Tag Archives: arbitration

Five Years Of The Litigators’ Blog

It’s hard to believe that this blog marks the five year anniversary of our inception of the Litigators’ Blog. We have tried over the last five years to provide you, our readers, with the most current developments-of-interest to Massachusetts litigators. We have sought to inform, and, when appropriate, offer insight and advice, on the significance of recent developments in the law.

Our latest blog, for example, discusses a recent Appeals Court case involving a general release which a party sought to avoid, advising caution when one seeks more than a straightforward general release of liability in a document.

We have given advice on a wide range of topics — how to access your client’s insurance policy even when the insurer agrees to defend the insured without a reservation of rights, how a non-party to an arbitration agreement can compel an adversary to arbitrate, how to avoid forfeiting an affirmative defense, how to avoid sanctions for deposition communications, and how to draft a settlement agreement to provide a mechanism to best enforce its terms. We have discussed the possibility that a stipulation of the parties will not be enforced, the scope of the new federal discovery Rule 26, and the value of a motion in limine.

From time to time we have talked about our travels, including a six-city, seven-day trip to see major league baseball games, and a hike to the summit of Mount Katahdin in Maine. Occasionally we have commented on current events, as when we gave our perspective as litigators on the Tsarnaev trial.

We hope you have found our blogs to be informative and perhaps even moderately entertaining. We certainly have enjoyed posting them.

This is as good a time as any to acknowledge the invaluable support of Jackie White, who makes sure our blogs are prepared and posted on time, our secretary, Rachel Hendley, and our indomitable editor and partner, Liz Ross.

And now, on to the next five years of the Litigators’ Blog.

Non-Signatory To Arbitration Agreement Compels Adversary To Arbitration

The Massachusetts Appeals Court recently applied the doctrine set forth in the seminal case of Machado v. System4 LLC, 471 Mass. 204 (2015), to require arbitration even though the defendant did not sign an arbitration agreement and was not otherwise compelled to arbitrate the dispute.

In Silverwood Partners LLC v. Wellness Partners LLC, No. 16-P-1174 (July 25, 2017), the Appeals Court affirmed the decision of the Superior Court to compel arbitration in the following situation: two broker-dealers, Nicolas McCoy and Michael Burgmaier, left the employ of Silverwood Partners LLC, also a broker-dealer, to secretly create a competing firm, the defendant Wellness Partners LLC doing business as Whipstitch Capital. In the process, as alleged by Silverwood, defendants stole Silverwood’s clients and diverted Silverwood’s business opportunities to Whipstitch. Following certain procedural wrangling, what came before the Court was an Amended Complaint by Silverwood against only Whipstitch asserting, among other things, claims for aiding and abetting the individuals in breaching their fiduciary duties, conversion, and tortious interference.

As a broker-dealer registered with the SEC, Silverwood was required to arbitrate any claims among any Financial Industry Regulatory Authority (FINRA) members or associated persons, including McCoy and Burgmaier. It appears as though by dropping McCoy and Burgmaier from the case in its Amended Complaint, Silverwood attempted to avoid the arbitration requirement and pursue its claims directly against Whipstitch in court rather than through arbitration.¹ It was conceded that Whipstitch, unlike McCoy and Burgmaier, is not a member or associated person within the meaning of the FINRA requirement of arbitration. The only issue before the court was whether Whipstitch could compel Silverwood to pursue any claim it had against Whipstitch in arbitration instead of in court.

In the Machado case, the SJC stated that courts have recognized six theories for binding non-signatories to arbitration agreements: incorporation by reference, assumption, agency, veil piercing/alter ego, equitable estoppel, and third party beneficiary. Machado at 210. In order to bind a non-signatory under a theory of equitable estoppel, the court noted that Machado requires one of two circumstances: “(1) when a signatory ‘must rely on the terms of the written agreement in asserting its claims against the non-signatory’ or (2) when a signatory ‘raises allegations of substantially interdependent and concerted misconduct by both the non-signatory and one or more of the signatories to the contract’.” Machado at 211.

In applying that principle, the court in Silverwood held that “the second circumstance emphatically applies in this case.” The Court at some length demonstrated and concluded that the allegations by Silverwood against Whipstitch were substantially interdependent with the allegations against McCoy and Burgmaier which were required to be, and in fact were, arbitrated pursuant to FINRA requirements. In so concluding, the Court rejected Silverwood’s argument that the doctrine of equitable estoppel has never been applied to compel FINRA arbitration as opposed to contractual arbitration. Acknowledging that that was in fact the case, the Court observed that while a FINRA member could not compel a non-member such as Whipstitch to submit to FINRA arbitration, the question before the court was whether the non-member, Whipstitch, could compel a FINRA member to submit to FINRA arbitration. The court concluded that since Silverwood did agree to subject itself to such arbitration and since Silverwood’s dispute with Whipstitch was substantially intertwined with the arbitrated dispute between Silverwood and McCoy and Burgmaier, the application of estoppel was appropriate.

¹ Footnote 4 of the decision explains that McCoy and Burgmaier prevailed in an arbitration proceeding brought by Silverwood.

The Trend To Enforce Arbitration Agreement Just Keeps Getting Stronger

It has become increasingly difficult for a party to avoid enforcement of a contractual arbitration provision and this summer the United States Supreme Court (“Supreme Court”) swept away one of the few remaining constraints, holding in American Express Co. v. Italian Colors Restaurant, 133 S.Ct. 2304, 2312 (2013) (“Amex”), that even where the terms of an arbitration provision make enforcement of a substantive right wholly impractical, the arbitration clause will be enforced. The ever-tightening noose of arbitration clauses is also evident in recent decisions of the Massachusetts Supreme Judicial Court (“SJC”). For example, in one case, Feeney v Dell, Inc. 454 Mass. 192 (2009) (“Feeney I”), the SJC was forced to follow the increasingly broad application of the Federal Arbitration Act (“FAA”), 9 U.S.C., §1 et seq., by the Supreme Court, even to the point where a party is, for all practical purposes, deprived of any effective means to enforce its substantive rights.

The SJC issued two other decisions in the Feeney matter, a dispute relating to the use of class action claims in arbitration proceedings, after Feeney I. The entire line of SJC decisions in the Feeney trilogy is illustrative of the ever-narrowing means of avoiding enforcement of an arbitration clause. Feeney I was a consumer class action case brought in state court relating to Dell’s allegedly improper collection of sales tax on computer services contracts for which no sales tax was actually due. The service contracts had a clause compelling arbitration and prohibiting the assertion of class claims in the arbitration proceeding. In 2009, in Feeney I, the SJC declined to enforce the class action waiver as violative of the strong Massachusetts public policy in favor of class actions for small value claims under G.L. c. 93A. In June 2013, the SJC revisited the case in Feeney v Dell, Inc. (“Feeney II”), 465 Mass. 470, 472 (June 12, 2013); in light of intervening Supreme Court precedent in AT & T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011). The SJC held in Feeney II that Concepcion barred a court “from invalidating an arbitration agreement that includes a class action waiver where a plaintiff can demonstrate that he or she effectively cannot pursue a claim against [a] defendant in individual arbitration according to the terms of the agreement, thus rendering his or her claim nonremediable.”

However, eight days after the SJC’s decision in Feeney II, the Supreme Court decided the Amex case in which it specifically rejected the SJC’s Feeney II analysis. As the SJC, much to its apparent chagrin, noted in Feeney v Dell, Inc. (“Feeney III”) (rescript), 466 Mass. 1001 (Aug. 1, 2013), in Amex the Supreme Court specifically found that “the FAA’s command to enforce arbitration agreements trumps any interest in ensuring the prosecution of low-value claims.” Thus, as long as an arbitration agreement does not expressly “forbid[ ] the assertion of certain [Federal] statutory rights” or “perhaps” require the payment of “filing and administrative fees attached to arbitration that are so high as to make access to the forum impracticable,” a plaintiff is not deprived of his or her right to pursue statutory remedies and the arbitration provision must be enforced. Id.

While the analysis of the Amex and Feeney cases was limited to the class action issue, the rationale behind it – that making the assertion of substantive rights wholly impractical will not bar the enforcement of an arbitration clause so long as the assertion of the right is not actually prohibited and remains theoretically possible – is likely to be applied more broadly over time.