A good chunk of FAA practice and procedure —including FAA practice and procedure in state court—involves knowing when, how, and why to make timely and effective objections and filings in arbitration enforcement litigation. Sivanesan v. YBF, LLC, ___ A.D. 3d ___, 2024 N.Y. Slip Op. 4327 (2d Dep’t 2024), which New York’s Appellate Division, Second Department, decided on August 28, 2024, illustrates this point well.
Appellants were not signatories to the arbitration agreement, did not agree to arbitrate any matters, and did not clearly and unmistakably agree to arbitrate questions of arbitrability. But the Court found that they participated in the arbitration without lodging adequate objections to the arbitrator’s jurisdiction and did not timely file in the confirmation litigation their petition to vacate the awards at issue. Accordingly, the Appellants were—by their participation in the arbitration without effective objections to the arbitrator’s jurisdiction—deemed to have impliedly consented to arbitrate all issues before the arbitrator, including whether they were bound by the contract and arbitration agreement as successors-in-interest. Not a happy place to be.
Background
The transactions pertinent to Sivanesan began in 2008 when YBF, LLC (“YBF”) sold to Cosmetics Specialties, East LLC (“CSE”) an exclusive license to use YBF’s trademarks. YBF marketed and sold retail cosmetic products here in the U.S., Canada and the United Kingdom using those marks.
In or about 2009, YBF and its members, Stacey and David Schieffelin (collectively the “YBF Parties”), entered a consulting agreement with Janu Sivanesan (“Sivanesan” or the “Petitioner”), under which Sivanesan undertook to help YBF recover its marks. The agreement provided for Sivanesan to receive hourly consulting fees for her services. In addition it provided that, if YBF recovered its marks within six months, Sivanesan would receive “a transaction fee in the amount of three percent of the outstanding equity of the entity operating the YBF beauty business and holding the right to exploit the YBF marks in connection therewith.” 2024 N.Y. Slip Op. 4327 at *2.
The consulting agreement had a broad arbitration clause, which provided for New York arbitration administered by JAMS/ENDISPUTE under its Comprehensive Arbitration Rules and Procedures.
Sivanesan carried out her end of the bargain and provided consulting services to YBF, and in September 2009 YBF and CSE entered an agreement under which YBF recovered the license to its marks. The YBF Parties, however, apparently did not: they did not pay Sivanesan her hourly fees and transaction fee (though they did acknowledge the debt).
Years later, in August 2015, Sivanesan demanded arbitration against YBF and “John Doe” and “Jane Doe” defendants, which the arbitration demand “described. . . as ‘the persons and/or entities intended and being those that at all relevant times held and continue to hold the YBF Marks as described herein.’” 2024 N.Y. Slip Op. 4327 at *2 (quoting arbitration demand).
The YBF Parties did not respond to the arbitration demand. But in the meantime, in May 2016, they, apparently without Sivanesan’s knowledge, “conveyed the rights to the YBF marks and a controlling interest in YBF to Visual Beauty, LLC. . . [“Visual Beauty”], an affiliate of TPR Holdings, LLC. . . .” (“TPR”; collectively, Visual Beauty and TPR are referred to as the “Appellants”). 2024 N.Y. Slip Op. 4327 at *2.
About one year, in May 2017, Petitioner amended the arbitration demand to include the Schieffelins as parties. It “served the amended demand for arbitration upon the [YBF Parties] ‘c/o Visual Beauty, LLC,’ at among other locations, an office located at 950 Third Avenue and an office located at 875 Third Avenue in Manhattan. . . .” (the “Third Avenue Offices”). 2024 N.Y. Slip Op. 4327 at *2.
JAMS subsequently served arbitration-hearing scheduling documents at the Third Avenue Offices. On or about March 27, 2018, Sivanesan obtained from the arbitrator arbitral summonses (i.e., arbitral subpoenas) that required Appellants to “attend an arbitration hearing as witnesses and to provide documentary evidence related to the corporate structures of YBF and the [A]ppellants.” 2024 N.Y. Slip Op. 4327 at *2.
The summonses bore the same caption as the amended arbitration demand. Visual Beauty was served with them at its 875 Third Avenue location. The Appellants did not appear at the April 25, 2018 arbitration hearing held for the summonses. Sivanesan, however, appeared, and “presented evidence to demonstrate that the [A]ppellants were successors in interest to YBF, and the arbitrator granted her application to add the appellants as parties to the arbitration.” 2024 N.Y. Slip Op. 4327 at *2.
Sivanesan submitted proposed arbitration awards naming the Appellants. These documents were served on Appellants on July 16, 2018, at the 875 Third Avenue address.
On July 17, 2018, the arbitrator made an award in Sivanesan’s favor and against: (a) the YBF Parties; and (b) Appellants. Visual Beauty was served at the 875 Third Avenue location at or around the same date.
The Appellants lodged formal objections on August 1, 2018, and sought from the arbitrator, among other things, vacatur of the July 17, 2018 Award “on the grounds that they were not parties to the arbitration and had not been served with process or received notice of the arbitration.” 2024 N.Y. Slip Op. 4327 at *2.
The arbitrator held another hearing, at which the Appellants appeared, and, on August 30, 2018 made another award, which determined there were no grounds for vacating the July 17, 2018 award. Sivanesan brought a CPLR Article 75 proceeding in Supreme Court, Westchester County, to confirm both awards and Appellants brought a cross-petition to vacate them.
By order dated December 23, 2019, the trial court confirmed the awards, thus effectively denying the cross-petition for vacatur. The trial court subsequently entered judgment on the order, awarding (as presumably set forth in the awards) Sivanesan $249,446.50 and a “three percent continuing equity interest in YBF commencing on September 20, 2009, and a three percent interest in Visual Beauty, ‘and/or any other entity owning the “YBF” marks or operating the YBF beauty business commencing on the date of creation and operations of such entity.’” 2024 N.Y. Slip Op. 4327 at *2-3 (quoting judgment).
An appeal to the Appellate Division, Second Department followed and the Court affirmed the judgment.
Vertical Choice-of-Law: The Federal Arbitration Act (“FAA”) Governs
The Appellants contended that the dispute was governed solely by New York arbitration law (as set forth in CPLR Article 75) but the Court determined that the FAA governed arbitration law issues. YBF was organized under the laws of Connecticut, had offices in New York and members in Florida, while Sivanesan was a New York-based individual. The contract between them contemplated Sivanesan securing for YBF and YBF members the YBF marks for purposes of marketing and distributing YBF products in the U.S., Canada and the U.K. The contract between them therefore “involved “involved interstate commerce,” which meant that the FAA applied. 2024 N.Y. Slip Op. 4327 at *3.
The Court recognized that, notwithstanding the applicability of the FAA, parties “‘may contemplate enforcement under state statutory or common law’” 2024 N.Y. Slip Op. 4327 at *3 (quoting Hall Street Associates, L.L.C. v Mattel, Inc., 552 U.S. 576, 590 (2008); and citing N.J.R. Assoc. v Tausend, 19 N.Y.3d 597, 602 (2012)). A general, New York choice-of-law clause, however, that provides “disputes concerning a contract will be governed by New York law ‘[does] not express an intent to have New York law govern [the] agreement’s enforcement.” 2024 N.Y. Slip Op. 4327 at *3 (quoting Matter of Diamond Waterproofing Sys., Inc. v 55 Liberty Owners Corp., 4 N.Y.3d 247, 253 (2005); and citing Empire Asset Mgt. Co. v Best, No. 21-1798-cv, 2022 WL 893402, *1, 2022 U.S. App LEXIS 7996, *3-4 (2d Cir. 2022)).
The choice-of-law provision in the consulting agreement did not evidence the requisite intent that New York govern not only the contract but also its enforcement. It simply said the consulting agreement “‘shall be governed by and construed in accordance with the laws of the State of New York.’” 2024 N.Y. Slip Op. 4327 at *3 (quoting choice-of-law provision). “This language[,]” said the Court, “is merely a general choice of law provision that specifies the law applicable to disputes involving the consulting agreement and does not express an intent to have New York law govern the arbitration agreement’s enforcement.” 2024 N.Y. Slip Op. 4327 at *3 (citing Diamond Waterproofing, 4 N.Y.3d at 253). The Court accordingly concluded that “the FAA governs the enforcement of the awards here.” 2024 N.Y. Slip Op. 4327 at *3.
Grounds for Objections: Arbitrability under the FAA
Having determined that the FAA governed award enforcement, the Court proceeded to review key rules and principles governing the question whether a person agreed to arbitrate at all and, if so, whether the person agreed to arbitrate the disputes at issue. (For information concerning arbitrability, see here, here, and here.)
The Court acknowledged that “[f]ederal policy strongly favors arbitration[,]” 2024 N.Y. Slip Op. 4327 at *3 (citations omitted), but qualified that by citing to FAA and labor arbitration’s first principle: “‘[a]rbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he [or she] has not agreed so to submit.’” 2024 N.Y. Slip Op. 4327 at *3 (quoting In re Buczek, No. 22-1920-bk, 2023 WL 6618901, *2, 2023 U.S. App LEXIS 26934, *3-4 (2d Cir. Oct. 11, 2023) (quotations omitted); and citing AT & T Technologies, Inc. v Communications Workers, 475 U.S. 643, 649 (1986)). It further recited what we sometimes refer to as the “clear and unmistakable rule”: “‘[u]nless the parties clearly and unmistakably provide otherwise, the question of whether the parties agreed to arbitrate is to be decided by the court, not the arbitrator.’” 2024 N.Y. Slip Op. 4327 at *3 (citing AT & T Technologies, 475 U.S. at 649; other citation omitted).
Processing the Objections: Who Gets to Decide Arbitrability in this Case?
Applying the general, FAA rules of arbitrability, the Court said the parties did not dispute that: (a) appellants were nonsignatories to the consulting agreement or its arbitration provision; and (b) there was no evidence the parties clearly and unmistakably agreed to arbitrate arbitrability. 2024 N.Y. Slip Op. 4327 at *3 (citing AT & T Technologies, 475 U.S. at 649; National Union Fire Ins. Co. of Pittsburgh, PA v Stucco Sys., LLC, 289 F.Supp.3d 457, 465 (S.D.N.Y. 2018)). “Thus,” explained the Court, the trial court “typically would have been required to determine, de novo, whether the [A]ppellants were nonetheless bound by the consulting agreement and its arbitration provision as successors in interest under New York law governing contracts.” 2024 N.Y. Slip Op. 4327 at *3 (citing First Options of Chicago, Inc. v Kaplan, 514 U.S. 938, 944 and Maynard v Smith, 206 A.D.3d 900, 901 (2d Dep’t 2022)).
The Effect of Insufficient Objections to the Arbitrator’s Jurisdiction
But, as the Court pointed out, there is an exception to that rule when the arbitration challenger has participated in the arbitration: objections on the ground that there is no agreement to arbitrate may be raised only if the challenger “‘has not participated in the arbitration.’” 2024 N.Y. Slip Op. 4327 at *3 (quoting Stone v Noble Constr. Mgt., Inc., 116 A.D.3d 838, 839 (2d Dep’t 2014) (quoting Matter of Commerce & Indus. Ins. Co. v Nester, 90 N.Y.2d 255, 263 (1997); citing Halley Optical Corp. v Jagar Intl. Mktg. Corp., 752 F. Supp. 638 (S.D.N.Y. 1990)).
This exception recognizes that an arbitration agreement “‘can be implied from a party’s conduct in the arbitration proceedings.’” 2024 N.Y. Slip Op. 4327 at *3 (quoting Absolute Nevada, LLC v Grand Majestic Riverboat Co., LLC, 646 F.Supp.3d 426, 435 (S.D.N.Y. 2022) (quotations omitted); and Gvozdenovic v United Air Lines, Inc., 933 F.2d 1100, 1103 (2d Cir. 1991)). If parties participate in an arbitration without making timely and sufficient objections, then they waive their rights to object to the arbitration and are bound by an implied agreement to arbitrate. See 2024 N.Y. Slip Op. 4327 at *3-4 (citing Absolute Nevada, 646 F. Supp. 3d at 435; Opals on Ice Lingerie v Bodylines Inc., 320 F.3d 362, 369 (2d Cir. 2003); and ConnTech Dev. Co. v University of Conn. Educ. Props., Inc., 102 F.3d 677, 687 (2d Cir. 1996)).
Applying the exception to the facts, the Court found that the Appellants’ objections were untimely. At the time they requested the arbitrator to vacate the July 17, 2018 Award, the Appellants’ objections did not specify that they were objecting on the ground that no arbitration agreement existed. They lodged objections on the ground that they were not parties to the arbitration and had not been properly served with an arbitration demand or notice of intent to arbitrate. The Court found that these were not jurisdictional objections, that is objections on the ground the Appellants did not agree to arbitrate. See 2024 N.Y. Slip Op. 4327 at *4 (citing AT&T Technologies, 475 U.S. at 649). The Court found that the Appellants’ objections raised due process questions, which are procedural matters within the ambit of the arbitrator’s authority. See 2024 N.Y. Slip Op. 4327 at *4 (citing Stotter Div. of Graduate Plastics Co., Inc. v District 65, United Auto Workers, AFL-CIO, 991 F.2d 997, 1001 (2d Cir. 1993); and Howsam v Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002)). The Court therefore concluded the Appellants, by participating in the arbitration, waived any objections they might otherwise have had concerning whether they agreed to arbitrate. 2024 N.Y. Slip Op. 4327 at *4 (citing In re Arbitration between Halcot Nav. Ltd. Partnership & Stolt-Nielsen Transp. Group, 491 F.Supp.2d 413, 417-419 (S.D.N.Y. 2007)).
Having found that Appellants made no timely and effective objections to the arbitrator’s jurisdiction, the Court next determined that the Appellants did not make a timely motion to vacate in response to Sivanesan’s motion to confirm.
The Court initially explained that an opposition to a motion to confirm may raise as objections to confirmation any ground supporting a motion to vacate, modify or correct an award. See 2024 N.Y. Slip Op. 4327 at *4 (citing McLaurin v Terminix Intl. Co., LP, 13 F4th 1232, 1240 (11th Cir. 2021); The Hartbridge, 57 F.2d 672, 673 (2d Cir. 1932); and United House of Prayer for All People of Church on the Rock of Apostolic Faith v L.M.A. Intl., LTD., 107 F.Supp.2d 227, 229 (S.D.N.Y. 2000)).
But those objections to confirmation must be timely under the FAA. If not, any application to vacate, modify, or correct the award is absolutely barred. 2024 N.Y. Slip Op. 4327 at *4 (citing Florasynth, Inc. v Pickholz, 750 F.2d 171, 175 (2d Cir. 1984); other citation omitted).
Applying the law to the facts, the Court explained that the trial court on January 18, 2019, ordered the Appellants to file their cross-petition for vacatur no later than February 8, 2019, and to file their objections to the petition to confirm by February 28, 2019. Without adjournment or rescheduling of any of the deadlines in the trial court’s January 18, 2019, Order, the Appellants filed both their cross-petition and their response to the petition to confirm on February 28, 2019. The Appellants did not offer any excuse or justification for filing the cross-petition on February 28, 2019, 20 days after the deadline expired. See 2024 N.Y. Slip Op. 4327 at *4.
The Court concluded that the trial court did not improvidently exercise its discretion by deeming the cross-petition to vacate to be untimely filed and ruling that Appellants were barred from opposing the petition to confirm on grounds that should have been asserted by cross-petition no later than February 8, 2024. 2024 N.Y. Slip Op. 4327 at *4 (citations omitted).
Because “the appellants waived their objections to the arbitrator’s jurisdiction and failed to timely seek to vacate the awards, the [trial court] properly granted the petition and, in effect, denied the cross-petition.” 2024 N.Y. Slip Op. 4327 at *4.
Contacting the Author
If you have any questions about this article, arbitration, or arbitration-related litigation, then please contact Philip J. Loree Jr., at (516) 941-6094 or PJL1@LoreeLawFirm.com.
Philip J. Loree Jr. is principal of the Loree Law Firm, a New York attorney who focuses his practice on arbitration and associated litigation. A former BigLaw partner, he has nearly 35 years of experience representing a wide variety of corporate, other entity, and individual clients in matters arising under the Federal Arbitration Act, state arbitration law, or both. He also has represented clients in litigation and arbitration clients in reinsurance, insurance, contract, and other commercial and business matters.
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