Under New Jersey law, an arbitration agreement is unenforceable if it does not clearly state that the signatory is waiving the right to pursue his or her legal remedies in court.
Barr vs. Bishop Rosen & Co., Inc., No. A-2502-14T2 (N.J. App. Div., 10/26/15).
A Costly Defense
Broker Stephen Barr worked at Bishop Rosen from 1997 to June 2014. During the course of his employment, Mr. Barr executed two Form U4s (memoranda containing disclosures under FINRA Rule 3080) and two amendments to the Form U4s. Between November 2009 and April 2014, Mr. Barr and Bishop Rosen defended claims by a customer of Mr. Barr’s in a FINRA Arbitration (ID #09-06659). It ended successfully for the Respondents, but Mr. Barr incurred $214,549.65 in legal defense costs, which Bishop Rosen either deducted from his salary and commissions or Mr. Barr paid directly. In this action for labor law violations, breach of contract, unjust enrichment, quantum meruit, and alleged breach of a duty to indemnify him, Mr. Barr sought to recover these payments and more.
New Jersey Waiver Principles
Bishop Rosen lost on a motion to compel arbitration and appealed that denial “as of right.” Reciting principles of general law, the Court observes that all contracts require mutual assent. For mutual assent to exist, the parties to an agreement must understand its terms. Where waiver of a jury trial or right to pursue a case in a judicial forum is concerned, the law in New Jersey requires “clarity.” Waiver must be “clearly and unmistakably established.” As a consequence of these general principles, the Court explains, an arbitration provision in a contract must convey that parties are forfeiting their right to pursue a judicial remedy. That could be something as simple, the Court offers, as indicating that “instead of suing in court,” the parties agree to settle any disputes by arbitration.
Applied to the Arbitration Agreement
The Form U4s signed by Plaintiff-Respondent do not contain such disclosures; nor do they explain what arbitration is, even generally. Bishop Rosen cites the Rule 2263 memorandum that it presented to Mr. Barr in 2000, which does explain that arbitration “includes a waiver of a judicial remedy.” The Court responds that Rule 2263 requires the presentation of this disclosure to a registered representative at the time it seeks an initial or amended Form U4 agreement. “Interestingly,” the Court remarks, NASD/FINRA even “warned Bishop Rosen” that it could face an adverse decision, if disclosure were deemed inadequate “in later litigation…. These words proved prophetic…,” the Court forecasts, as it rules “that the 2000 memorandum did not fairly or adequately reform the language contained in the 1997 agreement or inform the language contained in the 2009 agreement….” The decision below is affirmed.
(ed: *The Court clearly realizes it is on infirm ground, refusing to enforce an agreement to arbitrate that is sanctified in a federal document. It certainly risks 1934 Act preemption, so it relies upon a failure to properly execute Rule 2263 to deem the disclosures made inadequate. The real preemption question comes, though, with whether or not requiring a contemporaneous disclosure when forming an agreement to arbitrate offends the Federal Arbitration Act (which only requires a writing, not even a signature). The Court is careful to extract this requirement from sacred commandments in prior NJ case law, but few situations prompt the required disclosure besides an agreement to arbitrate. **A number of factors counsel against a brokerage firm’s reliance upon the Form U4 agreement, in lieu of a bilateral agreement with the broker to arbitrate. One reason is cited by Jed L. Marcus, Bressler Amery & Ross PC (NJ), in an insightful article on this decision: statutory employment claims may not be arbitrated at FINRA in reliance upon the Form U4. Also, firms should be considering arbitration at non-SRO forums, because FINRA is effectively the only SRO forum. Other reasons: the language was drafted by a committee and poorly done; the Form serves a regulatory purpose unrelated to arbitration (making arbitration of secondary concern); and one cannot lawfully engage in certain business activities in this nation without signing a Form U4 (so, it is truly mandatory).)
(SLC Ref. No. 2015-40-02)
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