FINRA litigants and arbitrators alike should take note of a federal court’s decision rejecting an unexplained FINRA award when it was unable to discern its basis, notwithstanding that FINRA rules did not require an “explained” decision, and later vacating the explained award once it demonstrated the panel’s manifest disregard of the law. This decision has potentially far-reaching tactical and practical implications, and suggests that arbitrators must be prepared to support their awards whether or not the parties request an explained decision.
Under FINRA dispute resolution rules, arbitrators are not required to issue an explanation of their decision unless requested by both parties. Code of Arbitration Procedure Rules 12904(g) (Customer Code), 13904(g) (Industry Code). Therefore, these “unexplained” awards are customarily devoid of any fact-based explanation, and even explained decisions need not contain legal analysis or damages calculations. Id.
This can present a problem when federal courts are called upon to either confirm or vacate arbitration awards, as was the case in Interactive Brokers LLC v. Saroop, 279 F.Supp.3d 699 (E.D. Va. 2017). There, customers initiated arbitration alleging an array of claims against their online brokerage firm. An arbitration panel entered a substantial monetary award in favor of the customers. However, because the parties had not requested an explained decision under FINRA rules, the panel included little-to-no factual application, legal authorities, or damages analysis. The brokerage moved to vacate and the customers cross-moved to confirm the award. Although recognizing the “extreme deference” due to arbitrators, the federal court was unable to discern the basis for the panel’s damages award and remanded to the panel for an explanation, noting bluntly that “[j]udges…are not wallflowers or potted plants.” Id. at *708.
Following an unsuccessful appeal to the Fourth Circuit, the panel issued a second award, adding some further text that the federal court found “not very helpful.” Interactive Brokers LLC v. Saroop, Case No. 3:17-cv-127, E.D. Va. (Dec. 18, 2018), Dkt. 95 at 12. The additional explanation, however, showed that the panel based both its damages award and its dismissal of the brokerage’s counterclaims on the brokerage’s alleged violation of FINRA Rule 4210. However, because a violation of FINRA rules does not provide a private right of action, the court vacated the award for manifest disregard of the law, and ordered that the brokerage’s reinstated counterclaims be heard by a new panel of arbitrators. Id. at 19.
There are at least three important takeaways from Interactive Brokers.
First, whether litigants request an explained decision is usually a tactical choice. Litigants who are concerned about the likelihood that arbitrators will appropriately apply the facts to the law sometimes request explained decisions to force arbitrators into making more reasoned decisions and to provide a basis to seek vacatur of adverse decisions. Interactive Brokers shows, however, that an unexplained decision may also lead to vacatur.
Second, for their part, arbitrators may wish to exercise their discretionary authority to issue explained decisions even where the parties do not request them. See Rules 12904(f); 13904(f). This is especially true where the issues and damages calculations are particularly complex. Issuing explained decisions will not only minimize the uncertainty around post-arbitration proceedings but will enhance the credibility of arbitrator decision-making.
Third, whether or not an explained decision is requested or issued as a matter of arbitrator discretion, an unexplained decision may conflict with the requirement that federal courts have an appropriate record on which to base their post-arbitration decisions. In Interactive Brokers, that conflict resulted in significant delay, extra expense, a new hearing, and a drastic shift in the outcome of the matter—none of which serve the purposes of arbitration, in FINRA or otherwise.
[View source.]
