Leo Middle E. FZE v. Zhe Zhang

Decision Date24 January 2022
Docket Number21-cv-03985-CRB
PartiesLEO MIDDLE EAST FZE, et al., Plaintiffs, v. ZHE ZHANG, et al., Defendants.
CourtU.S. District Court — Northern District of California

ORDER DENYING MOTION TO COMPEL ARBITRATION

Re: Dkt. No. 56

CHARLES R. BREYER, UNITED STATES DISTRICT JUDGE

Plaintiffs and Cross-Defendants Leo Middle East FZE (Leo ME), Leo Holdings Hong Kong Limited (Leo HK), Edgewater HTT III, LLC (Edgewater), and Wang Xiangrong, and Roes 1-15 move to compel arbitration of the crossclaims filed by Defendants and Cross-Claimants EWI Capital, LLC (EWI) and Zhe Zhang. See Mot. (dkt. 56). On January 20, 2021, the Court held a hearing on the motion. See Minute Entry (dkt. 66). After careful review of the parties' filings and oral argument the Court DENIES the motion.

I. BACKGROUND
A. Parties

EWI is a company registered in Delaware. Crossclaim (dkt. 14) ¶ 9. Zhang is the principal of EWI, and resides and conducts his business in San Mateo County, California. Id. Zhang controlled and managed Edgewater until November 2018, when Zhang transferred control to Cross-Defendants. Compl. (dkt. 1) ¶¶ 11, 27-28.

Leo ME is an entity registered to do business in the United Arab Emirates, and Leo HK is an entity registered to do business in Hong Kong. Crossclaim ¶¶ 10-11. Leo HK currently owns Edgewater. Id. ¶ 13. Wang Xiangrong is the chairman of the Leo group of companies, which include Leo ME and Leo HK. Id. ¶ 14. The Roe defendants are fifteen individuals whose true names and capacities are unknown, but who Defendants and Cross-Claimants believe bear responsibility for the management of the companies. Id. ¶¶ 17-18.

B. Investment Agreement

On or around September 1, 2017, Leo ME agreed to purchase 1, 428, 571 shares of Series A Preferred Stock of Hyperloop Transportation Technologies, Inc. (HTT) from Edgewater for $5 million in an Investment Agreement with Edgewater and EWI. Compl. ¶ 12. The parties agreed that Leo ME would act as a Limited Partner and EWI would act as a General Partner to manage the HTT investment. Id. Zhang signed the Investment Agreement on behalf of EWI. Id.

The Investment Agreement contains an arbitration clause. See Investment Agreement (dkt. 1-1) (hereinafter Investment Agreement) § 4.3. The Investment Agreement specifies:

Any dispute, controversy or claim arising out of or relating to this Agreement, or the breach, termination or invalidity thereof, shall be submitted to resolution by arbitration before the Hong Kong International Arbitration Center ("HKIAC") in accordance with the Hong Kong International Arbitration Centre Administered Arbitration Rules in force when the notice of arbitration is submitted in accordance with these rules.

Id.

C. Procedural History

Plaintiffs and Cross-Defendants brought suit in this Court on May 26, 2021, alleging that Defendants and Cross-Complainants materially breached the contract, breached their fiduciary duties, and committed fraud by failing to return the HTT investment upon expiration of the Agreement, and by failing to provide them with financial information on the investment. See Compl. at 3-10.

On June 30, 2021, Defendants and Cross-Complainants filed a cross complaint for damages, alleging that the Cross-Defendants breached the contract and the duty of good faith and fair dealing. See Crossclaim (dkt. 10). Defendants and Cross-Complainants moved to dismiss the complaint on June 29, 2021. See MTD Compl. (dkt. 9). On July 20, 2021, Plaintiffs and Cross-Defendants then moved to dismiss the Crossclaims. See MTD Crossclaim (dkt. 26). On October 28, 2021, the Court heard the parties' competing motions and granted Defendants and Cross- Claimants' motion. See Order on Mot. to Dismiss (dkt. 54). In that order, the Court dismissed Plaintiffs and Cross-Defendants' breach of contract claim on the merits, and dismissed its breach of fiduciary duty and fraud claims based on the mandatory forum selection clause in the Investment Agreement. Id. at 1-2.[1] The Court denied Plaintiffs and Cross-Claimants' Motion to Dismiss, leaving just the counterclaims in place. Id. at 3-4. On January 20, 2021, Plaintiffs and Cross-Defendants moved to compel arbitration on the crossclaims. See Mot. Defendants and Cross-Claimants opposed the motion, arguing that Plaintiffs and Cross-Defendants waived their right to compel arbitration via participation in litigation. See Opp'n. (dkt. 58).

II. LEGAL STANDARD

Under the Federal Arbitration Act, a "written provision in any . . . contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract. . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. Such "agreements to arbitrate are enforced according to their terms." Volt Info. Scis.. Inc. v. Bd. Of Trs. of Leland Stanford Junior Univ.. 489 U.S. 468, 479 (1989).

There is a presumption against finding that a party waived its contractual right to arbitrate. Moses H. Cone Mem'l Hosp. v. Mercury Const. Corp.. 460 U.S. 1, 24-25 (1983). A party seeking to prove waiver must demonstrate that the opposing party: (1) had knowledge of an existing right to compel arbitration, (2) acted inconsistently with that right, and (3) prejudiced the party that opposes the arbitration. Martin v. Yasuda. 829 F.3d 1118, 1123 (9th Cir. 2016).

III. DISCUSSION

Plaintiffs and Cross-Defendants argue that the arbitration clause in the Investment Agreement requires that the parties arbitrate the dispute before the Hong Kong International Arbitration Center. See Mot. at 3. They note that the Court already dismissed the breach of fiduciary duty and fraud causes of action because of the forum selection clause, and argue that not allowing the crossclaims to be arbitrated along with those claims would cause "parallel proceedings." See Reply (dkt. 59) at 2. Defendants and Cross-Claimants oppose arbitration, arguing that Plaintiffs and Cross-Defendants waived their right to compel arbitration via participation in litigation. See Opp'n. at 4-9. Defendants and Cross-Claimants argue that (A) the Court, not the arbitrator, should decide the issue of waiver, and (B) Plaintiffs and Cross-Defendants waived their right to arbitrate by initiating the lawsuit in this Court and otherwise acting inconsistently with that right, which prejudiced Defendants and Cross-Claimants. Id. They also argue that (C) the risk of parallel proceedings does not require arbitration. The Court agrees with Defendants and Cross-Claimants.

A. Whether the Court or the Arbitrator Decides Waiver

Plaintiffs and Cross-Defendants argue that the decision of whether a party waived its right to arbitrate should be determined by an arbitrator. See Reply at 2. Defendants and Cross-Claimants argue that it is the Court's duty to decide the issue of waiver. See Opp'n at 2.

The United States Supreme Court distinguishes between two categories of issues concerning motions to compel arbitration: questions of arbitrability and questions of procedure. Howsam v. Dean Witter Reynolds. Inc.. 537 U.S. 79, 83 (2002). The Ninth Circuit explained that the first category, pertaining to arbitrability, "includes issues that the parties would have expected a court to decide such as 'whether the parties are bound by a given arbitration clause' or whether 'an arbitration clause in a concededly binding contract applies to a particular type of controversy.'" Martin. 829 F.3d at 1123. Therefore, "questions of arbitrability" are for "judicial determination unless the parties clearly and unmistakably provide otherwise." Id. In contrast, the second category, pertaining to procedure, is presumptively for an arbitrator to decide. Id. For example, whether a party met the arbitral forum's statute of limitation requirement is a procedural question that the parties would have expected the arbitrator to decide. Howsam. 537 U.S. at 85.

Litigation conduct resulting in waiver of an arbitration clause falls into the first category. Cox v. Ocean View Hotel Corp.. 533 F.3d 1114, 1121 (9th Cir. 2008). Accordingly, a court must decide whether a party waived arbitration, unless the agreement contains "clear and unmistakable" language demonstrating that the parties intended that an arbitrator determine that issue. Martin. 829 F.3d at 1124.

Many courts have determined the issue of waiver as a defense to a motion to compel arbitration. See Cox. 533 F.3d at 1126n.2. (citing Khan v. Parsons Global Servs.. 521 F.3d 421, 424-25 (D.C. Cir. 2008); In re Tyco Int'l Ltd. Sec. Litis.. 422 F.3d 41, 44 (1st Cir. 2005); PPG Indus.. Inc. v. Webster Auto Parts Inc.. 128 F.3d 103, 107 (2d Cir. 1997); Great W. Mortgage Corp. v. Peacock. 110 F.3d 222, 232 (3d Cir. 1997)). In Cox, the arbitration agreement stated that "[a]ny controversy . . . involving the construction or application of the terms, provisions, or conditions of this Agreement or otherwise arising out of or related to this Agreement shall likewise be settled by arbitration." Cox. 533 F.3d at 1117. Despite this language, the court found that the court itself, and not an arbitrator, should decide the issue of waiver. Martin. 829 F.3d at 1124 (citing Cox, 533 F.3d at 1125).

In Martin, the Ninth Circuit echoed this rule concluding that the language in the arbitration provision was not clear and unmistakable enough to have an arbitrator determine the issue of waiver. 829 F.3d at 1124. There, the agreement language read, "any dispute arising from my [contract] no matter how described, pleaded or styled, shall be resolved by binding arbitration . . . All determinations as to the scope, enforceability and effect of this arbitration agreement shall be decided by the arbitrator, and not by a court." Id. at...

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