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Patterson v. Nine Energy Services, LLC

United States District Court, D. New Mexico

August 30, 2018

RYAN PATTERSON, Plaintiff,
v.
NINE ENERGY SERVICE, LLC, Defendant.

          Jack L. SiegelSiegel Law Group, P.L.L.C. J. Derek Braziel Travis Andrew Gasper Lee & Braziel, L.L.P. Dallas, Texas Attorneys for the Plaintiff

          Christopher S. Mann Jones Walker, L.L.P. Jennifer L. Anderson Jones Walker, L.L.P. Baton Rouge, Louisiana Attorneys for the Defendant

          MEMORANDUM OPINION AND ORDER

         THIS MATTER comes before the Court on: (i) the Defendant's Motion to Dismiss the First Amended Class Action Complaint (R. Doc. 3) and Compel Arbitration, filed December 6, 2017 (Doc. 5)(“Motion”); and (ii) the Surreply in Opposition to Defendant's Motion to Dismiss the Class Action Complaint and Serve [sic], filed January 10, 2018 (Doc. 16)(“Surreply Motion”). The Court held a hearing on June 27, 2018. The primary issues are: (i) whether the Court has diversity jurisdiction to adjudicate this case when the citizenship of one of the parties is unclear; (ii) whether the arbitration agreement into which Plaintiff Ryan Patterson and Defendant Nine Energy Service, LLC (“Nine Energy”) entered contains adequate consideration; (iii) whether the arbitration agreement is substantively unconscionable, because it contains a unilateral carve-out allowing Nine Energy to request injunctive relief in court to protect its confidential information; and (iv) whether the arbitration agreement is substantively unconscionable, because it provides only sixty days after a dispute arises in which to file a demand for arbitration. The Court concludes that the parties have not established diversity jurisdiction, so the Court will order the parties to show cause why the Court should not dismiss this case for lack of subject-matter jurisdiction. On the merits, if the Court has subject-matter jurisdiction, the Court is inclined to conclude that the Arbitration Agreement contains adequate consideration, and, although the injunctive relief provision is substantively unconscionable, it is also severable. Further, the Court is not inclined to hold the Arbitration Agreement's sixty-day limitations period unconscionable. Finally, if the Court has subject-matter jurisdiction, the Court is inclined to stay proceedings in this case, rather than dismissing it. Accordingly, the Court is inclined to grant the Motion in part.

         FACTUAL BACKGROUND

         Patterson worked for Nine Energy, an oilfield services company, from March to October of 2017. See First Amended Class Action Complaint ¶ 5, at 2, filed November 13, 2017 (Doc. 3)(“Amended Complaint”). His “primary job duty consisted of operating pressure control equipment and tools.” Amended Complaint ¶ 15, at 3. Nine Energy first offered Patterson employment via letter on February 28, 2017. See Letter from Sally Haynes, Human Resources Manager, to Ryan Patterson at 1-2, (dated February 28, 2017), filed January 3, 2018 (Doc. 14-2)(“Offer Letter”). Patterson's Offer Letter states that his employment is contingent upon an enumerated list of items, including drug testing, physical capacity testing, and other things. See Offer Letter at 1. The Offer Letter does not mention arbitration. See Offer Letter at 1-2. Patterson accepted the employment offer by signing the Offer Letter on March 1, 2017. See Offer Letter at 2. Patterson did not begin work at Nine Energy until March 20, 2017. See Supplemental Declaration of Sharon Warren ¶ 7, at 2 (dated January 3, 2018), filed January 3, 2018 (Doc. 14-1).

         On March 1, 2017 -- the same day that Patterson signed the Offer Letter -- he also signed the Confidentiality and Dispute Resolution Agreement at 6, filed December 6, 2017 (Doc. 5-2)(“Arbitration Agreement”). The Arbitration Agreement states that “the Company and the Employee agree to submit exclusively to final and binding arbitration any and all Disputes as defined herein in accordance with the following understanding and terms.” Arbitration Agreement at 3. The Arbitration Agreement defines the word “dispute” as

all legal and equitable claims, demands, disputes, controversies, issues, and disagreements, of whatever nature or kind, whether in contract, tort, under statute or regulation, or any other law or source of legal obligation, including but not limited to those relating to, concerning, or arising out of this Agreement; the interpretation or subject matter of this Agreement or program . . . wages or other compensation received by or owed to any Employee, including minimum wage and overtime pay.

         Arbitration Agreement at 2. The Arbitration Agreement continues:

Each Dispute shall be arbitrated on an individual basis. The parties forego and waive any right to join or consolidate their Disputes or claims with those of any other employee . . . or to assert any Disputes or claims in arbitration as a representative or as a member of a class. . . . Neither the Company nor any employee or applicant for employment may pursue any Dispute or claim on a class action, collective action, or consolidated basis or in a representative capacity on behalf of other individuals, or participate as a class or collective action member in such a proceeding. . . . The Parties waive any right to a jury trial and to pursue or participate in class or collective actions with respect to Disputes that are subject of this Agreement and for which a jury trial, class action, and collective action would otherwise be available.

         Arbitration Agreement at 3. The Arbitration Agreement contains several other important provisions. See Arbitration Agreement at 3-4. One states that “arbitration shall be commenced by either Party filing a demand for arbitration with the AAA [1] within 60 days after such Dispute has arisen.” Arbitration Agreement at 3. Another notes:

Notwithstanding the provisions of this Agreement, the Company may bring an action in any court of competent jurisdiction for injunctive relief to enforce the Employee's obligations with respect to the confidentiality and protection of trade secrets and other non-public information belonging to the Company, or with respect to any non-competition, non-solicitation, or any other restrictive covenant provisions in any separate agreement between the Company and the Employee.

         Arbitration Agreement at 4. Still another provision states: “The Parties acknowledge and agree that this Agreement and the Parties' employment relationship affect and involve interstate commerce, and that this Agreement is governed by the Federal Arbitration Act.”[2] Arbitration Agreement at 5. Finally, the Arbitration Agreement contains an integration clause, stating:

No agreements or representations, oral or otherwise express or implied, with respect to the subject matter hereof have been made by either Party that are not set forth expressly in this Agreement. . . . This Agreement sets forth the entire agreement of the Parties hereto with respect to the subject matter herein, in particular the Parties' agreement regarding the protection of Confidential Information and the procedural mechanism for the final resolution of Disputes and supersedes all prior understandings, agreements, clauses, provisions, representations, or promises, whether oral or written, of the Parties to the extent they relate to or concern the subject matter herein.

         Arbitration Agreement at 5. Patterson now alleges in this class action that Nine Energy failed to pay him and other employees overtime wages in violation of the New Mexico Minimum Wage Act, N.M. Stat. Ann. § 50-4-22(D). See Amended Complaint ¶ 3, at 1.

         PROCEDURAL BACKGROUND

         Patterson filed his original Complaint on November 8, 2017. See Original Class Action Complaint, filed November 8, 2017 (Doc. 1)(“Original Complaint”). Patterson subsequently filed the Amended Complaint on November 13, 2017. See Amended Complaint at 1. Nine Energy filed the Motion on December 6, 2017. See Motion at 1.

         1. The Motion.

         Nine Energy moves the Court to dismiss this case for lack of subject-matter jurisdiction and to compel arbitration. See Motion at 1. Nine Energy first contends that Patterson's claims fall within the Arbitration Agreement's scope, because the Arbitration Agreement's provisions “cover all disputes, claims, or disagreements relating to Plaintiff's employment.” Motion at 5. Nine Energy then argues that the Arbitration Agreement contains adequate consideration, asserting that “the bargained for exchange in this case was Plaintiff's offer of employment with Nine Energy in exchange for signing the Confidentiality and Dispute Resolution Agreement as well as the Parties' mutual agreement to submit all employment disputes to arbitration.” Motion at 6. Turning to the class action allegations, Nine Energy avers that the Arbitration Agreement expressly states that the parties waive any right to participate in a class or collective action regarding any disputes subject to the agreement. See Motion at 7-8. Nine Energy concludes that the Court should grant the Motion and compel Patterson to arbitrate his claims on an individual basis. See Motion at 8.

         2. The Response.

         Patterson responds. See Response to Defendant's Motion to Dismiss the First Amended Class Action Complaint and Compel Arbitration, filed January 2, 2018 (Doc. 13-1)(“Response”). Patterson first asserts that the Arbitration Agreement is substantively unconscionable. See Response at 4. According to Patterson, the Arbitration Agreement section allowing Nine Energy to bring an action for injunctive relief in court to enforce an employee's confidentiality obligations, such as the protection of trade secrets, represents a unilateral carve-out favoring Nine Energy and is therefore unconscionable. See Response at 4-5. Second, Patterson avers that the Arbitration Agreement contains no consideration and is thus illusory. See Response at 5. According to Patterson “continued at-will employment cannot serve as consideration for an agreement to arbitrate, ” which Patterson asserts is the Arbitration Agreement's purported consideration. Response at 6-7.[3]

         3. The Reply.

         Nine Energy replies. See Defendant's Reply in Support of Motion to Dismiss the First Amended Class Action Complaint and Compel Arbitration, filed January 3, 2018 (Doc. 14)(“Reply”). Nine Energy first asserts that the Arbitration Agreement's consideration is Patterson's initial offer of employment and not continued at-will employment, because Patterson signed the Arbitration Agreement on the same day he accepted his employment offer and did not begin working for Nine Energy until twenty days later. See Reply at 5. Additionally, Nine Energy contends that “there was separate, valid consideration for the Agreement. In exchange for Plaintiff agreeing to arbitrate his employment-related disputes, Nine Energy promised not only to hire Plaintiff, but also to provide him access to its confidential information and trade secrets.” Reply at 11.

         Second, Nine Energy argues that, while part of the Arbitration Agreement may exempt Nine Energy from arbitration, other parts of the agreement contain “exclusions for numerous types of employment-related claims that Plaintiff alone would be able to pursue.” Reply at 9. Nine Energy continues that “the exclusion of which Plaintiff complains relates to one limited form of relief -- injunctive relief -- that only the employer might be able to pursue to protect its confidential information and trade secrets.” Reply at 9. According to Nine Energy, “[i]t is impossible that the Plaintiff would be able to bring such a claim, just as it is impossible that Nine Energy would be able to bring any of the claims excluded for Plaintiff (i.e. EEOC charges, United States Magistrate Judge for the United States District Court for the District of New Mexico, held that the plaintiff “was hired prior to agreeing to arbitration. Upon starting her employment she was asked to surrender a valuable right -- the right to a jury trial -- with no detriment to [the defendant] and no benefit to her. Thus, the purported agreement is unenforceable.” Zamprelli v. Am. Golf Corp., No. CIV 00-0181 BB/RLP, at *4 (Doc. 46) (D.N.M. 2000)(Puglisi, M.J.). In the second case, the Honorable Bruce Black, United States District Judge, affirmed Magistrate Judge Puglisi's holding. See Zamprelli v. Am. Golf Corp., No. CIV 00-0181, 2001 WL 37119362, at *4 (D.N.M. 2001)(Black, J.). NLRB charges, unemployment claims).” Reply at 9.

         Finally, Nine Energy contends that, “[e]ven if the Court were to find this provision unconscionable, the Court can and should modify or sever the provision rather than invalidating the entire Agreement.” Reply at 11. According to Nine Energy, the provision allowing it to bring an action for injunctive relief to protect confidential information “is not relevant or intertwined with the agreement to arbitrate compensation disputes, and severability is in line with the strong federal policy underlying the FAA favoring enforcement of arbitration agreements.” Reply at 11-12.

         4. The Surreply.

         Patterson filed a surreply. See Surreply in Opposition to Defendant's Motion to Dismiss the Class Action Complaint and Compel Arbitration, filed January 10, 2018 (Doc. 16-1)(“Surreply”).[4] Patterson first asserts that Nine Energy's employment offer was not contingent on signing the Arbitration Agreement, so the employment offer is not consideration for the agreement. See Surreply at 4. According to Patterson, Nine Energy's employment offer cannot be consideration for Patterson agreeing to arbitration, because the Offer Letter provides a list of contingencies, none of which include signing the Arbitration Agreement. See Surreply at 6. Further, according to Patterson, the Arbitration Agreement “contains an explicit merger clause that prevents the Offer Letter -- or any other oral/written agreement -- from being incorporated into the Arbitration Agreement or for serving as the consideration for the Agreement.” Surreply at 6.

         Second, Patterson takes issue with Nine Energy's assertion that it promised to provide confidential information and trade secrets to Patterson as consideration for him signing the Arbitration Agreement. See Surreply at 6-7. According to Patterson, the Arbitration Agreement “does not require Defendant to disclose any specific confidential information or trade secrets.” Surreply at 7. Patterson adds that “no New Mexico court has reached the conclusion that an agreement to provide confidential information is adequate consideration for an agreement to arbitrate.” Surreply at 7.

         Third, Patterson argues for the first time that the Arbitration Agreement is unconscionable, because “the terms of the agreement prevent Plaintiff from vindicating his statutory rights under the FLSA.”[5] Surreply at 7. Specifically, Patterson contends that the Arbitration Agreement's provision requiring arbitration to commence within 60 days after a dispute arises is unconscionable, because “the FLSA's limitations period may not be shortened by contract.” Surreply at 8. Finally, Patterson avers that the Court should not sever any allegedly unconscionable provisions of the Arbitration Agreement, because the agreement contains no severance clause. See Surreply at 9-10. Patterson instead concludes that the Court should refuse to enforce the entire Arbitration Agreement and deny the Motion. See Surreply at 10.

         5. The Hearing.

         The Court held a hearing. See Draft Transcript of Motion Hearing at 1:10-11 (taken June 27, 2018)(Court)(“Tr.”).[6] Nine Energy began by asserting that “Mr. Patterson in the briefing concedes that this Court has recognized . . . that an offer of at will employment is sufficient consideration for an arbitration agreement. And that's exactly what we have here.” Tr. at 4:19-24 (Mann). Patterson responded that the Arbitration Agreement's integration clause precludes any outside oral or written agreement -- including Patterson's employment offer -- from being incorporated into the Arbitration Agreement. See Tr. at 10:1-9 (Siegel). Patterson added that the Offer Letter lists several contingencies that Patterson had to meet to accept his employment offer, none of which includes signing the Arbitration Agreement. See Tr. at 13:2-9 (Siegel).

         The parties then discussed unconscionability. See Tr. at 17:1-5 (Mann). Nine Energy asserted that Patterson “latches onto a portion of the agreement . . . that reserves to Nine the right to seek injunctive relief to enforce certain aspects of the agreement pertaining to confidential information. . . . What Mr. Patterson chooses to ignore [is] that the same paragraph on which he bases this argument contains multiple carve-outs solely for the . . . plaintiff here.” Tr. at 17:1-14 (Mann). Nine Energy thus contended that the carve-outs in the Arbitration Agreement are bilateral and not unilateral. See Tr. at 18:3-6 (Mann).

         Patterson then returned to the podium and asserted that the Arbitration Agreement is substantively unconscionable for the separate reason that it “has effectively shortened the statute of limitations period.” Tr. at 22:15-16 (Siegel). Specifically, Patterson argued that the Arbitration Agreement shortens the limitations period from three years to sixty days. See Tr. at 22:21-24 (Siegel). Nine Energy responded that “the parties cannot limit statute[s] of limitations by contract. So even if that language is contained in the agreement [, were] it be attempted to be enforced it could not.” Tr. at 25:9-13 (Mann).

         The Court then asked if Nine Energy contended that, if the Court were to find any provision unconscionable, it should sever the provision rather than not enforcing the entire agreement. See Tr. at 28:25-29:7 (Court, Mann). Nine Energy responded that, if the Court concluded that a provision is unconscionable, then Nine Energy would prefer the rest of the agreement enforced. See Tr. at 29:8-16 (Mann). At the hearing's conclusion, the Court stated that it was inclined to grant the Motion. See Tr. at 35:2 (Court).

         LAW REGARDING ARBITRATION AGREEMENTS

         An arbitration agreement is a contract or a provision in a contract whereby parties agree to “settle by arbitration a controversy . . . arising out of such contract or transaction.” 9 U.S.C. § 2. Both federal and New Mexico law reflect a public policy in favor of arbitration agreements. See Metz v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 39 F.3d 1482, 1488-89 (10th Cir. 1994)(“There is a strong federal policy encouraging the expeditious and inexpensive resolution of disputes through arbitration.”); United Tech. & Res., Inc. v. Dar Al Islam, 1993-NMSC-005, ¶ 11, 846 P.2d 307, 309 (“The legislature and the courts of New Mexico ‘have expressed a strong policy preference for resolution of disputes by arbitration.'”)(quoting Dairyland Ins. Co. v. Rose, 1979-NMSC-021, ¶ 14, 591 P.2d 281, 284). To be enforceable, an arbitration agreement must be validly formed pursuant to state contract law principles -- e.g., the arbitration agreement must not be illusory or unconscionable. See Salazar v. Citadel Communications Corp., 2004-NMSC-013, ¶ 8, 90 P.3d 466, 469 (“To determine whether the agreement to arbitrate is valid, courts look to general state contract law . . . .”).

         1. Federal Law.

         “The FAA reflects the fundamental principle that arbitration is a matter of contract.” Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63, 67 (2010). “[T]he basic purpose of the Federal Arbitration Act is to overcome courts' refusals to enforce agreements to arbitrate.” Allied-Bruce Terminix Cos., Inc. v. Dobson, 513 U.S. 265, 270 (1995). “The FAA thereby places arbitration agreements on an equal footing with other contracts, and requires courts to enforce them according to their terms.” Rent-A-Center, West, Inc. v. Jackson, 561 U.S. at 67-68 (internal citations omitted).

         Under § 4 of the FAA, a party “aggrieved” by another party's failure “to arbitrate under a written agreement for arbitration” may petition a federal court “for an order directing that such arbitration proceed in the manner provided for in such agreement.” 9 U.S.C. § 4. If one party's refusal to arbitrate under a written agreement aggrieves another party, the district court, upon petition, “shall hear the parties, and upon being satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue, the court shall make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement.” 9 U.S.C. § 4. Section 2, the “primary substantive provision of the Act, ” Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983), provides: “A written provision in . . . a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. “If a party challenges the validity under § 2 of the precise agreement to arbitrate at issue, the federal court must consider the challenge before ordering compliance with that agreement under § 4.” Rent-A-Center, West, Inc. v. Jackson, 561 U.S. at 64.

         Upon a finding that a matter is referable to arbitration, the FAA also indicates that the district court “shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement.” 9 U.S.C. § 3. Notwithstanding 9 U.S.C. § 3's terms, however, several Courts of Appeals have concluded that “dismissal is a proper remedy when all of the issues presented in a lawsuit are arbitrable.” Choice Hotels Int'l, Inc. v. BSR Tropicana Resort, Inc., 252 F.3d 707, 709-10 (4th Cir. 2001). See Green v. Ameritech Corp., 200 F.3d 967, 973 (6th Cir. 2000)(“The weight of authority clearly supports dismissal of the case when all of the issues raised in the district court must be submitted to arbitration.”); Bercovitch v. Baldwin Sch., Inc., 133 F.3d 141, 156 n.21 (1st Cir. 1998); Alford v. Dean Witter Reynolds, Inc., 975 F.2d 1161, 1164 (5th Cir. 1992); Sparling v. Hoffman Constr. Co., 864 F.2d 635, 638 (9th Cir. 1988).

         The United States Court of Appeals for the Tenth Circuit has cautioned that, when one of the parties petitions the court to stay an action pending compulsory arbitration, 9 U.S.C. § 3's mandatory language is binding, and it is error for the court to dismiss the action. See Adair Bus Sales, Inc. v. Blue Bird Corp., 25 F.3d 953, 955 (10th Cir. 1994). When, however, the party seeking to compel arbitration requests the court for dismissal, and there is no evidence in the record of any party requesting a stay, it is not error for the district court to dismiss the case. See Armijo v. Prudential Ins. Co. of Am., 72 F.3d 793, 797 (10th Cir. 1995); Cornoyer v. AT&T Mobility Servs., LLC, No. CIV 15-0474, 2016 WL 6404853, at *7-8 (D.N.M. Oct. 5, 2016)(Browning, J.); Thompson v. THI of New Mexico at Casa Arena Blanca, LLC, No. CIV 05-1331, 2006 WL 4061187, at *16 (D.N.M. Sept. 12, ...


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