1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 EASTERN DISTRICT OF CALIFORNIA 10 11 SIMPLE TRADITIONS, INC. and No. 2:24-cv-01335-TLN-SCR NANCY LINN, 12 Plaintiffs, 13 ORDER v. 14 PAYCHEX, INC., 15 Defendant. 16 17 This matter is before the Court on Defendant Paychex, Inc.’s (“Defendant”) Motion to 18 Compel Arbitration. (ECF No. 5.) Plaintiffs Simple Traditions, Inc. (“Simple Traditions”) and 19 Nancy Linn (“Linn”) (collectively, “Plaintiffs”) filed an opposition. (ECF No. 9.) Defendant 20 filed a reply. (ECF No. 11.) For the reasons set forth below, the Court GRANTS Defendant’s 21 motion. 22 /// 23 /// 24 /// 25 /// 26 /// 27 /// 28 /// 1 I. FACTUAL AND PROCEDURAL BACKGROUND 2 The instant action arises of out Defendant’s alleged failure to file employer tax returns and 3 pay payroll taxes for Simple Traditions, a company Linn owns that provides low-cost funeral and 4 cremation services. (ECF No. 1.) Plaintiffs allege that on October 6, 2016, Linn retained 5 Defendant’s services to provide payroll services, to prepare and file employer tax returns, and to 6 pay employer taxes for Simple Traditions. (Id. at 2.) 7 In 2018, Simple Traditions changed its corporate status in California from a “C” 8 corporation to an “S” corporation, which resulted in the Internal Revenue Service’s (“IRS”) 9 issuance of a new Employer Identification Number (“EIN”). (Id. at 2–3.) The old “C” 10 corporation ceased to be effective as of January 1, 2019, when the new EIN became effective. 11 (Id.) In September 2019, Linn informed Defendant’s employee of the change in corporate status, 12 the assignment of a new EIN, and that the new EIN must be used to identify Simple Traditions on 13 all communications with the IRS, including tax returns and employer taxes paid. (Id.) On 14 October 4, 2019, Defendant’s employee acknowledged the change in corporate status and change 15 of EIN and forwarded several forms for Linn to execute and return, which she did. (Id.) 16 In June 2021, Linn retained the services of an accounting firm to determine whether 17 Simple Traditions was eligible to receive Employee Retention Tax Credits (“ERTC”) pursuant to 18 the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). (Id. at 4.) The firm 19 advised Linn she could receive ERTC refunds of $91,712.58, and Linn retained the firm to apply 20 for the tax credits in the eligible quarters — quarters 2, 3, and 4 in tax year 2020 and quarters 2 21 and 3 in tax year 2021. (Id.) When Linn had not received any contact from the IRS about the 22 status of Simple Traditions’ ERTC application, she made several phone calls to the IRS and 23 learned in March 2022 that the IRS had no record of Simple Traditions’ employer tax returns 24 having been filed or payroll taxes having been paid for tax years 2020 and 2021. (Id.) 25 In March 2023, Linn contacted Defendant’s President’s office, which responded through a 26 client specialist. (Id. at 5.) In April 2023, the client specialist confirmed that not only had 27 Defendant failed to change the EIN in 2019 as Linn instructed, but Defendant misfiled Simple 28 Traditions’ employer tax returns for tax years 2019, 2020, 2021, 2022, and the first quarter of 1 2023 by identifying Simple Traditions under the former now defunct EIN. (Id.) Plaintiffs allege 2 that as a result of Defendant’s admitted errors, the IRS had no record of tax returns for Simple 3 Traditions for the foregoing tax years nor any record of tax payments being made for those years. 4 (Id.) Plaintiffs allege the IRS’s penalties and interest fines total $76,351.00 and are ongoing. 5 (Id.) 6 On May 9, 2024, Plaintiffs filed the instant action, alleging claims for: breach of contract, 7 negligence, gross negligence, and equitable indemnity. (ECF No. 1.) On June 11, 2024, 8 Defendant filed the instant motion to compel arbitration, arguing Linn signed a Paychex 9 Proprietor Services Agreement (the “Agreement”) on behalf of Simple Traditions and the 10 Agreement contains a valid and binding arbitration provision. (ECF No. 5.) 11 II. STANDARD OF LAW 12 In deciding whether to compel arbitration, a district court typically determines two 13 gateway issues: (1) whether a valid agreement to arbitrate exists; and, if it does, (2) whether the 14 agreement encompasses the dispute at issue. Lifescan, Inc. v. Premier Diabetic Servs., Inc., 363 15 F.3d 1010, 1012 (9th Cir. 2004). “To evaluate the validity of an arbitration agreement, federal 16 courts ‘should apply ordinary state-law principles that govern the formation of contracts.’” Ingle 17 v. Circuit City Stores, Inc., 328 F.3d 1165, 1170 (9th Cir. 2003) (citing First Options of Chicago, 18 Inc. v. Kaplan, 514 U.S. 938, 944 (1995)). If the court is “satisfied that the making of the 19 arbitration agreement or the failure to comply with the agreement is not in issue, the court shall 20 make an order directing the parties to proceed to arbitration in accordance with the terms of the 21 agreement.” 9 U.S.C. § 4. “[A]ny doubts concerning the scope of arbitrable issues should be 22 resolved in favor of arbitration.” Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp. (Moses 23 H. Cone), 460 U.S. 1, 24–25 (1983). If a court “determines that an arbitration clause is 24 enforceable, it has the discretion to either stay the case pending arbitration, or to dismiss the case 25 if all of the alleged claims are subject to arbitration.” Hoekman v. Tamko Bldg. Prod., Inc., No. 26 2:14-cv-01581-TLN-KJN, 2015 WL 9591471, at *2 (E.D. Cal. Aug. 26, 2015) (citation omitted). 27 There is an “emphatic federal policy in favor of arbitral dispute resolution.” Mitsubishi 28 Motors Corp. v. Soler Chrysler–Plymouth, 473 U.S. 614, 631 (1985). As such, “‘any doubts 1 concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the 2 problem at hand is the construction of the contract language itself or an allegation of waiver, 3 delay, or a like defense to arbitrability.’” Id. at 626 (quoting Moses H. Cone, 460 U.S. 1 at 24– 4 25). “Because waiver of the right to arbitration is disfavored, ‘any party arguing waiver of 5 arbitration bears a heavy burden of proof.’” Fisher v. A.G. Becker Paribas Inc., 791 F.2d 691, 6 694 (9th Cir. 1986) (quoting Belke v. Merrill Lynch, Pierce, Fenner & Smith, 693 F.2d 1023, 7 1025 (11th Cir. 1982), abrogated on other grounds by Dean Witter Reynolds, Inc. v. Byrd, 470 8 U.S. 213 (1985)). Therefore, an arbitration agreement may only “be invalidated by ‘generally 9 applicable contract defenses, such as fraud, duress, or unconscionability,’ but not by defenses that 10 apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate 11 is at issue.” AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 343–44 (2011) (quoting Doctor’s 12 Associates, Inc. v. Casarotto, 517 U.S. 681, 687 (1996)). Courts may not apply traditional 13 contractual defenses, like duress and unconscionability, in a broader or more stringent manner to 14 invalidate arbitration agreements and thereby undermine FAA’s purpose to “ensur[e] that private 15 arbitration agreements are enforced according to their terms.” Id. at 1748 (quoting Volt Info. 16 Scis., Inc. v. Bd.
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1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 EASTERN DISTRICT OF CALIFORNIA 10 11 SIMPLE TRADITIONS, INC. and No. 2:24-cv-01335-TLN-SCR NANCY LINN, 12 Plaintiffs, 13 ORDER v. 14 PAYCHEX, INC., 15 Defendant. 16 17 This matter is before the Court on Defendant Paychex, Inc.’s (“Defendant”) Motion to 18 Compel Arbitration. (ECF No. 5.) Plaintiffs Simple Traditions, Inc. (“Simple Traditions”) and 19 Nancy Linn (“Linn”) (collectively, “Plaintiffs”) filed an opposition. (ECF No. 9.) Defendant 20 filed a reply. (ECF No. 11.) For the reasons set forth below, the Court GRANTS Defendant’s 21 motion. 22 /// 23 /// 24 /// 25 /// 26 /// 27 /// 28 /// 1 I. FACTUAL AND PROCEDURAL BACKGROUND 2 The instant action arises of out Defendant’s alleged failure to file employer tax returns and 3 pay payroll taxes for Simple Traditions, a company Linn owns that provides low-cost funeral and 4 cremation services. (ECF No. 1.) Plaintiffs allege that on October 6, 2016, Linn retained 5 Defendant’s services to provide payroll services, to prepare and file employer tax returns, and to 6 pay employer taxes for Simple Traditions. (Id. at 2.) 7 In 2018, Simple Traditions changed its corporate status in California from a “C” 8 corporation to an “S” corporation, which resulted in the Internal Revenue Service’s (“IRS”) 9 issuance of a new Employer Identification Number (“EIN”). (Id. at 2–3.) The old “C” 10 corporation ceased to be effective as of January 1, 2019, when the new EIN became effective. 11 (Id.) In September 2019, Linn informed Defendant’s employee of the change in corporate status, 12 the assignment of a new EIN, and that the new EIN must be used to identify Simple Traditions on 13 all communications with the IRS, including tax returns and employer taxes paid. (Id.) On 14 October 4, 2019, Defendant’s employee acknowledged the change in corporate status and change 15 of EIN and forwarded several forms for Linn to execute and return, which she did. (Id.) 16 In June 2021, Linn retained the services of an accounting firm to determine whether 17 Simple Traditions was eligible to receive Employee Retention Tax Credits (“ERTC”) pursuant to 18 the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). (Id. at 4.) The firm 19 advised Linn she could receive ERTC refunds of $91,712.58, and Linn retained the firm to apply 20 for the tax credits in the eligible quarters — quarters 2, 3, and 4 in tax year 2020 and quarters 2 21 and 3 in tax year 2021. (Id.) When Linn had not received any contact from the IRS about the 22 status of Simple Traditions’ ERTC application, she made several phone calls to the IRS and 23 learned in March 2022 that the IRS had no record of Simple Traditions’ employer tax returns 24 having been filed or payroll taxes having been paid for tax years 2020 and 2021. (Id.) 25 In March 2023, Linn contacted Defendant’s President’s office, which responded through a 26 client specialist. (Id. at 5.) In April 2023, the client specialist confirmed that not only had 27 Defendant failed to change the EIN in 2019 as Linn instructed, but Defendant misfiled Simple 28 Traditions’ employer tax returns for tax years 2019, 2020, 2021, 2022, and the first quarter of 1 2023 by identifying Simple Traditions under the former now defunct EIN. (Id.) Plaintiffs allege 2 that as a result of Defendant’s admitted errors, the IRS had no record of tax returns for Simple 3 Traditions for the foregoing tax years nor any record of tax payments being made for those years. 4 (Id.) Plaintiffs allege the IRS’s penalties and interest fines total $76,351.00 and are ongoing. 5 (Id.) 6 On May 9, 2024, Plaintiffs filed the instant action, alleging claims for: breach of contract, 7 negligence, gross negligence, and equitable indemnity. (ECF No. 1.) On June 11, 2024, 8 Defendant filed the instant motion to compel arbitration, arguing Linn signed a Paychex 9 Proprietor Services Agreement (the “Agreement”) on behalf of Simple Traditions and the 10 Agreement contains a valid and binding arbitration provision. (ECF No. 5.) 11 II. STANDARD OF LAW 12 In deciding whether to compel arbitration, a district court typically determines two 13 gateway issues: (1) whether a valid agreement to arbitrate exists; and, if it does, (2) whether the 14 agreement encompasses the dispute at issue. Lifescan, Inc. v. Premier Diabetic Servs., Inc., 363 15 F.3d 1010, 1012 (9th Cir. 2004). “To evaluate the validity of an arbitration agreement, federal 16 courts ‘should apply ordinary state-law principles that govern the formation of contracts.’” Ingle 17 v. Circuit City Stores, Inc., 328 F.3d 1165, 1170 (9th Cir. 2003) (citing First Options of Chicago, 18 Inc. v. Kaplan, 514 U.S. 938, 944 (1995)). If the court is “satisfied that the making of the 19 arbitration agreement or the failure to comply with the agreement is not in issue, the court shall 20 make an order directing the parties to proceed to arbitration in accordance with the terms of the 21 agreement.” 9 U.S.C. § 4. “[A]ny doubts concerning the scope of arbitrable issues should be 22 resolved in favor of arbitration.” Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp. (Moses 23 H. Cone), 460 U.S. 1, 24–25 (1983). If a court “determines that an arbitration clause is 24 enforceable, it has the discretion to either stay the case pending arbitration, or to dismiss the case 25 if all of the alleged claims are subject to arbitration.” Hoekman v. Tamko Bldg. Prod., Inc., No. 26 2:14-cv-01581-TLN-KJN, 2015 WL 9591471, at *2 (E.D. Cal. Aug. 26, 2015) (citation omitted). 27 There is an “emphatic federal policy in favor of arbitral dispute resolution.” Mitsubishi 28 Motors Corp. v. Soler Chrysler–Plymouth, 473 U.S. 614, 631 (1985). As such, “‘any doubts 1 concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the 2 problem at hand is the construction of the contract language itself or an allegation of waiver, 3 delay, or a like defense to arbitrability.’” Id. at 626 (quoting Moses H. Cone, 460 U.S. 1 at 24– 4 25). “Because waiver of the right to arbitration is disfavored, ‘any party arguing waiver of 5 arbitration bears a heavy burden of proof.’” Fisher v. A.G. Becker Paribas Inc., 791 F.2d 691, 6 694 (9th Cir. 1986) (quoting Belke v. Merrill Lynch, Pierce, Fenner & Smith, 693 F.2d 1023, 7 1025 (11th Cir. 1982), abrogated on other grounds by Dean Witter Reynolds, Inc. v. Byrd, 470 8 U.S. 213 (1985)). Therefore, an arbitration agreement may only “be invalidated by ‘generally 9 applicable contract defenses, such as fraud, duress, or unconscionability,’ but not by defenses that 10 apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate 11 is at issue.” AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 343–44 (2011) (quoting Doctor’s 12 Associates, Inc. v. Casarotto, 517 U.S. 681, 687 (1996)). Courts may not apply traditional 13 contractual defenses, like duress and unconscionability, in a broader or more stringent manner to 14 invalidate arbitration agreements and thereby undermine FAA’s purpose to “ensur[e] that private 15 arbitration agreements are enforced according to their terms.” Id. at 1748 (quoting Volt Info. 16 Scis., Inc. v. Bd. of Trustees of Leland Stanford Junior Univ., 489 U.S. 468, 478 (1989)). 17 III. ANALYSIS 18 Defendant generally argues the Court should compel arbitration in Rochester, New York 19 because the Agreement and its arbitration clause are enforceable and Plaintiffs have directly 20 based their claims on the Agreement. (ECF No. 5 at 10–19.) In opposition, Plaintiffs argue: (1) 21 the arbitration provision is unconscionable; and (2) Simple Traditions is not bound by the terms 22 of the Agreement. (ECF No. 9 at 6–11.) The Court will address each of Plaintiff’s arguments 23 about whether the Agreement to arbitrate is valid and enforceable and will then discuss whether 24 the Agreement encompasses the dispute at issue. See Lifescan, Inc., 363 F.3d at 1012. 25 A. Whether the Agreement is Unconscionable 26 “Under California law, courts may refuse to enforce any contract found ‘to have been 27 unconscionable at the time it was made,’ or may ‘limit the application of any unconscionable 28 clause.’” AT&T Mobility LLC, 563 U.S. at 340 (citing Cal. Civ. Code § 1670.5(a)). “A finding 1 of unconscionability requires a procedural and a substantive element, the former focusing on 2 oppression or surprise due to unequal bargaining power, the latter on overly harsh or one-sided 3 results.” Id. (internal quotations omitted) (citing Armendariz v. Foundation Health Psychcare 4 Servs., Inc., 24 Cal. 4th 83, 114 (2000)). California courts apply a “sliding scale” analysis in 5 making determinations about unconscionability: “the more substantively oppressive the contract 6 term, the less evidence of procedural unconscionability is required to come to the conclusion that 7 the term is unenforceable, and vice versa.” Kilgore v. KeyBank Nat’l Ass’n, 673 F.3d 947, 963 8 (9th Cir. 2012) (quoting Armendariz, 24 Cal. 4th at 89). 9 Plaintiffs argue the Agreement is both procedurally and substantively unconscionable. 10 However, Plaintiffs fail to address these concepts separately and instead blend the discussion 11 together in a way that makes their argument difficult to follow. Nevertheless, the Court will 12 address each of these concepts in turn. 13 i. Procedural Unconscionability 14 “Procedural unconscionability focuses on ‘oppression or surprise due to unequal 15 bargaining power.’” Longboy v. Pinnacle Property Mgmt. Servs., LLC, 718 F. Supp. 3d 1004, 16 1012 (N.D. Cal. 2024) (citing Lim v. TForce Logistics, LLC, 8 F.4th 992, 1000 (9th Cir. 2021)). 17 Oppression arises “from an inequality of bargaining power [that] results in no real negotiation and 18 an absence of meaningful choice.” Circuit City Stores, Inc. v. Mantor, 335 F.3d 1101, 1106 (9th 19 Cir. 2003) (quoting Stirlen v. Supercuts, Inc., 51 Cal. App. 4th 1519, 1532 (1997)). “Surprise 20 involves the extent to which the contract clearly discloses its terms as well as the reasonable 21 expectations of the weaker party.” Lim, 8 F.4th at 1000 (citing Chavarria v. Ralphs Grocery Co., 22 733 F.3d 916, 922 (9th Cir. 2013)). The Court will consider oppression and surprise in turn. 23 With respect to oppression, Plaintiffs generally argue the Agreement is procedurally 24 unconscionable because it is a contract of adhesion — it is a standard form contract that was 25 presented to Linn on a “take it or leave it basis” with no opportunity to negotiate terms. (ECF No. 26 9 at 7.) Defendant asserts that Plaintiffs’ unconscionability arguments are unconvincing as courts 27 have enforced this arbitration clause in the past. (ECF No. 11 at 6.) 28 /// 1 A contract of adhesion is “a standardized contract, which, imposed and drafted by the 2 party of superior bargaining strength, relegates to the subscribing party only the opportunity to 3 adhere to the contract or reject it.” Armendariz, 24 Cal. 4th at 113. However, “the adhesive 4 aspect of an agreement is not dispositive.” Peng v. First Republic Bank, 219 Cal. App. 4th 1462, 5 1470 (2013) (citation omitted). When “there is no other indication of oppression or surprise” and 6 “the degree of procedural unconscionability of an adhesion agreement is low, . . . the agreement 7 will be enforceable unless the degree of substantive unconscionability is high.” Id. 8 Plaintiffs largely rely on Silicon Valley in support of their unconscionability arguments. 9 (Id. at 7–8 (citing Silicon Valley Self Direct, LLC v. Paychex, Inc., No. 5:15-CV-01055-EJD, 10 2015 WL 4452373, at *7 (N.D. Cal. July 20, 2015).) In Silicon Valley, a Northern District of 11 California court considered a similar arbitration agreement1 and concluded the agreement had an 12 “adhesive nature” — because it was presented on a take it or leave it basis without an opportunity 13 to negotiate terms — and therefore contained “a degree of procedural unconscionability.” 2015 14 WL 4452373, at *6. Ultimately, however, the Silicon Valley court only severed a few 15 substantively unconscionable terms, found the agreement was “not permeated with 16 unconscionability,” and enforced the arbitration clause. 2015 WL 4452373, at *6–7. 17 Here, with respect to execution of the Agreement, Plaintiffs contend Linn was not 18 provided with an opportunity to read the contract terms or ask questions regarding their meaning, 19 the execution was “chaotic and hurried,” and Defendant’s representative filled in the blanks 20 without explanation and directed Linn to sign it. (ECF No. 9 at 7.) Defendant does not rebut any 21 of these contentions in its reply nor does it argue the Agreement was not a contract of adhesion. 22 (See ECF No. 11.) The Court has reviewed the Agreement and finds that it is a standard form 23 contract. (ECF No. 1-1.) Accordingly, because it is a standard form contract, was presented on a 24 take it or leave it basis, and relegated Linn “only the opportunity to adhere to the contract or reject 25
1 It appears the Agreement in the instant case and the agreement in Silicon Valley are 26 substantially similar, as both involved the same Defendant, are referred to as the “PPSA,” and 27 contain a nearly identical arbitration clause on page 4. Silicon Valley, 2015 WL 4452373, at *2; (ECF No. 1-1 at 4). 28 1 it,”2 the Court agrees with Plaintiffs that the Agreement is a contract of adhesion. Armendariz, 24 2 Cal. 4th at 113. Further, the “adhesive nature” of the Agreement “imparts it with a degree of 3 procedural unconscionability.” Silicon Valley, 2015 WL 4452373, at *6. However, because “the 4 adhesive aspect of an agreement is not dispositive,” Peng, 219 Cal. App. 4th at 1470, the Court 5 next examines whether there was surprise. 6 With respect to surprise, the arbitration clause was clearly visible in paragraph 20 of the 7 Agreement, which states in bold text: “Except as provided herein, any dispute arising out of, or in 8 connection with, the Agreement will be determined only by binding arbitration in Rochester, New 9 York, in accordance with the commercial rules of the American Arbitration Association.” (ECF 10 No. 1-1 at 4.) Linn was also expressly informed on page 1 of the Agreement: “Client warrants 11 that it . . . has read and agrees to the terms and conditions set forth in sections 1-24 of this 12 Agreement.” (Id. at 1.) This language is indicative of a lack of surprise because the Agreement 13 “clearly disclose[d] its terms as well as the reasonable expectations of” Linn. Lim, 8 F.4th at 14 1000. 15 Based on the foregoing, it appears there is only minimal evidence of procedural 16 unconscionability. However, the Court must next “examine the extent of the substantive 17 unconscionability to determine, whether based on the California courts’ sliding scale approach, 18 the arbitration provision is unconscionable.” Nagrampa v. MailCoups, Inc., 469 F.3d 1257, 1284 19 (9th Cir. 2006). 20 ii. Substantive Unconscionability 21 As stated previously, an agreement is substantively unconscionable if it is “unfairly one- 22 sided.” Little v. Auto Stiegler, Inc., 29 Cal. 4th 1064, 1071 (2003). 23 Plaintiffs’ argument on substantive unconscionability lacks clarity, but they seem to argue 24 by analogy to Silicon Valley that designation of Rochester, New York as the arbitration venue is 25
2 Plaintiffs also argue paragraph 23 of the Agreement is procedurally and substantively 26 unconscionable. (ECF No. 9 at 9.) However, Plaintiffs fail to cite to any law, fail to present 27 meaningful analysis, and paragraph 23 is unrelated to the arbitration provision. Therefore, the Court declines to consider this provision. 28 1 substantively unconscionable.3 (ECF No. 9 at 8–9 8 (citing Silicon Valley, 2015 WL 4452373, at 2 *7).) Defendant asserts other courts have enforced the Agreement in its entirety, including the 3 provision for Rochester, New York. (ECF No. 11 at 6.) 4 In Silicon Valley, the court found plaintiff met its burden to demonstrate the arbitration 5 clause is substantively unconscionable because plaintiff was headquartered in San Jose, 6 California, was a small business that interacted with defendant entirely within California, and 7 would “incur significant expense and great inconvenience to its business operations and 8 employees if ordered to arbitrate across the country.” 2015 WL 4452373, at *7 (internal 9 quotation marks removed). As will be further explained below, in the instant matter Plaintiffs did 10 not submit sufficient evidence to allow the Court to make a similar finding. 11 “[F]orum selection clauses are valid and should be given effect unless enforcement of the 12 clause would be unreasonable.” Nagrampa, 469 F.3d at 1287 (citations omitted). Nevertheless, 13 “if the place and manner restrictions of a forum selection provision are unduly oppressive, or 14 have the effect of shielding the stronger party from liability, then the forum selection provision is 15 unconscionable.” Id. (internal citations and quotations omitted). To set aside the forum selection 16 clause, a party may argue: that “the agreement was affected by fraud, undue influence, or 17 overweening bargaining power; that enforcement would be unreasonable and unjust; or that 18 proceedings in the contractual forum will be so gravely difficult and inconvenient that the 19 resisting party will for all practical purposes be deprived of his day in court.” Id. California also 20 favors enforcement of forum selection clauses on the condition that “they are entered into freely 21 and voluntarily” and “enforcement would not be unreasonable.” Id. 22 In Nagrampa, the Ninth Circuit concluded that a forum selection clause was substantively 23 unconscionable, as the effect of requiring arbitration in Boston was so “prohibitively costly” to 24 plaintiff that it had the effect of precluding her from participating. Id. at 1290, 1293. The court
25 3 Plaintiffs make two further arguments. First, Plaintiffs appear to argue that the limitations on liability or “damages waiver” provision is substantively unconscionable. (ECF No. 9 at 5, 8.) 26 Second, Plaintiffs argue because this case was filed in this district, California law should apply 27 and not New York law. (Id. at 9.) However, Plaintiffs fail to develop meaningful analysis or cite controlling or persuasive authority. Accordingly, the Court declines to consider these two 28 arguments. 1 noted the contract would have required “a one-woman franchisee who operates from her home to 2 fly across the country to arbitrate a contract signed and performed in California,” and plaintiff 3 would have incurred increased costs for travel and living expenses and for hiring counsel familiar 4 with Massachusetts law. Id. To reach this conclusion, the Ninth Circuit examined three bank 5 statements for an account held jointly by plaintiff and her husband and the average monthly 6 deposits and the average monthly withdrawals and debits. Id. The court concluded that payment 7 of the initial $6,500 arbitration filing fee alone, without even considering the additional costs to 8 litigate in an out-of-state forum, would result in the bank account being overdrawn by $388.23. 9 Id. at 1290 fn. 13. 10 Here, Plaintiffs contend using Rochester, New York as the arbitration venue would 11 impose a severe financial hardship on Linn and her business to travel out-of-state and participate 12 in a multi-day arbitration, and it may also require the postponement of funeral and cremation 13 services and add emotional stress to Linn and her clients. (ECF No. 9 at 8–9.) While the Court is 14 sympathetic to this argument, Plaintiffs, unlike the plaintiff in Nagrampa, did not submit any 15 financial records or provide any estimate of arbitration costs and fees for litigating in an out-of- 16 state forum. The Court therefore does not have an ability to determine whether proceeding in 17 Rochester, New York “will be so gravely difficult and inconvenient” that Plaintiffs will be 18 deprived of their day in court. Nagrampa, 469 F.3d at 1287. Further, as Defendants state, courts 19 have enforced the Agreement in its entirety, including the venue provision for Rochester, New 20 York.4 (ECF No. 11 at 6 (citing Ruben Limpias v. Sierra Foods, Inc. et al., Los Angeles County 21 Superior Court Case No. 19STCV13739; Smith-Guardadu v. Paychex, Inc., Riverside County 22 Superior Court Case No. CVMV2205227; Claus v. Paychex, Inc., No. G045296, 2012 WL 23
24 4 The Court notes that Defendant filed a Request for Judicial Notice, citing state court rulings in other cases involving Defendant, for the proposition that courts have enforced the 25 Agreement in its entirety. (ECF No. 11 at 6; see ECF Nos. 11-3, 11-4, 11-5, 11-6.) Rule 201(b) provides that the court may judicially notice a fact that is not subject to reasonable dispute 26 because it: (1) is generally known within the trial court’s territorial jurisdiction; or (2) can be 27 accurately and readily determined from sources whose accuracy cannot reasonably be questioned. The documents at issue here are all court filings or matters of public record. Therefore, judicial 28 notice is appropriate and Defendant’s request is GRANTED. 1 1669425 (Cal. Ct. App. May 14, 2022)).) Accordingly, the Court finds the designation of 2 Rochester, New York as the arbitration venue is not substantively unconscionable. 3 Based on the foregoing, the Court does not find the Agreement is “permeated with 4 unconscionability.” Silicon Valley, 2015 WL 4452373, at *7. Accordingly, the “emphatic federal 5 policy in favor of arbitral dispute resolution” is in favor of compelling arbitration in this case. 6 Mitsubishi Motors Corp., 473 U.S. at 631. 7 B. Whether Simple Traditions Can Be Bound by the Agreement 8 Plaintiffs argue Simple Traditions is not bound by the Agreement, as Defendant does not 9 offer any evidence that Simple Traditions is a signatory to the Agreement or that it consented, 10 agreed to, or negotiated the terms of the Agreement. (ECF No. 9 at 10.) Plaintiffs also argue that 11 Simple Traditions does not seek the benefits of the Agreement but rather seeks to recover 12 damages and Simple Traditions’ claims do not arise out of the Agreement. (Id. at 10–11.) 13 Defendant argues the doctrine of estoppel should apply, as Simple Traditions directly benefited 14 from the Agreement. (ECF No. 5 at 16–18; ECF No. 11 at 7–8.) 15 The Ninth Circuit has made clear that there are a variety of ways that a non-signatory may 16 be bound by an arbitration agreement. Specifically, “non-signatories of arbitration agreements 17 may be bound by the agreement under ordinary contract and agency principles.” Comer v. Micor, 18 Inc., 436 F.3d 1098, 1101 (9th Cir. 2006) (citing Letizia v. Prudential Bache Securities, Inc., 802 19 F.2d 1185, 1187–89 (9th Cir. 1986)). Among these principles are the following: (1) incorporation 20 by reference; (2) assumption; (3) agency, (4) veil piercing/alter ego; and (5) estoppel. Id. 21 In the instant matter, the most applicable principle is estoppel. The Ninth Circuit has 22 repeatedly expressed that equitable estoppel “precludes a party from claiming the benefits of a 23 contract while simultaneously attempting to avoid the burdens that contract imposes.” Id. 24 Specifically, the Ninth Circuit has observed that “non-signatories have been held to arbitration 25 clauses where the non-signatory knowingly exploits the agreement containing the arbitration 26 clause despite having never signed the agreement.” Comer, 436 F.3d at 1101 (internal citations 27 omitted) (emphasis added). Non-signatories are also compelled to arbitrate when “the claims [of 28 the non-signatory are] intertwined with the underlying contractual obligations.” Mundi, 555 F.3d 1 at 1046 (citation omitted) (emphasis added). 2 Here, by knowingly exploiting the agreement and accepting benefits of the contract, the 3 new Simple Traditions “S” corporation cannot avoid the obligations of that contract. Comer, 436 4 F.3d at 1101. Plaintiffs’ actions show an intent to engage in a transaction for services, as Linn 5 retained Defendant “to provide payroll services, to prepare and file employer tax returns and to 6 pay employer taxes for Plaintiff Simple Traditions.” (ECF No. 1 at 2.) Simple Traditions did 7 more than just passively benefit from these services. At least from the time Linn first engaged 8 Defendant’s services on October 6, 2016, through sometime in 2019, Simple Traditions was 9 receiving the benefits of the Agreement with Defendant — namely, the payroll services, 10 preparation and filing of employer tax returns, and payment of employer taxes. (Id. at 2–3.) 11 Although Plaintiffs argue Simple Traditions changed corporate status from a “C” corporation to 12 an “S” corporation and received a new EIN (id. at 2–3), it was still the same entity Linn engaged 13 to receive services from Defendant. Linn informed Defendant’s employees in September and 14 October 2019 of the change in Simple Tradition’s corporate status and assignment of a new EIN, 15 and she submitted several forms to effectuate the change in Defendant’s system. (Id. at 3.) 16 Defendant’s employee acknowledged receipt of those forms on October 14, 2019.5 (Id.) Indeed, 17 Linn believed that Defendant was providing services pursuant to the Agreement for the new “S” 18 corporation until she learned in April 2023 that Defendant had misfiled Simple Traditions’ 19 employer tax returns for tax years 2019, 2020, 2021, 2022, and the first quarter of 2023 by 20 identifying Simple Traditions under the former now defunct EIN. (Id. at 5.) 21 Further, Plaintiffs maintain that Simple Traditions’ claims are separate from the 22 Agreement, as Simple Traditions seeks “to recover damages inflicted on it as a result of 23 [D]efendant’s negligence and gross negligence which occurred after it became a different 24 corporate entity on January 1, 2019.” (ECF No. 9 at 4 (emphasis in original).) However, Simple 25 Traditions’ claims are intertwined with the contract because they rely on and presume the 26
27 5 Plaintiffs state the date is October 14, 2018, but the Court believes the “2018” is likely a typo as most of the other dates surrounding this transaction were in 2019. Accordingly, the Court 28 has changed the date to 2019 above. 1 existence of the Agreement’s benefits (payroll and employer tax services). In sum, with respect 2 to their negligence and gross negligence claims, Plaintiffs allege Defendant owed them a duty to 3 use reasonable care “in preparing, filing and paying taxes” on behalf of Simple Traditions, 4 Defendant breached the duty of care, Defendant knew the delay in correcting a client’s EIN 5 would lead to greater penalties and interest, and Defendant “was grossly negligent in failing to 6 exercise any care or so little care in providing services to Linn and Simple Traditions that it acted 7 with indifference and total disregard as to the well[-]being of its client Nancy Linn and Simple 8 Traditions.” (ECF No. 1 at 15–17 (emphasis in original).) Because Plaintiffs ultimately seek to 9 recover for Defendant’s failure to provide the proper payroll and employer tax services under the 10 proper EIN pursuant to the Agreement through their negligence and gross negligence claims, the 11 claims rely on and presume the existence of the Agreement’s benefits. 12 Defendant is further correct that International Paper Co. decision is analogous to the 13 instant case. (ECF No. 5 at 16–17; ECF No. 11 at 8–9 (citing Int’l Paper Co. v. Schwabedissen 14 Maschinen & Anlagen GMBH, 206 F.3d 411 (4th Cir. 2000).) In International Paper Co., the 15 Fourth Circuit concluded the doctrine of equitable estoppel barred a buyer from asserting that, as 16 a non-signatory, it was not bound by the arbitration clause in a contract between the manufacturer 17 and distributor. 206 F.3d at 418. Here, the doctrine of equitable estoppel similarly bars Simple 18 Traditions from asserting that, as a non-signatory to the Agreement, it is not bound by the 19 arbitration clause. Like International Paper Co., this “entire case” hinges on the Agreement 20 because Simple Traditions is seeking to enforce the “contractual rights and avoid the contract’s 21 requirement that ‘any dispute arising out of’ the contract be arbitrated.” 206 F.3d at 418. 22 Because the Agreement is not “permeated with unconscionability” and Simple Traditions 23 can be bound by the Agreement, the Court finds the Agreement to be valid and enforceable. 24 C. Whether the Agreement Encompasses the Dispute at Issue 25 As the Court has found that there is an enforceable arbitration agreement, the next 26 question is “whether the agreement encompasses the dispute at issue.” Chiron Corp. v. Ortho 27 Diagnostic Sys., Inc., 207 F.3d 1126, 1130 (9th Cir. 2000). 28 /// 1 Plaintiffs allege four claims related to their use of Defendant’s services. (See ECF No. 1.) 2 These claims include: (1) breach of contract as asserted by Linn; (2) negligence as asserted by 3 Linn and Simple Traditions; (3) gross negligence as asserted by Linn and Simple Traditions; and 4 (4) equitable indemnity as asserted by Linn and Simple Traditions.6 (Id.) As stated previously, 5 Plaintiffs’ negligence and gross negligence claims are inextricably intertwined with the 6 Agreement. With respect to the breach of contract claim, Plaintiffs do not dispute that Linn seeks 7 to enforce the requirements of the Agreement and allege Defendant breached the Agreement to 8 provide taxpayer services by failing to change the EIN on the tax returns prepared and filed in 9 2019, 2020, 2021, 2022, and the first two quarters of 2023. (ECF No. 1 at 13; see also ECF No. 10 9.) With respect to the equitable indemnity claim, Plaintiffs allege they have been damaged by 11 Defendant’s breach of contract, gross negligence, and their failure to file Simple Traditions’ tax 12 returns and to timely pay taxes for tax years 2019, 2020, 2021, 2022, and the first two quarters of 13 2023. (ECF No. 1 at 18.) Plaintiffs also allege they “seek equitable indemnity for such penalties 14 and interest assessed by the [IRS] which are the direct consequence of Defendant’s breach of the 15 [Agreement], negligence, and gross negligence.” (Id.) Based on these allegations, the Court 16 finds the Agreement “encompasses” all of Plaintiffs’ claims. See Chiron Corp., 207 F.3d at 1130. 17 Defendant has established that a valid agreement exists, which includes a valid and 18 enforceable arbitration clause, and that the Agreement encompasses the dispute at issue. 19 Plaintiffs have not met their “heavy burden of proof” to overcome the “emphatic federal policy in 20 favor of arbitral dispute resolution.” See Fisher, 791 F.2d at 694; Mitsubishi Motors Corp., 473 21 U.S. at 631. Accordingly, Defendant’s motion is GRANTED. As all four of Plaintiffs’ claims 22 are subject to arbitration, Plaintiffs’ Complaint is dismissed with prejudice. See Lewis v. UBS 23 Financial Servs. Inc., 818 F. Supp. 2d 1161, 1169 (N.D. Cal. 2001) (finding that, because all of 24 plaintiff’s claims were subject to arbitration, dismissal with prejudice was appropriate). 25 /// 26 6 Plaintiffs also seem to assert a claim for declaratory relief (see ECF No. 1 at 9–12), as the 27 breach of contract is listed as their second cause of action. However, the Court construes Plaintiffs’ request for declaratory relief not as a claim but rather a prayer for relief (as Plaintiffs 28 have stated in their prayer for relief section) (id. at 19). 1 IV. CONCLUSION 2 Based on the foregoing, the Court GRANTS Defendant’s Motion to Compel Arbitration 3 | (ECF No. 5) and the instant action is DISMISSED with prejudice. The Clerk of the Court is 4 | directed to close the case. 5 IT IS SO ORDERED. 6 | Date: December 2, 2024 7 9 10 TROY L. NUNLEY CHIEF UNITED STATES DISTRICT JUDGE 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 14