Davis et al v. Cascade Tanks LLC et al
Filing
79
OPINION AND ORDER. For the reasons explained, the Motion to Remand is DENIED and the Motion for Stay Pending Arbitration is GRANTED. All claims are STAYED pending arbitration under the terms of the Macgrecov agreement. Signed on 7/24/14 by Judge Michael W. Mosman. (dls)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF OREGON
PORTLAND DIVISION
WILLIAM DAVIS and W.M.D.
CONSULTING, LLC,
No: 3:13-cv-02119-MO
Plaintiffs,
OPINION AND ORDER
v.
CASCADE TANKS LLC, CASCADE
COMPANIES LLC, BALUSA HOLDINGS,
INC., MACGRECOV INVESTMENTS
LIMITED, TRITORIA INVESTMENTS
LIMITED, and PIETER VAN DER STAAL,
Defendants.
MOSMAN, J.,
This is a suit for breach of fiduciary duty, minority shareholder oppression, intentional
interference with economic relations, and for an accounting. (Complaint [1-1].) Suit was
brought by Plaintiffs William Davis (“Mr. Davis”) and W.M.D. Consulting, LLC (“WMD”)
against Cascade Tanks, LLC (“Cascade Tanks”), various other entities in the corporate group of
which Cascade Tanks is a part, and various individuals who were officers or directors of these
entities during the relevant time. The suit was filed in Multnomah County Court on March 1,
1 – OPINION AND ORDER
2013, and was removed to this Court on November 27, 2013, under the Convention on the
Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958, 21 U.S.T. 2517,
codified at 9 U.S.C. § 201–208 (the “Convention”). Plaintiffs filed a motion to remand [14] and
Defendants filed a motion for stay pending arbitration [55, 57-1].
As explained on the record [69] and set out in my prior order [74], I DENIED the motion
for remand, finding that this Court has jurisdiction to determine the enforceability of the
arbitration agreement. Turning to the motion for stay, I concluded that the arbitration agreement
at issue is enforceable under the Convention, and therefore stayed the case pending arbitration.
(Order [74].) I now formally explain my rulings.
BACKGROUND
I.
Corporate Structure of the Parties
The parties have submitted evidentiary support for their respective motions. According
to this evidence and the Complaint [1-1], the facts in which I take as true, the basic structure of
the corporate group is as follows: Mr. Davis is the sole member of WMD. WMD owns twenty
five percent of the shares of Defendant Macgrecov Investments, Ltd., (“Macgrecov”), a Cyprus
corporation. See Armstrong Decl. [17] Ex. 3. The other seventy five percent of Macgrecov is
owned by Defendant Tritoria LLC, a Cyprus LLC, and Trio Group Investments, a Bahamas
entity. Id. These two entities are allegedly controlled by a combination of Defendant Mr. van
der Staal and other individuals, dubbed “the Norwegian Investors” by Plaintiffs. (Pl.’s Mem. in
Supp. Mot. to Remand [15] at 3.)
Macgrecov holds all shares in Defendant Balusa Holdings, Inc., a Nevada corporation,
which in turn wholly owns Defendant Cascade Tanks. See Armstrong Decl. [17] Ex. 3. Cascade
Tanks is an oilfield fluid handling supply and service business. (Davis Decl. [17-2] ¶ 4.)
2 – OPINION AND ORDER
Defendant Cascade Companies LLC is a now-dissolved corporation that was once the parent
company of Cascade Tanks. (Armstrong Decl. [17] Ex. 3.)
Mr. Davis was General Manager of Cascade Tanks until his termination on February 15,
2013. (Compl. [1-1] ¶ 31; Davis Decl. [17-2] ¶ 4–5.) He was paid a significant salary, and
ownership shares in Cascade Tanks were also part of his compensation. (Compl. [1-1] ¶¶ 16,
19–20, 23–24.) His employment was governed by an Employment Agreement that is not at issue
in this suit. (Compl. [1-1] ¶ 22; Armstrong Decl. [17] Ex. 7.) In this case, he brought suit in his
capacity as a minority shareholder of Defendants Balusa and/or Macgrecov, interests which he
holds through WMD. (Compl. [1-1] ¶¶ 1–31, 69.)
It is alleged that during the restructuring that ultimately resulted in the corporate structure
described above, Mr. Davis signed, on behalf of WMD, a Stock Buy-Sell Agreement related to
Balusa Holdings. (Compl. [1-1] ¶ 23; Armstrong Decl. [17] Ex. 6.) This agreement provided for
binding arbitration in Nevada. (Armstrong Decl. [17] Ex. 6 at 18–19.) Before signing this
agreement, Mr. Davis consulted with his attorney. (Davis Decl. [17-2] ¶ 13.) It is Mr. Davis’s
position that this agreement took effect and WMD thereby held shares in Balusa throughout 2011
and 2012. (Pl.’s Mem. [15] at 5.)
Defendants contend that the Balusa Agreement never took effect. Their position is that
after the Balusa Agreement was signed but before it was put into effect, (and thus before WMD
took ownership of any Balusa shares), it was determined that elements of the corporate structure
should be moved offshore for tax reasons. Thus, Defendant Macgrecov, later made the parent
company of Balusa, was purchased. Defendants submit evidence supporting the inference that
WMD quitclaimed any interest in Balusa. (Dueck Decl. [30] Ex. 1.) Mr. Davis then signed a
3 – OPINION AND ORDER
new agreement, the Macgrecov Stock Buy-Sell Agreement (the “Macgrecov Agreement”), on its
behalf. (Compl. [1-1] ¶ 25; Not. of Removal [1-1] Ex. B.)
In proposing that the Macgrecov Agreement replace the Balusa Agreement, Defendant
Mr. van der Staal explained to Mr. Davis in an email that the new agreement was essentially the
same as the former, except for two changes: “1. It shifts the competent court to [C]yprus, to
ensure that the entire jurisdiction is offshore: and, 2. The references to ‘Balusa’ are replaced with
‘Macgrecov.’” (Armstrong Decl. [17] Ex. 11 at 1.) The email containing these representations
was sent on January 3, 2012. Id. at 1. A subsequent email, sent January 24, 2014, reiterated that
“the document we sent you is the same as the one you previously signed, with only one
significant change—namely that the agreement is subject to Cyprus law.” Id. at 2.
Mr. Davis declares that he received the documents in August 2012, but “did not sign all
of the documents until December 2012 because [he] wanted more information about the
transaction.” (Davis Decl. [17-2] ¶ 29.) However, he also declares that he “did not ask [his]
lawyer to review the agreement” because he “relied on the representations . . . that the
Macgrecov agreement was ‘the same deal’ as the Balusa buy-sell agreement.” Id. ¶ 25.
II.
The Foreign Arbitration Agreement
Defendants removed to this Court under the Convention on the grounds that the lawsuit
relates to a foreign arbitration agreement found in the Macgrecov Agreement. (Not. of Removal
[1] ¶ 2.) The Macgrecov Agreement’s arbitration clause reads as follows:
10.15 Arbitration. Except as otherwise provided herein, any
dispute or controversy arising out of or relating to this Agreement
(including its execution or the construction or enforcement of its
terms) shall be determined by arbitration with the competent courts
of Cyprus Limassol who shall have jurisdiction to settle any
disputes, which may arise out of or in connection with this
Agreement and that accordingly any suit action or proceeding
arising out of or in connection with the Agreement may be brought
in such courts.
4 – OPINION AND ORDER
Upon filing of an action, each party agrees to undertake
good faith efforts to agree upon an arbitrator within thirty (30)
days after the deadline for filing of the answer to the complaint in
question. If, despite such good faith efforts, the parties are unable
to agree upon an arbitrator, each party such submit to the court . . .
a maximum of three (3) arbitrators who meet the foregoing
conditions for consideration, and the court shall decide upon the
arbitrator from the potential arbitrators submitted to the court. Each
party to the Action shall be responsible equally for the arbitrator’s
fees. The decision of the arbitrator shall be final and binding upon
all parties.
(Not. of Removal [1] Ex. B at 16.)
III.
The Underlying Claims
Plaintiffs’ claims are for breach of fiduciary duty, minority shareholder oppression,
intentional interference with economic relations, and for an accounting. (Complaint [1-1] ¶¶ 36–
77.) Among other things, Plaintiffs allege that a Mr. Dueck (one of the “Norwegian Investors,”
who has been dismissed as a defendant by the state court) and others authorized “suspect loan
transactions” through which Balusa would borrow money from a nonprofit entity controlled by
himself and other “Norwegian Investors” at high interest rates, thus transferring profits out of the
Cascade Tanks corporate family. (Pl.’s Mem. [15] at 5; Davis Decl. [17-2] ¶ 18.) Another basis
for the claims is that the “Norwegian Investors” caused an unspecified Defendant entity to enter
into fraudulent “consulting” transactions, through which they paid other entities in which the
“Norwegian Investors” have an interest for consulting services never actually performed. (See
Davis Decl. [17-2] ¶ 32.) Mr. Davis argues that his interest in Cascade Tanks, held through
Macgrecov and Plaintiff WMD, has been and is being devalued by Defendants’ actions.
LEGAL STANDARDS
The district courts have removal jurisdiction over any suit which “relates to” an
arbitration agreement “falling under the Convention.” 9 U.S.C. § 205. “[W]henever an
arbitration agreement falling under the Convention could conceivably affect the outcome of the
5 – OPINION AND ORDER
plaintiff’s case, the agreement ‘relates to’ the plaintiff’s suit.” Infuturia Global Ltd. v. Sequus
Pharms, Inc., 631 F.3d 1133, 1138 (9th Cir. 2011) (emphasis omitted) (quoting Beiser v. Weyler,
284 F.3d 665, 669 (5th Cir. 2002)).
Federal courts recognize “the emphatic federal policy in favor of arbitral dispute
resolution,” a policy that “applies with special force in the field of international commerce.”
Mitsubishi Motors Corp. v. Soler Chrysler–Plymouth, Inc., 473 U.S. 614, 631 (1985). The
Supreme Court has explained that “any doubts concerning the scope of arbitrable issues should
be resolved in favor of arbitration.” Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460
U.S. 1, 24 (1983).
Although the Convention’s implementing legislation is codified as part of the Federal
Arbitration Act (“FAA”), its terms differ in some significant ways. See 9 U.S.C. § 208
(“Chapter 1 [of the FAA] applies to actions and proceedings brought under this chapter to the
extent that chapter is not in conflict with this chapter or the Convention as ratified by the United
States”). The Convention provides that “the court of a Contracting State, when seized of an
action in a matter in respect of which the parties have made an agreement within the meaning of
this article, shall . . . refer the parties to arbitration, unless it finds that the said agreement is null
and void, inoperative or incapable of being performed.” Convention art. II(3), 21 U.S.T. 2517.
In contrast, the FAA allows a party to resist arbitration on “such grounds as exist at law or in
equity for the revocation of any contract.” 9 U.S.C. § 2.
DISCUSSION
I.
Removal Jursidiction
Plaintiffs contend that this court lacks removal jurisdiction because the arbitration clause
is “unenforceable under the Convention based on traditional contract defenses under the common
law of the United States.” (Pl.’s Mem. [15] at 12.) Defendants argue that the jurisdictional
6 – OPINION AND ORDER
inquiry is more limited, and that the substantive enforceability of the arbitration agreement is
relevant not to jurisdiction, but to whether the court should go on to enforce the agreement and
stay the action in favor of arbitration. (Def.’s Resp. [27] at 1.) As explained on the record, I
agree with Defendants’ reading of the Convention’s text and the case law interpreting it.
As with any removed case, the Court’s first inquiry is whether there is a statutory grant of
federal jurisdiction. Here, Defendants’ basis for removal is 9 U.S.C. § 205. In order to
determine whether 9 U.S.C. § 205 provides jurisdiction in this case, the Court must answer two
questions: (1) whether there is an arbitration agreement (or award) that “fall[s] under the
Convention,” and (2) whether “the subject matter of an action or proceeding pending in a State
court relates to” that arbitration agreement. 9 U.S.C § 205. Only if removal is proper does the
court turn to the merits of enforcement.
Plaintiffs argue that more is required. I disagree—that the jurisdictional inquiry is
separate from the merits of enforcement is required by the text of the Convention and the
provisions in which it is implemented. The Convention provides that a court, “when seized of an
action in a matter in respect of which the parties have made an agreement within the meaning of
this article, shall, at the request of one of the parties, refer the parties to arbitration, unless it finds
that the said agreement is null and void, inoperative or incapable of being performed.”
Convention art. II(3), 21 U.S.T. 2517. The text contemplates that only a court “seized of” the
suit will turn to the question whether the arbitration clause shall be enforced. As used in article
II(3), the phrase “seized of” means that the court is “in possession of” the action. 1 See 14 Oxford
English Dictionary 896 (J.A. Simpson & E.S.C. Weiner eds., 2d ed. 1989); Black’s Law
Dictionary 1524 (Rev. 4th ed. 1968). As explained below, a federal court cannot be “seized of
1
In this sentence, “seized” is used in a past participial phrase modifying “court.”
7 – OPINION AND ORDER
an action” under this provision in the absence of federal jurisdiction, which is granted in 9 U.S.C.
§§ 203 and 205.
One commentator has observed that “[t]he Convention’s text is drafted in broad terms,
designed for application in a multitude of states and legal systems . . . the Convention imposes
uniform international standards while leav[ing] a substantial role for national law and national
courts to play in the arbitral process.” 2 Congress did not individually codify many of the
Convention’s provisions, which apply on their own terms under 9 U.S.C. § 201. 3 In
implementing the treaty, however, Congress did fill in U.S. law–specific gaps in the
Convention’s provisions. 4 Naturally, the Convention itself does not specify jurisdictional
requirements, as these would differ between the many signatory states. See Carolina Power &
Light Co. v. Uranex, 451 F. Supp. 1044, 1051–52 (N.D. Cal. 1977) (observing that the
Convention was drafted to apply in “many very different legal systems”).
The federal courts, being courts of limited jurisdiction, cannot properly hear a case
without the consent of Congress. Therefore, Congress granted the federal courts jurisdiction
over actions or proceedings falling under the Convention. See Pub. L. No. 91-368, 84 Stat. 692,
692–93 (July 31, 1970), codified at 9 U.S.C. §§ 203, 205. The Convention itself must be
interpreted in light of its implementing legislation. See 9 U.S.C. § 201. Further, elsewhere the
necessity of jurisdiction before an agreement may be enforced is mentioned. In 9 U.S.C. § 206,
2
Gary B. Born, I International Commercial Arbitration 116 (2d ed. 2014) (internal quotation
omitted).
3
See Albert van den Berg, The New York Arbitration Convention of 1958 123 (1981) (“The
uniform provisions [of the Convention] supersede the relevant provisions of municipal [local] law”); c.f.
Rogers, 547 F.3d at 1157–58 (applying Article II(3)’s “null and void” defense, not set out in Chapter 2 of
Title 9, United States Code, instead of the FAA’s broader defenses provision); Bautista, 396 F.3d at
1301–02 (same); Standard Bent Glass Corp. v. Glassrobots Oy, 333 F.3d 440, 449 (3d Cir. 2003)
(applying Article II(2)’s requirement that the agreement be in writing).
4
See van den Berg, supra n.3, at 123 (observing that the Convention “contains internationally
uniform provisions, but it also leaves a number of matters to be determined under some municipal law”).
8 – OPINION AND ORDER
Congress specified that “a court having jurisdiction under this chapter” can direct arbitration as
provided in the agreement. Pub. L. No. 91-368, 84 Stat. 693, codified at 9 U.S.C. § 206. The
mention of “a court having jurisdiction” makes plain that jurisdiction is a necessary precondition
to enforcement. 5
The mandatory nature of the Convention’s text further disallows Plaintiffs’ preferred
reading. See McCreary Tire & Rubber Co. v. CEAT S.p.A., 501 F.2d 1032, 1037 (3d Cir. 1974)
(concluding that “[t]here is nothing discretionary about article II(3) of the Convention.”). Article
II(3) provides that a “court . . . seized of an action . . . shall . . . refer the parties to arbitration,
unless it finds that the said agreement is null and void, inoperative or incapable of being
performed.” Convention art. II(3), 21 U.S.T. 2517 (emphasis added). Under our law, only a
court with jurisdiction has the power to refer the parties to arbitration (or indeed to issue any
orders in the case). Because a court “seized of an action” under article II(3) is required to refer
the parties to arbitration, it follows that a federal court “seized of” an action under that provision
must have jurisdiction. Reading the Convention to require a court without jurisdiction to refer
parties to arbitration would lead to an absurd result.
As implemented, article II(3) must be read such that in the absence of jurisdiction the
district court would not be “seized of” the action. It is therefore appropriate to determine
whether federal jurisdiction exists before turning to the question whether there is an allowable
defense to enforcement; only a court “seized of” a suit related to an arbitration clause covered by
5
The term “seized of” has been used in other contexts to describe that a court has jurisdiction.
See Rosado v. Wyman, 397 U.S. 397, 403 (1970) (using the term “seised of jurisdiction” to describe a
district court’s exercise of federal question jurisdiction); Swift & Co. Packers v. Compania Columbiana
Del Caribe, S.A., 339 U.S. 684, 694 (1950) (discussing whether a court sitting in admiralty is “seized of
jurisdiction to correct a fraud”); F.C.C. v. Assoc. Broadcasters, 311 U.S. 132, 135 (1940) (considering
whether the court below was “seized of jurisdiction”); Hallstrom v. Tillamook Cnty., 844 F.2d 598, 601
(9th Cir. 1987) (noting that the federal courts’ pendant jurisdiction over state law claims can exist only “if
the court has previously properly been seized of jurisdiction”) (internal quotation omitted).
9 – OPINION AND ORDER
the Convention can turn to the question whether the arbitration clause shall be enforced, and only
a court with jurisdiction may be seized of the suit. Only once jurisdiction is determined is the
court to turn to the enforceability of the arbitration agreement, a question which requires it to
consider whether the agreement is “null and void, inoperative or incapable of being performed.”
Convention art. II(3), 21 U.S.T. 2517; see also Jain v. de Mere, 51 F.3d 686, 691 (7th Cir. 1995)
(“Given that the court is properly seized of this action, it should not then be left helpless to
enforce the arbitration agreement.”); Restatement (Third) of Foreign Rel. L. of the U.S. § 487
cmt. e (1987) (explaining that “a court having jurisdiction of an action concerning a controversy
with respect to which an agreement to arbitrate is in effect (i) must, at the request of any party,
stay or dismiss the action, pending arbitration; and (ii) may direct the parties to proceed to
arbitration in accordance with the agreement”).
A.
Does the Arbitration Agreement Fall Under the Convention?
Removal under Section 205 is predicated on the relatedness of the subject matter of the
suit to an arbitration agreement “fall[ing] under the Convention.” 9 U.S.C. § 205. Whether an
arbitration agreement “fall[s] under the Convention” is governed by 9 U.S.C. § 202 and the
Convention itself. The federal courts have developed a four-factor inquiry used to determine
whether the requirements of Section 202 and the Convention are satisfied. The court must
determine (1) whether “there is an agreement in writing within the meaning of the Convention;”
(2) whether “the agreement provides for arbitration in the territory of a signatory of the
Convention;” (3) whether “the agreement arises out of a legal relationship, whether contractual
or not, which is considered commercial;” and (4) whether “a party to the agreement is not an
American citizen, or that the commercial relationship has some reasonable relation with one or
more foreign states.” Balen v. Holland Am. Line, Inc., 583 F.3d 647, 654–55 (9th Cir. 2009)
(quoting Bautista v. Star Cruises, 396 F.3d 1289, 1294 n.7 (11th Cir. 2005)). If all four
10 – OPINION AND ORDER
questions are answered in the affirmative, the arbitration agreement “falls under [the
Convention].” Standard Bent Glass, 333 F.3d at 448–49.
Other courts, including those relied upon by the Ninth Circuit in Balen, have specified
that these four factors are jurisdictional and therefore only after they are satisfied is the court to
consider the substantive enforceability of the agreement. See Aggarao v. MOL Ship Mgmt. Co.,
Ltd., 675 F.3d 355, 366–67 (4th Cir. 2012); Bautista, 396 F.3d at 1294–95; 6 Standard Bent Glass,
333 F.3d at 448–49; Ledee v. Ceramiche Ragno, 684 F.2d 184, 186–87 (1st Cir. 1982). The
Fourth Circuit explains that “[w]hen these jurisdictional prerequisites have been satisfied, a
district court is obliged to order arbitration ‘unless it finds that the [arbitration] agreement is null
and void, inoperative or incapable of being performed.’” Aggarao, 675 F.3d at 366 (alteration in
original) (quoting the Convention Art. II(3), 21 U.S.T. 2517. 7
The Ninth Circuit applied these factors in Balen, 583 F.3d at 654–55. Although in Balen
the Ninth Circuit stated that courts “address” these factors “to determine whether to enforce an
arbitration agreement under the Convention,” id. at 654, the cases on which it relied actually
applied the factors to the jurisdictional question whether the agreement is covered by the
6
Plaintiff cites a case from the Southern District of Florida, Ruiz v. Carnival Corp., 754 F. Supp.
2d 1328, 1330–31 (S.D. Fla. 2010), for the proposition that whether the agreement is “null and void” is
part of the jurisdictional inquiry. In that case, the court cited Bautista, 396 F.3d at 1295 n.7, for the
proposition that “[e]ven if these jurisdictional requirements are met, removal is improper if affirmative
defenses such as ‘fraud, mistake, duress, and waiver’ render the arbitration agreement ‘null and void.’”
754 F. Supp. 2d at 1330 (emphasis added). I read Bautista differently. In Bautista, the Eleventh Circuit
explained that “[a] district court must order arbitration unless (1) the four jurisdictional prerequisites are
not met, . . . or (2) one of the Convention’s affirmative defenses applies.” 396 F.3d at 1294–95. This
makes clear that the court inquired separately into jurisdiction and enforcement. The Bautista court
concluded that in that case “there [were] no impediments to the district court’s jurisdiction to compel
arbitration,” and “[f]urthermore,” that “the agreement to arbitrate [was] not null and void or incapable of
being performed.” Id. at 1303. Thus, to the extent the Ruiz court’s reasoning conflated the two inquiries I
reject it as inconsistent with Bautista.
7
In Aggarao, jurisdiction was not predicated on the propriety of removal under Section 205, so
the court did not need to address whether the subject matter of the suit was “related to” an agreement
covered by the Convention. See 675 F.3d at 361.
11 – OPINION AND ORDER
Convention, not the substantive enforceability of the arbitration agreement, see Bautista, 396
F.3d at 1294–95; Standard Bent Glass, 333 F.3d at 448–49. For this reason and the textual
reasons discussed above, I decline to interpret the Ninth Circuit’s description of the factors’
purpose as other than jurisdictional.
Furthermore, the Ninth Circuit’s reasoning is consistent with its sister circuits’ framing of
the two (separate) inquiries. The Balen court applied the factors in a portion of its opinion
dealing with whether the Convention applied to the arbitration agreement at issue, not whether it
was subject to contract defenses. 8 583 F.3d at 654–55. I therefore conclude that the four factors
applied in Balen pertain to the jurisdictional inquiry.
The first factor is whether “there is an agreement in writing within the meaning of the
Convention.” Balen, 583 F.3d at 654–55 (quoting Bautista, 396 F.3d at 1294 n.7). I find that
there is an agreement in writing within the meaning of the Convention, i.e. the Macgrecov
Agreement’s arbitration clause. 9
8
The Ninth Circuit addressed the plaintiff’s arguments for the unenforceability of the arbitration
agreement separately, concluding that each was unavailing. See 583 F.3d at at 653–54. The Balen court
was faced with jurisdictional arguments, but they were based on the domestic Federal Arbitration Act’s
provision exempting “contracts of employment of seamen,” not the scope of 9 U.S.C. §§ 203 or 205. Id.
at 652–53. The court simply held that this exemption was not applicable to arbitration clauses covered by
the Convention. Id. (citing Rogers v. Royal Caribbean Cruise Line, 547 F.3d 1148, 1154 (9th Cir. 2008)).
The FAA’s exemption clause therefore did not affect whether the court had jurisdiction under Title 9,
Chapter 2.
9
In practicality the inquiry into whether the proffered arbitration clause falls under the
Convention may occasionally implicate issues also relevant to the enforceability of the arbitration clause.
Although I view the better approach to be to reserve full such consideration for the enforceability stage, I
have taken into account whether any of Plaintiffs’ arguments against enforcement could also impact
jurisdiction at this stage. (See Tr. [69] 49:3–21.) This inquiry need not reach the full substance of the
arguments regarding enforceability. Only a prima facie showing of each factor pertinent to whether the
arbitration agreement “fall[s] under the Convention” is required. 9 U.S.C. § 205.
In this case, Plaintiffs argue that Mr. Davis, on behalf of WMD, never actually signed the final
version of the Macgrecov Agreement containing the arbitration clause. As I explained on the record, this
is essentially an argument that there was no meeting of the minds, and thus the contract containing the
arbitration clause does not exist. This is why I took into consideration whether Plaintiffs’ argument that
the Macgrecov Agreement was not final when Mr. Davis signed it. For the reasons stated on the record, I
12 – OPINION AND ORDER
The final three factors are whether “the agreement provides for arbitration in the territory
of a signatory of the Convention;” whether “the agreement arises out of a legal relationship,
whether contractual or not, which is considered commercial;” and whether “a party to the
agreement is not an American citizen, or that the commercial relationship has some reasonable
relation with one or more foreign states.” Balen, 583 F.3d at 654–55 (quoting Bautista, 396 F.3d
at 1294 n.7). These factors are easily disposed of; indeed, Plaintiffs do not contest that they are
satisfied. The agreement provides for arbitration in the territory of a signatory of the
Convention, i.e., Cyprus. the agreement arises out of a commercial relationship; and there are
parties to the agreement, i.e., the foreign entity Defendants and Mr. van der Staal, who are not
American citizens. See Balen, 583 F.3d at 654–55.
Therefore, I find that the Macgrecov Agreement’s arbitration clause “fall[s] under the
Convention” as required by Section 205.
B.
Is the Subject Matter of the Action “Related to” the Arbitration Agreement?
Once the court has determined that the agreement falls under the Convention, the inquiry
into removal jurisdiction under Section 205 is quite limited. Removal is proper if the “subject
matter of [the] action or proceeding pending in State court relates to an arbitration agreement or
award falling under the Convention.” 9 U.S.C. § 205 (emphasis added). “[W]henever an
arbitration agreement falling under the Convention could conceivably affect the outcome of the
plaintiff’s case, the agreement ‘relates to’ the plaintiff's suit.” Infuturia, 631 F.3d at 1137–38
(quoting Beiser, 284 F.3d at 669) (emphasis in original). In Beiser, the Fifth Circuit observed
that “[w]hatever else the phrase ‘relates to’ conveys, it means at least as much as having a
found that Plaintiffs had failed to show any such fraud. (Tr. [69] at 50:6–51:6.) Plaintiffs did not rebut
Defendants’ showing that an arbitration agreement in writing exists within the meaning of the
Convention. See Balen, 583 F.3d at 654.
13 – OPINION AND ORDER
possible effect on the outcome of an issue or decision.” 284 F.3d at 669. The Ninth Circuit
agreed, observing that “[t]he phrase ‘relates to’ is plainly broad.” Infuturia, 631 F.3d at 1138.
That the jurisdictional inquiry is separate from the ultimate enforceability of the
arbitration clause is emphasized in Beiser. The Beiser court made clear that a foreign arbitration
agreement could conceivably affect a plaintiff’s suit even if the plaintiff “cannot ultimately be
forced into arbitration.” Beiser, 284 F.3d at 669. It is therefore clear that a suit may be
“relate[d] to an arbitration agreement . . . falling under the Convention” even if arbitration cannot
ultimately be required. Id.; 9 U.S.C. § 205.
The Macgrecov Agreement’s arbitration clause plainly relates to Mr. Davis and WMD’s
suit, as the claims arise, at least in part, from ownership of equity in Macgrecov, a relationship
governed by the Macgrecov Agreement. Because the agreement “falls under the Convention”
and the subject matter of the suit “relates to” the agreement, the court has jurisdiction under 9
U.S.C. § 205.
II.
Enforcement of the Arbitration Clause
Having determined that the arbitration agreement is covered by the Convention and that
the subject matter of the suit is related to the FAA, I turn to Plaintiffs’ defenses to enforcement. 10
Article II(3) of the Convention requires the court to “refer the parties to arbitration” unless the
agreement is “null and void, inoperative or incapable of being enforced.”
The enforceability of foreign arbitration clauses covered by the Convention is governed
by substantive federal arbitration law. See 9 U.S.C. § 208. If a party seeking to avoid arbitration
10
Defendants Macgrecov and Tritoria asked that I stay judicial proceedings pending arbitration
under the terms of the Macgrecov Agreement. Although they argued that interpretation of the Macgrecov
Agreement is to be done under Cypriot law under the terms of the Agreement, they provided no citations
to or argument on the law of Cyprus. (Resp. [27] at 17.) I therefore found that they had waived the
application of Cypriot law, and have applied the law of Oregon to interpretation of the contract and
Plaintiffs’ defenses to enforcement.
14 – OPINION AND ORDER
challenges the arbitration clause itself, the court is to decide the question of enforceability; if a
challenge is to the contract as a whole, it is to be resolved by the arbitrator. See Buckeye Check
Cashing, Inc. v. Cardegna, 546 U.S. 440, 447–49 (2006); Prima Paint Corp. v. Flood & Conklin
Mfg. Co., 388 U.S. 395, 403–04 (1967). Thus, in general I am only to consider arguments that
are specific to the arbitration provision itself, “separate and distinct from any challenge to the
underlying contract.” Teledyne, Inc. v. Kone Corp., 892 F.2d 1404, 1410 (9th Cir. 1989)
(emphasis omitted).
However, the Ninth Circuit has established that when a party resisting arbitration seeks to
show that the contract containing the arbitration clause is void, as opposed to voidable, it is
proper for the district court to resolve the question notwithstanding that it is an attack on the
contract as a whole. In Three Valleys Municipal Water District v. E.F. Hutton & Co., Inc., 925
F.2d 1136 (9th Cir. 1991), the Ninth Circuit held that Prima Paint’s bar on such consideration is
“limited to challenges seeking to avoid or rescind a contract—not to challenges going to the very
existence of a contract that a party claims never to have agreed to.” 925 F.2d at 1140 (emphasis
omitted). The Ninth Circuit reasoned that “a party who contests the making of a contract
containing an arbitration provision cannot be compelled to arbitrate the threshold issue of the
existence of an agreement to arbitrate.” Id. at 1140–41; see also Stanford v. MemberWorks, Inc.,
483 F.3d 956, 963 (9th Cir. 2007) (explaining Three Valleys’s relationship with the holding of
Prima Paint).
The Prima Paint rule applies to all but one of Plaintiffs’ arguments for unenforceability;
the remaining argument is governed by the rule announced in Three Valleys.
A.
Plaintiffs’ Fraud Defenses
Plaintiffs contend that “the Norwegian Investors induced Davis’s assent to the arbitration
clause with both affirmative misrepresentation and misrepresentations by non-disclosure.” (Pl.’s
15 – OPINION AND ORDER
Mem. [15] at 13.) Plaintiffs put forward two theories of fraud. First, they argue that Defendants
falsely represented to Mr. Davis that the only differences between the Macgrecov Agreement and
the Balusa Agreement are that it “shifts the competent court to Cyprus, to ensure that the entire
jurisdiction is offshore,” and changes the company name from Balusa to Macgrecov. Id.
(emphasis omitted). Plaintiffs contend that this misled them because it failed to mention that
there was an arbitration clause under Cypriot law in the Macgrecov Agreement. Second,
Plaintiffs contend that Defendants changed the Macgrecov Agreement’s terms after Mr. Davis
(on behalf of WMD) had signed it. Id. at 23–24.
1.
Fraud in the Inducement Theory
Plaintiffs first theory is one of fraud in the inducement: Defendants misrepresented the
terms of the Macgrecov Agreement in order to coerce Mr. Davis to sign it. Because fraud in the
inducement makes a contract voidable rather than void, I may consider this argument only if it
pertains to the arbitration clause itself. See Buckeye Check Cashing, 546 U.S. at 447–49; Prima
Paint, 388 U.S. at 403–04. Happily for Plaintiffs, it does: the alleged misrepresentations are
related to the arbitration clause specifically, and so consideration of this argument by this Court
is proper.
Plaintiffs argue that Mr. van der Staal affirmatively misrepresented the nature of the
Macgrecov Agreement’s dispute resolution clause when he told Mr. Davis that the Macgrecov
Agreement was “identical” to the Balusa Agreement except that it changed the company names
and “shifts the competent court to [C]yprus.” (Pl.’s Mem. [15] at 13 (emphasis and alteration in
original) (quoting Armstrong Decl. [17] Ex. 11 at 1).) It is Plaintiffs’ position that the reference
to “court” misled Davis, because “court” does not include arbitration. Id. They argue that “the
plain understanding of van der Staal’s statement that the arbitration clause shifted the jurisdiction
to the competent court of Cyprus was that any dispute would be resolved by a judge or jury in
16 – OPINION AND ORDER
Cyprus, not by arbitration.” Id. at 13–14. Finally, Plaintiffs argue that van der Staal owed
fiduciary duties to Davis, a minority shareholder of Balusa, because he was an officer of Cascade
Tanks and Balusa, and that he therefore had a duty to explain the Macgrecov Agreement’s
dispute resolution clause to Mr. Davis and failed to do so. Id. at 14.
Defendants respond that Plaintiffs’ theory does not satisfy several elements of fraud in
the inducement. The elements of fraud in Oregon are as follows: (1) a representation; (2) that is
false; (3) and is material; (4) the speaker’s knowledge of falsity or ignorance of truth; (5) the
speaker’s intent that the representation be acted on “by the person and in the manner reasonably
contemplated;” (6) the hearer’s ignorance of the statement’s falsity; (7) the hearer’s reliance on
its truth; (8) the hearer’s right to rely; and (9) the hearer’s injury caused thereby. Conzelmann v.
Northwest Poultry & Dairy Products Co., 190 Or. 332, 350, 225 P.2d 757, 764–765 (1950); see
also Restatement (Second) of Contracts § 162 (1981). Defendants contend that Plaintiffs’ theory
fails to show that the statements made by Mr. van der Staal were false, fails to show any intent to
induce Mr. Davis to rely on the statements, fails to show that Plaintiffs actually relied on their
misunderstanding of the Agreement in entering into it, and fails to show that the alleged reliance
on Mr. van der Staal’s statements was reasonable.
As explained on the record, I agree that the allegedly fraudulent statements were not
false. The Balusa Agreement, which Plaintiffs signed after consulting counsel, provides for
binding arbitration in Nevada under the oversight of a Nevada court and is governed by Nevada
law. The Macgrecov Agreement changed the dispute resolution provision so that the contract
provided for arbitration in Cyprus under Cypriot law. That the competent court was changed
from Nevada to Cyprus is simply not false. More importantly, the fact of binding arbitration
remained constant between the two Agreements. Mr. van der Staal’s description of the changes
17 – OPINION AND ORDER
from the Balusa Agreement in the Macgrecov Agreement would not be expected to include the
fact that arbitration was now required, as this was not a change.
Defendants next contend that Plaintiffs can only show fraud in the inducement by
proving that Mr. Davis was induced to sign the Macgrecov Agreement in reliance on a statement
that the Macgrecov provided for resolution of disputes in a court in Cyprus, not by arbitration in
Cyprus. As I explained on the record, I find that this showing has not been made. Plaintiffs did
not put forward evidence sufficient to show that Defendants intended Mr. Davis to rely on his
misunderstanding of the Macgrecov Agreement’s arbitration clause in signing it. 11
Finally, Defendants argue that Mr. Davis could not reasonably rely on Mr. van der Staal’s
statements without reading the contract itself. (Def.’s Resp. [27] at 22.) As explained on the
record, I agree with Defendants. A showing of fraud requires that the party claiming reliance
show that it was reasonable for him to rely. See Oregon PERB v. Simat, Helliesen & Eichner,
191 Or. App. 408, 428, 83 P.3d 350, 362 (2004); Restatement (Second) of Contracts § 162(2)).
Mr. Davis and WMD could not reasonably rely on the proffered understanding of Mr. van der
Staal’s statements because this understanding contradicted the plain terms of the Macgrecov
Agreement. Had Mr. Davis even skimmed the contract, he would have seen that it provided for
arbitration.
11
Plaintiffs’ contention is that Defendants pressured Mr. Davis into signing the agreement
quickly in order to effectuate the transfer of ownership to Macgrecov. First, I find this factual showing
insufficient. In light of Mr. Davis’s admission that he had the agreement for several months before
signing it and that Mr. van der Staal actually mentioned Mr. Davis’s consulting with counsel, see
Armstrong Decl. [17] Ex. 11 at 3, I find that Mr. Davis simply was not pressured into signing the
agreement without reading it or fully understanding it. Even if there were such a showing, however, I
would find it irrelevant because it shows only inducement to sign the Macgrecov Agreement as a whole,
not inducement to sign the arbitration clause specifically. Whether the contract as a whole was induced
by fraud is a question for the arbitrator.
18 – OPINION AND ORDER
Moreover, I find that even if Defendants owe fiduciary duties to Plaintiffs, Defendants
breached no duty to explain the meaning of the Macgrecov Agreement to Mr. Davis and WMD.
Mr. Davis represented that he was consulting counsel about the Macgrecov Agreement as he had
done with the Balusa Agreement, and he was given ample time to consider its terms. Defendants
and their officers could reasonably believe that he would do so and that he signed the agreement
with full understanding.
2.
Fraud in the Factum Theory
Plaintiffs also argues that Mr. Davis never signed the final version of the Macgrecov
Agreement: “[t]he document that defendants hold out as an enforceable arbitration agreement is
the result of continued editing and discussions amongst the Norwegian Investors after the time
that Davis[ ] purportedly signed the agreement.” (Pl.’s Mem. [15] at 15.) As explained on the
record, I read this argument as fraud in fact because it challenges whether Mr. Davis ever signed
the document purported to be the Macgrecov Agreement at all.
Because this argument challenged the very existence of the Macgrecov Agreement, it is
proper under Ninth Circuit precedent to address it, notwithstanding that it is not specific to the
arbitration clause. See Three Valleys, 925 F.2d at 1140 (holding that the court may address
challenges going to “the very existence of a contract that a party claims never to have agreed
to”).
Here, Plaintiffs’ contention is that Mr. Davis never signed the final Macrecov Agreement.
For the reasons stated on the record, I find that Plaintiffs have failed to make a showing
sufficient to show such fraud. There is no evidence that what Mr. Davis signed was, in actuality,
different than the contract submitted by the parties in this Court. Moreover, Plaintiffs themselves
submitted the Macgrecov Agreement along with their complaint, alleging that it is the one signed
by Mr. Davis on behalf of WMD. (Not. of Removal [1-1] Ex. B.) Plaintiffs’ own reliance on the
19 – OPINION AND ORDER
existence of the Macgrecov Agreement, in combination with their failure of proof regarding
whether the Agreement was changed after Mr. Davis signed the signature pages, belies their
argument that the Macgrecov Agreement was never signed.
B.
Plaintiffs’ Waiver Defense
Under federal arbitration law, waiver is found where the party seeking to enforce an
arbitration clause is shown to have been aware of an “existing right to compel arbitration,” took
actions inconsistent with that right, and thereby caused prejudice to the party opposing
arbitration. Gutierrez v. Wells Fargo Bank, NA, 704 F.3d 712, 720–21 (9th Cir. 2012) (citing
Fisher v. A.G. Becker Paribas Inc., 791 F.2d 691, 694 (9th Cir. 1986)). “[A]ny party arguing
waiver of arbitration bears a heavy burden of proof.” Van Ness Townhouses v. Mar Indus.
Corp., 862 F.2d 754, 758 (9th Cir. 1988) (internal quotation omitted). Although participation in
litigation can result in a finding of waiver, c.f. Hoffman Constr. Co. of Or. v. Active Erectors &
Installers, Inc., 969 F.2d 796, 798–99 (9th Cir. 1992), the necessary showing of prejudice is
unlikely to be satisfied where litigation has not progressed beyond the pleading stages, United
Computer Sys., 298 F.3d at 765.
Plaintiffs argue that Defendants have waived their right to compel arbitration by litigating
jurisdiction in state court before removal and by bringing a separate action in Nevada that
involves Mr. Davis’s employment contract. 12 Rather than “promptly moving to compel
arbitration,” Plaintiffs argue, Defendants did not seek arbitration until “after they lost an
important discovery motion.” (Pl’s Mem. [15] at 34.) Defendants point out that the “important
discovery motion” pertained to jurisdictional discovery regarding the foreign Defendants’
challenge to the court’s personal jurisdiction. (Def.’s Resp. [27] at 31.) They argue that they
12
This action is pending as Case No. 13-689221 in the District Court for Clark County, Nevada.
20 – OPINION AND ORDER
cannot be considered to have acted inconsistently with their right to compel arbitration simply by
contesting personal jurisdiction, the lack of which they have a right to raise. As explained on the
record, I agree with Defendants. I hold that a party does not act inconsistently with its right to
compel arbitration of claims brought against it by contesting whether it may be haled into court
in the first place, even if relatively extensive litigation of the jurisdictional issue is required as a
result. 13 See United Computer Sys., 298 F.3d at 765.
I also find that the foreign entities who seek to invoke the arbitration clause in the
Macgrecov Agreement cannot be said to have waived their right to arbitration based on the
Nevada litigation that is taking place between many of the same parties. Plaintiffs have made no
factual showing that the foreign Defendants have participated in the Nevada claims (which arise
from Mr. Davis’s employment agreement, not ownership of the companies). That counterclaims
exist in that case that are parallel to those at issue here does not result in waiver: Plaintiffs here
brought those counterclaims, and Plaintiffs’ actions cannot be used to show waiver by any
defendant. Thus, I find that the foreign Defendants have not waived their right to compel
arbitration under the Macgrecov Agreement by acting inconsistently with that right in the
Nevada action. They simply have not participated in that action at all.
C.
Plaintiffs’ Unconscionability Defense
Finally, Plaintiffs urged this Court to find the Macgrecov Agreement’s arbitration clause
unenforceable by reason of unconscionability. Defendants argue that unconscionability, while
13
The same might not be true if the argument for a lack of personal jurisdiction were groundless
or frivolous. That is not the case here, and I need not decide whether a contest to personal jurisdiction
that is without basis in law or fact could result in waiver. It is enough to observe that a supportable contest
to the court’s personal jurisdiction, such as the foreign Defendants raised in the state court, does not result
in waiver.
21 – OPINION AND ORDER
available as a defense under the domestic FAA, is not available under the Convention; and that
even if the defense is available, the dispute resolution clause is not unconscionable.
1.
Availability of Unconscionability as a Defense to Enforcement
The Convention’s defenses to enforcement are limited to arguments that the foreign
arbitration clause is “null and void, inoperative or incapable of being performed.” Convention
Art. II(3), 21 U.S.T. 2517. In contrast, the domestic FAA allows a party to contest arbitration
“on such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2.
Defendants contend that unconscionability, while available as a defense to enforcement under
the broad provision of the FAA, is simply not included in the Convention’s narrow list of
defenses.
Although the Ninth Circuit has not addressed the scope of the Convention’s defenses,
other courts have done so. Other courts have concluded that the Convention’s “null and void”
clause allows only such defense as “can be applied neutrally on an international scale.” Ledee,
684 F.2d at 187 (internal citation omitted). In Ledee, the court reasoned as follows:
The parochial interests of . . . [a] state[ ] cannot be the measure of
how the “null and void” clause is interpreted. Indeed, by acceding
to and implementing the treaty, the federal government has insisted
that not even the parochial interests of the nation may be the
measure of interpretation.
Id. (internal quotation omitted). Fraud, mistake, duress, and waiver have been recognized as
properly applicable under the Convention. 14 Id.
In Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985), the
Supreme Court recognized that the Convention does not directly parallel the FAA. At issue was
14
As I noted on the record, “null and void” could be read to encompass only defenses showing
that the contract is void, and not merely voidable. (Tr. [69] at 53:22–54:14) However, the provision has
long been held to include defenses rendering the agreement merely voidable, such as fraud in the
inducement, waiver, and duress. Therefore, this narrow reading would be inconsistent with precedent.
22 – OPINION AND ORDER
whether a foreign arbitration agreement could be enforced so as to require arbitration of antitrust
claims brought under the Sherman Act. 473 U.S. at 620–24. The Court rejected lower courts’
conclusion that “the pervasive public interest in enforcement of the antitrust laws” justified nonenforcement of an otherwise applicable foreign arbitration agreement. Id. at 629 (internal
quotation omitted). “[C]oncerns of international comity, respect for the capacities of foreign and
transnational tribunals, and sensitivity to the need of the international commercial system for
predictability in the resolution of disputes,” the Court concluded, “require that we enforce the
parties’ agreement, even assuming that a contrary result would be forthcoming in a domestic
context.” Id. Enforcement of foreign arbitration agreements under the Convention does not
directly parallel enforcement of domestic arbitration agreements under the FAA. 15
The Fifth Circuit has concluded that “state-law principles of unconscionability” are not
defenses to enforcement under the Convention, reasoning that the Convention allows only such
defenses as can be applied in all signatory countries under a “precise, universal definition.”
Bautista, 396 F.3d at 1302. The Ninth Circuit has not had occasion to decide whether
unconscionability is available. In Rogers, 547 F.3d at 1158, the court assumed without deciding
that unconscionability was available as a defense, but concluded that unconscionability had not
been shown.
Unconscionability is an inherently equitable defense implicating the fine details of state
public policy. As the Supreme Court has recognized, “the principal purpose underlying
American adoption and implementation of [the Convention] was to encourage the recognition
15
It has been recognized that the “null and void” inquiry, relevant to the agreement-enforcement
stage, is separate from any public policy defense that might be raised at the award-enforcement stage. See
Aggarao, 675 F.3d at 372–73; see also Restatement (Third) of Foreign Rel. L. of the U.S. § 488(2)(b) &
reporter’s note 2. In Mitsubishi, the Court recognized that at the award-enforcement stage the court
would consider whether enforcement of the arbitration award would be “contrary to the public policy” of
the United States. 473 U.S. at 637–38.
23 – OPINION AND ORDER
and enforcement of commercial arbitration agreements in international contracts and to unify the
standards by which agreements to arbitrate are observed and arbitral awards are enforced in the
signatory countries.” Scherk v. Alberto-Culber Co., 417 U.S. 506, 520 n.15 (1974); see also
Born, supra n.2, at 105–07. An unconscionability defense is a poor fit for the Convention’s
policy of unified standards for the enforcement of arbitration agreements and awards. To subject
agreements to defenses that turn on the particular public policy of the signatory nation (or state)
would create harmful uncertainty for parties seeking to use arbitration agreements to facilitate
international transactions. See Mitsubishi, 473 U.S. at 620–24; M/S Bremen v. Zapata Off-Shore
Co., 407 U.S. 1, 8–9 (1972) (“The expansion of American business and industry will hardly be
encouraged if, notwithstanding solemn contracts, we insist on a parochial concept that all
disputes must be resolved under our laws and in our courts. . . . We cannot have trade and
commerce in world markets and international waters exclusively on our terms”).
Were it necessary to determine whether unconscionability is available as a defense to
enforcement of an arbitration agreement under the Convention, I would conclude that it is not.
Like the Rogers court, however, I need not decide whether unconscionability is available as a
defense to enforcement of a foreign arbitration agreement covered by the Convention. Even if
that defense is available, the Macgrecov Agreement’s arbitration clause is not barred thereby.
2.
Unconscionability Arguments
Under Oregon law, the test for unconscionability “has both procedural and substantive
components,” but the party asserting unconscionability need not show procedural
unconscionability if the contract is shown to be substantively unconscionable. See Hatkoff v.
Portland Adventist Med. Center, 252 Or. App. 210, 217–18, 287 P.3d 1113, 1118 (2012)
(internal quotation omitted); Vasquez-Lopez v. Beneficial Oregon, Inc., 210 Or. App. 553, 567,
24 – OPINION AND ORDER
152 P.3d 940, 948 (2007) (observing that “only substantive unconscionability is absolutely
necessary”). The doctrine of unconscionability has been explained as follows:
Procedural unconscionability refers to the conditions of contract
formation and involves a focus on two factors: oppression and
surprise. Oppression exists when there is inequality in bargaining
power between the parties, resulting in no real opportunity to
negotiate the terms of the contract and the absence of meaningful
choice. Surprise involves the question whether the allegedly
unconscionable terms were hidden from the party seeking to avoid
them.
“Substantive unconscionability” generally refers to the terms of the
contract, rather than the circumstances of formation, and the
inquiry focuses on whether the substantive terms unfairly favor the
party with greater bargaining power.
Livingston v. Metro. Pediatrics, LLC, 234 Or. App. 137, 151, 227 P.3d 796, 806 (2010). The
Restatement (Second) of Contracts explains unconscionability in similar terms: “Relevant factors
include weaknesses in the contracting process like those involved in more specific rules as to
contractual capacity, fraud, and other invalidating causes; the policy also overlaps with rules
which render particular bargains or terms unenforceable on grounds of public policy.”
Restatement (Second) of Contracts § 208 cmt. a. Plaintiffs argue that the Macgrecov
Agreement’s arbitration clause is both procedurally and substantively unconscionable.
First, it is worth explaining that this is not a case involving a consumer transaction or
contract of employment. (Tr. [69] at 54:25–55:24.) Plaintiffs argue that this case is “more
analogous to cases involving employment relationships than sophisticated business dealings”
because Mr. Davis “was foremost an employee who was presented with an agreement by his
employer to obtain a substantial portion of his compensation.” (Pl.’s Reply [48] at 15.) They
rely heavily on Twilleager v. RDO Vermeer, LLC, No. 10-1167, 2011 WL 1637469 (D. Or. Apr.
1, 2011), in which the court found an arbitration agreement unconscionable where it required an
employee service technician to travel from Oregon to North Dakota to arbitrate disability
25 – OPINION AND ORDER
discrimination and Family and Medical Leave Act claims. 2011 WL 1637469 at *9. Although I
have taken into account that equity in Defendant Cascade Tanks was part of Mr. Davis’s
employment compensation, Mr. Davis is not similarly situated to the service technician in
Twilleager, and neither are the claims at issue in this case similar to the federal statutory rights at
issue in that case. I consider cases involving wage and hour employees to be largely inapplicable
here. Furthermore, arbitration agreements between employer and employee are considered
conscionable where the employee is given ample time to review the agreement and has the
education to understand it. See Livingston, 234 Or. App. at 152, 227 P.3d at 806 (contract
between doctor and medical group was not a contract of adhesion where doctor, “who is highly
educated, had an opportunity to review the employment agreement for two weeks, and he signed
and returned it without making any changes”). Here, although Defendants do not contest that
Mr. Davis is not as highly educated as the plaintiff in Livingston, it is apparent that he has
sufficient business sophistication to run the on-the-ground operations of a large company, and,
more importantly, had access to counsel and months in which to review the agreement. 16
Although it is uncontested that the shares in Macgrecov were intended to be part of Mr.
Davis’s compensation, he also failed to show that the Macgrecov Agreement, with both its
upsides and its downsides, was not bargained for. The unconscionability inquiry looks to the
terms of the contract at the time it was signed, not the parties’ positions once a conflict has arisen
later. See W.L. May Co., Inc. v. Philco-Ford Corp., 273 Or. 701, 707–08, 543 P.2d 283, 287
(1975). Taking one’s compensation in the form of equity has the potential for significant
16
Plaintiffs make much of the fact that Mr. Davis’s formal education continued only to the eighth
grade. While this fact is not irrelevant, it does not negate that Mr. Davis has developed significant
expertise in the relevant industry and was apparently a highly valued management-level employee of
Cascade Tanks. Most importantly, because he had access to counsel and time to consult, any detriment
caused by his lack of formal education could and should have been ameliorated.
26 – OPINION AND ORDER
benefits as well as increased risks, of which Mr. Davis was surely aware at the time of contract
formation. Mr. Davis has not shown that he was unaware of these risks and benefits.
Finally, the claims at issue in Plaintiffs’ case against these Defendants arise from WMD’s
status as a shareholder in Defendant entities and from Mr. Davis’s ownership of WMD. Plaintiff
WMD is the entity that owns shares in Macgrecov, and WMD cannot be said to be an employee
of any Defendant. Although Mr. Davis was an employee of Defendant Cascade Tanks, he signed
the Macgrecov Agreement in his capacity as owner of WMD, not in his capacity as an employee.
a)
Procedural Unconscionability
Plaintiffs argue that the Agreement is procedurally unconscionable because “[t]he
Norwegian Investors used pressure and deception to obtain Davis’s assent to the Macgrecov
Agreement.” (Pl.’s Mem. [15] at 20.) As explained above, I found that Plaintiff had shown no
such pressure and deception. For the reasons stated on the record and above, I find that there
was nothing procedurally unconscionable about Plaintiffs’ assent to the Macgrecov Agreement’s
arbitration clause. Mr. Davis had several months’ time in which to review the agreement before
he signed it, and had the opportunity to consult with counsel. He had consulted with counsel
before signing the Balusa agreement, which provided for arbitration of any disputes in Nevada.
Evidence submitted by the parties shows that Mr. Davis was also given the opportunity to
negotiate the terms of the Macrecov Agreement. See Armstrong Decl. [17] Ex. 11 at 1–3. For
instance, in an email dated February 9, 2012, Mr. van der Staal specifically mentioned changing
a certain term of the Macgrecov Agreement if Mr. Davis’s lawyer was concerned about the
meaning of the term as then drafted. Id. at 3.
The record shows that Mr. Davis and WMD had the “opportunity to negotiate the terms
of the contract.” Hatkoff, 252 Or. App. at 217, 287 P.3d at 1118 (internal quotation omitted).
27 – OPINION AND ORDER
Mr. Davis’s own decision not to carefully review the Macgrecov Agreement or to consult with
counsel before signing it does not create procedural unconscionability; that a party with
bargaining power fails to exercise that power does not create unconscionability in contract
formation. Plaintiffs have also failed to show any surprise. The plain text of the Macgrecov
Agreement provided for arbitration in Cyprus, and as Defendants point out, Mr. van der Staal’s
statements about the similarities between it and the Balusa Agreement should have drawn Mr.
Davis’s attention to the dispute resolution provision, rather than hiding it.
b)
Substantive Unconscionability
However, an arbitration clause may be unenforceable in Oregon even in the absence of
procedural unconscionable if it is substantively unconscionable. Vasquez-Lopez, 210 Or. App. at
566–67, 152 P.3d at 948. “[I]n determining whether the substantive contract provisions of a
commercial contract are unconscionable,” Oregon courts “look to the circumstances existing at
the time of the execution of the contract and examine the challenged provisions in the light of
both the general commercial background and the special commercial needs of the particular trade
involved.” W.L. May, 273 Or. at 708–09, 543 P.2d at 287; see also Vasquez-Lopez, 210 Or. App.
at 556, 152 P.3d at 948 (“unconscionability is a question of law to be assessed on the basis of
facts in existence at the time the contract was made”).
Substantive unconscionability in Oregon is recognized where the terms of the arbitration
agreement unreasonably favor the party with greater bargaining power. Hatkoff, 252 Or. App. at
217, 287 P.3d at 1118. Even assuming Defendants had greater bargaining power than did
Plaintiffs, the terms of the agreement do not unreasonably favor them. Naturally, there are some
costs to arbitration that would not exist if the dispute were litigated, such as fees for the arbitrator
and for facilities. Because the Macgrecov Agreement governs the relationship between several
28 – OPINION AND ORDER
parties of various countries of citizenship and residence, there is no venue that would be
convenient to all parties. 17 The parties therefore could reasonably agree to arbitration in Cyprus,
which is none of the individuals’ home country but is the country of citizenship of Macgrecov,
the parent company.
Although in the Macgrecov Agreement the site changed from Nevada to Cyprus, this
change did not increase the anticipated costs of arbitration per se. Rather, it added potential
international travel costs and substituted the need for counsel familiar with Nevada law for
counsel familiar with Cypriot law. These potential costs, however, came with the tax benefits of
offshore incorporation, of which Mr. Davis was surely aware. In exchange for the future tax
benefits of holding the companies offshore, he reasonably took the risk that, in the event of a
dispute, arbitration could involve international travel.
III.
Stay and Severability
Plaintiffs urged me to sever their claims against the domestic entity Defendants and allow
them to proceed in state court even if I were to enforce the arbitration agreement as to the foreign
Defendants. I declined to do so, ordering that all claims be stayed for the pendency of the
arbitration. As pled, Plaintiffs’ claims against the various defendants are indistinguishable from
one another. Therefore, parallel state court litigation would seriously interfere with the
arbitration for which the parties to the Macgrecov Agreement contracted. See Moses H. Cone,
460 U.S. at 20–21. As I explained in my Order, the parties are free to avoid duplicative litigation
17
Although this fact is primarily relevant to procedural unconscionability, I also note that
Plaintiffs’ own purported understanding of the Macgrecov Agreement would still require them to travel to
Cyprus to litigate any disputes. It is difficult to see how the existence of the costs of international travel
would have been a great burden to Mr. Davis at the time the agreement was signed, in light of Plaintiffs’
concession that he understood at the time that dispute resolution under the Macgrecov Agreement would
be overseas.
29 – OPINION AND ORDER
by agreement to a global arbitration of all claims, including those against Defendants who are not
signatories to the Macgrecov Agreement.
CONCLUSION
For the reasons explained above, the Motion to Remand is DENIED and the Motion for
Stay Pending Arbitration is GRANTED. All claims are STAYED pending arbitration under the
terms of the Macgrecov agreement.
IT IS SO ORDERED.
DATED this
24th
day of July, 2014.
/s/ Michael W. Mosman __
MICHAEL W. MOSMAN
United States District Judge
30 – OPINION AND ORDER
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