WILLIAM H. ORRICK, District Judge.
Plaintiff Petersen-Dean, Inc. ("PDI") filed this action in state court seeking a declaration that it has no liability to any defendants, SolarWorld Americas, Inc. ("SWA"), SolarWorld Americas LLC ("SWA LLC"), SolarWorld Industries America LP ("SWP"), and SolarWorld Industries Services LLC ("SWIS LLP"), under certain expired agreements related to the purchase and supply of solar panels. Defendants removed the action on the basis of diversity jurisdiction, asserting that SWA LLC, a California company, was fraudulently joined. After removal, they moved to compel arbitration or dismiss the action based on an existing arbitration agreement between the parties. PDI subsequently moved to remand, arguing that defendants had failed to meet their burden of establishing fraudulent joinder.
The evidence indicates that SWA LLC merged with its parent SWA and PDI has no independent claim against it. In addition, PDI's actions suggest that it has no true controversy with SWA LLC. The record also reveals an existing and valid arbitration agreement covering each and every dispute based on the commercial relationship between these parties. Accordingly, PDI's motion to remand is DENIED, and defendants' motion to compel arbitration is GRANTED.
On December 7, 2017, plaintiff Peterson-Dean, Inc. ("PDI") filed this action for declaratory relief against defendants SolarWorld Americas, Inc. ("SWA"), an Oregon corporation, SolarWorld Americas LLC ("SWA LLC"), a California limited liability company, SolarWorld Industries America LP ("SWP"), a Delaware corporation, and SolarWorld Industries Services LLC ("SWIS LLP"), a Delaware limited liability company seeking "to establish that PDI has no liability in any amount for any relief to any Defendant under the expired Guaranty Agreement between PDI and SWA, under the expired Supply Agreement of PD Solar, Inc. ("PDS"), or any other basis in law or equity." Compl. ¶ 2 (Dkt. No. 1-1 at 5).
The merits of this case center around PDI's obligation to pay for over $8 million in solar panels procured by PDS, PDI's wholly-owned subsidiary (and non-party), from defendant-supplier SWA. But the impetus for the present motions stems from the tortuous history between PDI, PDS, and SWA.
On June 8, 2017, SWA filed suit against PDI and PDS in the United States District Court, District of Oregon (the "Oregon Federal Case"). Geekie Decl. ¶ 3; see Complaint in the Oregon Federal Case ("SWA Complaint")(Geekie Decl., Ex. 1; Dkt. No. 38-1 at 82). SWA alleged that PDI was liable to SWA under a Guaranty Agreement from PDI to SWA, guaranteeing the obligations of PDS to SWA, which amounted to $8,247,184.89. Geekie Decl. ¶ 3. SWA specifically alleged that the outstanding and overdue invoices stemmed from 2017.
On the date their response was due, PDI and PDS filed a motion to compel arbitration and dismiss proceedings.
Thereafter, the parties agreed to arbitrate their entire dispute before Federal Arbitration, Inc. ("FedArb"), and SWA voluntarily dismissed the Oregon Federal Case. Geekie Decl. ¶ 8. On August 28, 2017, SWA filed an arbitration demand before FedArb seeking to recover from PDI under the Guaranty Agreement. Geekie Decl. ¶ 9; see FedArb Arbitration Demand (Geekie Decl., Ex. 4; Dkt. No. 5-1 at 61). PDI filed counterclaims against SWA, including one "for declaratory relief that [PDI] is not liable to [SWA] in any amount or for any relief under a contract of guaranty for [SWA's] defective and hazardous products that [PDI/PDS] rejected or of which [PDI/PDS] revoked acceptance." PDI's Counterclaims in FedArb (Geekie Decl. ¶ 10; id., Ex. 5; Dkt. No. 5-1 at 92).
In October 2017, the parties entered an Agreement to Arbitrate under FedArb Administration, with retired United States District Court Judge Vaughn R. Walker serving as arbitrator. Geekie Decl. ¶ 11; see Arbitration Agreement (Geekie Decl, Ex. 6; Dkt. No. 5-1 at 201).
On November 30, 2017, the parties mediated before Judge Walker, but they were unable to settle their dispute. Geekie Decl. ¶ 12. Judge Walker thereafter recused himself from the arbitration. Russo Decl. ¶ 11; see Email From FedArb (Id., Ex. 5). After the parties were unable to agree on a new arbitrator, FedArb designated Judge Gary Fees to arbitrate the matter. 1/19/18 Email from FedArb (Reply to Mot. to Compel, Ex. A).
PDI alleges that "SWA LLC, SWP, and SWIS are, on information and belief, all parties with interests in the 2016 Guaranty Agreement, or who may otherwise directly or indirectly claim against PDI for the amounts PDI is alleged to owe under the 2016 Guaranty Agreement, and who are joined in this action for full and total declaration of rights as to that instrument and whether any SolarWorld entity may make claims against PDI." Compl. ¶ 8.
Under 28 U.S.C. § 1441, "[a] defendant may remove an action to federal court based on federal question jurisdiction or diversity jurisdiction." Hunter v. Philip Morris USA, 582 F.3d 1039, 1042 (9th Cir. 2009). Courts "strictly construe the removal statute against removal jurisdiction[,]" and "[f]ederal jurisdiction must be rejected if there is any doubt as to the right of removal in the first instance." Gaus v. Miles, Inc., 980 F.2d 564, 566 (9th Cir. 1992)(internal citations omitted). "The `strong presumption' against removal jurisdiction means that the defendant always has the burden of establishing that removal is proper." Id.
Removal jurisdiction based on section 1332 "requires complete diversity of citizenship[,]" Morris v. Princess Cruises, Inc., 236 F.3d 1061, 1067 (9th Cir. 2001), and "may not be removed if any of the parties in interest properly joined and served as defendants is a citizen of the State in which such action is brought." 28 U.S.C. § 1441(b)(2). "[O]ne exception to the requirement of complete diversity is where a non-diverse defendant has been `fraudulently joined.'" Morris, 236 F.3d at 1067.
The Federal Arbitration Act ("FAA") governs the motion to compel arbitration. 9 U.S.C. §§ 1 et seq. Under the FAA, a district court determines (1) whether a valid agreement to arbitrate exists and, if it does, (2) whether the agreement encompasses the dispute at issue. Lifescan, Inc. v. Premier Diabetic Servs., Inc., 363 F.3d 1010, 1012 (9th Cir. 2004). "To evaluate the validity of an arbitration agreement, federal courts should apply ordinary state-law principles that govern the formation of contracts." Ingle v. Circuit City Stores, Inc., 328 F.3d 1165, 1170 (9th Cir. 2003) (internal quotation marks and citation omitted). If the court is "satisfied that the making of the arbitration agreement or the failure to comply with the agreement is not in issue, the court shall make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement." 9 U.S.C. § 4. "[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).
I will first address PDI's motion to remand because I must have jurisdiction before I can address defendants' motion to dismiss or compel arbitration.
PDI argues that removal was improper because defendant SWA LLC is a resident defendant and complete diversity is lacking. Mot. to Remand at 3 (Dkt. No. 23). Defendants insist that PDI fraudulently joined SWA LLC for the purpose of defeating diversity jurisdiction, when in actuality SWA LLC "is a defunct company that no longer conducts operations and is no longer in good standing in California." Geekie Decl. ¶ 16
"A district court may disregard a non-diverse party named in the state court complaint and retain federal jurisdiction if the non-diverse party is joined as a sham or if the joinder is fraudulent." Plute v. Roadway Package Sys., Inc., No. C-01-0353-SI, 141 F.Supp.2d 1005, 1008 (N.D. Cal. 2001) (citation omitted). Joinder is fraudulent "[i]f the plaintiff fails to state a cause of action against a resident defendant, and the failure is obvious according to the settled rules of the state." McCabe v. General Foods Corp., 811 F.2d 1336, 1339 (9th Cir. 1987).
There is a "general presumption against fraudulent joinder," and defendants who assert that a party is fraudulently joined carry a "heavy burden." Hunter v. Philip Morris USA, 582 F.3d 1039, 1046 (9th Cir. 2009). Defendants must "show that the individuals joined in the action cannot be liable on any theory," Ritchey v. Upjohn Drug Co., 139 F.3d 1313, 1318 (9th Cir. 1998), and that "there is no possibility that the plaintiff will be able to establish a cause of action in state court against the alleged sham defendant," Good v. Prudential Insurance Company of America, No. C-98-0894-CW, 5 F.Supp.2d 804, 807 (N.D. Cal. 1998). "All doubts concerning the sufficiency of a cause of action because of inartful, ambiguous or technically defective pleading must be resolved in favor of remand." Gaus v. Miles, Inc., 980 F.2d 564, 566-67 (9th Cir. 1992). See also Albi v. Street & Smith Publ'ns, 140 F.2d 310, 312 (9th Cir. 1944) ("[W]here it is doubtful whether the complaint states a cause of action against the resident defendant, the doubt is ordinarily resolved in favor of the retention of the case in state court. A merely defective statement of the plaintiff's action does not warrant removal . . . It is only where the plaintiff has not, in fact, a cause of action against the resident defendant, and has no reasonable ground for supposing he has, and yet joins him in order to evade the jurisdiction of the federal court, that the joinder cannot be said to be fraudulent").
At first glance, one might agree with PDI that SWA LLC is a proper party because it entered the 2014 agreements between the parties. See 2014 Supply Agreement (Milionis Decl. ¶ 5; id., Ex. 1; Dkt. No. 30-3[under seal]);
Additionally, the reason for the substitution from SWA LLC to SWA becomes clear upon a deeper dive into the record. SWA LLC is no longer an operating entity in California because it merged with SWA. Beecham Decl. ¶ 3. PDI itself recognized this in its Motion to Compel Arbitration in the Oregon Federal Action and asked the court to take judicial notice of the fact. See PDI's Mot. to Compel Arbitration at 3 n.3 ("Oregon and California public records record the merger of the LLC into the current entity, SWA.")(Dkt. No. 5-1 at 23). In California, "[u]pon merger . . . the separate existence of the disappearing corporations ceases. . . ." Cal. Corp. Code § 1107. "Under California law, a corporation that has been merged into another corporation cannot be sued." Goodwin v. Bruggeman-Hatch, 2014 WL 3881984, at *2 (D. Colo. Aug. 7, 2014); see also Asher v. Pac. Power & Light Co., 249 F.Supp. 671, 677 (N.D. Cal. 1965)("A complete answer to the question of joining this defendant is that, subsequent to its merger with Pacific, Copco is not liable to suit in California unless the action was pending prior to the merger."). The merger between SWA LLC and SWA is reason enough to conclude that SWA LLC is not a proper party to this case, but it is not the only reason.
The conclusion that SWA LLC was fraudulently joined is reinforced by PDI's own actions over the course of this dispute. PDI never before asserted any claims against the other three entities. If PDI was truly concerned about the other entities' interest in the business relationship, one would think that PDI would have included them in its JAMS Arbitration Demand, or its FedArb Counterclaims. But it did neither of those things. To the contrary, it attempted to resolve its dispute with SWA over the course of six months before insisting that these other entities might have an interest needing resolution. This behavior supports SWA's contention that there is no actual dispute between PDI and SWA LLC.
PDI joined SWA LLC for the purpose of destroying diversity jurisdiction. Because SWA LLC merged with its parent SWA, PDI cannot state a cause of action against it. Under these circumstances, I will disregard the non-diverse party and retain jurisdiction. See, e.g., Plute, 141 F. Supp. 2d at 1008.
Defendants argue that "there has been a longstanding agreement to arbitrate" any dispute between the parties. Mot. to Compel Arbitration at 5 (Dkt. No. 5). They cite to PDI's acknowledgment and agreement to arbitrate on numerous occasions, including PDI's motion to compel arbitration in the Oregon Federal Case, PDI's demand for arbitration before JAMS,
PDI counters that "[d]efendants erroneously point to expired contracts between PDI and SWA that do not encompass the substantive claims at issue, all of which post-date the expiration of the agreement to arbitrate." Opp'n at 1 (Dkt. No. 18). First, it claims that its prior motion to compel arbitration in the Oregon Federal Case pertained to overdue invoices within the year range 2014-2016. Opp'n ¶ 6 (citing Russo Decl. ¶ 4). Next, it asserts that the parties "agreed to arbitrate the claims regarding purportedly overdue invoices within the year range of 2014-2016. . . ." Opp'n ¶ 9 (citing FedArb Arbitration Agreement). Then it contends that SWA revealed for the first time in November 2017 that "the earliest allegedly overdue invoice at issue was dated January 24, 2017." Opp'n ¶ 11 (citing Russo Decl. ¶ 9). And last, it suggests that "[t]he parties' agreement had been to arbitrate before Judge Walker." Opp'n ¶ 14 (citing Arbitration Agreement ¶ 7).
Each of those representations is misleading, at best. The dispute between these parties has always been limited to outstanding and overdue invoices from 2017. See Complaint in Oregon Federal Case (Dkt. No. 5-1 at 7). In fact, one need only look to PDI's motion to compel arbitration in the Oregon Federal Case to negate its arguments here. PDI now contends that all agreements between PDI and SWA expired before the 2017 invoices, i.e., all "outstanding invoices" post-date the 2014, 2015, and 2016 agreements, and there was no new agreement for 2017. Opp'n at 4-5. But it had previously argued that the parties had been negotiating agreements for 2017, and although those negotiations stalled, "at no time with respect to the 2017 [sic] did PDI agree to any change in the dispute resolution provision, or that disputes under that agreement should be resolved in the Oregon courts as opposed to arbitration in California previously agreed to in 2014 and 2016."
PDI then proceeded to cite "General Terms and Conditions" attached to some of the 2017 invoices received by PDS, which included a "Dispute Resolution" provision dictating that disputes left unresolved after settlement negotiations "shall be submitted for arbitration. . . ." Id. ¶ 8. It also asserted that invoices dated 2017 may have pertained to purchase orders issued in 2016 and therefore subject to the 2016 Supply Agreement. Id. at 12. It concluded, "SWA and [d]efendants [PDI and PDS] agreed in more than one fully executed agreement that they would arbitrate `any dispute' related to their commercial business relationship." Id. at 14-15. In the absence of any actual change in facts (as opposed to PDI's false representations that the scope of the dispute has changed), this is an appropriate situation to judicially estop PDI "from deliberately changing positions according to the exigencies of the moment." New Hampshire v. Maine, 532 U.S. 742, 749-50 (2001).
"Judicial estoppel is an equitable doctrine that precludes a party from gaining an advantage by asserting one position, and then later seeking an advantage by taking a clearly inconsistent position." Hamilton v. State Farm Fire & Cas. Co., 270 F.3d 778, 782 (9th Cir. 2001). Courts consider three factors in determining whether judicial estoppel applies: "(1) whether a party's later position is `clearly inconsistent' with its original position; (2) whether the party has successfully persuaded the court of the earlier position[;] and (3) whether allowing the inconsistent position would allow the party to `derive an unfair advantage or impose an unfair detriment on the opposing party.'" United States v. Ibrahim, 522 F.3d 1003, 1009 (9th Cir. 2008) (quoting New Hampshire, 532 U.S. at 750-51).
PDI's position is "clearly inconsistent" as the scope of this dispute has been the same since SWA filed its complaint in the Oregon Federal Case. The Oregon court never ruled on PDI's motion, but PDI was at least successful in convincing SWA to voluntarily dismiss the action. This fact leads to consideration of the third factor because PDI would clearly "derive an unfair advantage" if allowed to pursue its inconsistent position.
But I need not rely on estoppel where there is a clear and unambiguous Agreement to Arbitrate. See Arbitration Agreement (Geekie Decl., Ex. 6; Dkt. No. 5-1 at 201). The parties signed the Agreement in October 2017, and it specifically provides an integration clause that the agreement and the FedArb rules "represent the entire understanding of the Parties" and "[n]o prior oral or written understanding shall be of any force or effect as to the matters covered in this agreement." Arbitration Agreement ¶ 13. The scope of the Agreement is not explicitly stated, but it necessarily encapsulates the claims of SWA's Demand (signed in August) and PDI's Counterclaims (signed in September). See SWA FedArb Demand for Arbitration (Geekie Decl., Ex. 4; Dkt. No. 5-1 at 61); PDI Counterclaims (Geekie Decl., Ex. 5; Dkt. No. 5-1 at 93). Although PDI's present claim for declaratory relief is not expressly listed as a counterclaim in the arbitration proceeding, the counterclaim sought to cover "each and every disputed issue by and between [the parties]. . . ." PDI Counterclaims ¶ 54. Moreover, PDI's present claim would necessarily have to be determined in deciding SWA's FedArb claim for payment of the outstanding and overdue invoices.
PDI insists that the FedArb proceedings "have concluded[.]" Opp'n at 6. But this representation is belied by the fact that the FedArb administrator attempted to set a deadline of January 12, 2018 to select a new arbitrator to replace Judge Walker.
Under these circumstances, I am "satisfied that the parties agreed to arbitrate [the present] dispute." Granite Rock Co. v. Int'l Bhd. of Teamsters, 561 U.S. 287, 297 (2010)(emphasis in original); see also Saint Agnes Med. Ctr. v. PacifiCare of California, 31 Cal.4th 1187, 1199 (2003)("By entering into the arbitration agreement, the parties established their intent that disputes coming within the agreement's scope be determined by an arbitrator rather than a court; this contractual intent must be respected. . . ."). Accordingly, the parties are compelled to arbitrate. Defendants' motion is GRANTED.
In accordance with the foregoing, PDI's motion to remand is DENIED. Defendants' motion to compel arbitration is GRANTED. Defendants shall also file the declaration described in footnote five within a week.
But defendants have yet to file a declaration establishing the basis for sealing the entirety of the exhibits. See Civil L. R. 79-5(e)(designating party must file a declaration within 4 days of the filing of the Administration Motion to File Under Seal). If they wish to establish compelling reasons for sealing any portions other than those identified by PDI, they should file a declaration within 7 days of this Order.
PDI's Counterclaims in FedArb at 3 n.1 (Dkt. No. 5-1 at 96).
