By James Reynolds, Esq. of Shustak Reynolds & Partners, P.C. posted on Tuesday, March 20, 2018.

James J. Reynolds

Partner

James Reynolds, Esq.
619.696.9500
[email protected]

Don’t expect relief from the appellate courts when an arbitrator makes a legal mistake in a FINRA arbitration.  In a recent Ninth Circuit decision, Sanchez v. Elizondo (2018) 878 F.3d 1216, 9th Circuit, the Court of Appeals reversed a district court order vacating an arbitration award, concluding that the arbitration panel’s award was not “completely irrational.”  While reversing the district court, the Court of Appeals ordered the parties to re-arbitrate their dispute. 

The facts in the underlying case were as follows.  Robert Elizondo retained Gregory Sanchez, a securities broker licensed by the Financial Industry Regulatory Authority (FINRA), to manage his investment portfolio. Sanchez invested a portion of the client’s portfolio in leveraged inverse Exchange Traded Funds, which Elizondo believed constituted an inappropriate risk. The Client brought a claim against Sanchez alleging the broker mismanaged Elizondo's portfolio. The parties executed a FINRA Arbitration Submission Agreement in which they agreed, 1) to submit their case to arbitration in accordance with the FINRA By-Laws, Rules and Code of Arbitration Procedure, 2) to be bound by the procedures and rules of FINRA relating to arbitration and 3) to conduct an arbitration hearing in accord with the FINRA Code of Arbitration Procedure.

FINRA Rule 12401 provides if the amount of a claim is greater than $50,000, and not more than $100,000, "the [arbitration] panel will consist of one arbitrator unless the parties agree in writing to three arbitrators." FINRA Rule 12401(b). “Only ‘[i]f the amount of a claim is more than $100,000’ should ‘the panel . . . consist of three arbitrators.’” Rule 12401(c). Since Elizondo originally claimed $100,000, his case was assigned to a single arbitrator.

Shortly before the arbitration hearing, Elizondo filed a Pre-Hearing brief increasing his damage claim to $125,500. Claimant did not seek to amend his complaint nor did the broker raise an objection. At the beginning of the arbitration hearing, the arbitrator asked whether either party objected to a single arbitrator deciding the claim considering the increase in damages. Sanchez objected to a single arbitrator. The arbitrator denied the objection since neither party had made a motion to dismiss or amend the complaint. The arbitrator determined that he would proceed alone based on the amount of damages claimed in the original complaint and awarded Elizondo $75,000, exclusive of interest, fees and costs.

Sanchez brought a petition in district court to vacate the arbitration award pursuant to 9 U.S.C. § 10. Elizondo answered and brought a countermotion to confirm the award and for attorney's fees. Sanchez raised several arguments in support of his petition to vacate the award, but the district court granted the petition on the “single ground that the arbitrator had exceeded his powers when he proceeded with a single arbitrator over Sanchez's objection, and in violation of FINRA Rule 12401(c).” The court denied Elizondo's countermotion to confirm the award, and it remanded the case "for further proceedings consistent with [its] Order."

Reversed and remanded. Sanchez’s vacatur was premised on the arbitrator’s purported error in deciding the arbitration by himself, rather than a panel of three arbitrators, over Sanchez’s objection. As such, the Court of Appeals remanded the case and ordered the parties to conduct a new arbitration before a panel of three arbitrators. The Court reasoned that a district court may vacate an arbitration award under 9 U.S.C. 10 "where the arbitrators exceeded their powers," a very "high standard for vacatur." "It is not enough for petitioners to show that the panel committed an error – or even a serious error. 'It is only when [an] arbitrator strays from interpretation and application of the agreement and effectively "dispense[s] his own brand of industrial justice" that his decision may be unenforceable.'" The Ninth Circuit has held "that arbitrators 'exceed their powers' in this regard not when they merely interpret or apply the governing law incorrectly, but when the award is 'completely irrational." Here, the district court identified no authority supporting its vacatur. The arbitrator did not exhibit a manifest disregard of the law nor was the award completely irrational. Rather, he interpreted Rule 12401 (“the amount of the claim”) to reference the amount of the claim pleaded in the operate complaint rather than any amount sought later in the proceeding. Therefore, the district court's order granting vacatur was reversed and the matter remanded.

Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. We represent many broker-dealers, registered representatives, investment advisors, investors and businesses. For more information, or if you or your company require counsel in these areas, contact us today for a confidential, complimentary consultation.

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