Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_12-cv-00373/USCOURTS-azd-2_12-cv-00373-0/pdf.json

Nature of Suit Code: 890
Nature of Suit: Other Statutory Actions
Cause of Action: 28:1331 Fed. Question

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WO 

IN THE UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF ARIZONA 

G&K, P.A., an Arizona Professional 

Association, 

Petitioner, 

v. 

James Willett, an individual; Yakima 

Compost Company, a Washington 

corporation; and The Yakima Company, 

Inc., a Washington corporation, 

Respondents.

No. CV12-0373-PHX-DGC

ORDER 

 On February 22, 2012, Petitioner Gallagher & Kennedy, P.A. (“G&K”) petitioned 

this Court to compel arbitration under 9 U.S.C. § 4. Doc. 1. Respondents James Willett, 

Yakima Compost Company, and The Yakima Company, Inc. (collectively “Yakima”) 

filed a response to the petition (Doc. 13) and G&K filed a reply (Doc. 22). On March 9, 

2012, Yakima moved for leave to file a complaint. Doc. 14. That motion is fully briefed. 

Docs. 14, 21, 23. For the reasons that follow, the Court will grant the petition to compel 

arbitration and deny the motion for leave to file a complaint. 

I. Background. 

This case involves a dispute over attorneys’ fees. G&K represented Yakima in 

protracted litigation with La Paz County in La Paz County Superior Court over 

approximately eight years (the “La Paz case”). County of La Paz v. Yakima Compost 

Company, Inc., et al., No. CV 2003-0119. Doc. 1, at 2. Yakima originally retained G&K 

on an hourly rate basis, but fell behind in its payments. Id. 

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 In February 2009, the parties entered into a new fee agreement. G&K erased 

Yakima’s past-due debt of more than $600,000 and agreed to “continue to represent” 

Yakima in the La Paz case on a 1/3 contingency basis. Id. Yakima had one year in 

which to convert back to an hourly rate engagement. Id. The fee agreement contained a 

binding arbitration clause: “If there arises any disagreement concerning the fees due 

hereunder, you and G&K agree to submit that disagreement to binding arbitration with 

the Fee Arbitration Committee of the State Bar of Arizona.” Doc. 1-1, at 3 (Fuller Decl. 

¶ 5); Doc. 1-1, at 9 (Ex. 1). 

 On June 22, 2010, Division One of the Arizona Court of Appeals affirmed the 

judgment that had been entered against La Paz County in the principal amount of 

$9,750,000.1

 Doc. 1, at 2. La Paz County then filed a petition for review, which the 

Arizona Supreme Court ultimately denied. Id. The mandate issued in late January 2011. 

Id.; Doc. 1-1, at 3 (Fuller Decl. ¶ 7). The judgment was uncollectible because La Paz 

County had no assets to pay any portion of the judgment. Id. As a result, the mandate 

spawned further litigation and motion practice in the trial court over mandamus and 

budgeting issues. Id. at 2-3. 

 Ultimately, the Arizona legislature passed a bill allowing La Paz County to raise 

additional tax revenue. Id. at 3; Doc. 1-1, at 3-4 (Fuller Decl. ¶ 8). The tax revenue 

supported a bond offering to pay Yakima’s judgment on September 29, 2011. Id. By this 

point, G&K had invested more than $1.75 million of unpaid attorney time. Id. 

On the same day that the judgment was paid, G&K received a faxed letter from 

John Casperson, an attorney in Washington State. Id.; Doc. 1-1, at 4 (Fuller Decl. ¶ 9). 

Mr. Casperson stated that he now represented Yakima and that his client wished to “reopen discussions concerning the revised fee agreement executed in February 2009.” Id.; 

Doc. 1-1, at 11-18 (Ex. 2). Specifically, Mr. Casperson demanded that G&K voluntarily 

 

1

 In its response to the petition to compel arbitration, Yakima alleges that it was awarded $14,182,142.99 on appeal, and that it recovered the full amount on 

September 29, 2011. Doc. 13, at 4. 

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reduce its fee by nearly $2 million. Id. He noted: “If this dispute is submitted for 

arbitration with the Arizona Bar Association – which is the dispute resolution method 

designated in the fee agreement itself – it is likely that G&K’s fees will be significantly 

reduced, given the circumstances surrounding the renegotiated fee agreement and the 

relatively low risk taken by G&K in exchange for a full third of Yakima’s recovery.” 

Doc. 1-1, at 11 (Ex. 2). 

 G&K responded by inviting Yakima to initiate fee arbitration with the State Bar 

within ten days, and offered to cooperate with Yakima in scheduling a hearing. Doc. 1, 

at 3; Doc. 1-1, at 4 (Fuller Decl. ¶ 10). In an October 11, 2011 letter, Mr. Casperson 

stated that “Yakima rejects arbitration” and indicated that it intended to file a court action 

with full discovery. Id.; Doc. 1-1, at 4 (Fuller Decl. ¶ 11). 

 Meanwhile, G&K wired Yakima’s funds from the judgment in the La Paz case, 

mistakenly wiring $500,000 more than Yakima was due under the agreement. Doc. 1, 

at 3-4; Doc. 1-1, at 4 (Fuller Decl. ¶ 12). The mistake resulted from failure to take into 

account a previous $500,000 payment Yakima had received from La Paz County. G&K 

notified Yakima of the error, but Yakima refused to refund the overpayment. Id. 

II. Legal Standard. 

The FAA provides that private agreements to arbitrate disputes are “valid, 

irrevocable, and enforceable.” 9 U.S.C. § 2. It also includes a savings clause that allows 

such agreements to be invalidated only “upon such grounds as exist at law or in equity for 

the revocation of any contract.” Id. The FAA “leaves no place for the exercise of 

discretion by a district court, but instead mandates that district courts shall direct the 

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

signed.” Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 218 (1985) (emphasis in 

original). “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. v. Ortho Diagnostic Sys., Inc., 207 F.3d 

1126, 1130 (9th Cir. 2000) (citing 9 U.S.C. § 4; Simula, Inc. v. Autoliv, Inc., 175 F.3d 

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716, 719-20 (9th Cir. 1999)). Because the parties here do not dispute that the claim at 

issue – the fees due to G&K – falls within the scope of the arbitration clause (Doc. 13, 

at 5-6), the Court must decide only whether the agreement to arbitrate is valid.2

III. Arbitrability.3

Challenges to arbitration agreements fall into two categories: (1) those 

“challeng[ing] specifically the validity of the agreement to arbitrate,” and (2) those 

“challeng[ing] the contract as a whole, either on a ground that directly affects the entire 

agreement (e.g., the agreement was fraudulently induced), or on the ground that the 

illegality of one of the contract’s provisions renders the whole contract invalid.” Buckeye 

Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 444 (2006). When a challenge is to the 

validity of the arbitration provision, courts decide the validity issue. But when the “crux 

of the complaint is that the contract as a whole (including its arbitration provision)” is 

invalid, the arbitrator decides the validity question. Id. Buckeye held that “because 

respondents challenge the Agreement, but not specifically its arbitration provisions, those 

provisions are enforceable apart from the remainder of the contract. The challenge 

should therefore be considered by an arbitrator, not a court.” Id. at 446. 

 In Bridge Fund Capital Corp. v. Fastbucks Franchise Corp., 622 F.3d 996 

(9th Cir. 2010), the Ninth Circuit explained that a court decides the validity question 

“when a plaintiff argues that an arbitration clause, standing alone, is unenforceable . . . 

for reasons independent of any reasons the remainder of the contract might be invalid.” 

Id. at 1000 (emphasis added). Bridge Fund used alternative language, explaining that 

 

2

 The arbitrability of a particular dispute is a threshold issue to be decided by the 

courts, Nagrampa v. MailCoups, Inc., 469 F.3d 1257, 1268 (9th Cir. 2006), unless that 

issue is explicitly assigned to the arbitrator, Rent-A-Ctr., W., Inc. v. Jackson, 130 S. Ct. 

2772, 2775 (2010) (holding that arbitrability is a question for the arbitrator “where the 

agreement explicitly assigns that decision to the arbitrator”). Here, the arbitration 

provision does not expressly assign the issue of arbitrability to the arbitrator. 

3

 Yakima initially argued that G&K violated the FAA notice requirement because 

it “failed to provide five days’ prior written notice” to Yakima. Doc. 13, at 4. Yakima 

has since conceded that the notice requirement has been satisfied. Doc. 23, at 2. 

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courts decide the validity question when the arbitration clause’s validity “is an entirely 

distinct issue from the contract claims in the case.” Id. at 1001-02 (emphasis added). 

Conversely, if “[t]he crux of the complaint . . . makes clear that the challenge to the 

arbitration clause is the same challenge that is being made to the entire contract,” validity 

is decided by the arbitrator. Id. at 1001 (emphasis added); see also Nagrampa v. 

MailCoups, Inc., 469 F.3d 1257, 1271 (9th Cir. 2006) (“[W]here . . . there are separate 

and independent claims specifically challenging enforcement of the arbitration provision, 

then the federal court will proceed to consider the challenge to arbitrability of the 

dispute.”) (emphasis added). 

 Applying this language, the Court must determine whether Yakima’s challenge to 

the arbitration clause in the fee agreement is based on reasons independent of Yakima’s 

reasons for claiming that the entire agreement as invalid – whether the challenge to the 

arbitration clause is an entirely distinct issue from the other contact claims in this case. If 

so, the Court must decide the clause’s validity. But if the challenge to the arbitration 

clause is the same challenge that is being made to the entire contract, validity must be 

decided by the arbitrator. 

 Yakima acknowledges that this case must be “submitted to arbitration unless there 

is a challenge to the arbitration provision which is separate and distinct from any 

challenge to the underlying contract.” Doc. 13, at 7 (quoting Teledyne, Inc. v. Kone 

Corp., 892 F.2d 1404, 1410 (9th Cir. 1989)). Yakima argues, however, that the 

arbitration provision need not be challenged on different substantive grounds than the 

underlying contract. Doc. 23, at 4. Yakima relies on WB, the Building Company, LLC v. 

El Destino LP, 257 P.3d 1182 (Ariz. App. 2011). See Doc. 13, at 7; Doc. 23, at 4-5. In 

WB, appellants argued that appellees’ challenge related only to the underlying contract 

and not to the arbitration agreement itself because appellees challenged both the contract 

and the arbitration agreement on the basis of failure to comply with specific statutes. See 

WB, 257 P.3d at 1187. The Arizona Court of Appeals concluded that “case law suggests 

that the same grounds may be used to challenge both an arbitration agreement and the 

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underlying contract so long as an arbitration agreement itself is separately and distinctly 

challenged on those grounds.” Id. Based on WB, Yakima argues that it has “undoubtedly 

alleged two separate challenges” by claiming that G&K’s conduct “rendered the contract 

and the arbitration provision void,” and that this alone is enough to warrant judicial 

review of the arbitration clause. Doc. 23, at 5. 

 State law is used to determine which contracts are binding and enforceable under 

the FAA “if that law arose to govern issues concerning the validity, revocability, and 

enforceability of contracts generally,” Arthur Anderson LLP v. Carlisle, 556 U.S. 624, 

630-31 (2009) (quoting Perry v. Thomas, 482 U.S. 483, 493 n.9 (1987)), but federal 

substantive law governs questions of arbitrability, see Cohen v. Wedbush, Noble, Cooke, 

Inc., 841 F.2d 282, 285 (9th Cir. 1988) (“The [FAA] creates ‘a body of federal 

substantive law of arbitrability,’ enforceable in both state and federal courts and 

preempting any state laws or policies to the contrary.”) (quoting Moses H. Cone Mem’l 

Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983)), overruled on other grounds by 

Ticknor v. Choice Hotels Int’l, Inc., 265 F.3d 931, 941-42 (9th Cir. 2001); Art Mktg. Grp. 

v. Poor & Co., No. CV 04-2764 PHX RCB, 2006 WL 1081064, at *3 (D. Ariz. April 25, 

2006). To the extent Yakima relies on WB to suggest that the Court must determine the 

validity of an arbitration provision even if its validity is challenged on the same basis as 

the contract as a whole, such a position is at odds with the Ninth Circuit’s statements in 

Bridge Fund. As noted above, under Bridge Fund, a court decides validity only when the 

arbitration clause is challenged “for reasons independent of any reasons the remainder of 

the contract might be invalid.” 622 F.3d at 1000; see also id. at 1001 (explaining that 

“[b]ecause the material question is whether the challenge to the arbitration provision is 

severable from the challenge to the contract as a whole, . . . the inclusion of, or failure to 

include, a specific challenge in the complaint is not determinative. What matters is the 

substantive basis of the challenge.”) (internal citations omitted and emphasis added). The 

Court therefore will consider the substantive basis of Yakima’s assertions to determine 

whether it has made a separate and distinct challenge to the validity of the arbitration 

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clause. 

 Yakima’s proposed complaint clearly asserts the invalidity of the fee agreement as 

a whole. The complaint alleges ten claims: (1) “willful and intentional breach of 

fiduciary duty,” (2) “negligent breach of fiduciary duty,” (3) “bad faith breach of 

contract,” (4) “the contract is unconscionable and therefore unenforceable,” (5) “the 

contract is unenforceable due to duress and/or undue influence,” (6) conversion, (7) “the 

contract is unenforceable for fraud and/or misrepresentation,” (8) intentional 

misrepresentation, (9) negligent misrepresentation, and (10) unjust enrichment. See 

Doc. 14-1. The claims focused on contract invalidity – Claims 4, 5, and 7 – all seek to 

invalidate the entire contingency fee agreement, not just the arbitration clause. 

 The fifth claim – duress and/or undue influence – concerns the entire agreement: 

“G&K waited until it was in a position of power and when Yakima felt vulnerable to 

insist upon a contingent fee arrangement”; “G&K threatened to withdraw as counsel if 

Yakima did not agree to the unreasonable fees sought by G&K”; “G&K failed to educate 

Yakima on the meaning of the Contingency Fee Agreement and how traditional 

contingency fee agreements are used.” Doc. 14-1, at 11-12 (emphasis added). None of 

these assertions relates specifically to the arbitration clause. Claim Five concludes with: 

“Because the Contingency Fee Agreement was entered under duress and/or undue 

influence, it is not enforceable.” Id. at 12 (emphasis added). 

Claim 4 also alleges that “[t]he Contingent Fee Agreement is unconscionable.” Id. 

at 19. Claim 7 alleges that “the Contingent Fee Agreement and its arbitration provision 

was obtained through fraud/misrepresentations” (id. at 13), but the 15 paragraphs that 

follow in Claim 7 never mention the arbitration clause. The Court accordingly concludes 

that the crux of Yakima’s complaint is the invalidity of the entire fee agreement. Under 

the cases discussed above, the validity of such a claim must be decided by the arbitrator, 

not the Court. 

Bridge Fund also made clear that a separate and distinct challenge to an arbitration 

provision need not be contained in the challenging party’s complaint; it may be contained 

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in the party’s response to the motion to compel arbitration. 622 F.3d at 1001-02. As a 

result, the Court must also consider arguments contained in Yakima’s response to G&K’s 

petition to compel arbitration. 

 Yakima’s response asserts that the “agreement to arbitrate was obtained through 

duress.” Doc. 13, at 7. Yakima alleges that G&K “strong-armed a client to change its 

fee agreement from hourly to contingent mid-stream in litigation, after the law firm 

assisted the client in obtaining a judgment of $9,200,000,” and that G&K “inserted an 

arbitration provision in that unreasonable contingency fee agreement.” Id. at 1 (emphasis 

in original). Yakima claims that “[t]he Contingency Fee Agreement unreasonably 

increased [Yakima’s] fees,” G&K “misrepresented the reasonableness of the fee they 

sought,” “[t]he arbitration clause in the Contingency Fee Agreement was not included in 

the prior fee agreement,” Yakima “did not understand what rights they were giving up 

when they signed the arbitration agreement,” G&K “breached the ethical duty to advise 

[Yakima] to seek independent counsel before they signed the agreement,” and Yakima 

was “under the impression that the only practical way to see the judgment converted to 

cash was with the assistance of [G&K].” Id. at 8-9. These arguments – the 

unreasonableness of the arbitration clause and its procurement through duress and 

misrepresentations – are the same arguments made by Yakima against the entire 

agreement. Claim 4 of Yakima’s proposed complaint alleges unconscionability, Claim 5 

alleges duress and undue influence, and Claim 7 alleges fraud and misrepresentation. 

Doc. 14-1 at 8-15. Yakima does not present a basis for invalidating the arbitration clause 

that is “independent of any reasons the remainder of the contract might be invalid,” or 

“an entirely distinct issue from the contract claims in the case.” Bridge Fund, 622 F.3d at 

1001-02. Rather, “the challenge to the arbitration clause is the same challenge that is 

being made to the entire contract.” Id. at 1001. As a result, Yakima’s challenge to the 

arbitration clause must be decided by the arbitrator. Id. at 446; Nagrampa, 469 F.3d 

at 1277. The Court will accordingly compel arbitration of the parties’ dispute in this 

case, consistent with the mandatory requirements of the FAA. 

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IT IS ORDERED: 

 1. The petition to compel arbitration (Doc. 1) is granted. Respondents shall 

arbitrate their dispute with Petitioner as required in the fee agreement. 

 2. Yakima’s motion for leave to file a complaint (Doc. 14) is denied. 

 3. This action is dismissed. The clerk is directed to terminate this action. 

 Dated this 24th day of April, 2012. 

 

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