Opinion
00 Civ. 5554 (WK)
April 24, 2001
For Plaintiff: Fredrick Sherman, Esq., Marc Seiden, Esq. Jones, Day, Reavis Pogue, New York, New York. John Galarnyk, Esq., Hochman, Dolgen, Dellott, Galarnyk Prohov Chicago, Illinois.
For Defendant Cendant Corporation: Samual Kadet, Esq., Joseph Sacca, Esq., William Clarke, Esq., Skadden, Arps, Slate, Meagher Flom. New York, New York.
MEMORANDUM ORDER
This action is before us on the basis of diversity jurisdiction and seeks to enjoin the prosecution of arbitration proceedings before the American Arbitration Association ("AAA") entitled Cendant Corporation and Stuart L. Bell (13 160 00595 00) (the "Arbitration"). Before us now are plaintiff's motion for a preliminary injunction and defendant Cendant Corporation's ("Cendant") cross motion to compel arbitration.
American Arbitration Association has not appeared in this action.
BACKGROUND
I. Bell's Relationship With CUC and Cendant.Stuart L. Bell ("Bell" or "plaintiff") was an employee of CUC International, Inc. ("CUC"), Cendant's predecessor, from 1981 until December 1994. From February 1, 1987 until January 31, 1995, the terms and conditions of his employment were governed by an employment agreement dated February 1, 1987, which was amended by agreements dated February 1, 1991 and November 1, 1991. We shall refer to these collectively in the singular as the "Employment Contract." The Employment Contract does not contain an arbitration clause.
As of February 1, 1995 Bell ceased to be an employee of CUC but continued his association with it as a part-time adviser. This association is defined by an Agreement dated December 13, 1994 which was to remain in effect until February 1, 1998. Since the Agreement contemplates a continuing relationship with CUC, we think it is properly termed the "Adviser Agreement." It contains non-solicitation, non-competition and non-disparagement provisions. It also contains an Arbitration Clause, which reads in pertinent part (§§ IX(C), XVII):
Any 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).
On November 25, 1997 plaintiff and CUC amended the Adviser Agreement extending the duration of all of its provisions through February 1, 2001, by which time CUC had merged with HFS Incorporated ("HFS") to become Cendant.
II. Bell's Misconduct
Under the Employment Contract Bell had been CUC's Executive Vice President, Chief Financial Officer and Treasurer. Subsequent to the merger between CUC and HFS that formed Cendant the company began the process of consolidating its financial reporting functions under the supervision of officers formerly associated with HFS. This process uncovered potential accounting irregularities with the former CUC, which were confirmed by an exhaustive internal investigation conducted by the Audit Committee of Cendant's Board of Directors with the assistance of the law firm Willkie Farr Gallagher and the accounting firm Arthur Anderson. Cendant publicly disclosed this discovery on April 15, 1998. After Cendant's announcement, multiple securities fraud lawsuits were filed against it by purchasers of CUC and Cendant securities. Cendant has already agreed to settle at least one of these suits for approximately $340 million and has agreed to pay in excess of $2.85 billion to settle another.
This disclosure also triggered an investigation by the Securities and Exchange Commission (the "SEC"). The SEC has concluded its investigation and found that a massive fraudulent accounting scheme began at CUC in 1985 at the latest, when Bell's relationship with CUC was governed by the Employment Contract, and continued until its discovery in April 1998, when his relationship was governed by the Adviser Agreement. See In re Cendant Corporation, Exchange Act Release No. 34-42933, 2000 WL 76595 (June 14, 2000).
III. Proceedings Instituted By Cendant.
A. The Connecticut Action
On or about May 26, 1999, Cendant commenced an action in United States District Court for the District of Connecticut against Bell and three other former officers of CUC and its subsidiaries. See Cendant Corp. v. Bell (D.Conn.) No. 99 Civ. 0996 (RNC) (the "Connecticut Action"). The gravamen of the Connecticut Action as against Bell is for breach of the non-solicitation, non-competition and non-disparagement provisions contained in the Adviser Agreement by founding and operating webloyalty.com, an internet company that develops affinity-based marketing programs which Cendant claims competes with the affinity-based marketing of its membership programs. The Connecticut Action seeks injunctive relief enjoining Bell from soliciting Cendant employees and from competing with Cendant in violation of his contractual commitments; an order extending the duration of the non-solicitation, non-competition and non-disparagement provisions of the Advisor Agreement for a period of time equal to the time that plaintiff allegedly has been in breach of those provisions; and compensatory and punitive damages.
B. The Arbitration Demand
On June 15, 2000 Cendant initiated arbitration with Bell by submitting a Demand for Arbitration to the AAA in New York City. The Demand alleges that Bell "knew about and/or participated in the scheme, and knew that materially false statements published by CUC and later Cendant would cause CUC and Cendant to incur enormous liabilities to investors." Bell Decl. Ex. 4. Cendant alleges that as a result of Bell's acts and omissions in connection with the fraud, he committed accounting fraud by: (1) breaching the Employment Agreement and the Adviser Agreement; (2) breaching fiduciary duties he owed to CUC and Cendant; and (3) defrauding CUC and Cendant. Cendant claims that these claims, unlike those it made in the Connecticut Action, relate solely to Bell's actions during the course of his employment with CUC and Cendant, and are thus subject to arbitration under the Adviser Agreement.
DISCUSSION
Bell brought this action to enjoin the Arbitration, and now seeks a preliminary injunction on the grounds that: (1) some of the claims asserted against him in the Arbitration are not the subject of the Arbitration Clause, and (2) Cendant has waived its right to arbitrate the remaining claims by commencing the Connecticut Action.
These basis of Bell's action to enjoin the Arbitration, although strenuously argued before us, will not be addressed in this Memorandum and Order. The arbitrability of a particular issue should be decided by the arbitrator and not by the Court 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." Painewebber Incorporated v. Bybyk (2d Cir. 1996) 81 F.3d 1193, 1198-99.
The parties agree that the "relevant state law" is the law of Connecticut. Under Connecticut law the intention to determine the scope of arbitration in arbitration itself may be determined either from an express provision or from broad terms. City of Bridgeport v. Bridgeport Local Police 1159 (Conn. 1981) 438 A.2d 1171, 1173. Scinto v. Sosin, a case from the Appellate Court of Connecticut upon which plaintiff heavily relies, can be read as suggesting that a broad arbitration clause must specifically manifest such an intent in order to arbitrate the issue of arbitrability. (Conn.App.Ct. 1998) 721 A.2d 552, 557. However, recent decisions of Connecticut courts indicate that language similar to that before us is sufficient to manifest the intent to arbitrate the issue of arbitrability. See Dodsworth v. Greater Bridgeport Transit District (Conn.Super.Ct. May 10, 2000) 2000 WL 72682 at *2 ("`All claims, disputes, and other matters in this agreement will be resolved by Arbitration.'"); Grunner v. Blumen (Conn.Super.Ct. August 13, 1999) 1999 WL 669844 at *2 ("`Any dispute, controversy or claim arising out of, or relating to, this agreement shall be submitted to final and binding arbitration' is broad enough to empower the arbitrator to rule on the question of arbitrability."); Northeast Utilities v. Century Indemnity Company (Conn.Super.Ct. June 21, 1999) 1999 WL 476274 at *8 ("`any dispute' with respect to its interpretation `shall' be referred to arbitration.")
While the "any other matter or thing" language does not specifically refer to arbitrability, plaintiff has not cited a single case except Scinto v. Sosin — and our research has discovered none — standing for the proposition that there must be explicit language referring arbitrability to the arbitrator before such a conclusion may be reached. The language in this instant clause is so broad that we find it manifests an intent to arbitrate the issue of arbitrability.
CONCLUSION
Having held that the issue of arbitrability is to be decided in arbitration and not by this Court, we deny plaintiff's motion for a preliminary injunction and grant defendant's motion to compel arbitration. We express no view as to the scope of the arbitration clause, or whether or not defendant has waived the right to arbitrate.
SO ORDERED.