Bell Products, Inc. v. Hospital Building and Equipment Company et al

Filing 27

ORDER by Magistrate Judge Jacqueline Scott Corley granting 7 Motion to Stay. (ahm, COURT STAFF) (Filed on 1/23/2017)

1
2
3
4

UNITED STATES DISTRICT COURT

5

NORTHERN DISTRICT OF CALIFORNIA

6
BELL PRODUCTS, INC.,

7

Plaintiff,

8

ORDER RE: DEFENDANT HBE
CORPORATION’S MOTION TO STAY

v.

9

HOSPITAL BUILDING AND
EQUIPMENT COMPANY, et al.,

10
11
United States District Court
Northern District of California

Case No. 16-cv-04515-JSC

Re: Dkt. No. 7

Defendants.

12
13

Plaintiff Bell Products, Inc. filed suit in Mendocino County Superior Court against

14

Defendants Hospital Building and Equipment Company, a division of HBE Corporation (“HBE”);

15

Hospital Designers, Inc. (“HDI”), a subsidiary of HBE; Travelers Casualty and Surety Company

16

of America (“Travelers”); and the Continental Insurance Company (“Continental”) for claims

17

arising out of a subcontract relating to the construction of a hospital in California. Defendants

18

timely removed the case to federal court on the basis of diversity jurisdiction. (Dkt. No. 1.1) Now

19

pending before the Court is HBE’s motion to stay pending arbitration. (Dkt. No. 7.) Having

20

carefully considered the parties’ submissions, and having had the benefit of oral argument on

21

October 6, 2016, the Court GRANTS the motion to stay. The Court further concludes that the

22

arbitration agreement’s venue provision is enforceable.2
BACKGROUND

23

On June 18, 2012, HBE entered into a design-build contract with Willits Hospital, Inc., dba

24
25

Frank R. Howard Memorial Hospital, to construct the Frank R. Howard Memorial Hospital

26
1

27
28

Record citations are to material in the Electronic Case File (“ECF”); pinpoint citations are to the
ECF-generated page numbers at the top of the documents.
2
All parties have consented to the jurisdiction of a magistrate judge pursuant to 28 U.S.C.
§ 636(c). (Dkt. Nos. 9, 12.)

1

located in Willits, California. (Dkt. No. 7-1 ¶ 2; Compl. ¶ 11.) On June 19, 2012, HBE solicited

2

bid proposals from subcontractors to work on portions of the project; the solicitation package

3

included project plans and specifications that were prepared by HDI. (Compl. ¶ 12.) Plaintiff

4

submitted a bid for the project based on the received plans and specifications. (Id.)

5

On July 20, 2012, Plaintiff and HBE entered into a written subcontract whereby Plaintiff

6

agreed to furnish labor, material, supervision and equipment, tools, supplies, holsting, and

7

scaffolding for the project. (Dkt. No. 7-1 ¶ 4 & at 4-25 (Ex. A).) On July 31, 2012, the parties

8

entered into a revised and reissued subcontract. (Id.; Compl. ¶ 13.) The revised subcontract

9

provided a set of Specific Requirements, including a dispute resolution provision that states, in

10

United States District Court
Northern District of California

11
12
13
14

relevant part:
Except as other provided below, all unresolved claims and disputes
between Contractor and Subcontractor arising out of or relating to
the Subcontract, whether for breach of contract, in tort, statutory, or
otherwise, shall be decided by arbitration under the Construction
Industry Arbitration Rules of the American Arbitration Association.
Unless Contractor requests the locale to be the place of the Project,
the arbitration locale shall be St. Louis, Missouri.

15

(Dkt. No. 7-1 at 11.) The subcontract also incorporated by reference a set of special conditions,

16

dated May 12, 2012, that provides that “[t]he law of the Project location governs the validity,

17

enforcement, and interpretation of the Subcontract; however, the Federal Arbitration Act governs

18

the Subcontract arbitration terms.” (Dkt. No. 7-1 at 19 ¶ 31.) The parties disagree as to the

19

applicability of the May 2012 special conditions.

20

Under the original project schedule, Plaintiff was required to begin performing the

21

mechanical scope of work on August 10, 2012, with substantial completion of the project by May

22

20, 2014 and completion for inspection and occupancy by August 12, 2014. (Compl. ¶ 14.) HBE

23

subsequently abandoned the original schedule and issued multiple new schedule updates,

24

extending the amount of time required to complete the project. (Id. ¶ 15.) According to Plaintiff,

25

the various schedule changes resulted from HBE’s initial submission of plans and specifications,

26

prepared by HDI, that failed to comply with the California Office of Statewide Health Planning

27

and Development guidelines and the California Building Code as well as HBE’s ineffective and

28

deficient management, supervision, and administration of the project. (Id. ¶¶ 18, 20, 21.) Plaintiff
2

1

verbally agreed to and complied with the schedule modifications while also notifying HBE that

2

extending the project timeline would result in additional costs. (Id. ¶¶ 16-17.) As a result of

3

HBE’s conduct, Plaintiff’s scope of work was not completed until August 2015, nearly 15 months

4

after the substantial completion date set forth in the original schedule. (Id. ¶¶ 15, 17.) Despite

5

Plaintiff incurring additional costs due to the extended project timeline, HBE has refused to

6

compensate Plaintiff for such added costs. (Id. ¶¶ 20-22.)

7

On July 7, 2016, Plaintiff filed suit against Defendants based on five state-law causes of

8

action: (1) misrepresentation against HBE; (2) quantum meruit against HBE; (3) breach of

9

contract against HBE; (4) negligence against HDI; and (5) recovery on payment bond against
Travelers and Continental. (See generally id.) After removing the case to federal court, HBE now

11
United States District Court
Northern District of California

10

moves for a stay of Plaintiff’s claims pending the completion of arbitration as required by the

12

subcontract. (Dkt. No. 7.)

13

DISCUSSION

14

HBE moves to stay this action pending arbitration of Plaintiff’s claims pursuant to 9

15

U.S.C. § 3. Plaintiff agrees that the subcontract between the parties “requires arbitration of all

16

disputes arising from the contract” and that a stay of this case is appropriate. (Dkt. No. 15 at 2.)

17

Plaintiff, however, raises two questions about arbitration: (1) whether the Federal Arbitration Act

18

or the Construction Industry Arbitration Rules of the American Arbitration Association governs

19

the arbitration; and (2) whether California, and not St. Louis, Missouri, is the proper venue for

20

arbitration. (See id. at 4-8; Dkt. No. 16 at 8-15.) As to the first question, the governing set of

21

rules is a procedural question for the arbitrator to decide; the Court therefore declines to resolve

22

the question here. See John Wiley & Sons, Inc. v. Livingston, 376 U.S. 543, 557 (1964) (“Once it

23

is determined . . . that the parties are obligated to submit the subject matter of a dispute to

24

arbitration, ‘procedural’ questions which grow out of the dispute and bear on its final disposition

25

should be left to the arbitrator.”).

26

As for the question of venue, the Court must determine whether the St. Louis, Missouri

27

venue provision is valid and enforceable. Plaintiff argues that the provision is unenforceable

28

under California Code of Civil Procedure § 410.42(a)(1) and thus the arbitration must occur in
3

1

California. Section 410.42(a)(1) states:

2

(a) The following provisions of a contract between the contractor
and a subcontractor with principal offices in this state, for the
construction of a public or private work of improvement in this
state, shall be void and unenforceable:

3
4

(1) A provision which purports to require any dispute between the
parties to be litigated, arbitrated, or otherwise determined outside
this state.

5
6

HBE responds that Section 410.42(a)(1) is preempted by the FAA and so the parties’

7
8

agreed-upon venue provision must be enforced. The FAA provides, in relevant part:

9

A written provision in any maritime transaction or a contract
evidencing a transaction involving commerce to settle by arbitration
a controversy thereafter arising out of such contract or transaction,
or the refusal to perform the whole or any part thereof, or an
agreement in writing to submit to arbitration an existing controversy
arising out of such a contract, transaction, or refusal, shall be valid,
irrevocable, and enforceable, save upon such grounds as exist at law
or in equity for the revocation of any contract.

10

United States District Court
Northern District of California

11
12
13
14

9 U.S.C. § 2. “The final phrase of § 2 . . . permits arbitration agreements to be declared

15

unenforceable ‘upon such grounds as exist at law or in equity for the revocation of any contract.’

16

This saving clause permits agreements to arbitrate to be invalidated by ‘generally applicable

17

contract defenses, such as fraud, duress, or unconscionability,’ but not by defenses that apply only

18

to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.”

19

AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011) (citations omitted).
The key to resolving the parties’ venue dispute then is determining whether Section

20
21

410.42(a)(1) is a generally applicable defense that applies to “any contract.” As the Court

22

previously noted, the Ninth Circuit, through two separate three-judge panels, has issued

23

conflicting decisions on the interpretation of “any contract” in (1) Bradley v. Harris Research,

24

Inc., 275 F.3d 884 (9th Cir. 2001), and (2) Sakkab v. Luxottica Retail North America, Inc., 803

25

F.3d 425 (9th Cir. 2015).3 HBE urges the Court to follow the earlier Bradley decision (Dkt. No.

26
3

27
28

The Court also brought the parties’ attention to Tompkins v. 23andMe, Inc., 840 F.3d 1016 (9th
Cir. 2016). As Plaintiff correctly notes, Tompkins is not relevant here because “[t]he basis for the
claim of unconscionability came not from application of a state statute which declared its
unconscionability as a matter of public policy[], but rather under general claims of
4

1

21 at 6-9), while Plaintiff argues that Sakkab controls because Bradley’s interpretation of “any

2

contract” has been overruled by the Supreme Court’s Concepcion decision (Dkt. No. 20 at 9-11).

3

A.

Bradley v. Harris Research, Inc.

4

In Bradley, the district court had ordered the parties to participate in private arbitration in
California rather than the agreed-upon venue of Utah because the franchise agreement’s venue

6

provision violated California Business & Professions Code § 20040.5, which provides: “A

7

provision in a franchise agreement restricting venue to a forum outside this state is void with

8

respect to any claim arising under or relating to a franchise agreement involving a franchise

9

business operating within this state.” On appeal, the defendant argued that Section 20040.5 was

10

preempted by the FAA, 9 U.S.C. § 2. The plaintiffs responded “that § 20040.5 is not preempted

11
United States District Court
Northern District of California

5

by the FAA because it treats arbitration and litigation equally and does not single out arbitration as

12

a disfavored form of dispute resolution.” Id. at 889. In addressing preemption, the Ninth Circuit

13

reasoned that the Supreme Court’s decisions in Doctor’s Associates, Inc. v. Casarotto, 517 U.S.

14

681 (1996) and Perry v. Thomas, 482 U.S. 483, “as well as the language of 9 U.S.C. § 2, indicate

15

that a state law that invalidates arbitration agreements is not preempted by the FAA only if the law

16

is ‘generally applicable,’ or applies to ‘any contract.’” Bradley, 275 F.3d at 890 (quoting Doctor’s

17

Assocs., 517 U.S. at 687; 9 U.S.C. § 2). The Ninth Circuit then noted that “Section 20040.5

18

applies only to forum selection clauses and only to franchise agreements; it therefore does not

19

apply to ‘any contract.’” Id. Accordingly, the court held that Section 20040.5 was preempted by

20

the FAA. Id.

21

B.

Sakkab v. Luxottica Retail N. Am., Inc.

22

In Sakkab, the Ninth Circuit asked “whether the FAA preempts the California rule

23

announced in Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348[ ](2014), which

24

bars the waiver of representative claims under the Private Attorneys General Act of 2004 (PAGA),

25

Cal. Lab. Code § 2698 et seq.” 803 F.3d at 427. To address this issue, the Ninth Circuit was

26

similarly required to determine whether the Iskanian rule was a “ground[ ] . . . for the revocation

27
28

unconscionability as imposing an unreasonable or unjust burden on the plaintiffs.” (Dkt. No. 20 at
13.) The Court therefore will not discuss Tompkins further.
5

1

of any contract.” 9 U.S.C. § 2. The court concluded that it was such a ground, calling into doubt

2

Bradley’s “any contract” interpretation in light of the Supreme Court’s intervening Concepcion

3

decision:
Some of our cases can be read to suggest that the phrase “any
contract” in § 2’s saving clause requires that a defense apply
generally to all types of contracts, in addition to requiring that the
defense apply equally to arbitration and non-arbitration agreements.
See Ting v. AT & T, 319 F.3d 1126, 1147-48 (9th Cir. 2003)
(holding that California’s Consumer Legal Remedies Act, Cal. Civ.
Code § 1751, is “not a law of ‘general applicability’” within the
ambit of § 2’s saving clause because it applies only to
noncommercial consumer contracts); Bradley v. Harris Research,
Inc., 275 F.3d 884, 890 (9th Cir. 2001) (holding that California
Business & Professions Code § 20040.5 does not apply to “any
contract” because it “applies only to forum selection clauses and
only to franchise agreements”). However, the Court’s decision in AT
& T Mobility, LLC v. Concepcion, 563 U.S. 333, 131 S.Ct. 1740,
179 L.Ed.2d 742, cuts against this construction of the saving clause.
The Court in Concepcion held that the FAA preempted California
law providing that class action waivers in certain consumer contracts
of adhesion were unconscionable and unenforceable. 131 S.Ct. at
1748-53. Even though the state-law rule at issue only applied to a
narrow class of consumer contracts, the Court strongly implied that
the rule was a “generally applicable contract defense[ ].” See id. at
1748. The Court held that the rule was preempted because it
conflicted with the purposes of the FAA, even though the rule
purported to apply to “any contract.” See id. (“Although § 2’s saving
clause preserves generally applicable contract defenses, nothing in it
suggests an intent to preserve state-law rules that stand as an
obstacle to the accomplishment of the FAA’s objectives.”).

4
5
6
7
8
9
10

United States District Court
Northern District of California

11
12
13
14
15
16
17
18

Following the logic of Concepcion, we conclude that the Iskanian
rule is a “generally applicable” contract defense that may be
preserved by § 2’s saving clause, provided it does not conflict with
the FAA’s purposes.

19
20
21

Sakkab, 803 F.3d at 432-33. The Ninth Circuit then concluded that the Iskanian rule did not

22

conflict with the purposes of the FAA and so held that the waiver of the plaintiff’s representative

23

PAGA claims was unenforceable. Id. at 433-40.

24

C.

Bradley is Binding Precedent.

25

“Once a panel resolves an issue in a precedential opinion, the matter is deemed resolved,

26

unless overruled by the court itself sitting en banc, or by the Supreme Court.” Hart v. Massanari,

27

266 F.3d 1155, 1171 (9th Cir. 2001). However, “[a]lthough a three judge panel normally cannot

28

overrule a decision of a prior panel on a controlling question of law, [a three judge panel] may
6

1

overrule prior circuit authority without taking the case en banc when ‘an intervening Supreme

2

Court decision undermines an existing precedent of the Ninth Circuit, and both cases are closely

3

on point.’” Galbraith v. Cty. of Santa Clara, 307 F.3d 1119, 1123 (9th Cir. 2002) (internal

4

citations omitted).
Neither the Ninth Circuit sitting en banc nor the Supreme Court have overruled Bradley,

5
6

the earlier decision. Nor did the three-judge panel in Sakkab expressly overrule Bradley in light of

7

Concepcion; instead, the Sakkab court simply “follow[ed] the logic of Concepcion” in departing

8

from Bradley’s interpretation of “any contract.”4 Sakkab, 803 F.3d at 433. Absent an order

9

overruling the decision, Bradley remains good law in the Ninth Circuit and binding precedent on
the Court. The Court therefore must follow that decision, particularly given that Bradley is

11
United States District Court
Northern District of California

10

directly on point with the facts of this case: Just as the Ninth Circuit found that Section 20040.5

12

did not apply to “any contract” because it “applie[d] only to forum selection clauses and only to

13

franchise agreements,” Bradley, 275 F.3d at 890, Section 410.42(a)(1) also does not apply to “any

14

contract” because it applies only to forum selection clauses and only to contracts between a

15

contractor and a subcontractor with principal offices in California—not contracts generally.

16

Plaintiff attempts to distinguish Bradley by arguing that the provision at issue here, Section

17

410.42, was enacted pursuant to public policy whereas Section 20040.5 was not. (See Dkt. No. 22

18

at 2 (“[T]he state statute at issue in Bradley did not equate to the statute at issue here, which was

19

specifically supported by public policy pronouncements similar to the PAGA statute at issue in

20

[Sakkab].”). Not so. As the Ninth Circuit has stated, “We conclude and hold that § 20040.5

21

expresses a strong public policy of the State of California to protect California franchisees from

22

the expense, inconvenience, and possible prejudice of litigating in a non-California venue.” Jones

23

v. GNC Franchising, Inc., 211 F.3d 495, 498 (9th Cir. 2000).
Accordingly, under the Ninth Circuit’s Bradley decision, Section 410.42(a)(1) is not

24
25

protected by the savings clause and is therefore preempted by the FAA.

26
4

27
28

Though Sakkab did not overrule Bradley, the panel called into doubt the decision based on
Concepcion. Bradley and Concepcion, however, are not necessarily irreconcilable, as Concepcion
did not resolve the interpretation of “any contract” in the savings clause but rather focused on
whether the disputed California law contravened the FAA’s purposes.
7

CONCLUSION

1
2

For the reasons stated above, the Court GRANTS HBE’s motion to stay pending

3

arbitration. Further, the Court holds that California Code of Civil Procedure § 410.42(a)(1) is

4

preempted by the FAA; Section 410.42(a)(1) therefore does not render the St. Louis, Missouri

5

venue provision unenforceable. The parties shall submit a joint status report to the Court within

6

30 days of receiving the arbitrator’s decision.

7
8

IT IS SO ORDERED.
Dated: January 23, 2017

9
10
JACQUELINE SCOTT CORLEY
United States Magistrate Judge

United States District Court
Northern District of California

11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
8