Posts tagged with "sanctions"

Fourth Circuit Confirms District Court Decision that FINRA Arbitration Panel is Not Bound to Apply State Procedural Law

Fourth Circuit Confirms District Court Decision that FINRA Arbitration Panel is Not Bound to Apply State Procedural Law

Wachovia Securities, LLC, v. Frank J. Brand, et al, 671 F.3d 472 (4th Cir. 2012)

In a recent case before the Fourth Circuit, Wachovia Securities, LLC (“Wachovia”) appealed a decision by the U.S. District Court for the District of South Carolina in which the court denied Wachovia’s motion to vacate a Financial Industry Regulatory Authority (“FINRA”) arbitration award that denied the firm’s claims in the arbitration of an employment dispute with Frank Brand and three other former employees (“the former employees”). The Fourth Circuit affirmed the district court’s ruling that denied vacatur and confirmed the arbitration award.

The underlying dispute in this case began when Wachovia filed a Statement of Claim with FINRA against four former employees alleging that the former employees had violated contractual and common law obligations. The former employees were employed as individual financial advisors by A.G. Edwards & Sons, Inc. until its merger with Wachovia in October 2007. After the merger, the former employees were employed by Wachovia until their termination in June 2008. All four former employees later found employment with a competing brokerage firm in the same geographic area. Wachovia alleged that the former employees had conspired with the competing brokerage firm to open an office in the area, that they had misappropriated confidential and proprietary information, and that they were soliciting current Wachovia clients and employees to join the new firm.

In its Statement of Claims, Wachovia requested a permanent injunction, the return of records and attorneys’ fees associated with the arbitration. In their answer, the former employees described the dispute as “meritless” and requested the arbitration panel award them attorneys’ fees and costs incurred in defending themselves. FINRA appointed a panel of three arbitrators to hear the matter, and requested that the parties submit proposals regarding requested attorneys’ fees and other costs during the final two days of hearings. Wachovia was unprepared to submit its brief on the penultimate date of hearings and requested a one-day extension, which the arbitration panel granted. On the last day of arbitration hearings, both parties submitted their briefs, each of which contained new arguments. Wachovia argued that, under the South Carolina Arbitration Act, neither party was entitled to attorneys’ fees. The former employees argued that they were entitled to attorneys’ fees under the Frivolous Civil Proceeding Act (“FCPA”), codified at S.C. Code Ann. § 15-36-10. In South Carolina, the FCPA provides both a mechanism for litigants to seek sanctions against attorneys filing frivolous claims and safeguards for attorneys facing such sanctions. These safeguards include a notice period affording the accused 30 days to respond to a request for FCPA sanctions and a separate hearing on sanctions after the verdict. Wachovia expressed its concern that it was not being afforded either of these procedural safeguards. The arbitration panel neither held additional hearings nor requested additional briefings. On December 18, 2009, the FINRA panel entered an award in favor of the former employees, awarding them $1.1 million for attorneys’ fees and costs under the FCPA only and denying all of Wachovia’s claims.

Following arbitration, the former employees filed a motion in federal court to confirm the arbitration award pursuant to the Federal Arbitration Act (“FAA”), 9 U.S.C. § 9. Wachovia filed its own motion to vacate the portion of the arbitration award granting relief to the former employees. Wachovia contended that the arbitration panel exceeded its authority and manifestly disregarded the law in violation of the FAA, 9 U.S.C. § 10(a)(4) and that the arbitration panel also deprived Wachovia of a fundamentally fair hearing in violation of FAA, 9 U.S.C. § 10(a)(3). The district court considered these claims in turn and rejected both claims. Wachovia appealed the district court’s holding that the arbitrators neither deprived Wachovia a fundamentally fair hearing nor manifestly disregarded the law.

In general, judicial review of an arbitration award in federal court is severely circumscribed, 9 U.S.C. § 9-11. When the district court denies vacatur of an arbitration award, the appellate court reviews the district court’s legal findings de novo and reviews the district court’s factual findings for clear error.

Vacating an arbitration award on the basis of FAA §10(a)(3) requires the court to find “the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced.” “Misconduct” and “misbehavior” are different from “mistake” in this context. The first two imply that the arbitrators intentionally contradicted the law. Mistakes lack the requisite intentionality to fall within FAA § 10(a)(3). Wachovia did not allege that the FINRA arbitration panel acted with an intention to contradict the law, only that the arbitrators made a mistake in handling the former employees’ FCPA claim. Because Wachovia did not allege intentional misconduct, § 10(a)(3) cannot be grounds for vacatur. Furthermore, the appellate court did not find that the arbitration panel made a mistake in not following the procedural safeguards of the FCPA. A recent U.S. Supreme Court case held that the FAA pre-empted state law. See AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011). Although parties may consent to particular arbitration procedures in advance, it is inconsistent with the FAA for one party to demand particular state law procedural requirements after the fact. Id. at 1750. Therefore, the FINRA arbitration panel was not compelled to follow FCPA procedural mandates and their failure to do so does not satisfy the requirements of § 10(a)(3).

The Fourth Circuit adopted the position that manifest disregard continues to exist either as an independent grounds for judicial review of arbitration awards or as a judicial gloss on arbitration awards. A court may vacate an arbitration award for manifest disregard of the law if: (1) the applicable legal principle is clearly defined and not subject to reasonable debate; and (2) the arbitrator refused to heed that legal principle. Long John Silver’s Rests., Inc. v. Cole, 514 F.3d 345, 349 (4th Cir. 2008). In this case, the appellate court found that whether the Panel erred by not applying the FCPA’s procedural requirements was a question that was itself not clearly defined and was certainly subject to debate. Therefore, the court held that the arbitrators did not manifestly disregard the law when they awarded the former employees $1.1 million in attorneys’ fees and costs under the FCPA.

The appellate court affirmed the decision of the district court denying Wachovia vacatur of the FINRA arbitration award.
Should you have any questions relating to FINRA, arbitration or employment issues, please do not hesitate to contact Attorney Joseph C. Maya in the firm’s Westport office in Fairfield County, Connecticut at 203-221-3100 or at JMaya@Mayalaw.com.

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“ELECTRONICALLY STORED INFORMATION” OR “ESI”—THE HIDDEN LITIGATION TRIPWIRE

“ELECTRONICALLY STORED INFORMATION” OR “ESI”—THE HIDDEN LITIGATION TRIPWIRE

 

October 12, 2010

New York: (212) 682-5700 Connecticut: (203) 221-3100

            We live in a digital world.  So prevalent is “data” that we forget that we are surrounded by visual portrayals of streams of zeroes and ones.  We have computers at work as well as at home, and laptops, PDA’s, and “Blackberrys” to keep us connected to e-mail, voice mail, and text messages while we vacation or commute (and blur the distinction between the two).  It has been said that technology is a wonderful slave and a terrible master.  Technology may also present the least understood and a most dangerous trap for the unwary litigant—one that can lose a case before it is even begun.  The solution is a timely and thoughtful “litigation hold” letter, and this article will explain when one has to be sent, and what it should say.

             In 1938, there was a tectonic shift in the litigation landscape with the adoption of the Federal Rules of Civil Procedure.  “Trial by ambush” gave way to liberal pretrial discovery and mandatory exchange among litigants of information and evidence.  State Rules of Court soon followed suit.  The theory was that while everyone is entitled to their own opinion of right and wrong, they are not entitled to their own set of facts held tightly to their vest like a poker hand.  Free and expansive pretrial discovery had at long last leveled the courtroom playing field.  Or so it seemed.

            Over the years, the Federal and State Rules governing pretrial discovery have generally kept pace with societal changes so that discovery vehicles such as Requests for Production could be tailored to fit the myriad and unique circumstances that surround any case, and perform as designed.  Recent technological advances, however, have pulled far ahead of the rules, and Courts have been scrambling to catch up.  Thus began the evolution of discovery of “electronically stored information”, or “ESI.”  Court interpretation of the discovery rules has given lawyers and litigants guidance on how to uncover ESI, but they also impose draconian penalties for conduct that heretofore might have been countenanced by a well meaning and lenient jurist.  The purpose of this article is to warn business owners and their counsel of the unseen pitfalls of ESI, and ensure by means of a “litigation hold” letter that devastating sanctions are avoided.  Simply stated, a “litigation hold” letter commands a party (or client) to locate, segregate, and preserve documents and data that may be relevant to pending or threatened litigation.

            In 2003 and 2004, Judge Shira A. Scheindlin of the United States District Court for the Southern District of New York, decided two in the series of the Zubulake v. UBS Warburg LLC cases and introduced a brave new world of ESI discovery.  In 2010, Judge Scheindlin decided Pension Committee of the University of Montreal Pension Plan v. Bank of America Securities, LLC, 2010 U.S. Dist. LEXIS 1839 and dispelled any doubt about the duty to preserve and produce ESI, and the penalties to be imposed for its breach.

            One teaching of Pension Committee is that the rules articulated in Zubulake are now “well established” and lawyers and litigants ignore them at their peril.  Judge Scheindlin leaves no room for interpretation or debate:

“Possibly after October, 2003, when Zubulake IV was issued, and definitely after July, 2004, when the final relevant Zubulake opinion was issued, the failure to issue a written litigation hold constitutes gross negligence because that failure is likely to result in the destruction of relevant information.” 2010 U.S. Dist. LEXIS at * 10.

The corollary teaching of Pension Committee is that if a party is currently in litigation or reasonably anticipates litigation, then such party in conjunction with its counsel must issue a timely and written litigation hold and supervise and oversee that hold diligently and in good faith, or face sanctions to include termination of the underlying case to its extreme prejudice. 

            A party to litigation or a party that reasonably anticipates litigation (more on that amorphous concept later) has a duty to preserve, collect, review and/or produce relevant evidence.  In failing to discharge that duty with respect to ESI, the party’s conduct may amount to negligence, gross negligence (a failure to exercise even that care which a careless person would use), or willful and bad faith misconduct (an intentional act of an unreasonable character in disregard of a known or obvious risk that was so great as to make it highly probable that harm would follow).  In each instance, available sanctions ratchet up accordingly.  With regard to the duty to preserve, post-Zubulake, the failure to issue a timely, written litigation hold will likely rise to the level of gross negligence.  With respect to the duty to collect, the failure to collect paper or electronic records from “key players” (another “fuzzy” concept that may even include former employees) constitutes gross negligence or willfulness, in contradistinction to failing to collect records from all employees, which may be viewed as mere negligence and carry a lesser penalty.  As noted by Judge Scheindlin, “[e]ach case will turn on its own facts and the varieties of efforts and failures is [sic] infinite.”  Id. At * 12-13.

            So what is a business owner/HR executive/general counsel to do?

            The first step is to understand when the ESI duty to preserve, collect, etc. attaches.  Where a party sues or is sued, that particular point in time is clearly defined.  But when must a party “reasonably anticipate” litigation?  If one or two employees get a mere whiff of threatened litigation, that does not impose an “all hands on deck” company-wide duty to preserve.  If those same employees, however, document their concerns with an identifiable plaintiff and targeted defendant, then the duty to preserve would arise well in advance of the actual filing of the lawsuit.  Often, it is middle-management that first sees litigation storm clouds on the horizon, and they need to be conditioned to alert senior management and outside counsel to threatened litigation.

            Once the alarm is sounded, the litigation hold letter must be carefully drafted and quickly disseminated.  Each situation is different, and this is not an area where a generic, “one size fits all” form letter can be sent.  Management and counsel should collaborate on ensuring company-wide compliance and the letter should emanate from the company’s upper echelons (e.g., CEO, COO, and CIO).  Implementation and supervision of the litigation hold cannot be delegated away and senior management must remain involved and responsible throughout the process.  In the words of Judge Scheindlin, “[i]n short, it is not sufficient to notify all employees of a litigation hold and expect that the party will then retain and produce all relevant information.  Counsel must take affirmative steps to monitor compliance so that all sources of discoverable information are identified and searched.”  Zubulake V, 229 F.R.D. at 432. 

            The litigation hold letter is both a sword and a shield.  It is a recognized and ubiquitous “terrain feature” on any litigation landscape and litigants and lawyers are now on notice that they are expected to be familiar with the evolving law and conform fully to its requirements.  Every case is different, however, and must be analyzed and evaluated on its own peculiar facts and circumstances.  If you have any questions relating to ESI in general, or litigation hold letters, in particular, please contact Maya Murphy by phone at (203) 221-3100.