Fees & FINRA

by Richard Birke
February 2016

JAMS ADR Blog by Chris Poole

Richard Birke

Following are two interesting and recent federal court rulings related to arbitration.

Award of Attorney’s Fees Associated with Motion to Confirm Reversed on Appeal
Zurich American Insurance (as subrogee of Vinmar International) v. Team Tankers

Vinmar International chartered a ship from Team Tankers (TT). When the chemical shipped from Houston arrived in South Korea, it showed signs of yellowing, reducing its value.

Vinmar initiated arbitration pursuant to the charter agreement and the majority of the arbitration panel held that Vinmar was not entitled to relief. Vinmar moved to vacate the award on several grounds – manifest disregard of the relevant law and because the panel chairman had been diagnosed with a brain tumor prior to the initiation of arbitration, which he never disclosed and from which he died during the post-award proceedings.

The district court held that the panel had not manifestly disregarded the law, that the panel chair had not been guilty of “corruption or misbehavior” and that TT was entitled to “all costs of suit and attorneys’ fees incurred,” including the costs associated with moving to confirm. Vinmar appealed.

The United States Court of Appeals for the Second Circuit affirmed the district court’s confirmation of the award, concluding that Vinmar had failed to meet its “heavy burden” that the panel had manifestly disregarded the law. As to the failure to disclose the tumor, the Court wrote, “if an arbitrator’s failure to comply with arbitral rules, without more, could properly be considered ‘corruption’ or ‘misbehavior,’ the FAA’s grounds for vacatur would be precisely as varied and expansive as the rules private parties might choose to adopt.”

However, the Court found that the district court erred in awarding fees and costs incurred seeking to confirm the award. The Court found that the general rule that parties bear their own costs was not undone by the charter contract, because the contract authorized a fee award against a party that breached the charter as part of the non-breaching party’s damages. In this case, there was no finding or suggestion that Vinmar breached.

As to TT’s argument that the award was justified by bad faith during litigation, the court wrote “[p]erhaps something in the record could support a fee award under [the federal bad faith standards, 28 U.S.C. sec. 1927], but we have not found it, and the respondent carrier has made no effort to identify it. Accordingly, we must reverse the District Court’s award of attorney’s fees and costs.”

Non-FINRA Arbitrators Allowed if Specified in Pre-Dispute Employment Agreement
Credit Suisse Securities v. Tracy

John Tracy and other Los Angeles-based financial advisors entered into employment agreements with Credit Suisse. Those agreements contained provisions requiring an internal grievance procedure followed by mediation, followed by binding arbitration in the event none of the other non-binding processes produced a settlement.

A dispute arose regarding amounts owed under a compensation hedge program and when the internal grievance process and mediation didn’t produce a result, Credit Suisse filed a demand for arbitration with an outside provider. Meanwhile, Tracy and his peers filed a demand with FINRA. Credit Suisse commenced an action to stay or dismiss the FINRA arbitration. Tracy argued that FINRA rules require arbitration with one of its own panels, but the district court granted Credit Suisse’s petition and Tracy appealed.

The United States Court of Appeals for the Second Circuit affirmed. It looked to FINRA rule 13200, which states, “Except as otherwise provided in the Code, 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 and Associated Persons.”

After finding a conflict between the employment agreement and the FINRA rules, the Court turned to the question of whether the requirement of application of FINRA rules, including that the arbitration be conducted in a FINRA forum, could be waived by a pre-dispute agreement. The Court reviewed prior cases related to waiver of other FINRA rules, other arbitration provisions inside and outside the context of employment and concluded “Our case law leads to the conclusion that a pre-dispute private agreement to arbitrate before a non-FINRA arbitral forum is enforceable.”

Biography


Richard Birke is a JAMS consultant and has taught dispute resolution for more than 20 years. He is a law school professor and director of the Center for Dispute Resolution at Willamette. Under his leadership, CDR has enjoyed more than a decade of high national rankings in the US and is the 2012 winner of the Ninth Circuit ADR Education Award. Mr. Birke is a two-time award-winning author, as well as an ADR neutral, consultant and trainer. 



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