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You’ve just represented a client in an arbitration proceeding…and lost. The client wants to “appeal” the decision. Now what? The only remedy your client has is to request that the court vacate or modify the arbitration award. However, this is no small task.

A recent decision by New York County Commercial Division Justice Charles E. Ramos (NSB Advisors, LLC v C.L. King & Assoc., Inc., 2018 NY Slip Op 32533 [Sup. Ct., NY County 2018]) serves as a reminder that a party seeking to vacate an arbitration award faces a heavy burden. Arbitration awards are almost always upheld by New York State courts because the standard of review is so high. An arbitration award must be upheld when the arbitrator offers “even a barely colorable justification for the outcome reached.”

The burden of proof lies with the party that is challenging the arbitration award to show the court why the award should be vacated. Pursuant to CPLR §7511, an application to vacate or modify an arbitration award may be made by a party within 90 days after the decision is rendered.

The only two instances when an arbitration award may be vacated include (1) instances involving fraud, corruption or misconduct of the arbitrators or (2) where an arbitration award exhibits “manifest disregard of the law”. To vacate an arbitration award on the latter ground, a court must find that the arbitration panel knew of a governing law yet refused to apply it or ignored it, and that the governing law was well defined, explicit and clearly applicable.

Examples of what could constitute a “manifest disregard of the law” include “an explicit rejection of controlling precedent” and “a decision that is logically impossible”. However, it is important to remember that the arbitration panel is entitled to make its own factual and legal findings, just like a judge or a jury. Alleging mere factual error by the arbitrator or misapplication of complex legal principals will not suffice.

A party seeking to vacate an arbitration award is best served by making every effort to obtain the reasoning behind the arbitration award. However, this must be requested prior the rendering of the award by the arbitrator. Moreover, arbitrators are not automatically required to explain their decision and Article 75 of the CPLR does not impose this requirement. Unfortunately, a failure to provide an explanation for the award is not grounds for vacating it.

However, in some instances, the parties can request that the arbitration panel issue an “explained decision.” Pursuant to FINRA Rule 13904(f), an arbitration panel may contain a rationale for the underlying award if the parties jointly request what is known as “an explained decision”. However, if only one party seeks this relief, the arbitrator is not required to honor the request. In this case, the arbitration was governed by FINRA, but the parties failed to request an explained decision. Justice Ramos reasoned that without an explanation behind the award, it would be next to impossible to determine whether the award was, in fact, a “manifest disregard of the law”.

Finally, a party seeking to vacate an arbitration award must provide the entire arbitration record to the court. Justice Ramos criticized Respondent in this case for not providing the court with a complete record of the arbitration materials despite acknowledging that the complete record included over 16,000 pages of transcripts and 800 exhibits. He reasoned that the court could not possibly have the opportunity to conclude that the arbitration panel “manifestly disregarded the law” with just “a mere snapshot of what occurred.”

Takeaway: Vacating an arbitration award is an uphill battle and attorneys seeking this relief from the court should avail their client to every procedural advantage, including seeking an explained decision from the arbitration panel and submitting the entire record for the court’s review.

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So a plaintiff obtains a default judgment against a defendant on a promissory note case.  Defendant fails to appear or defend.   On a motion to enter the default pursuant to CPLR 3215, one would assume that without opposition, judgment would be entered for the amount of the loans.  Interestingly, that’s not quite what happened in Power Up Lending Group, Ltd. v. Cardinal Resources, Inc., where a plaintiff lender sought entry of judgment on two loan agreements in the amount of $66,264.90.  So what did happen?

Justice Stephen A. Bucaria, sua sponte, examined the plaintiff’s submission (which the court must), but then determined that certain provisions in the agreements were illegal as violating New York’s criminal usury laws.   As a result, the Court calculated the amount due to the Plaintiff after severing the provisions deemed by the Court to be illegal, which was far less than that sought by plaintiff.  Plaintiff appealed.

The Second Department in Power Up Lending Group, Ltd. v Cardinal Resources, Inc. disagreed with Justice Bucaria’s approach and reversed, concluding that the court erred when it, sua sponte, severed certain provisions of the loan agreements, which it found on its own to be “illegal pursuant to the criminal usury statute.”   Since the defense of usury is an affirmative defense, it must be asserted by the Defendant affirmatively in its answer or as a ground to move to dismiss the complaint.  Otherwise, the defense is waived.  Here, because the Defendant failed to appear or answer or move, the defense was waived.

Two issues spring to mind.  First, the affirmative defense of criminal usury is far different than most affirmative defenses, which do not involve violations of criminal law (e.g., statute of frauds, statute of limitations and the like).  However, where an affirmative defense involves criminal activity, can a court as a matter of public policy have the power to raise the issue, sua sponte, even if it would otherwise be an affirmative defense?

Interestingly, in Youshah v. Staudinger, the defendant defaulted in an action brought by the plaintiff seeking to recover money owed to him by his former business partner for excluding him from an escort and dating service business, which fosters prostitution. The Court determined that although a party concedes liability by defaulting in an action, it would not, on public policy grounds, award judgment to the plaintiff as a result of an illegal enterprise. The Court held that it would not “enforce provisions of agreements which are patently illegal when public policy is at issue.”

Second, although the usury defense is waived if not raised, that very same defense could be advanced later by a defaulting defendant on a motion to vacate the default to establish a “meritorious defense.”   See, e.g., Blue Wolf Capital Fund II LP v. American Stevedoring, Inc. (citing cases).

In sum, in order to obtain a default judgment against an defaulting defendant, the moving party must submit sufficient proof to establish a viable cause of action.   Affirmative defenses, even if otherwise available to a defaulting defendant, should not stand in the way of entry of judgment.  However, on a later motion to vacate, those affirmative defenses can be used to re-open the case, assuming that an excuse for the default has been established.

Under what circumstances do customer information and business operations constitute “trade secrets” that may be enjoined from use by a former employee ? A recent decision by Justice Elizabeth H. Emerson on this issue serves as a stark reminder that a preliminary injunction requires “clear and convincing” proof that the information is truly a secret.

In Devos, Ltd v. United Returns, Inc., recently-troubled pharmaceutical-return company Devos sought to enjoin its former employees from operating a competitor, United Returns, pursuant to business tort law and non-compete/solicitation provisions contained in the former employees’ employment contracts. In August 2015, Devos obtained a temporary restraining order and sought a preliminary injunction, which United Returns subsequently moved to vacate. 

The court denied the preliminary injunction and vacated the temporary restraints. After finding that the non-compete provisions included in the restrictive covenants were overly broad, the court found that the restrictive covenants were unnecessary, as well. As for Devos’ business tort claims involving misappropriation of trade secrets, the court found that “clear and convincing evidence” of a trade secret was lacking. In particular, the court rejected Devos’ contention that its customer information and business operations were “trade secrets” that United Returns had unfairly exploited to obtain competitive advantages. Crucially, there was no evidence that Devos had taken measures to protect its customer lists from disclosure; in fact, United Returns submitted evidence that the names of Devos’ customers were publicly available and well known within the industry.

Nor did the manner in which Devos conducted its business constitute a “trade secret.” United Returns introduced evidence that Devos’ systems and processes were used throughout the pharmaceutical-return industry, and “an employee’s recollection of information pertaining to the specific needs and business habits of particular customers is not confidential.” Thus, the court reaffirmed and applied the elements of “secrecy”: (1) substantial exclusivity of knowledge of the process or compilation of information and (2) the employment of precautionary measures to preserve such exclusive knowledge by limiting legitimate access by others.

Devos’ failure to meet its evidentiary burden demonstrates how important it is for employers to restrict access to important customer records. But even where efforts have been made to maintain the secrecy of customers’ information, a former employee still cannot be prevented from using that information if it could be easily obtained from publicly available sources.  For example, in Sasqua Group v. Courtney, the Eastern District of New York dismissed a misappropriation action because the  plaintiff’s allegedly “confidential” customer information database could have been duplicated through simple (though lengthy) internet searches. By contrast, in Freedom Calls Foundation v. Bukstel, the Eastern District of New York held that it would be very difficult to duplicate the plaintiff’s efforts in compiling its list of non-profit donors and clients because their personal contact information was not publicly known outside of the industry.  

Merely because a well-trained former employee has successfully competed does not prove that confidential information was misappropriated–all the more reason to take care when drafting non-compete provisions. Absent such an effective provision, Devos serves as a cautionary tale that institutional knowledge sometimes must jump a high hurdle before it can be protected as a trade secret.