Memorandum Opinion: Denying as Moot the Defendants' 12(b)(1) Motion; Granting the Defendants' Motion to File a Surreply; and Granting in Part and Withholding Judgment in Part on the Plaintiffs' 15(a)(2) Motion

ROYCE C. LAMBERTH, District Judge.

I. Introduction

Before the Court are the following motions:

First, because the relevant plaintiffs already voluntarily dismissed their claims, the Court will deny as moot the defendants' motion to dismiss and compel arbitration pursuant to Rule 12(b)(1). Second, the Court will grant the defendants' motion for leave to file a surreply. Finally, the Court will grant in part and delay ruling in part on the plaintiffs' motion for leave to file their First Amended Complaint.

II. Background

This case concerns allegations brought by 138 plaintiffs for violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), negligence, and negligent misrepresentation in connection with the real estate education programs of Armando Montelongo Jr.; Real Estate Training International, LLC; Performance Advantage Group, Inc.; and License Branding, LLC ("Defendants"). The plaintiffs are all current or former students of Defendants' real estate education programs.

On March 6, 2017, the defendants filed a 12(b)(1) motion to dismiss the claims of 36 plaintiffs for lack of subject matter jurisdiction and requested that this Court compel those plaintiffs to arbitrate [ECF No. 12]. The defendants' allege that each of the 36 plaintiffs identified entered into purchase agreements with the defendants that contained the following arbitration provision:

[ECF No. 12]. On March 20, 2017, the 36 plaintiffs addressed in the defendants' 12(b)(1) motion voluntarily dismissed their claims to pursue them through arbitration. [ECF No.17]. However, due to the defendants' failure to cooperate with the AAA, these plaintiffs, in addition to 42 new plaintiffs subject to the same arbitration clause, now seek to rejoin/join the proceedings before this Court.

The defendants' failure to cooperate with the AAA is illustrated by the case of the Crabtrees. On March 8, 2017, Mike and Susan Crabtree filed a request for dispute resolution services with the AAA pursuant to their purchase agreement with the defendants (the "Crabtree Dispute"). The Crabtrees were two of the defendants' students who were not named as plaintiffs in the present case. The Crabtree's allege that they sustained damages in connection with the purchase agreement they entered into with the defendants.

On April 7, 2017, the AAA issued a letter notifying the parties that the AAA's Consumer Arbitration Rules ("Consumer Rules") applied to the Crabtree Dispute and requesting a waiver of the cost-splitting provision of the purchase agreement. The AAA explained that the Crabtree Dispute arose out of a consumer agreement and, while the arbitration provision referenced the Commercial Arbitration Rules ("Commercial Rules"), under R-1 of the Commercial Rules "[a] dispute arising out of a consumer arbitration agreement will be administered under the AAA's Consumer Arbitration Rules." Additionally, the AAA found that the cost-splitting provision of the arbitration provision substantially deviated from the Consumer Rules and Consumer Due Process Protocol.1 Accordingly, the AAA requested that the defendants waive the cost-splitting provision.

On April 21, 2017, pursuant to Consumer Arbitration Rule R-1(e), the defendants submitted a letter objecting to the use of the Consumer Rules and waiver of the fee-splitting provision.2 The defendants contend that the AAA's Commercial Arbitration Rules should be controlling under the terms of the purchase agreement. The defendants also acknowledge that the Supplementary Procedures for Consumer Related Disputes ("Consumer Supplement") have been replaced by the Consumer Rules, but argue that the Consumer Rules should be secondary and supplementary to the Commercial Rules. Defendants explain that under the Commercial Rules, fee splitting is permissible and incorrectly state that fee splitting would have been permissible under the Consumer Supplement. Accordingly, the defendants reiterate that under the controlling Commercial Rules the plaintiffs should be responsible for half of the initial $4,000 filing fee and refused to comply with the AAA's requests. But the defendants acknowledged that "[i]f an objection is filed, the arbitrator shall have the authority to make the final decision on which AAA rules will apply." [ECF No. 24 at 51].

The AAA subsequently reaffirmed its determinations regarding the Crabtree Dispute and ordered that if the defendants did not comply with their requests by July 18, 2017, they would no longer preside over the dispute. The AAA provided the following comprehensive explanation outlining their position:

On July 18, 2017, the defendants sent an email to the AAA again refusing to waive the cost-splitting provision and the AAA issued a letter providing notice that they would no longer administer the Crabtree Dispute. The AAA's letter also stated that they "may decline to administer future consumer arbitrations involving [defendants]." So the defendants' uncooperativeness prevents arbitration with the AAA.

As a result of the defendants' obstinacy, the plaintiffs now seek leave to file their First Amended Complaint. The amended complaint seeks to rejoin as plaintiffs the 36 plaintiffs who earlier voluntarily dismissed their suit to pursue arbitration, to newly join an additional 42 plaintiffs who have arbitrations agreements with the defendants, and to join an additional 114 new plaintiffs who are (allegedly) not contractually bound by arbitration provisions and have not brought their claims against the defendants in any other forum. For purposes of this opinion, the Court will divide these plaintiffs seeking to join the present suit into two groupsthose with arbitration agreements ("Arbitration Plaintiffs") and those without arbitration agreements ("Non-arbitration Plaintiffs).

III. Legal Standards

A. Federal Rule of Civil Procedure 12(b)(1) & Motion to Compel

In this Circuit, "a district court lacks subject matter jurisdiction over a case and should dismiss it pursuant to Federal Rule of Civil Procedure 12(b)(1) when the parties' dispute is subject to binding arbitration." Gilbert v. Donahoe, 751 F.3d 303, 306 (5th Cir. 2014). District courts have the authority to compel arbitration under Section 4 and Section 206 of the Federal Arbitration Act (the "FAA"), provided that a valid and enforceable arbitration agreement exists. See 9 U.S.C. § § 4, 206. Under the FAA, written arbitration agreements in any contract involving commerce "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. "There is a strong presumption in favor of arbitration and the party seeking to invalidate an arbitration agreement bears the burden of establishing its invalidity." Carter v. Countrywide Credit Indus., Inc., 362 F.3d 294, 297 (5th cir. 2004) (citing Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 24 (1991)).

When faced with a motion to compel, courts routinely apply a two-step inquiry. First, the court examines whether the parties agreed to arbitrate the dispute in question. "This determination involves two considerations: (1) whether there is a valid agreement to arbitrate between the parties; and (2) whether the dispute in question falls within the scope of that arbitration agreement." Webb v. Investacorp, Inc., 89 F.3d 252, 258 (5th Cir. 1996). Second, courts analyze "whether legal constraints external to the parties' agreement foreclosed the arbitration of those claims." Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 628 (1985).

B. Federal Rule of Civil Procedure 15

Under Rule 15, a party can amend its pleadings once as a matter of course and then "only with the opposing party's written consent or the court's leave." Fed. R. Civ. P. 15(a). The decision to grant leave to amend is within the discretion of the District Court but courts "should freely give leave when justice so requires." Id; Foman v. Davis, 371 U.S. 178, 182 (1962). When determining whether to grant leave to amend courts consider "undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, [and] futility of amendment." Foman, 371 U.S. at 182.

IV. Analysis

A. As to the Plaintiffs' Rule 15(a)(2) Motion to Amend

1. Granting the Plaintiffs' 1 5(a)(2) Motion as to the Non-arbitration Plaintiffs

Under Rule 15, leave to amend pleadings "shall be freely given when justice so requires." Fed.R.Civ.P. 15(a). Therefore, leave to amend should not be denied "unless there is a substantial reason to do so." Leffall v. Dallas Indep. Sch. Dist., 28 F.3d 521, 524 (5th Cir. 1994).

Here, the plaintiffs seek to add 114 plaintiffs who bring substantially similar claims against the defendants as the prior plaintiffs in this case. The plaintiffs also assert that the 114 additional plaintiffs have not previously brought theirs claims in any forum and are not subject to binding arbitration agreements. The defendants argue that the addition of these 114 plaintiffs should be denied on the grounds that the proposed amendment is unduly delayed and prejudices them. But the Court finds that these arguments are without merit given that the plaintiffs are bringing substantially similar claims and no substantive rulings have been issued at this point in the case. Therefore, this Court finds that none of the Rule 15 factorsundue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, [and] futility of amendmentare implicated by the addition of these 114 plaintiffs and grants the plaintiffs' 15 (a)(2) motion as it applies to them.

2. Giving the Defendants a Choice as to How to Proceed with the Arbitration Plaintiffs

There is no dispute that the Arbitration Plaintiffs and the defendants entered into binding arbitration agreements that apply to the claims brought in this case. See ECF No. 24. But the plaintiffs seek to amend their complaint to add the Arbitration Plaintiffs' claims due to the defendants' refusal to cooperate with the AAA as evidenced by the Crabtree dispute.

The problem, as the Court sees it, is as follows. The arbitration clause states that any disputes arising from the contracts will be arbitrated by the AAA. The clause also states that fees will be split in a certain way and that the AAA's Commercial Rules and Consumer Supplement will govern the dispute. But these provisions cannot all be fulfilledthe AAA will not arbitrate the parties' disputes unless fees are split in the way it deems appropriate under the Consumer Rules.

Given this state of affairs, the defendants attempt to put the Arbitration Plaintiffs in a Catch-22. First, the defendants said that the Arbitration Plaintiffs could not litigate their claims in this Court because they were required to arbitrate. Then, when the Arbitration Plaintiffs agreed to arbitrate, the defendants behaved so poorly that the AAA threatened to refuse to preside over the disputes. And now the defendants oppose the Arbitration Plaintiffs' attempt to return to this Court, saying that those plaintiffs must instead participate in the arbitration that the defendants are stonewalling. Ultimately, the defendants are trying to deny the Arbitration Plaintiffs any forum in which to be heard. The Court will not allow that.

Something has to give. And the Court will let the defendants choose what will give. The Court gives to the defendants two options. Option one: The defendants may choose to comply with the AAA's rulings about the applicable rules and fee arrangements and waive their objections so that arbitration may go forward. Option two: If the defendants cannot swallow abiding by the AAA's decisions regarding how arbitration is to proceed, then the Court will proceed by granting to the plaintiffs leave to amend since arbitration is otherwise futile. But the defendants will have seven clays from the date of this opinion and accompanying order to notify the Court of their decision whether to comply with option one.

As a final note, had the Arbitration Plaintiffs specifically requested enforcement of the AAA's decisions regarding how arbitration was to proceed, and had the issue been frilly briefed, the Court might have been inclined simply to order the defendants to comply with the AAA's rulings and to proceed with arbitration. But the Arbitration Plaintiffs did not request that relief. Instead, they seek to join this litigation. The Court concludes then that the Arbitration Plaintiffs waive their right to arbitrate. All that remains is to see what the defendants will waivetheir right to arbitrate or their objections to the AAA's decisions.

V. Conclusion

For the reasons stated above, the Court will do the following:

A separate order will issue.