Digital Landscape Inc. v. Media Kings LLC

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          City and County of Denver District Court No. 14CV33937, Honorable A. Bruce Jones, Judge

         Sean Connelly, Connelly Law LLC, Denver, Colorado, for Plaintiff-Appellant

         Sarah De Diego, De Diego Law, Santa Monica, California, for Defendant-Appellee

         OPINION

         BERNARD, JUDGE

         [¶ 1] Judge Learned Hand once wrote that "words are chameleons, which reflect the color of their environment." Comm’r v. Nat’l Carbide Corp., 167 F.2d 304, 306 (2d Cir. 1948), aff’d, 336 U.S. 422, 69 S.Ct. 726, 93 L.Ed. 779 (1949). In this appeal, the words are the phrase "arising under." Their environment is an arbitration clause, which reads: "Any disputes arising under this [a]greement will be resolved by binding arbitration...." (Emphasis added.) We are tasked with figuring out whether this phrase takes on a narrow or a broad hue from its context in the arbitration clause.

         [¶ 2] The appellant in this case— plaintiff, Digital Landscape Inc., which we shall call Digital— asserts that "arising under" has a narrow scope. For Digital, this means that the arbitrator lacked jurisdiction to decide a claim that Digital submits did not "arise under" the contract in this case. The appellee— defendant, Media Kings LLC, which we shall call Media— submits that the scope of "arising under" is broad, so the arbitrator had jurisdiction to consider the claim. In this appeal, Digital asks us to review the district court’s judgment confirming an arbitrator’s order and denying Digital’s request to vacate it.

         [¶ 3] Modern arbitration clauses are products of a strong policy that favors arbitration. For example, divisions of this court have concluded that "arising under," as it is used in an arbitration clause, is broad because (1) Colorado courts favor arbitration to resolve disputes; and (2) we should resolve any doubts that we have about a clause’s scope in favor of arbitration.

         [¶ 4] But Digital points us to a debate among federal circuits concerning the scope of "arising under" in an effort to convince us to part company with these Colorado decisions. One side of the debate thinks that the scope of "arising under" is narrow, while the other side thinks that the phrase’s scope is broad. After considering both sides of the debate, we are persuaded by the reasoning of the circuits that conclude that "arising under" is broad: these circuits are convinced that "arising under" is colored by a fundamental attribute of its environment— the arbitration clause— which reflects the strong federal policy that encourages arbitration.

         [¶ 5] We therefore conclude that all the claims that the arbitrator considered in this case were "dispute[s] arising under" the contract between Digital and Media, which were to "be resolved by binding arbitration." The arbitrator therefore had jurisdiction to resolve those claims.

         [¶ 6] We also disagree, for reasons that we explain below, with two other contentions that Digital raises. As a result, we affirm the district court’s judgment.

          I. Background

         [¶ 7] Media entered into a contract to provide marketing services to Transcendent Marketing, LLC, which we shall call Transcendent. Transcendent was not a named party in this case.

         [¶ 8] Media then contracted with Digital to provide advertising services to Transcendent. Under the contract, Media agreed to pay Digital a portion of its earnings from Transcendent in exchange for Digital’s work on the project.

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         [¶ 9] But Media did not pay Digital. And someone from Digital told someone from Transcendent that Media had not paid. Apparently dissatisfied with Media’s work and with its lack of payment to Digital, Transcendent proposed that Digital take over the project. Digital’s principal officer agreed, but he had one of his other companies assume the work. This proposal effectively cut Media out of its agreement with Transcendent.

         [¶ 10] Digital sued Media for breach of contract, seeking unpaid earnings that Digital contended Media owed it for work it had done for Transcendent. Media filed counterclaims. The one that is the focus of the appeal alleged that Digital had breached the implied covenant of good faith and fair dealing by disclosing confidential information to Transcendent, Media’s client; by soliciting Transcendent’s business; by disparaging Media to Transcendent; and by stealing Transcendent as a client.

         [¶ 11] Because the contract between Media and Digital included an arbitration clause, the district court ordered them to arbitrate their dispute. The court stayed the case until the arbitration proceeding was finished.

         [¶ 12] During the arbitration proceeding, Digital argued that Media had breached the contract because Media had not paid Digital the amount that the contract required. The arbitrator agreed, and she awarded Digital $68,197.41.

         [¶ 13] When discussing the counterclaim alleging that Digital had breached the implied covenant of good faith and fair dealing, the arbitrator also referred to it as addressing a breach of Digital’s duty of loyalty to Media. She then decided that, although the agreement described Digital as an independent contractor, Digital still owed a duty of loyalty to Media, which Digital had breached. So the arbitrator awarded Media $24,400 in damages.

         [¶ 14] In her final order, the arbitrator concluded that neither Media nor Digital had prevailed. She therefore declined to award either of them attorney fees.

         [¶ 15] Digital filed a petition in the district court that asked the court to confirm the part of the arbitration order that awarded damages to Digital, vacate the part of the order that awarded damages to Media because the arbitrator had exceeded the scope of the arbitration clause, and award Digital its attorney fees. The district court disagreed with Digital’s requests, so it confirmed the order in its entirety.

          II. Digital’s Contentions

         [¶ 16] Digital raises three contentions.

         [¶ 17] First, Digital contends that the arbitrator did not have jurisdiction to consider whether Digital had breached a duty of loyalty to Media because the duty of loyalty claim did not "arise under" the arbitration clause.

         [¶ 18] Second, Media filed a counterclaim alleging that Digital had breached the implied covenant of good faith and fair dealing. Digital submits that the arbitrator improperly converted this counterclaim to a different claim— breach of loyalty— that Media had not raised. Digital continues that it did not have notice of the different elements of this claim. Digital wraps up this contention by asserting that the arbitrator’s ruling on this different claim was unfair and that the arbitrator’s award to Media was therefore void.

         [¶ 19] Third, even if we disagree with the first two contentions, Digital asserts that it was nonetheless entitled to attorney fees because (1) its contract with Media stated that the prevailing party in an arbitration proceeding concerning the terms of the contract would be entitled to attorney fees; (2) it prevailed on its breach of contract claim; (3) Media prevailed on a claim— the breach of loyalty claim— that was not part of the contract; so (4) Media did not prevail on a claim that was related to the contract.

          III. Standard of Review and General Arbitration Principles

         [¶ 20] We review de novo

• whether a dispute falls within the scope of an arbitration clause, Taubman Cherry Creek Shopping Ctr., LLC v. Neiman-Marcus Grp., Inc., 251 P.3d 1091, 1093 (Colo.App. 2010);

• "a district court’s legal conclusions on a motion to confirm or vacate an arbitration award,"

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Rocha v. Fin. Indem. Corp., 155 P.3d 602, 604 (Colo.App. 2006); and

• whether "the arbitrator’s refusal to award attorney fees to plaintiff as the prevailing party was a determination beyond the scope of the parties’ arbitration agreement," Magenis v. Bruner, 187 P.3d 1222, 1225 (Colo.App. 2008).

         [¶ 21] "To facilitate confidence in the finality of arbitration awards and discourage piecemeal litigation, [Colorado’s arbitration statutes] strictly limit[ ] the role of the courts in reviewing awards, and a party challenging an award bears a heavy burden." BFN-Greeley, LLC v. Adair Grp., Inc., 141 P.3d 937, 940 (Colo.App. 2006). "An arbitrator is the final judge of both fact and law," id., and courts may not review the merits of an arbitration award if there are not statutory grounds to vacate, modify, or correct them, Levy v. Am. Family Mut. Ins. Co., 293 P.3d 40, 49 (Colo.App. 2011).

         [¶ 22] Such statutory grounds are found in section 13-22-223(1)(d), C.R.S. 2018, which provides, as is pertinent to this case, that a court "shall vacate" an award "if the court finds that ... [a]n arbitrator exceeded [her] powers." An arbitrator does not "exceed [her] powers by rendering a decision that is contrary to the rules of law that would have been applied by a court, so long as there is no violation of an express term of the agreement to arbitrate." Byerly v. Kirkpatrick Pettis Smith Polian, Inc., 996 P.2d 771, 774 (Colo.App. 2000). In other words, "[i]t is not sufficient ... to argue merely that the arbitrator committed an error of law on the merits." Giraldi v. Morrell, 892 P.2d 422, 424 (Colo.App. 1994). "Rather, [a] plaintiff must establish that the arbitrator exceeded the powers granted in the agreement by refusing to apply or ignoring the legal standard agreed upon by the parties for resolution of the dispute." Id. And an arbitrator has a great deal of flexibility in fashioning appropriate remedies. BFN-Greeley, LLC, 141 P.3d at 941.

          IV. Scope of "Arising Under"

          A. Introduction

         [¶ 23] Arbitration is a "favored method of dispute resolution" in Colorado. Lane v. Urgitus, 145 P.3d 672, 678 (Colo. 2006). "Our constitution, our statutes, and our case law all support agreements to arbitrate disputes." Id. But, like the federal courts, we do not force parties to arbitrate disputes when they have not clearly agreed to submit them to arbitration. Id. at 679.

         [¶ 24] An arbitration clause is a contract. Allen v. Pacheco, 71 P.3d 375, 378 (Colo. 2003). We must therefore "interpret the [arbitration clause] in a manner that best effectuates the intent of the parties." Id. We determine their intent by reading the language of the clause, looking to "the plain and ordinary meaning of its terms." Id. We will enforce the clause as it is written unless it contains an ambiguity. Id.

         [¶ 25] "If ambiguities are found ... we must afford the parties a presumption in favor of arbitration and resolve doubts about the scope of the arbitration clause in favor of arbitration." Id. "More specifically, we must compel arbitration unless we can say ‘with positive assurance’ that the arbitration clause is not susceptible of any interpretation that encompasses the subject matter of the dispute." Id. (quoting City & Cty. of Denver v. Dist. Court,939 P.2d 1353, 1364 (Colo. 1997)). A " ‘broad or unrestricted’ arbitration clause makes the ...