Bass, Berry & Sims attorney Chris Lazarini provided insight on factors a court should consider when determining whether a party has waived a contractual right to arbitration. The factors, which are tied to potential prejudice to the non-moving party, include: (1) the time elapsed between commencement of litigation and the request for arbitration, and (2) the extent to which the moving party has participated in the litigation process.
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.
Chehebar vs. Oak Financial Group, Inc., No. 14-2982 (E.D. N.Y., 3/7/17)
The key to determining whether a party has waived a contractual right to arbitration is prejudice to the non-moving party; factors to consider include: (1) the time elapsed between commencement of litigation and the request for arbitration and (2) the extent to which the moving party has participated in the litigation process.
In 2009, Plaintiffs opened several accounts with Oak Financial, and executed the firm's Advisory Agreement. The Agreement called for arbitration of disputes "in accordance with the securities arbitration rules then in effect with the [NASD]." The relationship was short-lived, as nine months after opening the accounts, Plaintiffs claimed that the firm and its principal officer failed to follow their directions, causing them to lose almost $1 million in profits.
In April 2014, Plaintiffs filed a state court action, alleging breach of contract, breach of fiduciary duty, and negligence. Defendants answered, and then removed the case to the Federal Court. Once in Federal Court, Plaintiffs sought leave to move to compel arbitration and for a stay. Defendants moved for judgment on the pleadings and, it appears, convinced the Court to hold Plaintiffs' motion in abeyance. No discovery was taken, and the Court granted Defendants' motion on the breach of fiduciary duty and negligence claims, but denied it on the breach of contract claim (see summary below). Plaintiffs then filed their motion to compel arbitration. Defendants opposed, arguing that Plaintiffs waived their right to seek arbitration by filing the state court complaint and participating in the Federal Court proceedings. In their response, Plaintiffs claimed they had filed with FINRA in March 2013, only to have FINRA reject the claim because Defendants were not broker/dealers and had not consented to arbitration. Plaintiffs also claimed that Defendants refused their request to consent to FINRA arbitration. Defendants claimed not to have knowledge of the arbitration filing and denied that they were asked to consent to it.
It is unclear whether these arguments were supported by affidavit, and the Court ignores them, focusing instead on the prejudice and waiver issues. First, the Court finds no prejudice because little time passed between the commencement of litigation and the filing of Plaintiffs' motion. Second, it finds no prejudice because discovery was not conducted, and Plaintiffs' only affirmative act was to seek arbitration. Third, the Court finds no prejudice because Defendants could not establish they had incurred excessive costs. Finally, the Court finds no waiver in Plaintiffs' mere filing of the complaint. The Court grants Plaintiffs' motion to compel arbitration and stays the case pending its outcome.
The PDAA alone does not create FINRA jurisdiction. Rather, FINRA considers this scenario an elective arbitration and provides complaining clients with a special written submission agreement, which they and the investment advisory firm must sign before FINRA will take jurisdiction. See FINRA Rule 12201 (parties "may" arbitrate under FINRA's Code if they "agree in writing to submit the dispute to arbitration under the Code after the dispute arises"). Under Section 3 of the FAA, the Court, having determined that the dispute was arbitrable, should not have ruled on the merits of Plaintiffs' breach of fiduciary duty and negligence claims, and one wonders whether Plaintiffs will seek an interlocutory appeal before arbitration or otherwise try to revive the dismissed claims in arbitration.