Henry Schein, Inc. v. Archer and White Sales, Inc., No. 19-963 (U.S. Supreme Court Dec. 8)
We covered briefly in the Alert the December 8, 2020 oral argument at SCOTUS in Henry Schein II, and promised a full analysis. Upon further reflection, we instead decide to pass along references to some excellent analyses we’ve encountered.
To review, as reported in SAA 2020-46 (Dec. 10), with a full complement of Justices, oral argument took place December 8 before the Supreme Court in the arbitration-centric Henry Schein, Inc. v. Archer and White Sales, Inc., No. 19-963 (Henry Schein II). As we reported in SAA 2020-23 (Jun. 17), the Supreme Court in June agreed to review an open issue from its 2019 ruling in Henry Schein, Inc. v. Archer and White Sales, Inc.,139 S. Ct. 524 (2019) (Henry Schein I), where the Court held unanimously that there is no delegation carveout under the Federal Arbitration Act for “wholly groundless” assertions of arbitrability. The predispute arbitration agreement (“PDAA”) provided for AAA arbitration of: “Any dispute arising under or related to this Agreement (except for actions seeking injunctive relief and disputes relating to trademarks, trade secrets or other intellectual property of [the manufacturing company]) ….” (brackets in original). Left unresolved after the parties’ first trip to SCOTUS was whether this PDAA constituted clear and unmistakable delegation of all issues of arbitrability or carved out injunctive relief. The issue for review in Schein’s granted Petition for Certiorari was: “Whether a provision in an arbitration agreement that exempts certain claims from arbitration negates an otherwise clear and unmistakable delegation of questions of arbitrability to an arbitrator.”
Our High Level Thoughts
We provided in #46 some overall reactions, most of which we attributed to pandemic-prompted format changes (i.e., Chief Justice Roberts calling on each Justice seriatim in descending order of seniority): 1) contrary to what usually happens, Henry Schein’ attorney Kannon K. Shanmugan made it all the way through his opening without being peppered with questions within seconds of uttering “May it please the Court” (Archer and White’s counsel Daniel L. Geyser had no such luck); 2) also unusual was the brevity of Mr. Shanmugan’s opening statement, which took just two minutes; 3) Justice Thomas asked several questions of both attorneys; and 4) based on the questions and comments from several Justices, it seems that the Court is having second thoughts about not also taking on whether incorporation of the AAA’s Rules constitutes clear and unmistakable evidence of delegation. On the last point, recall that the Court declined to grant Archer and White’s cross-Petition for Certiorari that had raised two other questions: “1. Whether an arbitration agreement that identifies a set of arbitration rules to apply if there is arbitration clearly and unmistakably delegates to the arbitrator disputes about whether the parties agreed to arbitrate in the first place. 2. Whether an arbitrator or a court decides whether a nonsignatory to an arbitration agreement can enforce the arbitration agreement through equitable estoppel.” The first topic came up several times, nonetheless.
Some Excellent Analyses
We read several blog posts analyzing the oral argument and pass along in alpha order of author name information on and a snippet from three of our favorites. These articles cover the interactions between the Justices and counsel in different ways, but collectively convey the tenor of the oral argument:
To us, a very obvious common theme was the sense some members of the Court realized that, in retrospect, they might have taken up the related issue of whether incorporating the AAA’s Rules constitutes clear and unmistakable evidence of delegation. While we usually make bold predictions on where the Court may land, this one is murky at best. If forced, we would say the odds favor Schein, but we’re not betting on it.
(ed: *The transcript is posted on the Court’s Website, as is the official audio recording. For our money, we recommend the Oyez recording, which highlights the corresponding part of the transcript along with the audio, and a photo of the Justice speaking. **As described in this week’s “Did You Know?,” live oral argument audio can now be heard on C-SPAN. ***Several Amicus Briefs were filed; they may be viewed here. Henry Schein’s brief is here, and Archer and White’s here.)
Servotronics, Inc. v. Rolls-Royce PLC and the Boeing Company, No. 20-794 (U.S. Supreme Court Dec. 7, 2020)
As we’ve been speculating for quite some time, the Supreme Court is being asked to resolve a major split on whether 28 USC Section 1782 provides for discovery in aid of private, foreign, commercial arbitration or only covers cases administered by governmental arbitration forums.
We have already reported on this issue several times this year. To review, under 28 U.S.C. § 1782, a party to a matter pending in a “foreign or international tribunal” can seek an ex parte discovery order in aid of arbitration. Specifically: “The district court of the district in which a person resides or is found may order him to give his testimony or statement or to produce a document or other thing for use in a proceeding in a foreign or international tribunal … for use in the foreign proceeding.” But does section 1782 cover foreign, private arbitration proceedings? The answer is “Yes or No,” depending on the Circuit. Here’s the split as of today: the Second, Fifth, Seventh, and two Third Circuit District Courts hold that section 1782 covers only governmental arbitration forums. The Fourth and Sixth Circuits extend section 1782’s reach to private arbitration organizations.
The Split in a Nutshell: Same Arbitration Case Yields Different Results
We covered in SAA 2020-13 (Apr. 8) Servotronics, Inc. v. The Boeing Co. and Rolls-Royce PLC, 954 F.3d 209 (4th Cir. Mar. 30, 2020), where, in a case involving a private commercial arbitration being held in England under Chartered Institute of Arbitrators Rules, the Court upheld a District Court decision ordering discovery from three Boeing employees residing in South Carolina. A more recent entry in the “no” camp was the Seventh Circuit, which in Servotronics, Inc. v. Rolls-Royce PLC, No. 19-1847, 2020 WL 5640466 (Sept. 22, 2020) – a dispute arising out of the same arbitration – held that section 1782 does not extend to private international commercial arbitration. As described in SAA 2020-37 (Oct. 7), the District Court barred Servotronics from obtaining discovery documents located in Illinois for use in the same private arbitration pending in London, and the Seventh Circuit (ed: then-Judge Amy Coney Barrett was not on the Panel deciding the case) affirmed unanimously. Among the Court’s rationales was a perceived conflict between section 1782 and the Federal Arbitration Act: “The discovery assistance authorized by § 1782(a) is notably broader than that authorized by the FAA…. If § 1782(a) were construed to permit federal courts to provide discovery assistance in private foreign arbitrations, then litigants in foreign arbitrations would have access to much more expansive discovery than litigants in domestic arbitrations. It’s hard to conjure a rationale for giving parties to private foreign arbitrations such broad access to federal-court discovery assistance in the United States while precluding such discovery assistance for litigants in domestic arbitrations. In sum, what the text and context of § 1782(a) strongly suggest is confirmed by the principle of avoiding a collision with another statute: a ‘foreign or international tribunal’ within the meaning of § 1782(a) is a state-sponsored, public, or quasi-governmental tribunal.”
A Split Worthy of Review?
Every time we’ve covered this growing split, our editorial comment queried if SCOTUS would eventually be asked to take up this issue. The answer is now “yes.” Servotronics on December 7 Petitioned the Court for Certiorari in the Seventh Circuit case, Servotronics, Inc. v. Rolls-Royce PLC and the Boeing Company, No. 20-794. The question presented: “Whether the discretion granted to district courts in 28 U.S.C. §1782(a) to render assistance in gathering evidence for use in ‘a foreign or international tribunal’ encompasses private commercial arbitral tribunals, as the Fourth and Sixth Circuits have held, or excludes such tribunals without expressing an exclusionary intent, as the Second, Fifth, and, in the case below, the Seventh Circuit, have held.”
(ed: We suspect and hope SCOTUS will grant Cert., given the significant Circuit Court split and the frequency with which the issue keeps arising.)
Torres v. Morgan Stanley Smith, Barney, LLC, No. 20-11535 (11th Cir. Dec. 10, 2020) (per curiam) (unpublished)
This analysis is authored by SAA Editorial Board member Robert Pearce, a Securities Arbitration Lawyer at the Law Offices of Robert Wayne Pearce, P.A. The words that follow are his, lightly edited. In an unpublished per curiam Opinion, the Eleventh Circuit affirms unanimously a Southern District of Florida decision confirming a FINRA Award of over $3 million in sanctions against Morgan Stanley.
Briefly stated, the Petitioners were residents of Puerto Rico who filed sales practice claims arising out of their Morgan Stanley’s advisor’s recommendation and over-concentration of the investments in Puerto Rico bonds and closed-end funds using securities-backed loans. The arbitration Panel’s stated compensatory damage Award in Litovich-Quintana and Torres v. Morgan Stanley Smith Barney, LLC, FINRA ID 17-01908 (Miami, FL July 16, 2019), was relatively small ($261,420.63 in compensatory damages), compared to the $3 million sanction for violating the Arbitrators’ discovery orders. The District Court, in a case we covered in SAA 2020-14 (Apr. 15), denied Morgan Stanley’s Motion to vacate the Award (see No. 1:19-cv-22977-MGC (S.D. Fla. Oct. 1, 2019)), and this appeal followed.
Motion to Vacate
Morgan Stanley argued “evident partiality” by the Arbitrators and that they “exceeded their powers” in ordering sanctions as their statutory bases for vacatur of the Award. The District Court had rejected those two arguments and found expressly that “the sanctions award was compensatory rather than punitive.” In so doing, the District Court relied upon the Panel’s reasoning for the monetary sanctions; that is, “the negative effect that [MSSB’s] noncompliance with the Panel’s Orders had on its efforts to achieve a fair arbitration hearing” and “the extreme prejudice [MSSB’s] failure of compliance caused [Petitioners’] counsel in preparing their case and asserting their claims without the documents which the panel deemed were highly relevant to the dispute in question, the central figure of which was the terminated employee whose related documents were being withheld.” Notably, the $3 million in sanctions was relatively close to the actual alleged compensatory damages, attorney’s fees and interest that Petitioners requested the Panel award them in the arbitration.
Morgan Stanley appealed to the Eleventh Circuit seeking to reverse the District Court’s findings that there was no “evident partiality” and that the Panel had not “exceeded its powers.” The unanimous Court in Torres v. Morgan Stanley Smith, Barney, LLC, No. 20-11535 (11th Cir. Dec. 10, 2020) (per curiam) (unpublished), rejects both arguments, holding that Morgan Stanley failed to establish a statutory basis for vacating an arbitration Award under the Federal Arbitration Act.
Issue on Appeal: Evident Partiality
Morgan Stanley had contended that two of the Arbitrators demonstrated: “evident partiality” because they purportedly knew of, but failed to disclose, information which would have led Morgan Stanley to believe there was a potential conflict of interest in selecting them as Arbitrators. However, the Eleventh Circuit found the Arbitrators made sufficient disclosures and that what Morgan Stanley contended should have been disclosed was: 1) false; 2) gave rise to “no reasonable impression of partiality;” and/or 3) could not “conclude that an objective reasonable person would believe the potential conflict existed.”
Issue on Appeal: Exceeding Powers
The Eleventh Circuit then turned its attention to the “exceeded powers” argument and reminded Morgan Stanley of its ruling in Gherardi v. Citigroup Global Markets, Inc., 975 F. 3d 1232, 1236-38 (11th Cir. 2020), a case covered in SAA 2020-36 (Sep. 23): “When parties agree to arbitrate their disputes, they ‘opt out of the court system’ and, thus, have limited avenue for relief in federal court.” The Court notes its jurisdiction was limited to making sure the arbitration agreement gave the Panel authority to reach the issues it resolved and that the agreement in this case expressly incorporated: “FINRA By-Laws, Rules, and Code of Arbitration Procedure,” and that Morgan Stanley had agreed to be bound by same. Further, that the Arbitrators’ power to impose sanctions under FINRA’s Code of arbitration Procedure was undisputed. The Court also rejects Morgan Stanley’s argument that the sanctions was prohibited by “applicable law.” In that regard, it states: “Whether the Panel applied its rules consistent with ‘applicable law’ or in an arbitrary manner are legal questions that are beyond the limited scope of our judicial review.”
(ed: The vacatur fever has been prevalent in the Puerto Rico arbitration cases resulting in big Awards to investors. It’s time the big wire-houses honor the rules they pushed upon investors and remember they opted-out of the court system for their own brand of justice in every case -- not only when the vote goes their way!)
Sanduski v. Charles Schwab & Co, Inc., No. 2:19-cv-01340-JAD-BNW (D. Nev. August 20, 2020)
This decision is at first blush a run-of-the-mill effort to vacate a FINRA Award, in this case in favor of the firm’s effort to collect on a debit balance. Like most attacks on arbitration Awards it failed, but the facts and verbiage of the Opinion offer a cautionary tale for Arbitrators – and experts.
One ground for the Petition to vacate the $418,000+ Award, was that one of the Arbitrators had impropriate contact at the hearings with Schwab’s expert, constituting bias under Federal Arbitration Act section 10(a)(2). What happened?
A Cautionary Tale
Says the Opinion in Sanduski v. Charles Schwab & Co, Inc., No. 2:19-cv-01340-JAD-BNW (D. Nev. August 20, 2020): “The specter of impropriety surfaced at the hearing's close. After argument ceased and the parties filed out, one of Charles Schwab's experts said ‘see you next week’ to Arbitrator Grinnell. Though Grinnell did not respond to or acknowledge the statement, the parties agree this was likely a reference to Grinnell's empanelment on a second Charles Schwab arbitration, which would involve that same expert witness. After Grinnell made her decision and learned that she would not be involved in writing the order, Grinnell left the arbitration and called a car for the airport. Noticing that a different Charles Schwab expert witness was also going to the airport, Grinnell chose to share a ride. Grinnell warned the expert that she could not discuss the preceding arbitration and they chatted exclusively about living in Phoenix” (footnotes omitted).
But Challenge Rejected
District Judge Jennifer A. Dorsey rejects the challenge, finding that the interactions were trivial and not likely to impact the Arbitrator’s impartiality: “Charles Schwab's expert's acknowledgement that he would see Grinnell in a subsequent hearing, and Grinnell's choice to share a ride to the airport with another Charles Schwab expert after entering her decision in this matter, are the type of ‘attenuated’ and ‘insubstantial connections between a party and an arbitrator’ that the Ninth Circuit rejects as grounds for vacatur. Indeed, the passing communication between Grinnell and Charles Schwab's experts -- the majority of which took place after a decision had already been made -- evince merely the ‘trivial’ contact any arbitrator might have with a recurring, corporate defendant. The Ninth Circuit consistently denies vacatur in alleged-partiality cases where arbitrators and parties have far more substantial contacts” (footnotes omitted).
(ed: *While the effort to vacate was denied, the Court was clearly troubled by the Arbitrator’s conduct, terming it “perhaps inappropriate.” All three Panel members commented on it in a “Post-Award Discussion” section in the Award. **AAA and FINRA train arbitrators to avoid these situations. ***The Court was untroubled that, due to a family emergency, an arbitrator participated virtually in a hearing.)
Warfield v. ICON Advisors, Inc., No. 3:20CV195-GCM (W.D.N.C. June 16, 2020)
The Court looked to the Fourth Circuit which has recognized “manifest disregard” both under the Federal Arbitration Act (“FAA”) and as an “independent ground for overturning arbitral awards” to partially vacate a FINRA Award.
In Warfield v. ICON Advisors, Inc., No. 3:20CV195-GCM (W.D.N.C. June 16, 2020), the Court finds itself in a rare situation. Although the scope of judicial review for an arbitrator’s decision is “among the narrowest known at law,” the Court still finds that it cannot simply “rubber stamp” the decisions of the Arbitrator. In this instance, however, the Court finds enough reason to partly vacate the arbitration Award.
FINRA Arbitration for Wrongful Termination
The Plaintiff, who was employed as a mutual funds wholesaler by Defendants Icon Advisors, Inc. and ICON Distributors, Inc. (“ICON”), was terminated in November 2017. Plaintiff thereafter initiated an arbitration against ICON by filing with FINRA a Statement of Claim (“SOC”) on March 14, 2019 (and an amended SOC on April 11, 2019). Plaintiff claimed that ICON’s termination explanation in the U5 termination notice (“Form U5”) was “false and defamatory,” and asserted claims of “wrongful termination, defamation, and unfair and deceptive trade practices.” He sought damages and relief exceeding $5 million and expungement of the allegedly “false and defamatory” language in the termination explanation on his Form U5. On March 18, 2020, the Arbitrators awarded Plaintiff $1,186,975 in compensatory damages for “the stated claim of ‘wrongful termination without just cause.’” Additionally, the Panel recommended that the termination explanation in Plaintiff’s Form U5 be expunged and replaced with “Awaiting Financing to Clear Tax Liens.” Plaintiff moved to confirm the Award and enter judgment pursuant to FAA section 9, while ICON moved to vacate the award.
Vacating an Award for Exceeding Authority Under FAA Section 10
The Court focused on the “exceeding powers” part of 9 U.S.C § 10 (a)(4) and cited Stolt-Nielsen S.A. v. Animalfeeds Int'l Corp., 130 S. Ct. 1758 (2010), which provided “concise direction” to federal courts stating: “It is only when an arbitrator strays from interpretation and application of the agreement and effectively dispenses his own brand of industrial justice that his decision may be unenforceable ... In that situation, an arbitration decision may be vacated under § 10(a)(4) of the FAA on the ground that the arbitrator ‘exceeded [his] powers,’ for the task of an arbitrator is to interpret and enforce a contract, not to make public policy.” Additionally, the Court states it may be appropriate to vacate an Award where it “does not draw its essence from the agreement,’ or where the arbitrator’s interpretation of the contract is ‘wholly baseless and completely without reason....’”
“Manifest Disregard” Lives …
The Fourth Circuit has recognized the existence of “manifest disregard” of the law as a basis for vacating an award in Wachovia Securities, LLC v. Brand, 671 F.3d 472 (4th Cir. 2012), where the Court adopted a two-part test: “(1) the applicable legal principle is clearly defined and not subject to reasonable debate; and (2) the arbitrator refused to heed that legal principle.” The Warfield Court cites to the nearly identical case of Raymond James Financial Services, Inc. v. Bishop, 596 F.3d 183 (4th Cir. 2010). In that case the Court found that: “where arbitrators imply a termination ‘for-cause’ provision into a private employment agreement that expressly provides for termination ‘at-will,’ the arbitrators do more than commit a permissible error of law, they exceed their authority by ignoring the agreement’s plain language.”
… And is Present Here As to Damages (But Not Expungement)
The Court finds Raymond James to be persuasive and holds that “at-will employees” such as Plaintiff, have no avenue of relief for wrongful termination because under North Carolina law “no such cause of action exists for ‘at-will’ employees.” The Court further finds that ICON had made the Arbitrators aware of the “clear, well-established law” in both North Carolina and the Fourth Circuit. The Court concludes that the Arbitrators chose to disregard that law and that their Award demonstrated a “manifest disregard” of the law and must be vacated. As to the U5 expungement, however, the Court goes the other way: “Unlike the Panel’s manifest disregard of the law in their award of damages to Warfield for wrongful termination without just cause, the Court cannot say that the Panel’s U5 language exceeded their powers or demonstrated a manifest disregard of the law.”
(ed: This Squib was authored by Theodore Ryan, a 3L at St. John's School of Law. He is the Managing Editor of the New York International Law Review at St. John’s.)
Levenson v. J.P. Morgan Securities LLC, FINRA ID 20-01140 (Atlanta, GA Dec. 1, 2020)
While not a classic explained Award, the decision in Levenson v. J.P. Morgan Securities LLC, FINRA ID 20-01140 (Atlanta, GA Dec. 1, 2020), offers insights on why the Majority-Public Panel denied an investor’s claim.
How so? In recommending expungement of claims against an unnamed broker, the Arbitrators – as required by FINRA Code of Arbitration Procedure Rule 12805(c) – explained why the claim, allegation, or information was factually impossible or clearly erroneous. In so doing, the Panel also explained why the principal claim was denied. The Statement of Claim asserted claims of failure to supervise, suitability, and misrepresentation that related to: “Claimant’s allegation that no one contacted him about market changes or advised him of risks being taken by continuing to purchase and sell securities during the market decline, despite his low risk tolerance.”
Explanation by FINRA Panel
In the part of the Award explaining why expungement is recommended, the Award states: “The underlying customer complaint giving rise to this matter had its origin in the sudden market downturn caused by the advent of the coronavirus in late-February and March of 2020. While Claimant alleged that he was a risk-averse investor who intended to invest in ultra-secure investments, the Proposal Summary which he completed and signed clearly showed that he represented himself as a ‘moderate aggressive’ investor, who sought ‘growth’ with current income as a secondary concern. Furthermore, while Claimant alleged that [unnamed broker] failed to contact him about the market risks connected with the pandemic, the uncontroverted documentary evidence and [broker’s] testimony show that Claimant was contacted on numerous occasions, beginning on, at least, February 26, 2020, to discuss the impact of the pandemic. Based on the evidence and testimony adduced at the hearing, it is beyond doubt that the underlying customer complaint was clearly erroneous and the resulting occurrence should be expunged.”
(ed: This is the first Award we’ve seen involving a “Corona Crash” customer claim.)
Aguirre v. Thurston Springer Financial, FINRA ID No. 19-02721 (Indianapolis, IN, Sep. 22, 2020): In a rare COVID-era instance of a customer winning damages after a Zoom hearing on her claim that was contested by Respondent, the sole Public Arbitrator holds a broker liable for $45,000 in compensatory damages and $23,500 in attorney fees and costs. However, the customer did dismiss her claim against the broker’s employer, without any mention of a settlement in the Award.
Dael v. Gaber, FINRA ID No. 19-03430 (Phoenix, AZ Nov. 5, 2020): Three brokers take their dispute over the dissolution of their joint control of WBI Management LLC, a business that provides credit and loans to business, to FINRA, even though WBI is not a FINRA member. Among other things, the claimants alleged that the respondent misappropriated trade secrets, while the respondent asserted claims for conversion and tortious interference. An All-Public Panel denies relief to the Claimants, except to remove the single Respondent from membership in WBI, but awards $554,254 in compensatory damages, $210,807 in attorney fees and $25,000 in expert witness fees on the Respondent's counterclaim.
(ed: The two summaries immediately above were submitted by Harry Jacobowitz, Esq. He can be reached at email@example.com.)
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