Desperately Seeking FINRA Arbitration On Remand From Federal Court

April 15, 2021

Another day and another dispute about whether an employment dispute is arbitrable before FINRA. In today's iteration, we got two former employees of a non-FINRA-member-firm but they are also employees of a FINRA member firm -- and both firms are subsidiaries of the same parent. After the employees resign to join Wells Fargo Advisors, only the non-FINRA employer sues them in federal court. In trying to get their case before a FINRA Arbitration Panel, the former employees argue that as FINRA registered representatives, their disputes are subject to the arbitration provisions of the Form U4 and FINRA Rule 13200, and if the Court ain't buyin' that, the employees further argue that the FINRA member firm is an indispensable party and must be joined, which would then give them another avenue to argue for FINRA arbitration.

In the Beginning

In September 2016, Carl Adkins joined asset management firm Fort Washington Investment Advisors, Inc. (a wholly-owned subsidiary of Western & Southern Financial Group) as a Vice President Wealth Adviser and brought with him Katherine Owens as an Associate Client Advisor. Fort Washington Investment Advisors, Inc., Plaintiff, v. Carl Adkins, et al., Defendants (Opinion and Order, United States District Court for the Southern District of Ohio, 19-CV-00685 / April 12, 2021)

During Adkins and Owens' onboarding, they executed an "Agreement to Protect Confidential Information," which referenced Western & Southern but not Fort Washington, and does not contain an arbitration provision. Separately, Adkins executed an "Amended and Restated Non-Solicitation Agreement," which also does not contain an arbitration provision and which references the parties as:

Carl Adkins and "Fort Washington Investment Advisors, Inc. ('Employer' . . . and collectively with Western & Southern Financial Group, Inc. (the 'Parent Company') . . .and any entity that is wholly or partially owned by the Employer or the Parent Company. . .)." (Id. at #32). Both Adkins and two Fort Washington representatives signed the Non-Solicitation Agreement. (Id. at #36). 

at Page 2 of the SDOH Opinion

Adkins and Owens Register with Touchstone Securities

In 2018, Adkins and Owens became registered persons with Touchstone Securities, Inc., which is both a FINRA member firm and a subsidiary of Western & Southern. Pointedly, Fort Washington is not a FINRA member firm. 

Adkins and Owens Join Wells Fargo

On August 2, 2019, Adkins and Owens resigned from Fort Washington and became registered with Wells Fargo Clearing Services, LLC d/b/a Wells Fargo Advisors. The SDOH Opinion offers this background as to the transition:

[B]ut the transition was far from smooth. Almost immediately, Fort Washington claims that several of Adkins' and Owens' clients began to transfer their accounts from Fort Washington to Wells Fargo. (See Compl., Doc. 1, ¶ 21, #5). After a little digging, Fort Washington says it discovered that Owens accessed, edited, printed, and deleted client information in Fort Washington's computer system shortly before her departure. (Id. at ¶¶ 24-35, #6-8). That information, Fort Washington says, correlates with the clients who subsequently followed Adkins and Owens to Wells Fargo Advisors. (Id. at ¶¶ 36-56, #8-10).

at Page 5 of the SDOH Opinion

Fort Washington Files Complaint

On or about August 20, 2019, Fort Washington filed a Complaint in SDOH alleging a violation of the Defend Trade Secrets Act, 18 U.S.C. §§ 1836(B), 1839 et seq., a claim for trade secret misappropriation (Count One); a violation of the Ohio Trade Secrets Act, Rev. Code § 133.61 et seq. (Count Two); a violation of the Computer Fraud and Abuse Act, 18 U.S.C. § 1030 et seq. (Count Three); breach of contract (Count Four); breach of fiduciary duty (Count Six); and tortious interference with business relations (Count Seven). The Complaint sought a Declaratory Judgment as to the parties' obligations under the employment agreements, and also sought permanent and preliminary injunctions -- a Motion for a Temporary Restraining Order was filed the same day as the Complaint. On September 5, 2019, a TRO was granted that prevented Adkins and Owens from contacting or soliciting Fort Washington's current clients, but did not prohibit Adkins and Owens from contacting Fort Washington's former clients or prohibit Fort Washington clients (current or former) from contacting Adkins or Owens.

Adkins and Owens Move for Arbitration

Adkins and Owens filed a motion to remove the matter to arbitration or, in the alternative, to join Touchstone and, thereafter, to compel arbitration:

Defendants first argue that Fort Washington should arbitrate this dispute -- whether Touchstone is added as a party or not -- because the arbitration agreements in FINRA's Form U4 and FINRA Rule 13200 allegedly apply to Fort Washington. (Defs.' Mot. at #156). As discussed above, Form U4 contains a broad arbitration clause where Owens and Adkins agreed to arbitrate according to FINRA rules. The most relevant rule, as Defendants point out, is FINRA Rule 13200, which requires arbitration of disputes between an Associated Person, like Adkins and Owens, and a Member, like Touchstone and Wells Fargo. Defendants acknowledge that Fort Washington is not a FINRA Member-firm, and thus, is not party to the Form U4 agreement. (Defs.' Mot. at #154). Nonetheless, Defendants argue that Form U4 requires Fort Washington to arbitrate this dispute because (1) Fort Washington derived a "direct benefit" from the Defendants executing the agreement and is therefore equitably estopped from avoiding the arbitration clause, (Defs.' Mot. at #153), or because (2) Fort Washington is a third-party beneficiary to the agreement (Defs.' Reply, Doc. 22, #584). 

In the alternative, Defendants argue that the Court should add Touchstone as a necessary party under Fed. R. Civ. P. 19, and then compel arbitration. Defendants argue that Touchstone is a necessary party for two reasons. First, Defendants point to their Confidentiality Agreements and the Non-Solicitation Agreement (i.e., the agreements allegedly breached here). (Defs.' Mot. at #151). Defendants note that, both agreements identify Western and Southern, not Fort Washington, as the "Company" that is the counterparty on the contracts. Defendants further explain that the term Company is defined to include all subsidiaries, and that Touchstone is a subsidiary of Western and Southern. Touchstone is thus technically a party to both agreements, Defendants say, and failing to join it to this litigation may impair and impede its interests. (Id.). Secondly, Defendants argue that Touchstone is a necessary party because, as Defendants' former employer, it might separately sue in the future (i.e., independent of the outcome here), which could subject Defendants to conflicting obligations under the agreements. (Id. at #151-52). Once Touchstone is joined, Defendants continue, the FINRA rules necessitate arbitration because there would be FINRA Associated Persons and Members adverse to each other in this action. 

at Pages 6 - 7 of the SDOH Opinion

Fort Washington argued that it is not a FINRA member firm and is not regulated by FINRA. Accordingly, Fort Washington asserted that it was not required to arbitrate the instant dispute; and, further, that because Touchstone is not a party (and not an indispensable party) to the employment agreements, FRCP 19 does not apply. As such, the appeal before SDOH is whether the Court should compel Fort Washington to arbitrate its claims against Defendants. In the forefront of SDOH's analysis is whether there is an enforceable arbitration agreement:

[T]here are four agreements that are potentially relevant to this suit. The first is Adkins's Non-Solicitation Agreement, which does not contain an arbitration agreement. (Doc. 1-6). Next are the two Confidentiality Agreements Owens and Adkins both signed. Again, neither of these agreements contain an arbitration agreement. (Docs. 1-4, 1-7). Finally, there are the FINRA Form U4s, which Adkins and Owens signed to update their FINRA registrations. The Form U4s do contain an arbitration agreement. That arbitration agreement requires Associated Persons, like Owens and Adkins, to "arbitrate any dispute, claim or controversy that may arise between [them] and [their] firm, or a customer, or any other person, that is required to be arbitrated under the rules, constitutions, or by-laws of [FINRA]." Form U4 at Section 15A, ¶ 5; (Defs.' Mot. at #144).

at Page 9 of the SDOH Opinion

No FINRA Finesse

SDOH quickly dismissed the boot-strap by which Defendants proposed to avail themselves of arbitration via what the Court found as a nebulous relationship with FINRA: 

[N]otably, however, Fort Washington is not FINRA-regulated, nor is it a Member, and Defendants admit as much. (See Defs.' Mot. at #154 ("Defendants concede that the named Plaintiff in this action, Fort Washington is not a FINRA-member firm.")). As Fort Washington has no formal relationship with FINRA, it has never expressly consented to FINRA's various arbitration clauses. Accordingly, neither the Form U4 nor FINRA Rule 13200, standing alone, provide grounds for the Court to compel Fort Washington to arbitrate this dispute. 

at Page 10 of the SDOH Opinion

Third-Party Beneficiary/ Equitable Estoppel

Defendants assert that they are placed in the role of a third-party beneficiary or should benefit from the doctrine of equitable estoppel:

[S]pecifically, Adkins and Owens first argue that Fort Washington has derived a direct benefit from the Form U4, and as such, "principles of . . . equitable estoppel" compel Fort Washington to arbitrate. (Defs. Mot. at #153). Secondly, Adkins and Owens say that Fort Washington is an intended third-party beneficiary of the Form U4, and thus, is bound to the Form's arbitration agreement. (Defs.' Reply, Doc. 22, #584).

at Page 12 of the SDOH Opinion

SDOH declined to impose equitable estoppel because it would only seem to arise if Fort Washington was somehow bound to arbitrate because of the Form U4 whereby Adkins and Owens were licensed with FINRA. The Court finds such an alleged benefit dubious, at worst, and far too indirect, at best. to justify estoppel. As to the third-party-beneficiary argument, SDOH notes that whatever claims are asserted in Fort Washington's Complaint arise from the Confidentiality and Non-Solicitation Agreements and, pointedly, not the Form U4s. That fact undercuts any third-party-beneficiary status in the Court's view. 

Out of Touch(stone)

As to Defendants theory that Touchstone is an indispensable party, which triggers FRCP 19 and such a joinder would compel arbitration, SDOH does not view Touchstone as a necessary party. In rebuffing the FRCP 19 argument, in workmanlike fashion, the Court finds that it is able to award complete relief to Fort Washington from Adkins and Owens absent Touchstone's involvement. Further, the Court notes that Touchstone's and Fort Washington's interests are practically identical, and that:

[E]very single Touchstone client Owens and Adkins managed was also a Fort Washington client. In fact, Owens and Adkins's only dealings with Touchstone involved three Fort Washington clients who wanted to purchase certain FINRA securities, which in turn, required Adkins and Owens to complete those purchases through Touchstone. And although this lawsuit does not concern those three clients, both Touchstone and Fort Washington would have an equal interest, and incentive, to sue Adkins and Owens for soliciting those clients. Id. (instructing courts to consider whether the present party is "capable of and willing to make" the arguments of the absent party). 

Accordingly, Fort Washington will undoubtedly make all of the arguments that Touchstone would make if the Court joined it to the litigation. In all, Defendants have advanced no evidence that Touchstone would "offer any necessary element to the proceedings" that Fort Washington would neglect. . . .

at Page 28 of the SDOH Opinion

Finally, SDOH disagrees with Defendants' argument that in the absence of  joining Touchstone that they will be subjected to the risk of multiple and inconsistent obligations:

Here, Owens and Adkins contend that if not joined, Touchstone "could initiate an arbitration against Defendants," either under the employment agreements or for a violation of the FINRA rules.9 (Defs.' Mot., Doc. 14, #151-52). The fact that Touchstone has "a right to file suit in another forum," Defendants argue, exposes them to the risk of inconsistent obligations. (Id.). But even if Touchstone could also sue to enforce the employment agreements, that does not mean that those potential suits present a risk of inconsistent obligations. As discussed above, Fort Washington's claims concern exclusively Fort Washington clients. If Touchstone were to sue in the future, it presumably would have to sue concerning its own clients, or at least, the clients it shared with Fort Washington. None of those clients are at issue in this case. In other words, although both this suit and Touchstone's potential suit stems from the same agreement, they raise different issues involving different clients, and the Court's determination on one front will not affect the Defendants' liability on the other front.

at Pages 28 - 29 of the SDOH Opinion

Accordingly, SDOH denied Defendants' motions to:
  • join a necessary party, 
  • compel arbitration, and
  • stay the proceedings.