Eisen v. Venulum Ltd. et al

Filing 23

DECISION AND ORDER denying 7 Defendants' motion to compel arbitration. SO ORDERED. Signed by Hon. Elizabeth A. Wolford on 3/27/17. (JPL)

Case 1:16-cv-00461-EAW Document 23 Filed 03/27/17 Page 1 of 34

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF NEW YORK

BERNARD M. EISEN,
Plaintiff,

DECISION AND ORDER

v.

1:16-CV-00461 EAW

VENULUM LTD., GILES CADMAN,
individually, MARK TROTTER, individually,
and PHILLIP SERRIEN, individually,
Defendants.

I.

Introduction
Bernard M. Eisen ("Plaintiff'), a citizen and resident of New York, filed this

action on June 8, 2016, claiming violations of both the Securities Act of 1933 ("the '33
Act") and the Securities Act of 1934 ("the '34 Act"), and related state-law claims of
unconscionability, fraud, civil conspiracy, and intentional infliction of emotional distress.
(Dkt. 1).

Plaintiff's claims arise out of Plaintiff's investment with Venulum Ltd.

("Venulum"), and involve actions by Venulum's principal, Giles Cadman ("Cadman"),
and two Venulum employees, Mark Trotter ("Trotter"), and Phillip Serrien ("Serrien")
(together "Defendants"). (Id.). Venulum Ltd. is a corporation incorporated in the British
Virgin Islands ("BVI"), with its principal place of business in Toronto, Canada. (Id. at
1). Cadman resides in the United Kingdom. (Id. at 2). Trotter and Serrien reside in
Canada. (Id.).
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Before the Court is Defendants' motion to compel arbitration. (Dkt. 7). The
Court received briefing from the parties, heard oral arguments, and received
supplemental briefing following oral argument. (Dkt. 7; Dkt. 11; Dkt. 13; Dkt. 18; Dkt.
20; Dkt. 21; Dkt. 22).

Because the arbitration provisions are substantively

unconscionable and would require Plaintiff to forego his rights and remedies under the
applicable securities laws of the United States, the motion to compel arbitration is denied.
II.

Factual Background 1
A.

The First Contract

Plaintiff first invested with Venulum in 2007, after repeated phone calls from
Defendant Serrien to Plaintiffs home in Williamsville, New York.

(Dkt. 1 at 3-4).

Serrien was soliciting investments in wine, in which, according to Serrien, Venulum
"possessed a high degree of experience and sophistication." (Id. at 3). Serrien promised
Plaintiff an 8% return on his investment. (Id.). After an initial agreement via phone to
invest $1,000 in 2007, Plaintiff made a number of additional investments with Venulum.
(Id. at 4). Plaintiff alleges he was not provided sufficient documentation to piece together

the fair market value of his account, the true nature of his investment, or the criteria
Venulum used to evaluate the suitability of possible investments, all violations of federal
securities laws. (Id. at 4-5).
On October 7, 2008, Plaintiff entered into a wine purchase contract with Venulum
(the "First Contract"). (Id. at 5). The First Contract contained an arbitration clause

The facts here are primarily those alleged in the complaint.
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which required that any dispute arising under the contract be:
referred to binding arbitration in the British Virgin Islands applying British
Virgin Islands law: Such arbitration shall be before one arbitrator appointed
by [Plaintiff], one arbitrator appointed by Venulum Ltd. and one arbitrator
appointed by such two arbitrators, if either or both of them considers it
appropriate: The Arbitrators' costs will be borne equally by [Plaintiff] and
Venulum Ltd.: The arbitration shall take place in accordance with the Rules
of the International Chamber of Commerce.
If the claim to be arbitrated is a claim by [Plaintiff], then unless [Plaintiffs]

arbitrator is appointed within six months of the dispute arising, such claim
shall be deemed to be absolutely released, waived and barred and Venulum
shall be discharged from all liability.
(Dkt. 1-2 at 5).
"Between October 7, 2008, and March 16, 2010, Plaintiff invested approximately
$122,480.64 under the [First Contract]." (Dkt. 1 at 6). Serrien represented to Plaintiff
that Plaintiff could liquidate his holdings at any time with 10-days' notice. (Id. at 4).
B.

The Second Contract

In "early 2010," Plaintiff told Serrien that he wished to liquidate his holdings. (Id.
at 6). Thereafter, Defendant Trotter became Plaintiffs main contact at Venulum, and
Plaintiff no longer had any contact with Serrien. (Id.). Trotter told Plaintiff that he could
not liquidate the account in the manner described by Serrien. (Id.). Trotter told Plaintiff
that Plaintiff could liquidate his investment only if Plaintiff signed a second investment
contract (the "Second Contract"), which Plaintiff did on March 16, 2010. (Id.). Plaintiff
was told that he would lose "all or substantially all of his investment of $122,480" unless
he signed the Second Contract. (Id. at 7). Trotter explained that if Plaintiff invested an
additional $100,000, he would be entitled to the return of the previously invested
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$122,480.

(Id.).

Plaintiff invested the additional $100,000 ahead of the contract's

schedule, in an attempt to liquidate the $122,480 as quickly as possible. (Id. at 8).
The Second Contract, like the First, contained an arbitration clause:
In the event that any dispute whatsoever arises between the Parties in

relation to or in any way in connection with this Agreement, the Parties
hereby agree that such dispute shall be referred to binding arbitration in the
British Virgin Islands applying British Virgin Islands law. Such arbitration
shall be before an arbitrator appointed by Venulum. The arbitration shall
take place in accordance with the Rules of the International Chamber of
Commerce.
(See Dkt. 1-3 at 3).
C.

Venulurn's SEC Violations

The Securities and Exchange Commission ("SEC") charged Venulum and
Cadman with violations of the '33 Act on February 15, 2012, alleging that Venulum
"raised approximately $22,000,000 through the unregistered offerings of (a) investment
contracts involving interests in fine wines; and (b) promissory notes from which proceeds
were used as working capital for Venulum Ltd., Venulum Inc., and other businesses
affiliated with Giles Cadman." Sec. & Exch. Comm 'n v. Venulum Inc. et al., 3:12-cv00477-N, Dkt. 1, at * 1 (N.D. Tex. Feb. 15, 2012). They were alleged to have solicited
investments through an instrument which constituted a "security" without registering
with the SEC, in violation of§§ 5(a) and 5(c) of the '33 Act. Id. at *4. By consent,
Venulum Inc., Venulum Ltd., and Giles Cadman were "permanently restrained and
enjoined from violating Section 5 of the Securities Act" by selling any security in the
United States without registering with the SEC. Sec. & Exch. Comm'n, 3:12-cv-00477-

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N, Dkt. 11, Dkt. 12, Dkt. 13 (N.D. Tex. Feb. 27, 2012). Thereafter, Venulum entered
into similar consent decrees with state regulators in South Carolina and Wisconsin. (Dkt.
1-5; Dkt. 1-6).
Plaintiff alleges that Trotter was prohibited by a 1998 Wisconsin state order from
selling securities in Wisconsin without registering under state law. (Dkt. 1-8 at 4). A
purported order by the Wisconsin Securities Commission states that Trotter had violated
state securities laws "by transacting business in Wisconsin as a securities agent without a
license." (Id. at 3).
On July 10, 2013, to comply with the Dodd-Frank Wall Street Reform and
Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 852 (2010), the SEC adopted
the so-called "Bad Actor" disqualification provisions under Regulation D of the '33 Act.

See Sec. & Exch. Comm'n, Disqualification of Felons and Other "Bad Actors" from
Rule 5 06 Offerings and Related Disclosure Requirements (Sept. 19, 2013) [hereinafter
"Sec. & Exch. Comm'n, Bad Actor Disclosure Requirements"], available at https://www.
sec.gov/info/smallbus/secg/bad-actor-small-entity-compliance-guide.htm.
Any "covered" person who "has a relevant criminal conviction, regulatory or court
order or other disqualifying event that occurred on or after September 23, 2013," is
disqualified from relying on certain exemptions from compliance with the '33 Act in the
sale of securities to accredited investors. Id.; 17 C.F .R. § 230.506 (Regulation D Rule
506).

Covered individuals include securities issuers, the directors of an issuer, and

"persons compensated for soliciting investors."

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Sec. & Exch. Comm'n, Bad Actor

Case 1:16-cv-00461-EAW Document 23 Filed 03/27/17 Page 6 of 34

Disclosure Requirements. Disqualifying events include court injunctions and restraining

orders arising in connection with the purchase or sale of a security that are in effect at the
time of the sale of the security and that were entered within the previous five years. Id.
Disqualifications under final orders of state regulators are also disqualifying events. Id.
"Disqualification will not arise as a result of disqualifying events that occurred
before September 23, 2013," but those events must be disclosed to investors in writing
before the sale of a security under Rule 506. Id. Rule 506 allows exceptions from the
requirement to register a security with the SEC before sale. See 17 C.F.R. § 230.506.
However, "Rule 506 is unavailable to an issuer that fails to provide the required
disclosure, unless the issuer is able to demonstrate that it did not know and, in the
exercise of reasonable care, could not have known that a disqualifying event was required
to be disclosed." Id.
Plaintiff alleges that Venulum, Cadman, and Trotter were covered persons under
the Bad Actor provision of the '33 Act, that they had disqualifying events at the time of
the sale of the investment securities to Plaintiff, and that they failed to disclose the
disqualifying events to Plaintiff. (Dkt. 1 at 12-13 ). Plaintiff also alleges that none of the
Defendants were registered as broker-dealers under SEC regulations, and, therefore, they
were not registered to sell securities in the United States. (Id. at 13 ).

D.

The Third Contract

Plaintiff became aware of the SEC Consent Order in October 2013, and thereafter
requested a return of his investment and liquidation of his account. (Id.). According to

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Plaintiff, Trotter required Plaintiff to enter into yet another contract (the "Third
Contract") before Plaintiff could get any of his money back from Venulum.

(Id.).

"Trotter threatened the complete loss of Plaintiffs investment, which at the time was
over $200,000." (Id.). Plaintiff signed the Third Contract on October 3, 2013, "under the
extreme duress of losing his entire investment." (Id.).
The Third Contract, like the others, included an arbitration clause:
In the event that any dispute whatsoever arises between [Plaintiff] and
[Venulum] in relation to or in any way in connection with the Contract,
[Plaintiff] and [Venulum] hereby agree that such dispute shall be finally
settled by binding arbitration in the British Virgin Islands applying British
Virgin Islands law in accordance with the Rules of Arbitration of the
International Chamber of Commerce ("ICC Rules"). Such arbitration shall
be conducted before a panel of three (3) arbitrators, one of whom shall be
appointed by [Plaintiff], one of whom shall be appointed by [Venulum] and
the third arbitrator shall be appointed by the other arbitrators so chosen. If
the arbitrators chosen by the parties ("Party Arbitrator(s)") fail to agree
upon the appointment of the third arbitrator within one month after the
second Party Arbitrator is appointed, the third arbitrator shall be appointed
in accordance with the ICC Rules. If a claim arising under the Contract may
be arbitrated by [Plaintiff], then, unless [Plaintiffs] arbitrator is appointed
within 6 months of the issuance of the request for arbitration, such claim
arising under the Contract shall be deemed to be absolutely released,
waived and barred and [Venulum] shall be discharged from all liability. If
the claim to be arbitrated is asserted by [Venulum], then, unless [Plaintiffs]
arbitrator is appointed within 6 months of the issuance of the request for
arbitration, the arbitration shall be determined by a single arbitrator
appointed in accordance with the ICC Rules. Each party to the arbitration
proceeding shall be responsible for payment of one-half of the costs,
arbitrators' fees and other expenses of the arbitration until a decision by the
arbitration panel is rendered. If a party fails to pay its share of such fees and
expenses of the arbitration when due, the arbitration panel shall have the
power immediately to issue an award in favor of the other party for the
relief requested by such party.
(Dkt. 1-9 at 11).

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By the terms of paragraph 11.1, the Third Contract relies on the private placement
exception to SEC Rule 506. (Id. at 12). If Plaintiffs allegations are true, this reliance
necessitated compliance with the Bad Actor provisions of Regulation D, and required
disclosure of any previous disqualifying event by Venulum, Cadman, and/or Trotter to
Plaintiff. Plaintiff claims that no such disclosure was made. (Dkt. 1 at 16). Plaintiff
further claims that "[i]n the nearly 10 years that Plaintiff has interacted with Venulum,
Plaintiff has never received, or been offered, any third-party confirmation of Venulum's
representations as to its wine holdings, storage, financial condition or the use of
Plaintiffs funds." (Id.).

III.

Discussion

Defendants have moved to compel arbitration under the terms of the contracts. 2
(Dkt. 7). Defendants argue that arbitration is required under the contracts, and that the
Court should dismiss the action, or stay proceedings until after arbitration is complete.
2

Either Cadman or Trotter signed each agreement on behalf of Venulum. (Dkt. 7-1
at 13). Serrien is not a signatory to any of the three contracts. This does not prevent him
from moving to compel arbitration. See JLM Indus., Inc. v. Stolt-Nielsen SA, 387 F.3d
163, 177 (2d Cir. 2004) ("[A] non-signatory to an arbitration agreement may compel a
signatory to that agreement to arbitrate a dispute where a careful review of the
relationship among the parties, the contracts they signed, and the issues that had arisen
among them discloses that the issues the nonsignatory is seeking to resolve in arbitration
are intertwined with the agreement that the estopped party has signed.") (internal
quotations omitted). Here, Serrien was an employee of Venulum and was Plaintiffs
main point of contact with Venulum until Plaintiff attempted to liquidate his investment
under the First Contract. Plaintiffs claims include assertions that Serrien violated federal
securities laws and perpetrated a fraud by inducing Plaintiff to sign the First Contract.
Therefore, Serrien's involvement is "intertwined" with at least one of the arbitration
agreements at issue, and Serrien can move to compel arbitration even though he did not
sign any of the agreements. See id. Plaintiff does not challenge Serrien's standing to
compel arbitration. (See Dkt. 11 ).

Case 1:16-cv-00461-EAW Document 23 Filed 03/27/17 Page 9 of 34

(Dkt. 7-1 at 5). Plaintiff argues that the arbitration clauses are void and unenforceable.
(Dkt. 11 at 5).

Plaintiff further argues that the Court lacks jurisdiction to compel

arbitration in the BVI. (Id.).
A.

The Third Contract Supersedes the Prior Two Contracts

As a threshold matter, the Court must determine which of the three contracts'
arbitration clauses is operable. The parties agree that the arbitration clause in the First
Contract has been superseded. (See Dkt. 20 at 4; Dkt. 21 at 3). The parties disagree as to
whether the Third Contract superseded the Second. Plaintiff argues that the "arbitration
clause in the Third Contract necessarily supersedes the previous two," because the Third
Contract's arbitration clause provides for arbitration of "any dispute" between Plaintiff
and Venulum relating to the contract. (Dkt. 20 at 4).

More specifically, the arbitration

clause in the Third Contract requires that if "any dispute whatsoever arises between
[Plaintiff] and [Venulum] in relation to or in any way in connection with the Contract,
[Plaintiff] and [Venulum] hereby agree that such dispute shall be finally settled by
binding arbitration." (Dkt. 1-9 at 11). The Third Contract also includes a merger clause,
which states that the Third Contract "constitutes the entire agreement made between the
Contractholder and the Company. All other terms and conditions, including, without
limitation, any representations or implied terms, are hereby expressly excluded and
superseded by the Contract." (Id. at 15). Defendants argue that this provision "does not
supersede the independent contractual arrangement contained in the Second Contract," in

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that the Third Contract's "any dispute" language applies only to "prior negotiations and
understandings with regard to [the Third Contract] .... " (Dkt. 21 at 3).
"Under New York law, [i]t is well established that a subsequent contract regarding
the same matter will supersede the prior contract." Applied Energentics, Inc. v. NewOak
Capital Mias., LLC, 645 F.3d 522, 526 (2d Cir. 2011); see, e.g., Barnum v. Millbrook
Care Ltd. P'ship, 850 F. Supp. 1227, 1236 (S.D.N.Y. 1994), aff'd 43 F.3d 1458 (2d Cir.
1994).

However, "a broad arbitration clause in an agreement survives and remains

enforceable for the resolution of disputes arising out of that agreement subsequent to the
termination thereof and the discharge of obligations thereunder" unless a merger clause in
a subsequent agreement serves to supersede the prior agreement to arbitrate. Primex Int 'l
Corp. v. Wal-Mart Stores, Inc., 89 N.Y.2d 594, 598-99 (1997). A general merger clause
"typically containing the language ... that it 'represents the entire understanding between
the parties,"' only serves to require "full application of the parol evidence rule in order to
bar the introduction of extrinsic evidence to vary or contradict the terms of the writing."
Id. at 599. Where a later contract includes only that general language in its merger
clause, the clause does not terminate a requirement to arbitrate issues that arose under a
prior agreement. See id. at 600-01; id. at 601 ("[A]bsent a more specific indication of
intent to abandon contractual rights to an arbitration forum, a general release terminating
the substantive rights of the parties to the contract will not nullify their obligation to
submit to an arbitrator all of the disputes relating to that contract and its termination.").
Where there is a showing of specific intent for a subsequent contract to supersede a prior
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agreement to arbitrate, the later contract's language controls. See Goldman, Sachs & Co.
v. Golden Empire Sch. Fin. Auth., 764 F.3d 210, 216 (2d Cir. 2014) (finding that "allinclusive and mandatory" language in a subsequent agreement superseded a prior
agreement to arbitrate); Applied Energetics, 645 F.3d at 525 n.2 (finding that where a
merger clause went well beyond stating that the agreement only "represent[ed] the entire
understanding between the parties" by including language that "there are no agreements
or understandings" between the parties except for those in specified documents, the
merger clause served to terminate a prior agreement to arbitrate).
Here, the language of the Third Contract expresses a desire of the parties for the
Third Contract to supersede both prior contracts. The arbitration clause of the Third
Contract requires that "any dispute whatsoever" between Plaintiff and Venulum "in
relation to or in any way in connection with the Contract" be subject to arbitration in
accordance with the arbitration terms of the Third Contract. (Dkt. 1-9 at 11 ).
"Contract" is defined broadly to include not only the Third Contract, but also any
transaction between the parties. (Id. at 2). The merger clause states not only that the
Third Contract "constitutes the entire agreement between [Plaintiff] and [Venulum]," but
also that "all other terms and conditions ... are hereby expressly excluded and
superseded by the [Third] Contract." (Id. at 15 (emphasis added)). The terms of the

merger clause do not evince only a desire to have the parol evidence rule fully applied;
the language states an intention of the parties to completely replace and "supersede" any

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prior agreement with the terms of the Third Contract. See Primex Int'! Corp., 89 N.Y.2d
at 599; Applied Energetics, 645 F.3d at 525 n.2.
The language of the Third Contract belies Defendants' assertion that the Second
Contract is still operative. The Second Contract required, in consideration for settling a
dispute under the First Contract, that Plaintiff "contribute an additional $10,000.00 per
annum over a ten (10) year period towards physical wine purchases." (Dkt. 1-3 at 3). In
addition to the express language of the Third Contract's arbitration and merger clauses,
the Third Contract contains two WHEREAS clauses which, read in conjunction, further
suggest that the Third Contract superseded the Second. The first such clause states that
Plaintiff "from time to time may wish to acquire fine wines or champagne" from
Venulum and "either take delivery of such fine wines or champagne or have [Venulum]
sell such fine wines or champagne on [Plaintiffs] behalf." (Dkt. 1-9 at 2). The very next
clause states that Plaintiff and Venulum "wish to establish and agree upon certain terms
and conditions that will apply to any such Transaction between [Plaintiff] and
[Venulum]." (Id. (emphasis added)). The Second Contract was, in essence, a contract
for the further purchase of wine. The Third Contract, by its terms, superseded all prior
contracts and established the terms and conditions for "any" transaction between Plaintiff
and Venulum regarding the sale of wines or champagne.

The Second and Third

Contracts, though perhaps drafted with different underlying motivations, were both for
the sale of wine. A subsequent contract regarding the same matter supersedes an earlier
contract. Applied Energentics, 645 F.3d at 526. Thus, the Third Contract superseded the
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Second Contract, and only the Third Contract's arbitration clause remains enforceable.
However, in an abundance of caution, and because it does not change the Court's
analysis, the Court will address both the validity of the Second and Third Contracts'
arbitration clauses below.

B.

Validity of the Arbitration Clauses

Defendants' argument-that the Court is required to compel arbitration under the
contracts-requires that the arbitration clauses be enforceable. (See Dkt. 7-1 ). Plaintiff
argues that they are not enforceable.

(Dkt. 11).

Before compelling arbitration, a

reviewing court is required to decide two threshold issues: (1) whether the arbitration
agreement is valid; and (2) whether the dispute is within the scope of the arbitration
agreement. Cap Gemini Ernst & Young, US., L.L.C. v. Nacke!, 346 F.3d 360, 365 (2d
Cir. 2003 ). Because Plaintiff asserts federal statutory claims, if the arbitration provisions
survive the two threshold hurdles, the court must then consider whether Congress
intended those statutory claims to be nonarbitrable. See Parisi v. Goldman, Sachs & Co.,
710 F.3d 483, 486 (2d Cir. 2013); see, e.g., JLM Industries, Inc. v. Stolt-Nielsen SA, 387
F.3d 163, 169 (2d Cir. 2004).
The Federal Arbitration Act ("FAA") states that an arbitration clause "shall be
valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity
for the revocation of any contract." 9 U.S.C. § 2. "[I]t is difficult to overstate the strong
federal policy in favor of arbitration .... " Arciniaga v. Gen. Motors Corp., 460 F .3d 231,

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234 (2d Cir. 2006).

"But emphatic application does not amount to automatic

application." Ragone v. Atl. Video at Manhattan Ctr., 595 F.3d 115, 121 (2d Cir. 2010).
An arbitration clause is a matter of contract law. Rent-A-Center, West, Inc. v.
Jackson, 561 U.S. 63, 67 (2010). Arbitration clauses "may be invalidated by generally
applicable contract defenses, such as fraud, duress, or unconscionability." Id. at 68; see,
e.g., AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011). A challenge to the
contract as a whole is not sufficient to prevent the enforcement of an arbitration clause,
because an arbitration provision is severable from the rest of the contract. Rent-A-Center,
561 U.S. at 71; see, e.g., Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395,
403-04 ( 1967). Under the FAA, the party seeking to invalidate an arbitration clause must
show that the arbitration clause itself was invalid. Rent-A-Center, 561 U.S. at 71-72. "If
a party challenges the validity ... of the precise agreement to arbitrate at issue, the
federal court must consider the challenge before ordering compliance with that
agreement. ... " Id. at 71; see, e.g., Duran v. J Hass Group, L.L.C., 531 F. App'x 146,
147 (2d Cir. 2013) ("We assume that if [the plaintiff] had claimed that the arbitration
agreement itself was unconscionable due to the forum selection clause, the District Court
would have had to consider whether the arbitration agreement was unconscionable prior
to dismissing the suit."); Celltrace Commc 'ns Ltd. v. Acacia Research Corp., 15-CV4746 (AJN), 2016 WL 3407848, at *2 (S.D.N.Y. June 16, 2016) ("[W]here one party
argues that there is no valid arbitration agreement, courts have decided the question of
arbitrability."), appeal pending, No. 16-2326 (2d Cir.). If the challenge is to the validity
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of the contract as a whole, the issue is for the arbitrator to decide in the first instance.
Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 445-46 (2006); Rent-A-Center,
561 U.S. at 70.
Here, as required by Rent-A-Center, Plaintiff has challenged the validity of the
arbitration clauses. (See Dkt. 11 at 17-21). The FAA does not require that a party
challenge an arbitration provision in the complaint, but, as here, the challenge can be
made in response to a motion to compel. See Rent-A-Center, 561 U.S. at 72 ("The
District Court correctly concluded that Jackson challenged only the validity of the
contract as a whole. Nowhere in his opposition to Rent-A-Center's motion to compel
arbitration did he even mention the delegation provision.").
1.

This Court Must Decide Whether the Arbitration Clause are
Valid

Defendants' main argument is that it is the province of the arbitrator, and not the
Court, to determine whether the arbitration clauses are valid or invalid. (Dkt. 13 at 5-10).
Defendants rely on Shaw Group Inc. v. Triplefine Int'! Corp., 322 F.3d 115 (2d Cir.
2003) for the proposition that under the International Chamber of Commerce ("ICC")
arbitration rules "any question of arbitrability must be decided by the arbitral tribunal."
(Dkt. 13 at 6).

Shaw Group provides that if the parties reference the ICC rules of

arbitration in an arbitration clause they have "evince[ d] a clear and unmistakable
agreement to arbitrate arbitrability," and the court is required to defer questions of
arbitrability to the arbitrator. Shaw Group, 322 F.3d at 121.

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It is settled law that it is the province of the court to "resolve any issue that calls

into question the formation or applicability of the specific arbitration clause that a party
seeks to have the court enforce." Granite Rock Co. v. lnt'l Bhd. Of Teamsters, 561 U.S.
287, 297 (201 O); see, e.g., id. at 299-300 ("[O]ur precedents hold that courts should order
arbitration of a dispute only where the court is satisfied that neither the formation of the
parties' arbitration agreement nor (absent a valid provision specifically committing such
disputes to an arbitrator) its enforceability or applicability to the dispute is in issue.
Where a party contests either or both matters, the court must resolve the disagreement.")
(internal citations omitted); Rent-A-Center, 561 U.S. at 71 ("If a party challenges the
validity under [FAA] § 2 of the precise agreement to arbitrate at issue, the federal court
must consider the challenge before ordering compliance with that agreement under
[FAA] § 4."); Contee Corp. v. Remote Sol., Co., Ltd., 398 F.3d 205, 208 (2d Cir. 2005)
("[T]here is a general presumption that the issue of arbitrability should be resolved by the
courts."). To have an arbitrator determine arbitrability, the party asserting so must "point
to a clear and unmistakable expression of the parties' intent to submit arbitrability
disputes to arbitration." NASDAQ OMX Grp., Inc. v. UBS Sec., LLC, 770 F.3d 1010,
1032 (2d Cir. 2014).
There is no language in the contracts expressly stating that disputes concerning
arbitrability should be resolved by arbitration. Cf Mumin v. Uber Techs. Inc., 15-CV6143 (NGG) (JO), 15-CV-7387 (NGG) (JO), 2017 WL 934703, at *9-10 (E.D.N.Y. Mar.
8, 2017) (finding that where a contract arbitration provision specifically stated that
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disputes, including the enforceability of arbitration provisions, were to be decided by the
arbitrator, and not by a court or judge, the issue of arbitrability must be decided in
arbitration). Nonetheless, each arbitration clause in this case includes a requirement that
all disputes under the contracts be sent to arbitration, and that the ICC rules will control
during the arbitration.

(Dkt. 1-2 at 5; Dkt. 1-3 at 3; Dkt. 1-9 at 11). Shaw Group

involved an interpretation of ICC Rule 6.2, which was amended after Shaw Group was
decided and renumbered Rule 6.3. The text of the rule, at the time Shaw Group was
decided, provided that the arbitrator determined the validity of the arbitration agreement
"if any party raises one or more pleas concerning the existence, validity or scope of the
arbitration agreement." Shaw Group, 322 F.3d at 122 (emphasis added). Today, ICC
Rule 6.3 provides:

If any party against which a claim has been made ... raises one or more
pleas concerning the existence, validity or scope of the arbitration
agreement or concerning whether all of the claims made in the arbitration
may be determined together in a single arbitration, the arbitration shall
proceed and any question of jurisdiction or of whether the claims may be
determined together in that arbitration shall be decided directly by the
arbitral tribunal. ...
International Chamber of Commerce, ICC Rules of Arbitration, Art. 6

~

3 (Jan. 1, 2012)

(emphasis added), available at https://iccwbo.org/dispute-resolution-services/arbitration/
rules-of-arbitration/#article_ 6. The parties disagree over what the change in language
means. Plaintiff asserts that the language of Rule 6.3, as currently enacted, states that the
arbitrator determines validity only if the party against whom a claim is asserted
challenges the validity of the clause. (Dkt. 11 at 12-13). Because Plaintiff is asserting
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the claim and arguing that the clauses are invalid, Plaintiff argues that Rule 6.3 does not
relegate the issue of validity to the arbitrator. (Id.).
Defendants argue that although the Rule's language was changed after the Second
Circuit's decision in Shaw Group, the meaning of the Rule did not change, and, therefore,
the Court must defer to the arbitrator on any issue of validity as required by Shaw Group.
(Dkt. 13 at 6-8).

Defendants point to the ICC Handbook, which reiterates the language

of the old rule, while not explaining what the change in language actually means. (Id. at
7 (citing Thomas H. Webster & Michael W. Buhler, Handbook of ICC Arbitration:

Commentary, Precedents, Materials

ii 6-26

(3d ed. 2014) ("Article 6(3) provides

that ... arbitration should proceed if ... a party raises one or more pleas concerning the
existence, validity or scope of the arbitration agreement" (emphasis added)))).
Essentially, Defendants ask the Court to ignore the change in the language of the Rule. 3

3

The new ICC rules apply to both the Second and Third Contracts, even though
they were enacted after the Second Contract was signed on March 16, 2010. (See Dkt. 1
at 6). The Second Contract's arbitration clause does not specify whether arbitration must
be held in accordance with the ICC rules in effect at the time that the contract was signed,
or those in effect at the time of the arbitration. (See Dkt. 1-3 at 3, 6); cf Woodson v.
Loram Maint. of Way, Inc., No. 10-CV-6263L, 2011WL6033012, at *1 (W.D.N.Y. Dec.
5, 2011) (describing a contract in which the arbitration clause required arbitration in
accordance with certain rules "in force at the time of the claim or dispute"). However,
ICC Rule 6.1 provides that "[w]here the parties have agreed to submit to arbitration under
the [ICC] Rules, they shall be deemed to have submitted ipso facto to the Rules in effect
on the date of commencement of the arbitration, unless they have agreed to submit to the
Rules in effect on the date of their arbitration agreement." International Chamber of
Commerce, ICC Rules of Arbitration, Art. 6 ii 1 (Jan. 1, 2012) (emphasis added),
available at https://iccwbo.org/dispute-resolution-services/arbitration/rules-of-arbitration/
#article_6; see, e.g., Thomas H. Webster & Michael W. Buhler, Handbook of ICC
Arbitration: Commentary, Precedents, Materials ii 6-20 (3d ed. 2014) ("Article 6(1)
establishes the presumption that the applicable rules are the current Rules unless the
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The plain language of the Rule advises that Plaintiff is correct, and only when the
party against whom a claim is asserted challenges the validity of an arbitration agreement
is the issue of arbitrability decided by the arbitrator. 4 The plain meaning of the terms, as
enacted by the ICC, should control the Court's interpretation. See United States v. Mo.
Pac. R. Co., 278 U.S. 269, 278 (1929) ("[W]here the language of an enactment is clear,
and construction according to its terms does not lead to absurd or impracticable
consequences, the words employed are to be taken as the final expression of the meaning
intended."). Here, only Plaintiff makes a claim. Under the language of Rule 6.3, as
currently fashioned, Plaintiff's challenge to the arbitration clause is not required to be
heard by the arbitrator because Plaintiff is not the party "against whom" the claim is
parties have agreed on the rules as of the date of the arbitration agreement. Article 6 of
the 1998 Rules had a similar provision."). Thus, the parties agreed to use the ICC rules in
effect at the time any arbitration would commence. No such arbitration has yet
commenced, and, therefore, Rule 6.3 as it is currently in force applies to the Second
Contract. In other words, the analysis as to why the issue of arbitrability should be
decided by the Court, as opposed to the arbitrator, applies equally to the Second and
Third Contracts.
4

The Court acknowledges that at least two other courts have addressed the new
Rule 6.3 in the context of Shaw Group, and applied Shaw Group despite the change in
language from the 2012 amendments. See Microsoft Corp. v. Samsung Elecs. Co., Ltd.,
60 F. Supp. 3d 525, 529 (S.D.N.Y. 2014) (stating that "[t]he version of the ICC Rules
currently in force has a substantially similar provision" to the one in force at the time
Shaw Group was decided); Kastner v. Vanbestco Scandanavia, AB, No. 5:14-cv-141,
2014 WL 6682440, at *5-6 (D. Vt. Nov. 25, 2014) (interpreting Rule 6.3 as requiring the
issue of arbitrability to be decided by the arbitral body, in accordance with Shaw Group).
Nonetheless, this Court cannot reconcile the changed language to the ICC rules-plainly
mandating the issue of arbitrability to only be decided by the arbitral tribunal where the
validity of the arbitration agreement is raised by the party "against which a claim has
been made"-with a finding that Shaw Group requires the issue of arbitrability to be
decided by the arbitrator. Thus, to the extent that those cases hold otherwise, this Court
disagrees with their conclusions.
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asserted.

The language of Rule 6.3, as currently in force, does not "clearly and

unmistakably commit[] to arbitration" Plaintiffs validity challenge. See NASDAQ OMX
Grp., 770 F .3d at 1032 (requiring more than a reference to certain arbitration rules which
provide that arbitrability be decided by the arbitrator to "clearly and unmistakably"
require a court to delegate arbitrability). Therefore, even if Shaw Group requires the
Court to defer to the arbitrator on issues of validity where contemplated in the ICC rules,
the ICC rules as currently enacted do not provide for the issue of arbitrability to be
decided by the arbitrator in this case. This conclusion is only further buttressed by the
Supreme Court's pronouncements in Granite Rock, and Rent-A-Center that this Court is
responsible for determining issues of validity before compelling arbitration. 5 See Granite
Rock, 561 U.S. at 297; Rent-A-Center, 561 U.S. at 71.

5

The Second Circuit seemingly reaffirmed the central holding of Shaw Group after
the Supreme Court's decision in Rent-A-Center and after the 2012 amendments. See
VRG Linhas Aereas S.A. v. MatlinPatterson Glob. Opportunities Partners II L.P., 717
F. 3d 322, 326-2 7 (2d Cir. 2013). However, that case turned on an interpretation of ICC
Rule 6.2, as in effect prior to the 2012 amendments. As noted above, the rules "in effect
on the date of commencement of the arbitration" control during the arbitration. ICC
Rules of Arbitration, Art. 6 ,-r 1. The dispute at issue in VRG Linhas Aereas was referred
to arbitration in December 2007, such that Rule 6.2, as it was then enacted, attached. See
id. at 324; see also Brief for Appellant at 58, VRG Linhas Aereas S.A. v. MatlinPatterson
Glob. Opportunities Partners II L.P., No. 12-593-cv, ECF No. 35 (2d Cir. Apr. 19, 2012)
(stating that the arbitration clause at issue in that litigation "adopt[ ed] the then-current
ICC Arbitration" and citing to Rule 6.2). Because Rule 6.2 was at issue, a straightforward application of Shaw Group was appropriate. That is not the case here, where the
amended rule-Rule 6.3-applies. As such, Shaw Group and VRG Linhas Aereas are not
dispositive.
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2.

The Arbitration Clauses are Unconscionable

Plaintiff can avoid arbitration of his claims under the Second and Third Contracts
if the arbitration clauses are void. Rent-A-Center, 561 U.S. at 71. Plaintiff asserts that
both arbitration clauses are unconscionable, and therefore unenforceable, under New
York law. (Dkt. 11 at 5).
"[I]t is possible that an arbitration agreement may contain terms so onerous as to
render it unenforceable under Section 2 of the FAA. Further, it is clear that questions of
contractual validity relating to the unconscionability of an arbitration agreement must be
resolved first, as a matter of state law, before compelling arbitration pursuant to the
FAA."

Ragone, 595 F.3d at 121 (citing Cap Gemini, 346 F.3d at 365) (internal

quotations omitted). 6
a.

New York Law Applies in Determining Unconscionability

Because the Court is sitting in diversity, it must first determine what jurisdiction's
law of unconscionability applies. Both the Second and Third Contracts state that BVI
law governs the contracts. (Dkt. 1-3 at 3; Dkt. 1-9 at 11). However, the parties stipulate

6

Defendants argue that "the Second Circuit has clearly held that an arbitration
provision may be challenged only where such provision was entered by fraud in the
inducement." (Dkt. 13 at 7-8). Defendants cite Campaniello Imports, Ltd. v. Saporiti
Italia Sp.A., 117 F .3d 655 (2d Cir. 1997) for the proposition that only fraud in the
inducement can invalidate an arbitration clause.
(Id.).
Defendants misread
Campaniello-which does not support Defendants' assertion in any way-and have
failed to acknowledge (more recent) Supreme Court and Second Circuit cases which
incontrovertibly declare that all contract defenses are available to invalidate an arbitration
clause. See, e.g., Rent-A-Center, 561 U.S. at 68. Even if Defendants reading of
Campaniello was correct, Campaniello's holding would be inconsistent with the Supreme
Court's decision in Rent-A-Center, and would, therefore, not be controlling.
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that New York law controls in determining unconscionability. (See Dkt. 20 at 2-4; Dkt.
21 at 1-2) The Court agrees that New York law on unconscionability applies to this
determination.
A federal district court is required to apply the choice-of-law rules for the state in
which it sits. Liberty Synergistics Inc. v. Microflo Ltd., 718 F.3d 138, 153 (2d Cir. 2013)
(citing Klaxon Co. v. Stentor Elec. Mfg. Co., Inc., 313 U.S. 487, 494-97 (1941)). In
determining a conflict-of-law issue in New York, the court must first determine whether
there is an actual conflict. Curley v. AMR Corp., 153 F.3d 5, 12 (2d Cir. 1998) (citing
Matter of Allstate Ins. Co. and Stolarz, 81 N.Y.2d 219, 223 (1993)). A federal court can

apply foreign law, as long as doing so would not "be violative of fundamental notions of
justice or prevailing concepts of good morals." Id.
Defendants assert that "[t]here is no discemable difference between the law of
New York and the law of the British Virgin Islands." 7 (Dkt. 21 at 1). Plaintiff does not
dispute this assertion. (See Dkt. 20). Thus, if there is no discernable difference as the
parties appear to agree, the Court could dispense with a choice-of-law analysis and apply
New York Law.

See Curley, 153 F.3d at 12 (citing J Aron & Co. v. Chown, 647

N.Y.S.2d 8 (1st Dept. 1996)).
However, even if there is a conflict, New York law applies. "New York law is
clear in cases involving a contract with an express choice-of-law provision ... a court is
7

Defendants submitted with their post-hearing briefing an "expert opinion" on the
BVI law of unconscionability. (See Dkt. 21-1). Plaintiff objects to the expert opinion.
(Dkt. 22 at 1-2). Because New York law applies to this issue, the Court need not decide
whether the expert opinion is properly before the Court.
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to apply the law selected in the contract as long as the state selected has sufficient
contacts with the transaction." Hartford Fire Ins. Co. v. Orient Overseas Containers
Lines (UK) Ltd., 230 F.3d 549, 556 (2d Cir. 2000); see, e.g., Cap Gemini, 346 F.3d at

365.

Here, there are, at most, minimal contacts between the contract and the BVI.

Venulum is a corporation incorporated in the BVI, but has its principal place of business
in Toronto, Canada. (Dkt. 1at1). Plaintiff is a resident of New York. (Id.). Defendants
Serrien and Trotter-Plaintiffs main points of contact with Venulum-are residents of
Canada. (Id. at 2). Cadman is a resident of the United Kingdom. (Id.). Nothing in the
contracts, besides the choice-of-law provisions and the arbitration clauses, point to any
contacts with the BVI. (See Dkt. 1-2; Dkt. 1-3; Dkt. 1-9). Based on the record before the
Court, no acts committed pursuant to the contract occurred in the BVI.

(See id.).

Although the contract may have "significant contacts" sufficient to use BVI law if
Venulum's principal place of business, and not merely its incorporation, were in the BVI,
Defendants provided no information asserting as such. See Cap Gemini, 346 F .3d at 366
("While the choice of New York law would be reasonable, and hence enforceable, if Cap
Gemini's 'principal place of business' were in New York, creating significant contacts to
the state, the record in this case merely reveals that Cap Gemini's 'headquarters' are in
New York.").
Conversely, the contracts do have extensive contacts with New York. Plaintiff
resides in New York, and was solicited by Venulum (through Serrien and Trotter) while
he was physically located in New York. Plaintiff signed all three contracts in New York.
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Plaintiff also sent money to Venulum from New York.

Therefore, even though the

contracts contain express choice-of-law provisions, the contracts do not have "sufficient
contacts" to mandate the use of BVI law.

Therefore, New York's law applies to

determine whether the arbitration clauses are unconscionable.
b.

The Arbitration Clauses are Unconscionable

New York law on unconscionability is quite clear.
Under New York law, a contract is unconscionable when it is "so grossly
unreasonable or unconscionable in the light of the mores and business
practices of the time and place as to be unenforceable ... according to its
literal terms." Gillman v. Chase Manhattan Bank, NA., 73 N.Y.2d 1, 10,
537 N.Y.S.2d, 534 N.E.2d 824 (1988). Generally, there must be a showing
that such a contract is both procedurally and [substantively]
unconscionable. See id. "The procedural element of unconscionability
concerns the contract formation process and the alleged lack of meaningful
choice; the substantive element looks to the content of the contract, per se."
State v. Wolowitz, 96 A.D.2d 47, 468 N.Y.S.2d 131, 145 (1983); see also
Desiderio v. National Ass 'n of Sec. Dealers, Inc., 191 F.3d 198, 207 (2d
Cir. 1999) ("A contract or clause is unconscionable when there is an
absence of meaningful choice on the part of one of the parties together with
contract terms which are unreasonably favorable to the other party."
(quotation marks omitted)).

Ragone, 595 F.3d at 122 (quoting Nayal v HIP Network Servs. IPA, Inc., 620 F. Supp. 2d
566, 571 (S.D.N.Y. 2009)). Unconscionability is determined at the time of the contract.
U.C.C. § 2-302(1). A court reviewing a contract for unconscionability is required to fully
explore the facts and circumstances surrounding the agreement. King v. Fox, 418 F.3d
121, 135 (2d Cir. 2005).
"Procedural and substantive unconscionability operate on a sliding scale; the more
questionable the meaningfulness of choice, the less imbalance in a contract's terms
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should be tolerated and vice versa." Hojnowiski v. Buffalo Bills, Inc., 995 F. Supp. 2d
232, 238 (W.D.N.Y. 2014) (quoting David v. No. 1 Mktg. Serv., Inc., 979 N.Y.S.2d 375,
378-79 (2d Dep't 2014)). Although New York law generally requires both procedural
and substantive unconscionability to render a contract provision void, "there have been
exceptional cases where a provision of the contract is so outrageous as to warrant holding
it unenforceable on the ground of substantive unconscionability alone." Gillman, 73
N.Y.2d at 12. The unconscionability doctrine is flexible, and is "intended to be sensitive
to the realities and nuances of the bargaining process." Id. at 10.
Procedural unconscionability examines the contract-formation process and focuses
on "the size and commercial setting of the transaction, whether deceptive or highpressured tactics were employed, the use of fine print in the contract, the experience and
education of the party claiming unconscionability, and whether there was disparity in
bargaining power." Id. at 11 (internal citation omitted); see, e.g., Dallas Aerospace, Inc.
v. CIS Air Corp., 352 F.3d 775, 787 (2d Cir. 2003).
Plaintiff asserts that the Second and Third arbitration clauses were each
procedurally unconscionable. (Dkt. 11 at 18-21 ). The Court notes that Plaintiff holds a
doctorate degree (D.D.S.). (Dkt. 1 at 1). It is unclear how much experience Plaintiff had
as an investor at the time that his claims arose, though Plaintiff did affinn in the Third
Contract that he had 25 years of experience investing in equity or debt securities, and that
he was an "accredited investor" under SEC rules. (Dkt. 1-9 at 19-20).

- 25 -

Further, "the

Case 1:16-cv-00461-EAW Document 23 Filed 03/27/17 Page 26 of 34

contract provisions at issue were set forth in a clear and legible manner. ... " See Morris

v. Snappy Car Rental, Inc., 84 N.Y.2d 21, 30 (1994).
Plaintiff asserts that the Second Contract's arbitration clause was procedurally
unconscionable

because

of "economic

distress,"

"high pressure tactics[,]

and

[Defendants'] threatening [Plaintiff] with the loss of his entire investment under the [First
Contract]." (Dkt. 11 at 21 ). Plaintiffs factual assertions of procedural unconscionability
relate to the Second Contract as a whole, not the arbitration provision. Plaintiff claims he
was forced to sign the Second Contract because Trotter threatened Plaintiff with a loss of
his entire investment-to that point, more than $122,000-if Plaintiff did not sign the
Second Contract. (Dkt. 1 at 6-8). Taken as true, Plaintiff may assert a sufficient showing
of economic duress and high-pressure sales tactics with respect to the Second Contract as
a whole. But, Plaintiff has not asserted facts that go towards the arbitration clause in
particular. Such a showing is required by the Supreme Court. See Rent-A-Center, 561
U.S. at 71.
Plaintiffs procedural unconscionability challenge to the Third Contract similarly
fails. Plaintiff argues that Defendants' "high-pressure tactics [coerced] Dr. Eisen into
signing the contract. ... " (Dkt. 11 at 19). Plaintiffs procedural claims vis-a-vis the
Third Contract do not focus on the arbitration clause, but, instead, challenge the contract
as a whole. Plaintiff has not shown that either of the arbitration clauses themselves was
procedurally unconscionable.

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New York law allows for a finding of unconscionability, in exceptional cases,
even where there was no procedural unconscionability. Gillman, 73 N.Y.2d at 12; Dallas

Aerospace, Inc., 352 F.3d at 787. Plaintiff argues that this is one of those exceptional
cases, and that the arbitration clauses themselves are so substantively unreasonable that
they are void. (Dkt. 11 at 17-21). If Plaintiff makes such a showing, he would satisfy

Rent-A-Center's requirement that the arbitration clauses themselves be void under
contract law, and arbitration would not be compelled.
"Absent substantive unconscionability or fraud ... , parties are charged with
knowing and understanding the contents of documents they knowingly sign." Horvath v.

Banco Comercial Portugues, S.A., 461 F. App'x 61, 63 (2d Cir. 2012). Contract terms
are substantively unconscionable when they are unreasonably balanced in favor of one
party over the other. Gilman, 73 N.Y.2d at 10; see, e.g., Dassero v. Edwards, 190 F.
Supp. 2d 544, 553 (W.D.N.Y. 2002).

"There is no general test for measuring the

reasonableness of a transaction .... " Sablosky v. Edward S. Gordon Co., Inc., 73 N.Y.2d
643, 647 (1989). However, an arbitration clause which equally binds the parties is not
substantively unconscionable. See Nayal v. HIP Network Servs. IPA, Inc., 620 F. Supp.
2d 556, 573 (S.D.N.Y. 2009). Examples of terms that are substantively unconscionable
include "inflated prices, unfair termination clauses, unfair limitations on consequential
damages and improper disclaimers of warranty ... [and] contract provisions that are
oppressive, unjust, and unreasonably deprive a party of the benefits of his or her

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bargain." Day Op of North Nassau, Inc. v. Viola, 847 N.Y.S.2d 901 (Table), at *6 (N.Y.
Sup. Ct. 2007).
There is very little New York caselaw elaborating what an "exceptional case"
under Gillman requires. The Appellate Division of the Second Department has found
that a case was not "exceptional" where the price charged under the contract was not
excessive. Bianco v. S'holders Commc'n Corp., 637 N.Y.S.2d 314, 314 (2d Dep't 1996).
A small claims court in New York City found an "exceptional case" where a forumselection clause in a contract required a party to travel to New York City from California
to defend himself if a dispute arose in a contract with a total worth of $2,600. Lease Fin.

Grp. LLC v. Indries, 29 N.Y.S. 3d 847 (Table), at *5 (N.Y. Ct. Cl. 2015). There, the
purpose of the forum-selection clause was "to increase the likelihood of obtaining a
default judgment ... because of the distance [the defend,ant] would have to travel and the
expense he would incur to travel and stay in New York City as compared to the small
amount of money sought."

Id.

Similarly, a New York Supreme Court found an

"exceptional case" where, under the contract at issue, a party benefited from its own
breach and caused a forfeiture of the opposing party's .contractual benefits. Day Op of

North Nassau, Inc., 847 N.Y.S.2d 901, at *7.
Federal caselaw provides little guidance as to what constitutes an "exceptional
case" under Gillman. See Teah v. Macy's Inc., No. 11-CV-1356 (CBA)(MDG), 2011
WL 6838151, at *7 (E.D.N.Y. Dec. 29, 2011) (finding that an arbitration agreement
which applied equally to both sides did not fall under the "exceptional case" exception);
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Auto Style Leasing Ltd. v. Evans, No. 92 Civ. 6837, 1995 WL 144812, at *7 (S.D.N.Y.
Mar. 31, 1995) (finding that even where a "lease agreement [was] hardly a model of
fairness" it did not fall into the exceptional-case exception); Don King Prod., Inc. v.

Douglas, 742 F. Supp. 778, 781 (S.D.N.Y. 1990) (holding that an exclusive personal
services contract of commercial-lifetime duration was not an "exceptional case" under

Gillman).
Broadly, Plaintiff argues that the terms of both arbitration clauses unreasonably
favor Venulum, making each provision substantively unconscionable. (Dkt. 11 at 18-21 ).
In post-oral argument briefing, Defendants waived certain contractual rights under the
arbitration clauses. (See Dkt. 21 at 3). Specifically, Defendants waived the "potentially
unconscionable aspects" of the provision in the Second Contract's arbitration clause
which allows Venulum to appoint the sole arbitrator, and the provision in the Third
Contract which bars Plaintiff from pursuing any claim against Venulum where its
arbitrator is not appointed within six months of the request for arbitration. (Id. at 3-4).
New York law allows for parties to waive potentially problematic provisions
within arbitration clauses without waiving the entire arbitration clause. Ragone, 595 F .3d
at 124 ("New York courts have accepted offers by patties to waive the enforcement of
certain provisions of arbitration agreements, and have evaluated those agreements as
modified by the parties' after-the-fact waivers.") (citing Brower v. Gateway 2000, Inc.,
676 N.Y.S.2d 569, 574-75 (1st Dep't 1998)). "Because unconscionability is an equitable
defense to the enforcement of harsh or unreasonable contract terms, a party cannot
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complain when the defendant through its waivers declines to enforce any potentially
unconscionable term." Id. (internal citations omitted). Thus, the Court will not consider
the provisions waived by Defendants in determining whether the arbitration clauses are
unconscionable.
Plaintiffs main argument-beyond his argumei:its against provisions which have
been waived by Defendants-is that both arbitration

cl~uses

are unconscionable because

the selection of BVI law as the law of arbitration preclqdes Plaintiff from any protections
as an investor under federal or state securities laws. (See Dkt. 11 at 15; Dkt. 20 at 1-2).
Plaintiff alleges that BVI law precludes the application of federal securities laws, and the
"principal reason" for Defendants' desire to arbitrate according to the clauses in the
Second and Third Contracts is "to evade United States laws and courts." (Dkt. 20 at 2).
Agreements which provide for arbitration of federal statutory claims are generally
permissible.

See Hayes v. Delbert Serv. Corp., 811 F.3d 666, 674 (4th Cir. 2016)

(collecting cases). Indeed, the Supreme Court has clearly stated that claims under the '33
Act and the '34 Act are subject to binding arbitration where the parties so agree.
Shearson/Am. Express, Inc. v. McMahon, 482 U.S. 220 1 239 (1987); Rodriguez de Quijas
v. Shearson/Am. Express, Inc., 490 U.S. 477, 480 (1989).

However, a court can

invalidate an agreement to arbitrate which acts as a "prnspective waiver of a party's right
to pursue statutory remedies." Am. Express Co. v. Italian Colors Rest., 133 S. Ct. 2304,
2310 (2013) (original emphasis omitted). "[A] federal :court will compel arbitration of a
statutory claim only if it is clear that the prospective litigant effectively may vindicate its
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statutory cause of action in the arbitral forum, such that the statute under which its claims
are brought will continue to serve both its remedial and deterrent function." Ragone, 595
F.3d at 125 (internal citations omitted); see, e.g., Am. E:xrpress, 133 S. Ct. at 2310; Hayes,
811 F.3d at 674 ("[W]hile the Court has affirmed that tlie FAA gives parties the freedom
to structure arbitration in the way they choose, it has repeatedly cautioned that this
freedom does not extend to a substantive waiver of federally protected civil rights in an
arbitration agreement.") (internal citation omitted).
In somewhat similar circumstances to those at issue here, a Vermont federal court
found that "an arbitration agreement crafted to preclude federal and state consumer
protections is unenforceable as unconscionable." 8 Gingtas v. Rosette, Case No. 5:15-cv101, 2016 WL 2932163, at *18 (D. Vt. May 18, 2016),' appeals pending, Nos. 16-2128,
16-2132, 16-2135, 16-2140 (2d Cir.). In that case, the:arbitration agreement stated that
8

The Gingras court applied Vermont law on unconscionability. Gingras v. Rosette,
2016 WL 2932163, at *15. Vermont law regarding unc~nscionability is similar to that in
New York. "Under Vermont law, terms of a contract m:ay be avoided as unconscionable
if they are procedurally or substantively unfair." Bergman v. Spruce Peak Realty, LLC,
874 F. Supp. 2d 653, 666 (D. Vt. 2012) (citing Val Preda Leasing, Inc. v. Rodriguez, 540
A.2d 648, 651 (1987)). "Unconscionability may be based upon 'evidence of some
overreaching on the part of one of the parties such: as that which results from an
inequality in bargaining power or under other circumstal,lces in which there is an absence
of meaningful choice on the part of one of the parties, together with contract terms which
are unreasonably favorable to that party."' Id. (quoting1Maglin v. Tschannerl, 800 A.2d
486, 491 (2002)). "Thus, unequal bargaining power cioupled with lack of meaningful
choice, plus unreasonably favorable contract tenns, may supply grounds for avoiding the
terms of a contract on unconscionability grounds." Id. (citing Mag/in, 800 A.2d at 49091 ).
As in New York, Vermont law does no( absolutely require procedural
unconscionability to find a contract unconscionable. Glassford v. BrickKicker, 35 A.3d
1044, 1049 (2011) ("The superior court was mistaken in assuming that the presence of
procedural unconscionability 1s required to void a contract based on it containing
unconscionable terms.").
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Native American tribal law was the law of decision in arbitration. The Gingras court
stated that the reliance on tribal law would allow; "the defendants [to] effectively
insulate[] themselves from claims that they have violatfd state and federal lending laws."
Id.
Here, similarly, Defendants have attempted ·to use BVI law to avoid the
requirements of federal securities laws. See, e.g., Hqyes v. Delbert Servs. Corp., 811
F.3d 666, 676 (4th Cir. 2016) ("[R]ather than use arbit*tion as a just and efficient means
of dispute resolution, [the defendant] seeks to deploy it to avoid state and federal law and
to game the entire system.").

Defendants argue that Plaintiffs assertion that the
'

arbitration clauses allow them to avoid federal securities laws is "simply untrue." (Dkt.
13 at 9). However, Defendants fail to assert that federal securities laws could be applied
by an arbitrator acting according to BVI law; in
Defendants only state that Plaintiff signed the

r~sponse

agreem~nts

to Plaintiffs allegation,

knowing that arbitration was

required, and that ICC rules require an arbitrator to be il)Ilpartial. (See id. at 9-10).
The "arbitration agreement fails for the funda:tnental reason that it purports to
renounce wholesale the application of any federal law. to the plaintiffs' federal claims."
Hayes, 811 F.3d at 673; see, e.g., Gingras, 2016

\fL

2932163, at

*18.

Although

Defendants are correct that "[t]here is no limitation unqer ... federal case law that limits
an arbitration panel in the [BVI] from adjudicating" se¢urities claims, under the terms of
the contracts, the panel would apply BVI, and not feaeral securities law to Plaintiffs
federal securities law claims. (See id. at 8). Plaintiff m~st be able to effectively vindicate
- 32 -

Case 1:16-cv-00461-EAW Document 23 Filed 03/27/17 Page 33 of 34

his federal rights in the arbitration forum selected un~er the investment contracts. See
Am. Express, 133 S. Ct. at 2310.

The arbitration ¢lauses in the Second and Third

Contracts require Plaintiff-through submission of :his federal securities claims to
arbitration applying BVI law-to forgo any applicatipn of the federal law protections
;

provided to him.

In other words, Defendants, wh:o have, according to Plaintiff's

allegations, repeatedly run afoul of federal and state se:curities laws resulting in repeated
admonishments by regulatory authorities, could noneth~less insulate themselves from the
I

protections and remedies provided by these securities

l~ws

for their conduct in the United

States with a U.S. investor by compelling arbitration i~ the BVI applying the law of the
BVI.

This makes the arbitration clauses of the Second and Third Contracts

unconscionable and void as against public policy.

Se~

certain terms of an arbitration agreement served to

Ragone, 595 F.3d at 125 ("[I]f

~ct

as a prospective waiver of a

I

party's right to pursue statutory remedies, we would h~ve little hesitation in condemning
I

the agreement as against public policy.") (internal

citat~ons

omitted); Hayes, 811 F.3d at

673-74 ("[The defendant] seeks to avoid federal law tJirough the prospective waiver of
federal law provision found in the arbitration

agreem~nt.

But that provision is simply

I

unenforceable. . . . The just and efficient system of 1arbitration intended by Congress
when it passed the FAA may not play host to this sort pf farce."). As a result, the Court
cannot compel Plaintiff to arbitrate his claims pur~uant to the Second and Third
Contracts' arbitration clauses, and this action may procded in this forum.
I

- 33 -

Case 1:16-cv-00461-EAW Document 23 Filed 03/27/17 Page 34 of 34

IV.

Conclusion

For the foregoing reasons, Defendants' motion
denied.
SO ORDERED.

Dated: March 27, 2017
Rochester, New York

- 34 -

'

~o

compel arbitration (Dkt. 7) is