Nothing dramatic was decided over the last couple of days, as the courts wound down the holiday season. So, today we get an opportunity to take a quick look at a number of issues.

What Claims Must a FINRA Member Arbitrate?

In July 2020, while Nartith Long was a registered representative with NYLIFE Securities, LLC, he was introduced to Rolando and Edwardo Suarez.  According to District Judge Olguin in NYLIFE Securities LLC v. Suarez, 2021 U.S. Dist. LEXIS 247737 (C.D. Cal. December 29, 2021), at that meeting Long showed the defendants marketing material with the New York Life logo.  He also provided them with paperwork to establish accounts at TD Ameritrade and Fidelity Investments, to which he requested access.  The Suarez brothers invested $80,000, which they lost, allegedly because Long “invest[ed] in speculative investments on margin.” On December 1, 2020, NYLSEC terminated Long’s employment for “violating company policy by engaging in unauthorized securities transactions in the same manner alleged by defendants, i.e., ‘recommending consumers open brokerage accounts with a non-affiliated firm and, then, using their log in information, . . . trad[ing] securities in those brokerage accounts.’”  (quoting Long’s Broker Check).  Defendants commenced a FINRA arbitration, which NYLSEC here seeks to enjoin.

According to FINRA Rule 12200, parties must arbitrate a dispute if, among other requirements, “[t]he dispute is between a customer and a member or associated person of a member . . . .” (Underlining in the opinion). NYLSEC contended that, because Long did not implement the transactions through an NYLSEC account, but, rather, through the third-party accounts which defendants established at his direction, the Suarezes were not “customers” of the plaintiff.  Judge Olguin addresses two issues.  First, he holds that Long was an “associated person of a member,” i.e., NYLIFE Securities.  He “held himself out as a representative of plaintiff, including by showing defendants a business card stating that he was an agent of plaintiff, presenting marketing materials with plaintiff’s logo, and telling defendants that plaintiff provided him with ‘resources other stockbrokers did not have[].’” (brackets in opinion). Thus, the court opines, “defendants were Long’s customers and, therefore, plaintiff’s customers, for purposes of FINRA Rules 12100 and 12200.”  Second, the court holds that, because defendants included a negligent supervision claim in their arbitration demand, the dispute “arises in connection with the business activities of plaintiff. . . .” Accordingly, he compels arbitration.  The opinion is a good resource for beginning research on these issues, as it cites extensively to cases from various District Courts and Courts of Appeals.

Confirming Arbitrations against Non-appearing parties

Two cases serve as reminders that, in an action to confirm an arbitration, a default judgment may not be entered under Fed. R. Civ. P. 55(b)(2) against a non-appearing party.  Rather, as Magistrate Judge Cave opines in Theatrical Drivers & Helpers Local Union No. 817 v. BNM Production Services, Inc., 2021 U.S. Dist. LEXIS 2021 U.S. Dist. LEXIS 246033 (S.D.N.Y. December 27, 2021), “Fed. R. Civ. P. ’55 does not operate well in the context of a motion to confirm or vacate an arbitration award.’ The Second Circuit instead advised district courts to treat an unanswered petition to confirm an arbitration award as ‘a motion for summary judgment,’ given that such a petition is usually accompanied by” the agreement to arbitrate and the award, which resolve issues on the merits or to which the court must defer, quoting D.H. Blair & Co. v. Gottdiener, 462 F.2d 95, 107 (2^nd Cir. 2006). “The Court concludes that the award ’provides more than a “barely colorable justification for the outcome reached,”’ with the exception of one mathematical correction to the Award. . . .”  (citations omitted).  After correcting that $280 error, the Magistrate Judge recommends that the District Court confirm the award.

Likewise, Choice Hotels International, Inc. v. Megha Hotels, LLC, 2021 U.S. Dist. LEXIS 246604 (D. Md. December 28, 2021)(Xinis, J.), holds that “a plaintiff moving for default judgment to confirm an arbitration award ‘must show that it is entitled to confirmation of the arbitration award as a matter of law.’” (Citation omitted). Like Magistrate Judge Cave, the court here specifically reviews the amount of the damage award, but finds no error.  The opinion provides a good template for courts or counsel addressing confirmation of an award against a non-appearing party, as District Judge Xinis carefully checks off each of the elements relevant to a summary judgment – the timeliness of the application to confirm, the existence of subject matter jurisdiction, the legal standard for review of an award under the Federal Arbitration Act, and the absence of any material question of fact under that standard.

Attorney fees and withdrawal of action

The arbitration agreement which was the subject of Amazing Lash Franchise, LLC v. Sayed, 2021 U.S. Dist. LEXIS 247871 (D. Col. December 30, 2021)(Martinez, J.), provided that “the prevailing party in any . . . litigation arising out of or relating to” the agreement would recover reasonable attorneys’ fees incurred “in successfully enforcing any provision” thereof.  Plaintiff brought this action for unspecified violations of the parties’ franchise agreement.  Defendants had earlier moved to compel arbitration, but, before the court adjudicated the issue, Plaintiffs voluntarily dismissed the action pursuant to Fed. R. Civ. P. 41(a)(1)(A)(i).  Invoking the quoted provisions of the agreement, Defendants sought counsel fees  which they incurred in seeking to compel arbitration.  The court denies the motion, holding that “voluntary dismissal does not create a prevailing party because in order to create a prevailing party there must be a ‘judicially sanctioned change in the legal relationship of the parties’” (internal citations omitted).  “Given Plaintiff’s early voluntary dismissal of this action,” there was no such change.  Even the court’s denial of plaintiff’s motion for a temporary restraining order “does not render Defendants the prevailing party because the Court’s denial was not based on the merits of this action.”  It is noteworthy that the plaintiff here withdrew its action under Rule 42(a)(1)(A)(i), which permits a voluntary dismissal without a court order where the opposing party has not served an answer or motion for summary judgment.  Under Rule 41(a)(2), once there has been service of an answer or motion for summary judgment, an action may be dismissed only with permission of the court “on terms that the court considers proper.”  Where the parties’ agreement has a now-common attorneys’ fees provision similar to that in Amazing Lash, counsel who have filed an answer prior to opposing counsel’s request to voluntarily dismiss the action in favor of arbitration should consider asking the court to condition that dismissal upon the payment of any counsel fees they may have incurred.

Quick Hits –

Arbitral institutions should decide disputes regarding their rules – Candice Juarez and Discovery Bank entered into an arbitration agreement which provided for arbitration before JAMS, with either party having the right to appeal an unsatisfactory award to a new three-member panel when more than $100,000 was in dispute.  The agreement further provided that “the appealing party pays all appellate costs.” Plaintiff sought to invoke the appellate procedures.  JAMS ordered that, notwithstanding the agreement, the institution’s fees would initially be divided pursuant to the JAM’s Consumer Rules, with only $250 allocated to Juarez and the balance to Discovery Bank, as the non-consumer party.  In Juarez v. Discovery Bank, 2021 U.S. Dist. LEXIS 248201 (C.D. Cal. December 30, 2021), the bank, relying upon the terms of the arbitration provision, seeks an order compelling Plaintiff to pay those fees.  District Judge Olguin defers to JAMS’ application of its own rules and denies the request. “[C]ourts presume that the parties intend arbitrators, not the courts, to decide disputes about the meaning and application of particular preconditions for the use of arbitration.” (Citation omitted).  “[T]he parties’ dispute is entirely procedural in nature, namely, who will bear the costs of plaintiff’s appeal before the appeal may be heard.”

Litigation Waiver – In Core Progression Franchise, LLC v. O’Hare, 2021 U.S. Dist. LEXIS 247185 (D. Col. December 29, 2021), District Judge Martinez does a deep dive into the procedural history of the litigation before holding that, despite the passage of approximately six months between the commencement of the action and the filing of a motion to compel, defendants did not waive their right to arbitrate the dispute.  As in most litigation waiver cases, the result is dependent upon the facts of the individual case.  However, the opinion is worth reading as a guide to the factors to be considered and a court’s analysis thereof. (The motion to compel is granted in part and denied in part in a separate opinion filed the same day, Core Progression Franchise, LLC v. O’Hare, 2021 U.S. Dist. LEXIS 247183 (D. Col. December 29, 2021)).

Retroactivity of Atalese – In 2014, the New Jersey Supreme Court established standards for arbitration agreements in legal engagement letters, Atalese v. U.S. Legal Services Group, L.P. 219 N.J. 430 (2014).  Such an agreement, it held, required that the arbitration clause “must explain that the plaintiff is giving up [his] right to bring [his] claims in court or to have a jury resolve the dispute,” Altalese at page 447.  Various decisions, including Moon v. Breathless, Inc., 868 F. 3d 209 (3d Cir. 2017), extended those requirements to agreements other than those between lawyer and client.  In Maity v. Tata Consultancy Services, Ltd., 2021 U.S. Dist. LEXIS 247355 (D.N.J. December 29, 2021), District Judge Hayden, in dictum wrapped in footnote, questions whether the requirements of Atalese are retroactive so as to encompass agreements entered into before its promulgation.

Dismissal for failure to commence arbitration – On January 19, 2021, the Court in Occilien v. Related Partners, Inc. granted the defendants’ motion to compel arbitration. Plaintiff failed to file for arbitration and, in Occilien v. Related Partners Inc., 2021 U.S. Dist. LEXIS 248232 (S.D.N.Y. December 29, 2021), District Judge Failla runs out of patience. “Plaintiff has informed the  Court that she does not intend to initiate arbitration proceedings. . . .despite the Court’s exhortation that Plaintiff’s ‘persistent failure and unwillingness to pursue arbitration could, at some point in the near future, result in dismissal of this action.’ The Court has determined that the point is now.” Applying the Second Circuit’s standards in LeSane v. Hall’s Security Analyst, Inc., 239 F. 3d 206 (2^nd Cir. 2001), the court dismisses the action under Fed. R. Civ. P. 41(b).  As the court does not state otherwise, the dismissal, by virtue of the rule, is an adjudication on the merits, thus essentially making it with prejudice.

2021 was a difficult year on any number of fronts.  Most of us are tired of travel challenges, health restrictions, and a continued sense of concern for ourselves, our families, and our friends – and many will look back on the year as one of deep personal loss. So, however you may address expressions of hope, worries for yourself and others, and a desire for grace, let us all seek a 2022 that is vibrant, healthy and safe.  Happy New Year.

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