Posts tagged with "defamation"

An Overview of Legal Issues Relating to Bullying and Cyberbullying in Connecticut

The purpose of this article is to explore the laws, statutes, and cases relating to school bullying in Connecticut, specifically “cyberbullying,” and to provide an overview of the types of legal avenues that may be available to a victim of bullying.

According to Connecticut’s General Assembly Commission on Children, “25 percent of Connecticut high school students – and 35 percent of the state’s 9th graders – report having been bullied or harassed on school property in the previous year.”[1] Furthermore, the report states that “[m]ore than 900,000 U.S. high school students reported being cyberbullied in one year.”[2] According to the U.S. Department of Justice, “Bullying may be the most underreported safety problem in American schools.”[3]

The National Crime Prevention Council (NCPC) defines cyberbullying as “similar to other types of bullying, except that it takes place online and through text messages sent to cell phones.” www.ncpc.org.  The NCPC has said that cyberbullying can take the form of:

  • Sending mean or threatening emails, instant messages, or text messages;
  • Excluding someone from an instant messenger buddy list or blocking their email for no reason;
  • Tricking someone into revealing personal or embarrassing information and sending it to others;
  • Breaking into someone’s email or instant message account to send cruel or untrue messages while posing as that person;
  • Creating websites to make fun of another person such as a classmate or teacher;
  • Using websites to rate peers as prettiest, ugliest, etc.

One recent study from Texas describes cyberbullying as bullying in which bullies use the Internet, text messaging, and similar technology, “which give an illusion to anonymity, [and] encourage bullying by those who would not normally engage in such behavior.  They also allow a bully to avoid direct confrontation with the target.”[4]

I. Conn. Gen. Stat. §10-222d

In July 2011, Governor Dannel Malloy signed Public Act 11-232 into law, marking Connecticut’s first anti-bullying legislation.  The Act, known as “An Act Concerning the Strengthening of School Bullying Laws,” defines bullying as “the repeated use by one or more students of a written, oral or electronic communication, such as cyberbullying, directed at or referring to another student attending school in the same district.”[5] The law defines cyberbullying as “any act of bullying through the use of the Internet, interactive and digital technologies, cellular mobile telephone or other mobile electronic devices or any electronic communications.”[6]

The law requires that each local and regional board of education develop and implement a specific bullying policy addressing the existence of bullying within its schools.  Specifically, the law requires the school policy to:

  • Enable students to anonymously report acts of bullying to school administrators;
  • Appoint a safe school climate coordinator to facilitate the school’s plan;
  • Enable the parents or guardians of students to file written reports of suspected bullying;
  • Require school administrators (including teachers and staff) who witness bullying or receive reports of bullying to notify a school administrator no more than one day after the employee witnesses or receives the report of bullying; and to file a written report no more than two school days after making such oral report;
  • Provide for the inclusion of language in student codes of conduct concerning bullying;
  • Require each school to notify the parents or guardians of students who commit bullying and the parents or guardians of students who are the victims of bullying, and invite them to attend at least one meeting.

The Governmental Immunity Barrier

The doctrine of governmental immunity may preclude a plaintiff in Connecticut from recovering on a claim against a school district. Where the defendants’ activities in a bullying case are discretionary, they may enjoy the defense of governmental immunity; conversely, where the defendants’ activities alleged in the complaint are ministerial, they cannot be shielded by governmental immunity.[7] A ministerial act is an act which is “performed in a prescribed manner without the exercise of judgment or discretion . . ..”  There must be a “written policy, directive, or guidelines mandating a particular course of action.”[8] If a court deems the acts and responsibilities of a school district to be ministerial, governmental immunity will not serve to provide immunity.

That distinction was tested in Santoro v. Town of Hamden. There, the Connecticut Superior Court held that plaintiffs, parents of a bullying victim, could not maintain a private cause of action under §10-222d, finding that “section 10-222d does not provide a basis for circumventing the doctrine of sovereign immunity.” As such, the court granted defendants’ motion to strike two counts of plaintiffs’ complaint on the grounds that the school district was shielded by governmental immunity.[9]

There is an exception to the immunity defense, which permits a tort action in the circumstance of “perceptible harm to an identifiable person.” Scruggs, at *70.  The “identifiable person, imminent harm exception” applies when the circumstances make it apparent to the public officer charged with the exercise of discretion that his or her failure to act would be likely to subject an identifiable person to imminent harm.  Rigoli v. Town of Shelton, 2012 Conn. Super. LEXIS 349, at *9 (Feb. 6, 2012).  Connecticut courts adhere to a three-pronged test.  Failure of a plaintiff to meet all three prongs will be fatal to a claim. Id. The test requires: (1) an imminent harm; (2) an identifiable victim; and (3) a public official to whom it is apparent that his or her conduct is likely to subject that victim to that harm.  Id. The Court in Esposito concluded that schoolchildren are a “foreseeable class to be protected.” Esposito, at *28.

II. Criminal Statutes and Cyberbullying

The 2011 revision to Connecticut’s anti-bullying statute included a new provision requiring the school principal, or the principal’s designee, “to notify the appropriate local law enforcement agency when such principal, or the principal’s designee, believes that any acts of bullying constitute criminal conduct.”[10]

Below is a non-exhaustive list of crimes that may be implicated by school bullying.

a. Criminal Harassment

Connecticut General Statute § 53a-182b, Harassment in the first degree, and 53a-183, Harassment in the second degree, are Connecticut’s criminal harassment statutes.  A person is guilty of harassment in the first degree when, “with the intent to harass, annoy, alarm or terrorize another person, he threatens to kill or physically injure that person or any other person, and communicates such threat by telephone, or by telegraph, mail, computer network, as defined in section 53a-250, or any other form of written communication, in a manner likely to cause annoyance or alarm and has been convicted of [a specifically enumerated felony].”

A person is guilty of harassment in the second degree when, “(1) By telephone, he addresses another in or uses indecent or obscene language; or (2) with intent to harass, annoy or alarm another person, he communicates with a person by telegraph or mail, by electronically transmitting a facsimile through connection with a telephone network, by computer network, as defined in section 53a-250, or by any other form of written communication, in a manner likely to cause annoyance or alarm; or (3) with intent to harass, annoy or alarm another person, he makes a telephone call, whether or not a conversation ensues, in a manner likely to cause annoyance or alarm.”

Not all cyberbullying, however, rises to the level of statutorily defined harassment.  As one author has noted, “it is more difficult to prosecute bullies under anti-harassment or anti-stalking statutes due to the mens rea requirement in criminal proceedings . . . [and] thus, criminal statutes do not offer victims of cyberbullying a viable option to seek redress against their harassers.”[11]

b. Bias Crimes

A person is guilty of intimidation based on bigotry or bias when such person maliciously, and with specific intent to intimidate or harass another person because of the actual or perceived race, religion, ethnicity, disability, sexual orientation or gender identity or expression of such other person, causes serious physical injury to such other person or to a third person.[12] Furthermore, a person is guilty of intimidation based on bigotry or bias when such person maliciously, and with specific intent to intimidate or harass another person because of the actual or perceived race, religion, ethnicity, disability, sexual orientation or gender identity or expression of such other person, does any of the following:

–          Causes physical contact with such other person;

–          Damages, destroys or defaces any real or personal property of such other person; or

–          Threatens, by word or act, described in subdivision (1) or (2) of this subsection, if there is reasonable cause to believe that an act described in subdivision (1) or (2) of this subsection will occur.[13]

In an action for damages resulting from intimidation based on bigotry or bias, any person injured in person or property as a result of such an act may bring a civil action against the person who committed such act to recover damages for such injury.  Where a plaintiff in such an action prevails, the court shall award treble damages and may award equitable relief and reasonable attorneys’ fees in its discretion.[14]

c. Criminal Threats

Under Connecticut law, a person is guilty of threatening when: (1) by physical threat, such person intentionally places or attempts to place another person in fear of imminent serious physical injury; (2) such person threatens to commit any crime of violence with the intent to terrorize another person; or (3) such person threatens to commit such crime of violence in reckless disregard of the risk of causing such terror.[15]

III. Other Legal Issues Relating to Cyberbullying

a. Defamation/Slander

In Connecticut, “a defamatory statement is defined as a communication that tends to harm the reputation of another as to lower him in the estimation of the community or to deter third persons from associating or dealing with him.”[16] To establish a prima facie case of defamation, a plaintiff must show that: (1) the defendant published a defamatory statement; (2) the defamatory statement identified the plaintiff to a third person; (3) the defamatory statement was published to a third person; and (4) the plaintiffs reputation suffered injury as a result of the statement.”  Id.

Cyberbullying by means of social networking sites such as Twitter or Facebook may give rise to defamation claims, if the plaintiff can meet all of the elements of defamation in Connecticut.  Sometimes, however, “the tortious statements are not necessarily published or widely disseminated to cause harm, but are specifically aimed at inflicting distress on a particular target based on the content of the communication itself . . ..”[17]

Therefore, defamation might not be a viable claim if the hurtful speech or writing is not disseminated to a wide enough audience.  It is, however, an avenue to be explored.

b. Intentional Infliction of Emotional Distress

In order for a plaintiff to prevail in an intentional infliction of emotional distress cause of action, the plaintiff must show: (1) that the actor intended to inflict emotional distress, or that he knew or should have known that emotional distress was likely a result of his conduct; (2) that the conduct was extreme and outrageous; (3) that the defendant’s conduct was the cause of the plaintiff’s distress, and (4) that the emotional distress sustained by the plaintiff was severe.”[18] In order for liability to be imposed, the conduct must exceed “all bounds usually tolerated by decent  of a very serious kind.”[19]

Though it can be difficult to prove that the conduct was of such a level as to be intolerable by any measure of societal standards, egregious cases of cyberbullying may gave rise to successful IIED claims.  To prove an IIED claim, there is no requirement that the plaintiff suffer any physical harm.  As the Connecticut Supreme Court stated in Whelan v. Whelan, “The enormity of the outrage carries conviction that there has in fact been severe mental distress which is neither figured or trivial so that bodily harm is not required.”[20] It should be noted that “mere insults, indignities, threats, petty oppressions, or other trivialities” will not give rise to a successful IIED claim.[21]

An interesting facet of IIED law in Connecticut, and one that may apply to cyberbullying claims, is the invocation of the continuing course of conduct argument. While IIED has a three-year statute of limitations, the Connecticut Supreme Court has stated: “Courts that have applied the continuing course of conduct doctrine to claims for intentional infliction of emotional distress have done so on the ground that it is the repetition of the misconduct that makes it extreme and outrageous.  Watts v. Chittenden, 301 Conn. 575 (2011).  In other words, a cause of action for IIED might not begin to accrue until plaintiff has endured such a repetitive course of conduct such that it has amounted to conduct that is extreme and outrageous.

In a 2003 case, the Connecticut Superior Court denied defendants’ motion to strike plaintiff-student’s claim for IIED, where the defendant co-conspirators locked the plaintiff in a locker, doused him with water, and threatened him with electrocution.[22]

Conversely, in Brodsky v. Trumbull, the court declined to exercise supplemental jurisdiction over plaintiff’s state-law IIED claim, having granted summary judgment as to all of plaintiff’s federal claims in favor of defendants.[23]

c. Negligence

Many bullying cases sound in negligence. In a 2007 case, plaintiff parents alleged that defendant school district owed their son, the victim, “a duty to protect him and prevent intentional harm, provide him with a safe and productive learning environment, and supervise students at [the school] to prevent the alleged acts which harmed [plaintiff].”[24] The Court, finding that plaintiff did not make a proper showing of entitlement to the “identifiable person-imminent harm exception to governmental immunity for tort claims” (discussed infra), granted defendants’ motion for summary judgment on the state-law negligence claim.

In Esposito, plaintiff student, a victim of bullying, brought an action alleging that the defendant school district, town, and the individual defendants were negligent in failing to follow its own bullying policies, thereby failing to ensure that plaintiff could attend school in a harassment-free environment.[25] Unlike in Scruggs, the court in Esposito denied the school board’s motion for summary judgment, finding that governmental immunity did not apply and that the plaintiff met the identifiable person-imminent harm exception, as “schoolchildren are a foreseeable class to be protected.” Id.

Finally, the doctrine of negligent supervision, codified at Conn. Gen. Law 52-572, may be available as a claim against the parents of a bully.

d. Recklessness

In a 2010 decision, a Connecticut court denied defendant school district’s motion for summary judgment, finding that the student-plaintiff stated a plausible cause of action based on the defendants’ “reckless and wanton” supervision of plaintiff’s fellow classmates.[26] The court found that the defendant school board “offered no argument as to why a claim of common-law recklessness [was] not cognizable,” given the specific facts of the case.[27]

e. Privacy Tort Laws

The emergence of cyberbullying by means of Facebook and Twitter and other social networking sites may give rise claims sounding in tort privacy laws.  Connecticut recognizes four distinct kinds of invasion of privacy torts.[28] Connecticut first recognized a cause of action for invasion of privacy in Goodrich v. Waterbury Republican, Inc., 188 Conn. 107 (1982), in which the Supreme Court clarified that the invasion of one’s privacy developed into “four distinct kinds of invasion of four different interests,” each of which “represents an interference of the right of the plaintiff to be let alone.”  Goodrich, at 125.

The four categories of invasion of privacy are: (1) unreasonable intrusion upon the seclusion of another; (2) appropriation of the other’s name of likeness; (3) unreasonable publicity given to the other’s private life; or (4) publicity which unreasonably places the other in a false light before the public. Id.; 3 Restatement (2d) of Torts.

A cyberbullying claim may implicate the third cause of action – unreasonable publicity given to the other’s private life, and may also implicate the fourth cause of action – false light.  To successfully allege a false light claim, a plaintiff must allege that “defendant gave publicity to a matter concerning the plaintiff.”  Goodrich.  “Publicity” refers to a matter made public through communication “to the public at large or to so many persons that the matter must be regarded as substantially certain to become one of public knowledge.”  3 Restatement of Torts (2d) §252d comment A.  The Restatement clarifies that publication do a small group of people will not give rise to a false light cause of action.   

f. Free Speech

A 2011 article in Law Technology News questioned how Connecticut’s anti-bullying law would fare in the face of free speech issues, noting that “[t]he new law puts school officials in the position of having to pass judgment on off-campus speech with little legal precedent to guide them . . . If they clamp down on online comments, they risk First Amendment challenges.  If they’re too lenient, they could be deemed responsible if cyberbullying leads to tragedy.”[29]

What worries some officials and lawmakers is the prospect of the regulation of speech that doesn’t take place on school grounds.  Legal Director of the ACLU of Connecticut Sandra Staub stated during testimony in March of this year that “simply plugging the phrase ‘cyberbullying’ into the current statute on bullying policies will encourage and allow schools to regulate children’s speech and conduct while they are in their own homes.”[30] Essentially, Staub’s argument sounds in the notion that what children do in their own homes is under the control of their parents, who, pursuant to the United States Supreme Court, have a due process right to raise their children in the manner they see fit.  Permitting schools to regulate such speech turns schools into internet police.  Instead, Staub suggests that it is the school’s responsibility to provide an education that instills in students the means by which to deal with conflicts in an appropriate manner.

g.  Federal Claims

Victims of bullying have brought substantive due process claims against school districts and school district officials. See, Risica ex rel. Risica v. Dumas, 466 F. Supp. 2d 434 (D. Conn. 2006) (granting defendant school district’s motion for summary judgment on the grounds that the School’s failure to prevent continued bullying did not rise to the level of a constitutional violation because the school had no constitutional duty to prevent student-on-student harassment).

Finally, where bullying is based on sexual harassment, a plaintiff may have a cause of action under Title IX of the Education Amendments. See, Brodsky, at *19 (granting defendant school board’s motion for summary judgment on the grounds that defendants acted reasonably and expeditiously in response to any alleged harassment against plaintiff student).  In order to successfully allege a student-on-student sexual harassment claim, the Supreme Court of the United States has clarified that the school administration must have “acted with deliberate indifference to known acts of harassment . . . [and the] harassment [must have been] so severe, pervasive, and objectively offensive that it effectively bars the victim’s access to an educational opportunity or benefit.”[31]

IV. Conclusion

With the popularity of social networking sites such as Facebook and Twitter, cyberbullying is as prevalent a problem as ever.  Schools around the country are taking steps to eradicate bullying of all kinds, but for the time being, it is everywhere.  Bullying issues can be handled by attorneys with experience in education law.  Navigating the school district system can be difficult, frustrating, and intimidating, and without the right guidance, you may find yourself reaching dead ends.  If you find yourself with questions relating to bullying, cyberbullying, or education law in general, do not hesitate to contact an attorney in our Westport, Fairfield County office, at 203-221-3100.


[1] Conn. Gen. Assembly Commission on Children, Anti-Bullying Bill Becomes Law, available at http://www.cga.ct.gov/coc/PDFs/bullying/2011_bullying_law.pdf (July 21, 2011).

[2] Id.

[3] http://www.cops.usdoj.gov/Default.asp?Item=2460

[4] Bullying: Legislative Changes, Texas Assc. of School Boards, Legal Servs., available at http://www.tasbrmf.org/training/conference/documents/2012conference_handouts/bullying.pdf.

[5] Conn. Gen. Law §10-222d(a)(1)

[6] Id.

[7] Estate of Girard v. Town of Putnam, 2011 Conn. Super. LEXIS 306 (Conn. Super. Ct. Jan. 28, 2011).

[8] Rigoli v. Town of Shelton, 2012 Conn. Super. LEXIS 349 (Conn. Super. Ct. Feb. 6, 2012).

[9] Santoro, 2006 Conn. Super. LEXIS 2418, at *9 (Aug. 18, 2006); see also, Karlen v. Westport Bd. Of Educ., 638 F. Supp. 2d 293, 302 (D. Conn. 2009) (dismissing plaintiff’s claim pursuant to Connecticut’s anti-bullying statute because the statute does not provide for a private cause of action).

[10] Public Act No. 11-232.

[11] Todd D. Erb, Comment, A Case for Strengthening School District Jurisdiction to Punish Off-Campus Incidents of Cyberbullying, 40 Ariz. St. L.J. 257, 279 (2008).

[12] Conn. Gen. Stat. §53a-181j.

[13] Conn. Gen. Stat. §53a-181k.

[14] Conn. Gen. Stat. §52-571c.

[15] Conn. Gen. Stat. §53a-62.

[16] Cweklinsky v. Mobil Chem. Co., 267 Conn. 210, 217 (2004).

[17] Andrew S. Kaufman, Cyberbullying and Intentional Infliction of Emotional Distress, 245 New York Law Journal 27, Feb. 9, 2011.

[18] Peytan v. Ellis, 200 Conn. 243 (1986).

[19] Id., quoting Prosser & Keeton, Torts, 5th ed. 12, page 60.

[20] Whelan v. Whelan, 41 Conn. Sup. 519, 522 (1991).

[21] Restatement 2d.

[22] Gasper v. Sniffin, 2003 Conn. Super. LEXIS 1363 (Conn. Super. Ct. May 6, 2003).

[23] Brodsky v. Trumbull Bd. Of Educ., 2009 U.S. Dist. LEXIS 8799, at *28 (D. Conn. Jan. 30, 2009).

[24] Scruggs v. Meriden Bd. Of Educ., 2007 U.S. Dist. LEXIS 58517, 67-68 (D. Conn. Aug. 7, 2007).

[25] Esposito v. Town of Bethany, 2010 Conn. Super. LEXIS 1050, at *1 (Conn. Super. Ct. May 3, 2010).

[26] Dornfried v. Berlin Bd. of Educ., 2010 Conn. Super. LEXIS 2537 (Conn. Super. Ct. Oct. 4, 2010).

[27] Id., at *8.

[28] Law Offices of Frank N. Peluso, P.C. v. Rendahl, 2012 Ct. Sup. 2356 (Aug. 15, 2012).

[29] Jacqueline Rabe, New Conn. ‘Cyberbullying’ Law Prompts Free Speech Debate, Law Technology News (Sept. 7, 2011).

[30] Sandra Staub, Written Testimony Opposing Raised Bill No. 1138 An Act Concerning the Strengthening of School Bullying Laws.

[31] Davis v. Monroe Cnty. Bd. of Educ., 526 U.S. 629, 633 (1999).

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

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

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

In a recent case before 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.

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 objection. 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.

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 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. 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 in the firm’s Westport office in Fairfield County, Connecticut at 203-221-3100 or at JMaya@Mayalaw.com.

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

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

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

In a recent case before 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.

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 objection. 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.

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 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. 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 in the firm’s Westport office in Fairfield County, Connecticut at 203-221-3100 or at JMaya@Mayalaw.com.

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FINRA Arbitration Awards Employer Over $500,000 for Promissory Notes Accelerated by Employee’s Termination

In the Matter of the Arbitration between Claimants Morgan Stanley Smith Barney and Morgan Stanley Smith Barney FA Notes Holdings, LLC v. Respondent Robert W. Hathaway (2012 WL 2675417)

In a recent Financial Industry Regulatory Authority (FINRA) arbitration, a sole FINRA arbitrator held that an employee is liable to satisfy his indebtedness on promissory notes, including interest, to his employer upon termination of employment.

In this case, Morgan Stanley Smith Barney (“MSSB”) and Morgan Stanley Smith Barney FA Notes Holdings, LLC, alleged that Robert W. Hathaway (“Hathaway”) was in breach of two promissory notes executed while he was employed by MSSB. In its arbitration filing, MSSB claimed the principal balances due under both notes, per diem interest for both notes, and costs of collection and arbitration. This matter proceeded pursuant to Rule 13806 of the Code of Arbitration Procedure because Hathaway neither filed a Statement of Answer nor appeared at the hearing.

On or about March 8, 2008, Hathaway executed the first promissory note with MSSB for $729,560, at an interest rate of three-percent per annum, to be repaid in nine consecutive annual installments beginning on March 19, 2009. The terms of the note included an agreement to pay all costs and expenses of collection, including reasonable attorneys’ fees. On or about June 9, 2009, Hathaway executed the second promissory note for $75,257.83 at an interest rate of 2.25-percent per annum, to be repaid in eight consecutive annual installments beginning on June 9, 2010.

On or about September 19, 2011, Hathaway’s employment at MSSB ended. MSSB alleged that termination of employment triggered acceleration of the promissory notes and made a demand for immediate re-payment. Hathaway failed and refused to satisfy the indebtedness.

After considering the pleadings and the submissions, the sole arbitrator decided that Hathaway was liable for the principal balance due under each promissory note. Hathaway was also liable for per diem interest accruing from the date employment was terminated through the date of payment on each note. Finally, Hathaway was to reimburse MSSB for non-refundable portion of its initial claim filing fee. The final award to MSSB totaled $542,816.00.

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

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FINRA Arbitration Awards Employer Over $500,000 for Promissory Notes Accelerated by Employee’s Termination

In the Matter of the Arbitration between Claimants Morgan Stanley Smith Barney and Morgan Stanley Smith Barney FA Notes Holdings, LLC v. Respondent Robert W. Hathaway (2012 WL 2675417)

In a recent Financial Industry Regulatory Authority (FINRA) arbitration, a sole FINRA arbitrator held that an employee is liable to satisfy his indebtedness on promissory notes, including interest, to his employer upon termination of employment.

In this case, Morgan Stanley Smith Barney (“MSSB”) and Morgan Stanley Smith Barney FA Notes Holdings, LLC, alleged that Robert W. Hathaway (“Hathaway”) was in breach of two promissory notes executed while he was employed by MSSB. In its arbitration filing, MSSB claimed the principal balances due under both notes, per diem interest for both notes, and costs of collection and arbitration. This matter proceeded pursuant to Rule 13806 of the Code of Arbitration Procedure because Hathaway neither filed a Statement of Answer nor appeared at the hearing.

On or about March 8, 2008, Hathaway executed the first promissory note with MSSB for $729,560, at an interest rate of three-percent per annum, to be repaid in nine consecutive annual installments beginning on March 19, 2009. The terms of the note included an agreement to pay all costs and expenses of collection, including reasonable attorneys’ fees. On or about June 9, 2009, Hathaway executed the second promissory note for $75,257.83 at an interest rate of 2.25-percent per annum, to be repaid in eight consecutive annual installments beginning on June 9, 2010.

On or about September 19, 2011, Hathaway’s employment at MSSB ended. MSSB alleged that termination of employment triggered acceleration of the promissory notes and made a demand for immediate re-payment. Hathaway failed and refused to satisfy the indebtedness.

After considering the pleadings and the submissions, the sole arbitrator decided that Hathaway was liable for the principal balance due under each promissory note. Hathaway was also liable for per diem interest accruing from the date employment was terminated through the date of payment on each note. Finally, Hathaway was to reimburse MSSB for non-refundable portion of its initial claim filing fee. The final award to MSSB totaled $542,816.00.

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

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Court confirms FINRA Arbitration Award for Employee in the amount of $150,000 with interest

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.

Should you have any questions relating to FINRA, arbitration or employment issues generally, please feel free to contact Russell J. Sweeting, Esq. by telephone at (203) 221-3100 or by e-mail at rsweeting@mayalaw.com.

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

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 recently 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.

“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.

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.

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).

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.

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 Bob Keepnews, Esq. at the Maya Murphy, P.C. office located in Westport at (203) 221-3100 or rkeepnews@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.

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Court finds that Form U5 Employment Termination Statement is Absolutely Privileged under New York Law

Rosenberg v. Metlife, Inc., 493 F.3d 290; 2007 U.S. App. LEXIS 15341 (2d Cir. 2007)

Mr. Rosenberg brought an action against his former employer, MetLife, Inc. (“MetLife”).  Mr. Rosenberg’s allegations included an assertion that MetLife’s statements on his Form U5 were malicious and defamatory.  The Form U5 stated the following reason for Mr. Rosenberg’s employment termination from MetLife:

An internal review disclosed Mr. Rosenberg appeared to have violated company policies and procedures involving speculative insurance sales and possible accessory to money laundering violations.

Judge Rakoff of the United State District Court for the Southern District of New York held that such statements are absolutely privileged and granted summary judgment to MetLife on the libel claim.  Rosenberg v. Metlife, Inc., 2005 U.S. Dist. LEXIS 2135 (S.D.N.Y. 2005).  The United States Court of Appeals for the Second Circuit found on appeal that the issue of whether the statements were subject to an absolute or qualified privilege was a question of New York law.  Rosenberg v. Metlife, Inc., 453 F.3d 122 (2d Cir. 2006).  The Second Circuit certified to New York State’s highest court, the New York Court of Appeals, to rule on the issue.  Id.  The New York Court of Appeals ruled that such statements are subject to an absolute privilege.  Rosenberg v. Metlife, Inc., 866 N.E.2d 439, 8 N.Y.3d 359, 368, 834 N.Y.S.2d 494 (2007).  Thereafter, the Second Circuit affirmed the initial summary judgment ruling on the libel claim.

Should you have any questions relating to the Form U5, expunging information on the Form U5 or employment issues generally, please feel free to contact Russell J. Sweeting, Esq. by telephone at (203) 221-3100 or by e-mail at rsweeting@mayalaw.com.

 

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ERISA Claim Challenges Vague Language of FINRA Arbitration Award in order to Include Back Pay as Benefits-Eligible Compensation

Ronald A. Roganti v .Metropolitan Life Insurance Company, et el, 2012 WL 2324476 (S.D.N.Y. June 18, 2012)

In a recent case before the Southern District of New York, Ronald Roganti (“Roganti”), a former employee of the Metropolitan Life Insurance Company (“MetLife”), asserted claims under the Sarbanes–Oxley Act of 2002, 18 U.S.C. § 1514A (“SOX”), and the Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1132 (“ERISA”). Both claims challenge MetLife’s denial of Roganti’s request that a 2010 Financial Industry Regulatory Authority (“FINRA”) arbitration award be treated as benefits-eligible compensation. MetLife moved to dismiss both claims on several grounds. The court granted MetLife’s motion with respect to the SOX claim and denied the motion with respect to the ERISA claim.

The underlying dispute in this case arose during Roganti’s employment with MetLife, which lasted from 1971 to 2005. In 1999, Roganti began to voice concerns regarding allegedly-suspect business practices at MetLife and continued to do so until he terminated his employment in 2005. Roganti claimed that throughout that time period, MetLife repeatedly disregarded his complaints and actively retaliated against him, including undermining his authority within the business subsets he oversaw and reducing his compensation with the specific purpose of reducing his pension benefits.

In July 2004, Roganti filed his initial Statement of Claim with the National Association of Securities Dealers (“NASD”) to arbitrate his disputes with MetLife. FINRA, the successor to NASD, appointed a panel of three arbitrators to adjudicate four claims brought by Roganti: (1) the breach of contract claim, based on MetLife’s reduction of Roganti’s compensation; (2) violation of SOX retaliation provisions, based on MetLife’s retaliation against Roganti for reporting questionable business practices; (3) for the value of services rendered by Roganti; and (4) for violating ERISA, on the theory that, in reducing Roganti’s compensation, MetLife also sought to reduce his pension benefits. In August 2010, the FINRA panel held that MetLife was liable to Roganti for $2,492,442.07 in “compensatory damages … above [MetLife’s] existing pension and benefit obligation to Claimant.” The arbitral award explain neither how the arbitrators arrived at this sum nor for what the award was intended to compensate Roganti. FINRA Docket Number 04-04876.

On March 24, 2011, Roganti filed a benefits claim with MetLife, in its capacity as the Plan Administrator, asking that the arbitral award be treated as compensation for income which MetLife had improperly denied him, and that the award be factored into the calculation of the benefits which he was entitled to under his pension plan with MetLife. MetLife denied the request for three reasons. First, only income of current employees was benefits-eligible; therefore, since Roganti was not employed by MetLife when he received the award; therefore, it did not qualify as benefits-eligible compensation. Second, FINRA broadly termed the award as “compensatory damages” rather than stating it was compensation for lost income. Finally, the FINRA award did not indicate to which years of Roganti’s employment the award applied; therefore, even if the award represented unpaid income, it would be impossible for MetLife to determine concretely how the award should affect Roganti’s pension benefits. Roganti appealed this decision to MetLife, and MetLife again denied his claim. Subsequently, Roganti filed SOX and ERISA claims in federal district court.

Because Roganti’s current SOX and ERISA claims are based on the 2011 denial of pension benefits, the court determined that these have not already been dispositioned by the 2010 FINRA arbitration. Therefore, the court denied MetLife’s motions to dismiss both claims on grounds of res judicata and collateral estoppel. However, because Roganti did not exhaust administrative remedies before filing his SOX claim in federal district court, the court determined that his SOX claim must be dismissed.

Roganti made two claims under ERISA, which creates a private right of action to enforce the provisions of a retirement benefits plan. 29 U.S.C. § 1132(a)(1)(B). First, he alleged that the FINRA arbitral award compensated him for unpaid wages that resulted from MetLife’s retaliation against him. Second, he argued that because the award constituted back pay, it must be taken into account in calculating his pension benefits. The court determined that central to both claims is the issue of whether the FINRA arbitration award constitutes back pay to compensate Roganti for services rendered while he was a MetLife employee, which would properly be included in pension benefits calculations. Neither the brevity of the FINRA arbitration award nor Roganti’s statement of claims to FINRA provided the court with sufficient clarity to resolve the factual issue of exactly what the award represented. The court, therefore, construed the ambiguity in the award language in the light most favorable to Roganti. The court concluded that he had met his burden and denied MetLife’s motion to dismiss the ERISA claim.

Because the three-month timeframe to seek clarification from a FINRA arbitration panel pursuant to 9 U.S.C. § 12 had elapsed, the court ordered the ERISA Plan Director to closely review the arbitral record, in the context of the evidence offered and arguments made by both sides at the arbitration, to determine whether or not the award represented back pay for Roganti. The court found it unacceptable that the initial denials of benefits were based on the terse language of the arbitration award, rather than a more detailed analysis as to what the award amounts represented.

Should you have any questions relating to FINRA, employment, compensation or benefits 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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Federal Court Confirms FINRA Arbitration Award that Refuses to Classify a Forgivable Loan as Employee Compensation Subject to the Wage Act

Federal Court Confirms FINRA Arbitration Award that Refuses to Classify a Forgivable Loan as Employee Compensation Subject to the Wage Act

Pauline Sheedy v. Lehman Brothers Holdings, Inc., 2011 WL 5519909 (D. Mass. Nov. 14, 2011)

In a recent Massachusetts case, Pauline Sheedy (“Sheedy”), a former managing director at Lehman Brothers, Inc., filed an action in state court seeking to vacate a Financial Industry Regulatory Authority (“FINRA”) arbitration award entered in favor of Lehman Brothers Holdings, Inc. (“LBHI”). LBHI removed the case from state to federal court, and filed a motion to dismiss Sheedy’s complaint, confirm the FINRA arbitration award and award “collection expenses.” The United States District Court for the District of Massachusetts allowed LBHI’s motion.

The underlying dispute in this case involves LBHI’s efforts to collect the unpaid principal balance, plus interest and fees, for a forgivable loan that was extended to Sheedy when she began her employment with Lehman Brothers, Inc. Sheedy alleged that her compensation package included a “one-time incentive signing bonus” of $1 million; however, Lehman’s offer letter characterized the $1 million payment a loan to be forgiven in five equal installments of $200,000 on the first through fifth anniversary of her employment start date. The offer letter further stated that if Sheedy separated from Lehman Brothers, Inc. for “any reason” prior to full forgiveness of the loan, she would be required to repay the remaining principal balance, plus interest accrued through her separation date. In 2008, Lehman Brothers, Inc. was forced to file for bankruptcy protection and ceased doing business in Massachusetts. As a result, Sheedy was separated from Lehman Brothers, Inc. in September 2008, approximately two months prior to the second anniversary of her employment start date. During the marshaling of assets for the bankruptcy estate, Lehman Brothers, Inc. assigned Sheedy’s promissory note for the loan to LBHI.

LBHI initiated FINRA arbitration proceedings against Sheedy, claiming the principal balance due of $800,000, plus interest and fees. A single FINRA arbitrator was appointed to hear the case. In June 2011, the arbitrator entered an award ordering Sheedy to repay LBHI the outstanding balance of $800,000, plus interest and attorneys’ fees.
After the arbitration award, Sheedy filed an action in Massachusetts state court to vacate the FINRA arbitration award pursuant to the state Uniform Arbitration Act for Commercial Disputes. Mass. Gen. Laws ch. 251, §§ 1-19. LBHI timely removed the case from state to federal court. Sheedy sought vacatur on two grounds: (1) that the arbitrator exceeded her authority because the award requires her to “forfeit earned compensation” in violation of the Massachusetts Weekly Wage Act (“Wage Act”), Mass. Gen. Laws ch. 149, § 148; and (2) that the award violated the Massachusetts public policy prohibiting the unlawful restraint of trade and competition.

Both the Massachusetts Uniform Arbitration Act for Commercial Disputes and the Federal Arbitration Act (“FAA”) provide statutory grounds for vacating an arbitration award where an arbitrator exceeds his authority. Compare Mass. Gen. Laws ch. 251, §§ 12(a)(3) with 9 U.S.C. § 10(a)(3). Sheedy argued that the FINRA arbitrator exceeded her authority by issuing an award that required Sheedy to forfeit earned compensation in violation of the Wage Act. The Wage Act defines the requirements for payment of employee wages and commissions, and prohibits the use of “special contract…or other means” to create exemptions from these requirements. Citing Massachusetts case law, Sheedy argued that the provisions of the Wage Act cover any payment that an employer is obligated to pay an employee; therefore, once she signed Lehman’s offer letter and Lehman was bound to make the $1 million payment to her, that payment became a nondiscretionary deed subject to the Wage Act. The court disagreed with this characterization of the payment. The court determined that the accepted offer clearly made forgiveness of the full amount of the loan contingent upon completing five years of employment at Lehman Brothers, Inc.; therefore, the portion of the payment which remained outstanding at the time of Sheedy’s termination was never “earned” within the meaning of the Wage Act. The court denied vacatur on the grounds that the arbitrator exceeded her authority because the award was not in violation of the Wage Act.

An arbitration award may also be challenged by reference to a “well-defined and dominant” public policy. United Paperworkers Int’l Union v. Misco, Inc., 484 U.S. 28, 43 (1987). Arbitrators may not award relief that offends public policy or requires a result contrary to statutory provisions. Plymouth–Carver Reg’l Sch. Dist. v. J. Farmer & Co., 553 N.E.2d 1284 (1985). Sheedy argued that the FINRA arbitration award should be vacated because forfeiture of the payment is an unlawful penalty to punish her if she chose to leave Lehman and freely compete in the market place. The court determined that the structure of the forgivable loan in the offer letter was not equivalent to a non-compete agreement that restricted an employee’s ability to work in the same field within a given geographic area. Therefore, the arbitration award did not violate the state public policy against unlawful restraint of trade and competition and the court denied vacatur on these grounds.

The court allowed LBHI’s motion to dismiss Sheedy’s complaint, confirm the arbitration decision and award collection expenses. The court gave LBHI fourteen days from the date of its order to submit a request for attorneys’ fees and a proposed form of judgment.

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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