Edwards v. Vemma Nutrition et al

Filing 61

ORDER - Vemma's motion to compel arbitration and dismiss (Doc. 18 ) is granted.Plaintiff's claims against Vemma are subject to arbitration, and those claims are dismissed without prejudice. Plaintiff's motion for leave to file sur-reply (Doc. 30 ) is denied in light of the opportunity Plaintiff's counsel was given to address all of the issues in this case during oral argument. Signed by Judge David G Campbell on 01/30/2018. (KAS)

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WO

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IN THE UNITED STATES DISTRICT COURT

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FOR THE DISTRICT OF ARIZONA

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John Edwards,
Plaintiff,

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ORDER

v.

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No. CV-17-02133-PHX-DGC

Vemma Nutrition, et al.,

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Defendants.

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Defendant Vemma Nutrition Company (“Vemma”) has filed a motion to compel

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arbitration and dismiss Plaintiff’s first amended complaint. Doc. 18. The motion is fully

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briefed, and the Court heard oral argument on January 5, 2018. The Court will grant the

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motion.

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I.

Background.

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Vemma sells nutrition and wellness products directly to customers and through a

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network of independent contractors called Affiliates.1 Doc. 18 at 2; Doc. 18-1 at 6 ¶ 7.

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To become an Affiliate, an individual must agree to certain contractual terms and

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conditions. Doc. 18 at 2.

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On December 27, 2007, Plaintiff enrolled as an Affiliate by accepting an online
agreement titled “Vemma Policies and Agreement” (“the Agreement”).

Id.

The

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Affiliates were previously known as “Members.” See Doc. 18 at 2. The 2007
Agreement discussed below refers to “Members” but later documents, such as the 2015
policies and procedures, refers to “Affiliates.”

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Agreement provided that Plaintiff would abide by Vemma’s “marketing plan and policies

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and procedures” that were “incorporated as part of this agreement.” Doc. 18-1 at 6 ¶ 4.

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One such policy was Vemma’s “Cost Effective Dispute Resolution/Waiver of Jury Trial”

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provision (“the Arbitration Provision”), which provides that arbitration is “the sole and

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exclusive procedure for resolution of disputes between the parties.” Id. at 14.

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Plaintiff remained an Affiliate until July 15, 2015, when Vemma terminated him

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due to “repeated violation of Vemma’s policies and procedures.” Doc. 25 at 3; Doc. 25-1

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at 4 ¶ 7(e). Plaintiff subsequently filed this case against Vemma and other defendants,

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alleging copyright infringement, breach of contract, unjust enrichment, and racketeering.

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Doc. 13.

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II.

Legal Standard.

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The Federal Arbitration Act (“FAA”) “provides that arbitration agreements ‘shall

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be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity

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for the revocation of any contract.’”

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F.3d 1087, 1092 (9th Cir. 2009) (quoting 9 U.S.C. § 2). Because arbitration is a matter of

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contract, “a party cannot be required to submit to arbitration any dispute which he has not

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agreed so to submit.”

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U.S. 643, 648 (1986). Thus, “[a] party seeking to compel arbitration has the burden

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under the FAA to show (1) the existence of a valid, written agreement to arbitrate; and, if

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it exists, (2) that the agreement to arbitrate encompasses the dispute at issue.” Ashbey v.

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Archstone Prop. Mgmt., Inc., 785 F.3d 1320, 1323 (9th Cir. 2015). If a valid agreement

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to arbitrate encompasses the dispute at issue, the FAA requires the court “to enforce the

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arbitration agreement in accordance with its terms.” Chiron Corp. v. Ortho Diagnostic

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Sys., Inc., 207 F.3d 1126, 1130 (9th Cir. 2000).

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III.

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Chalk v. T-Mobile USA, Inc., 560

AT&T Techs., Inc. v. Commc’ns Workers of Am., 475

Analysis.
Vemma argues that the Arbitration Provision requires arbitration of any dispute

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relating to any relationship between Vemma and its distributors.

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Plaintiff counters that the Arbitration Provision is unenforceable because he did not

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Doc. 18 at 1, 3.

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assent to its terms and because the provision is unconscionable, both procedurally and

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substantively. Doc. 24 at 1. Even if the Arbitration Provision is enforceable, Plaintiff

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contends, his copyright infringement and breach of contract claims fall outside its scope.

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Id. at 10-15.

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A.

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Vemma argues that Plaintiff agreed to arbitrate his claims when he agreed to

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become an Affiliate in December 2007. Doc. 18 at 5-6. Plaintiff argues that he never

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agreed to the Arbitration Provision. Doc. 24 at 4-6. Plaintiff also argues that the

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provision is procedurally and substantively unconscionable. Id. at 6-10.

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Enforceability of the Arbitration Provision.

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Assent.

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Plaintiff contends that he “was not even aware that he was being signed up as an

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affiliate.” Doc. 24 at 6. He asserts that other individuals enrolled him as an Affiliate

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without his knowledge or authorization. See Doc. 24-1 at 3 ¶¶ 2-3. Plaintiff also argues

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that he “did not see the Policies and Agreement for Affiliates” and thus “could not have

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provided assent to the terms.” Doc. 24 at 6. The Court rejects both arguments.

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When determining whether parties have agreed to arbitrate, courts apply ordinary

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state law principles that govern contract formation.

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F.3d 1089, 1093 (9th Cir. 2014). Both parties agree that Arizona law applies. Doc. 18

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at 5; Doc. 24 at 7-9.

Davis v. Nordstrom, Inc., 755

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To form a valid contract under Arizona law, “there must be an offer, an

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acceptance, consideration, and sufficient specification of terms so that the obligations

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involved can be ascertained.” Savoca Masonry Co., Inc. v. Homes & Son Const. Co.,

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Inc., 542 P.2d 817, 819 (Ariz. 1975). “Thus, a defendant seeking to compel arbitration

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must show that the plaintiff accepted the arbitration agreement.” Escareno v. Kindred

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Nursing Ctrs. W., L.L.C., 366 P.3d 1016, 1019 (Ariz. Ct. App. 2016). An agent can

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accept a contract, including an arbitration provision, on behalf of a principal, id., and

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agency can be established by contract, by facts which raise the implication of agency, by

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ratification, or by estoppel, Daru v. Martin, 363 P.2d 61, 66 (Ariz. 1961) (citing Bristol v.

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Moser, 99 P.2d 706 (Ariz. 1940)). Arizona courts have long recognized that a principal

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ratifies an agent’s unauthorized acceptance of a contract if the principal “has knowledge

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of all the facts surrounding the contract made by the agent” and “accepts the benefits of

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the contract.”

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(Ariz. 1934). Ratification “may be express or implied, and intent may be inferred from

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the failure to repudiate an unauthorized act . . . or from conduct on the part of the

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principal which is inconsistent with any other position than intent to adopt the act.”

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United Bank v. Mesa N. O. Nelson Co., 590 P.2d 1384, 1386 (Ariz. 1979) (quoting

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Thermo Contracting Corp. v. Bank of N.J., 354 A.2d 291 (N.J. 1976)).

Mut. Benefit Health & Accident Ass’n v. Neale, 33 P.2d 604, 608

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In his declaration, Plaintiff states that “[his] agent,” Walter Bratten, enrolled him

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as an Affiliate “without [his] knowledge or permission” on December 27, 2007.

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Doc. 24-1 at 3 ¶ 3. Even if this is true, Plaintiff ratified Bratten’s acceptance of the

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Agreement. First, Plaintiff acknowledges that he “learned that Mr. Bratten had logged

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into Vemma’s member website to sign [him] up as a member.” Id. After learning this

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fact, Plaintiff neither disavowed Bratten’s acts nor terminated his Vemma membership.

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Instead, he actively participated as an Affiliate between 2007 and 2015, which required

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Plaintiff to renew his membership each year. See Doc. 18-1 at 6 ¶ 5. Second, Vemma

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paid Plaintiff his first commission on January 9, 2008, two weeks after his initial

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enrollment as an Affiliate. Doc. 25-1 at 3 ¶ 5. During his eight years as an Affiliate,

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Plaintiff received and cashed at least 45 commission checks from Vemma, and each

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check included endorsement language stating that “I have read, agreed with and am in

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compliance with current Vemma policies and procedures.” Id. at ¶ 6. Lastly, when

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Vemma terminated Plaintiff’s membership in July 2015, Plaintiff emailed Vemma’s

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compliance manager and requested that Vemma “give me back my affiliate spot,” stating

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that he “never disregarded Vemma’s policies” and “[has] always done everything in [his]

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power to enforce all of Vemma’s policies[.]” Id. at 21, 23. Thus, even if Bratten enrolled

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Plaintiff as an Affiliate without his authorization, Plaintiff ratified the enrollment by

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continuing as an Affiliate, accepting financial benefits, and agreeing to abide by

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Vemma’s terms and conditions.

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At oral argument, Plaintiff’s counsel informed the Court that Plaintiff’s

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declaration incorrectly describes his enrollment. According to counsel, Bratten was

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indeed Plaintiff’s agent, but he enrolled Plaintiff as an Affiliate sometime in

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November 2007, not December 2007. See Court’s Livenote Tr. at 23-24 (Jan. 5, 2018).

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Upon learning this, counsel asserted, Plaintiff sent Bratten a letter disavowing his

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registration as an Affiliate. Id. Counsel argued that another individual who was not

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Plaintiff’s

agent

–

Tom

Alkazin

–

enrolled

Plaintiff

as

an

Affiliate

on

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December 27, 2007, without Plaintiff’s authorization. Id. at 25-26, 30. Counsel asserted

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that Plaintiff learned of this December 2007 enrollment when he received an email from

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Vemma approximately two weeks later informing him of his registration. Id. Counsel

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acknowledged that Plaintiff never disavowed this December 2007 enrollment, arguing

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that Plaintiff did not think he was enrolled as an Affiliate who markets and sells

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Vemma’s products, but rather as a doctor who would speak about mangosteen, a fruit

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used in Vemma products. Id. at 24-26, 31. Counsel also stated that Plaintiff did not want

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to disavow his affiliation with Vemma because he and his family personally consumed

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Vemma’s products. Id. at 25. Counsel acknowledged that none of these facts are

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contained in the record, including the disavowal letter Plaintiff allegedly sent to Bratten.

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Id. at 31.

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Even if these new facts are accepted as true, they do not change the Court’s

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decision. Ratification of a contract does not depend on the existence of an actual agency

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relationship at the time the contract is accepted. “‘Ratification is the affirmance by a

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person of a prior act which does not bind him but which was done or professedly done on

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his account,’” and it “recasts the legal relations between the principal and agent as they

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would have been had the agent acted with actual authority.” Fid. & Deposit Co. of Md. v.

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Bondwriter Sw., Inc., 263 P.3d 633, 639 (Ariz. Ct. App. 2011) (quoting the Restatement

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(Second) of Agency § 82 (1958)). Thus, whether Alkazin was Plaintiff’s actual agent is

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irrelevant because Plaintiff clearly manifested assent after Alkazin purported to act on his

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behalf. Plaintiff received notice of Alkazin’s December 2007 registration and never

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disavowed it; he accepted commission checks from Vemma for eight years; and when he

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was terminated as an Affiliate, Plaintiff emailed Vemma and asked to be reinstated,

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avowing that he “never disregarded” Vemma’s policies and procedures.

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at 21, 23.

Doc. 25-1

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The fact that Plaintiff did not see Vemma’s policies and procedures, which include

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the Arbitration Provision, does not mean that he did not agree to the Arbitration

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Provision. Under Arizona law, a contracting party agrees to terms and conditions in an

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extrinsic document if the agreement being executed clearly and unequivocally refers to

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the extrinsic document, the party consents to the incorporation by reference, and the

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terms of the incorporated document are “known or easily available to the contracting

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parties.” United Cal. Bank v. Prudential Ins. Co. of Am., 681 P.2d 390, 420 (Ariz. Ct.

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App. 1983) (quoting 17A C.J.S. Contracts § 299 at 136 (1963)). If a party consents to the

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incorporation by reference, the party “is presumed to know its full purport and meaning.”

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Indus. Comm’n v. Ariz. Power Co., 295 P. 305, 307 (Ariz. 1931). A contracting party,

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therefore, need not see the incorporated document if the document is easily available.

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See Weatherguard Roofing Co. v. D.R. Ward Constr. Co., 152 P.3d 1227, 1230 (Ariz. Ct.

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App. 2007) (concluding that the arbitration clause was incorporated by reference even

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though the extrinsic document was not attached to the contract).

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The Court finds sufficient evidence that Plaintiff knew about or could easily have

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accessed the Arbitration Provision. The Agreement expressly states that Plaintiff has

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“carefully reviewed, understand[s], and agree[s] to abide by [Vemma’s] marketing plan

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and policies and procedures, and acknowledge[s] that they are incorporated as part of this

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agreement[.]” Doc. 18-1 at 6 ¶ 4. This language expressly incorporates by reference

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Vemma’s policies and procedures, which include the Arbitration Provision. And before

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completing enrollment, a PDF copy of Vemma’s policies and procedures popped up on

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the screen before his agent could click “OK.” Doc. 18-1 at 3 ¶ 2. Plaintiff also concedes

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that Vemma’s policies and procedures were available on Vemma’s website’s homepage

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during his enrollment in December 2007 and re-enrollment each year thereafter. Court’s

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Livenote Tr. at 29.

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In sum, the Court finds that Plaintiff assented to the Agreement by ratifying his

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enrollment, and that the Agreement clearly incorporated the Arbitration Provision. This

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is sufficient to subject Plaintiff to the Arbitration Provision under Arizona law. See Pinto

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v.

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DGC, 2017 WL 3172871, at *3 (D. Ariz. July 26, 2017).

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USAA

Ins.

2.

Agency

Inc.

of

Texas

(FN),

No.

CV17-00873-PHX-

Unconscionability.

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Unconscionability is a generally applicable contract defense that may render an

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arbitration agreement unenforceable under the FAA, Doctor’s Assocs., Inc. v.

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Casarotto, 517 U.S. 681, 687 (1996), and it is determined according to the laws of the

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state of contract formation, Chalk, 560 F.3d at 1092. Under Arizona law, the plaintiff

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bears the burden of proving the unenforceability of an arbitration provision, and the

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determination is made by the Court as a matter of law. Maxwell v. Fid. Fin. Servs.,

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Inc., 907 P.2d 51, 56 (Ariz. 1995); see also Tabel v. AutoNation USA Corp., No.

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CV06-02013-PHX-NVW, 2006 WL 3716922, at *2 (D. Ariz. Nov. 13, 2006). The Court

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concludes that the unilateral modification clause is substantively unconscionable.

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a.

Procedural Unconscionability.

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Procedural unconscionability arises from unfairness in the bargaining process. It

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“is concerned with ‘unfair surprise,’ fine print clauses, mistakes or ignorance of

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important facts or other things that mean bargaining did not proceed as it should.”

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Maxwell, 907 P.2d at 57-58.

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Plaintiff contends that the Arbitration Provision is unenforceable because the

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Agreement is an adhesion contract. Doc. 24 at 6. But adhesion contracts are not per se

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unconscionable under Arizona law.

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Ltd., 840 P.2d 1013, 1016 (1992) (holding that adhesion contract is valid and enforceable

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unless it is otherwise unconscionable or beyond the range of reasonable expectations).

See Broemmer v. Abortion Servs. of Phoenix,

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Plaintiff also reasserts his earlier argument that his agent, not he, assented to the

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agreement. Doc. 24 at 9. But an agent’s unauthorized acceptance of a contract does not

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render the contract procedurally unenforceable if the principal subsequently ratifies the

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agreement. United Bank, 590 P.2d at 1386. As noted above, Plaintiff ratified his agent

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or purported agent’s acceptance of the Agreement.

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b.

Substantive Unconscionability.

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Substantive unconscionability is concerned with the relative fairness of the actual

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contract terms. Maxwell, 907 P.2d at 58. “Indicative of substantive unconscionability

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are contract terms so one-sided as to oppress or unfairly surprise an innocent party, an

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overall imbalance in the obligations and rights imposed by the bargain, and significant

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cost-price disparity.” Id.

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Plaintiff argues that the Arbitration Provision is substantively unconscionable

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because the Agreement contains a unilateral modification provision. Doc. 24 at 9-10.

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The Agreement provides that Vemma “may modify or amend its policies and procedures

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and marketing program at any time.” Doc. 18-1 at 6 ¶ 3. Moreover, under the terms of

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the Agreement, Vemma need not notify its Affiliates of modifications to the policies and

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procedures. Vemma instead imposes on Affiliates “a duty to keep current on policy and

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marketing changes by reviewing the current policies and procedures located on

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www.govemma.com on a regular basis to ensure . . . familiarity.”

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unilateral right to modify extends to its Arbitration Provision with Plaintiff, which is

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located in Vemma’s policies and procedures. Id. at 13.

Id.

Vemma’s

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The unilateral modification provision is particularly salient in this case because

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Vemma modified its Arbitration Provision with Plaintiff. When Plaintiff enrolled as an

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Affiliate in December 2007, the Arbitration Provision provided that the parties must

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arbitrate “[i]f a dispute arises relating to any relationship between or among Vemma, its

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officers, employees, distributors or vendors or arising out of any products or services sold

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by Vemma” (“2007 Arbitration Provision”). Doc. 18-1 at 13. The Arbitration Provision

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in effect when Vemma terminated Plaintiff in July 2015 states that the parties must

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arbitrate “[i]f a dispute arises relating to any relationship between or among Vemma, its

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Affiliates, officers, employees, distributors or vendors or arising out of any products or

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services sold by Vemma” (“2015 Arbitration Provision”). Id. at 17 (emphasis added).

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Thus, Vemma unilaterally expanded the Arbitration Provision to encompass disputes

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between Vemma and Plaintiff as an Affiliate.

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The Court concludes that the unilateral modification provision is, in the context of

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the arbitration agreement, substantively unconscionable. It purports to grant Vemma an

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unfettered right to change the terms of arbitration altogether, including requiring Plaintiff

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to arbitrate a dispute he did not originally agree to arbitrate.

Such a modification

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contradicts the fundamental contract principle that “a party cannot be required to submit

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to arbitration any dispute which he has not agreed so to submit.” AT&T Techs., Inc., 475

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U.S. at 648; see also Demasse v. ITT Corp., 984 P.2d 1138, 1144 (Ariz. 1999) (noting the

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“traditional contract law” rule that, once a contract is formed, “a party may no longer

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unilaterally modify the terms” unless there is assent to and consideration for the offer to

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modify); Yeazell v. Copins, 402 P.2d 541, 545 (Ariz. 1965) (“A contract cannot be

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unilaterally modified nor can one party to a contract alter its terms without the assent of

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the other party.”); Angus Med. Co. v. Digital Equip. Corp., 840 P.2d 1024, 1029 (Ariz.

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Ct. App. 1992) (“One party to a written contract cannot unilaterally modify it without the

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assent of the other party.”).

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To remedy a contract with a substantively unconscionable provision, a court under

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Arizona law “may refuse to enforce the contract, or may enforce the remainder of the

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contract without the unconscionable term, or may so limit the application of any

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unconscionable term as to avoid any unconscionable result.” Restatement (Second) of

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Contracts § 208 (1981); see also Maxwell, 907 P.2d at 60 (citing Restatement (Second) of

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Contracts § 208 for the proposition that a court may refuse enforcement of contract

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altogether if the contract contains substantively unconscionable terms). “If it is clear

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from its terms that a contract was intended to be severable, the court can enforce the

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lawful part and ignore the unlawful part.” Olliver/Pilcher Ins., Inc. v. Daniels, 715

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P.2d 1218, 1221 (Ariz. 1986).

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Plaintiff argues that the Court should decline to enforce the entire Arbitration

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Provision because the Agreement contains the unilateral modification clause.

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Doc. 24 at 9-10. The Court does not agree. First, Vemma’s policies and procedures

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include a severability clause, which provides that “only the invalid portion(s) of the

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provision shall be severed and the remaining terms and provisions shall remain in full

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force and effort.” Doc. 18-1 at 14. The Agreement therefore contemplates that any

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unenforceable provision be severed. Furthermore, this is not a case in which multiple

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unconscionable terms “permeated the arbitration provision in such a way as to invalidate

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the entire arbitration agreement.”

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F.Supp.2d 1266, 1290 (D. Ariz. 2007). The unilateral modification provision is the only

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unconscionable provision in the Agreement, and it is not located within the Arbitration

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Provision itself. The Court will sever the Agreement’s unilateral modification provision.2

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3.

See

Cooper v. QC Fin. Servs., Inc., 503

The 2007 Arbitration Provision Governs.

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Severance of the unilateral modification provision does not invalidate the

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Arbitration Provision, and, as noted earlier, there are two different versions of the

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provision at issue here: the 2007 Arbitration Provision, which does not include the term

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“Affiliates,” and the 2015 Arbitration Provision, which does include “Affiliates.”

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Because Vemma did not have power to modify the Arbitration Provision

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unilaterally, the 2015 version would be valid only if it was adopted by mutual consent of

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the parties.

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requires: “(1) an offer to modify the contract, (2) assent to or acceptance of that offer,

In Demasse, the Arizona Supreme Court held that such a change

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2

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At oral argument, the Court raised the question of whether the unilateral
modification provision is unenforceable under Demasse v. ITT Corp., 984 P.2d 1138
(Ariz. 1999). Demasse held that an employer may unilaterally change an at-will
employment contract, but may not so change a contract with a non-at-will employee. Id.
at 1143-46. If Plaintiff falls in the latter category, Vemma would have no power
unilaterally to change the Agreement. The Agreement, however, states that an Affiliate is
“an independent contractor” and “not an employee.” Doc. 18-1 at 6 ¶ 7, 7 ¶ 11. In light
of the conclusion that the modification provision is unconscionable, the Court need not
decide whether Demasse applies to independent contractors.
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and (3) consideration.” 984 P.2d at 1144. Vemma has not shown that Plaintiff assented

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to the addition of the term “Affiliates” to the Arbitration Provision. It is not sufficient

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that Vemma required Plaintiff to remain abreast of changes to the Arbitration Provision

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because “[l]egally adequate notice is more than . . . awareness of or receipt of the newest

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[policy].” Id. at 1146. And the fact that Plaintiff received at least 45 commission checks

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which included endorsement language stating that “I have read, agreed with and am in

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compliance with current Vemma policies and procedures” is likewise inadequate.

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See Doc. 25-1 at 3 ¶ 6. There is no evidence that Plaintiff received or endorsed any of

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these checks after April 1, 2015, when the 2015 Arbitration Provision was in effect.

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Furthermore, Vemma provides no evidence that the 2015 modification was supported by

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consideration.

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Arbitration Provision is not enforceable.

The Court accordingly concludes that the 2015 amendment to the

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The 2007 Arbitration Provision, on the other hand, is binding on Plaintiff. He

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ratified his enrollment as an Affiliate in December 2007 and thereby assented to the

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Agreement, which incorporated the 2007 Arbitration Provision.

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B.

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The 2007 Arbitration Provision provides in relevant part:

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Arbitrability of Claims.

If a dispute arises relating to any relationship between or among Vemma,
its officers, employees, distributors or vendors or arising out of any
products or services sold by Vemma, it is expected that the parties will
attempt, in good faith, to resolve any such dispute in an amicable and
mutually satisfactory way. However, all such disputes shall be governed by
this provision.
***
If differences cannot be resolved by mediation, the Parties agree that in
order to promote to the fullest extent reasonably possible a mutually
amicable resolution of the dispute in a timely, efficient, and cost-effective
manner, they will waive their respective rights to a trial by jury and settle
their dispute by submitting the controversy to arbitration . . . .
Doc. 18-1 at 13.

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1

Vemma argues that Plaintiff is a “distributor” within the meaning this provision,

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and that the Arbitration Provision governs because it covers disputes “relating to any

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relationship between or among Vemma, [and] its . . . distributors[.]” Id.; Doc. 18 at 1, 3.

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Plaintiff does not specifically address the “distributor” issue, but argues that any

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interpretation that would bring his claims within the scope of the Arbitration Provision is

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unreasonable because his claims do not relate to the sale of Vemma products, but instead

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concern services and products Plaintiff developed and sold. Doc. 24 at 13-14.

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Although general state contract law governs the validity of an arbitration clause,

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“the scope of the arbitration clause is governed by federal law.” Tracer Research Corp.

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v. Nat’l Envtl. Servs. Co., 42 F.3d 1292, 1294 (9th Cir. 1994). “[A]rbitration is a matter

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of contract and a party cannot be required to submit to arbitration any dispute which he

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has not agreed so to submit.” United Steelworkers of Am. v. Warrior & Gulf Navigation

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Co., 363 U.S. 574, 582 (1960). Thus, “a court may order arbitration of a particular

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dispute only where the court is satisfied that the parties agreed to arbitrate that dispute.”

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Granite Rock Co. v. Int’l Bhd. Of Teamsters, 561 U.S. 287, 297 (2010).

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The parties have submitted only portions of the Agreement with their briefing, and

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none of them defines the term “distributor.” But other portions of the Agreement provide

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insight into its meaning. Before discussing these provisions, it should be noted that

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the 2007 version of the Agreement referred to Plaintiff as a “Member” (Doc. 18-1

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at 6-8, 12-14), while the 2015 version referred to persons in his position as “Affiliates”

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(Doc. 18-1 at 16-18). Vemma asserts that the name Member was changed to Affiliate

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and that they represent the same position within the Vemma organization. Doc. 18 at 2.

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Plaintiff does not dispute this fact.

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With these terms in mind, the language of the 2007 Agreement and some of

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Plaintiff’s admissions shed light on the meaning of “distributor.” The 2007 Agreement

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contains this provision: “If I am a Member who chooses to enroll other Members, I must

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fulfill the obligation of performing a bona fide supervisory, distributing and selling

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function in the sale or delivery of product to the ultimate consumer[.]” Doc. 18-1 at ¶ 9

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1

(emphasis added). Vemma’s compliance manager submitted a declaration that Plaintiff

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“personally enroll[ed] 20 additional Vemma Affiliates and Customers” (Doc. 25-1 at 3),

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which would bring him within this provision and impose on him the duty of

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“distributing.” The 2007 Agreement also states that “no fees have been or will be

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required from Members for the right to distribute the Company’s products.” Doc. 18-1

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at 7 ¶ 11 (emphasis added). This language suggests that Plaintiff had the right to

7

distribute Vemma products and the responsibility to oversee distribution by the Members

8

below him.

9
10
11

Plaintiff’s amended complaint also suggests that he viewed persons in the position
of a Member or Affiliate as distributors:

15

From its founding in 2004 and continuing until September 2015, Vemma
sold products through its websites and a series of independent distributors.
As a result of selling Vemma products, independent distributors could
potentially earn a share of the revenue from their own product sales as well
as those from a network of distributors that the independent distributor
developed.

16

***

12
13
14

17
18
19
20
21
22
23
24
25
26
27
28

On information and belief, Vemma entered into distribution agreements
with various third parties to act as independent distributors of Vemma’s
products. As part of this agreement, the third party would be deemed a
“Vemma Affiliate” and would stand to earn commissions based off Vemma
products that were sold. As part of these distribution agreements, Vemma
would collect a certain percentage of the revenue received by the Vemma
Affiliate. Vemma further promised that its Vemma Affiliates could
maximize earnings by enrolling others either as affiliates or customers.
Doc. 13 at 4 ¶¶ 14, 16 (emphasis added).
These allegations equate Vemma Affiliates – or, in 2007, Vemma Members – with
distributors. They describe Affiliates as entering into “distribution agreements” to earn
commissions. And other evidence shows that Plaintiff viewed himself as a Vemma
Affiliate. When he was terminated in July 2015, Plaintiff emailed Vemma’s compliance
manager and requested that Vemma “give me back my affiliate spot.” Doc. 25-1 at 21.
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1

He also referred to “my residual affiliate income” and to other doctors who were not

2

“affiliates with your company like I am.” Id. at 23.

3

From the language of the 2007 Agreement, the admission in Plaintiff’s amended

4

complaint, and this evidence, it appears that Members or Affiliates were entitled to

5

distribute Vemma products, Plaintiff was such a person, and Plaintiff is therefore fairly

6

characterized as a “distributor” within the meaning of the Arbitration Provision.

7

But the 2007 Agreement is not uniformly clear. It also states that “the position of

8

Member does not constitute either a sale of a franchise or distributorship[.]” Doc. 18-1

9

at 7 ¶ 11. The Court can find nothing in the materials submitted by the parties that

10

defines “distributorship,” but its use in this phrase would suggest it meant something akin

11

to a franchise.

12

On balance, the Court concludes that the 2007 Agreement is ambiguous as to the

13

meaning of “distributor.”

14

“distributor” includes Members or Affiliates, the Agreement remains unclear.

Although the evidence leans in favor of finding that

15

The Supreme Court has instructed that “where the contract contains an arbitration

16

clause, there is a presumption of arbitrability in the sense that an order to arbitrate the

17

particular grievance should not be denied unless it may be said with positive assurance

18

that the arbitration clause is not susceptible of an interpretation that covers the asserted

19

dispute.” AT&T Techs., Inc., 475 U.S. at 650 (internal quotation marks, brackets, and

20

citation omitted). The Ninth Circuit has explained that this “presumption in favor of

21

arbitrability applies only where the scope of the agreement is ambiguous as to the dispute

22

at hand, and we adhere to the presumption and order arbitration only where the

23

presumption is not rebutted.”

24

F.3d 733, 742 (9th Cir. 2014); see also Mundi v. Union Sec. Life Ins. Co., 555

25

F.3d 1042, 1044-45 (9th Cir. 2009) (“The presumption in favor of arbitration, however,

26

does not apply if contractual language is plain that arbitration of a particular controversy

27

is not within the scope of the arbitration provision.” (quotation marks and citation

28

omitted)).

Goldman, Sachs & Co. v. City of Reno, 747

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1

Because the meaning of “distributor” in the Arbitration Provision is ambiguous,

2

and the Court does not find that the presumption of arbitrability has been rebutted by

3

Plaintiff (for reasons discussed above with respect to his arguments that he never agreed

4

to arbitrate), the Court will apply the presumption in this case and construe “distributor”

5

to include Plaintiff as a Member and Affiliate. It cannot “be said with positive assurance

6

that the arbitration clause is not susceptible of an interpretation that covers” Plaintiff.

7

AT&T Techs., Inc., 475 U.S. at 650.

8

The 2007 Arbitration Provision covers disputes “relating to any relationship

9

between or among Vemma [and] its . . . distributors[.]” Doc. 18-1 at 13 (emphasis

10

added). All of Plaintiffs claims arise from and relate to his relationship with Vemma.

11

Count One alleges that Plaintiff contracted with Vemma to use in his copyrighted

12

materials to promote Vemma’s products, and that Vemma instead reproduced, displayed,

13

advertised, and sold the materials without his authorization. See Doc. 13 at 19-21. Count

14

Two alleges that Vemma vicariously or contributorily infringed Plaintiff’s copyrighted

15

CDs and relies on the same facts as Count One. Id. at 21-22. Count Three alleges that

16

Vemma breached separate speaking contracts Plaintiff had with Vemma, and that Vemma

17

breached a contract to publish and pay Plaintiff royalties for his book, The Mangosteen

18

Revolution – Volume I. Id. at 22-23. Count Four alleges that Vemma asked Plaintiff to

19

speak about its products with international doctors and government officials in foreign

20

countries, and, as result of those speaking engagements, Vemma was unjustly enriched

21

by increased sales of its products. Id. at 24. Count Five asserts a racketeering claim

22

under 18 U.S.C. §§ 1961-62, alleging that Vemma knowingly participating in the

23

unauthorized copying and distribution of his copyrighted CDs. Id. at 24-25.

24

Each of these claims arise out of Plaintiff’s relationship with Vemma – either

25

Vemma’s contractual enlistment of Plaintiff to speak and use his copyrighted materials to

26

promote Vemma products, or alleged separate contracts regarding speaking and use of his

27

materials.

28

Provision and his claims arise out of a relationship with Vemma, his claims are subject to

Because Plaintiff is a distributor within the meaning of the Arbitration

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1

arbitration. Doc. 18-1 at 13 (“If a dispute arises relating to any relationship between or

2

among Vemma, its officers, employees, distributors, or vendors,” the parties agree to

3

arbitration). This holding comports with the federal policy favoring arbitration when the

4

scope of the arbitration agreement is ambiguous. Goldman, Sachs & Co., 747 F.3d

5

at 741-42.3

6

IT IS ORDERED:

7

1.

Vemma’s motion to compel arbitration and dismiss (Doc. 18) is granted.

8

Plaintiff’s claims against Vemma are subject to arbitration, and those

9

claims are dismissed without prejudice.

10

2.

Plaintiff’s motion for leave to file sur-reply (Doc. 30) is denied in light of

11

the opportunity Plaintiff’s counsel was given to address all of the issues in

12

this case during oral argument.

13

Dated this 30th day of January, 2018.

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18
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21
22
23
24
25
26
3

27
28

In light of this conclusion, the Court need not decide whether Plaintiff’s claims
fall within other portions of 2007 Arbitration Provision, such as whether they constitute
“a dispute . . . arising out of any products or services sold by Vemma.” Doc. 18-1 at 13.

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