OrthoLA v. DePuy Synthes Sales

ORTHOLA, INC. et al., Plaintiffs and Respondents, v. DEPUY SYNTHES SALES, INC., Defendant and Appellant.

B296589

COURT OF APPEAL OF THE STATE OF CALIFORNIA SECOND APPELLATE DISTRICT DIVISION THREE

October 26, 2020

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

(Los Angeles County Super. Ct. No. 18STCV02833)

APPEAL from an order of the Superior Court of Los Angeles County, Rafael A. Ongkeko, Judge. Reversed.

Blank Rome, Gregory M. Bordo, Cheryl Chang and Anthony B. Haller for Defendant and Appellant.

Julander Brown & Bollard, Dirk O. Julander, M. Adam Tate, Tiffany Wang; Ostergar Law Group and Treg A. Julander for Plaintiffs and Respondents.

____________________ DePuy Synthes Sales, Inc. (DePuy) appeals from the trial court's order denying its motion to compel OrthoLA, Inc. (OrthoLA) and Bruce Cavarno's claims to arbitration. DePuy contends the trial court should have sent the threshold issue of whether there was an enforceable agreement to arbitrate to the arbitrator and then erred again when it found the agreements unconscionable and thus unenforceable. We agree and reverse the order.

BACKGROUND

DePuy designs, manufactures, and sells medical implants and instruments used in orthopedic surgeries and is based in Warsaw, Indiana. It is one of the largest medical device companies in the world and has gross revenues in the United States of over $2 billion. OrthoLA was a distributor of DePuy's medical devices in the Los Angeles area and had gross revenues of approximately $50 million at the end of 2017. Cavarno is OrthoLA's founder and principal.

DePuy and OrthoLA's distribution relationship was governed by the sales representative agreement (SRA), which authorized OrthoLA to act as a sales representative of DePuy's products in and around the Los Angeles area. Additionally, DePuy and OrthoLA entered into a supplemental agreement, the continuing income agreement (CIA), which was intended to be the functional equivalent of a pension for Cavarno. Under the CIA, DePuy agreed to pay Cavarno for a period of 10 years after the termination of the parties' distribution relationship so long as OrthoLA did not compete with DePuy. As a condition of payment under the CIA, Cavarno was required to comply with section 4.4 of the SRA, which prohibited him or OrthoLA from engaging in "Solicitation Activities" during the parties' relationship and for a period of one year thereafter. Section 4.4 reads in part: "Solicitation Activitiesshall mean to, whether directly or indirectly, solicit, employ or offer to employ, retain or offer to retain (whether as an independent contractor or otherwise), any (i) employee, contractor or agent of [DePuy], or (ii) any person or entity which is engaged, whether full-time or part-time, as an employee, contractor or agent of any third party in the marketing, sale or distribution of any Product or any other products or services of DePuy."

During the negotiations of the SRA and CIA, the parties each had their own separate counsel. Cavarno stated that he and his attorney "pressed very hard to get DePuy to eliminate the non-competition language of section 4.4" of the SRA, but DePuy refused. However, DePuy agreed to add a provision that section 4.4 would not apply if it was found unenforceable under California law. Thus, while the remainder of the contract was to be governed by Indiana law, under section 4.4, California law controlled.

Both the SRA and CIA contain arbitration provisions. Section 14.1 of the SRA and section 7.1 of CIA read: "Any controversy or claim arising out of or relating to this Agreement shall be resolved by arbitration before a single arbitrator in accordance with the Commercial Arbitration Rules of American Arbitration Association ('AAA') then pertaining (available at www.adr.org), except where those rules conflict with this provision, in which case this provision controls. Any court with jurisdiction shall enforce this clause and enter judgment on any award." (Italics omitted.) Under the agreements, an arbitrator or a court of competent jurisdiction could sever any provision that is invalid or unenforceable.

Eventually the relationship between the parties soured and OrthoLA sued DePuy for intentional interference with contractual relationships, intentional and negligent interference withprospective economic advantage, unfair competition, breach of the CIA, breach of the covenant of good faith and fair dealing, and declaratory relief. The declaratory relief cause of action sought an order declaring unenforceable section 4.4 of the SRA and those terms of the CIA that conditioned payment on compliance with section 4.4 because they violated California's fundamental public policy against restraints on trade. The declaratory relief cause of action also sought to invalidate the agreements' arbitration provisions.

DePuy moved to compel OrthoLA's claims to arbitration, asserting the arbitration provisions should be enforced according to the Federal Arbitration Act (9 U.S.C. § 1 et seq.; hereafter FAA), that California and Indiana law favored arbitration, and that neither agreement was unconscionable because they were the result of negotiations by sophisticated parties through their respective counsel.

OrthoLA responded that the arbitration provisions were unconscionable because the SRA and CIA were presented on a take-it-or-leave-it basis, contained unilateral obligations to arbitrate, were drafted to circumvent California law, and selected a forum that was unrelated to the parties' transactions or locations. With respect to the first version of the SRA, Cavarno stated that, when it was first presented to him and his lawyer, he was told he "had to sign the contract or no deal." Cavarno also said he felt compelled to agree to the CIA's terms to keep his pension following his work with DePuy. Further, he believed there was "no legitimate reason" why the dispute should be litigated in Indiana rather than California because he was a California resident, OrthoLA was a California corporation, and the majority of witnesses were located in California.

The trial court denied DePuy's motion. It first determined that California law should apply, finding that applying Indiana law would contravene California's public policy against covenants not to compete. It then concluded that the arbitration provisions were both procedurally and substantively unconscionable. The trial court found the amount of procedural unconscionability was "slight" because, even though the agreements were prepared and negotiated by both parties' counsel, there was an obvious disparity in the parties' relative economic bargaining power and respective roles in the relevant market. In contrast, the trial court found a "high degree of substantive unconscionability" because the agreements: (1) contained unilateral obligations to arbitrate in favor of DePuy, (2) required the application of Indiana law in circumvention of California's public policy against non-compete agreements, and (3) required the parties to arbitrate in Indiana.

DISCUSSION

We review an appeal from an order denying a motion to compel arbitration de novo. (Baker v. Osborne Development Corp. (2008) 159 Cal.App.4th 884, 892.) To the extent the trial court's determination turned on the resolution of contested facts, we review the factual determinations for substantial evidence. (Ibid.)

According to the arbitration provisions, their interpretation and enforcement is governed by the FAA. When a party seeks to enforce an arbitration agreement within the FAA's scope, courts apply state contract law while showing deference to the federal policy favoring arbitration. (Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior University (1989) 489 U.S. 468, 474.)

DePuy raises several arguments in support of reversal. However, we find only two relevant here, whether the partiesdelegated threshold questions to the arbitrator and whether the trial court erred when it found the arbitration provisions unconscionable and thus unenforceable. For the reasons stated below, we find that the trial court was the proper decision maker, but it erred when it concluded that the agreements were procedurally unconscionable.

I. The SRA and CIA do not clearly and unmistakably delegate enforceability to the arbitrator and, in any event, the issue was waived.

DePuy's first contention is that the trial court failed to enforce the delegation clauses contained within the arbitration provisions. In other words, the trial court had no authority to decide the threshold question of whether the arbitration agreements were enforceable because the parties agreed that only the arbitrator could decide that issue. We disagree.

The FAA allows parties to agree by contract that an arbitrator, rather than a court, can resolve threshold arbitrability questions, such as enforceability. (Rent-A-Center, West, Inc. v. Jackson (2010) 561 U.S. 63, 68-70.) Thus, the parties can have the arbitrator not only decide the merits of a dispute but also gateway questions of arbitrability, such as the existence of a valid and enforceable arbitration agreement or whether the parties agreed to arbitrate a particular controversy. (Henry Schein, Inc. v. Archer and White Sales, Inc. (2019) ___ U.S. ___, ___ [139 S.Ct. 524, 529].) This delegation of authority must be clear and unmistakable, otherwise the trial court retains jurisdiction over those threshold determinations. (AT&T Technologies v. Communications Workers (1986) 475 U.S. 643, 649.) "In this manner the law treats silence or ambiguity about the question [of] 'who (primarily) should decide arbitrability' differently from the way it treats silence or ambiguityabout the...