The opinion of the court was delivered by
Defendants appeal four orders dated December 20, 2010, enjoining them from pursuing their third-party arbitration claims for contribution and indemnification against plaintiffs Merrill Lynch, Pierce, Fenner & Smith, Inc. (Merrill Lynch) and Andrew Katchen, and denying defendants' cross-motions to compel plaintiffs to FINRA
Merrill Lynch is a securities broker-dealer registered with FINRA as a member firm, and Katchen is registered with FINRA as an associated person of Merrill Lynch. Defendants Cantone Research, Inc., PNC Investments, Inc. (PNCI) and J.J.B. Hilliard, W.L. Lyons, LLC (Hilliard Lyons) are securities broker-dealers also registered with FINRA as member firms. Individual defendants, Anthony J. and Christine L. Cantone, and Victor Polakoff, are registered with FINRA as associated persons of defendant Cantone Research, Inc. (collectively Cantone).
Between April and June 2009, four groups of investors filed four separate complaints in the Law Division and one federal court action against Maxwell Baldwin Smith as well as Merrill Lynch and defendants.
The four state court actions were consolidated and Merrill Lynch moved for dismissal pursuant to Rule 4:6-2(e). The investor-plaintiffs in those matters opposed the motion and cross-moved for an order compelling FINRA arbitration. The court granted Merrill Lynch's motion and denied the plaintiffs' cross-motion, holding
An appeal ensued, and we affirmed the decision of the motion judge. Frederick v. Smith, 416 N.J.Super. 594, 596, 7 A.3d 780 (App.Div.2010), certif. denied, 205 N.J. 317, 15 A.3d 325 (2011). In affirming the judge's decision, we determined the investors possessed no viable negligence claim against Merrill Lynch. Id. at 601, 7 A.3d 780. Additionally, we noted that
On July 22, 2010, Cantone filed third-party FINRA arbitration claims against plaintiffs, seeking contribution and indemnification in the event Cantone is found liable to the investors in arbitration actions (the Frederick and Tedeschi arbitrations)
On August 16 and September 29, 2010, plaintiffs filed two complaints
On August 26 and October 6, Judge W. Hunt Dumont entered orders to show cause requiring Cantone to demonstrate why they should not be enjoined from proceeding with their third-party claims against plaintiffs. Also on October 6, the judge entered an order allowing PNCI and Hilliard Lyons to intervene as defendants in the injunction action between plaintiffs and Cantone. PNCI and Hilliard Lyons subsequently cross-moved to compel plaintiffs to arbitrate their third-party claims via FINRA arbitration.
On October 8, 2010, the judge entered an order consolidating the complaints under the Cantone I docket number, and preliminarily enjoined all defendants from pursuing their third-party claims against plaintiffs in the Frederick and Tedeschi arbitrations, pending the disposition of the order to show cause.
At oral arguments on the order to show cause, plaintiffs framed two issues before the court: whether the Law Division has the authority to determine if defendants' third-party claims against plaintiffs in the Frederick and Tedeschi arbitrations are arbitrable; and whether plaintiffs are compelled to arbitrate those claims in the FINRA forum.
The judge then proceeded to review the FINRA regulations to determine, in the absence of an agreement, whether there is a basis for arbitration. First, the judge cited section 12200 of the FINRA Customer Code,
Next, the judge cited section 13200(a) of the Industry Code,
In support of his decision, the judge noted that under the Supreme Court's decision
On the issue of whether to issue the injunction, the judge determined that plaintiffs will suffer irreparable harm if forced to expend time and resources arbitrating an issue that is not arbitrable; plaintiffs "would likely succeed on the merits of their application, because arbitration is contractual by nature" and plaintiffs have not agreed to submit to arbitration; and no hardship would result to defendants if the injunction was granted because the claims for contribution and indemnification have "not even accrued and will not accrue at all unless and until at a minimum [] defendants are found to be liable to the investor[s] on their claims."
Following his oral decision, the judge entered orders that: preliminarily enjoined Cantone from proceeding with their third-party claims against plaintiffs in the Frederick and Tedeschi arbitrations; and denied Hilliard Lyons and PNCI's cross-motions to compel plaintiffs to FINRA arbitration.
Defendants appealed, and the appeals are consolidated before us. For ease of readership and unless otherwise noted, we refer to Cantone, Hilliard Lyons, and PNCI as defendants; we refer to Merrill Lynch and Katchen as plaintiffs.
On appeal, defendants argue the motion judge lacked authority to interpret FINRA's Customer Code and Industry Code, as any interpretation is not delegated to Law Division judges but instead to the arbitrators, who are better equipped to interpret FINRA's rules. Additionally, defendants contend the judge erred in failing to order their claims to FINRA arbitration because "there is a contract calling for the parties to arbitrate." In support of the assertion that a contract exists between plaintiffs and defendants, they argue the two threshold conditions triggering FINRA arbitration have been satisfied: (1) the claim must involve a dispute between either a FINRA-member and a customer, or an associated person and a customer; and (2) the dispute must arise in connection with the activities of the member or in connection with the business activities of the associated person.
With regard to the injunction barring them from seeking contribution and indemnification in the arbitration, defendants contend the judge erred in finding their claims derivative of the investors' because he "created a situation in which disputes of this type cannot be resolved either in arbitration or through the courts."
We address these arguments in turn.
As a preliminary matter, we note the applicable standard of our review on appeal. Because the matter at issue is
We firmly adhere to the principle that "arbitration is ... `favored ... as a means of resolving disputes[.]'" Angrisani v. Fin. Tech. Ventures, L.P., 402 N.J.Super. 138, 148, 952 A.2d 1140 (App. Div.2008) (quoting Martindale v. Sandvik, Inc., 173 N.J. 76, 84, 800 A.2d 872 (2002)). "The affirmative policy of this State, both legislative and judicial, favors arbitration as a mechanism to resolve disputes." Alfano v. BDO Seidman, LLP, 393 N.J.Super. 560, 575, 925 A.2d 22 (App.Div.2007). New Jersey jurisprudence and public policy favor alternative dispute resolution and are consistent with our view that "[l]itigation ought to be a last resort, not a first one." Billig v. Buckingham Towers Condo. Ass'n, 287 N.J.Super. 551, 564, 671 A.2d 623 (App.Div.1996). A strong public policy favors arbitration as a means of dispute resolution and "`[a]n agreement to arbitrate should be read liberally in favor of arbitration.'" Angrisani, supra, 402 N.J.Super. at 148, 952 A.2d 1140 (quoting Marchak v. Claridge Commons, Inc., 134 N.J. 275, 282, 633 A.2d 531 (1993)). See also Bruno v. Mark MaGrann Assocs., 388 N.J.Super. 539, 545, 909 A.2d 768 (App. Div.2006) (citing Young v. Prudential Ins. Co. of Am., 297 N.J.Super. 605, 617, 688 A.2d 1069 (App.Div.), certif. denied, 149 N.J. 408, 694 A.2d 193 (1997)). "[D]oubts concerning the scope of arbitrable issues must be resolved in favor of arbitration, over litigation." Alfano, supra, 393 N.J.Super. at 576, 925 A.2d 22. "An agreement relating to arbitration should thus be read liberally to find arbitrability if reasonably possible." Jansen v. Salomon Smith Barney, Inc., 342 N.J.Super. 254, 257, 776 A.2d 816 (App.Div.), certif. denied, 170 N.J. 205, 785 A.2d 434 (2001).
Notwithstanding the foregoing well-established principles, we also recognize that under both federal and state law, "`arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.'" AT & T Techs., supra, 475 U.S. at 648, 106 S.Ct. at 1418, 89 L.Ed.2d at 655 (quoting United Steelworkers of Am. v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582, 80 S.Ct. 1347, 1353, 4 L.Ed.2d 1409, 1417 (1960)). "[T]he duty to arbitrate ... [is] dependent solely on the parties' agreement." Cohen v. Allstate Ins. Co., 231 N.J.Super. 97, 101, 555 A.2d 21 (App.Div.), certif. denied, 117 N.J. 87, 563 A.2d 846 (1989). The determination as to whether such a duty exists "rests solely on the parties' intentions as set forth in the writing." Martindale, supra, 173 N.J. at 92, 800 A.2d 872. Therefore, "a `court may not rewrite a contract to broaden the scope of arbitration[.]'" Garfinkel v. Morristown Obstetrics & Gynecology Assocs., 168 N.J. 124, 132, 773 A.2d 665 (2001) (quoting Yale Materials Handling Corp. v. White Storage & Retrieval
The motion judge's responsibility to decide the issue of arbitrability depends on whether it is an issue of substantive arbitrability or procedural arbitrability. Bd. of Educ. of Alpha v. Alpha Educ. Ass'n, 190 N.J. 34, 42, 918 A.2d 579 (2006).
Substantive arbitrability refers to "whether the particular grievance is within the scope of the arbitration clause specifying what the parties have agreed to arbitrate." Std. Motor Freight, Inc. v. Local Union No. 560, Int'l Bhd. of Teamsters, 49 N.J. 83, 96, 228 A.2d 329 (1967). Issues of substantive arbitrability are generally decided by the court. Ibid. Procedural arbitrability refers to whether a party has met the procedural conditions for arbitration. Id. at 97, 228 A.2d 329. Matters of procedural arbitrability "should be left to the arbitrator." Ibid. (citing John Wiley & Sons, Inc. v. Livingston, 376 U.S. 543, 557, 84 S.Ct. 909, 918, 11 L.Ed.2d 898, 909 (1964)). Further, there is a presumption that the arbitrator should decide "`allegations of waiver, delay, or a like defense to arbitrability.'" Howsam, supra, 537 U.S. at 84, 123 S.Ct. at 592, 154 L.Ed.2d at 498. The Howsam Court has determined that "arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." The Court also determined that it is a judicial decision, not a question left to an arbitrator, "whether the parties have submitted a particular dispute to arbitration ... [u]nless the parties clearly and unmistakably provide otherwise." Ibid. (citations omitted).
As the proponent of arbitration, defendants have the burden to establish the existence of an agreement to arbitrate between themselves and Merrill Lynch. Here, it is undisputed that there was no specific written arbitration agreement between plaintiffs and defendants concerning the Frederick and Tedeschi arbitrations. Defendants argue, however, that an agreement to arbitrate arises out of Merrill Lynch's membership with FINRA and its predecessor organizations. Defendants refer us to Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Georgiadis, 903 F.2d 109, 113 (2d Cir.1990), which determined that "the arbitration rules of an exchange are sufficient to compel arbitration of exchange-related disputes in the absence of a specific written arbitration agreement." However, here plaintiffs and defendants were not engaged in exchange-related disputes with each other. On the contrary, we held in Frederick that plaintiffs owed no duty to the investors, who were non-customers. Supra, 416 N.J.Super. at 596, 7 A.3d 780.
We agree with Judge Dumont that the Law Division was the correct venue for plaintiffs to pursue a determination as to whether the parties agreed to arbitrate the claims in dispute. The absence of an express agreement to arbitrate these claims undercuts any argument that either party "clearly and unmistakably" provided otherwise. Howsam, supra, 537 U.S. at 83, 123 S.Ct. at 591, 154 L.Ed.2d at 497.
Because "a party can be forced to arbitrate only those issues it specifically has agreed to submit to arbitration," First Options, supra, 514 U.S. at 945, 115 S.Ct. at 1925, 131 L.Ed.2d at 994, and even though parties can be compelled to arbitrate claims arising from exchange-related disputes, Merrill Lynch, supra, 903 F.2d at 113, plaintiffs here cannot be compelled to arbitrate absent an agreement or a covered, exchange-related transaction with defendants. Defendants have failed to advance any support for their contention that
Plaintiffs correctly assert that the investors' third-party complaints are not covered, exchange-related transactions of either FINRA Code. Their position is supported by the Second Circuit's decision in John Hancock Life Insurance Co. v. Wilson, 254 F.3d 48, 57 (2d Cir.2001), which held that
We have already noted that there was no separate agreement among the parties that required plaintiffs to submit to the Frederick and Tedeschi arbitrations. Defendants fail to point to any section of the FINRA Code of Arbitration Procedures that expressly indicates that "any and all" disputes between member firms must be submitted to arbitration; particularly those initiated for contribution and indemnification from a member with whom the party seeking arbitration had no agreement to arbitrate. While PNCI cites to the FINRA By-Laws, it fails to cite a section that binds a member exclusively to arbitration for all disputes. We note if that were the By-Laws' directive, then separate sections in the Customer and Industry Codes outlining when members and/or customers may proceed to arbitration would not seem necessary.
The motion judge accurately determined that the basis for the contribution and indemnification claims was not a dispute between industry members, as it was derivative in nature and contingent on the initial dispute between defendants and the investors, defendants' customers. Therefore, the Industry Code, which compels arbitration between member firms, does not apply in these circumstances. Likewise, the Customer Code does not apply to plaintiffs because neither defendants nor the investors are customers, as defined by the Customer Code, of Merrill Lynch.
After reviewing the record, we agree with the motion judge that a plain reading of the Industry Code and case law concerning the courts' role in interpreting arbitration agreements reveals that FINRA members are required to submit to arbitration only if an agreement between them exists. Without such an agreement, and without an exchange-related dispute, which triggers the mandatory arbitration clause of Section 13200 of the Industry Code, the issue of arbitrability is for the motion judge to determine.
Our inquiry does not end here. Defendants contend that the court's ruling has set a precedent that will forever brand third-party claims for contribution and indemnification as derivative. However, this assertion is speculative, considering defendants have not attempted to file a complaint against plaintiffs in the Law Division.
Defendants further argue that the courts are not a proper venue to seek contribution or indemnification because FINRA's Code of Arbitration governs these types of disputes. Even though arbitration is clearly favored as a matter of policy, when no arbitration agreement exists or if there is a "disagreement about whether an arbitration clause in a concededly binding contract applies to a particular type of controversy[,]" the Supreme Court has reserved such issues for the courts. Howsam, supra, 537 U.S. at 84, 123 S.Ct. at 592, 154 L.Ed.2d at 497. Neither FINRA's Industry or Customer Codes cover the claims at issue, and the Supreme Court's list articulated in Howsam outlines what matters are strictly reserved to the arbitrators: prerequisites such as waiver, delay, time limits, notice, laches, estoppel, and other conditions precedent to an obligation to arbitrate. Id. at 85, 123 S.Ct. at 592, 154 L.Ed.2d at 498. None of these issues are the subject of the present action.
PNCI urges this court to consider the issue on appeal as one dealing with joinder under the Customer Code, which is procedural by nature and reserved to the arbitrators. Although PNCI cites no authority for such a proposition, plaintiffs correctly note that by allowing defendants to join plaintiffs as third-party defendants in the investor-initiated arbitrations, such a concession would strip the courts of its authority to determine gateway issues, such as whether the parties are bound by an arbitration clause or whether a binding contract applies to a particular controversy. Here, the issue before the court is indeed a gateway dispute, and one that the Law Division has the authority to decide.
Finally, we address the court's order granting plaintiffs an injunction. Injunctive relief will be imposed only when the proponent demonstrates that it has established the liability of the other party, the need for injunctive relief, "and the appropriateness of such relief on a balancing of equities." Rinaldo v. RLR Inv., LLC, 387 N.J.Super. 387, 397, 904 A.2d 725 (App.Div.2006).
Here, the judge determined the issue of arbitrability and found that plaintiffs would suffer hardship by being subject to defending arbitration actions not required by the FINRA codes. Further, defendants have not demonstrated that they face immediate and irreparable harm, as the arbitrations are ongoing and the record indicates that the Frederick arbitration has been stayed by FINRA. We see no reason to disturb Judge Dumont's grant of injunctive relief.
Accordingly, we affirm the orders entered in the Law Division enjoining defendants from pursuing their third-party claims against plaintiffs in arbitration, as well as denying their cross-motions to compel plaintiffs to arbitration.
Affirmed.