15-0345-cv

Credit Suisse Secs. LLC v. Tracy, et al.



## In the 1



# United States Court of Appeals

2



## For the Second Circuit 3

4

5

August Term, 2015 6

No. 15

‐ 345

‐ cv 7

8

C REDIT S UISSE S ECURITIES (USA) LLC, 9

Petitioner

‐ Appellee

, 10

11

v. 12

13

J OHN D AVID T RACY

, C HARLES T HARNSTROM

, L EONARD K ORTEKAAS

, 14

C HRISTOPHER C HAPIN

, AND S TEVEN L AZNY

, 15

Respondents

‐ Appellants

.  16

17

18

Appeal from the United States District Court 19

for the Southern District of New York. 20

No. 14

‐ cv

‐ 8568

– Naomi Reice Buchwald, Judge

. 21

22

23

A RGUED : S EPTEMBER 16, 2015 24

D ECIDED : J ANUARY 28, 2016 25

 The Clerk of the Court is directed to amend the official caption to conform to

the above.2 1

2

Before: N EWMAN

, S ACK

, and D RONEY

, Circuit Judges

. 3

4

5

6

Appeal from a judgment of the United States District Court 7

for the Southern District of New York (Buchwald, J. ) ordering 8

former employees of Credit Suisse Securities (USA) LLC to dismiss 9

their claims in arbitration before the Financial Industry Regulatory 10

Authority, and compelling employees to pursue their claims against 11

Credit Suisse in the JAMS arbitral forum in accordance with the 12

terms of their employment agreements. We AFFIRM

. 13

14

15

A LEXANDER C.B. B ARNARD

, Credit 16

Suisse Securities (USA) LLC, New 17

York, NY (Stephen M. Kramarsky, 18

Ariel P. Cannon, and Angela L. 19

Harris, Dewey Pegno & Kramarsky 20

LLP, New York, NY, on the brief ) for 21

Petitioner

‐ Appellee

. 22

23

C YNTHIA R. L EVIN M OULTON

, 24

Moulton, Wilson & Arney, LLP, 25

Houston, TX (Louis M. Lagalante, 26

Gallagher, Harnett & Lagalante LLP, 27

New York, NY, on the brief ) for 28

Respondents

‐ Appellants

. 293 1

2

D RONEY

, Circuit Judge : 3

4

The Respondents

‐ Appellants are five former employees of 5

Credit Suisse Securities (USA) LLC (“Credit Suisse”) who entered 6

into employment agreements with Credit Suisse that included 7

provisions to resolve all employment

‐ related disputes by arbitration 8

before a private arbitration provider. Following their resignation 9

from Credit Suisse, the employees began arbitration proceedings 10

before the Financial Industry Regulatory Authority (“FINRA”) 11

concerning employment

‐ related disputes. Credit Suisse sought to 12

compel the employees to dismiss the FINRA arbitration and pursue 13

their claims in a non

‐ FINRA arbitral forum. The district court 14

(Buchwald, J. ) granted Credit Suisse’s petition and entered judgment 15

ordering the employees to pursue their claims in a non

‐ FINRA 16

arbitral forum. 174 On appeal, 1 the employees argue that FINRA Rule 13200 1

prohibits waiver of arbitration in a FINRA forum. For the reasons set 2

forth below, we hold Rule 13200 does not prohibit a pre

‐ dispute 3

waiver of a FINRA arbitral forum. 4

Accordingly, we AFFIRM the judgment of the district court. 5

BACKGROUND 6

Respondents

‐ Appellants John David Tracy, Charles 7

Tharnstrom, Leonard Kortekaas, Christopher Chapin, and Steven 8

Lazny (collectively “Employees”) are a team of Los Angeles

‐ based 9

financial advisors who began working at Credit Suisse in April 2008 10

after resigning from Goldman Sachs & Co. 2 Upon beginning work at 11

Credit Suisse, Employees entered into employment agreements that 12

included a provision to resolve all employment

‐ related disputes 13

1 Because the district court’s judgment finally disposes of the petition, the

judgment is clearly appealable. See Clarendon Nat’l Ins. Co. v. Kings Reinsurance

Co., Ltd., 241 F.3d 131, 133

‐ 34 (2d Cir. 2001).

2 Lazny was hired by Credit Suisse as an investment analyst to support the other

Respondents

‐ Appellants.5 through the Credit Suisse Employment Dispute Resolution Program 1

(“EDRP”). The agreements provide as follows: 2

All United States employees are subject to the Credit 3

Suisse United States Employment Dispute Resolution 4

Program, as amended from time to time (the 5

“Program”). The Program provides that all 6

employment

‐ related claims, including all statutory 7

claims, an employee may at any time have are to be 8

resolved through a three

‐ step process consisting of an 9

internal grievance procedure; mediation before an 10

independent service provider; and (in the case in which 11

a claim is not resolved through the first two steps) 12

binding arbitration before one of three independent 13

service providers in accordance with its arbitration 14

rules. Any disputes arising hereunder shall be resolved 15

in accordance with such Program. A copy of the 16

Program as currently in effect is annexed hereto. 3 17

18

J.A. 55. 19

The EDRP provided further details as to the three

‐ step process 20

discussed in the contract, including that “[a]ll arbitrations under the 21

Program will be conducted by a single arbitrator, or upon written 22

3 Employees also executed other agreements and annual certifications confirming

their participation in the EDRP.6 consent of both parties, a panel of three arbitrators, supplied by 1

JAMS 4 or the American Arbitration Association [(the “AAA”)].” 5 J.A. 2

191. 3

While still employed at Credit Suisse, a dispute arose between 4

Employees and Credit Suisse. That dispute was a result of certain 5

challenges raised by Employees to the amounts they owed Credit 6

Suisse under the Credit Suisse “Currency Facility” plan. 6 The 7

Currency Facility plan was an optional program for employees to 8

“hedge” equity portions of their compensation from fluctuations in 9

exchange rates. In the event an employee suffered a loss under the 10

program, the employee was required to pay Credit Suisse any 11

deficit. Employees disputed the amounts Credit Suisse claimed they 12

4 JAMS, formerly Judicial Arbitration and Mediation Services, Inc., is a private

alternative dispute resolution provider. See JAMS Arbitration, Mediation, and ADR

Services

, JAMS, http://www.jamsadr.com (last visited Jan. 4, 2016).

5 The contract provided that “one of three independent service providers” would

conduct arbitration. J.A. 55. The EDRP specified only two such service providers,

JAMS and the AAA.

6 Lazny was not involved in the Currency Facility dispute.7 owed under the plan and attempted, unsuccessfully, to resolve the 1

dispute through the first two stages of the EDRP, including private 2

mediation. 3

On March 27, 2014, Employees resigned from Credit Suisse 4

and became employed by Merrill Lynch. As a result of the still 5

unpaid balance relating to the Currency Facility plan, Credit Suisse 6

commenced arbitration on this issue in JAMS on April 15, 2014. On 7

May 14, 2014, Employees filed a statement of counter

‐ claims and 8

affirmative defenses in that arbitration. 7 9

Also on May 14, 2014, Credit Suisse initiated a JAMS 10

mediation against Employees claiming improper solicitation of 11

Credit Suisse clients and employees in connection with their move 12

to Merrill Lynch. On October 7, 2014, following unsuccessful 13

mediation of the employment

‐ related claims, Employees and Merrill 14

Lynch initiated an arbitration against Credit Suisse with FINRA. 15

7 Employees do not challenge the Currency Facility arbitration before JAMS.8 That Statement of Claim asserted that Credit Suisse breached an 1

industry agreement regarding employee mobility and clients’ 2

interests of privacy and freedom of choice called the “Protocol for 3

Broker Recruiting,” 8 and was liable to Employees for defamation, 4

tortious interference, and unfair competition. 5

Rather than participate in the FINRA arbitration, Credit Suisse 6

commenced an action in the Southern District of New York seeking 7

an order to stay or dismiss the FINRA arbitration and to compel 8

arbitration by JAMS in accordance with the EDRP. Credit Suisse 9

argued that the claims raised by Employees were “Employment

‐ 10

Related Claims” under the EDRP and were therefore required to be 11

arbitrated before JAMS or AAA. Employees argued before the 12

8 The Protocol for Broker Recruiting is an agreement among more than 1,000

firms in the securities industry. Credit Suisse and Merrill Lynch are signatories to

the Protocol. The stated goal of the Protocol is “to further the clients’ interests of

privacy and freedom of choice in connection with the movement of their

Registered Representatives (‘RRs’) between firms.” J.A. 25. Signatories of the

Protocol “agree to forego litigation against their departing [RRs]

. . . when the

RR moves between signatory firms and complies in good faith with the terms of

the Protocol.” Id.9 district court that FINRA Rule 13200 (“Rule 13200”), which provides 1

that “a dispute must be arbitrated under the Code if the dispute 2

arises out of the business activities of a member or an associated 3

person and is between or among

. . . Members and Associated 4

Persons,” prohibited Credit Suisse from selecting a non

‐ FINRA 5

arbitral forum for arbitration. The district court granted Credit 6

Suisse’s petition, ordered Employees to dismiss their claims in the 7

FINRA arbitration and compelled arbitration in a JAMS forum. 9 8

Employees appeal the district court’s judgment effectuating that 9

order. 10

11

12

13

14

9 Merrill Lynch moved to intervene in the action below, but that motion was

denied by the district court in the order granting Credit Suisse’s stay. Employees

do not challenge this decision on appeal.10 DISCUSSION 1

I. Standard of Review 2

This Court reviews the grant of a petition to compel 3

arbitration de novo

. Cap Gemini Ernst & Young, U.S., L.L.C. v. Nackel

, 4

346 F.3d 360, 364 (2d Cir. 2003). 5

II. FINRA Rule 13200 6

FINRA is an independent organization authorized by 7

Congress to regulate the U.S. securities markets and professionals 8

who sell securities in the United States. “FINRA is a self

‐ regulatory 9

organization [“SRO”] that (among other things) sponsors an 10

arbitration forum.” Cohen v. UBS Fin. Servs.

, Inc.

, 799 F.3d 174, 176 11

(2d Cir. 2015). Use of the FINRA arbitration forum to adjudicate 12

disputes between its member securities firms and “associated 13

persons” is governed by the Code of Arbitration Procedure for 14

Industry Disputes (the “Code”), which regulates different features of 1511 arbitration between FINRA members and their employees. Id. 1

Again, Rule 13200 of the Code states: 2

Except as otherwise provided in the Code, a dispute 3

must be arbitrated under the Code if the dispute arises 4

out of the business activities of a member or an 5

associated person and is between or among

. . . 6

Members and Associated Persons. 7

8

J.A. 166. 9

10

The parties do not dispute that Credit Suisse is a FINRA 11

“member” or that Employees are “associated persons” under Rule 12

13200. Neither do they question the fact that the Employees’ 13

employment

‐ related claims and Credit Suisse’s improper

‐ solicitation 14

claims “arise[] out of the business activities” of Credit Suisse and 15

Employees. See FINRA Rule 13200. Nor is there any dispute that, as 16

a member of FINRA, Credit Suisse is bound to follow FINRA’s 17

arbitration rules. Arbitration rules, as we have previously 18

concluded, bind FINRA members, see UBS Fin. Servs., Inc. v. W. Va. 19

Univ. Hosps., Inc.

, 660 F.3d 643, 648

‐ 49 (2d Cir. 2011) (“Upon joining 2012 FINRA, a member organization agrees to comply with FINRA’s 1

rules

. . . including its Code and relevant arbitration provisions 2

contained therein.”) Nor do the parties dispute that Employees 3

entered into the employment agreements that contained the EDRP 4

provision, or that the EDRP provided for resolution of employment

‐ 5

related claims in a private non

‐ FINRA arbitral forum. 6

The parties do disagree, however, as to whether Rule 13200 7

requires them to arbitrate their disputes before FINRA. Employees 8

argue that the plain language of Rule 13200 requires arbitration in a 9

FINRA forum and that the rule is not subject to waiver. Credit 10

Suisse contends to the contrary that notwithstanding the mandatory 11

language of Rule 13200, it can be waived by a private pre

‐ dispute 12

arbitration agreement pursuant to the Federal Arbitration Act 13

(“FAA”), 9 U.S.C. § 1 et seq.

, such as that included in Employees’ 14

employment agreements. 10 15

10 Under the FAA, “[a] written provision in

. . . a contract

. . . to settle by

arbitration a controversy thereafter arising out of such contract

. . . shall be valid,13 We first address whether there is an inconsistency between 1

the arbitration provisions of the employment agreements and Rule 2

13200, and we then address whether the Rule 13200 requirement of 3

arbitration in the FINRA forum may be waived in a pre

‐ dispute 4

agreement. 5

A. Inconsistency Between FINRA Rule 13200 and the EDRP 6

Employees argue that the plain terms of Rule 13200 require 7

arbitration under the Code. Unless there is an explicit exception in 8

the FINRA Rules, 11 Employees argue, FINRA requires arbitration in 9

a FINRA forum. 10

irrevocable, and enforceable, save upon such grounds as exist at law or in equity

for the revocation of any contract.” 9 U.S.C. § 2; see also Volt Info. Scis., Inc. v. Bd. of

Trs. of Leland Stanford Junior Univ.

, 489 U.S. 468, 478 (1989) (noting that the FAA

“simply requires courts to enforce privately negotiated agreements to arbitrate,

like other contracts, in accordance with their terms”). Both the EDRP and Rule

13200 call for arbitration, and the FAA does not prefer one type of arbitration

over another. See Volt

, 489 U.S. at 476 (“There is no federal policy favoring

arbitration under a certain set of procedural rules

. . . .”).

11 An example of an exception allowing for arbitration outside a FINRA forum

would be a dispute “arising out of the insurance business activities of a member

that is also an insurance company.” FINRA Rule 13200(b); J.A. 166. Credit Suisse

does not assert that such an exception applies here.14 Rule 13200 plainly requires arbitration pursuant to the FINRA 1

code: “a dispute must be arbitrated under the Code.” To interpret 2

the plain language of the Rule otherwise would render the phrase 3

“under the Code” of no effect. This Court must construe the text of 4

the rule so that no part is rendered inoperative or superfluous. Cf. 5

Krys v. Farnum Place, LLC (In re Fairfield Sentry Ltd.)

, 768 F.3d 239, 245 6

(2d Cir. 2014). 7

Credit Suisse argues that Rule 13200 makes no mention of a 8

specific forum and so cannot preclude arbitration by JAMS or the 9

AAA. While Rule 13200 does not explicitly require arbitration in a 10

FINRA forum, by requiring that “a dispute must be arbitrated under 11

the Code,” the Rule must be read to require arbitration in a FINRA 12

forum because the Code of Arbitration Procedure applies only to 13

FINRA arbitrations. Therefore, Rule 13200 by its own terms requires 14

arbitration in a FINRA forum. 1515 Because the Credit Suisse EDRP requires that arbitration take 1

place in a non

‐ FINRA forum, it is clearly inconsistent with Rule 2

13200. But this does not mean that Rule 13200 necessarily trumps the 3

parties’ pre

‐ dispute private agreement to arbitrate in a non

‐ FINRA 4

arbitral forum, for if Rule 13200 can be waived, then arbitration 5

before FINRA is not required. 6

B. Waiver of FINRA Rule 13200 7

Credit Suisse argues that even if Rule 13200 is inconsistent 8

with the EDRP, this does not preclude waiver of the FINRA forum 9

by the Employees in a pre

‐ dispute agreement. Employees maintain 10

that FINRA Rule 13200 cannot be waived, in part because FINRA 11

arbitrations contribute to FINRA and the SEC’s regulation of the 12

securities markets. Employees also argue that because the SEC has 13

approved the FINRA arbitration procedure, Rule 13200 has the force 14

of law and cannot be superseded by a pre

‐ dispute private 15

agreement. We disagree. Our case law leads to the conclusion that a 1616 pre

‐ dispute private agreement to arbitrate before a non

‐ FINRA 1

arbitral forum is enforceable. 2

We have held in several cases that an SRO’s arbitration 3

provisions are default rules which may be overridden by more 4

specific contractual terms. See, e.g.

, Ameriprise Fin. Servs., Inc. v. 5

Beland ( In re Am. Express Fin. Advisors Secs. Litig.)

, 672 F.3d 113, 132 6

(2d Cir. 2011) (“In particular, as relevant here, different or additional 7

contractual arrangements for arbitration can supersede the rights 8

conferred on a customer by virtue of a broker’s membership in a 9

self

‐ regulating organization such as FINRA.”) (alterations and 10

quotation marks omitted). 11

For instance, in Merrill Lynch, Pierce, Fenner & Smith Inc. v. 12

Georgiadis

, 903 F.2d 109 (2d Cir. 1990), a Merrill Lynch customer had 13

agreed in an options trading agreement with Merrill Lynch to 14

arbitrate any dispute about his trades before the New York Stock 15

Exchange (“NYSE”). Merrill Lynch was a member of the American 1617 Stock Exchange (“AMEX”), and AMEX’s Constitution provided for a 1

customer’s right to arbitration before the AAA. After a dispute arose 2

concerning the customer’s trades in put and call options, he 3

demanded arbitration before the AAA. However, the district court 4

compelled arbitration before the NYSE, pursuant to the customer 5

trading agreement. We affirmed, and concluded that the arbitration 6

provisions of the AMEX Constitution “may be superseded by a 7

more specific customer agreement of the parties.” Id. at 112. 8

Similarly in Goldman, Sachs & Co. v. Golden Empire Schools 9

Financing Authority

, 764 F.3d 210 (2d Cir. 2014), we held that 10

customers of FINRA

‐ regulated securities firms were required to 11

litigate their claims pursuant to a forum selection clause in their 12

customer agreements rather than arbitrate under a FINRA rule 13

requiring that customer disputes be arbitrated before FINRA if the 14

customer chooses arbitration. See id. at 214

‐ 17. 1518 We have also recently addressed the waiver of a different 1

FINRA Rule in the employee

‐ member context. In Cohen v. UBS 2

Financial Services, Inc.

, we considered whether Rule 13204, which 3

bans arbitrations of class action and collective claims in certain 4

instances, can be waived by employees in a pre

‐ dispute agreement. 5

Cohen, a financial advisor for UBS Financial (“UBS”), had executed 6

a class action waiver and an arbitration agreement as part of his 7

initial employment contract with UBS. He subsequently filed a 8

putative class action suit against UBS asserting wage and hour 9

compensation violations. The district court granted UBS’s motion for 10

a stay of the action pending FINRA arbitration. On appeal, Cohen 11

argued that UBS could not enforce the pre

‐ dispute agreement 12

because Rule 13204 prohibited enforcement of an arbitration 13

agreement during the course of a class action. We concluded that 14

“Rule 13204 says nothing about class action and collective action 15

waivers, and cannot be read to bar enforcement of them.” Id. at 178. 1619 Although Rule 13204 “bars arbitration of a claim so long as it is 1

embedded in a class action,” that Rule “does not preserve the right 2

to assert a claim in class or collective form notwithstanding a 3

contractual waiver .” Id. (emphasis added). Cohen’s pre

‐ dispute class 4

action waiver and agreement to arbitrate was thus enforceable. 5

Here, as in Merrill Lynch

, Goldman

, and Cohen

, the parties 6

signed a pre

‐ dispute agreement that overrode an SRO’s default rule: 7

The Employees signed a pre

‐ dispute waiver agreeing to arbitrate 8

any employment related claims in a non

‐ FINRA arbitral forum. Rule 9

13200 states that such disputes must be arbitrated “under the Code,” 10

but, like Rule 13204 addressed in Cohen

, it does not address the issue 11

of whether arbitration in a FINRA forum may be waived before a 12

dispute arises. 12 Our decisions addressing a conflict between an 13

SRO’s broad arbitration rules and a specific pre

‐ dispute agreement 14

12 Had FINRA wished to clearly state that Rule 13200 cannot be waived, it could

have done so. In the customer

‐ member context, FINRA requires that a

predispute arbitration agreement not include any condition that “limits or

contradicts the rules of any self

‐ regulatory organization.” Rule 2268(d)(1).20 between an SRO member and an employee or customer hold that 1

the more specific agreement will prevail. See, e.g.

, Cohen

, 799 F.3d at 2

180; Goldman, 764 F.3d at 214

‐ 17; Kidder, Peabody & Co., v. Zinsmeyer 3

Trs. P’ship

, 41 F.3d 861, 864 (2d Cir. 1994) (holding that “different or 4

additional contractual arrangements for arbitration can supersede 5

the rights conferred on the customer by virtue of the broker’s 6

membership in a self

‐ regulating organization”); Merrill Lynch

, 903 7

F.2d at 112. Accordingly, the EDRP’s arbitration

‐ forum provisions 8

are enforceable, and the district court did not err in compelling 9

Employees to dismiss the FINRA arbitration and pursue their claims 10

before JAMS. 11

It is true, as Employees argue, that a pre

‐ dispute complete 12

waiver of arbitration has been held unenforceable in the 13

employment context. In Thomas James Associates v. Jameson

, 102 F.3d 14

60 (2d Cir. 1996), a broker at a securities firm executed an 15

employment agreement that waived arbitration of employment 1621 disputes. The rules of the National Association of Securities Dealers 1

(“NASD”) 13 required such disputes to be arbitrated, although it did 2

not specify the forum. We held the arbitration waiver unenforceable 3

based on the public policy favoring arbitration of disputes. Id. at 66

‐ 4

67. 5

Jameson does not compel non

‐ enforcement of the EDRP here, 6

however. Rather than waive the ability to arbitrate, Employees 7

merely waived the right to arbitrate in a FINRA forum

. Cf. Credit 8

Suisse First Bos., LLC v. Groves

, 333 F. Supp. 2d 229, 232 (S.D.N.Y. 9

2004) (“[N]othing in Jameson or in the law extends the public policy 10

favoring arbitration to the point of favoring a particular arbitral 11

forum, or one forum over another.”). Forum preference does not 12

raise the same public policy concern as a complete waiver of 13

arbitration. 14

13 NASD

‐ promulgated rules were the predecessor to FINRA’s rules.22 Employees’ argument that FINRA arbitration allows for more 1

consistency in arbitration awards is unavailing as a factual matter. 2

Although the results of a FINRA arbitration award are publically 3

disclosed, the awards include only the names of the parties, a 4

summary of the issues, the damages awarded, and other general 5

information about the nature of the arbitration. See FINRA Rule 6

13904(e), (h); J.A. 177

‐ 78. Parties may request an “explained 7

decision,” but only if there is a joint request. See FINRA Rule 8

13904(g); J.A. 177

‐ 78. The publicly available arbitration award, then, 9

typically contains little helpful information that would provide 10

guidance for future awards or enforcement actions. 11

Finally, Employees assert that since FINRA arbitration panels 12

are comprised of FINRA

‐ trained and approved arbitrators, private 13

arbitrators such as those that make up JAMS and AAA panels may 14

have lesser qualifications. But Employees do not assert any basis for 15

concluding that JAMS or AAA arbitrators would be less competent. 1623 In fact, Employees have willingly engaged in arbitration before 1

JAMS related to the Currency Facility dispute. 14 2

CONCLUSION 3

For the foregoing reasons, we conclude that Rule 13200 does 4

not prohibit the enforcement of pre

‐ dispute waivers of a FINRA 5

arbitral forum. Accordingly, we AFFIRM the judgment of the 6

district court. 7

8

14 Employees also point to a FINRA “guidance letter” regarding a proposed

change to Rule 13204. The letter, written by a FINRA assistant chief counsel and

addressed to the SEC, states that members may not “prohibit employees from

arbitrating their disputes with the firm in FINRA’s dispute resolution forum.”

However, the FINRA Board of Governors expressed a contrary view in In re

Dep’t of Enforcement v. Charles Schwab & Co.

, No. 2011029760201, 2014 WL 1665738

(FINRA Bd. of Governors Apr. 24, 2014), which provides that “there are no

restrictions upon firms regarding the content of predispute arbitration

agreements with employees.” Id. at *8.