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Arbitration / Court Decisions

New York Federal Court Confirms $2M Arbitral Award to Defunct Liquor Distributor in Dispute Over Royalties Owed to Rapper Snoop Dogg

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This royalties dispute arose out of an agreement between Cognac Ferrand S.A.S., a French company that produces and sells various liquors and spirits, and Mystique Brands LLC, a company that imports and markets liquors and spirits in the United States, involving the importation and marketing of Ferrand’s cognac in the United States.

In 2008, the parties executed a contract in which Ferrand granted Mystique the five-year exclusive right to import and market certain products in the United States. Under that agreement, Mystique agreed to purchase certain minimum amounts of Ferrand’s products each year and to enter into a marketing agreement with the musical artist Calvin Brodus, aka Snoop Dogg, for the promotion of those products, the costs of which Mystique would pay. The agreement granted Ferrand the right to terminate the agreement if Mystique became insolvent or filed a bankruptcy petition, or if Mystique committed a “material breach” that it failed to cure within 30 days.

Ferrand terminated the agreement roughly a year later in 2010, citing Mystique’s purported insolvency and unpaid royalties owed to Snoop Dogg. Mystique then initiated arbitration proceedings before the International Centre for Dispute Resolution in New York (ICDR) against Ferrand claiming wrongful termination. Ferrand fought back with a $4.5 million counterclaim, alleging it had been fraudulently induced to enter the deal because Mystique lied about its finances.

The arbitration proceeding was stayed after Mystique filed bankruptcy in 2013, but once Mystique emerged from Chapter 11 in 2017, Ferrand sought to reinstate the arbitration proceeding so that it could pursue its counterclaims against Mystique. The ICDR advised that the matter had been closed administratively, and directed Ferrand to file a new notice of arbitration. The parties proceeded in a new arbitration before a new ICDR arbitrator in New York.

In May 2020, the new arbitrator in New York found in Mystique’s favor and dismissed all of Ferrand’s claims. There, the arbitrator found that Mystique did not breach its minimum purchase obligation or repudiate the agreement and that Mystique’s insolvency did not constitute a material breach. The arbitrator also rejected Ferrand’s breach of contract claim for Mystique’s failure to pay Snoop Dogg because Ferrand had not offered evidence of damages or causation. Finding that Mystique was the “prevailing party,” the arbitrator also awarded Mystique $2 million in attorneys’ fees and costs.

Ferrand thereafter sought relief in the U.S. District Court for the Southern District of New York, filing a petition to vacate the arbitral award pursuant to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Ferrand argued that the arbitrator erred by finding that Mystique was the prevailing party in the arbitration and wrongly awarded Mystique nearly $2 million in fees and costs. Mystique opposed the petition and cross-petitioned to confirm the award, also seeking sanctions under both 28 U.S.C. § 1927 and Federal Rule of Civil Procedure 11 against Ferrand for pursuing this action.

The district court denied Ferrand’s petition to vacate the award, finding that the arbitrator did not exceed her authority or act in manifest disregard and that the award was final and definite. The district court determined that Ferrand’s challenge amounted to a mere substantive disagreement with the arbitrator’s reasoning and ultimate determination, which is not a valid basis to overturn the award. Because Ferrand failed to show that any aspect of the award should be vacated, the district court granted Mystique’s cross-petition to confirm the award.

Cognac Ferrand S.A.S. v. Mystique Brands, LLC, No. 1:20-cv-05933 (S.D.N.Y. Jan. 13, 2021).

Seventh Circuit Affirms Wisconsin Federal Court’s Finding That Arbitration Panel’s Decision Was Arbitrary and Capricious Where It Was Contrary to the Evidence in the Record

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This action arises out of a grievance filed by Theresa Taylor, a blind vending machine operator, with the Wisconsin Department of Workforce Development (DWD) over the DWD’s decision to award Jocelyn Belsha, another blind applicant, a bid to operate the vending machine at the Racine/Sturtevant correctional facility over Taylor. In 2007, Taylor accepted the DWD’s invitation to run the vending machines at three Wisconsin correctional facilities on an interim basis. In 2011, the DWD bid out these sites on a permanent basis, granting Belsha a bid to operate the vending machine at the Racine/Sturtevant correctional site.

In July 2015, the DWD convened a three-member arbitration panel to hear Taylor’s grievance.  The arbitration took place in September 2017, and in February 2018, the arbitration panel rendered a decision finding that the DWD “acted in an arbitrary, capricious and biased manner” when it failed to award Taylor the Racine/Sturtevant site during the two selection processes and that Taylor had proved her case “by substantial evidence,” even though she would have also prevailed under a “preponderance of the evidence” test.

The DWD filed a petition for judicial review of the arbitration panel’s decision favoring Taylor. The U.S. District Court for the Western District of Wisconsin vacated the arbitration award, ruling that there were no material deficiencies in the choice of Belsha for the Racine/Sturtevant site, the arbitration panel’s key factual findings were not supported by substantial evidence, and the arbitration panel’s ultimate conclusion was arbitrary and capricious.

Taylor appealed to the Seventh Circuit, which affirmed the district court’s decision. The Seventh Circuit held that Taylor’s appointment to Racine/Sturtevant by the arbitration panel ran afoul of administrative procedure in several ways.

First, the arbitration panel misapprehended the burden of proof — the Seventh Circuit held that preponderance of the evidence, rather than substantial evidence, was the correct burden of proof during the arbitration proceeding and that the arbitration panel fundamentally erred when it applied the substantial evidence standard.

Second, the key factual findings by the arbitration panel were not supported by substantial evidence — the Seventh Circuit held that the panel’s finding that the DWD should have evaluated Taylor based on earlier profitability data rather than more recent data in reinterviews was not supported by substantial evidence, under the Randolph-Sheppard Act, since there were only two questions in the selection criteria that assessed profitability data, and the record did not contain evidence of what operators’ scores would have been using recent data.

Third, the Seventh Circuit found that the arbitration panel’s decision for Taylor as the best operator for the Racine/Sturtevant site was contrary to the evidence and thus arbitrary and capricious.

State of Wisconsin, Dep’t of Workforce Development-Division of Vocational Rehabilitation v. U.S. Dep’t of Education, 980 F.3d 558 (7th Cir. 2020).

New York Federal Court Grants $12M Foreign Arbitration Award Under New York Convention

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The petitioner sought confirmation of an international arbitration award issued in its favor by the Society of Maritime Arbitrators. The petitioner and the respondent had entered into an agreement for the petitioner to charter a vessel to transport iron ore. The respondent objected to the arbitration in part on the ground that the parties’ agreement was procured by fraud and therefore void. The panel ruled in the petitioner’s favor and issued a final award of more than $12 million plus interest, finding no evidence of fraud or corruption. In opposition to the motion to confirm the award, the respondent argued that the panel lacked jurisdiction to arbitrate the dispute; that the award violated article V.1(c) of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention); and that the award violated article V.2(b) of the New York Convention because it was procured by corruption and thus enforcement would be against U.S. public policy.

Article V of the New York Convention sets forth seven grounds upon which a court may refuse to enforce a foreign arbitration award. The court acknowledged that district courts are “strictly limited” to those seven defenses in determining whether to confirm a foreign award. The party opposing enforcement bears the “heavy” burden of proving that one of the seven defenses applies. Here, having found that the panel had jurisdiction to decide a threshold arbitrability issue, the court found that the respondent failed to establish any basis to disturb the award pursuant to the New York Convention. The court thus granted the petition to confirm. In addition, given the respondent’s failure to comply with the award or otherwise put forth a good faith basis for not complying, the court also granted the petitioner’s request for attorneys’ fees and costs arising from the proceeding.

Commodities & Minerals Enterprise, Ltd. v. CVG Ferrominera Orinoco, C.A., No. 1:19-cv-11654 (S.D.N.Y. Dec. 10, 2020).

Florida Federal Court Denies Policyholder’s Motion to Compel Discovery of Reinsurance Agreements Relating to Disability Insurance Policies

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An insured filed suit in a Florida district court for breach of contract and breach of fiduciary duty in connection with the defendant-carriers’ handling of claims made under the insured’s disability insurance policies. During discovery, the insured requested documents concerning the carriers’ general claims handling practices, as well as copies of any coinsurance or reinsurance agreements that the carriers entered into with respect to the insured’s insurance policies. The carriers refused to produce this material, and the insured filed a motion to compel.

The district court ruled at the outset that the insured was not entitled to discovery of the carriers’ general claims handling practices. Relying on D’Aprile v. Unum Life Insurance Co. of America, No. 2:09-cv-00270 (M.D. Fla. Aug. 25, 2010), the court held that the carriers were required to produce only their “rules, guidelines, protocols, standards, and criteria, published or internal, which were utilized in whole or in part, or which relate to” the insured’s claims. With respect to coinsurance and reinsurance agreements, the insured argued that his request was permissible insofar as it related to assets available to satisfy a possible judgment. But the court rejected the argument, agreeing with the carriers that the insured failed to show how these requests were at all relevant to his breach of contract and/or breach of fiduciary claims. The request for coinsurance and/or reinsurance material was denied accordingly.

Allen v. First Unum Life Insurance Co., No. 2:18-cv-00069 (M.D. Fla. Sept. 30, 2020).

Sixth Circuit Reverses Order Finding Employment Arbitration Agreement Void Due to Coercion

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An employee sued her former employer and coworkers in the Eastern District of Michigan for sexual harassment, defamation, and for subjecting her to a hostile work environment. The employer argued that the employee’s claims fell within the scope of an arbitration agreement, but the district court held that the agreement was void because the employee had been coerced into signing it.

The employee argued that her boss told her that if she did not sign the agreement she would be fired. She stated that the agreement was presented to her in the middle of the workday, when she had little time due to her pressing work duties, and that her boss stood behind her and waited while she attempted to review it, ratcheting up the pressure. In addition, the plaintiff employee noted that she was a single mother with a disabled child and could not afford to lose her job.

The Sixth Circuit reversed, holding that “fear of financial ruin alone is insufficient to establish economic duress; it must also be established that the person applying the coercion acted unlawfully.” Where a party does not threaten anything that the party is not legally entitled to do, then there is no duress. Michigan is an at-will employment state, meaning that the employer’s conditioning the plaintiff’s continued employment on her signing the arbitration agreement did not amount to unlawful conduct. Therefore, the employee could not show that she was coerced into signing the agreement.

The plaintiff also argued that she did not knowingly and voluntarily waive her right to a judicial forum for her prospective claims under Title VII of the Civil Rights Act of 1964. The court applied a five-factor test to determine whether the waiver of Title VII claims was valid. The plaintiff had a high school-level education with some post-secondary education and experience reviewing and executing car sales contracts, which was held to be sufficient under the first prong. The court also found that the employee was given sufficient opportunity to review the contract, emphasizing the fact that she failed to request more time or the opportunity to consult a lawyer before signing. The court quickly dispatched the remaining factors, whether the agreement was sufficiently clear, whether sufficient consideration was provided, and the totality of the circumstances, and held that the contract was a valid waiver of the plaintiff’s right to adjudicate her Title VII claims in a judicial forum.

Solomon v. Carite Corporate LLC, No. 20-1020 (6th Cir. Nov. 23, 2020).