This case raises for the first time since the decision of the Supreme Court in Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 114 L Ed 2d 26, 111 S. Ct. 1647 (1991) whether a claim under the Conscientious Employee Protection Act. (CEPA), N.J.S.A. 34:19-1 to 34:19-8, commonly known as the whistleblower statute, is subject to arbitration under an arbitration clause in a private employment agreement and if so, whether the arbitration clause in this case is broad enough to require arbitration under the Federal Arbitration Act, 9 U.S.C.A. §§ 1 to 15, of plaintiff's CEPA claim. Defendants have moved to stay this action and to compel arbitration of the CEPA claim.
Based on the allegations of the complaint, the certification of John A. Ricca, assistant vice president and assistant general counsel of defendant, Fireman's Fund Insurance Company (FFIC), and the exhibits attached to Mr. Ricca's certification, with all inferences being drawn most favorably to plaintiff as must be done on a motion of this nature, the facts appear to be as set forth below.
FFIC is a national property, liability and accident insurer headquartered in California with offices across the country. Defendant, Parkway Insurance Company (Parkway) was originally established as of New Jersey (FFNJ) in 1983 and changed its name to Parkway in 1992.
Pursuant to a consent order between FFIC and the New Jersey Commissioner of Insurance (the Commissioner) dated July 29, 1991 and consented by various subsidiaries of FFIC licensed in New Jersey, FFIC and each of its subsidiaries were authorized to transfer their private passenger automobile business in New Jersey to FFNJ and to withdraw from that line of insurance subject to certain conditions. These conditions included, among others, requirements that Fireman's Fund transfer to FFNJ assets sufficient to bring the total capital and surplus of FFNJ to $25 million and that FFIC deposit $6 million into an escrow account for a two year period, at the Conclusion of which FFIC would be permitted to withdraw that part of the sum held in escrow which would not cause the net premium - to - surplus ratio of FFNJ to exceed 3 to 1. The consent order imposes certain maximum ratios of acquisition expenses, general expenses and variable expenses to earned premium of FFNJ in each calendar year through 1996 as a condition for FFIC not being required by the New Jersey Department of Insurance (NJDOI) to make additional capital contributions to FFNJ. The consent order defines each such category of expense and establishes a formula for additional capital contributions by FFIC to FFNJ should any of the categories of expense exceed earned premium of FFNJ in any calendar year between 1991 and 1996.
The consent order authorized FFIC and each of its subsidiaries then selling private passenger automobile insurance in New Jersey to mail notices to their policyholders informing them that they would not be renewing their policies on expiration and that FFNJ would be offering to renew such policies. FFNJ was required to renew all currently written private passenger automobile policies on their anniversary dates except to the extent that non-renewal was permitted by statute, regulation or the terms of the consent order.
FFIC and each of its subsidiaries were required to deposit $500,000 with the Commissioner to guarantee that they would satisfy their liabilities to New Jersey policyholders, claimants and creditors, but the Commissioner is required to return those deposits if satisfied that the companies have complied with all the provisions of the consent order.
B. Plaintiff's Hiring and Termination
On or about May 30, 1991, about two months before execution of the aforesaid consent order, defendant, Raymond Barrette ("Barrette"), who was then chief financial officer of FFIC and president of its Personnel Insurance Division, contacted plaintiff and recruited him to become president and chief executive officer of FFNJ under a five year employment contract. Plaintiff informed Barrette he would not take the position with FFNJ unless he could get FFIC's support to make FFNJ a successful independent entity for later sale, and Barrette agreed.
A written employment agreement (hereinafter "the contract") between FFIC and plaintiff was executed on August 2, 1991 pursuant to which plaintiff agreed to serve approximately 5-1/2 years from July 15, 1991 to December 31, 1996 as president and chief executive officer of FFNJ. A copy of the consent order was provided to plaintiff and its general purpose summarized in the contract. In that connection the contract stated that the goal of FFIC was the consolidation of all its New Jersey private passenger automobile insurance business into FFNJ by April 1992. FFIC committed itself to provide any services required by FFNJ to meet operating needs. The contract further stated that the mission of FFNJ was to operate as a regional company within New Jersey so as to preserve FFIC's investment and to ultimately extract FFIC and its subsidiaries from the New Jersey private passenger automobile insurance market through an approved withdrawal plan or the sale of FFNJ. The contract also provided that FFNJ would change its name to Parkway.
Plaintiff's duties are detailed in the contract and include setting up the New Jersey office of FFNJ, hiring staff, creating benefit plans, contracting with outside vendors, developing and implementing a marketing plan and developing a good working relationship with the NJDOI. Although the contract provides that plaintiff is to have significant autonomy in managing the day to day operations of FFNJ, he was required by its terms to report to FFNJ's board chairman, whose approval was required for all major decisions. The only major decisions for which such approval was specifically required under the contract were creation of benefit plans, employment of senior executives and the terms and conditions of their employment.
The contract fixes plaintiff's annual salary, describes his benefit package and sets forth a detailed procedure for calculating and paying plaintiff a bonus and an additional bonus upon the sale of FFNJ or its withdrawal from the New Jersey private passenger automobile insurance market on or before December 31, 1996.
The contract contains detailed provisions for termination of plaintiff's employment with FFNJ for cause, for disability and without cause. The contract defines the three types of termination and describes the severance pay to which plaintiff will be entitled in the event of termination for cause, for disability or without cause. The contract provides for substantially less severance pay if plaintiff is terminated for cause than if he is terminated without cause. Section 13 of the contract contains a number of miscellaneous provisions, among which are a clause providing for arbitration of any disputes between the parties "regarding the agreement," and a provision allowing FFIC to assign the employment contract to any of its affiliates or their successors so long as FFIC agrees to also remain obligated to plaintiff under the agreement. On or about December 31, 1991 FFIC assigned this contract to FFNJ.
In order to perform his duties plaintiff was required to relocate to New Jersey from California, where he resided when the contract was signed. Plaintiff asserts that by August 1992 he had succeeded in establishing a New Jersey presence for Parkway, had improved relations with the NJDOI, had largely corrected past violations of the Fair Act*fn1 by FFIC, had brought Parkway into compliance with the Fair Act, had improved the financial position of Parkway and had created a foundation for Parkway to succeed as an independent entity.
On January 13, 1993 plaintiff was suspended when Barrette initiated a "confidential investigation" of Parkway. On January 15, 1993 Barrette removed the investigators and reinstated plaintiff. On January 28, 1993 plaintiff was again suspended. On February 2, 1993 Barrette terminated plaintiff without cause. On February 3, 1993 Barrette asked plaintiff to perform consulting services for Parkway, which plaintiff agreed to do until April 1993. By letter dated March 19, 1993, signed by both Barrette as chairman of the board of directors of Parkway and by John E. Meyer as executive vice president and chief financial officer of FFIC, plaintiff was formally notified that his employment with Parkway was terminated without cause effective April 1, 1993; that effective immediately, he was no longer authorized to act on behalf of Parkway, and that he was no longer to report to his office; that he would be employed at his currently salary and benefits through March 31, 1993 and that he would thereafter be paid one year's salary, less applicable withholdings and deductions. The one year's salary represented the severance pay required pursuant to the termination without cause provisions of the contract.
C. Summary of CEPA Allegations
Plaintiff alleges that, from the outset, Barrette and FFIC engaged in a pattern of wrongful and fraudulent conduct, pursuant to a scheme to defraud the NJDOI, by seeking to avoid compliance with the requirements of the consent order regarding additional capital funding of Parkway by FFIC and by extracting the maximum dividend from Parkway based upon submitting knowingly false financial information to the NJDOI. Plaintiff contends that in furtherance of the scheme to defraud the NJDOI, defendants instructed plaintiff to falsely interpret the consent order to the detriment of Parkway and to submit false financial statements to the NJDOI, and when plaintiff refused, he was terminated; that such termination was malicious and in retaliation for his protests; and that defendants violated CEPA, causing him to suffer damages.
The complaint alleges the following acts in furtherance of the defendants' alleged scheme to defraud the NJDOI: Following the third quarter of 1992 plaintiff reported to Barrette that an estimated $2 million capital funding requirement from FFIC to Parkway would be required at the end of 1992 pursuant to the consent order. Barrette directed plaintiff to reduce this amount. In December 1992, Barrette and others allegedly suggested illegal methods of reducing the capital infusion obligation, including falsely reporting commission expense to the NJDOI in Parkway's financial statements as a percentage of earned premium rather than written premium. Plaintiff refused to participate in the issuance of such false financial reports.
In January 1993 plaintiff became aware that Parkway would be notified of an assessment of Market Transition Facility (MTF) operating deficits. Plaintiff received notice from NJDOI as to the required method of recording the assessments in its financial statements. Parkway was told it "shall record" a portion of the assessment and "may record" another portion as a liability in Parkway's financial statements. Plaintiff calculated Parkway's "shall record" assessment at $5.4 million and its "may record" assessment at $5.7 million. Plaintiff further determined both amounts as material to Parkway's financial statements as of December 31, 1992. On or about January 22, 1993 plaintiff notified both Barrette and Richard Warren, FFIC Controller, of these developments and provided documentation to them.
Barrette stated that he did not want to list either assessment in the December 31, 1992 financial statements. Plaintiff told Barrette that the "shall record" assessment at March 31, 1993 would eliminate any possibility of extracting the dividend under the consent order. Barrette then ordered plaintiff to come up with a way to improve surplus on the financial statements. Barrette told plaintiff not to rule out altering existing contracts so as to show improved surplus at March 31, 1993. Plaintiff protested that this would be illegal and improper.
Plaintiff was then informed that Parkway's 1992 year end financial statements would not reflect the MTF "shall record" assessment, that the "shall record" assessment would be reported in Parkway's financials at March 31, 1993 and that the assessment would reduce surplus. Plaintiff was instructed not to discuss with or disclose this matter to Parkway's independent auditors. Shortly thereafter, Barrette suspended plaintiff and ordered Parkway executives to avoid any contact with him.
Plaintiff contends that after his termination, Barrette instructed that schedules produced by FFIC's accounting department indicating a $925,000 FFIC obligation be discontinued. Subsequent to a February 11, 1993 FFIC board meeting, FFIC's payment obligation under the consent order was further reduced by almost 90% to less than $30,000.
Barrette allegedly directed Parkway staff to approach contract service providers to alter existing contracts for the sole purpose of transferring liabilities on the books at March 31, 1993 to a future date so as to falsely inflate surplus. One contract provider was allegedly asked to consider forgiveness of about two million dollars owed to it for services rendered to Parkway prior to March 31, 1993 in consideration for increasing its service fee reimbursement for those services after March 31, 1993.
Barrette also allegedly directed that a portion of Parkway's books be closed early in March 1993, resulting in less than one years's written premium being reported. Barrette then allegedly ordered false adjustments to the March 31, 1993 Parkway financial statements to drastically reduce reported loss reserves and artificially inflate surplus. Barrette also directed that the "shall record" portion of the MTF assessment be reduced and falsely reported as losses, thereby disguising the loss reserve adjustment so as to inflate surplus. It is alleged that Parkway then fraudulently applied to the NJDOI for a return to FFIC of nearly $5.5 million of Parkway's capital based on these allegedly false adjustments to Parkway's financial statements for March 31, 1993.
A. Applicability of Federal Arbitration Act
Defendants assert that their right to arbitration of the CEPA claim is governed by the Federal Arbitration Act (FAA), 9 U.S.C.A. §§ 1-15. Section 2 of the FAA requires enforcement of "[a] written provision in . . . a contract evidencing a transaction involving commerce to settle by arbitrating a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, . . . save upon such grounds as exist at law or equity for the revocation of any contract." Section 1 of the FAA defines the term "commerce" as ". . . commerce among the several States or with foreign nations, or in any Territory of the Unites States or in the District of Columbia, or between any such Territory and another, or between any such Territory and any State or foreign nation, or between the District of Columbia and any State or Territory or foreign nation, but nothing herein contained shall apply to contracts of employment of seamen, railroad employees or any other class of workers engaged in foreign or interstate commerce."
Plaintiff disputes the applicability of the FAA, asserting that plaintiff's employment contract involved intrastate commerce exclusively conducted in New Jersey, rather than interstate commerce within the meaning of section 1 of the FAA. Plaintiff argues that the intrastate character of the employment agreement is evidenced by the facts that he is a New Jersey resident; that Parkway is a New Jersey corporation; that Parkway was formed to separate and insulate FFIC's private passenger automobile insurance business in New Jersey from that of any other state; and that plaintiff's employment with Parkway allegedly was purely intrastate.
The issue of whether an arbitration agreement relates to interstate commerce so that it is covered by the FAA is governed by Bernhardt v. Polygraphic Co. of America, 350 U.S. 198, 100 L. Ed. 199, 76 S. Ct. 273 (1956). In Bernhardt plaintiff sought to invoke the arbitration act with respect to an employment contract entered into in New York, but which was to be performed in Vermont. The court held that the FAA did not apply because the contract did not evidence "a transaction involving commerce." The Court's finding was based upon the absence of any proof demonstrating that plaintiff ". . . while performing his duties under the employment contract was working 'in' commerce, was producing goods for commerce, or was engaging in activity that affected commerce, . . ." 350 U.S. at 200-201, 100 L. Ed. at 204, 76 S. Ct. at 275.
In analyzing whether plaintiff in this case was either working in commerce or engaging in activity which affects commerce, reference must be made to his contract with Parkway. Plaintiff was given ". . . a significant amount of autonomy to manage the day-to-day operations of FFNJ." (Section 2 of the contract). He was also given express authority by its terms to "contract with outside vendors for services."
Defendants correctly argue that in selling private passenger automobile insurance to New Jersey residents, Parkway, which was under plaintiff's day-to-day management and control, was of necessity engaged in activities involving or affecting interstate commerce whenever its policyholders became involved in accidents outside New Jersey. Employees of Parkway, either under plaintiff's supervision and/or in accordance with policies and procedures promulgated or approved by plaintiff, would be required to retain out-of-state claims adjusters, investigators and/or attorneys to investigate such accidents, to adjust claims or defend suits arising out of such accidents, to authorize settlement of such claims, to pay judgments and to authorize appeals from adverse jury verdicts. Plaintiff's employment agreement clearly contemplates his supervision at least to some extent of such activities by subordinate employees of Parkway and the promulgation or approval of company policies and procedures pertinent thereto. Accordingly, this court concludes that plaintiff's duties under his employment agreement with Parkway, at least to some extent, involve or affect interstate commerce and that defendants' right to arbitration of the CEPA claim is governed by the FAA.*fn2
Arbitrability of the CEPA Claim under the FAA
Relying upon Le Pore v. National Tool and Mfg. Co., 224 N.J. Super. 463, 540 A.2d 1296 (App. Div. 1988), aff'd. 115 N.J. 226, 557 A.2d 1371 (1989), cert. den. 493 U.S. 954, 110 S. Ct. 366, 107 L. Ed. 2d 353 (1989) and Labib v. Younan, 755 F. Supp. 125 (D.N.J. 1991), plaintiff argues that retaliatory discharge claims, including those arising under CEPA, are not subject to compulsory arbitration. Defendants counter that, in view of the Supreme Court's opinion in Gilmer, the LePore case must be read to apply only to employees working under collective bargaining agreements containing arbitration clauses, and that under Gilmer employees subject to individual employment agreements containing broadly worded arbitration clauses are required to submit all statutory claims, including a CEPA claim, to binding arbitration. Defendant further argues that Labib v. Younan, supra, having been decided before Gilmer, has been effectively overruled by Gilmer to the extent at least that Judge Gerry held that there was no reason to distinguish an individual employment agreement from a collective bargaining agreement in determining whether a statutory discrimination claim was arbitrable.
In LePore a union employee brought a common law tort claim against his former employer for retaliatory discharge for reporting workplace safety violations to the Occupational Safety and Health Administration. Defendant argued that such claims were preempted by section 301 of the Labor Management Relations Act, 29 U.S.C.A. § 185 (LMRA) and the Occupational Safety and Health Act, 29 U.S.C.A. §§ 651 - 678 (OSHA). Summary ...