FBC Mortgage, LLC v. Broker Solutions, Inc

Background

FBC Mortgage, LLC sued Broker Solutions, Inc., doing business as New American Funding (NAF), and former FBC employees Brian Skarg, Amanda Benson, Ryan Gee, and Joshua Savea. FBC alleged that the defendants misappropriated its trade secrets. The defendants later moved to compel arbitration, and FBC moved to strike the arbitration-related affirmative defense in the defendants’ amended answer.

The defendants had filed a motion addressing FBC’s trade-secret claims, objected to FBC’s evidence, opposed FBC’s request for a temporary restraining order, and filed an answer that did not mention arbitration. They first indicated that they intended to seek arbitration in an August 18, 2023 joint case-management statement, added arbitration as an affirmative defense on August 23, 2023, and moved to compel arbitration on September 20, 2023.

Motion to Compel Arbitration

The Federal Arbitration Act requires courts to enforce a valid arbitration agreement according to its terms. The court generally determines whether a valid agreement exists and whether the agreement covers the dispute.

The court rejected the motion as to NAF because FBC had never entered into an agreement with NAF to arbitrate a dispute. The court also ruled that the Individual Defendants waived their right to compel arbitration. Waiver required both knowledge of an existing right to arbitrate and intentional conduct inconsistent with that right.

The Individual Defendants had known about the arbitration clauses since at least January 11, 2023. The court found that they acted inconsistently with arbitration by waiting more than eight months, pursuing a motion addressing two of FBC’s claims, objecting to evidence, opposing the temporary restraining order, and filing an answer that did not assert arbitration. The court emphasized that the defendants sought a ruling in federal court before attempting to change course and seek arbitration.

Because the court found that NAF had no right to compel arbitration and that the Individual Defendants waived their right, it did not decide FBC’s separate argument that the claims fell outside the scope of the arbitration provisions. The court denied the defendants’ motion to compel arbitration.

Motion to Strike

FBC asked the court to strike paragraph 49 of the amended answer, which asserted that FBC’s claims were subject to binding arbitration. Under Federal Rule of Civil Procedure 12(f), a court may strike an insufficient defense. The court concluded that the arbitration defense could not succeed because NAF had no basis to compel arbitration and the Individual Defendants had waived their arbitration rights.

The court therefore granted FBC’s motion to strike. It also vacated the hearing set for October 27, 2023.