Jeffrey M. Davies v. Waterstone Capital Management, L. P.

• Court: Court of Appeals of Minnesota
• Decided: December 1, 2014
• Docket: A14-17
• Status: Published

Opinion

STATE OF MINNESOTA IN COURT OF APPEALS A14-0017

Jeffrey M. Davies, Respondent,

vs.

Waterstone Capital Management, L. P., Appellant.

Filed December 1, 2014 Reversed and remanded Hudson, Judge

Hennepin County District Court File Nos. 27-CV-11-16371, 27-CV-13-11253

Liz Kramer, Sharon R. Markowitz, Stinson Leonard Street LLP, Minneapolis, Minnesota (for respondent)

Sam L. Hanson, Diane B. Bratvold, Briggs and Morgan, P.A., Minneapolis, Minnesota; and

Richard A. Ross, Pamela Abbate-Dattilo, Fredrickson & Byron, P.A., Minneapolis, Minnesota (for appellant)

Considered and decided by Kirk, Presiding Judge; Hudson, Judge; and

Stoneburner, Judge.

SYLLABUS

A party’s assertion that a contractually shortened limitations period in an

arbitration agreement is unreasonable, and thus unenforceable, is a challenge to the

 Retired judge of the Minnesota Court of Appeals, serving by appointment pursuant to Minn. Const. art. VI, § 10. validity of the arbitration agreement, which presents an issue of arbitrability for the court

to decide.

OPINION

HUDSON, Judge

Appellant Waterstone Capital Management, L.P. challenges a district court order

confirming an arbitration award in favor of respondent Jeffrey M. Davies. Appellant

asserts that the district court erred by, inter alia, concluding that a 90-day limitations

period in the parties’ arbitration agreement is unreasonable and unenforceable. Because

we conclude that the 90-day limitations period is enforceable and compels vacation of the

arbitration award, we reverse and remand.

FACTS

In January 2007, Waterstone, a hedge fund, made a written employment offer to

Davies. The offer, for the position of senior analyst, was contingent on Davies executing

a confidentiality, non-compete, and non-solicitation agreement (the employment

agreement), which Davies signed on January 22, 2007. The employment agreement

includes an arbitration provision, mandating arbitration of “any controversy or claim”

relating to the agreement and requiring that “[a]ny request for arbitration must be filed

with the American Arbitration Association within ninety (90) days of the events giving

rise to the claim.” On July 15, 2011, Waterstone terminated Davies’s employment,

purportedly “for cause.”

2 Initial district court proceedings

On August 11, 2011, 27 days after Waterstone terminated his employment, Davies

initiated civil litigation against Waterstone, alleging breach of contract, defamation, and

related claims. In his complaint, Davies asserted that the arbitration provision in the

employment agreement was in conflict with a choice-of-law-and-forum provision of the

agreement and that the agreement must be construed against Waterstone as the drafter.

Waterstone answered the complaint, asserting as its first defense that the district court

lacked subject-matter jurisdiction because the claims were subject to the exclusive

remedy of arbitration.

On January 16, 2012, 185 days after terminating Davies’s employment,

Waterstone moved to dismiss or for judgment on the pleadings, asserting alternatively

that, because of the arbitration provision, the complaint failed to state a claim upon which

relief could be granted; that the district court lacked subject-matter jurisdiction; and that

three of the claims failed on the pleadings. Waterstone expressly argued to the district

court that the timeliness of a demand for arbitration is an issue for the court to decide.

Because the 90-day period to initiate arbitration proceedings had passed, Waterstone

asserted that the litigation must be dismissed rather than ordered to arbitration.

In his memorandum in opposition to Waterstone’s motion to dismiss, Davies

argued alternatively that there was no agreement to arbitrate; that Waterstone waived the

right to arbitrate by participating in district court proceedings; and that the 90-day

limitations period is unreasonable and thus unenforceable. Davies made the timeliness

3 argument assuming arguendo that the arbitration provision is enforceable, but he did not

argue that the timeliness issue should be decided by an arbitrator.

On April 3, 2012, the district court issued an order dismissing the complaint and

ordering the matter to arbitration. The district court reasoned that there is no conflict in

the employment agreement and that, based on its plain language, “the arbitration clause

governs what disputes will be resolved in arbitration, while the forum selection clause

designates where other claims not subject to arbitration will be heard.” The district court

also determined that Waterstone did not waive the right to arbitrate by participating in the

litigation. And the district court determined that the 90-day limitations period in the

arbitration agreement is unreasonable. Accordingly, the district court ordered the matter

to arbitration within 90 days of its order, less the 27 days that had elapsed between

Davies’s termination and his initiation of the civil action (effectively tolling the 90-day

limitations period during the pendency of the civil action).

Waterstone appealed. This court questioned jurisdiction and dismissed the appeal,

reasoning that an order compelling arbitration is not an appealable order under Minn.

Stat. § 572B.28(a) (2012) and that Waterstone could challenge the district court’s order in

an appeal from an order confirming a subsequent arbitration award. Davies v.

Waterstone Capital Mgmt., L.P., No. A12-0679 (Minn. App. May 15, 2012) (order).

The arbitration proceedings

Davies submitted an arbitration demand on April 13, 2012, 273 days after

Waterstone terminated his employment. Waterstone moved to dismiss the claims,

arguing that the arbitration demand was untimely and asserting that the district court had

4 exceeded its authority by “rewriting” the arbitration provision and thereby “encroached

upon the Arbitrator’s authority to interpret a contract subject to arbitration.” Davies

opposed the motion to dismiss, asserting that “the validity and enforceability of

arbitration provisions are undoubtedly a question for the Court—not arbitrators.”

The arbitrator denied Waterstone’s motion to dismiss. In an attached

memorandum, the arbitrator explained that he was not reaching “the issue of whether I

lack the power to disagree with the District Court and Court of Appeals, because I do not

disagree with them.”

Following an arbitration hearing held over five days, the arbitrator issued a

$9,000,000 interim award in favor of Davies and a final award allowing $1,000,000 in

attorney fees and $34,091.57 in costs and disbursements in addition to the $9,000,000

damages award.

District court proceedings following the arbitration

Davies moved to confirm the arbitration award, and Waterstone moved to vacate

or modify it. In support of its motion to vacate or modify, Waterstone renewed its

argument that Davies’s claims were untimely because of the 90-day limitations period in

the arbitration provision.1

The district court granted Davies’s motion and denied Waterstone’s. The district

court reasoned that the arbitrator had authority to determine the timeliness issue and that

1 Waterstone also asserted that the arbitrator exceeded his authority and manifestly disregarded the law in ruling on the merits of Davies’s claims. Because our holding on the timeliness issue is dispositive, we do not set forth or address Waterstone’s other arguments for vacatur.

5 the arbitrator’s decision in that regard was entitled to deference. The district court

alternatively concluded that the timeliness decision was correct on the merits. The

district court rejected Waterstone’s other arguments for vacatur and ordered that

judgment be entered in favor of Davies. Waterstone appeals.

ISSUE

Did the district court err by denying Waterstone’s motion to vacate the arbitration

award?

ANALYSIS

I.

We first address the parties’ disagreement over which law applies: the Federal

Arbitration Act (FAA), the Minnesota Uniform Arbitration Act (MUAA), and/or the

Minnesota Revised Uniform Arbitration Act (MRUAA).

The FAA, 9 U.S.C. §§ 1-16 (2012), generally is applied to actions asserted in

United States courts. See, e.g., 9 U.S.C. § 10 (enumerating circumstances under which

United States court may vacate arbitration award). Section 2 of the act, however,

expresses a broad federal policy favoring arbitration, and the FAA preempts state law that

“require[s] a judicial forum for the resolution of claims which the contracting parties

agreed to resolve by arbitration.” Volt Info. Sciences, Inc. v. Bd. of Trustees, 489 U.S.

468, 478, 109 S. Ct. 1248, 1255 (1989) (quotation omitted). Notwithstanding this

preemption, generally applicable state-law “contract defenses, such as fraud, duress, or

unconscionability, may be applied to invalidate arbitration agreements.” Doctor’s

Assocs., Inc. v. Casarotto, 517 U.S. 681, 686-87, 116 S. Ct. 1652, 1656 (1996). And with

6 respect to procedural issues, the United States Supreme Court has held that the FAA will

pre-empt state law only “to the extent that [state law] actually conflicts with federal

law—that is, to the extent that it stands as an obstacle to the accomplishment and

execution of the full purposes and objectives of Congress.” Volt, 489 U.S. at 477, 109 S.

Ct. at 1255 (quotation omitted). Thus, Minnesota courts may apply state law to motions

to confirm or vacate arbitration awards unless provisions of state law are preempted by

section 2 of the FAA.

For more than fifty years, the enforcement of arbitration awards in Minnesota was

governed by the MUAA, Minn. Stat. §§ 572.08-.30 (2010). See 1957 Minn. Laws, ch.

633, at 849–856 (adopting MUAA). In 2010, the legislature repealed the MUAA, and

passed the MRUAA, Minn. Stat. §§ 572B.01-.31 (2012). 2010 Minn. Laws. ch. 264, art.

1, §§ 1-33, at 449–511. The MRUAA generally became effective August 1, 2011, but it

includes a savings clause that precludes its application to “an action or proceedings

commenced or right accrued before [the MRUAA took] effect.” Minn. Stat. § 572B.30.

Because Davies was discharged from employment on July 15, 2011, we conclude

that the MUAA governs his claims. See, e.g., State ex rel. Kane v. Stassen, 208 Minn.

523, 527, 294 N.W. 647, 649 (1940) (reasoning that relator had accrued right to contest

his discharge on date of discharge); Black’s Law Dictionary 1436 (9th ed. 2009)

(defining “accrued right” as “[a] matured right; a right that is ripe for enforcement (as

through litigation)”). Accordingly, in deciding this appeal, we apply the MUAA.

7 II.

Under the MUAA, a district court, upon application, must “confirm an award,

unless . . . grounds are urged for vacating or modifying or correcting the award.” Minn.

Stat. § 572.18. “[T]he court shall vacate an award when the award is procured by

corruption, fraud, or other undue means; there was prejudicial misconduct or corruption

by the arbitrator or evident partiality of the neutral; substantial prejudice occurred

through improper conduct of the hearing; or there was no arbitration agreement.”

Hunter, Keith Indus. v. Piper Capital Mgmt., Inc., 575 N.W.2d 850, 854 (Minn. App.

1998) (citing Minn. Stat. § 572.19, subd. 1).

“A judicial appeal from an arbitration decision is subject to an extremely narrow

standard of review.” Id. The courts must “exercise every reasonable presumption in

favor of the award’s finality and validity.” Id. (quotation omitted). “In reviewing an

arbitrator’s decision, the arbitrator is the final judge of both law and fact, but this court’s

review of the determination of arbitrability is de novo.” Indep. Sch. Dist. No. 88 v. Sch.

Serv. Emps. Union Local 284, 503 N.W.2d 104, 106 (Minn. 1993).

Waterstone asserts that the district court was required to vacate the arbitration

award because Davies’s arbitration demand was not submitted within the 90-day

limitations period of the arbitration provision. As a threshold matter here, the parties

dispute which timeliness decision should be reviewed—the district court’s or the

arbitrator’s—and thus what standard of review should apply. Waterstone asserts that

arbitrability is an issue for the courts to decide and that this court should review the

district court’s timeliness decision de novo. Davies asserts that timeliness is a condition

8 precedent to arbitration that, as a procedural matter, is within the authority of the

arbitrator to decide, and thus that the arbitrator’s timeliness decision must be reviewed

under the deferential standard applied to arbitration awards.2

A. The enforceability of the 90-day limitations period is an issue for the courts to decide.

Unless an arbitration agreement provides otherwise, courts presume that parties

intend for courts to primarily decide substantive matters of arbitrability but for arbitrators

to primarily decide “disputes about the meaning and application of particular procedural

preconditions for the use of arbitration.” BG Group, PLC v. Republic of Argentina, 134

S. Ct. 1198, 1206–07 (2014). The parties focus on whether the timeliness of an

arbitration demand is for the court or the arbitrator to decide, an issue on which there

appears to be some inconsistency in the Minnesota caselaw. Compare Minn. Fed’n of

Teachers, Local 331 v. Indep. Sch. Dist. No. 361, 310 N.W.2d 482, 484 (Minn. 1981),

with 200 Levee Drive Assocs. v. Bor-Son Bldg. Corp., 441 N.W.2d 560, 563–64 (Minn.

App. 1989). We conclude, however, that the parties’ focus is misplaced. There is no

dispute over the meaning of the 90-day limitations period in the arbitration provision, and

2 Each of the parties also devotes significant efforts to demonstrating that the opponent has taken inconsistent positions or agreed to have the timeliness issue decided by a particular decisionmaker. Our own review of the record confirms that Davies did not object to the district court’s authority to decide the timeliness issue in opposing Waterstone’s motion to dismiss, although he now argues that the decision was for the arbitrator and that Waterstone took a position during the arbitration that was inconsistent with its assertions to the district court. But we are not persuaded that either party is estopped from challenging a particular decision. See State v. Pendleton, 706 N.W.2d 500, 507 (Minn. 2005) (declining to adopt judicial-estoppel doctrine and noting that, even if adopted, it would only apply when a party has prevailed on a previous, inconsistent position). Nor can we discern from the record any contemporaneous agreement to have the matter decided by the district court or the arbitrator.

9 Davies does not dispute that he failed to comply with that limitations period. Rather,

Davies argues that the limitations period is unreasonable and should not be enforced.

This is a challenge to the validity of the arbitration agreement, which is an issue for the

court to decide. See, e.g., Faber v. Menard, Inc., 367 F.3d 1048, 1052-54 (8th Cir. 2004)

(reviewing as issue of contract validity argument that fee-splitting requirement in

arbitration provision was unconscionable); Alexander v. Anthony Int’l, L.P., 341 F.3d

256, 264 (3d Cir. 2003) (holding that issue of whether arbitration agreement including

30-day limitations period was unconscionable was for court to decide); cf. Minn. Stat.

336.2-302(1) (2012) (assigning to court determination of whether contract for sale of

goods is unconscionable).

B. The district court erred by determining that the 90-day limitations period in the parties’ arbitration agreement was unreasonable.

We review de novo the district court’s decision that the 90-day limitations period

is unreasonable. See Share Health Plan, Inc. v. Marcotte, 495 N.W.2d 1, 3 (Minn. App.

1993) (holding that enforceability of contract is issue of law reviewed de novo), review

denied (Minn. Mar. 30, 1993). The general rule is that “[p]arties may limit the time

within which legal claims may be brought provided there is no statute specifically

prohibiting the use of a different limitations period in such a case and the time fixed is

not unreasonable.” Peggy Rose Revocable Trust v. Eppich, 640 N.W.2d 601, 606 (Minn.

2002). In Peggy Rose, the Minnesota Supreme Court held that this rule applies to

contractual limitations periods in arbitration agreements. Id. at 607.

10 There is little guidance in the Minnesota caselaw on how to determine whether a

contractually shortened limitations period is reasonable. In Peggy Rose, the supreme

court held unreasonable an 18-month limitations clause in an arbitration agreement. Id.

at 609. The Peggy Rose court found “it useful as a starting point to consider what

parameters the legislature has determined to be appropriate.” Id. at 607. But Peggy Rose

involved unusual circumstances because the respondent in that case asserted fraud claims,

and the supreme court interpreted the limitations provision in the arbitration agreement to

not include a discovery provision. Id. at 610. Primarily because the 18-month limitations

period could expire before a claim even accrued, the supreme court held it unreasonable.

The supreme court explained, “Although we maintain that parties may agree to a shorter

limitations period than provided by statute, there is a difference between merely

shortening the time within which an existing claim may be brought and altering the date

on which a cause of action accrues.” Id. at 608-09. The decision did not address whether

an 18-month term would be reasonable if it included a discovery provision.

In Henning Nelson Constr. Co. v. Fireman’s Fund Am. Life Ins. Co., the supreme

court explained that “[w]hether a contractual limitation is reasonable or not is to be

decided on a case-by-case basis, looking at the particular facts of each case.” 383

N.W.2d 645, 651 (Minn. 1986). The Henning court affirmed a district court

determination that a one-year contractual limitations period was unreasonably short. But

in Gendreau v. State Farm Ins. Co., a case on which Henning relies, the supreme court

11 held that a one-year contractual limitations period was not unreasonable. 206 Minn. 237,

239, 288 N.W. 225, 226 (1939). 3

Courts in other jurisdictions have held that “[a] contractually modified limitations

period is unreasonable if the reduced limitations period ‘effectively deprives a party of

the reasonable opportunity to vindicate his or her rights.’” Holcomb Condo.

Homeowners’ Ass’n, Inc. v. Stewart Venture, LLC, 300 P.3d 124, 129 (Nev. 2013)

(quoting Hatkoff v. Portland Adventist Med. Ctr., 287 P.3d 1113, 1121 (Or. Ct. App.

2012), and citing William L. Lyon & Assoc. v. Super. Ct., 139 Cal. Rptr. 3d 670, 680 (Cal.

Ct. App. 2012) (“‘Reasonable’ in this context means the shortened period nevertheless

provides sufficient time to effectively pursue a judicial remedy.” (Quotation omitted)).

“[A] limitations provision that requires the plaintiff to bring an action before any loss can

be ascertained is per se unreasonable.” Holcomb, 300 P.3d at 129. Conversely, “[t]he

period of limitation is reasonable if (1) the claimant has sufficient opportunity to

investigate and file an action, (2) the time is not so short as to work a practical abrogation

of the right of action, and (3) the action is not barred before the loss or damage can be

3 In Henning, the supreme court treated the district court’s determination that a one-year contractual limitations period was unreasonably short as a finding of fact. 383 N.W.2d at 651. But in both Peggy Rose and Gendreau, the supreme court addressed the issue without deference to the district court decisions. See Peggy Rose, 640 N.W.2d at 606-09; Gendreau, 206 Minn. at 239, 288 N.W. at 226. Because the parties do not dispute the underlying facts, we conclude that de novo review is appropriate. See, e.g., Capehart v. Heady, 23 Cal. Rptr. 851, 853 (Cal. Ct. App. 1962) (rejecting argument that question of reasonableness was fact issue for jury: “The question is one of law, namely, is the period of limitation, in itself, unreasonable.”); 54 C.J.S. Limitations of Actions § 65 (2010) (describing reasonableness standard as deriving from public policy).

12 ascertained.” Timko v. Oakwood Custom Coating, Inc., 625 N.W.2d 101, 104 (Mich. Ct.

App. 2001) (quotation omitted).

Under the totality of the circumstances in this case, we conclude that the 90-day

limitations period in the parties’ arbitration agreement is not unreasonable. Davies is a

sophisticated party who actively negotiated the terms of his employment. And there is

nothing in the record suggesting that the 90-day period precluded a “sufficient

opportunity to investigate and file an action,” that it was “so short as to work a practical

abrogation of the right of action” or that an “action [was] barred before the loss or

damage [could] be ascertained.” Id. To the contrary, Davies was able to serve a detailed

complaint on Waterstone less than 30 days after the termination of his employment. The

record reflects that Davies made a strategic decision not to demand arbitration within the

90-day period, not that he was unfairly precluded from doing so.

We acknowledge that the statutory limitations periods governing the claims that

Davies asserted are significantly longer than 90 days. See, e.g., Minn. Stat. §§ 541.05,

subd. 1(1) (2012) (six-year statute of limitations for breach-of-contract claims); 541.07(1)

(2012) (two-year statute of limitations for defamation claims). But we also note

Waterstone’s assertion that it includes a 90-day arbitration provision in its employment

agreements to ensure the quick and private resolution of employment disputes. Cf. Allen

v. Hennepin Cnty, 680 N.W.2d 560, 564-65 (Minn. App. 2004) (recognizing interest of

public employers in promptly resolving employment disputes in holding that 90-day

limitation period applies to “hybrid” labor claims). The 90-day limitations period is

clearly stated in Davies’s employment agreement, and Davies acknowledged in the

13 agreement that he had had “a reasonable and adequate opportunity to consult with

independent counsel regarding the effect of [the a]greement, the sufficiency of the

independent consideration provided [Davies] hereunder, and the reasonableness of the

restrictions set forth herein.” Under these circumstances, we conclude that the 90-day

limitations period in the parties’ arbitration agreement is not unreasonable.

DECISION

The district court erred by determining that the 90-day limitations period in the

arbitration provision of the parties’ employment agreement was unreasonable. Because

Davies indisputably failed to file his demand for arbitration within the limitations period,

we reverse the district court’s order confirming the arbitration award and remand for

entry of an order and judgment vacating the award.

Reversed and remanded.