Court: District Court, N.D. Illinois; October 23, 2015; Federal District Court
Alexander Freund initiated legal action against UBS Financial Services, Inc. under 28 U.S.C. § 1332, seeking to halt an arbitration process with the Financial Industry Regulatory Authority (FINRA). Freund claims that FINRA lacks jurisdiction and cannot compel him to arbitrate due to the absence of a valid arbitration agreement. The court reviewed Freund's motion for a preliminary injunction and an expedited ruling, ultimately denying the injunction but approving the expedited consideration.
The background reveals that UBS, a FINRA member, employed Freund as a Client Service Associate starting November 7, 2011. Freund signed a letter agreement that included confidentiality and compliance clauses but did not reference FINRA or arbitration. Following his resignation from UBS on February 15, 2012, Freund joined Wells Fargo, along with two other former UBS employees. UBS subsequently filed a lawsuit against those employees for breaching their employment agreements but did not include Freund or the new hire Fryman in that case.
On the same day, UBS initiated a claim with FINRA against Kinnear, Bakas, and Wells Fargo, again excluding Freund. While at Wells Fargo, Freund applied for FINRA registration, marking his first attempt to register. His application included a signed Form U-4, which contains an arbitration provision requiring disputes to be arbitrated according to relevant rules and allowing arbitration awards to be enforceable in court.
On February 21, 2013, FINRA approved Plaintiff's registration application. Subsequently, on October 23, 2013, UBS submitted an Amended Statement of Claim to FINRA, adding Plaintiff as a respondent. UBS accused Kinnear, with Plaintiff's assistance, of stealing confidential UBS client and business records prior to their resignations, and alleged that Wells Fargo aided Kinnear in soliciting UBS clients using this misappropriated information. Plaintiff allegedly created numerous Excel spreadsheets containing sensitive UBS client details on his personal computer and emailed them to Kinnear’s personal accounts multiple times. UBS contended that Plaintiff admitted during deposition that he retained these spreadsheets after leaving UBS for Wells Fargo. Following the resignations, Kinnear reportedly used the stolen information to solicit UBS clients.
UBS’s Amended Statement of Claim includes two counts against Plaintiff: Count III for breach of contract, asserting that he failed to maintain the confidentiality of UBS information during and after his employment, and Count IV for breach of fiduciary duty, claiming that he acted disloyally by removing confidential data and collaborating with Wells Fargo while still employed by UBS. Plaintiff and Fryman filed a Response to the Amended Statement on January 29, 2014, challenging FINRA's jurisdiction. UBS subsequently sought a motion to compel discovery, which was granted by the FINRA arbitration Chairperson on December 18, 2014, confirming FINRA's jurisdiction based on Plaintiff's status as an "associated person" under arbitration rules.
On September 8, 2015, notice was given for the arbitration to commence on October 26, 2015. Plaintiff filed a court complaint on September 9, 2015, seeking a declaration that he was not obligated to participate in the FINRA arbitration and requested injunctive relief against UBS. A motion for a preliminary injunction was filed on September 17, 2015, to prevent UBS from pursuing claims in FINRA. The Court established an expedited briefing schedule and aimed to issue a ruling by October 23, 2015, before the arbitration was set to begin.
A preliminary injunction is an extraordinary equitable remedy requiring the movant to demonstrate clear need. The Seventh Circuit employs a two-step analysis for determining the appropriateness of such relief. Initially, the movant must establish: 1) the likelihood of suffering irreparable harm without the injunction; 2) the inadequacy of legal remedies; and 3) a reasonable likelihood of success on the merits. If these conditions are met, the court then weighs: 4) the irreparable harm to the movant if the injunction is denied against the harm to the nonmoving party if it is granted; and 5) the public interest implications of granting or denying the injunction. This balancing act operates on a sliding scale; a stronger likelihood of success reduces the burden of demonstrating harm.
In assessing the movant’s likelihood of success on the merits, the Federal Arbitration Act (FAA) governs arbitration agreements, affirming their validity unless grounds exist for revocation. The FAA establishes a federal policy favoring arbitration and mandates that any doubts regarding the scope of arbitration agreements be resolved in favor of arbitration. For arbitration to be compelled under the FAA, three conditions must be satisfied: 1) a written arbitration agreement; 2) a dispute that falls within the agreement’s scope; and 3) a refusal to arbitrate.
The dispute centers on whether a binding written agreement requires the Plaintiff to arbitrate claims made by UBS. Arbitration is inherently contractual, meaning a party cannot be compelled to arbitrate disputes unless they have agreed to do so. The Seventh Circuit identifies five doctrines that can bind non-signatories to arbitration agreements: assumption, agency, estoppel, veil piercing, and incorporation by reference. UBS contends that the Plaintiff submitted to FINRA's jurisdiction via three actions: signing the Form U-4 two months post-resignation, signing a letter agreement upon starting at UBS, and being an agent of UBS, a FINRA member.
The Court will assess these arguments, starting with the Form U-4. UBS claims that by signing the Form U-4, the Plaintiff agreed to arbitration regarding UBS’s claims. However, the Plaintiff argues that the Form U-4 does not apply retroactively to claims arising before its signing. The determination of whether these claims require arbitration is a judicial question, except where parties have explicitly designated otherwise. The Form U-4 lacks any language granting FINRA the authority to decide arbitrability. Although FINRA can interpret its Code's provisions, this does not imply a clear intent for an arbitrator to resolve disputes regarding arbitration applicability.
The Court is evaluating whether the U-4 form constitutes an agreement for the Plaintiff to arbitrate claims made by UBS against him. The analysis is based on contract law principles. The Plaintiff checked the "FINRA" box in section 4 of the U-4, indicating a registration with the Financial Industry Regulatory Authority (FINRA). In section 15A, he acknowledged submitting to FINRA's authority and agreed to arbitrate disputes that arise with his firm, customers, or any parties as mandated by the rules of the self-regulatory organizations (SROs) he registered with. FINRA Rule 13200 requires arbitration for disputes related to the business activities of members or associated persons. The term "member" includes brokers or dealers admitted to FINRA, and "Associated Person" refers to individuals registered or applying for registration under FINRA rules, including various positions within a member firm.
Both parties agree that the dispute would typically be subject to arbitration had the Plaintiff signed the U-4 before the dispute arose, as UBS is a FINRA member and the Plaintiff qualifies as an associated person. However, the Plaintiff signed the U-4 two months after leaving UBS and while employed at Wells Fargo, arguing that this signature does not retroactively bind him to arbitrate prior claims. UBS counters that the timing of the alleged tort or breach is irrelevant; what matters is whether UBS's claims are connected to the Plaintiff's employment or termination from UBS. UBS also contends that the Plaintiff's misconduct continued after his departure to Wells Fargo, involving solicitation of UBS clients with misappropriated information from UBS.
The Court will first evaluate whether UBS's amended statement of claim indicates that Plaintiff engaged in any misconduct after signing the U-4 arbitration agreement. UBS claims that its dispute arises from actions taken by Kinnear and his team, including Plaintiff, both during and after their employment at UBS. Specifically, UBS accuses Plaintiff of creating and retaining confidential customer spreadsheets on his personal computer after resigning from UBS. While UBS does not assert that Plaintiff misused these spreadsheets post-employment, it alleges that Kinnear utilized the stolen information to solicit UBS clients after both he and Plaintiff left the firm.
In Count III, UBS contends that Plaintiff breached a contractual obligation not to use UBS's confidential information, resulting in significant financial damages to UBS. Count IV alleges a breach of fiduciary duties by Plaintiff during his employment, but does not claim any breach of duty after his resignation. Overall, the amended statement implies that while Plaintiff did not directly solicit UBS clients post-resignation, his actions contributed to Kinnear's solicitation efforts using the confidential information he allegedly provided.
The next consideration is whether these allegations fall under the arbitration provision of the U-4 agreement, which mandates arbitration for disputes arising between the Plaintiff and UBS. UBS references a legal precedent indicating that the focus should be on whether the arbitration clause encompasses the claims made, rather than when the alleged misconduct occurred.
In the Amoco Cadiz case, the owner of a tanker sued the owner of a salvage tug after an unsuccessful rescue attempt, governed by a salvage agreement with an arbitration clause for disputes arising from the agreement. The district court ruled that tort claims (negligence, breach of warranty, and misrepresentation) were not subject to arbitration since they arose before the agreement. However, the Seventh Circuit reversed, concluding that the arbitration clause was sufficiently broad to encompass these claims due to their close relation to the salvage agreement's subject matter. The court asserted that assessing damages for the tanker owner required a comprehensive evaluation of the entire salvage operation. It also highlighted a strong public policy favoring arbitration in maritime and commercial disputes under the Arbitration Act.
The argument presented by UBS regarding the alleged theft of client information by Kinnear and his team mirrored aspects of Amoco Cadiz, as UBS’s damages likely stemmed from actions tied to the team's overall operation, extending beyond their departure. Plaintiff referenced two out-of-circuit cases suggesting courts typically do not apply arbitration agreements retroactively unless explicitly stated. However, these cases were not binding and did not necessitate express retroactivity language, as their arbitration clauses were specifically limited to disputes arising from the respective agreements or new employment relationships they created. In summary, the precedent established in Amoco Cadiz indicates the Seventh Circuit's flexibility concerning arbitration agreements and disputes arising prior to their execution when closely linked to the agreement's subject matter.
The U-4 form mandates arbitration for "any dispute, claim, or controversy" between the Plaintiff and any relevant parties as per FINRA rules, extending beyond specific agreements or employment with Wells Fargo. This interpretation aligns with precedents such as Kristian v. Comcast Corp., which established that broad arbitration clauses can retroactively cover disputes not directly arising out of an agreement. Similarly, the case of Zink v. Merrill Lynch reinforced that arbitration agreements can encompass disputes occurring before the agreement's execution. The court also pointed to Marcus v. Masucci, where the U-4 required arbitration for disputes arising from business activities. In that case, Marcus, who signed the U-4 in April 2000, argued against retroactive application for claims that arose prior to his employment. However, the court ruled in favor of arbitration, asserting that the allegations pertained to ongoing misconduct, thus affirming the broad applicability of the U-4’s arbitration clause.
The court clarified that retroactive application of arbitration agreements in the securities industry is permissible, as established by the Second Circuit, which has rejected the notion that such agreements cannot be applied retroactively. The arbitration clause in the Form U-4 encompasses disputes with current employers as well as any NASD-member firm or associated person, limited only to matters arising from the business activities of the NASD member or associated person, including employment issues. The court applied a presumption of arbitrability, concluding that any claims by the Plaintiff prior to April 2000 are included in ongoing claims related to alleged misappropriation, therefore mandating arbitration for the entire dispute.
The allegations against the Plaintiff suggest misconduct continued post-employment with UBS at Wells Fargo, but the clarity of these allegations does not affect the requirement for arbitration. Like the U-4 in the Marcus case, the Plaintiff’s U-4 mandates arbitration for disputes with "any other person" as long as they fall under FINRA's arbitration rules. Given that UBS is a FINRA member and the Plaintiff became an "associated person" upon applying for registration, UBS's claims, which involve the sale of securities and alleged theft of confidential customer information, are subject to arbitration.
The court stated that no provisions in the U-4 or FINRA rules prevent arbitration for disputes occurring before signing the U-4. Following Seventh Circuit precedent favoring arbitration, the court found that the Plaintiff did not demonstrate a reasonable likelihood of success in opposing FINRA arbitration. UBS only needs one basis for jurisdiction, which supports their position. Additionally, UBS referenced a letter agreement signed by the Plaintiff upon employment, which obligates adherence to federal laws and regulations applicable to UBS, providing further grounds for FINRA jurisdiction over the Plaintiff.
UBS contends that the Plaintiff agreed to abide by the rules of self-regulatory organizations, specifically FINRA, when signing a letter agreement. Under FINRA Rule 13200, disputes related to business activities between members and associated persons must be arbitrated. UBS classifies the Plaintiff as an "associated person" and itself as a "member," asserting that any disputes must be arbitrated according to this rule. The Court's primary task is to determine whether the letter agreement sufficiently references FINRA rules to bind the Plaintiff.
UBS assumes this reference is adequate but fails to provide legal support for its claim. The Court notes that a non-signatory may be compelled to arbitrate if they signed a separate agreement that incorporates the arbitration agreement. Under New Jersey law, for a document to be properly incorporated by reference, it must be described clearly enough for its identity to be established, and the party must have knowledge and consent to the incorporated terms. The Court finds that the letter agreement does not adequately incorporate the FINRA arbitration rules because it does not specifically mention FINRA or arbitration, nor does it provide evidence that the Plaintiff was aware of these rules at the time of signing. Consequently, the letter agreement does not establish a basis for FINRA's jurisdiction over the Plaintiff, indicating a strong likelihood of success for the Plaintiff on this issue.
Additionally, UBS argues that the Plaintiff, as an agent, is bound to the agreements made by UBS, including adherence to FINRA rules. UBS cites cases where employees of brokerage firms were compelled to arbitrate disputes due to their employer's agreements. However, the cited cases do not support UBS's assertion that the Plaintiff, as an agent, is bound to arbitrate claims against him based solely on UBS's agreement with FINRA.
A stockbroker was permitted to compel his employer's customers to arbitrate claims against him based on an arbitration agreement between the employer and the investors, despite the stockbroker not being a signatory to the agreement. In the case of Pritzker v. Merrill Lynch, the court ruled that pension plan trustees' claims against a broker, its consultant, and a sister corporation were subject to arbitration because the latter two acted as agents of the broker during alleged ERISA violations, even though they were not parties to the arbitration agreement. However, neither Hoffman nor Pritzker supports the idea that a signatory can require its agent to arbitrate claims based solely on the signatory's arbitration agreement with a third party.
In Belom v. Nat’l Futures Ass’n, an employee was compelled to arbitrate disputes due to federal statutes requiring members of the Commodity Futures Trading Commission to arbitrate customer disputes, rather than an arbitration contract. This case does not clarify whether an employer, as a member of a self-regulatory organization (SRO) like FINRA, can force employees to arbitrate under an agreement they never signed. UBS lacks legal grounds to assert that FINRA can compel arbitration for the Plaintiff simply because the Plaintiff acted as UBS’s agent under UBS's agreement with FINRA.
Courts have applied common law agency principles to compel arbitration for non-signatories, but typically only when a signatory brings claims against non-signatory agents. The situation differs when a signatory attempts to enforce an arbitration clause against a non-signatory, as agents do not become parties to contracts made on behalf of a disclosed principal. The court found no controlling authority supporting the notion that a signatory can bind a non-signatory agent to an arbitration agreement of its principal. UBS's argument is particularly weak as it seeks to compel its agent to arbitrate based on its own agreement to follow FINRA’s arbitration rules, without a written agreement with the agent. Thus, the agency theory does not justify FINRA's jurisdiction over the Plaintiff, and there is a reasonable likelihood of success for the Plaintiff on this issue.
Plaintiff asserts that proceeding with arbitration of UBS’s claims would lead to irreparable harm and lacks an adequate remedy at law, citing that arbitration awards are rarely vacated. He references *First Options of Chicago, Inc. v. Kaplan*, emphasizing that the authority to determine arbitrability significantly impacts a party resisting arbitration. The Supreme Court clarified that if parties have not agreed to submit the arbitrability issue to arbitration, a court will not defer to the arbitrator’s decision regarding arbitration requirements. Plaintiff highlights that a basis for vacating an award includes an arbitrator exceeding their powers, citing relevant cases.
Plaintiff argues that moving forward with arbitration would constitute per se irreparable harm, as post-arbitration remedies would be ineffective. However, the Seventh Circuit has countered this view, stating that concerns about arbitration do not irrevocably deprive a party of its forum choice, as they can seek to vacate an award if an arbitrator exceeds their authority. The court noted that the only potential harm from delaying until the arbitration concludes is the associated costs, which do not constitute irreparable injury under established Supreme Court rulings.
The court denies the Plaintiff's motion for a preliminary injunction, establishing that even if the likelihood of success on the merits were misjudged, the Plaintiff would not face irreparable harm nor lack an adequate legal remedy by participating in FINRA arbitration. The court must balance the harm to the non-movant against the movant's potential irreparable harm, contingent upon the moving party demonstrating a likelihood of success, lack of an adequate remedy at law, and potential irreparable harm. Here, the court finds the Plaintiff lacks a likelihood of success, possesses an adequate remedy post-arbitration, and would not suffer irreparable harm, negating the need for harm balancing.
The excerpt also references the definitions of "associated person" and "member" under the NASD code, and discusses the precedent set in Coenen v. R.W. Pressprich Co., where the court ruled that arbitration clauses applied even to disputes arising before a party became a member. However, the arbitration agreement in this case is narrower than in Coenen, stating “all disputes that may arise” rather than “all disputes.” The court notes that the Plaintiff's lack of prior experience in the securities industry suggests he may not have been aware of FINRA’s arbitration rules. Additionally, the court critiques a similar case, Trustmark, where the district court had wrongly concluded that the plaintiff could not be compelled to arbitrate issues not previously agreed upon. The Seventh Circuit found that the plaintiff had indeed agreed to arbitrate the issue and that participation in arbitration did not constitute irreparable injury.
