47 A.3d 1
N.J. Super. Ct. App. Div.2012Background
- Investors in a Ponzi scheme pursued negligence claims against Merrill Lynch and Katchen, with Smith using Merrill Lynch's account to perpetrate the fraud.
- Four Law Division actions were consolidated; Merrill Lynch moved to dismiss, investors cross-moved to compel FINRA arbitration, and the court held investors were not customers and owed no duty.
- Cantone filed third-party FINRA arbitration claims against Merrill Lynch for contribution and indemnification; plaintiffs sought to enjoin these third-party claims.
- Judge Dumont consolidated complaints, preliminarily enjoined Cantone from pursuing third-party claims in the Frederick and Tedeschi arbitrations, and denied PNCI/Hilliard Lyons' cross-motions to compel arbitration.
- On December 20, 2010, the Law Division held it had authority to decide arbitrability, concluded there was no agreement or exchange-related basis to compel arbitration, and granted injunctive relief; defendants appealed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Law Division has authority to decide arbitrability | Law Division may determine arbitrability under Howsam and AT&T. | Arbitrability is for arbitrators; no court should interpret FINRA codes in absence of a contract. | Law Division has authority to decide arbitrability. |
| Whether there was an arbitration agreement binding Cantone and Merrill Lynch | No written agreement; investors not customers; no exchange-related basis to compel arbitration. | FINRA membership and codes imply an arbitration obligation between members. | No agreement or exchange-related basis; arbitration not required. |
| Whether FINRA Customer/Industry Codes apply to the third-party, derivative claims | Codes do not apply because there is no customer/member dispute between the parties. | Codes should apply to compel arbitration among FINRA members whenever disputes arise. | Codes do not compel arbitration absent a covered dispute or agreement. |
| Whether the injunction against Cantone from pursuing third-party claims was proper | Preventing non-arbitrable, derivative claims preserves irreparable harm and avoids unnecessary arbitration costs. | Injunction improperly restrains arbitration and adjudication of disputes. | Injunction affirmed; irreparable harm shown and no right to arbitration required. |
Key Cases Cited
- AT&T Technologies, Inc. v. Communications Workers of America, 475 U.S. 643 (1986) (arbitrability decision rests with the court for gateway issues)
- Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002) (gateway vs. procedural arbitrability; some issues for arbitrators)
- First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995) (courts decide whether there is an agreement to arbitrate, not rewrite contracts)
- John Hancock Life Insurance Co. v. Wilson, 254 F.3d 48 (2d Cir. 2001) (absence of express agreement means court decides arbitrability absent exclusive language)
- Frederick v. Smith, 416 N.J.Super. 594 (App.Div.2010) (investors not customers; no duty owed by Merrill Lynch)