DeVary v. National Securities Corporation

Background

James DeVary was a registered representative, or stockbroker, of National Securities Corporation and held the title of Senior or Executive Vice President at Forte Capital Group, Inc. He worked as a financial advisor selling investments and earning commissions. National was a registered securities broker-dealer; Forte was not. The firms were separate entities, but Forte was registered as a branch office of National.

National retained DeVary’s commissions and paid him a percentage of the revenue from his transactions. DeVary worked from Forte’s branch office and, according to the record, followed Forte’s policies, reported to Forte supervisors, received performance reviews from Forte, used Forte-selected products unless permitted otherwise, paid for certain Forte services, and needed Forte’s approval for various work activities.

National terminated DeVary’s services on March 2, 2021. DeVary later alleged that National and Forte failed to pay more than $300,000 in commissions earned between February 1 and March 2, 2021. The dispute went to a three-member Financial Industry Regulatory Authority arbitration panel.

Arbitration Award

After a five-day hearing, the panel ruled that National owed DeVary $227,656.40 in compensatory damages and interest at 10 percent per year from March 15, 2021, through payment in full or court confirmation of the award. The panel ruled that Forte owed DeVary $227,656.40 in statutory damages under section 198(1-a) of the New York Labor Law and $105,000 in attorney’s fees. National and Forte were jointly and severally liable for $400 in reimbursement of part of DeVary’s arbitration filing fee. The panel denied all claims for relief that it did not specifically address, including requests for punitive and treble damages.

Forte moved under sections 10 and 11 of the Federal Arbitration Act and New York Civil Practice Law and Rules section 7511 to vacate the portions of the award against it. DeVary cross-moved to confirm the award. The court concluded that it did not need to decide whether the New York statute applied because Forte’s motion failed under either standard. The court also limited its analysis to section 10 of the Federal Arbitration Act because Forte’s arguments relied on that provision and did not challenge the award as insufficiently reasoned under section 11.

Legal Standard

Courts review arbitration awards narrowly and deferentially. Under the Federal Arbitration Act, a court may vacate an award in circumstances including arbitrator partiality, fraud or corruption, serious misconduct, or an arbitrator’s exceeding the authority granted by the parties. An award is generally enforced if there is at least a barely colorable justification for the result.

Forte argued that the panel exceeded its authority by acting in manifest disregard of the law, issuing an irrational award, and violating public policy. “Manifest disregard” requires proof that the arbitrators knew a clearly established legal rule applied, understood that it controlled the issue, and deliberately refused to follow it. It requires more than a legal error or misunderstanding.

Court’s Analysis

Manifest disregard of the law. Forte argued that the New York Labor Law required the panel to find that Forte both underpaid DeVary and lacked a good-faith basis for doing so before awarding statutory damages and attorney’s fees. Forte emphasized that the panel ordered National, rather than Forte, to pay compensatory damages.

The court rejected this argument. Forte did not try to show that the arbitrators knew the asserted legal rule, understood that it controlled, and deliberately refused to apply it. The court also stated that Forte cited no authority establishing that an employer must be ordered to pay compensatory damages before it can be ordered to pay statutory damages and attorney’s fees. Any ordinary mistake in applying the law would not by itself justify vacating the award.

Irrationality. Forte argued that it was irrational to impose statutory damages on it when the panel did not impose compensatory damages on it and when National alone could legally pay commissions. The court rejected both theories. The award expressly described Forte as liable, and the absence of compensatory damages did not mean that the panel had cleared Forte of wrongdoing under the New York Labor Law.

The court explained that the New York Labor Law applies to an employer-employee relationship and that the relevant inquiry includes the degree of control exercised over the work and the means used to perform it. The record contained substantial evidence of Forte’s control over DeVary’s work. The panel evidently found that evidence sufficient to treat Forte as DeVary’s employer for purposes of the statute. The district court stated that its role was not to decide whether the arbitrators correctly resolved that issue, but whether they had authority to decide it. Forte did not establish a basis for finding the award irrational.

Public policy. Forte argued that enforcing the award would conflict with Financial Industry Regulatory Authority and Securities and Exchange Commission rules concerning payments by or through unregistered broker-dealers. The court rejected the argument because the panel did not require Forte to pay DeVary compensatory wages in violation of those rules and did not find that DeVary illegally performed securities transactions for Forte.

The panel instead found that Forte, as an employer for purposes of the New York Labor Law, owed statutory liquidated damages and attorney’s fees to DeVary. Forte did not clearly show that enforcing the award would violate a well-defined and dominant public policy.

Disposition

The court denied Forte’s motion to vacate the arbitration award. It granted DeVary’s cross-motion to confirm the award and directed the Clerk of Court to terminate ECF No. 26.