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Arbitration / Court Decisions

ARBITRAL AWARD SETTLING BUYOUT PRICE IN DIAMOND BUSINESS DISPUTE AFFIRMED OVER ALLEGATIONS OF ARBITRATOR PARTIALITY

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The arbitration award in a dispute between former joint venture partners in a series of international diamond businesses has been confirmed by the Southern District of New York. The decision resolved motions by Julius Klein Diamonds, LLC, related entities, and several members of the Klein family (the “Kleins”) attempting to vacate the arbitration award ordering them to pay a buyout price of $179 million to LGC USA Holdings. The bulk of the Kleins’ substantive arguments challenging the award alleged bias on the part of the third neutral arbitrator selected by the two party-appointed arbitrators. At the outset of the arbitration, the arbitrator at issue disclosed professional relationships with LGC’s owner as well as the arbitrators, but failed to disclose the extent of those relationships or his pending indictment and later conviction on tax fraud charges.

First, applying the standard set forth by the Federal Arbitration Act and applicable case law, the court rejected the Kleins’ substantive challenges to the arbitral award. While the court noted that third arbitrator could have been more forthcoming concerning the scope of his business relationships with the other arbitrators and LGC’s owner, the court found his initial disclosure was sufficient to put the Kleins on inquiry notice. Thus, the court found that their failure to investigate or object until after an unfavorable award waived any such objection. The court also found insufficient admissible evidence to substantiate the assertion that the undisclosed relationship impacted his partiality in any way. Additionally, the court concluded the arbitrator’s failure to disclose his indictment and subsequent conviction for tax fraud issues did not warrant vacatur because the conviction was unrelated to and did not affect the outcome of the arbitration.

The court also rejected the Kleins’ additional substantive challenges that the arbitrators acted with manifest disregard for the law or exceeded their powers in issuing the award. Noting the high degree of deference afforded arbitration awards, the court found the particular arbitral agreement at issue to be broad, covering “[a]ny controversy or claim arising out of or relating to” the agreements. Thus, the arbitrators did not err by ordering a full buyout of the joint ventures at issue. Nor did the arbitrators err by finding the Kleins joint and severally liable with their associated entities, because the family members were personal signatories to the agreement, agreed to allow the arbitrators decide all disputes, and actively and voluntarily participated in the arbitral process.

LGC Holdings, Inc. v. Julius Klein Diamonds, LLC, Case No. 16-5352 (USDC S.D.N.Y. Feb. 28, 2017).

This post written by Thaddeus Ewald .
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COURT FINDS THAT ARBITRATION AWARD THAT INTERPRETED CONTRACT “TERMINATION” TO INCLUDE CONTRACT “EXPIRATION” WAS NOT A “MANIFEST DISREGARD OF THE LAW”

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Former franchisees filed a petition to vacate an arbitration award entered in favor of their former franchisor which enforced a 2-year non-compete provision in the parties’ franchise agreement when the agreement expired. The arbitrator had determined that the non-compete provision applied, notwithstanding that the provision contemplated applying upon the agreement’s “termination,” and did not refer to the agreement’s “expiration.” The franchisees argued that the arbitrator committed a “manifest disregard of the law,” and that the award “failed to draw its essence” from the parties’ agreement. The court determined that “both readings [were] plausible,” and therefore the award “derived from the essence of the Franchise Agreement.” The court continued, “Where the arbitrator did not act with ‘manifest disregard of the law” there was “no basis to vacate the award.” The court further upheld the arbitrator’s decision to enforce the 2-year non-compete provision from the date the franchisees started to comply with the agreement’s post-expiration terms, rather than from the (earlier) date that the agreement expired. That decision, the court explained, also “comported with the law and thus did not exhibit ‘manifest disregard of the law.’” The court therefore denied the petition to vacate the award, and granted the petition to confirm the award. Frye v. Wild Bird Centers of America, Inc., Case No. 8:16-cv-03216 (USDC D. Md. Feb. 14, 2017).

This post written by Michael Wolgin.

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UPDATE ON LIQUIDATION OF THE HOME INSURANCE COMPANY

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The New Hampshire liquidation court approved the commutation, settlement, and release agreement between The Home Insurance Company (liquidating) and Pennsylvania Manufacturers Association Insurance Company (PMAIC). The commutation agreement was approved February 10, 2017 and provides for the commutation of all of Home’s ceded and assumed business to or from PMAIC, as well as the resolution of all of PMAIC’s contribution claims against Home. A redacted copy of the commutation agreement, with economic terms removed, was filed with Home’s motion for approval. Additionally, in New York, in a contested claim between the liquidator and a Danish non-admitted reinsurer, the court approved the reinsurer’s posting of a security bond in the stipulated amount of $259,886.13. In re Liquidation of The Home Insurance Co., 217-2003-EQ-00106 (N.H. Sup. Ct. Feb. 10, 2017) (order approving commutation); Motion for Approval (Dec. 15, 2016); Sevigny v. Trygvesta Forsikring A/S, Case No. 16 Civ. 4874 (USDC S.D.N.Y. Jan. 30, 2017) (stipulation and bond); (Feb. 14, 2017) (bond).

This post written by Gail Jankowski.

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NINTH CIRCUIT REAFFIRMS ISKANIAN RULE, REJECTS WAIVER OF REPRESENTATIVE ACTION UNDER PAGA

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Defendants appealed an order from a California federal district court that denied their motion to compel individual arbitration of a former employee’s representative claim under California’s Private Attorney General Act (PAGA). On appeal, the defendants argued that the plaintiff’s arbitration agreement, wherein she agreed to arbitrate all disputes regarding her employment on an individual basis, applied to her PAGA claim as well. The Ninth Circuit affirmed the district court’s order denying defendants’ motion to compel arbitration. The panel reaffirmed the Iskanian rule, which holds that under California law, an employment agreement that compels the waiver of representative claims under the PAGA, is contrary to public policy and therefore unenforceable. Hernandez v. DMSI Staffing, LLC, Case No. 15-15366 (9th Cir. Feb. 16, 2017).

This post written by Gail Jankowski.

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NINTH CIRCUIT CONFIRMS ARBITRATION AWARD CHALLENGED FOR LACK OF “REASONED OPINION”

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Petitioner Daniel Olson brought an action in federal court seeking vacatur of an award against him in arbitration of an employment dispute. He challenged the arbitration award for lack of a “reasoned opinion” and failure of the arbitrator to rule on all of the evidentiary issues and claims submitted. The district court denied the motion to vacate and Olson appealed.

In the Ninth Circuit’s opinion, the Court reminded Plaintiff that “Arbitrators have no obligation to give their reasons for an award” and that here, “the arbitration award included two bases for the arbitrator’s determination that [Defendant] was the prevailing party, which provides enough of the arbitrator’s reasoning to facilitate the limited review available under the FAA.”

The Court further rejected Plaintiff’s claims that the arbitrator did not rule on all of the evidentiary issues, stating “arbitrators’ awards are not judicial opinions. The proceedings the arbitrator conducts are generally informal, lacking most of the fixed rules of procedure and evidence.” As to Plaintiff’s contention that the arbitrator failed to rule on all the claims submitted for arbitration, that too was rejected as “the award states that all claims not expressly granted herein are hereby, denied.”

Olson v. Harland Clarke Corp.a>, 14-35586 (9th Cir. Feb. 10, 2017)

This post written by Nora A. Valenza-Frost.

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