Court Opinion

ID: 5853736
Source: CourtListenerOpinion
Date Created: 2022-01-13 00:38:53.582161+00
Date Added: 2024-06-11T08:44:03.975322
License: Public Domain

Sweeny, J.
(dissenting in part). I agree with the majority that the doctrine of res judicata has no applicability in this case, as the Federal District Court made no determination regarding the merits of the state law claims. Where we part company is on the question of whether plaintiffs may properly assert their claims as a class action. It is abundantly clear from the record that plaintiffs are attempting, as they did in their federal court action, to improperly utilize the vehicle of a class action to avoid their written agreement to arbitrate their claims. I must therefore dissent.
The facts of this case are essentially not in dispute. Plaintiffs, former registered representatives at defendant securities firm which consists of approximately 50 associates, were commission-only retail stock brokers who claim they are owed overtime wages and other compensation from defendants. Plaintiffs are registered with the Financial Industry Regulatory Authority (FINRA), a self-regulatory agency under the U.S. Securities and Exchange Commission. All registered securities representatives, including the named and putative plaintiffs, must sign a Uniform Application for Securities Industry Registration or Transfer, known as a Form U-4.1 Section 15A (5) of this form provides, in pertinent part: “I agree to arbitrate any dispute, claim, or controversy that may arise between me and my firm . . . that is required to be arbitrated under the rules ... of [FINRA] as may be amended from time to time” (emphasis omitted). FINRA Manual rule 13200 (a) provides that
“[e]xcept as otherwise provided in the Code [of Arbitration Procedure for Industry Disputes, rule 13100 (f)], a dispute must be arbitrated under the Code if the dispute arises out of the business activities of a member or an associated person and is between or among:
“• Members;
“• Members and Associated Persons; or “• Associated Persons.”
FINRA Manual rule 13204 excludes class actions from the requirement of mandatory arbitration of disputes.
On or about April 27, 2010, plaintiffs Gomez and Gabiam commenced an action against defendants in the United States *41District Court for the Southern District of New York, combining state claims identical to those brought here, and a federal claim for overtime pay under the Fair Labor Standards Act (FLSA). The FLSA claim was the sole basis of federal jurisdiction and was brought as a “collective action” pursuant to FLSA § 16 (b) (29 USC § 216 [b]), on behalf of all Brill employees employed as stockbrokers in New York during the three years preceding the commencement of the action. The accompanying state claims were brought as a class action.
Defendants moved to dismiss the federal action or, alternatively, to compel arbitration of the FLSA claim and either dismiss the state law claims by declining jurisdiction or stay the state law claims pending resolution of the arbitration. Plaintiffs opposed the motion, arguing that FINRA’s restriction against compelling arbitration of class actions extended to their FLSA collective action claim, especially since the state and federal claims were “virtually identical,” and if forced to arbitrate their federal claim, they would “be barred by principles of collateral estoppel from being part of the state class action.”
The District Court granted defendants’ motion to compel arbitration of the FLSA claim and stayed the action pending resolution of such arbitration, finding that the FLSA collective action was not a “class action” for purposes of FINRA Manual rule 13204 and thus, was required to be arbitrated pursuant to the provisions of Form U-4. Significantly, the court rejected plaintiffs’ argument that compelling arbitration of the FLSA claim would interfere with their state law claims which were “virtually identical,” holding in pertinent part:
“[T]he Court rejects this attempt to circumvent the arbitration of plaintiffs’ FLSA claim . . . finding that to hold otherwise would allow plaintiffs to avoid arbitration and litigate in federal court so long as their FLSA claim may also be styled as a state law class action claim . . . Such an outcome is inconsistent with plaintiffs’ obligations under the Form U-4 and the FINRA rules incorporated therein.” (Gomez v Brill Sec., Inc., 2010 WL 4455827, *2, 2010 US Dist. LEXIS 118162, *5 [SD NY 2010].)
Thereafter, plaintiffs voluntarily discontinued the federal action without prejudice, stipulating that any FLSA claims brought in the future would be subject to arbitration. They then filed the present action via a class action complaint. The parties to this action are identical to those in the federal action with the exception of an additional plaintiff, Kwesi Moore, and *42the complaint alleges essentially identical causes of action as those alleged in the state law claims in their federal complaint.
The District Court’s reasoning that plaintiffs’ claims were a not so subtle attempt to circumvent the arbitration provisions of Form U-4 and the FINRA rules is compelling and equally applicable here. The result should be the same.
An appropriate starting point would be a review of the role arbitration plays in the judicial system.
There is a strong public policy “supporting arbitration and discouraging judicial interference with either the process or its outcome” (Matter of New York City Tr. Auth. v Transport Workers Union of Am., Local 100, AFL-CIO, 99 NY2d 1, 6 [2002]), particularly when used as a means of settling labor disputes (see Matter of Town of Haverstraw [Rockland County Patrolmen’s Benevolent Assn.], 65 NY2d 677, 678 [1985]; Matter of Associated Teachers of Huntington v Board of Educ., Union Free School Dist. No. 3, Town of Huntington, 33 NY2d 229, 236 [1973]).
There is no question, and the plaintiffs do not challenge the validity of the arbitration provisions of the FINRA rules as incorporated into Form U-4. Rather, plaintiffs follow the same playbook as used in the federal court by casting their complaint as a class action in order to avoid their obligation to arbitrate under the provisions of the FINRA rules to which they agreed.
The fact that there are multiple plaintiffs and potential plaintiffs does not prevent these issues from being arbitrated. FINRA Manual rule 13312 permits multiple claimants to participate in a single arbitration.2 Thus, FINRA provides an appropriate forum to hear plaintiffs’ claims in an expeditious manner, before an arbitrator who has expertise in the securities industry. Given the limited size of this class, there is no justification to argue the class action method is superior to other methods of adjudication under CPLR 901 (a) (5), as will be discussed infra.
The majority makes the curious argument that the federal court, by staying the state law claims, implicitly found those claims to be outside the scope of arbitration. There is nothing in *43the record to support this assumption. Although not directly referenced by the federal court in its decision, the Federal Arbitration Act (9 USC § 3) mandates a stay of the trial of any causes of action, pending completion of arbitration on any other cause of action.3 As noted, the federal court found that plaintiffs’ use of the federal procedural vehicle of a “collective action” was essentially an attempt to avoid its obligations to arbitrate their claims. In holding the FLSA claims to be arbitrable, the court was required to stay the state court claims. No determination was made or inferred with respect to the arbitrability of these claims, despite the fact that plaintiffs argued in the federal action that their FLSA and state claims were “virtually identical.” The result, as the majority rightfully determined, was that defendants’ argument that this action is precluded by the doctrine of res judicata is unavailing.
An examination of the statutory requirements for a proper class action is also in order.
CPLR 901 (a) sets forth criteria which a court must consider in certifying a class action:
“1. the class is so numerous that joinder of all members, whether otherwise required or permitted, is impracticable;
“2. there are questions of law or fact common to the class which predominate over any questions affecting only individual members;
“3. the claims or defenses of the representative parties are typical of the claims or defenses of the class;
“4. the representative parties will fairly and adequately protect the interests of the class; and
“5. a class action is superior to other available methods for the fair and efficient adjudication of the controversy.”
The party moving for class action certification has the burden of satisfying all five criteria (Godwin Realty Assoc. v CATV *44Enters., 275 AD2d 269 [2000]). Although these statutory criteria should be liberally construed (Englade v HarperCollins Publs., 289 AD2d 159 [2001]), such construction should not be utilized as a license to evade contractual obligations to arbitrate disputes (see 82 NY Jur 2d, Parties § 247; Harris v Shearson Hayden Stone, 82 AD2d 87, 91 [1981], affd 56 NY2d 627 [1982]).
Here, although plaintiffs arguably meet the numerosity requirement of CPLR 901 (a) (1) (see e.g. Gilbert v Hamilton, 35 AD2d 715 [1970], affd 29 NY2d 842 [1971] [where we held that an action for the equitable dissolution of a corporation could be maintained as a class action even though the plaintiff class consisted of only five persons]), they certainly do not meet the requirements of CPLR 901 (a) (5). The purported class action is clearly not superior to any other available methods of fairly and efficiently resolving this controversy.
The policy of this State “favors and encourages arbitration as a means of conserving the time and resources of the courts and the contracting parties” (Matter of Nationwide Gen. Ins. Co. v Investors Ins. Co. of Am., 37 NY2d 91, 95 [1975]). Given the limited size of this class and the issues involved, there is no justification to argue the class action method is superior to other methods of adjudication. This purported class action does not further judicial economy, particularly since, as noted, FINRA rules provide for the arbitration of multiple party claims. Because plaintiffs do not meet the requirement of CPLR 901 (a) (5), class action certification must be denied (see Geiger v American Tobacco Co., 277 AD2d 420, 421 [2000], lv dismissed 96 NY2d 754 [2001]).
Most importantly, the majority overlooks the fact that CPLR article 9 is merely a procedural provision designed as a method of enforcing substantive law. By contrast, CPLR article 75 is substantive law, particularly because arbitration is rooted in contract law.
State of New York v Philip Morris Inc. (308 AD2d 57, 67 [2003], lv denied 1 NY3d 502 [2003]) is instructive in this regard. In reversing the motion court’s determination to grant class action certification, we held that the order in question
“rests on the assumption that, if CPLR articles 9 and 75 conflict, the former trumps the latter. However, that assumption is incorrect. In Harris v Shearson Hayden Stone, this Court held that ‘the interests favoring arbitration should prevail over *45those favoring the class action, both in general and in the present instance’ ” (308 AD2d at 67 [citations omitted]).
Although, as the majority notes, Harris was decided prior to the advent of FINRA and its predecessor National Association of Securities Dealers (NASD), its rationale is still applicable under the circumstances of this case. Harris specifically found that, in a conflict between a purported class action and a valid arbitration agreement, the “strong public policy which underlies arbitration” must prevail (82 AD2d at 92). While it is true that FINRA’s exception for class actions was not involved in Harris, the principle that class actions are procedural vehicles to enforce the substantive law is unchanged. Indeed, Harris, in quoting from Vernon v Drexel Burnham & Co. (52 Cal App 3d 706, 716, 125 Cal Rptr 147, 153 [1975]) astutely observed that “[altering the substantive law to accommodate procedure would be to confuse the means with the ends — to sacrifice the goal for the going” (82 AD2d at 95). In effect, the majority is doing just that — substituting a procedural device in place of a substantive one.
This rationale is particularly applicable here. A basic reading of the four corners of Form U-4 and the FINRA rules leads to the conclusion that the claims being asserted by plaintiffs are arbitrable. Simply styling a complaint as a class action in order to bring it within an exception to arbitration elevates form over substance and essentially negates the strong public policy in favor of arbitration as stated in Harris and a legion of other cases. Plaintiffs are merely utilizing the procedural device of a class action to circumvent their obligations under substantive contractual law to arbitrate their overtime claims. Having been thwarted at the federal level, they are now attempting to pull off the same charade in state court. As in the federal court, such an attempt should not be permitted.
If these plaintiffs are permitted to evade their obligations under Form U-4 and the FINRA rules by getting a few other potential plaintiffs to sign on to their complaint and thus refer to themselves as a “class,” other plaintiffs could and would follow suit with other issues covered by FINRA rules and Form U-4. This would completely eviscerate the purpose of the arbitration rules and create litigation in cases which should be, and have been, the subject of mandatory arbitration. This not only runs afoul of the intent of the FINRA rules, but also negates the requirements of CPLR 901 (a). In short, the major*46ity is throwing open the floodgates of litigation in the securities industry, as well as potentially creating an unwarranted exception to other validly enforceable arbitration agreements. There is no basis for doing so.
Gonzalez, EJ., and Tom, J, concur with Román, J.; Sweeny, J., dissents in part in a separate opinion in which Renwtck, J., concurs.
Order, Supreme Court, New York County, entered June 13, 2011, affirmed, with costs.

. There is no dispute that all parties are members of FINRA and that its rules are incorporated by reference in Form U-4.

. FINRA Manual rule 13312 (a) (formerly NASD Manual rule 13312 [a]) provides:
“One or more parties may join multiple claims together in the same arbitration if the claims contain common questions of law or fact and:
“• The claims assert any right to relief jointly and severally; or “• The claims arise out of the same transaction or occurrence, or series of transactions or occurrences.”-

. 9 USC § 3 provides as follows:
“If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court . . . upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement” (emphasis added).