You have been engaged in extensive motion practice in the Supreme Court of the State of New York.  You learn that your adversary, it appears, has taken a position contrary to the one taken in a prior proceeding. These “gotcha” moments don’t happen often, but you savor them when they do.  You immediately proceed to seek an order from the court that the non-movant be judicially estopped from taking that contrary position in the current proceeding. Will you be successful in invoking the doctrine? Maybe. A recent decision by Commercial Division Justice Andrew Borrok highlights the difficulty in succeeding on a summary judgment motion premised on judicial estoppel.

The doctrine of judicial estoppel may be invoked when the party takes one position in a prior proceeding, securing a favorable outcome; and a contrary or inconsistent position in a subsequent proceeding.  In Divine Capital, LLC v Legado Inv. Group, LLC, Plaintiff Divine Capital, LLC (“Divine Capital”) attempted to recover $4 million that it transferred to Legado Investment Group, LLC (“LIG”) as a reserve fund to finance an assisted living facility, subject to certain conditions. Two separate agreements were executed, setting forth terms pursuant to which Plaintiff could withdraw the funds, i.e., the Divine Project Equity Reserve Agreement (“Divine PERA”) and the KB Project Equity Reserve Agreement (“KB PERA”).

Plaintiff’s initial complaint alleged breach of the Divine PERA, asserting that it was the governing agreement. The Court denied Plaintiff’s ex parte motion seeking an attachment of the funds for reasons, including that KB Capital was an indispensable party to the action, and LIG represented that it would hold the funds in the LIG Account pending resolution of the case.

Plaintiff then amended its complaint, adding KB Capital as a Plaintiff and adding a cause of action for breach of contract.  The amended pleading alleged an alternative theory; if KB PERA, and not Divine PERA, is the controlling agreement, then Plaintiffs are entitled to a return of the funds by virtue of the terms set forth in that agreement.  Plaintiffs moved by order to show cause seeking an order of attachment of the funds, which the Court denied.

Plaintiffs subsequently moved for summary judgment seeking to invoke the doctrine of judicial estoppel to prevent LIG from taking the position that the KB PERA governs the investment, in light of the fact that they previously argued that the Divine PERA governed. The Court denied the motion because Plaintiffs failed to establish that the Court relied on LIG’s prior position, i.e., that the Divine PERA is the controlling agreement in arriving at its decision.  Indeed, the Court’s decision denying the initial request for an attachment of funds was based on the fact that KB Capital, not a plaintiff in the action until Divine Capital amended its complaint, was an essential party; and because LIG represented that they would hold funds in the LIG Account pending the resolution of the case, thus not warranting the attachment of funds.  Put differently, the Court determined that because the record did not show that the Court relied on LIG’s statements regarding which agreement governed the investment of funds in denying Divine Capital’s ex parte motion, the doctrine of judicial estoppel was inapplicable.

Relying on a New York Court of Appeals’ decision in Stewart v Chautauqua Cty. Bd. of Elections, Justice Borrok held that a party cannot rely on a prior proceeding in which the court “did not unambiguously adopt the prior inconsistent position in some manner.” In Stewart v Chautauqua Cty. Bd. of Elections, the Court similarly determined that the doctrine of judicial estoppel was inapplicable because the record was unclear on whether the petitioner successfully persuaded the Supreme Court to adopt his initial position.

The Takeaway: Judicial estoppel can only be invoked in matters where the “court has relied on or adopted a party’s prior inconsistent position in ruling in that party’s favor.” However, you cannot simply rely on the fact that a non-movant is adopting an inconsistent position in attempting to invoke the doctrine. Rather, you must show that the court relied on the inconsistent position in coming to its decision.

At the New York City Bar Association the evening of February 25th, five recently retired justices of the Commercial Division—Hon. Eileen Bransten, Hon. Shirley W. Kornreich, Hon. Charles E. Ramos, Hon. Melvin L. Schweitzer, and moderator Hon. Carolyn E. Demarest—convened for a panel entitled “The Commercial Division: Past, Present and Future.” Here is a summary of some of the topics discussed by the panel:

History of the Commercial Division. Before the Commercial Division, commercial cases were heard in New York County’s Special Term, Part 1, a forum marked by chaos and disengaged justices. In Special Term, Part 1, there was no continuity and no monitoring of discovery. Opinions were generally drafted by the law department. Several of the panelists remarked that when they were in private practice, they had no faith that their clients would be treated fairly in Special Term, Part 1.

When it was first created, no judges were interested in sitting in the Commercial Division, as it had no rules and had not yet proved successful. Nowadays, by contrast, many view the Commercial Division as a stepping-off point to the Appellate Division. At a recent luncheon with judges from the Southern District, the federal judges complained that the Commercial Division was “taking all the good cases.”

Development of the Commercial Division Rules. The Rules began from discussions among judges about how to resolve certain common problems. The judges had similar, but not identical, part rules. Justice Ramos credited Robert L. Haig (who was in attendance, author of the exhaustive treatise on commercial litigation in New York courts) with creating uniform rules and then forming an advisory council. Justice Bransten emphasized that each new Rule is carefully considered and debated before it is enacted, going through multiple rounds of input from the advisory council, the chief counsel of court administration, board of judges, and public comment.

Effectiveness of the Rules. The panel generally agreed that the Rules have been effective because they allow individualism and flexibility to each part. For example, Justice Kornreich noted that the flexibility afforded by the Rules allowed her to make her procedures conform to the expectations of practitioners accustomed to the federal courts. The justices also discussed variations in their part rules concerning affidavits for direct examination and resolution of discovery disputes.

Common Mistakes Made by Practitioners. Throughout the evening, as well as in response to a specific question from the audience, the panelists shared the following tidbits of advice for attorneys in the Commercial Division:

  • Motions to dismiss should be utilized as much as possible, to clean the pleadings (and the scope of discovery) of non-meritorious claims, as well as to give the judge a “feel” for the case.
  • Unsolicited letters to the court should be avoided—if in doubt about whether a letter should be sent to chambers, ask the clerk in advance.
  • Preliminary conferences are an important opportunity to address the merits and educate the judge about the case, as well as to give the judge a sense of the potential usefulness of ADR.
  • Take care to read the Commercial Division Rules and Part Rules carefully. Justice Bransten believed that there should be stricter enforcement of the Rules.
  • Be aware of differences between federal and state procedural law, and do not confuse the two.
  • Take the court seriously—do not send in per-diem attorneys unfamiliar with the case.

Is the Commercial Division Elitist? The panel addressed this question last, and generally agreed that the Commercial Division was not elitist, although Justice Ramos conceded that it might appear so from the outside. Justice Schweitzer felt strongly that as the business center of the United States, if not the world, New York should devote extra resources to its commercial litigation courts to the extent necessary. Other benefits from the Commercial Division that justified its extra costs included:

  • The Commercial Division has made other Parts more efficient by not having to oversee trials of these matters;
  • High value cases attract higher-quality litigants who operate more efficiently and require less of the court’s time and resources;
  • The Commercial Division serves as a laboratory for creative solutions to issues affecting other courts; and
  • The Commercial Division does not really require so much extra resources—simply one extra clerk per Part.

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Perhaps the most important aspect of any case is determining what your damages are.  After all, isn’t that generally the point of all our efforts – to try to recover the most amount of money?  The defendant may undeniably be the villain you make them out to be, and undoubtedly they have caused you all the harm and damage you allege.  But, a recent decision by the Honorable Saliann Scarpulla highlights the difficulty in proving your damages, particularly a claim for lost profits.

In Sullivan v. Christie’s Fine Art Storage Services, Inc., Sullivan and his business partner concocted a plan to reproduce, market, and sell prints of artwork created by Alberto Vargas (“Mara Corday or Pin-Up Girl,” “Beauty and the Beast,” formerly known as “Ziegfeld Girl with Mask,” and “Miss America”).  In October 2012, Sullivan stored the artwork in Christie’s Fine Art Storage Services’ (“CFASS”) warehouse, and not even a month later the property was destroyed or damaged by Superstorm Sandy.

Sullivan sued CFASS seeking to recover compensatory damages over $11 million, including lost profits.  On summary judgment, the Court dismissed Sullivan’s claim for lost profits because it was not within contemplation of the parties at the time of the contract, and even more so because the lost profits were too speculative.

First, the Court noted that the agreements between the parties did not directly discuss lost profits, and there was no dispute that “CFASS knew or had any basis upon which to reasonably contemplate that the works of art were intended for reproduction, marketing, and sale with an alleged net profit of more than $10 million.”

Second, the court stated “Sullivan’s potential consequential damages are not capable of measurement with reasonable certainty.”  Which was the polite way of saying they were far too speculative.  The court found that Sullivan had no experience in this area, and that this new business venture created by him and his partner in 2012, had “no track record of previous profits.”  Therefore, Sullivan could not “estimate lost profits with the requisite degree of reasonable certainty.”

The major takeaway here, as in any case, is that “it’s not what you know it’s what you can prove.”  And proving lost profits is one of the more difficult things to do in court.  Nonetheless, if you want to recover lost profits, at the very minimum, at the time of contract, make sure the other party is aware of what your damages may be, so they are within contemplation of the parties.  Also, in order to prove your lost future profits, make sure to keep records of your past profits.  Only then will you be able to win an award for your lost profits.

Boy invites Girl on a date for Valentine’s Day. They agree to meet at a restaurant near Boy’s home (rude, but ok). Girl wakes up on Valentine’s Day and cancels the date once she realizes she has to travel a longer distance than she expected. Boy is left wondering what happened because they had agreed on the restaurant in advance. Girl spends Valentine’s Day with her girlfriends. While breaking the location of a date leads to little (if any) repercussions for Girl in this situation, the same cannot be said for parties to a commercial contract.

Recently, Suffolk County Commercial Division Justice Emerson weighed in on the proper procedure for making a motion to dismiss based on a forum-selection clause as well as what type of harm a party needed to show in order to invalidate such a clause.

It is important to remember that a court cannot be divested of its subject matter jurisdiction by a contract and so a forum-selection clause does not affect the jurisdiction of Court. See Lischinskaya v. Carnival Corp.The proper procedure for dismissing an action based on a forum-selection clause is CPLR 3211(a)(1) using the contractual forum-selection clause as documentary evidence for a proper basis for dismissal. In this case, the Court sua sponte converted the motion from a CPLR 3211(a)(2) motion to a CPLR 3211(a)(1) motion. However, you might not be so lucky next time.

In Somerset Fine Home Building, Inc. v. Simplex Industries, Inc., Plaintiff, a home builder, contracted with Defendant for the purchase of a modular home. The sales agreement provided that any disputes arising thereunder would be determined by the law of the Commonwealth of Pennsylvania and that the exclusive forum for any action to enforce the agreement would be the Court of Common Pleas of Lackawanna County, Pennsylvania. Plaintiff commenced an action for, inter alia, breach of contract and the failure to deliver conforming merchantable goods in New York Supreme Court, Suffolk County. Defendant moved to dismiss this action based on the forum-selection clause arguing that the parties agreed to litigate their dispute in Pennsylvania.

In opposition, Plaintiff gave a laundry list of weak arguments as to why the forum-selection clause should be dismissed.

Plaintiff first argued that the agreement is unconscionable. However, a determination of unconscionability generally requires some showing of an absence of meaningful choice on the part of one of the parties, together with contract terms that are unreasonably favorable to the other party. See Gillman v. Chase Manhattan Bank. Here, the forum-selection cause was not hidden or tucked away within a complex document of inordinate length, it appeared in the same size print as the rest of the agreement, each page was initialed by the plaintiff’s principal and there was no allegations that Defendant used high-pressure tactics to get it to sign the agreement. See Brower v. Gateway 2000.

Plaintiff next argued that it was in a weaker bargaining position than the Defendant and that it had no choice other than to agree to the forum-selection clause as it was. However, the record showed that the parties acknowledged in the agreement that they had the opportunity to confer with their separate counsel in the negotiation, drafting and execution of the agreement. Id.

As a last ditch effort, Plaintiff argued that it would incur financial distress in travelling to Pennsylvania from Suffolk County, NY to pursue this action against Defendant. However, the Court noted that the Plaintiff did not support its argument with evidence showing that the cost of commencing an action in Pennsylvania would be so financially prohibitive that it would be deprived of its day in court. See Horton v. Concerns of Police Survivors, Inc. Plaintiff also did not show any evidence that Pennsylvania would treat it unfairly and deny it a chance to gain a remedy. Id.

Ultimately, these arguments were not good enough to prevent the dismissal of the action. The Court found that Plaintiff was unable to make a “strong showing” that “enforcement would be unreasonable and unjust, that enforcement would contravene public policy, or that the forum-selection clause is invalid because of fraud or overreaching such that a trial in the contractual forum would be so gravely difficult and inconvenient that the challenging party would, for all practical purposes, be deprived of his or her day in court.” See D.O.T. Tiedown & Lifting Equip. v. Wright; Koko Contr. v. Continental Envtl. Asbestos Removal Corp.; Bell Constructors v. Evergreen Caissons.

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Most litigators are familiar with the requirement that a summary motion be supported with “evidentiary proof in admissible form” establishing the merits of a cause of action or defense.  Nevertheless, many practitioners make the common mistake of submitting evidence in support of a summary judgment motion that would not be admissible at trial, resulting in swift denial of the motion.  In fact, the Appellate Division, Second Department recently reversed a decision by the Nassau County Commercial Division (Bucaria, J.), which granted summary judgment to the moving party, even though the evidence submitted in support of the motion was not in admissible form.

The plaintiff in GMP Fur Trade Fin., LLC v Brenner, 2019 NY Slip Op 00858 (2d Dept Feb. 6, 2019) commenced an action against defendant Dean Brenner (“Brenner”) and others seeking to recover damages for breach of fiduciary duty, breach of contract, conversion and fraud.  The plaintiff moved for summary judgment on the issue of liability as against Brenner, alleging that he had misappropriated funds and goods in connection with his servicing of four finance agreements plaintiff had entered into with certain non-parties.  Justice Bucaria granted plaintiff’s motion for summary judgment on the issue of liability on the breach of fiduciary duty claim.  The plaintiff thereafter moved for summary judgment on the issue of damages.  Again, Justice Bucaria granted the plaintiff’s motion and entered judgment against Brenner in the amount of $1,755,630.79.  Brenner appealed.

The Second Department reversed, finding that the evidence upon which plaintiff primarily relied was not in “admissible form.”  The Court stated:

“Here, in moving for summary judgment on the issue of liability insofar as asserted against Brenner, the plaintiff relied primarily on an affidavit of its managing member, in which the managing member stated that he was told by certain nonparties that Brenner had misappropriated funds and goods.  This hearsay evidence was insufficient to satisfy the plaintiff’s burden of establishing its prima facie entitlement to judgment as a matter of law on the breach of fiduciary duty cause of action insofar as asserted against Brenner.”

The Court also concluded that the plaintiff could not cure this defect by submitting unauthenticated, and therefore inadmissible, bank records for the first time on reply.   It is abundantly clear, then, from the Second Department’s decision in GMP Fur Trade that inadmissible hearsay does not have any probative value when submitted in support of a motion for summary judgment, and should not be considered.

However, the rigidity of this rule should be contrasted with the principle that, under certain circumstances, a party opposing summary judgment may rely on evidence that is not in admissible form, but only if the opposing party provides a reasonable excuse for its failure to submit evidence in admissible form (see e.g. Zuckerman v City of New York, 49 NY2d 557 [1980] [“The rule with respect to defeating a motion for summary judgment, however, is more flexible, for the opposing party, as contrasted with the movant, may be permitted to demonstrate an acceptable excuse for his failure to meet the strict requirement of tender in admissible form”]).  Indeed, a party opposing a motion for summary judgment may rely on hearsay, as long as it is not the only piece of evidence relied on by that party (Sumitomo Mitsui Banking Corp. v Credit Suisse, 89 AD3d 561 [1st Dept 2011]).

Takeaway:  The Second Department’s point was made clear in GMP Fur Trade, but it is worth repeating: counsel for the moving party should review each piece of evidence submitted in support of its summary judgment motion and ensure that it is admissible.  Indeed, affidavits must be signed and properly notarized, deposition transcripts must be certified by a court reporter and signed by the deponent, a proper foundation must be laid for each record relied upon in the motion, especially business and medical records, and importantly, hearsay statements must be qualified for the court’s consideration under one of the many hearsay exceptions.  By contrast, the “admissible form” requirement is more flexible with respect to an opposing party’s evidence, allowing an opposing party to rely on hearsay (as long as it is not the only piece of evidence relied upon by the opposing party), or other inadmissible evidence (if the opposing party offers a reasonable excuse for its failure to submit evidence in admissible form).

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In our last “Check the Rules” post back in December, we noted the recent additions to the Manhattan Commercial Division bench, Justices Andrew Borrok and Joel M. Cohen, and promised to report back in early 2019 on any notable practice rules in their respective Parts.

My colleague Viktoriya Liberchuk’s perceptive post last week on the recent trend in the Commercial Division (and beyond) to formally encourage in-court “at bats” for young lawyers cited two specific rules from the newly-published “Practices and Procedures” for both Justice Borrok and Justice Cohen, both of whom encourage and even incentivize the “less senior attorney” or the “lawyer out of law school for five years or less” to argue motions before them.

In addition to advocating for the development of junior associates, Justice Borrok’s individual practice rules also suggest that he’s an advocate for the use of technology in the practice of law, or at least in his Part.  In his one and only published decision in 2019 thus far, Ostro v Ostro, Justice Borrok twice ordered the parties to comply with the court’s e-filing procedures, which is the subject of an entire section of his practice rules entitled “Electronic Filing.”

Justice Borrok has a handful of other techie practice rules worthy of note:

Be sure to “bookmark” your briefs and “hyperlink” your references to case law, etc.  Justice Borrok requires strict adherence to the requirement in Commercial Division Rule 6 that all briefs “shall include bookmarks providing a listing of the document’s contents and facilitating easy navigation by the reader within the document.”  He also “strongly encourages” the use of hyperlinks within documents submitted to the court.

Make sure you’re registered for “eTrack.”  As noted in Justice Borrok’s practice rules, as well as in the New York State Unified Court System’s description of the service, “eTrack is a case tracking service which enables you to track active Civil Supreme Court cases from all 62 counties of New York State.”  Justice Borrok requires that “parties and/or their counsel” litigating in his Part be registered for eTrack.

Check in at the “kiosk” outside the courtroom before appearing for a conference.  There’s a kiosk located near the courtroom entrance of Part 53.  Counsel are required to check in by entering the index number of their case, select and print the appropriate conference form(s), and fill them out before entering the courtroom.  By the way, be sure to set specific discovery dates in your proposed conference orders.  Open-ended “within 45 days”-type deadlines won’t cut it.

Submit your trial documents on a “flash drive.”  If you’re headed to trial before Justice Borrok, be sure to submit all your trial documents — including marked pleadings, prior decisions, notices to admit, deposition transcripts, and the like — “via flash drive prior to the hearings or start of trial.”

Be sure to check back with us in the coming months for notable decisions coming out of the newly-constituted Parts 3 and 53 in the Manhattan Commercial Division.

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Are “consequential damages” available on contract claim against an insurer in an action brought by an insured for breach of a commercial liability policy? In D.K. Prop., Inc. v. National Union Fire Ins.,  a recent case out of the First Department, the answer is a resounding “yes”.  There, the complaint alleged two causes of action, namely, breach of contract for failure to pay for covered losses and branch of the implied covenant of good faith and fair dealing.  Plaintiff sought consequential damages on both claims, and attorney’s fees as to the “bad faith” claim.

The insurer argued that consequential damages were unavailable in a breach of contract claim against a carrier when the policy itself covers only “direct and physical loss” to the building.   Indeed, as the complaint outlines, the insured is claiming damages for the carrier’s “unreasonable” and “burdensome” informational requests during the investigatory period which extended over a three-year period.  Engineering costs, ,water abatement equipment because of delays in repairs, monitoring equipment  and interim repairs were only a few of the “types” of damages alleged.

On a pre-answer motion to dismiss, the defendant insurer sought dismissal of the claim for consequential damages on the ground they did not state a claim, namely, that the pleading did not provide a detailed factual showing of why the damages, which do not flow directly from the breach, are recoverable.  The motion court, the Hon. Robert Reed agreed, and dismissed the claim for consequential damages.  On appeal, the First Department in an unanimous decision, reversed the dismissal and reinstated the claim for consequential damages, holding such claims are not subject to any degree of heightened pleading.  The foreseeability of such damages is not for a motion to dismiss, but rather proof at trial.  The court made clear that an insured has a claim against a carrier for consequential damages when a carrier doesn’t provide coverage “if such damages (“risks”) were foreseen or should have been foreseen when the contract was made.”

In one line, the court also rejected the insurer’s argument that a breach of contract claim and “bad faith” claim were duplicative:  such claims can coexist, so long as the claims allege different conduct which they did here.

The Takeaway:  “consequential” damages need not be particularized in your pleading in connection with contractual based claims (breach of contract or implied covenant).  Don’t worry, neither CPLR 3015 (pleading particularity with respect to specific matters) nor 3016 (pleading particularity in specific actions) apply.    A detailed pleading nevertheless should be alleged setting forth at least the types of damages sought that flow from the claimed breach.

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As a junior associate you’re typically asked to do research and draft motion papers, but you also yearn for the opportunity to argue your motion before the Court. But junior associates are usually not afforded such opportunities. Or are they? In recent years, New York judges have been making a real commitment to the development of junior associates by encouraging firms to permit junior associates to argue motions and question witnesses.

Commercial Division Justices, including Justice Saliann Scarpulla and recently appointed Justices Andrew Borrok and Joel M. Cohen have made the training of less-seasoned attorneys a priority by encouraging firms to permit junior attorneys to argue motions. For instance, Justice Scarpulla includes the following in her part rules:

To create opportunities for attorneys knowledgeable with the subject matter of the action, and who historically have been underrepresented in the Commercial Division, courtroom participation of such attorneys is strongly encouraged. This could be achieved, for example, by having a less senior attorney, who prepared the brief on the motion, argue the motion before Justice Scarpulla.

Justice Cohen not only supported this agenda but gave it some teeth by incentivizing firms to send junior associates to argue motions by including the following language in his part rules:

Requests for oral argument are more likely to be granted if counsel identifies a lawyer out of law school for five years or less who will argue the motion and references this rule in the request.

Justice Cohen’s Part Rules suggest that oral arguments on motions that would otherwise be decided on submission will be entertained if firms permit junior associates to argue the motions. And so, next time you have a motion pending before Justice Cohen and are seeking oral argument, send the junior associate.

New York Commercial Divisions are not the only courts encouraging the participation of junior associates. The Eastern District of New York Bankruptcy Court initiated a policy in May of 2018 that encourages junior lawyers familiar with the matter under consideration to argue before the Court. The EDNY Bankruptcy Court even went so far as to permit more than one lawyer to argue for a party in an effort to create an opportunity for a more junior lawyer while simultaneously ensuring that client interests are protected by the more senior attorney.

Some federal courts sitting in New York have similarly been encouraging firms to allow junior associates to argue motions they helped prepare and question witnesses with whom they met. For example, Judge Jack B. Weinstein’s Part Rules encourage junior attorneys with little to no experience arguing before a court to “speak by the presiding judge and the law firms involved in the case.” Recognizing that the ultimate decision as to who will speak in Court lies with the lawyer in charge of the case and not the court, Judge Weinstein’s rules nevertheless indicate that his Court is willing to permit a number of lawyers to argue for one party in order to create an opportunity for a less seasoned attorney’s participation.

This movement, which is not new, is being adopted in various forms by certain judges across the country and followed closely,  see Judicial Orders Providing/Encouraging Opportunities for Junior Lawyers.” (collecting and summarizing orders and rules of judges adopting some form of rule encouraging junior lawyer participation in trials and arguments).

Takeaway:Courts are increasingly sensitive to the issue and firms must become familiar with and aware of the individual practices (and even preferences) of the judges before whom they appear. In addition, this may also require some educating of clients to manage client expectations.

 

Your client who was just subpoenaed to provide documents in an arbitration, advises you, but with confidence says “But we did not agree to arbitrate, so I can ignore this, right?” After some discussion, your client agrees it’s in her best interest to comply with the subpoena, but only after you promise she will not be forced to arbitrate. How can you be sure your client will not be brought into the arbitration?  A recent decision by the Honorable Barry Ostrager highlights some ways in which a non-signatory can be dragged into an arbitration they never even envisioned

In IQVIA RDS Inc. v. Eisai Co. Ltd, IQVIA, a subcontractor, was forced to seek a stay of arbitration after Eisai, the client, sought to join IQVIA as a party to its ongoing arbitration against PharmaBio, the contractor.  The only problem was that the subcontractor never agreed to an arbitration provision.

If the subcontractor did not agree to arbitrate this dispute, how could it be forced into an ongoing arbitration?

The Direct Benefits Theory

The client argued that the subcontractor was prohibited from avoiding arbitration under a theory known as direct benefits estoppel.  This is an exception to the general rule against binding non-signatories to arbitration.  Under this theory, a non-signatory may be compelled to arbitrate where it “knowingly exploits the benefits of an agreement containing an arbitration clause and receives benefits flowing directly from the agreement” (Notably Federal Courts have applied a similar theory, see Ouadani v. TF Final Mile LLC, 876 F.3d 31, 33 (1st Cir. 2017).  The court found that the subcontractor did not receive direct benefits from agreement between the contractor and the client because their agreement conferred no direct benefits on the subcontractor.  Rather, the agreement allowed the contractor the option to select a subcontractor of its choosing.  Simply because the contractor hired and paid the subcontractor did not make the subcontractor a direct beneficiary of the contract compelling it to arbitrate. Thus, the court allowed the subcontractor to seek a stay of arbitration.

Prior participation in the Arbitration

Another way a non-signatory could be forced to arbitrate its dispute is if it already “participated” in the ongoing arbitration.  Section 7503 (b) of the CPLR states that a party may not seek a stay if it already participated in the arbitration.   A party participates in arbitration by, among other things, appearing in the dispute, selecting the arbitrators, or scheduling the hearing.  The subcontractor’s participation in the ongoing arbitration was limited to complying with subpoena demands.  This, as the court found, is not participating in the arbitration for purposes of Section 7503 (b).  Thus, subcontractor was permitted to seek, and was granted, a stay of arbitration.

The lesson here is that even if your client did not agree to an arbitration provision, it still could be forced into arbitration.  You and your client should be wary of these pitfalls, and seek to avoid these mistakes, if you do not wish to arbitrate your disputes.

 

To welcome the New Year, we venture outside this blog’s traditional realm of commercial division practice and procedure to reflect on the nature of “intent” at the intersection of professional wrestling and insurer coverage liability. No, this is not a surrealist poem, but a recent decision by Justice Peter Sherwood of the Commercial Division for New York County arising from the 2015 publication of scandalous material featuring professional wrestler Terry Bollea (aka Hulk Hogan).

In May of 2016, Bollea filed an action in Pinellas County, Florida (Case No. 16-002861-CI), against Don Buchwald & Assocs. (DBA), Bollea’s former talent agency, and Tony Burton, Bollea’s agent at DBA, among others. In that action, Bollea asserted claims for, among other things, invasion of privacy and intentional infliction of emotional distress, arising from Burton’s alleged role in delivering scandalous footage to the now-defunct website Gawker. A year later, in May of 2017, Bollea filed an amended complaint against DBA for “negligent retention,” alleging that DBA acted negligently by employing Burton when DBA “knew or should have known” that Burton was “predisposed to committing wrongs.”

DBA subsequently sought to have its commercial liability insurer, American Zurich Insurance Company (AZIC), and umbrella liability insurer, Zurich American Insurance Company (ZAIC), provide a defense to DBA and Burton in the Florida action pursuant to certain Primary Policies and Umbrella Policies. These policies provide coverage for “bodily injury” caused by an “occurrence” that takes place during the policy period.

AZIC and ZAIC disclaimed coverage, arguing, among other things, that certain of the claims were ineligible for coverage, and that all of DBA’s and Burton’s actions were allegedly intentional and therefore not caused by an “occurrence,” as defined in the policies. The insurers subsequently filed an action in New York Supreme Court, New York County, Commercial Division, seeking a declaration that, among other things, they have no duty to defend DBA and Burton.

On summary judgment, Justice Sherwood offered a thorough and expansive discussion of the insurers’ obligation to defend the claims against DBA and Burton. First, the “duty to defend” is broader than the “duty to indemnify,” and arises where there is a “reasonable possibility of coverage” (Rhodes v Liberty Mut. Ins. Co., 67 AD3d 881, 882 [2d Dept 2009]). Moreover, “[i]f any of the claims against an insured arguably arise from covered events, the insurer is required to defend the entire action” (Town of Massena v Healthcare Underwriters Mut. Ins. Co., 98 NY2d 435, 443-444 [2002]).

The insurers’ argument that the policies did not cover claims for intentional torts was also rejected, because from the perspective of an insured employer, its employees’ intentional torts would be “unexpected, unusual and unforeseen.” “In that context, New York courts assess whether the insured intended to cause harmful consequences, not whether the insured, as a general matter, intended to act.” Furthermore, even intentional torts might give rise to coverage for “accidental” conduct, “where the plaintiff in the underlying action can succeed on his or her intentional tort claim without actually proving intentional or knowing conduct – i.e., where something less than actual intent suffices to establish liability.”

Applying this principals, the court held that the Florida action gave rise to a duty to defend because, from DBA’s standpoint, Burton’s acts in allegedly aiding and abetting the publication of scandalous footage were unexpected. Moreover, under Florida law, a claim for intentional infliction of emotional distress can be sustained by showing “reckless disregard,” without proving deliberate or intentional harm.

Defendants facing liability for intentional conduct should thus bear in mind that an “intentional” tort can still be “accidental” within the meaning of commercial liability policies, so long as the actor did not intend to achieve the specific harmful results (see Messersmith v American Fid. Co., 232 NY 161, 165-166 [1921]).