Goobich v. Excelligence Learning Corporation

Background

Joel Goobich and Excelligence Learning Corporation entered an employment agreement more than twenty years before the order. Under that agreement, Goobich assigned Excelligence rights in certain paint formulations in exchange for commissions on some of Excelligence’s products for twenty-five years. The agreement required that disputes be resolved through binding arbitration under the rules of the American Arbitration Association (AAA) and stated that the parties would share arbitration costs equally.

A dispute later arose over the amount Excelligence owed Goobich. Goobich filed an arbitration request with the AAA under its employment rules. Those rules required the employer to pay most arbitration costs, including $1,900 of a $2,200 filing fee. Excelligence disputed that fee allocation because the employment agreement required equal cost sharing. Excelligence did not pay the larger amount, and the AAA closed the arbitration before it began.

Goobich then litigated in federal court. He initially sought a default judgment or, alternatively, an order compelling arbitration. The court previously denied that motion after finding that the California statute on which Goobich relied did not apply retroactively. The court also noted that both parties had agreed that the royalty-related dispute was covered by a valid arbitration clause and directed them to explain why the case should not be stayed while arbitration proceeded. In response, Goobich opposed arbitration, while Excelligence argued that arbitration was required.

Issues and Analysis

The court applied the Federal Arbitration Act, which requires courts to enforce a valid arbitration agreement covering the dispute. The parties agreed that a valid agreement existed and that it covered their dispute. The court therefore considered Goobich’s three objections.

Alleged material breach. Goobich argued that Excelligence materially breached the arbitration agreement by refusing to pay the $1,900 filing fee required under the AAA employment rules. The court disagreed. It interpreted the employment agreement under California contract law and held that its express requirement that the parties share arbitration costs equally controlled over the AAA employment rules incorporated by reference. Because Excelligence was not contractually required to pay the disproportionate filing fee, the court found that Excelligence had not materially breached the arbitration agreement.

Waiver. Goobich argued that Excelligence waived its right to compel arbitration by failing to raise that right during eleven months of litigation, opposing Goobich’s earlier request to compel arbitration, and participating in the court case. The court recognized that arbitration can be waived when a party knows of the right, acts inconsistently with it, and prejudices the opposing party. It found that Excelligence’s conduct was inconsistent with its arbitration right, including its earlier opposition to arbitration. But the court found no prejudice to Goobich. The case remained at the pleading stage, and the court had not considered the merits of the underlying dispute. The court also reasoned that Goobich had previously sought arbitration himself and therefore could not show that the litigation expenses or loss of court-based discovery procedures resulted in prejudice from allowing arbitration at this stage. The court concluded that Excelligence had not waived arbitration.

Whether arbitration had already occurred. Goobich argued that the case should not be stayed because arbitration had already been completed within the meaning of Section 3 of the Federal Arbitration Act. The court distinguished the cited case because the arbitration there had progressed substantially before ending. Here, the parties never actually began arbitration; the AAA closed the case before it started. Because Excelligence had not breached the agreement and had not participated in arbitration, the court held that arbitration had not occurred as required by the agreement.

Disposition

The court concluded that the dispute was subject to a valid and enforceable arbitration agreement. It ordered that the case be stayed pending arbitration. It also vacated all pretrial deadlines and hearing dates and ordered the parties to file a joint status report within thirty days after the arbitration proceedings were resolved. The order did not decide the merits of the royalty dispute.