According to the Court’s opinion in Rowlette, the defendant employee was jointly employed by the
plaintiff bank and a securities firm in a “dual employment agreement.” He sold registered securities on behalf of
the securities firm to members of the public and to the bank’s customers. The plaintiff bank referred customers to the
defendant and he signed stock option agreements with the bank’s parent company
which contained non-competition clauses. He then resigned his employment and became
associated with a different securities firm.
The bank and its parent company filed suit against the employee, his
company and the new securities firm for, among other thing, breach of contract,
unfair competition, theft, etc.
The defendants asserted that the plaintiffs were required to
arbitrate their claims under the rules of the Financial Industry Regulatory Authority
(FINRA):
FINRA Rule 13200 provides that a dispute must be arbitrated
under the FINRA Code of Arbitration Procedure for Industry Disputes
("FINRA 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.1 Under
FINRA Rule 13100(o), "member" is defined as any broker or dealer
admitted to membership in FINRA, and under FINRA Rule 13100(a),
"associated person" is defined as a person associated with a member.
Rowlette also signed a Uniform Application for Securities Industry Regulation or
Transfer form ("Form U4") while employed with Fifth Third Securities,
which contains a clause requiring arbitration of claims. Appellants claim that
Form U4 also compels arbitration of the claims in this case.
Problem was, the plaintiffs were not members of FINRA, were
not bound by FINRA rules and had never signed the U4 form or otherwise agreed
to arbitrate any disputes with any of the defendants. While the plaintiff’s other dual employer
(i.e., the securities firm which shared the plaintiff bank’s name) was a FINRA
member and obligated to arbitrate disputes, it was not a party to the lawsuit.
Appellants also claim that, if this case proceeds in the
court below, Fifth Third Bank will be unable to prove any damages. They assert
that Rowlette only did work involving securities for Fifth Third Securities and
did not perform any banking transactions for Fifth Third Bank. Appellants argue
that Fifth Third Securities is the real party in interest in this case and that
any damages arising from Rowlette's change of employment would accrue to Fifth
Third Securities, not Fifth Third Bank. However, Fifth Third Bank and Fifth
Third Bancorp are distinct entities from Fifth Third Securities. The claims in
appellees' complaint rely solely on the stock agreements Rowlette signed with
Fifth Third Bank and Fifth Third Bancorp. Further, appellants concede that
Rowlette was a dual employee of both Fifth Third Bank and Fifth Third Securities,
although they argue that his employment with Fifth Third Bank was merely pro
forma. Thus, it appears that appellees are asserting their own independent
claims, not seeking to recover damages owing to Fifth Third Securities.
Moreover, to the extent that appellees asserted claims seeking to recover
damages owing to another entity, such claims could be addressed through a
motion for summary judgment.
Therefore, the Court affirmed the denial of the motions to
dismiss and compel arbitration.
In the Schafer case, the trustees of an ESOP
sought indemnification from the parent companies for the settlement of a
lawsuit alleging breach of fiduciary duties.
The arbitrator found that the indemnification agreement was void under
ERISA. The trustees then appealed the
arbitrator’s decision to federal court on the grounds that the arbitrator’s
legal reasoning was erroneous under
Sixth Circuit precedent. The trial court
vacated the award and the parent corporation appealed. The Court of Appeals agreed that if a judge
had made the same mistake as the arbitrator, the decision would have been
reversed.
But the arbitrator’s
decision reasoned from the statute and the contract, and not in clear disregard
of them, such that the arbitrator’s decision should not have been vacated by
the district court because of the legal error of the arbitrator. Absent
extraordinary circumstances, arbitration is supposed to resolve, with finality,
legal as well as factual disputes.
Section 10 of the Federal Arbitration Act only permits
arbitration decisions to be vacated in the following situations:
(1) where the award was procured by corruption, fraud, or
undue means;
(2) where there was evident partiality or corruption in the
arbitrators, or either of them;
(3) where the arbitrators were guilty of misconduct in
refusing to hear evidence pertinent and material to the controversy; or of any
other misbehavior by which the rights of any party have been prejudiced; or
(4) where the arbitrators exceeded their powers, or so
imperfectly executed them that a mutual, final, and definite award upon the subject
matter submitted was not made
The best
argument that could be made for vacating the arbitration decision was that the
arbitrator exceeded his authority by manifestly disregarding the law. The Court was not certain that this constitutes
a valid basis under the FAA to vacate an arbitration award. However, the Court side-stepped that issue
because it did not think the arbitrator’s error in interpreting ERISA rose to
that level. “Because
the arbitrator, notwithstanding his apparent error of law, did not manifestly disregard
the law so as to warrant vacatur of the award, we need not decide whether a
manifest disregard of the law legitimately forms a basis for vacatur in the
first place, either as an interpretation of the fourth statutory basis for
vacatur, or as a fifth, inferred, basis for vacatur.”
While the arbitrator may have misinterpreted ERISA, his
decision was based on a plausible interpretation of the statute.
Legal error by the
arbitrator—even clear legal error—is however not by itself sufficient for vacatur
of an arbitration agreement. One of the advantages of arbitration is the
avoidance of the expense of
appeals, and the avoidance of such costs would be undermined by permitting
appeals based on clear error of law. . . . Even assuming that manifest
disregard of the law is a basis for vacatur of an arbitral decision, the scope
of the basis has to be very narrow. Manifest disregard of the law is not just
manifest error of law. If the arbitrator expressed disagreement with the law,
rather than interpretation of the law, that might suggest “disregard.” But
there is little evidence of that in the arbitrator’s decision. Instead, the
arbitrator relied on a very broad “plain” reading of the ERISA provision
invalidating contractual provisions that relieve a fiduciary of liability, and
relied on a narrow and formal meaning of the insurance exception to that
provision. The arbitrator also relied on precedents that we can distinguish.
Even together, however, this is not enough to show a manifest (as opposed to
possible, or even likely) disregard (as opposed to questionable reading) of the
law.
Moreover, the very idea that an arbitral decision is not
appealable for legal error leads to the conclusion that the arbitrator is not
necessarily bound by legal holdings of this court. If an arbitrator relies on a
colorable meaning of the words of the statute—as the arbitrator did here—the
fact that there is Sixth Circuit precedent to the contrary is not necessarily
determinative. Sixth Circuit holdings
are binding in courts and on agencies whose decisions are appealable to the
Sixth Circuit, ultimately because of that appealability. An arbitrator cannot
reject the law, but can disagree with nonbinding precedent without disregarding
the law.
NOTICE:
This summary is designed merely to inform and alert you of recent legal
developments. It does not constitute legal advice and does not apply to any
particular situation because different facts could lead to different results.
Information here can change or be amended without notice. Readers should not
act upon this information without legal advice. If you have any questions about
anything you have read, you should consult with or retain an employment
attorney.
