Posts tagged with "California"

Court Grants Motion for Transfer to California District Court in Non-Compete Agreement Dispute

Court Grants Motion for Transfer to California District Court in Non-Compete Agreement Dispute

United Rentals, Inc. v. Pruett, 296 F. Supp.2d 220

United Rentals, Inc. was a Delaware corporation with headquarters in Connecticut that employed Mr. Lawrence Pruett from May 2001 until August 2003 in its San Juan Capistrano, CA office. He first worked as a salesperson and then the company promoted him to branch manager. Mr. Pruett signed an Employment Agreement after verbally accepting the branch manager position wherein he agreed to restrictive covenants preventing employment with a competitor, soliciting the company’s customers, or from disclosing trade secrets. The agreement contained a choice of law provision that stated Connecticut law would govern legal disputes arising from the agreement and that courts (federal or state) in Fairfield County had exclusive jurisdiction. Mr. Pruett abruptly resigned in August 2003, began to work for one of United’s competitors, Brookstone Equipment Services, and allegedly solicited United’s customers. United Rentals sued Mr. Pruett in federal court for violation of the non-compete agreement and requested that the United States District Court of Connecticut enforce the provisions of the agreement. Mr. Pruett however submitted motions to dismiss and to transfer the case to a court in California, where he lived and worked.
The court denied Mr. Pruett’s motion to dismiss but granted his motion for transfer, handing the case over to the Central District of California. The central issues of the case were the enforceability of the forum selection clause and the court’s ability to transfer the case to another district court. Mr. Pruett argued that it was unenforceable because he “lacked notice of its existence, because the clause is unreasonable, and because it was the product of United’s overreaching”. The court mentioned two United States Supreme Court cases, M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972), and Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585 (1991) to establish the federal judicial system’s attitude toward forum selection clauses and their enforceability. In Bremen, the court held that the clauses are valid and enforceable so long as there is no showing that it would be unreasonable or unjust. This case reversed American courts’ “long-standing hostility to forum selection clauses”. In Carnival, the court held that a forum selection clause was enforceable only if both parties were aware of its existence. In the current case, the court denied the motion to dismiss and found that the clause was reasonable and that the written contract had indeed provided Mr. Pruett with adequate notice of its existence.
The court did however grant Mr. Pruett’s motion for transfer under 28 U.S.C. 1404(a) which authorizes district courts to transfer civil action to other districts “for the convenience of parties and witness, [and] in the interest of justice”. In reaching this decision, the court analyzed the convenience of the parties, the existence of the forum selection clause, and factors of systemic integrity and fairness. Mr. Pruett bore the burden of proof to show that the transfer was in the best interest of justice and the court concluded that he meant his burden. All the witnesses for the case lived in California, the actions that led to the suit took place in California, and the vast majority of documentary evidence (sales records, advertising information, customer lists, etc.) was in California. With regard to justice, United Rentals asserted that a transfer to a district court in California would deprive it of uniform treatment of its employment contracts. The court recognized that Connecticut and California law greatly differ on their treatment of non-compete agreements but concluded that California had a materially greater interest in the case “because the impact of this litigation will be felt entirely in California”. Furthermore, the court noted that California had a right to apply its own laws in order to protect its residents from anti-competitive measures by out-of-state employers that are contrary to California’s established public policy.
This case demonstrates that the convenience of the parties and the interests of justice can at times outweigh a contractual forum selection clause. The court analyzed these factors and concluded that the facts surrounding the case favored a transfer of venues to a district court in California.
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.

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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.

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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.

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Connecticut Non-Competes and Jurisdiction Can Be Applicable To Out-Of-State Companies And Employees

United Natural Foods, Inc. v. Hagen, 2010 U.S. Dist. LEXIS 82871
Connecticut Non-Competes and Jurisdiction Can Be Applicable To Out-Of-State Companies And Employees
This case concerns two former employees, Mr. Barclay Hope and Mr. James Hagen, of United Natural Foods. The two men worked for Albert’s Organics, a nationwide subsidiary of the Providence, Rhode Island based United Natural Foods. Mr. Hope was employed in the Los Angeles area from 1997 to December 2006 at which time he began to work as an independent consultant in the organic food industry. In May 2010 Mr. Hope accepted the position of Chief Executive Officer at Freshpack Produce, a Denver, Colorado based produce grower and shipper. Albert’s Organics hired Mr. Hagen in March 2003 upon the recommendation of Mr. Hope to work in the company’s Denver offices. Mr. Hagen left Albert’s in April 2010 and began a new job as the Chief Operating Officer of Freshpack Produce, the same company as Mr. Hope, and upon the recommendation of Mr. Hope. While employed by United Natural Foods Mr. Hagen and Mr. Hope exchanged many emails wherein they transferred some of United Natural Foods’ transactions, customer information, trade secrets, and other confidential information. Mr. Hope maintained hard and electronic copies of this confidential information and utilized it in the management of Freshpack Produce’s business operations.
Mr. Hope signed an “Employment Termination Agreement and Release” upon the termination of his employment with United Natural Foods wherein he agreed to abide by a non-compete agreement (one-year duration) and confidentiality provision (indefinite). A special and notable feature of this agreement however was the choice of law provision that stated the agreement was “made pursuant to and shall be governed by the laws of the State of Connecticut” such that “the parties agree that the courts of the State of Connecticut, and the Federal Courts located therein, shall have exclusive jurisdiction over all matters arising from this Agreement”. This is especially interesting given that none of the parties (individuals or the companies) in this case are based in Connecticut. United Natural Foods is based in Rhode Island, Freshpack Produce is based in Colorado, Mr. Hagen worked in Colorado, and Mr. Hope worked in California. Connecticut law is must more apt to enforce a non-compete agreement than many states. Colorado for example, where Freshpack Produce and Mr. Hagen were based, historically has a policy against the enforcement of non-compete covenants.
The courts do not see a problem in enforcing a non-compete agreement under Connecticut law for an individual living in California and working for a Colorado based company. In the past, courts have enforced non-compete agreements in similar situations because the parties both agreed to the jurisdiction in the covenant and the swiftness and ease of air travel negates distance as an issue. This case illustrates how employees should be mindful of the jurisdiction contained in the choice of law provision in their non-compete agreement. The law and court governing the agreement could have a profound effect on the employee should a dispute arise between the signing parties of the agreement. Corporations have the liberty to afford the best and brightest lawyers to handle their legal matters and they do things for specific, advantageous reasons. It is safe to say that a corporation’s legal department will construct an agreement that utilizes a jurisdiction that will be favorable to them in the event of a legal dispute with a former employee. Employees should pay close attention to the jurisdiction and make efforts to understand the applicable law if the choice of law is not that of the state where they live.
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.

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Two-Prong Test for Temporary Injunction for Breach of Non-Solicitation Agreement

Two-Prong Test for Temporary Injunction for Breach of Non-Solicitation Agreement

Integrated Corporate Relations, Inc. v. Bidz, Inc., 2009 Conn. Super. LEXIS 2212

Integrated Corporate Relations, Inc. was a Westport-based parties relations and public consulting firm that contracted with Bidz, Inc., a California corporation, to perform various investor relations services. The agreement between the companies contained a non-solicitation clause that prohibited Bidz from soliciting, hiring, or otherwise engaging any of Integrated’s personnel during the agreement and for one year following its termination. Integrated stated that this was their standard practice with clients in order to protect its legitimate business interests and the resources it had spent to develop its business model. It also claimed that it incurs a hardship when an employee leaves because it must find a suitable replacement.
Integrated hired Mr. Andrew Greenebaum in 2003 as an at-will employee at the company’s Los Angeles office to work as a Senior Managing Director where he was the primary manager of Bidz’s account. Mr. Greenebaum worked in this capacity until his resignation on February 27, 2009 at which point he founded his own company, Addo Communications, Inc. with another former Integrated employee. Bidz terminated its business relationship with Integrated on March 30, 2009 and shortly thereafter contracted with Mr. Greenebaum and Addo for investor relations services. Integrated sued Bidz when it learned of this new business relationship and claimed that Bidz had violated the non-solicitation agreement in their contract. The company requested equitable relief and called for the enforcement of the restrictive covenant. Integrated requested a temporary injunction while the case was being decided in order to prevent further violations of the agreement. The court’s holding in this case pertains to the issue of whether to grant a temporary injunction.
The court outlined that the primary purpose of a temporary injunction is to “preserve the status quo until the rights of the parties can be finally determined after a hearing on the merits”. Connecticut courts will generally grant temporary injunctions when the moving party: 1) demonstrates “it is likely to succeed on the merits of its case” and 2) that it will “suffer immediate and irreparable harm if the injunction is not granted”. The court concluded that Integrated failed to meet either of these requirements and denied the company’s request for a temporary injunction.
The court concluded that Integrated lacked a meritorious claim regarding a breach of the employment contract by Bidz contracting with one of its former employees. The non-solicitation agreement in question is one between a consulting company and a client, not between a company and its employee(s). Integrated failed to present any case from any jurisdiction in the United States where a court recognized this business arrangement as an interest that warranted legal protection. This, according to this court, meant that Integrated lacked a legitimate business interest that a temporary injunction would be necessary to protect. Additionally, Integrated failed to present evidence that Bidz had actually “solicited” Mr. Greenebaum and purposefully induced him to terminate his employment with Integrated. The court used these two factors to hold that that Integrated would most likely not succeed on the merits of its case.
The facts of the case also led the court to conclude that Integrated would not experience imminent and irreparable harm if it failed to issue an injunction. The court held that this was requisite for granting a temporary injunction and commented “Connecticut law supports a distinctly moderated level of proof required to establish the elements of irreparable harm”. Even though Connecticut courts require only a “moderated level of proof”, the moving party must demonstrate some degree of imminent, irreparable harm. The only loss that Integrated could demonstrate was that two employees terminated their employment and started their own company. They were both at-will employees however and could have done so at any point in time, regardless of Bidz’s action.
In conclusion, the court held that Integrated failed to meet the requirements that would warrant a temporary injunction against Bidz to prevent it from transacting with Mr. Greenebaum and his company Addo.
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.

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California Appellate Court Upholds Vacatur of FINRA Arbitration Award Based on Denial of Due Process

California Appellate Court Upholds Vacatur of FINRA Arbitration Award Based on Denial of Due Process

Roland Hansalik v. Wells Fargo Advisors, LLC, 2012 WL 1423014 (Cal. Ct. App. April 25, 2012)

In a recent case before the California Court of Appeals, Wells Fargo Advisors, LLC (“Wells Fargo”) appealed the trial court order to vacate the Financial Industry Regulatory Authority (“FINRA”) award in its favor against Ronald Hansalik (“Hansalik”). The appellate court found no error in the trial court ruling and affirmed the decision.

The underlying dispute in this case arose from Wells Fargo’s action to collect from Hansalik the unpaid balance of $1,239,044.16 due on a promissory note that contained a clause agreeing to arbitrate before FINRA. Prior to the initiation of arbitration proceedings, Hansalik moved from California to Switzerland, and failed to notify FINRA of his change of address as required by a notice sent to all members of FINRA’s predecessor, the National Association of Securities Dealers (“NASD”). FINRA mailed Wells Fargo’s Statement of Claim and other notices to Hansalik’s prior residential address in California. The post office notified FINRA that Hansalik’s forwarding address was an incomplete address in Zurich, Switzerland. Wells Fargo provided FINRA with the street address of the private bank where Hansalik worked in Switzerland. FINRA continued to mail arbitration notices to Hansalik’s former residential address in California. In April 2010, FINRA issued a default award against Hansalik for the principal sum of $1,297,694.14, plus interest, costs and attorney fees. The award also stated that the arbitrator determined that Hansalik had been properly served notice of the Statement of Claim and Notification of the Arbitrator.

After the award, Wells Fargo hired a Swiss attorney who demanded payment from Hansalik. Hansalik immediately filed a petition to vacate the FINRA arbitration award under the relevant provisions of California law, claiming that he never received notice and challenging the fundamental fairness of the entire arbitration proceeding. The trial court granted the petition on the grounds that Hansalik was not properly served under FINRA rules and that he was denied due process. Wells Fargo appealed contending that the arbitrator found that service complied with FINRA rules, that Hansalik was not denied due process, and that there was substantial evidence that Hansalik received actual notice of the arbitration.

Under California law, the limited grounds for vacating an arbitration award include instances when an arbitrator exceeds his authority by denying the litigant a fair hearing. Code Civ. Proc. § 1286.2, subd. (a)(4). This is substantially similar to the statutory grounds for vacatur in the Federal Arbitration Act (“FAA”), 9 U.S.C. § 10(a). California case law provides precedent for reversal of an arbitration award when the arbitrator “did not give appellant notice of any hearing, nor did he give it any opportunity to be heard.” Smith v. Campbell & Facciolla, Inc. 202 Cal.App.2d 134, 135 (1962).

FINRA Rule 13301(a) requires that the initial Statement of Claim be served on the individual at his residential address or “usual place of abode.” The rule further provides that if service cannot be completed at this address, the initial Statement of Claim will be served at the person’s business address. The appellate court concurred with the trial court determination that FINRA did not give Hansalik notice and an opportunity to be heard because it knowingly sent notices to his previous residential address instead of sending them to the current business address provided by Wells Fargo. Furthermore, the appellate court concurred that even if Hansalik had actual notice of the initial Statement of Claim from Wells Fargo via Federal Express and e-mail, he was entitled to such notice from FINRA.

FINRA Rule 13413 provides that the arbitration panel has the authority to interpret and determine the applicability of all provisions under the FINRA rules. The appellate court held that proper notice is so intrinsic to the fundamental fairness of a hearing that it denied Wells Fargo’s argument that this rule gave the arbitrator the power to interpret the FINRA notice rule and determine if service was proper under FINRA rules.

In light of FINRA’s unfair procedure and Hansalik’s lack of actual notice, the appellate court determined that the trial court properly vacated the FINRA arbitration award.

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.

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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.

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Court Denies Motion to Vacate FINRA Arbitration Award Without A Hearing

In a recent case before the Northern District of California, Farhang Oshidary (“Oshidary”), a securities broker, filed a petition to vacate a Financial Industry Regulatory Authority (“FINRA”) Arbitration Award issued on February 10, 2012 in favor of Grace Purpura–Andriola, Trustee FBO Grace Purpura–Andriola Revocable Living Trust (“Andriola”) and Olga Michel Basil ( “Basil”). Andriola and Basil filed an opposition to the motion, and a request for entry of judgment on the FINRA award pursuant to 9 U.S.C. § 9. The court denied the motion to vacate without a hearing, and confirmed the FINRA award.

The underlying dispute in this case arose from Oshidary’s investment advice to Andriola, Basil, and others while Oshidary was a broker at the Menlo Park, California office of Smith Barney, now Citigroup Global Markets, Inc (“Citigroup”). Andriola and several other claimants filed suit against Oshidary and Citigroup in California Superior Court, which ordered the case to FINRA Arbitration. After multiple hearing sessions, the FINRA arbitration panel dismissed all claims against Citigroup and dismissed all claims against Oshidary, except for claims for breach of fiduciary duty brought by Andriola, Basil and three other parties. On February 10, 2012, the panel issued its Arbitration Award. It found that Oshidary was liable for breach of fiduciary duty to Andriola for $250,000 plus seven-percent interest from April 1, 2001. Oshidary was also found liable for breach of fiduciary duty to Basil for $120,000 plus seven-percent interest from January 1, 2005.

Two of the four separate theories under which Oshidary proposed to vacate the FINRA award were rejected by the court for failure to satisfy the burden of proof. Under one of the remaining theories, Oshidary argued that, in violation of California Civil Procedure Code § 1281.9, the Chairman of the FINRA arbitration panel failed to disclose information that might preclude him from being impartial. Under his final theory, Oshidary argued that the FINRA arbitration panel manifestly disregarded the law by acting without jurisdiction over Andriola’s claims, which were barred by the “six year rule” regarding arbitration eligibility.

The Federal Arbitration Act (“FAA”), 9 U.S.C. § 10(a), provides four narrowly delineated circumstances in which a federal district court can vacate an arbitration award:
(1) where the award was procured by corruption, fraud or undue means;
(2) where there was evident partiality or corruption in the arbitrators, or either of them;
(3) where 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; or
(4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.

Courts may not reverse an arbitration award even in the face of an erroneous interpretation of the law. However, the court may vacate an award where the arbitrators’ decision is in manifest disregard of the law. Johnson v. Wells Fargo Home Mortg., Inc., 635 F.3d 401, 414–15 (9th Cir.2011). “Manifest disregard of the law” has been interpreted to mean “something beyond and different from a mere error in the law or failure on the part of the arbitrators to understand and apply the law.” Collins v. D.R. Horton, Inc., 505 F.3d 874, 879 (9th Cir.2007) (quotation omitted).

California Civil Procedure Code § 1281.9, subdivision (a), imposes on arbitrators a duty to “disclose all matters that could cause a person aware of the facts to reasonably entertain a doubt that the proposed neutral arbitrator would be able to be impartial.” In decisions interpreting this statute, courts have highlighted the importance of the link between the subject matter of the arbitration and the matter subject to disclosure. In the instant case, the alleged conflict occurred over two decades ago, and was completely unrelated to the subject of the arbitration. Therefore, the court denied vacatur on these grounds.

FINRA Rule 12206(a) provides that “[n]o claim shall be eligible for submission to arbitration under the Code where six years have elapsed from the occurrence or event giving rise to the claim. The panel will resolve any questions regarding the eligibility of a claim under this rule.” Eligibility under Rule 12206 is a question for the arbitrators and not for the court. The FINRA arbitration panel was free to interpret Rule 12206 as it saw fit, in particular with respect to the triggering date, i.e. the “occurrence or event giving rise to the claim.” FINRA Rule 12206. That the investments at issue were loans supported the Panel’s decision to not choose the purchase date as the triggering event because, unlike other investments, the investor likely will not know whether repayment will occur until the agreed-upon return date.

Because the court denied Oshidary’s vacatur of the award on each of the four separate grounds, the court found that confirmation of the FINRA arbitration award was appropriate. Judgment would be entered by separate order, once respondents confirmed that they withdrew their parallel request to the state court.

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.

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