Management Registry, Inc. v. A.W. Companies, Inc.

Background

Management Registry, Inc. acquired several business entities from Allan K. Brown in September 2017. Before the acquisition closed, Management Registry and Brown entered an Employment Agreement under which Brown would help lead the acquired companies. The agreement contained a mandatory arbitration clause. Brown’s employment ended in October 2017.

Management Registry sued A.W. Companies, Inc., Allan K. Brown, Wendy Brown, and Milan Batinich. Brown asserted counterclaims, including breach of contract, fraud, and negligent misrepresentation. The court previously ordered arbitration of those counterclaims and stayed them while arbitration proceeded.

The arbitrator conducted an eight-day hearing involving more than twenty witnesses and more than 900 exhibits. On November 14, 2022, the arbitrator found that Brown breached the Employment Agreement by engaging in activities that directly and indirectly involved setting up and operating a business competing with Management Registry. The arbitrator awarded Management Registry $1,422,716 in compensatory damages, $18,875 in additional expenses, and other arbitration-related expenses. In a separate order, the arbitrator awarded $127,273.69 in attorney, paralegal, and other costs based on Brown’s discovery abuses. The total award was $1,568,864.69, with six percent post-judgment interest.

Arbitration award

Allan Brown moved to vacate, or cancel, the arbitration award. He argued that the arbitrator incorrectly concluded that Management Registry had not breached the Employment Agreement by terminating him and that the arbitrator improperly refused to consider evidence supporting Brown’s fraudulent-inducement theory.

The court explained that judicial review of an arbitration award is very limited. Under the Federal Arbitration Act, an award may be vacated for specified forms of corruption, misconduct, or action beyond the arbitrator’s authority. The Eighth Circuit also permits relief when an award is completely irrational or shows a manifest disregard for the law.

The court rejected Brown’s challenge to the termination ruling. The arbitrator had concluded that Management Registry terminated Brown for cause because he engaged in willful misconduct that violated the Employment Agreement and caused significant financial harm. Although neither party had argued precisely that position during arbitration, the parties had asked the arbitrator to decide whether Brown resigned or was terminated and whether the termination was without cause. The court held that the arbitrator’s conclusion was within the scope of the arbitration and was not completely irrational. The court therefore affirmed the arbitrator’s dismissal of Brown’s breach-of-contract counterclaim.

The court also rejected Brown’s challenge concerning fraudulent inducement. Brown claimed that Management Registry induced him to sign the Employment Agreement by promising to sell certain assets to Wendy Brown. The arbitrator found that the Employment Agreement was clear and unambiguous, contained no such promise, and included a comprehensive integration clause. Based on the parol evidence rule—a contract-law rule limiting the use of outside evidence to change the meaning of a clear written agreement—the arbitrator refused to consider the proposed evidence. The court held that this reasoning was rational and consistent with the law. It also held that the extensive arbitration proceedings did not deprive Brown of a fair opportunity to present his case. The court denied Brown’s motion to vacate the award.

Management Registry’s request to modify the award

Management Registry asked the court to modify the award to allow additional attorney’s fees and costs under the Kentucky Uniform Trade Secrets Act and Rule 68, which concerns the consequences of rejecting an offer of judgment. The court denied both requests.

The arbitrator had found that Brown’s conduct constituted trade-secret misappropriation under Kentucky law but treated those acts and damages as part of the breach-of-contract claim. The court held that the Federal Arbitration Act did not allow the requested modification because there was no evident mathematical error, material mistake, or non-merits defect in the award. The court also noted that the arbitrator had not expressly found the misappropriation to be willful and malicious, the Kentucky statute makes a fee award discretionary, and Management Registry had not asked the arbitrator for fees under that statute. The court held that Management Registry waived that request by not raising it during arbitration.

Management Registry also sought fees and costs under Rule 68 based on a $10,000 offer of judgment that Brown rejected. The court held that Management Registry had waived this request as well because, although it had generally requested fees and costs, it had not asked the arbitrator to award them under Rule 68. The court confirmed the award without modification.

Fraudulent-inducement counterclaim

The court granted the defendants’ motion to lift the stay on Brown’s fraudulent-inducement counterclaim and dismissed the claim. The court reasoned that the arbitrator had effectively considered the substance of the claim and determined that the clear Employment Agreement and its integration clause prevented Brown from relying on outside evidence of a promise to transfer assets to Wendy Brown. Brown later stipulated that he would not pursue the claim in arbitration. The court concluded that the claim had been effectively resolved in the arbitration and that Brown could not succeed on it.

Request concerning Wendy Brown’s statements

Management Registry asked for permission to use admissions made by Wendy Brown in an answer and counterclaim filed in related Illinois litigation during upcoming briefing concerning reconsideration of summary judgment. Management Registry attached the entire 55-page filing but did not identify which statements were material or contradictory. The court denied the request because Management Registry had not shown the exceptional circumstances required to expand the scope of the upcoming summary judgment arguments.

Disposition

The order granted in part and denied in part Management Registry’s motion to confirm the arbitration award, granting confirmation but denying its request to modify the award for additional costs and attorney’s fees. The court denied Allan K. Brown’s motion related to enforcement of the award, granted the defendants’ motion to lift the stay and dismissed the fraudulent-inducement counterclaim, and denied Management Registry’s request to address Wendy Brown’s admissions and arguments. The court entered judgment for Management Registry for $1,568,864.69 plus six percent annual interest from December 14, 2022, until paid in full. The parties were also ordered to file summary-judgment briefs according to the stated 30-day, 45-day, and 50-day deadlines.