Gomez v. Brill Securities, Inc.Gomez v. Brill Securities, Inc.
APPEARANCES OF COUNSEL
Joseph, Herzfeld, Hester & Kirschenbaum LLP, New York City (Michael D. Palmer, Matthew Kadushin and Charles Joseph of counsel), for respondents.
OPINION OF THE COURT
Román, J.
When parties expressly agree to arbitrate their disputes we enforce their agreement and compel arbitration. However, the issue of whether to compel arbitration turns on the language of the agreement between the parties. Therefore, when an agreement to arbitrate expressly precludes arbitration under certain circumstances, and one of those enumerated circumstances exists, a party cannot be compelled to arbitrate. In this case, where the arbitration agreement expressly precludes arbitration if the otherwise arbitrable claims are brought via a plenary class action, we cannot compel arbitration since the agreement proscribes it.
Plaintiffs are registered representatives in the securities industry. Each plaintiff was required to, and did, execute a Uniform Application for Securities Industry Registration or Transfer (Form U-4). Pursuant to section 15A (5) of Form U-4, plaintiffs "agree[d] to arbitrate any dispute, claim or controversy that may arise between me and my firm . . . that is required to be arbitrated under the rules . . . of [the Financial Industry Regulatory Authority (FINRA)]" (emphasis omitted). FINRA Manual rule 13204 (d) prohibits arbitration of class action claims and prohibits enforcement of "any arbitration agreement against a member of a . . . putative class action with respect to any claim that is the subject of the . . . class action" until certain conditions, inapplicable here, are met.
Before the initiation of this action, two of the plaintiffs brought an action against the same defendants in the United States District Court for the Southern District of New York, asserting, via a class action, the state law claims alleged here, as well as a federal claim for overtime pay under the Fair Labor Standards Act (
Plaintiffs then commenced this action. Shortly thereafter, defendants moved to dismiss this action on grounds that it was barred by the doctrine of res judicata (
Contrary to defendants’ assertion, since the order issued by the District Court did not make any determination on the merits as to the state law claims, it has no res judicata effect on this action. The doctrine of res judicata serves to preclude a party from relitigating issues of fact and law decided in a prior proceeding. Specifically "as to the parties in a litigation and those in privity with them, a judgment on the merits by a court of competent jurisdiction is conclusive of the issues of fact and questions of law necessarily decided therein in any subsequent action" (Gramatan Home Invs. Corp. v Lopez, 46 NY2d 481, 485 [1979]). By precluding the relitigation of redundant claims, res judicata promotes judicial economy and conserves judicial resources (id.). Since res judicata precludes relitigation of issues actually litigated and resolved in a prior proceeding, the party seeking to invoke the doctrine of res judicata must demonstrate that the critical issue in a subsequent action was decided in the prior action and that the party against whom estoppel is sought was afforded a full and fair opportunity to contest such issue (Matter of New York Site Dev. Corp. v New York State Dept. of Envtl. Conservation, 217 AD2d 699, 700 [1995]). Here, the District Court, which stayed plaintiffs’ state law claims, held by implication that plaintiffs’ state law claims—the very claims they now assert—could not be arbitrated. Thus, far from
Insofar as, here, the agreement to arbitrate, by its very terms, clearly precludes arbitration when arbitrable claims are brought as a class action, plaintiffs cannot be required to arbitrate their class action claims. While
"[i]t has long been this State‘s policy that, where parties enter into an agreement and, in one of its provisions, promise that any dispute arising out of or in connection with it shall be settled by arbitration, any controversy which arises between them and is within the compass of the provision must go to arbitration" (Matter of Exercycle Corp. [Maratta], 9 NY2d 329, 334 [1961]), whether arbitration is mandated, however, turns entirely on the language of the agreement between the parties (Matter of Waldron [Goddess], 61 NY2d 181, 183 [1984] ["It is settled that a party will not be compelled to arbitrate and, thereby, to surrender the right to resort to the courts, absent evidence which affirmatively establishes that the parties expressly agreed to arbitrate their disputes" (internal quotation marks omitted)]; Matter of Acting Supt. of Schools of Liverpool Cent. School Dist. [United Liverpool Faculty Assn.], 42 NY2d 509,
512 [1977]; Gulf Underwriters Ins. Co. v Verizon Communications, Inc., 32 AD3d 709, 710 [2006]; Harris v Shearson Hayden Stone, 82 AD2d 87, 95 [1981], aff‘d, 56 NY2d 627 [1982]).
Accordingly, since an agreement to arbitrate is a contract, and when clear, shall "be enforced according to its terms" (Vermont Teddy Bear Co. v 538 Madison Realty Co., 1 NY3d 470, 475 [2004] [internal quotation marks omitted]; First Options of Chicago, Inc. v Kaplan, 514 US 938, 943 [1995] ["arbitration is simply a matter of contract between the parties"]), while parties who clearly and expressly agree to arbitrate shall be so compelled, parties who unequivocally agree to forgo arbitration under certain circumstances cannot be compelled to arbitrate when those enumerated circumstances exist.
Here, the agreement between the parties makes it exceedingly clear that arbitration shall be governed by the rules promulgated by FINRA. FINRA Manual rule 13204 (d) prohibits arbitration of class action claims and specifically, prohibits enforcement of "any arbitration agreement against a member of a . . . putative class action with respect to any claim that is the subject of the . . . class action" until certain conditions, inapplicable here, are met. Accordingly, based on the parties’ own agreement, which incorporates by reference FINRA Manual rule 13204 (d), arbitration of this class action suit is barred (Velez v Perrin Holden & Davenport Capital Corp., 769 F Supp 2d 445, 446-447 [SD NY 2011] [plaintiff‘s state law claims, brought as a class action, alleging that defendants failed to pay him overtime, commissions, and timely wages not arbitrable insofar as the agreement to arbitrate stated that arbitration would be governed by FINRA rules and FINRA Manual rule 13204 (d) precludes arbitration of claims brought by class action]; see Olde Discount Corp. v Hubbard, 4 F Supp 2d 1268, 1271 [D Kan 1998], aff‘d, 172 F3d 879 [10th Cir 1999]).
Contrary to defendants’ contention, neither our holding in Harris nor the holdings by the United States Supreme Court in Preston v Ferrer (552 US 346 [2008]) and AT&T Mobility LLC v Concepcion (563 US 333, 131 S Ct 1740 [2011]) warrant reversal of the motion court‘s decision and compulsion to arbitrate. In Harris, a case decided before the establishment of FINRA2 and the rules it promulgated, and where the agreement to arbitrate
did not contain an exemption from arbitration for claims brought by class action, we held that the parties to that action were bound by a clear agreement to arbitrate disputes and that a class action suit alleging causes of action subject to arbitration would not preclude arbitration (Harris at 95). Here, in adherence to Harris, in staying arbitration we simply enforce the express agreement between the parties, which, by incorporating by reference FINRA Manual rule 13204 (d), precludes arbitration when arbitrable claims are brought by class action (Nielsen v Piper, Jaffray & Hopwood, Inc., 66 F3d 145, 148-149 [1995], cert denied 516 US 1116 [1996] [arbitration stayed where agreement to arbitrate was governed by rules in chosen arbitration forum, one of which, NASD rule 12 (d), precluded arbitration when arbitrable claims were brought by class action]). Preston is also inapposite since in that case, the United States Supreme Court, reiterating that the law requires that parties be bound by their express arbitration agreements, held that "[w]hen parties agree to arbitrate all questions arising under a contract, the FAA [Federal Arbitration Act] supersedes state laws lodging primary jurisdiction in another forum, whether judicial or administrative" (Preston at 359). Here, arbitration is not being stayed by virtue of any state law, but because of an exclusion to arbitration in the agreement itself. AT&T Mobility LLC is similarly inapposite since in that case the Court, reiterating that an agreement to arbitrate must be enforced as written, simply held that such an agreement, freely entered into, cannot be vitiated by a state law deeming unconscionable the preclusion of a right antithetical to the goals of arbitration as envisioned by the FAA (AT&T Mobility LLC, 563 US at 333, 131 S Ct at 1749-1750 [California law which held that contracts which precluded class action suits were unconscionable could not preclude arbitration of claims even though the agreement itself violated California law by mandating arbitration and precluding class action suits]).
Respectfully, the dissent reaches its conclusion the only way it can, by prematurely determining, absent a motion for such relief, that this suit and the claims asserted do not merit class action certification and then by failing to recognize that this case raises an issue never previously addressed by New York law.
Second, like the dissent, we acknowledge this State‘s strong preference for compelling arbitration when parties expressly agree to arbitrate. Where we part ways, however, is in the dissent‘s failure to recognize that this is a case of first impression, such that cases like Harris and State of New York v Philip Morris Inc. (308 AD2d 57 [2003], lv denied 1 NY3d 502 [2003]), which indeed compelled arbitration despite the existence of plenary class action suits, cannot control the outcome. Simply restated, in these cases there existed no agreement precluding arbitration if claims were brought via class action. Here, by contrast, we have an agreement precluding arbitration if otherwise arbitrable claims are brought via class action. As such, until such time as class certification is denied, we cannot compel arbitration (Velez at 446-447; Olde Discount Corp. at 1271).
Accordingly, the order of the Supreme Court, New York County (Barbara R. Kapnick, J.), entered June 13, 2011, which denied defendants’ motion to dismiss the complaint or, in the alternative, to compel arbitration and stay the action pending arbitration, should be affirmed, with costs.
The facts of this case are essentially not in dispute. Plaintiffs, former registered representatives at defendant securities firm which consists of approximately 50 associates, were commission-only retail stock brokers who claim they are owed overtime wages and other compensation from defendants. Plaintiffs are registered with the Financial Industry Regulatory Authority (FINRA), a self-regulatory agency under the U.S. Securities and Exchange Commission. All registered securities representatives, including the named and putative plaintiffs, must sign a Uniform Application for Securities Industry Registration or Transfer, known as a Form U-4.1 Section 15A (5) of this form provides, in pertinent part: "I agree to arbitrate any dispute, claim, or controversy that may arise between me and my firm . . . that is required to be arbitrated under the rules . . . of [FINRA] as may be amended from time to time" (emphasis omitted). FINRA Manual rule 13200 (a) provides that
"[e]xcept as otherwise provided in the Code [of Arbitration Procedure for Industry Disputes, rule 13100 (f)], a dispute must be arbitrated under the Code 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 Persons; or
- "• Associated Persons."
FINRA Manual rule 13204 excludes class actions from the requirement of mandatory arbitration of disputes.
On or about April 27, 2010, plaintiffs Gomez and Gabiam commenced an action against defendants in the United States
Defendants moved to dismiss the federal action or, alternatively, to compel arbitration of the FLSA claim and either dismiss the state law claims by declining jurisdiction or stay the state law claims pending resolution of the arbitration. Plaintiffs opposed the motion, arguing that FINRA‘s restriction against compelling arbitration of class actions extended to their FLSA collective action claim, especially since the state and federal claims were "virtually identical," and if forced to arbitrate their federal claim, they would "be barred by principles of collateral estoppel from being part of the state class action."
The District Court granted defendants’ motion to compel arbitration of the FLSA claim and stayed the action pending resolution of such arbitration, finding that the FLSA collective action was not a "class action" for purposes of FINRA Manual rule 13204 and thus, was required to be arbitrated pursuant to the provisions of Form U-4. Significantly, the court rejected plaintiffs’ argument that compelling arbitration of the FLSA claim would interfere with their state law claims which were "virtually identical," holding in pertinent part:
"[T]he Court rejects this attempt to circumvent the arbitration of plaintiffs’ FLSA claim . . . finding that to hold otherwise would allow plaintiffs to avoid arbitration and litigate in federal court so long as their FLSA claim may also be styled as a state law class action claim . . . Such an outcome is inconsistent with plaintiffs’ obligations under the Form U-4 and the FINRA rules incorporated therein." (Gomez v Brill Sec., Inc., 2010 WL 4455827, *2, 2010 US Dist LEXIS 118162, *5 [SD NY 2010].)
Thereafter, plaintiffs voluntarily discontinued the federal action without prejudice, stipulating that any FLSA claims brought in the future would be subject to arbitration. They then filed the present action via a class action complaint. The parties to this action are identical to those in the federal action with the exception of an additional plaintiff, Kwesi Moore, and
The District Court‘s reasoning that plaintiffs’ claims were a not so subtle attempt to circumvent the arbitration provisions of Form U-4 and the FINRA rules is compelling and equally applicable here. The result should be the same.
An appropriate starting point would be a review of the role arbitration plays in the judicial system.
There is a strong public policy "supporting arbitration and discouraging judicial interference with either the process or its outcome" (Matter of New York City Tr. Auth. v Transport Workers Union of Am., Local 100, AFL-CIO, 99 NY2d 1, 6 [2002]), particularly when used as a means of settling labor disputes (see Matter of Town of Haverstraw [Rockland County Patrolmen‘s Benevolent Assn.], 65 NY2d 677, 678 [1985]; Matter of Associated Teachers of Huntington v Board of Educ., Union Free School Dist. No. 3, Town of Huntington, 33 NY2d 229, 236 [1973]).
There is no question, and the plaintiffs do not challenge the validity of the arbitration provisions of the FINRA rules as incorporated into Form U-4. Rather, plaintiffs follow the same playbook as used in the federal court by casting their complaint as a class action in order to avoid their obligation to arbitrate under the provisions of the FINRA rules to which they agreed.
The fact that there are multiple plaintiffs and potential plaintiffs does not prevent these issues from being arbitrated. FINRA Manual rule 13312 permits multiple claimants to participate in a single arbitration.2 Thus, FINRA provides an appropriate forum to hear plaintiffs’ claims in an expeditious manner, before an arbitrator who has expertise in the securities industry. Given the limited size of this class, there is no justification to argue the class action method is superior to other methods of adjudication under
The majority makes the curious argument that the federal court, by staying the state law claims, implicitly
the record to support this assumption. Although not directly referenced by the federal court in its decision, the Federal Arbitration Act (
An examination of the statutory requirements for a proper class action is also in order.
"1. the class is so numerous that joinder of all members, whether otherwise required or permitted, is impracticable;
"2. there are questions of law or fact common to the class which predominate over any questions affecting only individual members;
"3. the claims or defenses of the representative parties are typical of the claims or defenses of the class;
"4. the representative parties will fairly and adequately protect the interests of the class; and
"5. a class action is superior to other available methods for the fair and efficient adjudication of the controversy."
The party moving for class action certification has the burden of satisfying all five criteria ( Godwin Realty Assoc. v CATV Enters., 275 AD2d 269 [2000]). Although these statutory criteria
should be liberally construed (Englade v HarperCollins Publs., 289 AD2d 159 [2001]), such construction should not be utilized as a license to evade contractual obligations to arbitrate disputes (see 82 NY Jur 2d, Parties § 247; Harris v Shearson Hayden Stone, 82 AD2d 87, 91 [1981], aff‘d 56 NY2d 627 [1982]).
Here, although plaintiffs arguably meet the numerosity requirement of
The policy of this State "favors and encourages arbitration as a means of conserving the time and resources of the courts and the contracting parties" (Matter of Nationwide Gen. Ins. Co. v Investors Ins. Co. of Am., 37 NY2d 91, 95 [1975]). Given the limited size of this class and the issues involved, there is no justification to argue the class action method is superior to other methods of adjudication. This purported class action does not further judicial economy, particularly since, as noted, FINRA rules provide for the arbitration of multiple party claims. Because plaintiffs do not meet the requirement of
Most importantly, the majority overlooks the fact that
State of New York v Philip Morris Inc. (308 AD2d 57, 67 [2003], lv denied 1 NY3d 502 [2003]) is instructive in this regard. In reversing the motion court‘s determination to grant class action certification, we held that the order in question
"rests on the assumption that, if
CPLR articles 9 and75 conflict, the former trumps the latter. However, that assumption is incorrect. In Harris v Shearson Hayden Stone, this Court held that ‘the interests favoring arbitration should prevail over
those favoring the class action, both in general and in the present instance’ " (308 AD2d at 67 [citations omitted]).
Although, as the majority notes, Harris was decided prior to the advent of FINRA and its predecessor National Association of Securities Dealers (NASD), its rationale is still applicable under the circumstances of this case. Harris specifically found that, in a conflict between a purported class action and a valid arbitration agreement, the "strong public policy which underlies arbitration" must prevail (82 AD2d at 92). While it is true that FINRA‘s exception for class actions was not involved in Harris, the principle that class actions are procedural vehicles to enforce the substantive law is unchanged. Indeed, Harris, in quoting from Vernon v Drexel Burnham & Co. (52 Cal App 3d 706, 716, 125 Cal Rptr 147, 153 [1975]) astutely observed that "[a]ltering the substantive law to accommodate procedure would be to confuse the means with the ends—to sacrifice the goal for the going" (82 AD2d at 95). In effect, the majority is doing just that—substituting a procedural device in place of a substantive one.
This rationale is particularly applicable here. A basic reading of the four corners of Form U-4 and the FINRA rules leads to the conclusion that the claims being asserted by plaintiffs are arbitrable. Simply styling a complaint as a class action in order to bring it within an exception to arbitration elevates form over substance and essentially negates the strong public policy in favor of arbitration as stated in Harris and a legion of other cases. Plaintiffs are merely utilizing the procedural device of a class action to circumvent their obligations under substantive contractual law to arbitrate their overtime claims. Having been thwarted at the federal level, they are now attempting to pull off the same charade in state court. As in the federal court, such an attempt should not be permitted.
If these plaintiffs are permitted to evade their obligations under Form U-4 and the FINRA rules by getting a few other potential plaintiffs to sign on to their complaint and thus refer to themselves as a "class," other plaintiffs could and would follow suit with other issues covered by FINRA rules and Form U-4. This would completely eviscerate the purpose of the arbitration rules and create litigation in cases which should be, and have been, the subject of mandatory arbitration. This not only runs afoul of the intent of the FINRA rules, but also negates the requirements of
ity
Gonzalez, P.J., and Tom, J., concur with Román, J.; Sweeny, J., dissents in part in a separate opinion in which Renwick, J., concurs.
Order, Supreme Court, New York County, entered June 13, 2011, affirmed, with costs.
Notes
"One or more parties may join multiple claims together in the same arbitration if the claims contain common questions of law or fact and:
- "• The claims assert any right to relief jointly and severally; or
- "• The claims arise out of the same transaction or occurrence, or series of transactions or occurrences."
"If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court . . . upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement" (emphasis added).