The Arbitration System

The premise that underlies the justification for the loss of rights in arbitration is simple: both parties knowingly agreed to binding arbitration. This presumption is based upon the presumptions that 1) signators read contracts before signing, 2) they have the time and knowledge to understand the implications of the arbitration provision, and 3) they have a viable ability to opt-out of agreeing to the provision. Arbitration's entire legitimacy is based upon these fairly specious presumptions. And there has been much written about these presumptions and whether or not binding arbitration is actually the product of an informed voluntary decision by both parties. See “Whimsy Little Contracts' with Unexpected Consequences: An Emperical Analyss of Consumer Understanding of Arbitration Agreements,” Jeff Sovern, Elayne Greenberg, Paul Kirgis, and Yuxiang Liu, St. John's Legal Studies Research Paper No. 14-0009, October 29, 2014 and “Arbitration Clauses Trap Consumers with Fine Print,” Jeff Sovern, AmericanBanker.com, December 2, 2014.

The position of the “Whimsy Little Contracts'...” study is that no one would voluntarily agree to have substantial rights resolved in a quasi-judicial system contaminated by bias. Take a look at this chart and decide for yourself if the system is fair and free of improper influence:

Finally, there is another false assumption that bolsters the presumption favoring arbitration: it is more efficient than the courts: Cheaper and quicker! Unfortunately, I could rattle off twenty examples demonstrating just how questionable this presumption is when presented as a general truth. I received an arbitration award from JAMS 7 years after the claim was filed. I just paid AAA over $20,000 before the Panel has ever convened, and the Respondent buried us in discovery. If I was in Federal Court, I would have a scheduling order protecting my client for approximately $200 in filing fees.

In sum, both the courts and the legislature need to take a hard and honest look at the jurisprudential legitimacy of binding arbitration. Food for thought.

North Carolina Plaintiffs and Connecticut Defendants End Up in Southern District of New York Due to Presence of New York Attorney Co-Defendant

The law firm of Cosgrove Law, LLC has already counseled one client regarding the investment adviser activities of James Tagliaferri and his TAG Virgin Islands, Inc. (“TAG”). Another TAG client, Matthew Szulik, brought a federal suit in the Eastern District of North Carolina in 2010 on behalf of a number of family trusts. The suit alleged that, among other things, TAG and Tagliaferri, as well as a TAG managing director by the name of Patricia Cornell, committed violations of the U.S. Investment Advisers Act, the North Carolina Investment Advisers Act, the 1934 Act and breach of fiduciary duty. The Complaint also included three claims against a New York attorney that advised TAG and drafted investment documents, including a civil conspiracy claim. In a nutshell, the Complaint alleged that TAG made self-serving and inappropriate investments with the Szulik's trust funds, including investments in Protein Polymer Technologies shares and a race horse through International Equine Acquisition Holdings. According to the Eastern District's opinion, 2012 WL 8 44662 (E.D. NC, March 12, 2012), the Plaintiffs also alleged that they had evidence that TAG received illegal undisclosed kickbacks for the equine investments.

The contractual advisory relationship between TAG and the Plaintiffs was based upon an Investment Management Agreement with a Connecticut choice-of-law provision executed in Connecticut and North Carolina. TAG's office was in Connecticut before it relocated to St. Thomas. None of the transactions or representations at issue took place in New York. The New York attorney and the TAG Defendants moved to dismiss the Complaint on jurisdictional, venue, and 12(b)(6) grounds.

In an opinion that I found to be an excellent, if not belated, law school refresher, Eastern District Chief Judge Dever carefully walked through a succinct analysis of the rules and principles of federal court jurisdiction and venue. In doing so, he concluded that, while the Eastern District federal court possessed personal jurisdiction over the TAG Defendants and venue in the Eastern District was proper for them as well, it lacked both general and specific personal jurisdiction over the New York attorney. But according to Judge Dever, the federal court in Manhattan possessed such jurisdiction. And venue there was proper as to all of the Defendants pursuant to the less utilized 28 USC 1391(b)(3). As such, he ordered the transfer of the entire case pursuant to 28 USC Section 1404.

So the next time your investment adviser spends your money on a race horse or uses it for loans secured by property in Mexico City—you might ask him where his attorney's office is located. Food for thought.