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Choice of Law: Characterization of Facts Determines the Outcome

Published on the Resolution Roundtable Blog, sponsored by the Dispute Resolution Section of the New York State Bar Association, October 7, 2014.

Although there may be no disagreement about the facts, what law applies often depends on how the facts are characterized. An illustration of how characterization of facts determine the outcome is seen in the Cusimano, et al v. Schnurr decisions from the motion court, 40 Misc.3d 1208 (2013) and appellate division, 2014 NY Slip Op 05702 (1st Dept. August 7, 2014). The dispute turns on the nature of the economic activity of the parties’ enterprise. For Justice Ramos, “[a]s [a] result of plaintiffs’ flagrant forum shopping, [the] issue of statute of limitations defense was for court, rather than for arbitrators to decide.” An equally important but secondary issue in Cusimano—what level of litigation activity will result in a waiver?—is for the court under New York law, although It may also implicate the rules of the service provider. For example, the American Arbitration Commercial Rules provide that “[a]ny party who proceeds with the arbitration after knowledge that any provision or requirement of these rules has not been complied with and who fails to state an objection in writing shall be deemed to have waived the right to object” (Rule 41).

The motion court found “that the totality of the economic activity in question has no affect on interstate commerce, and thus, the FAA does not apply to the claims asserted by the Cusimanos in the Arbitration.” The appellate panel disagreed. It explained that the phrase “involving commerce” is to be broadly construed (Decision at 4). It is the “equivalent of ‘affecting commerce,’ a term associated with the broad application of Congress’s power under the Commerce Clause” (Id.). This brings the dispute within the ambit of the FAA which assigns the limitations defense to the arbitrator. Cusimano had reached the appellate division after plaintiff filed a demand for arbitration that Justice Ramos denied because he had already previously given plaintiffs leave to replead their complaint.

The dispute in Cusimano involved three separate real estate properties, one located in Florida and two in New York. Justice Ramos found “the totality of the economic activity in question has no affect on interstate commerce, and thus, the FAA does not apply to the claims asserted by the Cusimanos in the Arbitration” (Decision at 17). Veering to arbitration after commencing an action, he ruled, is a flagrant example of forum shopping – dressed up as a professed concern for judicial economy – to get a second bite at the apple in arbitration. The Court will not and does not accept such a gaming of the litigation process, and any right that Rita may have had to insist on arbitration of her claims against the accountants has been waived by her resort to, and aggressive participation in this litigation. (Id., at 19).

The appellate panel characterized the facts differently and not as “a flagrant example of forum shopping”:

Each of the agreements concerns transactions that affect commerce, and all of the entities are involved in the rental of commercial property…. Because [these properties] … can affect interstate commerce, the ownership of and investment in the commercial buildings here, one of which is occupied by an international chain hotel and another which houses a national chain drug store located out of state, renders the FAA applicable to these agreements (Decision at 5).

Therefore, the timeliness issue was for the arbitrator to determine.

However, the secondary issue of waiver is properly before the court although plaintiffs argued it too was for the arbitrator. Whether there is a waiver is informed by state and federal policies favoring arbitration. The appellate panel held that “waiver should not be ‘lightly inferred’ under the FAA,” citing federal decisions. The answer of how much litigation bars arbitration turns on what has actually been done and whether what has been done is prejudicial to a party to have to defend itself anew in the arbitral forum. “A party does not waive the right to arbitrate simply by pursuing litigation, but by ‘engag[ing] in protracted litigation that results in prejudice to the opposing party’” (Kramer v. Hammond, 943 F2d 176, 179 [2d Cir 1991]). Justice Ramos viewed the filing for arbitration as a “gaming of the litigation process” (Id.)

The appellate panel commenced its analysis with a caution: “there is no bright line rule. Rather, the court should consider three factors: (1) the amount of time between the commencement of the action and the request for arbitration; (2) the amount of litigation thus far; and (3) proof of prejudice to the opposing party.” Costs could be a factor but it is not alone “sufficient to establish prejudice.”

Litigation becomes too much where the party opting for arbitration seeks to relitigate issues lost before the motion court. However, in Cusimano “the motion court gave plaintiffs leave to replead with specificity, effectively giving plaintiffs ‘another bite at the apple,’ at least as to the sufficiency of the pleadings. Thus, plaintiffs have not received any greater advantage by filing a statement of claim in an arbitration than they would have obtained had they filed an amended complaint.” Further, (the appellate division noted) defendants “point to no case finding waiver solely because a party filed an arbitration demand after limited motion practice, particularly where, as here, only one year had passed and no discovery had been exchanged.” (Id. at 6-7).

The resolution of this tension between court and arbitrator depends largely on the posture of the case. Since Cusimano started in court certain determinations are within its jurisdiction depending on the applicable law. Although both waiver and limitations determine an outcome, only waiver prevents a party from proceeding with arbitration. On the other hand, where a case reaches court after an arbitrator’s ruling on waiver his determination is likely to be respected.

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