Fasano v. Li

Background

The case arose from a 2016 transaction that took Dangdang private. The plaintiffs—Joe Fasano, Altimeo Optimum Fund, and Altimeo Asset Management—alleged that the controlling shareholders bought out minority holders of Dangdang’s American Depositary Shares at artificially depressed prices. They asserted federal securities claims and common-law claims for negligent misrepresentation, breach of fiduciary duty, and aiding and abetting a breach of fiduciary duty.

The deposit agreement governing the American Depositary Shares contained an arbitration provision. The agreement required disputes relating to the shares or deposit agreement to be arbitrated, while providing a special election for claims based on federal securities laws. The Second Circuit had previously explained, in an earlier round of this case, that the plaintiffs’ common-law claims were required to proceed in New York arbitration.

Arbitration and waiver

The plaintiffs asked the court to compel arbitration of their common-law claims. The defendants argued that the plaintiffs had waived arbitration by litigating in federal court for more than six years, stating during a 2019 conference that the case belonged in federal court, and selecting responses on a civil cover sheet that did not identify the case as an arbitration matter.

The court rejected those arguments. It said that the plaintiffs’ delay weighed against arbitration but that delay alone did not establish waiver. The court also found that the case had involved little litigation on the merits and virtually no discovery; the earlier proceedings had focused primarily on which forum should hear the dispute. The court concluded that the plaintiffs had relied on a reasonable, good-faith but ultimately mistaken interpretation of the arbitration provision, rather than intentionally giving up a known right to arbitrate.

The court further held that the question whether the claims could proceed as a class arbitration belonged to the arbitrator. The deposit agreement incorporated the American Arbitration Association’s rules, including rules assigning the arbitrator the threshold question whether an arbitration agreement permits class proceedings. Under Second Circuit precedent, the incorporation of those rules was clear evidence that the parties delegated that question to the arbitrator.

Remaining claims and disposition

The defendants also moved to dismiss the amended complaint for failure to state a claim and sought to stop or stay arbitration. The court did not decide the merits of the dismissal motion. It concluded that the common-law claims and the remaining federal securities claims were closely connected and that proceeding with the court case while arbitration was pending could cause duplicative discovery, piecemeal litigation, or inconsistent results.

The court therefore granted the plaintiffs’ motion to compel arbitration of their common-law claims. It denied the defendants’ motion to dismiss without prejudice to its renewal after arbitration, denied the request to stay arbitration, and stayed the case pending the outcome of the arbitration. The parties were ordered to submit a status letter within fourteen days after the arbitrator’s final judgment or another similarly significant development.