Nowak v. NAHB RESEARCH CENTER, INC.

JAMES R. EYLER, Judge. This case arises out of an employment dispute between NAHB Research Center, Inc. (the Research Center), appellee, and three former employees: Mark Nowak, David Dacquisto, and Larry Zarker, appellants. On December 16, 2002, after the Research Center commenced binding arbitration proceedings against appellants pursuant to a clause in their employment contracts, appellants filed a petition to stay arbitration proceedings in the Circuit Court for Prince George’s County. ²⁷ On June 12, 2003, the court denied appellant’s petition and subsequently denied their motion to alter or amend judgment. For the reasons discussed herein, we hold that the employment contracts contain valid and binding mutual agreements to arbitrate future disputes arising out of the employment contracts.

Further, we hold that the Research Center’s claims presented for arbitration fall within the scope of this arbitration clause. Finally, the circuit court did not err in denying the contract defenses asserted by appellants in support of their contention that the arbitration clause is unenforceable, and we, therefore, affirm the judgment of the circuit court. Factual Background The Research Center is a wholly owned subsidiary of the National Association of Home Builders of the United States of America (NAHB). Appellants were each long-term employees of the Research Center, working as corporate officers and administrators. 1 Prior to 2002, none of the appellants had written employment contracts.

In 2001, appellants requested written contracts. In 2002, the Research Center presented each appellant with an employment contract, which, if signed, was to be backdated to January 1, 2002. These contracts were identical, with the exception of the rate of compensation and the description of position. 2 Appellants signed their respective contracts without varying or negotiating the terms. The Contract contained the following arbitration clause: ²⁸ 12.

Arbitration. The parties agree that they will use their best efforts to amicably resolve any dispute arising out of or relating to this Agreement. Any controversy, claim or dispute that cannot be so resolved shall be settled by final binding arbitration in accordance with the rules of the American Arbitration Association and judgment upon the award rendered by the arbitrator or arbitrators may be entered in any court having jurisdiction thereof. Any such arbitration shall be conducted in the State of Maryland, or such other place as may be mutually agreed upon by the parties.

Within fifteen (15) days after the commencement of the arbitration, each party shall select one person to act as arbitrator, and the two arbitrators so selected shall select a third arbitrator within ten (10) days of their appointment. Each party shall bear its own costs and expenses and an equal share of the arbitrator’s expenses and the administrative fees of arbitration. Effectively, this clause required binding arbitration for all disagreements arising out of or relating to the Contract of employment. Athough the Contract prohibited competing with the Research Center while appellants were employed by the company, there was no such non-compete provision effective upon the termination of appellants’ employment.

While NAHB is a nonprofit trade association, the Research Center is a for-profit entity. In early 2001, NAHB became concerned about the financial consequences resulting from the Research Center’s rising profits. Ater seeking advice from attorneys and independent consultants, the Research Center decided to enter into a licensing/royalty agreement with NAHB, providing for payment by the Research Center of a five percent licensing fee for use of, among other things, NAHB’s name and logo. Appellants disapproved of the concept of a licensing/ royalty agreement between the companies.

While still employed by the Research Center, appellants, along with Liza Bowles, then-President of the Research Center, formed their own company, The Newport Partners, L.L.C. (Newport Partners). Appellee alleges that appellants planned ²⁹ to divert Research Center business to Newport Partners. According to appellee, appellants conspired with Ms. Bowles, whereby Ms. Bowles would terminate them in a fashion entitling them to severance payments, pursuant to a clause in the Contract which provides: 5.

Terms and Termination B. This agreement and the Employee’s employment may be terminated by [The Research Center] at its discretion at any time, provided that in such case, Employee shall be paid a lump-sum severance payment equal to the Employee’s currently weekly base salary multiplied by two (2) weeks for every year, or fraction thereof, that the Employee has been employed by the Company up to a maximum of fifty two (52) weeks. In addition, [The Research Center] shall pay the Employee for any unused vacation days and shall make such contribution on the Employee’s benefit as are required under the retirement plans. On September 9, 2002, Ms. Bowles terminated appellants’ employment relationship, without cause, and issued severance payments in accordance with the above provision in the Contract. 3 According to appellee, on September 11, 2002, upon discovering appellants’ scheme, a special meeting of the Research Center Board of Directors was convened, at which the Directors voted to rescind the termination of appellants. The Research Center then sent letters to appellants informing them that they had been improperly terminated, that such termination was rescinded and, as a result, that they were still employed by the Research Center.

Appellants were directed to return to work and ordered to repay the severance they had each received, or risk being terminated for cause. Appellants were not consulted prior to the decision to rescind their termination. ³⁰ On October 21, 2002, when appellants had not returned to work or repaid their severance, the Research Center terminated the employment of each of the appellants “for cause.” The Research Center rested its authority to make this decision on the terms of the Contract. On or about November 18, 2002, the Research Center commenced binding arbitration proceedings against each appellant before the American Arbitration Association (AAA), attempting to enforce paragraph 12 of the Contract. The Research Center sought $300,000 in damages from each appellant, asserting a claim with counts that contained the following headings: (1) civil conspiracy, for misleading the Board of Directors, obtaining wrongful termination, and therefore wrongful severance, and engaging in conduct to fund a competing company in contravention of appellants’ fiduciary duties to the Research Center; (2) breach of contract, for failing to comply with the provisions of the Contract; (3) breach of fiduciary duty of loyalty, for engaging in conspiracy and diverting business to another company while employed by the Research Center; and (4) unjust enrichment/quantum meruit, for wrongfully obtaining severance and failing to repay it.

Appellants sought to have the three arbitrations consolidated, but the Research Center rejected their proposal. 4 On December 16, 2002, appellants filed a petition in circuit court, seeking to stay the arbitration proceedings, along with a Request for Production of Documents and Interrogatories. Appellants contended that appellee’s claims were not subject ³¹ to arbitration and argued that: (1) following their September 9, 2002 termination, the Contract no longer existed; (2) even if the Contract still existed, the claims asserted by the Research Center were outside the scope of the arbitration clause; (3) the Research Center acted illegally and without good faith; (4) the arbitration clause is a contract of adhesion and is unconscionable; (5) the arbitration clause fails to comply with Maryland Code (1974, 2002 Repl. Vol), § 3-206 of the Courts and Judicial Proceedings Article; (6) the arbitration clause fails to carry out its purpose, namely to be more efficient and less expensive than court proceedings; (7) the arbitration clause should fail for want of consideration; and (8) the purpose of the arbitration proceedings was to harass and interfere with the livelihoods of appellants. In response to appellants’ petition, the Research Center filed a motion to dismiss and filed its own petition to compel arbitration.

In addition, the Research Center asked the circuit court to deny appellant’s discovery requests, arguing that the discovery was inappropriate. Appellants claimed that discovery was necessary to determine issues of enforceability and validity of the arbitration clause. Appellants thereafter filed a motion to dismiss the Research Center’s motion to compel arbitration. On the day the Research Center’s discovery was due, appellants filed a motion for sanctions, based on the Research Center’s alleged failure to provide discovery responses.

The Research Center opposed appellants’ motion for sanctions. On May 9, 2003, a hearing was held on all open motions. 5 On June 12, 2003, the court issued an opinion and order denying appellants’ petition to stay arbitration proceedings, noting that the termination of an employment contract does ³² not necessarily terminate a provision for arbitration. The court rejected appellants’ arguments that the arbitration agreement did not exist and/or could not be enforced and ordered the parties to submit to binding arbitration. In effect, the order granted the Research Center’s motion to compel arbitration and disposed of the motions to dismiss.

Thereafter, appellants argued in a motion to alter or amend judgment that the court’s order was defective and that the court should have granted an evidentiary hearing and permitted discovery to comply with due process requirements. This motion was denied on July 14, 2003. On July 16, 2003, appellants appealed to this Court. Contentions of the Parties On appeal, appellants make several arguments, which we shall paraphrase and condense.

First, appellants contend that the circuit court erred in finding that an agreement to arbitrate existed and, specifically, that it applied to conduct that occurred after the purported termination of appellants’ employment. Second, the court erred in concluding that appellee’s claims are within the scope of the arbitration clause in the Contract. Finally, the court erred in not fully addressing the validity of defenses and in failing to find that the arbitration clause is unenforceable, as a matter of law, because the Contract is one of adhesion and is unconscionable, either because the expense of arbitration is prohibitive or the consideration for the arbitration clause is inadequate. Appellants contend that, in order to resolve the above issues, the circuit court should have permitted discovery and conducted a trial, and it erred in failing to do so.

In response, the Research Center contends that there are only two issues which this Court must address on appeal. First, whether the circuit court erred in ruling that the parties had entered into a valid and enforceable arbitration agreement, and second, whether the circuit court erred in ruling that the claims asserted by the Research Center fell within the scope of the arbitration clause. ³³ Discussion 1. Is There An Agreement to Arbitrate In Maryland, there is “a strong legislative policy in favor of enforcing arbitration agreements.” NRT Mid-Atlantic, Inc. v. Innovative Properties, Inc., 144 Md.App. 263, 278 , 797 A.2d 824 (2002). Nevertheless, in determining whether a binding agreement to arbitrate exists, the courts will examine traditional contract principles, because “a party cannot be required to submit any dispute to arbitration that it has not agreed to submit.” Cheek v. United Healthcare of the Mid-Atlantic, Inc., 378 Md. 139, 147 , 835 A.2d 656 (2003)(quoting Curtis G. Testerman Co. v. Buck, 340 Md. 569, 579 , 667 A.2d 649 (1995)).

Thus, when considering whether to stay or compel arbitration, the sole question before the court must be whether an agreement to arbitrate exists. Holmes v. Coverall North America, Inc., 336 Md. 534, 545 , 649 A.2d 365 (1994)(citing Crown Oil v. Glen, 320 Md. 546, 557 , 578 A.2d 1184 (1990)). It is well-settled in Maryland that “an arbitration clause is a severable contract which is enforceable independently from the contract as a whole.” Holmes, 336 Md. at 545 , 649 A.2d 365 . Moreover, the validity of an arbitration agreement is considered separately from any dispute over the merits of the contract itself.

Id. Questions on the merits are for the arbitrator to decide. Id. See also Regina v. Envirmech, 80 Md.App. 662, 674 , 565 A.2d 693 (1989) (claim regarding the validity of a subcontract is for the arbitrator to decide); Security Construction, Co. v. Maietta, 25 Md.App. 303, 307, 334 A.2d 133 (1975)(arguments regarding fraud in the inducement of the contract are for the arbitrator’s consideration).

In a recent case, the Court of Appeals reiterated the very narrow role of the courts in determining questions of arbitrability. Cheek, 378 Md. at 154 , 835 A.2d 656 . In Cheek , the Court was asked to determine whether consideration existed to support the agreement to arbitrate contained in Cheek’s employment contract. Id.

In declining to delve into the merits of the underlying controversy, the Court reiterated ³⁴ that its sole purpose was to determine whether a valid arbitration agreement existed. Id. at 155 , 835 A.2d 656 . Once the court finds that a “mutual exchange of promises to arbitrate” exists, “its inquiry ceases, as the agreement to arbitrate has been established as a valid and enforceable contract.” Id. at 153-54 , 835 A.2d 656 (quoting Holmes, 336 Md. at 544 , 649 A.2d 365 ). In the instant