May 9

Simon pubishes article on SDNY’s decision to that arbitrators have discretion to exclude evidence

Setting aside allegations of bias and error stemming from the arbitration panel’s exclusion of evidence, the SDNY confirmed a FINRA arbitration award in Rubenstein v. Advanced Equities, Inc., Case No. 13-Civ-1502(PGG) (S.D.N.Y. March 31, 2014).

In March 2007, Advanced Equities, Inc. (“AEI”), a private equity firm, recruited several brokers to join its recently-opened New York City office. The brokers were presented with employment contracts that guaranteed them the greater of a minimum draw or a “gross commission” payout. In connection with their employment agreements, the brokers executed promissory notes, pursuant to which AEI agreed to make a loan to the each broker that would be forgiven over the first five years of employment but that would become immediately due and payable upon the employee’s termination.

The brokers believed that AEI violated their employment agreements throughout their employment. By late 2009, all of them had either resigned from or been terminated by the company. The brokers initiated a FINRA arbitration against AEI and its parent company, asserting various claims including breach of contract, breach of FINRA rules, and fraud.

A critical issue at the arbitration was the meaning of the term “gross commissions.” The brokers contended they were entitled to commissions based on the total cash compensation that AEI received from the brokers’ transactions. AEI contended that the term referred only to the cash remaining after deducting the costs of overhead and non-commissioned employees.

The arbitration panel conducted twelve pre-hearing sessions and sixty hearing sessions that took place over thirty-two days. Altogether, it heard testimony from twenty-two fact witnesses and three expert witnesses.

Following the hearing, the panel denied four of the five brokers’ claims in their entirety, and as to the fifth granted only $18,000 in compensatory damages. The panel also awarded AEI compensatory damages against each of the brokers on the ground that their employment contracts provided for prejudgment interest and attorneys’ fees for any action involving collection on the promissory notes.

The brokers moved to vacate the arbitration award in state court, asserting that the panel wrongfully excluded pertinent evidence and acted with manifest disregard for the law. AEI removed the matter to the Southern District of New York.

Before addressing the brokers’ claim that pertinent evidence was excluded, the district court noted that the arbitrators judge the admissibility and relevancy of evidence submitted in an arbitration proceeding and that their refusal to hear evidence does not automatically require the vacatur of an award unless the refusal amounts to a denial of fundamental fairness.

The brokers argued that the panel should not have excluded evidence that AEI brokers in other locations had brought similar claims against the company, but the court held that the panel could have reasonably concluded that the claims of brokers outside the New York office were not pertinent in determining AEI’s liability. The court also ruled that the panel properly excluded the brokers’ evidence of other FINRA awards against AEI due to the general rule that FINRA awards are not considered precedent in other cases. In substance, the court held that the brokers had not demonstrated that the panel’s rulings on the evidence issues were egregious errors or a denial of fundamental fairness. The court also ruled that the panel was not biased, as “evident partiality” may not be shown by alleged errors in the admission or exclusion of evidence – even if the panel had clearly failed to follow the rules of evidence.

The court also explained that the panel’s refusal to admit certain evidence could not justify vacatur of the award on grounds of manifest disregard of the law, in part because the court considered manifest disregard to be a “doctrine of last resort,” but more importantly because a FINRA arbitration panel has great latitude in deciding what evidence to consider.

The Takeaway
Because the goal of arbitration is to promote a speedy and efficient resolution of conflicts, arbitrators have a great deal of discretion in making evidentiary rulings and are not required to admit every piece of relevant evidence. Thus, evidentiary rulings are unlikely to constitute the “denial of fundamental fairness” required to overturn an award unless there is a clear showing that the arbitrators favored one side over another.

Scott D. Simon, Goetz Fitzpatrick LLP, New York, New York. This article originally appeared in the ABA Section of Litigation, News & Developments for May 2014.

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