Articles Posted in Arbitration

Plaintiff Cooper worked for a company (“DST”) which offered a profit sharing plain in which Cooper participated. The plan had two pools of funds, one which included contributions of the employee, which were partially matched by DST, and a profit sharing account (the “PSA”), to which only DST contributed. DST’s employees were automatically enrolled in the PSA and were obligate to keep those funds in the account for so long as they remained employees.

DST hired an advisor, Ruane Cunniff & Goldfarb, to manage the PSA funds, with complete investment discretion, but overseen by DST. The PSA was covered by ERISA regulations which required periodic disclosure of summary descriptions of the employees’ rights thereunder. These descriptions made no mention of arbitration in event of any dispute. DST employees also received investment information and updates about the PSA investments.

All of the employees received a handbook which included that all employment related disputes were to be adjudicated in arbitration. That provision excluded, among other things, ERISA relate claims.

“Questions of arbitrability” cover the scope of a dispute and address whether “parties are bound by a given arbitration clause,” and if an agreement to arbitrate “applies to a particular controversy.” The question of whether a matter is required to be arbitrated or whether a party is obligated to arbitrate a dispute, “is generally an issue for judicial determination.” However, “when the parties’ agreement specifically incorporates by reference the rules of” the arbitration panel and states that “all disputes” are to be decided by arbitration, “courts will leave the question of arbitrability to the arbitrators.” In this case, AAA was the denominated panel, and the parties’ agreement provided that any controversy or claim arising out of or relative to the agreement was to be submitted to the AAA. As such, the court determined that the questions or “issues of arbitrability” were for the arbitrators to decide.

Bromberg & Liebowitz v O’Brien

We have discussed cases where the costs of arbitrating a dispute were so prohibitive that the First Department voided the arbitration agreement.

In a recent Federal decision out of Texas, a court modified an arbitration agreement’s cost and venue provisions, relieving a party from some of the costs she would otherwise have been obligated to pay.

As part of her employment, plaintiff agreed to arbitrate any claims arising from her employ. She commenced suit against her employer alleging wage and labor claims. The employer sought to compel arbitration. There was no dispute that the employee signed an arbitration agreement that covered her asserted claims. Instead, the employee argued that the agreement was unenforceable because it’s cost-splitting and venue provisions rendered it “substantively unconscionable.” The employer countered that the provisions were reasonable but if they were not, the court could sever those provisions while still compelling arbitration.

After an extensive selection process to select arbitrators, and 10 hearings over 19 months, defendant sought an injunction to stay the continuation of an AAA arbitration and to disqualify the remaining two arbitrators. At a point prior to that, the panel chair disclosed that his daughter-in-law was an attorney working for the same firm that was representing plaintiff. Not seeing a conflict, the other panel members supported the chair’s efforts to stay on the panel. After defendant objected, the AAA removed the chair from the panel, but not the “wing” arbitrators.

Defendant sought to disqualify those two remaining panel members because they did not agree to disqualify the chair and were thus “compromised by their improper participation” in the chair’s disclosure process and efforts to stay on the panel, which purportedly demonstrated their impartiality against defendant. It appears from the decision that defendant was not just complaining about the chair’s discussion with the other two arbitrators about the conflict and his resignation, but their knowledge that defendant challenged their partiality, all of which rendered them unfit to continue as arbitrators.

After noting that the AAA had the final say about disqualification of arbitrators, and did not bar the type of discussion of which defendant complained, the court held that defendant was not entitled to the injunction finding “neither the appearance [of] nor ‘probable partiality.’” Reiterating the reluctance of courts to interfere in a pending arbitration, especially as AAA rules and procedure were on point to the issues of which defendant complained, the court rejected defendant’s argument that the disqualified arbitrator somehow poisoned the remaining two. The court underscored its opinion of defendant’s application by pointing out that defendant’s concern about the remaining arbitrators’ opinion of defendant was entirely of its own making in that until the lawsuit was filed those two arbitrators were not aware that defendant was challenging their role as the remaining arbitrators. The court closed its opinion by rejecting the remaining claims of bias asserted by defendant and reminding defendant that it could object to the panel’s decision in court.

A client sued its law firm for malpractice. The law firm commenced an arbitration addressed to its unpaid fees, as required by the parties’ retainer agreement. The client sought to stay the arbitration pending the outcome of the lawsuit while the law firm attempted to stay the lawsuit pending the outcome of the arbitration.

Finding that no question existed as to the arbitrable nature of the legal fees, the lawsuit would be stayed while the arbitration progressed because “where ‘arbitrable and nonarbitrable claims are inextricably interwoven, the proper course is to stay judicial proceedings pending completion of the arbitration, particularly where . . . the determination of issues in arbitration may well dispose of nonarbitrable matters.’” The court then addressed the fact that no arbitration agreement was ever signed addressed to the client’s malpractice claims, stating “[t]o the extent plaintiff argues that it cannot be forced to arbitrate its malpractice claim because it did not explicitly agree to do so, both the First and Second Departments have clearly found that a nonarbitrable issue can be decided in an arbitration when it is inextricably intertwined with an arbitrable issue, particularly where, as here, the determination of the arbitrable unpaid fees claim may dispose of the nonarbitrable malpractice claim.”

Protostorm, Inc. v. Foley & Lardner LLP

Plaintiff and a China-based manufacturer and its Georgia-based subsidiary executed an NDA to develop a specialty LED light bulb. The parties ended up going their own way with each developing their own LED bulb.

Plaintiff thereafter alleged that the Chinese company and its subsidiary had breached the NDA and, pursuant to the terms of the parties’ NDA, commenced an arbitration before the AAA in North Carolina. In 2019, the AAA panel awarded plaintiff some $3 million. Plaintiff filed a petition to confirm the award, serving the Petition by email and Federal Express, upon counsel and the subsidiary’s registered agent.

Defendants moved to dismiss the Petition, arguing they were not properly served under the Federal Rules of Procedure, the Federal Arbitration Act (the “FAA”), or the Hague Convention. Plaintiff responded by noting that in the NDA the parties had agreed to comply with the rules of the AAA, and that those rules permitted service as made by plaintiff—by email and upon a representative. Plaintiff also argued that defendants had actual notice of the Petition which, under the FAA, was a critical issue in determining whether service would be upheld.

In a recent case, the United States Court of Appeals for the Fourth Circuit dismissed an appeal based on the parties’ waiver of any right to an appeal.

A doctor that at one point was associated with Beckley Oncology Associates (“BOA”) filed an arbitration against BOA claiming that he was owed money. The arbitration was to proceed in accordance with the parties’ agreement, which included the provision that the arbitrator’s decision would be final and enforceable in court “without any right of judicial review or appeal.”

The doctor was awarded $167,030. BOA filed a lawsuit seeking to vacate that award. The lower court refused, dismissing the complaint and confirming the award, finding that the Federal Arbitration Act precluded a party’s ability to waive judicial review of an arbitration award.

It is no secret that convincing a judge to vacate or even modify an arbitration award is a tall order. Even more difficult is to vacate based on a public policy argument. To establish vacatur on public policy grounds, a petitioner must show either that the arbitrator decided an issue that is deemed a matter of public policy and thus not subject to an arbitrator’s jurisdiction or where the arbitrator’s award violates a well-defined law or regulatory provision; and this prong can be further broken down.

In this case, Petitioner was employed by an executive search firm. As part of his employment agreement, Petitioner agreed not to compete for six years within 100 miles of the company’s office and/or New York City. After arbitrating between Petitioner and his employer, Respondent, an award was issued that enforced the restrictive covenant. Petitioner came to court seeking to vacate the award. Among the arguments petitioner made was that the broad nature of the restriction, on its face, violated public policy as being unreasonable in scope as a matter of law.

After finding that the award did not run afoul of the first prong noted above, the Nassau County court considered whether the broad scope of this restriction comported with the policy considerations of restrictive covenants—to protect an employer but also not deprive an employee of earning a living in his chosen field of work. After noting that the six-year term would alone not necessarily offend public policy, the court turned to the geographic scope of the restriction. Finding that the award barred Petitioner from working in the “United States’s largest city by population [and] all of its metropolitan area, and more,” and “greatly affect[ed]” his ability to earn an income in the field where he has years of experience, did not just protect Respondent from unfair competition but was grounded in preventing Petitioner from competing at all and thus violative of public policy. As such, the award was vacated.

The parties to a failed merger agreed to arbitrate the issue of damages resulting from the inability to complete the merger. As part of the arbitration, one of the parties made a declaration specifically disavowing any knowledge of a certain escrow payment that was to have been made as part of the efforts to complete the merger. As a result, the arbitrator concluded, relying on that declaration, that the escrow payment was never made so that the other party breached the merger agreement. Discovery in a related action, however, disclosed that the declaration was inaccurate and that its maker had lied. The court, applying the Federal Arbitration Act (the “FAA”), vacated the arbitration award.

After first explaining that it applied the FAA and not New York’s rules because the merger involved international commerce, the court went on to note the well-worn standard that its ability to review an arbitration award was extremely limited and that it would be compelled to uphold such an award even where the arbitrator provided “‘even a barely colorable justification for the outcome reached.’” Despite this high bar, the court also recognized that some conduct would support vacatur. Where fraud was the basis to vacate, the fraud must have been material and not discovered before the award was issued. There also must be a showing that there is a connection between the fraud and the award. Even something less than outright fraud, which the court called “undue means,” could support vacatur.

In this case, the declarant’s failure to disclose the truth permitted the court to vacate the award as having been procured by fraud or undue means.

Typically, properly executed arbitration agreements, even as boilerplate in a form agreement, are strictly enforced. That said, there is an interesting 2017 First Department case that allows a party to avoid arbitration due to the cost of doing so.

In this case, as part of his employment, an employee agreed to arbitrate any disputes with his employer before the AAA in Florida. Doing so would require the employee to pay half of the arbitration costs, including the fees charged by the arbitrators, and administrative costs. The claims of the employee were as part of a class, where claims of late payment of wages were made, and recovery would include an award of statutory attorneys’ fees. In response to the employer’s motion to compel arbitration, the employee argued that “he had not agreed to arbitrate Labor Law claims, that any such agreement would be against public policy, and that, based on his limited financial means, as detailed in a supporting affidavit, the fee splitting and venue provisions of the agreement render arbitration financially prohibitive.”

The First Department reaffirmed New York’s strong public policy of favoring arbitrations (where agreed to) and that courts interfere as little as possible in that process and resulting award. “As a general matter, therefore, a clear and unmistakable agreement to arbitrate statutory wage claims is not unenforceable as against public policy.” That said, the court recognized the competing public policy argument that the employee could not afford to travel to Florida and participate in the AAA proceeding and that forcing him to do so would “preclude him from pursuing his claims.” The court referred the matter back to the trial court for an accounting of the employee’s income “and assets,” and the cost to participate in the arbitration. The court did not acquit the employee from the arbitration, only directed the trial court to determine if arbitrating in New York at the employer’s expense would obviate the employee’s concerns. The court also allowed the trial court to consider how the attorneys’ fees provision would impact the employee’s ability to participate in the arbitration. The court did not directly address the issue of whether the employee’s inability to pay the AAA expenses would free him from arbitration completely.

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