Developements in the Second Circuit: 1997-98

JurisdictionUnited States,Federal
Publication year2021
CitationVol. 73 Pg. 143
Connecticut Bar Journal
Volume 73.




This year's survey of decisions from the United States Court of Appeals for the Second Circuit covers the time period of October 1, 1997, through September 30, 1998. During that period, the Second Circuit terminated 1,721 appeals on the merits, slightly more cases than last year, and issued published opinions in approximately 550 of those appeals. Based upon the statistics prepared by the Office of the judicial Business of the United States Courts, the court affirmed the large percentage of these appeals, although because of the manner in which these statistics are collected they likely overstate the number of affirmances considerably.(fn1) Given the vast number of decisions issued by the Second Circuit in a year, it would not be possible in one survey to discuss at length all of the court's decisions or even all of the important ones. As in last year's survey, this article focuses upon a mix of particularly interesting decisions, including, among others, decisions involving the application of antitrust laws to the Connecticut Resource Recovery Authority; President Clinton's "don't ask, don't tell policy" for the military; New York City's "efforts to enforce sex shop zoning laws"; the presumption of innocence and a defendant's right to a public trial; thejournalists' privilege; and the habeas corpus power of federal courts in immigration cases. The survey covers seven broad areas of law: Arbitration Law and Procedure; Constitutional Law; Corporate and Securities Law; Criminal Law and Procedure; Intellectual Property; jurisdiction and Procedure; and Labor and Employment.


During the 1997-98 period, the Second Circuit issued several important decisions in the area of arbitration law and procedure. In each, the court reaffirmed the strong federal policy favoring arbitration as a device to resolve disputes arising in a variety of contexts, from employment to the commercial arena. The Second Circuit continued to construe arbitration clauses broadly and, with one notable exception, continued to accord great deference to the decisions of arbitrators.(fn)2

A. Arbitrating Employment Disputes

In a case of first impression, the Second Circuit in Equal Employment Opportunity Commission v. Kidder, Peabody & Company, InC. (fn3) joined the Third, Seventh and Ninth CircuitS (fn4) in holding that an arbitration agreement between an employer and employee precludes the Equal Employment Opportunity Commission (EEOC) from seeking purely monetary relief on behalf of the employee under the Age Discrimination in Employment Act (ADEA). In 1994, the EEOC filed suit under the ADEA against Kidder, Peabody & Co. (Kidder) seeking back pay, liquidated damages and reinstatement on behalf of several former Kidder investment bankers. When Kidder discontinued its investment banking operations in 1994, the EEOC stipulated that it no longer sought injunctive relief. However, the agency continued to seek back pay and liquidated damages on behalf of the former employees. Kidder then moved to dismiss the action on the ground that arbitration agreements signed by the employees, in which they had agreed to submit all disputes arising from their employment to binding arbitration, precluded the EEOC's pursuit of monetary damages on behalf of the employees. The district court granted Kidder's motion to dismiss and the Second Circuit affirmed in an opinion authored byJudge Parker.

The Second Circuit recognized that the case presented a clash of competing public interests - the interest in allowing the EEOC broad authority to pursue actions for employment discrimination versus the "liberal federal policy favoring arbitration agreements.(fn5) Nonetheless, the court held that the district court's solution, which allowed the EEOC to pursue injunctive relief while requiring arbitration of the employees' claims for monetary damages, struck the right balance between these interests. In reaching its decision, the Second Circuit relied on several circuit court decisions holding that the EEOC may not seek monetary relief on behalf of an employee who has waived, settled, or previously litigated the claim (though it may pursue injunctive relief) because when it seeks monetary relief, the EEOC acts as a representative of the employee. fn6) When it seeks class-wide injunctive relief, however, the EEOC "promotes public policy and seeks to vindicate rights belonging to the United States as sovereign.(fn7) Since, under the Supreme Court's decision in Gilmer v. Interstate Johnson Lane Corp, (fn8) the employer is entitled to compel an employee to arbitrate his monetary claims under the ADEA, the court believed that the EEOC should not be permitted to evade that arbitration agreement by bringing monetary claims in court as a representative of that employee. Rejecting the EEOC's argument that the threat of monetary damages is necessary to deter employment discrimination, the Second Circuit found "no reason to believe that the threat of an award of monetary damages obtained by a private individual through arbitration has any less deterrent value than the threat of an award of monetary damages obtained by the EEOC.(fn9) Under Kidder, therefore, an employee who signs an arbitration agreement will not be able to avoid the agreement by having the EEOC pursue back pay or liquidated damages in his or her behalf, although the EEOC will remain free to seek injunctive relief in federal court for ADEA violations.

In a concurring opinion, judge Feinberg agreed that the majority correctly applied the relevant authorities, but he went on to question many of the assumptions made by those cases, including the Supreme Court's assumption in Gilmer that ADEA rights can be vindicated equally well in arbitration as they are in the courts. judge Feinberg thus waded into the ongoing nationwide debate over the arbitrability of discrimination claims, a debate that the Supreme Court must eventually confront.

In Worldcrisa Corp. v. Armstrong,(fn10) a case arising from an employment relationship, the Second Circuit applied principles of parallel-proceeding abstention to hold that a district court has inherent power to stay a lawsuit brought by an entity related to a party to an arbitration agreement. Worldcrisa involved two agreements. In the first, signed in 1995, Worldcrisa and Armstrong entered into a termination and credit agreement, under which Armstrong left his employment with Worldcrisa and, in return, Worldcrisa agreed to furnish merchandise to Armstrong's designee. That agreement contained an arbitration clause. Later, Armstrong executed a separate agreement with Worldcrisa's parent, Crisa Corporations (Crisa), under which he guaranteed any obligations owed to Crisa by his designee. The guaranty agreement did not contain an arbitration clause.

Crisa then sued Armstrong in the Connecticut District Court, alleging that Armstrong was in default of his obligadons under the guaranty agreement and seeking to recover the value of the merchandise Worldcrisa had supplied Armstrong's designee. Armstrong responded by filing a demand for arbitration in California that alleged breach of contract and fraud against Worldcrisa, and a motion in the district court to stay the Connecticut suit pending that arbitration. The district court (Chatigny, J.) denied the stay on the ground that the credit agreement's arbitration clause did not apply to a suit based on the guaranty agreement.

In an opinion written byJudge Feinberg, the Second Circuit reversed. The court first held that the arbitration clause was broad enough to justify a presumption of arbitrability and that even without resort to the presumption, the parties' dispute fell squarely within the scope of the arbitration clause. The court next determined that Armstrong had not waived his arbitration rights when he executed the guaranty agreement.(fn11) Finally, the court concluded that although ordinarily a stay against a nonparty to an arbitration agreement is not authorized by section 3 of the Federal Arbitration Act (FAA) (unless principles of agency, veil-piercing, or estoppel would allow the court to find that a nonsignatory was bound by an arbitration agreement), a district court may nonetheless, in appropriate circumstances, stay a nonparty from litigating a claim under the court's inherent power to "control the disposition of the causes on its docket with economy of time and effort for itself, for counsel, and for litigants." (fn12) The Second Circuit found that failure to stay the Connecticut action would result in substantial prejudice to Armstrong because litigating the action with "Crisa alone would involve significant expense and inconvenience and might adversely affect the outcome of his arbitration against Worldcrisa."(fn13) By applying principles of parallel-proceeding abstention to justify a stay of the Connecticut litigation, the court made it clear that a nonparty who is related to a party to an arbitration agreement will not be allowed to evade that agreement by filing a suit in the hope that its claim will be adjudicated first and have preclusive effect in the arbitration.

B. Arbitrating Commercial Disputes

In 1998, the Second Circuit continued to explore the outer boundaries of the FAA's preemption of state law. In Doctor's Associates, Inc. v. Hamilton,(fn14) a former franchisee of a Subway sandwich shop filed suit against the franchisor, Doctor's Associates, Inc. (DAI), in NewJersey state court, alleging that DAI fraudulently induced him to enter into a franchise agreement that violated the New Jersey Franchise Practices Act. When DAI filed a petition in Connecticut District Court to compel arbitration of Hamilton's claim in Connecticut and moved to enjoin Hamilton from...

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