Opinion
112479/05.
Decided January 3, 2006.
Petitioners Arthur Cohen, Jeffrey Paul Green, Joseph Healey, Avi Horev and Michael Mashaal (collectively, the "Petitioners") move pursuant to Article 75 of the CPLR for, among other things, a judgment consolidating two American Arbitration Association ("AAA") proceedings — S.A.C. Capital Advisors, LLC v. Healey (AAA No. 13 166 01 555 05) ("Managers Proceeding") and S.A.C. Capital Management, LLC v. Green (AAA No. 13 116 Y 01640 05) ("Analysts Proceeding") — commenced by respondents S.A.C. Capital Advisors, LLC and S.A.C. Capital Management, LLC.
This proceeding requires analysis of the interplay between the Federal Arbitration Act ("FAA") and general choice-of-law provisions contained in employment agreements with investment fund managers and analysts. Because the generic choice-of-law clauses do not clearly establish that the parties intended to displace the FAA and for New York State law to govern any and all matters related to arbitration, the petition seeking consolidation is denied.
Background
Petitioners managed capital for S.A.C. Capital Advisors, LLC and S.A.C. Capital Management, LLC — Delaware limited liability companies, with offices in New York and a trading floor in Connecticut (collectively, "SAC") — through two healthcare-related hedge funds. Mr. Healey, a New York resident, and Mr. Cohen, a Connecticut resident, served as the fund managers. Their 48-page employment agreement with S.A.C. Capital Advisors, LLC provided, among other things:
"This Agreement shall be governed by and construed in accordance with the laws of the State of New York (excluding the law thereof that governs the application of or reference to the law of any other jurisdiction).
* * *
"Except as otherwise expressly provided herein, the parties agree that any dispute or controversy arising out of or relating to this agreement or the interpretation thereof, shall be settled by arbitration before a one-arbitrator panel in accordance with the rules, then in effect, of the American Arbitration Association; provided, however, that the arbitrator shall be knowledgeable in industry standards and practices and the matters giving rise to the dispute, that the power of the arbitrator shall be limited to interpreting this agreement as written and that the arbitrator shall state in writing the reasons for the award and the legal and factual conclusions underlying the award. The award of the arbitrator shall be final and judgment upon the award may be confirmed and entered in any court, state or federal, having jurisdiction."
Affirmation of Jonathan D. Lupkin ("Supp. Aff."), Ex. 2, at ¶¶ 10.7 and 10.9.
Petitioners Dr. Green, Mr. Horev, and Dr. Mashaal — all New York residents — were hired as research analysts for the hedge funds. Each of them had a separate 12-page employment agreement with S.A.C. Capital Management LLC, which provided, among other things:
"Except as otherwise expressly provided herein, the parties agree that any dispute or controversy arising out of or relating to this agreement, the interpretation thereof, and/or the employment relationship shall be settled by arbitration in accordance with the rules, then in effect, of the American Arbitration Association Commercial Arbitration Rules; provided, however, that the arbitrator shall be knowledgeable in industry standards and practices and the matters giving rise to the dispute, that the power of the arbitrator shall be limited to interpreting this agreement as written and that the arbitrator shall state in writing the reasons for the award and the legal and factual conclusions underlying the award. The award of the arbitrator, or a majority of them, shall be final and judgment upon the award may be confirmed and entered in any state or federal court located in New York."
* * *
"This Agreement shall be governed by the laws of the State of New York without regard to conflicts of law principles."
Supp. Aff., Ex. 3 (Dr. Green's contract), at ¶¶ 6 and 7.2; Ex. 4 (Mr. Horev's contract), at ¶¶ 6 and 7.2; Ex. 3 (Dr. Mashaal's contract), at ¶¶ 6 and 7.2.
After a dispute with SAC arose, all five Petitioners formally resigned at the same time. Petition, at ¶ 12. The five subsequently began working together at an independent investment firm, with Mr. Cohen and Mr. Healy as owners and the remaining petitioners as employees. Id.
On July 11, 2005, SAC commenced an arbitration — the Mangers Proceeding — against Mr. Cohen and Mr. Healy before the AAA. SAC asserts claims for breach of contract, tortious interference of contract, civil conspiracy to induce breach of contract, breach of fiduciary duty and unfair competition. Memorandum of Law in Opposition to Petition to Consolidate Arbitrations ("Opp. Mem."), at 13.
Mr. Cohen and Mr. Healy served Answers and Counterclaims (to which SAC replied), and Richard H. Silberberg was appointed to serve as arbitrator.
On July 22, 2005, SAC commenced three additional AAA arbitrations: one against Dr. Green, a second against Mr. Horev and a third against Dr. Mashaal. Petition, at ¶ 13; Opp. Mem., at 17. SAC initiated separate proceedings against each analyst because each was subject to a separate employment agreement. SAC asserted claims against the analysts for breach of contract, breach of fiduciary duty and unfair competition. Opp. Mem., at 17. Dr. Green, Mr. Horev and Dr. Mashaal served answers and counterclaims.
Petitioners sought consolidation of the proceedings before AAA. AAA refused to consolidate absent the parties' consent or a court order. Given the similarities of the three analysts' agreements and the facts surrounding their departures, SAC agreed to consolidate the three analyst arbitration matters into one proceeding — the Analysts Proceeding. It would not, however, consent to any further consolidation. Thus, currently two proceedings are pending: the Managers Proceeding and the Analysts Proceeding.
This Petition
Petitioners seek a judgment consolidating the two AAA arbitrations. They contend that "SAC has initiated virtually identical arbitration proceedings involving common facts, common witnesses, common documents, and virtually identical contract provisions." Petition, at ¶ 1. According to Petitioners:
"It would be extraordinary wasteful and burdensome for two different arbitrators separately to hear the same testimony from the same witnesses, and to interpret the same contracts and evidence. Moreover, SAC's attempt to double the proceedings would invite conflicting and possibly unenforceable rulings."
Id.
They stress that New York law authorizes this Court to consolidate the arbitration proceedings, see, Matter of Cowper Co. [Hires-Turner Glass Co.], 51 NY2d 937, 940 (1980); County of Sullivan v. Nezelek, 42 NY2d 123, 129 (1977), and that it would be an abuse of discretion not to do so. See, Yaffe v. Mintz Fraade, P.C., 270 AD2d 43 (1st Dept. 2000) (consolidation of arbitration proceedings "all of which involved claims that respondent failed to compensate petitioners in accordance with their of counsel' contracts" was proper exercise of discretion); Gershen v. Hess, 163 AD2d 17, 19 (1st Dept. 1990) (denial of consolidation of arbitrations was an abuse of discretion "in light of the existence of at least one common party, common issues, [and] the possibility of inconsistent judgments"); Farr Man Supliciy, Inc. v. Van Ekris and Stoett, Inc., 101 AD2d 756, 757 (1st Dept. 1984) (arbitrations between coffee supplier, seller and purchaser involving interpretation of contracts that were "substantially identical except for price and payment" should be consolidated in the absence of provisions precluding or limiting consolidation), appeal discontinued 64 NY2d 756 (1984); Materials International v. Manning Fabrics, 46 AD2d 627, 628 (1st Dept. 1974) (reversing denial of consolidation of arbitrations and explaining that the test for consolidation "is whether the issues are substantially the same and whether any substantial right is prejudiced"); see also, Feinstein Iron Works, Inc. v. F.J. Sciame Constr. Co., 7 AD3d 662, 663 (2nd Dept. 2004); East Meadow Union Free School District v. East Meadow Teachers Assn., 7 AD3d 621, 622 (2nd Dept. 2004).
SAC vigorously opposes consolidation. It argues that the FAA applies and divests this Court of the power to consolidate the proceedings. SAC correctly points out — indeed, the New York Court of Appeals acknowledged — that "courts [applying the FAA] have refused to consolidate related arbitration hearings in the absence of any provision for consolidation in the parties' agreement, even though consolidation would result in a more economical arbitration process." Matter of Salvano [Merril Lynch, Pierce, Fenner Smith, Inc.], 85 NY2d 173, 182 (1995); Cullman Ventures, Inc. v. Conk, 252 AD2d 222, 228 (1st Dept. 1998); see also, Government of the United Kingdom v. Boeing, 998 F.2d 68, 72-74 (2d Cir. 1993) ("district court cannot consolidate arbitration proceedings arising from separate agreements to arbitrate, absent the parties' agreement to allow such consolidation"). The rationale underlying the FAA policy against consolidation in the absence of an explicit agreement is that the authority of courts is "narrowly circumscribed." See, Government of the United Kingdom v. Boeing, 998 F.2d, at 73 (citation omitted). The FAA only allows a court to enforce a written arbitration agreement "in accordance with its terms," and "a court is not permitted to interfere with private arbitration arrangements in order to impose its own view of speed and economy * * * even [when] the result would be the possibly inefficient maintenance of separate proceedings.'" Id. (quoting American Centennial Ins. Co. v. National Casualty Co., 951 F.2d 107, 108 [6th Cir. 1991]).
In response, Petitioners argue that the parties' choice-of-law provisions — each of which essentially set forth that the respective "Agreement shall be governed by * * * the laws of the State of New York" — displace the FAA. Giving effect to the clauses, Petitioners contend, would not conflict with the policies underlying the federal arbitration statute as it would only enforce the parties' agreements. Reply in Support of Joint Petition for Consolidation of Related Arbitration Proceedings ("Reply"), at 3. Petitioners urge that the parties chose to be bound by New York law and New York's presumption that courts will order consolidation when appropriate to promote convenience and avoid inconsistent results. Id. (citing Shoyo Shipping Co. v. Shipmair, B.V., No. 86 Civ. 2148, 1986 WL 11607, at *2 [S.D.NY May 7, 1986]).
Because the FAA applies and the parties' choice-of-law provision does not override the federal policy against consolidation, the petition is denied.
Analysis
The FAA broadly mandates that a "written provision in any * * * contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract * * * shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2 (emphasis added). The statute applies expansively to any transaction affecting interstate commerce and signifies Congressional intent to exercise its Commerce Clause powers to the fullest extent. Allied-Bruce Terminex Cos. v. Dobson, 513 U.S. 265, 273-277 (1995); see also, Matter of Diamond Waterproofing Systems, Inc. [Liberty Owners Corp.], 4 NY3d 247, 252 (2005). The FAA, moreover, is applicable to employment contracts. See, Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 119 (2001).
The FAA undoubtedly applies to arbitration of the parties' disputes. "Under settled law, the arbitration of disputes concerning employment in the securities industry" is governed by the FAA. Matter of Salvano [Merril Lynch, Pierce, Fenner Smith, Inc.], 85 NY2d 173, 180 (1995). Additionally, the parties, who together engaged in interstate commercial activity, are residents of multiple states: SAC consists of Delaware limited liability companies and Petitioners reside in New York and Connecticut. See, Matter of Diamond Waterproofing Systems, Inc. [Liberty Owners Corp.], 4 NY3d 247, 253 (2005) (FAA applicable because numerous "out-of-state entities were involved in the transaction").
The applicability of the FAA, however, is not dispositive. Important to resolution of this proceeding is analysis of whether the parties' general New York choice-of-law provisions trump the FAA's policy against consolidation in the absence of an agreement.
United States Supreme Court precedent makes clear that choice-of-law clauses are not antithetical to policies embodied in the FAA. See, Volt Information Sciences, Inc. v. Board of Trustees, 489 U.S. 468, 476 (1989). Recent cases, however, have made clear that general choice-of-law provisions will not be deemed to displace the FAA; rather, the clauses will be used in conjunction with federal law and policies to fill any appropriate state-law gaps. See, e.g., Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83-86 (2002) (using federal law to analyze whether NASD time-limit rule should be resolved by courts or arbitrators despite the parties' choice-of-law clause providing that the agreement "shall be construed and enforced in accordance with the laws of the State of New York").
Indeed, a decade ago the United States Supreme Court rejected an argument similar to the one that Petitioners espouse here. In Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 55-56 (1995), two investors sued their broker and others in federal court. The parties' brokerage agreement contained a provision requiring that "any controversy" be settled by arbitration in accordance with the rules of the National Association of Securities Dealers or the Boards of Directors of the New York Stock Exchange and/or the American Stock Exchange. Based on the arbitration clause, the federal action was stayed and the parties proceeded to arbitration. The arbitrators awarded plaintiffs $400,000 in punitive damages.
Relying on another provision in the brokerage agreement specifying that "the contract shall be governed by New York law," Id., at 55, the broker and other respondents strenuously argued that "the choice-of-law provision in their contract evidences the parties' express agreement that punitive damages should not be awarded in the arbitration of any dispute arising under their contract" since New York law absolutely prohibits arbitrators from awarding punitive damages. Based on the parties' contract, the United States Supreme Court disagreed.
The Supreme Court pointed out that "the agreement contains no express reference to claims for punitive damages." Id., at 59. The Court explained that:
" The choice-of-law provision, when viewed in isolation, may reasonably be read as merely a substitute for the conflict-of-laws analysis that otherwise would determine what law to apply to disputes arising out of the contractual relationship. * * * In such event, there would be nothing in the contract that could possibly constitute evidence of an intent to exclude punitive damages claims.
* * *
"Even if the reference to the laws of the State of New York' is more than a substitute for ordinary conflict-of-laws analysis and, as respondents urge, includes the caveat detached from otherwise-applicable federal law,' the provision might not preclude the award of punitive damages because New York allows its courts, though not its arbitrators, to enter such awards. In other words, the provision might include only New York's substantive rights and obligations, and not the State's allocation of power between alternative tribunals. Respondents' argument is persuasive only if New York' law means New York decisional law, including that State's allocation of power between courts and arbitrators, notwithstanding otherwise applicable federal law.' But as we have demonstrated, the provision need not be read so broadly. It is not, in itself, an unequivocal exclusion of punitive damages claims."
Id., at 60 (emphasis added).
Similarly, the parties' choice-of-law clauses here do not unequivocally indicate an intention to allow for consolidation of proceedings. The provisions simply set forth:
"This Agreement shall be governed by and construed in accordance with the laws of the State of New York (excluding the law thereof that governs the application of or reference to the law of any other jurisdiction).
and
"This Agreement shall be governed by the laws of the State of New York without regard to conflicts of law principles."
These clauses can reasonably be interpreted as invoking New York substantive law for purposes of ascertaining whether the parties had a contract and the scope of that contract. In fact, one of the choice-of-law provisions makes plain that New York law applies "without regard to conflicts of law principles." This language suggests (even more strongly than in Mastrobuono) that the provision was intended to address substantive, contractual-relationship issues, not procedural ones related to arbitration.
Contrary to Petitioners' argument, the exclusionary words contained in the general choice-of-law clauses in no way alters the analysis. There is every reason to believe that the parties intended for New York law to apply to contractual issues "excluding the law * * * that governs the application of or reference to the law of any other jurisdiction" or "without regard to conflicts of law principles." There is absolutely no indication that the parties intended for New York law to sweepingly apply to procedural arbitration issues and to the exclusion of the FAA.
Federal Courts of Appeals that have grappled with similar issues have likewise determined that "general" or "generic" choice-of-law provisions do not operate to displace the FAA and federal standards of review. See, Puerto Rico Telephone Co. v. U.S. Phone Manufacturing Corp., 427 F.3d 21, 29, 31 (1st Cir. 2005) ("application of state law rules is appropriate only when there is no conflicting federal policy," the FAA's primary goal is enforcement of private agreements to arbitrate and the statute requires piecemeal resolution when necessary to give effect to the parties' agreement); Jacada (Europe) Ltd. v. International Marketing Strategies, 401 F.3d 701, 710 (6th Cir. 2005) ("Just as in Mastrobuono, the choice-of-law clause could be read as only specifying what state contract law the parties wished to use," thus, despite contract provision setting forth that the "Agreement will be governed by the laws of the State of Michigan" federal standard applied to vacatur determination), cert. denied 2005 WL 3144135 (Nov. 28, 2005); Action Industries, Inc. v. United States Fidelity Guaranty Co., 358 F.3d 337, 341 (5th Cir. 2004) ("choice-of-law provision is insufficient, by itself, to demonstrate the parties' clear intent to depart from the FAA's default rules"); Sovak v. Chugai Pharmaceutical Co., 280 F.3d 1266, 1270 (9th Cir. 2002) ("general choice-of-law clause * * * does not trump the presumption that the FAA supplies the rules for arbitration. * * * Rather, we will interpret the choice-of-law clause as simply supplying state substantive, decisional law, and not state rules for arbitration"), cert. denied 537 U.S. 825 (2002); Roadway Package System, Inc. v. Kayser, 257 F.3d 287, 294 (3d Cir. 2001) (generic choice-of-law clause did not evidence requisite "clear intent" to incorporate state standards for judicial review; rather, it spoke to issues that were wholly distinct such as construction of the contract) , cert. denied 534 U.S. 1020 (2001); National Union Fire Ins. Co. v. Belco Petroleum Corp., 88 F.3d 129, 134 (2d Cir. 1996) (standard New York choice-of-law clause is insufficient "to incorporate New York decisional law on the allocation of powers between the court and the arbitrator").
The New York State Court of Appeals has arrived at the same conclusion as well. Matter of Diamond Waterproofing Systems, Inc. [Liberty Owners Corp.], 4 NY3d 247, 253 (2005) (emphasizing that to incorporate New York decisional arbitration laws, a choice-of-law provision must specify that "New York law shall govern both the agreement and its enforcement'"); see also, Matter of Salvano [Merril Lynch, Pierce, Fenner Smith, Inc.], 85 NY2d, at 180 (only an explicit choice-of-law provision "will displace the provisions of the FAA" and parties must explicitly choose New York State law "to govern their arbitration" to remove the issues from the ambit of federal law and invoke CPLR Article 75).
Additionally, the arbitration clauses in the managers' contract and those in the analysts' agreements are different. The managers' arbitration provision specifically requires that arbitration be held before a "one-arbitrator panel." The analysts' provisions, by contrast, do not mandate use of a single arbitrator. This difference in the arbitration provisions certainly indicates that the parties understood there could well be differences in the manner of arbitration of disputes between SAC and the mangers and SAC and the analysts. This fact bolsters the conclusion that the parties did not clearly and unambiguously intend for courts to be able to consolidate arbitration proceedings without the parties' consent.
Under these circumstances, there is no clear indication that the parties intended for CPLR Article 75 to displace the FAA. Contrast, Volt Information Sciences, Inc. v. Board of Trustees, 489 U.S. 468, 472 (1989) (affirming California Court of Appeal determination that "the parties had incorporated the California rules of arbitration * * * into their arbitration agreement"). In the end, an important policy underlying the FAA — enforcement of the parties' agreement as written, regardless of any inefficiency — warrants denial of the petition to consolidate.
Sealing of Court Record
Petitioners also request that the proceeding be filed under seal because "of the confidential and proprietary business information discussed" and because of the pendency of a "confidential arbitration." They argue that they should not be deemed to forfeit their desire for confidentiality simply because a procedural ruling with regard to arbitration has been sought. They further assert that the parties' agreements contain extensive confidentiality provisions setting forth, among other things, a prohibition against disclosure of "confidential information." "Confidential Information," as defined by the agreements, includes "financial, organizational and operational information" and the terms of the agreements themselves. See, e.g., Supp. Aff., Ex. 2, at ¶ 1.6. In the course of litigating this matter, the parties have annexed to their papers relevant employment contracts, including a schedule titled "Description of Investment Strategy," certain account information and budgets.
SAC does not oppose the application to have the records sealed. In its Answer to the Petition, SAC states that this proceeding relates to a private dispute between an employer and certain employees that will be resolved through private arbitrations "and that the proceedings in this matter should be sealed." Answer, at ¶ 26.
22 N.Y.C.R.R. 216.1 provides:
"a court shall not enter an order in any action or proceeding sealing the court records, whether in whole or in part, except upon a written finding of good cause, which shall specify the grounds thereof. In determining whether good cause has been shown, the court shall consider the interests of the public as well as of the parties."
New York courts have authorized sealing the records of Article 75 proceedings involving arbitrable disputes "since the matter properly belongs in arbitration * * * [and] the material filed with the court belongs not in the court, but in the files of the arbitrating body." See, Feffer v. Goodkind, Wechsler, Labaton Rudoff, 152 Misc 2d 812, 815-816 (Sup.Ct. NY Cty. 1991), affd. 183 AD2d 678 (1st Dept. 1992). Sealing records may be particularly appropriate, moreover, when the parties wish to maintain the confidentiality of materials that "for the most part involve the internal finances" of a party and do not implicate any matters of public interest. Id.; see also, Dawson v. White Case, 184 AD2d 246, 247 (1st Dept. 1992) (affirming sealing order).
Petitioners have established good cause to have the records in this proceeding sealed. Their exhibits include sensitive proprietary and business information, which the parties have an interest in protecting and there is no countervailing public interest that would be furthered by their disclosure.
Accordingly, it is
ORDERED that the Clerk of the Court is directed to seal the file in this action upon service on the Clerk of a copy of this Order and Judgment with notice of entry; it is further
ORDERED that absent further Order of the Court, the Clerk shall deny access to the file to anyone except for counsel of record to any party to this proceeding, any party, and any representative of counsel of record to a party upon presentation to the Clerk of written authorization from said counsel; and it is further
ORDERED and ADJUDGED that, with the exception of the application for a sealing order, the petition is denied and the proceeding is dismissed.
This constitutes the Decision, Order and Judgment of the Court.