Summary of a Recent
Judicial
Development in
Alternative Dispute Resolution
Court Compels Arbitration for Collateral Matters
Relating to the Parties' Agreement
Walt McCarterNational AgLaw Center Research Associate
Summary of Decision
In Empire State Ethanol and Energy, LLC v. BBI International, No. 1:08-CV-623 (GLS/DRH), 2009 WL 790962 (N.D.N.Y. Mar. 20, 2009), the United States District Court for the Northern District of New York held that the parties' arbitration clause was drafted broadly and therefore covered even collateral matters that touched upon and related to the underlying agreement, and ordered the plaintiff to submit its claims to arbitration.
Background
Plaintiff Empire State Ethanol (Empire) retained defendant BBI to conduct a feasibility study regarding entering the biofuels market in New York. Id. at *1. BBI's reports recommended Oneonta, New York as a potential site for an ethanol plant, but failed to mention the Port of Albany, which was allegedly a far more desirable site. Id. The parties entered into a project development agreement, which contained an arbitration clause, and BBI took control of the plant project. Id. Meanwhile, two high-ranking BBI employees had started a company called Bio-Pro for the purpose of developing an ethanol plant in New York that would compete directly with Empire's proposed plant. Id. at *2. Bio-Pro was created "with the knowledge, encouragement and consent of BBI, its CEO . . . and its Vice-President of Project Development." Id. The two officers were then appointed to oversee parts of Empire's project, which gave them access to Empire's confidential information. Id. BBI subsequently cancelled its agreement with Empire, created a new company called ARE, and submitted an ethanol plant proposal of its own. Id. Empire then brought several claims against BBI, ARE, and the individual officers. Id. The defendants sought a gag order to prevent Empire from discussing the merits of the case with the media and filed a motion to dismiss and compel arbitration. Id. at *3.
Arguments
The parties disputed whether the nonsignatory defendants (those who were not a party to the project development agreement) could enforce the arbitration clause, which of Empire's several claims were covered by the clause, and the proper disposition of the case while arbitration was pending. Id. at *4.
Analysis and Holdings
Regarding which parties were protected by the arbitration clause, the court acknowledged that other Second Circuit courts had "consistently . . . held that employees or disclosed agents of an entity that is a party to an arbitration agreement are protected by that agreement," but pointed out that the individual defendants were not sued in their capacity as BBI officials, but as members of Bio-Pro/ARE, and thus held that the nonsignatory defendants could not enforce the arbitration clause. Id. at *4-5. Considering which of Empire's claims should be submitted to arbitration, the court explained that when an arbitration clause is broadly drafted, a presumption of arbitrability arises and the clause will cover even collateral matters. Id. Thus the court determined that Empire's antitrust claims were arbitrable because they "clearly touch[ed] on the [project development agreement] and implicate[d] the parties' rights and obligations thereunder." Id. at *8. The court likewise found that Empire's several tort claims touched upon and related to the agreement, and were therefore arbitrable. Id. at *9. The court then stayed the action pending arbitration with respect to the signatory defendants, but denied the defendants' motion for a gag order because they had failed to show that Empire's statements presented a "substantial likelihood of materially prejudicing an adjudicative proceeding." Id. at *10-11.
The case was decided on March 20, 2009.