Hottle v. Seidman, 268 Conn. 694 (CT 5/4/2004), (SC 16941).

• Decision Date: 04 May 2004
• Docket Number: (SC 16941).
• Court: Connecticut Supreme Court
• Parties: DEAN M. HOTTLE <I>v.</I> BDO SEIDMAN, LLP. BDO SEIDMAN, LLP <I>v.</I> DEAN M. HOTTLE.

Page 694

268 Conn. 694

DEAN M. HOTTLE

v. BDO SEIDMAN, LLP.

BDO SEIDMAN, LLP v. DEAN M. HOTTLE.

(SC 16941).

Supreme Court of Connecticut.

Argued January 14, 2004.

Officially released May 4, 2004.

Borden, Norcott, Katz, Palmer and Vertefeuille, Js.

Syllabus

H. the plaintiff in the first case, who was a former partner in the defendant accounting firm, B Co., filed an application for a prejudgment remedy against B Co. in connection with a dispute over the payment of certain compensation. B Co. moved to stay the court proceedings that H had initiated and brought the action in the second case to compel arbitration in accordance with the partnership agreement that the parties had executed. The trial court rendered judgment in favor of B Co. in both cases, and H appealed to the Appellate Court. H claimed that the arbitration clause of the partnership agreement was unenforceable because it did not provide for a neutral third party decision maker but, instead, an arbitral panel consisting entirely of five partners from B Co. The Appellate Court determined that the partnership agreement had been executed pursuant to New York law, that under the laws of that state the parties properly had entered into an agreement to arbitrate and that the arbitration clause was enforceable. On the granting of certification, the plaintiff appealed to this court, again challenging the validity of the arbitration clause under New York law, which the parties had agreed was to govern the partnership agreement. Held:

1. The arbitration clause was neither illusory under New York law nor contrary to the public policy of that state because B Co.'s partners were neither legally equivalent to B Co. nor so identified with it that the law had to presume, in advance of their selection as arbitrators, that they would be incapable of conducting a fair and impartial adjudication of the underlying dispute.

2. The arbitration clause was not so skewed in B Co.'s favor as to be unconscionable as a matter of law: H, who was a well educated accountant made no claim that the partnership agreement was a contract of adhesion, that the contract language was in any way deceptive or that B Co. used high pressure tactics in the formation of the contract; furthermore, the terms of the arbitration clause, which required that the arbitrators were to be mutually agreed to by B Co.'s board of directors and the parties to the dispute and which also provided that no member of the arbitration panel was to be either from an office of B Co. in which a complaining partner was located at the time of the filing of the complaint or otherwise involved in the controversy or dispute, were not so imbalanced as to require invalidation of that clause.

Procedural History

Application, in the first case, for a prejudgment remedy, and application, in the second case, for an order to compel arbitration, brought to the Superior Court in the judicial district of Danbury, where the defendant in the first case filed a motion to stay the prejudgment remedy proceedings pending arbitration; thereafter, the matters were consolidated and tried to the court, White, J.; judgment, in the first case, denying the application for a prejudgment remedy and granting the motion for a stay, and judgment, in the second case, granting the application to compel arbitration, from which Dean M. Hottle filed separate appeals to the Appellate Court, where the appeals were consolidated, and where the court, Foti, Schaller and Peters, Js., affirmed the trial court's judgments, and Dean M. Hottle, on the granting of certification, filed a consolidated appeal to this court. Affirmed.

William J. Wenzel, for the appellant (Dean M. Hottle).

Donald E. Frechette, for the appellee (BDO Seidman, LLP).

Daniel Blinn and F. Paul Bland, Jr., pro hac vice, filed a brief for the Trial Lawyers for Public Justice et al. as amici curiae.

Opinion

KATZ, J.

The principal issue raised by these consolidated, certified appeals¹ is whether an arbitration clause, in a contract executed under New York law, is enforceable when it authorizes an arbitration panel consisting solely of directors and partners of one of the parties. We conclude that, under the facts of this case, the arbitration clause is enforceable under New York law and, accordingly, we affirm the judgment of the Appellate Court. Hottle v. BDO Seidman, LLP, 74 Conn. App. 271, 811 A.2d 745 (2002).

The opinion of the Appellate Court sets forth the following relevant facts and procedural history. "These appeals arise out of a dispute over the payment of compensation between the plaintiff, Dean M. Hottle, a former partner, and the defendant partnership, BDO Seidman, LLP, an accounting firm. After his withdrawal from the firm, the plaintiff initiated judicial proceedings by filing an application for a prejudgment remedy. In response, the defendant filed a motion to stay the court proceedings and an independent action to compel arbitration² under §§ 3 and 4 of the [Federal Arbitration Act (arbitration act)].³ The defendant argued that the plaintiff was obligated to arbitrate his claims pursuant to § 14.8 of the partnership agreement [the parties had executed].⁴ The trial court agreed and rendered judgment in favor of the defendant." Id., 273-74. The plaintiff thereafter filed two separate appeals to the Appellate Court, which consolidated the appeals.⁵

On appeal to the Appellate Court, the plaintiff argued that the arbitration clause of the partnership agreement was unenforceable because it did not provide for a neutral third party decision maker. Specifically, the plaintiff contended that § 14.8 of the partnership agreement does not qualify as an agreement for "arbitration" because it provides for an arbitral panel consisting entirely of five partners from the defendant accounting firm.⁶ The defendant argued, in response, that the arbitration clause is not invalid simply because it authorizes adjudication by the defendant's partners, and further, that the plaintiff knowingly agreed to the terms of the arbitration clause and, therefore, cannot now seek to avoid enforcement of those terms. Id., 275.

The Appellate Court, noting that the partnership agreement contains a provision that the agreement "shall be governed" by New York law;⁷ id., 275 n.6; proceeded to construe that agreement under a plenary standard of review. Id., 275, citing 805 Third Avenue Co. v. M.W. Realty Associates, 58 N.Y.2d 447, 451, 448 N.E.2d 445, 461 N.Y.S.2d 778 (1983). The court first determined that the partnership agreement "`involves commerce'" and is therefore governed by the arbitration act. Hottle v. BDO Seidman, LLP, supra, 74 Conn. App. 276. Applying the arbitration act, the court determined that it was required to resolve two issues: "(1) whether the parties agreed to arbitrate, and (2) whether the agreement was enforceable." Id., 277. The court answered both questions in the affirmative. Id., 278, 283.

In concluding that the parties had agreed to arbitrate, the court first noted that the partnership agreement had been executed pursuant to New York law and, under the laws of that state, the parties properly had entered into an agreement to arbitrate. The court further noted that it was uncontroverted that the underlying dispute fell within the scope of § 14.8 of the partnership agreement. Id., 277-78.

Turning to the enforceability of the arbitration clause, the court noted that, "[a]lthough the requirement of a neutral arbitrator has often been stated . . . the parties have not cited, and we have not found, an authoritative definition of the requisite neutrality." (Citations omitted.) Id., 278. Accordingly, the court held, "[a]s a matter of first impression . . . that neutrality requires an absence of structural bias that demonstrates probable partiality in favor of one of the parties to the dispute." Id. In arriving at the "structural bias" standard, the court relied on federal cases that, within the context of claims brought under the arbitration act, had "phrased the need for neutrality in terms of `institutional bias' and `evident partiality.'" Id.; see id., 279, citing Harter v. Iowa Grain Co., 220 F.3d 544, 553 (7th Cir. 2000); Scott v. Prudential Securities, Inc., 141 F.3d 1007, 1015 (11th Cir. 1998), cert. denied, 525 U.S. 1068, 119 S. Ct. 798, 142 L. Ed. 2d 660 (1999); see also Andersons, Inc. v. Horton Farms, Inc., 166 F.3d 308, 325 (6th Cir. 1998).

In specific, the Appellate Court relied on two federal cases discussing structural bias in a manner that it found informative. Hottle v. BDO Seidman, LLP, supra, 74 Conn. App. 279, citing Rosenberg v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 170 F.3d 1 (1st Cir. 1999), and Woods v. Saturn Distribution Corp., 78 F.3d 424 (9th Cir.), cert. dismissed, 518 U.S. 1051, 117 S. Ct. 30, 135 L. Ed. 2d 1123 (1996). The Appellate Court read those cases, and the other federal cases cited, as holding "that a structural linkage of the arbitration panel to one side of the dispute does not prove a violation of § 10 (a) (2) [of the arbitration act]. Industry relationships may demonstrate an appearance of bias, but do not in and of themselves establish `evident partiality.'" Hottle v. BDO Seidman, LLP, supra, 281. Therefore, the court concluded: "The plaintiff has not demonstrated the likelihood of any significant financial incentive that would, in fact, influence present partners as potential arbitrators. Unsurprisingly, before the selection of the arbitral panel, it is difficult to present any such evidence. At this juncture, the plaintiff's claims demonstrate nothing more than an appearance of bias and that is not enough to demonstrate structural bias." Id.

In so concluding, the court found distinguishable cases wherein courts had refused to enforce arbitration provisions on the ground of unconscionability in the form of "unequal economic power and difference in sophistication between the contracting parties." Id., 282, citing Murray v....