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Dt-Trak Consulting, Inc v. Dan Prue

May 23, 2012

DT-TRAK CONSULTING, INC., A SOUTH DAKOTA CORPORATION, PLAINTIFF AND APPELLANT,
v.
DAN PRUE, AN INDIVIDUAL, DEFENDANT AND APPELLEE.



APPEAL FROM THE CIRCUIT COURT OF THE SIXTH JUDICIAL CIRCUIT HUGHES COUNTY, SOUTH DAKOTA THE HONORABLE MARK BARNETT Judge

The opinion of the court was delivered by: Gilbertson, Chief Justice

ARGUED MARCH 20, 2012

[¶1.] Dan Prue sold his majority interest in DT-Trak Consulting, Inc. (DT- Trak), a medical coding business, for a lump-sum payment and several annual payments. DT-Trak withheld an annual payment, asserting that Prue had violated the Stock Purchase Agreement. The matter proceeded to arbitration. A three-member arbitration panel made an award in Prue's favor. DT-Trak sought to vacate the award, alleging that the arbitrator it selected demonstrated evident partiality, and that the panel's findings of fact and conclusions of law were insufficient. The circuit court affirmed. DT-Trak appeals. We affirm.

FACTS & PROCEDURAL HISTORY

[¶2.] DT-Trak is a South Dakota corporation that offers services to medical providers using electronic medical records. Most of DT-Trak's clients are Indian Health Services facilities and providers. Prue became a 51% owner of DT-Trak in 2003, in addition to serving as President and Chief Executive Officer. His primary responsibility was developing and maintaining relationships with clients. [¶3.] In 2007, Prue was removed from daily operations of DT-Trak due to personality and other conflicts. Prue entered into a Stock Purchase Agreement ("Agreement") with DT-Trak, terminating his relationship with the company. The Agreement provided for DT-Trak's purchase of Prue's interest for $310,000 plus annual performance payments totaling $500,000 beginning in January 2009 to January 2012. The Agreement also contained provisions limiting competition, solicitation, and disclosure. Specifically, Prue agreed that for three years he would not: (1) compete with DT-Trak; (2) directly or indirectly solicit or attempt to induce current and certain former employees of DT-Trak to leave the company; (3) solicit or induce any current or prospective DT-Trak customers to cease doing business with DT-Trak; or (4) knowingly attempt to interfere with any business relationship between DT-Trak and any third party. If Prue violated any of these provisions, DTTrak was entitled to cease making any further annual payments and to a full refund of the funds it had already paid to Prue. The Agreement contained an arbitration provision.

[¶4.] Kathy Price and Tara Hochhalter worked for DT-Trak. Both women worked on DT-Trak's account with Maniilaq Health Center in Alaska, a key account for the company. Hochhalter worked there from 2005 to March 2007. Price started with DT-Trak in August 2002 and resigned in June 2007. She allegedly took confidential information related to the Maniilaq account with her. Before leaving, Price and Hochhalter signed non-compete and non-disclosure agreements with DTTrak, but the restrictions ended in or around November 2008. Their agreements did not contain arbitration clauses.

[¶5.] In 2009, Price and Hochhalter formed P&H Med Services, which competes with DT-Trak. P&H entered into a contract with Maniilaq in March 2009, even though Maniilaq was still DT-Trak's client. Maniilaq terminated its contract with DT-Trak in June 2009. That same month, DT-Trak sued Price, Hochhalter, P&H, and other former employees under a variety of theories, including breach of non-compete agreements and misappropriation of trade secrets and confidential information. DT-Trak claims it would have named Prue as a co-defendant in the litigation but his Agreement contained an arbitration provision. Believing Prue was involved with the formation of P&H, DT-Trak withheld Prue's January 2010 payment, asserting that he had violated the Agreement by assisting Price and Hochhalter.

[¶6.] Prue initiated an arbitration proceeding. He sought his 2010 payment, plus damages for breach of the covenant of good faith and fair dealing, prejudgment interest, lost investment income, and procedural safeguards for future payments. DT-Trak counterclaimed that under the Agreement, it was entitled to withhold the payment.

[¶7.] The arbitration provision of the Agreement required arbitration by a three-person panel of licensed attorneys with commercial law experience. No arbitrator could be related to or have represented either party at any time. Each party was entitled to choose an arbitrator and the two arbitrators would then select a third arbitrator. Written notice of each party's selected arbitrator was mandated. The Agreement also required the panel to enter findings of fact and conclusions of law. Prue selected Robert Hayes. DT-Trak selected Don Peterson from Morgan & Theeler, LLP. Hayes and Peterson chose Jon Sogn as the third arbitrator.

[¶8.] After arbitration had commenced and the hearing was scheduled, Peterson informed DT-Trak's attorneys that he previously had contact with a person listed as a witness. Peterson withdrew as an arbitrator, but indicated Jack Theeler, also from his firm, could serve because the conflict was personal, not legal. The nature of the conflict was confirmed by Sogn. DT-Trak agreed to allow Theeler to replace Peterson.

[¶9.] The arbitration panel issued findings of fact and conclusions of law after a two-day hearing. The arbitration panel unanimously held that DT-Trak failed to prove Prue violated the non-compete provisions. Prue was awarded payments under the Agreement. After the hearing, DT-Trak's attorneys examined phone records and noticed that Price had placed a call to Morgan & Theeler the day she was served with DT-Trak's complaint in the state court litigation. DT-Trak served discovery on Price in that litigation asking her to identify and describe the conversations she had with the Morgan & Theeler firm. Price asserted attorney-client privilege.

[¶10.] DT-Trak filed a motion to vacate the arbitration award with the circuit court. DT-Trak claimed that its chosen arbitrator (Theeler) was evidently partial and that the arbitration panel exceeded its authority by failing to submit sufficient findings of fact on key issues in dispute. In response to this motion, Prue's attorney contacted Price's attorney. Price provided a supplemental discovery response, indicating that Price had spoken with Tim Bottum of Morgan & Theeler when she called about possible representation. They spoke briefly and Price ultimately hired a different law firm to represent her.

[¶11.] The circuit court denied DT-Trak's motion to vacate the arbitration award, determining there was no evident partiality by the arbitrators and that the panel had not exceeded its authority. We address the following issues on appeal:

1. Whether a choice-of-law provision in the Agreement preempts the Federal Arbitration Act.

2. Whether the circuit court erred in determining there was not evident partiality in the arbitration panel.

3. Whether the circuit court erred in concluding that the arbitration panel provided findings of fact and conclusions of law ...


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