Gomez v. Brill Securities, Inc.

OPINION OF THE COURT

Román, J.

When parties expressly agree to arbitrate their disputes we enforce their agreement and compel arbitration. However, the issue of whether to compel arbitration turns on the language of the agreement between the parties. Therefore, when an agreement to arbitrate expressly precludes arbitration under certain circumstances, and one of those enumerated circumstances exists, a party cannot be compelled to arbitrate. In this case, where the arbitration agreement expressly precludes arbitration if the otherwise arbitrable claims are brought via a plenary class action, we cannot compel arbitration since the agreement proscribes it. This class action seeks declaratory relief and monetary damages for violation of 12 NYCRR 142-2.2 and Labor Law § 191 (1) (c), and §§ 193 and 198-b. Plaintiffs allege that they, along with all members of the putative class, were brokers employed by defendant Brill Securities, Inc.,1 a full-service broker-dealer offering a comprehensive range of financial and wealth management services for retail investors. While so employed, plaintiffs allege that despite working in excess of 40 hours per week, they were not paid the requisite overtime wages, in violation of 12 NYCRR 142-2.2; that defendants made impermissible wage deductions from their earned wages/commissions, in violation of Labor Law § 193; that defendants made illegal wage deductions from their wages/commissions, in violation of Labor Law § 198-b; and that defendants failed to pay them their wages/commissions as agreed, in violation of Labor Law § 191.

Plaintiffs are registered representatives in the securities industry. Each plaintiff was required to, and did, execute a Uniform Application for Securities Industry Registration or Transfer (Form U-4). Pursuant to section 15A (5) of Form U-4, plaintiffs “agree[d] 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 [the Financial Industry Regulatory Authority (FINRA)]” (emphasis omitted). FINRA Manual rule 13204 (d) prohibits arbitration of class action claims and prohibits enforcement of “any arbitration agreement against a member of a . . . putative class action with respect to any claim that is the subject of the . . . class action” until certain conditions, inapplicable here, are met.

Before the initiation of this action, two of the plaintiffs brought an action against the same defendants in the United States District Court for the Southern District of New York, asserting, via a class action, the state law claims alleged here, as well as a federal claim for overtime pay under the Fair Labor Standards Act (29 USC § 201), brought via a collective action (29 USC § 216 [b]; see Gomez v Brill Sec., Inc., 2010 WL 4455827, 2010 US Dist LEXIS 118162 [SD NY 2010]). Asserting that plaintiffs’ claims could not be brought via a plenary action, defendants moved to dismiss the federal action, or, alternatively, to stay the state claims and compel arbitration of plaintiffs’ claims pursuant to the Fair Labor Standards Act (FLSA). Implicitly finding that the state class action claims were not arbitrable, the court stayed those claims and compelled arbitration of plaintiffs’ claims pursuant to the FLSA. In compelling arbitration of the claims pursuant to the FLSA, the court found that while the agreement between the parties precluded arbitration of arbitrable claims brought by class action, “[t]here are significant differences between an opt-out class action and an opt-in FLSA collective action” (2010 WL 4455827, *2, 2010 US Dist LEXIS 118162, *3-4). After the court issued its decision, plaintiffs voluntarily dismissed the federal action.

Plaintiffs then commenced this action. Shortly thereafter, defendants moved to dismiss this action on grounds that it was barred by the doctrine of res judicata (CPLR 3211 [a] [5]) and that it was barred by documentary evidence (CPLR 3211 [a] [1]), i.e., the agreement. Alternatively, defendants sought an order pursuant to CPLR 7503 (a) compelling arbitration. Plaintiffs opposed defendants’ motion and after oral argument the motion court denied defendants’ motion in its entirety. The instant appeal then ensued.

Contrary to defendants’ assertion, since the order issued by the District Court did not make any determination on the merits as to the state law claims, it has no res judicata effect on this action. The doctrine of res judicata serves to preclude a party from relitigating issues of fact and law decided in a prior proceeding. Specifically “as to the parties in a litigation and those in privity with them, a judgment on the merits by a court of competent jurisdiction is conclusive of the issues of fact and questions of law necessarily decided therein in any subsequent action” (Gramatan Home Invs. Corp. v Lopez, 46 NY2d 481, 485 [1979]). By precluding the relitigation of redundant claims, res judicata promotes judicial economy and conserves judicial resources (id.). Since res judicata precludes relitigation of issues actually litigated and resolved in a prior proceeding, the party seeking to invoke the doctrine of res judicata must demonstrate that the critical issue in a subsequent action was decided in the prior action and that the party against whom estoppel is sought was afforded a full and fair opportunity to contest such issue (Matter of New York Site Dev. Corp. v New York State Dept. of Envtl. Conservation, 217 AD2d 699, 700 [1995]). Here, the District Court, which stayed plaintiffs’ state law claims, held by implication that plaintiffs’ state law claims — the very claims they now assert — could not be arbitrated. Thus, far from precluding this action, the District Court’s order bolsters plaintiffs’ contention that arbitration of these claims is barred by the agreement between the parties and further belies defendants’ res judicata claim. Moreover, the District Court’s order cannot have a preclusive effect in this action insofar as the issue decided there — that plaintiffs must arbitrate their claims pursuant to the FLSA because under federal law those claims could not be brought by class action and were therefore not exempt from arbitration by the agreement — has no applicability here since nothing bars plaintiffs from bringing their state claims, pursuant to 12 NYCRR 142-2.2, by class action. To that end, we are not persuaded by defendants’ assertion that insofar as 12 NYCRR 142-2.2 incorporates sections of the FLSA by reference, the District Court’s order compelling arbitration of plaintiffs’ prior FLSA claim bars, on grounds of res judicata, plaintiffs’ instant claim pursuant to 12 NYCRR 142-2.2. Notably, 12 NYCRR 142-2.2 only incorporates two sections of the FLSA, namely, 29 USC §§ 207 and 213, and critically unlike the FLSA, 12 NYCRR 142-2.2, does not, as noted above, preclude a class action suit. Thus, there, is no substantial similarity between the prior FLSA claim ánd the current claim pursuant to 12 NYCRR 142-2.2 so as to invoke the doctrine of res judicata.

Insofar as, here, the agreement to arbitrate, by its very terms, clearly precludes arbitration when arbitrable claims are brought as a class action, plaintiffs cannot be required to arbitrate their class action claims. While

“[i]t has long been this State’s policy that, where parties enter into an agreement and, in one of its provision's, promise that any dispute arising out of or in connection with it shall be settled by arbitration, any controversy which arises between them and is within the compass of the provision must go to arbitration” (Matter of Exercycle Corp. [Maratta], 9 NY2d 329, 334 [1961]), whether arbitration is mandated, however, turns entirely on the language of the agreement between the parties (Matter of Waldron [Goddess], 61 NY2d 181, 183 [1984] [“It is settled that a party will not be compelled to arbitrate and, thereby, to surrender the right to resort to the courts, absent evidence which affirmatively establishes that the parties expressly agreed to arbitrate their disputes” (internal quotation marks omitted)]; Matter of Acting Supt. of Schools of Liverpool Cent. School Dist. [United Liverpool Faculty Assn.], 42 NY2d 509, 512 [1977]; Gulf Underwriters Ins. Co. v Verizon Communications, Inc., 32 AD3d 709, 710 [2006]; Harris v Shearson Hayden Stone, 82 AD2d 87, 95 [1981], affd 56 NY2d 627 [1982]).

Accordingly, since an agreement to arbitrate is a contract, and when clear, shall “be enforced according to its terms” (Vermont Teddy Bear Co. v 538 Madison Realty Co., 1 NY3d 470, 475 [2004] [internal quotation marks omitted]; First Options of Chicago, Inc. v Kaplan, 514 US 938, 943 [1995] [“arbitration is simply a matter of contract between the parties”]), while parties who clearly and expressly agree to arbitrate shall be so compelled, parties who unequivocally agree to forgo arbitration under certain circumstances cannot be compelled to arbitrate when those enumerated circumstances exist.

Here, the agreement between the parties makes it exceedingly clear that arbitration shall be governed by the rules promulgated by FINRA. FINRA Manual rule 13204 (d) prohibits arbitration of class action claims and specifically, prohibits enforcement of “any arbitration agreement against a member of a . . . putative class action with respect to any claim that is the subject of the . . . class action” until certain conditions, inapplicable here, are met. Accordingly, based on the parties’ own agreement, which incorporates by reference FINRA Manual rule 13204 (d), arbitration of this class action suit is barred (Velez v Perrin Holden & Davenport Capital Corp., 769 F Supp 2d 445, 446-447 [SD NY 2011] [plaintiff’s state law claims, brought as a class action, alleging that defendants failed to pay him overtime, commissions, and timely wages not arbitrable insofar as the agreement to arbitrate stated that arbitration would be governed by FINRA rules and FINRA Manual rule 13204 (d) precludes arbitration of claims brought by class action]; see Olde Discount Corp. v Hubbard, 4 F Supp 2d 1268, 1271 [D Kan 1998], affd 172 F3d 879 [10th Cir 1999]).

Contrary to defendants’ contention, neither our holding in Harris nor the holdings by the United States Supreme Court in Preston v Ferrer (552 US 346 [2008]) end AT&T Mobility LLC v Concepcion (563 US —, 131 S Ct 1740 [2011]) warrant reversal of the motion court’s decision and compulsion to arbitrate. In Harris, a case decided before the establishment of FINRA2 and the rules it promulgated, and where the agreement to arbitrate did not contain an exemption from arbitration for claims brought by class action, we held that the parties to that action were bound by a clear agreement to arbitrate disputes and that a class action suit alleging causes of action subject to arbitration would not preclude arbitration (Harris at 95). Here, in adherence to Harris, in staying arbitration we simply enforce the express agreement between the parties, which, by incorporating by reference FINRA Manual rule 13204 (d), precludes arbitration when arbitrable claims are brought by class action (Nielsen v Piper, Jaffray & Hopwood, Inc., 66 F3d 145, 148-149 [1995], cert denied 516 US 1116 [1996] [arbitration stayed where agreement to arbitrate was governed by rules in chosen arbitration forum, one of which, NASD rule 12 (d), precluded arbitration when arbitrable claims were brought by class action]). Preston is also inapposite since in that case, the United States Supreme Court, reiterating that the law requires that parties be bound by their express arbitration agreements, held that “[w]hen parties agree to arbitrate all questions arising under a contract, the FAA [Federal Arbitration Act] supersedes state laws lodging primary jurisdiction in another forum, whether judicial or administrative” (Preston at 359). Here, arbitration is not being stayed by virtue of any state law, but because of an exclusion to arbitration in the agreement itself. AT&T Mobility LLC is similarly inapposite since in that case the Court, reiterating that an agreement to arbitrate must be enforced as written, simply held that such an agreement, freely entered into, cannot be vitiated by a state law deeming unconscionable the preclusion of a right antithetical to the goals of arbitration as envisioned by the FAA (AT&T Mobility LLC, 563 US at —, 131 S Ct at 1749-1750 [California law which held that contracts which precluded class action suits were unconscionable could not preclude arbitration of claims even though the agreement itself violated California law by mandating arbitration and precluding class action suits]).

Respectfully, the dissent reaches its conclusion the only way it can, by prematurely determining, absent a motion for such relief, that this suit and the claims asserted do not merit class action certification and then by failing to recognize that this case raises an issue never previously addressed by New York law.

First, where the defendants shortly after being served with the summons and complaint, in lieu of serving an answer, moved to dismiss it, plaintiffs have not yet moved for class action certification pursuant to CPLR 9023 and it is thus wholly improper, and in fact impermissible, for us to offer any opinion with respect to whether class certification will ultimately be or ought to be granted. Accordingly, whether class certification will be denied should not play any role in the determination of this appeal. Moreover, whether the claims here qualify for class certification is an argument notably absent from any of the briefs submitted on appeal and we should therefore refrain from proffering any opinion on this issue (Misicki v Caradonna, 12 NY3d 511, 519 [2009] [“We are not in the business of blindsiding litigants, who expect us to decide their appeals on rationales advanced by the parties, not arguments their adversaries never made”]).

Second, like the dissent, we acknowledge this State’s strong preference for compelling arbitration when parties expressly agree to arbitrate. Where we part ways, however, is in the dissent’s failure to recognize that this is a case of first impression, such that cases like Harris and State of New York v Philip Morris Inc. (308 AD2d 57 [2003], lv denied 1 NY3d 502 [2003]), which indeed compelled arbitration despite the existence of plenary class action suits, cannot control the outcome. Simply restated, in these cases there existed no agreement precluding arbitration if claims were brought via class action. Here, by contrast, we have an agreement precluding arbitration if otherwise arbitrable claims are brought via class action. As such, until such time as class certification is denied, we cannot compel arbitration (Velez at 446-447; Olde Discount Corp. at 1271).

Accordingly, the order of the Supreme Court, New York County (Barbara R. Kapnick, J.), entered June 13, 2011, which denied defendants’ motion to dismiss the complaint or, in the alternative, to compel arbitration and stay the action pending arbitration, should be affirmed, with costs.

1 The other defendants are Robert Brown, chief executive officer and owner of Brill Securities, Inc. (Brill), Nicholas Brown, chief financial officer and owner of Brill, Jonathan Kurtin, president and owner of Brill, and David Nutkis, vice-president and chief operating officer of Brill.

2 FINRA succeeded the National Association of Securities Dealers, Inc. (NASD) in 2007 and while NASD Manual rule 10301 (d) previously and *38similarly proscribed arbitration of any claims brought by class action, that rule did not take effect until 1992, approximately 10 years after our decision in Harris.

3 CPLR 902 states that

“[w]ithin sixty days after the time to serve a responsive pleading has expired for all persons named as defendants in an action brought as a class action, the plaintiff shall move for an order to determine whether [the class action] is to be so maintained . . .

The action may be maintained as a class action only if the court finds that the prerequisites under section 901 have been satisfied.”