Court: Connecticut Appellate Court; December 24, 2002; Connecticut; State Appellate Court
The Federal Arbitration Act (9 U.S.C. 1 et seq.) establishes a federal preference for arbitration. The case at hand involves whether an arbitration panel composed solely of partners from the accounting firm BDO Seidman, LLP is disqualified due to structural bias. The trial court found the arbitration agreement enforceable against plaintiff Dean M. Hottle, a former partner, who is in dispute with the firm over compensation. After Hottle's withdrawal, he sought a prejudgment remedy, prompting the firm to file a motion to stay court proceedings and compel arbitration based on the partnership agreement's section 14.8.
Hottle contends the arbitration provision is unenforceable due to a lack of a neutral third-party arbitrator, arguing that the defendant controls the arbitrator selection process, which compromises fairness. Conversely, the defendant maintains that the agreement is valid despite the presence of partners as arbitrators, asserting that Hottle was aware of the agreement's terms when he signed it. The court's role is to interpret the partnership agreement under New York law, which governs the case. The arbitration act applies to agreements involving commerce, as interpreted broadly by the U.S. Supreme Court, and the court must assess if section 14.8 meets this criterion. The defendant argues that as long as the arbitration process is fundamentally fair, the trial court’s decision to compel arbitration is appropriate.
The defendant, a nationwide accounting firm, and the plaintiff, who has clients in and outside New York, are bound by a partnership agreement that involves commerce and is governed by the arbitration act. The court needed to determine two main issues: (1) whether the parties agreed to arbitrate, and (2) whether the arbitration agreement is enforceable. There is no dispute regarding the existence of the partnership agreement under New York law, nor that the plaintiff knowingly accepted the arbitration clause. Under New York law, signing the agreement implies knowledge of its contents. The parties are allowed to define their arbitration process via contract, leading to the conclusion that they agreed to arbitrate.
The dispute falls within the scope outlined in section 14.8 of the partnership agreement, aligning with federal policy favoring broad interpretations of arbitration agreements. Any ambiguity regarding arbitrable issues is resolved in favor of arbitration, establishing a presumption of arbitrability unless there is clear evidence that the arbitration clause does not cover the dispute. The arbitration provision mandates that any controversy related to the partnership be resolved according to its terms, and since the dispute is about compensation under the withdrawal agreement—which incorporates the arbitration provision—the claims are deemed to fall under its scope.
On enforceability, the plaintiff argues that the arbitration provision is invalid due to its lack of a neutral arbitrator, as the arbitration pool consists solely of partners from the accounting firm. However, the court disagrees, stating that while neutrality is often required, there is no clear authoritative definition of it. The court defines neutrality as the absence of structural bias indicating probable partiality towards one party.
Neutrality in arbitration is essential, characterized by concepts of 'institutional bias' and 'evident partiality.' Under 9 U.S.C. 10(a)(2), a court may vacate an arbitration award due to evident partiality, which requires a reasonable impression of bias from the arbitrators that is direct and demonstrable, rather than speculative. This standard, as established in relevant case law, necessitates evidence of more than mere appearance of bias, but less than actual bias. Notably, Connecticut law aligns with this standard.
The excerpt also references cases such as Rosenberg v. Merrill Lynch and Woods v. Saturn Distribution Corp., which, while not identical, provide informative insights into structural bias. In Rosenberg, a relationship between the New York Stock Exchange and an arbitrator was evaluated, leading to a conclusion that the arbitration rules were not structurally biased, though the court affirmed judgment on waiver grounds. In Woods, the Ninth Circuit ruled that a direct financial relationship between prospective arbitrators and a party does not inherently indicate evident partiality, emphasizing that the franchisee was aware of this relationship when signing the agreement. Other federal circuits have similarly examined structural bias, contributing to the framework for evaluating such claims in arbitration contexts.
The arbitration provision in question is claimed to be unenforceable due to a financial relationship between the arbitrators and one party. However, existing case law asserts that such structural linkages do not inherently violate 9 U.S.C. § 10(a)(2), as mere appearances of bias do not constitute 'evident partiality.' The plaintiff has not shown any compelling financial motive that would influence the arbitrators. Previous cases cited by the plaintiff, which invalidated arbitration provisions due to unconscionability, are distinguishable as they involved significant power imbalances between employers and employees. In contrast, the plaintiff is a knowledgeable professional who voluntarily entered into a partnership agreement that clearly outlined the arbitration terms.
Moreover, the plaintiff contends that the arbitration provision improperly allows the defendant, a limited liability partnership, to arbitrate its own disputes due to the shared legal identity of partners. However, the plaintiff has not demonstrated that the New York statute governing partner relationships also affects the validity of arbitration provisions. Consequently, the arbitration provision in section 14.8 of the partnership agreement is deemed enforceable, and the arbitral process is not structurally biased against the plaintiff. The judgment is affirmed, with all judges concurring. In this context, BDO Seidman, LLP, is the defendant, while Hottle is the plaintiff. Section 3 of the arbitration act mandates that if a dispute is referable to arbitration under a written agreement, courts will stay trial proceedings to allow for arbitration, provided the applicant is not in default.
Section 4 of the arbitration act permits a party aggrieved by another's failure to arbitrate under a written agreement to petition a U.S. district court with jurisdiction over the subject matter to compel arbitration as outlined in the agreement. The court will evaluate whether the agreement's existence or compliance is contested; if not, it will order arbitration. If such issues are in dispute, the court will conduct a summary trial.
Section 14.8 of the partnership agreement mandates that any disputes related to the agreement or partnership affairs be resolved through a specified arbitration process, excluding conclusive accountings which bind Partners. An arbitration panel will consist of two Board members (excluding the Chairman and Chief Executive Partner) and three Partners from practice offices, with selections made to avoid conflicts of interest. The arbitration panel will be formed promptly after a dispute notice, will follow procedures set by the Board, and a majority vote will determine resolutions. The panel's decisions are binding and not subject to further proceedings.
Under Connecticut law, a trial court's order to compel arbitration is a final judgment. The arbitration act does not override state procedural laws. The choice of law provision in Section 16.9 states that the agreement will be governed by New York law, consistent with Section 2 of the arbitration act, which enforces arbitration agreements in maritime transactions or commerce-related contracts unless legally revocable.
The plaintiff's reliance on Rosenberg v. Merrill Lynch, Pierce, Fenner, Smith, Inc. is deemed unfounded due to the subsequent Court of Appeals decision. The plaintiff claims the discovery process is unfair, asserting that arbitration must adhere to fundamental fairness principles, which include proper notice, opportunities to be heard, the ability to present material evidence, and unbiased decision-makers. However, the defendant’s arbitration rules fulfill these fairness requirements. The plaintiff also cites Penn v. Ryan’s Family Steak Houses, where an employee's arbitration clause was deemed unenforceable due to bias and lack of clear communication. The Court of Appeals affirmed the lower court's ruling on different grounds, stating the agreement was too vague. Even if this case offered some precedential value, it would not support the plaintiff's arguments in the current case, as the District Court’s findings are not conclusive in this context, similar to the precedent set in Hooters of America, Inc. v. Phillips.
