Ian Pai was an early participant in the Blue Man Group (“BMG”).  Between 1989 and 1991, he met and began collaborating with the founders of BMG, namely, Chris Wink, Phillip Stanton and Matt Goldman.  Pai claims to have made significant contributions to BMG’s creative and musical aspects over the decades-long relationship he had with the group, having ultimately assumed the duties of Music Director and Conductor.   In 2014, Pai’s royalty checks were abruptly cut in half without explanation.  Ultimately, Pai filed a  complaint against BMG and its founders, claiming breach of fiduciary duty, breach of contract, accounting, quantum meruit and unjust enrichment.  Following discovery, defendants moved for summary judgment on all counts.  Justice Barry Ostrager denied the motion in part, but granted summary judgment dismissing the two counts premised upon the existence of a fiduciary duty:  breach of fiduciary duty and accounting.  The remaining claims survived the motion, and trial is now scheduled for April 9, 2018.

Pai concedes that his fiduciary duty and accounting claims are not based upon a “formal” fiduciary relationship, but rather on his decades-old personal relationship with the three founders, and the founders’ alleged representations that they would “take care” of him.   In sum, his fiduciary duty claims were based solely upon the close relationship they developed over the years.  The defendants denied a fiduciary relationship ever existed, but did admit they had a long close-knit relationship with Pai.

So, can a mere close personal relationship create a fiduciary duty?   Maybe!  Indeed, as the Court recognized, citing Kohan v. Nehmadi, a fiduciary relationship can be found to exist between close friends under certain circumstances.   Here, the Court considered that “Pai’s age, lack of financial experience, and trust in the Individual Defendants to look out for him” may very well have given rise to a fiduciary relationship.  However, fatal to Pai’s claims was applicable six-year statute of limitations which barred any claims he may have had in the 1990s.  The Court reasoned that since 2009, Pai has been represented by counsel, negotiating agreements between Pai and BMG, all at arms-length.  The result is that the contract-based claims survive for trial, but the fiduciary relationship-based do not.

The concept of a close personal relationship giving rise to fiduciary duty is not new.    Whether a fiduciary relationship exists is, of course, a very fact-intensive inquiry.  The Court in the Pai case recognized this and, in the end, did not have to decide whether the early relationship in fact gave rise to a fiduciary one since it was time barred.  A good overview of this very issue — how New York courts determine the existence of a fiduciary duty — is found in an EDNY case, St. John’s Univ. v. Bolton (Garaufis, J., 2010) (“a fiduciary relationship embraces not only those the law has long adopted . . . but also more informal relationships where it can be readily seen that one party reasonably trusted another”).  The starting point (and maybe the ending one too) is whether there is an agreement between the parties governing their rights and obligations.  In the absence of such, a close personal relationship intertwined with a business one can very well create at least issues of fact whether a fiduciary relationship exists between them.

Frequent readers of this blog may recall my post from the end of last year in which I highlighted a decision of the Appellate Division, First Department affirming a decision of New York County Commercial Division Justice Shirley Werner Kornreich, that examined the application of Judiciary Law § 470.  For those needing a refresher, Judiciary Law § 470 provides that an attorney residing in “an adjoining state” may practice New York – without moving for pro hac admission – only if  both (I) admitted in New York and, (ii) more crucially to the Arrowhead Capital decision, maintains a physical law office in New York. In Arrowhead Capital, the Appellate Division affirmed Justice Kornreich’s dismissal of the plaintiff’s complaint due entirely to its non-resident lawyer’s failure, in violation of Judiciary Law § 470, to maintain an office in New York. 

Proving that this is not nearly as esoteric an issue as you might think is Platinum Rapid Funding Group, Ltd. v H D W of Raliegh, Inc., a recent decision out of the Nassau County Supreme Court (Hon. Jerome C. Murphy). While not a Commercial Division decision, Platinum Rapid Funding is valuable to readers of this blog for its additional analysis of Judiciary Law § 470. Before the Court in Platinum Rapid Funding was the plaintiff’s motion brought pursuant to Judiciary Law § 470, seeking disqualification of defendants’ counsel (the firm of Higbee & Associates [“Higbee”] and lawyer Rayminh L. Ngo [“Ngo”]) for failing to maintain an office for the transaction of law in New York, and dismissing the defendants’ counterclaims and affirmative defenses on the same basis. The court’s holding that defendants’ counsel did not maintain a physical office in the State of New York at the time they appeared in the action, relied on the following evidentiary findings:

  1. The defendants’ Verified Answer identified the principal office for Higbee as being in Santa Ana, California;
  2. Ngo identified himself not as an associate or partner of Higbee, but as the principal of his own law practice based in Salt Lake City, Utah;
  3. While Ngo asserted in opposition that he is duly admitted to practice in New York and was serving of counsel to Higbee, which he claimed was a “multijurisdictional law firm based in California” that purportedly leases office space on Wall Street and in Syracuse, neither Ngo nor Higbee asserted that there were attorneys or law firm staff in either location;
  4. The lease agreements subsequently submitted by Ngo as proof of the two New York office locations failed to establish that they were maintained by Higbee at the time Ngo and Higbee appeared in the action; and
  5. The court “[could not] overlook the fact that the defendants . . . failed to offer any competing evidence against the sworn affidavits of . . . process servers who attest[ed] that they physically went to [the Wall Street and Syracuse] addresses . . . and confirmed that neither Ngo nor Higbee had physical offices at th[ose] locations.”

The court further instructed that disqualification under these circumstances is not permissively left to the court’s discretion, but rather a finding that counsel’s violation of Judiciary Law § 470 mandates immediate disqualification from continued representation in the action.  Platinum Rapid Funding offers another stern reminder to non-resident lawyers attempting to practice in New York State courts: be sure to maintain a physical office in New York at the time you first appear in a given action or else be prepared to be disqualified.

My colleague Adam Rafsky’s astute post last week on Manhattan Commercial Division Justice Shirley Werner Kornreich’s recent reminder regarding the importance of proper service and claim viability when seeking a default judgment under CPLR 3215 reminded me of another default decision last fall from the same judge also addressing issues of service.

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In Wimbeldon Fin. Master Fund, Ltd. v Weston Capital Mgt. LLC, Justice Kornreich denied the plaintiff’s motion because it had served the defendant “in a jurisdiction where he did not work or reside.”  However, because of the defendant’s “apparent evasion of service,” as well as the undisputed fact that he “ha[d] clearly been aware of this action for some time,” the court sua sponte and “in the interest of justice” granted the plaintiff leave to serve the defendant “by alternative service,” including electronically by the court’s NYSCEF system.

Under CPLR 308 (5), a court may direct service by alternative means in certain circumstances, provided that the statutorily-prescribed methods are otherwise “impracticable” and the alternative method complies with constitutional due process – i.e., is reasonably calculated to apprise a defendant that an action is pending against him.

What caught my eye in Justice Kornreich’s Wimbeldon decision was a line in a footnote, noting that “courts have increasingly recognized the wisdom of permitting electronic service that is reasonably calculated to apprise defendant that he is being sued, even on social media networks.”

Justice Kornreich cited a non-commercial, Manhattan Supreme Court decision from 2015, Baidoo v Blood-Dzraku, in which the court discussed at length service of process in “the advent and ascendency of social media” and, after considering an affidavit verifying regular social media exchanges between the plaintiff and the on-the-lam defendant, directed alternative service “by Facebook, albeit novel and nontraditional, [a]s the form of service that most comports with the constitutional standards of due process.”

The court in Baidoo even went so far as to direct the specific procedure for effectuating such service:

Specifically, because litigants are prohibited from serving other litigants, plaintiff’s attorney shall log into plaintiff’s Facebook account and message the defendant by first identifying himself, and then either including a web address of the summons or attaching an image of the summons.  This transmittal shall be repeated by plaintiff’s attorney to the defendant once a week for three consecutive weeks or until acknowledged by the defendant.”

A quick Google Scholar search for New York cases involving “service of process” by “social media” since Baidoo revealed just two federal court decisions from 2016 and 2017 out of the Eastern and Northern Districts of New York.  In Ferrarese v Shaw, the Eastern District allowed service of a summons and petition by Facebook as a “backstop” to simultaneous service by certified mail on the defendant’s last known address.  And in Baez v City of Schenectady, the Northern District, after repeated nonparty witness no-shows, required that court-ordered deposition subpoenas be prepared, issued, and “transmitted to the witnesses via any known social media (i.e. Facebook), email, or text address.”

Nevertheless, according to the Baidoo court, “it would appear that the next frontier in the developing law of the service of process over the Internet is the use of social media sites as forums through which a summons can be delivered.”  In citing Baidoo in her recent Wimbeldon decision, Justice Kornreich appears to have “recognized the wisdom” of allowing for such service.   Look for the development of the law in this area in Commercial Division jurisprudence in the near future.

**Nota Bene**January 24, 2018:  Don’t miss this year’s Commercial and Federal Litigation Section Annual Meeting Program and Luncheon at which Manhattan Commercial Division Justice Charles E. Ramos will be honored with the Stanley H. Fuld Award for Outstanding Contributions to Commercial Law and Litigation.

Default judgments are merely rubber-stamped when defendant fails to appear and/or answer, right?  Wrong, as the New York County Commercial Division’s recent decision in Gutterman v. Stark (Hon. Shirley Werner Kornreich, J.) reminds us. In Gutterman, a case arising from plaintiff’s failed investment in a would-be ambulatory care surgical facility, the plaintiff purportedly served by personal service the individual (“Stark”) and corporate defendant (“FinPrime”) in question with a summons with notice and subsequently served its complaint on both by overnight express mail. FinPrime never appeared and Stark, after appearing, failed to file an answer. Naturally, plaintiff moved for a default judgment under CPLR § 3215 against Stark and FinPrime. Notwithstanding FinPrime’s and Stark’s failures to appear and answer, respectively, the Commercial Division denied the plaintiff’s motion. So, what gives?

The plaintiff failed to satisfy the two fundamental requirements: effectuating proper service and pleading viable claims.  First, the court held that FinPrime was not properly served. Plaintiff’s affidavit of service for FinPrime indicated only that the recipient of service was “a person of suitable age and discretion” who was employed at the location of FinPrime’s principal place of business. The court explained that suitable age and discretion service under CLPR § 308(2) is proper as against a corporation only if the person served is authorized to receive service on the corporation’s behalf. Plaintiff’s AOS did not indicate whether the person served was employed by FinPrim, let alone authorized to accept service on its behalf.  Second, the court held that the plaintiff failed to meet its very minimal pleading burden with respect to each of its claims against Stark. While noting that the standard of proof “is not stringent, amounting only to some firsthand confirmation of the facts,” the Commercial Division explained that notwithstanding, “a default judgment does not ‘give rise to a mandatory ministerial duty to enter a default judgment” but rather it is the plaintiff’s burden to demonstrate that it “at least [has] a viable cause of action.”(quoting the Second Department’s decision in Resnick v. Lebovitz).  With respect to the plaintiff’s claims against Stark, the Court explained that:

  • Its claim for malpractice could not be maintained as a matter of law because financial advisors such as Stark are not “professionals” in the context of professional malpractice;
  • the negligent misrepresentation claim failed to allege specific facts indicating the requisite special relationship between plaintiff and Stark;
  • the negligence claim failed to identify from where Stark’s alleged duty of care originated or how his alleged breaches caused plaintiff’s alleged damages; and
  • that its claims for breach of the implied covenant of good faith and fair dealing were not viable because Stark was not a party to the underlying agreement.

The court did, however, show  plaintiff some leniency by sua sponte granting it leave to amend its Complaint. The lesson to be learned here is that a defendant’s default does not automatically entitle the plaintiff, as a matter of right, to a default judgment. As always, the plaintiff must properly effectuate service and must establish through its complaint that it has viable claims.

“The expert discovery rules are promulgated so no party will be ‘sandbagged’ or surprised by another expert’s opinion” – Manhattan Commercial Division Justice Eileen Bransten

Several weeks ago, we reviewed some of the newer Commercial Division Rules and reported on a couple of recent decisions from Justice Shirley Werner Korneich of the Manhattan Commercial Division applying one of those Rules, Rule 11-c, concerning nonparty electronic discovery.  We follow up this week as promised with a look at another recent new-rule application from the same court.

Earlier this year, Justice Eileen Bransten, whose similarly-insightful decisions also are regular fodder for this blog, addressed issues concerning expert disclosure under Commercial Division Rule 13(c) in Singh v PGA Tour, Inc.Sandbagger

In Singh, the plaintiff, a professional golfer and member of the defendant PGA Tour, sued the Tour alleging that he had been humiliated by an arbitrary administration of the Tour’s anti-doping program and that the Tour wrongfully withheld his prize monies.  Singh had used a product called “deer antler spray” between seasons to address knee and back problems.  Sports Illustrated later posted an article about the spray on its website, referencing Singh’s use and suggesting that he had used it in violation of the Tour’s drug policy.  Singh responded by providing the Tour with a bottle of the spray for testing.  The initial results were negative for steroids but positive for a separate prohibited substance called “IGF-1.”  The Tour suspended Singh and held his 2013 prize money in escrow.  Singh challenged the Tour’s determination in arbitration.

The World Anti-Doping Agency, from which the Tour adopted its list of prohibited substances, subsequently determined that deer-antler spray was not a prohibited substance.  As a result, the Tour dropped its disciplinary action against Singh, and the arbitration was discontinued on the eve of the hearing.  Singh then sued the Tour in the Manhattan Commercial Division.

In the course of expert discovery in the Supreme Court action, Singh submitted a second, expert “reply report,” which the Tour challenged under Commercial Division Rule 13(c) as “impermissibly including new opinions which were not included in the first report.”  Specifically, Singh’s expert reply contained certain newly-obtained “consumer data” leading Singh to conclude that the “Tour suspension reduced the favorable criteria that marketing executives would use in their decision-making process in evaluating Singh’s viability as a spokesperson/endorser/advocate.”

Rule 13(c) mandates that an expert report contain, among other things, “a complete statement of all opinions the witness will express and the basis and the reasons for them,” as well as “the data or other information considered by the witness in forming the opinion(s).”  Quoting from The Chief Judge’s Task Force on Commercial Litigation in the 21st Century, Justice Bransten noted in her decision that “this rule was promulgated in an effort to harmonize the disclosure rules of our state and federal courts,” and that the Commercial Division looks to the Federal Rules of Civil Procedure “for guidance on expert disclosure issues.”  Federal Rule 26(a)(2)(B) mandates that an expert report contain the same statement, data, and information cited above, and Federal Rule 37(c)(1) provides that if a party fails to do so, “the party is not allowed to use that information or witness to supply evidence on a motion, at a hearing, or at trial.”

Justice Bransten granted the Tour’s motion to strike Singh’s expert reply, finding that “the new analysis, information, opinion and data contained within Plaintiff’s Reply Expert Report violates Commercial Division Rule 13(c) and FRCP 26.”  Noting the “egregiousness of the belated disclosure,” Justice Bransten cautioned Commercial Division practitioners that Rule 13(c) does not provide for “an opportunity for a party to ‘correct’ the deficiencies and omissions made in an initial expert report — including addition of new data and opinions, particularly when that data was available to the expert at the time the initial report was issued” or for an expert “to say what he neglected to say in his opening report.”

The rules of golf prohibit a player from “sandbagging” or deceiving others about their knowledge, intentions, and abilities.  As Justice Bransten’s recent decision in Singh v PGA Tour, Inc. makes clear, the same goes for the Commercial Division Rules regarding expert disclosure.

**Nota Bene** – Readers interested in hearing from Commercial Division Justices directly on lessons to be drawn from the implementation of some of these new rules and rule-changes should register for the upcoming Bench & Bar Forum sponsored by the NYSBA Commercial & Federal Litigation Section.  The program, entitled “True Innovation and Efficiency: New York County Commercial Division Justices Discuss the Success of the New Commercial Division Rules,” is scheduled for the evening of November 27th at Foley & Lardner LLP.

Under Delaware law, the decision to commence litigation on behalf of a corporation is, of course,  a fundamental exercise of business judgment, which decision rests with the Board of Directors.  A shareholder, therefore, cannot bring a derivative action without pleading that a demand on the corporation to do so had been made, or that such demand would have been “futile.”  The shareholder, therefore, has an initial decision to make:  make the demand, or plead futility. 

Recently, in Reese v. Andreotti, Justice O. Peter Sherwood dismissed a derivative action brought by a shareholder who made the demand, which was rejected by the Board.    Relying on Delaware law, the court noted that the mere making of a demand is a tacit acknowledgment by the shareholder that there is an absence of facts that would support a “futility” argument (citing Spiegel v. Buntrock).  Mere disagreement with the Board’s conclusion is simply not sufficient to raise doubts about the Board’s good faith and whether it acted on an informed basis.  Similarly, the court held that by making a demand, a shareholder is effectively conceding that his demand can be fairly assessed and thereby waives any later claim that the Board members were conflicted.

How about the availability of discovery to determine the reasonableness of the Board’s rejection of the demand?  “No” says the court, relying on both Delaware law and New York law, which come to the same conclusion:  plaintiffs are not entitled to discovery to assess the reasonableness of the Board’s rejection.

Making a demand or pleading futility becomes an important, strategic first step in any derivative action.  There are presumptions and ramifications that must be considered before the chosen course is charted and demand is made.

 

 

As we have come to expect, the Commercial Division Advisory Council periodically makes recommendations to amend and/or supplement the Rules of the Commercial Division, many of which are eventually adopted following a solicitation process for public comment by the Office of Court Administration.

In 2015, as a host of new Commercial Division rules and amendments were being rolled out, the NYSBA Commercial and Federal Litigation Section sponsored several panels throughout the metro-area to discuss the impact of the new rules on the various county bar associations.  At the time, Commercial Division practitioners and judges alike were still figuring out how and under what circumstances the new rules – concerning, among other things, interrogatory limitations, categorical privilege logs, nonparty electronic discovery, and expert disclosure – would be applied in their cases.  It’s been a couple years, so let’s take a look at some recent decisions to see how some of these rules are being applied.

Manhattan Commercial Division Justice Shirley Werner Kornreich, whose thoughtful decisions are no strangers to this blog, has at least twice this year addressed Commercial Division Rule 11-c concerning nonparty electronic discovery.  Under Rule 11-c and the corresponding guidelines found in Appendix A to the Rules of the Commercial Division, “[t]he requesting party shall defray the nonparty’s reasonable production expenses” – including, for example, “fees charged by outside counsel and e-discovery consultants” and “costs incurred in connection with the identification, preservation, collection, processing, hosting, use of advanced analytical software applications and other technologies, review for relevance and privilege, preparation of a privilege log . . . , and production.”

Recently, in Gottwald v Sebert, Justice Kornreich addressed Rule 11-c in the context of a motion to compel production of documents by a nonparty public-relations firm hired by pop star, “Kesha” Sebert, in connection with her allegations of sexual assault, battery, and harassment against her former manager and producer, “Dr. Luke” Gottwald.  Justice Kornreich granted Dr. Luke’s motion, assessing any burden on the PR firm as “minimal,” given that “hit count caps can be used to keep costs reasonable”; that hit counts for the limited time period in which the firm was involved “should be minimal or nonexistent”; and that Dr. Luke “must reimburse [the firm] for the reasonable costs of . . . review[ing] documents for responsiveness to the subpoena, and log[ging] those that are purportedly privileged.”

Earlier this year, in Bank of NY v WMC Mtge., LLC, Justice Kornreich addressed Rule 11-c in the context of motions to quash nonparty subpoenas in a RMBS put-back case.  In denying the motions, Justice Kornreich similarly assessed the burden on the nonparties as “relatively minimal,” given that the defendant serving the subpoenas “will have to defray the [nonparties’] reasonable document collection, review, and production costs, including certain legal fees.”

Justice Kornreich also addressed Rule 11-b (b) concerning the “categorical” versus “document-by-document” approach to logging of privileged materials in Bank of N.Y. Mellon.  Under Rule 11-b (b) (1), specifically, the Commercial Division had expressed a “preference . . . for the parties to use categorical designations, where appropriate, to reduce the time and costs associated with preparing privilege logs.”  Referencing the parties’ prior meet-and-confer on the subject, Justice Kornreich ruled that “a categorical privilege log, in the first instance, will be employed for the sake of cost efficiency,” and that once the defendant serving the subpoenas “is made aware of the hit count totals associated with the [nonparties’] privilege designations,” it may then “elect . . . to pursue such purportedly privileged documents in light of the legal fees necessary to do so.”

Be sure to check back in a few weeks when we take a look at a couple more recent decisions applying some of these newer Commercial Division rules.  In the meantime, Commercial Division practitioners, particularly those on the receiving end of a nonparty subpoena seeking ESI, should be mindful that the rules defraying the costs of e-discovery appear to have minimized the effect of the commonly-asserted “unduly burdensome” objection.

Statutorily imposed deadlines are not optional for commercial litigants; this much should be obvious. Notwithstanding, and despite numerous technological calendaring options available to commercial litigators, deadlines are blown in the Commercial Division, including the mother of all deadlines: the defendant’s time to answer or otherwise move against a complaint (see CPLR 3012). As should also be obvious, the defaulting defendant’s request for a “Get out of Jail Free Card” – a motion to extend the time to appear or plead (see CPLR § 3012 [d]) – will not be taken lightly.

A recent ruling provides such a reminder.  In State Farm Mut. Auto Ins. Co. v. Austin Diagnostic Med., P.C., the Appellate Division, Second Department recently considered the Queen’s County Commercial Division’s (Dufficy, J.) denial of such a motion. State Farm commenced the action seeking a declaratory judgment that it was not obligated to pay certain no-fault insurance benefits to the defendant. The defendant blew its deadline and, three and a half months late, filed its answer. State Farm rejected the answer and the defendant moved to extend its time to answer, “or in the alternative, to compel the plaintiff to accept” it.

In affirming the Commercial Division’s denial of the motion, the Appellate Division offered a clear reminder of the defaulting defendant’s bright-line burden: in addition to providing a reasonable excuse for its delay, it must demonstrate that it has a potentially meritorious defense. The Appellate Division held that the documents offered in support of a potentially meritorious defense – the untimely answer, which was verified by the defendant’s attorney, and an affirmation of the defendant’s attorney – were insufficient because the attorney lacked personal knowledge of the facts.

The take-away here is fundamental, but critical: do what you must to avoid a default and, if you do miss your deadline, be sure your motion for an extension establishes a reasonable excuse for the delay and a potentially meritorious defense, both of which are attested to by someone having personal knowledge of those facts.

Visitors to this blog may recall our recent posts (here and here) concerning the individual practice rules of Manhattan Commercial Division Justice Bransten and Queens County Commercial Division Justices Gray and Livote.  “Check the rules!”, was the cautionary theme of those posts.

But just how much of a stickler for compliance can one expect a judge to be with respect to the part’s individual rules?  And is there any precedent for enforcement – perhaps even some case law that can be cited by a party affected by a non-compliance?

More and more, counsel are being reminded of the importance of following the rules in the Commercial Division.  In at least two decisions this year, Manhattan Commercial Division Justice Shirley Werner Kornreich gave such reminders to the bar when she admonished the parties for violating her part rules in the context of summary judgment motions.

With respect to motion papers filed in her court, particularly motions for summary judgment, Justice Kornreich’s “Practices in Part 54” clearly require, among other things, that:

·       “all e-filed documents must be OCR Text Searchable PDFs”;

·       all memoranda of law must include “cover pages, tables of contents, and tables of authorities, all three of which are mandatory”;

·       “the parties shall . . . prepare and file one joint Rule 19-a statement of material facts at least three weeks before the summary judgment motion is filed” and that “[i]f the parties cannot agree on a joint statement, no Rule 19-a statement of facts may be filed”; and that

·       “[i]f summary judgment briefs cite to deposition testimony, a complete copy of that deposition transcript must be filed.”

Simple enough, right?  Maybe not.

In Lau v Lazar, which involved cross-motions for summary judgment concerning the ownership and operation of an outpatient surgical center, Justice Kornreich reprimanded the parties for “substantially delay[ing] the court in resolving the instant motions” due to their filing of lengthy briefs that “lack[ed] tables of contents and authorities, that [we]re not text-searchable, and that contain[ed] almost no case law in violation of this part’s rules.”  Justice Kornreich also scolded the parties for “submit[ting] fact statements without citations to the record, forcing the court to piece together the factual background from the parties’ exhibits, which . . . did not include complete deposition transcripts.”

In Arizona Premium Fin. Co., Inc. v American Tr. Ins. Co., which involved cross-motions for summary judgment concerning the return of unearned insurance premiums, Justice Kornreich threw out altogether the defendant’s “proposed statement of material facts, which was submitted in violation of this part’s rules,” because the parties otherwise “were unable to agree on a joint statement of undisputed facts.”

You are remembered for the rules you break“, remarked Gen. Douglas MacArthur.  In the Commercial Division, however, you don’t want to be remembered as the one who broke the rules.  Justice Kornreich’s recent Lau and Arizona Premium decisions serve as another, a best-practices reminder for the Commercial Division practitioner to first “check the rules”, then follow them!

As any seasoned commercial litigator knows, courts are generally loathe to overturn the independent decisions of arbitrators.

New York County Commercial Division Justice Charles E. Ramos recently examined the standard for doing so in Daesang Corp. v NutraSweet Co., a dispute arising from Daesang Corporation’s attempted $79,250,000 sale of its aspartame business to iconic sweetener brand NutraSweet.

Daesang commenced the breach of contract action when NutraSweet attempted to exercise its right to rescind the purchase transaction based upon the filing of a suit against the parties by a class of aspartame purchasers for alleged violations of federal antitrust laws. The parties stipulated to the jurisdiction of the International Chamber of Commerce (“ICC”), which ultimately issued a written award dismissing all of NutraSweet’s counterclaims and defenses and awarded Daesang damages of over $100 million. Daesang then commenced the instant proceeding to confirm the ICC’s award, which NutraSweet moved to vacate.

Acknowledging the “presumption in favor of upholding arbitration awards,” Justice Ramos further observed that such deference is not limitless.   The Court explained that an arbitration award may be vacated only if it a) violates a ground set forth in Section 10 of the Federal Arbitration Act; or b) was rendered in “manifest disregard” of the law.

Justice Ramos determined this to be the rare case, finding two exceptional aspects of the ICC’s award to Daesang warranting vacatur. First, the Court held that with respect to NutraSweet’s defense and counterclaim for equitable rescission based on fraud in the inducement, the ICC disregarded, and in fact ignored the “well-established principle that a fraud claim can be based on a breach of contractual warranties where the misrepresentations are of present facts.”

Second, the Court found that the ICC’s outright refusal to consider NutraSweet’s breach of contract counterclaim, which the ICC concluded NutraSweet waived during its closing argument, went “beyond a mere error in law or facts, and amount[ed] to an egregious dereliction of duty.” The Court explained that, beyond the fact that NutraSweet submitted witness statements, live and expert testimony, and took cross-examination on the counterclaim, the portion of the transcript that the ICC based its decision on failed entirely to address the breach of contract counterclaim.

While the Commercial Division’s decision was a sweet success for NutraSweet, this case should serve as a stark reminder to commercial litigators that a successful motion to vacate an arbitration award requires a finding of truly egregious errors and/or “manifest disregard” for well-established law.