FBC Mortgage, LLC v. Broker Solutions, Inc

Opinion

1 2 3 4 5 IN THE UNITED STATES DISTRICT COURT 6 FOR THE NORTHERN DISTRICT OF CALIFORNIA 7 8 FBC MORTGAGE, LLC, Case No. 23-cv-00143-CRB

9 Plaintiff,

ORDER DENYING MOTION TO 10 v. COMPEL ARBITRATION AND GRANTING MOTION TO STRIKE 11 BRIAN SKARG, et al., 12 Defendants.

13 Plaintiff FBC Mortgage, LLC (“FBC”) brought suit based on the alleged 14 misappropriation of its trade secrets by Defendant Broker Solutions, Inc. dba New 15 American Funding (“NAF”) and former employees Defendant Brian Skarg, Defendant 16 Amanda Benson, Defendant Ryan Gee, and Defendant Joshua Savea (former employee 17 defendants hereinafter referred to as “Individual Defendants” or, with NAF, 18 “Defendants”). See FAC (dkt. 7). Defendants now move to compel arbitration, and FBC 19 separately moves to strike Defendants’ affirmative defense pertaining to arbitration. See 20 Mot. to Compel (dkt. 57); Mot. to Strike (dkt. 54). The Court finds this matter suitable for 21 resolution without oral argument, per Civil Local Rule 7-1(b), VACATES the hearing 22 currently set for October 27, 2023, DENIES the motion to compel arbitration, and 23 GRANTS the motion to strike. 24 I. BACKGROUND1 25 FBC brought suit on January 11, 2023 and filed an amended complaint a week later. 26 See Compl. (dkt. 1); FAC. The parties engaged “in lengthy settlement negotiations, which 27 1 included various meet and confer efforts, the negotiation of a protective order, and 2 extensive searching and production of information in an attempt to settle the underlying 3 dispute,” Ridley Decl. (dkt. 54-1) ¶ 5. On June 16, 2023, Defendants filed a motion to 4 dismiss FBC’s trade secrets claims, causes of action nine and ten. See MTD (dkt. 19-1). 5 They also objected to FBC’s evidence. See Evidentiary Objections (dkt. 28). FBC moved 6 for a temporary restraining order, see Pet. for TRO (dkt. 25), which Defendants opposed, 7 see Opp’n to TRO (dkt. 32). The Court held a hearing on July 21, 2023 on the motion to 8 dismiss and the petition for a TRO, at which Defendants appeared. See Motion Hearing 9 (dkt. 42). The Court denied the TRO and the motion to dismiss on August 1, 2023. See 10 Order on Motion for TRO (dkt. 44); Order on Motion to Dismiss (dkt. 43). 11 Following the Court’s orders on those motions, Defendants on August 15, 2023 12 filed an Answer to the amended complaint, which did not mention arbitration. See Answer 13 (dkt. 48). Three days later, in the course of preparing a joint case management statement, 14 Defendants indicated for the first time that they intended to move to compel arbitration. 15 Joint CMC (dkt. 49) at 2. On August 23, 2023, Defendants filed an amended answer, 16 asserting as the forty-ninth affirmative defense that Defendants had the right to compel 17 arbitration. Amended Answer (dkt. 53). FBC moved to strike that affirmative defense. 18 See Motion to Strike. On September 20, 2023, Defendants moved to compel arbitration. 19 Mot. to Compel. 20 II. LEGAL STANDARD 21 A. Motion to Compel Arbitration 22 The Federal Arbitration Act (FAA) provides that contractual arbitration agreements 23 are “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in 24 equity for the revocation of any contract.” 9 U.S.C. § 2; Rent-A-Ctr., W., Inc. v. Jackson, 25 561 U.S. 63, 67–68 (2010). Private agreements to arbitrate under the FAA are enforced 26 according to their terms. 9 U.S.C. § 4. Therefore, a party may petition a district court “for 27 an order directing that such arbitration proceed in the manner provided for in such 1 “[T]here is no ‘strong federal policy favoring enforcement of arbitration 2 agreements.’ The federal policy is to treat arbitration agreements like other contracts.” 3 Armstrong v. Michaels Stores, Inc., 59 F.4th 1011, 1014–15 (9th Cir. 2023) (citing 4 Morgan v. Sundance, Inc., 142 S.Ct. 1708 (2022)). A party “cannot be required to submit 5 to arbitration any dispute which he has not agreed so to submit.” AT&T Techs., Inc. v. 6 Commc’ns Workers of Am., 475 U.S. 643, 648 (1986) (internal quotation marks omitted). 7 Under the FAA, in assessing the enforceability of a contractual arbitration provision, a 8 district court’s role is “limited to determining (1) whether a valid agreement to arbitrate 9 exists, and if it does, (2) whether the agreement encompasses the dispute at issue.” Chiron 10 Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1130 (9th Cir. 2000). If the answer to 11 both inquiries is affirmative, then the FAA requires the court to enforce the agreement in 12 accordance with its terms. Id. “[T]he party resisting arbitration bears the burden of 13 proving that the claims at issue are unsuitable for arbitration.” Green Tree Fin. Corp.- Ala. 14 v. Randolph, 531 U.S. 79, 91 (2000). 15 B. Motion to Strike 16 Rule 12(f) of the Federal Rules of Civil Procedure permits a court to strike from a 17 pleading an insufficient defense. Fed. R. Civ. P. 12(f). “[T]he function of 18 a 12(f) motion to strike is to avoid the expenditure of time and money[, which] arise from 19 litigating spurious issues by dispensing with those issues prior to trial....” Sidney-Vinstein 20 v. A.H. Robins Co., 697 F.2d 880, 885 (9th Cir.1983). “Generally, Rule 12(f) motions are 21 ‘disfavored’ because they are ‘often used as delaying tactics, and because of the limited 22 importance of pleadings in federal practice.’” Equine Solutions, Inc., v. Buntrock, No. 07- 23 04976 (CRB), 2008 WL 111237, at *2 (N.D. Cal. Jan.9, 2008) (citing Bureerong v. 24 Uvawas, 922 F. Supp. 1450, 1478 (C.D. Cal.1996) (quotations and citations omitted)). 25 III. DISCUSSION 26 This order addresses first Defendants’ motion to compel arbitration and then FBC’s 27 motion to strike the arbitration-related affirmative defense. A. Motion to Compel Arbitration 1 Defendants move to compel arbitration of FBC’s claims, arguing that the Individual 2 Defendants’ employment agreements “contain clear arbitration clauses requiring that any 3 claims arising out of the Employment Agreements be submitted to binding arbitration.” 4 Mot. to Compel at 6. They further argue that Plaintiff is aware of the arbitration provisions 5 in the Employment Agreements, and that Plaintiff concedes that the Employment 6 Agreements are “valid, enforceable, and binding.” Id. (quoting FAC ¶¶ 12–15). And 7 Defendants argue that the arbitration clauses encompass the claims alleged by FBC. Id. at 8 11–13. FBC opposes the motion on three main grounds: first, that NAF has no basis to 9 compel arbitration because it has no agreement to arbitrate with FBC (its competitor); 10 second, that the Individual Defendants have waived the right to arbitrate; and third, that 11 even if there was no waiver, the claims are outside the scope of the arbitration provisions. 12 See Opp’n to Mot. to Compel (dkt. 63). 13 1. NAF 14 FBC’s first argument, that NAF has no basis to compel arbitration, is indisputable. 15 See Ridley Decl. ¶ 15 (“FBC has never entered into an agreement to arbitrate any dispute 16 with [NAF].”). It is not clear why NAF joined with the Individual Defendants in bringing 17 the motion to compel. Defendants do not even address this issue in their reply brief. See 18 Reply re Mot. to Compel (dkt. 64). The only defendants who have any basis for moving to 19 compel arbitration are the Individual Defendants, former employees of FBC. 20 2. Waiver 21 FBC’s second argument, that those Individual Defendants have waived their right to 22 compel arbitration, is also correct. 23 “[T]he test for waiver of the right to compel arbitration consists of two elements: (1) 24 knowledge of an existing right to compel arbitration; and (2) intentional acts inconsistent 25 with that existing right.” Hill v. Xerox Business Services, LLC, 59 F.4th 457, 468 (9th 26 Cir. 2023). A party takes “intentional acts inconsistent with its right to arbitrate” “when a 27 party chooses to delay his right to compel arbitration by actively litigating his case to take 1 advantage of being in federal court.” Id. at 471 (quoting Martin v. Yasuda, 829 F.3d 1118, 2 1125 (9th Cir. 2016)). “[A] party’s extended silence and delay in moving for arbitration 3 may indicate a ‘conscious decision to continue to seek judicial judgment on the merits of 4 [the] arbitrable claims,’ which would be inconsistent with a right to arbitrate.” Martin, 829 5 F.3d at 1125 (quoting Van Ness Townhouses v. Mar Indus. Corp., 862 F.2d 754, 759 (9th 6 Cir. 1988)). Courts are to “consider the totality of the parties’ actions” in determining 7 whether a party acted inconsistently with its right to arbitrate. Armstrong, 59 F.4th at 1015 8 (quoting Hill, 59 F.4th at 471). 9 Here, the Individual Defendants “acknowledged having notice of the arbitration 10 clauses since at least January 11, 2023.” Ridley Decl. ¶ 16, Ex. E (9/8/23 letter from 11 defense counsel stating that Complaint and FAC attached individual employment 12 agreements with arbitration clauses). The first element of waiver is therefore satisfied. 13 As to the second element, Defendants assert somehow that they “immediately 14 sought to compel arbitration as soon as they were permitted to file a responsive pleading in 15 this matter.” Reply at 6–7. But that is false. FBC brought suit on January 11, 2023. 16 Nothing prevented the Individual Defendants from filing a motion to compel arbitration 17 immediately. The Individual Defendants might have reasonably held off on filing a 18 motion to compel arbitration while engaging in “lengthy settlement negotiations.” See 19 Ridley Decl. ¶ 5. Even so, they could have filed a motion to compel arbitration once those 20 settlement discussions broke down. Instead, Defendants chose to file a motion to dismiss 21 central claims in this case. See MTD. They also objected to FBC’s evidence. See 22 Evidentiary Objections. And they opposed FBC’s petition for a TRO. See Opp’n to TRO. 23 When Defendants failed in their motion to dismiss, they filed an Answer to the Amended 24 Complaint, again not mentioning arbitration. See Answer. Although they referenced an 25 intention to move to compel arbitration in the August 18, 2023 Joint CMC statement, see 26 Joint CMC at 2, and included an affirmative defense of arbitrability in their August 23, 27 2023 amended answer, see Amended Answer, “[a] statement by a party that it has a right 1 471. Defendants did not move to compel arbitration until September 20, 2023. See Mot. 2 to Compel. In all, Defendants waited over eight months, and a month and a half after 3 receiving an adverse ruling on their motion to dismiss, before they moved to compel 4 arbitration. 5 The motion to dismiss is significant. Defendants argue that “Individual Defendants 6 have not taken advantage of judicial procedures unavailable in arbitration as the Individual 7 Defendants’ Motion to Dismiss and/or Demurrer could have been brought in arbitration.” 8 Reply re Mot. to Compel at 7. That argument misses the point. Yes, the Individual 9 Defendants could have challenged the FAC in arbitration. They did not. They chose to 10 proceed in this Court, and they used this Court’s resources. As the Martin court explained:

11 a party that signs a binding arbitration agreement and has subsequently been sued in court has a choice: it can either seek 12 to compel arbitration or agree to litigate in court. It cannot choose both. A party may not delay seeking arbitration until 13 after the district court rules against it in whole or in part; nor may it belatedly change its mind after first electing to proceed 14 in what it believed to be a more favorable forum. Allowing it to do so would result in a waste of resources for the parties and the 15 courts and would be manifestly unfair to the opposing party. 16 Martin, 829 F.3d at 1128). 17 That the Individual Defendants here dragged their feet for only eight months and 18 not longer is not dispositive. See Sywula v. Teleport Mobility, Inc., No. 21-cv-01450- 19 BAS-SBC, 2023 WL 4630620, at *7 (S.D. Cal. July 18, 2023) (“the length of delay is just 20 one factor that gives color to the totality of Defendants’ conduct . . . and whether 21 Defendants’ acts were inconsistent with their known rights”). A court in the Southern 22 District of California recently held that a defendant had not undertaken acts inconsistent 23 with its right to arbitrate where—though it waited eight months to move—it raised the 24 arbitration agreement as an affirmative defense in its answer, and “engaged in other 25 litigation procedure only insofar as it was obligated to because of other plaintiffs who are 26 not subject to the arbitration agreement, and filed a motion to compel arbitration without 27 seeking any other relief on the merits.” Ashirwad v. Charter Commc’ns, LLC, No. 21-cv- 1 Defendants waited eight months and affirmatively “engaged in other litigation procedure” 2 to try to dismiss two of FBC’s claims on the merits. 3 Defendants therefore took “intentional acts inconsistent with their right to 4 arbitrate.” See Hill, 59 F.4th at 471 (quoting Martin, 829 F.3d at 1125); see also 5 Armstrong, 59 F.4th at 1015 (“Obviously, ‘[s]eeking a decision on the merits of a key 6 issue in a case indicates an intentional and strategic decision to take advantage of the 7 judicial forum.’”) (quoting Newirth by & through Newirth v. Aegis Senior Cmtys., LLC, 8 931 F.3d 935, 944 (9th Cir. 2019)); Martin, 829 F.3d at 1126 (defendants waived right to 9 compel arbitration where they filed “a motion to dismiss on a key merits issue”)2; Kelly v. 10 Pub. Util. Dist. No. 2, 552 Fed. Appx. 663, 664 (9th Cir. 2014) (intentional acts 11 inconsistent with the right of arbitration where parties “waited eleven months after the 12 lawsuit was filed to demand arbitration, actively litigating the case in district court” and 13 filing motion for preliminary injunction and motion to dismiss). The second element of 14 waiver is therefore also satisfied. 15 Accordingly, the Individual Defendants waived their right to arbitrate. 16 3. Scope 17 Because the Court concludes that the Individual Defendants waived their right to 18 arbitrate, the Court need not reach FBC’s third argument, that its claims are outside the 19 scope of the arbitration provisions. 20 4. Conclusion as to Motion to Compel 21 Because the Court concludes that NAF never had a right to compel arbitration, and 22 that the Individual Defendants waived their right to compel arbitration, the Court DENIES 23 Defendants’ motion to compel arbitration. 24 B. Motion to Strike 25 In a related motion, FBC moves the Court to strike paragraph 49 of Defendants’ 26

27 2 See also id. n.4 (“when defendants move for dismissal with prejudice on a key merits 1 || amended answer. Mot. to Strike. That paragraph is where Defendants assert the 2 || affirmative defense of “Arbitration,” stating: “Plaintiff's causes of action, and each of 3 || them, are subject to binding arbitration pursuant to enforceable arbitration agreements 4 || between the parties.” Amended Answer 7 49. FBC argues that this affirmative defense is 5 || “insufficient” pursuant to Rule 12(f) of the Federal Rules of Civil Procedure because 6 || “NAF has absolutely no basis for compelling arbitration with FBC” and “Individual 7 || Defendants have waived any right to compel arbitration.” Mot. to Strike at 2. Defendants 8 || respond that “a motion to strike is not the proper mechanism to dismiss portions of a 9 || pleading,’ and that FBC “fails to demonstrate that Defendants’ arbitration defense is an 10 || ‘insufficient defense’ per Rule 12(f).” Opp’n to Mot. to Strike (dkt. 61) at 5-6. 11 A defense is “insufficient if ‘there are no questions of fact,’ ‘any questions of law = 12 || are clear and not in dispute,’ and ‘under no set of circumstances could the defense 13 succeed.’” Woods v. Shaffer, No. 14-cv-1936-CW, 2018 WL 6436981, at *1 (N.D. Cal. 14 || Dec. 7, 2018) (quoting SEC v. Sands, 902 F. Supp. 1149, 1165 (C.D. Cal. 1995)). 8 15 || Whether or not FBC would have satisfied the 12(f) standard absent the Court’s ruling on 16 |} the motion to compel arbitration, the Court ruled herein that Defendants’ efforts to compel 5 17 || arbitration cannot succeed. Accordingly, the defense of arbitrability is insufficient. The 5 18 |} Court GRANTS the motion to strike. 19 || Iv. CONCLUSION 20 For the foregoing reasons, the Court DENIES the motion to compel arbitration and 21 || GRANTS the motion to strike. 22 IT IS SO ORDERED. 23 Dated: October 19, 2023 Co CHARLES R. BREYER 24 United States District Judge 25 26 27 28 The motion does not seek to “dismiss” anything.