Bell v. Cendant Corp.

• Decision Date: 11 June 2002
• Docket Number: Docket No. 01-7622.
• Parties: Stuart L. BELL, Plaintiff-Appellant, v. CENDANT CORPORATION, Defendant-Appellee, American Arbitration Association, Defendant.
• Court: U.S. Court of Appeals — Second Circuit

293 F.3d 563

Stuart L. BELL, Plaintiff-Appellant, v. CENDANT CORPORATION, Defendant-Appellee, American Arbitration Association, Defendant.

Docket No. 01-7622.

United States Court of Appeals, Second Circuit.

Argued: March 8, 2002.

Decided: June 11, 2002.

Fredrick E. Sherman, Jones, Day, Reavis & Pogue, New York, NY (Charles M. Carberry, Mark R. Seiden, Traci L. Jones, on the brief), for Plaintiff-Appellant.

Samuel Kadet, Skadden, Arps, Slate, Meagher & Flom LLP, New York, NY (Joseph N. Sacca, William F. Clarke, Jr., on the brief), for Defendant-Appellee.

Before: CARDAMONE, F.I. PARKER, and B.D. PARKER, Jr., Circuit Judges.

B.D. PARKER, JR., Circuit Judge.

Plaintiff-appellant Stuart L. Bell appeals from the May 1, 2001 judgment of the United States District Court for the Southern District of New York (Whitman Knapp, Senior Judge) denying his motion for a preliminary injunction to enjoin arbitration proceedings and granting the cross-motion of his former employer, defendant-appellee Cendant Corporation, to compel arbitration pursuant to the Federal Arbitration Act, 9 U.S.C. § 4. Cendant demanded arbitration before the American Arbitration Association ("AAA") of claims arising out of Bell's conduct as an employee of and adviser to Cendant. The District Court determined that, under Connecticut law, a broadly worded arbitration clause in Bell's consulting agreement with Cendant required that the issue of whether, and to what extent, the dispute was arbitrable must be decided by the arbitrator, not by the court. We affirm.

BACKGROUND

Bell was an employee of Cendant's predecessor, CUC International, from 1979 to January 31, 1995, serving as executive vice president, chief financial officer, and treasurer. From early 1987 until his departure, while Bell was chief financial officer, the terms and conditions of his employment with CUC were governed by an employment contract, last amended in November 1991 (the "Employment Agreement"). The Employment Agreement, governed by Connecticut law, contained an indemnification clause providing that Cendant would indemnify Bell for costs related to litigation in which he was involved as a director and officer, and reimburse him for costs incurred in litigation with the company if the action was concluded in Bell's favor.

After Bell ceased working as chief financial officer in February 1995, he continued to work for CUC part-time as a consultant, reporting to the company's chief executive and president. The consulting relationship was reflected in a Special Adviser Agreement ("Adviser Agreement"), dated December 1994 and effective through February 1, 2001, that expressly "supercede[d] any prior Employment Agreement" between Bell and Cendant. It contained non-solicitation, non-competition, and non-disparagement provisions (the "non-compete provisions"), a Connecticut choice of law provision, and a broadly worded arbitration clause. The arbitration clause provided that "[a]ny controversy arising in connection with or relating to this Agreement, any stock options granted to the Executive [Bell], the Executive's employment or any services to be provided hereunder, or any other matter or thing, shall be determined and settled by arbitration, in accordance with the rules of the American Arbitration Association...." (emphasis added). The clause contained an exception allowing Cendant to sue in court for injunctive relief arising out of Bell's violation of the Adviser Agreement.

In April 1998, following a merger of CUC and HFS Incorporated to form Cendant, an internal investigation uncovered accounting irregularities at CUC. Public disclosure of these irregularities led to a significant decline in the price of Cendant's stock and triggered numerous securities class actions by purchasers of CUC and Cendant securities. A parallel investigation by the Securities and Exchange Commission (the "SEC") discovered the existence of a fraudulent accounting scheme at CUC beginning in 1985 and running through April 1998. The SEC found that the scheme was devised to inflate CUC's operating income and "was driven by [CUC] senior management's determination that CUC would always meet the earnings expectations of Wall Street analysts and fueled by disregard for any obligation that the earnings reported need to be `real.'" In re Cendant Corp., Exchange Act Release No. 34-42933, 2000 WL 766595, at *2 (June 14, 2000). Cendant alleges that Bell was involved in and shared responsibility for these accounting irregularities, which spanned the period of both of his agreements with Cendant.

In May 1999, Cendant sued Bell in federal district court in Connecticut over matters unrelated to the accounting irregularities. Cendant claimed that Bell had breached the non-compete provisions of the Adviser Agreement by founding and operating webloyalty.com, an Internet-based marketing company that allegedly competed with Cendant. Cendant sought an order enjoining Bell from violating the non-compete provisions, an order extending the duration of the provisions, and damages.

In June 2000, Cendant filed a demand for arbitration with the AAA, seeking damages from Bell arising out of his alleged participation in the accounting scheme. In addition to asserting claims for fraud and breach of fiduciary duty, Cendant alleged that Bell had breached both the Employment Agreement and the Adviser Agreement.

In July 2000, Bell sued in diversity in the Southern District of New York to enjoin the arbitration on the grounds that (1) Cendant's claims arising under the Employment Agreement were not arbitrable, and (2) Cendant waived its right to arbitrate by prosecuting the Connecticut action. Bell moved for a preliminary injunction on these grounds, and Cendant cross-moved to compel arbitration. The District Court denied Bell's motion and granted Cendant's cross-motion. Bell v. Cendant Corp., No. 00 Civ. 5554, 2001 WL 422881 (S.D.N.Y. Apr. 25, 2001). Construing the Adviser Agreement's arbitration clause under Connecticut law, the District Court found that the issues raised by Bell regarding arbitrability must themselves be decided by the arbitrator. Id. at *3. The court declined to consider whether Cendant waived its right to arbitrate, also leaving this issue for the arbitrator. Id. Bell now appeals.

DISCUSSION

I. Who Decides Arbitrability

This Court's review of whether the issue of arbitrability is for the court or for the arbitrator is de novo. John Hancock Life Ins. Co. v. Wilson, 254 F.3d 48, 53 (2d Cir.2001); see also Abram Landau Real Estate v. Benova, 123 F.3d 69, 72 (2d Cir.1997) ("This Court reviews de novo a final district court order compelling arbitration."). "There is a strong federal policy favoring arbitration as an alternative means of dispute resolution." Oldroyd v. Elmira Sav. Bank, FSB, 134 F.3d 72, 76 (2d Cir.1998) (citation omitted). The Federal Arbitration Act, 9 U.S.C. §§ 1 et seq., creates "a body of federal substantive law of arbitrability, applicable to any arbitration agreement within the coverage of the Act." Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983). Because an agreement to arbitrate is a creature of contract, however, the ultimate question of whether the parties agreed to arbitrate is determined by state law. As the Supreme Court stated in First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995), "[w]hen deciding whether the parties agreed to arbitrate a certain matter (including arbitrability), courts generally ... should apply ordinary state-law principles that govern the formation of contracts." See also Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 404 n. 12, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967) (purpose of the Federal Arbitration Act "was to make arbitration agreements as enforceable as other contracts, but not more so").

Where the scope of an arbitration agreement is ambiguous, the Federal Arbitration Act's policy favoring arbitration requires that "any doubts ... be resolved in favor of arbitration." Moses H. Cone, 460 U.S. at 24-25, 103 S.Ct. 927. But where the ambiguity relates to who determines arbitrability — that is, the arbitrability of the question of arbitrability — the Act's presumption is reversed and a court ordinarily decides the question. PaineWebber Inc. v. Bybyk, 81 F.3d 1193, 1198 (2d Cir.1996) (citing First Options, 514 U.S. at 944-45, 115 S.Ct. 1920). Parties to an arbitration agreement "may provide that the arbitrator, not the court, shall determine whether an issue is arbitrable." Id. at 1198, 115 S.Ct. 1920. But the issue of arbitrability may only be referred to the arbitrator if "there is `clear and unmistakable' evidence from the arbitration agreement, as construed by the relevant state law, that the parties intended that the question of arbitrability shall be decided by the arbitrator." Id. at 1198-99 115 S.Ct. 1920 (emphasis added) (quoting First Options, 514 U.S. at 944, 115 S.Ct. 1920). Here, the parties agree that the relevant state law is the law of Connecticut.

Bell argues that there is a distinction between arbitration law and contract law, and that the District Court should have looked only to general principles of Connecticut contract law in conjunction with First Options in determining who should decide arbitrability. We fail to see the distinction between arbitration law and contract law. As Bell acknowledges, arbitration is a creature of contract, and a person may only be compelled to arbitrate a dispute to the extent that he has agreed to do so. See AT&T Techs., Inc. v. Communications Workers of Am., 475 U.S. 643, 648, 106 S.Ct. 1415, 89 L.Ed.2d 648 (1986); White v. Kampner, 229 Conn. 465, 641 A.2d 1381, 1384 (1994). Thus, the intent of the parties, as evidenced by their contractual language, determines whether arbitrability is a determination for the court or for the arbitrator. Int'l Marine Holdings, Inc. v. Stauff, 44...