459 F.Supp.3d 597
S.D.N.Y.2020Background
- Augustus Intelligence, a New York AI company, employed Marco Pacelli and Ed Crump under written employment agreements that included broad arbitration provisions (AAA rules) and a mediation-before-arbitration condition.
- Pacelli and Crump had co-founded an LLC, Quantum Intelligence (QI); Augustus later terminated them for cause, allegedly to avoid bonus/commission obligations, and made defamatory statements; Plaintiffs allege fraudulent inducement, defamation, unlawful surveillance, RICO and other claims.
- Augustus initially sued Plaintiffs in New York state court, then voluntarily dismissed that suit and filed an AAA arbitration demand after Plaintiffs’ counsel demanded dismissal and asserted the arbitration clauses.
- Plaintiffs filed this federal suit and opposed Augustus’s motion to compel arbitration, arguing (inter alia) that Augustus waived arbitration by litigating, that the arbitration procedures are unfair/deny due process, that California law (Cal. Lab. Code § 925) prevents forcing Crump to arbitrate in New York, and that some claims fall outside the arbitration clauses.
- The court found valid arbitration agreements and held that (a) incorporation of the AAA Employment Rules (Rule 6(a)) provided clear and unmistakable delegation of arbitrability to the arbitrator despite the mediation condition; (b) litigation-conduct waiver (i.e., waiver by participating in court litigation) is a question for the court, but Augustus had not waived; and (c) remaining objections (due process, § 925, scope) are for the arbitrator.
- Court granted Augustus’s motion to compel arbitration and stayed the case pending arbitration.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Validity/existence of arbitration agreement | Plaintiffs concede existence but contest enforceability as to some claims | Agreement signed and contains arbitration clause | Agreement exists and is valid; arbitrability questions proceed as addressed below |
| Delegation of arbitrability given mediation condition | Mediation-before-arbitration means courts must decide arbitrability because only "unresolved" mediation items go to arbitration | Incorporation of AAA Employment Rules (Rule 6(a)) is clear and unmistakable delegation; mediation is a condition precedent and procedural | Delegation stands: incorporation of AAA rules clearly delegates arbitrability to arbitrator; mediation is a procedural condition precedent and does not defeat delegation |
| Waiver by litigation conduct (Defendant sued in state court then dismissed) | Augustus waived right to arbitrate by initiating (and briefly litigating) in court | No waiver: dismissal occurred promptly after Plaintiffs demanded arbitration; minimal litigation occurred; no prejudice | Litigation-conduct waiver is for courts to decide; here no waiver — dismissal was timely, little litigation, no prejudice |
| Substantive defenses (due process/fundamental fairness, Cal. Lab. Code § 925, and claim scope) | Due process/fundamental fairness and § 925 (forum restriction) and some claims fall outside arbitration | Such objections concern arbitrability/enforceability and were delegated to arbitrator by clause/incorporation | These substantive enforceability and scope objections are delegated to the arbitrator (court defers) |
Key Cases Cited
- AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (recognizing federal policy favoring arbitration and enforceability of arbitration agreements)
- Moses H. Cone Mem. Hosp. v. Mercury Constr. Corp., 460 U.S. 1 (federal policy favoring arbitration)
- Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63 (arbitration is a matter of contract; courts decide gateway issues unless clearly delegated)
- First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (who decides arbitrability is a threshold question)
- Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (procedural prerequisites to arbitration are for arbitrators)
- Contec Corp. v. Remote Sol., Co., 398 F.3d 205 (2d Cir.) (incorporation of AAA rules is clear delegation of arbitrability)
- NASDAQ OMX Grp., Inc. v. UBS Sec., LLC, 770 F.3d 1010 (2d Cir.) (contract carve-outs can defeat delegation)
- Republic of Ecuador v. Chevron Corp., 638 F.3d 384 (2d Cir.) (definition/scope of "questions of arbitrability")
- BG Group PLC v. Republic of Argentina, 572 U.S. 25 (presumption that procedural preconditions to arbitration are for arbitrators)
- Meyer v. Uber Techs., Inc., 868 F.3d 66 (2d Cir.) (where party has participated in litigation over dispute, courts may decide waiver)
- S & R Co. of Kingston v. Latona Trucking, Inc., 159 F.3d 80 (2d Cir.) (no-waiver contractual clauses do not eliminate litigation-conduct waiver analysis)
- Doctor’s Assocs., Inc. v. Alemayehu, 934 F.3d 245 (2d Cir.) (formation/threshold issues of arbitration are for courts)