Diamond Foods, Inc. v. Hottrix, LLC

Filing 110

ORDER GRANTING 89 THIRD PARTY DEFENDANT DEUTSCH LA, INC.'S MOTION TO COMPEL ARBITRATION OF DIAMOND FOODS, INC.'S THIRD PARTY COMPLAINT AND STAY LITIGATION OF DIAMOND FOODS' CLAIMS AGAINST DEUTSCH. Signed by Judge Beth Labson Freeman on 6/15/2018. (blflc2S, COURT STAFF) (Filed on 6/15/2018)

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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SAN JOSE DIVISION

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DIAMOND FOODS, INC.,
Plaintiff,

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v.

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HOTTRIX, LLC,
Defendant.

United States District Court
Northern District of California

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[Re: ECF 89]
Counterclaimant,
v.
DIAMOND FOODS, INC.,

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Counterclaim-defendant.
DIAMOND FOODS, INC.,

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ORDER GRANTING THIRD PARTY
DEFENDANT DEUTSCH LA, INC.’S
MOTION TO COMPEL ARBITRATION
OF DIAMOND FOODS, INC.’S THIRD
PARTY COMPLAINT AND STAY
LITIGATION OF DIAMOND FOODS’
CLAIMS AGAINST DEUTSCH

HOTTRIX, LLC,

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Case No. 14-cv-03162-BLF

Third party plaintiff,
v.
DEUTSCH LA, INC.,
Third party defendant.

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Since July 2014, this lawsuit has centered on a dispute between Plaintiff and

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Counterclaim-defendant Diamond Foods, Inc. (“Diamond Foods”) and Defendant and

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Counterclaimant Hottrix, LLC (“Hottrix”) over alleged copyright and trade dress infringement of a

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mobile software application that depicts popcorn. On January 22, 2018, this Court granted

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Diamond Foods’ unopposed motion to file a third party complaint for indemnity against Deutsch

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LA, Inc. (“Deutsch”), the company hired by Diamond Foods to develop the “Perfect Popcorn”

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mobile application to promote Diamond Foods’ Pop Secret Popcorn Brand. See ECF 84.
Deutsch now moves to compel arbitration of Diamond Foods’ third party complaint

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pursuant to the Federal Arbitration Act based on the arbitration clause in the agreement between

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Deutsch and Diamond. See generally Motion to Compel Arbitration (“Mot.”), ECF 89. The Court

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deemed this matter suitable for submission without oral argument. ECF 108. For the reasons that

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follow, Deutsch’s motion to compel arbitration is GRANTED.

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I.

BACKGROUND
Diamond Foods originally filed this case against Hottrix on July 11, 2014, seeking a

declaratory judgment that Diamond Foods’ Perfect Popcorn mobile application does not infringe

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United States District Court
Northern District of California

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upon any copyright or trade dress rights in Hottrix’s “iMunchies” app. See ECF 1 (“Compl.”).

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Hottrix asserts counterclaims against Diamond Foods for copyright infringement, statutory and

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common law trade dress infringement, and unfair competition. See ECF 46 (“Amend.

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Counterclaims”). Following establishment of the pleadings between Diamond Foods and Hottrix,

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the parties proceeded with discovery. On January 3, 2018, Diamond Foods moved pursuant to

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Federal Rule of Civil Procedure 14 for leave to file a third party complaint for express contractual

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indemnity against Deutsch. See ECF 82. Hottrix did not oppose, and the Court granted Diamond

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Foods leave to file and serve its third party complaint against Deutsch. See ECF 84.

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Deutsch now moves to stay the third party action and compel arbitration under Sections 3

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and 4 of the Federal Arbitration Act (“FAA”). See Mot. at 7 (citing 9 U.S.C. §§ 3, 4). The

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following facts are relevant to the instant motion: Effective January 1, 2011, Diamond Foods

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entered into a Master Service Agreement (“MSA”) with Deutsch to develop a marketing plan and

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related software for Diamond Foods’ brands, including Pop Secret popcorn. See Third Party

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Compl. ¶ 7, ECF 85; Exh. A to Third Party Complaint, ECF 85-1 (“MSA”). On or about March

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22, 2013, Diamond Foods and Deutsch executed a Statement of Work (“2013 SOW”) governed by

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the MSA, pursuant to which Deutsch agreed to create and build the Perfect Popcorn mobile phone

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application for Diamond Foods as part of the advertising campaign for Pop Secret. See Third

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Party Compl. ¶ 9. On or about January 21, 2014, Diamond Foods and Deutsch executed a
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Statement of Work (“2014 SOW”) governed by the MSA, pursuant to which Deutsch created and

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built a subsequent iteration of the Perfect Pop app. Id. ¶ 11.
The MSA contains two relevant indemnification provisions, whereby Diamond Foods

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agreed to indemnify Deutsch for any expenses arising from “any subpoena received by

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Deutsch…in connection with a litigation, arbitration or other dispute involving [Diamond Foods]

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where Deutsch is not a party.” MSA ¶ 9. The MSA also provides that Deutsch would indemnify

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Diamond Foods for any copyright infringement claims arising from any advertising prepared by

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Deutsch and used by Diamond Foods “other than Claims (a) based upon materials furnished or

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approved by [Diamond Foods].” Id. ¶ 10.
The MSA includes an arbitration clause that provides:

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Any dispute arising under this Agreement or the termination of this Agreement
may be submitted by either party to arbitration in Los Angeles, CA, under the
commercial rules of the American Arbitration Association before a single
arbitrator. Any award will be enforceable in any court of competent jurisdiction
and will not be inconsistent with the terms of this Agreement. The non-prevailing
party in any arbitration will be assessed the cost of the prevailing party’s reasonable
attorneys’ fees and expenses.

United States District Court
Northern District of California

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See MSA ¶ 22. 1 In addition, the MSA contains a general choice-of-law provision that states
“[t]his Agreement will be interpreted under, construed in accordance with and governed by the
laws of the State of California without regard to its conflict of laws principles.” MSA ¶ 30.
In October 2017, during the course of Diamond Foods’ litigation with Hottrix, Diamond

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Foods issued a subpoena duces tecum to Deutsch. See Declaration of Hazel Mae B. Pangan
(“Pangan Decl.”) ¶ 2, ECF 93-1. Deutsch produced documents in response to the subpoena, and
also notified counsel for Diamond Foods of its position that Deutsch was entitled to
indemnification for all costs arising from the subpoena consistent with Section 9 of the MSA. See
Mot. at 4. On December 12, 2017, Diamond Foods issued an indemnity demand to Deutsch
pursuant to Section 10 of the MSA, demanding that Deutsch indemnify and defend Diamond

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The Court acknowledges that it reviewed the MSA containing the arbitration clause at issue
before Deutsch was impleaded in the context of Diamond Foods’ unopposed motion for leave to
file a third party complaint. See ECF 82-2. The enforceability of the arbitration provision was not
before the Court in its analysis of the factors under Federal Rule of Civil Procedure 14. Thus,
Deutsch’s motion to compel arbitration is this Court’s first opportunity to consider whether
Diamond Foods’ claims against Deutsch must be arbitrated pursuant to the FAA.
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Foods from and against all claims asserted by Hottrix in the instant action. See Exh. D to Pangan

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Decl., ECF 93-5. Diamond Foods also notified Deutsch of its intention to seek leave of court in

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the Hottrix litigation to file a third party complaint in impleader against Deutsch for express

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contractual indemnity in the event that Deutsch refused Diamond Foods’ demand for indemnity

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and defense. Id. at 3.
In response, Deutsch invoked the MSA’s arbitration clause and sent an arbitration

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demand to Diamond Foods through the American Arbitration Association (“AAA”) on January 9,

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2018. See Pangan Decl. ¶ 6; see also Exh. A to Declaration of David B. Berman (“Berman

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Decl.”), ECF 90. In arbitration, Deutsch sought (1) indemnification from Diamond Foods under
Section 9 of the MSA for all costs incurred as a result of Diamond Foods’ subpoena in the Hottrix

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United States District Court
Northern District of California

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litigation; and (2) a declaration that Deutsch is not liable to indemnify Diamond Foods under

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Section 10 of the MSA for defending Hottrix’s counterclaims. See Exh. A to Berman Decl.
On January 24, 2018, Diamond Foods served Deutsch with the third party complaint in this

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action, which includes claims for indemnity as well as a declaratory judgment setting forth “the

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respective rights and duties of Deutsch and Diamond Foods with respect to the damages claimed

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in the complaint.” Third Party Compl. ¶ 41. Two days later, on January 26, 2018, Diamond

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Foods objected to arbitral jurisdiction before the arbitrator in Los Angeles. See Exh. E to Pangan

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Decl. Deutsch’s instant motion to compel arbitration of the third party complaint followed.
On May 24, 2018, while Deutsch’s motion was pending before this Court, Deutsch filed a

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supplemental letter brief informing the Court that the arbitration was moving forward and the

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arbitrator recently ruled in favor of arbitral jurisdiction and denied Diamond Foods’ request for a

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stay of arbitration. See ECF 105; ECF 105-1 (“Arbitration Order”). Diamond Foods filed a

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supplemental letter brief on May 30, 2018, arguing that this Court is not bound by the Arbitration

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Order and has the power to stay arbitration. See ECF 107. The Court has reviewed and

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considered these supplemental materials in reaching the conclusion below.

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II.

LEGAL STANDARD
Enforceability of an arbitration clause, and the determination of the scope of that clause, is

governed by the Federal Arbitration Act (“FAA”). 9 U.S.C. §§ 1 et seq. Under the FAA,
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arbitration agreements are a matter of contract, and “shall be valid, irrevocable, and enforceable,

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save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C.

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§ 2. Such generally applicable contract defenses include “fraud, duress, or unconscionability,” but

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not “defenses that apply only to arbitration or that derive their meaning from the fact that an

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agreement to arbitrate is at issue.” AT & T Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011)

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(citation omitted). A party seeking to invoke an arbitration agreement may petition the district

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court “for an order directing that such arbitration proceed in the manner provided for in such

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agreement.” 9 U.S.C. § 4; see also Trompeter v. Ally Fin., Inc., 914 F.Supp.2d 1067, 1071 (N.D.

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Cal. 2012).
A district court faced with a petition to enforce an arbitration clause engages in a limited

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United States District Court
Northern District of California

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two-part inquiry: first, it determines whether the arbitration agreement is valid, and second, it

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determines whether the agreement encompasses the claims at issue. Ashbey v. Archstone Prop.

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Mgmt., Inc., 785 F.3d 1320, 1323 (9th Cir. 2015). A district court does not consider challenges to

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the contract as a whole, but rather only specific challenges to the validity of the arbitration clause

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itself. See Rent–A–Center, W., Inc. v. Jackson, 561 U.S. 63, 70 (2010) (noting the “two types of

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validity challenges” but holding that only challenges to the validity of the agreement to arbitrate

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are “relevant to a court’s determination whether the arbitration agreement at issue is enforceable”).

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III.

DISCUSSION
Diamond Foods does not dispute the validity or mandatory nature of the arbitration clause

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in its opposition to Deutsch’s motion. The Court therefore finds that the arbitration agreement

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between Diamond Foods and Deutsch is valid and encompasses the claims raised in Diamond

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Foods’ third party complaint. However, Diamond Foods argues that (1) arbitration with Deutsch

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is premature given the instant litigation involving Hottrix; and (2) the Court has discretion

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pursuant to California Code of Civil Procedure Section 1281.2(c) to decide not to enforce

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arbitration agreements where pending litigation leads to conflicting rulings. See Opp’n at 5-14,

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ECF 93. For the reasons discussed below, neither of these arguments persuades the Court to

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relieve Diamond Foods of its agreement to arbitrate its indemnity claims against Deutsch.

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A.

Ripeness

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Diamond Foods argues that compelling arbitration is premature because the Court must

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first resolve threshold issues regarding liability for Hottrix’s claims before deciding indemnity

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obligations between Diamond Foods and Deutsch. See Opp’n at 6. This is not so.

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The Court agrees with Deutsch that Diamond Foods has conflated the two different
indemnity provisions at issue in the arbitration: one of which is Deutsch’s demand pursuant to

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Section 9 of the MSA that Diamond Foods indemnify it in connection with the October 2017

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subpoena duces tecum. Reply at 7, ECF 94. This contractual obligation that Deutsch seeks to

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enforce is entirely independent of the resolution of the intellectual property claims involved in this

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litigation. In other words, the outcome of the dispute between Diamond Foods and Hottrix has no

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United States District Court
Northern District of California

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consequence whatsoever with respect to whether Diamond Foods must indemnify Deutsch for

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costs associated with the subpoena. Diamond Foods’ argument impermissibly requests this Court

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to resolve the underlying dispute in its favor by finding that Section 9(g) of the MSA no longer

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applies because Deutsch is now a party to this litigation. See Opp’n at 9. That is precisely the

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type of dispute that Diamond Foods and Deutsch agreed to arbitrate. See MSA ¶ 22 (providing for

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arbitration of “[a]ny dispute arising under this Agreement or the termination of this Agreement”).

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Regarding the parties’ respective liability pursuant to Section 10 of the MSA, Diamond

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Foods vastly overstates the “inextricably intertwined” nature of Hottrix’s infringement claims with

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Deutsch’s involvement in the creation of the Perfect Popcorn app. The indemnity dispute

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proceeding before the arbitrator is limited to whether Diamond Foods owes Deutsch for the costs

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associated with the October 2017 subpoena, and whether Deutsch owes Diamond Foods for the

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cost of the Hottrix litigation and any potential judgment entered against Diamond Foods. Liability

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on Hottrix’s counterclaims against Diamond Foods does not need to be determined first.

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Diamond Foods has already issued a demand that Deutsch “indemnify and defend”

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Diamond Foods in the Hottrix litigation pursuant to Section 10 of the MSA, which presumably

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includes paying for litigation expenses in the event Diamond Foods is unable to recover such costs

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from Hottrix. See Exh. D to Pangan Decl. Thus, Diamond Foods’ argument that determination of

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the indemnity claims at this juncture would amount to an advisory opinion based on “an uncertain
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future event” is unpersuasive and legally unsupported. See Am. States Ins. Co. v. Kearns, 15 F.3d

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142, 144 (9th Cir. 1994) (holding that declaratory judgment action regarding duty to “defend and

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indemnify” was sufficiently ripe “even when the underlying liability action in state court had not

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yet proceeded to judgment”) (citing Maryland Cas. Co. v. Pac. Coal & Oil Co., 312 U.S. 270

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(1941).

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Diamond Foods points to no authority for its proposition that a party can avoid

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enforcement of a binding arbitration clause because certain amounts owed under the agreement

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may be offset depending on the outcome of litigation with a non-party to the arbitration clause.

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Although the ultimate dollar amount at issue may be undetermined and depend in part on whether
Hottrix obtains a judgment against Diamond Foods on its infringement claims, Diamond Foods’

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United States District Court
Northern District of California

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and Deutsch’s respective indemnity obligations can be resolved independently. Even if Perfect

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Popcorn ultimately is found to infringe on Hottrix’s iMunchies app, that outcome does not depend

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on whether Diamond Foods or Deutsch is responsible for those infringement claims under the

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MSA.

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In any event, unless Diamond Foods provides a basis for the Court not to enforce the

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mandatory arbitration clause in the MSA, ripeness is arguably a question to be decided by the

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arbitrator. See Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 85 (2002); Chicago

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Typographical Union No. 16 v. Chicago Sun-Times, Inc., 860 F.2d 1420, 1425 (7th Cir. 1988)

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(“[T]here is authority that the court should inquire only whether the subject matter of a dispute is

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within the arbitration clause, leaving the arguably procedural issue of ‘ripeness’ to the arbitrator.”)

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Indeed, the arbitrator in this matter has already determined that the issues are ripe,

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explaining in the denial of Diamond Foods’ request for a stay that “the indemnity issues appear to

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be contractual in nature relating to the indemnity obligations of Deutsch and Diamond Foods,

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arising from the work performed pursuant to the MSA. It does not appear necessary, as Diamond

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Foods argues, to resolve the issue of its potential liability in the Perfect Pop Litigation before the

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indemnity issues become ‘ripe.’” Arbitration Order at 4. As explained above, this Court is in

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complete agreement with the arbitrator’s determination that “[t]he indemnity issues appear capable

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of declaration before the expenses of the Perfect Pop Litigation further accumulate and the parties’
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claims for indemnity potentially multiply.” Id.
Just as this case has advanced toward trial on the intellectual property claims for the past

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four years without Deutsch’s involvement, this Court can continue to adjudicate this dispute

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between Diamond Foods and Hottrix while arbitration on the indemnity claims proceeds as

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mandated by the MSA. For these reasons, Diamond Foods’ ripeness argument fails.
B.

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CCP § 1281.2(c)

Diamond Foods’ only other argument in opposition to Deutsch’s motion to compel
arbitration is that under California law, this Court has the discretion not to enforce arbitration

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agreements where pending litigation leads to conflicting rulings. See Opp’n at 10-14 (citing Cal.

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Code Civ. P. § 1281.2(c)). For the same reasons discussed above, there is virtually no possibility

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United States District Court
Northern District of California

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of conflicting rulings given the separateness of the indemnity issues and intellectual property

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issues. More importantly, Diamond Foods’ argument fails because the FAA governs the parties’

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dispute, and the California procedural rule on which Diamond Foods relies does not.

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California Code of Civil Procedure Section 1281.2(c) permits nonenforcement of an

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otherwise mandatory arbitration agreement where “[a] party to the arbitration agreement is also a

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party to a pending court action or special proceeding with a third party, arising out of the same

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transaction or series of related transactions and there is a possibility of conflicting rulings on a

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common issue of law or fact.” Cal. Code Civ. P. § 1281.2(c). Accordingly, “[i]f the court

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determines that a party to the arbitration is also a party to litigation in a pending court action or

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special proceeding with a third party as set forth under subdivision (c) herein, the court (1) may

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refuse to enforce the arbitration agreement and may order intervention or joinder of all parties in a

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single action or special proceeding; (2) may order intervention or joinder as to all or only certain

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issues; (3) may order arbitration among the parties who have agreed to arbitration and stay the

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pending court action or special proceeding pending the outcome of the arbitration proceeding; or

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(4) may stay arbitration pending the outcome of the court action or special proceeding.” Cal. Code

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Civ. Proc. § 1281.2.

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Diamond Foods argues that even though the MSA includes an agreement to arbitrate
“under the commercial rules of the American Arbitration Association,” this Court can and should
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apply CCP § 1281.2 and refuse to enforce the arbitration agreement or stay arbitration pending the

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outcome of litigation. See Opp’n at 10. Because the MSA and two SOWs between Diamond

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Foods and Deutsch concern the development of the Perfect Popcorn application at issue in

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Diamond Foods’ litigation with Hottrix, Diamond Foods argues that the MSA arises “out of the

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same transaction or series of related transactions” as the allegations of infringement in the instant

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litigation. Id. Moreover, Diamond Foods argues that California procedural law rather than the

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FAA governs the contract because the MSA expressly states in its choice-of-law provision that the

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“Agreement will be…governed by the laws of the State of California.” Id. (citing MSA § 30).

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Deutsch responds that CCP § 1281.2 is inapplicable because the parties could not intend
both AAA and California procedural rules to apply to arbitration. See Reply at 1-4. Accordingly,

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United States District Court
Northern District of California

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Deutsch argues that the MSA’s choice-of-law clause does not incorporate California procedural

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rules such as CCP § 1281.2. Id. The Court agrees with Deutsch that applying CCP § 1281.2 in

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this case would run counter to clear authority from the Supreme Court and Ninth Circuit holding

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that a contract’s general choice-of-law clause does not incorporate state rules addressing the

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allocation of authority between courts and arbitrators.

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In Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52 (1995), the Supreme Court

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interpreted a contract that contained an arbitration provision and a choice-of-law provision in the

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same paragraph. See id. at 58. The choice of law sentence provided that the entire agreement

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“shall be governed by the laws of the State of New York.” Id. at 58-59. The second sentence

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provided that “any controversy” arising out of the transaction between the parties “shall be settled

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by arbitration” in accordance with the rules of the National Association of Securities Dealers. Id.

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at 59. The respondent argued that the sentence “shall be governed by the laws of the State of New

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York” incorporated a New York rule prohibiting arbitrators from awarding punitive damages. Id.

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at 53. The Supreme Court rejected this broad interpretation and held that “the best way to

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harmonize the choice-of-law provision with the arbitration provision is to read ‘the laws of the

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State of New York’ to encompass substantive principles that New York courts would apply, but

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not to include special rules limiting the authority of arbitrators. Thus, the choice-of-law provision

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covers the rights and duties of the parties, while the arbitration clause covers arbitration; neither
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sentence intrudes upon the other.” Id. at 63-64.

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The Ninth Circuit then relied on Mastrobuono in reaching its holding in Wolsey, Ltd. v.

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Foodmaker, Inc., a case that is binding and directly on point with respect to the applicability of

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CCP § 1281.2(c). 144 F.3d 1205, 1211 (9th Cir. 1998). Like the MSA and the contract in

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Mastrobuono, the agreement in Wolsey contained an arbitration clause and a general choice-of-law

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clause but did not refer to § 1281.2(c). 144 F.3d at 1212. The Ninth Circuit explained that the

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relevant question is whether § 1281.2(c) is a “substantive principle that [California] courts would

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apply” or is instead “a special rule[ ] limiting the authority of arbitrators.” Id. (citing

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Mastrobuono, 514 U.S. at 64). As explained above, § 1281.2(c) allows courts to stay arbitration
proceedings where a party to the arbitration agreement is also a party to a pending court action

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United States District Court
Northern District of California

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with a third party arising out of the same transaction. The Ninth Circuit was unequivocal: “Such a

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rule assuredly does affect California’s allocation of power between alternative tribunals.” Wolsey,

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144 F.3d at 1212 (citing Mastrobuono, 514 U.S. at 64). Accordingly, § 1281.2(c) was not deemed

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to be incorporated into the contract’s general choice of law provision.

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Diamond Foods tries in vain to distinguish Wolsey from the MSA in this case, arguing that

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the Wolsey agreement’s choice-of-law clause stated that it “shall be interpreted and construed

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under the laws of the State of California, U.S.A.” without reference to what law “governed.”

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Opp’n at 13. This is a distinction without a difference, and Diamond Foods provides no authority

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for its argument that the mere addition of the “governed by” language in the MSA manifests a

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specific intent by the parties to incorporate state law arbitration rules. Diamond Foods’ argument

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is further undermined by the language of the choice-of-law provision in Mastrobuono providing

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that the agreement would be “governed by the laws of the state of New York.” 514 U.S. at 64.

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Even in the presence of this nearly identical language to that in the MSA, the Supreme Court held

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that an agreement’s general choice-of-law provision did not incorporate state rules allocating

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authority between courts and arbitrators. Id. Diamond Foods’ attempt to narrow the holding of

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Mastrobuono and downplay its relevance to the issue at hand is not persuasive.

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Mastrobuono and Wolsey squarely settle the legal question in this case. The MSA

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expressly incorporates California substantive law in Section 30 and incorporates the AAA rules in
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Section 22 to resolve the parties’ disputes. Diamond Foods’ reliance on the general choice-of-law

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clause does not show that the parties intended to incorporate state procedural rules on arbitration

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such as CCP § 1281.2(c). The Supreme Court has further clarified that the “best way to

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harmonize the parties’ adoption of the AAA rules and their selection of California law is to read

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the latter to encompass prescriptions governing the substantive rights and obligations of the

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parties, but not the State’s ‘special rules limiting the authority of arbitrators.’” Preston v. Ferrer,

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552 U.S. 346, 363 (2008) (citing Mastrobuono, 514 U.S. at 63-64); see also BioMagic, Inc. v.

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Dutch Bros. Enters., LLC, 729 F. Supp. 2d 1140, 1146 (C.D. Cal. 2010) (interpreting nearly

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identical California choice-of-law clause and holding that Section 1281.2(c) cannot be reconciled
with the parties’ agreement to arbitrate under the AAA rules, which have procedural rules that

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United States District Court
Northern District of California

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differ from California’s). Thus, Section 1281.2(c) is inapplicable and does not preclude Deutsch

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from invoking its right to arbitrate the indemnity claims, even as parallel litigation between

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Diamond Foods and Hottrix pends before this Court. See Arbitration Order at 3.

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Diamond Foods relies heavily on Volt Information Sciences, Inc. v. Board of Trustees of

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Leland Stanford Junior University, 489 U.S. 468, 477 (1989), to argue that the FAA does not

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preempt CCP § 1281(c) because the two laws do not conflict. See Opp’n at 11. Volt involved the

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applicability of CCP § 1281.2(c) to a dispute over contract that included both an arbitration

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provision and a general choice-of-law clause. 489 U.S. at 470. The California Court of Appeal

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held that by agreeing to a California choice-of-law provision, the parties had agreed to incorporate

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CCP § 1281.2(c) and invoked its discretion to deny the defendant’s motion to compel arbitration.

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Id. at 471. Although seemingly relevant to the question presented here, the Supreme Court in Volt

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expressly declined to review the California Court of Appeal’s interpretation of the contract. Id. at

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474 (reasoning that “the interpretation of private contracts is ordinarily a question of state law,

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which this Court does not sit to review.”)

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Thus, Volt only addressed the limited question of “whether, assuming the choice-of-law

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clause meant what the Court of Appeal found it to mean, application of [CCP] § 1281.2(c) is

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nonetheless pre-empted by the FAA to the extent it is used to stay arbitration under this contract

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involving interstate commerce.” Id. at 476. The Supreme Court did not consider the argument
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raised by Deutsch here: that incorporation of the AAA rules in the arbitration agreement

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overcomes the contract’s general choice of law clause.

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The Supreme Court’s majority opinion in Mastrobuono emphasized this limitation of

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Volt’s holding, explaining that “[t]he dissent makes much of the similarity between this choice-of-

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law clause and the one in Volt, which we took to incorporate a California statute allowing a court

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to stay arbitration pending resolution of related litigation.” 514 U.S. at 60 n.4. However, the

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Supreme Court distinguished Volt on the grounds that “we did not interpret the contract de

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novo. Instead, we deferred to the California court’s construction of its own State’s law.” Id. The

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Supreme Court explained again in Preston that although the Volt contract provided for arbitration
in accordance with AAA rules, “Volt never argued that incorporation of those rules trumped the

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United States District Court
Northern District of California

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choice-of-law clause contained in the contract” and thus the Supreme Court in Volt did not address

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“the import of the contract’s incorporation by reference of privately promulgated arbitration

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rules.” 552 U.S. at 361-362.

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The Ninth Circuit in Wolsey also distinguished Volt, explaining that although Volt involved

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the applicability of CCP § 1281.2(c) to a dispute over a contract that included both an arbitration

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provision and a general choice-of-law clause, the Volt court “declined to review the California

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Court of Appeal’s interpretation of the contract.” Wolsey, 144 F.3d at 1212–13 (emphasis in

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original). Unlike Volt, the Ninth Circuit in Wolsey interpreted the contract de novo, and held that

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“[b]ecause Mastrobuono dictates that general choice-of-law clauses do not incorporate state rules

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that govern the allocation of authority between courts and arbitrators, the district court erred in

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applying Cal.Civ.Proc.Code Ann. § 1281.2(c) to deny [the defendant’s] motion to compel

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arbitration.” Wolsey, 144 F.3d at 1213. It would thus be error for this Court to contravene the

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binding precedent of Wolsey and Mastrobuono—where the higher courts did reach the

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incorporation issue—in deciding Deutsch’s motion to compel arbitration of Diamond Foods’ third

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party complaint.

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Faced with the authority discuss above, Diamond Foods cannot explain how the parties

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could have intended California procedural rules to govern their arbitration when the MSA

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explicitly incorporates the AAA rules in Section 22 of the MSA. Notwithstanding the choice-of12

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law provision in Section 30, the MSA does not manifest the parties’ intent to incorporate

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California Code of Civil Procedure Section 1281.2(c) instead of the FAA. Accordingly, Section

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1281.2(c) is inapplicable and Diamond Foods cannot invoke that rule to avoid its contractual

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obligation to arbitrate its claims against Deutsch. See Wolsey, 144 F.3d at 1213.

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As Diamond Foods provides no other basis for the Court to deny Deutsch’s motion to

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compel arbitration of the third party complaint, the motion is GRANTED. Because the Court

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grants Deutsch’s motion to compel arbitration, it does not reach Deutsch’s alternative argument

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that the third party complaint should be dismissed under Rule 12(b)(6) for failure to state a claim.

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See Mot. at 14-16.

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United States District Court
Northern District of California

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IV.

ORDER
For the foregoing reasons, IT IS HEREBY ORDERED that Deutsch’s motion to compel

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arbitration of Diamond Foods’ claims in the third party complaint is GRANTED. Litigation of

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Diamond Foods’ claims against Deutsch only shall be STAYED pending the resolution of

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arbitration. Within seven days of the resolution of the arbitration, Diamond Foods and Deutsch

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shall file a joint status report advising the Court of the resolution of the matter and any further

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action required by the Court.

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Litigation regarding the claims asserted between Diamond Foods and Hottrix is not stayed
and shall proceed in this Court pursuant to the operative Case Schedule.

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Dated: June 15, 2018
______________________________________
BETH LABSON FREEMAN
United States District Judge

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