The Franchise Memorandum

A federal court in New York recently upheld an 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). Medical device manufacturer Conmed filed an arbitration demand against First Choice, its Puerto Rico distributor, seeking declarations that New York law controlled the parties’ agreement pursuant to its choice-of-law provision, and that New York law permitted Conmed to terminate the parties’ relationship without penalty. Conmed also alleged that First Choice failed to meet purchase targets and make required debt payments. The arbitrator held that Puerto Rico law controlled, because of the parties’ extensive contacts with the jurisdiction and Puerto Rico’s strong public policy interest in dealership termination, expressed in the Puerto Rico Dealer’s Act. That law requires just cause for termination, and the arbitrator held that the $750 at issue between the parties did not rise to that level. The arbitrator did award Conmed the outstanding $750, plus a due monthly payment of $3,000. Conmed challenged the application of Puerto Rico law in federal court, arguing that the arbitrator should have applied New York law and that his application of Puerto Rico law constituted “manifest disregard of the law” under the FAA.

The court rejected this argument, finding that the parties submitted the choice-of-law question to the arbitrator, so that his decision fell within his interpretive authority as established by the FAA. The court also addressed, and upheld, the arbitrator’s decision on other claims at issue, including the award of $3,750. Finally, the court addressed recent developments regarding the proper subject matter jurisdiction standard for challenging an arbitration award under Sections 9 and 10 of 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 may not “look through” to the underlying controversy. The Conmed court sua sponte requested briefing on this issue even though the challenge had been filed before Badgerow, but ultimately concluded that the parties had satisfied the relevant jurisdictional requirements.