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Inc. v. Safeguard Business Systems, Inc.

Supreme Court of Idaho

February 21, 2019

T3 ENTERPRISES, INC., an Idaho corporation, Plaintiff-Respondent,
v.
SAFEGUARD BUSINESS SYSTEMS, INC., a Delaware corporation, Defendant-Appellant, and THURSTON ENTERPRISES, INC., an Idaho corporation, Plaintiff, and SAFEGUARD ACQUISITIONS, INC., et al., Defendants.

          Appeal from the District Court of the Fourth Judicial District, State of Idaho, Ada County. Hon. Steven Hippler, District Judge.

         District court order denying motion to vacate and modify, affirmed.

          Hawley Troxell Ennis & Hawley LLP, Boise, and Weil, Gotschal & Manges LLP, Dallas, TX, for appellant. Paul R. Genender argued.

          Givens Pursley LLP, Boise and Mulcahy LLP, Irvine, CA, for respondent. James M. Mulcahy argued.

          BURDICK, CHIEF JUSTICE.

         This action arises out of Ada County and involves a distributorship agreement (the Distributor Agreement) between Appellant Safeguard Business Systems (SBS) and Respondent T3 Enterprises (T3). In 2006, T3 entered into the Distributor Agreement with SBS. In 2014, T3 filed suit alleging SBS had breached the Distributor Agreement by failing to prevent other SBS distributors from selling to T3's customers and for paying commissions to the interfering distributors rather than to T3. The Distributor Agreement between SBS and T3 contained an arbitration clause indicating disputes must be resolved in a Dallas, Texas based arbitration procedure. The Distributor Agreement also contained a forum selection clause indicating that the Federal Arbitration Act (FAA) and Texas law would apply to any disputes between the parties. Pursuant to this agreement, SBS moved the district court to compel arbitration in Dallas. The district court determined the parties must submit to arbitration, but that the Dallas forum selection clause was unenforceable, and arbitration was to take place in Idaho. The Arbitration Panel (the Panel) found for T3 and the district court confirmed the award in the amount of $4, 362, 041.95. The district court denied SBS's motion to vacate or modify the award. SBS timely appealed, and we affirm.

         I. FACTUAL AND PROCEDURAL BACKGROUND

         SBS is engaged in the distribution of Safeguard brand products (e.g., checks, envelopes, and business forms) and services (e.g., W-2 processing and drop shipping) through a nationwide network of distributors. In 2006, after working eleven years for Roger Thurston, another SBS distributor, Dawn Teply formed T3 and started her own distributorship with SBS. T3 purchased the exclusive rights to commissions on all sales made to 2, 000 of Thurston's customers. The purchase was approved by SBS which transferred the "Protected Customers" to T3. Around this same time, on July 28, 2006, T3 entered into the Distributor Agreement with SBS. Pursuant to the agreement, T3 obtained the rights, services, and SBS support that is given to SBS distributors. This included customer protection contractual rights and SBS's enforcement of commission protection and commission rotation. This meant T3 was entitled to all commissions sold to its Protected Customers.

         In 2013, Safeguard Acquisitions (a holding company) was funded by SBS's parent company, Deluxe, to acquire independent non-SBS distributor businesses that operated in the same market as SBS. Following the acquisitions, SBS operated the acquired businesses until a qualified buyer could be found to purchase the commission rights on those accounts. Two of the businesses SBS acquired were Form Systems, Inc., (DocuSource) and Idaho Business Forms (IBF). Both DocuSource and IBF were direct competitors of T3 in the same geographic market in Idaho and selling a line of products that directly competed with T3's sale of Safeguard products. Thus, T3 had a high volume of cross-over clients with DocuSource and IBF.

         In 2015, SBS entered into a Distributor Agreement with KMMR, (a staffing company to IBF), giving it customer protection rights for the same Protected Customers it had given T3 years earlier. This resulted in customer confusion as to whom they were supposed to order from and pay. SBS's general counsel, Michael Dunlap, was tasked with managing the conflict resulting from the overlap in Protected Customers. In this role, Dunlap sent several email communications to various parties. In 2013 and 2014, Teply attempted, unsuccessfully, to get information from Mr. Dunlap and SBS for T3 about the cross-over accounts.

         In August 2014, T3 filed suit in Idaho alleging SBS breached its Distributor Agreement by failing to prevent other SBS distributors from selling to T3's customers and for paying commissions to the interfering distributors rather than to T3. The Distributor Agreement contained an arbitration clause stating that:

EXCEPT AS OTHERWISE PROVIDED IN SUBPARAGRAPH (A) [(ADDRESSING SBS'S INTERNAL DISPUTE RESOLUTION PROCEDURES)], ALL CONTROVERSIES, DISPUTES OR CLAIMS ARISING BETWEEN U.S. . . . AND YOU . . . ARISING OUT OF OR RELATED TO: (1) THIS AGREEMENT OR ANY PROVISION THEREOF OR ANY RELATED AGREEMENT; (2) THE RELATIONSHIP OF THE PARTIES HERETO; (3) THE VALIDITY OF THIS AGREEMENT OR ANY RELATED AGREEMENT, OR ANY PROVISION THEREOF; OR (4) ANY SPECIFICATION, STANDARD OR OPERATING PROCEDURE RELATING TO THE ESTABLISHMENT OR OPERATION OF THE SAFEGUARD BUSINESS SHALL BE SUBMITTED FOR ARBITRATION TO BE ADMINISTERED BY THE DALLAS, TEXAS OFFICE OF THE AMERICAN ARBITRATION ASSOCIATION ON DEMAND OF EITHER PARTY. SUCH ARBITRATION PROCEEDINGS SHALL BE CONDUCTED IN DALLAS, TEXAS AND, EXCEPT AS OTHERWISE PROVIDED IN THIS AGREEMENT, SHALL BE CONDUCTED IN ACCORDANCE WITH THE THEN CURRENT COMMERCIAL ARBITRATION RULES OF THE AMERICAN ARBITRATION ASSOCIATION . . . .

         The Distributor Agreement also contained a forum selection clause that stated:

This Agreement shall become effective when executed and accepted by us in Texas. All matters relating to arbitration will be governed by the Federal Arbitration Act . . . . Except to the extent governed by the Federal Arbitration Act, . . . or other federal law, this Agreement, the distributorship and the relationship between you and Safeguard will be governed and construed under and in accordance with the laws of Texas, except that the provisions of the Texas Deceptive Trade Practices Act (and the regulations thereunder) will not apply unless its jurisdictional requirements are met independently without reference to this subsection.[[1]

         SBS moved to compel arbitration of T3's claims against it in Dallas, Texas. SBS also moved to stay proceedings pending the outcome of the arbitration proceeding. T3 initially conceded it was bound to arbitrate but sought to sever the forum provision from the arbitration clause. Later, T3 contended the invalid forum selection provision rendered the entire arbitration clause void. The district court determined that it had jurisdiction to consider the validity of the forum selection clause, that Texas law was applicable, and that under Texas law the forum selection clause was unenforceable. Thus, the court ordered the parties to arbitrate in Idaho and denied SBS's motion to stay proceedings. The district court also granted T3's motion to compel the Dunlap emails and ordered SBS to produce the documents. The Panel found for T3, and in a supplemental award, awarded T3 over $4.3 million in damages which included attorney fees. The district court confirmed the award and denied SBS's motion to vacate or modify the award. SBS timely appealed.

         II. ISSUES ON APPEAL

1. Whether the district court had jurisdiction to consider T3's challenge to forum.
2. Whether the district court erred in ordering the parties to arbitrate in Idaho as opposed to Dallas.
3. Whether the district court abused its discretion in overruling SBS's claims of attorney-client privilege.
4. Whether the district court erred in denying SBS's motion to vacate based on the arbitration panel exceeding its powers under the FAA.
5. Whether T3 is entitled to attorney fees and costs on appeal.

         III. STANDARD OF REVIEW

         "When ruling on a motion to compel arbitration, the district court applies the same standard as if ruling on a motion for summary judgment." Wattenbarger v. A.G. Edwards & Sons, Inc., 150 Idaho 308, 317, 246 P.3d 961, 970 (2010). As a result, "[a]rbitrability is a question of law to be decided by the court." Id. at 315, 246 P.3d at 968 (quoting Mason v. State Farm Mut. Auto. Ins. Co., 145 Idaho 197, 200, 177 P.3d 944, 947 (2007)). This Court "exercise[s] free review over questions of arbitrability and may draw [its] own conclusions from the evidence presented." Id. "Whether the district court had subject matter jurisdiction is a question of law over which this Court exercises free review." H.F.L.P., LLC v. City of Twin Falls, 157 Idaho 672, 678, 339 P.3d 557, 563 (2014).

         "Trial courts have broad discretion over the admission of evidence at trial, including . . . determining whether or not to grant a motion to compel." Kirk v. Ford Motor Co., 141 Idaho 697, 700, 116 P.3d 27, 30 (2005). "Such decisions will only be reversed when there has been a clear abuse of discretion." Id. at 701, 116 P.3d at 31. When this Court reviews whether a trial court has abused its discretion, the four-part inquiry is "[w]hether the trial court: (1) correctly perceived the issue as one of discretion; (2) acted within the outer boundaries of its discretion; (3) acted consistently with the legal standards applicable to the specific choices available to it; and (4) reached its decision by the exercise of reason." Lunneborg v. My Fun Life, 163 Idaho 856, 863, 421 P.3d 187, 194 (2018).

         "The scope of review for awards made pursuant to the [FAA] . . . parallels the review of arbitrations governed by Idaho's Uniform Arbitration Act[.]" Barbee v. WMA Sec., Inc., 143 Idaho 391, 396 n.4, 146 P.3d 657, 662 n.4 (2006); see also Hecla Min. Co. v. Bunker Hill Co., 101 Idaho 557, 561 n.3, 617 P.2d 861, 865 n.3 (1980) ("We note that our view of the proper scope of judicial review of commercial arbitrator's awards does not vary significantly depending upon which act applies."). "When reviewing a district court's decision to vacate or modify an award of an arbitration panel this Court employs virtually the same standard of review as that of the district court when ruling on the petition." Moore v. Omnicare, Inc., 141 Idaho 809, 814, 118 P.3d 141, 146 (2005). "Judicial review of arbitrators' decisions is 'limited to an examination of the award to discern if any of the grounds for relief stated in the [FAA] exist.'" Barbee, 143 Idaho at 396, 146 P.3d at 662 (quoting Bingham Cnty. Comm'n v. Interstate Elec. Co., 105 Idaho 36, 42, 665 P.2d 1046, 1052 (1983)). Pursuant to the FAA, when a party moves to confirm an arbitration award, a "court must grant such an order unless the award is vacated, modified, or corrected as prescribed in sections 10 and 11 of this title." 9 U.S.C. § 9. This includes, among other things, "when arbitrators exceeded their powers . . . ." 9 U.S.C. § 10(a)(4).

         IV. ANALYSIS

         A. The district court had jurisdiction to consider the enforceability of the forum selection clause.

         SBS moved to compel arbitration of T3's claims against it in Dallas, Texas. T3 challenged the forum selection clause arguing it was unconscionable and unenforceable under Idaho Code section 29-110. T3 argued that whether a forum selection clause is enforceable is a substantive matter for the court to decide, while SBS argued it is a procedural matter for the arbitrator to decide. The district court determined the matter was substantive and ordered the parties to arbitrate T3's claims against SBS in accordance with the Distributor Agreement, but determined the Dallas forum selection clause was unenforceable and severable. Thus, the court ordered the parties to arbitrate in Idaho. The initial issue is whether the district court had jurisdiction to consider whether the Dallas forum selection clause was enforceable. For the reasons discussed below, the district court had jurisdiction to consider the enforceability of the forum selection clause.

         The FAA applies to arbitrations involving commerce and provides that:

A written provision in . . . a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract . . . 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. Thus, "the FAA places arbitration agreements on an equal footing with other contracts" and therefore "requires courts to enforce them according to their terms . . . ." Rent-A-Ctr., W., Inc., v. Jackson, 561 U.S. 63, 67 (2010). And, "[l]ike other contracts, [arbitration agreements] may be invalidated by 'generally applicable contract defenses, such as fraud, duress, or unconscionability.'" Id. at 68 (quoting Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 687 (1996)). Pursuant to Section 4 of the FAA, a court must order the parties to proceed with arbitration if the making of the arbitration agreement is not at issue. 9 U.S.C. § 4.

         As both this Court and the United States Supreme Court have said, arbitrability is a question of law for the court to decide. Wattenbarger, 150 Idaho at 315, 246 P.3d at 968; Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002). However, procedural questions related to arbitrability are not for the Court to decide, but rather are for an arbitrator to decide. Storey Const. Inc. v. Hanks, 148 Idaho 401, 412, 224 P.3d 468, 479 (2009) (decision on rehearing). Thus, whether the district court had jurisdiction to consider the enforceability of the Dallas ...


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