Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_18-cv-00249/USCOURTS-casd-3_18-cv-00249-0/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1332 Diversity Action

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

NATIONAL UNION FIRE INSURANCE 

COMPANY OF PITTSBURGH, PA, AS 

SUBROGEE OF THE ORANGE 

COUNTY TRANSPORTATION 

AUTHORITY,

Plaintiff,

v.

SHAREPOINT360, INC.,

Defendant.

Case No.: 18cv249-L(AGS)

ORDER GRANTING DEFENDANT'S 

MOTION TO DISMISS OR STAY 

PENDING ARBITRATION

In this action alleging breach of contract, indemnity and gross negligence, 

Defendant SharePoint360, Inc. filed a motion to dismiss or stay pending arbitration. 

Plaintiff filed an opposition, and Defendant replied. The Court decides the matter on the 

papers submitted and without oral argument. See Civ. L. R. 7.1(d.1). For the reasons 

stated below, Defendant's motion is granted, and this action is dismissed.

Plaintiff National Union Fire Insurance Company of Pittsburgh, PA alleges that its 

insured, Orange County Transportation Authority ("OCTA") entered into a contract with 

Defendant to manage and maintain its computer network and servers ("Agreement"). 

Among other things, the Agreement obligated Defendant to take commercially 

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reasonable measures to ensure the security of OCTA's data, including firewall protection, 

and to independently archive backup copies for 30 days. Defendant allegedly failed to 

properly maintain the firewall and security software and failed to perform basic security 

measures to ensure OCTA's system security. OCTA was allegedly damaged when a 

third-party hacker launched a ransomware attack. According to the complaint, this 

affected numerous OCTA servers, which had to be rebuilt and restored, and caused the 

loss of OCTA's data, which was not archived and backed up as agreed. Plaintiff 

indemnified OCTA under its insurance company. Plaintiff filed the instant action as 

OCTA's subrogee and assignee to recover the sums paid OCTA under the insurance 

policy. Plaintiff alleges claims for breach of contract, indemnity and gross negligence 

against Defendant. The Court has diversity jurisdiction under 28 U.S.C. § 1332.

Defendant moves to compel arbitration pursuant to the arbitration clause in the 

Agreement. (Compl. Ex. 1 (doc. no. 1-2) at 18.)1 Plaintiff does not dispute that the

arbitration clause is valid and applicable, as it filed a demand for arbitration concurrently 

with the complaint in this action. (Schlecht Decl. (doc. no. 9-2) at 2 & Def.'s Ex. A (doc. 

no. 9-4.) Nevertheless, this motion was necessary because, the arbitration 

notwithstanding, Plaintiff does not agree to dismiss the action, although he would agree 

to stay it. (Schlecht Decl. at 2.) Plaintiff's arbitration demand is essentially identical to 

the complaint in this action, and the request for relief is the same. (See Def.'s Ex. A.) As 

an alternative to seeking dismissal based on the pending arbitration, Defendant requests 

dismissal pursuant to Federal Rule of Civil Procedure 12(b)(1), (3) and (6) for lack of 

subject matter jurisdiction, improper venue and failure to state a claim, respectively. The 

former two grounds for dismissal are based on the pending arbitration, while the latter is 

also based on the contention that Plaintiff's gross negligence claim is barred by California 

law under the economic loss rule. 

 

1 All page number references are assigned by the Court's Electronic Case Filing and 

Case Management System.

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Plaintiff does not oppose arbitrating the breach of contract and indemnity claims. 

(Opp'n (doc. no. 15) at 5.) However, it maintains that the gross negligence claim is not 

arbitrable because it is based on "an independent duty that is . . . not dependent upon the 

contract." (Id. at 11.) It further requests leave to amend the complaint to add a claim for 

negligent misrepresentation about Defendant's services and argues that this claim also 

would not be subject to arbitration because the alleged misrepresentation pre-dates the 

Agreement. (Id.) 

Because the Agreement is “a contract evidencing a transaction involving 

commerce,” it is subject to the Federal Arbitration Act, 9 U.S.C. §1 et seq. ("FAA"). See 

Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1130 (9th Cir. 2000). "The 

standard for demonstrating arbitrability is not high." Simula, Inc. v. Autoliv, Inc., 175 

F.3d 716, 719 (9th Cir. 1999). "The FAA mandates that district courts 'shall direct the 

parties to proceed to arbitration on issues as to which an arbitration agreement has been 

signed.'" Kilgore v. KeyBank N.A., 718 F.3d 1052, 1058 (9th Cir. 2013) (emphasis in 

original) (quoting Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 218 (1985)). In this 

regard, the FAA “leaves no place for the exercise of discretion by a district court . . .."

Dean Witter Reynolds, 470 U.S. at 218. "The court's role under the [FAA] is therefore 

limited to determining (1) whether a valid agreement to arbitrate exists and, if it does, (2) 

whether the agreement encompasses the dispute at issue." Chiron Corp., 207 F.3d at 

1130 (citations omitted). 

Plaintiff does not dispute the validity of the arbitration clause. It claims only that 

the gross negligence and the proposed negligent misrepresentation claims fall outside its 

scope. In determining this issue, the Court "must be cognizant of the [FAA's] federal 

policy favoring arbitration agreements." Chiron Corp., 207 F.3d at 1131. The FAA 

establishes that, as a matter of federal law, 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.

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Moses H. Cone Memorial Hosp. v. Mercury Const. Corp., 460 U.S. 1, 24–25 (1983). 

The arbitration clause in the agreement between OCTA and Defendant provides in 

pertinent part that "[a]ny dispute or controversy arising from or related to this Agreement 

or the rights of the parties to this Agreement shall be settled by binding arbitration . . .." 

(Compl. Ex. 1 at 18 (emphasis added).) This language does not limit arbitration to the 

literal interpretation or performance of the Agreement. Coupled with the policy favoring 

arbitration, the clause warrants expansive interpretation. See Simula, 175 F.3d at 720-21

(interpreting clause "[a]ll disputes arising in connection with this Agreement" and 

discussing cases). "To require arbitration, [Plaintiff's] factual allegations need only 

'touch matters' covered by the contract containing the arbitration clause and all doubts are 

to be resolved in favor of arbitrability." Id. at 721 (quoting Mitsubishi Motors Corp. v. 

Soler Chrysler–Plymouth, Inc., 473 U.S. 614, 624 n.13 (1985)). 

To determine whether the gross negligence and proposed negligent 

misrepresentation claims are arbitrable, the Court "must examine the factual allegations." 

Simula, 175 F.3d at 721. The facts alleged in support of the gross negligence claim 

describe Defendant's performance of the Agreement, i.e., failure to monitor software and 

firewalls, failure to patch their vulnerabilities, and failure to properly provide archival 

and backup copies of data. (See Compl. at 10.) The proposed negligent 

misrepresentation claim is based on Defendant's alleged pre-Agreement representations 

regarding these services. (See Opp'n at 11, 14.) 

Like Plaintiff here, in Simula, the plaintiff argued that the tort claims were "based

not on rights and remedies under the [agreement], but upon separate, independent . . . 

common law prohibitions," and that claims based on pre-agreement misconduct, 

including misrepresentations, were not arbitrable because they were "separate tort claims 

relating to conduct occurring prior to the date on which the parties entered into the 

arbitration clause." 175 F.3d at 724, 723. These arguments were rejected because the 

claims nevertheless implicated the defendant's performance of the agreement. Id. at 724.

/ / / / /

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Had the defendant fully complied with the agreement, there would be no basis for the tort 

claims. Id. at 725.

The reasons articulated in Simula apply here as well. Defendant's alleged 

misrepresentations and negligent performance implicate the promise to perform, and the 

actual performance of, the Agreement. Accordingly, these claims arise from, or are 

related to, the Agreement, and fall within the scope of the arbitration clause. 

The Court declines Defendant's invitation to dismiss the gross negligence claim 

pursuant to Rule 12(b)(6) based on the defense that it is barred by the economic loss rule. 

The Court's “role is strictly limited to determining arbitrability and enforcing agreements 

to arbitrate, leaving the merits of the claim and any defenses to the arbitrator.” Chiron 

Corp., 207 F.3d at 1131 (internal quotation marks and citation omitted). 

Plaintiff urges that if Defendant's motion to compel arbitration is granted, this 

action should be stayed rather than dismissed. Its reliance on the FAA, 9 U.S.C. § 3, is 

unavailing. Stay is appropriate when specific issues are referred to arbitration. See id. 

When, as here, the entire action is referred to arbitration, it may be dismissed. See 

Simula, 175 F.3d at 719. This Order does not preclude Plaintiff from returning to court to 

confirm, vacate or modify the arbitration award as provided in the FAA.

For the foregoing reasons, Defendant's motion to dismiss is granted.

IT SO ORDERED.

Dated: March 27, 2019

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