Parrella v. The Orange Rabbit, Inc.

Background

Nicholas Giacopelli, through The Orange Rabbit, Inc., entered into franchise agreements with ILKB, LLC to purchase kickboxing franchises. After the franchises lost money, Giacopelli and Orange Rabbit began arbitration against ILKB and its executives Michael Parrella, Scott Ferrari, and Ryan Healy. They alleged fraudulent and negligent misrepresentations and breach of contract, along with claims under New York and New Jersey franchise and consumer-protection statutes.

The arbitrator conducted the hearing by video from March 23 through April 1, 2020. The arbitrator denied several requests to postpone the hearing, including requests based on the COVID-19 pandemic, Parrella’s need for more time with newly retained counsel, and ILKB’s difficulty accessing documents. Parrella and his counsel did not attend the hearing, although ILKB’s counsel participated. Parrella and ILKB later filed post-hearing submissions.

The arbitrator awarded Giacopelli and Orange Rabbit $791,011.84 in compensatory damages against Parrella, ILKB, Ferrari, and Healy, jointly and severally. The final award also granted $179,714.52 in prejudgment interest, $143,387.00 in attorney fees, $2,686.60 in interest on attorney fees, and $67,794.57 in costs, for an additional total of $393,582.69.

Parrella petitioned to vacate the award under Sections 10(a)(3) and 10(a)(4) of the Federal Arbitration Act. ILKB later joined that petition. Giacopelli and Orange Rabbit cross-moved to confirm the award. Ferrari and Healy did not join the petition to vacate or oppose confirmation.

Refusal to Postpone the Hearing

Section 10(a)(3) permits a court to vacate an arbitration award when an arbitrator improperly refuses to postpone a hearing or otherwise conducts the proceeding in a way that prejudices a party’s rights. The court explained that arbitrators have broad discretion over postponements and that vacatur is appropriate only when the arbitration was fundamentally unfair.

The court held that the arbitrator had reasonable grounds to deny the postponements. The arbitrator concluded that a video hearing could be conducted fairly despite the pandemic, offered alternatives for addressing ILKB’s document-access problem, and had already granted earlier delays. The court also found that Parrella had notice of the hearing, had received scheduling orders by email, had been given a deadline to obtain counsel, and had not requested an extension of that deadline.

The court therefore concluded that the arbitrator’s refusal to postpone the hearing did not constitute misconduct or make the proceedings fundamentally unfair. It denied vacatur on this ground.

Claims That the Arbitrator Exceeded His Authority

Section 10(a)(4) allows a court to vacate an award when an arbitrator exceeds the arbitrator’s powers. The court emphasized that this review is narrow: the question is generally whether the arbitrator had authority to decide an issue, not whether the court would have reached the same result.

The court first held that the franchise agreement and incorporated JAMS arbitration rules clearly and unmistakably delegated questions of arbitrability to the arbitrator. The agreement broadly covered disputes relating to the agreement, including disputes about its validity, and the JAMS rules authorized the arbitrator to decide issues concerning the agreement’s scope and the proper parties.

Parrella was not an individual signatory to the franchise agreement. Nevertheless, the court held that he waived his objection to arbitrability by actively participating in the arbitration for nine months, filing an answer and affirmative defenses, and bringing cross-claims against Ferrari. He did not make a forceful objection to arbitrability before the hearing or timely object to the arbitrator’s authority to decide that issue. The court therefore reviewed the arbitrator’s decision concerning Parrella under the deferential Section 10(a)(4) standard and upheld it.

The court also upheld the arbitration of Giacopelli’s claims. Although Giacopelli did not sign the franchise agreement, the court held that the arbitrator had authority to decide whether he was a proper party. The court found that Parrella and ILKB had waived their objection by raising it only after the hearing, and that the arbitrator’s conclusion that Giacopelli’s claims were related to Orange Rabbit’s claims was at least a reasonable interpretation of the agreement.

The court rejected the argument that the agreement barred Giacopelli and Orange Rabbit from proceeding together because it required arbitration by a “single plaintiff.” The court acknowledged that the agreement’s language was not entirely clear, but held that the arbitrator’s interpretation—that the provision barred multiple franchisees from bringing separate claims together, rather than one franchisee and its business presenting one set of claims—was sufficiently plausible to support the award.

Finally, the court held that the arbitrator did not exceed his authority by awarding attorney fees and costs. The franchise agreement allowed an award of fees to the prevailing party and authorized the arbitrator to grant appropriate relief. The court also interpreted Section 691 of the New York Franchise Sales Act as allowing attorney fees when a violation was willful and material, without requiring rescission as an additional condition.

Confirmation and Disposition

The Federal Arbitration Act requires confirmation of an arbitration award unless the award is vacated, modified, or corrected under the statute. Because Parrella and ILKB did not establish grounds for vacatur, the court granted Giacopelli and Orange Rabbit’s cross-motion to confirm the award.

Judge Ronnie Abrams denied the motion to vacate the arbitration award and granted the motion to confirm it. The court directed the Clerk of Court to terminate the pending motion and close the case.