New York Federal Court Upholds Arbitrator’s Rejection of Choice-of-Law Provision

Arbitration comes with significant risk.  Most arbitration decisions are not reviewable or appealable.  Even if an arbitrator makes a mistake in deciding a case, generally it cannot be appealed.  Recently  Medical device producer Conmed, dissatisfied with the outcome in arbitration, asked a federal court in New York to vacate the arbitrator’s decision. The court upheld the arbitration award, rejecting an argument that the arbitrator had improperly applied Puerto Rico law. Conmed Corp. v. First Choice Prosthetic & Orthopedic Serv., 2023 WL 157957 (N.D.N.Y. Jan. 11, 2023).

Conmed filed arbitration against its Puerto Rico distributor, seeking declarations that New York law applied to the parties’ agreement pursuant to a choice-of-law provision, and that New York law permitted Conmed to terminate the parties’ relationship without penalty. Conmed claimed that the Puerto Rico distributor failed to meet purchase targets and make required payments.  The arbitrator ruled that Puerto Rico law controlled, despite the choice of the law provision in the parties’ agreement, reasoning that the parties’ extensive contacts with Puerto and Rico Puerto Rico’s strong policy interest in dealership termination, articulated in the Puerto Rico Dealer’s Act.

The Puerto Rico Dealer’s Act requires just cause for termination, and the arbitrator held that the $750 at issue between the parties did not constitute just cause for termination. Conmed challenged the application of Puerto Rico law, arguing that the arbitrator should have applied New York law and that the arbitrator’s’ application of Puerto Rico law constituted “manifest disregard of the law” under the FAA.

The court disagreed, finding that the parties submitted the choice-of-law question to the arbitrator, so that arbitrator’s decision fell within the arbitrator’s authority as established by the FAA. The court also addressed recent developments on the proper subject matter jurisdiction standard for challenging an arbitration award under the FAA. Last year the Supreme Court held in Badgerow v. Walters that a district court determining its jurisdiction over such a challenge is limited to the arbitration petition itself and cannot “look through” to the core controversy. The Conmed court  concluded that the parties had satisfied the relevant jurisdictional requirement.

Franchisors should think carefully before agreeing to arbitration of disputes. Many courts have noted that the arbitration process cannot be expected to be error free. Agreeing to arbitration means agreeing to and accepting the risk of errors as part of the decision-making outcome; error that cannot be corrected.

Read the opinion here: Conmed Corp. v. First Choice Prosthetic & Orthopedic Serv., Inc.

Samuel C. Wolf, Esq. of Brown Rudnick, LLP prepared this Case Report. Mr. Wolf’s practice focuses on representing franchisors in closing acquisition and sale transactions and advising clients on franchisor/franchisee relational matters in mergers and acquisitions. He may be reached at swolf@brownrudnick.com.