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Ellington v. Hayward Baker Inc.

United States District Court, D. South Carolina, Charleston Division

February 28, 2019




         The following matter is before the court on defendant Hayward Baker, Inc.'s (“HBI”) motion to dismiss and compel arbitration, ECF No. 5, and motion to dismiss the amended complaint and compel arbitration, ECF No. 9. For the reasons set forth below, the court dismisses the amended complaint and compels arbitration.

         I. BACKGROUND

         Plaintiff Scott Ellington (“Ellington”) is the founder of Ellington Cross, LLC (“EC”), a construction company that specializes in the design and installation of Earthquake Drains (“EQD”). EQD technology mitigates liquefaction, which occurs when sand loses strength during earthquakes and often results in damage to structures that sit on the sand. In 2010, HBI acquired assets from Nelix Construction, which included the EQD patent, subject to Ellington and EC's exclusive license to use the patent in the southeastern United States. As a result, Ellington alleges, HBI faced little to no EQD competition except in the southeastern region of the country, where Ellington and EC still sold EQD systems. To eliminate this competition, Ellington alleges, HBI offered to enter into an agreement with HBI so that EC would operate as “Ellington Cross, a Division of Hayward Baker.” Am. Comp. ¶ 17. The purported advantage of this arrangement for Ellington was that he would be able to continue to run and expand his business nationwide while HBI covered the administration and overhead expenses. Ellington alleges that HBI engaged in a fraudulent scheme to acquire EC from Ellington by inducing Ellington to sell EC's trade name, assets, and accounts to HBI in exchange for Ellington's employment with HBI and no payment for EC's goodwill or value. Instead, Ellington alleges, HBI fraudulently convinced Ellington that it would pay for EC's goodwill through an Employment and Non-Compete Agreement, in which Ellington would have the opportunity to “earn out” HBI's goodwill payment over a period of five years. Ellington's “earn-out” compensation was based on profits derived from EQD technology.

         This transaction was completed using an Asset Purchase Agreement (“APA”) and an Employment and Non-Compete Agreement (“EA”), which the parties signed on August 17, 2015. Ellington then alleges that HBI engaged in “individual micro-frauds” that were designed to deprive Ellington of the benefits he was to receive under the APA. Id. ¶ 25. Ellington makes various allegations about HBI's accounting practices and management decisions that Ellington alleges undermined the terms of the parties' agreement. Ellington eventually came to believe that “HBI had intended to simply eliminate EC as a competitor without HBI ever actually intending to allow Ellington to succeed in the national market.” Id. ¶ 47. Throughout this time, there were also various disputes about the calculation of Ellington's earn-out compensation. Ellington worked for HBI until August 22, 2017, when he either resigned or was “constructively terminated.”[1] Id. ¶ 54. Ellington alleges that pursuant to the APA and EA, HBI was required to submit an earn-out calculation for Ellington, and it failed to do so.

         Ellington filed his complaint in the Court of Common Pleas in the County of Charleston, South Carolina on August 23, 2018. The complaint asserted causes of action for: (1) fraud; (2) violation of the South Carolina Unfair Trade Practices Act (“SCUTPA”); (3) negligence, negligent misrepresentation, and/or negligent supervision; (4) breach of contract; (5) breach of contract accompanied by fraudulent act and/or fraudulent inducement; (6) unjust enrichment/quantum meruit/restitution; (7) a declaratory judgment; and (8) conversion. HBI removed the case to federal court on December 13, 2018. HBI then filed its first motion to dismiss and compel arbitration on December 20, 2018. ECF No. 5. On January 3, 2019, Ellington responded, ECF No. 6, and also filed an amended complaint, ECF No. 7. The amended complaint changed the fifth cause of action to breach of contract accompanied by fraudulent act and added causes of action for fraud in the inducement and rescission. Other than these changes, there are no substantive changes to the complaint.[2] HBI replied to Ellington's response on January 10, 2019, ECF No. 8, and filed another motion to dismiss and compel arbitration based on the amended complaint on January 16, 2019, ECF No. 9.[3] Ellington responded on January 20, 2019. ECF No. 11. The motions are ripe for review.

         II. STANDARD

         Section 4 of the Federal Arbitration Act (“FAA”) provides in part that a “party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court . . . for an order directing that such arbitration proceed in the manner provided for in such agreement.” 9 U.S.C. § 4. A court shall compel arbitration pursuant to the FAA if a party demonstrates:

(1) the existence of a dispute between the parties, (2) a written agreement that includes an arbitration provision which purports to cover the dispute, (3) the relationship of the transaction, which is evidenced by the agreement, to interstate or foreign commerce, and (4) the failure, neglect or refusal of [a party] to arbitrate the dispute.

Adkins v. Labor Ready, Inc., 303 F.3d 496, 500-01 (4th Cir. 2002). The party opposing arbitration bears the burden of proving the claims at issue should not be sent to arbitration. Green Tree Fin. Corp.-Alabama v. Randolph, 531 U.S. 79, 92 (2000). In determining whether the claims should be sent to arbitration, courts have the authority to evaluate whether an agreement to arbitrate was formed. See Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403-04 (1967) (“[A] federal court may consider only issues relating to the making and performance of the agreement to arbitrate.”). Therefore, “a court may order arbitration only when it ‘is satisfied that the parties agreed to arbitrate.'” Lorenzo v. Prime Commc'ns, L.P., 806 F.3d 777, 781 (4th Cir. 2015) (quoting Granite Rock Co. v. Int'l Bhd. of Teamsters, 561 U.S. 287, 297 (2010)).

         In the Fourth Circuit, a litigant seeking arbitration should move to dismiss for improper venue under Rule 12(b)(3) of the Federal Rules of Civil Procedure. Brown v. Five Star Quality Care, Inc., 2016 WL 8710474, at *2 (D.S.C. Jan. 8, 2016) (citing Aggarao v. MOL Ship Mgmt. Co., 675 F.3d 355, 365 n.9 (4th Cir. 2012)). “When considering a motion under Rule 12(b)(3), the Court may consider evidence outside the pleadings, but the facts are viewed light most favorable to the plaintiff because a plaintiff need only make a prima facie showing of proper venue to survive a motion to dismiss.” Id.


         HBI argues that the allegations in this case all arise out of the EA, and because the EA contains an arbitration clause, the case must be sent to arbitration. Of the four elements required for the court to compel arbitration, see Adkins, 303 F.3d at 500-01, the only one disputed by Ellington is the second element-whether there is an agreement to arbitrate. Ellington argues that the APA and EA form the parties' entire agreement and have conflicting provisions as to whether the parties agreed to arbitration. Ellington contends that these conflicting provisions make the agreement to arbitrate ambiguous, which evinces a lack of mutual assent and means the parties never agreed to arbitrate. The court disagrees and compels arbitration.

         A. Whether Conflicting Provisions in the ...

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