Res v Masterworks Dev. Corp.

[*1] Res v Masterworks Dev. Corp. 2004 NY Slip Op 51169(U) Decided on July 27, 2004 Supreme Court, New County Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on July 27, 2004
Supreme Court, New County

BARBARA RES, Plaintiff,

against

MASTERWORKS DEVELOPMENT CORPORATION, CLUB QUARTERS, INC., CLUB QUARTERS OPERATING SERVICES, LLC, and RALPH BAHNA, Defendants.



120295/03

Alice Schlesinger, J.

This is an action by plaintiff, Barbara Res, against her past employer, defendant Masterworks Development Corporation ("MDC"). Also named as defendants are Club Quarters, Inc. and Club Quarters Operating Services, LLC, which maintain MDC employee stock options, and Ralph Bahna, president of MDC. Plaintiff is seeking damages for employment discrimination and for defendants' failure to provide her with stock options she was promised. Defendants are moving herein for an order pursuant to CPLR §7503(a) to stay the action and compel arbitration. Plaintiff opposes the motion in its entirety and urges the Court to allow her case to proceed. For the reasons stated below, defendants' motion is conditionally granted as to the discrimination causes of action (one through three) but denied as to plaintiff's stock option causes of action (four through seven) which are severed and shall continue herein.

Background Plaintiff began her employment with MDC on or about July 12, 1999. On that date, MDC sent plaintiff two letter agreements, an Employment Agreement explaining the terms of her compensation and job responsibilities, and a Confidentiality Agreement containing a covenant not to compete, as well as an arbitration clause. The Confidentiality Agreement is a two-page letter, all in the same size typeface. See Defendants' Motion, Exhibit B. The broad arbitration clause reads as follows:

In the event a dispute shall arise with respect to the provisions hereof or otherwise in connection with your employment with us, you hereby agree that, at the option of the undersigned, the same may be submitted for binding arbitration in accordance with the rules and regulations as set forth in the Employee Handbook. Notably, the Confidentiality Agreement makes no [*2]mention of the Stock Options Plan at issue herein. Rather, it merely indicates that: " . . . IF Club Quarters goes public, it MAY have a share option scheme." See Defendants' Motion, Exhibit A (emphasis added). In fact, such stock options were later adopted by MDC and awarded to plaintiff on January 1, 2001, approximately sixteen months after she began her employment. See Plaintiff's Opposition, Exhibit 1. Plaintiff worked under the July 12, 1999 agreements until March 17, 2003, when her full-time employment with MDC was terminated and she began as an independent consultant with the company. When the consultancy began, MDC provided Ms. Res with a Consultancy Agreement letter and an updated Confidentiality Agreement letter. The contents of the letters were similar to the previous set, including a broad arbitration clause in the second Confidentiality Agreement dated March 3, 2003. See Defendant's Motion, Exhibit D. On May 12, 2003 plaintiff discontinued her consultant position with defendant MDC. Shortly after discontinuing her consultancy, plaintiff commenced the instant action. Ms. Res alleges seven causes of action. The first through third causes of action allege gender discrimination, national origin and citizenship discrimination, as well as retaliatory discrimination. Ms. Res alleges that MDC wrongfully terminated her full-time employment, forcing her to take the consultancy position. The fourth through the seventh causes of action relate to the Club Quarters Employee Option Plan. Plaintiff's position is that all claims arise out of the time period covered by the original Employment and Confidentiality Agreements. See Plaintiff's Opposition ¶ 7. The Standard for Compelling Arbitration

"It is well settled that a party cannot be compelled to submit to arbitration unless the agreement to arbitrate expressly and unequivocally encompasses the subject matter of the particular dispute." Gerling Global Reinsurance Corp. v. Home Ins. Co., 302 AD2d 118, 123 (1st Dep't 2002), quoting American Centennial Ins. Co. v. Williams, 233 AD2d 320 (2d Dep't 1996). The movant has the burden to show a "clear and unequivocal" agreement to arbitrate the claim. Id., quoting Siegel v. 141 Bowery Corp., 51 AD2d 209, 212 (1st Dep't 1976). Moreover, it is a general principle that "the threshold for clarity of agreement to arbitrate is greater than with respect to other contractual terms." Waldron v. Goddess, 61 NY2d 181, 185 (1984), quoting Doughboy Indus. v. Pantasote Co., 17 AD2d 216, 219 (1st Dep't 1962). This means that the arbitration clause must definitively state what issues are to be arbitrated. This principle is based on the strong policy, repeatedly articulated by New York courts, that [*3]a party cannot be deprived of his or her day in court unless both parties clearly consent to arbitrate the particular issue in dispute. See, e.g., Gangel v. N. DeGroot, PVBA, 41 NY2d 840, 841 (1977). Thus, this Court cannot compel arbitration if doing so would "depend upon implication or subtlety." Waldron, 61 NY2d at 184. If a particular dispute is outside the scope of the arbitration agreement, arbitration will not be compelled and the action will not be stayed. See Trump v. Refco Properties, Inc., 194 AD2d 70, 74 (1st Dep't 1993). Discrimination Cause of Actions Plaintiff primarily argues that the arbitration clause is too vague, and thus not applicable to her employment discrimination claims. She contends that the agreement to arbitrate "certainly was not express, direct and unequivocal." Plaintiff's Memorandum of Law at 9. This Court disagrees. The plain language of the arbitration clause includes within its scope "a dispute . . . in connection with your employment . . . ." Certainly, a disagreement on the reason for termination falls within plaintiff's employment with MDC and is thus covered within the scope of the broad arbitration clause. In addition, both parties freely entered into the agreement. The clause in the original Confidentiality Agreement was not hidden or confusing. The letter specifically states: "If you are in agreement with the foregoing, please sign below and return an original executed counterpart to the undersigned." See Defendants' Motion, Exhibit B. This sentence suggests that plaintiff had an adequate opportunity to review the document, possibly with the aid of counsel, and question any unsatisfactory item. However, particularly compelling is the claim by Ms. Res that the costs of arbitrating her claims will be so excessive that she will be unable to redress any of her grievances. She claims that if this Court grants defendants' motion, because of the onerous costs associated with arbitration and her limited resources, she will have lost any opportunity to have her claims heard. Plaintiff's argument is powerful and well- founded. Following oral argument, plaintiff prepared for the Court an extensive and convincing affidavit discussing the actual fees and expenses associated with arbitration. Ms. Res also detailed her current financial status. See Res Supplemental Affidavit. Additionally, plaintiff presented relevant case law supporting her position that excessive fees associated with arbitration can invalidate an otherwise binding arbitration clause. See, e.g., Green Tree Fin. Corp.-Alabama v. Randolph, 531 US 79, 92 (2000) (where "a party seeks to invalidate an arbitration [*4]agreement on the ground that arbitration would be prohibitively expensive, that party bears the burden of showing the likelihood of incurring such costs.") Most on point is Ball v. SFX Broadcasting, Inc., 165 FSupp2d 230 (N.D.NY 2001). In Ball the employee (in opposing arbitration) made a similar argument of prohibitive arbitration fees. Judge Hurd held that if the party opposing arbitration can demonstrate the prohibitive nature of the costs, "[s]uch a showing is sufficient to demonstrate that the challenged arbitration agreement does not provide an effective mechanism for the vindication of statutory rights." Ball, 165 FSupp2d at 240. Judge Hurd concluded: In light of the fact that the imposition of such costs upon an employee seeking to vindicate his or her statutory rights has no parallel in the litigation arena, and also because [the employee] has demonstrated that the imposition of such fees upon her as a condition of vindicating her statutory rights, it simply cannot be said that, under such circumstances, arbitration is "a reasonable substitute for a judicial forum." Id., quoting Cole v. Burns Int'l Sec. Servs., 105 F3d 1465, 1484 (D.C. Cir. 1997). This Court agrees with the Ball Court and adopts this policy for the instant case. Ms. Res has met her burden and has proven to the Court that she will be unable to redress her grievances if compelled to arbitrate her claims. To remedy this problem, at the suggestion of the Court, defendants agreed (after receiving plaintiff's affidavit) to pay all but $5000 of plaintiff's arbitration costs. With this compromise, Ms. Res will not be financially prohibited from pursuing her claims. Thus, as to the discrimination causes of action, defendants' §7503(a) motion to stay the action and compel arbitration is granted on the condition that defendants pay all but $5000 of plaintiff's arbitration costs. Stock Options Causes of Action Defendants maintain that the broad arbitration clause also covers the Stock Options Agreement entered into between plaintiff and Club Quarters. However, the Court disagrees. The facts demonstrate that the Stock Options Plan is an agreement wholly separate from the original Employment and Confidentiality Agreements, not binding the signatories to arbitrate it. Thus, arbitration cannot be compelled as to the stock options claims (causes of action four through seven). The Stock Options Plan was given to plaintiff more than one year after she began her employment and received the Confidentiality Agreement letter that contained the arbitration [*5]clause. "While an agreement to arbitrate can be incorporated [into a second agreement] by reference, any such reference must clearly show such an intent to arbitrate." Aerotech World Trade Ltd. v. Excalibur Sys., Inc., 236 AD2d 609, 611 (2d Dep't 1997), citing Level Export Corp. v. Wolz, Aiken & Co., 305 NY 82 (1953). Here, the Stock Option Plan made no reference whatsoever to the earlier agreements. Indeed, as stated above, the original Employment Agreement letter only speculated as to the future existence of a stock options plan. Moreover, as indicated above, it is settled law that the issue in dispute must clearly fall within the scope of the arbitration clause. See, e.g., Gerling, 302 AD2d at 123. That is not the case here, as the clause refers back to the provisions of the Confidentiality Agreement and to plaintiff's employment. Further, the arbitration clause specifically limits itself to "a dispute," and there is no real "dispute" concerning the stock options. Nowhere in defendants' papers does it rebut the claim that Ms. Res is entitled to the stock options. Per the Club Quarters Employee Option Plan, an employee only loses the stock options if the employee is discharged for cause. Cause is defined as: [Y]our [the employee's] commission or omission of any act which materially and adversely affects Club Quarters and which constitutes: (a) a material breach or material failure to perform your duties under applicable law and such breach or failure to perform constitutes self-dealing, willful misconduct or recklessness, (b) commission of an act of dishonesty in the performance of his or her duties or engagement in conduct materially detrimental to the business of Club Quarters, ) conviction of a felony involving moral turpitude or (d) a material breach or material failure to perform your obligations and duties hereunder, which breach or failure you shall fail to remedy within 20 days after written demand from Club Quarters. Neither plaintiff nor defendants allege that Ms. Res was terminated for cause, much less the type of "cause" defined above. Rather, the dispute seems to concern whether she was terminated from full-time employment for discriminatory reasons.

Lastly, defendants argue that since the March 3, 2003 Consultancy Agreement makes mention of the stock options, the arbitration clause extends to all issues involving the Stock Options Plan. However, pursuant to the previously discussed standards that the New York courts apply to arbitration clauses, this argument in unavailing. The particular dispute must clearly be connected or intertwined with the dispute to be arbitrated. Simply having the arbitration clause in an agreement where the Stock Option Plan is mentioned does not satisfy defendants' [*6]burden. See Aerotech, 236 AD2d at 611. Wholly misplaced is defendant's reliance on Alsy Corp. v. Gindel, 197 AD2d 492 (1st Dep't 1993) for the proposition that when the clause is located in one of multiple contracts, the arbitration clause covers the whole dispute. Though the case contains a slim recitation of the facts, Alsy is readily distinguishable because in that case "there is no question that there is 'a reasonable relationship between the subject matter of the dispute and the general subject matter of the underlying contract[s].'" Alsy, 197 AD2d at 492-93, quoting Nationwide General Ins. Co. v. Investors Ins. Co., 37 NY2d 91, 96 (1975). Yet here, as previously explained, the Confidentiality and Employment Agreements and the Stock Options Plan are not clearly interrelated. Thus, pursuant to CPLR §603, plaintiff's causes of action relating to the stock options are severed from the action, and as to those claims, defendants' motion is denied.[FN1]

Defendant Ralph Bahna

Defendants also argue that all claims against Ralph Bahna should be dismissed because Mr. Bahna cannot be held personally liable for the alleged damages. However, that contention has not been proven as a matter of law. Mr. Bahna was president of MDC and an owner of the company when Ms. Res began her employment. He authored the original Employment and Confidentiality Agreements, the Consultancy and updated Confidentiality Agreements, and he was the addressee on plaintiff's letter terminating her consultancy. In Patrowich v. Chemical Bank, 63 NY2d 541, 542 (1984) the Court of Appeals held that: "A corporate employee, though he has a title as an officer . . . is not individually subject to suit with respect to discrimination . . . if he is NOT shown to have any ownership interest or any power to do more than carry out personnel decisions made by others." (Emphasis added.) In the instant case, there are certainly issues of fact as to whether Bahna, as president and an owner of the company, was involved in the alleged discrimination. Dismissal of Mr. Bahna is thus not warranted at this time.

Conclusion Plaintiff's discrimination causes of action fall within the broad scope of the governing arbitration clause and thus as to them defendants' motion to compel arbitration is granted on the condition that defendants pay all but $5000 of plaintiff's arbitration costs. However, since defendants have not met their burden of showing that the arbitration clause in the Confidentiality Agreement covers the claims relating to the Stock Options Plan, the motion as to those claims is denied. Accordingly, it is hereby ORDERED that defendants' motion to compel arbitration is granted as to the first three causes [*7]of action in the complaint on the condition that defendants pay all but $5000 of the arbitration costs; and it is further ORDERED that the motion is denied as to the remaining causes of action (four through seven) and those causes of action are severed and continued upon the service by plaintiff on the Clerk of Trial Support in Room 158 of a copy of this order with Notice of Entry; and it is further ORDERED that defendants are directed to serve an answer to the remaining causes of action in the complaint within 20 days after service of a copy of this order with Notice of Entry; and it is further ORDERED that the parties shall appear before this Court in Room 222 for a discovery conference on October 6, 2004 at 9:30 a.m. Dated: July 27, 2004

____________________________

J.S.C. Footnotes

Footnote 1: Plaintiff also maintains that since the arbitration agreement was signed between MDC and herself, then Club Quarters Employee Option Plan, a non-signatory, cannot compel her to arbitrate any claims against them. Since the Court has decided to deny the motion to compel arbitration of the stock options claims on other grounds, the merits of this argument need not be reached.