GAF Corp. v. Werner, 66 N.Y.2d 97 (1985)
The Federal Arbitration Act preempts state laws that would otherwise prevent arbitration of disputes, even when those disputes involve issues of corporate waste and overreaching that are also the subject of a court action.
Summary
This case addresses the enforceability of arbitration agreements under the Federal Arbitration Act (FAA) when a dispute involves issues that are also part of a related court action. The New York Court of Appeals held that the FAA’s policy favoring arbitration preempts state laws or policies that would prevent arbitration, even if the arbitration involves issues of corporate waste and overreaching that are also involved in a court action under Business Corporation Law § 720. The court emphasized the strong federal policy favoring arbitration and reversed the Appellate Division’s decision to stay arbitration.
Facts
Jesse Werner was terminated from GAF Corporation after losing a proxy fight. Werner’s employment agreement contained an arbitration clause. Following his termination, Werner demanded arbitration regarding unpaid salary and benefits. GAF sought to stay arbitration, arguing that the issues in arbitration were intertwined with a shareholder derivative action alleging mismanagement, waste, and self-dealing during Werner’s tenure as chairman. GAF argued that allowing arbitration could lead to inconsistent results and prejudice other defendants in the derivative action.
Procedural History
Special Term denied GAF’s motion to stay arbitration and granted Werner’s motion to compel arbitration, but stayed trial of so much of the consolidated action as related to Werner’s compensation rights under the employment agreement until completion of the arbitration. The Appellate Division reversed, granting a stay of arbitration. Werner appealed to the New York Court of Appeals.
Issue(s)
Whether the Federal Arbitration Act requires arbitration of a dispute arising under an employment agreement, despite the dispute involving issues of corporate waste and overreaching that are also the subject of a related court action under Business Corporation Law § 720.
Holding
Yes, because the Federal Arbitration Act expresses a strong federal policy favoring arbitration agreements, which preempts state laws or policies that would prevent arbitration, even if the arbitration involves issues of corporate waste and overreaching that are also involved in a court action.
Court’s Reasoning
The court emphasized the strong federal policy favoring arbitration agreements as declared in the Federal Arbitration Act. The court cited several Supreme Court cases, including Southland Corp. v. Keating, to support the principle that the FAA withdraws from the states the power to require resolution in a judicial forum of claims that the parties have agreed to arbitrate. The court reasoned that Business Corporation Law § 720, which GAF argued was intended to protect shareholders, was similar to the California Franchise Investment Law struck down in Southland. The court stated, “The preeminent concern of the Congress being that arbitration agreements within the coverage of the Act be carried out, such agreements are to be rigorously enforced, absent a countervailing policy in another Federal statute, even if the result is ‘piecemeal’ litigation of the issues in separate proceedings in different forums.” The court also addressed GAF’s concern that the arbitration might have a preclusive effect on the judicial proceedings, noting that the judge could consider differences in expertise, authority, fact-finding procedures, and the interests of the parties when deciding whether to give preclusive effect to the arbitrator’s holding. Ultimately, the court held that the FAA preempts any state law or policy, including Business Corporation Law § 720, that would prevent the arbitration of the dispute between GAF and Werner. The court found no overriding Federal policy preemptive of the policy favoring arbitration enunciated by the Federal Arbitration Act. The court also noted that under New York law, a broad arbitration clause requires submission to arbitration of all issues, including fraud in the inducement of the contract, except such as are specifically excluded by enumeration in the arbitration clause itself.