Posts tagged with "benefits"

Five Things You Need to Know About Connecticut Separation Agreements

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As a result of the state of the economy, in general, and in Fairfield County, in particular, we in the Westport, Connecticut office of Maya Murphy, P.C. have seen a spate of Separation Agreements brought to us by recently terminated employees.  Our experienced employment-law attorneys review and critique these Agreements, and often advocate on behalf of our clients to enhance a separation package.

Here are five things you need to know about Separation Agreements:

They are here and more may be on the way. 

Companies are scrutinizing their bottom lines to try to increase profits, decrease expenses, and improve share value or owner’s equity.  If sales can’t be increased or cost-of-goods-sold decreased, one alternative is to cut personnel.  Often senior (and more highly paid) employees are let go in favor of younger (i.e., “cheaper”) employees, thereby also raising the specter of an age discrimination claim (a topic deserving of its own post).

They are complex. 

For an employee over the age of 40, a federal statute known as the “Older Workers Benefit Protection Act” requires that your Separation Agreement contain certain provisions, including a comprehensive release of all claims that you might have against your employer.  The statute also gives you specific time periods to review the Agreement prior to signing, and even to rescind your approval after you have signed.  It is not uncommon to have Separation Agreements exceed 10 pages in length.  All of the language is important.

They are a minefield. 

Separation Agreements frequently contain “restrictive covenants,” usually in the form of confidentiality, non-solicitation, and non-competition provisions.  These can have a profound effect on your ability to relocate to another position and have to be carefully reviewed and analyzed to avoid potentially devastating long-term consequences after the Agreement has been signed and the revocation period has expired.

They are not “carved in stone.”

Although many companies ascribe to a “one size fits all” and a “take it or leave it” policy with regard to Separation Agreements, such is not necessarily the case.  Often, Maya Murphy employment attorneys can find an “exposed nerve” and leverage that point to obtain for a client more severance pay, longer health benefits, or some other perquisite to ease the client’s transition into a new job with a new employer.  Every case is factually (and perhaps legally) different and you should not assume that your severance package should be determined by those that have gone before you.

You need an advocate.

You need an experienced attorney to elevate discussion of your Separation Agreement above the HR level.  HR directors have limited discretion and are tasked with keeping severance benefits to an absolute minimum.  Maya Murphy’s goal is to generate a dialogue with more senior management to drive home the point that a particular client under certain circumstances is equitably entitled to greater benefits than initially offered.

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If you find yourself in the unfortunate position of having been presented with a Separation Agreement, you should contact Joseph Maya and the other experienced employment law attorneys in our Westport, Connecticut office by phone at (203) 221-3100 or via e-mail at JMaya@Mayalaw.com.

Expunging a Dirty U-5—Be Careful What You Ask For!

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Expunging a Dirty U-5

The view from the impending “fiscal cliff” takes in much of Fairfield County’s “Gold Coast”—Greenwich, Stamford, Darien, and Westport.  We at Maya Murphy, P.C. represent many residents employed in the financial industry, both within and without the State of Connecticut.  Some of their financial employers may be considering reductions in personnel depending upon the results of the upcoming Presidential election, Congressional action (or inaction) concerning “taxmaggedon” and “sequestration,” and their own Q4 and year-end results.  If a financial firm retrenches, there will be a dirty U-5 on “the street.”

We are often asked about the possibility of “scrubbing” a U-5 or expunging it altogether.  The current economic climate and new proposed rules from FINRA warrant a warning that usually accompanies our advice.

The current FINRA Customer and Industry Codes do not afford “unnamed persons,” i.e., the subject of allegations but not named parties to the underlying arbitration, to seek expunging of allegations reported to the Central Registration Depository (“CRD”) on Form U-5 (and available to the public through such resources as “Broker Check”).  To rectify that situation (recognizing that a dirty U-5 impacts one’s livelihood), FINRA has proposed In re expungement rules seeking to balance the respective interests of the registered professional and the investing public.  Public comment on the proposed rules was closed on May 21, 2012.

The purpose of this post is not to critique the new rules that, while not problem-free, at least address the issue of incorrect allegations remaining on CRD records in the absence of an evidentiary hearing to determine the accuracy of those allegations.  The purpose of this post is to point out that the new rules, in whatever final form they may take, can be a cure worse than the disease.

The Original Language

There is no denying the injustice of having a registered representative’s U-5 amended to reflect a customer complaint without the representative being named as a respondent in subsequent arbitration. The net effect is to have the representative tried in absentia without the ability to present evidence or cross-examine witnesses by way of defense.  The proposed In re expungement rules, however, may not be all they are cracked up to be.  A recent FINRA arbitration decision points up the problem.

In the Matter of the FINRA Arbitration between Eduard Van Raay, Claimant v. Raymond James Financial Services, Inc., et al., Respondents (FINRA 11-04544, July 16, 2012), the underlying claim was settled and an arbitrator was appointed solely for the purpose of considering a request for U-5 expunging.  The original offending, terminating language was: “Violation of firm policy. Failure to disclose an outside business activity (personal representative relationship with a client).”  After the arbitration, the recommendation was for the language to be amended to read: “Permitted to resign. Advisor chose to continue unapproved outside business activity.”  This was hardly an improvement to that which he sought to have expunged.

The Post-Arbitration Language

The original language was cryptic, susceptible to differing interpretations, and perhaps easily explained.  The post-arbitration language, however, was clear, concise, damaging, and most importantly, the product of FINRA arbitration.  Instead of vague allegations of a personal relationship with a client, the representative’s CRD will now be saddled with a finding that he chose to continue an unapproved outside business activity.  The takeaway is that the outcome would not survive a rigorous pre-arbitration risk/reward analysis.  Arbitrations, as with lawsuits, are a lot like wars—they are easier to start than to stop.  They often bring with them unintended consequences.

The new In re expungement rules present registered representatives with an additional option that was previously unavailable.  Assuming their future adoption, that does not mean that every offending CRD entry should be the subject of a FINRA arbitration.

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Whether, and when, to pursue expunging is a decision that should be discussed thoroughly with a seasoned litigator familiar with the FINRA Rules and decisions.  We, here, in Maya Murphy’s Westport, Connecticut office stand ready to assist in that regard.  Please contact Joseph Maya and the other experienced attorneys at (203) 221-3100 or via e-mail at JMaya@Mayalaw.com to schedule a consultation today.

Duration of Connecticut Non-Compete Agreement Reduced by the Court

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Access America, LLC v. Mazzotta, 2005 Conn. Super. LEXIS 2597
Case Background

Ms. Vassilia Mazzotta worked at Access America, LLC, a franchised office affiliated with Century 21 Real Estate, as a licensed real estate broker.  She sold single and multi-family residential real estate in conjunction with her job at Access America until she terminated her employment on April 20, 2005.  There was an employment contract between Ms. Mazzotta and Access America that contained a non-compete clause wherein it stipulated that Ms. Mazzotta could not “engage in or carry on directly or indirectly, a business similar to or competing with any business or products carried on by [Access America] within a fifteen (15) mile radius of 136 Berlin Road, Cromwell, CT (Access America’s office)”.

Shortly after her termination with Access America, Ms. Mazzotta began to work at ERA Innovative Realty, a competing real estate broker well within the fifteen-mile radius as defined in the non-compete covenant of the employment agreement.  Access America brought suit against Ms. Mazzotta and sought injunctive relief in the form of enforcement of the non-compete covenant.  Ms. Mazzotta conversely argued that she signed the restrictive covenant under duress and that its provisions were unreasonable, therefore making it unenforceable.

The Court’s Decision

The court found in favor of Access America, holding that the non-compete agreement was valid and enforceable but did amend its provisions in a way that lessened the occupational hardship placed on Ms. Mazzotta.  The court justified its holding by first discussing the public policy of the issue.  It stated, “It has long been recognized in this state [Connecticut] that a restrictive covenant is a valuable business asset which is entitled to protection”.  Access America, according to the court, had legitimate reasons for using a non-compete agreement to protect its business interest in the form of the money, time, and effort it spent to train Ms. Mazzotta.

The court found Ms. Mazzotta’s defense of signing the agreement under duress to be unpersuasive because the same agreement that contained the restrictive covenant also contained clauses that conferred considerable benefits on her in the form of a private office and a higher commission rate on real estate sales.  In addition, the court cited Ms. Mazzotta’s termination letter wherein she reaffirmed her obligations and prohibitions under the employment agreement.

Reducing the Duration of the Non-Compete Agreement

The one portion of the decision that Ms. Mazzotta found favorable was the reduction in applicable duration for the non-compete agreement.  The court reduced the two-year prohibition down to only one year.  During the legal proceedings, both parties were open to the possibility that the court could reduce the duration of the restriction if in the end it found the non-compete to be valid and enforceable.

Both parties referenced an earlier case, Century 21 Access America v. Nereida Lisboa (35 Conn. L. Rptr. 272 (Conn. Super. Ct. 2003)) where a court had reduced the duration based on the specific language of the employment agreement and specifically the non-compete clause.  This portion of the decision is very valuable as it shows that certain non-compete agreements, depending on the specific language used, are enforceable but the court has the authority to amend the provisions to lessen the restrictions placed on the employee.

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If you have any questions relating to your non-compete agreement or would like to discuss any element of your employment agreement, please contact Joseph C. Maya, Esq. by phone at (203) 221-3100 or via e-mail at JMaya@Mayalaw.com.

What to Know About Your Non-Compete Agreement

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In the current economic environment, understanding your obligations under a non-compete agreement could be essential to finding new employment. In uncertain times, an employee may not understand that not all non-compete agreements are enforceable. Here are seven (7) important things to know about non-compete agreements.

(1)  Courts Do Not View All Non-Compete Agreements Equally:

Courts view non-compete agreements ancillary to the sale of a business or between partners differently than they view non-compete agreements between an employee and employer. “When an employee agrees to be subjected to future work restrictions, he or she does so in order to obtain employment and ordinarily gets nothing in return for giving up this important freedom.  Thus the employee is at a great bargaining disadvantage.”  CT Cellar Doors, LLC v. Stephen Palamar, 2010 Conn. Super. LEXIS 3247, J.D. of Waterbury, Docket No. UWY-CV-10-5016075-S (2010). Therefore, the courts will view such a non-compete with great scrutiny.

(2)  Reasonableness Requirement:

By definition, a non-compete is a restrictive covenant that prevents employees from competing with their former employers after termination, thereby creating a restraint on the free market. Given this, Connecticut courts may find that these covenants are against public policy. Consequently, non-compete agreements are only enforceable if the restraint imposed is reasonable.

(3)  Courts Consider Multiple Factors in Evaluating the Reasonableness of a Non-Compete:

In deciding whether a particular non-compete agreement is reasonable, the court will look to the following factors: “(1) the length of time the restriction operates; (2) the geographical area covered; (3) the fairness of the protection afforded to the employer; (4) the extent of the restraint on the employee’s opportunity to pursue his occupation; and (5) the extent of interference with the public’s interests.” Robert S. Weiss and Associates, Inc. v. Wiederlight, 208 Conn. 525 (1988). The Connecticut Appellate Court has instructed that “the five pronged test is disjunctive; a finding of unreasonableness in any one of the criteria is enough to render the covenant unenforceable.” New Haven Tobacco Co., Inv. v. Perrelli, 18 Conn. App. 531 (1989).

(4)  Involuntarily Termination Not Required:

A prevalent feeling among employees is that if “let go,” a non-compete should not apply.  However, this is not the law. When reviewing a non-compete agreement for reasonableness, the Court will not look to whether the employee left his position voluntarily or involuntarily.

(5)  Geography:

“The general rule is that the application of a restrictive covenant will be confined to a geographical area which is reasonable in view of the particular situation.” Scott v. General Iron, 171 Conn. 132 (1976) (upheld statewide restriction). Geographic restrictions should be “narrowly tailored to the plaintiff’s business situation.” Robert S. Weiss & Associates, Inc. v. Wiederlight, supra, 208 Conn. at 531. In CT Cellar Doors, LLC v. Stephen Palamar, supra, the Court held that a three-year restriction that covered the entire State of Connecticut was unenforceable, unfair and an unreasonable restraint of trade and was contrary to public policy.

Compare that to Robert S. Weiss and Associates, Inc. v. Wiederlight, supra, where the Supreme Court held that a two-year restriction that covered a 10-mile radius of Stamford, was narrowly tailored and therefore reasonable.  See also, Access America, LLC v. Mazzotta, 2005 Conn. Super. LEXIS 2597, J.D. of Middlesex, Docket  No. CV-O5-4003389 (2005)(15-mile restriction upheld); compare, Trans-Clean Corp. v. Terrell, 1998 Conn. Super. LEXIS 717, J.D. of Fairfield, Docket No. CV-97-0348039-S (1998) (60-mile restriction held unreasonable).

(6)  Duration:

Connecticut courts have frequently enforced non-compete periods of a year or more.  However, the courts have stated that the reasonableness of time and geographic restrictions in non-compete agreements are intertwined and “that broad geographic restrictions may be reasonable if the duration of the covenant is short, and longer periods may be reasonable if the geographic area is small.” Van Dyck Printing Company v. DiNicola, 43 Conn. Supp. 191 (1993), affirmed per curiam 231 Conn. 272 (1994) (one year);  Robert S. Weiss & Assoc. v. Wiederlight, supra (two years); Hart Nininger & Campbell Assoc. v. Rogers, 16 Conn. App. 619 (1988) (two years); Scott v. General Iron & Welding Co., 171 Conn. 132 (1976) (five years); Torrington Creamery, Inc. v. Davenport, 126 Conn. 515 (1940) (two years).

(7)  Forfeiture Clauses:

Forfeiture clauses differ from non-compete agreements in that the employee does not make an express promise not to compete, but rather agrees to a forfeiture of benefits if the employee engages in competition with its former employer. Despite this difference, the Connecticut Supreme Court has held that “a covenant not to compete and a forfeiture upon competing are but alternative approaches to accomplish the same practical result.” Deming v. Nationwide Mut. Ins. Co., 279 Conn. 745 (2006). Consequently, forfeiture clauses are subject to the reasonable requirement of non-compete agreements.

Conclusion

Before signing a non-compete agreement, speak to an attorney who is well versed in the law surrounding restrictive covenants and employment contracts.  If you have already signed the non-compete agreement, contact an attorney before pursuing a course of conduct that might violate a non-compete clause. A violation of a non-compete may result in legal action brought against you by your former employer, whether or not such agreement is enforceable.  Situations involving non-compete agreements are very fact specific, requiring case-by-case analysis.

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If you have any questions relating to your non-compete agreement or would like to discuss any element of your employment agreement, please contact Joseph C. Maya, Esq. by phone at (203) 221-3100 or via e-mail at JMaya@Mayalaw.com

What To Know About Your Severance Package

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During these economic times, many companies big and small, are facing the hard reality of layoffs. As hard as it is for companies, it is even harder for employees. Faced with no job and a bare economy, accepting a severance package might seem like the best choice.  But before signing anything, it is important to understand the basics of the severance package and the potential rights that might be relinquished in the process.

(1)  Time to Consider the Severance Package:

A prevalent misconception is that all employees are entitled to twenty-one (21) days to review severance package offers. Unfortunately, that is not the case.  In the case where the employer is only offering a severance package to one employee, and that employee is under the age of forty (40), there is no specific time to review the documents that is required by law. However, as the severance package must be made “knowingly and voluntarily,” that allows the employee some time to consider the severance agreement.  There is no statutory minimum amount of time.

If, however, the employee being offered the severance agreement is forty (40) years or older, he or she is protected by the Age Discrimination in Employment Act (“ADEA”) of the Older Workers Benefit Protection Act (“OWBPA”). By law, when only one employee is offered the severance agreement and a release of ADEA claims is included, the employer must provide the employee with twenty-one (21) days to review and consider the proposed severance agreement. Moreover, if the employer and employee engage in negotiations, the consideration period commences on the date of the employer’s final offer.

If more than one employee is terminated at or around the same time, it is considered a “group layoff.”  By law, when a severance agreement is offered as part of a group layoff, and a single employee is over the age of forty (40), and a release of ADEA claims is included, then every employee regardless of age must be given forty-five (45) days to consider the agreement.

(2)  Release of Claims:

Most severance agreements contain a release of a variety of claims, including claims you may have based upon your age, race, national origin, gender, disability, religion, among others. It may also include a release of all claims, whether known to you or not at the signing of the agreement.

However, the United States Equal Employment Opportunities Commission (“EEOC”) has held that, although the severance agreement may restrict the employee’s ability to file a lawsuit, the release cannot restrict the rights of an employee to file a charge of discrimination with the EEOC, nor can the severance agreement limit an employee’s right to testify, assist or participate in an investigation, hearing or other proceeding conducted by the EEOC. Furthermore, the EEOC has declared that an agreement cannot waive an employee’s rights regarding acts of discrimination that occur after the signing of the agreement.

(3)  Seven (7) Day Revocation Period:

When a severance agreement contains an ADEA release of claims, by law, the employer must provide you with seven (7) days to revoke the agreement after signing it. This seven (7) day window cannot be waived or changed by either party.

(4)  Ability to Consult with an Attorney:

Severance packages generally contain more than just the release of ADEA claims, but also claims under Title VII of the Civil Rights Act, Americans with Disabilities Act, Employee Retirement Income Security Act, retaliation, whistle blowing, breach of contract, invasion of privacy, among others. Given the breadth of the claims released, before the signing of a severance agreement, it is extremely important to consult with an attorney prior to its execution.

Moreover, when the severance agreement contains a release, the agreement must specifically advise the employee to seek the advice of any attorney.  Faced with financial distress because of the layoff, you may not be able to think objectively concerning your rights and options. It is best to consult an attorney.

(5)  Consideration:

Consideration is required for every agreement. That means that an employee must receive something of value in exchange for giving up certain rights. That “something of value” must be above and beyond what the employee would otherwise be entitled to.

(6)  Ability to Negotiate:

Despite the “take it or leave it” undertones of an employer, generally, many employers will negotiate severance on some level. Given that, there is also a risk that an employer will revoke the offer of severance if negotiation is attempted.  Your chances of negotiating successfully increase if there is a claim that your particular severance package is not fair in light of your industry, your position, or the circumstances of your employment.  Additionally, the negotiations do not need to focus on the dollar amount connected with the severance agreement.  Employers might be willing to extend insurance coverage, disability benefits, or other items.

(7)  Gather All Information:

Before deciding to accept, negotiate, or reject a severance package, it is important to understand completely what is being offered to you, including compensation, benefits and insurance.  If you are in an industry that provides for deferred stock options or bonus, it is important to understand whether you would still be entitled to it.   You should gather information concerning your employer’s welfare plans, health plans, vacation and sick leave policies, as well as any structured bonus plans or stock options.  If the severance package is only offering you what you would be entitled to, the agreement may lack adequate consideration.

(8)  Restrictive Covenants:

Many employers will place some kind of restrictive covenant into the severance package. These range from confidentiality clauses, to non- disclosure agreements, to non-solicitation agreements, to non-compete agreements.  Therefore, it is important to understand how signing the severance agreement may restrict your ability to find new employment.

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Before you sign a severance agreement, it is important to fully understand your rights and the consequences of accepting the offer. The attorneys at Maya Murphy, P.C., have years of experience in all sectors of employment law. If you have any questions relating to your severance agreement, please contact Joseph C. Maya, Esq. by phone at (203) 221-3100 or via e-mail at JMaya@Mayalaw.com.

What to Know About Your Offer Letter

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In Connecticut, an employment relationship is “at will,” unless governed by a contract. Employment at will grants both parties the right to terminate the relationship for any reason or no reason, at any time. But what about employment pursuant to an offer letter?  Here are a few things you need to know about an offer letter and its terms.

(1)  At-Will Employees:

Most employees are “at-will” employees and an offer letter will most likely confirm that the employment is “at-will.” When an offer letter states that employment will be “at-will” it means that the employer or employee may terminate the employment for a good reason, a bad reason, or for no reason at all, at any time.  In a 2006 case, Petitte v. DSL.net, Inc., the Superior Court held that the employer could terminate an “at-will” employee, in which it offered employment pursuant to an offer letter, prior to the commencement of the employee’s duties.  2006 Conn. Super. LEXIS 915, J.D. of New Haven, Docket. No. CV-04-0489777-S (2006).

(2)  Position and Duties:

When reviewing or drafting an offer letter, you want to make sure that the employer stated the initial position the employee is being hired for and what duties or responsibilities are included as part of that position.  This way, everyone will have a better understanding of what is expected from the employee.  A well-drafted offer letter will often include a reservation of rights for the employer that could include a clause that allows for a change in position, assignment of additional duties and/or the elimination of duties.

(3)  Compensation:

An offer letter should set forth clearly what the base salary is and how that base salary will be paid. For example, is it to be paid out weekly, bi-weekly, or annually? More importantly, any bonus or compensation should be clearly defined as well, including how and when such bonus or commission will be paid.  Generally, in a skillfully drawn up offer letter, there will be a clause reserving the employer’s rights to alter or rescind these arrangements. If the bonus or commission structure is highly complex, an employment agreement or schedule to the offer letter should be considered.

(4)  Benefits:

As an employee, you would want your employer to outline the specific benefits you are expected to receive, including vacation, sick days, personal days, health benefits, pension benefits, 401(k) plans (or the similar), and any other comparable matters.  Generally, the employer will reserve the right to rescind or alter these benefits, in accordance with the corresponding plan.  An employer must provide notice to the employee if it makes any changes to these benefits. Conn. Gen. Stat. §31-71f.

(5)  Restrictive Covenants:

An offer letter will generally not include non-solicitation clauses or non-compete clauses.  However, an offer letter can condition employment upon the signing of these documents at commencement of employment. What is generally found in offer letters are confidentiality clauses and non-disclosure clauses.  By signing the offer letter, the employee (depending on the clause) may agree to refrain from disclosure of certain information, such as salary or client lists. Moreover, the employee may be requested to affirmatively acknowledge that he or she is not currently subject to any restrictive covenants, such as a non-compete clause.

(6)  Conditions of Employment:

While in most circumstances, the employment is “at-will,” the employer can still make the offer of employment contingent of other items, such as satisfactory references, drug screening, background check, valid driver’s license, or proof of authorization.

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As with any employment related document, complex issues can arise.  Careful drafting and review is necessary to protect the interests of the employee and employer.  If you have any questions relating to any offer letter or employment agreement, please contact Joseph C. Maya, Esq. by phone at (203) 221-3100 or via e-mail at JMaya@Mayalaw.com

Courts Cannot Extend Expired Non-Compete Agreements Under Connecticut Law

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Aladdin Capital Holdings, LLC v. Donoyan, 2011 U.S. Dist. LEXIS 61095

Ms. Harumi Aoto Donoyan worked as a Senior Managing Director for Japan Sales and Marketing at Aladdin Capital Holdings, LLC, a boutique investment bank in Stamford, Connecticut.  The firm promoted her to this position in 2008 contingent on executing a restrictive covenant wherein she promised not to complete with the firm following termination while she continued to receive compensation and other benefits from the firm.  Aladdin terminated Ms. Donoyan in April 2010 with the agreement that she would receive her full salary and benefits through May 5, 2011.  This arrangement made prohibitions in the non-compete effective until May 5, 2011 since the restrictions were applicable while she received benefits from the firm.

Aladdin alleged that Ms. Donoyan engaged in activities that amounted to competing with the firm while she was still receiving a salary and benefits.  It filed a suit in federal court on April 25, 2011 and served Ms. Donoyan on April 28, 2011, ten and seven days respectively before the expiration of the restrictive covenant.

The case reached the federal district court in June 2011, well after the non-compete agreement had expired.  Aladdin asked the court to declare that Ms. Donoyan had breached the agreement and issue an injunction prohibiting any further violations.  The court noted that the request for injunctive relief was moot since the time restriction had already expired.

The Court’s Analysis

The court did however analyze its authority as a court sitting in equity to extend the duration of a restrictive covenant as a remedy for a previous breach of a non-compete agreement.  Restrictive covenants can have built-in provisions that extend the time restriction upon a breach by the former employee.

This however, was not the case with the dispute before the court and the only way for the time restriction to be extended was for the court to unilaterally amend the agreement.  While some states’ highest courts have held that the lower courts have “broad equitable power to extend even an expired restrictive covenant as a remedy for breach”, the federal court here did not see any evidence that the Connecticut Supreme Court held this legal stance.

In light of this, the federal court held that it lacked the authority under Connecticut state law to extend an expired non-compete agreement.  The federal court’s holding with regard to this issue was that “a request for injunctive relief based on a restrictive covenant becomes moot upon the expiration of the period specified in the parties’ restrictive covenant, unless the restrictive covenant contains language that expressly permits extension of the restrictive covenant”.  Aladdin could have placed an automatic extension mechanism in its non-compete agreement but chose not to do so.

Even though the court acknowledged that Ms. Donoyan had in fact breached the non-compete agreement, it ultimately denied Aladdin’s request to extend and enforce the restrictive covenant based on the fact it lacked the authority to do so under Connecticut law.

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The lawyers at Maya Murphy, P.C., are experienced and knowledgeable employment and corporate law practitioners and assist clients in New York, Bridgeport, Darien, Fairfield, Greenwich, New Canaan, Norwalk, Stamford, Westport, and elsewhere in Fairfield County.  If you have any questions relating to your non-compete agreement or would like to discuss any element of your employment agreement, please contact Joseph C. Maya, Esq. by phone at (203) 221-3100 or via e-mail at JMaya@Mayalaw.com.

What is “FINRA” and What Does (Should) It Do?

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Attorneys here at Maya Murphy frequently are called upon to represent individuals who are the subject of a FINRA inquiry, or a party to a FINRA arbitration.  We routinely post to our website client alerts regarding FINRA-related decisions but it occurred to us that we should take a step back and issue a post about FINRA itself—what it is, what it does (or doesn’t do), and where it came from.  Knowledge is power and because FINRA so pervades the financial industry to be forewarned is to be forearmed.

What is FINRA?

“FINRA” is an acronym for the “Financial Industry Regulatory Authority,” a so-called “Self Regulating Organization.”  On July 30, 2007, the New York Stock Exchange and the National Association of Securities Dealers (“NASD”) combined to form FINRA.  To be sure, FINRA is cloaked in official garments of the purest silk.  It was established under § 15A of the Securities Exchange Act of 1934, 15 U.S.C. § 78o-3, Karsner v. Lothian, 532 F.3d 876, 879 n.1 (D.C. Cir. 2008). It is authorized to exercise comprehensive oversight over “all securities firms that do business with the public.”  Sacks v. SEC, 648 F.3d 945 (9th Cir. 2011) (quoting 72 Fed. Reg. 42170 (Aug. 1, 2007)).

With respect to the creation of FINRA, the NASD, itself, made it clear that the new entity was directed at “the regulation of the financial markets.”  Id. “By virtue of its statutory authority, NASD wears two institutional hats: it serves as a professional association, promoting the interests of its members; and it serves as a quasi-governmental agency, with express statutory authority to adjudicate actions against members who are accused of illegal securities practices and to sanction members found to have violated the Exchange Act or Securities and Exchange Commission  . . . regulations issued pursuant thereto.”  NASD v. SEC, 431 F.3d 803, 804 (D.C. Cir. 2005) (citations omitted).

FINRA is a private corporation and the largest “independent” regulator of securities firms in the United States, overseeing approximately 4,800 brokerage firms, 172,000 branch offices, and 646,000 registered securities representatives.  It (not necessarily by claimant choice or mere happenstance) benefits from up to 9000 arbitration filings every year.  FINRA has a staff of approximately 3,000 employees and in 2009, collected revenue of $775 Million.  Senior FINRA management enjoys seven-figure annual salaries.

Codes for Industry Disputes and Customer Disputes

FINRA maintains two separate but similar “Codes of Arbitration Procedure”: one for “customer disputes” and another for “industry disputes.” In drafting its Industry Code, FINRA has apparently chosen to “trim some of the fat” off of the controlling law.  For example, Rule 13209 (amended December 15, 2008) states: “During an arbitration, no party may bring any suit, legal action, or proceeding against any other party that concerns or that would resolve any of the matters raised in the arbitration.”

In Arnold Chase Family, LLC v. UBS AG, 2008 U.S. Dist. LEXIS 58697 (D. Conn. Aug. 4, 2008), Judge Kravitz (in analyzing the analogous FINRA “customer” Rule 12209) demonstrated remarkable restraint in reminding UBS that within the Second Circuit (which includes Connecticut and New York) since at least 1998, United States District Courts have had not only the right, but also the duty to entertain requests for preliminary injunctions during the pendency of arbitration.  See Am. Express Fin. Advisors, Inc. v. Thorley, 147 F.3d 229, 231 (2d Cir. 1998). But FINRA’s arbitral disdain for the twin plinths of fundamental fairness and the opportunity to confront one’s accusers does not stop there.

Code Requirements

The Code’s §§ 13400-13402 require that at least one “non-public arbitrator” (i.e., one who within the last five years was associated with, or registered through, a broker or a dealer) serve on every three-person arbitration panel.  Given the state of the economy, in general, and the sudden appearance, disappearance, and consolidation of Wall Street firms, in particular, it is not unreasonable for a “non-public arbitrator” to have past connections or future aspirations with respect to a corporate party to the arbitration.[1] 

This ethical tar pit is bottomless, as evinced by Rule 13410, which vests in the “Director of FINRA Arbitration” discretion to retain an arbitrator who fails to make a required disclosure, notwithstanding a timely notice of disqualification by one of the parties.  See, generally, Credit Suisse First Boston Corp. v. Grunwald, 400 F.3d 1119 (9th Cir. 2005).

Interfering with Productive Arbitration

FINRA also makes it clear that it will not permit its Code to let the discoverable truth get in the way of an otherwise productive arbitration.  Rule 13506(a) ostensibly permits pre-arbitration requests for documents or information, provided such requests do “not require narrative answers or fact finding,” thereby rendering such requests virtually useless.  Rule 13510 states outright that depositions are “strongly discouraged” and permitted “only under very limited circumstances.”  The absence of meaningful pre-arbitration discovery makes the proceeding something akin to “trial by ambush.”  Rule 13604(a) states: “The panel will decide what evidence to admit.  The panel is not required to follow state or federal rules of evidence.”

Finally, Rule 13904 permits rendition by the panel of a skeletal or elliptical award devoid of underlying factual findings or legal reasoning.  Even if the parties jointly request an “explained decision” (requiring an additional $400.00 “honorarium” to the FINRA chairperson), only “general reasons” for the award are required, and inclusion of legal authorities and damage calculations is specifically not required.  Under these circumstances, mere comprehension of the basis for the award, much less meaningful judicial review of the award even under the most stringent “manifest disregard” standard (assuming such standard of review still exists, see Stmicroelectronics, N.V. v. Credit Suisse Securities (USA) LLC 648 F.3d 68, 78 (2d Cir. 2011), is rendered impossible.

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The take-away from this is that for financial industry professionals, FINRA rules, investigations, and arbitrations (however unsatisfying) are often the only game in town.  If you find yourself trying to negotiate the FINRA minefield and need help, contact us at the Maya Murphy, P.C. office located in Westport, Connecticut, at (203) 221-3100.

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.

[1] In Arnold Chase Family, LLC v. UBS AG, 2008 U.S. Dist. LEXIS 58697 (D. Conn. Aug. 4, 2008), Judge Kravitz made pointed reference to both the sudden demise of Bear Stearns and the fact that securities customers do not have much say in the writing of FINRA’s rules.  Id. at *8-9, *13-14.

Court Confirms FINRA Arbitration Award for Employee in the Amount of $150,000 with Interest

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Scoble v. Blaylock & Partners, L.P., 2012 U.S. LEXIS 13706 (S.D.N.Y. 2012)

Matthew W. Scoble (“Scoble”) filed a petition against his former employer, Blaylock & Partners, L.P., subsequently known as Blaylock & Company, Inc. (“Blaylock”), to confirm an arbitration award pursuant to § 9 of the Federal Arbitration Act (“FAA”), 9 U.S.C. § 9.  Scoble claimed that Blaylock breached a contract between the parties by failing to make a severance payment of $150,000 to him after Blaylock terminated his employment without cause.

The Financial Industry Regulatory Authority (“FINRA”) appointed a panel of three arbitrators to hear the matter after both parties agreed to submit the dispute to arbitration for a decision and award.  Both parties participated in the arbitration hearing that lasted several days.  Thereafter, the Arbitration Panel issued an award to Scoble in the amount $150,000 in compensatory damages.  The responsible party, Blaylock, would be liable for post-judgment interest pursuant to FINRA’s Code of Arbitration Procedure if it did not pay the award within thirty days.

The Court found that Scoble’s petition was sufficiently supported and indicated that there was no question of material fact.  Blaylock did not move to modify, vacate or correct the arbitration award and did not submit an opposition to the petition.  The petition to confirm the arbitration award was granted and judgment was entered for Scoble in the amount of $150,000 with post-judgment interest.

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If you have any question relating to FINRA or arbitration, please do not hesitate to contact Joseph Maya and the other experienced employment law attorneys at Maya Murphy, P.C. at (203) 221-3100 or JMaya@Mayalaw.com to schedule a free initial consultation.

Federal Court Found Form U-4 and FINRA Rules to Constitute a Sufficient Basis for an Arbitration Agreement Between the Parties

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Lawrence R. Gilmore v. Scott T. Brandt, 2011 WL 5240421 (D. Colo. Oct. 31, 2011).

In a case before the United States District Court for the District of Colorado, Lawrence Gilmore (“Gilmore”) filed a motion to confirm the Financial Industry Regulatory Authority (“FINRA”) arbitration award in his favor, pursuant to the Federal Arbitration Act (“FAA”), 9 U.S.C. § 9.  Scott Brandt (“Brandt”) responded by filing a motion to vacate the FINRA award pursuant to the FAA, 9 U.S.C. § 10.  The court granted Gilmore’s motion to confirm the award, entered judgment for the award, and denied Brandt’s motion to vacate the award.

Case Details

The dispute underlying the FINRA arbitration began when Brandt, a representative of Lighthouse Capital Corporation, suggested that Gilmore invest $92,000 in Diversified Lending Group, Inc. (“DLG”).  Gilmore made the investment, which was quickly decimated.  Gilmore alleged that DLG was a Ponzi scheme and filed a Statement of Claim with FINRA.  Rather than seek a stay of arbitration, Brandt contested the issue of arbitrability by appending a statement of jurisdictional objection to his FINRA Arbitration Submission Agreement and raising jurisdictional objections throughout the arbitration proceedings.

FINRA appointed a panel of arbitrators to hear the matter, however, the arbitration panel did not directly address Brandt’s jurisdictional challenge.  In December 2010, the panel issued an arbitration award in Gilmore’s favor for compensatory damages of $106,024.68, post-judgment interest, and attorneys’ fees.

Arbitrability of a Dispute

In his motion for vacatur, Brandt argued that he never entered into an arbitration agreement with Gilmore; therefore, their dispute should not have been subjected to arbitration. The district court found that Brandt had sufficiently preserved his objection to arbitrability, and that it fell to the court to decide whether the dispute was in fact arbitrable.

Because arbitration is entirely a matter of contract, a party cannot be required to arbitrate a dispute that it has not agreed to submit to arbitration. See Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 57 (1995).  When Brandt first sought to be licensed to sell securities, he executed a Uniform Application for Securities Industry Registration or Transfer (“Form U-4”), which contained a section agreeing “to arbitrate any dispute, claim or controversy that may arise between me and my firm, or a customer, or any other person, that is required to be arbitrated under the rules, constitutions, or by-laws of [FINRA].”

The court determined that the agreement embodied in Brandt’s Form U-4 would constitute an agreement to arbitrate the dispute with Gilmore only if FINRA rules required this dispute to be arbitrated.

FINRA Rule 12200

FINRA Rule 12200 is a broad provision that generally applies to any customer dispute arising in connection with the business activities of a FINRA member.  Specifically, FINRA Rule 12200 requires that a dispute must be arbitrated under the FINRA Code of Arbitration Procedure if: (1) arbitration is required by written agreement or requested by a customer; (2) the dispute is between a customer and a FINRA member or associated person; and (3) the dispute arises in connection with the business activities of the FINRA member or associated person.

By submitting his Statement of Claim to FINRA for arbitration, Gilmore was clearly requesting arbitration of the dispute.  The district court found that Gilmore was in a customer relationship with Brandt because Brandt had induced him to invest in DLG.

The Court’s Decision

Additionally, the district court found that Gilmore’s claims related to Brandt’s recommendation of an investment in particular securities fell within the class of disputes reasonably regulated by FINRA.  Therefore, the district court determined that FINRA Rule 12200 required the dispute between Gilmore and Brandt be submitted to arbitration.  Because of this result, Brandt’s U-4 Form was determined to be his agreement to submit to arbitration of the dispute.

Because the arbitration panel had jurisdiction to decide the dispute, the award decision is entitled to deference by the federal court.  9 U.S.C. § 9-11.  Because Brandt provided no argument that satisfied the statutory grounds for vacatur of an arbitration award, 9 U.S.C. § 10(a), the court granted Gilmore’s motion for confirmation of the arbitration award of compensatory damages of $106,024.68, with interest, and attorneys’ fees.

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