Bencharsky v. Cottman Transmission Systems, LLC

• Decision Date: 29 December 2008
• Docket Number: No. C 08-03402 SI.,C 08-03402 SI.
• Court: U.S. District Court — Northern District of California
• Parties: Joseph BENCHARSKY et al., Plaintiffs, v. COTTMAN TRANSMISSION SYSTEMS, LLC; American Driveline Systems, Inc.; and Does 1-50, Defendants.

625 F.Supp.2d 872

Joseph BENCHARSKY et al., Plaintiffs, v. COTTMAN TRANSMISSION SYSTEMS, LLC; American Driveline Systems, Inc.; and Does 1-50, Defendants.

No. C 08-03402 SI.

United States District Court, N.D. California.

December 29, 2008.

COPYRIGHT MATERIAL OMITTED

Peter Clark Lagarias, Esq., Robert Samuel Boulter, Lagarias & Boulter, LLP, San Rafael, CA, for Plaintiffs.

Jeffrey L. Fillerup, Luce Forward Hamilton & Scripps LLP, San Francisco, CA, for Defendant.

ORDER GRANTING MOTION TO COMPEL ARBITRATION and GRANTING MOTIONS TO DISMISS

SUSAN ILLSTON, District Judge.

On November 7, 2008, the Court heard argument on motions by defendant Cottman Transmission Systems, LLC ("Cottman") to compel arbitration and to dismiss, and a motion by defendant American Driveline System, Inc. ("ADS") to dismiss for lack of personal jurisdiction. Having considered the arguments of the parties and the papers submitted, the Court GRANTS Cottman's motions to compel arbitration and to dismiss. The Court also GRANTS ADS's motion to dismiss.

BACKGROUND

Plaintiffs Kund, LLC ("Kund") and Joseph Bencharsky entered into a franchise agreement in San Rafael, California with defendant Cottman, a franchisor of automotive repair businesses, on May 9, 2005. Complaint ¶ 8. Plaintiffs Remach Chaplet Corporation ("Remach") and Joseph Rego entered into a franchise agreement on September 14, 2004 with Cottman in Sacramento, California. Id. ¶ 9.

The relationship between defendants Cottman and ADS is disputed. According to plaintiffs, ADS, a Delaware corporation with its principal place of business in Pennsylvania, is the parent company of both Cottman and AAMCO. Id. ¶ 11. Plaintiffs allege that like Cottman, AAMCO is a franchisor of auto transmission service franchises, and that Cottman and AAMCO are competitors. Id. Plaintiffs also allege that ADS is the alter ego of Cottman. Id. ¶ 15. ADS asserts that it is a holding company that owns a subsidiary that in turn owns some shares in Cottman. Decl. of Todd P. Leff in Supp. of Def. ADS Mot. to Dismiss ¶ 2. According to ADS, a subsidiary of this subsidiary owns the remainder of Cottman. Id.

Plaintiffs allege that Cottman and ADS marketed franchises to plaintiffs through defendants' Uniform Franchise Offering Circular ("UFOC"). Complaint, ¶ 20. The UFOC included the following representations: that Cottman had a proven system, that Cottman had recognized trademarks that Cottman would continuously promote, that each franchisee would have a renewable protected territory (the area where the franchisor has agreed not to franchise out to another franchisee), and that plaintiffs could acquire multiple Cottman locations under a discount plan. Id. Defendants concealed the fact that all of these representations were false. Id. ¶ 21. In reliance on these false representations, plaintiffs entered into franchise agreements with Cottman. Id. ¶ 23.

The franchise agreements between plaintiffs and Cottman include the following provision:

COTTMAN and OPERATOR shall attempt to negotiation and settle any dispute, controversy or claim or cause of action (collectively "Dispute") arising out of or relating to this Agreement. In the event the Dispute is not settled through negotiation, the parties shall file the Dispute with the American Arbitration Association ("AAA") in Philadelphia, Pennsylvania or such other place as COTTMAN may designate.

See Decl. of William B. Jameson in Supp. of Def. Cottman Mot. to Compel Arbitration, at exs. A, C, § 28(a). The franchise agreements also contain a choice-of-law provision: "This Agreement has been entered into and shall be governed by and construed and enforced in accordance with the laws of the Commonwealth of Pennsylvania." See id. § 29.

Plaintiffs allege that in March of 2006, Cottman purchased AAMCO and stopped marketing the Cottman franchises. Id. ¶¶ 24, 26. Plaintiffs' franchises are located in a protected territory with AAMCO franchises. Id. ¶ 27. Cottman has offered to renew franchises of plaintiffs, but only under the AAMCO brand. Id. ¶ 30. In addition, Cottman refused to issue AAMCO franchises to plaintiffs in their existing locations because Cottman has AAMCO franchises near those locations. Id.

On June 20, 2008, Cottman filed a demand for arbitration against Bencharsky with the American Arbitration Association ("AAA"), alleging that Bencharsky owed Cottman over $30,000 for unpaid franchise fees. Decl. of William B. Jameson in Supp. of Def. Cottman Mot. to Compel Arbitration, at ex. B, ¶ 3. Cottman listed Philadelphia as the locale for the arbitration hearing. Id.

On June 25, 2008, plaintiffs filed suit against defendants Cottman and ADS in Marin County Superior Court. Plaintiffs alleged breach of contract, fraud, negligent misrepresentation, interference with contractual rights; and violation of the California Franchise Investment Law ("CFIL"), Cal. Corp.Code §§ 31000 et seq.; and California's Unfair Competition Law (UCL), Cal. Bus. & Prof.Code § 17200 et seq. Defendants removed to this Court on July 15, 2008, invoking diversity jurisdiction pursuant to 28 U.S.C. § 1332.

Now before the Court are Cottman's motion to compel arbitration and to dismiss the complaint and ADS's motion to dismiss the complaint for lack of personal jurisdiction.

LEGAL STANDARD

Section 4 of the Federal Arbitration Act ("FAA") permits "a party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration [to] petition any United States District Court ... for an order directing that ... arbitration proceed in the manner provided for in [the arbitration] agreement." 9 U.S.C. § 4. Upon a showing that a party has failed to comply with a valid arbitration agreement, the district court must issue an order compelling arbitration. See Cohen v. Wedbush, Noble Cooke, Inc., 841 F.2d 282, 285 (9th Cir.1988). The FAA espouses a general policy favoring arbitration agreements. See Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983). Federal courts are required to rigorously enforce agreements to arbitrate. See id.

In determining whether to issue an order compelling arbitration, the Court may not review the merits of the dispute, but must limit its inquiry to (1) whether the arbitration agreement is governed by Chapter One of the Federal Arbitration Act (rather than Chapter Two or Chapter Three); (2) whether the contract containing the arbitration agreement evidences a transaction involving interstate commerce; (3) whether there exists a valid agreement to arbitrate; and (4) whether the dispute falls within the scope of the agreement to arbitrate. 9 U.S.C. §§ 2, 202, and 302; see Nicaragua v. Standard Fruit Co., 937 F.2d 469, 477-78 (9th Cir.1991), cert denied, 503 U.S. 919, 112 S.Ct. 1294, 117 L.Ed.2d 516 (1992) (Courts must disregard contract language and "consider only issues relating to the making and performance of the agreement to arbitrate") (citing Prima Paint v. Flood & Conklin Mfg. Co., 388 U.S. 395, 404, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967)). If the answer to each of these queries is affirmative, then the Court must order the parties to arbitrate in accordance with the terms of their agreement. 9 U.S.C. § 4.

"The standard for demonstrating arbitrability is not a high one; in fact, a district court has little discretion to deny an arbitration motion, since the [Federal Arbitration] Act is phrased in mandatory terms." Standard Fruit, 937 F.2d at 475; see also Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 218, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985) (holding that the Act "leaves no place for the exercise of discretion by a district court").

DISCUSSION

1. Defendant Cottman's Motion to Compel Arbitration

A. This Court must determine the validity of the arbitration clause

Cottman moves for the Court to compel arbitration of plaintiffs' claims. Plaintiffs do not dispute that (1) their claims are covered under Chapter One of the FAA, (2) the franchise agreements evidence interstate commerce, and that (3) the dispute falls within the scope of the agreement to arbitrate. Plaintiffs argue, however, that the arbitration agreement is invalid because it is unconscionable and therefore unenforceable under California law.

The FAA provides that arbitration agreements generally "shall be valid, irrevocable, and enforceable," but courts may decline to enforce them when grounds "exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. "Thus, generally applicable contract defenses, such as fraud, duress, or unconscionability, may be applied to invalidate arbitration agreements without contravening" federal law. Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 687, 116 S.Ct. 1652, 134 L.Ed.2d 902 (1996).

Cottman argues that under Nagrampa v. MailCoups, 469 F.3d 1257 (9th Cir.2006), this Court cannot reach the issue of whether the arbitration agreement is unenforceable and instead must refer that issue to the arbitrator. Courts must apply the "crux of the complaint" test to determine whether a court or an arbitrator should decide the validity of an arbitration agreement. 469 F.3d at 1263-64. "[W]hen the crux of the complaint challenges the validity or enforceability of the agreement containing the arbitration provision, then the question of whether the agreement, as a whole, is unconscionable must be referred to the arbitrator." Id. (citing Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 445-46, 126 S.Ct. 1204, 163 L.Ed.2d 1038 (2006)). On the other hand, "[w]hen the crux of the complaint is not the invalidity of the contract as a whole, but rather the arbitration provision itself, then the federal courts must decide whether the arbitration provision is invalid and unenforceable under 9 U.S.C. § 2 of the FAA." Id. at 1264.

In Nagrampa, the complaint fell into the latter category. Two of the franchisee's six causes of action "specifically and exclusively"...