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Edwards v. Nutrition

United States District Court, D. Arizona

January 30, 2018

John Edwards, Plaintiff,
Vemma Nutrition, et al., Defendants.


          David G. Campbell United States District Judge

         Defendant Vemma Nutrition Company (“Vemma”) has filed a motion to compel arbitration and dismiss Plaintiff's first amended complaint. Doc. 18. The motion is fully briefed, and the Court heard oral argument on January 5, 2018. The Court will grant the motion.

         I. Background.

         Vemma sells nutrition and wellness products directly to customers and through a network of independent contractors called Affiliates.[1] Doc. 18 at 2; Doc. 18-1 at 6 ¶ 7. To become an Affiliate, an individual must agree to certain contractual terms and conditions. Doc. 18 at 2.

         On December 27, 2007, Plaintiff enrolled as an Affiliate by accepting an online agreement titled “Vemma Policies and Agreement” (“the Agreement”). Id. The Agreement provided that Plaintiff would abide by Vemma's “marketing plan and policies and procedures” that were “incorporated as part of this agreement.” Doc. 18-1 at 6 ¶ 4. One such policy was Vemma's “Cost Effective Dispute Resolution/Waiver of Jury Trial” provision (“the Arbitration Provision”), which provides that arbitration is “the sole and exclusive procedure for resolution of disputes between the parties.” Id. at 14.

         Plaintiff remained an Affiliate until July 15, 2015, when Vemma terminated him due to “repeated violation of Vemma's policies and procedures.” Doc. 25 at 3; Doc. 25-1 at 4 ¶ 7(e). Plaintiff subsequently filed this case against Vemma and other defendants, alleging copyright infringement, breach of contract, unjust enrichment, and racketeering. Doc. 13.

         II. Legal Standard.

         The Federal Arbitration Act (“FAA”) “provides that arbitration agreements ‘shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.'” Chalk v. T-Mobile USA, Inc., 560 F.3d 1087, 1092 (9th Cir. 2009) (quoting 9 U.S.C. § 2). Because arbitration is a matter of contract, “a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.” AT&T Techs., Inc. v. Commc'ns Workers of Am., 475 U.S. 643, 648 (1986). Thus, “[a] party seeking to compel arbitration has the burden under the FAA to show (1) the existence of a valid, written agreement to arbitrate; and, if it exists, (2) that the agreement to arbitrate encompasses the dispute at issue.” Ashbey v. Archstone Prop. Mgmt., Inc., 785 F.3d 1320, 1323 (9th Cir. 2015). If a valid agreement to arbitrate encompasses the dispute at issue, the FAA requires the court “to enforce the arbitration agreement in accordance with its terms.” Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1130 (9th Cir. 2000).

         III. Analysis.

         Vemma argues that the Arbitration Provision requires arbitration of any dispute relating to any relationship between Vemma and its distributors. Doc. 18 at 1, 3. Plaintiff counters that the Arbitration Provision is unenforceable because he did not assent to its terms and because the provision is unconscionable, both procedurally and substantively. Doc. 24 at 1. Even if the Arbitration Provision is enforceable, Plaintiff contends, his copyright infringement and breach of contract claims fall outside its scope. Id. at 10-15.

         A. Enforceability of the Arbitration Provision.

         Vemma argues that Plaintiff agreed to arbitrate his claims when he agreed to become an Affiliate in December 2007. Doc. 18 at 5-6. Plaintiff argues that he never agreed to the Arbitration Provision. Doc. 24 at 4-6. Plaintiff also argues that the provision is procedurally and substantively unconscionable. Id. at 6-10.

         1. Assent.

         Plaintiff contends that he “was not even aware that he was being signed up as an affiliate.” Doc. 24 at 6. He asserts that other individuals enrolled him as an Affiliate without his knowledge or authorization. See Doc. 24-1 at 3 ¶¶ 2-3. Plaintiff also argues that he “did not see the Policies and Agreement for Affiliates” and thus “could not have provided assent to the terms.” Doc. 24 at 6. The Court rejects both arguments.

         When determining whether parties have agreed to arbitrate, courts apply ordinary state law principles that govern contract formation. Davis v. Nordstrom, Inc., 755 F.3d 1089, 1093 (9th Cir. 2014). Both parties agree that Arizona law applies. Doc. 18 at 5; Doc. 24 at 7-9.

         To form a valid contract under Arizona law, “there must be an offer, an acceptance, consideration, and sufficient specification of terms so that the obligations involved can be ascertained.” Savoca Masonry Co., Inc. v. Homes & Son Const. Co., Inc., 542 P.2d 817, 819 (Ariz. 1975). “Thus, a defendant seeking to compel arbitration must show that the plaintiff accepted the arbitration agreement.” Escareno v. Kindred Nursing Ctrs. W., L.L.C., 366 P.3d 1016, 1019 (Ariz.Ct.App. 2016). An agent can accept a contract, including an arbitration provision, on behalf of a principal, id., and agency can be established by contract, by facts which raise the implication of agency, by ratification, or by estoppel, Daru v. Martin, 363 P.2d 61, 66 (Ariz. 1961) (citing Bristol v. Moser, 99 P.2d 706 (Ariz. 1940)). Arizona courts have long recognized that a principal ratifies an agent's unauthorized acceptance of a contract if the principal “has knowledge of all the facts surrounding the contract made by the agent” and “accepts the benefits of the contract.” Mut. Benefit Health & Accident Ass'n v. Neale, 33 P.2d 604, 608 (Ariz. 1934). Ratification “may be express or implied, and intent may be inferred from the failure to repudiate an unauthorized act . . . or from conduct on the part of the principal which is inconsistent with any other position than intent to adopt the act.” United Bank v. Mesa N. O. Nelson Co., 590 P.2d 1384, 1386 (Ariz. 1979) (quoting Thermo Contracting Corp. v. Bank of N.J., 354 A.2d 291 (N.J. 1976)).

         In his declaration, Plaintiff states that “[his] agent, ” Walter Bratten, enrolled him as an Affiliate “without [his] knowledge or permission” on December 27, 2007. Doc. 24-1 at 3 ¶ 3. Even if this is true, Plaintiff ratified Bratten's acceptance of the Agreement. First, Plaintiff acknowledges that he “learned that Mr. Bratten had logged into Vemma's member website to sign [him] up as a member.” Id. After learning this fact, Plaintiff neither disavowed Bratten's acts nor terminated his Vemma membership. Instead, he actively participated as an Affiliate between 2007 and 2015, which required Plaintiff to renew his membership each year. See Doc. 18-1 at 6 ¶ 5. Second, Vemma paid Plaintiff his first commission on January 9, 2008, two weeks after his initial enrollment as an Affiliate. Doc. 25-1 at 3 ¶ 5. During his eight years as an Affiliate, Plaintiff received and cashed at least 45 commission checks from Vemma, and each check included endorsement language stating that “I have read, agreed with and am in compliance with current Vemma policies and procedures.” Id. at ¶ 6. Lastly, when Vemma terminated Plaintiff's membership in July 2015, Plaintiff emailed Vemma's compliance manager and requested that Vemma “give me back my affiliate spot, ” stating that he “never disregarded Vemma's policies” and “[has] always done everything in [his] power to enforce all of Vemma's policies[.]” Id. at 21, 23. Thus, even if Bratten enrolled Plaintiff as an Affiliate without his authorization, Plaintiff ratified the enrollment by continuing as an Affiliate, accepting financial benefits, and agreeing to abide by Vemma's terms and conditions.

         At oral argument, Plaintiff's counsel informed the Court that Plaintiff's declaration incorrectly describes his enrollment. According to counsel, Bratten was indeed Plaintiff's agent, but he enrolled Plaintiff as an Affiliate sometime in November 2007, not December 2007. See Court's Livenote Tr. at 23-24 (Jan. 5, 2018). Upon learning this, counsel asserted, Plaintiff sent Bratten a letter disavowing his registration as an Affiliate. Id. Counsel argued that another individual who was not Plaintiff's agent - Tom Alkazin - enrolled Plaintiff as an Affiliate on December 27, 2007, without Plaintiff's authorization. Id. at 25-26, 30. Counsel asserted that Plaintiff learned of this December 2007 enrollment when he received an email from Vemma approximately two weeks later informing him of his registration. Id. Counsel acknowledged that Plaintiff never disavowed this December 2007 enrollment, arguing that Plaintiff did not think he was enrolled as an Affiliate who markets and sells Vemma's products, but rather as a doctor who would speak about mangosteen, a fruit used in Vemma products. Id. at 24-26, 31. Counsel also stated that Plaintiff did not want to disavow his affiliation with Vemma because he and his family personally consumed Vemma's products. Id. at 25. Counsel acknowledged that none of these facts are contained in the record, including the disavowal letter Plaintiff allegedly sent to Bratten. Id. at 31.

         Even if these new facts are accepted as true, they do not change the Court's decision. Ratification of a contract does not depend on the existence of an actual agency relationship at the time the contract is accepted. “‘Ratification is the affirmance by a person of a prior act which does not bind him but which was done or professedly done on his account, '” and it “recasts the legal relations between the principal and agent as they would have been had the agent acted with actual authority.” Fid. & Deposit Co. of Md. v. Bondwriter Sw., Inc., 263 P.3d 633, 639 (Ariz.Ct.App. 2011) (quoting the Restatement (Second) of Agency § 82 (1958)). Thus, whether Alkazin was Plaintiff's actual agent is irrelevant because Plaintiff clearly manifested assent after Alkazin purported to act on his behalf. Plaintiff received notice of Alkazin's December 2007 registration and never disavowed it; he accepted commission checks from Vemma for eight years; and when he was terminated as an Affiliate, Plaintiff emailed Vemma and asked to be reinstated, avowing that he “never disregarded” Vemma's policies and procedures. Doc. 25-1 at 21, 23.

         The fact that Plaintiff did not see Vemma's policies and procedures, which include the Arbitration Provision, does not mean that he did not agree to the Arbitration Provision. Under Arizona law, a contracting party agrees to terms and conditions in an extrinsic document if the agreement being executed clearly and unequivocally refers to the extrinsic document, the party consents to the incorporation by reference, and the terms of the incorporated document are “known or easily available to the contracting parties.” United Cal. Bank v. Prudential Ins. Co. of Am., 681 P.2d 390, 420 (Ariz.Ct.App. 1983) (quoting 17A C.J.S. Contracts § 299 at 136 (1963)). If a party consents to the incorporation by reference, the party “is presumed to know its full purport and meaning.” Indus. Comm'n v. Ariz. Power Co., 295 P. 305, 307 (Ariz. 1931). A contracting party, therefore, need not see the incorporated document if the document ...

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