Securities Industry Arbitrations and Litigation Update: Second Circuit Affirms Southern District of New York’s Denial of Investment Banker’s Motion to Vacate FINRA Arbitration[...]

In Jefferies LLC v Gegenheimer, the Second Circuit reminded prospective FINRA arbitration litigants of the high burden in court to vacate an unsatisfactory arbitration award issued by a panel of arbitrators.

In this matter, the petitioner was a FINRA-member investment bank and respondent was an individually licensed investment banker. The dispute arose out of a negotiated employment contract between the parties. Under the contract at-issue, the respondent agreed to join the petitioner as an employee and become a Managing Director, specializing in mergers and acquisitions in the technology sector, with $1,070,834 in first year salary and bonus compensation.

The terms of the employment agreement were heavily negotiated by the parties and memorialized in a written agreement, which included a term that respondent would leave his current employer, a competitor investment bank, and join petitioner by August 17, 2016, with petitioner holding the position open for respondent for 90 days. Further, the agreement included a clause, running only in favor of petitioner, providing for $1 million in liquidated damages if respondent failed to commence his employment with petitioner by the August 17 hiring date.

Ultimately, however, respondent never joined petitioner and rescinded the employment agreement, instead renegotiating his compensation package with his current employer. Thereafter, petitioner commenced a FINRA arbitration, and eventually, the arbitration panel ruled in petitioner's favor, awarding $1,000,000 in liquidated damages for breach of the employment agreement and an additional $483,245.36 in attorneys' fees and costs.

On June 17, 2020, the Southern District of New York confirmed the FINRA arbitration award in favor of the petitioner and denied respondent's cross-motion to vacate the award on the basis of the arbitration panel's alleged 'manifiest disregard of the law.' See Jefferies LLC v. Gegenheimer, 19 CIV. 3147 (NRB), 2020 WL 3268536, at *1 (S,D,N,Y, June 17, 2020], affd, 20-2273, 2021 WL 2272832 (2d Cir June 3, 2021). On June 2, 20201, the Second Circuit affirmed.

In its holding, the Second Circuit explained that that Federal Arbitration Act (FAA) governs the confirmation and vacatur of FINRA arbitration awards. In addition to the grounds for vacatur explicitly provided for under the FAA, the Second Circuit held that a FINRA arbitral decision may be vacated when an arbitrator has exhibited a manifest disregard of the law. However, the Second Circuit explained that the doctrine is a last resort and is used only in limited instances where some egregious impropriety on the part of the arbitrators is apparent, such that the court finds that: (1) the arbitrators knew of a governing legal principle yet refused to apply it or ignored it altogether, and (2) the law ignored by the arbitrators was well defined, explicit, and clearly applicable to the case.

Before the federal courts, in moving to vacate the arbitration award, petitioner argued that New York's so-called 'exclusive remedy rule' barred the liquidated damages provision because a valid liquidated damages clause requires both parties to be bound to a fixed amount and the liquidated damages provision here provided the petitioner with the option to pursue actual damages. However, the Second Circuit noted that the caselaw relied upon by the petitioner was not settled and binding and was at odds other authority provided by the respondent. Accordingly, the Second Circuit concluded that the arbitration panel had a 'colorable justification' for finding the liquidated damages provision enforceable as negotiated and agreed upon by the parties, and the petitioner had failed to establish the arbitration panel's manifest disregard of the law.

Troutman Pepper frequently represents financial services institutions such as broker-dealers and their associated persons in FINRA arbitration disputes and regulatory matters involving customer/investor, employment, and intra-industry claims.