The opinion of the court was delivered by: KAPLAN
Plaintiff Daniel Freeman claims that defendant Complex Computing Company ("C3") breached the contract between them and that C3 was tortiously induced to do so by defendants Jason Glazier and Thomson Trading Services, Inc. ("Thomson"). Now before the Court are defendants' motion to stay this action pending arbitration and plaintiff's cross-motion to compel all defendants to arbitrate and to disqualify defendants' counsel on the basis of the witness-advocate rule.
In September 1993, plaintiff and C3 entered into an agreement pursuant to which Freeman agreed to sell C3's computer software in exchange for commissions based on sales or licenses made to customers, as well as on revenues received from those customers, over a ten year period. The agreement contained a broad arbitration clause
and was terminable by C3 on sixty days notice. The agreement provided also that it was to bind the heirs, legal representatives, successors and assigns of the parties.
On or about August 22, 1994, C3 and Thomson allegedly entered into an agreement pursuant to which Thomson would act as a resdistributor of C3's product, and C3 granted it an exclusive worldwide sales and marketing rights. By letter dated October 14, 1994, received by plaintiff on October 17, 1994, C3 terminated its agreement with plaintiff, effective sixty days hence.
Defendants responded by seeking a stay of the action pending arbitration. C3 contends that plaintiff is obliged to arbitrate his claims against C3 and argues that the claims against the other defendants should not proceed until the arbitration is concluded. Plaintiff counters by seeking to compel all of the defendants to arbitrate, asserting that Glazier and Thomson are obliged to arbitrate on the theory that they are alter egos of or successors in interest to C3. Defendants rejoin that plaintiff, in consequence of his commencement of this action, may not compel arbitration and, in any case, that there is no basis for holding that the arbitration clause binds Glazier and Thomson.
Arbitrability of the Claim Against C3
Plaintiff's claim falls within the broad language of the arbitration clause; indeed, no one suggests otherwise. While plaintiff ignored the arbitration clause in commencing this action, C3's immediate response was to seek enforcement of the arbitration clause by moving for a stay of this action pending arbitration. Were that the concluding chapter of the story, the result would be obvious. C3's papers in opposition to plaintiff's cross-motion to compel arbitration, however, argue that plaintiff may not compel arbitration in view of its having resorted to the Court in the first instance. Thus, C3's position is that the litigation against it should be stayed pending arbitration, but that plaintiff is not entitled to an order compelling C3 to proceed with the arbitration. This position is without merit.
C3's first argument rests on Section 3 of the Federal Arbitration Act (the "Act"), 9 U.S.C. § 3, which provides:
"If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration." (Emphasis added)
C3 contends that the italicized language precludes plaintiff from compelling arbitration because its commencement of this action constituted a default in proceeding with the arbitration. The argument, however, takes the language out of the broader context of Section 3.
Section 3 requires the Court to compel arbitration "on application of one of the parties," not on application of one of the defendants. The Statute thus contemplates the issuance of an order compelling arbitration upon application of a plaintiff, which would be inconsistent with defendants' proposed construction of the final clause of the section. The final clause readily may be read more narrowly as precluding compulsion only at the instance of a plaintiff who had obstructed or otherwise interfered with the progress of a pending arbitration. As the statute must be construed in a manner that would give meaning to each of its parts, defendants' contention must be rejected.
C3 argues also that plaintiff's commencement of this action waived his right to arbitrate. Waiver, however, is not to be inferred lightly. There must be some prejudice to the party asserting the waiver. Leadertex, Inc. v. Morganton Dyeing & Finishing Corp., 67 F.3d 20, 25 (2d Cir. 1995); Rush v. Oppenheimer & Co., 779 F.2d 885, 889 (2d Cir. 1985). While plaintiff's commencement of this action gives pause, the explanation is reasonably plain. Absent an express agreement to arbitrate with Glazier and Thomson, plaintiff sought a single forum in which he could be sure of the right to proceed against all parties. He then sought an order compelling all three defendants to arbitrate. The explanation is not unreasonable in the circumstances. See Kramer v. Hammond, 943 F.2d 176, 179 (2d Cir. 1991) (there is no 'bright line' test for prejudice sufficient to waive right to compel arbitration; prejudice must be assessed on facts and circumstances of each case). There is no prejudice to the defendants. In consequence, the Court holds that plaintiff did not waive his right to arbitrate by commencing this action. In any case, C3 cannot be heard to assert the waiver argument in view of its own motion to stay this action pending arbitration, which of course post-dated the filing of the action and manifested C3's insistence on arbitration despite any waiver by plaintiff.
The Arbitrability of the Claim Against Glazier
Glazier resists plaintiff's motion to compel him to arbitrate on the ground that he is not party to any arbitration clause. Plaintiff rejoins that the relationship between C3 and Glazier is so intimate that Glazier is bound by the arbitration clause in the Freeman-C3 contract. This presents an interesting issue on very unusual facts.
Arbitration is a matter of private contract. "[A] party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." United Steelworkers of America v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582, 4 L. Ed. 2d 1409, 80 S. Ct. 1347 (1960). Nevertheless, a non-signatory may be bound to arbitrate in a number of circumstances, must notably for purposes of this case where the relationship between a corporate party to an arbitration agreement and its parent entity "is sufficiently close as to justify piercing the corporate veil and holding [the shareholder] legally accountable for the actions" of the corporate signatory. Thomson-CSF, S.A. v. American Arbitration Association, 64 F.3d 773, 777 (2d Cir. 1995). Plaintiff here argues that the relationship between Glazier and C3 warrants the conclusion that Glazier is bound by C3's arbitration clause -- notwithstanding the fact that Glazier was not an officer, director, employee or stockholder of C3. On the highly unusual facts of this case, the Court agrees.
Glazier is a recent doctoral graduate of Columbia University in computer science. In the early 1990s, while a Columbia student, he developed computer software, which he believed could be licensed profitably.
(Akabas Aff. P 2) Columbia, however, prohibited students receiving fellowship monies from serving as an officer, director or shareholder of an entity licensing such software for profit. (Id. P 3) For reasons that are far from clear, it nevertheless permitted such students to establish corporations which would license the software from Columbia and sublicense it to others for profit and to serve as independent contractors to such corporations. This permitted the students to earn money from the software licensing activity, while Columbia derived royalty income. (Id.) Such an arrangement was the genesis of C3.
C3 was organized on September 16, 1992 by Elizabeth Slater as sole incorporator. One Jonathan Hochman initially was the sole director and shareholder. Hochman thereupon elected Seth Akabas, Glazier's lawyer, and one Naim J. Peress as C3's officers. (Id. P 4) Two months later, the board was expanded to two, Gary Feldman was designated to fill the vacancy thus created, Hochman resigned from the board, and Feldman subscribed to 199 C3 shares at a price of $ 0.01 per share. At the same time, the board designated Glazier as the sole signatory to C3's bank account, and C3 entered into a consulting agreement with Glazier, Inc., a corporation wholly owned by Glazier. (Id. P 5 & Exs. E, F, G) Moreover, Glazier entered into an option agreement with Feldman. (Olk Aff. Ex. 7) The terms of the consulting and option agreements are critical in assessing plaintiff's position here.
The consulting agreement obligated Glazier, Inc. to serve C3 and vested in it the responsibility "for marketing [C3's] software products, developing new software products, enhancing [C3's] existing software products, and providing support services to [C3's] clients." (Akabas Aff. Ex. F, § 3) It was terminable if Glazier himself was unable to perform or supervise the performance of Glazier, Inc.'s obligations. (Id. § 5) C3 was obligated to pay Glazier, Inc. annual compensation of $ 150,000, subject to adjustment for changes in the consumer price index. In addition, Glazier, Inc. was entitled to a "bonus" for each calendar year equal to 60% of the first $ 200,000, 70% of the next $ 200,000, 80% of the third $ 200,000, and 85% of all royalties received by C3 in excess of $ 600,000. (Id. § 4) Indeed, C3 covenanted that it would not pay any compensation whatsoever to anyone unless Glazier, Inc. had received every nickel to which it was entitled under the agreement. (Id § 4(f)) Since the clause determined Glazier, Inc.'s bonus on the ...