New York Law Review

Tag: Federal Arbitration Act

  • Matter of Monarch Consulting, Inc. v. National Union Fire Ins. Co., 25 N.Y.3d 661 (2015): FAA, McCarran-Ferguson Act, and Arbitrability of Insurance Disputes

    25 N.Y.3d 661 (2015)

    The McCarran-Ferguson Act does not reverse preempt the FAA when a state law does not regulate arbitration provisions, even if it governs the filing of insurance documents.

    Summary

    The New York Court of Appeals addressed whether the Federal Arbitration Act (FAA) applied to arbitration clauses in workers’ compensation insurance agreements, or if the McCarran-Ferguson Act, which favors state regulation of insurance, preempted the FAA. The court held that the McCarran-Ferguson Act did not apply because the relevant California law, requiring the filing of insurance agreements, did not regulate arbitration itself. Since the parties’ agreements delegated the question of arbitrability to the arbitrator, and the challenge was to the agreement as a whole, the court found the arbitrator, not the court, should determine whether the agreements were enforceable.

    Facts

    National Union Fire Insurance Company issued workers’ compensation policies to several California-based employers. After the initial policies were executed and filed, National Union and the insureds entered into “Payment Agreements” that were not filed with the state, as required by California law. These agreements included arbitration clauses. Disputes arose, and National Union sought to compel arbitration. The insureds argued the Payment Agreements were unenforceable because they were not filed as required by California Insurance Code § 11658, and therefore, the arbitration clauses within were also unenforceable. The trial court granted National Union’s petitions to compel arbitration, which was reversed by the Appellate Division.

    Procedural History

    The trial court initially granted National Union’s petitions to compel arbitration. The Appellate Division reversed, holding that the McCarran-Ferguson Act precluded application of the FAA. The New York Court of Appeals reversed the Appellate Division’s order, finding that the FAA applied.

    Issue(s)

    1. Whether the McCarran-Ferguson Act reverse preempts the FAA, thus making the arbitration clauses unenforceable.

    2. If the FAA applies, whether the enforceability of the Payment Agreements and their arbitration clauses is a question for the courts or the arbitrators.

    Holding

    1. No, because the California law does not regulate the form or content of arbitration clauses in insurance contracts; therefore, the McCarran-Ferguson Act does not reverse preempt the FAA.

    2. Yes, because the agreements contained a valid delegation clause, the enforceability of the arbitration clauses is a question for the arbitrators, not the courts, to decide.

    Court’s Reasoning

    The court applied a three-part test to determine if the McCarran-Ferguson Act applied: (1) whether the FAA specifically relates to insurance; (2) whether the state law at issue was enacted to regulate the business of insurance; and (3) whether the FAA would invalidate, impair, or supersede the state law. The court found that the first two prongs were met. The FAA does not specifically relate to insurance, and the California statute was enacted to regulate the business of insurance. The court held that the third prong was not met. The state filing requirement did not regulate arbitration, so enforcing the FAA would not “invalidate, impair, or supersede” the state law. The court distinguished cases where the state law directly regulated the content of arbitration clauses. Because the parties delegated the issue of arbitrability to the arbitrators, the court deferred to that delegation based on the FAA’s principle of severability of arbitration agreements.

    Practical Implications

    This case emphasizes that the McCarran-Ferguson Act’s impact on the enforceability of arbitration agreements turns on whether state law regulates the *content* of the arbitration agreements themselves. The FAA will be enforced unless a state law directly restricts arbitration’s use or form. When drafting arbitration agreements, clearly state the scope of the arbitration and include a delegation clause. If a party challenges the enforceability of an arbitration clause, it’s critical to determine whether that challenge is directed to the arbitration clause itself or to the contract as a whole, including the delegation clause. Courts are generally obligated to enforce delegation clauses.

  • U.S. Electronics, Inc. v. Sirius Satellite Radio, Inc., 17 N.Y.3d 912 (2011): Establishes Standard for Vacating Arbitration Awards Based on Evident Partiality

    U.S. Electronics, Inc. v. Sirius Satellite Radio, Inc., 17 N.Y.3d 912 (2011)

    To vacate an arbitration award based on “evident partiality” under the Federal Arbitration Act, a court must find that a reasonable person would conclude that the arbitrator was partial to one party; mere appearance of bias or attenuated relationships are insufficient.

    Summary

    U.S. Electronics, Inc. (USE) sought to vacate an arbitration award favoring Sirius Satellite Radio, Inc., claiming the arbitration panel’s chairman, William Sessions, had failed to disclose relationships creating bias. USE argued that Sessions’ son, a Congressman, publicly supported a merger beneficial to Sirius and was politically aligned with a director of USE’s competitor. The New York Court of Appeals affirmed the lower court’s decision upholding the award, adopting the Second Circuit’s “reasonable person” standard. The court found USE’s claims of bias too tenuous and speculative to justify vacating the award, as the alleged relationships were attenuated and lacked a direct connection to the arbitration.

    Facts

    USE had a nonexclusive distribution agreement with Sirius. A dispute arose, leading to arbitration where Sirius prevailed. USE sought to vacate the award, alleging “evident partiality” by the arbitration panel’s chairman, William Sessions. USE based its claim on two points: (1) Sessions’ son, Congressman Peter Sessions, had publicly advocated for a merger between Sirius and XM Satellite Radio, Inc. (XM), and (2) Sessions’ son was a political ally of Congressman Darrell Issa, the director of Directed Electronics, Inc. (DEI), a competitor of USE. USE argued these connections created bias affecting the impartiality of the arbitration.

    Procedural History

    The lower court upheld the arbitration award. The Appellate Division affirmed, but imposed a “clear and convincing evidence” standard for proving prejudice, which the Court of Appeals rejected. The Court of Appeals then affirmed, but clarified the appropriate standard for “evident partiality.”

    Issue(s)

    Whether the arbitration award should be vacated for “evident partiality” under 9 USC § 10(a)(2) based on the arbitrator’s alleged indirect relationships with parties interested in the outcome of the underlying dispute.

    Holding

    No, because the alleged relationships were too attenuated and speculative to create “evident partiality” requiring vacatur of the arbitration award; a reasonable person would not conclude the arbitrator was biased.

    Court’s Reasoning

    The Court of Appeals adopted the Second Circuit’s “reasonable person” standard for determining evident partiality, holding that vacatur is warranted “where a reasonable person would have to conclude that an arbitrator was partial to one party to the arbitration.” The court emphasized that the moving party bears a heavy burden of proof. It rejected the Appellate Division’s imposition of a “clear and convincing evidence” standard. The court distinguished the facts from situations involving direct personal or business relationships. The court reasoned that Congressman Sessions’ son’s endorsement of the Sirius-XM merger had no bearing on the breach of contract matter. Moreover, the purported connection between Chairman Sessions and Congressman Issa was deemed too tenuous to impute bias. The court stated, “the interest or bias . . . must be direct, definite and capable of demonstration rather than remote, uncertain, or speculative.” The court emphasized that absent a showing of a direct connection, the allegations amounted to speculation, which is insufficient to vacate an arbitration award.

  • Hirschfeld Productions, Inc. v. Mirvish, 698 N.E.2d 1055 (N.Y. 1998): Arbitration Agreements Extend to Agents Acting on Behalf of Signatories

    Hirschfeld Productions, Inc. v. Mirvish, 698 N.E.2d 1055 (N.Y. 1998)

    Under the Federal Arbitration Act, agents of a signatory to an arbitration agreement can invoke the agreement’s protections when the alleged misconduct relates to their actions as officers, directors, or agents of the corporation, preventing circumvention of the agreement.

    Summary

    Hirschfeld Productions (HPI) sued Edwin and David Mirvish, officers of Mirvish Productions (MP), alleging tortious interference with contract and breach of fiduciary duty related to a failed theatrical production joint venture. The agreement between HPI and MP contained an arbitration clause. The Mirvishes, though nonsignatories, moved to compel arbitration. The New York Court of Appeals held that because the claims against the Mirvishes arose from their roles as agents of MP in relation to the agreement, they could enforce the arbitration clause, preventing circumvention of the agreement and effectuating the parties’ intent.

    Facts

    HPI and MP entered a joint venture to produce “Hair” at the Old Vic Theater in London. David Mirvish signed the agreement on behalf of MP. The agreement contained a clause requiring arbitration of disputes. The play closed quickly due to poor ticket sales. HPI sued Edwin and David Mirvish individually, alleging tortious interference with contract and breach of fiduciary duty.

    Procedural History

    The defendants moved to stay the action and compel arbitration. The Supreme Court denied the motion. The Appellate Division reversed, granting the motion to compel arbitration. The New York Court of Appeals affirmed the Appellate Division’s order.

    Issue(s)

    Whether an arbitration clause in a contract between a plaintiff and a corporation can be invoked by individual officers/agents of that corporation, who are not signatories to the contract, when the plaintiff’s claims relate to the officers’/agents’ conduct on behalf of the corporation.

    Holding

    Yes, because the Federal Arbitration Act and related federal law extend the benefit of arbitration agreements to agents acting on behalf of their principals, especially when the alleged misconduct relates to their behavior as officers or directors in their capacities as agents of the corporation.

    Court’s Reasoning

    The court reasoned that the dispute involved an international commercial contract, making it subject to the Federal Arbitration Act (9 U.S.C. § 201 et seq.) and federal law. Federal courts have consistently allowed agents to benefit from arbitration agreements entered into by their principals, provided the alleged misconduct relates to their roles as officers, directors, or agents. The court emphasized the importance of preventing parties from circumventing arbitration agreements by suing agents of the signatory party. Allowing agents to invoke arbitration effectuates the intent of the original parties to protect individuals acting on behalf of the principal in furtherance of the agreement. The court stated, “The rule is necessary not only to prevent circumvention of arbitration agreements but also to effectuate the intent of the signatory parties to protect individuals acting on behalf of the principal in furtherance of the agreement.” The Court found that HPI’s complaint focused on the Mirvishes’ conduct related to MP’s failure to effectively produce and promote the play, not their separate roles as owners of Enterprises. Therefore, the Mirvishes, as agents of MP, could enforce the arbitration agreement.

  • Salvano v. Merrill Lynch, Pierce, Fenner & Smith, 85 N.Y.2d 173 (1995): Enforceability of Arbitration Agreements and Expedited Arbitration

    Salvano v. Merrill Lynch, Pierce, Fenner & Smith, 85 N.Y.2d 173 (1995)

    In the absence of an explicit contractual provision, a court cannot compel parties to expedited arbitration; the Federal Arbitration Act (FAA) mandates enforcement of private arbitration agreements according to their terms.

    Summary

    Former Merrill Lynch account executives sought expedited arbitration to lift injunctions preventing them from soliciting former clients. The New York Supreme Court ordered expedited arbitration. The New York Court of Appeals reversed, holding that neither state nor federal law authorized the court to compel expedited arbitration because the parties’ arbitration agreement (NYSE rules) did not provide for it. The FAA’s primary purpose is to enforce private agreements to arbitrate according to their terms. The court emphasized that arbitration is a matter of consent, and courts should not impose additional terms or rewrite contracts.

    Facts

    Three account executives (Salvano, Coon, and Tate) resigned from Merrill Lynch to work for a competitor, Prudential Bache. Merrill Lynch initiated actions in federal courts in Illinois and Kentucky to enjoin them from soliciting former clients and using confidential records. The Illinois and Kentucky courts issued temporary injunctions. The employees then sought expedited arbitration through the New York Stock Exchange (NYSE).

    Procedural History

    The employees moved in New York Supreme Court to compel expedited arbitration. The Supreme Court granted the motion. The Appellate Division affirmed. The New York Court of Appeals granted Merrill Lynch leave to appeal.

    Issue(s)

    Whether a court has the authority to order parties to proceed to expedited arbitration when the parties’ arbitration agreement does not explicitly authorize expedited arbitration.

    Holding

    No, because neither state nor federal law grants such authority in the absence of an explicit agreement for expedited arbitration; the FAA requires enforcing arbitration agreements according to their terms.

    Court’s Reasoning

    The court held that the FAA governs disputes concerning employment in the securities industry. The FAA’s primary policy is to ensure the enforceability of private agreements to arbitrate, according to their terms. The Constitution and Rules of the New York Stock Exchange, which governed the arbitration, did not provide for expedited arbitration. CPLR 7506(b) authorizes the court to direct the arbitrator, not the parties, to proceed promptly. CPLR 7503(a) allows the court to compel arbitration if one party fails to arbitrate, which wasn’t the case here. CPLR 7502(c) only allows for attachment or preliminary injunctions. “Arbitration under the [FAA] is a matter of consent, not coercion, and parties are generally free to structure their arbitration agreements as they see fit. Just as they may limit by contract the issues which they will arbitrate [citation omitted] so too may they specify by contract the rules under which that arbitration will be conducted” (see, Volt Information Sciences v Leland Stanford Jr. Univ., 489 US 468, 479, supra). The court rejected the argument that NYSE Rule 621, giving arbitrators power to interpret provisions, implicitly allows them to compel expedited arbitration. The award was vacated because an erroneous court order compelled expedited proceedings, violating Merrill Lynch’s contract rights.

  • Fletcher v. Kidder, Peabody & Co., 81 N.Y.2d 623 (1993): Enforceability of Arbitration Agreements in Discrimination Claims

    81 N.Y.2d 623 (1993)

    In cases governed by the Federal Arbitration Act (FAA), the arbitrability of statutory discrimination claims is determined by reference to Congress’s intent regarding alternative dispute resolution for that class of claims.

    Summary

    This case addresses whether an arbitration clause in a U-4 form, signed as part of a securities industry registration, is enforceable for disputes involving claims of unlawful discrimination. The Court of Appeals of New York held that, in light of Supreme Court precedent, specifically Gilmer v. Interstate/Johnson Lane Corp., the FAA mandates enforcement of such arbitration agreements unless Congress intended to preclude a waiver of judicial forum for the specific statutory right at issue. The court overruled its prior holding in Matter of Wertheim & Co. v. Halpert to the extent it conflicted with this principle.

    Facts

    Alphonse Fletcher, Jr., an African-American equity trader, alleged racial discrimination by Kidder, Peabody & Co. Rita Reid, a registered securities representative, claimed gender discrimination by Goldman, Sachs & Co. Both Fletcher and Reid had signed U-4 forms containing broad arbitration clauses as part of their securities industry registration. These forms committed all disputes “arising out of [his] employment” to arbitration. Both then brought suit in court, alleging violations of New York’s Human Rights Law.

    Procedural History

    In Fletcher, the trial court denied the motion to compel arbitration, citing public policy concerns. The Appellate Division reversed, granting the motion to compel arbitration. In Reid, both the trial court and the Appellate Division compelled arbitration, relying on Gilmer. The Court of Appeals consolidated the appeals.

    Issue(s)

    1. Whether the FAA preempts state law regarding the enforceability of arbitration clauses in disputes involving statutory discrimination claims.

    2. Whether Congress intended to preclude a waiver of a judicial forum for claims arising under the New York Human Rights Law (Executive Law § 296 (1)(a)), which prohibits employment discrimination, and analogous federal laws such as Title VII of the Civil Rights Act.

    3. Whether the U-4 form signed by Reid was a contract of employment excluded from the FAA’s coverage under Section 1.

    Holding

    1. Yes, because in situations where the FAA is applicable, it preempts state law on the subject of the enforceability of arbitration clauses.

    2. No, because there is no evidence in the legislative history of Title VII or its amendments indicating a congressional intent to override the general rule that anticipatory contracts to arbitrate are enforceable under the FAA.

    3. No, because the Supreme Court in Gilmer specifically stated that the U-4 form is a contract with the securities exchanges, not a contract of employment, and thus not excluded from the FAA’s coverage.

    Court’s Reasoning

    The court relied heavily on Gilmer v. Interstate/Johnson Lane Corp., which established that statutory claims are subject to arbitration if the agreement to arbitrate is governed by the FAA, unless Congress intended to preclude a waiver of judicial remedies for the statutory right at issue. The court stated, “Under that methodology, the party seeking to avoid enforcement of an arbitration clause governed by the FAA must demonstrate a congressional intent ‘to preclude a waiver of a judicial forum’ for disputes based on a particular statutory right.”

    The court found no evidence in the legislative history of Title VII indicating that Congress intended to preclude arbitration of discrimination claims. It noted that the 1991 amendments to the Civil Rights Act, which authorize the use of alternative dispute resolution methods, do not shed light on Congress’ intentions regarding anticipatory agreements to arbitrate future disputes.

    Regarding the U-4 form, the court cited Gilmer‘s holding that it is a contract with the securities exchanges, not a contract of employment, and therefore not subject to the FAA’s exclusion for employment contracts. The court dismissed arguments about the adequacy of the arbitral forum, stating that Congress has already considered and balanced those concerns in enacting the FAA. Quoting Mitsubishi Motors v. Soler Chrysler-Plymouth, the court stated that agreeing to arbitration “trades th[ose] procedures and [the] opportunity for review * * * for the simplicity, informality, and expedition of arbitration”.

  • GAF Corp. v. Werner, 66 N.Y.2d 97 (1985): Federal Arbitration Act and Enforceability of Arbitration Agreements

    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.