Commercial Division Blog

Posted: May 19, 2019 / Categories Commercial, Arbitation, Mediation and Other ADR

Based on FINRA Rules, Court Declines to Order Class Action Arbitration

On May 15, 2019, the Second Department issued a decision in Rutella v. National Sec. Corp., 2019 NY Slip Op. 03833, reversing an order requiring class arbitration based on FINRA rules, explaining:

The plaintiff . . . commenced this putative class action to recover damages for violations of Labor Law articles 6 and 19 on behalf of himself and others similarly situated, alleging that the defendants had failed to pay required minimum and overtime wages. The defendants moved, inter alia, pursuant to CPLR 7503 to compel arbitration of the plaintiff's individual claims and to stay all proceedings in this action pending the arbitration. The plaintiff opposed the motion, arguing that his claims in the action, since they were asserted as class claims, did not fall within the parties' [*2]arbitration agreement. The Supreme Court, in effect, granted that branch of the motion, and the plaintiff appeals.

Arbitration is a matter of contract, and arbitration clauses, which are subject to ordinary principles of contract interpretation, must be enforced according to their terms.

Here, the plaintiff correctly contends that the parties did not agree to arbitrate the claims asserted by the plaintiff in this putative class action. The parties' agreement required that any controversy between the parties arising out of the Agreement would be settled by FINRA arbitration. Any claim settled by FINRA arbitration must be settled according to FINRA rules. Under FINRA Rule 13204(a)(4), the defendants are not permitted to enforce an arbitration agreement against a member of a putative class action with respect to any claim that is the subject of the putative class action, unless, among other things, class certification is denied. By agreeing to apply this rule to any arbitration between the parties, the defendants agreed not to arbitrate any claim that is the subject of a putative class action.

The defendants' contention that the Agreement contained a broad and unequivocal arbitration provision that required the parties to arbitrate all disputes without exception ignores the clause "settled by FINRA arbitration" and the implications of agreeing to arbitrate before that forum. The defendants further contend that the plaintiff is using the class action as a device to avoid arbitration and that he should not be permitted to avoid arbitration so easily, particularly given the public policy favoring arbitration. However, the prohibition against enforcing arbitration agreements against members of a putative class action becomes inapplicable if class certification is denied. Thus, to actually avoid arbitration, the plaintiff cannot merely allege class claims in a complaint. The plaintiff must ultimately establish his entitlement to class certification. To do so, the plaintiff must prove, among other things, that a class action is superior to other available methods for the fair and efficient adjudication of the controversy. In short, the defendants' contention that the assertion of a class action provides a ready means to circumvent the parties' arbitration agreement is without merit.

Accordingly, the Supreme Court should have denied that branch of the defendants' motion which was pursuant to CPLR 7503 to compel arbitration of the plaintiff's individual claims and to stay all proceedings in this action pending the arbitration.

(Internal quotations and citations omitted).

Complex commercial litigation involves more than courts. Disputes often are--by agreement--decided by private arbitrators. Contact Schlam Stone & Dolan partner John Lundin at if you or a client have a question regarding a dispute that is subject to an arbitration agreement.