Arbitration Provision Which Completely Prohibited Any Discovery Enforced By NC Business court.

I don't draft arbitration provisions in agreements, but if I did I would not draft one like the one in Taggart v. Physicians Pharmacy Alliance, Inc.  Not because it turned out to be unenforceable, but because it was found to be enforceable. What?

Judge McGuire granted a Motion to Compel Arbitration in that case in an (unpublished) Order last week.

The arbitration provision said that:

[i]]t is the desire and intent of the Parties that such arbitration be held without any discovery, deposition or motion practice, that the arbitrator receive evidence solely through the written submissions and not hold an evidentiary hearing, and that the arbitrator has no ability to extend dates or apply rules that conflict with these provisions.

Order 2 (emphasis added).

So the Plaintiff will have to go into this arbitration with absolutely no discovery, and with no way for the arbitrator to assess the credibility of witnesses (since there will be no depositions and all the evidence will be presented in writing).

Although I have arbitrated cases where the arbitration provision made no mention of discovery (and most often I got none), my preference for an arbitration clause which specifies that limited discovery will be allowed to the parties.

What About Discovery In Arbitration?

It's tempting to say that arbitration -- often billed as being quicker and less expensive than in-court litigation --- shouldn't include any discovery, but as a practical matter, it often does.  The Rules of the American Arbitration Association specifically permit discovery.  The Procedures for Large, Complex Commercial Disputes give the arbitrator the "[b]road authority to order and control the exchange of information, including depositions."

But it's not particularly clear whether the AAA Rules apply anyway.  The arbitration provision calls for the arbitrator to be selected via AAA procedures, but does not make any mention or incorporation of the AAA Rules. 

And regardless of whether the AAA Rules apply, these parties chose, in a most emphatic way, to prohibit any discovery whatsoever.  

The AAA Rules probably don't apply, but if they did, Rule 22 provides for a "pre--hearing exchange and production of information."  Maybe there's an argument that an "exchange and production of information" doesn't fall into the category of the prohibited "discovery."

Was This  Arbitration Provision Enforceable?

Plaintiff said that the ban on discovery and the lack of any ability to have the arbitrator to consider a motion made the arbitration "unfair and substantively unconscionable."  Order 16.

That might have been a successful argument if the parties to the agreement had been of "greatly unequal bargaining power."  But under Delaware law (which governed the Agreement), great deference is accorded to "the voluntary agreements of sophisticated parties."  Op. ¶15 (quoting NACCO Indus., Inc. v. Applica Inc., 997 A.3d 813, 840 (Del. Ch. 2011),

Judge McGuire concluded that:

although arbitration procedures might not be as extensive as [those available in courts], by agreeing to arbitrate, a party "trades the procedures and opportunity for review of the courtroom for the simplicity, informality, and  expedition of arbitration."    An agreement between  two corporate parties to decrease expected litigation costs is not unconscionable, particularly when both sides must adhere to the same prohibitions.

Order 19 (quoting Tierra Right of Way Servs. v. Abengoa Solar Inc., 2011 U.S. Dist.. LEXIS *15-16 (D. Ariz.. 2011).

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Notwithstanding the ruling forcing him to arbitrate  without any discovery at all, it is hard to feel sorry for Mr. Taggart.  The arbitration was required under the terms  of a Stock Purchase Agreement by which the Plaintiff sold his company for $52.5 million dollars.  Plaintiff was represented in that transaction by one of the largest law firms in the United States.

The issue in arbitration will be whether Mr. Taggart is bound to indemnify the buyer of his company for a $5 million settlement paid after the sale as the result of an investigation by the U.S. Department of Justice of the company

 

NC Business Court Revokes Pro Hac Vice Admission Of Out Of State Lawyer

Judge McGuire came down pretty hard on a Florida attorney admitted pro hac vice (meaning "for this one particular occasion") by another Superior Court Judge, in McCarthy v. Hampton, 2016NCBC 4.  He revoked the lawyer's admission and barred him from practicing law in North Carolina for the next two years.

What had this attorney done to warrant his expulsion from the North Carolina courts?  Judge McGuire said that:

Attorney McCarthy has not only engaged in a course of conduct that does not meet the standard expected of attorneys practicing in North Carolina courts, but that conduct has also delayed this action, caused unnecessary additional expense, and has generally frustrated this Court''s efforts to resolve the dispute.

Op. 16.

You might remember the McCarthy case from a post here in July, which involved the Plaintiff''s effort to squirm out a settlement reached during a mediation.  Judge McGuire rejected those efforts, saying:

"[t]he fact that plaintiff later changed [his] mind does not render the settlement agreement unenforceable."  Order ¶29 (quoting Smith v. Young Moving & Storage, Inc., 167 N.C. App. 487, 494 (2004)). 

He also said "that Plaintiff now seems dissatisfied with the agreement reached does not render the [agreement] unenforceable."  Order ¶30 (emphasis added).

If you want more specifics on what led to the revocation, last week's ruling was prompted by actions by Plaintiff's attorney which frustrated the conclusion of the settlement.  Those included:

  • Not telling Defendant''s counsel that the Plaintiff did not have the $155,000 necessary to fund his settlement obligation until five days after the due date for the payment had passed.
  • Not informing the Court of his client's inability to pay the $155,000 until the Court had set a hearing on a Motion to Show Cause why the Plaintiff should not be held in contempt for not making the payment.
  • Refusing to participate in the appraisal process required by the Settlement Agreement mandating the valuation of real property owned by an LLC in which the parties shared an interest. That required a Motion by the Defendants, resulting in a further unpublished ruling directing the appraisal to proceed.
  • "Misrepresenting and obfuscating" that his client had filed a bankruptcy petition.  The attorney informed the Court that his client had filed for bankruptcy when the petition had not yet been filed.

You might be wondering whether Judge McGuire had the power to revoke McCarthy's pro hac admission.  The Order admitting the attorney to appear in the NC case was granted by another Superior Court Judge, before the case was designated to the Business Court.

That is not one Superior Court Judge overruling another, because G.S. §84-4.2 says that a pro hac admission can be "summarily revoked" by the Court in its discretion. The NC COA has ruled explicitly that a state court judge may withdraw the pro hac privileges granted by another judge.  Smith v. Beaufort County Hospital Association, Inc., 540 S.E.2d 775 (N.C. App. 2000).

As for the two year ban on the attorney's right to be admitted pro hac vice in North Carolina, it is likely to be far longer than that.  The statute setting forth the requirements for a pro hac admission (G.S. §84-4.1) says that the applicant must disclose a record of "all that attorney's disciplinary history."  Discipline is defined to include any "revocation of any pro hac vice admission."  §84-4.1(6). There is no time limit on the disclosure of a revocation, so any Superior court Judge considering granting pro hac admission by this attorney will likely be hesitant to do so given this decision.

 If you've noticed that haven't written about the first three 2016 Opinions from the Business Court before this one that I haven't  written about, you can attribute it to my not finding them interesting enough to write about plus a dose of laziness on my part.