Not a lot of case law today, so we move into the weekend with a look at some basic principles.
In Amargos v. Verified Nutrition, LLC, 2023 U.S. Dist. LEXIS 16262 (S.D. Fla. January 31, 2023), the Court first considers the standard, after the Supreme Court’s decision in Morgan v. Sundance, Inc., 142 S. Ct. 1708 (2022), for deciding whether a party has waived the right to arbitrate by its participation in the underlying litigation. In Morgan, SCOTUS barred an arbitration-specific requirement that a party alleging waiver demonstrate prejudice, where no such requirement existed as to other waiver claims. As a preliminary matter, Judge Bloom holds that the issue of waiver is one of federal law, rather than the state law designated under the contract’s choice-of-law provision. The court, then, considers decisions in the Seventh, Kawasaki Heavy Industries, Ltd. v. Bombardier Recreational Products, Inc., 660 F.3d 988 (7th Cir. 2011); Second, Nicosia v. Amazon.com, Inc., 2023 U.S. App. LEXIS 1259 (2nd Cir. January 19, 2023); and D.C. Circuits, National Foundation for Cancer Research v. A.G. Edwards & Sons, Inc., 821 F. 2d 772 (D.C. Cir. 1987). Based on those holdings, Judge Bloom applies a “totality of the circumstances test [to] determine whether the Defendant acted inconsistently with its contractual right to arbitration. To determine whether the right to arbitrate has been waived, the court considers whether the Defendant substantially participated in the litigation as one factor in a holistic analysis of whether the Defendant, through participation in this case or by any other action or inaction, waived its right to arbitrate.” (Emphasis added). The court holds that, although Defendant filed an answer that did not seek arbitration, participated in a court-ordered scheduling conference, and participated in the selection of a mediator, those steps were “not significant enough to support a finding that it acted inconsistently with its contractual right to arbitrate.” The court distinguishes cases in which defendants “participated in mediation, exchanged discovery, or sought deposition testimony.” Here, Judge Bloom opines, the “case is in its infancy,” and there were “limited judicial resources” employed. Also, the Court emphasizes that Defendant’s attorney stated in an email to Plaintiff’s counsel that the filing of a motion to compel arbitration was “imminent,” that he or she was filing the answer “under duress simply to avoid Default under the court’s order,” and that they “DO NOT INTEND to avail ourselves of the Federal Courts except to the extent that you require us to on a going forward basis.” Finding no waiver, the court grants the motion to compel arbitration. For litigators, the lesson is simple; as early and often as possible, make it clear that your client intends to arbitrate and, before filing your motion to compel, do only those things which the court requires.
Contract Provisions v. Rules of Arbitration
In Defiance Charters, L.L.C. v. Florida Yacht Management, L.L.C., 2023 U.S. Dist. LEXIS 16261 (S.D. Fla. January 31, 2023), Judge Bloom opines on another waiver issue; did a party waive its right to appoint an arbitrator by waiting too long to make the nomination? Under the terms of the parties’ yacht management agreement, the rules of the Miami Maritime Arbitration Council (“MMAC”) governed any dispute. Those rules provided that, within thirty days of receiving notification that its opponent had appointed an arbitrator, a party had to name its own panel member. If it failed to do so in a timely manner, the first party could ask MMAC to make an appointment. However, the parties’ agreement shortened the response period to twenty days and provided that, if the responding party failed to appoint an arbitrator within that time frame, the first appointee would sit as a sole panel member. Plaintiff named its appointee in thirty days, i.e. within MMAC’s time-frame, but past the twenty day limit in the agreement. Judge Bloom holds that, since arbitration is a matter of contract, the agreement’s time frame takes precedence over MMAC’s rules. “The arbitration rules are incorporated only to the extent that they do not conflict with the express provisions of the arbitration agreement.” (Citation omitted). She further holds that, while Defiance did not waive the right to rely upon the agreement, its reference to MMAC’s rules in the nomination of its arbitrator estopped it from enforcing the agreement’s shortened time frames.
FINRA Expungement Hearings
Under FINRA rules, written customer complaints are set forth on a broker’s CRD, a public record that is available through Broker Check. Since some customer complaints may not be valid, the rules provide that, although only a court may order removal thereof from the CRD, an arbitration panel may make a finding that the complaint should be expunged. Under the limited scope of judicial review, courts give that finding great deference. Mutual Securities, Inc. v. Gilotti, 2023 U.S. Dist. LEXIS 16626 (E.D. Pa. February 1, 2023)(Baylson, J.), addresses the arbitral procedure.
The arbitration panel’s procedural decisions in this matter were unusual. Although the brokers did not file a request for expungement, but merely sought an award to cover costs should such a request be filed in the future, the panel addressed the merits of expungement and issued an award thereon. While the arbitrators found in favor of expungement as to some defendants, they found that expungement would be improper as to others. The defendants as to whom the panel denied expungement here challenge that ruling. The case addresses two issues. First, did the panel exceed its authority by denying expungement without holding a formal, recorded hearing directed to that issue? FINRA Rule 12805(a) requires a recorded hearing “in order to grant expungement.” While citing cases which would apply the rule to all expungement proceedings, including those which deny expungement, Judge Baylson finds that, in the absence of a rule to that effect, the panel did not act “irrational[ly]” in resolving the issue without a separate hearing. In light of the deference given arbitral awards, the court does not vacate on that basis. However, it does vacate on a different ground. The brokers were never given an opportunity to present any evidence or to make arguments on the expungement issue. While finding that it “is not willing to require a FINRA arbitration panel to hold a hearing for every expungement proceeding unless FINRA rules so require, this Court does think that Mutual was entitled to an opportunity to present arguments and evidence in support of its position.” Therefore, the court vacates the award and remands to the Arbitration panel for further hearings. A question, though. Since it already reached the merits and denied expungement to the plaintiff brokers, does the existing panel have authority to hold a further hearing or must FINRA constitute a new tribunal? While FINRA Rule 12609 allows the panel to reopen the record upon the request of a party, that authority is limited by any provision of “applicable law.” Is the doctrine of functus officio, which prohibits arbitrators from changing the merits of their decision after a final award, such “applicable law?”
Mother Nature apparently took offense when I said, in the last “Highlights,” that winter had not yet arrived in New England. The wind chill factor tonight in New Haven will be minus 26 degrees. My grandson, who is at the University of Maine at Orono, has been warned to expect a wind chill of minus 52, and, atop Mount Washington, that measurement will be hovering around minus 100. Please check on the elderly and any neighbors who may be without heat to make sure they are safe – and keep in your thoughts and give support to those who live without shelter.
David A. Reif, FCIArb
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