Guidewire Software, Inc. v. Chookaszian

Filing 30

Order by Hon. Lucy H. Koh granting 14 Motion to Compel.(lhklc1, COURT STAFF) (Filed on 10/31/2012)

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

United States District Court
For the Northern District of California

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SAN JOSE DIVISION

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GUIDEWIRE SOFTWARE, INC.,
Plaintiff,

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v.

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DENNIS CHOOKASZIAN,
Defendant.

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Case No. 12-CV-03224-LHK
ORDER GRANTING DEFENDANT’S
MOTION TO STAY THE ACTION IN
FAVOR OF ARBITRATION AND
DENYING PLAINTIFF’S MOTION TO
STAY ARBITRATION

This matter is before the Court on Defendant’s Motion to Compel Arbitration and to

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Dismiss or Alternatively Stay the Action in Favor of Arbitration (ECF No. 7 (“Def. Mot.”)), and

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Plaintiff’s Motion to Stay Arbitration (ECF No. 12 (“Pl. Mot”)) (collectively “Motions”). Both

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parties have filed oppositions to the Motions, ECF Nos. 17 (“Pl. Opp’n”), 20 (“Def. Opp’n”), and

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replies in support of the Motions, ECF Nos. 22 (“Def. Reply”), 23 (“Pl. Reply”).1

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Having read and considered the arguments presented by the parties in the papers submitted

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to the Court, the Court finds this matter appropriate for resolution without a hearing pursuant to

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The parties’ motions discuss the same arbitrability issue.
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Case No.: 12-CV-03224-LHK
ORDER GRANTING DEFENDANT’S MOTION TO STAY THE ACTION IN FAVOR OF
ARBITRATION AND DENYING PLAINTIFF’S MOTION TO STAY ARBITRATION

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Civil Local Rule 7–1(b). Accordingly, the hearing on the parties’ Motions and the Case
Management Conference set for November 8, 2012 are VACATED.
The Court hereby GRANTS Defendant’s motion to the extent it seeks to stay this action,

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DENIES Plaintiff’s Motion to Stay Arbitration, and STAYS all further proceedings in this action

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until the earlier of: (1) completion of the arbitration involving the same parties and claims currently

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pending before the American Arbitration Association; or (2) 20 days after any ruling by the

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United States District Court
For the Northern District of California

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arbitrators that the parties’ claims therein are not arbitrable.
I.

Procedural Posture
On April 26, 2012, Defendant Dennis Chookaszian (“Defendant”) filed a complaint with

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the American Arbitration Association (the “AAA”) asserting six claims against Plaintiff Guidewire

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Software, Inc.2 (“Plaintiff”) for: (1) breach of contract, (2) breach of the duty of good faith and fair

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dealing, (3) conversion, (4) unjust enrichment, (5) quantum meruit, and (6) fraud. ECF No. 8

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(“Chookaszian Decl.”) Ex. C; see Pl. Mot. at 1.
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On May 24, 2012, Plaintiff filed a complaint in the Superior Court of California for the

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County of Santa Clara seeking declaratory relief with respect to Defendant’s stock option and also

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a declaration regarding whether the dispute is arbitrable. Pl. Mot at 1; ECF No. 1 Ex. A

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(“Complaint”) ¶¶ 41-48. On May 25, 2012, Plaintiff then filed a motion to stay the arbitration

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pending the outcome of litigation. Id. On June 21, 2012, Defendant removed the case to this Court

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based on diversity jurisdiction pursuant to 28 U.S.C. § 1332. Id. The parties have agreed to stay

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the arbitration until the Court rules on the instant motions. Pl. Opp’n, Donohue Decl. at ¶ 11.
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II.

On November 10, 2001, Defendant accepted Plaintiff’s offer for a position on its advisory

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Factual Background

board. Pl. Mot. at 1; Chookaszian Decl. Ex. A (“Letter Agreement”). The offer letter (“Letter

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Guidewire Software, Inc. was formerly known as Centrica Software, Inc. Def. Mot. at 3.
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Case No.: 12-CV-03224-LHK
ORDER GRANTING DEFENDANT’S MOTION TO STAY THE ACTION IN FAVOR OF
ARBITRATION AND DENYING PLAINTIFF’S MOTION TO STAY ARBITRATION

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Agreement”) stated that Plaintiff was required “to grant Defendant the option to purchase 25,000

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shares of [Plaintiff’s] common stock at an exercise price equal to the fair market value on the date

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of grant, as determined by the board of directors.” Pl. Mot. at 1-2; see Letter Agreement at 1. The

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Letter Agreement further stated that the “stock shall be subject to other standard provisions set

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forth in a restricted stock purchase agreement, which must be executed by [Defendant] and the

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Company prior to such grant.” Letter Agreement at 1.

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United States District Court
For the Northern District of California

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The Letter Agreement also contained an arbitration clause that stated:
Any controversy between the parties hereto involving the construction or application of any
terms, covenants or conditions of this Letter Agreement, or any claims arising out of or
relating to this Letter Agreement or the breach thereof or with your service to the Company
or any termination of that service, will be submitted to and settled by final and binding
arbitration in Palo Alto, California, in accordance with the Model Employment Dispute
Resolution Rules of the American Arbitration Association (the “Rule”) then in effect, and
an arbitrator shall be selected pursuant to such Rules and judgment upon the award rendered
by the arbitrators may be entered in any court having jurisdiction thereof.
Letter Agreement at 1.
On May 30, 2002, Plaintiff granted Defendant an option to purchase 25,000 shares of stock
as specified in the Notice of Grant. Pl. Mot. at 2; Chookaszian Decl. Ex. B (“Notice of Grant”).
The Notice of Grant stated that the option was granted subject to and in accordance with the terms

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of the 2002 Stock Option/Stock Issuance Plan (the “Plan”), the Stock Option Agreement, and the
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Stock Purchase Agreement. Notice of Grant at 1. None of the above documents contained an

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arbitration provision. Pl. Mot. at 2-3; see Notice of Grant; Chookaszian Decl. Ex. B-C (the

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“Plan”); Chookaszian Decl. Ex. B-A (“Stock Option Agreement”); Chookaszian Decl. Ex. B-B

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(“Stock Purchase Agreement”). The Stock Option Agreement and the Plan both contained

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provisions stating that the stock option would terminate and cease to be outstanding three months

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after “cessation of service.” Pl. Mot. at 2; Stock Option Agreement § 5(a); the Plan at 5. Both the

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Case No.: 12-CV-03224-LHK
ORDER GRANTING DEFENDANT’S MOTION TO STAY THE ACTION IN FAVOR OF
ARBITRATION AND DENYING PLAINTIFF’S MOTION TO STAY ARBITRATION

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Stock Option Agreement and the Plan also defined the term “service.” Stock Option Agreement at
A-3; the Plan at A-4.
Around November 1, 2011, Defendant contacted Plaintiff’s CEO to exercise the stock

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option. Chookaszian Decl. ¶ 9. On November 3, Plaintiff’s CEO informed Defendant that the

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option had been cancelled. Id. ¶ 11. Plaintiff’s in-house counsel later told Defendant that the stock

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option was “cancelled pursuant to the ‘Cessation of Services’ provision” in the Stock Option

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United States District Court
For the Northern District of California

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Agreement. Id. ¶ 12. Plaintiff contends that “Defendant has not provided service to [Plaintiff]
since at latest, 2006,” and that “[Plaintiff] cancelled Defendant’s option several years ago in

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accordance with the terms of the Plan and Stock Option Agreement.” Pl. Mot. at 3. Defendant,

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however, alleges that he has “provided extensive consulting services to [Plaintiff] over the past 10

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years and continue[s] to work on behalf of the company.” Chookaszian Decl. ¶ 7; see Def. Mot. at

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4. Defendant also alleges, and it is not contested, that Plaintiff never provided notice to him that

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his services were terminated or ceased, or that his stock option was cancelled. Chookaszian Decl. ¶
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13; Def. Mot. at 5.
In January 2012, Defendant “sent a formal request to exercise the stock option[], along with

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a $1,250 check for the exercise price.” Chookaszian Decl. ¶ 14; Def. Mot. at 5. Plaintiff again

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responded, this time in writing, that Defendant’s option had been cancelled. Chookaszian Decl. ¶

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15; Def. Mot at 5; Pl. Mot. at 3. Days after Defendant’s second attempt to exercise his option, the

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company had a successful initial public offering. Chookaszian Decl. ¶ 16; Def. Mot. at 5; see Pl.

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Mot. at 3. The 25,000 shares of Plaintiff’s stock were valued over $700,000 as of June 26, 2012.
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Chookaszian Decl. ¶ 17; Det. Mot. at 5; see Pl. Mot. at 3 (valuing the stocks at over $650,000 as of

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May 2012). Defendant then initiated the arbitration proceeding on April 26, 2012, asserting that

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“[Plaintiff] breached its agreement with him, as well as the duty of good faith and fair dealing

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implied in that agreement, converted his property, was unjustly enriched because it cancelled his

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Case No.: 12-CV-03224-LHK
ORDER GRANTING DEFENDANT’S MOTION TO STAY THE ACTION IN FAVOR OF
ARBITRATION AND DENYING PLAINTIFF’S MOTION TO STAY ARBITRATION

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sole compensation for services, owes him compensation under the theory of quantum meruit[,] and

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committed fraud.” Def. Mot. at 5.

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III.

Legal Standard

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The Federal Arbitration Act (“FAA”) contains a mandatory stay provision:

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If any suit or proceeding be brought in any of the courts of the United States upon any issue
referable to arbitration under an agreement in writing for such arbitration, the court in
which such suit is pending, upon being satisfied that the issue involved in such suit or
proceeding is referable to arbitration under such an agreement, shall on application of one
of the parties stay the trial of the action until such arbitration has been had in accordance
with the terms of the agreement, providing the applicant for the stay is not in default in
proceeding with such arbitration.

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United States District Court
For the Northern District of California

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9 U.S.C. § 3.

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IV.

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Discussion
The instant Motions raise the question of who has the power to decide arbitrability, the

Court or the arbitrator. Defendant contends that because the dispute relates to the Letter

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Agreement which contains an arbitration clause, an arbitrator should decide arbitrability pursuant
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to the Model Employment Dispute Resolution Rules of the American Arbitration Association as

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stated in the Letter Agreement. Def. Mot. at 7-9. Plaintiff, however, contends that the Court

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should decide the matter of arbitrability, and that because the dispute only “requires interpretation

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of the terms of the Stock Option Agreement and the Plan,” the arbitration clause in the Letter

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Agreement is not implicated. Pl. Opp’n at 5-6. The Court agrees with Defendant that, in this case,

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the matter of arbitrability is for the arbitrator to decide.

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The Supreme Court has held that the question of “who has the power to decide
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arbitrability” turns upon what the parties agreed about that matter.

First Options of Chi. v.

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Kaplan, et al., 514 U.S. 938, 943 (1995). “If … the parties did not agree to submit the arbitrability

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question itself to arbitration, then the court should decide that question….” Id. However, if there

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is clear and unmistakable evidence that the parties intended that questions of arbitrability be

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Case No.: 12-CV-03224-LHK
ORDER GRANTING DEFENDANT’S MOTION TO STAY THE ACTION IN FAVOR OF
ARBITRATION AND DENYING PLAINTIFF’S MOTION TO STAY ARBITRATION

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decided by the arbitrator, the arbitrator should decide those issues. Id. at 943-44 (“Courts should

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not assume that the parties agreed to arbitrate arbitrability unless there is ‘clea[r] and

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unmistakabl[e]’ evidence that they did so.”).

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In cases where the parties “clearly and unmistakably intend to delegate the power to decide
arbitrability to an arbitrator,” the Court’s inquiry is “limited… [to] whether the assertion of
arbitrability is ‘wholly groundless.’” Qualcomm Inc. v. Nokia Corp., 466 F.3d 1366, 1371 (Fed.

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United States District Court
For the Northern District of California

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Cir. 2006) (applying Ninth Circuit law). “If the court finds that the assertion of arbitrability is not
‘wholly groundless,’ then it must stay the trial of the action pending a ruling on arbitrability by an
arbitrator.” Id. at 1372.
Accordingly, the Court will first address whether the parties clearly and unmistakably
intended to delegate the power to decide arbitrability to the arbitrator. The Court will then address
whether the assertion of arbitrability is wholly groundless.

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A. Clear and Unmistakable Intent
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Defendant argues that the explicit incorporation of “the Model Employment Dispute

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Resolution Rules of the [AAA]” (“AAA Rules”) in the arbitration clause in the Letter Agreement

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evinces a clear and unmistakable agreement that questions of arbitrability would be submitted to

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arbitration for resolution. Def. Mot. at 7-9; Chookaszian Decl. Ex. A at 1. The Court agrees.

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“When the arbitration agreement explicitly incorporate[s] rules that empower an arbitrator
to decide issues of arbitrability, the incorporation serves as clear and unmistakable evidence of the

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parties' intent to delegate such issues to an arbitrator.” Clarium Capital Management LLC v.
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Choudhury, No. C 08-5157 SBA, 2009 WL 331588, at *5 (N.D. Cal. Feb. 11, 2009) ; see also

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Terminix Int’l Co. v. Palmer Ranch Ltd., 432 F.3d 1327, 1332 (11th Cir. 2005) (holding that by

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incorporating AAA rules, including rule authorizing arbitrator to determine the issue of

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arbitrability, “the parties clearly and unmistakably agreed that the arbitrator should decide whether

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Case No.: 12-CV-03224-LHK
ORDER GRANTING DEFENDANT’S MOTION TO STAY THE ACTION IN FAVOR OF
ARBITRATION AND DENYING PLAINTIFF’S MOTION TO STAY ARBITRATION

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the arbitration clause is valid”); Contec Corp. v. Remote Solution, Co., Ltd., 398 F.3d 205, 208 (2d

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Cir. 2005) (“[W]hen, as here, parties explicitly incorporate rules that empower an arbitrator to

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decide issues of arbitrability, the incorporation serves as clear and unmistakable evidence of the

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parties' intent to delegate such issues to an arbitrator”).

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In the instant case, the arbitration clause in the Letter Agreement explicitly incorporates the
AAA Rules (see id. at 1), which provide that “[t]he arbitrator shall have the power to rule on his or

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United States District Court
For the Northern District of California

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her own jurisdiction, including any objections with respect to the existence, scope or validity of the
arbitration agreement.” AAA Employment Arbitration Rules and Mediation Procedures Rule 6.3

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“The incorporation of the AAA rules in the arbitration agreement is ‘clear and unmistakable’

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evidence of the parties' intent to delegate the issue of arbitrability to the arbitrator.” Clarium

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Capital Management LLC, 2009 WL 331588 at *5; see also Terminix Int’l Co., 432 F.3d at 1332

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(holding that by incorporating AAA rules, including rule authorizing arbitrator to determine the

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issue of arbitrability, “the parties clearly and unmistakably agreed that the arbitrator should decide
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whether the arbitration clause is valid”); Contec, 398 F.3d at 208 (holding that incorporation of

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AAA rules was clear and unmistakable evidence that the parties agreed that the arbitrator should

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decide whether the arbitration clause is valid).

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B. Wholly Groundless

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If “the court concludes that the parties to the agreement did clearly and unmistakably intend
to delegate the power to decide arbitrability to an arbitrator, then the court should perform a

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second, more limited inquiry to determine whether the assertion of arbitrability is ‘wholly
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Available at: http://www.adr.org/aaa/faces/rules. The Court understands that the AAA
“Employment Arbitration Rules and Mediation Procedures” are the current version of the “Model
Employment Dispute Resolution Rules of the AAA” referred to in the Letter Agreement. See
Letter Agreement at 1 (incorporating the Model Employment Dispute Resolution Rules of the
AAA); Def. Mot. at 8 (stating that the AAA Employment Arbitration Rules and Mediation
Procedures are the “current, and applicable,” version of the Model Employment Dispute Resolution
Rules of the AAA).
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Case No.: 12-CV-03224-LHK
ORDER GRANTING DEFENDANT’S MOTION TO STAY THE ACTION IN FAVOR OF
ARBITRATION AND DENYING PLAINTIFF’S MOTION TO STAY ARBITRATION

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groundless.’” Qualcomm, 466 F.3d at 1371. Because the Court finds that the parties did clearly

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and unmistakably intend to delegate power to decide arbitrability to an arbitrator, the Court will

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now conduct the “wholly groundless” inquiry. As set forth in Qualcomm, in conducting this

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inquiry:

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United States District Court
For the Northern District of California

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[T]he district court should look to the scope of the arbitration clause and the precise issues
that the moving party asserts are subject to arbitration. Because any inquiry beyond a
‘wholly groundless’ test would invade the province of the arbitrator, whose arbitrability
judgment the parties agreed to abide by in the [agreement], the district court need not, and
should not, determine whether [the appellants’] [claims] are in fact arbitrable. If the
assertion of arbitrability is not “wholly groundless,” the district court should conclude that
it is “satisfied” pursuant to section 3.
Qualcomm, 466 F.3d at 1374.
The scope of the arbitration clause in the instant case is broad. It encompasses “[a]ny
controversy between the parties hereto involving, or any claims arising out of or relating to this
Letter Agreement or the breach thereof or with [Defendant’s] service to [Plaintiff] or any

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termination of that service.” Chookaszian Decl. Ex. A at 1. The dispute in the instant case relates
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to stock options granted to Defendant in exchange for his service as a consultant and member of

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Plaintiff’s Advisory Board. Id. The nature of Defendant’s service and the grant of the stock

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options were first outlined in the Letter Agreement. Id. Thus, the case appears to “aris[e] out of or

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relat[e] to th[e] Letter Agreement… or… [Defendant’s] service to [Plaintiff] or any termination of

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that service.” Chookaszian Decl. Ex. A at 1. Defendant’s claim that this matter should be referred

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to arbitrartion is therefore not wholly groundless.

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Plaintiff contends that the arbitration clause in the Letter Agrement is not implicated in this
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case. Plaintiff argues that Defendant ceased providing services in 2006, and that, as a result,

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Defendant’s stock options were cancelled pursuant to the provisions of the Stock Agreement and

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the Plan pertaining to the “cessation of Service.” Pl. Opp’n at 6-7. Thus, Plaintiff contends that

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“[t]his dispute” concerns and “requires interpretation of the terms of the Stock Option Agreement

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Case No.: 12-CV-03224-LHK
ORDER GRANTING DEFENDANT’S MOTION TO STAY THE ACTION IN FAVOR OF
ARBITRATION AND DENYING PLAINTIFF’S MOTION TO STAY ARBITRATION

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and the Plan” and not the Letter Agreement. Pl. Opp’n at 6. Plaintiff contends that because neither

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the Stock Option Agreement nor the Plan include arbitration clauses, Defendant’s claim that this

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matter is subject to arbitration is without merit. Id. at 7-8.

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While Plaintiff’s arguments may ultimately prove to be correct, these arguments should be

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raised before the arbitrator. As set forth above, the Court is convinced that Defendant’s arbitration

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claim is not wholly groundless. The arbitration clause in the Letter Agreement is broad. It

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provides for arbitration of any matter “involving[] or… arising out of or relating to th[e] Letter

United States District Court
For the Northern District of California

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Agreement… [or Defendant’s] service to” Plaintiff. Chookaszian Decl. Ex. A at 1. The instant

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action involves: (1) issues relating to stock options that were originally provided for in the Letter

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Agreement, and (2) Defendant’s service (or lack thereof) to Plaintiff. The Court therefore

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concludes that there is sufficient evidence that Defendant’s claim that this matter is arbitrable is not

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wholly groundless. See Qualcomm, 466 F.3d at 1374 (“Because any inquiry beyond a ‘wholly

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groundless’ test would invade the province of the arbitrator, whose arbitrability judgment the
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parties agreed to abide by in the [agreement], the district court need not, and should not, determine
whether [the appellants’] [claims] are in fact arbitrable.”).4
Because the Court concludes that Defendant’s claim that this matter is arbitrable is not

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wholly groundless, the Court must stay these proceedings pursuant to 9 U.S.C. § 3. See

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Plaintiff also argues that this suit is not subject to arbitration because it does not “‘touch[]
matters’ covered by the” Letter Agreement. Pl. Opp’n at 8 (arguing that “the ‘touch matters’
standard is irrelevant where, as here, other contracts exist that encompass the dispute and that lack
an arbitration clause”) (citing Mirant Americas Energy Mktg. LP v. 1st Rochdale Co-op. Group,
Ltd., 363 F. Supp. 2d 679, 682 (S.D.N.Y. 2005); Alticor, Inc. v. Nat'l Union Fire Ins. Co. of
Pittsburgh, Pa., 411 F.3d 669, 673 (6th Cir. 2005); In re Hops Antitrust Litig., 655 F. Supp. 169,
172 (E.D. Mo. 1987)); see also Def. Mot. at 9 (arguing that the matters in this action are arbitrable
because the Letter Agreement provides for arbitration of “any claims… relating to th[e] Letter
Agreement”). The Court need not resolve this issue because the Court is convinced that, based on
the broad “relating to” language in the arbitration clause in the Letter Agreement, Defendant’s
assertion of arbitration is not “wholly groundless.” Qualcomm, 466 F.3d at 1374.

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Case No.: 12-CV-03224-LHK
ORDER GRANTING DEFENDANT’S MOTION TO STAY THE ACTION IN FAVOR OF
ARBITRATION AND DENYING PLAINTIFF’S MOTION TO STAY ARBITRATION

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Qualcomm, 466 F.3d at 1374. For the same reason, Plaintiff’s request that the arbitration be stayed

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(see Pl. Mot. at 7-9) must be denied.

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V. Conclusion

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For the foregoing reasons, IT IS HEREBY ORDERED that Defendant’s Motion to Compel
Arbitration and to Dismiss or Alternatively Stay the Action in Favor of Arbitration is GRANTED
to the extent it requests a stay of this action. Plaintiff’s Motion to Stay Arbitration is DENIED.

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United States District Court
For the Northern District of California

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This action is STAYED until the earlier of: (1) completion of the arbitration involving the same
parties and claims currently pending before the American Arbitration Association; or (2) 20 days
after any ruling by the arbitrator that the parties’ claims are not arbitrable.

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The Court requests that the parties consider stipulating to a dismissal of this case without

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prejudice with a tolling agreement. If the parties do not stipulate to such a dismissal, the parties

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shall file a status report regarding the status of the arbitration and whether the parties wish the stay

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to continue every six months from the date of this order. The first status report shall be due April
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30, 2012.
The Clerk’s Office shall administratively close the file.
IT IS SO ORDERED.

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Dated: October 31, 2012

_________________________________
LUCY H. KOH
United States District Judge

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Case No.: 12-CV-03224-LHK
ORDER GRANTING DEFENDANT’S MOTION TO STAY THE ACTION IN FAVOR OF
ARBITRATION AND DENYING PLAINTIFF’S MOTION TO STAY ARBITRATION