Posts tagged with "9 U.S.C. §§ 1-16"

The “Manifest Disregard of the Law” Standard for Judicial Review of a FINRA Arbitration Award Excludes Questions of Fact

The “Manifest Disregard of the Law” Standard for Judicial Review of a FINRA Arbitration Award Excludes Questions of Fact

Patrick R. Murray v. Citigroup Global Markets, Inc., 2011 WL 5523680 (N.D. Ohio Nov. 14, 2011)

In a recent case before United States District Court for the Northern District of Ohio, Patrick R. Murray (“Murray”) filed motions to vacate, modify or correct portions of a Financial Industry Regulatory (“FINRA”) arbitration award. Citigroup Global Markets, Inc., (“CGMI”) filed a cross-motion to confirm the arbitration award and to award costs and fees incurred while seeking confirmation. The court denied Murray’s motions to vacate, modify or correct the arbitration award and granted CGMI’s motion to confirm the arbitration award. CGMI’s request for costs and fees was denied.

In July 2000, Murray was hired as a financial advisor in a local Smith Barney office, which was later acquired by CGMI. As required by FINRA rules, Murray executed a Uniform Application for Securities Industry Registration or Transfer (“Form U–4”). He also executed a promissory note for a $1,508,401 forgivable loan, and an addendum to the promissory note that extended the length of the repayment period from seven years to nine years. The instruments provided that the loan was to be repaid in nine equal annual installments commencing on the first anniversary date of its execution and that, if Murray terminated his employment prior to full repayment, the outstanding balance would be immediately payable with interest accruing from the date of termination. In April 2009, Murray resigned after having made eight annual payments on the loan.

In May 2009, Murray sued CGMI in state court alleging that CGMI fraudulently induced him to sign the addendum to the promissory note and illegally confiscated his assets related to a capital accumulation plan account. CGMI removed the case to federal court, where it filed a motion to compel arbitration. The court found that the arbitration clauses in the Form U-4, the promissory note, the addendum to the promissory note and a separate signed acknowledgment of the CGMI employee hand book were valid and enforceable; therefore, it granted CGMI’s motion to compel arbitration. FINRA appointed a panel of three neutral arbitrators to hear the matter. In April 2011, the FINRA panel awarded CGMI compensatory damages of $40,153.00 representing the unpaid balance on the promissory note and awarded Murray compensatory damages of $25,705.95.

Murray filed the instant motion to vacate, modify or correct portions of the arbitration award in federal court and CGMI filed its response and cross-motion to confirm the arbitration award. Murray challenged the arbitration award on the following grounds: (1) the award was irrational; (2) the award did not draw its essence from the contract between the parties; (3) the award violated public policy; and (4) the award manifestly disregarded the law.

The Federal Arbitration Act (“FAA”), 9 U.S.C. §§ 1-16, defines four limited statutory grounds on which a court may vacate an arbitration award, including instances of fraud or corruption, evident partiality, misbehavior or misconduct and acts exceeding the arbitration panel’s authority. 9 U.S.C. § 10(a). The court found that none of Murray’s first three grounds for vacatur satisfied these statutory requirements.

Several federal circuits, including the Sixth Circuit, have held that an arbitration award can be vacated “if it displays ‘manifest disregard of the law.’ ” Jacada, Ltd. v. Int’l Mktg. Strategies, Inc., 401 F.3d 701, 712 (6th Cir. 2005), overruled on other grounds, (citing Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Jaros, 70 F.3d 718, 421 (6th Cir. 1995)). However, the court found that Murray’s assertions of manifest disregard of the law were based on questions of fact rather than questions of law. A federal court does not have the authority to re-litigate facts when reviewing an arbitration award to determine whether the arbitrators manifestly disregarded the law. See Bd. Of County Commis of Lawrence County, Ohio v. L. Robert Kimball & Assocs., 860 F.2d 683, 688 (6th Cir.1988). Therefore, the court denied Murray’s motion to vacate the arbitration award.

The court additionally determined that, although Murray was incorrect on the merits of his case, he did not engage in the degree of bad faith or vexatious behavior that would compel the court to award CGMI fees and costs for the instant litigation. Therefore, the court confirmed the arbitration award in its entirety without awarding CGMI additional fees and costs.

Should you have any questions relating to FINRA, arbitration or employment issues, please do not hesitate to contact Attorney Joseph C. Maya in the firm’s Westport office in Fairfield County, Connecticut at 203-221-3100 or at JMaya@Mayalaw.com.

Continue Reading

California Court Does Not Compel FINRA Arbitration of Statutory Discrimination Claims

California Court Does Not Compel FINRA Arbitration of Statutory Discrimination Claims

John Simmons v. Morgan Stanley Smith Barney, LLC, et al, 2012 WL 1900110 (S.D. Cal. May 24, 2012)

In January 2008, John Simmons (“Simmons”) was offered employment by Morgan Stanley Smith Barney, LLC (“Morgan Stanley”) as the Executive Director and District Manager in the Global Wealth Management Department. The offer letter stated that Simmons would be entitled to a $1 million forgivable loan, relocation benefits and a stock award. Simmons accepted the employment offer by signing the Morgan Stanley offer letter. In February 2008, Simmons and Morgan Stanley entered into bonus agreement and a promissory note that each contained a clause agreeing to arbitrate disputes related to these instruments in accordance with the Financial Industry Regulatory Authority (“FINRA”) rules. In March 2008, Simmons signed a Uniform Application for Securities Industry Registration or Transfer (“Form U-4”) which also contained an arbitration clause citing FINRA rules. In May 2009, Simmons and Morgan Stanley entered into a second bonus agreement and a second promissory note, each of which contained the same arbitration clauses as the previous instruments. In March 2011, Simmons’s employment with Morgan Stanley was terminated. In September 2011, Morgan Stanley initiated a Statement of Claim with FINRA seeking to arbitrate its claim against Simmons for violation of the bonus agreements and promissory notes.

In December 2011, Simmons initiated an action in California state court asserting statutory claims for discrimination pursuant to Cal. Govt.Code section 12940(a) and for violation of 42 U.S.C. § 2000e (“Title VII”). Simmons claimed that Morgan Stanley employees made disparaging remarks to him regarding his religious beliefs because he was a member of the Church of Jesus Christ of Latter Day Saints. Simmons also alleged that, despite his high level of performance, he was not paid in accordance with the terms of his employment agreement. Finally, the complaint also alleged that, in February 2011, shortly before his termination, Simmons informed his supervisor that he was aware of the fact that he was paid less than other co-workers who performed similar duties but who did not share his religious beliefs. Simmons’s complaint stated that these discrimination claims were “inextricably related” to Morgan Stanley’s allegations that he violated the two promissory notes because he was “illegally terminated before he was able to fully perform his obligations thereunder.” In addition to the two statutory discrimination claims, Simmons’s complaint also asserted non-statutory claims of wrongful termination in violation of public policy, fraud, and breach of contract.

Morgan Stanley removed the matter to the United States District Court for the Southern District of California and filed motions to compel arbitration and stay litigation. Simmons filed a motion for a preliminary injunction asserting that he should not be compelled to arbitrate the claims that Morgan Stanley filed with FINRA in September 2011. Simmons presented five distinct legal arguments for why he should not be compelled to arbitrate with Morgan Stanley. The federal court dedicated the most discussion to Simmons’s argument that the arbitration agreements which he allegedly entered into did not encompass his statutory discrimination claims.

The Federal Arbitration Act (“FAA”), 9 U.S.C. §§ 1-16, embodies both a fundamental principle that arbitration is based in contract and a federal policy favoring arbitration. A written arbitration agreement “shall be valid, irrevocable and enforceable,” unless the arbitration agreement can be invalidated by a generally applicable contract defense, such as fraud, duress and unconsionability. 9 U.S.C. §2. Therefore, federal courts deciding motions to compel or stay arbitration examine (1) whether a valid arbitration agreement exists; and (2) whether the agreement encompasses the dispute at issue. Cox v. Ocean View Hotel Corp., 533 F.3d 1114, 1119 (9th Cir. 2008). Courts apply state contract law to determine whether an arbitration agreement exists and whether such agreement is enforceable. Only if both findings are affirmative can a federal court enforce an arbitration agreement in accordance with its terms.

Causes of action premised on statutory rights are just as subject to contractual arbitration agreements as non-statutory common law claims. However, Congress may pass federal legislation that removes certain claims from the purview of the FAA. Precedent within the Ninth Circuit is that “a Title VII plaintiff may only be forced to forego her statutory remedies and arbitrate her claims if she has knowingly agreed to submit such disputes to arbitration.” Renteria v. Prudential Ins. Co. of Am., 113 F.3d 1104, 1105-06 (9th Cir. 1997)(citing Prudential Ins. Co. of America v. Lai, 42 F.3d 1299, 1305 (9th Cir.1994)). Both the public policy of protecting victims of sexual discrimination and the Congressional intent motivating Title VII legislation required that there be a knowing waiver of statutory remedies for civil rights violations, including employment discrimination based on gender. Id. at 1108. An earlier case within the Ninth Circuit held that parallel state anti-discrimination laws were made part of the Title VII enforcement scheme. Lai, 42 F.3d at 1301 n.1. Because the agreements to arbitrate in the February 2008 and May 2009 promissory notes and bonus agreements did not explicitly state that Simmons waived his right to a jury trial on claims of statutory employment discrimination, the court refused to find that Simmons knowingly waived his statutory remedies on these claims. Therefore, the court concluded that these arbitration provisions did not encompass Simmons’s first claim for violation of Cal. Govt. Code section 12940(a) and his second claim for Title VII violation. However, the court determined that Simmons’s remaining non-statutory claims were encompassed by the existing arbitration agreements.

An arbitration provision may be challenged “upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. Under California law, a contract clause is unenforceable only if it is both procedurally and substantively unconscionable. Davis v. O’Melveny & Myers, 485 F.3d 1066, 1072 (9th Cir.2007) Procedural unconscionability analysis focuses on the oppression or surprise of a contract clause. The court found that the arbitration provisions at issue contain a minimal element of procedural unconscionability because they were standard FINRA agreements and clearly visible. Substantive unconscionability considers the effect of the contract clause, specifically whether the clause is so one-sided as to shock the conscience. Id. at 1075. The court found that the arbitration provisions were substantively unconscionable because the rules of FINRA may require Simmons to pay hearing session fees in excess of what he would pay in court. However, the single substantively unconscionable provision can be severed from the arbitration agreements; therefore, the court held that the arbitration agreements in the February 2008 and May 2009 promissory note and bonus agreements were enforceable once the unconscionable provision was severed.

The court granted Morgan Stanley’s motion to compel arbitration on Simmons’s non-statutory claims pursuant to the arbitration provisions set out in the February 2008 and May 2009 promissory note and bonus agreements. Likewise, pursuant to 9 U.S.C. § 3, the court granted Morgan Stanley’s motion to stay litigation on these claims pending arbitration. Because the court found that valid arbitration provisions exist, it denied Simmons’s motion for a preliminary injunction.

With respect to Simmons’s first two claims of employment discrimination under California and federal statutes, the court denied Morgan Stanley’s motions to compel arbitration and stay litigation. Simmons was permitted to litigate these claims in federal district court.

Should you have any questions relating to FINRA, arbitration or employment issues, please do not hesitate to contact Attorney Joseph C. Maya in the firm’s Westport office in Fairfield County, Connecticut at 203-221-3100 or at JMaya@Mayalaw.com.

Continue Reading

California Court Modifies FINRA Arbitration Award to Provide for a Setoff

California Court Modifies FINRA Arbitration Award to Provide for a Setoff

UBS Financial Services, Inc. and Piper Jaffray & Co. v. Mark C. Riley, 2012 WL 1831720 (S.D. Calif. May 18, 2012)

In a recent case before the Southern District of California, UBS Financial Services, et al, (“UBS”) petitioned to confirm, or in the alternative modify, a Financial Industry Regulatory Authority (“FINRA”) Arbitration Award issued September 2, 2011. Mark Riley (“Riley”), a former USB employee, filed a reply. The court granted UBS’s alternative motion to modify the award and awarded UBS pre and post judgment interest. All other motions were denied.

The underlying dispute in this case arose when Riley failed to satisfy his indebtedness on two promissory notes after he terminated his employment with UBS, which had acquired his previous employer, Piper Jaffray. The two loans were received during Riley’s course of employment with Piper Jaffray and UBS. Because submission to FINRA arbitration was included in Riley’s employment agreement with UBS, the firm initiated a FINRA arbitration claim against Riley to recover the outstanding balances, as well as interest and attorneys’ fees. Riley filed a counterclaim against UBS and Piper Jaffray, alleging claims related to his employment with the firms.

FINRA appointed a panel of three arbitrators to hear the matter. The panel issued an arbitration award in favor of UBS for $377,024.83, including principal, interest and attorneys’ fees. The panel also held UBS and Piper Jaffray jointly and severally liable to Riley in the amount of $127,024.83. One week after the award, UBS filed a motion with the arbitration panel requesting clarification of the award to provide for Riley’s award to be offset against the UBS award. The Director of Arbitration rejected the motion because it did not comply with the FINRA Code of Arbitration Procedure for Industry Disputes Rule 13905, which provides that parties may not submit documents to arbitrators in cases that have been closed except under limited circumstances. Therefore, UBS petitioned the federal district court to confirm, or alternatively modify, the award with a setoff of the amount awarded to Riley against the larger amount awarded to UBS, and to enter a single judgment in favor of UBS in the net amount of $250,000, plus interest, attorneys’ fees and costs.

The Federal Arbitration Act (“FAA”), 9 U.S.C. §§ 1–16, governs the role of federal courts in reviewing arbitration decisions and provides very limited grounds on which a federal court may correct, modify or vacate such decision. “Under the statute, confirmation [by federal court] is required even in the face of erroneous findings of fact and misinterpretations of law.” Kyocera Corp. v. Prudential–Bache T Serv’s, Inc., 341 F.3d 987, 997 (9th Cir.2003) (internal quotation marks and citation omitted)

Riley argued the award should be confirmed without setoff on three separate grounds: (1) the court does not have the authority to provide a setoff; (2) UBS and Piper Jaffray are jointly and severally liable so to allow an offset against the money awarded to UBS would deprive him of the ability to recover from Piper Jaffray; and (3) his counsel’s attorneys’ fee lien on his award takes priority over UBS’s right to a setoff. He opposed modification of the award for the same reasons.

The court denied UBS’s motion to confirm the arbitration award with a setoff because it was unable to find any authority in the Ninth Circuit to permit a setoff in the confirmation of an arbitration award. However, section 11 of the FAA permits a federal court to modify or correct an award “as to effect the intent thereof and promote justice between the parties” under the following circumstances:

(a) Where there was an evident material miscalculation of figures or an evident material mistake in the description of any person, thing, or property referred to in the award.

(b) Where the arbitrators have awarded upon a matter not submitted to them, unless it is a matter not affecting the merits of the decision upon the matter submitted.

(c) Where the award is imperfect in matter of form not affecting the merits of the controversy.

The court determined that allowing for a setoff in the instant case was consistent with the requirements of section 11(c). The court was not required to reconsider the merits of the arbitration decision, and the modification did not affect the amount of damages awarded to either party. Setoff only modified the form of the award to avoid the potentially unjust consequences of UBS paying Riley a substantial sum of money in a situation where there was a high likelihood that Riley would not pay UBS in return. Finally, allowing Riley to pay just his net obligation would avoid “the absurdity of making A pay B when B owes A.” Studley v. Boylston Nat’l Bank of Boston, 229 U.S. 523, 528 (1913).

The court ordered the FINRA arbitration award be modified to a single judgment of $250,000 in favor of UBS. It also awarded UBS prejudgment interest at the state interest rate of nine percent per annum on the sum of $250,000.00 from the date of the arbitration award until the judgment was entered in federal court, and post-judgment interest at the federal interest rate as provided for in 28 U.S.C. § 1961 from the entry of the judgment until the judgment award is paid in full.

Should you have any questions relating to FINRA, employment or arbitration issues, please do not hesitate to contact Attorney Joseph C. Maya in the firm’s Westport office in Fairfield County, Connecticut at 203-221-3100 or at JMaya@Mayalaw.com.

Continue Reading

Failure to Disclose Challenge to FINRA Arbitration Award Requires Court to Scrutinize FAA Statutory Grounds for Vacatur

Laurence Stone v. Bear, Stearns & Co., Inc., et al., 2012 WL 1946938 (E.D. Pa. May 29, 2012)

In a recent case before the Eastern District of Pennsylvania, Laurence Stone (“Stone”), a businessman and investor, filed a petition to vacate a Financial Industry Regulatory Authority (“FINRA”) Arbitration Award issued in July 2011. Bear, Stearns & Co and other named respondents filed a cross-petition to confirm the FINRA arbitration award. The court addressed several open questions of law concerning the judicial review of an arbitration award and denied the motion to vacate.

The underlying dispute in this case arose from Stone’s investments in a Bear Stearns hedge fund that held residential securities before that market collapsed in 2007. In April 2008, Stone filed a FINRA arbitration claim seeking damages of $7.6 million based on the allegation that Bear Sterns had fraudulently induced and misled him into investing in the fund. Pursuant to FINRA Rule 12403, FINRA generated and provided to the parties the following random lists of arbitrators: (1) a list of eight arbitrators from the FINRA non-public arbitrator roster; (2) a list of eight arbitrators from the FINRA public arbitrator roster; and (3) a list of eight public arbitrators from the FINRA chairperson roster. An arbitrator disclosure report (ADR) was provided for each individual. Using the ADR and publicly available information, the parties ranked and/or struck the arbitrators on the lists. Stone relied on his attorneys to conduct due diligence on the arbitration panel candidates and did no independent research on the arbitrators at that time. Based on parties’ input, FINRA appointed a panel of two public arbitrators and one non-public arbitrator to hear the case. The panel unanimously rejected all of Stone’s claims.

After the adverse decision, Stone conducted his own background investigation into each of the three arbitrators looking for evidence that would support vacatur of the judgment. Stone discovered that one of the arbitrator’s husband was a finance professor at a well-known business school and had close ties to the securities sector. The arbitrator had made full disclosure of her husband’s activities to FINRA; however, the ADR that FINRA provided to the parties only stated that the arbitrator’s “Family Member has a relationship with [the] University of Pennsylvania.” Stone alleged that this summarization constituted a failure to disclose on the part of the arbitrator and petitioned to vacate the arbitration award.

Failure to disclose is not a sufficient basis for vacating a FINRA arbitration award; it is relevant only to the extent that it can be linked to one of the statutory grounds for vacatur defined by the Federal Arbitration Act (“FAA”), 9 U.S.C. §§ 1-16. In his petition, Stone linked the arbitrator’s alleged failure to disclose her husband’s connections to three statutory bases for vacatur: evident partiality under FAA §10(a)(2), misbehavior under §10(a)(3), and exceeding powers under §10(a)(4).

Vacating an arbitration award pursuant to FAA §10(a)(2) requires “evident partiality or corruption in the arbitrators, or either of them.” The FAA does not provide an explicit definition of “evident partiality;” therefore, courts have struggled with its interpretation. “Evident partiality” can be defined either with respect to an “appearance of bias” standard or with respect to an “actual bias” standard. Under the appearance of bias standard, a court may vacate an arbitration award whenever an arbitrator fails to “disclose to the parties any dealings that might create an impression of possible bias.” Commonwealth Coatings Corp. v. Continental Casualty Co., 393 U.S. 145, 149 (1968). Under the actual bias standard, “the challenging party must show ‘a reasonable person would have to conclude that the arbitrator was partial’ to the other party to the arbitration.” Apperson v. Fleet Carrier Corp., 879 F.2d 1344, 1358 (6th Cir.1989). The court in the instant case adopted the actual bias standard, reiterating that in order to prevail on an evident partiality challenge, Stone “require[d] proof of circumstances powerfully suggestive of bias.” Kaplan v. First Options of Chicago, Inc., 19 F.3d 1503, 1523 n. 30 (3d Cir. 1994) (citations and internal quotations omitted). The court then concluded that Stone failed to show such circumstances.

Vacating an arbitration award pursuant to FAA §10(a)(3) requires the arbitrator to have engaged in “misbehavior by which the rights of any party have been prejudiced.” The Supreme Court pronounced in Hall Street Associates, L.L.C. v. Mattel, Inc. that the terms “misconduct” and “misbehavior” in section 10 of the FAA denote “extreme arbitral conduct.” 552 U.S. 576, 586 (2008). Federal courts may not vacate an arbitration award for “misbehavior” under FAA §10(a)(3) unless the arbitrator shows misconduct so severe that it denied the aggrieved party a fundamentally fair hearing. Therefore, the court found in Stone’s case that there was no “misbehavior” by the arbitrator that could fairly be characterized as “extreme arbitral conduct,” especially since the record reflects no scienter on the part of the arbitrator.

Vacating an arbitration award pursuant to FAA §10(a)(4) requires the arbitrators to have exceeded their powers. The Third Circuit delineated the categories of conduct that may suffice for a court to vacate an award as in excess of the arbitrators’ powers: “when [an arbitrator] [1] decides an issue not submitted to him, [2] grants relief in a form that cannot be rationally derived from the parties’ agreement and submissions, or [3] issues an award that is so completely irrational that it lacks support altogether.” Sutter v. Oxford Health Plans LLC, 675 F.3d 215, 219-220 (3d Cir. 2012). If an arbitrator makes a “good faith attempt” to comply with his or her mandate, “even serious errors of law or fact will not subject [the arbitrator’s] award to vacatur.” Id. at 220. The court found that none of the arbitration panel exceeded their powers by presiding over Stone’s dispute with Bear Stearns.

Courts afford the arbitrators’ decision extreme deference because, if a losing party could easily overturn an adverse arbitration award through judicial review, it would make little sense for parties to arbitrate a dispute in the first place. Based on its interpretation of the three cited sections of the FAA, the court denied Stone’s petition to vacate and granted the respondents’ cross–petition to confirm the FINRA arbitration award. Because resolving the dispute required the court to confront several open questions of law, the court denied the respondents’ request for attorneys’ fees and costs.

Should you have any questions relating to FINRA or arbitration issues, please do not hesitate to contact Attorney Joseph C. Maya in the firm’s Westport office in Fairfield County, Connecticut at 203-221-3100 or at JMaya@Mayalaw.com.

Continue Reading