Practice Makes Perfect When It Comes To Virtual Hearings

AAA arbitrator decides whether claims were subject to arbitration before the AAA or the Commissioner of Major League Baseball . . .

Incorporation of AAA Rules constitutes “clear and unmistakable” agreement that AAA arbitrator shall determine its own jurisdiction. 

WN Partner, LLC v. Baltimore Orioles Ltd. P’ship, 179 A.D.3d 14, 112 N.Y.S.3d 68 (1st Dep’t 2019).

In WN Partner, LLC v. Baltimore Orioles, the parties indisputably agreed to arbitrate.  The court was called upon to tackle the question of who was to be the arbitrator of the parties’ dispute.

The dispute arose out of a broadcast partnership agreement between the Washington Nationals and the Baltimore Orioles, two Major League Baseball franchises.  The parties had agreed to arbitrate all disputes under the partnership agreement before the Commissioner of Major League Baseball, except in the event the League had a financial interest in the dispute. In that case, the arbitration would be resolved before the American Arbitration Association (AAA) under the AAA Rules.

After the dispute arose and the Orioles initiated an arbitration before the AAA on the ground that the League had a financial interest in the dispute, the Nationals asked the court to enjoin the AAA arbitration and order the parties to proceed before the Commissioner.

The court refused.  Instead, noting that AAA Rule 7(a) provides that the “arbitrator shall have the power to rule on his or her own jurisdiction,” it held that, by adopting the AAA Rules and agreeing to arbitrate “all disputes” under the agreement, the parties had “clearly and unmistakably” agreed that the AAA arbitrator would decide who had jurisdiction to hear the dispute.  Accordingly, the arbitrator, not the Commissioner or the court, would decide the threshold issue of whether, under the facts, Major League Baseball had a financial interest that required arbitration before the AAA.

Read the court’s full decision here.

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Non-signatory shareholder of corporate party to arbitration agreement could not compel arbitration . . .

Claims against the shareholder did not arise out of his role in the corporation.

City of Almaty, Kazakhstan v. Sater, 2019 WL 6681560 (S.D.N.Y. Dec. 6, 2019).

It is generally accepted that a non-signatory may be bound to an arbitration agreement “if so dictated by the ordinary principles of contract and agency.” In City of Almaty, the court addressed when a shareholder may invoke the arbitration agreement in his company’s contract with a third party in a dispute between the shareholder and the third party.

The plaintiffs—a Kazak municipality and a Kazak bank— sued various defendants including Felix Sater, before a federal court in New York, asserting claims for fraud and conversion on the basis that the defendants had assisted former city and bank officials to launder and store money stolen from the plaintiffs. Prior to commencing the action, the plaintiffs had hired a company called Litco to investigate and help them locate and recover their stolen assets, including the monies allegedly laundered by Sater.

In a Kafkaesque twist, while their lawsuit was pending in New York, the plaintiffs discovered that Sater actually owned Litco and was leading its efforts on behalf of the plaintiffs to locate the very assets they accused Sater of concealing. Upon making this discovery, the plaintiffs terminated their contract with Litco. That contract contained an arbitration provision requiring the parties to arbitrate any dispute under the agreement under the American Arbitration Association (AAA) rules. It also included a release of all claims against Litco and unidentified “officers, directors, shareholders, interest holders, members, partners, . . . agents, employees, managers and representatives.” Following termination, Litco commenced arbitration against the plaintiffs seeking to collect outstanding payments for services rendered. Litco also asked the arbitrators, inter alia, to find that the release covered the plaintiffs’ claims against Sater, as Litco’s shareholder.

Although he did not seek to compel arbitration, Sater claimed that the effect of the release in the Litco contract on the plaintiffs’ claim was a question for the arbitrators in the Litco arbitration. Sater therefore asked the federal court in New York to stay the litigation pending the arbitrators’ decision on whether the release in the Litco contract barred the plaintiffs’ claims against Sater.

Under U.S. federal law, there is a presumption that courts, not arbitrators, decide whether the parties have agreed to arbitrate a dispute. Nevertheless, the U.S. Supreme Court has long recognized that the question may be for the arbitrator in the first instance where the parties have “clearly and unmistakably” delegated to the arbitrator the authority to determine such issues (often referred to as “arbitrability”). Courts have generally held that an arbitration agreement incorporating institutional rules granting arbitrators jurisdiction to determine their own jurisdiction constitutes such a clear and unmistakable delegation of the authority to decide arbitrability to the arbitrators.

Here, as a threshold matter, the court held that it, rather than the arbitrator, would determine whether the effect of the release in the Litco agreement on the plaintiffs’ claims was arbitrable. Although Litco and the plaintiffs’ incorporation of the AAA Rules into their arbitration clause reflected their agreement to delegate arbitrability questions to the arbitrators, the court held that such incorporation did not constitute a “clear and unmistakable” agreement between Sater and the plaintiffs to arbitrate the arbitrability of Sater’s defense based on the release. Not only was Sater not a signatory to the agreement, but Sater acknowledged that he had hidden his affiliation with Litco from the plaintiffs.

On the merits of the arbitrability question, the court concluded that Sater, as a shareholder and officer of Litco, was not entitled to invoke the arbitration agreement in the Litco contract under any recognized non-signatory theory. First, under New York law, a shareholder or officer may be entitled to enforce an arbitration clause in his corporation’s contract if the claims against the officer concern his conduct on behalf of the company in connection with the agreement. Sater, however, could not avail himself of this theory here because the plaintiffs’ claims centered on actions he had allegedly taken in his personal capacity, before the Litco contract had come into force. The court next found that Sater could not enforce the arbitration provision as a third-party beneficiary because the arbitration agreement did not explicitly provide for arbitration with non-parties to the agreement, such as Sater. Finally, the court held that Sater could not force the plaintiffs to arbitrate the enforceability of the release on a theory of estoppel. The plaintiffs’ lawsuit relating to Sater’s conduct before the agreement with Litco was not sufficiently intertwined with the Litco arbitration, nor was the plaintiffs’ relationship with Sater sufficiently close to suggest that the plaintiffs implicitly consented to extend their agreement to arbitrate to Sater. The court accordingly concluded that Sater could not invoke the arbitration clause in the Litco contract, and denied the motion to stay.

Read the court’s full decision here.

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Award in favor of Trump Campaign for breach of NDA vacated . . .

Arbitrator exceeded authority by deciding claims outside demand for arbitration and violated public policy by awarding damages for statements made in court proceeding.

Denson v. Donald J. Trump For President, Inc., No. 101616/17, 2020 WL 573113 (1st Dep’t Feb. 6, 2020).

New York state arbitration law, similar to the Federal Arbitration Act, provides that an award may be vacated if the arbitrator “exceeded his power or so imperfectly executed it that a final and definite award upon the subject matter submitted was not made.”  NY CPLR 7511(b)(iii).  In Denson, a court vacated an award of damages for breach of a non-disclosure and non-disparagement agreement (NDA) on this ground.  In particular, the court found that the arbitrator exceeded his authority, in part, because the award addressed claims outside the scope of the demand and, in part, because some of the relief granted was in violation of strong state public policy.

Jessica Denson served as the Director of Hispanic Engagement for the company that ran Donald Trump’s 2016 presidential campaign (Trump Campaign).  As a condition of her employment, Denson signed an NDA, which prohibited her from disclosing confidential information detrimental to Trump and from disparaging him publicly.  The NDA contained an arbitration clause, which provided the Trump Campaign with the unilateral right to arbitrate “any dispute arising under or relating to the NDA” pursuant to the American Arbitration Association (AAA) Commercial Rules.  Denson also agreed in the NDA that she would not challenge the submission of a dispute to arbitration.

One year after the election, Denson filed an action in New York state court against the Trump Campaign asserting violations of the New York City Human Rights Law, including sexual discrimination and a hostile work environment.  The Trump Campaign responded by filing a demand for arbitration with the AAA, alleging that Denson’s statements in her state court complaint violated her confidentiality and non-disparagement obligations under the NDA.  The Trump Campaign then filed a motion to compel Denson’s state court action to arbitration.  The court denied the Trump Campaign’s motion, finding that Denson’s claims arose under the Human Rights Law, not the NDA.

While the motion to compel was pending in state court, Denson filed an action in New York federal court seeking a declaration that the NDA was unenforceable as against public policy, and the Trump Campaign filed a cross-motion to compel arbitration.  The federal court compelled arbitration of that case on the ground that Denson’s direct challenge to the enforceability of the agreement did arise under the NDA.  The arbitrator ultimately awarded the Trump Campaign monetary damages of $50,000, holding that Denson breached the NDA by making disparaging statements about Trump in the course of her federal action, as well as through statements made on her Twitter account after Denson filed her state court action.

Denson petitioned the court to vacate the award, but the state trial court denied the motion.  On appeal, the Appellate Division reversed, vacating the award in its entirety because the arbitrator had “exceeded his power or so imperfectly executed it that a final and definite award upon the subject matter submitted was not made.” CPLR 7511(b)(iii).  First, the court held that the arbitrator’s finding that Denson’s statements before the federal court breached the NDA violated New York’s “long-standing public policy in favor of a person’s right to make statements during the course of court proceedings without penalty” and “improperly punished [Denson] for availing herself of a judicial forum.”  Second, the court vacated the balance of the award based on Denson’s disparaging Tweets because the Trump Campaign’s demand for arbitration was limited to statements made “in connection” with the state action.  Since there was no indication in the award that the Tweets related to the state action, or that they were posted before the demand to arbitrate,  the arbitrator had exceeded his authority by awarding damages outside the scope of the demand.  Arguably, the court also could have found that the arbitrator likewise exceeded his authority when ruling on Denson’s statements made in the federal action, because it was her statements in the state action that were the subject of the demand.  However, having determined that that portion of the award violated public policy, the court did not reach the issue.

Read the court’s full decision here.

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“Administrative closure” did not convert order compelling arbitration into final order subject to immediate appeal . . .

Court’s administrative closure was equivalent to a non-final stay pending the final award.

Psara Energy, Ltd. v. Advantage Arrow Shipping, L.L.C., 946 F.3d 803 (5th Cir. 2020).

The Federal Arbitration Act (FAA) embodies the strong federal policy favoring arbitration.  One example is Section 16, which provides that an order refusing to compel arbitration is always subject to immediate appeal, while an order compelling arbitration is generally not immediately appealable, unless it is “final.” 9 U.S.C. §§ 16(a)(3) & 16(b)(1),(3).  Accordingly, if the court compels arbitration and stays the litigation pending a final award, the order compelling arbitration is not appealable until after the arbitration is completed.  However, “a district court order that compels arbitration and dismisses or closes a case outright possesses finality and confers jurisdiction on [the appellate] court.”  So what happens if the court compels arbitration, but “administratively closes” the case?

The Court of Appeals for the Fifth Circuit answered this question in Psara.  While its claims under a charter party were pending against its counter-signatory in an arbitration in London, Psara sued two non-signatories – its counter-signatory’s corporate successor and its guarantor – in U.S. federal court to enforce its rights under the same agreement.  On the defendants’ motion to refer the plaintiff’s claims to the pending arbitration in London, the magistrate judge found that the defendants were entitled to arbitrate the plaintiff’s claims under the charter party and therefore recommended that the district court direct the parties to arbitration and stay the case pending resolution of the issues in the London arbitration.  Adopting the magistrate’s recommendation, the district court compelled the parties to arbitration and “administratively closed” the case.

The plaintiff appealed that order, arguing that the appellate court had jurisdiction to review the district court’s decision under Section 16 of the FAA because that court’s direction that the case be “administratively closed” was tantamount to a final, outright dismissal.  The United States Court of Appeals for the Fifth Circuit disagreed, finding that “an administrative closure is not different from a simple stay.”  The Fifth Circuit noted that courts use administrative closure “to remove from their pending cases suits which are temporarily active elsewhere (such as before an arbitration panel) or stayed (such as where a bankruptcy is pending).”  The district court’s adoption of the magistrate’s recommendation that the case be stayed, along with the ordinary use of the “administrative closure” procedure, demonstrated that the district court intended to retain jurisdiction pending resolution of the claims in arbitration.  Thus, the district court’s order “administratively closing the case pending arbitration was nonfinal for purposes of appellate review,” and the appeal was dismissed.  As a result, the plaintiff could only return to court after the arbitrators’ award.

This case highlights the strategic importance of the relief litigants seek when moving to compel arbitration.  A party wishing to compel arbitration and avoid costly or distracting collateral litigation should seek a stay pending completion of the arbitration.  Asking for outright dismissal will invite further appellate proceedings in parallel with the arbitration.

Read the court’s full decision here.