Court Opinion

ID: 5141372
Source: CourtListenerOpinion
Date Created: 2021-12-29 18:00:43.24473+00
Date Added: 2024-06-11T08:24:28.511264
License: Public Domain

FOR PUBLICATION

   UNITED STATES COURT OF APPEALS
        FOR THE NINTH CIRCUIT

ROBERT W. AHLSTROM,                              No. 20-15114
               Plaintiff-Appellant,
                                                   D.C. No.
                    v.                          5:19-cv-03435-
                                                     BLF
DHI MORTGAGE COMPANY, LTD.,
L.P.,                                              OPINION
              Defendant-Appellee.

       Appeal from the United States District Court
           for the Northern District of California
      Beth Labson Freeman, District Judge, Presiding

            Argued and Submitted March 5, 2021
                 San Francisco, California

                   Filed December 29, 2021

Before: Kim McLane Wardlaw and Marsha S. Berzon,
Circuit Judges, and Dean D. Pregerson, * District Judge.

                 Opinion by Judge Pregerson

     *
       The Honorable Dean D. Pregerson, United States District Judge
for the Central District of California, sitting by designation.
2             AHLSTROM V. DHI MORTGAGE CO.

                          SUMMARY *

                           Arbitration

   The panel reversed the district court’s order dismissing a
putative class action complaint and granting the defendant’s
motion to compel arbitration pursuant to the Federal
Arbitration Act, and remanded for further proceedings.

    When the plaintiff was hired as a loan officer by DHI
Mortgage Co. (“DHIM”), he signed a Mutual Arbitration
Agreement (“MAA”) with D.R. Horton, the parent company
of DHIM. The MAA included a delegation clause providing
that the arbitrator would have “exclusive authority to resolve
any dispute relating the formation, enforceability,
applicability, or interpretation” of the MAA. The plaintiff
brought employment-related claims. DHIM moved to
compel arbitration and to dismiss the putative class claims.
The plaintiff opposed the motion, contending that the MAA
was never properly formed due to a failure to satisfy a
condition precedent in the MAA. The district court granted
DHIM’s motion. Citing the delegation clause, the district
court concluded that formation issues, including the
plaintiff’s condition precedent argument, could not be
decided by the court, and were instead delegated to the
arbitrator.

   The panel held that it is well-established that some
“gateway” issues pertaining to an arbitration agreement,
such as issues of validity and arbitrability, can be delegated

    *
      This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.
            AHLSTROM V. DHI MORTGAGE CO.                  3

to an arbitrator by agreement. Agreeing with other circuits,
the panel held, however, that parties may not agree to
delegate issues of formation to an arbitrator.

    The panel further held that the MAA did not constitute a
properly formed agreement between the plaintiff and D.R.
Horton, with which the plaintiff had no employment
relationship. The panel concluded that the MAA, as drafted,
described a relationship between the plaintiff and D.R.
Horton that did not exist, and thus did not constitute a
properly formed agreement to arbitrate.

                       COUNSEL

Shaun Setareh (argued) and Thomas Segal, Setareh Law
Group, Beverly Hills, California, for Plaintiff-Appellant.

Jennifer L. Katz (argued) and Jack S. Sholkoff, Ogletree,
Deakins, Nash, Smoak & Stewart, P.C., Los Angeles,
California, for Defendant-Appellee.

                        OPINION

PREGERSON, District Judge:

   Robert Ahlstrom (“Ahlstrom”) appeals the district
court’s order dismissing his putative class action complaint
and granting DHI Mortgage Company, Ltd.’s (“DHIM”)
motion to compel arbitration pursuant to the Federal
Arbitration Act (“FAA”), 9 U.S.C. § 1 et seq.

   Ahlstrom contends that the arbitration agreement upon
which DHIM relies was not properly formed. The district
4           AHLSTROM V. DHI MORTGAGE CO.

court found that it could not decide the issue because the
arbitration agreement delegated issues of contract formation
to the arbitrator. Ahlstrom timely appealed the district
court’s order.

    We have jurisdiction under 28 U.S.C. § 1291. For the
reasons set forth below, we reverse.

                FACTUAL BACKGROUND

    DHIM employed Ahlstrom as a loan officer from July
20, 2015 to December 9, 2016. On July 24, 2015, Ahlstrom
signed a Mutual Arbitration Agreement (“MAA”) as part of
the new-hire onboarding process. The MAA provides, in
relevant part, that “[t]he undersigned employee
(‘Employee’) and D.R. Horton, Inc., (the ‘Company’)
voluntarily and knowingly enter into this Mutual Arbitration
Agreement . . . .” Nonparty D.R. Horton, Inc. (“D.R.
Horton”) is the parent company of Appellee DHIM.
Although neither Ahlstrom nor DHIM contends that
Ahlstrom was ever an employee of D.R. Horton, DHIM has
maintained throughout this action that Ahlstrom entered into
the MAA with D.R. Horton.

    The MAA goes on to provide that the signatories agree
that “all legal disputes and claims between them, including
without limitation those relating to Employee’s employment
with the Company or any separation therefrom and claims
by Employee against the Company’s parents, subsidiaries,
affiliates, directors, employees, or agents, shall be
determined exclusively by final and binding arbitration.”
The MAA also contains a delegation clause providing that
the arbitrator “shall have exclusive authority to resolve any
dispute relating to the formation, enforceability,
applicability, or interpretation of this [MAA].”
              AHLSTROM V. DHI MORTGAGE CO.                            5

                   PROCEDURAL HISTORY

    On August 2, 2017, Ahlstrom filed a putative class action
(the “first action”) in the Northern District of California
alleging various employment-related claims against D.R.
Horton and DHI Mortgage Company GP. 1 Although the
parties now agree that DHIM was Ahlstrom’s only
employer, at the time of the first action, Ahlstrom appears to
have been unaware that DHIM was his employer and did not
name DHIM as a defendant. The defendants in the first
action moved to compel arbitration pursuant to the same
MAA that is the subject of this appeal, maintaining, as
DHIM does here, that Ahlstrom entered into the MAA with
D.R. Horton. On November 30, 2018, the district court
granted the motion, ordered Ahlstrom’s individual claims to
arbitration, and dismissed Ahlstrom’s putative class action
claims pending the resolution of the arbitration. Ahlstrom
did not appeal.

    On March 27, 2019, Ahlstrom filed a putative state court
class action in Alameda County Superior Court, naming
DHIM as the defendant-employer. Ahlstrom alleged
employment-related causes of action identical to those
brought in the first action against D.R. Horton. DHIM
timely removed the action to the Northern District of
California. On July 22, 2019, relying on the MAA, DHIM
moved to compel arbitration and to dismiss the putative class
claims. Ahlstrom opposed the motion, contending that the

    1
      We GRANT Ahlstrom’s unopposed Motion to take Judicial
Notice and take notice of the filings in the first state court action,
Ahlstrom v. DHI Mortgage Company GP, Inc., Case No. 3:17-cv-03843.
See Reyn’s Pasta Bella, LLC v. Visa USA, Inc., 442 F.3d 741, 746 n.6
(9th Cir. 2006) (“We may take judicial notice of court filings and other
matters of public record.”).
6               AHLSTROM V. DHI MORTGAGE CO.

MAA was never properly formed due to a failure to satisfy a
condition precedent in the MAA. 2

    On January 16, 2020, the district court granted DHIM’s
motion. Citing the MAA’s delegation clause, the district
court concluded that formation issues, including Ahlstrom’s
condition precedent argument, could not be decided by the
court, and were instead delegated to the arbitrator. Ahlstrom
timely appealed the district court’s order compelling
arbitration.

                     STANDARD OF REVIEW

    We review the district court’s order compelling
arbitration de novo. Int’l Bhd. of Teamsters v. NASA Servs.,
Inc., 957 F.3d 1038, 1041 (9th Cir. 2020). We also review
“legal conclusions regarding the existence of a valid, binding
contract de novo.” Casa del Caffe Vergnano S.P.A. v.
ItalFlavors, LLC, 816 F.3d 1208, 1211 (9th Cir. 2016)
(emphasis omitted).

    2
        The MAA includes an opt-out provision stating:

          Employee may opt out of this Agreement by
          delivering, within 30 days of the date this Agreement
          is provided to Employee, a completed and signed Opt-
          Out Form to the Company’s senior Human Resources
          officer at the Company’s headquarters. An Opt-Out
          Form is available from Human Resources upon
          request. If Employee does not deliver the executed
          form within 30 days, and if Employee accepts or
          continues employment with the Company after that
          date, he or she shall be deemed to have accepted the
          terms of this Agreement.
             AHLSTROM V. DHI MORTGAGE CO.                      7

                        DISCUSSION

I. Delegability of Contract Formation Issues

    “The cardinal precept of arbitration is that it is ‘simply a
matter of contract between the parties; it is a way to resolve
those disputes—but only those disputes—that the parties
have agreed to submit to arbitration.’” Local Joint Exec. Bd.
v. Mirage Casino-Hotel, Inc., 911 F.3d 588, 595 (9th Cir.
2018) (quoting First Options of Chicago, Inc. v. Kaplan, 514
U.S. 938, 943 (1995)). “Because of this axiomatic principle,
a party cannot be required to submit to arbitration any
dispute which he has not agreed so to submit.” Int’l Bhd. of
Teamsters, 957 F.3d at 1041 (internal alterations and
quotation marks omitted) (citation omitted); see also First
Options, 514 U.S. at 945 (“[A] party can be forced to
arbitrate only those issues it specifically has agreed to submit
to arbitration . . . .”). Accordingly, the Supreme Court has
instructed that “courts should order arbitration of a dispute
only where the court is satisfied that neither the formation of
the parties’ arbitration agreement nor (absent a valid
provision specifically committing such disputes to an
arbitrator) its enforceability or applicability to the dispute is
in issue.” Granite Rock Co. v. Int’l Bhd. of Teamsters, 561
U.S. 287, 299 (2010). Thus, “[w]here a party contests either
or both matters, the court must resolve the disagreement.”
Id. at 299–300 (internal quotation marks omitted) (citation
omitted).

    It is well-established that some “gateway” issues
pertaining to an arbitration agreement, such as issues of
validity and arbitrability, can be delegated to an arbitrator by
agreement. See Green Tree Fin. Corp. v. Bazzle, 539 U.S.
444, 452 (2003) (“[G]ateway matters, [include] whether the
parties have a valid arbitration agreement at all or whether a
concededly binding arbitration clause applies to a certain
8            AHLSTROM V. DHI MORTGAGE CO.

type of controversy.”); Rent-A-Ctr., W., Inc. v. Jackson, 561
U.S. 63, 68–69 (2010) (collecting cases).

    DHIM argues that, like issues of validity and
arbitrability, parties may also agree to delegate issues of
formation to an arbitrator. We do not agree. See Granite
Rock, 561 U.S. at 299–300; Sanford v. MemberWorks, Inc.,
483 F.3d 956, 962 (9th Cir. 2007); Kum Tat Ltd. v. Linden
Ox Pasture, LLC, 845 F.3d 979, 983 (9th Cir. 2017)
(“Although challenges to the validity of a contract with an
arbitration clause are to be decided by the arbitrator,
challenges to the very existence of the contract are, in
general, properly directed to the court.” (emphasis added)
(internal citations omitted)). As the Supreme Court has
recognized, a court should order arbitration only if it is
convinced an agreement has been formed. See Granite
Rock, 561 U.S. at 299–300; First Options, 514 U.S. at 943.

    We are not inclined to disrupt this well-settled principle.
Although DHIM argues that “the court does not have the
authority to decide” whether an agreement to arbitrate exists
“where the parties have ‘clearly and unmistakably’
delegated the arbitrability issues to the arbitrator,” the Fifth
and Tenth Circuits have rejected that very argument. See,
e.g., Edwards v. Doordash, Inc., 888 F.3d 738, 744 (5th Cir.
2018) (“Arguments that an agreement to arbitrate was never
formed, though, are to be heard by the court even where a
delegation clause exists. . . . [This] test is limited to contract
formation.” (citing Kubala v. Supreme Prod. Servs., Inc.,
830 F.3d 199, 202 (5th Cir. 2016)); Fedor v. United
Healthcare, Inc., 976 F.3d 1100, 1104 (10th Cir. 2020)
(“Courts must . . . first determine whether an arbitration
agreement was indeed formed before enforcing a delegation
clause therein.”).
             AHLSTROM V. DHI MORTGAGE CO.                      9

    We agree with our sister circuits and hold that parties
cannot delegate issues of formation to the arbitrator. Here,
where Ahlstrom challenged the very existence of an
agreement to arbitrate, the district court was required to
address Ahlstrom’s challenge and determine whether an
agreement existed. See Granite Rock, 561 U.S. at 299–300.
If no agreement to arbitrate was formed, then there is no
basis upon which to compel arbitration.

II. Formation of the MAA

   We next address whether the MAA constitutes a properly
formed agreement between Ahlstrom and D.R. Horton.

    On its face, the MAA is plainly drafted to govern an
employer-employee relationship.             For example, in
Paragraph 1, the MAA states that “Employee and the
Company both agree all legal disputes and claims between
them, including without limitation those relating to
Employee’s employment with the Company or any
separation therefrom . . . shall be determined exclusively by
final and binding arbitration.” Paragraph 4 indicates that
notice must be sent to the employee’s “most recent residence
address reflected in the Company’s employment records.”
Further, an employee initiating a claim must contribute “an
amount equal to the filing fee to initiate the claim in the court
of general jurisdiction in the state in which Employee is or
was last employed by the Company.” Paragraph 9 further
states that the “Agreement shall remain in effect even after
the termination of Employee’s employment with the
Company.” Additionally, the MAA’s opt-out provision,
which applies to and can only be exercised by an employee
of the Company, requires that employee to obtain a form
from the employer and deliver that form to the employer’s
headquarters, and provides that the ability to opt out can no
longer be exercised “if Employee accepts or continues
10             AHLSTROM V. DHI MORTGAGE CO.

employment” after a certain date. Finally, Paragraph 12
provides that “[b]y signing this Agreement, Employee
acknowledges that he or she is knowingly and voluntarily
waiving the right to file a lawsuit relating to Employee’s
employment with the Company.”

    None of these provisions, however, has any relevance to
any relationship between Ahlstrom and D.R. Horton.
Indeed, no party has taken the position that there is any
relationship between Ahlstrom and D.R. Horton, let alone
the type of employer-employee relationship contemplated
by the MAA. All parties appear to agree that Ahlstrom’s
only employer was DHIM. Yet, in its introductory sentence,
the MAA defines Ahlstrom’s employer (i.e., “the
Company”) as D.R. Horton alone. Nowhere in the MAA is
there any specific reference to Ahlstrom’s actual employer,
DHIM.

    Notwithstanding this fundamental omission, DHIM has
not argued at any time during this action, either to the district
court or to us, that the MAA’s definition of D.R. Horton as
the employer was a mistake or scrivener’s error, or that it
otherwise should have referenced DHIM. Instead, DHIM
argues that Ahlstrom “entered into a binding arbitration
agreement . . . with D.R. Horton.” 3 To the extent DHIM
suggests that the definition of D.R. Horton as the employer
also encompasses D.R. Horton’s subsidiaries, such as
DHIM, DHIM is mistaken.              Courts adhere to the
fundamental principle that corporations, including parent

     3
      Although DHIM briefly states, that an “agreement to arbitrate . . .
was entered into by Ahlstrom . . . and DHIM,” this passing reference is
inconsistent with DHIM’s repeated, core contention that Ahlstrom
“entered into a binding arbitration agreement . . . with D.R. Horton, but
also covering all claims he might have against DHIM.”
               AHLSTROM V. DHI MORTGAGE CO.                              11

companies and their subsidiaries, are treated as distinct
entities. See Dole Food Co. v. Patrickson, 538 U.S. 468, 474
(2003); United States v. Bestfoods, 524 U.S. 51, 61 (1998);
Ranza v. Nike, Inc., 793 F.3d 1059, 1070 (9th Cir. 2015);
United States v. Bennett, 621 F.3d 1131, 1137 (9th Cir.
2010). As such, the parent-subsidiary relationship between
D.R. Horton and DHIM is insufficient to establish that the
MAA in any way identifies the latter as the employer. The
parties have not argued, nor is there evidence to suggest, that
DHIM and D.R. Horton share the same rights, liabilities, or
employees. Nor is there any other factual basis to disregard
the entities’ separate corporate forms. Put simply, the MAA,
as drafted, describes and governs a relationship between
Ahlstrom and D.R. Horton that does not exist, and thus does
not constitute a properly formed agreement to arbitrate. 4

                            CONCLUSION

   For the foregoing reasons, we REVERSE the district
court’s order granting DHIM’s motion to compel arbitration
and REMAND to the district court for further proceedings
consistent with this opinion.

     4
       Although the MAA could perhaps have defined “the Company” to
include DHIM, broadened the scope of who the “employer” is, or
otherwise have been drafted to apply to the parties to this case, this is not
how D.R. Horton chose to draft the MAA, and it is not for us to fix any
defect on behalf of D.R. Horton, DHIM, or any other entity. Arriagarazo
v. BMW of N. Am., LLC, 64 Cal. App. 5th 742, 748 (2021) (“Courts must
refrain from altering or rewriting a contract, and they must not ‘add a
term to a contract about which the agreement is silent.’” (quoting Moss
Dev. Co. v. Geary, 41 Cal. App. 3d 1, 9 (1974))).