HOWARD R. LLOYD, Magistrate Judge.
Defendants Miasole Hi-Tech Corp. ("MHT") and Miasole, Inc. (together, "Defendants") move to compel arbitration on the basis of an arbitration clause contained in a purchase order. Plaintiff REIS Robotics ("REIS") argues that the purchase order, issued by MHT after the parties executed a Master Supply Agreement ("MSA"), is not part of the parties' agreement. All parties have consented to magistrate judge jurisdiction. Dkt. Nos. 7, 13. For the reasons described below, the court grants Defendants' motion to compel arbitration.
REIS, a Chinese corporation that manufactures assembly lines, Dkt. No. 1, ¶ 1, sues Defendants for breach of contract and joint enterprise liability. Defendants are alleged to be California corporations. Id., ¶¶ 2, 3. MHT, the party with which REIS contracted, reportedly breached its agreement with REIS by failing to pay the amounts owed for two assembly lines it ordered. Id., ¶ 47. Plaintiff also asserts joint enterprise liability as to MHT and Miasolé, Inc., claiming that both companies were used in an allegedly fraudulent scheme to falsely inflate the value of their ultimate common parent, Hanergy Thin Film Power Group. Id., ¶ 53.
The current dispute between the parties concerns three documents: the Master Supply Agreement ("MSA"), the contract (a document describing technical specifications), and the purchase order. The contract's terms are confidential, and neither party asserts that its terms are relevant to the issues in this motion. See Dkt. No. 14, Withee Decl., ¶ 4.
MHT and REIS executed the MSA in October 2014. Withee Decl., Ex. 1; Emonts Decl., Ex. A. The MSA contains the following relevant terms:
Paragraph Three, Terms of Sale, contemplates that purchases would be initiated upon REIS's acceptance of a written purchase order from MHT (or MHT's affiliate):
Schedule A and Exhibit A, along with three other schedules and associated exhibits, are described in Paragraph 1.3, which states that the exhibits and schedules "form part of this Agreement." Paragraph 1.3 also notes that exhibits and schedules "will be negotiated on a project-by-project basis."
Section 18, General Provisions, contains most of the provisions pertinent to the resolution of Defendants' motion. They are as follows:
Additionally, the MSA provides that Delaware law applies and that the United Nations Convention for Contracts for the International Sale of Good and/or any local implementing legislation does not apply. MSA ¶ 18.9.
On October 30, 2014 (three days after the MSA was signed), MHT issued a purchase order (in fact, the only purchase order it ever issued). The pertinent terms are as follows:
The purchase order was initialed by a Photovoltaic Manager for REIS, YuSheng Zhao. REIS Managing Director, Dr. Manfred Emonts, avers that Zhao never had authority to agree to any modification of the MSA's business or legal terms; that Zhao had no role in negotiating the business or legal terms of the MSA; and that Zhao's role was limited to clarifying and discussing various technical issues associated with the manufacturing lines MHT purchased. Pursuant to REIS' policy, Emonts says that the purpose of Zhao's review of the purchase order was simply to check that the technical and commercial data matched the underlying contract. Emonts Decl. ¶¶ 17-18. Emonts further notes that the purchase order was signed by one Kevin Chang on behalf of MHT. Emonts says that Chang had no leading role in the MSA negotiations. Emonts Decl. ¶ 19.
In the present motion, Defendants move to compel arbitration on the basis of the arbitration provision contained in the purchase order. Defendants argue that (1) the MSA is not the complete agreement of the parties, and that the purchase order became part of the parties' agreement; (2) the arbitration provision was not precluded by the MSA because it did not conflict with that document, which is silent with respect to dispute resolution; and (3) the arbitration provision was an additional term, and, under UCC 2-207, it became part of the agreement because (a) the New York rule
Under the Federal Arbitration Act (FAA), "[a] party to a valid arbitration agreement may `petition any United States district court for an order directing that such arbitration proceed in the manner provided for in such agreement.'" Lifescan, Inc. v. Premier Diabetic Servs., Inc., 363 F.3d 1010, 1012 (9th Cir. 2004) (quoting 9 U.S.C. § 4). When such a request is made, the court must determine (1) whether an arbitration agreement exists and (2) whether it encompasses the dispute at issue. See id. at 1012; see also Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1130 (9th Cir.2000). "[A]ny doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration." Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983).
"Arbitration is a matter of contract and the FAA requires court to honor parties' expectations." AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 351 (2011). A court may compel the parties to arbitration only when the parties have agreed to arbitrate the dispute at issue. Granite Rock Co. v. Int'l Bhd. of Teamsters, 561 U.S. 287, 302-03 (2010). Additionally, arbitration should be denied if the court finds "grounds as exist at law or in equity for the revocation of any contract," such as fraud, duress or unconscionability. 9 U.S.C. § 2; Rent-A-Center, West, Inc. v. Jackson, 130 S.Ct. 2772, 2776 (2010). The court applies ordinary state-law principles governing the formation of contracts to carry out this task. Davis v. O'Melveny & Myers, 485 F.3d 1066, 1072 (9th Cir.2007).
There appears to be no dispute that the terms of the arbitration provision are broad enough to cover the present dispute. Thus, the court's only task is to determine whether the arbitration provision is part of the parties' agreement.
The MSA is not the complete and entire expression of the parties' agreement. It cannot be, according to its own terms. The MSA, in two ways, acknowledges that aspects of the agreement between the parties will be determined in the future, in additional documents. First, paragraph 1.3 describes exhibits and schedules that "form part of this Agreement" and "will be negotiated on a project-by-project basis." Second, paragraph 18.2 anticipates—and paragraph 3 essentially requires, in order for the MSA to have any real commercial effect—the issuance of purchase orders with additional terms, some of which may conflict with the terms of the MSA. Given that the MSA itself is not yet fully negotiated, and given that it requires additional documents for any transaction between the parties to occur, the court concludes that the MSA is not the complete agreement of the parties.
REIS argues that this conclusion requires the court to read paragraph 18.1 out of the MSA. 18.1 states: "This Agreement, together with its Schedules and Exhibits, constitutes the complete agreement of the parties and supersedes any other agreements, written or oral, concerning any purchase orders accepted after the Effective Date." Indeed, courts must interpret contracts "in a way that gives effect to every term of the instrument, and that, if possible, reconciles all of the provisions of the instrument when read as a whole." Council of the Dorset Condo. Apartments v. Gordon, 801 A.2d 1, 7 (Del. 2002). Paragraph 18.1, however, is susceptible of two meanings: the meaning that REIS proposes—that the MSA trumps all purchase orders submitted in the future— and the meaning proposed by Defendants—that the MSA trumps only prior agreements made regarding purchase orders. Though the Defendants place great weight on the retrospective connotations of the word "supersedes" (and the court agrees that this word often has a backwards-looking aspect), the more telling clue in the text is the word "concerning." "Concerning" suggests that the MSA supersedes agreements made "about" or "with respect to" purchase orders accepted after the effect date—that is, it supersedes other agreements dictating terms related to the effects of such purchase orders. If the parties had wished the MSA to supersede purchase orders, they should have said so directly.
As REIS points out, the phrase "complete agreement" is a term of art, with REIS arguing that it blocks out additional terms or modifications proposed after the agreement is signed. But the cases REIS cites suggests that phrase's specific meaning and legal effect is not the one REIS intends. In both Dave Markley Ford, Inc. v. Lair and McGrew v. Vanguard Corp., the courts determined that contracts that were the complete agreements of the parties precluded the admission of parol evidence—that is, "evidence of prior agreements." McGrew, No. C.A. 5743, 1979 WL 4635, at *3 (Del. Ct. Chanc. Sept. 25, 1979) (emphasis added); Lair, 565 P.2d 671 (Okla. 1977). Paragraph 18.1 has this meaning—it blocks out prior agreements, not later ones.
The court thus concludes that the MSA is not the complete agreement of the parties, and that paragraph 18.1 has the meaning suggested by defendants—it is a parol-evidence-type provision stating that the MSA supersedes any prior agreements made with respect to future purchase orders. But this conclusion does not address whether the arbitration provision became part of the parties' agreement. Two provisions of the MSA are relevant to this question, but neither ultimately provides an answer.
First, paragraph 18.2 states that, "[i]n the event of any conflict between this Agreement and any purchase order, order confirmation or the like, this Agreement shall control," with exceptions for several provisions not at issue here and "any other provision that specifically states that such provision shall supersede the provisions of this Agreement." The MSA is silent as to dispute resolution. Paragraph 18.2—governing conflicting terms—does not dictate whether or not the arbitration provision controls, because the arbitration provision does not conflict with any terms or provisions of the MSA.
Second, paragraph 18.4 states that, "[a]ny amendment to this Agreement or any Schedule or Exhibit hereto shall be in writing and signed by authorized representatives of each party." As an initial matter, the court observes that the purchase order was signed by representatives of each party, and the parties began performance after it was issued. REIS, however, argues that its signatory—YuSheng Zhao—was not authorized to amend the MSA. The court need not address this last argument, as it concludes, as a matter of law, that the arbitration provision was not an amendment to the MSA. Paragraph 18.4 refers specifically to "this Agreement"—with a capital "A"—and its schedules or exhibits. This indicates that the paragraph refers to amendments to the MSA document itself (for example, Paragraph 18.1 refers to the MSA as "[t]his Agreement" with a capital "A" and the "complete agreement of the parties"—meaning the sum-total of the parties' meeting of the minds—with a lower-case "a"). The arbitration provision in the purchase order is not an amendment to the (upper-case) Agreement, but a proposed additional term to the (lower-case) agreement between the parties. As such, paragraph 18.4 does not block the application of the arbitration provision.
Having concluded that the MSA does not keep out the arbitration provision, the question still remains whether the arbitration provision—a provision that does not conflict with or amend the MSA, but still proposes an additional term—is part of the contract. As the MSA is silent on the matter of non-conflicting, non-amending additional terms, the court must turn to the default rules.
Defendants argue that UCC Section 2-207—adopted by Delaware in Del. Code Ann. Tit. 6, § 2-207—applies in cases, like this one, where multiple writings make up the contract and the court must determine which terms apply. REIS responds that Section 2-207 is limited to battle-of-the-forms situations, and that it does not apply when a party attempts to modify an agreement that has already been set. As the parties already completed contract formation through offer and acceptance of the MSA, REIS asserts, Section 2-207 should not apply.
As the court stated above, however, the MSA is not a complete agreement. In order to initiate a product purchase, the MSA requires REIS's written acceptance of a written purchase order from MHT. MSA ¶ 3. The MSA further provides that certain terms of these sales "will be negotiated on a project-by-project basis." MSA ¶ 1.3. These terms call for the sort of acceptances, confirmations, or memoranda discussed in the Official Comments to Section 2-207. The arbitration provision is thus a proposal for an added term in a writing that forms part of the parties' agreement, and Section 2-207 applies. Del. Code Ann. Tit. 6, § 2-207, Official Comment 2.
Section 2-207(2) states that additional terms will become part of a contract between merchants unless: "(a) the offer expressly limits acceptance to the terms of the offer; (b) [the additional terms] materially alter [the contract]; or (c) notification of objection to [the additional terms] has already been given or is given within a reasonable time after notice of them is received." Del. Code Ann. Tit. 6, § 2-207. The parties confine their arguments solely to the second of these conditions—whether the additional term materially alters the contract.
Plaintiff argues that the New York rule, which states that an arbitration provision per se materially alters a contract under Section 2-207, should apply.
Section 2 of the Federal Arbitration Act ("FAA") states that arbitration provisions in written contracts 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. This provision preempts state law rules that single out arbitration provisions and hold them unenforceable or invalid because they involve arbitration. Nelsen v. Legacy Partners Residential, Inc., 207 Cal.App.4th 1115, 1136 (2012). Arbitration clauses may be invalidated by generally applicable rules, but "not by defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue." AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011). Defendants argue that the New York rule, by applying a per se determination specifically to arbitration provisions that does not apply generally, is preempted by the FAA.
REIS argues that Defendants have misinterpreted Supreme Court precedent. In Concepcion and several other cases cited by Defendants, the Supreme Court held that the FAA preempted state law rules that prohibited "the arbitration of [ ] particular type[s] of claim[s]." Id., Nitro-Lift Techs., LLC v. Howard, 133 S.Ct. 500 (2012); Marmet Health Care Center, Inc. v. Brown, 132 S.Ct. 1201 (2012). REIS argues that these cases all involved state laws regarding the validity of arbitration provisions, not state laws concerning whether the parties agreed to arbitrate. The New York rule survives, REIS asserts, because it concerns the latter question (specifically, whether an added arbitration provision becomes part of a contract), which is a matter determined by state law.
The FAA's pre-emptive reach, however, is broader than REIS claims. The federal statute preempts not only state laws that prohibit arbitration of particular types of claims, but also state law rules that, while thought to be generally applicable, are "applied in a fashion that disfavors arbitration." Concepcion, 563 U.S. at 341. Courts have found this second type of pre-emption at work even in analyses of whether there was an agreement to arbitrate. Progressive Cas. Ins. Co. v. C.A. Reaseguradora Nacional de Venezuela, 991 F.2d 42, 46 (2d Cir. 1993); see also Mitchell v. Am. Fair Credit Ass'n, Inc., 99 Cal.App.4th 1345, 1355-57 (2002) ("In applying state law rules to determine if an agreement to arbitrate exists, we are mindful that, to the extent these rules single out arbitration agreements and impose special burdens on them, they interfere with the statutory goal of placing such agreements on an equal footing and are preempted."); Erickson v. Aetna Health Plans of Cal., Inc., 71 Cal.App.4th 646, 655 (1999). In Progressive, in just such an analysis of whether an agreement to arbitrate existed, the Second Circuit held that the FAA preempted the New York rule because it discriminated against arbitration provisions. 991 F.2d at 46.
The court finds the reasoning in Progressive persuasive. Because the New York rule discriminates against arbitration provisions by applying an otherwise generally applicable rule— Section 2-207(2)—in a manner that disfavors arbitration (by applying a per se rule rather than engaging in a case-by-case analysis of hardship and surprise), the court determines that the rule is pre-empted and does not apply here.
In place of the New York rule, the court engages in a case-by-case analysis under 2-207 of whether the proposed added provision materially alters the contract. Material alteration occurs when the added provision would "result in surprise or hardship if incorporated without express awareness by the other party[.]" Official Comment 4, UCC § 2-207. Surprise must be both objective and subjective. Standard Bent Glass Corp. v. Glassrobots Oy, 333 F.3d 440, 448 (3d Cir. 2003) (quoting Aceros Prefabricados, S.A. v. TradeArbed, 282 F.3d 92, 100 (2d Cir. 2002)) ("A profession of surprise and raised eyebrows are not enough. Instead, . . . the nonassenting party must establish that, under the circumstances, it cannot be presumed that a reasonable merchant would have consented to the additional term."). Hardship refers to whether the provision would impose "substantial economic hardship" on the other party. El Paso Pipe & Supply Co., 978 F.2d 1185, 1191 (10th Cir. 1992).
Here, the court is not persuaded that the addition of the arbitration provision subjected REIS to either surprise or hardship. With respect to surprise, the MSA specifically stated that a product purchase would be "initiated upon Supplier's written acceptance of a written purchase order[,]" and that the terms related to purchases would be negotiated on a project-by-project basis. The MSA further contains terms related to which provisions from purchase orders could enter the parties' agreement. Additionally, the purchase order concerns products worth millions of dollars. Under these circumstances, an objectively reasonable merchant would carefully review the entire purchase order. In fact, an agent of REIS did review the purchase order, signing it and initialing it on each page, including the page containing the arbitration agreement. Finally, REIS does not argue that arbitration provisions are unusual in the industry. REIS cannot establish objective surprise. See Standard Bent Glass Corp., 333 F.3d at 448 n.12.
As for hardship, the arbitration provision states that arbitration would occur in San Jose, the same city in which this litigation is occurring, so the change of location would not lead to hardship for REIS. REIS specifically offers three claims of hardship. Two of the three are unrelated to economic factors, but instead relate to features of arbitration (i.e., more limited discovery and grounds for appeal). If the court were to hold that these features were hardships, then all arbitration provisions would materially alter contracts under 2-207, and the court would be back in the territory of the New York rule in discriminating against arbitration provisions because they involve arbitration. The only claim of economic hardship REIS offers is the expense of three arbitrators. But REIS does not offer any explanation regarding why or how the expense of three arbitrators would be a hardship for it, a "leading technology company for robot and system integration." Dkt. No. 1, ¶ 8. Additionally, arbitration is generally regarded as a less expensive option than litigation. Concepcion, 563 U.S. at 345 (citing promoting arbitration as a more efficient and less costly means of dispute resolution as a goal of the FAA); see also Hawkins v. Superior Court, 89 Cal.App.3d 413, 416 (1979) ("arbitration is less expensive and more expeditious than litigation"). Finally, the court finds REIS's argument that the cost of three arbitrators would constitute a hardship disingenuous in light of its request, in nearly the same breath, for the more expansive (and expensive) discovery available in litigation.
The court thus concludes that REIS would suffer neither surprise nor hardship from the inclusion of the arbitration provision. As a result, under 2-207, the arbitration provision did not materially alter the contract and became one of its terms.
As the parties had an agreement to arbitrate, and as REIS does not argue that the broad arbitration provision does not cover the present dispute, the court GRANTS the defendants' motion to compel arbitration and STAYS this litigation pending the completion of arbitration. 9 U.S.C. § 3.
