Fernandez v. Debt Assistance Network, LLC

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8 UNITED STATES DISTRICT COURT

9 SOUTHERN DISTRICT OF CALIFORNIA

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11 IRMA FERNANDEZ and PATRICIA Case No. 19-cv-1442-MMA (JLB)

FERNANDEZ,

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ORDER DENYING DEFENDANT’S

Plaintiffs,

13 MOTION TO COMPEL

v. ARBITRATION OR,

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ALTERNATIVELY, TO DISMISS

DEBT ASSISTANCE NETWORK, LLC,

15 FOR IMPROPER VENUE

Defendant.

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[Doc. No. 17]

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19 On August 1, 2019, Irma Fernandez and Patricia Fernandez (collectively,

20 “Plaintiffs”) filed a Complaint against Debt Assistance Network, LLC (“Defendant”).

21 Doc. No. 1 (“Compl.”).1 Plaintiffs allege seven causes of action: (1) violation of the

22 Credit Repair Organization Act (“CROA”); (2) violation of the California Credit Services

23 Act (“CCSA”); (3) violation of the California Consumers Legal Remedies Act

24 (“CLRA”); (4) violation of the California Unfair Competition Law (“UCL”); (5) breach

25 of contract; (6) negligence; (7) negligent misrepresentation; and (8) intentional

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1 misrepresentation. Id. Defendant answered Plaintiffs’ allegations on November 13,

2 2019. Doc. No. 10.

3 On December 12, 2019, Defendant filed a motion to compel arbitration or,

4 alternatively, to dismiss for improper venue pursuant to Federal Rule of Civil Procedure

5 12(b)(3). Doc. No. 17. Relatedly, Defendant also seeks leave to file a motion for an

6 award of attorneys’ fees, arguing that Plaintiffs have no good faith objection to

7 arbitration. Id. at 20–22. Plaintiffs filed an opposition to Defendant’s motion, and

8 Defendant replied. See Doc. Nos. 22, 23. The Court found the matter suitable for

9 determination on the papers and without oral argument pursuant to Federal Rule of Civil

10 Procedure 78(b) and Civil Local Rule 7.1.d.1. Doc. No. 24.

11 For the reasons set forth below, the Court DENIES Defendant’s motion to compel

12 arbitration and DENIES Defendant’s request for attorneys’ fees.

13 I. BACKGROUND2

14 Plaintiffs purchased credit repair services from Defendant. Compl. ¶ 1. Defendant

15 “represents that it provides debt relief, debt negotiation, and debt management services to

16 Plaintiffs . . . to eliminate or reduce their debts.” Id. ¶ 2. Plaintiffs allege “Defendant

17 operates an elaborate scheme to defraud debtors that preys on consumers who are

18 drowning in credit card and unsecured debt.” Id. ¶ 6.

19 Before November 2016, Plaintiffs incurred debt to several creditors. Id. ¶ 21. On

20 November 18, 2016, Plaintiffs signed “a contract with Defendant entitled ‘Consumer

21 Tender Of Offer and Debt Assumption Agreement’ [‘Debt Agreement’] to receive

22 Defendant’s assistance with debt settlement and to improve Plaintiffs’ consumer credit

23 record, history, or rating with credit reporting agencies.” Id. ¶ 23; see also Doc. No. 17-1

24 6–9. On the same day, Plaintiffs also signed an Automatic Clearing House Agreement

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1 (“ACH Agreement”) with Secure Account Service (“SAS”) titled “Account Agreement

2 and Disclosure Statement.” Doc. No. 17-1 at 11–12.

3 A declaration signed by a principal member of Defendant provides that

4 Defendant’s “acceptance of Plaintiffs’ offer was conditioned on Plaintiffs agreeing to

5 execute both the [Debt Agreement] and the ACH Agreement.” Id. at 3. Further, without

6 the ACH Agreement, Defendant claims that it “would not have received any payments

7 from Plaintiffs.” Id. The ACH’s “Scope of Services and Limitation of Liability” section

8 states that “SAS is a third-party processor.” Id. The section continues: “[SAS] is not a

9 party to the agreement between Client and [the Referring Company] and SAS does not

10 participate in the underlying debt negotiations.” Id.

11 The Debt Agreement states “[a]ll sums paid according to the terms shown on the

12 ACH AGREEMENT, which is included as part of this AGREEMENT.” Id. at 8. The

13 ACH Agreement contains the following arbitration clause:

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15 6. BINDING ARBITRATION, GOVERNING LAW, AND

ATTORNEY’S FEES. Client agrees that any dispute or claim arising out

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of this Agreement or otherwise, related to SAS’s services to Client, shall be

17 resolved through binding arbitration with the American Arbitration

Association in Phoenix, Arizona and the decision of the arbitrator shall be

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final and enforceable by a court of competent jurisdiction. Client further

19 agrees that this Agreement, and any claims it may bring against SAS, shall

be construed according to the laws of the State of Arizona. Further, Client

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agrees that the successful party to any action between SAS and Client shall

21 be entitled to the recovery of its reasonable attorneys’ fees and costs.

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23 Id. at 11.

24 II. LEGAL STANDARD

25 The Federal Arbitration Act (“FAA”) permits “[a] party aggrieved by the alleged

26 failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration

27 [to] petition any United States district court . . . for an order directing that . . . arbitration

28 proceed in the manner provided for in [the arbitration] agreement.” 9 U.S.C. § 4. Upon a

1 showing that a party has failed to comply with a valid arbitration agreement, the district

2 court must issue an order compelling arbitration. Id. The Supreme Court has stated that

3 the FAA espouses a general policy favoring arbitration agreements. AT&T Mobility v.

4 Concepcion, 563 U.S. 333, 339 (2011). Federal courts are required to rigorously enforce

5 an agreement to arbitrate. See id.

6 In determining whether to compel a party to arbitration, the Court may not review

7 the merits of the dispute; rather, the Court’s role under the FAA is limited to determining

8 “(1) whether a valid agreement to arbitrate exists and, if it does, (2) whether the

9 agreement encompasses the dispute at issue.” Kilgore v. KeyBank, Nat. Ass’n, 718 F.3d

10 1052, 1058 (9th Cir. 2013) (quoting Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207

11 F.3d 1126, 1130 (9th Cir. 2000)); see also 9 U.S.C. § 4. If the Court finds that the

12 answers to both questions are “yes,” then the Court must compel arbitration. Chiron

13 Corp., Inc., 207 F.3d at 1130. A court’s circumscribed role in making these inquiries

14 “leav[es] the merits of the claim and any defenses to the arbitrator.” Id. (quoting

15 Republic of Nicaragua v. Standard Fruit Co., 937 F.2d 469, 478 (9th Cir. 1991).

16 As to the first inquiry—whether the parties agreed to arbitrate—courts adopt a

17 standard similar to summary judgment. See Three Valleys Mun. Water Dist. v. E.F.

18 Hutton & Co., 925 F.2d 1136, 1141 (9th Cir. 1991); Lopez v. Terra’s Kitchen, LLC, 331

19 F. Supp. 3d 1092, 1097 (S.D. Cal. 2018); Cordas v. Uber Techs., Inc., 228 F. Supp. 3d

20 985, 988 (N.D. Cal. 2017). Agreements to arbitrate are “valid, irrevocable, and

21 enforceable, save upon such grounds as exist at law or in equity for the revocation of any

22 contract.” 9 U.S.C. § 2. Courts must apply ordinary state law principles in determining

23 whether to invalidate an agreement to arbitrate. Ferguson v. Countrywide Credit Indus.,

24 Inc., 298 F.3d 778, 782 (9th Cir. 2002). As such, arbitration agreements may be

25 “invalidated by ‘generally applicable contract defenses, such as fraud, duress, or

26 unconscionability.’” Concepcion, 563 U.S. at 339–41 (quoting Doctor’s Assocs., Inc. v.

27 Casarotto, 517 U.S. 681, 687 (1996)). In assessing whether there is an agreement to

28 arbitrate, the presumption and policy in favor of arbitration does not apply, and instead,

1 the issue is determined through standard contract law principles. See Comer v. Micor,

2 Inc., 436 F.3d 1098, 1104 n.11 (9th Cir. 2006); see also E.E.O.C. v. Waffle House, Inc.,

3 534 U.S. 279, 293 (2002).

4 As to the second inquiry—whether the agreement encompasses the dispute at

5 issue—courts resolve any “ambiguities as to the scope of the arbitration clause itself . . .

6 in favor of arbitration.” Volt Info. Scis., Inc. v. Bd. of Trs. of Leland Stanford Jr. Univ.,

7 489 U.S. 468, 475–76 (1989); see also Moses H. Cone Mem’l Hosp. v. Mercury Constr.

8 Corp., 460 U.S. 1, 24–25 (1983) (“[A]ny doubts concerning the scope of arbitrable issues

9 should be resolved in favor of arbitration, whether the problem at hand is the construction

10 of the contract language itself or an allegation of waiver, delay, or a like defense to

11 arbitrability.”). Moreover, “the party resisting arbitration bears the burden of proving

12 that the claims at issue are unsuitable for arbitration.” Green Tree Fin. Corp.-Alabama v.

13 Randolph, 531 U.S. 79, 91 (2000). Absent contractual ambiguity, “it is the language of

14 the contract that defines the scope of disputes subject to arbitration.” Waffle House, Inc.,

15 534 U.S. at 289.

16 III. DISCUSSION

17 A. Evidentiary Objections

18 As a preliminary matter, Defendant objects to the Declaration of Irma Fernandez

19 (Doc. No. 22-2) and Declaration of Patricia Fernandez (Doc. No. 22-1) provided in

20 support of Plaintiffs’ opposition brief. Doc. No. 23-1; Doc. No. 23-2. Both declarations

21 contain almost identical content. Compare Doc. No. 22-1, with Doc. No. 22-2.

22 Defendant argues that the content is “irrelevant, argumentative, speculative and self-

23 serving, lacks foundation, and constitutes improper legal opinion.” Doc. No. 23-1 at 4–6;

24 Doc. No. 23-2 at 4–6.

25 As noted above, in addressing whether there is a valid arbitration agreement, the

26 Court adopts a standard akin to summary judgment. See Three Valleys Mun. Water Dist.,

27 925 F.2d at 114; Lopez, 331 F. Supp. 3d at 1097. “A trial court can only consider

28 admissible evidence in ruling on a motion for summary judgment.” Orr v. Bank of Am.,

1 NT & SA, 285 F.3d 764, 773 (9th Cir. 2002); see also Fed. R. Civ. P. 56(c). However,

2 courts will consider evidence with content that would be admissible at trial even if the

3 form of the evidence would be inadmissible. See Celotex Corp. v. Catrett, 477 U.S. 317,

4 324 (1986); Fraser v. Goodale, 342 F.3d 1032, 1036–37 (9th Cir. 2003) (admitting a

5 diary in considering summary judgment where its contents were within the author’s

6 personal knowledge and could be admitted in several ways at trial despite a hearsay

7 objection). “That an affidavit is self-serving bears on its credibility, not on its

8 cognizability for purposes of establishing a genuine issue of material fact.” United States

9 v. Shumway, 199 F.3d 1093, 1104 (9th Cir. 1999). “Only in certain instances—such as

10 when a declaration ‘state[s] only conclusions, and not “such facts as would be admissible

11 in evidence,”’—can a court disregard a self[-]serving declaration for purposes of

12 summary judgment.” S.E.C. v. Phan, 500 F.3d 895, 909 (9th Cir. 2007) (quoting

13 Shumway, 199 F.3d at 1104). Moreover, “‘objections to evidence on the ground that it is

14 irrelevant, speculative, and/or argumentative, or that it constitutes an improper legal

15 conclusion are all duplicative of the summary judgment standard itself’ and unnecessary

16 to consider here.” Holt v. Noble House Hotels & Resort, Ltd, 370 F. Supp. 3d 1158, 1164

17 (S.D. Cal. 2019) (quoting Burch v. Regents of Univ. of Cal., 433 F. Supp. 2d 1110, 1119

18 (E.D. Cal. 2006)).

19 The declarations set forth Plaintiffs’ present individual understanding of the

20 contracts as it relates back to the execution of the contracts. They are clearly self-serving

21 to persuade the Court to find no valid arbitration agreement exists between Plaintiffs and

22 Defendant. However, self-serving statements go to credibility—not admissibility. See

23 Shumway, 199 F.3d at 1104. And Defendant’s arguments based on relevance,

24 speculation, argument, and legal opinion are unnecessary to consider here because they

25 are “duplicative of the summary judgment standard itself.” Holt, 370 F. Supp. 3d at 1164

26 (quoting Burch, 433 F. Supp. 2d at 1119). Additionally, the Court finds “it is

27 unnecessary to expressly rule on many of the objections because they would not alter the

28 Court’s resolution” of the present motion. White v. Home Depot U.S.A. Inc., No. 17-CV-

1 00752-BAS-AGS, 2019 WL 1171163, at *1 (S.D. Cal. Mar. 13, 2019). Accordingly, the

2 Court OVERRULES Defendant’s evidentiary objections.

3 B. Choice of Law

4 Plaintiffs assert that enforcing the Arizona forum selection clause and choice of

5 law clause “violate California public policy, jeopardize due process, and deprive

6 Plaintiffs access to justice in the appropriate forum.” Doc. No. 22 at 24. Plaintiffs

7 elaborate that an Arizona forum would deprive Plaintiffs of rights provided under

8 California law, would have no relation to Defendant, and would have no nexus between

9 Defendant’s conduct and Plaintiffs’ claims. Id. Defendant replies that the Arizona forum

10 selection clause and choice of law clause do not violate California public policy. Doc.

11 No. 23 at 10. Defendant asserts that Plaintiffs “have made no showing that (1) applying

12 Arizona’s law ‘is contrary to a fundamental policy of California,’ or that (2) ‘California

13 has a materially greater interest than [Arizona] in resolution of the issue.’” Id. at 10

14 (quoting Ruiz v. Affinity Logistics Corp., 667 F.3d 1318, 1323 (9th Cir. 2012)).

15 Defendant further argues that Plaintiffs have failed to show that Arizona law directly

16 conflicts with California law. Id. Arguing that Plaintiffs merely assert “that venue would

17 have been appropriate in California,” Defendant emphasizes that “Plaintiffs have failed to

18 show that there is anything unfair or unreasonable about the mandatory choice of forum

19 clause.” Id. at 11.

20 “Before a federal court may apply state-law principles to determine the validity of

21 an arbitration agreement, it must determine which state’s laws to apply. It makes this

22 determination using the choice-of-law rules of the forum state . . . .” Pokorny v. Quixtar,

23 Inc., 601 F.3d 987, 994 (9th Cir. 2010) (citing Paracor Fin., Inc. v. Gen. Elec. Capital

24 Corp., 96 F.3d 1151, 1164 (9th Cir. 1996)).

25 Here, the Court notes that despite Defendant advocating for the validity of the

26 Arizona forum selection and choice of law clauses, it relies upon California law in

27 arguing the merits of its motion. Regardless, the Court must apply California’s choice of

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1 law rules to determine whether to apply California or Arizona law. See Bridge Fund

2 Capital Corp. v. Fastbucks Franchise Corp., 622 F.3d 996, 1002 (9th Cir. 2010).

3 “When an agreement contains a choice of law provision, California courts apply

4 the parties’ choice of law unless the analytical approach articulated in § 187(2) of the

5 Restatement (Second) of Conflict of Laws . . . dictates a different result.” Id. (quoting

6 Hoffman v. Citibank (S.D.), N.A., 546 F.3d 1078, 1082 (9th Cir. 2008) (per curiam)).

7 Under the Restatement approach, the court must first determine

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9 (1) whether the chosen state has a substantial relationship to the parties or

their transaction, or (2) whether there is any other reasonable basis for the

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parties’ choice of law. If neither of these tests is met, that is the end of the

11 inquiry, and the court need not enforce the parties’ choice of law. If,

however, either test is met, the court must next determine whether the

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chosen state’s law is contrary to a fundamental policy of California. If there

13 is no such conflict, the court shall enforce the parties’ choice of law. If,

however, there is a fundamental conflict with California law, the court must

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then determine whether California has a “materially greater interest than the

15 chosen state in the determination of the particular issue . . . .” If California

has a materially greater interest than the chosen state, the choice of law shall

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not be enforced, for the obvious reason that in such circumstance we will

17 decline to enforce a law contrary to this state’s fundamental policy.

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19 Nedlloyd Lines B.V. v. Superior Court, 834 P.2d 1148, 1152 (Cal. 1992) (footnotes

20 omitted) (quoting Restatement (Second) of Conflict of Laws § 187(2) (Am. Law Inst.

21 1971)).

22 Here, the ACH Agreement contains a choice of law provision: “Client further

23 agrees that this Agreement, and any claims it may bring against SAS, shall be construed

24 according to the laws of the State of Arizona.” Doc. No. 17-1 at 11. Given the choice of

25 law provision, the Court applies Arizona law regarding claims brought under the ACH

26 Agreement unless the Restatement approach requires a different result. See Bridge Fund

27 Capital Corp., 622 F.3d at 1002 (quoting Nedlloyd Lines B.V., 834 P.2d at 1152).

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1 Under the Restatement approach, Arizona has a substantial relationship to the

2 transaction because SAS, a signatory of the ACH Agreement, is based in Arizona. Thus,

3 given that one of the preliminary tests is met, the Court must now determine whether

4 Arizona law is “is contrary to a fundamental policy of California.” Nedlloyd Lines B.V.,

5 834 P.2d at 1152. Plaintiffs fail to adequately cite to an established, concrete policy that

6 conflicts with Arizona law. Relatedly, Plaintiffs further fail to cite relevant Arizona law

7 to contrast against California law even if it had cited to a fundamental California policy.

8 Similarly, the Court finds Plaintiffs’ argument that “California has the greater material

9 interest in protecting the rights of its citizens,” Doc. No. 22 at 24, is vague and

10 conclusory, and it thus fails to persuade the Court that California law should apply

11 instead of Arizona law. Because Plaintiffs fail to demonstrate a conflict between

12 California and Arizona law, the Court must enforce the Arizona choice of law provision

13 under the Restatement approach.

14 Because the Court finds that the choice of law provision and the Restatement

15 approach reach the same result, the Court would apply Arizona law. However, because

16 the arbitration clause falls outside the scope of the dispute at issue, see infra Section

17 III.D, the Court does not apply the Arizona choice of law provision or the forum selection

18 clause. Without an applicable choice of law provision, the Court applies California

19 contract law to determine whether a valid arbitration agreement exists. See Republic

20 Pictures Corp. v. Rogers, 213 F.2d 662, 664 (9th Cir. 1954) (“Being a diversity of

21 citizenship case, the contracts will be interpreted so as to reach the same results as would

22 be reached in a California court.”).

23 C. Whether a Valid Arbitration Agreement Exists

24 Defendant argues that the parties entered into a valid arbitration agreement. Doc.

25 No. 17 at 15–16. Defendant points to the Debt Agreement signed by Plaintiffs and

26 argues that the Debt Agreement incorporates the ACH Agreement, which Plaintiffs

27 executed the same day as the Debt Agreement. Doc. No. 17 at 15; Doc. No. 17-1 at 9,

28 12. Defendant further argues that it is a third-party beneficiary of the ACH Agreement

1 and thus can enforce the ACH Agreement. Plaintiffs respond that no valid agreement

2 exists between the parties. Doc. No. 22 at 11. Specifically, Plaintiffs argue that there

3 was no mutual assent between Plaintiffs and Defendant, incorporation of the AHC

4 Agreement into the Debt Agreement does not allow Defendant to “step into the shoes of

5 SAS” to enforce the arbitration clause, Defendant is not a third-party beneficiary of the

6 ACH Agreement, and the arbitration clause is unenforceable because it is unconscionable

7 and violates California public policy. Doc. No. 22 at 22, 19, 23.

8 1. Whether the ACH Agreement is Incorporated into the Debt Agreement

9 Under contract incorporation, “[a] secondary document becomes part of a contract

10 as though recited verbatim when it is incorporated into the contract by reference provided

11 that the terms of the incorporated document are readily available to the other party.”

12 King v. Larsen Realty, Inc., 121 Cal. App. 3d 349, 357 (1981); see also Incorporation by

13 Reference, Black’s Law Dictionary (11th ed. 2019). Incorporation of a secondary

14 document into a contract by reference requires that “[1] the reference must be clear and

15 unequivocal, [2] the reference must be called to the attention of the other party and he

16 must consent thereto, and [3] the terms of the incorporated document must be known or

17 easily available to the contracting parties.” Wolschlager v. Fid. Nat’l Title Ins. Co., 4

18 Cal. Rptr. 3d 179, 184 (Ct. App. 2003) (quoting Shaw v. Regents of Univ. of California,

19 58 Cal. App. 4th 44, 54 (1997)). Incorporation by reference applies in the arbitration

20 context. E.g., Valley Casework, Inc. v. Comfort Constr., Inc., 76 Cal. App. 4th 1013,

21 1022 (1999) (“Where a construction contract or subcontract incorporates the arbitration

22 procedures found in the related contract, arbitration may be ordered.”).

23 Here, the Court finds that the Debt Agreement incorporated the ACH Agreement.

24 First, the Debt Agreement clearly and unequivocally refers to the ACH Agreement in

25 stating “[a]ll sums paid according to the terms shown on the ACH AGREEMENT, which

26 is included as part of this AGREEMENT.” Doc. No. 17-1 at 8. Second, the

27 incorporation clause is called to the attention of the party because not only does the

28 clause include all-capitalized words and underlining but also the incorporation was done

1 as part of the signed and executed Debt Agreement. See id. at 8–9; see also King, 121

2 Cal. App. 3d at 358 (“As a general rule, a party is bound by the provisions of an

3 agreement which he signs, even though he does not read them and signs unaware of their

4 existence.”). Third, the terms of the incorporated ACH Agreement were known and

5 available to the contracting parties given that Plaintiffs signed and executed the ACH

6 Agreement the same day as the Debt Agreement. See Doc. No. 17-1 at 9, 12.

7 Therefore, the Court finds that the Debt Agreement incorporates the terms of the

8 ACH Agreement. The Court must now assess (1) whether the terms of the arbitration

9 clause apply to the contractual relationship between Plaintiffs and Defendant or only

10 between Plaintiffs and SAS or, if the latter scenario be the case, (2) whether Defendant

11 can enforce the arbitration clause as a third-party beneficiary.

12 2. Whether the Arbitration Clause Applies to the Contractual Relationship

13 Between Plaintiffs and Defendant

14 The first step to determine whether to compel arbitration is not merely to uncover

15 whether there is a contract between the parties but, rather, “whether a valid agreement to

16 arbitrate exists.” Kilgore, 718 F.3d at 1058 (emphasis added) (quoting Chiron Corp.,

17 207 F.3d at 1130). Therefore, the Court must now determine whether the terms of the

18 ACH Agreement’s arbitration clause cover the Plaintiffs-Defendant relationship and

19 Plaintiffs-SAS relationship or only the Plaintiffs-SAS relationship.

20 Defendant argues that because the Debt Agreement’s incorporation clause

21 “unequivocally places zero restriction on the parts of the ACH Agreement that are

22 incorporated in the Debt Assumption Agreement, the Court must find that the Debt

23 Assumption Agreement incorporated the entire document, Arbitration Agreement and

24 all.” Doc. No. 17 at 15. Defendant appears to argue that the clause is not limited to the

25 Plaintiffs-SAS relationship and, instead, extends broader to be include the Plaintiffs-

26 Defendant relationship through the Debt Agreement’s incorporation provision. See id. at

27 16 (“The Arbitration Agreement covers ‘any dispute’ arising out of the ACH Agreement

28 ‘or otherwise’ that is ‘related’ to the services described in the ACH Agreement.”). It

1 argues that this broadness makes the arbitration clause applicable to the Plaintiffs-

2 Defendant relationship because the ACH Agreement was “designed to facilitate the

3 exchange of consideration between the Plaintiffs and [Defendant].” Id. Plaintiffs counter

4 that

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6 even if Defendant were to successfully incorporate the SAS ACH

Agreement into its own separate contract, the arbitration provision in the

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SAS ACH Agreement is unambiguous in its narrowly tailored terms which

8 clearly and repetitively state that the arbitration provision concerns disputes

or claims “related to SAS’s services to [Plaintiffs]” and their claims against

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SAS.

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11 Doc. No. 22 at 19.

12 In another case involving the same Defendant and a similar—if not identical—

13 agreement to the one before this Court, the court ordered arbitration after finding that the

14 debt agreement between defendant and plaintiff incorporated the “entire” SAS agreement

15 between SAS and plaintiff, including the arbitration clause. Hunt v. Debt Assistance

16 Network, LLC, No. 1:18CV644, 2019 WL 4647008, at *4 (M.D.N.C. Sept. 24, 2019)

17 (applying North Carolina contract law). However, the court there failed to address

18 whether the arbitration clause covered the specific relationship between defendant and

19 plaintiff. See id. at 4–5. Instead, the court proceeded to determine whether the

20 arbitration clause covered the dispute at issue after finding that incorporation satisfied the

21 first inquiry of whether there was an agreement to arbitrate. See id.

22 Here, the Court finds that the plain language of the arbitration clause governs the

23 relationship between SAS and Plaintiff, defined as “Client” in the ACH Agreement. The

24 Court further finds that the arbitration clause does not govern the Plaintiffs-Defendant

25 relationship. The arbitration clause begins by stating the following: “Client agrees that

26 any dispute or claim arising out of this Agreement or otherwise, related to SAS’s services

27 to Client, shall be resolved through binding arbitration . . . .” Doc. No. 17-1 at 11

28 (emphasis added). The Court finds that “this Agreement” refers to the ACH Agreement

1 and does not refer to the Debt Agreement despite incorporation. Even though the Debt

2 Agreement incorporates the terms of the ACH Agreement, the terms within the

3 arbitration clause do not govern the Plaintiffs-Defendant relationship because the terms

4 themselves are narrow and apply to payment processing by SAS. This finding is

5 underscored by the language “otherwise, related to SAS’s services.” Id. Given the

6 construction of the clause, “SAS’s services” appears to be the broadening language of the

7 clause. However, it is telling that the broadness is explicitly confined to the relationship

8 with SAS. The remainder of the contract section further supports this limited

9 interpretation of the arbitration clause given the similar language used in the choice of

10 law and attorneys’ fees clauses. See id.

11 The Court finds Defendant’s argument to the contrary unavailing. Defendant

12 argues Plaintiffs’ contention that the arbitration clause only covers claims against SAS

13 “contradicts the broad, unambiguous language that demonstrates the expansive scope of

14 the Arbitration Agreement.” Doc. No. 23 at 4; see also Doc. No. 17 at 17. Defendant

15 emphasizes that “Plaintiffs’ claims relate . . . to payments made to [Defendant]—

16 payments that could not have been made possible without the ACH Agreement.” Doc.

17 No. 17 at 17; Doc. No. 23 at 4. The Court agrees with Defendant that the language of the

18 arbitration clause sweeps broadly. However, its scope is ultimately limited to Plaintiffs’

19 relationship with SAS, where SAS operated as a “third-party processor” that facilitated

20 Plaintiffs’ relationship with Defendant. Doc. No. 17-1 at 11.

21 Therefore, the Court finds that there is no valid arbitration agreement between

22 Plaintiffs and Defendant—unless the Court finds Defendant can enforce the agreement as

23 a third-party beneficiary. See infra Section III.C.3.

24 3. Whether Defendant Can Enforce the Arbitration Clause as a Third-Party

25 Beneficiary

26 Alternatively, the Court may find that the arbitration clause’s terms can be

27 enforced by Defendant if the Defendant is a third-party beneficiary of the ACH

28 Agreement. Plaintiffs argue that “Defendant has not and cannot make any showing that

1 the arbitration provision in [SAS’s] contract was intended to confer any benefit upon

2 Defendant.” Doc. No. 22 at 18. Defendant responds in its reply that the ACH Agreement

3 was designed to facilitate the Debt Agreement and that a third-party beneficiary is not

4 required to be expressly mentioned in the contract. Doc. No. 23 at 5–6.

5 Third-party beneficiaries can enforce an arbitration provision. Cohen v. TNP 2008

6 Participating Notes Program, LLC, 243 Cal. Rptr. 3d 340, 355 (Ct. App. 2019) (citing

7 Smith v. Microskills San Diego L.P., 63 Cal. Rptr. 3d 608, 613 (Ct. App. 2007)). “To sue

8 as a third-party beneficiary of a contract, the third party must show that the contract

9 reflects the express or implied intention of the parties to the contract to benefit the third

10 party.” Klamath Water Users Protective Ass’n v. Patterson, 204 F.3d 1206, 1211 (9th

11 Cir. 1999), opinion amended on denial of rehg, 203 F.3d 1175 (9th Cir. 2000). “[T]hird

12 party beneficiary principles do not require that the person to be benefited be named in the

13 contract, but rather allow the third party to qualify as a contract beneficiary if ‘the

14 contracting parties must have intended to benefit that individual and such intent appears

15 on the terms of the agreement.’” San Diego Hous. Comm’n v. Indus. Indem. Co., 95 Cal.

16 App. 4th 669, 685 (2002) (quoting Harper v. Wausau Ins. Co., 56 Cal. App. 4th 1079,

17 1086 (1997)).

18 The ACH Agreement facilitates the underlying Debt Agreement where SAS

19 operates as a “third-party processor” and provides “payment processing services”

20 “pursuant to [Plaintiffs’] underlying agreement with the referring company.” Doc No.

21 17-1 at 11. The ACH Agreement states that “[SAS] is not a party to the agreement

22 between Client and [the Referring Company] and SAS does not participate in the

23 underlying debt negotiations.” Id. The Court finds that the ACH Agreement arises out

24 of, and indeed, bolsters the operation of the underlying Debt Agreement between

25 Plaintiffs and Defendant, who appears to be defined as the “referring company.” But for

26 the ACH Agreement, Plaintiffs would have been unable to fulfil its contractual

27 obligations under the Debt Agreement.

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1 Therefore, the Court finds that Defendant is a third-party beneficiary of the ACH

2 Agreement even if the arbitration clause only pertains to actions between Plaintiffs and

3 SAS. Thus, Defendant can enforce the terms of the ACH Agreement’s arbitration clause

4 against Plaintiffs, but only with respect to disputes that involve the payment processing

5 services as detailed in the ACH Agreement.

6 4. Whether the Arbitration Clause is Unconscionable

7 Plaintiffs argue in their opposition brief that the ACH Agreement is

8 unconscionable. Doc. No. 22 at 19–23. Specifically, Plaintiffs assert that the ACH

9 Agreement is an adhesion contract because of its take-it-or-leave-it nature that deprived

10 Plaintiffs of their negotiating power. Id. at 20. Plaintiffs argue that the ACH Agreement

11 is procedurally unconscionable because it was “drafted entirely by SAS and did not alert

12 Plaintiffs or give them reason to know or expect that any claims that Plaintiffs sought to

13 pursue against Defendant regarding Defendant’s conduct and services could be subject to

14 binding arbitration or the SAS ACH Agreement’s arbitration provision.” Id. at 22.

15 Plaintiffs make a similar argument as to the Debt Agreement. See id. As to substantive

16 unconscionability, Plaintiffs state that applying the arbitration provision to Plaintiffs’

17 claims against Defendant “would be oppressive” and would fall outside Plaintiffs’ initial

18 contracting expectations. Id. at 23. Moreover, Plaintiffs argue that the arbitration

19 language contains “overly broad-sweeping application to Plaintiffs’ claims against

20 Defendant” and provided no opportunity for Plaintiffs to opt-out. Id.

21 As to procedural unconscionability, Defendant counters that Plaintiffs cannot claim

22 surprise over the arbitration clause within the ACH Agreement because it was not hidden

23 in fine print. Doc. No. 23 at 7. Defendant argues that the Debt Agreement is not

24 procedurally unconscionable even though it was drafted by Defendant because the Debt

25 Agreement clearly incorporates the ACH Agreement. Id. Defendant adds that Plaintiffs

26 were free to pursue other market alternatives, undercutting their oppression assertions.

27 Id. at 8. Defendant argues that unsatisfied expectations do not satisfy substantive

28 unconscionability. See id. at 9. Defendant states that the arbitration clause is not cost

1 prohibitive, applies equally to Plaintiffs and Defendant, does not restrict discovery

2 procedures, and does not yield an imbalance of available remedies to either party. Id.

3 Agreements to arbitrate are “valid, irrevocable, and enforceable, save upon such

4 grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2.

5 Arbitration agreements are subject to standard general defenses. Ingle v. Circuit City

6 Stores, Inc., 328 F.3d 1165, 1170 (9th Cir. 2003). “Because unconscionability is a

7 generally applicable defense to contracts, California courts may refuse to enforce an

8 unconscionable arbitration agreement.” Id.

9 A contract defense of “unconscionability . . . may operate to invalidate arbitration

10 agreements.” Circuit City Stores, Inc. v. Adams, 279 F.3d 889, 892 (9th Cir. 2002). The

11 party asserting that an arbitration agreement is unconscionable bears the burden of proof.

12 Sanchez v. Valencia Holding Co., LLC, 353 P.3d 741, 749 (Cal. 2015). Both procedural

13 and substantive unconscionability must be present for a court to refuse to enforce a

14 contract. See Armendariz v. Found Health Psychcare Servs., 6 P.3d 669, 690 (Cal.

15 2000). California courts apply a sliding scale: “the more substantively oppressive the

16 contract terms, the less evidence of procedural unconscionability is required to come to

17 the conclusion that the term is unenforceable, and vice versa.” Id. However, courts

18 cannot apply principles of unconscionability in a way that undermines the FAA’s

19 objective “to ensure the enforcement of arbitration agreements according to their terms so

20 as to facilitate streamlined proceedings.” Concepcion, 563 U.S. at 344. Instead, courts

21 should give “due regard to the federal policy in favor of arbitration.” Wagner v. Stratton

22 Oakmont, Inc., 83 F.3d 1046, 1049 (9th Cir. 1996).

23 i. Procedural Unconscionability

24 The procedural unconscionability analysis focuses on the circumstances

25 surrounding the creation of a contract and the presence of “oppression or surprise.”

26 Gatton v. T-Mobile USA, Inc., 61 Cal. Rptr. 3d 344, 352 (Ct. App. 2007) (citing

27 Armendariz, 6 P.3d at 690.). In doing so, a court must uncover “the manner in which the

28 contract was negotiated and the circumstances of the parties at that time.” Ingle, 328

1 F.3d at 1171 (quoting as Kinney v. United HealthCare Servs., Inc., 83 Cal. Rptr. 2d 348,

2 352–53 (Ct. App.1999)). Oppression results from “an inequality in bargaining power that

3 results in no real negotiation and an absence of meaningful choice.” Id. (citing Flores v.

4 Transamerica HomeFirst, Inc., 113 Cal. Rptr. 2d 376, 381 (Ct. App. 2001)). Surprise

5 arises when the “agreed-upon terms of the bargain are hidden in the prolix printed form

6 drafted by the party seeking to enforce the disputed terms.” Id. (citing Stirlen v.

7 Supercuts, Inc., 60 Cal. Rptr. 2d 138, 145 (Cal. Ct. App. 1997). Procedural

8 unconscionability typically takes the form of an adhesion contract, which is “a

9 standardized contract, which, imposed and drafted by the party of superior bargaining

10 strength, relegates to the subscribing party only the opportunity to adhere to the contract

11 or reject it.” Gutierrez v. Autowest, Inc., 7 Cal. Rptr. 3d 267, 275 (Ct. App. 2003).

12 However, an adhesive contract term not being read or understood “does not justify a

13 refusal to enforce it”; rather, the imposed term can only be denied if it is also

14 substantively unreasonable. Id.; see also Poublon v. C.H. Robinson Co., 846 F.3d 1251,

15 1261 (9th Cir. 2017) (“[T]he California Supreme Court has not adopted a rule that an

16 adhesion contract is per se unconscionable.”).

17 Here, Defendant’s name is stylized across the top of the Debt Agreement. See

18 Doc. No. 17-1 at 6–9. Defendant’s name is ingrained within the text whereas Plaintiffs’

19 names are in a different inserted font. Id. at 6, 9. In a declaration signed by a principal

20 member of Defendant, the member declares that “[Defendant] regularly requires that

21 individuals offering to retain its services execute both the [Debt Agreement] and the

22 ACH Agreement.” Id. at 3. Therefore, the Court finds that the Debt Agreement appears

23 to be an adhesion contract imposed and drafted by Defendant. Similar factual

24 underpinnings persuade the Court to similarly find the ACH contract as an adhesion

25 contract. See Doc. No. 17-1 at 11–12. Plaintiffs lacked the power to negotiate both

26 contracts and only had the option to take the contracts or leave them. However, finding

27 an adhesion contract only begins the Court’s analysis. See Parada v. Superior Court, 98

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1 Cal. Rptr. 3d 743, 757 (Ct. App. 2009) (“A procedural unconscionability analysis also

2 includes consideration of the factors of surprise and oppression.”).

3 A claim of oppression may be defeated “if the complaining party has a meaningful

4 choice of reasonably available alternative sources of supply from which to obtain the

5 desired goods and services free of the terms claimed to be unconscionable.” Parada, 98

6 Cal. Rptr. 3d at 758. The Debt Agreement enrolled part of Plaintiffs’ debts into

7 Defendant’s debt assumption program “to receive Defendant’s assistance with debt

8 settlement and to improve Plaintiffs’ consumer credit, history, or rating with credit

9 reporting agencies.” Compl. ¶ 23; Doc. No. 17 at 9. The Parada court determined that

10 the petitioner had “reasonable and realistic market alternatives to opening [investment]

11 accounts, including the option of not investing in precious metals at all.” Parada, 98 Cal.

12 Rptr. 3d at 758. The court further reasoned that precious metal investments were not a

13 necessity, such as admittance to a hospital or employment contexts where an adhesion

14 contract may still be oppressive despite alternatives. Id. Here, the Court finds that

15 Plaintiffs had other reasonable and realistic market alternatives to address their debt

16 needs and entering into the Debt Agreement was not a necessity akin to hospital or

17 employment contexts. However, Plaintiffs did not have other alternatives in executing

18 the ACH Agreement with SAS given Defendant’s own declaration: “[Defendant]

19 regularly requires that individuals offering to retain its services execute both the [Debt

20 Agreement] and the ACH Agreement. The case of Plaintiffs is no exception.

21 [Defendant] required that Plaintiffs execute both the [Debt Agreement] and the ACH

22 Agreement.” Doc. No. 17-1 at 3. Despite having reasonably available alternatives as to

23 finding a debt relief company, Plaintiffs were essentially given no alternative in selecting

24 the third-party processor. Because of the lack of choice in selecting SAS as the third-

25 party processor, the Court finds the arbitration clause within the SAS Agreement

26 oppressive despite finding the terms of the Debt Agreement not oppressive.

27 As to surprise, the arbitration clause was not hidden. The arbitration provision is

28 on the first page of the two-page ACH Agreement and is in the same style and typeface

1 as the other contract terms. Moreover, the arbitration term rests within a clause that

2 contains an all-capitalized, bolded, and underlined header: “6. BINDING

3 ARBITRATION, GOVERNING LAW, AND ATTORNEY’S FEES.” Id. at 11.

4 Given that the terms of the arbitration clause were not hidden or otherwise buried within

5 the SAS Agreement, the Court finds that there is no surprise.

6 Accordingly, the Court finds a moderate level of procedural unconscionability as

7 to the arbitration clause. The Court proceeds by assessing substantive unconscionability

8 while keeping in mind the sliding scale relationship between procedural and substantive

9 unconscionability. See Armendariz, 6 P.3d at 690.

10 ii. Substantive Unconscionability

11 The substantive unconscionability analysis focuses on the “terms of the agreement

12 and whether those terms are so one-sided as to shock the conscience.” Ingle, 328 F.3d at

13 1172 (quoting Kinney, 83 Cal. Rptr. 2d at 353). Courts evaluate substantive

14 unconscionability “as of the time the contract was made.” A & M Produce Co. v. FMC

15 Corp., 186 Cal. Rptr. 114, 122 (Ct. App. 1982). The “shock the conscience” standard

16 requires more than a contract term that “merely gives one side a greater benefit . . . .”

17 Pinnacle Museum Tower Assn. v. Pinnacle Mkt. Dev. (US), LLC, 282 P.3d 1217, 1232

18 (Cal. 2012). “Substantive unconscionability may be shown if the disputed contract

19 provision falls outside the nondrafting party’s reasonable expectations.” Parada, 98 Cal.

20 Rptr. 3d at 759 (emphasis added) (citing Gutierrez, 7 Cal. Rptr. 3d at 275).

21 As to the specific terms of the arbitration clause, the Court finds that the arbitration

22 clause is not one-sided. The clause applies equally to “any dispute or claim” brought by

23 any party that “aris[es] out of this Agreement or otherwise, related to SAS’s services to

24 Client.” Doc. No. 17-1 at 11. Plaintiffs may view the clause as a bad bargain because it

25 fell outside their expectations, Doc. No. 22 at 23, but a bad bargain is insufficient to

26 trigger substantive unconscionability. Baltazar v. Forever 21, Inc., 367 P.3d 6, 11 (Cal.

27 2016) (internal quotation marks and citations omitted). Substantive unconscionability

28 requires “terms that are unreasonably favorable to the more powerful party.” Id. (internal

1 quotation marks and citations omitted). The terms here do not reach the high threshold of

2 shocking the conscience.

3 Accordingly, the court finds that the arbitration clause is not substantively

4 unconscionable. Given the lack of substantive unconscionability, the Court finds that the

5 clause is not unconscionable because both procedural and substantive unconscionability

6 are necessary before a court can refuse to enforce a clause under the doctrine of

7 unconscionability. Id. at 11.

8 5. Conclusion

9 Accordingly, the Court finds that there is a valid arbitration clause that Defendant

10 may enforce as a third-party beneficiary of the ACH Agreement—as to disputes that arise

11 from payment processing services.

12 D. Whether the Arbitration Agreement Encompasses the Dispute at Issue

13 Defendant argues that the arbitration agreement covers the dispute at issue. Doc.

14 No. 17 at 16–17. Defendant asserts that the expansive scope of the arbitration clause

15 encompasses Plaintiffs’ claims and that any ambiguity as to the scope should be resolved

16 in favor of arbitration. Id. at 17. Plaintiffs respond that its claims “are outside the scope

17 of the arbitration provision.” Doc. No. 22 at 15. Specifically, Plaintiffs argue that its

18 causes of action pertain to their relationship with Defendant and do not rely upon the

19 terms of the ACH Agreement. See id. at 16.

20 The arbitration clause states “[Plaintiffs] agree[] that any dispute or claim arising

21 out of this Agreement or otherwise, related to SAS’s services to [Plaintiff], shall be

22 resolved through binding arbitration.” Doc. No. 17-1 at 11. Although the Court finds

23 that there is a valid arbitration clause that Defendant may enforce as a third-party

24 beneficiary of the ACH Agreement, see supra Sections III.C.3, III.C.5, Defendant may

25 do so only to the extent that there is a “claim arising out of this Agreement or otherwise,

26 related to SAS’s services to [Plaintiff].” Doc. No. 17-1 at 11. Given the Court has found

27 that the arbitration clause is narrow in applying to payment processing services, see supra

28

1 Sections III.C.2–3, III.C.5, the Court accordingly finds that that the arbitration clause

2 only encompasses disputes involving payment processing.

3 With the scope of the arbitration clause in mind, the Court must compare the

4 clause’s scope to Plaintiffs’ allegations. Plaintiffs argue their claims address

5 “Defendant’s services to Plaintiffs, business practices, failure to perform services as

6 promised in Defendant’s agreement with Plaintiffs, breach of Defendant’s duties owed to

7 Plaintiffs, misrepresentations to Plaintiffs and the damages that Plaintiffs have incurred as

8 a result of Defendant’s violations of law.” Doc. No 22 at 16. Indeed, Plaintiffs’

9 allegations do not involve mere payment processing. See, e.g., Compl. ¶¶ 82 (CROA

10 claim), 88–89 (CCSA claim), 92–93 (same), 100 (CLRA claim), 109 (UCL claim), 119–

11 20 (same), 133–38, (breach of contract claim), 142–43 (negligence claim), 148 (negligent

12 misrepresentation claim), 164 (intentional misrepresentation claim). Plaintiffs’ claims

13 address their relationship with Defendant outside of payment processing. Given

14 Plaintiffs’ allegations and the clear language of the arbitration clause within the context

15 of the ACH Agreement, the Court finds that there is no sufficient ambiguity in the

16 contract that could otherwise result in finding in favor of arbitration. Cf. Volt Info. Scis.,

17 Inc., 489 U.S. at 475–76. Plaintiffs have carried their burden in proving that their claims

18 are unsuitable for arbitration. See Green Tree Fin. Corp.-Alabama, 531 U.S. at 91.

19 Accordingly, the Court finds that the arbitration clause does not cover the dispute

20 at issue.

21 E. Whether Attorneys’ Fees Are Appropriate

22 Defendant “requests leave of Court to file a motion for reasonable attorneys’ fees

23 incurred in preparing the Petition because Plaintiffs’ actions constitute a frivolous refusal

24 to arbitrate.” Doc. No. 17 at 22. Plaintiffs respond that attorneys’ fees are not

25 appropriate because they filed this action in good faith. Doc. No. 22 at 25.

26 The traditional American rule requires each party to pay its own attorneys’ fees.

27 See Alyeska Pipeline Serv. Co. v. Wilderness Soc’y, 421 U.S. 240, 257, 263–64 (1975).

28 However, a court has the inherent, discretionary power to award one party attorneys’ fees

1 || when another party acts “in bad faith, vexatiously, wantonly, or for oppressive reasons.”

2 ||Id. at 258-59; see also Marx v. Gen. Revenue Corp., 568 U.S. 371, 382 (2013).

3 Given that Plaintiffs are successful in defeating Defendant’s motion to compel

4 || arbitration, the Court finds that Plaintiffs have not acted in bad faith, vexatiously,

5 || wantonly, or for oppressive reasons. Accordingly, the Court DENIES Defendant’s

6 request for attorneys’ fees.

7 IV. CONCLUSION

8 For the foregoing reasons, the Court DENIES Defendant’s motion to compel

9 || arbitration and DENIES Defendant’s request for attorneys’ fees.

10 IT IS SO ORDERED.

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12 || Dated: February 5, 2020

13 path CHU Ldilte

14 Hon. Michael M. Anello

15 United States District Judge

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