DT–Trak Consulting, Inc. v. Prue

• Citation: 814 N.W.2d 804,2012 S.D. 39
• Decision Date: 23 May 2012
• Docket Number: No. 26065.,26065.
• Parties: DT–TRAK CONSULTING, INC., a South Dakota Corporation, Plaintiff and Appellant, v. Dan PRUE, an individual, Defendant and Appellee.
• Court: Supreme Court of South Dakota

814 N.W.2d 804

2012 S.D. 39

DT–TRAK CONSULTING, INC., a South Dakota Corporation, Plaintiff and Appellant,

v.Dan PRUE, an individual, Defendant and Appellee.

No. 26065.

Supreme Court of South Dakota.

Argued March 20, 2012.

Decided May 23, 2012.

Roger W. Damgaard, Sander J. Morehead of Woods, Fuller, Shultz and Smith, P.C., Sioux Falls, South Dakota, Attorneys for plaintiff and appellant.

Vanya S. Hogen of Jacobson, Buffalo, Magnuson, Anderson & Hogen, P.C., St. Paul, Minnesota, Attorneys for defendant and appellee.

GILBERTSON, Chief Justice.

[¶ 1.] Dan Prue sold his majority interest in DT–Trak Consulting, Inc. (DT–Trak), a medical coding business, for a lump-sum payment and several annual payments. DT–Trak withheld an annual payment, asserting that Prue had violated the Stock Purchase Agreement. The matter proceeded to arbitration. A three-member arbitration panel made an award in Prue's favor. DT–Trak sought to vacate the award, alleging that the arbitrator it selected demonstrated evident partiality, and that the panel's findings of fact and conclusions of law were insufficient. The circuit court affirmed. DT–Trak appeals. We affirm.

FACTS & PROCEDURAL HISTORY

[¶ 2.] DT–Trak is a South Dakota corporation that offers services to medical providers using electronic medical records. Most of DT–Trak's clients are Indian Health Services facilities and providers. Prue became a 51% owner of DT–Trak in 2003, in addition to serving as President and Chief Executive Officer. His primary responsibility was developing and maintaining relationships with clients.

[¶ 3.] In 2007, Prue was removed from daily operations of DT–Trak due to personality and other conflicts. Prue entered into a Stock Purchase Agreement (“Agreement”) with DT–Trak, terminating his relationship with the company. The Agreement provided for DT–Trak's purchase of Prue's interest for $310,000 plus annual performance payments totaling $500,000 beginning in January 2009 to January 2012. The Agreement also contained provisions limiting competition, solicitation, and disclosure. Specifically, Prue agreed that for three years he would not: (1) compete with DT–Trak; (2) directly or indirectly solicit or attempt to induce current and certain former employees of DT–Trak to leave the company; (3) solicit or induce any current or prospective DT–Trak customers to cease doing business with DT–Trak; or (4) knowingly attempt to interfere with any business relationship between DT–Trak and any third party. If Prue violated any of these provisions, DT–Trak was entitled to cease making any further annual payments and to a full refund of the funds it had already paid to Prue. The Agreement contained an arbitration provision.

[¶ 4.] Kathy Price and Tara Hochhalter worked for DT–Trak. Both women worked on DT–Trak's account with Maniilaq Health Center in Alaska, a key account for the company. Hochhalter worked there from 2005 to March 2007. Price started with DT–Trak in August 2002 and resigned in June 2007. She allegedly took confidential information related to the Maniilaq account with her. Before leaving, Price and Hochhalter signed non-compete and non-disclosure agreements with DT–Trak, but the restrictions ended in or around November 2008. Their agreements did not contain arbitration clauses.

[¶ 5.] In 2009, Price and Hochhalter formed P & H Med Services, which competes with DT–Trak. P & H entered into a contract with Maniilaq in March 2009, even though Maniilaq was still DT–Trak's client. Maniilaq terminated its contract with DT–Trak in June 2009. That same month, DT–Trak sued Price, Hochhalter, P & H, and other former employees under a variety of theories, including breach of non-compete agreements and misappropriation of trade secrets and confidential information. DT–Trak claims it would have named Prue as a co-defendant in the litigation but his Agreement contained an arbitration provision. Believing Prue was involved with the formation of P & H, DT–Trak withheld Prue's January 2010 payment, asserting that he had violated the Agreement by assisting Price and Hochhalter.

[¶ 6.] Prue initiated an arbitration proceeding. He sought his 2010 payment, plus damages for breach of the covenant of good faith and fair dealing, prejudgment interest, lost investment income, and procedural safeguards for future payments. DT–Trak counterclaimed that under the Agreement, it was entitled to withhold the payment.

[¶ 7.] The arbitration provision of the Agreement required arbitration by a three-person panel of licensed attorneys with commercial law experience. No arbitrator could be related to or have represented either party at any time. Each party was entitled to choose an arbitrator and the two arbitrators would then select a third arbitrator. Written notice of each party's selected arbitrator was mandated. The Agreement also required the panel to enter findings of fact and conclusions of law. Prue selected Robert Hayes. DT–Trak selected Don Peterson from Morgan & Theeler, LLP. Hayes and Peterson chose Jon Sogn as the third arbitrator.

[¶ 8.] After arbitration had commenced and the hearing was scheduled, Peterson informed DT–Trak's attorneys that he previously had contact with a person listed as a witness. Peterson withdrew as an arbitrator, but indicated Jack Theeler, also from his firm, could serve because the conflict was personal, not legal. The nature of the conflict was confirmed by Sogn. DT–Trak agreed to allow Theeler to replace Peterson.

[¶ 9.] The arbitration panel issued findings of fact and conclusions of law after a two-day hearing. The arbitration panel unanimously held that DT–Trak failed to prove Prue violated the non-compete provisions. Prue was awarded payments under the Agreement. After the hearing, DT–Trak's attorneys examined phone records and noticed that Price had placed a call to Morgan & Theeler the day she was served with DT–Trak's complaint in the state court litigation. DT–Trak served discovery on Price in that litigation asking her to identify and describe the conversations she had with the Morgan & Theeler firm. Price asserted attorney-client privilege.

[¶ 10.] DT–Trak filed a motion to vacate the arbitration award with the circuit court. DT–Trak claimed that its chosen arbitrator (Theeler) was evidently partial and that the arbitration panel exceeded its authority by failing to submit sufficient findings of fact on key issues in dispute. In response to this motion, Prue's attorney contacted Price's attorney. Price provided a supplemental discovery response, indicating that Price had spoken with Tim Bottum of Morgan & Theeler when she called about possible representation. They spoke briefly and Price ultimately hired a different law firm to represent her.

[¶ 11.] The circuit court denied DT–Trak's motion to vacate the arbitration award, determining there was no evident partiality by the arbitrators and that the panel had not exceeded its authority. We address the following issues on appeal:

1. Whether a choice-of-law provision in the Agreement preempts the Federal Arbitration Act.

2. Whether the circuit court erred in determining there was not evident partiality in the arbitration panel.

3. Whether the circuit court erred in concluding that the arbitration panel provided findings of fact and conclusions of law sufficient to support its decision.

STANDARD OF REVIEW

[¶ 12.] The standard of review of a court order affirming an arbitrator's award is as follows:

Judicial review of arbitration awards is narrow as provided by SDCL 21–25A–24. In reviewing a trial court's order ‘confirming the arbitrator's award, we accept the court's factual findings unless clearly erroneous, but decide questions of law de novo.’ The party asserting error has the burden of proof.Spiska Eng'g, Inc. v. SPM Thermo–Shield, Inc., 2007 S.D. 31, ¶ 9, 730 N.W.2d 638, 643 (quoting Spiska Engineering, Inc. v. SPM Thermo–Shield, Inc., 2004 S.D. 44, ¶ 4, 678 N.W.2d 804, 805);see also Wright v. GGNSC Holdings LLC, 2011 S.D. 95, ¶ 8, 808 N.W.2d 114, 117 (“We review de novo the circuit court's interpretation of an arbitration agreement.”).

ANALYSIS

[¶ 13.] 1. Whether a choice-of-law provision in the Agreement preempts the Federal Arbitration Act.

[¶ 14.] Section 13.9 of the Agreement is entitled “Governing Law” and provides:

This Agreement, including its validity, interpretation and enforcement, and the rights and obligations of the parties hereunder, or arising directly or indirectly from this transaction or the parties' relationships because of the Business, shall be governed by the laws of the State of South Dakota (without giving effect to the conflicts of laws provisions thereof).

To the circuit court, DT–Trak argued that the Federal Arbitration Act (FAA), codified at 9 U.S.C. §§ 1–16, preempts the South Dakota Arbitration Act (SDAA), SDCL chapter 21–25A. Prue asserted that the choice-of-law provision in the Agreement controls to the extent that the SDAA does not conflict with the FAA. The circuit court concluded that South Dakota law controlled because of the choice-of-law provision in Section 13.9 of the Agreement. However, the circuit court “assume[d], arguendo, that DT–Trak's interpretation of the law is correct and [performed] its analysis under the application of the FAA.”

[¶ 15.] On appeal, DT–Trak asserts that the FAA controls because the FAA governs agreements to arbitrate disputes that relate to transactions involving interstate commerce. 9 U.S.C. § 2. “Congress' Commerce Clause power ‘may be exercised in individual cases without showing any specific effect upon interstate commerce’ if in the aggregate the economic activity in question would represent ‘a general practice ... subject to federal control.’ ” Citizens Bank v. Alafabco, Inc., 539 U.S. 52, 56–57, 123 S.Ct. 2037, 2040, 156 L.Ed.2d 46 (2003) (quoting Mandeville Island Farms, Inc. v. Am. Crystal Sugar Co., 334 U.S. 219, 236, 68 S.Ct. 996, 1006, 92 L.Ed. 1328 (1948)). DT–Trak and Prue are both South...