Turtle Ridge v. Pacific Bell Directory

• Decision Date: 21 June 2006
• Docket Number: No. B180324.,B180324.
• Citation: 140 Cal.App.4th 828,44 Cal.Rptr.3d 817
• Court: California Court of Appeals Court of Appeals
• Parties: TURTLE RIDGE MEDIA GROUP, INC., Plaintiff and Respondent, v. PACIFIC BELL DIRECTORY et al., Defendants and Appellants.

44 Cal.Rptr.3d 817

140 Cal.App.4th 828

TURTLE RIDGE MEDIA GROUP, INC., Plaintiff and Respondent, v. PACIFIC BELL DIRECTORY et al., Defendants and Appellants.

No. B180324.

Court of Appeal, Second District, Division Eight.

June 21, 2006.

Bjork Lawrence, Robert K. Lawrence and Robyn D. Roberts, Walnut Creek, for Defendants and Appellants.

Albright, Yee & Schmit, LLP, Clifton W. Albright, Derek S. Yee, Lucien A. Schmit III, and Boris Orlov, Los Angeles, for Plaintiff and Respondent.

RUBIN, Acting P.J. Pacific Bell Directory doing business as SBC Smart Yellow Pages, SBC Communications, Inc., and SBC Directory Operations appeal from the trial court's order denying their petition to compel. We reverse and direct the court to order arbitration.

FACTS AND PROCEEDINGS¹

Turtle Ridge Media Group, Inc. is in the business of hand delivering printed advertising media. In the spring of 2002, it made a sales call to the offices of SBC Smart Yellow Pages (SBC) hoping to get some of SBC's business.² In the past, SBC had declined to work with Turtle Ridge because the company was too small. In the intervening time, however, SBC had changed its approach to delivering phonebooks and was therefore interested in Turtle Ridge's proposal. SBC suggested Turtle Ridge contact Clientlogic Operating Company, Inc. (Clientlogic), which was also bidding on SBC's phonebook delivery contract. SBC believed that by pooling their resources, Turtle Ridge and Clientlogic might be able to submit a successful bid.

Turtle Ridge and Clientlogic agreed to work together to win SBC's contract, and their efforts prevailed. SBC awarded the contract to Clientlogic and expressly authorized Clientlogic to subcontract work to Turtle Ridge. Accordingly, Clientlogic awarded a subcontract to Turtle Ridge incorporating the contract between SBC and Clientlogic for hand and mail delivery of SBC phonebooks.

According to the complaint, after entering into the subcontract, Turtle Ridge began to discover that many of the phonebooks were undeliverable because their delivery addresses were invalid. Unknown to Turtle Ridge, SBC's request for bids on the contract had deliberately exaggerated the number of phonebooks Clientlogic and Turtle Ridge were to deliver. SBC had inflated the number because it allowed SBC to charge higher advertising rates to advertisers in the phonebook, who paid rates based on the phonebook's circulation. In addition to defrauding advertisers, the inflated number defrauded Turtle Ridge because it had calculated its contract price using that number. Turtle Ridge asked Clientlogic to discuss the exaggerated number with SBC. When Clientlogic did so, SBC attempted to cover up its scheme by terminating Clientlogic's contract. In response, Clientlogic terminated Turtle Ridge's subcontract.

Turtle Ridge sued SBC. It alleged causes of action for fraud and deceit, unlawful conduct by a public utility, unfair business practices, intentional and negligent interference with prospective economic advantage, and quantum meruit.

SBC petitioned to compel arbitration. It argued Turtle Ridge's claims arose from Turtle Ridge's subcontract with Clientlogic, which had incorporated the contract between Clientlogic and SBC. SBC's contract with Clientlogic, SBC observed, contained an arbitration clause covering "any controversy arising under, out of, in connection with, or relating to" the contract, which according to SBC, applied to Turtle Ridge's claims against SBC.³ Turtle Ridge opposed arbitration, noting SBC had never entered into a direct contractual relationship with it, and therefore SBC could not enforce the arbitration provision against it. Finding no contract between SBC and Turtle Ridge, the court denied SBC's petition for arbitration. This appeal followed.⁴

DISCUSSION

The parties agree the subcontract involves interstate commerce because Turtle Ridge is a California corporation, and Clientlogic is from Tennessee, and the delivery area for the phone books covered California and Nevada. Because the subcontract involves interstate commerce, Turtle Ridge concedes the Federal Arbitration Act (FAA) applies to it. (9 U.S.C. § 1 et seq.)

Under the FAA, state law governs formation of arbitration agreements. (9 U.S.C.A. § 2; Metalclad Corp. v. Ventana Environmental Organizational Partnership (2003) 109 Cal.App.4th 1705, 1712, 1 Cal.Rptr.3d 328 (Metalclad Corp.).) The FAA obligates states to treat arbitration agreements the same as other types of contracts, and prohibits them from disfavoring or burdening arbitration agreements compared to other types of contracts. Section 2 of the act states, "an agreement in writing to submit to arbitration an existing controversy ... shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." Thus, states must place arbitration agreements on an equal footing with all other types of contracts. (EEOC v. Waffle House, Inc. (2002) 534 U.S. 279, 289, 122 S.Ct. 754, 151 L.Ed.2d 755; Volt Info. Sciences v. Leland Stanford Jr. U. (1989) 489 U.S. 468, 478, 109 S.Ct. 1248, 103 L.Ed.2d 488.)

Here, Turtle Ridge does not challenge the contract's formation, nor does it contend the agreement to arbitrate has been revoked. Hence, we are not called upon to decide whether a contract exists under state law. (Metalclad Corp., supra, 109 Cal.App.4th at p. 1712, 1 Cal.Rptr.3d 328.)

Once a viable arbitration agreement is found under state law, federal law governs its interpretation. (Metalclad Corp., supra, 109 Cal.App.4th at pp. 1712-1713, 1 Cal.Rptr.3d 328; accord, Boucher v. Alliance Title Co., Inc. (2005) 127 Cal. App.4th 262, 268, 25 Cal.Rptr.3d 440 (Boucher).) As there are no undisputed facts, we review the trial court's order de novo. (NORCAL Mutual Ins. Co. v. Newton (2000) 84 Cal.App.4th 64, 71-72, 100 Cal.Rptr.2d 683.) The legal issue presented to us is not whether the subcontract is enforceable but who may invoke its terms. (See Metalclad Corp., at p. 1712, 1 Cal Rptr.3d 328 [where nonsignatory trying to enforce arbitration agreement, "the question is not so much what is covered by the agreement but rather who may invoke it" (italics original)].) Turtle Ridge contends SBC as a nonsignatory to the subcontract may not enforce the incorporated arbitration clause. To answer that contention, we turn to federal arbitration law. (Metalclad Corp., at pp. 1712-1713, 1 Cal.Rptr.3d 328; accord, Boucher, supra, at p. 268, 25 Cal. Rptr.3d 440.)

Under federal law, a nonsignatory may compel a signatory to arbitrate its claims when the signatory's claims are based upon and intertwined with a contract containing an arbitration agreement. As the court explained in Metalclad Corp., supra, 109 Cal.App.4th 1705, 1 Cal.Rptr.3d 328, "the equitable estoppel doctrine applies when a party has signed an agreement to arbitrate but attempts to avoid arbitration by suing nonsignatory defendants for claims that are `"based on the same facts and are inherently inseparable" `from arbitrable claims against signatory defendants." (Id. at pp. 1713-1714, 1 Cal. Rptr.3d 328; see also Boucher, supra, 127 Cal.App.4th at pp. 268-272, 25 Cal.Rptr.3d 440 [allowed estoppel based solely on claims being intertwined with contract].) The rule applies to prevent parties from trifling with their contractual obligations. As the Metalclad Corp. court observed, "The doctrine thus prevents a party from playing fast and loose with its commitment to arbitrate, honoring it when advantageous and circumventing it to gain undue advantage." (Metalclad Corp., at p. 1714, 1 Cal.Rptr.3d 328.)⁵

Turtle Ridge contends equitable estoppel does not apply because its causes of action against SBC are not intertwined with its subcontract. Turtle Ridge is mistaken. Its claims against SBC arose from its business dealings with SBC and Clientlogic, which the contract and subcontract governed; outside of those contracts, Turtle Ridge had no business relationship with SBC. We observe that SBC did not impose itself on Turtle Ridge; Turtle Ridge instead sought out SBC, hoping to do business for it. Interested in giving work to Turtle Ridge, SBC encouraged Turtle Ridge to work with Clientlogic in submitting a coordinated bid. The contract and subcontract that emerged reflected that coordination. As if fitting a hand inside a glove, the SBC contract named Turtle Ridge as the sole approved subcontractor, and the subcontract incorporated the contract, a point emphasized by Turtle Ridge in its complaint. The following emerges from our consideration of the contract and subcontract together: SBC and Clientlogic expressly agreed to arbitrate any disputes. Their agreement was expressly incorporated by reference in the subcontract between Turtle Ride and Clientlogic. Although the subcontract explicitly excluded certain SBC/Clientlogic terms in the incorporation process, the arbitration clause was not one of them. The result was that either expressly or by incorporation each agreement contained an arbitration provision. Given the contractual and actual relationships among the parties, Turtle Ridge's claims against SBC are legally intertwined with its subcontract with Clientlogic that contains the incorporated arbitration clause.⁶

In addition to the roots of its business relationship with SBC resting in one overarching business proposal, the allegations of Turtle Ridge's complaint presupposed the existence of the contract and subcontract as part of a tripartite, on-going relationship that benefited SBC, Clientlogic and Turtle Ridge. Turtle Ridge's causes of action for fraud and deceit rested on SBC's use of inflated circulation numbers in soliciting bids for the contract. Its causes of action for unfair business practices and violation of the Public Utilities Code also rested on the inflated numbers.⁷ Turtle Ridge's interference with prospective economic advantage causes of action were intertwined with the subcontract because Turtle Ridge...