Black Rock Coffee Bar, LLC v. BR Coffee, LLC, Case No. 3:20-cv-976-SI
| Decision Date | 14 August 2020 |
| Docket Number | Case No. 3:20-cv-976-SI |
| Parties | BLACK ROCK COFFEE BAR, LLC, Petitioner, v. BR COFFEE, LLC, et al., Respondents. |
| Court | U.S. District Court — District of Oregon |
J. Matthew Donahue, Shannon Armstrong, Kristin Asai, and Lisa Howley, HOLLAND & KNIGHT LLP, 601 SW Second Avenue, Suite 1800, Portland, OR 97204. Of Attorneys for Petitioner.
Kenneth R. Davis II and Mohammed N. Workicho, LANE POWELL PC, 601 SW Second Avenue, Suite 2100, Portland, OR 97204; Jonathan W. Fountain and Jennifer R. Lloyd, HOWARD & HOWARD ATTORNEYS PLLC, 3800 Howard Hughes Parkway, Suite 1000, Las Vegas, NV 89169. Of Attorneys for Respondents.
Petitioner Black Rock Coffee Bar, LLC ("Black Rock") has petitioned the Court under § 4 of the Federal Arbitration Act ("FAA"), 9 U.S.C. § 4, to compel arbitration of Black Rock's dispute with Respondents BR Coffee, LLC; BR Rainbow OP, LLC; BR Blue Diamond OP, LLC; BR Silverado Ranch OP, LLC; BR Ft. Apache OP, LLC; and BR Rainbow North OP, LLC (collectively, the "BR Parties"). Opposing the petition, the BR Parties argue that there is no valid contract—and thus no valid arbitration clause—because Black Rock committed fraud in the execution of the contract. The BR Parties also contend that, under the first-to-file rule, the Court should abstain from exercising jurisdiction because the BR Parties have an earlier-filed lawsuit against Black Rock pending in California state court. For the following reasons, the Court finds that the first-to-file rule does not apply here and abstention is unwarranted under the Colorado River doctrine. On the merits, the Court holds that even accepting as true all allegations by the BR Parties, they only show that the contract may be voidable but not void. Thus, the Court grants Black Rock's petition.
In all contracts involving interstate commerce, the FAA specifies that "written agreements to arbitrate controversies arising out of an existing contract 'shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.'" Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 218 (1985) (quoting 9 U.S.C. § 2). The FAA "leaves no place for the exercise of discretion by a district court," but "mandates that district courts shall direct the parties to proceed to arbitration on issues as to which an arbitration agreement has been signed." Id. at 218 (citing 9 U.S.C. §§ 3-4) (emphasis in original). The district court must limit itself "to determining (1) whether a valid agreement to arbitrate exists and, if it does, (2) whether the agreement encompasses the dispute at issue." Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1130 (9th Cir. 2000).
Under the FAA, "any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration." Moses H. Cone Mem'l Hosp. v. Mercury Const. Corp., 460 U.S. 1, 24-25 (1983). But the "liberal federal policy regarding the scope of arbitrable issues is inapposite" to the question of whether a party assented to the arbitration agreement. Comer v. Micor, Inc., 436 F.3d 1098, 1104 n.11 (9th Cir. 2006). The validity of an arbitration agreement remains "a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." AT & T Technologies, Inc. v. Commc'ns Workers of Am., 475 U.S. 643, 648 (1986). Because arbitration is "a matter of contract," the FAA "places arbitration agreements on an equal footing with other contracts and requires courts to enforce them according to their terms." Rent-A-Ctr., W., Inc. v. Jackson, 561 U.S. 63, 67 (2010) (citations omitted). Courts also should generally "apply ordinary state-law principles that govern the formation of contracts" to determine whether the parties agreed to arbitrate. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995).
Unless there is clear and unmistakable evidence that the parties agreed that an arbitrator should decide issues of arbitrability, see Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct. 524 (2019), a court must decide "the threshold issue of the existence of an agreement to arbitrate." Three Valleys Mun. Water Dist. v. E.F. Hutton & Co., 925 F.2d 1136, 1140-41 (9th Cir. 1991). In deciding whether an agreement to arbitrate exists, a court should apply a summary judgment-style standard. "Only when there is no genuine issue of fact concerning the formation of the agreement" should the court decide as a matter of law that an agreement to arbitrate exists. Id. at 1141 (quoting Par-Knit Mills, Inc. v. Stockbridge Fabrics Co., 636 F.2d 51, 54 (3d Cir. 1980)). A court must give the party opposing a motion to compel arbitration "the benefit of all reasonable doubts and inferences that may arise." Id. The party seeking to compel arbitration bears "the burden of proving the existence of an agreement to arbitrate by a preponderance of the evidence." Knutson v. Sirius XM Radio Inc., 771 F.3d 559, 565 (9th Cir. 2014). When "the making of the arbitration agreement" is at issue, "the court shall proceed summarily to the trial thereof." 9 U.S.C. § 4. "The court shall hear and determine such issue" if the party alleged to be in violation of the agreement does not demand a jury trial. Id.
Black Rock is an Oregon company that developed a retail chain of coffee shops with locations in Oregon, Washington, Idaho, California, Arizona, and Texas. The BR Parties are a group of business entities affiliated with Chris Lattanzio and Michael Georgen that sought to open and operate the first Black Rock franchises in Las Vegas, Nevada. Respondents ultimately opened three such franchises and had plans to open more before the parties' business relationship deteriorated.
There are several documents or types of documents relevant to this dispute. The first is the Geographic Territory Agreement ("GTA"), which Black Rock and BR Coffee signed in August 2019. The second type of document is a Franchise Agreement ("FA"). There are three FAs relevant to this dispute, one for each of the Black Rock-branded coffee bars that the BR Parties ultimately opened: (1) the Blue Diamond FA, signed August 23, 2019; (2) the Rainbow FA, signed the same day; and (3) the Silverado Ranch FA, signed in October 2019. The third relevant document is the Franchise Disclosure Document ("FDD"). The GTA is an overarching contract that gave BR Coffee the exclusive right to create up to 10 coffee bars in Clark County, Nevada. The FAs state the specific terms governing the operations of each of the respective franchises that BR Coffee created. The FDD is a document that franchisors must disclose under Oregon, California, and federal law.
The parties' business relationship deteriorated over a dispute about how much the BR Parties owed Black Rock in Initial Franchise Fees and Grand Opening Fees. The parties exchanged several emails stating their respective understanding of the amount of fees required under the contract, but they could not agree. Under a provision of the relevant contracts, the BR Parties eventually demanded a mediation to resolve the issues. Before that mediation occurred, however, Black Rock purported to exercise its contractual right to purchase the franchisees' Nevada locations. The price that Black Rock stated it would pay under the contract, 12 times EBITDA (earnings before interest, taxes, depreciation, and amortization), surprised the BR Parties, who expected that if Black Rock chose to exercise its purchase rights, the BR Parties would get back at least the amount of their investment in the franchises.
The confusion appears to have arisen based on a discrepancy in the terms of Black Rock's purchase option in the form GTA and FA that was included in the 2018 FDD and the terms for the purchase option contained in the signed GTA and FAs. The 2018 FDD stated, in relevant part:
Subject to applicable law, BRCB has the option to purchase the franchise business at any time following the Grand Opening. If purchase occurs 1 year or less after the Grand Opening, then the Purchase Price will equal the greater of (A) 5 times the business's annualized EBITDA (Earnings before interest, tax, depreciation and amortization) based on EBITDA for the month immediately preceding BRCB's exercise of the purchase right or (B) Franchisee's (actual, documented, reasonable and customary) costs (including fees paid to BRCB). Thereafter, the purchase price shall equal 5 times the business's EBITDA for the twelve-month period ending as of the last full calendar month immediately preceding BRCB's exercise of the purchase right.
The FAs, however, included a revised franchise purchase option provision in Section 15.7 that eliminated price option (B), which ensured that the BR Parties could recover their costs if Black Rock exercised its purchase option, and changed price option (A) to be 12 times EBITDA, instead of five times. The BR Parties contend that, before they signed the final GTA and FAs, counsel for the BR Parties asked counsel for Black Rock whether Black Rock had changed any of the terms from the form contracts previously disclosed in the 2018 FDD. According to the BR Parties, counsel for Black Rock told counsel for the BR Parties that no terms had been changed, even though Black Rock had modified Section 15.7 of the FAs. The BR Parties further assert that they signed the contracts without having noticed this discrepancy. For purposes of the pending motion, the Court views the evidence in the light most favorable to the BR Parties.
In sum, the BR Parties allege that Black Rock fraudulently changed the purchase option terms in Section 15.7 without the knowledge or consent of the BR Parties so that Black Rock could later purchase the BR Parties' franchises without fully compensating them for their investment. The BR Parties notified Black Rock that they were rescinding the GTA and each of the...
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