To the extent that there is a theme to this week’s cases, it’s the scope of arbitration, as one court gives a broad read to FINRA’s mandating of arbitration and another addresses the interesting twists of the Military Lending Act.  Also, there are several interesting educational/networking opportunities on the horizon.

Broad Scope of FINRA Arbitration Provisions; Libel Claim

In Monk v. Goldman Sachs & Co., LLC, 2023 U.S. Dist. LEXIS 401 (S.D.N.Y. January 3, 2023)(Furman, J.), a former Goldman private wealth advisor alleges that a Goldman employee, Doe, advised plaintiff’s co-workers at his new employment that he had been a “sexual predator” during his employment at the defendant.  As a result, he alleges, the new employer terminated his employment.  He sued, alleging defamation and tortious interference with his new employment. Goldman moved for arbitration before a FINRA panel, based upon eight separate arbitration agreements which it alleges Monk signed over the course of his employment.

The court first “easily reject[s]” Monk’s claim that the Federal Arbitration Act does not apply, holding that the U-4 Agreement “is a contract involving the sale of securities and thus involves commerce.” (Quoted citation omitted).  Plaintiff’s other agreements also invoked commerce as he “managed the wealth of investors across the United States. . . .”

The more interesting part of the opinion relates to whether Monk’s claims fall within the scope of the arbitration agreements. “The court begins and ends with the U-4 – although the answer would almost certainly be the same under the other Arbitration Agreements, as well. . . .”  FINRA Rule 13200(e), when read together with Rules 12100(q) and 13200(a), requires that any dispute between Monk and Defendant must be arbitrated if “the dispute arises out of the business activities of a member or an associated person and is between or among Members, Members and Associated Person, or Associated person.” “Member” includes “any broker or dealer admitted to membership in FINRA” “whether or not the membership has been terminated. . . .”  Associated person includes “a person formerly associated with a member.”  Thus, the court holds, even though Monk is no longer registered under the FINRA rules, because of his previous association with Goldman he still must arbitrate disputes which “aris[e] out of” “business activities.”

So, does this post-employment defamation “arise out of” business activities?  Judge Furman holds that it does and compels arbitration. “[R]esolution of the parties’ dispute in this case ‘will necessarily entail an inquiry’ into Monk’s ‘business activities’ for GS&Co – including for example, whether Monk did or did not commit sexual harassment while employed at GS&Co.”  Looking at the relationship from the other side, the court also finds that Monk alleges that Doe’s statements were made while “acting in the course of his/her employment by Goldman Sachs.”  (Record citations omitted). “Thus, Monk expressly ties his tort claims to the business activities of GS&Co.”  Nor, the court holds, is it controlling that the alleged defamation arose after Monk’s employment ceased; Judge Furman cites to numerous decisions across the federal courts, making the case a great starting place of relevant research. The court distinguishes cases in which the arbitration agreements are limited to “disputes arising from or relating to the contracts  themselves.” (Emphasis in original).

In summary, Judge Furman takes a broad view of the U-4 arbitration mandate.  The central issue, he opines, is whether the tort claims “’involve significant aspects of the employment relationship,’” quoting Fleck v. E.F. Hutton Group, 891 F. 2d 1047 (2^nd Cir. 1989).  If so, then arbitration ensues.  Query, though.  What if the libel has nothing to do with a plaintiff’s  employment at the Member, say a claim that she cheats at poker during a neighborhood game?  Under Judge Furman’s analysis, is arbitration still required if the alleged libeler is an employee of the brokerage?  Under the second part of his analysis, it would seem so.  But, is that really in keeping with FINRA’s purpose to provide a forum for non-litigation resolution of disputes related to operation of the securities industry?  I see a law review note lurking here.

Military Lending Act; Delegation of Arbitrability

Steines v. Westgate Palace, L.L.C., 2022 U.S. Dist. LEXIS 234304 (M.D. Fla. December 14, 2022)(Dalton, J.), addresses an interesting issue of arbitrability delegation and an important question for time-share developers.  Steines and his co-plaintiff were active-duty members of the military at the time they purchased time-shares from defendants. Each of those purchases involved a loan to finance part of the purchase price.  Alleging violations of the Military Lending Act, 10 U.S.C. §§ 987 et seq., (“MLA”), they brought this action seeking, inter alia, rescission of those loans. Defendants moved to arbitrate under the provisions of the time-share agreements.

The court opines that the MLA prohibits mandatory arbitration of claims “involving consumer credit unlawful and unenforceable notwithstanding § 2 of the Federal Arbitration Act. . . But it does not define ‘consumer credit’ . . . except to say that the definition shall not include a ‘residential mortgage.’” Thus, the court’s analysis involves two issues – is a lien on a time-share interest a “residential mortgage” and who decides whether that claim is arbitrable.

Judge Dalton first holds that the court, not the arbitrator, makes the decision regarding the scope of “residential mortgage.” The court’s authority to compel arbitration arises by virtue of the FAA.  The MLA’s “notwithstanding” language quoted above, the court opines, “leaves no room to compel arbitration of any dispute, including an arbitrability dispute.” (Emphasis added).

Turning to the merits, the court looks to the text of the MLA, the Department of Defense’s regulatory history, and the regulatory purpose to hold that, although Florida law compels the timeshare developer to give a “freehold estate,” the short-term, primarily “transient” occupancy of a time-share, together with the control retained by the Owner’s Association, distinguishes the properties from those which are “residential.”  Therefore, the court holds, they do not fall within the exception to the MLA. Accordingly, it denies the defendants’ motions to compel arbitration and to dismiss.

Multiple Insurers; Equitable Estoppel

Certain Underwriters at Lloyd’s v. Belmont Commons, L.L.C., 2023 U.S. Dist. LEXIS 1521 (E.D. La. January 3, 2023)(Fallon, J.), arises from property damage which Belmont incurred as a result of Hurricane Ida.  Eleven insurance companies jointly subscribed to the policy under which Belmont claimed coverage.  However, it sued only the nine domestic insurers in an action in Louisiana State Court, omitting two non-domestic carriers.  All eleven insurers filed this action, seeking to compel arbitration.  The New York Convention, which the carriers claim gives the court its authority to compel arbitration, only applies if “a party to the agreement is not an American citizen.”  The issue is whether the non-domestic insurers should be considered to be “parties to the agreement,” even though Belmont did not sue them.  The court looks to Grigson v. Creative Artists Agency, LLC., 210 F. 3d 524 (5^th Cir. 2000), which holds that equitable estoppel applies “when a signatory to the contract containing an arbitration claim raises allegations of substantially interdependent and concerted misconduct by both the nonsignatory[ies] and one or more the signatories to the contract.” (Brackets in Belmont).  Finding that “[Belmont’s] petition in state court makes clear that Belmont alleges identical, interrelated misconduct by all insurers in handling its Hurricane Ida claims,” Judge Fallon applies equitable estoppel to compel arbitration as to claims against all eleven plaintiffs.

Events

Although it may too late for you to get to Phoenix to attend in person, the Fifth Annual Schiefelbein Global Dispute Resolution Conference is available on-line.  The conference, which is set for January 13, 2023, has its usual array of high-powered academics, arbitrators, and practitioners who will address catastrophic sovereign events, pharma claims, “nontraditional” international arbitration claims, and investor state arbitrations. The keynote speaker is Clauda Salomon, President of the ICC’s International Court of Arbitration.  It promises to be a valuable day.  Registration is available at Home – Schiefelbein Global Dispute Resolution Conference (asucollegeoflaw.com).

With the ADR world appropriately focused on diversity and equity in the appointment of arbitration panels, the AAA-ICDR and New York Law School are jointly presenting an important program addressing “ADR and Diversity,” on January 26, 2023, from 4:00 to 7:30 PM, Eastern Time.  Registration is free and available at https://lnkd.in/gYyMzKca

I will be with family for the next few days, so “Highlights” will be on vacation until the issue on Friday, January 20^th.  If something big (as we measure in the world of arbitration geeks) breaks over the week, I may be able to pick it up remotely and put out something short.  In the meantime, have a good week.

David A. Reif, FCIArb
Reif ADR
Dreif@reifadr.com
Reifadr.com