Fourth Circuit Confirms District Court Decision that FINRA Arbitration Panel is Not Bound to Apply State Procedural Law
Wachovia Securities, LLC, v. Frank J. Brand, et al, 671 F.3d 472 (4th Cir. 2012)
In a recent case before the Fourth Circuit, Wachovia Securities, LLC (“Wachovia”) appealed a decision by the U.S. District Court for the District of South Carolina in which the court denied Wachovia’s motion to vacate a Financial Industry Regulatory Authority (“FINRA”) arbitration award that denied the firm’s claims in the arbitration of an employment dispute with Frank Brand and three other former employees (“the former employees”). The Fourth Circuit affirmed the district court’s ruling that denied vacatur and confirmed the arbitration award.
The underlying dispute in this case began when Wachovia filed a Statement of Claim with FINRA against four former employees alleging that the former employees had violated contractual and common law obligations. The former employees were employed as individual financial advisors by A.G. Edwards & Sons, Inc. until its merger with Wachovia in October 2007. After the merger, the former employees were employed by Wachovia until their termination in June 2008. All four former employees later found employment with a competing brokerage firm in the same geographic area. Wachovia alleged that the former employees had conspired with the competing brokerage firm to open an office in the area, that they had misappropriated confidential and proprietary information, and that they were soliciting current Wachovia clients and employees to join the new firm.
In its Statement of Claims, Wachovia requested a permanent injunction, the return of records and attorneys’ fees associated with the arbitration. In their answer, the former employees described the dispute as “meritless” and requested the arbitration panel award them attorneys’ fees and costs incurred in defending themselves. FINRA appointed a panel of three arbitrators to hear the matter, and requested that the parties submit proposals regarding requested attorneys’ fees and other costs during the final two days of hearings. Wachovia was unprepared to submit its brief on the penultimate date of hearings and requested a one-day extension, which the arbitration panel granted. On the last day of arbitration hearings, both parties submitted their briefs, each of which contained new arguments. Wachovia argued that, under the South Carolina Arbitration Act, neither party was entitled to attorneys’ fees. The former employees argued that they were entitled to attorneys’ fees under the Frivolous Civil Proceeding Act (“FCPA”), codified at S.C. Code Ann. § 15-36-10. In South Carolina, the FCPA provides both a mechanism for litigants to seek sanctions against attorneys filing frivolous claims and safeguards for attorneys facing such sanctions. These safeguards include a notice period affording the accused 30 days to respond to a request for FCPA sanctions and a separate hearing on sanctions after the verdict. Wachovia expressed its concern that it was not being afforded either of these procedural safeguards. The arbitration panel neither held additional hearings nor requested additional briefings. On December 18, 2009, the FINRA panel entered an award in favor of the former employees, awarding them $1.1 million for attorneys’ fees and costs under the FCPA only and denying all of Wachovia’s claims.
Following arbitration, the former employees filed a motion in federal court to confirm the arbitration award pursuant to the Federal Arbitration Act (“FAA”), 9 U.S.C. § 9. Wachovia filed its own motion to vacate the portion of the arbitration award granting relief to the former employees. Wachovia contended that the arbitration panel exceeded its authority and manifestly disregarded the law in violation of the FAA, 9 U.S.C. § 10(a)(4) and that the arbitration panel also deprived Wachovia of a fundamentally fair hearing in violation of FAA, 9 U.S.C. § 10(a)(3). The district court considered these claims in turn and rejected both claims. Wachovia appealed the district court’s holding that the arbitrators neither deprived Wachovia a fundamentally fair hearing nor manifestly disregarded the law.
In general, judicial review of an arbitration award in federal court is severely circumscribed, 9 U.S.C. § 9-11. When the district court denies vacatur of an arbitration award, the appellate court reviews the district court’s legal findings de novo and reviews the district court’s factual findings for clear error.
Vacating an arbitration award on the basis of FAA §10(a)(3) requires the court to find “the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced.” “Misconduct” and “misbehavior” are different from “mistake” in this context. The first two imply that the arbitrators intentionally contradicted the law. Mistakes lack the requisite intentionality to fall within FAA § 10(a)(3). Wachovia did not allege that the FINRA arbitration panel acted with an intention to contradict the law, only that the arbitrators made a mistake in handling the former employees’ FCPA claim. Because Wachovia did not allege intentional misconduct, § 10(a)(3) cannot be grounds for vacatur. Furthermore, the appellate court did not find that the arbitration panel made a mistake in not following the procedural safeguards of the FCPA. A recent U.S. Supreme Court case held that the FAA pre-empted state law. See AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011). Although parties may consent to particular arbitration procedures in advance, it is inconsistent with the FAA for one party to demand particular state law procedural requirements after the fact. Id. at 1750. Therefore, the FINRA arbitration panel was not compelled to follow FCPA procedural mandates and their failure to do so does not satisfy the requirements of § 10(a)(3).
The Fourth Circuit adopted the position that manifest disregard continues to exist either as an independent grounds for judicial review of arbitration awards or as a judicial gloss on arbitration awards. A court may vacate an arbitration award for manifest disregard of the law if: (1) the applicable legal principle is clearly defined and not subject to reasonable debate; and (2) the arbitrator refused to heed that legal principle. Long John Silver’s Rests., Inc. v. Cole, 514 F.3d 345, 349 (4th Cir. 2008). In this case, the appellate court found that whether the Panel erred by not applying the FCPA’s procedural requirements was a question that was itself not clearly defined and was certainly subject to debate. Therefore, the court held that the arbitrators did not manifestly disregard the law when they awarded the former employees $1.1 million in attorneys’ fees and costs under the FCPA.
The appellate court affirmed the decision of the district court denying Wachovia vacatur of the FINRA arbitration award.
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.