A New York state trial court has denied a motion to stay arbitration in an action brought by plaintiffs, a private equity firm and its affiliate, against defendants, two of plaintiffs’ former officers, despite plaintiffs’ argument that the employment and separation agreements containing the relevant arbitration clauses were invalid.
Plaintiffs’ lawsuit alleged, inter alia, that defendants breached their fiduciary duties and committed fraud by engaging in multiple transactions in plaintiffs’ names for defendants benefit. Defendants responded with five counterclaims and nine affirmative defenses, including that the dispute was subject to arbitration. In opposing arbitration, Plaintiffs relied upon a case in which a court held that the plaintiff had “raised a threshold issue regarding the validity of the parities’ agreement” and that “the validity of the arbitration provision was thus an issue for the court to decide.” The court found this case inapposite, finding that defendants’ employment and separation agreements left no doubt that matters regarding their employment would be resolved by arbitration. Emphasizing that doubts regarding whether an arbitration clause covers a particular dispute should be resolved in favor of coverage, the court held that the arbitration provisions were valid and binding, even if the rest of the employment agreements were not valid, because plaintiffs had failed to show “that the arbitration agreements were permeated by fraud.”
Plaintiffs also challenged a portion of the arbitration agreement stating that plaintiffs “shall pay all fees in excess of those which would be required if the dispute was decide in a court of law,” arguing that the burden of this cost would prevent them from pursuing their claims against defendants. However, emphasizing that courts are loathe to interfere “with the freedom of consenting parties in structuring their arbitration relationship,” the court found that plaintiffs had not provided evidence showing that litigating the matter in court would be cheaper or that they were unable to bear these costs. The court also refused to dismiss defendants’ counterclaims for reimbursement of their legal fees and violation of a non-disparagement clause. However, it dismissed defendants’ claim for defamation, which was based on the allegations of plaintiffs’ complaint, because such statements are absolutely privileged, and dismissed their claim for harassment because New York does not recognize this as an independent cause of action.