Levi Strauss & Co., v. Aqua Dynamics Systems, Inc.

Filing 37

ORDER DENYING 30 MOTION TO DISMISS FOR LACK OF SUBJECT MATTER JURISDICTION, OR IN THE ALTERNATIVE, TO DISMISS OR STAY PENDING ARBITRATION - Unless the parties agree otherwise, they shall have 60 days from the date of this Order to conduct discov ery on the non-signatory standing issue, and Aqua shall file any motion to compel arbitration no more than 15 days thereafter. Case Management Statement due by 8/30/2016. Case Management Conference set for 9/6/2016 02:00 PM in Courtroom 2, 17th Floor, San Francisco. Signed by Judge William H. Orrick on 04/06/2016. (jmdS, COURT STAFF) (Filed on 4/6/2016)

1
2
3
4

UNITED STATES DISTRICT COURT

5

NORTHERN DISTRICT OF CALIFORNIA

6
7

LEVI STRAUSS & CO.,,

Case No. 15-cv-04718-WHO

Plaintiff,
8
v.
9
10

AQUA DYNAMICS SYSTEMS, INC.,
Defendant.

Re: Dkt. No. 30

United States District Court
Northern District of California

11
12
13

ORDER DENYING MOTION TO
DISMISS FOR LACK OF SUBJECT
MATTER JURISDICTION, OR IN THE
ALTERNATIVE, TO DISMISS OR
STAY PENDING ARBITRATION

INTRODUCTION
This is a declaratory relief action arising from a contract dispute between plaintiff Levi

14

Strauss & Co. (“Levi” or “LS&Co.”) and defendant Aqua Dynamics Systems, Inc. (“Aqua”).

15

Aqua recently initiated an arbitration against Levi for alleged breach of a license agreement that

16

requires Levi to pay royalties to Aqua’s alleged predecessor-in-interest for the use of certain

17

processes relating to the colorization of fabrics and garments. Levi responded by filing this

18

lawsuit, seeking declaratory judgment that (1) Aqua, as a nonsignatory to the license agreement,

19

lacks standing to enforce its arbitration provision; (2) Aqua waived its rights, if any, to enforce the

20

arbitration provision; and (3) Levi has not breached the license agreement. Aqua moves to

21

dismiss for lack of subject matter jurisdiction. In the alternative, it asks that the case be dismissed

22

or stayed in light of the pending arbitration.

23

I find that federal question jurisdiction exists and, accordingly, DENY Aqua’s motion to

24

dismiss for lack of subject matter jurisdiction. I also DENY Aqua’s motion to dismiss or stay the

25

case pending arbitration. While Levi’s waiver argument is for the arbitrators to decide, its

26

nonsignatory standing argument is properly resolved in this Court. Accordingly, this action will

27

proceed as set out at the conclusion of this Order.

28

BACKGROUND

1
2

In 1993, Aqua’s alleged predecessor in interest, Earth Aire Corporation (“Earth Aire” or

3

“EAC”), Eric Wasinger, and Levi entered a written license agreement. First Amended Complaint

4

¶ 16 (“FAC”) (Dkt. No. 22); see also FAC Ex. B (the “Agreement” or “License Agreement”). The

5

Agreement granted Levi the right to use certain processes relating to the colorization of fabrics

6

and garments using ozone. FAC ¶ 16. In exchange, Levi agreed to pay royalties to Earth Aire.

7

Id. The Agreement refers to the licensed processes as “Licensed Ozone Processes” and identifies

8

two categories of such processes: (1) Licensed Ozone Processes “covered by a valid and

9

enforceable patent;” and (2) Licensed Ozone Processes “not covered by a valid and enforceable
patent.” Agreement ¶¶ 10.1.1, 10.1.2. I refer to these two categories as “Covered Processes” and

11
United States District Court
Northern District of California

10

“Uncovered Processes,” respectively, in this Order.

12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

The Agreement provides that it “will continue in effect and royalties will be paid” during
the following time periods for Covered versus Uncovered Processes:
10.1.1 For the use of any Licensed Ozone Process which is covered
by a valid and enforceable patent, during the life of the patent as to
product produced by the process claimed by that patent, but in no
event for more than seventeen (17) years after the end of the
Development Period.
10.1.2 For the use of any Licensed Ozone Process not covered by
a valid and enforceable patent, for seven (7) years after the end of
the Development Project. LS&CO may freely use the affected
Licensed Ozone Process after the expiration of this Agreement as to
it.
Agreement ¶¶ 10.1.1, 10.1.2 (emphasis added). The parties do not dispute that both the
“Development Period” and the “Development Project” ended on December 14, 1994, at which
point the Agreement became effective, and that the Agreement terminated on December 14, 2011.
See Oppo. at 4 (Dkt. No. 33); FAC Ex. G. Using a start date of December 14, 1994, the
Agreement required Levi to pay royalties on the Uncovered Processes through December 14,
2001, and on the Covered Processes through the termination of the Agreement on December 14,
2011. See Oppo. at 4 (noting same).
The Agreement includes an arbitration provision stating that
all disputes, differences of opinion, or controversies which may arise
between the parties hereto out of or in relation to or in connection
2

with this Agreement or the breach thereof, shall be finally settled by
arbitration in Chicago, Illinois . . . by a panel of three (3) arbitrators
in accordance with the Rules of the American Arbitration
Association.

1
2
3

Agreement ¶ 15.2. A subsequent amendment to the arbitration provision states as follows:
AMENDMENT TO ARBITRATION AGREEMENT

4

[...]

5

WHEREAS, Aqua alleges that it is the successor in interest to
[EAC]; and

6
7

WHEREAS, EAC and LS&Co. are parties to [the Agreement]; and

8

WHEREAS, the Agreement contains certain provisions relating to
Arbitration; and

9

WHEREAS, the Parties,1 by their attorneys, wish to vary certain
terms of the Agreement relating to only the place at which
arbitration may take place and the organization which shall conduct
the Arbitration;

10

United States District Court
Northern District of California

11
12

THEREFORE, IT IS AGREED AS FOLLOWS:

13

1. This Agreement does not constitute a waiver, abandonment or
modification of any claim, defense or counterclaim of either Party or
to LS&Co.’s right to assert that this case is not subject to arbitration,
but, to the contrary, effects only the provision of paragraph 15.2
referenced below.

14
15
16

2. The Parties agree that paragraph 15.2 of the Agreement shall be
modified only to the extent that the place of arbitration, if any shall
take place, shall be San Francisco, California, and such arbitration
shall be conducted before a JAMS panel of three neutral arbitrators
and pursuant to “JAMS Comprehensive Arbitration Rules &
Procedures,” effective July 1, 2014.

17
18
19

3. Except as set forth in paragraph 2 above, the Agreement remains
unchanged and unmodified.

20
21

FAC Ex. C.

22

The Agreement’s severability provision states that in relevant part that “[i]f any part of this

23

Agreement shall be declared invalid or unenforceable by a court of competent jurisdiction, it shall

24

not affect the validity of the balance of this Agreement.” Agreement ¶ 16.7.

25

On February 4, 2015, Aqua filed an action against Levi in the United States District Court

26
27
1

28

The amendment to the arbitration provision was executed on August 17, 2015 by Aqua and Levi.
FAC Ex. C. The amendment defines the “Parties” as Aqua and Levi. Id.
3

1

for the Southern District of New York for breach of contract and patent infringement (the “New

2

York action”). FAC Ex. E (original complaint in the New York action). Its original complaint

3

alleged that “[i]n or around 2002,” Levi stopped paying royalties to Earth Aire, thereby breaching

4

the Agreement. Id. ¶ 9. Aqua subsequently amended its complaint to drop the patent infringement

5

cause of action. FAC Exs. F, G (first amended complaint and second amended complaint in the

6

New York action).2

7

On September 15, 2015, Aqua filed a “Demand for Arbitration Before JAMS” seeking to

8

arbitrate the same breach of contract dispute at issue in the New York action. FAC Ex. A. Levi

9

filed this action on October 13, 2015 and its FAC on January 1, 2016. Dkt. Nos. 1, 22. The FAC

10

contains three causes of action for declaratory judgment. FAC ¶¶ 42-64.
The first cause of action, titled, “Lack of Standing,” seeks a declaration that Aqua, as a

United States District Court
Northern District of California

11
12

nonsignatory to the Agreement, “has no standing to assert any claim or request any relief related to

13

the License Agreement, including the right to commence the Arbitration against LS&Co. for

14

breach of the License Agreement.” FAC ¶ 48; see also FAC at Prayer for Relief (requesting an

15

order declaring that Aqua “has no standing to enforce the License Agreement because it is not a

16

party to the License Agreement”). Levi alleges that the Agreement “requires LS&Co.’s consent

17

for Earth Aire Corporation, or any subsequent assignee, to assign its rights in the License

18

Agreement to any other party,” and that “LS&Co. has identified no record that it ever provided, or

19

was ever asked to provide, its consent to any assignment of Earth Aire Corporation’s ownership or

20

rights in the License Agreement.” FAC ¶¶ 46-47.
The second cause of action, titled, “Waiver,” seeks a declaration that Aqua waived its

21
22

rights to enforce the Agreement’s arbitration provision by failing to demand arbitration until

23

approximately 13 years after the alleged breach commenced, and approximately 9 years after it

24

sent Levi a Notice of Default in 2006. FAC ¶¶ 56-58; see also FAC at Prayer for Relief

25

(requesting an order declaring that Aqua “has waived its rights, if any, to enforce the License

26
27
28

2

On February 10, 2016, Aqua voluntarily dismissed the New York action, stating that “no federal
question . . . or diversity of citizenship now exists between the parties.” McFarlane Decl. Ex. 1
(Dkt. No. 34-1).
4

1

Agreement in arbitration”). Levi alleges that Aqua “sat on whatever rights it had or has in the

2

License Agreement until it filed [the New York action],” and that “LS&Co. has been materially

3

prejudiced by the long delay.” FAC¶¶ 56-57.

4

The third cause of action, titled, “No Breach of Contract; Performance by LS&Co.,” seeks
a declaration that “LS&Co. has not breached the License Agreement, at least for the reason that

6

none of LS&Co. or its suppliers’ processes or devices are covered by any valid and enforceable

7

patent [under] the License Agreement.” FAC ¶ 64; see also FAC at Prayer for Relief (requesting

8

an order declaring that Levi “is not in breach of the License Agreement”). In support of this

9

theory, Levi points to the Agreement’s differing time periods for Covered Processes versus

10

Uncovered Processes. See Oppo. at 4. Levi explains that because Aqua’s breach of contract

11
United States District Court
Northern District of California

5

theory is that Levi began breaching the Agreement in 2002 – after Levi’s obligation to pay

12

royalties on the Uncovered Processes had expired on December 14, 2001 – Aqua’s breach of

13

contract claim depends on a finding that Levi continued using the Covered Processes after 2001.

14

Id. “[I]f there is no such patent infringement,” Levi contends, “there is no breach of contract.” Id.

15

In the FAC, Levi “denies that it or its vendors used a process covered by a valid and enforceable

16

patent under the License Agreement during the time frame relevant to this dispute and, therefore,

17

denies that it has breached the License Agreement.” FAC ¶ 21.

18

The FAC alleges that subject matter jurisdiction exists under 28 U.S.C. §§ 1331 and 1338,

19

on the ground that Aqua’s “right to relief necessarily depends on resolution of a substantial

20

question of federal patent law.” FAC ¶ 7. Section 1331 provides jurisdiction over “all civil

21

actions arising under the Constitution, laws, or treaties of the United States.” 28 U.S.C. § 1331.

22

Section 1338 provides jurisdiction over “any civil action arising under any Act of Congress

23

relating to patents.” 28 U.S.C. § 1338.

24

On January 21, 2016, the parties stipulated to extend Aqua’s time to respond to the FAC,

25

and for Aqua’s motion to dismiss the FAC, if any, to be heard on March 30, 2016. Dkt. Nos. 25-

26

26. Shortly thereafter, on February 12, 2016, Levi moved for a temporary restraining order

27

prohibiting Aqua from pursuing the JAMS arbitration. Dkt. No. 26. I denied the motion but ruled

28

that I would treat it as a motion for a preliminary injunction to be heard along with the motion to
5

1

dismiss on March 30, 2016. Dkt. No. 29. Aqua then filed the instant motion, Dkt. No. 30

2

(“Mot.”), and the parties stipulated to stay the JAMS arbitration, Dkt. No. 32. I heard argument on

3

March 30, 2016. Dkt. No. 36.
LEGAL STANDARD

4
5

I.

FEDERAL RULE OF CIVIL PROCEDURE 12(b)(1)
Federal Rule of Civil Procedure 12(b)(1) allows a party to bring a motion to dismiss for

6
7

lack of subject matter jurisdiction. Fed. R. Civ. P. 12(b)(1). A challenge under Rule 12(b)(1) may

8

be “facial or factual.” White v. Lee, 227 F.3d 1214, 1242 (9th Cir. 2000). Where, as here, the

9

challenge is facial – meaning that it is confined to whether the allegations in the complaint are
sufficient “on their face” to invoke subject matter jurisdiction, Safe Air for Everyone v. Meyer, 373

11
United States District Court
Northern District of California

10

F.3d 1035, 1039 (9th Cir. 2004) – the court applies essentially the same standard as in considering

12

a motion to dismiss under Rule 12(b)(6), assuming the allegations to be true and drawing all

13

reasonable inferences in the complaining party’s favor, Wolfe v. Strankman, 392 F.3d 358, 362

14

(9th Cir. 2004); see also Terenkian v. Republic of Iraq, 694 F.3d 1122, 1131 (9th Cir. 2012);

15

Colony Cove Properties, LLC v. City Of Carson, 640 F.3d 948, 955 (9th Cir. 2011).

16

II.

17

FEDERAL ARBITRATION ACT
Under 9 U.S.C. § 2, the “primary substantive provision” of the Federal Arbitration Act

18

(“FAA”), Moses H. Cone Mem’l Hosp. v. Mercury Const. Corp., 460 U.S. 1, 24 (1983), a written

19

agreement to arbitrate “in any maritime transaction or a contract evidencing a transaction

20

involving commerce . . . shall be valid, irrevocable, and enforceable, save upon such grounds as

21

exist at law or in equity for the revocation of any contract,” 9 U.S.C. § 2. This provision reflects

22

“both a liberal federal policy favoring arbitration, and the fundamental principle that arbitration is

23

a matter of contract.” AT & T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1745 (2011) (internal

24

quotation marks and citations omitted). “Because arbitration is fundamentally a matter of

25

contract, the central or primary purpose of the FAA is to ensure that private agreements to

26

arbitrate are enforced according to their terms.” Momot v. Mastro, 652 F.3d 982, 986 (9th Cir.

27

2011) (internal quotation marks omitted).

28

Where a claim is subject to arbitration, the court “shall on application of one of the parties
6

1

stay the trial of the action until such arbitration has been had in accordance with the terms of the

2

agreement.” 9 U.S.C. § 3.
DISCUSSION

3

Aqua’s motions raise two basic questions: (1) whether subject matter exists; and

4
5

(2) whether the issues underlying Levi’s first and second causes of action (i.e., nonsignatory

6

standing and waiver) are for this Court or the arbitrators to decide. I address the questions in turn.

7

I.

8
9

SUBJECT MATTER JURISDICTION
“Where the complaint in an action for declaratory judgment seeks in essence to assert a

defense to an impending or threatened state court action, it is the character of the threatened
action, and not of the defense,” that determines whether there is subject matter jurisdiction over

11
United States District Court
Northern District of California

10

the case. Pub. Serv. Comm’n of Utah v. Wycoff Co., 344 U.S. 237, 248 (1952). “In other words,

12

the court examines the declaratory defendant’s hypothetical well-pleaded complaint to determine

13

if subject matter jurisdiction exists.” ABB Inc. v. Cooper Indus., LLC, 635 F.3d 1345, 1349-50

14

(Fed. Cir. 2011) (emphasis in original); see also Medtronic, Inc. v. Mirowski Family Ventures,

15

LLC, 134 S. Ct. 843, 848 (2014) (“The relevant question concerns the nature of the threatened

16

action in the absence of the declaratory judgment suit.”). As stated above, Levi asserts subject

17

matter jurisdiction under 28 U.S.C. §§ 1331 and 1338, which together confer jurisdiction over all

18

civil actions “arising under” either “the Constitution, laws, or treaties of the United States,” 28

19

U.S.C. § 1331, or, more particularly, “any Act of Congress relating to patents,” 28 U.S.C. § 1338.

20

Thus, to establish subject matter jurisdiction, Levi must show that Aqua’s hypothetical breach of

21

contract action is one “arising under” federal law.

22

For the purposes of both section 1331 and section 1338, “a case can ‘arise under’ federal

23

law in two ways.” Gunn v. Minton, 133 S. Ct. 1059, 1064 (2013). First, and most commonly, “a

24

case arises under federal law when federal law creates the cause of action asserted.” Id. Second,

25

even when a claim “finds its origins in state rather than federal law,” the claim nevertheless arises

26

under federal law where it “necessarily raise[s] a stated federal issue, actually disputed and

27

substantial, which a federal forum may entertain without disturbing any congressionally approved

28

balance of federal and state judicial responsibilities.” Id. at 1064-65. That is, a state law claim
7

1

provides a basis for federal question jurisdiction where a federal issue is “(1) necessarily raised,

2

(2) actually disputed, (3) substantial, and (4) capable of resolution in federal court without

3

disrupting the federal-state balance approved by Congress.” Id.

4

Only the second of these two means of determining subject matter jurisdiction is at issue

5

here. See Oppo. at 8-13; Reply at 2-4 (Dkt. No. 35). Applying that framework, courts have

6

repeatedly held that a state-law-based breach of contract claim arises under federal law where it

7

depends on a finding that the defendant has infringed the plaintiff’s patents. See, e.g., Jang v.

8

Boston Sci. Corp., 767 F.3d 1334, 1336 (Fed. Cir. 2014) (subject matter jurisdiction existed where

9

“[a]lthough this case arises from a [state law breach of contract] claim, rather than directly as a
patent infringement claim, [plaintiff’s] right to relief . . . depends on an issue of federal patent law

11
United States District Court
Northern District of California

10

– whether the [products] sold by [defendants] would have infringed [plaintiff’s patents]”) (internal

12

quotation marks omitted); U.S. Valves, Inc. v. Dray, 212 F.3d 1368, 1372 (Fed. Cir. 2000) (subject

13

matter jurisdiction existed where, to show that the defendant breached an exclusive license

14

agreement, the plaintiff “must show that [the defendant] sold [products] covered by the licensed

15

patents”); Alexsam, Inc. v. Green Dot Corp., No. 15-cv-05742, 2015 WL 6520917, at *4 (C.D.

16

Cal. Sept. 28, 2015) (“Just as in Dray, any determination of whether the agreement was breached

17

will require the Court to interpret the . . . patents to determine if defendants’ products in fact

18

infringe on the patents.”); Berman v. OpenTV Corp., No. 09-cv-04065-MMC, 2010 WL 3987448,

19

at *3 (N.D. Cal. Oct. 12, 2010) (“Where a plaintiff asserts that a breach of contract occurs from a

20

defendant’s infringement of the plaintiff’s patents, the breach of contract claim necessarily

21

depends on resolution of a substantial question of patent law.”).

22

Resolution of Aqua’s hypothetical breach of contract claim depends on a finding that Levi

23

has infringed its patents. Aqua’s breach of contract theory (assuming that its pleadings in the New

24

York action accurately reflect that theory) is that Levi stopped paying royalties in 2002, after its

25

obligation to pay royalties on the Uncovered Processes had expired on December 14, 2001. Thus,

26

to prove that Levi breached the Agreement by failing to pay royalties, Aqua will have to show that

27

Levi continued using the Covered Processes after 2001. In other words, Aqua will have to show

28

that Levi continued to use a process that was “covered by a valid and enforceable patent.”
8

1

Agreement ¶ 10.1.1. Aqua offers no reason to doubt this characterization of its hypothetical

2

breach of contract claim. Although it argues that the patent issues in this case are mere

3

“affirmative defenses,” it fails to explain how it could establish that Levi breached the Agreement

4

without also establishing that Levi committed patent infringement. See Reply at 2-4; see also

5

Christianson v. Colt Indus. Operating Corp., 486 U.S. 800, 809 n.3 (1988) (“[M]erely because a

6

claim makes no reference to federal patent law does not necessarily mean the claim does not ‘arise

7

under’ patent law.”).
Aqua’s attempt to analogize this case to Gunn, 133 S. Ct. 1059, is unpersuasive. In Gunn,

9

the plaintiff brought a state court action accusing his attorneys of malpractice for failing to timely

10

raise an exception to the on-sale bar in federal district court litigation that ultimately resulted in his

11
United States District Court
Northern District of California

8

patent being held invalid. 133 S. Ct. at 1062-63. After the state court granted summary judgment

12

for the attorneys, the plaintiff argued on appeal that the state court lacked jurisdiction over the

13

case, and that its summary judgment order should be vacated, leaving him “free to start over” in

14

federal court. Id. The Supreme Court found that the patent issue underlying the malpractice

15

action was “not substantial in the relevant sense,” in that “[t]he substantiality inquiry . . . looks . . .

16

to the importance of the issue to the federal system as a whole,” not to the importance of the issue

17

“to the particular parties in the immediate suit.” Id. at 1066. The patent issue raised by the

18

plaintiff’s malpractice claim was not substantial in this sense because it was “backward-looking”

19

and “hypothetical.” Id. at 1066-67. The Court concluded, “[A]lthough the state courts must

20

answer a question of patent law to resolve [plaintiff’s] malpractice claim, their answer will have

21

no broader effects. It will not stand as binding precedent for any future patent claim; it will not

22

even affect the validity of [plaintiff’s] patent.” Id. at 1068. Thus, the patent issue did not support

23

“arising under” jurisdiction. Id.

24

Aqua contends that the patent issues in this case are also “backward-looking” and

25

“hypothetical” and thus insufficient to support federal question jurisdiction. Mot. at 7-8. The

26

Federal Circuit rejected this argument in Jang, 767 F.3d 1334. There, the Federal Circuit had

27

previously determined that it had jurisdiction over the plaintiff’s contract claim because the

28

plaintiff’s “right to relief . . . depends on an issue of federal patent law – whether the [products]
9

1

sold by [defendants] would have infringed [plaintiff’s patents].” 767 F.3d at 1336 (internal

2

quotation marks omitted). The court held that Gunn did not alter this conclusion. Id. It found that

3

the patent issues presented by the plaintiff’s contract claim were “neither entirely backward-

4

looking nor hypothetical” for two reasons. Id. at 1337. First, “the court may be called upon to

5

determine the extent to which validity is made relevant to the resolution of the [contract] claim by

6

the language of the contract itself,” which extended only to products covered by patent claims that

7

had not “been held invalid.” Id. Second, the court reasoned that in “disputes like the one at issue

8

here in which resolution of the contract claim itself requires resolution of underlying issues of

9

infringement, there exists the possibility that the patentee would file suits alleging infringement by
others and may even be contractually obligated to do so.” Id. at 1337-38. It concluded that

11
United States District Court
Northern District of California

10

“[m]aintaining Federal Circuit jurisdiction over such contractual disputes to avoid such conflicting

12

rulings is important to ‘the federal system as a whole’ and not merely ‘to the particular parties in

13

the immediate suit.’” Id. at 1338 (quoting Gunn, 133 S. Ct. at 1066).
Aqua does not dispute that resolution of its breach of contract claim would require a

14
15

determination of the validity of the relevant patents. See Oppo. at 11 (raising this point). Nor

16

does it dispute that there exists the possibility of subsequent infringement suits based on those

17

same patents. See id. (same). Accordingly, in line with Jang, I find that Levi has shown that the

18

patent issues in this case are sufficient to support “arising under” jurisdiction, and that subject

19

matter jurisdiction exists under sections 1331 and 1338. Aqua’s motion to dismiss under Rule

20

12(b)(1) is DENIED.

21

II.

22
23
24
25
26
27
28

NONSIGNATORY STANDING AND WAIVER
In the alternative, Aqua asks that I dismiss or stay the case in light of the JAMS arbitration.

See Mot. at 9-13; Reply at 8-12. It contends that the parties clearly and unmistakably delegated
questions of arbitrability to the arbitrators, and that as a result Levi’s arbitrability challenges (i.e.,
Levi’s first and second causes of action, regarding nonsignatory standing and waiver) must be
resolved by the arbitrators. Levi argues that, for a variety of reasons, its nonsignatory standing
and waiver challenges are properly resolved by this Court. I find that each party is half-right. The
waiver issue is a question for the arbitrators, while the nonsignatory standing issue is a question
10

1
2

for the Court.
“The [FAA] establishes that, as a matter of federal law, any doubts concerning the scope of
arbitrable issues should be resolved in favor of arbitration.” Moses, 460 U.S. at 24-25.

4

Nevertheless, “so-called ‘question[s] of arbitrability’ [ – ] which include certain gateway matters,

5

such as whether parties have a valid arbitration agreement at all or whether a concededly binding

6

arbitration clause applies to a [particular] controversy [ – ] are presumptively for courts to decide.”

7

Oxford Health Plans LLC v. Sutter, 133 S.Ct. 2064, 2068 n.2 (2013) (some internal quotation

8

marks omitted); see also Momot, 652 F.3d at 987 (issues that “contracting parties would likely

9

have expected a court to have decided” are “gateway questions of arbitrability” to be determined

10

by the court, not the arbitrator). This rule flows from the “principle that a party can be forced to

11
United States District Court
Northern District of California

3

arbitrate only those issues it specifically has agreed to submit to arbitration.” First Options of

12

Chicago, Inc. v. Kaplan, 514 U.S. 938, 945 (1995).

13

“Although gateway issues of arbitrability presumptively are reserved for the court, the

14

parties may agree to delegate them to the arbitrator.” Momot, 652 F.3d at 987. In other words,

15

parties can “agree to arbitrate” questions of arbitrability. Rent-A-Ctr., W., Inc. v. Jackson, 561

16

U.S. 63, 68-69 (2010) (internal quotation marks omitted). For arbitration agreements governed by

17

the FAA, courts considering whether the parties have agreed to arbitrate questions of arbitrability

18

“should apply federal arbitrability law absent clear and unmistakable evidence that the parties

19

agreed to apply nonfederal arbitrability law.” Cape Flattery Ltd. v. Titan Mar., LLC, 647 F.3d

20

914, 921 (9th Cir. 2011) (internal quotation marks omitted); accord Brennan v. Opus Bank, 796

21

F.3d 1125, 1129 (9th Cir. 2015). Under federal arbitrability law, “[w]hen deciding whether the

22

parties agreed to arbitrate a certain matter (including arbitrability), courts . . . should apply

23

ordinary state law principles that govern the formation of contracts.” First Options, 514 U.S. at

24

944. Because questions of arbitrability are presumptively for courts to decide, however, courts

25

“apply a more rigorous standard in determining whether the parties have agreed to arbitrate [such]

26

question[s].” Momot, 652 F.3d at 987. “Courts should not assume that the parties agreed to

27

arbitrate arbitrability unless there is clear and unmistakable evidence that they did so.” First

28

Options, 514 U.S. at 944 (internal quotations marks and alterations omitted); accord Rent-A-Ctr.,
11

1

561 U.S. at 69 n.1.
Aqua contends that the parties clearly and unmistakably agreed to delegate questions of

2
3

arbitrability to the arbitrators by agreeing to amend the Agreement to provide for arbitration under

4

the JAMS Comprehensive Arbitration Rules & Procedures (the “JAMS Rules”). See Mot. at 10-

5

11. Rule 11(b) of the JAMS Rules provides in relevant part:
Jurisdictional and arbitrability disputes, including disputes over the
formation, existence, validity, interpretation or scope of the
agreement under which Arbitration is sought, and who are proper
Parties to the Arbitration, shall be submitted to and ruled on by the
Arbitrator. The Arbitrator has the authority to determine jurisdiction
and arbitrability issues as a preliminary matter.

6
7
8
9

JAMS Rules § 11(b) (effective July 1, 2014) (RJN Ex. 3, Dkt. No. 30-5).3

10

Viewed in a vacuum, the incorporation of the JAMS Rules might be sufficient to establish

United States District Court
Northern District of California

11

a clear and unmistakable delegation. Viewed holistically, however, the Agreement is ambiguous

12

on this point. The Agreement’s severability provision states that that “[i]f any part of this

13

Agreement shall be declared invalid or unenforceable by a court of competent jurisdiction, it shall

14

not affect the validity of the balance of this Agreement.” Agreement ¶ 16.7 (emphasis added).

15

The parties do not dispute that by referring to “any part of this Agreement,” the severability

16

provision extends to the Agreement’s arbitration provision.

17

A number of courts have held that contracts including similar evidence of delegation, as

18

well as similarly worded severability provisions, fail to evince a clear and unmistakable agreement

19

to delegate questions of arbitrability to the arbitrator. See Vargas v. Delivery Outsourcing, LLC,

20

No. 15-cv-03408-JST, 2016 WL 946112, at *6-7 (N.D. Cal. Mar. 14, 2016) (“[D]espite clear

21

language delegating arbitrability to the arbitrator, the issue of delegation is made ambiguous by

22

the language of the arbitration provision that permits modification of the [Agreement] should ‘a

23

court of law or equity’ hold any provision of the Agreement unenforceable.”); Parada v. Superior

24

Court, 176 Cal. App. 4th 1554, 1565-66 (2009) (finding no clear and unmistakable delegation

25

where the contract included a severability provision applicable “[i]n the event that any provision

26

of this Agreement shall be determined by a trier of fact of competent jurisdiction to be

27
28

3

Aqua’s request for judicial notice, Dkt. No. 30-1, is GRANTED.
12

1

unenforceable;” reasoning that this language suggested that “the trial court also may find a

2

provision, including the arbitration provision, unenforceable”); Baker v. Osborne Dev. Corp., 159

3

Cal. App. 4th 884, 891, 893-94 (2008) (finding no clear and mistakable delegation where the

4

contract included a severability provision applicable if “any provision of this arbitration agreement

5

shall be determined by the arbitrator or by any court to be unenforceable;” reasoning that

6

“although one provision of the arbitration agreement stated that issues of enforceability or

7

voidability were to be decided by the arbitrator, [the severability] provision indicated that the court

8

might find a provision unenforceable”) (emphasis omitted); see also Mohamed v. Uber Techs.,

9

Inc., 109 F. Supp. 3d 1185, 1198 (N.D. Cal. 2015).
These courts have reasoned that, “[a]s a general matter, where one contractual provision

11
United States District Court
Northern District of California

10

indicates that the enforceability of an arbitration provision is to be decided by the arbitrator, but

12

another provision indicates that the court might also find provisions in the contract unenforceable,

13

there is no clear and unmistakable delegation of authority to the arbitrator.” Ajamian v.

14

CantorCO2e, L.P., 203 Cal. App. 4th 771, 792 (2012); see also Mohamed, 109 F. Supp. 3d at

15

1202 (“[I]t is reasonable to assume that the typical Uber driver might read this severability

16

language to provide further evidence that Uber intended any determination as to whether ‘any

17

provision of this Agreement is invalid or unenforceable’ to be made in court, and not arbitration.”)

18

(internal footnotes and emphasis omitted).

19
20

In line with these cases, I find that the parties did not clearly and unmistakably agree to
delegate questions of arbitrability to the arbitrators.

21

This resolves the question of who decides the nonsignatory standing issue, as that

22

particular issue is not arbitrable absent a clear and unmistakable delegation of it to the arbitrator.

23

See Kramer v. Toyota Motor Corp., 705 F.3d 1122, 1127 (9th Cir. 2013) (holding that “the district

24

court had authority to decide whether Toyota, a nonsignatory to the [agreements], can compel

25

plaintiffs to arbitrate,” where there was no “clear and unmistakable evidence that plaintiffs and

26

Toyota agreed to arbitrate arbitrability”).

27

On the other hand, I find that the waiver issue is not actually a gateway question of

28

arbitrability and is thus properly resolved by the arbitrator even in the absence of clear and
13

1

unmistakable evidence of an agreement to delegate it. “[C]ontract-based challenges to the validity

2

of arbitration agreements come in two types: one type challenges specifically the validity of the

3

agreement to arbitrate and the other challenges the contract as a whole.” Cox v. Ocean View Hotel

4

Corp., 533 F.3d 1114, 1119 (9th Cir. 2008) (internal quotation marks and alterations omitted).

5

While a court presumptively determines the validity of an arbitration clause where the challenge is

6

“specifically to the validity of the agreement to arbitrate,” where the challenge is “that [the]

7

contract as a whole is unenforceable, the arbitrator decides the validity of the contract, including

8

derivatively the validity of its constituent provisions (such as the arbitration clause).” Bridge

9

Fund Capital Corp. v. Fastbucks Franchise Corp., 622 F.3d 996, 1000 (9th Cir. 2010) (internal
quotation marks and alterations omitted). In other words, it is only when “the crux of [the]

11
United States District Court
Northern District of California

10

complaint is a challenge to the arbitration provision itself,” and that challenge to the arbitration

12

provision does not “threate[n] to invalidate or otherwise directly affect the entire contract,” that

13

the question is presumptively decided by the court. Nagrampa v. MailCoups, Inc., 469 F.3d 1257,

14

1271 (9th Cir. 2006); see also Bridge Fund, 622 F.3d at 1000 (“When a plaintiff argues that an

15

arbitration clause, standing alone, is unenforceable – for reasons independent of any reasons the

16

remainder of the contract might be invalid – that is a question to be decided by the court.”)

17

(emphasis added).

18

The waiver challenge raised by Levi is not independent of any reasons the remainder of the

19

Agreement might be invalid; it directly affects the entire Agreement. In contrast with cases like

20

Cox, 533 F.3d 1114, in which the waiver challenge is based on a party’s conduct with respect to

21

the specific right to arbitrate under the contract at issue, see id. at 1124-26, Levi’s waiver

22

challenge is based on Aqua’s general delay in seeking to enforce its purported rights under the

23

Agreement and on the Notice of Default Aqua sent Levi in 2006, see FAC ¶¶ 24-30, 53-58. This

24

conduct goes as much to Aqua’s ability to enforce the Agreement at all as to its ability to enforce

25

the Agreement’s arbitration provision in particular. Indeed, the portion of the FAC setting out the

26

facts regarding the waiver challenge is titled, “Waiver/Statute of Limitations,” and Levi’s counsel

27

conceded at oral argument that Levi’s waiver challenge overlaps with the statute of limitations

28

defense Levi states it will assert if Aqua brings a breach of contract claim in this action. See FAC
14

1

¶¶ 24, 41. Levi’s waiver challenge is properly decided by the arbitrator, not this Court.

2

Nevertheless, because the nonsignatory standing issue is properly resolved here, Aqua’s

3

request that I dismiss or stay this case pending the JAMS arbitration is DENIED, at least for the

4

time being.4
CONCLUSION

5

For the foregoing reasons, Aqua’s motion is DENIED. Unless the parties agree otherwise,

6
7

they shall have 60 days from the date of this Order to conduct discovery on the nonsignatory

8

standing issue, and Aqua shall file any motion to compel arbitration no more than 15 days

9

thereafter. The Case Management Conference set for May 10, 2016 is CONTINUED until

10

September 6, 2016.
IT IS SO ORDERED.

United States District Court
Northern District of California

11
12

Dated: April 6, 2016
______________________________________
WILLIAM H. ORRICK
United States District Judge

13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
4

28

I do not address Levi’s other arguments for denying Aqua’s motion to dismiss or stay the case
pending the JAMS arbitration.
15