Adult Use Holdings Inc.. v. FaZe Clan Inc.

Background

Adult Use Holdings Inc. and Zola Ventures Ltd. sought referral commissions from FaZe Clan Inc. Adult Use had a written referral agreement under which FaZe Clan agreed to pay a five-percent commission for securities purchased by a referred party as a direct result of Adult Use’s introductions. The parties also alleged an oral agreement under which Zola would receive a five-percent commission.

Adult Use and Zola received commissions from FaZe Clan’s Series A financing. They later claimed commissions based on a Series B transaction involving a CAD $30 million convertible loan facility negotiated by Canaccord and Bridging Finance Group. Adult Use and Zola had no involvement in that financing round, and FaZe Clan paid them nothing for it.

The parties submitted their dispute to arbitration under the American Arbitration Association’s Commercial Arbitration Rules. FaZe Clan argued that federal and state securities laws barred payment of transaction-based commissions to unregistered brokers. Adult Use and Zola argued, among other things, that those laws did not apply because they had not dealt directly with the sources of the loan funding.

The arbitrator instead resolved the claims on contractual grounds. The August 4, 2021 Partial Final Award held that the referral agreement’s plain language did not entitle Adult Use to a commission for the Bridging transaction and that Zola likewise was not entitled to a commission because it had no agreement with FaZe Clan concerning that transaction. The arbitrator later refused to reconsider that decision.

Arguments in District Court

Adult Use and Zola filed a petition asking the court to vacate, meaning set aside, or alternatively modify the arbitration award. They argued that the arbitrator exceeded his authority by deciding contractual issues that were outside the scope of the motion submitted to him. They also argued that they were denied a fair opportunity to present evidence and arguments because FaZe Clan raised the contractual points in its reply brief. FaZe Clan filed a cross-petition asking the court to confirm the award.

The court held that the award was subject to the Federal Arbitration Act and the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards because the arbitration involved a written commercial arbitration agreement and parties domiciled or principally located outside the United States. The court therefore analyzed the petition under those authorities rather than under the New York procedural provisions cited by Adult Use and Zola.

Analysis

The court first held that it had authority to review the Partial Final Award. Although FaZe Clan’s counterclaims remained in arbitration, the award had finally and conclusively disposed of the separate claims brought by Adult Use and Zola. That was enough for the award to qualify as final for purposes of federal court review.

The court rejected the argument that the arbitrator exceeded his powers. The arbitration agreement covered “any and all disputes arising out of or related to” the referral agreement. That broad language included FaZe Clan’s argument that the agreement did not apply to the Bridging transaction. The court explained that the question was whether the arbitrator had authority to decide the issue, not whether the arbitrator had decided it correctly. The arbitrator therefore acted within his authority by resolving the claims on contractual grounds instead of the regulatory grounds initially emphasized in the motion.

The court also rejected the challenge to the arbitrator’s refusal to reconsider the award. The court concluded that the Partial Final Award was a final, although partial, award under the governing arbitration rules. It further explained that Adult Use and Zola’s objection was essentially an assertion of legal error, and that legal error alone was not a basis for vacating the award under the Federal Arbitration Act’s provision concerning arbitrators who exceed their powers.

The court rejected the claim that Adult Use and Zola had been denied a fair opportunity to present their case. Although FaZe Clan raised the contractual arguments in its reply, Adult Use and Zola had weeks before the award was issued to respond or request permission to file an additional submission. They did neither. The court concluded that the arbitrator could not be faulted for failing to consider evidence or arguments that the petitioners never presented.

The court also denied the alternative request to modify the award. Because Adult Use and Zola had not shown a basis to vacate the award, and relied on the same arguments for modification, they had not shown a legal basis for changing it.

Disposition

The petition to vacate or modify the arbitration award was DENIED. FaZe Clan’s cross-petition to confirm the award was GRANTED. The opinion states that FaZe Clan’s counterclaims concerning repayment of the Series A commissions were the only claims remaining in the arbitration after the Partial Final Award; this district court opinion did not decide those counterclaims.