Case Number: SS128070 Hearing Date: January 12, 2018 Dept: O

SC128070

MELAMED ET AL v. ROUGH ET AL

Plaintiffs’ Application for Preliminary Injunction is DENIED. Defendant’s Motion to Compel Arbitration is GRANTED.

APPLICATION FOR PRELIMINARY INJUNCTION

Plaintiff Global Fertility Concept, LLC’s (the “LLC”) Application for Preliminary Injunction is DENIED.

ANALYSIS: Plaintiff LLC asks that the Court issue an injunction enjoining Defendant Rough from retaining and withholding the LLC’s books and records and from contacting and soliciting the LLC’s clients in an effort to poach the LLC’s clients. According to Plaintiff Melamed, she personally demanded the return of the LLC’s records from Defendant Rough and Rough has refused to return them. See Decl. of S. Melamed, ¶¶6 and 7. Plaintiff Melamed also alleges that Defendant Rough told existing clients of the LLC that Melamed did not know what she was doing, disparaging Melamed to these individuals. Id. at ¶6.

In response, Defendant rough disputes that she refused to return any books or records. Defendant testifies that the books and records of the LLC are maintained on Google docs and she provided Plaintiff with a link to view and access the docs. See Decl. of J. Rough, ¶10. Defendant does not have any hard copies of the relevant docs. Id. at ¶14. Any hard copy documents are submitted directly to the register nurse for review or are mailed directly to the Beverly Hills office. Id. at ¶15. All of those documents were shipped to Melamed on 10/24/17 and Melamed signed a receipt for those docs on 10/25/17. Id. at ¶15. After repeatedly demanding that Rough turn over documents, Rough directed Melamed to use the Google Docs link forwarded to her. Despite being given the link, Melamed continued to claim Rough was withholding those documents. As such, Rough took the additional step of copying all the LLC documents to a USB drive, which was physically mailed to the LLC’s counsel on 12/26/17. Id. at ¶13.

On reply, Plaintiff LLC fails to address any of Rough’s assertions that she provided the LLC documents to Plaintiff by (1) a link to Google Docs; (2) mailing of any hard copy documents on 10/24/17; and (3) finally, the physical delivery of a USB drive containing any and all docs.

The decision to grant a preliminary injunction rests in the sound discretion of the trial Court and will not be reversed unless the trial Court exceeded the bounds of reason or contravened the uncontradicted evidence. The trial Court must consider three interrelated factors when deciding whether to issue preliminary injunctions:

(1) balancing of hardships the interim harm the applicant is likely to sustain if the injunction is denied as compared to the harm to the defendant if it issues;

(2) likelihood of prevailing on the merits the likelihood the applicant will prevail on the merits at trial; and

(3) irreparable harm/inadequacy of legal remedies a real threat of immediate and irreparable injury due to the inadequacy of legal remedies. See CCP § 526(a)(2); see also Choice In Education League v. L.A. School District (1993) 17 Cal.App.4th 415, 422.

In deciding whether to issue a preliminary injunction, a court must weigh two interrelated factors: (1) the likelihood that the moving party will ultimately prevail on the merits, and (2) the relative interim harm to the parties from issuance or non-issuance of the injunction. Butt v. State of California, 4 Cal. 4th 668, 677-78 (1992); Alliant Ins. Services, Inc. v. Gaddy, 159 Cal. App. 4th 1292, 1299 (2008).

The general objective in issuing a preliminary injunction is to preserve the status quo. See Continental Baking Co. v. Katz (1968) 68 Cal.2d 512, 528. In addition, it is rarely appropriate to grant a preliminary injunction that not only does not preserve the status quo but also grants the ultimate relief sought in the action, before trial. See Paramount Pictures Corp. v. Davis (1965) 228 Cal.App.2d 827. A preliminary injunction must not issue unless the plaintiff can demonstrate reasonable probability that he will prevail on the merits, regardless of the balancing of the hardships or the irreparable nature of the harm. See San Francisco Newspaper Printing Co. v. Superior Court (1985) 170 Cal.App.3d 438, 442.

Based on the evidentiary showing, Plaintiff LLC fails to demonstrate the existence of immediate and irreparable harm due to Defendant’s withholding of documents or her attempts to solicit clients for her own personal business. The weight of the evidence affirmatively supports Defendant’s claim that Plaintiff was provided with access to the LLC’s documents and records from the outset via Google Docs, and later, by way of physical delivery of documents and a USB drive. As such, there is an insufficient showing that an injunction enjoining Defendant to turn over the documents is necessary to prevent irreparable harm.

Likewise, the evidence is insufficient to demonstrate irreparable harm due to Defendant’s solicitation of clients for her own personal gain. Plaintiff testifies that clients informed her that Defendant said Plaintiff did not know what she was doing. The testimony regarding what clients said Defendant told them is hearsay and inadmissible.

As moving party, Plaintiff bears the burden of establishing all necessary elements to justify issuance of the injunction. See O’Connell v. Sup.Ct. (Valenzuela) (2006) 141 Cal.App.4th 1452, 1481. This requires Plaintiff to provide the Court with admissible evidence establishing irreparable harm and the likelihood that Plaintiff will prevail on the merits in this action. See CCP §527(a). A preliminary injunction must not issue unless the Plaintiff can demonstrate reasonable probability that he will prevail on the merits, regardless of the balancing of the hardships or the irreparable nature of the harm. See San Francisco Newspaper Printing Co. v. Superior Court (1985) 170 Cal.App.3d 438, 442.

In order for Plaintiff to prevail at trial they must establish his claims by a preponderance of the evidence. In civil cases, the requisite degree of proof is generally a “preponderance” of the evidence: “Except as otherwise provided by law, the burden of proof requires proof by a preponderance of the evidence.” Ev.C. § 115. “Preponderance of the evidence” means evidence that has more convincing force than that opposed to it. “If the evidence is so evenly balanced that [the jury is] unable to say the evidence on either side of an issue preponderates, [the jury’s finding] on that issue [must be] against the party who had the burden of proving it.” See BAJI 2.60 (emphasis and brackets added); compare CACI 200—“more likely to be true than not true.” “The trial court is the judge of the credibility of the affidavits filed in support of the application for preliminary injunction and it is that court’s province to resolve conflicts.” Yu v. University of La Verne (2011) 196 Cal.App.4th 779, 787 (substantial evidence supported trial court’s factual determination that university’s disciplinary action against student was not based on student’s exercise of speech rights).

Defendant Rough’s breach of the Operating Agreement and status as a member is disputed. The preponderance of the evidence does not establish that Rough is no longer a member of the LLC, or that she is in breach of the Operating Agreement. According to Melamed, Defendant Rough canceled key meetings with prospective employees and contacts of the LLC and used her company card for personal expenses. See Decl. of S. Melamed, ¶6. In addition, Defendant Rough allegedly vested the LLC’s website domain name in her own personal name and not the name of the LLC. Id. at ¶9. The domain name was purchased with Melamed’s funds. Id. at ¶9. Melamed purportedly terminated Rough’s member status pursuant to ¶4.8 of the Operating Agreement. Id.

Melamed’s testimony regarding Rough’s breaches are conclusory and lack foundation. As discussed above, Melamed’s claim that Rough is wrongfully withholding documents and improperly soliciting LLC clients for her own personal business are unpersuasive. There is also no evidence to support Melamed’s statement that Rough misused corporate funds. Melamed testifies that Rough placed the domain name in her own personal name, but Melamed fails to explain how she discovered this or the basis for this testimony. Finally, even if accepted as true, Melamed’s testimony that Rough cancelled meetings is too vague to establish that Rough materially breached the Operating Agreement.

Moreover, Rough provides testimony challenging Melamed’s claim that she was wrongfully excluding Melamed from the business, or that Rough was not bringing in clients as she promised. Rough testifies that of the seven couples who have signed with the LLC, Melamed only brought one of the couples in as a client and that couple ultimately demanded to work only with Rough. See J. Rough Decl., ¶¶22-29. Melamed also allegedly breached the operating agreement in September 2017 by forming competing surrogacy agencies, withdrawing her capital contribution, appointing counsel without consent from Rough and attempting to poach LLC clients for her newly formed surrogacy agencies. Id. at ¶¶30-39. Rough asserts she has fulfilled her obligations under the Operating Agreement.

Based on the competing evidence, Rough’s claims that Melamed breached and her denials of any wrongdoing are equally, if not more, convincing that Melamed’s testimony. As such, Melamed fails to establish the probability of prevailing on her claims by a preponderance of the evidence.

MOTION TO COMPEL ARBITRATION

Defendant Rough’s Motion to Compel Arbitration is GRANTED.

ANALYSIS: Defendant Rough moves to compel arbitration pursuant to ¶11.4 of the Operating Agreement, which states, “Except as otherwise provided in this Agreement, any controversy between the parties arising out of this Agreement shall be submitted to the American Arbitration Association for binding arbitration in Los Angeles, CA.” See Decl. of J. Rought, Ex. A, p. 20, ¶11.4. Each of Plaintiff’s claims arise out of the Operating Agreement, because they are based on Defendant Rough’s alleged failures to fulfill her obligations thereunder and her breach of her fiduciary duties to Plaintiffs. Defendant Rough argues that Plaintiff violated the arbitration provision by filing this lawsuit and an order compelling arbitration is required.

In addition, Rough seeks sanctions pursuant to CCP §128.6. Plaintiffs’ lawsuit was clearly frivolous and in bad faith in light of the clear and unambiguous mandatory arbitration clause.

Plaintiff contends Rough cannot seek arbitration under the Operating Agreement, because Rough never turned over the required capital contribution to the LLC. Rough was required to transfer IP assets and to pay for her membership units. Rough allegedly did neither and therefore under ¶2.1 of the Operating Agreement, she had no interest in the LLC and was never a member. Plaintiff also argue that Rough waived any right to arbitrate by waiting until 12/19/17 to file a motion to compel arbitration. Rough was served with the complaint and summons on 10/19/17. Plaintiffs have already propounded some discovery, as well. Finally, Plaintiff argues the arbitration clause is inapplicable to the tort claims.

Pursuant to CCP §1281.2, “On petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party thereto refuses to arbitrate such controversy, the court shall order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists, unless it determines that:

(a) The right to compel arbitration has been waived by the petitioner; or

(b) Grounds exist for the revocation of the agreement.

(c) A party to the arbitration agreement is also a party to a pending court action or special proceeding with a third party, arising out of the same transaction or series of related transactions and there is a possibility of conflicting rulings on a common issue of law or fact…This subdivision shall not be applicable to an agreement to arbitrate disputes as to the professional negligence of a health care provider made pursuant to Section 1295.”

“A party petitioning the court to compel arbitration (Code Civ. Proc., § 1281.2) bears the burden of proving by a preponderance of evidence the existence of an arbitration agreement. A party opposing the petition bears the burden of proving by a preponderance of evidence any fact necessary to its defense.” See Olvera v. El Pollo Loco, Inc. (2009) 173 Cal.App.4th 447, 453.

Judicial review is limited to a determination whether the party resisting arbitration in fact agreed to arbitrate. See State Farm Mut. Auto Ins. Co. v. Superior Court (1994) 23 Cal.App.4th 1297, 1301, 1304.) If the court determines that an arbitration agreement exists, arbitration may not be denied on the ground that the petitioner’s contentions lack substantive merit. See CCP §1281.2(c). However, “[t]here is no public policy favoring arbitration of disputes which the parties have not agreed to arbitrate.” Metters v. Ralphs Grocery Co. (2008) 161 Cal.App.4th 696, 701.

Plaintiffs argue Defendant cannot compel arbitration under the Operating Agreement, because Defendant is not a member of the LLC by virtue of her breach of the Operating Agreement. Plaintiffs conflate the issues of whether Defendant is in breach of the Operating Agreement and whether Defendant is a party to the Operating Agreement. So long as Defendant is a party to the Operating Agreement, Defendant is entitled to compel arbitration thereunder. It is undisputed that Defendant is a party to the Operating Agreement subject to the obligations and rights contained therein. Plaintiffs’ entire complaint is based on Defendant’s status as a party to the Operating Agreement and a member of the LLC. Plaintiff’s breach of fiduciary duty, breach of contract and involuntary dissolution claims are all based on Defendant’s status as an LLC member. Plaintiffs are therefore estopped from opposing Defendant’s motion to compel arbitration on grounds that Defendant is not a member. At the very least, Defendant is undisputedly a party to the Operating Agreement and therefore has standing to compel arbitration of claims against her based on breach of that Operating Agreement.

Moreover, to the extent Plaintiffs contend Defendant is not a member by virtue of Defendant’s breach, that issue is subject to the arbitration agreement. Given the broad language of the arbitration clause, “arising from,” whether Defendant actually breached must be arbitrated and cannot be assumed for purposes of this motion to compel arbitration.

The broad arbitration clause also encompasses the Plaintiffs’ fraud claims. The three tort claims all arise from the parties’ contractual relationship under the Operating Agreement. “The phrase ‘any controversy arising out of or relating to this contract’ is certainly broad enough to embrace tort as well as contractual liabilities so long as they have their roots in the relationship between the parties which was created by the contract.” Berman v. Dean Witter & Co., Inc. (1975) 44 Cal.App.3d 999, 1003. The breach of fiduciary duty claim is based on Defendant’s fiduciary duty to Plaintiffs as a member of the LLC. The fraudulent inducement claim pertains to the statements made by Defendant to induce Plaintiff into entering the Operating Agreement and forming the LLC with Defendant. The constructive trust claim is based on Defendant’s alleged wrongful taking of certain opportunities and property that rightfully belonged to the LLC. All of these claims “arise” from or out of the Operating Agreement, which created Defendant’s status as a member of the LLC and a fiduciary of both the LLC and Plaintif, Defendant’s co-member.

Finally, Plaintiffs fail to demonstrate waiver of the right to compel arbitration. While there is no single test for establishing waiver, the relevant factors include: (1) whether the party’s actions are inconsistent with the right to arbitrate; (2) whether the litigation machinery has been substantially invoked and the parties were well into preparation of a lawsuit before the party notified the opposing party of an intent to arbitrate; (3) whether a party either requested arbitration enforcement close to the trial date or delayed for a long period before seeking a stay; (4) whether a defendant seeking arbitration filed a counterclaim without asking for a stay of the proceedings; (5) whether important intervening steps (e.g., taking advantage of judicial discovery procedures not available in arbitration) had taken place; and (5) whether the delay affected, misled, or prejudiced the opposing party. See Saint Agnes Med. Ctr. v. PacifiCare of Calif. (2003) 31 Cal.4th 1187, 1203. The presence or absence of prejudice from the litigation is a determinative issue. Id. at 1203–1204.

Any claim that the right to arbitration has been waived is reviewed with close judicial scrutiny. Id. at 1195. “Although a court may deny a petition to compel arbitration on the ground of waiver (§ 1281.2, subd. (a)), waivers are not to be lightly inferred and the party seeking to establish a waiver bears a heavy burden of proof.” Id. Any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability. Ericksen, Arbuthnot, McCarthy, Kearney & Walsh, Inc. v. 100 Oak Street (1983) 35 Cal.3d 312, 320.

Defendant was served by personal service on 10/19/17. Any responsive pleading was due within 30 days, on 11/19/17. Defendant filed and then withdrew a demurrer. The motion to compel arbitration was filed on 12/20/17, only two months after Defendant was personally served. According to the LLC, Defendant also refused to stipulate to arbitration unless the Plaintiff dismissed her suit and the arbitration took place in Orange County. See Decl. of M. Viovli, ¶9.

None of these actions amount to a clear course of conduct inconsistent with the desire to arbitrate and do not qualify as waiver. The delay was short and there was never an unequivocal refusal to arbitrate under any circumstances. If anything, Defendant expressed a willingness to arbitrate contingent upon certain reasonable conditions, e.g. the location of the arbitration and dismissal of this suit.

The request for CCP §128.6 sanctions is denied. The lawsuit was not filed in bad faith merely because there was an existing arbitration clause. The right to arbitrate is waivable. Plaintiffs were entitled to file this lawsuit and place the onus on Defendant to assert her right to demand arbitration, or allow Defendant to forego arbitration. Such a procedural step is common place. There is no evidence that the lawsuit was otherwise in bad faith or frivolous.