Ellison Framing, Inc. v. Zurich American Insurance Company

Filing 14

ORDER signed by Judge Lawrence K. Karlton on 12/10/13: Cases 2:13-cv-01761 JAM AC and 2:11-cv-00122 LKK DAD are CONSOLIDATED. All future filings are to be made only in case No. 2:11-cv-00122 LKK DAD. All hearing dates are VACATED. The Clerk of the Court is DIRECTED to administratively close case No. 2:13-cv-01761-JAM-AC. (Kaminski, H)

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UNITED STATES DISTRICT COURT

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EASTERN DISTRICT OF CALIFORNIA

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ELLISON FRAMING, INC.,

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Plaintiff,

No. CIV. S-11-0122 LKK/DAD
No. CIV. S-13-1761 JAM/AC
ORDER

v.
ZURICH AMERICAN INSURANCE
COMPANY,

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Defendant.
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Plaintiff Ellison Framing, Inc. simultaneously filed a new

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complaint in this action, without leave of court and in apparent

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violation of a stay order, as well as in a new case, which was

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assigned to the Hon. John A. Mendez. Defendant Zurich American

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Insurance Company now moves to (i) consolidate the two cases in

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this court, (ii) strike the new complaint, and (iii) enforce the

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standing arbitration order.

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Zurich’s motions came on for hearing on December 9, 2013.

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Having considered the matter, the motions will be granted, for

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the reasons set forth below.

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I.

Zurich moves to consolidate the action pending before Judge

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MOTION TO CONSOLIDATE

Mendez with the existing action in this court.

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A. Background re: Motion to Consolidate
1. 2011 Complaint

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On January 6, 2011, Ellison commenced the instant action by

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filing a complaint in Sacramento County Superior Court, case

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no. 34-2011-00094691 (“2011 Complaint”). One week later, Zurich

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removed the action to this court.

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The 2011 Complaint concerns certain disputes over a Workers

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Compensation insurance policy that Ellison obtained from Zurich.

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On November 15, 2010, Ellison had filed a complaint with the

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California Department of Insurance regarding $195,000.00 in “cost

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containment” fees that it claimed Zurich had improperly charged

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it. (Complaint ¶ 5, ECF No. 1.) Approximately one month later,

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Zurich made an arbitration demand, alleging that Ellison owed it

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$569,640.97 in unpaid deductibles, pursuant to “deductible

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agreements”1 between the parties; relevant clauses in these

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According to an exhibit filed by Zurich: “A workers’
compensation large deductible agreement . . . is an agreement in
which an insurer is obligated to pay workers’ compensation
insurance benefits to claimants . . . but as between the insurer
and the insured, the insured agrees to bear the risk of loss
within a specified amount per claim or per occurrence. Under an
LDA, the insured agrees to reimburse or otherwise pay the insurer
for claims payments made by the insurer, typically up to an
aggregate cap. The insured may also agree to reimburse or
otherwise pay the insurer for loss adjustment expenses and/or
other claims or policy related expenses. The amounts that the
insured agrees to reimburse or pay are substantial, often
equaling 100% of the amounts paid by the insurer to satisfy
workers’ compensation insurance claims.” (Notice of Hearing and
Order to Show Cause re Issuance of Orders 4-5, Decl. Dow Exh B.,
ECF No. 26-2.)
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agreements identified Schaumburg, Illinois as the arbitral venue

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and specified that the arbitration would be governed by New York

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state law. After considering Zurich’s arbitration demand, the

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American Arbitration Association (“AAA”) determined that the

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arbitration would be conducted in Schaumburg. In the 2011

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Complaint, Ellison sought compensatory damages of $195,000.00,

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and declaratory and injunctive relief regarding the purported

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unconscionability of the arbitration provision.

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Upon removal to this court, Zurich filed a motion to stay

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the action and compel arbitration pursuant to the Federal

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Arbitration Act, 9 U.S.C. § 1 et seq. (“FAA”). (ECF No. 5.) After

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hearing, the court granted Zurich’s motion. See Ellison Framing,

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Inc. v. Zurich Am. Ins. Co., 805 F. Supp. 2d 1006 (E.D. Cal.

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2011) (“Arbitration Order”). The Arbitration Order held in

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pertinent part as follows:

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Ellison was unable to demonstrate that the venue clause

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in the arbitration provision was unconscionable. Zurich

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introduced unrebutted evidence that the parties actively

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negotiated the terms of the deductible agreements,

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thereby demonstrating both that Ellison had bargaining

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power and that these agreements were not contracts of

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adhesion. The agreements therefore lacked procedural

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unconscionability. Ellison also failed to introduce

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evidence of the financial infeasibility of arbitrating in

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Illinois. Finally, the court determined that a challenge

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to the venue provision (as opposed to the arbitration

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clause as a whole) was properly presented to the

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arbitrator. Ellison Framing, 805 F. Supp. 2d at 1011.
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The Illinois arbitral venue was proper. Under Ninth

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Circuit precedent interpreting the FAA, an arbitrator’s

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venue decision must be upheld unless it can be shown that

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“there was partiality on the part of an arbitrator, or

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that the arbitrator exceeded his authority, or that the

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award was rendered in ‘manifest disregard of the law.’”

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Aerojet-General Corp. v. Am. Arbitration Ass’n, 478 F.2d

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248, 252 (9th Cir. 1973) (internal citations omitted).

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Ellison failed to make the necessary showing. Ellison

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Framing, 805 F. Supp. 2d at 1010.

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Plaintiff’s claim for $195,000.00 in improper “cost

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containment” fees fell within the scope of the

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arbitration agreement. Ellison Framing, 805 F. Supp. 2d

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at 1012.

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By citing California law in their papers, the parties

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waived the provision of the deductible agreements

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specifying a New York choice of law. Ellison Framing, 805

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F. Supp. 2d at 1011 n. 1.

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Ultimately, the court stayed the instant action, compelled

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the parties to arbitrate their dispute in Schaumburg, Illinois,

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and directed Ellison to inform the court once the arbitration

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concluded. The matter was then administratively closed. (Id.)

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2. 2013 Complaints

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Ellison never provided the court with notice regarding the

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status of the arbitration. Instead, on August 23, 2013, Ellison

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filed two new, identical complaints (“2013 Complaints”) in the

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Eastern District of California against Zurich; one with this

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court, under the previous case number (ECF No. 24); the other

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with Judge John A. Mendez, case no. 2:13-cv-01761-JAM-AC.

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The 2013 Complaints allege, inter alia, that:

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The arbitration in Illinois was stayed “pursuant to State

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of California regulatory action against Zurich, among

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other issues, with regard to the form under which the

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out-of-state arbitration provision was set forth.” (2013

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Complaints 2-3.)

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In July 2013, the State of California and Zurich entered

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into a Settlement Agreement to resolve the regulatory

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action. (Id. 3.)

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Under the Settlement Agreement, Zurich waived its right

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to enforce the deductible agreements pursuant to which it

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sought $569,640.97 in unpaid deductibles from Ellison.

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(Id. 3.)

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In the 2013 Complaints, Ellison sought declaratory and injunctive

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relief regarding Zurich’s waiver of its contractual rights under

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the deductible agreements, and monetary damages of $500,000.00

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for “bad faith.” (Id. 3, 5.)

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On September 5, 2013, Zurich filed a Notice of Related Cases

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in both courts, as required by Local Rule 123. (ECF No. 25.)

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Eight days later, Judge Mendez issued an Order to Show Cause why

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the action in his court should not be dismissed as duplicative of

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the instant action. (No. 2:13-cv-01761-JAM-AC, ECF No. 6.) In its

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response, Ellison claimed that the 2013 Complaint it had filed

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before Judge Mendez arose from conduct different from that

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alleged in the 2011 Complaint. (No. 2:13-cv-01761-JAM-AC, ECF

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No. 7.) By minute order dated September 20, 2013, Judge Mendez
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determined that, good cause having been shown, he would not

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dismiss the action pending in his court. (No. 2:13-cv-01761-JAM-

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AC, ECF No. 8.) But Ellison’s response to the OSC failed to

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address the central issue raised by Zurich’s motion to

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consolidate: the identity of the two 2013 Complaints. Nowhere in

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its response (and, in fact, nowhere in its oppositions to the

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instant motions) did Ellison address the fact that it has filed

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two identical complaints in two different actions in this

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judicial district.

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Currently pending before Judge Mendez are Zurich’s motion to

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strike and dismiss the 2013 Complaints in that court as

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duplicative of the 2013 Complaints in this court, or

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alternatively, for an order compelling the parties to arbitrate

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their dispute. (No. 2:13-cv-01761-JAM-AC, ECF No. 10.) That

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motion is set for hearing on January 22, 2014.

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B. Standard re: Motion to Consolidate
Federal Rule of Civil Procedure 42(a) provides as follows:

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(a) Consolidation. If actions before the
court involve a common question of law or
fact, the court may:
(1) join for hearing or trial
matters at issue in the actions;

any

or

all

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(2) consolidate the actions; or
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(3)
issue
any
other
orders
unnecessary cost or delay.

to

avoid

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Under this rule, the district court has broad discretion to

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consolidate cases pending in the judicial district, even if one

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or more of those cases is pending before a different judge.

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Investors Research Co. v. United States Dist. Court for Central

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Dist. of California, 877 F.2d 777 (9th Cir. 1989).

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The standards governing a Rule 42(a) motion are as follows:
The critical question for the district court
in the final analysis [i]s whether the
specific risks of prejudice and possible
confusion [a]re overborne by the risk of
inconsistent adjudications of common factual
and legal issues, the burden on parties,
witnesses and available judicial resources
posed by multiple lawsuits, the length of
time required to conclude multiple suits as
against a single one, and the relative
expense to all concerned of the single-trial,
multiple-trial alternatives.

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Arnold v. E. Air Lines, Inc., 681 F.2d 186, 193 (4th Cir.

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1982) (cited with approval for this point by 9A Charles Alan

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Wright & Arthur R. Miller, Federal Practice and Procedure: Civil

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§ 2383 (3d. ed.

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economy must yield to a paramount concern for a fair and

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impartial trial.” Johnson v. Celotex Corp., 899 F.2d 1281, 1285

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(2d Cir. 1990), cert. denied, 498 U.S. 920 (1990).

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2012)). “Considerations of convenience and

The moving party bears the burden of demonstrating that

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consolidation is appropriate. In re Consol. Parlodel Litig., 182

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F.R.D. 441, 444 (D.N.J. 1998); Internet Law Library, Inc. v.

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Southridge Capital Mgmt., LLC, 208 F.R.D. 59, 61 (S.D.N.Y. 2002).

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C. Analysis re: Motion to Consolidate
Every factor to be considered in the Rule 42(a) analysis

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weighs in favor of consolidation. The 2013 Complaints are

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identical, and therefore present identical questions of law and

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fact. While the 2013 Complaints and the 2011 Complaint seek

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different remedies, the declaratory and injunctive relief sought
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in the 2013 Complaints directly implicates this court’s

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Arbitration Order - Ellison is essentially seeking to vacate this

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court’s referral of this matter to arbitration, in favor of a

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judicial determination that Zurich waived its right to enforce

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the deductible agreements. If such a determination is to be made,

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it should be made by this court; the alternative would be to

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leave open the possibility of either a judicial or arbitral

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determination regarding enforceability in this action (whether in

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this court, or in arbitration ordered by this court), and an

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inconsistent judicial determination regarding enforceability in

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another action. Parallel arbitral and judicial proceedings would

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increase the burdens on the parties and witnesses, extend the

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length of time required to resolve the disputes herein, and

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invariably drive up the parties’ legal expenses. Finally, there

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is nothing before the court to suggest that Ellison’s right to

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fair and impartial proceedings would be impaired by

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consolidation.

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Ellison’s principal argument against consolidation is that

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Judge Mendez, by vacating the OSC, determined that the 2013

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Complaint did not share common questions of law or fact with the

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2011 Complaint. This argument is unavailing, as there is nothing

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before the court to suggest that Judge Mendez made such a

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determination. The record, consisting of a minute order, only

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shows that he refused to “dismiss this action as duplicative.”

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While Ellison’s response to the OSC elaborated on the differences

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between the 2011 Complaint and the 2013 Complaint, that filing

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neither disclosed to Judge Mendez that Ellison had filed an

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identical 2013 Complaint before this court, nor did it provide
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any explanation for the duplicative filing. In light of these

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omissions, one cannot read Judge Mendez’s minute order as making

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any substantive determination as to the identity or non-identity

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of the two actions.

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In light of the foregoing, consolidation in this court
appears warranted.

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II.

MOTION TO STRIKE

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Zurich moves to strike the 2013 Complaint on the grounds

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that, by filing this complaint, Ellison both (i) violated the

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stay under the Arbitration Order and (ii) effectively filed an

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amended complaint, in violation of Rule 15(a)(2).2

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Striking the 2013 Complaint seems appropriate. It is

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axiomatic that an action may have only one operative complaint.

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See, generally, 6 Charles Alan Wright & Arthur R. Miller, Federal

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Practice and Procedure: Civil § 1476 (3d. ed.

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an Amended Pleading”). And, as Zurich points out, Ellison

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violated the stay order by filing the 2013 Complaint. The proper

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course of action would have been for Ellison to notify the court

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as to the status of the arbitration; if Ellison contended that

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changed circumstances (specifically, the Settlement Agreement)

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meant that the parties’ dispute was no longer arbitrable or that

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new issues were presented, it could have sought leave from the

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court to lift the stay.

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2013) (“Effect of

Accordingly, the 2013 Complaint will be stricken in its
entirety.
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Under Rule 15(a)(2), once the deadline for amending a pleading
as a matter of course has expired, “a party may amend its
pleading only with the opposing party’s written consent or the
court’s leave.”
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III. MOTION TO ENFORCE ARBITRATION ORDER
Finally, Zurich moves the court to enforce its Arbitration

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Order and direct the parties to continue to arbitrate their

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claims and defenses.

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A. Background re: Motion to Enforce Arbitration Order
In support of this motion, Zurich has provided the

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declaration of its employee, one Nancy Dow. (Decl. Dow, ECF

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No. 26-2). Ellison provides no evidence of its own in opposition,

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nor has it otherwise objected to Dow’s declaration. The facts set

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forth herein are therefore taken from Dow’s declaration and the

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exhibits that it introduces.

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On February 27, 2012, the California Department of Insurance

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initiated administrative proceedings against Zurich before the

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California Insurance Commissioner, case no. DISP-2011-00811.

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(Decl. Dow ¶ 4 & Exh. B.) The core allegation therein is that

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Zurich issued deductible agreements (the contracts that were the

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subject of the Arbitration Order) without first filing these

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agreements with the Insurance Commissioner for review.

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On July 11, 2013, Zurich and the California Department of

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Insurance entered into the Settlement Agreement, a copy of which

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is attached to the Dow Declaration. The Agreement has several

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provisions that arguably conflict with one another, and

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consequently, are at issue in the instant motion. These are

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reproduced below.

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Paragraph 13 provides in pertinent part:
Zurich agrees that it will waive enforcement
of its contractual rights under Deductible

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Agreements used prior to the Start Date3 with
California Employers that require: (i) that
arbitration
of
disputes
take
place
in
Schaumburg,
Illinois,
and
(ii) the
application of New York law to such disputes.
Arbitration will take place in California and
California law and venue will apply in the
arbitration of such disputes (without giving
effect to California conflicts of laws
principles) unless the parties agree to the
application of another law or venue. The
foregoing waiver does not apply to any
dispute involving a California Employer which
(i) has
been
resolved
by
a
settlement
agreement signed as of the Start Date, (ii) a
trier of fact in a trial or evidentiary
hearing (in the case of arbitration) has
rendered his or her finding as of the Start
Date,
or
(iii) was
in
litigation
or
arbitration that is final as of the Start
Date. (Decl. Dowd ¶ 5 & Exh. C.)

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Paragraph 14 provides in pertinent part:

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Zurich agrees that, for matters involving a
Current
Dispute . . .
it
will
grant
California Employers the one-time option
either to adhere to the binding arbitration
provisions in their Deductible Agreements (in
addition
to
the
waivers
set
forth
in
paragraph
13)
or
to
litigate
disputes
otherwise falling within the scope of such
binding
arbitration
provisions
in
a
California
civil
proceeding,
without
prejudice to any party’s right to commence or
remove such proceeding in or to Federal court
in California. As used in this paragraph 14,
a Current Dispute includes any dispute or
claim for which no final decision has been
issued or settlement agreement signed by the

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The Settlement Agreement defines “Start Date” as “the later of
(1) the date that sixty (60) days after the Effective Date and
(2) the date the Deductible Agreement and Large Deductible
Endorsement forms . . . are deemed approved for use in California
after filing with the Department of Insurance . . . .”
“Effective Date,” in turn, is defined as “the date the Settlement
becomes effective pursuant to the Insurance Commissioner’s order
approving and adopting this Settlement Agreement.”
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parties prior to the Cutoff Date4
which one of the following applies:

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and

to

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. . .

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(2) Any dispute or claim for which a written
arbitration demand has been made prior to the
Cutoff Date, and no arbitration has been
commenced; or

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(3) Any dispute or claim which is subject of
a pending arbitration as of the Cutoff Date.
(Id.)

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Paragraph 19 provides in pertinent part:
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[S]ubject to paragraphs 13 and 14, the
Department of Insurance will not require
Zurich to waive any Deductible Agreement
terms.

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Paragraph 23 provides:

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Except for the express waiver by Zurich set
forth in paragraph 13 and one-time option
granted by Zurich in paragraph 14, nothing in
this Settlement Agreement or any of its terms
and conditions shall alter the contractual
terms
of
any
Zurich
insurance
policy,
Deductible Agreement or other agreement.

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Finally, paragraph 25 provides in pertinent part:

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This Settlement Agreement is not intended to
and shall not confer any rights upon any
persons or entities besides the Department of
Insurance and Zurich. (Id.)

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On August 6, 2013, Zurich’s counsel sent Ellison’s counsel

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an email offering to “either (a) proceed with the pending

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arbitration before [AAA], with the understanding that the venue

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would be moved to California upon Ellison’s request, or

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(b) return to . . . the Eastern District of California and

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The Settlement Agreement defines “Cutoff Date” as May 1, 2013.
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request that all of the parties’ disputes proceed before Judge

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Karlton.” (Decl. Dow ¶ 4 & Exh. D.) The email gave Ellison an

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August 13, 2013 deadline to decide. (Id.) On August 13, Ellison’s

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counsel responded, contending that neither option was acceptable

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as, under paragraph 13, supra, Zurich had waived enforcement of

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its contractual rights under the deductible agreements, except as

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to disputes resolved by settlement, a finding by a trier of fact,

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or through already-concluded litigation or arbitration. (Id.) On

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August 14, Zurich’s counsel replied, maintaining that Zurich had

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not waived its right to collect the amounts due by Ellison, and

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extending Ellison’s deadline to respond to its offer by one week.

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(Id.) That same day, Ellison’s counsel replied, reiterating his

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position, and contending that Zurich was not acting in good

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faith. (Id.) On August 16, Zurich’s counsel, responded,

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reiterating her position. (Id.) On August 24, Ellison’s counsel

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filed the two 2013 Complaints in this district.
B. Standard re: Motion to Enforce Arbitration Order

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Section 2 of the FAA provides that contractual arbitration
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clauses are “valid, irrevocable, and enforceable, save upon such
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grounds as exist at law or in equity for the revocation of any
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contract.” 9 U.S.C. § 2. Section 4 of the FAA permits a “party
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aggrieved by the alleged failure, neglect, or refusal of another
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to arbitrate under a written agreement for arbitration [to]
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petition any United States district court . . . for an order
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directing that . . . arbitration proceed in the manner provided
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for in [the arbitration] agreement.” 9 U.S.C. § 4. If the court
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is satisfied “that the making of the arbitration agreement or the
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failure to comply with the agreement is not in issue, the court
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shall make an order directing the parties to proceed to

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arbitration in accordance with the terms of the agreement.” Id.

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A district court’s role under the FAA is to determine

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“(1) whether a valid agreement to arbitrate exists, and, if it

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does, (2) whether the agreement encompasses the dispute at

6

issue.” Kilgore v. KeyBank, Nat. Ass’n, 718 F.3d 1052, 1058 (9th

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Cir. 2013) (en banc) (quoting Chiron Corp. v. Ortho Diagnostic

8

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

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requirements are met, the FAA mandates the district court to

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direct the parties to arbitration. Id.

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The Supreme Court has repeatedly held that “attacks on the

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validity of an entire contract, as distinct from attacks aimed at

13

the arbitration clause, are within the arbitrator’s ken.” Preston

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v. Ferrer, 552 U.S. 346, 353 (2008). Accord Prima Paint Corp. v.

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Flood & Conklin Mfg Co., 388 U.S. 395, 404 (1967) (“[W]ith

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respect to a matter within the jurisdiction of the federal courts

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save for the existence of an arbitration clause, the federal

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court is instructed to order arbitration to proceed once it is

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satisfied that ‘the making of the agreement for arbitration or

20

the failure to comply (with the arbitration agreement) is not in

21

issue.’”) (quoting 9 U.S.C. § 4); Buckeye Check Cashing, Inc. v.

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Cardegna, 546 U.S. 440, 445-6 (2006) (“[U]nless the challenge is

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to the arbitration clause itself, the issue of the contract’s

24

validity is considered by the arbitrator in the first

25

instance.”).

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C. Analysis re: Motion to Enforce Arbitration Order
The parties’ dispute turns on whether the deductible

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agreements are now unenforceable, given the terms of the

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Settlement Agreement. In advancing its argument for

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unenforceability, Ellison attacks the validity of the contract as

6

a whole, rather than the validity of the arbitration clause. It

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is well-settled that once a matter has been deemed subject to

8

arbitration, the validity of the underlying contract is a

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question for the arbitrator, rather than for the court. Preston,

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552 U.S. at 353.
Ellison does not present any sensible argument in opposition

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to this point. Its sole citation of substance, to Orion Pictures

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Corp. v. Writers Guild of Am., 946 F.2d 722 (9th Cir. 1991), is

14

inapt. Orion stands for the proposition that “[a] district court

15

may resolve questions about the jurisdiction of an arbitrator de

16

novo pursuant to the Declaratory Judgment Act, and may do so even

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after the arbitrator has asserted jurisdiction over the dispute,”

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so long as the party seeking a judicial determination was not the

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one that invoked arbitration in the first place. Id. at 725. But

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there is no question about the arbitrability of this matter; that

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question was resolved by the court’s 2011 Arbitration Order.

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Ellison’s present challenge is to the validity of the deductible

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agreements, a question that is unequivocally for the arbitrator –

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unless, pursuant to the Settlement Agreement, Ellison had opted

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to proceed in this court.

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Zurich twice presented Ellison with the option to elect a

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judicial forum; Ellison declined to elect the option, and instead

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appears to have forum-shopped for a new judge. In light of
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Ellison’s conduct, this court’s previous order compelling

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arbitration, and the numerous Supreme Court cases holding that

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the validity of the contract of whole is a matter for the

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arbitrator, it appears that this matter must be arbitrated.

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One further matter requires the court’s attention. On

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August 6, 2013, Zurich’s counsel sent Ellison’s counsel an email

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offering to “either (a) proceed with the pending arbitration

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before [AAA], with the understanding that the venue would be

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moved to California upon Ellison’s request, or (b) return

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to . . . the Eastern District of California and request that all

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of the parties’ disputes proceed before Judge Karlton.” (Decl.

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Dow ¶ 4 & Exh. D.) Contrary to Zurich’s counsel understanding,

13

the Settlement Agreement does not appear to require that Ellison

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request a California arbitral forum; instead, it provides that

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“[a]rbitration will take place in California and California law

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and venue will apply in the arbitration of such disputes (without

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giving effect to California conflicts of laws principles) unless

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the parties agree to the application of another law or venue.”

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(Settlement Agreement ¶ 13.) Accordingly, unless they agree

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otherwise, the parties will arbitrate this matter in California,

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under California law.

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IV.

CONCLUSION

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The court hereby orders as follows:

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[1] Ellison Framing, Inc. v. Zurich Am. Ins. Co., No. 2:13-

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cv-01761-JAM-AC, and Ellison Framing, Inc. v. Zurich Am.

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Ins. Co., No. 2:11-cv-00122-LKK-DAD are CONSOLIDATED in this

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court. All future filings are to be made only in case

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No. 2:11-cv-00122-LKK-DAD.

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[2] All hearing dates in case No. 2:13-cv-01761-JAM-AC are

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VACATED.

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[3] The Clerk of the Court is DIRECTED to administratively

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close case No. 2:13-cv-01761-JAM-AC.

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[4] The complaint filed at ECF No. 24 is STRICKEN in its

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entirety.

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[5] The parties are DIRECTED to resume arbitration of their

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dispute, in California and under California law (without

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giving effect to California conflicts of laws principles)

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unless the parties mutually agree to an alternate venue or

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choice of law.

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[6] The stay and administrative closure previously ordered

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herein remain in effect. Plaintiff is DIRECTED to inform the

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court within fourteen (14) days of the completion of

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arbitration.

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IT IS SO ORDERED.

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DATED:

December 10, 2013.

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