Bass, Berry & Sims attorney Chris Lazarini examined a case filed by Morgan Stanley against Defendant in a FINRA arbitration over an un-paid promissory note. The Defendant answered without asserting counterclaims, but later sued Morgan Stanley in a different Court, asserting retaliatory discharge claims under Dodd-Frank, the False Claims Act and Tennessee common law. When the retaliatory discharge claims were dismissed (and affirmed by the Sixth Circuit), the Defendant moved to amend his answer in the arbitration to add the Dodd-Frank, False Claims Act and common law claims. Applying res judicata, the Court found Morgan Stanley would be irreparably injured if it were forced to defend in another forum the identical claims already asserted against it unsuccessfully.
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.
Morgan Stanley Smith Barney, LLC vs. Verble, No. 3:17-CV-175 (E.D. Tenn., 7/31/17)
The doctrine of res judicata bars a party from re-litigating issues that were or could have been asserted in an earlier action between the same parties.
In 2014, Morgan Stanley sued Defendant in a FINRA arbitration over an un-paid promissory note. Defendant answered without asserting counterclaims, but later sued Morgan Stanley in this Court, asserting retaliatory discharge claims under the Dodd-Frank and False Claims Acts and Tennessee common law. The Court dismissed the claims (SLA 2015-48) and the Sixth Circuit affirmed (SLA 2017-08). In 2017, Defendant moved to amend his answer in the arbitration to add the Dodd-Frank, False Claims Act and common law claims. Morgan Stanley then filed this action, asking the Court to enjoin Defendant from asserting the claims in arbitration on the ground that Defendant waived any right to arbitrate by pursuing the claims for two years in this Court and on appeal.
Applying a standard injunction analysis, the Court first examines whether Morgan Stanley will likely succeed on the merits of the claims. It finds that it will. Under the doctrine of res judicata, the Court notes, it has broad injunctive powers to protect a prior court judgment from a successive arbitration claim where the parties and claims are the same and where the claims were adjudicated on the merits or the party seeking to assert the claims had a full and fair opportunity to litigate them. Here, the parties and claims are the same in both actions. Dismissal of the Dodd-Frank claims for failure to state a claim constitutes a judgment on the merits. Dismissal of the False Claims Act claims for failure to plead facts showing Defendant engaged in a protected activity, where, as here, the Court, in its discretion, determined not to allow Plaintiff leave to amend, also constitutes a judgment on the merits. Finally, the Court's earlier election not to exercise supplemental jurisdiction over the state law claims ordinarily is not a judgment on the merits. Here, however, Defendant could have alleged diversity jurisdiction to get those claims before the Court and failed to do so. Finding that the proposed state law claims arise from the same common nucleus of operative facts as the Dodd-Frank and False Claims Act claims and that Defendant could have pursued them, the Court applies res judicata to them as well.
Next, the Court finds that Morgan Stanley would be irreparably injured if it were forced to defend in another forum the identical claims already asserted against it unsuccessfully. Here, allowing Defendant to re-litigate his claims in arbitration is against the public interest because the complications and added expenses to the parties would frustrate the purposes of arbitration. Having determined that all injunctive factors favor Morgan Stanley, the Court issues the injunction. Finally, the Court rejects Defendant's request to re-open the original court action with leave to file an amended complaint, noting that he failed to move for such relief under FRCP 60 (b), which sets forth the circumstances under which a court may relieve a party from a final judgment.
EIC: After finding that Defendant's claims are barred by res judicata, the Court declined to rule on whether he waived his right to arbitration.