Second Circuit affirms denial of motion to compel FINRA arbitration on grounds of waiver

Last week, the Second Circuit Court of Appeals affirmed the denial of FINRA arbitration to a customer of a broker-dealer on the grounds of waiver. In Louisiana Stadium Exposition District v. Merrill Lynch, 10-889-CV (Nov. 22, 2010), the Court affirmed a district court’s order denying a motion to compel arbitration on the grounds that the movant, the Louisiana Stadium Exposition District (LSED), the owner of the Superdome in New Orleans, had waived its right to arbitrate its dispute against Merrill Lynch arising out of Merrill’s services as underwriter and broker-dealer to LSED in connection with the refinancing of LSED debt. LSED had first filed an action in federal district court in Louisiana against several Merrill entities, and also an identical action in Louisiana state court, alleging Merrill gave it poor financial advice in connection with its offering of auction-rate securities. LSED spent most of 2009 amending its Complaint in response to a letter from Merrill identifying deficiencies in its initial pleading, and trying to determine whether the individuals who gave the challenged advice were all employees of Merrill’s broker-dealer entity, and thus subject to FINRA arbitration. At the end of December 2009, once LSED determined that the individuals were in fact all employees of the broker-dealer, it filed a motion in the federal action to compel arbitration. The district court denied the motion, concluding that LSED had waived any right it had to arbitrate the dispute. The court pointed to the significant resources the Merrill defendants had already expended in defending against LSED’s complaint in federal court, including the filing of numerous motions and authoring the letter to LSED identifying deficiencies in the Complaint. In addition to procedural prejudice, the district court concluded that Merrill was substantively prejudiced by LSED’s actions that were inconsistent with its contractual right to arbitration.

The Second Circuit’s holding reflects a trending judicial reluctance to order parties to arbitration who assert their claims in court and then, only if the litigation isn’t going well, attempt to invoke their pre-dispute arbitration agreements. While courts generally trumpet a liberal national policy favoring arbitration, that policy yields when courts perceive that disputants are manipulating the machinery of the judicial system.

3 thoughts on “Second Circuit affirms denial of motion to compel FINRA arbitration on grounds of waiver”

  1. I’d say that the decision came out the right way. If you want to use an arbitration clause to keep out of court then you really shouldn’t be filing there in the first place.

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