Arbitration Provision Enforceable Despite Questions About Legitimacy Of Remainder Of Agreement

A New York state trial court has denied a motion to stay arbitration in an action brought by plaintiffs, a private equity firm and its affiliate, against defendants, two of plaintiffs' former officers, despite plaintiffs' argument that the employment and separation agreements containing the relevant arbitration clauses were invalid.

Plaintiffs' lawsuit alleged, inter alia, that defendants breached their fiduciary duties and committed fraud by engaging in multiple transactions in plaintiffs' names for defendants benefit. Defendants responded with five counterclaims and nine affirmative defenses, including that the dispute was subject to arbitration. In opposing arbitration, Plaintiffs relied upon a case in which a court held that the plaintiff had "raised a threshold issue regarding the validity of the parities' agreement" and that "the validity of the arbitration provision was thus an issue for the court to decide." The court found this case inapposite, finding that defendants' employment and separation agreements left no doubt that matters regarding their employment would be resolved by arbitration. Emphasizing that doubts regarding whether an arbitration clause covers a particular dispute should be resolved in favor of coverage, the court held that the arbitration provisions were valid and binding, even if the rest of the employment agreements were not valid, because plaintiffs had failed to show "that the arbitration agreements were permeated by fraud."

Plaintiffs also challenged a portion...