Bass, Berry & Sims attorney Chris Lazarini examines a case in which the court retroactively applied the arbitration clause found in the Form U4 Plaintiff signed with his current employer to compel an associated person to arbitrate a dispute with his former employer. The Court rejected the former employer's efforts to bind Plaintiff to FINRA's arbitration rules through incorporation by reference. Chris provided the analysis for Securities Litigation Commentator (SLC). The full text of the analysis is below and used with permission from the publication. If you would like to receive additional content from the SLC, please visit the SLC website to sign up for the newsletter.
Freund vs. UBS Financial Services, Inc., No. 15-cv-7965 (N.D. Ill., 10/23/15)
*The broad arbitration clause of the Form U4 covers disputes not only with an associated person's current employer, but also with any FINRA member firm and any other associated person.
**The clause may be applied retroactively to disputes with member firms and other associated persons arising prior to the signing of the Form U4.
In November 2011, Plaintiff joined UBS. He was not licensed and signed only a Letter Agreement in which he agreed to maintain the confidentiality of customer information and abide by the laws, rules, and regulations of the industry, including those of the any self-regulatory organization ("SRO") of which UBS was a member. The Letter Agreement did not specifically mention FINRA or arbitration. In February 2012, Plaintiff, his branch manager, and several registered persons, resigned from UBS and joined Wells Fargo.
UBS commenced arbitration against the branch manager and other registered persons, but did not name Plaintiff. After Plaintiff signed a Form U4 and became an associated person of Wells Fargo, UBS sought to amend its arbitration claims to add Plaintiff as a respondent. The panel chair rejected Plaintiff's jurisdictional objections. Plaintiff then filed this action, seeking to enjoin UBS from proceeding against him in the arbitration. UBS argued that FINRA jurisdiction was proper by virtue of (a) the Form U4's arbitration clause, (b) the UBS Letter Agreement, which required Plaintiff to abide by SRO rules, and/or (c) Plaintiff's status as a former agent of UBS.
The Court first notes that, absent a clear and unmistakable agreement to the contrary – which does not exist here -- the jurisdictional issue is for the Court, not the arbitrator, to decide. The Court then examines whether Plaintiff established a reasonable likelihood of success on the merits. The parties agreed that arbitration would be required if Plaintiff had signed the Form U4 while employed by UBS, but disagreed on its retroactive application. The Court sides with UBS, citing the broad scope of the Form U4's arbitration clause, UBS' claims that Plaintiff's misconduct continued after Plaintiff left UBS and went to work for Wells Fargo, and the presumption that arbitration is a favored means of dispute resolution.
Although this conclusion is sufficient to deny Plaintiff's injunction request, the Court addresses UBS' other arguments. Examining New Jersey law, as required by the Letter Agreement, the Court rejects the argument that the Letter Agreement's reference to SRO rules bound Plaintiff to FINRA's arbitration rules. An enforceable incorporation by reference leaves no doubt as to what is being incorporated. The Court concludes that the Letter Agreement was not specific enough to allow Plaintiff to ascertain without doubt that FINRA's arbitration rules would bind him. The Court similarly rejects UBS' agency argument, finding no legal support for the concept that, as UBS' agent, Plaintiff was bound by the terms of UBS' FINRA membership agreement. The Court also concludes that Plaintiff failed to show irreparable harm or the lack of an adequate remedy at law if he were required to participate in the FINRA arbitration.
Depending on the facts, Plaintiff might have made a tactical error conceding that arbitration would have been required had he signed a Form U4 at UBS. In Barr v. Bishop Rosen & Co., Inc., the New Jersey Appellate Court declined to enforce the Form U4 arbitration clause under New Jersey law because the Form U4 does not contain a clear and unmistakable waiver of the right to pursue remedies in court, and Bishop Rosen presented no other evidence of a knowing waiver. See SLA 2015-40. The Court here was attuned to New Jersey's knowing waiver requirement, having applied it in rejecting UBS' arguments on the Letter Agreement, and might have viewed the retroactive reach of the Form U4 differently if Wells Fargo had failed to comply with FINRA Rule 2263, which requires member firms to provide associated persons with a written statement explaining the arbitration process when asking a person to sign an initial or amended Form U4.