Honorable Edmond E. Chang, United States District Judge.
Plaintiff Sam Bahoor alleges that Defendant Varonis Systems, Inc. lured him into accepting a job with false promises and later improperly fired him.
In evaluating a motion to dismiss for improper venue, the Court "takes all the allegations in the complaint as true unless contradicted by the defendant's affidavit and may examine facts outside the complaint." Interlease Aviation Inv'rs II (Aloha) L.L.C. v. Vanguard Airlines, Inc., 262 F.Supp.2d 898, 913 (N.D.Ill.2003) (citation omitted). It also "constru[es] all facts
This case stems from a soured employment relationship. In March 2014, Varonis Systems, an IT software company, allegedly began recruiting Sam Bahoor to work as a Channel Manager, which is like a sales representative. R. 1-1, Exh. 1, Compl. ¶¶ 13, 16.
Upon accepting the position, Bahoor signed an agreement entitled, "At-Will Employment, Confidential Information, Invention Assignment, and Arbitration Agreement." Id. ¶ 33; R. 1-2, Exh. 2, Agreement. This Agreement provided that "all employment-related disputes ... arising out of, relating to, or resulting from my employment with the company or the termination of my employment with the company, including any breach of this agreement, shall be subject to binding arbitration...." Id. ¶ 12(A). The arbitration provision included a comprehensive list of all arbitrable disputes, including "any statutory claims under local, state or federal law" and "any ... common law claims." Id. And the Agreement also stated that "the Federal Arbitration Act shall continue to apply with full force and effect...." Id.
Problems arose immediately after Bahoor started working. First, Bahoor discovered that his compensation was not based on revenue targets, as Tsur had originally described. Compl. ¶¶ 39-41. Instead, commissions were determined by metrics unrelated to revenue, such as the performance of an inside marketing team over which Bahoor had no influence. Id. Bahoor complained to his manager, Barbra Aboud, about this issue to no avail. Id. ¶¶ 47-49. A few months later, the company gave Bahoor a report showing a drop in performance with the inside telemarketing team; when Bahoor alerted management that the data in the report was incorrect, he was repeatedly ignored. Id. ¶¶ 51-62, 71-75. Bahoor began shifting his focus to improving the data and the telemarketing team's performance, an undertaking that prevented him from completing his actual responsibilities to manage reseller accounts. Id. ¶¶ 69-70. In early December 2014, Aboud and an HR representative let Bahoor know that his performance was declining. Id. ¶¶ 77-79. Bahoor believed that management based its conclusion on the inaccurate reports and erroneous data that he had repeatedly pointed out. Id. A few weeks later, Varonis fired Bahoor after just six months with the company. Id. ¶ 80.
Bahoor now alleges three causes of action: promissory estoppel, negligent misrepresentation, and breach of contract. Id. ¶¶ 81-114. In each of these three counts, Bahoor complains of similar underlying conduct: that Varonis induced Bahoor to accept a position by making false promises of long-term employment and commissions based on easily-attainable revenue targets. Id. ¶¶ 81-89; 92-102. Bahoor further alleges that Varonis relied on false data about his job performance. Id. ¶¶ 103-109. Finally, Bahoor alleges that Varonis fired him
Bahoor filed the complaint in the Circuit Court of Cook County on May 19, 2015, but a few weeks later, Varonis removed the action to federal court. R. 1, Notice of Removal. Varonis now moves to compel arbitration based on the arbitration provision in the Agreement, and it also requests that this Court either dismiss the complaint under Rule 12(b)(1) or stay the action pending arbitration. R. 11, Def.'s Mot. to Compel. Bahoor opposes arbitration, arguing that (1) the scope of the arbitration clause does not encompass his claims; (2) the arbitration requirement is unenforceable because it would be prohibitively expensive; and (3) Varonis waived its right to arbitrate.
Section 4 of the Federal Arbitration Act provides that if arbitration is proper, a "court shall make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement. The hearing and proceedings, under such agreement, shall be within the district in which the petition for an order directing such arbitration is filed." 9 U.S.C. § 4 (emphasis added). Interpreting this provision, the Seventh Circuit concluded that "where the arbitration agreement contains a forum selection clause, only the district court in that forum can issue a § 4 order compelling arbitration." Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Lauer, 49 F.3d 323, 327 (7th Cir.1995) (emphasis added). In other words, "[w]e cannot compel arbitration in a forum out-side the Northern District of Illinois." Ferenc v. Brenner, 927 F.Supp.2d 537, 542 (N.D.Ill.2013) (citing Merrill Lynch, 49 F.3d at 327). Normally, when arbitration is dictated, a court compels arbitration in that district and stays the court proceeding. 9 U.S.C. § 3 ("If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration ... the court in which such suit is pending ... shall on application of one of the parties stay the trial of the action until such arbitration has been had ...."). But when a court is presented with a motion to compel arbitration in a different district, the proper action is to dismiss the complaint for improper venue under Rule 12(b)(3). See Ferenc, 927 F.Supp.2d at 542 (holding that claims were subject to arbitration and converting the motion to compel into a motion to dismiss for improper venue because the contract mandated arbitration in California); Faulkenberg, 637 F.3d at 808 ("under § 4 of the FAA, a district court cannot compel arbitration outside the confines of its district."); Haber v. Biomet, Inc., 578 F.3d 553, 558 (7th Cir.2009) ("When a complaint requesting arbitration is filed in the wrong forum, the appropriate response is for the opposing party to file a motion to dismiss, which should then be granted by the court.").
Here, the arbitration clause in the Agreement between Bahoor and Varonis provides that "any arbitration will be administered... in New York County, New York." Agreement ¶ 12(B). Neither party challenges the validity of this provision or addresses the limitation that this Court may not compel parties to arbitrate out-side this district. Regardless, "the central question in this case is the same whether we proceed under § 4 of the FAA or Rule 12(b)(3): did the plaintiff[ ] agree to arbitrate the claims asserted in [his] complaint?" Ferenc, 927 F.Supp.2d at 542. The Court, therefore, will proceed as if it is deciding a motion to compel arbitration. If the Agreement's arbitration provision is valid and the parties' dispute falls within its scope, the Court will convert Varonis's motion to compel arbitration and dismiss under Rule 12(b)(1) into a motion to dismiss
The Federal Arbitration Act applies to the Agreement between Bahoor and Varonis, Agreement ¶ 12(A), and provides that "[a] written provision ... to settle by arbitration a controversy thereafter arising out of such contract or transaction... 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. Under the FAA, if the parties have a valid arbitration agreement and the asserted claims in a lawsuit are within its scope, the arbitration requirement must be enforced. 9 U.S.C. §§ 3-4; Sharif v. Wellness Int'l Network, Ltd., 376 F.3d 720, 726 (7th Cir.2004) (citing Kiefer Specialty Flooring, Inc. v. Tarkett, Inc., 174 F.3d 907, 909 (7th Cir. 1999)). "Although it is often said that there is a federal policy in favor of arbitration, federal law places arbitration clauses on equal footing with other contracts, not above them." Janiga v. Questar Capital Corp., 615 F.3d 735, 740 (7th Cir.2010) (citing Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63, 68, 130 S.Ct. 2772, 177 L.Ed.2d 403 (2010)). That is, the Act was intended to respect parties' agreements to arbitrate and "put arbitration on a par with other contracts and eliminate any vestige of old rules disfavoring arbitration." Stone v. Doerge, 328 F.3d 343, 345 (7th Cir.2003).
For arbitration to be required, the Court must determine that (1) there is a valid written agreement to arbitrate; and (2) Bahoor's claims are within the scope of the arbitration agreement. Zurich Am. Ins. Co. v. Watts Indus., Inc., 417 F.3d 682, 687 (7th Cir.2005). Whether a binding arbitration agreement exists is determined under principles of state contract law. Janiga, 615 F.3d at 742 (citing First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 939, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995)). And "the party seeking to invalidate or oppose the arbitration agreement bears the burden of demonstrating that the arbitration agreement is unenforceable and that the claims are unsuitable for arbitration." Paragon Micro, Inc. v. Bundy, 22 F.Supp.3d 880, 887 (N.D.Ill.2014) (citing Green Tree Fin. Corp.-Ala. v. Randolph, 531 U.S. 79, 91-92, 121 S.Ct. 513, 148 L.Ed.2d 373 (2000)). The FAA also "establishes that, as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration."
Bahoor does not contest the first issue of validity, as he acknowledges that "Plaintiff admittedly signed arbitration provisions which would govern some disputes between the parties." R. 17, Pl.'s Resp. at 2.
The crux of Bahoor's argument is that his allegations are outside the scope of the Agreement because the "dispute has its origin in Asaf Tsur's misrepresentations, made prior to Plaintiff ever signing an arbitration agreement." Pl.'s Resp. at 6. All three counts of his complaint — promissory estoppel, negligent misrepresentation, and breach of contract — are grounded in some part on the alleged promises that Tsur made during the recruitment period. Compl. ¶¶ 81-114. According to Bahoor, arbitration is inappropriate because it would be "retroactive" and "include claims that had already arisen and are not based on the employment relationship between the parties...." Pl.'s Resp. at 6. In response, Varonis argues that Bahoor mischaracterizes his allegations, which are actually centered on his work performance and subsequent termination. R. 18, Def.'s Reply at 2-3. Even if these claims did arise before the employment relationship started, Varonis argues that they are nevertheless encompassed by the broad arbitration clause. Id. at 4-6.
The Court agrees with Varonis that the parties' broad arbitration provision covers all of Bahoor's claims. In determining the scope of an arbitration provision, courts apply state laws of contract interpretation. Stone, 328 F.3d at 344-45 ("most interpretive disputes [about the scope of an arbitration provision] must be resolved under state law."); Wisconsin v. Ho-Chunk Nation, 564 F.Supp.2d 856, 861 (W.D.Wis.2008) ("In determining the scope of the arbitration provision, ordinary state law contract principles are applied." (citing Hill's Pet Nutrition, Inc. v. Fru-Con Construction Corp., 101 F.3d 63, 65-66 (7th Cir.1996))). Here, the Agreement contains an expansive arbitration provision that
As a result, the arbitration clause encompasses the entire dispute. Bahoor's claims involving statements made during the recruitment process about compensation, the methods of calculating commissions, and the longevity of the position, Compl. ¶¶ 81-109, clearly arise out of and relate to Bahoor's employment at Varonis, and are common-law claims explicitly covered by the arbitration provision. Similarly, any allegations based on events occurring after Bahoor began his employment — such as claims that Varonis improperly measured his performance and then improperly fired him, Compl. ¶¶ 52-80, 110-114 — are also claims that arise out of, relate to, or resulted from his employment. Given that "any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration," Moses H. Cone, 460 U.S. at 24-25, 103 S.Ct. 927, the Court must give effect to the parties' clear intent, as expressed in the arbitration provision, to arbitrate Bahoor's claims, all of which relate to his employment at Varonis.
In addition, Bahoor's argument that statements made before he signed the Agreement do not "arise out of" his employment is unsupported by the caselaw. Pl.'s Br. at 6. To the contrary, New York courts have held that broad arbitration clauses encompassing "any dispute" cover even fraudulent inducement and other claims involving promises made before the signing of the contract. See Gabriel Capital, L.P. v. Caib Investmentbank Aktiengesellschaft, 28 A.D.3d 376, 814 N.Y.S.2d 66, 67 (2006). For example, in one case, arbitration was proper for claims of "fraud, negligent misrepresentation, promissory estoppel and unjust enrichment[ ] [that] arose as a result of defendants' alleged misrepresentations for the purpose of inducing plaintiffs to purchase controlling interest" in a company. Id. The disputes were within the broad arbitration clause in a purchase agreement covering "[a]ll disputes, controversies or claims arising out of ... this Agreement or the validity, interpretation, performance or breach thereof." Id. (quotation marks omitted). See also, e.g., Silverman v. Benmor Coats, Inc., 61 N.Y.2d 299, 473 N.Y.S.2d 774, 461 N.E.2d 1261, 1266 (1984) ("a broad arbitration clause is held to submit to the arbitrator questions of fraud in the inducement"); Tong v. S.A.C. Capital Mgmt., LLC, 16 Misc.3d 401, 835 N.Y.S.2d 881, 887 (N.Y.Sup.Ct.2007) aff'd as modified, 52 A.D.3d 386, 860 N.Y.S.2d 84 (2008) (agreement to arbitrate "any dispute or controversy arising out of or relating to this agreement" was broad enough to cover breach of contract, promissory estoppel, fraudulent inducement, and other common law claims).
Federal case law interpreting the scope of similar clauses also mandates
Next, Bahoor argues that the arbitration provision is unenforceable and violates public policy because it requires him to pay half of the arbitration costs, which are prohibitively expensive. Pl.'s Resp. at 8. The Court, however, holds that Bahoor has failed to provide any concrete evidence that arbitration would be cost-prohibitive.
As an initial matter, the Court must determine the operative fee provision. Bahoor argues that an American Arbitration Association (AAA) rule requires the employer to pay the costs of arbitration. Pl.'s Resp. at 7. But this rule does not apply because nowhere in the Agreement are the AAA rules adopted. See generally Agreement. To the contrary, the Agreement clearly mandates fee-splitting: "the parties to the arbitration shall each pay an equal share of the costs and expenses of such arbitration, except as prohibited by law ...." Agreement ¶ 12(B). Is it true that the parties agreed to operate under New York's procedural laws and JAMS rules. Id. ("any arbitration will be administered by Judicial Arbitration & Mediation Services, Inc. (`JAMS') pursuant to its Employment Arbitration Rules and Procedures"); id. ¶ 12(A) (any arbitration will be subject to the "rules set forth in the New York Civil Practice Law and Rules, Article 75, Section 7501 through 7514"). But any default fee provisions in the New York Code and JAMS rules are overridden by the express Agreement that the parties signed. See Brady v. Williams Capital Grp., L.P., 64 A.D.3d 127, 878 N.Y.S.2d 693, 697 (2009) aff'd as modified, 14 N.Y.3d 459, 902 N.Y.S.2d 1, 928 N.E.2d 383 (2010) (AAA rule that the employer pays was trumped by the parties' "clear and unambiguous ... intent to share the cost of the arbitrator's compensation" in the contract). See also N.Y. C.P.L.R. § 7513 ("[u]nless otherwise provided in the agreement to arbitrate, the arbitrators' expenses and fees, together with other expenses, not including attorney's fees, incurred in the conduct of the arbitration, shall be paid as provided in the award." (emphasis added)); JAMS Rule 31 ("unless the Parties have agreed to a different allocation, each Party shall pay its pro rata share of JAMS fees and expenses as set forth in the JAMS fee schedule ...." (emphasis
Bahoor argues that this fee-splitting provision would be cost prohibitive. Pl.'s Resp. at 8. The Supreme Court has recognized that "the existence of large arbitration costs could preclude a litigant ... from effectively vindicating her federal statutory rights in the arbitral forum." Green Tree, 531 U.S. at 81, 121 S.Ct. 513. Although the Supreme Court held that "a party seek[ing] to invalidate an arbitration agreement on the ground that arbitration would be prohibitively expensive ... bears the burden of showing the likelihood of incurring such costs," id. at 92, 121 S.Ct. 513, it "did not state how detailed that showing must be," Livingston v. Associates Fin., Inc., 339 F.3d 553, 557 (7th Cir.2003); Brady, 878 N.Y.S.2d at 698 (same). It did explain, however, that the mere "`risk' that [a plaintiff] will be saddled with prohibitive costs is too speculative to justify the invalidation of an arbitration agreement." Green Tree, 531 U.S. at 91, 121 S.Ct. 513. Courts have interpreted Green Tree as requiring "some individualized evidence that it likely will face prohibitive costs in the arbitration at issue and that it is financially incapable of meeting those costs." Livingston, 339 F.3d at 557 (citation omitted). Both the Seventh Circuit and New York state courts have applied a "case-by-case analysis focused on `the claimant's ability to pay the arbitration fees and costs, the expected cost differential between arbitration and litigation in court, and whether the cost differential is so substantial as to deter the bringing of claims.'" Brady, 878 N.Y.S.2d at 698 (quoting Bradford v. Rockwell Semiconductor Sys., Inc., 238 F.3d 549, 556 (4th Cir.2001)); James v. McDonald's Corp., 417 F.3d 672, 680 (7th Cir.2005) (requiring a litigant to provide evidence of her financial situation and "[t]he cost differential between arbitration and litigation"); Mariglio v. Berthel Fisher & Co. Fin. Servs., 133 A.D.3d 1371, 19 N.Y.S.3d 653 (2015) (same).
Here, Bahoor has not provided any specific evidence about the financial burden of arbitration. He does not detail what the costs of arbitration might be, the cost differential between court and arbitration, and why this differential will limit his ability to litigate his claims. Instead, Bahoor states only that he is representing himself to save on attorneys' fees and that court costs are "minimal in comparison" to arbitration. Pl.'s Resp. at 8. This is insufficient under the Green Tree standard to establish that arbitration would be prohibitively expensive. Nor has Bahoor previously petitioned to proceed in forma pauperis, requested appointed counsel, or otherwise indicated any financial difficulties. Bahoor's statements are speculative and the Court cannot conclude that the costs of arbitration would prevent Bahoor from bringing his claims.
Bahoor finally argues that Varonis waived the right to arbitrate. Pl.'s
In this case, Varonis has not waived its right to arbitration because it has not delayed its request for arbitration nor actively litigated the case in federal court through dispositive motions or discovery before making the request to arbitrate. In fact, it has done the opposite. Bahoor filed his complaint in the Circuit Court of Cook County on May 19, 2015. See Compl. Around a month later, on June 22, Varonis removed the case to federal court. Notice of Removal. Just one week after that, it filed this motion to compel arbitration. Mot. to Compel. Varonis has not filed any other motions or otherwise litigated this federal case. This is unlike the litigation conduct in Cabinetree, where the defendant moved to compel arbitration after the parties conducted six months of pretrial proceedings, exchanged thousands of pages in discovery, and set a trial date. 50 F.3d at 388. The only "plausible interpretation" of that defendant's behavior was that it originally intended to litigate in federal court but later changed its mind. Id. at 391. Similarly, in St. Mary's, the defendant waived its right to arbitrate because during a ten-month period, it did more than just weigh the decision to arbitrate or litigate — it filed a dispositive motion without ever mentioning arbitration. 969 F.2d at 589. In contrast, Varonis's actions are consistent with the intent to arbitrate.
Bahoor's argument that the pre-litigation settlement negotiations waived arbitration is also without merit. Pl.'s Resp. at 9-10. Settlement negotiations generally do not indicate waiver, whether they take place before or after a complaint is filed. See, e.g., Super Pawn Jewlery [sic] & Loan, LLC v. Am. Envtl. Energy, Inc., 2013 WL 1337303, at *16 (N.D.Ill. Mar. 29, 2013) ("Engaging in settlement negotiation is not tantamount to waiver, and even when settlement negotiations occur after lawsuit has been initiated.") (citing Dickinson v. Heinold Securities, Inc. 661 F.2d 638, 641 (7th Cir.1981) (eighteen-month settlement negotiations prior to lawsuit not sufficient to waive arbitration); Carbajal v. Household Bank, FSB, 2003 WL 22159473 (N.D.Ill.2003) ("Although the delay in Dickinson took place prior to the filing of the lawsuit, there is nothing in the opinion that would suggest that this conclusion should not also be extended to settlement efforts after the suit has been filed especially when those efforts take place in court.")).
For the reasons discussed above, the Court concludes that Bahoor's claims are subject to arbitration in New York. The Court converts Varonis's motion to compel arbitration and motion to dismiss under Rule 12(b)(1) [R. 11] into a motion to dismiss for improper venue under Rule 12(b)(3), and grants this motion.
The Court points out that Varonis's Notice of Removal — which states that Bahoor is a resident of Illinois, id ¶ 6 — is insufficient to establish citizenship. See Denlinger v. Brennan, 87 F.3d 214, 216 (7th Cir.1996) (citizenship means domicile, or physical presence with the intent to stay, and not residence); Am.'s Best Inns, Inc. v. Best Inns of Abilene, L.P., 980 F.2d 1072, 1074 (7th Cir.1992) ("In federal law citizenship means domicile, not residence."). But Bahoor's underlying complaint does allege that he is domiciled in Illinois and properly establishes citizenship. Compl. ¶ 9.
Any invalidity argument based on fraudulent inducement, however, would not affect arbitrability. Because Bahoor does not allege that he was fraudulently induced as to the specific arbitration provision (as opposed to the entire Agreement), any question of invalidity based on fraud would be a question for the arbitrator. See Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 400, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967) ("[A] claim of fraud in the inducement of the contract generally — as opposed to the arbitration clause itself — is for the arbitrators and not for the courts."); Faulkenberg, 637 F.3d at 811 ("The plaintiffs' claim that they were fraudulently induced into signing the franchise agreement does not save this case from dismissal. The only relevant inquiry at this stage is whether the arbitration clause itself was fraudulently induced.").
