early February 2004. ( See id.) Based on that representation, the Arbitrator vacated the March 2004 arbitration dates, and scheduled a further status conference for February 5, 2004. (See id.)

On November 26, 2003, plaintiff wrote the AAA and asked for an explanation as to how it had determined the Employment Agreement was individually negotiated. (See Farnbach Decl., filed Feb. 6, 2004, Ex. C.) Plaintiff also requested information as to what would happen if plaintiff were unable to pay the arbitration fees. (See id.) The AAA asked defendants for their comments, and several letters from defendants' and plaintiffs counsel followed, in which each side presented arguments as to whether the AAA had properly determined the Employment Agreement was individually negotiated. ( See id. Ex. D.)1 According to defendants, on January 14, 2004, the AAA advised the parties by telephone that it had reviewed the parties' correspondence, that it had declined to reconsider its decision that the Employment Agreement was individually negotiated, and that plaintiff would be held responsible for one half of all AAA fees. ( See id. ¶ 9.)

On January 21, 2004, the AAA sent the parties a letter in which it indicated that its decision on the fee issue was not final. (See id. Ex. E.) Specifically, the AAA stated that when an employment arbitration is filed, its National Case Management Department makes "an initial administrative determination" of whether the employment agreement is employer-promulgated or individually negotiated. (See id.) In the instant case, that decision was made solely by reviewing the demand for arbitration, plaintiffs complaint, and the Employment Agreement. (See id.) The AAA explained that "when a contract exists between an employer and an executive or other high ranking employee where the terms of the contract appear to have been open for discussion, it is assumed that individual had the opportunity to negotiate or reject terms of the contract." (See id.) The AAA expressly invited the parties "to provide the AAA with all relevant information regarding this issue." (See id.)

The AAA also noted:

[P]er the administrative fee schedule of the [AAA Rules], if arbitrator compensation or administrative charges have not been paid in full, the administrator may so inform the parties in order that one of them may advance the required payment. If such payments have not been made, the arbitrator may order the suspension or termination of the proceedings. (See id.)

On May 10, 2004, the AAA, after considering further evidence submitted by the parties, reaffirmed its previous determination that plaintiffs employment contract was individually negotiated. See Erlewine Decl. Ex. F.) The AAA thereafter suspended the arbitration pending plaintiffs advancing his share of the arbitration fees. (See Erlewine Decl. ¶ 7.) On November 30, 2004, the AAA issued the following order:

Rather [than] keep this matter in suspension indefinitely, it is determined that the appropriate disposition at this time is to terminate these proceedings so that either party, if they choose to do so, may pursue any available remedies in the U.S. District Court.

Accordingly, this matter is hereby ordered terminated pursuant to Rule No. 56 of the AAA Commercial Arbitration Rules effective July 1, 2003.(See Rosenberg Decl. Ex. B.)

After holding a case management conference on December 17, 2004, the Court, on that date, issued an order to show cause why the above-titled action should not be dismissed due to plaintiffs failure to advance its share of the arbitration costs.

DISCUSSION

A. Reconsideration of Court's Order Compelling Arbitration

Earlier in the proceedings, the Court determined that the arbitration agreement at issue is enforceable. Williams now argues, relying on Abramson v. Juniper Networks. Inc., 115 Cal. App. 4th 638 (2004), that the arbitration agreement is unconscionable because, under its provisions, he has been required to pay arbitration fees he cannot afford.2 In Abramson, the Court of Appeal reversed an order granting summary judgment for the defendant after a AAA arbitration was terminated due to the plaintiffs failure to pay the arbitration fees. See id. at 644-47. There, however, the arbitration agreement at issue therein was found to be a contract of adhesion that lacked mutuality as to the arbitration obligations of the parties and thus was both procedurally and substantively unconscionable as of the time it was entered into. See id . at 662-666. Nothing in Abramson suggests that an arbitration agreement that is enforceable at the time it is entered into nonetheless becomes unconscionable at a later time as a result of the arbitrator's allocation of fees. Indeed, Abramson recognizes that "[w]hether an agreement is unconscionable depends on circumstances at the time it was made." See id. at 656.

Additionally, Williams submits new evidence that he contends supports his argument that the arbitration agreement was unconscionable when entered into. He fails, however, to demonstrate that such evidence was unavailable to him at the time the Court considered defendants' motion to compel arbitration. See Civil L.R. 7-9(b) (stating party moving for reconsideration based on additional facts "must show that in the exercise of reasonable diligence the party applying for reconsideration did not know such fact[s]" at time challenged order was entered).

Accordingly, Williams has not demonstrated a basis for reconsideration of the Court's order compelling arbitration.

B. Review of Arbitrator's Fee Determination and Termination of Arbitration

The United States Supreme Court has observed: "Once it is determined . . . that the parties are obligated to submit the subject matter of a dispute to arbitration, 'procedural' questions which grow out of the dispute and bear on its final disposition should be left to the arbitrator." See John Wiley & Sons v. Livingston, 376 U.S. 543, 557-58(1964); See also Howsam v. Dean Witter Reynolds. Inc., 537 U.S. 79, 84 (2002) (citing John Wiley & Sons, 376 U.S. at 557) (noting that procedural questions "are presumptively not for the judge, but for an arbitrator to decide") (emphasis in original). Additionally, the Supreme Court has held that because arbitrators are more expert than the district court at interpreting and applying the arbitrators' own rules, "[i]n the absence of any agreement to the contrary in the arbitration agreement, it is reasonable to infer that the parties intended the agreement to reflect that understanding." See Howsam, 537 U.S. at 85. Here, the parties expressly agreed that the AAA Rules would govern the arbitration of this dispute.(See Compl. Ex. A § 15(a)). The AAA Rules expressly authorize the arbitrator to interpret and apply those rules. See AAA Rules, Rule 42.3

As noted above, under the AAA Rules, allocation of AAA fees in employment disputes depends upon whether the employment agreement was "individually negotiated" or "employer-promulgated." (See Farnbach Decl., filed Feb. 6, 2004, Ex. B, Administrative Fee Schedule.) The AAA Rules further provide: "Any questions or disagreements about whether a matter arises out of an employer-promulgated plan or an individually-negotiated agreement or contract shall be determined by the AAA and its determination shall be final." ( See id.) Accordingly, the parties agreed that the AAA, not this Court, would have the authority to allocate fees. (See id.) After considering the evidence submitted by the parties, the AAA concluded, on May 10, 2004, that plaintiff's employment contract was individually negotiated. (See Erlewine Decl. Ex. F.) The administrative fee schedule of the AAA Rules provides, in relevant part:

If arbitrator compensation or administrative charges have not been paid in full, the administrator may so inform the parties in order that one of them may advance the required payment. If such payments are not made, the arbitrator may order the suspension or termination of the proceedings.

See AAA Rules, Administrative Fee Schedule. Here, the AAA suspended the arbitration pending plaintiffs advance of his share of the arbitration fees, and on November 30, 2004 terminated the arbitration. (See Erlewine Decl. ¶ 7; Rosenberg Decl. Ex. B.)

The Ninth Circuit has held that the Federal Arbitration Act ("FAA") "gives federal courts only limited authority to review arbitration decisions, because broad ludicial review would diminish the benefits of arbitration." See Lifescan. Inc. v. Premier Diabetic Services. Inc., 363 F.3d 1010, 1012 (9th Cir. 2004) (citing Kyocera Core. v. Prudential-Bache Trade Services. Inc., 341 F.3d 987, 998 (9th Cir. 2003) (en banc)). Under the FAA, vacatur of arbitrators' decisions is appropriate only where the arbitrators engaged in the misconduct specified in § 10 of the FAA, or where the arbitrators "exceeded their powers." See Kyocera, 341 F.3d at 997 (quoting 9 U.S.C. § 10(a)). "[A]rbitrators 'exceed their powers' in this regard not when they merely interpret or apply the governing law incorrectly, but when the award is 'completely irrational' or exhibits a 'manifest disregard of the law."' Id. (citations omitted). "These grounds afford an extremely limited review authority, a limitation that is designed to preserve due process but not to permit unnecessary public intrusion into private arbitration procedures." Id.

In Lifescan, the Ninth Circuit addressed the issue of "[w]hat happens when a party to an arbitration is unable to pay its pro-rata share of the arbitration fees[.]" See Lifescan 363 F.3d at 1011. There, the parties had submitted their dispute to arbitration and participated in the initial stages of arbitration, but shortly before the final hearing, one party, Premier, announced that it could not pay its pro rata share of the estimated fees and costs for the remainder of the arbitration proceedings. ~ id. The arbitrator gave the opposing party, Lifescan, the option of advancing the fees owed by Premier, with the expectation that it could recoup the advance as party of any award. See id. When Lifescan refused to advance the fees, the AAA suspended the proceedings. See id. Lifescan then petitioned the district court to compel arbitration and order Premier to pay its pro rata share of the fees, and requested that the district court enter judgment against Premier if it failed to pay the fees. See id. The district court granted the petition, and the Ninth Circuit reversed. The Ninth Circuit first examined the parties' arbitration agreement and noted that the parties had agreed to arbitration conducted in accordance with the rules of the AAA, which granted the arbitrators broad discretion to allocate fees and expenses among the parties. See id. at 1012. It then found that the arbitrators acted "well within their discretion" in "allowing the arbitration to proceed on the condition that Lifescan advance the remaining fees." See id. at 1012-13. Although the Ninth Circuit noted that the arbitrator's decision to do so "may not be an ideal solution to the problem of a party's failure to pay its share of the fees," such decision "was well within the discretion of the arbitrators." See id. at 1013. The Court concluded that because "the arbitration ha[d] proceeded pursuant to the parties' agreement and the rules they incorporated," the district court had "no basis for an order requiring Premier to pay the fees, or compelling arbitration." See id.

Similarly, in the instant case, the arbitrators, as noted above, had the authority, under the AAA Rules, to determine whether the arbitration agreement was individually negotiated. After deciding that the agreement was individually negotiated, the AAA further had the authority, under the AAA Rules, to require Williams to pay certain of the estimated arbitration fees in advance, and to terminate the arbitration when Williams failed to do so. As in Lifescan, the arbitrator acted well within his discretion, under the AAA Rules, in terminating the arbitration based on a failure to pay the requisite fees.

Although Williams, throughout his response to the order to show cause, continues to argue that the arbitration agreement was not individually negotiated, that issue already has been decided by the arbitrator, based on the evidence submitted to him by the parties. Williams sets forth no basis for this Court to overturn the arbitrator's decision on the issue. See e.g., Coutee v. Barington Capital Group. L.P., 336 F.3d 1128, 1134 (9th Cir. 2003) (holding that where arbitrator resolves disputed issue of fact, courts "have no authority to re-weigh the evidence").

Finally, Williams argues that the arbitrator exceeded his powers because the arbitrator stated, in a January 21, 2004 letter, that he did not apply California law in determining how to apportion fees. (See Rosenberg Decl., Ex. C (stating determination as to whether dispute arises from employer-promulgated plan or individually negotiated agreement, for purposes of fee allocation, is made pursuant to AAA Rules and "is not based on any particular state or federal law"). As noted, the parties agreed that the arbitration would be governed by the AAA Rules. ( See Compl. Ex. A § 15(a).) The parties also agreed that the arbitrator would "apply California law to the merits of any dispute or claim, without reference to rules of conflicts of law" and that the "arbitration proceedings will be governed by federal arbitration law and by the [AAA] Rules, without reference to state arbitration law." ( See id. § 15(b).) The only rational way to construe this language is that the substantive dispute submitted to arbitration is to be resolved under California law, while procedural issues arising out of the arbitration are governed by the AAA Rules and federal arbitration law. The parties submit no evidence of a contrary intent. Thus, the arbitrator was not required to apply California law in apportioning fees for the arbitration. Moreover, Williams fails to point to any difference between California law and the AAA Rules with respect to a determination of the issue of how to apportion arbitration fees among the parties. Accordingly, Williams has not shown that the arbitrator exceeded his powers in determining the issue pursuant to the AAA Rules.

CONCLUSION

For the reasons set forth above, Williams has failed to set forth any basis for reconsideration of the Court's order compelling arbitration or vacating the arbitrator's order terminating the arbitration as a result of Williams' failure to pay the arbitration fees.

Accordingly, the above-titled action is hereby DISMISSED.

The Clerk shall close the file.

IT IS SO ORDERED.

Dated: March 18, 2005

  

MAXINE M. CHESNEY
United States District Judge

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FOOTNOTES:

1)  The record before the Court does not indicate that either party submitted any evidence on the issue to the AAA.

2)  The United States Supreme Court has held that, under the FAA, "generally applicable" state law contract defenses, "such as fraud, duress, or unconscionability may be applied to invalidate arbitration agreements." See Doctor's Associates. Inc. V. Casarotto, 517 U.S. 681, 687 (1996).

3)  The AAA rules are available at http://www.adr.org.

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