DENNIS JACOBS, Circuit Judge:
Former employees of Chase Investment Securities Corp. (now J.P. Morgan Securities, LLC) filed a putative class and collective action against J.P. Morgan Chase & Co. and Chase Investment Services Corp. (collectively, "Chase") for violations of state and federal overtime laws. Chase moved to compel arbitration pursuant to an arbitration clause in the plaintiffs' employment contracts. The United States District Court for the Southern District of New York (Swain, J.) denied the motion. The court interpreted the clause to cover only claims or controversies "required to be arbitrated by the FINRA Rules," ruled that it thus incorporated the arbitrability restrictions of the FINRA Code of Arbitration Procedure for Industry Disputes ("FINRA Rules"), and applied the current version of FINRA Rule 13204, which prohibits arbitration of claims brought as putative class or collective actions.
On appeal, Chase contends that the arbitration clause incorporates FINRA Rules that govern arbitration procedure, but not rules (like Rule 13204) that govern the scope of arbitrable issues. Chase argues that the district court erred by: (1) construing the arbitration clause to incorporate Rule 13204, and (2) applying the amended version of Rule 13204 in effect at the time of Chase's motion, rather than the earlier version that was in effect when plaintiffs entered into their contracts. We affirm.
The following facts are drawn from plaintiffs' First Amended Class Action Complaint, which we presume to be true at this juncture. See, e.g., Dejesus v. HF Mgmt. Servs., LLC, 726 F.3d 85, 87 (2d Cir.2013).
Chase employs Financial Advisors to sell financial products at its numerous branch locations.
In addition to the Form U4, plaintiffs executed an employment agreement (the "Chase Agreement") that contains the following arbitration clause:
(emphases added).
The arbitration clause thus incorporates the FINRA Rules, but with disputed effects. The issues are (1) whether the clause incorporates FINRA Rule 13204 at all, and (2) whether the parties agreed to apply (a) the version of Rule 13204 in effect at the time they entered into the Chase Agreement or (b) the current, amended version that took effect before Chase filed its motion to compel. The earlier version refused FINRA arbitration of class action claims, while the current version refuses FINRA arbitration of collective action claims as well. The difference between the two versions is thus potentially decisive as to plaintiffs' FLSA claims, which are brought as a collective action.
At the time plaintiffs signed the Chase Agreement,
FINRA Rule 13204 (effective Dec. 15, 2008 to July 8, 2012) ("Old Rule 13204"). In 2012, FINRA relabeled the existing sections and added a new one:
FINRA Rule 13204 (effective July 9, 2012) ("New Rule 13204"). Thus, following the 2012 amendment, neither class nor collective action claims can be arbitrated under the FINRA Rules.
Plaintiffs commenced suit on December 19, 2011. On January 14, 2013, Chase moved to compel arbitration based on the Chase Agreement's arbitration clause. The district court denied the motion, reasoning that the arbitration clause requires arbitration of only those claims required to be arbitrated under the FINRA Rules and that, under New Rule 13204, Plaintiffs' claims cannot be arbitrated. We affirm.
"A district court's denial of a motion to compel arbitration is reviewed de novo." Specht v. Netscape Commc'ns Corp., 306 F.3d 17, 26 (2d Cir.2002).
Under the Federal Arbitration Act ("FAA"), "[a] written provision in ... a contract ... to settle by arbitration a controversy thereafter arising out of such contract ... shall be valid, irrevocable, and enforceable." 9 U.S.C. § 2. In interpreting a validly formed arbitration agreement, we apply a "presumption of arbitrability" if the "arbitration agreement is ambiguous about whether it covers the dispute at hand." Granite Rock Co. v. Int'l Bhd. of Teamsters, 561 U.S. 287, 301, 130 S.Ct. 2847, 177 L.Ed.2d 567 (2010); see also Goldman, Sachs & Co. v. Golden Empire School Fin. Auth., 764 F.3d 210, 215 (2d Cir.2014).
However, this "policy favoring arbitration" is "merely an acknowledgment of the FAA's commitment to overrule the judiciary's longstanding refusal to enforce agreements to arbitrate and to place such agreements upon the same footing as other contracts." Granite Rock, 561 U.S. at
So if an arbitration clause is best construed to express the parties' intent not to arbitrate certain disputes, that intent controls and cannot be overridden by the presumption of arbitrability. Granite Rock, 561 U.S. at 302, 130 S.Ct. 2847; see also Allstate Ins. Co. v. Mun, 751 F.3d 94, 97 (2d Cir.2014). The presumption is a soft one, and has effect "only where it reflects, and derives its legitimacy from, a judicial conclusion that arbitration of a particular dispute is what the parties intended because their express agreement to arbitrate ... [is] best construed to encompass the dispute." Granite Rock, 561 U.S. at 303, 130 S.Ct. 2847 (emphasis added). The presumption may tip the scale if an agreement is truly ambiguous, see Allstate, 751 F.3d at 97, but it does not alter the controlling question: is the arbitration agreement "best construed to encompass the dispute"?
Citing cases from the Supreme Court and this Circuit, Chase urges that, under the presumption, an arbitration agreement must be interpreted to cover a dispute if the agreement is "susceptible" of such an interpretation, even if the contrary one may be considerably more plausible. Chase further argues that the presumption of arbitrability can be rebutted only by "positive assurances" that a dispute is non-arbitrable.
Most of the cases on which Chase relies were decided in the peculiar and exceptional context of collective bargaining agreements. See Wright v. Universal Mar. Serv. Corp., 525 U.S. 70, 78, 119 S.Ct. 391, 142 L.Ed.2d 361 (1998) (cautioning against extending "positive assurances" language in AT & T Techs., Inc. v. Commc'ns Workers of Am., 475 U.S. 643, 650, 106 S.Ct. 1415, 89 L.Ed.2d 648 (1986), to other contexts). Moreover, every case cited by Chase predates Granite Rock, which made clear that the presumption of arbitrability is a tool for resolving genuine ambiguity, not a bias in favor of arbitration. 561 U.S. at 301-02, 130 S.Ct. 2847.
We thus review the district court's interpretation under Granite Rock: does the Chase Agreement reflect the parties' intent to arbitrate plaintiffs' claims?
The disputed phrase in the arbitration clause is "required to be arbitrated by the FINRA Rules," and the principal interpretive issue is what words that phrase is intended to modify in the following sentence:
(emphasis added).
Since class and collective action claims cannot be arbitrated under New Rule 13204, the question becomes whether the phrase "required to be arbitrated by the FINRA Rules" applies to the whole category of claims and controversies (in which case plaintiffs' claims cannot be arbitrated), or only to claims arising out of plaintiffs'
The district court held that the arbitration clause requires individual arbitration only to the extent such arbitration is "required ... by the FINRA Rules." Since, as discussed, plaintiffs' class and collective action claims are precluded from arbitration by FINRA Rule 13204, they fall outside the scope of the arbitration clause. We agree.
The arbitration clause begins with two nouns ("claim or controversy") followed by three modifiers:
The natural reading of this sentence is that each modifier modifies "claim or controversy," so that only a claim or controversy that satisfies each of the three criteria "shall be resolved by ... arbitration."
That reading is grammatically sound and makes substantive sense. The arbitration clause requires the whole category of claims arbitrable under the Chase Agreement to be arbitrated "in accordance with" the FINRA Rules. It is therefore logical that the clause also incorporates the limitations of the FINRA Rules as to the scope of arbitrable claims. If the universe of arbitrable claims consists solely of claims "required to be arbitrated by the FINRA Rules," then such claims may always be arbitrated "in accordance with" the FINRA Rules.
Chase's competing interpretation is both ungrammatical and substantively flawed. Chase argues that the absence of a comma before the phrase "required to be arbitrated by the FINRA Rules" compels the conclusion that it modifies only the immediately preceding words, "your employment and/or the termination thereof." This result is required, Chase argues, by the rule of the last antecedent, which provides that "a limiting clause or phrase ... should ordinarily be read as modifying only the noun or phrase that it immediately follows," Barnhart v. Thomas, 540 U.S. 20, 26, 124 S.Ct. 376, 157 L.Ed.2d 333 (2003). See also Am. Int'l Grp. v. Bank of Am. Corp., 712 F.3d 775, 781-82 (2d Cir. 2013).
Fastidious use of punctuation is a virtue in a drafter and often commands respect, but here, the absence of the comma does not support Chase's position. First, while the last antecedent rule can be useful, it "is not an absolute and can assuredly be overcome by other indicia of meaning." Barnhart, 540 U.S. at 26, 124 S.Ct. 376. Second and more importantly, courts have applied the rule only when the last antecedent can grammatically be modified by the limiting phrase. Hence, in Barnhart, the Supreme Court read the phrase "which exists in the national economy" to modify
In this case, the restrictive phrase "required to be arbitrated by the FINRA Rules" follows two other restrictive phrases that unquestionably modify the only available antecedent: "claim or controversy." The phrase "your employment and/or the termination thereof" is integral to the phrase "arising out of ... your employment and/or the termination thereof," which in turn modifies "claim or controversy." The last antecedent rule does not apply because there is only one antecedent to which all of the modifiers must refer: "claim or controversy."
Chase's interpretation is also substantively flawed. As discussed, the arbitration clause unquestionably requires arbitrable claims to be resolved before FINRA and "in accordance with the FINRA Rules." But it is impossible to arbitrate plaintiffs' class and collective action claims before FINRA, since New Rule 13204 prevents FINRA arbitrators from entertaining class and collective action claims. See FINRA Rule 13203(a) ("The Director [of FINRA Dispute Resolution] may decline to permit the use of the FINRA arbitration forum if the Director determines that, given the purposes of FINRA and the intent of the Code, the subject matter of the dispute is inappropriate.") Again, the district court's reading obviates this interpretive problem: if the only claims that are arbitrable under the Chase Agreement are those that are "required to be arbitrated by the FINRA Rules," then every arbitrable claim may be resolved by FINRA arbitrators.
That the arbitration clause calls for "individual (not class or collective) arbitration" does not assist Chase. That language simply echoes New Rule 13204, which prohibits individual arbitration of claims that are the subject of putative class or collective actions, unless the party asserting those claims declines to proceed on a class or collective basis or the court decertifies (or declines to certify) the class or collective action.
Finally, we are unpersuaded by Chase's argument that interpreting the arbitration clause to incorporate the FINRA Rules would violate the interpretive canon against surplusage. It is true that plaintiffs separately signed Form U4 agreeing to arbitrate claims required to be arbitrated by the FINRA Rules, but there is nothing unusual about an employer's conforming its in-house documents to requirements that already exist in standard FINRA forms. In any event, the surplusage canon does not apply because the Chase
Accordingly, we hold that the district court correctly interpreted the arbitration clause to require arbitration of only those claims "required to be arbitrated by the FINRA Rules."
We next consider whether the arbitration clause incorporates Old Rule 13204 (which was effective when plaintiffs entered into the Chase Agreement) or New Rule 13204 (which became effective prior to Chase's motion to compel and remains the current rule). The former barred FINRA arbitration of class action claims, while the latter added a parallel provision concerning collective actions.
As the district court observed, the arbitration clause contains no wording on the effect (if any) of amendments to the FINRA Rules. However, as discussed supra, the arbitration clause requires that arbitrable claims be resolved "in accordance with" the FINRA Rules; and New Rule 13204 expressly provides that any claim that is part of a pending class or collective action suit "shall not be arbitrated under the Code." New Rule 13204(a)(2), (b)(2). It cannot be disputed that New Rule 13204 governs FINRA arbitrators. So unless the arbitration clause tracks amendments to the FINRA Rules, some claims arbitrable under the clause (in this case, FLSA collective action claims) would be required to be arbitrated before a body that does not entertain them. See FINRA Rule 13203(a) ("The Director [of FINRA Dispute Resolution] may decline to permit the use of the FINRA arbitration forum if the Director determines that, given the purposes of FINRA and the intent of the Code, the subject matter of the dispute is inappropriate.").
We think that the parties could not have intended to arbitrate claims before an arbitral body that, under its own rules, cannot hear them. As the district court concluded: the parties must have intended the FINRA Rules (as they may be amended) to govern both the scope of arbitrability and the manner of arbitrating claims between Chase and its employees.
Chase argues that the district court's ruling raises a problem of retroactivity. However, contracts can and often do contain terms that are subject to the impact of future developments. A party that agrees to arbitrate before a particular forum according to the rules of that forum assumes the risk that the forum's rules might change.
In any event, the amendment of Old Rule 13204 did not upset expectations. Since 1999, FINRA has informally taken the position that collective action claims cannot be arbitrated, even under Old Rule 13204. See FINRA Regulatory Notice 12-28. FINRA amended the rule to make its position explicit only after district courts refused to apply Old Rule 13204 to FLSA collective actions. Id.; see Velez v. Perrin Holden & Davenport Capital Corp., 769 F.Supp.2d 445, 447 (S.D.N.Y. 2011); Gomez v. Brill Sec., Inc., No. 10 Civ. 3503(JSR), 2010 WL 4455827, at *2 (S.D.N.Y. Nov. 2, 2010); Chapman v. Lehman Bros., Inc., 279 F.Supp.2d 1286, 1290 (S.D.Fla.2003). The 2012 amendment was thus the formal statement of a longstanding FINRA position.
For the foregoing reasons, we affirm the decision of the district court.
SACK, Circuit Judge, concurring dubitante
I write to express my concern, however, about the panel's conclusion that New Rule 13204, which amended Old Rule 13204 (as those terms are defined in the majority opinion) by adding collective actions to the list of those not arbitrable under FINRA rules, necessarily applied to the instant case even though at the time that the Chase Agreement was entered into, Old Rule 13204, not New Rule 13204, was in effect.
In a two-paragraph analysis addressed to the "problem of retroactivity" raised by Chase, the majority observes that it is not unusual for contract terms to be "subject to the impact of future developments," and that in this case the future developments were a change in "the forum's rules." Id. at 273. Moreover, because FINRA had already "informally taken the position that collective actions[
Separately, in addressing the intent of the parties at the time the contract was signed, the majority asserts that because the arbitrable claims are required to be resolved "in accordance with" the FINRA Rules, and the operative rule 13204 (New Rule 13204) provides that a collective action "shall not be arbitrated" by FINRA, the Chase Agreement must therefore be read to incorporate New Rule 13204. Id. at 273. The majority is of the view that to hold otherwise would require the Court to find that the parties intended to arbitrate their claims before a body that "under its own rules, cannot hear them," and that "the parties could not have intended" such a result. Id. at 273.
I think a more detailed and thorough inquiry would be necessary before I could comfortably reach a firm conclusion as to whether or not the provisions of New Rule 13204 apply to this dispute.
The defendant in Wong moved to compel arbitration in a "whistleblower" suit pursuant to an employment contract that required such arbitration and that was entered into before Dodd-Frank went into effect. The question before the district court was whether the plaintiff could take advantage of the new law's prohibition even though it was enacted after she entered into the contract; indeed all the relevant behavior of the parties occurred before Dodd-Frank became law. "Therefore," noted the court, "the issue [was] whether to apply the [later] amendment to the present dispute." Id.
The court began its analysis by stating widely accepted general principles.
Id.
The district court then looked to the Supreme Court's decision in Fernandez-Vargas
The Wong court ultimately reached a decision roughly similar to that reached by the majority in this appeal — the new arbitration rules applied to an old arbitration agreement. The court did so, however, by engaging in step two of the prescribed analysis: It concluded that "[t]he right to have a dispute heard in an arbitral forum is a procedural right that affects the forum that will decide the substantive rights of the parties. Therefore, applying the present law to this dispute would not have a disfavored retroactive consequence." 890 F.Supp.2d at 423.
Other district courts have considered the issue addressed in Wong. At least one has arrived at the same conclusion; others have not. Compare Pezza v. Investors Capital Corp., 767 F.Supp.2d 225, 233-34 (D.Mass.2011) (concluding that Dodd-Frank § 922 changed only the procedural rights of the parties and therefore could be applied retroactively), with Taylor v. Fannie Mae, 839 F.Supp.2d 259, 263 (D.D.C. 2012) ("the Court here fails to see how a retroactive application would not impair the parties' rights possessed when they acted"; retroactive effect not given; arbitration compelled) (citing Henderson v. Masco Framing Corp., 2011 WL 3022535, 2011 U.S. Dist. LEXIS 80494 (D.Nev. July 22, 2011)). Irrespective of their outcomes, though, these courts proceeded as had the Wong court by applying the test set forth in Fernandez-Vargas.
To be sure, the case before us is plainly distinguishable from both Fernandez-Vargas and Wong, most obviously because FINRA rules, although perhaps comparable to the statutes considered by the district courts for present purposes, are not federal statutes. But see Sacks v. S.E.C., 648 F.3d 945, 950 (9th Cir.2011) (applying the retroactivity test articulated in Fernandez-Vargas to FINRA Rules). These decisions do, however, illustrate the complexity involved in determining the retroactive application of new rules to existing contracts. In the case at bar, the majority reaches its conclusion without acknowledging or grappling with that complexity.
Moreover, even assuming arguendo that none of the retroactivity principles or frameworks employed by the district courts in the Dodd-Frank cases is applicable in the situation presented here, the majority's approach is not free from doubt. The Chase Agreement presents an issue of contractual ambiguity as to the parties' intent with respect to the incorporation of new FINRA rules. When faced with ambiguity, courts ordinarily consider "[e]xtrinsic
If "impossibility of performance" or "frustration of purpose" ultimately manifests itself, then there is long-standing precedent to which courts in this Circuit can look to address the parties' interests. See United States v. Gen. Douglas MacArthur Senior Vill., Inc., 508 F.2d 377, 381 (2d Cir.1974). If it is determined that the parties are contractually bound to have collective claims arbitrated by a FINRA arbitral body and should that body refuse, courts — including this Court if necessary — can then decide how the dispute should be resolved.