Appel et al v. Concierge Auctions, LLC et al

Filing 30

ORDER granting in part Defendant Concierge Auctions, LLC's 10 Motion to Compel Arbitration; denying Plaintiff's 25 Motion for Leave to File Sur-Reply. Court stays this action as to all parties and all claims. Court orders the parties to proceed arbitration for a determination of arbitrability and possible arbitration of Plaintiffs' claims in an manner provided in the Bidder Agreement. Court directs the Clerk to administratively close this action. The decision to administratively close this action pending resolution of the arbitration does not have any jurisdictional effect. Signed by Judge Cynthia Bashant on 4/13/2018. (jah)

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1 2 3 4 5 6 7 8 9 10 UNITED STATES DISTRICT COURT 11 SOUTHERN DISTRICT OF CALIFORNIA 12 13 Case No. 17-cv-02263-BAS-MDD HOWARD APPEL, et al., 14 ORDER: Plaintiffs, (1) GRANTING IN PART MOTION TO COMPEL ARBITRATION (ECF No. 10) 15 16 17 v. CONCIERGE AUCTIONS, LLC, et al., AND 18 19 (2) DENYING EX PARTE MOTION FOR LEAVE TO FILE SUR-REPLY (ECF No. 25) Defendants. 20 21 Plaintiffs Howard Appel and David Cohen bring this action against Defendant 22 Concierge Auctions, LLC (“Concierge”) and its agents and employees—Chad 23 Roffers, Frank Martorano, Frank Trunzo, Alexander Gray, Emily Pryor, Katie 24 McMains, Serena Irwin, and Olivia Asavei—challenging the company’s solicitation 25 and auctioning practices. (First Amended Complaint (“FAC”), ECF No. 12.) 26 Presently, before the Court is Concierge’s motion to compel arbitration of Plaintiffs’ 27 claims and to dismiss the case or stay the proceedings pending arbitration or, in the 28 alternative, to transfer venue to the Federal District Court for the Southern District of –1– 17cv2263 1 New York. (Mot., ECF No. 10.) The Court finds this motion suitable for 2 determination on the papers submitted and without oral argument. See Fed. R. Civ. 3 P. 78(b); Civ. L.R. 7.1(d)(1). For the reasons set forth below, the Court GRANTS IN PART Concierge’s 4 5 motion to compel arbitration. 6 7 I. BACKGROUND 8 A. Relevant Factual Background 9 Plaintiffs are both real estate investors residing in San Diego, California. (FAC 10 ¶¶ 3-4.) As recently retired business executives, Plaintiffs routinely purchase luxury 11 real estate. (Opp., ECF No. 21, at 24.) In the last year, Plaintiffs participated in seven 12 Concierge real property auctions, four of which, Plaintiffs were the winning 13 bidders—totaling $14 million in purchase prices. (Mot.-1 at 7.) In each of these 14 auctions, Plaintiffs entered into Bidder terms, identical to the ones currently in 15 question. (Id.) 16 Concierge is a Delaware limited liability corporation with its principal place 17 of business in San Antonio, Texas. (FAC ¶ 6.) It advertises as a large, high-end real 18 estate company that auctions luxury residential real property. (Id.) In addition to its 19 representations made on its website, Concierge’s project sales manager, Alexander 20 Grey, sent multiple emails to Plaintiffs in California soliciting them to purchase 21 property in Fiji known as “Navado Bay, Banua Levu” (the “Fiji Property”). (ECF 22 Nos. 12 ¶ 20, 10-1 at 6.) On June 20, 2017, Plaintiffs registered to bid in the auction 23 of the Fiji Property (the “Auction”) by signing Concierge’s form bidder registration 24 agreement (“Bidder Agreement”). (FAC ¶ 23.) Section 27 of the Bidder Agreement 25 contained the following provisions: 26 27 28 ARBITRATION; VENUE; PREVAILING PARTY. The parties agree to submit all controversies, disputes, claims and matters of difference arising out of or relating to these Terms & Conditions, including but not limited to its enforcement, scope and/or interpretation, exclusively to –2– 17cv2263 arbitration in New York, New York in accordance with the Commercial Arbitration Rules of the American Arbitration Association from time to time in effect (the “Arbitration Rules”). . . . 1 2 3 THE PARTIES UNDERSTAND THAT, ABSENT THIS AGREEMENT, THEY WOULD HAVE THE RIGHT TO SUE EACH OTHER IN COURT, AND THE RIGHT TO A JURY TRIAL, BUT THEY GIVE UP THOSE RIGHTS VOLUNTARILY AND AGREE TO RESOLVE ANY AND ALL GRIEVANCES BY ARBITRATION. 4 5 6 7 8 (Id. ¶ 25.) The Bidder Agreement also contains a choice of law clause that provides: 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 The respective rights and obligations of the parties with respect to these Auction Terms & Conditions and the conduct of the Auction shall be governed, enforced and interpreted by the laws of the state of New York, without regard for conflicts of law principles. (Id. ¶ 26.) The Bidder Agreement further reads: The Auction Terms & Conditions and all other publicized elements of the Auction are subject to amendment by the posting of notices or by oral announcements made before or during the Auction. By participating in the Auction, you acknowledge and agree that you are bound by these Auction Terms as well as any additional terms that may be imposed by the Seller or announced prior to or at the Auction by Concierge. . . . CONCIERGE . . . RESERVE[S] THE RIGHT TO MODIFY OR AMEND ANY TERMS OF THE AUCTION, THE AUCTION METHOD OR PARTICULAR CONDITIONS OF THE AUCTION UPON ANNOUNCEMENT PRIOR TO OR DURING THE COURSE OF THE AUCTION. (Decl. of Appel, ECF No. 21-1, at 13, 17.) Both Plaintiffs signed the Bidder Agreement: Appel in person, and Cohen through DocuSign. (FAC ¶ 23.) On June 28, 2017, Plaintiffs participated in the Auction for the Fiji Property. (Id. ¶ 41.) Plaintiffs were the winning bidders in the auction with their $2,375,000 bid and subsequently paid Concierge a $285,000 earnest money deposit. (Id. ¶¶ 56, 61, 64.) According to the Complaint, unbeknownst to Plaintiffs, on the morning of 28 –3– 17cv2263 1 the Auction, the seller of the Fiji Property repudiated the Seller’s Agreement, yielding 2 the Fiji Property not for sale at the time the Auction took place. (Id. ¶ 52.) 3 4 B. Procedural Background 5 Plaintiffs brought suit against Concierge and eight individuals associated with 6 Concierge on November 6, 2017. (Complaint, ECF No. 1.) Plaintiffs’ First Amended 7 Complaint is brought in diversity and alleges claims under California’s unfair 8 competition law, Racketeering Influenced and Corrupt Organizations Act (“RICO”), 9 and state tort claims. (FAC.) Citing the Arbitration Clause, Concierge filed a motion 10 to compel arbitration, requesting the Court compel arbitration in New York, or 11 transfer the case to New York pursuant to the forum selection clause. (Mot.) 12 13 II. EX PARTE MOTION FOR LEAVE TO FILE SUR-REPLY 14 On February 2, 2017, Plaintiffs also filed an ex parte motion for leave to file a 15 sur-reply. (ECF No. 25.) “Although the court in its discretion [may] allow the filing 16 of a sur-reply, this discretion should be exercised in favor of allowing a sur-reply 17 only where a valid reason for such additional briefing exists.” Johnson 18 v. Wennes, No. 08-cv-1798, 2009 WL 1161620, at *2 (S.D. Cal. April 28, 2009). 19 Neither the federal rules nor the local rules permit a sur-reply as a matter of course. 20 Plaintiffs claim their sur-reply is necessary to respond to four new arguments 21 raised by Concierge in its Reply (ECF No. 23), but the Court finds Concierge made 22 no new arguments in the Reply. Rather, it appears two of Concierge’s purported new 23 arguments are responses to arguments raised in Plaintiff’s opposition. First, 24 Concierge discusses the parties’ contacts with New York (Reply at 6) to respond to 25 Plaintiffs’ contentions that “New York has No Substantial Relationship” to the 26 transaction. (Opp. at 18.) Second, Concierge discusses another broker’s involvement 27 in the transactions (Reply at 2) to refute Plaintiffs’ allegations that Concierge acted 28 as a broker. (Opp. at 6.) Additionally, for the third argument at issue, Concierge first –4– 17cv2263 1 raises this standing argument in its supplemental briefing to its initial motion, which 2 was filed and available to Plaintiffs before their opposition was filed. (ECF No. 14 at 3 7-8.) Thus, Plaintiffs did not need a sur-reply to respond to these arguments.1 For the 4 fourth and last argument Plaintiff raises, the Court finds that Concierge seeks with its 5 initial motion to arbitrate all claims against itself and its employees in this action, and 6 not only Concierge’s claim as Plaintiff contends. Thus, any discussion of Concierge 7 seeking to send the entire action to arbitration is not a new argument raised on reply. 8 Accordingly, the Court DENIES Plaintiffs’ ex parte motion for leave to file a 9 sur-reply. (ECF No. 23.) 10 11 III. LEGAL STANDARD 12 The Federal Arbitration Act (“FAA”) applies to arbitration agreements in any 13 contract affecting interstate commerce. Circuit City Stores, Inc. v. Adams, 532 U.S. 14 105, 119 (2001); 9 U.S.C. § 2. Under the FAA, arbitration agreements “shall be valid, 15 irrevocable, and enforceable, save upon such grounds as exist at law or in equity for 16 the revocation of any contract.” 9 U.S.C. § 2. This provision reflects both a “liberal 17 federal policy favoring arbitration” and the “fundamental principle that arbitration is 18 a matter of contract.” AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011) 19 (internal citations omitted). Arbitration agreements, “[l]ike other contracts . . . may 20 be invalidated by ‘generally applicable contract defenses, such as fraud, duress, or 21 unconscionability.’” Rent-A-Ctr., W., Inc. v. Jackson, 561 U.S. 63, 68 (2010) 22 (quoting Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 681, 687 (1996)). “In 23 determining whether to compel a party to arbitration, a district court may not review 24 the merits of the dispute[.]” Marriott Ownership Resorts, Inc. v. Flynn, No. 14-00372 25 26 27 28 Given the Court’s ruling on this motion, the Court declines to address any arguments going to the merits of Plaintiffs’ claims, and rather leave these for an arbitrator to decide. Likewise, the Court denies as moot any requests for judicial notice and evidentiary objections not addressed in this Order. (ECF Nos. 21-4, 21-5, 21-6, 23-1.) 1 –5– 17cv2263 1 JMS-RLP, 2014 WL 7076827, at *6 (D. Haw. Dec. 11, 2014). Instead, a district 2 court’s determinations are limited to (1) whether a valid arbitration agreement exists 3 and, if so, (2) whether the agreement covers the relevant dispute. See 9 U.S.C. § 4; 4 Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1130 (9th Cir. 2000). 5 Threshold issues of arbitrability are presumptively for the district court to 6 decide. See Martin v. Yasuda, 829 F.3d 1118, 1122-23 (9th Cir. 2016). However, 7 parties can delegate the power to decide arbitrability to the arbitrator through “clear 8 and unmistakable” evidence of an agreement to do so. Brennan v. Opus Bank, 796 9 F.3d 1125, 1130 (9th Cir. 2015). In determining whether the parties delegated 10 arbitrability to the arbitrator, the court applies federal arbitrability law “absent clear 11 and unmistakable evidence that the parties agreed to apply non-federal arbitrability 12 law.” Cape Flattery Ltd. v. Titan Mar., LLC, 647 F.3d 914, 921 (9th Cir. 2011). 13 “[T]he party resisting arbitration bears the burden of proving that the claims at issue 14 are unsuitable for arbitration.” Green Tree Fin. Corp.-Ala. v. Randolph, 531 U.S. 79, 15 91 (2000). 16 17 18 IV. A. DISCUSSION The FAA Applies to this Dispute 19 As an initial matter, Plaintiffs challenge Concierge’s use of the FAA to compel 20 arbitration. (Opp. at 16.) Specifically, they argue that the Bidder Agreement did not 21 concern interstate commerce and instead concerned “the sale of a single residential 22 property.” (Id. at 16-17.) 23 In enacting the FAA, Congress intended to reach the full range of transactions 24 covered by the Commerce Clause. Citizens Bank v. Alafabco, Inc., 539 U.S. 52, 56 25 (2003). Therefore, even if a specific economic activity alone would not affect 26 interstate commerce in a substantial way, the interstate commerce requirement of the 27 FAA is satisfied if the aggregate practice of which that economic activity is a part of 28 affects interstate commerce. Id. at 56-57. Furthermore, if some activity of one of the –6– 17cv2263 1 parties, even if not directly the subject of the contract or transaction at issue, has a 2 nexus to interstate commerce, the FAA applies. See Allied-Bruce Terminix 3 Companies, Inc. v. Dobson, 513 U.S. 265, 282 (holding the FAA applied to a local 4 service contract between a homeowner and termite control company because the 5 termite control company was multi-state in nature and used out-of-state material in 6 performing on the contract). 7 Plaintiffs cite to a handful of cases where courts found the FAA did not apply 8 to arbitration over real estate transactions. (Opp. at 17 (citing to SI V, LLC v. FMC 9 Corp., 223 F. Supp. 2d 1059 (N.D. Cal. 2002) (finding the FAA does not apply in an 10 arbitration dispute over a real estate sale between an in-state buyer and an out-of- 11 state seller); Cecala v. Moore, 982 F. Supp. 609, 612 (N.D. Ill. 1997) (finding the 12 FAA did not apply in arbitration over representations made in residential real estate 13 sale between in-state seller and out-of-state buyer); Saneii v. Robards, 289 F. Supp. 14 2d 855, 859 (W.D. Ky. 2003) (finding FAA does not apply to single sale of residential 15 real estate)). 16 The cases Plaintiffs cite are distinct from the instant case. The first two cases 17 listed above specifically address an in-state party and in-state property. Here, neither 18 Plaintiff resides in Fiji where the property is located. (FAC ¶¶ 3-4.) Similarly, 19 Concierge is incorporated in Delaware with its principal place of business in Texas. 20 (Id. ¶ 6.) Additionally, all of the cases above involve one-time real estate sales.2 21 Concierge’s sale of the subject real estate was not an isolated transaction from one 22 home owner to another. Rather, the contract placed Plaintiffs within a vast web of 23 connections and commercial transactions with various players around the globe. The 24 Bidder Agreement was for Plaintiffs to participate in an auction to bid against other 25 potential buyers. The Bidder Agreement further allowed Plaintiffs to submit offers 26 27 28 2 Saneii touches on more complex transactions relating to land, and discusses the possibility that these transactions would affect interstate commerce. Saneii, 289 F. Supp. 2d at 859. –7– 17cv2263 1 for other properties Concierge listed for sale and was not limited to the Fiji Property. 2 (FAC ¶ 23.) Moreover, because Plaintiffs are real estate investors who have recently 3 purchased other properties from Concierge alone, the Court can infer that Plaintiffs 4 are not using the property solely for their residential use. Instead, it is likely Plaintiffs 5 purchased the Fiji Property for profit, either through property management, rental, or 6 sale of the property, suggesting a more commercial aspect to this transaction. 7 Finally, the Court finds Defendants engagement in marketing and sales 8 activities for the Fiji Property as well as other properties far beyond the borders of 9 one particular state. See Berman v. Spruce Peak Realty, LLC, Nos. 2:11-CV-127, 10 2:11-CV-128, 2012 WL 6212849, at *6 (D. Vt. Dec. 13, 2012). In Plaintiff’s RICO 11 claim, they describe how Defendant’s “conduct[ed] the[ir] enterprise in ways that 12 affect interstate commerce” including: interstate website and digital advertisements, 13 phone calls, emails, interstate bank-wire transactions, transmitting writings, pictures, 14 and other electronic media. (FAC ¶¶ 108, 110, 116, 117 (parentheses omitted).) Thus, 15 Concierge demonstrates a nexus to interstate activity. For the foregoing reason, the Court finds that the FAA applies here. 16 17 18 B. The Parties Clearly and Unmistakably Delegated Arbitrability 19 The Court must address who—an arbitrator or the Court—should resolve the 20 parties’ disagreement concerning the scope and validity of the Arbitration Clause. 21 Concierge seeks to compel arbitration pursuant to the arbitration provisions of the 22 Bidder Agreement. It contends the Bidder Agreement requires any issue pertaining 23 to “enforcement, scope and/or interpretation” be delegated to the arbitrator, including 24 the validity of the provision itself. (Mot. at 12.) Plaintiffs disagree. Instead, they deny 25 the existence of a delegation clause within the Bidder Agreement, thereby arguing 26 that the validation of the arbitration clause was reserved for this Court. (Opp. at 20- 27 21.) 28 –8– 17cv2263 1 A district court determines whether an arbitration clause is valid, applicable, 2 and enforceable unless “the parties clearly and unmistakably provide[d] otherwise 3 such as by delegating the issue of arbitrability to arbitration.” AT&T Techs., Inc. v. 4 Commc’ns Workers of Am., 475 U.S. 643, 649 (1986). The Ninth Circuit has held 5 that the incorporation of the American Arbitration Association (“AAA”) Rules into 6 an arbitration agreement “constitutes clear and unmistakable evidence that 7 contracting parties agreed to arbitrate arbitrability.” Brennan, 796 F.3d at 1130. 8 There is a split within the Ninth Circuit as to whether the scope of Brennan is 9 limited to delegation clauses in cases involving sophisticated parties. The Court 10 agrees with the authorities that find that Brennan is not limited by the sophistication 11 of parties. See Esquer v. Educ. Mgmt. Corp., __ F. Supp. 3d __, No. 17-cv-1240- 12 BAS-AGS, 2017 WL 5194635, at *4 (S.D. Cal. Nov. 9, 2017). Nonetheless, the Court 13 is mindful of the concerns reflected by several courts, which emphasize that “an 14 inexperienced individual untrained in the law” is less likely to be reasonably expected 15 to understand the incorporation of arbitrator rules into an arbitration agreement. See, 16 e.g., Galilea, LLC v. AGCS Marine Ins. Co., No. CV 15-84-BLG-SPW, 2016 WL 17 1328920, at *3 (D. Mont. Apr. 5, 2016). However, these concerns are not present 18 here. The Court is satisfied with Plaintiffs’ level of sophistication to the extent they 19 can understand the provisions within this arbitration agreement. As self-described 20 real estate investors that have engaged in various real estate ventures, and who have 21 seen and negotiated similar Bidder Agreements with Concierge, Plaintiffs are not the 22 “ordinary customers who could not be expected to appreciate the significance of 23 incorporation of the AAA rules,” in which courts intend to protect. See, e.g., Ingalls 24 v. Spotify USA, Inc., No. C 16-03533 WHA, 2016 WL 6679561, at *4 (N.D. Cal. 25 Nov. 14, 2016); cf. Cordas v. Uber Techs., Inc., 228 F. Supp. 3d 985, 992 (N.D. Cal. 26 2017) (“Nearly every decision in the Northern District of California has consistently 27 found effective delegation of arbitrability regardless of the sophistication of the 28 parties.”); Seaman v. Private Placement Capital Notes II, LLC, No. 16-CV-00578–9– 17cv2263 1 BAS-DHB, 2017 WL 1166336, at *4 (S.D. Cal. 2017) (applying the dicta in Brennan, 2 stating “there is no requirement that the parties be sophisticated or that the contract 3 be a commercial contract before a court may conclude that incorporation of the AAA 4 Rules is a clear and unmistakable evidence of intent to arbitrate arbitrability”). 5 Additionally, even if Plaintiffs were unsophisticated, the Bidder Agreement is not 6 “so complicated that it is not reasonable to find a clear and unmistakable intent 7 between the parties to delegate.” Esquer, 2017 WL 5194635, at *4. 8 Plaintiffs neglect to address the entire arbitration provision within their 9 argument. The Arbitration Clause provides in part: “The parties agree to submit all 10 controversies, disputes, claims and matters of difference arising out of or relating to 11 these Terms & Conditions, including . . . its enforcement, scope and/or interpretation, 12 exclusively to arbitration in New York, New York in accordance with the 13 Commercial Arbitration Rules of the American Arbitration Association.”(FAC ¶ 25.) 14 According to Rule 7(a) of the AAA Rules, “The arbitrator shall have the power to 15 rule on his or her own jurisdiction, including any objections with respect to the 16 existence, scope, or validity of the arbitration agreement or to the arbitrability of any 17 claim or counterclaim.” AAA Commercial Rule 7(a) (effective as of October 1, 18 2013). This rule delegates all jurisdictional questions to the arbitrator, including 19 arbitrability. Accordingly, by incorporating the AAA Rules into their arbitration 20 agreement, the parties have clearly and unmistakably delegated the question of 21 arbitrability to the arbitrator. See Brennan, 796 F.3d at 1130; see also Khraibut v. 22 Chahal, No. C15-04463 CRB, 2016 WL 1070662, at *6 (N.D. Cal. Mar. 18, 2016) 23 (collecting cases holding that incorporation of arbitrator rules manifests clear and 24 unmistakable evidence of the parties’ agreement to arbitrate arbitrability). 25 Additionally, the Court can look within the Bidder Agreement’s terms to find 26 the parties’ requisite intent to delegate in this case. See Han v. Synergy Homecare 27 Franchising LLC, 2017 WL 446881 (N.D. Cal. Feb. 2, 2017) (“When the contractual 28 language is clear, there is no need to consider extrinsic evidence of the parties’ – 10 – 17cv2263 1 intentions; the clear language of the agreement governs.”) (quoting Berman v. Dean 2 Witter & Co., 119 Cal. Rptr. 130, 133 (Cal. App. 1975)). Both Plaintiffs signed the 3 Bidder Agreement containing the arbitration provision. The arbitration provision 4 explicitly requires disputes and controversies regarding the “enforcement, scope 5 and/or interpretation” to be arbitrated. (FAC ¶ 25.) Consequently, the Court finds the 6 parties clearly and unmistakably delegated the question of arbitrability. 7 8 C. Arbitration Provision is Enforceable 9 Despite a clear and unmistakable delegation of arbitrability, an arbitration 10 provision may still be found unenforceable if delegation itself is unconscionable. 11 Rent-A-Ctr., 561 U.S. at 74. Thus, the delegation enforcement is only proper “in the 12 absence of some other generally applicable contract defense, such as fraud, duress, 13 or unconscionability.” See Mohamed v. Uber Techs., Inc., 848 F.3d 1201, 1209 (9th 14 Cir. 2016). Because an arbitration provision is severable from the contract as a whole, 15 and a delegation clause is severable from an arbitration provision, the party must 16 specifically attack the arbitration clause. Rent-A-Ctr., 561 U.S. at 71-74; see also 17 Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 444 (2006) (finding “unless 18 the challenge is to the arbitration clause itself, the issue of the contract’s validity is 19 considered by the arbitrator in the first instance.”). 20 It is evident that the majority of Plaintiffs’ arguments challenge the 21 enforcement of the contract as a whole, instead of just the arbitration clause. 22 Specifically, Plaintiffs contend that “[h]ad Concierge disclosed the truth [about seller 23 rescinding], Plaintiffs would not have participated in the Auction, much less bid or 24 increase their bid at Concierge’s insistence.” (Opp. at 12.) Further, Plaintiffs argue 25 they were illegally solicited as prospective buyers of the Fiji Property by Concierge’s 26 “unlicensed real estate broker activities.” (Id. at 6.) The notion of the majority of 27 Plaintiffs’ arguments is they were fraudulently induced into the contract thereby 28 making it, as well as the arbitration clause, void. See Prima Paint Corp. v. Flood & – 11 – 17cv2263 1 Conklin Mfg. Co., 388 U.S. 395, 404 (1967) (“[I]f the claim is fraud in the 2 inducement of the arbitration clause itself—an issue which goes to the making of the 3 agreement to arbitrate—the federal court may proceed to adjudicate it.”). 4 Accordingly, the Court will only consider Plaintiffs’ arguments as to the 5 unconscionability of the parties’ agreement to arbitrate. 6 7 i. California Law Applies 8 Next the Court decides whether to apply New York or California law in 9 determining the enforceability of the arbitration provision. A federal court sitting in 10 diversity applies the choice of law rules of the state in which it sits. See Bridge Fund 11 Capital Corp. v. Fastbucks Franchise Corp., 622 F.3d 996, 1002 (9th Cir. 2010). 12 Because Plaintiffs brought this lawsuit in California, the Court applies California’s 13 choice of law rules to determine the unconscionability issue. Here, the parties’ Bidder 14 Agreement contains a New York choice-of-law provision. California courts generally 15 honor the parties’ choice-of-law to govern their claims in dispute, unless: (1) “the 16 chosen state has no substantial relationship to the parties or the transaction” and (2) 17 “there is no other reasonable basis for the parties’ choice.” Nedlloyd Lines B.V. v. 18 Superior Court, 834 P.2d 1148, 1152 (Cal. 1992). If either test is met, the Court must 19 then determine whether the chosen state’s law is contrary to a fundamental policy of 20 California. Fastbucks, 621 F.3d at 1002-03 (9th Cir. 2010). 21 New York has no substantial relationship to the parties or the transactions at 22 issue here. Neither party is located in New York, nor is there evidence to suggest that 23 either party conducts substantial business in New York. Cf. Restatement 2d of 24 Conflict of Laws § 187 cmt. f (recognizing that a “substantial relationship” with the 25 chosen state exists where “one of the parties is domiciled or has his principal place 26 of business”). This action’s only ties to New York is a provision within the Bidder 27 Agreement indicating Plaintiffs’ intent to bid on a property in New York at an 28 unspecified time in the future. (ECF No. 23 at 6 n.4.) Without more, the Court will – 12 – 17cv2263 1 not construe this potential interaction as a substantial relationship with New York. 2 Further, as Concierge concedes, there is no material difference between California 3 and New York law on the issue of unconscionability. (Mot.-1 at 14.) Accordingly, 4 California law applies. 5 ii. 6 The Delegation Provision is Not Unconscionable 7 Plaintiffs argue the arbitration provision, including its delegation clause, are 8 unenforceable because it is both procedurally and substantively unconscionable. 9 Under California law, unconscionable contracts are those that are “so one-sided as to 10 shock the conscience.” Baltazar v. Forever 21, Inc., 367 P.3d 6, 11 (Cal. 2016). 11 Finding that a contract is unenforceable on grounds of unconscionability requires a 12 substantial degree of unfairness beyond “a simple old-fashioned bad bargain.” Id. An 13 agreement may be found to be “invalid if it is both procedurally and substantively 14 unconscionable.” Sanchez v. Carmax Auto Superstores California LLC, 168 Cal. 15 Rptr. 16 unconscionability focuses on oppression and surprise due to unequal bargaining 17 power, and substantive unconscionability turns on overly harsh or one-sided results.” 18 Id. California courts apply a “sliding scale” to determine whether to invalidate an 19 agreement that is both procedurally and substantively unconscionable: “the more 20 substantively oppressive the contract term, the less evidence of procedural 21 unconscionability is required to come to the conclusion that the term is 22 unenforceable, and vice versa.” Armendariz v. Found. Health Pyschare Servs., Inc., 23 6 P.3d 669, 690 (Cal. 2000). “Because unconscionability is a contract defense, the 24 party asserting the defense bears the burden of proof.” Sanchez v. Valencia Holding 25 Co., LLC, 353 P.3d 741, 749-50 (Cal. 2015); see also Pinnacle Museum Tower, 282 26 P.3d 1217, 1224-25 (“[T]he party opposing arbitration bears the burden of proving 27 any defense, such as unconscionability.”). 473, 477 (Cal. Ct. App. 2014) (emphasis added). “Procedural 28 – 13 – 17cv2263 a. 1 Procedural Unconscionability 2 A “[p]rocedural unconscionability analysis focuses on oppression or 3 surprise.” Nagrampa v. MailCoups, Inc., 469 F.3d 1257, 1280 (9th Cir. 4 2006) (internal quotations omitted). “Oppression arises from an inequality of 5 bargaining power that results in no real negotiation and an absence of meaningful 6 choice, while surprise involves the extent to which the supposedly agreed-upon terms 7 are hidden in a prolix printed form drafted by the party seeking to enforce 8 them.” Id. (internal quotations omitted). Here, Plaintiffs raise three arguments why 9 the delegation provision is procedurally unconscionable. 10 As a preliminary note, Plaintiffs cite to Nagrampa to counter the significance 11 of their sophisticated business status. (Opp. at 25). However, Nagrampa presents 12 issues of employment contracts that revolve around the inherently unequal 13 bargaining structure of franchises. Nagrampa, 469 F.3d at 1282-83. As stated above, 14 Plaintiffs are self-described real estate investors that have engaged in previous multi- 15 million dollar deals in high end luxury real estate. (FAC ¶¶ 4-5; Decl. of McMains ¶ 16 4.3) Nonetheless, the Court will consider the parties’ sophistication in respects to the 17 oppressiveness and surprise elements of procedural unconscionability, 18 First, Plaintiffs argue the arbitration clause is contained in an adhesion contract 19 against a powerful “global commercial entity,” in which they had no bargaining 20 power. (Opp. at 24.) Procedural unconscionability often arises when the contract in 21 question is one of adhesion. Stirlen v. Supercuts, Inc., 60 Cal. Rptr. 2d 138, 145-146 22 (Cal. Ct. App. 2003). A contract of adhesion is a “a standardized contract, which, 23 imposed and drafted by the party of superior bargaining strength, relegates to the 24 subscribing party only the opportunity to adhere to the contract or reject it.” Id. 25 Finding that a contract is one of adhesion essentially is finding procedural 26 unconscionability. Flores v. Transamerica HomeFirst, Inc., 113 Cal. Rptr. 2d 376, 27 382 (Cal. Ct. App. 2001). This is because when a weaker party is presented with a 28 3 The Court denies Plaintiffs’ objections to this evidence. – 14 – 17cv2263 1 “take it or leave it” clause and afforded no opportunity to meaningfully negotiate it, 2 oppression—and therefore, procedural unconscionability—are present. Szetela v. 3 Discover Bank, 118 Cal. Rptr. 2d 862, 867 (Cal. Ct. App. 2002). However, the fact 4 that a contract is adhesive is insufficient by itself to render an arbitration clause 5 unenforceable. Newton v. Am. Debt Servs., 854 F. Supp. 2d 712, 723 (N.D. Cal. 6 2012). 7 The Court acknowledges that that the Bidder Agreement, which includes the 8 delegation clause, contains some elements of an adhesion contract. The Bidder 9 Agreement has standard bidder terms used throughout auctioneer commercial 10 practices. (ECF No. 23 at 7.) It is presented to all individuals interested in 11 participating in Concierge’s auctions. (Id.) Despite Concierge’s contentions that 12 Plaintiffs negotiated a “deal” with Concierge,4 (id.), there is no indication that 13 Plaintiffs were ever given an opportunity to negotiate any terms within their 14 contracts. However, there is also no indication that they tried. 15 On the other hand, the Agreement also contains elements that support a finding 16 that it was not a contract of adhesion. As previously mentioned, this contract was not 17 essential to Plaintiffs. They did not have to participate in the auction, nor did they 18 have to continue contracting with Concierge; yet, there is no evidence that they 19 sought real estate transactions with other companies. Cf. Morris v. Redwood Empire 20 Bancorp, 27 Cal. Rptr. 3d 797, 807 (2005) (“Oppression refers not only to an absence 21 of power to negotiate the terms of a contract, but also the absence of reasonable 22 market alternatives.”). Further, the negotiations were absent a superior bargaining 23 party. Plaintiffs fail to demonstrate they were the weaker party considering their level 24 of business sophistication and past experiences with similar multi-million dollar 25 transactions. (See Decl. of McMains ¶ 4 (stating Plaintiffs previously purchased four 26 4 27 28 The deal Concierge refers to was a post-contract performance dispute of Concierge’s fees not regarding the negotiation of the terms of the agreement. (Decl. of Appel ¶ 17.) The Court denies Concierge’s objections to this evidence. (ECF No. 23-1.) – 15 – 17cv2263 1 properties with Concierge, totaling almost $14 million in purchase prices.) 2 Ultimately, the Court finds that a determination on this matter would have little 3 significance to the overall unconscionability analysis because a finding of an 4 adhesion contract establishes only some degree of procedural unconscionability. In 5 and of itself, it is not enough to find that a contract, or one of its provisions, is 6 unenforceable. See Sanchez v. Valencia Holding Co., LLC, 353 P.3d 741, 751 (2015). 7 Second, Plaintiffs further suggest there was procedural unconscionability 8 because Concierge did not attach the AAA rules to the arbitration provision. (FAC ¶ 9 25.) The Court notes that Concierge is silent on this issue. 10 Federal courts in the Ninth Circuit have come to different conclusions on this 11 issue. Some federal courts note the failure to provide a copy of arbitration rules adds 12 to the degree of procedural unconscionability. See Raymundo v. ACS State & Local 13 Solutions, Inc., No. C 13-00442 WHA, 2013 WL 2153691, at *11 (N.D. Cal. May 14 16, 2013); Williams v. Am. Speciality Health Group, Inc., 2013 WL 1629213, at *4 15 (S.D. Cal. Apr. 16, 2013); Cisneros v. Am. General Fin. Servs., Inc., No. C 11-02869 16 CRB, 2012 WL 3025913, at *6 (N.D. Cal. July 24, 2012); Rosendahl v. Bridgepoint 17 Educ., Inc., No. 11CV61 WQH (WVG), 2012 WL667049, at *8 (S.D. Cal. Feb. 28, 18 2012). However, in contrast, numerous federal courts render this fact insignificant. 19 See Morgan v. Xerox, No. 2:13-cv-00409-TLN-AC, 2013 WL 2151656, at *9-11 20 (E.D. Cal. May 16, 2013); Collins v. Diamond Pet Food Processors of Cal., No. 2:13- 21 CV-00113-MCE-KJN, 2013 WL 1791926, at *5 (E.D. Cal. Apr. 26, 2013); Miguel 22 v. JPMorgan Chase Bank, N.A., No. CV12-3308 PSG (PLAx), 2013 WL 452418, at 23 *5 (C.D. Cal. Feb. 5, 2013) Hodsdon v. DirectTV, LLC, No. C 12-02827 JSW, 2012 24 WL 5464615, at *5 (N.D. Cal. Nov. 8, 2012); Wilson v. United Health Group, Inc., 25 No. 2:12-cv-01349-MCE-JFM, 2012 WL 6088318, at *4 (E.D. Cal. Dec. 6, 2012); 26 Ulbrich v., Inc., 887 F. Supp. 2d 924, 932-33 (N.D. Cal. 2012); 27 Sullivan v. Lumber Liquidators, No. C-10-1447 MMC, 2010 WL 2231781, at *5 28 (N.D. Cal. June 2, 2010). – 16 – 17cv2263 1 California contract law allows parties to incorporate the terms of another 2 document by reference into an agreement. Troyk v. Farmers Group, Inc., 90 Cal. 3 Rptr. 3d 589, 610 (2009). “For the terms of another document to be incorporated into 4 the document executed by the parties, the reference must be clear and unequivocal, 5 the reference must be called to the attention of the other party and he or she must 6 consent thereto, and the terms of the incorporated document must be known or easily 7 available to the contracting parties.” Collins, 2013 WL 1791926, at *5 (quoting Shaw 8 v. Regents of Univ. of Cal., 67 Cal. Rptr. 2d 850, 856 (1997)) (internal quotation 9 marks omitted). Here, the Bidder Agreement clearly states that the arbitration will be 10 conducted “in accordance with the Commercial Arbitration Rules of the American 11 Arbitration Association.” (Decl. of Appel at 21.) This is sufficiently clear and 12 unambiguous to incorporate these rules into the contract by reference. Furthermore, 13 the sophisticated Plaintiffs can easily acquire the applicable rules that are available 14 on the AAA website. 15 Furthermore, the Court recognizes that requiring parties to attach arbitration 16 rules to their agreements to avoid a finding of procedural unconscionability would 17 place arbitration contracts on a different footing than other contracts as to the doctrine 18 of 19 Court. Concepcion, 563 U.S. at 366 (“[W]e have repeatedly referred to the [FAA’s] 20 basic objective as assuring that courts treat arbitration agreements like all other 21 contracts.”) (internal quotation marks omitted); see also Lane v. Francis Capital 22 Mgmt. LLC, 168 Cal. Rptr. 3d 800, 813 (2014) (“Like any other contract, 23 an arbitration agreement may incorporate other documents by reference.”). 24 Consequently, the incorporation of these documents by reference does not support 25 Plaintiff’s claim that the delegation provision was oppressive. See Do v. CashCall, 26 Inc., SACV 13-01242 JVS (RNBx), 2013 WL 12116340, at *6 (C.D. Cal., 2013). incorporation by reference, which is prohibited by the Supreme 27 Lastly, Plaintiffs argue the “the delegation language in the Arbitration 28 Provision here is buried in prolix at the bottom of page nine of an eleven page – 17 – 17cv2263 1 document.” (Opp. at 18.) However, even a cursory review of the Bidder Agreement 2 reveals the arbitration provisions are not hidden. Paragraph 27 of the Agreement is 3 the second longest provision of the contract. (Decl. of Appel at 21.) While the 4 typeface is not overly large, it appears to be standard size and font that corresponds 5 with the rest of the Agreement. (Id.) The title “Arbitration; Venue; Prevailing Party” 6 is bolded and in all caps and does not contain deceptive or overly confusing language. 7 (Id.) The Bidder Agreement further required Plaintiffs pay $100,000 “bidder 8 deposit,” a relatively large sum of money. “The amount of the contract and business 9 plans of the parties reflect a level of sophistication and business planning indicative 10 of sophisticated business entities.” Everest Biosynthesis Group, LLC v. Biosynthesis 11 Pharma Grp. Ltd., No. 17CV1466 JM(BGS) 2018 WL 35123, at *4 (addressing how 12 the specific facts that the parties were an industrial hemp supplier and CBD 13 manufacturers who contracted for $2 million disfavored a procedurally 14 unconscionable finding). Most notable, however, is this is the seventh time Plaintiffs 15 have seen this provision in their relatively short contracts within the last year. (See 16 Decl. of McMains ¶¶ 4-5.5) Plaintiffs cannot not now claim they were surprised by 17 the existence of the arbitration provision. 18 The circumstances weigh against a finding of procedural unconscionability. 19 Although Concierge introduced the standard Bidder Agreement on a take it or leave 20 it basis, Plaintiffs are relatively sophisticated and had the capacity to understand the 21 Bidder Agreement’s delegation provision. 22 b. 23 24 25 Substantive Unconscionability Plaintiffs contend the Bidder Agreement’s two unilateral modification clauses render the arbitration provision substantively unconscionable. (Opp. at 26.) 26 Under the circumstances here, where the unilateral modification clauses are in 27 distinct provisions of the contract, the unilateral modification clauses may be severed 28 5 The Court denies Plaintiffs’ objections to this evidence. – 18 – 17cv2263 1 from the arbitration provision. Therefore, it does not make the arbitration provision 2 itself unconscionable. See Tompkins v. 23andMe, Inc., 840 F.3d 1016, 1033 (9th Cir. 3 2016). Plaintiffs may argue that the unilateral modification clause itself is 4 unenforceable during arbitration. See Kilgore v. KeyBank, Nat. Ass’n, 718 F.3d 1052, 5 1059 n.9 (9th Cir. 2013) (en banc). Under California law, the fact that one party has 6 the unilateral right to modify an arbitration agreement does not automatically make 7 the agreement illusory: “the discretionary power to modify or terminate an agreement 8 carries with it the duty to exercise that power in good faith and fairly.” John v. 9 Hanlees Davis, Inc., No. 12-CV-2529, 2013 WL 3458183, at *6 (E.D. Cal. July 9, 10 2013) (determining, under state law, that one party’s unilateral right to modify an 11 agreement did not render the arbitration clause illusory or unenforceable); Serpa v. 12 Cal. Sur. Investigations, Inc., 155 Cal. Rptr. 3d 506, 514 (Cal. Ct. App. 2013) (“[I]t 13 has long been the rule that a provision in an agreement permitting one party to modify 14 contract terms does not, standing alone, render a contract illusory because the party 15 with that authority may not change the agreement in such a manner as to frustrate the 16 purpose of the contract.” (citations omitted)). California courts “have held the 17 implied covenant of good faith and fair dealing prevents a party from exercising its 18 rights under a unilateral modification clause in a way that would make it 19 unconscionable.” Tompkins, 840 F.3d at 1033 (listing California cases holding 20 implied covenant of good faith and fair dealing limits parties’ unconscionable 21 exercise of the unilateral modification clause). 22 Plaintiffs do not indicate that Concierge has ever exercised its right to modify 23 the Bidder Agreement. Further, their agreement was subject to the limitation that 24 Concierge had the express obligation to provide Plaintiffs with notice of amendments 25 to the contract orally or through Concierge’s auction website. (Decl. of Appel at 17); 26 see Migule v. JP Morgan Chase Bank, N.A., No. 12-CV-3308, 2013 WL 452418, at 27 *6 (C.D. Cal. Feb. 5, 2013) (citing 24 Hour Fitness, Inc. v. Superior Court, 78 Cal. 28 – 19 – 17cv2263 1 Rptr. 2d 533, 541-42 (Cal. Ct. App. 1998) (“[A]rbitration agreements that allow a 2 party to prospectively modify them with notice are enforceable and not illusory.”)). 3 Although Plaintiffs may shown a slight degree of procedural unconscionability 4 as to the adhesion contract, they nonetheless fail to establish that the arbitration 5 provision, including the delegation clause, is substantively unconscionable. Because 6 California law requires a showing of both types of unconscionability, Armendariz, 6 7 P.3d at 690, Plaintiffs have not met their burden to show the arbitration provision, 8 including the delegation clause, is unenforceable, and the Court will enforce the 9 provision. Accordingly, the Court GRANTS IN PART Concierge’s motion to compel 10 11 arbitration. 12 13 D. Arbitration Location 14 Although the Court finds the conditions compelling arbitration were satisfied, 15 it lacks discretion to compel arbitration outside its district. 9 U.S.C. § 4 (“The hearing 16 and proceedings, under such [arbitration] agreement, shall be within the district in 17 which the petition for an order directing such arbitration is filed.”); Cont’l Grain Co. 18 v. Dant & Russell, 118 F.2d 967, 968-69 (9th Cir. 1941). This is true even when the 19 arbitration agreement specifies a venue. See Bencharsky v. Cottman Transmission 20 Sys., LLC, 625 F. Supp. 2d 872, 883-84 (N.D. Cal. 2008) (holding that although 21 parties 22 Continental Grain required the court to compel arbitration in the Northern District of 23 California); Homestead Lead Co. of Mo. v. Doe Run Res. Corp., 282 F. Supp. 2d 24 1131 (N.D. Cal. 2003) (following Continental Grain and compelling arbitration in 25 the Northern District of California when parties designated Missouri as 26 the arbitration forum). Although this Court recognizes the unfavorable reception 27 from courts both in and out of this circuit as well as the inconvenience to Concierge, 28 the Continental Grain rule remains the law of this circuit. See Homestead Lead, 282 designated Pennsylvania as – 20 – the forum for arbitration, 17cv2263 1 F. Supp. 2d at 1143-44 (N.D. Cal. 2003) (“The Ninth Circuit’s 1941 decision in 2 Continental Grain Co. v. Dant & Russell remains the controlling authority” for 3 determining the situs of a compelled arbitration). 4 The Court may permissibly stay this action pending a resolution of the 5 arbitration issues. The FAA prescribes that when a matter referable to arbitration is 6 brought before the court, the court “shall on application of one of the parties stay the 7 trial of the action until such arbitration has been had in accordance with the terms of 8 the agreement, providing the applicant for the stay is not in default in proceeding 9 with such arbitration.” 9 U.S.C. § 3. 10 Accordingly, the Court STAYS all proceedings in this action and ORDERS 11 the parties to proceed to arbitration in the Southern District of California. See 12 Bencharsky, 625 F. Supp. at 884; Cabot Creekside 8 LLC v. Cabot Inv. Props., LLC, 13 No. 10-00937-MMM(Ex), 2011 WL 13223878, at *20 (C.D. Cal March 21, 2011) 14 (“[N]umerous courts have held that although a court cannot compel arbitration 15 outside its district, an order compelling arbitration within its district is an adequate 16 alternative.”). 17 18 V. CONCLUSION 19 In light of the foregoing: 20 1. arbitration (ECF No. 10). 21 22 2. 3. 27 The Court STAYS this action as to all parties and all claims. See 9 U.S.C. § 3. 25 26 The Court DENIES Plaintiff’s motion for leave to file a sur-reply (ECF No. 25). 23 24 The Court GRANTS IN PART Concierge’s motion to compel 4. The Court further ORDERS the parties to proceed to arbitration for a determination of arbitrability and possible arbitration of Plaintiffs’ 28 – 21 – 17cv2263 1 claims in the manner provided for in the Bidder Agreement. See 9 2 U.S.C. § 4. 3 5. The Court directs the Clerk of the Court to ADMINISTRATIVELY 4 CLOSE this action. The decision to administratively close this action 5 pending the resolution of the arbitration does not have any jurisdictional 6 effect. See Dees v. Billy, 394 F.3d 1290, 1294 (9th Cir. 2005) (“[A] 7 district court order staying judicial proceedings and compelling 8 arbitration is not appealable even if accompanied by an administrative 9 closing. An order administratively closing a case is a docket 10 11 management tool that has no jurisdictional effect.”). IT IS SO ORDERED. 12 13 DATED: April 13, 2018 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 – 22 – 17cv2263

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