Securities Industry’s Arbitration Agreements Still Enforceable in California, Court of Appeal Says

Tuesday, May 27, 2003

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Securities Industry’s Arbitration Agreements Still Enforceable in California, Court of Appeal Says

By KENNETH OFGANG, Staff Writer/Appellate Courts

Recent changes in California arbitration law do not necessarily render standard arbitration agreements used in the nationwide securities industry unenforceable, the Court of Appeal for this district ruled Friday.

“The arbitration agreements are not so ‘permeated’ with unconscionable provisions that [they] cannot be saved,” Presiding Justice Paul A. Turner wrote for Div. Five.

The court reinstated an order requiring Michael J. McManus, a former executive of the investment bank and securities brokerage CIBC, to arbitrate his claims of wrongful termination, failure to pay wages, and defamation—among others—under the rules of the National Association of Securities Dealers or the New York Stock Exchange.

McManus filed a complaint against CIBC in the Los Angeles Superior Court, alleging that the company used an off-duty bar brawl as a pretext to terminate him and avoid having to pay his salary and bonuses. The fight, he explained, came when he and a CIBC financial analyst visited a bar after a beach party for employees and the other man falsely accused McManus of harassing the man’s wife.

CIBC moved to compel arbitration pursuant to two agreements, one incorporated into the letter in which the company offered McManus his job, and the other part of the “U-4” uniform registration form that all employees of NASD- and NYSE-affiliated firms must complete.

Los Angeles Superior Court Judge Morris Jones originally granted the motion to compel, but vacated it after the Court of Appeal issued an order to show. The judge then entered an order denying the motion to compel, and CIBC appealed.

While the agreements are subject to the federal arbitration law, Turner explained, state law determines whether the agreements are so unconscionable as to be unenforceable.

Turner acknowledged that the agreements were procedurally unconscionable; McManus had no choice but to sign them or forego employment in the industry, he said. But to be unenforceable as a matter of law, the presiding justice explained, they also had to be substantively unconscionable.

Several features of the agreements that McManus complained of, including the authority of the NASD or NYSE to select arbitrators and the fact that non-lawyers may serve as arbitrators, do not render the agreement unreasonable, Turner insisted

Under the rules, Turner explained, the governing body will select arbitrators, but only with input from the parties. Potential arbitrators, he noted, must disclose possible conflicts of interest and their employment histories, and each party gets one peremptory challenge and unlimited challenges for cause.

Arbitrators will also have to comply with the ethical standards established by the state Legislature and the Judicial Council, Turner said.

There is no requirement that arbitrators have legal backgrounds, the presiding justice went on to say. “Judicial suspicions about the competency of arbitral tribunals may not inhibit enforcement of the arbitration provisions subject to the limited preemptive effect of the United States Arbitration Act,” Turner wrote.

Turner agreed with McManus that one feature of the agreement, which would require the claimant to pay, in advance, $500 plus $1,200 for each session of the anticipated hearing is substantively unconscionable. But that provision can be severed from the rest of the agreement, the presiding justice said.

Attorneys on appeal were Michael G. McGuinness and Adam J. Karr of O’Melveny & Myers for CIBC and Craig A. Horowitz and Wayne D. Clayton of Horowitz & Clayton for McManus.