October 2014 Archives

Awarding Punitive Damages in Arbitral Disputes

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By Gerald M. Levine

Awarding punitive damages may be available as a remedy in arbitral disputes but the question is: Who gets to decide the issue, court or arbitrator? There have been a number of cases recently in New York on this point. The "who" depends on which law applies, the Federal Arbitration Act or CPLR Article 75. In In re Flintlock Construction Services, LLC v. Weiss, 2014 NY Slip Op 05818 (1st Dept. August 14, 2014) and Cusimano, et al v. Schnurr, 2014 NY Slip Op 05702 (1st Dept. August 7, 2014) (discussed in last week's blog) the courts first have to decide which law applies before they reach the ultimate issue. Cusimano dealt with "waiver" (for the court) and "statute of limitations"(for the arbitrator).

Who decides depends to a large extent on both the factual matrix and the parties' agreement. On the issue of arbitrability, for example, the U.S. Supreme Court has held that "Courts should not assume that the parties agreed to arbitrate arbitrability unless there is 'clea[r] and unmistakabl[e]' evidence that they did so." First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 944 (1995). If the parties have incorporated Rule 7 of the Commercial Rules of the American Arbitration Association, for example, they will be deemed to have agreed that "[t]he arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim."

If the evidence is not clear and unmistakable, the question of arbitrability is reserved to the court--- and "presumptively" so according to the court in Werner Schneider v. Thailand, 688 F.3d 68(2d Cir. 2012). But where parties "agree to include claims ... within the issues to be arbitrated, the FAA ensures that their agreement will be enforced according to its terms even if a rule of state law would otherwise exclude such claims from arbitration," Mastrobuono v. Shearson Lehman Hutton, 514 US 52, 58 (1995). Mastrobuono dealt specifically with a New York case,Garrity v. Lyle Stuart, Inc., 40 NY2d 354, 356 (1976), that reserved the decision on punitive damages to the court. The Supreme Court rejected the reasoning of the 7th Circuit that New York law prevented the arbitrator from ruling on punitive damages.
The explanation for this reasoning lies in the concluding clause in Mastrobuono---"even if a rule of state law would otherwise exclude such claims from arbitration"---the court is obliged to look at both the applicable law and the parties' agreement for the scope of the arbitrator's jurisdiction. Moreover, if the issue arises under the FAA, federal law applies even though the arbitration clause contains a choice-of-law provision.

In re Flintlock Construction Services, LLC v. Weiss, 2014 NY Slip Op 05818 (1st Dept. August 14, 2014)clarified how these disparate elements are reconciled. As in Mastrobuono, the issue in Flintlock Construction concerned who gets to decide punitive damages. If the claim includes a request for punitive damages and the dispute involves interstate commerce, it is properly before the arbitrator. Over a vigorous dissent the court rejected application of the Garrity rule.

The parties' operating agreements in Flintlock Construction provided that they "shall be construed and enforced in accordance with the law of the State of New York." The key terms "construed" and "enforced" would appear to apply to both the substantive and procedural law of New York. As the New York Court of Appeals explained in the Matter of Diamond Waterproofing Sys., Inc. v. 55 Liberty Owners Corp., 4 NY3d 247 (2005), the choice of language is critical. Diamond Waterproofing involved the application of the statute of limitations, a question which would ordinarily be reserved to the court (CPLR 7502[b]). But because the parties' agreement did not provide that New York law shall govern the enforcement of the parties' agreement, the court held that the issue was reserved to the arbitrator under the FAA. The parties have to employ the correct lexical formula to assure the application of New York law, and, if they do, it is sufficient to override other principles.

Petitioners in Flintlock Construction (and the dissent) argued that the issue of punitive damages was for the court relying on Garrity's statement that New York law arbitrators "ha[ve] no power to award punitive damages, even if agreed upon by the parties." The argument for a court determination further urged that Mastrobuono "is not dispositive on this issue" because it dealt only with a general choice-of-law provision, i.e.,"[it] shall be governed by the laws of the State of New York," which is a different lexical formula. In Flintlock Construction, the parties included in their agreement the proper lexical formula as directed by the Court of Appeals in Diamond Waterproofing.

Given that the parties properly expressed their intention, why did they not get what they asked for? Although the dissent's argument was unpersuasive to the majority, it cannot be said to be unreasonable.
The majority in Flintlock Construction offered three reasons for denying petitioners' application to prevent the arbitrator from deciding the issue of punitive damages. First, a New York choice-of-law provision does not constitute a manifestation of unequivocal intent sufficient to invoke the Garrity rule. "Merely stating, without further elaboration that an agreement is to be construed and enforced in accordance with the law of New York" does not make it so. "The Supreme Court has made clear that in order to remove the issue of punitive damages from the arbitrators, the agreement must 'unequivocal[ly] exclu[de]' the claim" (Mastrobuono at 60).

The second reason stems from the rule against rendering an advisory opinion. Here, the arbitration panel "had denied the motion to dismiss the punitive damages claim without prejudice to renewal upon a complete record." Because it "remains to be determined whether, on this record, the contracts evidence a 'transaction involving commerce' such that the FAA, and not state law, applies," it would be premature to weigh in on the issue.

The third reason for denying petitioners' application rests on CPLR 7503(b), which authorizes motions to stay arbitration by parties "who ha[ve] not participated in the arbitration." In this case, "[p]etitioners participated in the arbitration process for nearly eight months - selecting arbitrators, participating in preliminary proceedings - before registering an objection to the arbitrability of respondent's claim for punitive damages." The objection took the form of a motion to the arbitrator to dismiss the claim, thereby
"squarely placing the issue of the arbitrability and availability of punitive damages before the arbitrators." In doing that, the court explained, petitioners "chartered their own course ... and cannot now avail themselves of the mechanisms set forth in CPLR 7503(b).

Since Flintlock Construction is a 3-2 decision the appellate court's reasoning may not be the last word on the application of the Garrity rule although petitioners may well have "chartered their own course." Having done that, the issue of punitive damages is squarely before the arbitration panel, at least until it makes a ruling, at which time (if it awards punitive damages) the issue will presumably return to the court.

Gerald M. Levine is a member of Levine Samuel, LLP. He practices in New York City and is on the list of neutrals of the American Arbitration Association. Mr. Levine runs an ADR blog on domain names and cybersquatting at http:www.iplegalcorner.com. He is the author of a forthcoming book to be published in March 2015 on domain name arbitration under the Uniform Domain Name Dispute Resolution Policy.

ABA Mediation Week and 13 Top Reasons for a Failed Mediation

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By Jeffrey T. Zaino, Esq.

Last week (October 12th-18th) marked the American Bar Association Section of Dispute Resolution's 5th Annual Mediation Week campaign. The American Arbitration Association (AAA) and other ADR providers promoted mediation during this important week by offering free educational programs.

The goal of ABA Mediation Week is to raise the awareness of mediation to the general public at large - including mediation users, businesses and the public. The theme for this year's ABA Mediation Week is "Stories Mediators Tell--From Rookie to Veteran, Exploring the Spectrum of Mediation."

The AAA scheduled 16 programs nationwide during the week of October 12th titled: "Stories Mediators Tell: Best Practices and Tips for a Successful Mediation." The program held in New York City on October 14th had Neal Eiseman, Susan Mackenzie and Richard Silberberg as panelists. The following is taken from part of Neal Eiseman's remarks regarding the 13 top reasons for a failed mediation:

1. The wrong person is at the bargaining table--one who lacks ultimate authority to settle the case.
2. Failing to get the parties' commitment to a fair and candid mediation process.
3. In the rush to save time and money, the parties mediate prematurely.
4. Failing to vet potential mediators to insure that the mediator possesses expertise in the subject matter of the parties' dispute.
5. In their pre-mediation submissions, the parties fail to identify the key issues that must be resolved for the mediation to succeed.
6. The parties believe they must "win" the mediation because they were not properly prepared for the mediation session by their counsel and/or the mediator.
7. A non-party to the mediation has his or her "own agenda" and clouds a party's evaluation of the case and the probability of success in court or arbitration.
8. Refusing to reveal information or positions that need to be addressed.
9. Lack of civility to the point where, out of principle alone, the parties become entrenched in their positions.
10. Insisting that the mediator tell you the "right" settlement number.
11. Totally unrealistic and/or insulting offers, counteroffers and demands.
12. The mediator inadvertently reveals information to one party that was communicated confidentially by the other party.
13. Allowing settling parties to leave the room without a written, executed settlement agreement.

Jeffrey T. Zaino, Esq., is Vice President for the Commercial Division of the American Arbitration Association in New York

2015 AAA Higginbotham Fellows Program - Applications Now Being Accepted

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By Jeffrey T. Zaino

The American Arbitration Association (AAA) is now accepting applications for the 2015 AAA Higginbotham Fellows Program. The training component of the Program will be hosted in New York during the week of May 4, 2015 in order to coincide with the AAA's Annual Meeting. During the Program, Fellows will engage with leading ADR practitioners for an intensive week of training, seminars, and networking events. Fellows will also have the opportunity to attend the AAA's Annual Meeting Luncheon and Discussion of Initiatives. Interested candidates can visit www.adr.org/diversity to download a copy of the Program Guidelines and Application or to apply online. Applications should be received no later than January 16, 2015.

The American Arbitration Association launched the AAA Higginbotham Fellows Program in 2009 in order to provide training, mentorship and networking opportunities to up and coming diverse alternative dispute resolution professionals who have historically not been included in meaningful participation in the field of alternative dispute resolution. The AAA Higginbotham Fellows Program is a one-year program designed to offer the full breadth of the AAA resources for emerging diverse alternative dispute resolution professionals.

Questions about the program may be directed to AAAHigginbothamFellows@adr.org.

Jeffrey T. Zaino, Esq., is Vice President for the Commercial Division of the American Arbitration Association in New York

Choice of Law: Characterization of Facts Determines the Outcome

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By Gerald M. Levine

Although there may be no disagreement about the facts, what law applies often depends on how the facts are characterized. An illustration of this is seen in the Cusimano, et al v. Schnurr decisions from the motion court, 40 Misc.3d 1208 (2013) and appellate division, 2014 NY Slip Op 05702 (1st Dept. August 7, 2014). The dispute turns on the nature of the economic activity of the parties' enterprise. For Justice Ramos,"[a]s [a] result of plaintiffs' flagrant forum shopping, [the] issue of statute of limitations defense was for court, rather than for arbitrators to decide."

An equally important but secondary issue in Cusimano--what level of litigation activity will result in a waiver--is for the court under New York law, although it may also implicate the rules of the arbitration forum. For example, the American Arbitration Commercial Rules provide that:

[a]ny party who proceeds with the arbitration after knowledge that any provision or requirement of these rules has not been complied with and who fails to state an objection in writing shall be deemed to have waived the right to object (Rule 41).
The motion court found "that the totality of the economic activity in question has no affect on interstate commerce, and thus, the FAA does not apply to the claims asserted by the Cusimanos in the Arbitration." The appellate panel disagreed. It explained that the phrase "involving commerce" is to be broadly construed (Decision at 4). It is the "equivalent of 'affecting commerce,' a term associated with the broad application of Congress's power under the Commerce Clause" (Id.). This brings the dispute within the ambit of the FAA which assigns the limitations defense to the arbitrator. Cusimano had reached the appellate division after plaintiff filed a demand for arbitration that Justice Ramos denied because he had already previously given plaintiffs leave to replead their complaint.

The dispute in Cusimano involved three separate real estate properties, one located in Florida and two in New York. Justice Ramos found "the totality of the economic activity in question has no affect on interstate commerce, and thus, the FAA does not apply to the claims asserted by the Cusimanos in the Arbitration" (Decision at 17). Veering to arbitration after commencing an action, he ruled, is a flagrant example of forum shopping - dressed up as a professed concern for judicial economy - to get a second bite at the apple in arbitration. The Court will not and does not accept such a gaming of the litigation process, and any right that Rita may have had to insist on arbitration of her claims against the accountants has been waived by her resort to, and aggressive participation in this litigation. (Id., at 19).

The appellate panel characterized the facts differently and not as "a flagrant example of forum shopping":

Each of the agreements concerns transactions that affect commerce, and all of the entities are involved in the rental of commercial property.... Because [these properties] ... can affect interstate commerce, the ownership of and investment in the commercial buildings here, one of which is occupied by an international chain hotel and another which houses a national chain drug store located out of state, renders the FAA applicable to these agreements (Decision at 5).

Therefore, the timeliness issue was for the arbitrator to determine.

However, the secondary issue of waiver was held to be properly before the court although plaintiffs argued it too was for the arbitrator. Whether there is a waiver is informed by state and federal policies favoring arbitration. The appellate panel held that "waiver should not be 'lightly inferred' under the FAA," citing federal decisions. The answer of how much litigation bars arbitration turns on what has actually been done and whether what has been done is prejudicial to a party to have to defend itself anew in the arbitral forum. "A party does not waive the right to arbitrate simply by pursuing litigation, but by 'engag[ing] in protracted litigation that results in prejudice to the opposing party'" (Kramer v. Hammond, 943 F2d 176, 179 [2d Cir 1991]). Justice Ramos viewed the filing for arbitration as a "gaming of the litigation process." (Id.)

The appellate panel commenced its analysis with a caution:

there is no bright line rule. Rather, the court should consider three factors: (1) the amount of time between the commencement of the action and the request for arbitration; (2) the amount of litigation thus far; and (3) proof of prejudice to the opposing party."
Costs could be a factor but it is not alone "sufficient to establish prejudice."

Litigation becomes too much where the party opting for arbitration seeks to relitigate issues lost before the motion court. However, in Cusimano:

the motion court gave plaintiffs leave to replead with specificity, effectively giving plaintiffs "another bite at the apple," at least as to the sufficiency of the pleadings. Thus, plaintiffs have not received any greater advantage by filing a statement of claim in an arbitration than they would have obtained had they filed an amended complaint.
Further, as the appellate division noted, defendants
point to no case finding waiver solely because a party filed an arbitration demand after limited motion practice, particularly where, as here, only one year had passed and no discovery had been exchanged. (Id. at 6-7).
The resolution of this tension between court and arbitrator depends largely on the posture of the case. Since Cusimano started in court, certain determinations are within its jurisdiction depending on the applicable law. Although both waiver and limitations determine an outcome, only waiver prevents a party from proceeding with arbitration. On the other hand, where a case reaches court after an arbitrator's ruling on waiver his determination is likely to be respected.

Gerald M. Levine is a member of Levine Samuel, LLP. He practices in New York City and is on the list of neutrals of the American Arbitration Association. Mr. Levine runs an ADR blog on domain names and cybersquatting at http:www.iplegalcorner.com. He is the author of a forthcoming book to be published in March 2015 on domain name arbitration under the Uniform Domain Name Dispute Resolution Policy.

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This page is an archive of entries from October 2014 listed from newest to oldest.

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