UBS Financial Services, Inc. v. Gary Padussis , 842 F.3d 336 ( 2016 )


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  •                               PUBLISHED
    UNITED STATES COURT OF APPEALS
    FOR THE FOURTH CIRCUIT
    No. 15-2148
    UBS FINANCIAL SERVICES, INC.,
    Petitioner - Appellant,
    v.
    GARY T. PADUSSIS,
    Respondent - Appellee.
    Appeal from the United States District Court for the District of
    Maryland, at Baltimore.     William D. Quarles, Jr., District
    Judge. (1:14-cv-03721-WDQ)
    Argued:   October 25, 2016             Decided:   November 22, 2016
    Before WILKINSON, KING, and HARRIS, Circuit Judges.
    Affirmed by published opinion.       Judge Wilkinson      wrote   the
    opinion, in which Judge King and Judge Harris joined.
    ARGUED: Francis X. Dee, MCELROY, DEUTSCH, MULVANEY & CARPENTER,
    LLP, Newark, New Jersey, for Appellant.         Edward Patrick
    McDermott, Sr., LAW OFFICE OF E. PATRICK MCDERMOTT LLC,
    Annapolis, Maryland, for Appellee.      ON BRIEF: Margaret L.
    Watson, MCELROY, DEUTSCH, MULVANEY & CARPENTER, LLP, New York,
    New York, for Appellant.
    WILKINSON, Circuit Judge:
    Appellant       UBS    Financial         Services         (“UBSFS”)         challenges        an
    arbitration      award      that,       in     practical           effect,           granted      Gary
    Padussis    over     $900,000      in    compensatory              damages.          The   district
    court    refused     to    disturb       the    award,         and    we    now        affirm     its
    judgment. Any other result would open arbitration proceedings to
    a host of challenges over the very type of subsidiary questions
    that Howsam v. Dean Witter Reynolds, Inc., 
    537 U.S. 79
     (2002),
    indicated should be left to the discretion of the arbitral body.
    I.
    Gary Padussis worked for UBSFS as a financial advisor from
    2009 through 2013. When he joined UBSFS, Padussis brought with
    him a team of three financial advisors as well as an established
    business clientele. As part of his initial compensation, UBSFS
    lent Padussis over $2.7 million. Padussis signed a promissory
    note,    which       provided          that     any          remaining          balance          would
    immediately      come      due    if    Padussis         ended       his    employment           with
    UBSFS.     Padussis        also     executed         a       Letter        of        Understanding
    describing     his      compensation           and       a    Financial          Advisor         Team
    Agreement     governing          the    operations            of     his    team.          All    the
    agreements    provided           that    any       dispute         would        be    subject      to
    arbitration before the Financial Industry Regulatory Authority
    (“FINRA”).
    2
    Padussis        resigned   from    UBSFS    in    2013,     complaining    that
    UBSFS had ruined his team of financial advisors and cost him
    valuable clients. Upon his resignation, Padussis owed UBSFS the
    remaining balance on the promissory note, nearly $1.6 million.
    When he failed to pay that amount, UBSFS initiated arbitration
    on June 3, 2013. Padussis responded with counterclaims on July
    31, 2013, alleging that UBSFS’s interference with his team was
    both tortious and a breach of contractual duties.
    Under the FINRA Code of Arbitration Procedure for Industry
    Disputes,      the     Director    of        FINRA     Dispute     Resolution     is
    responsible    for     the   process    of    selecting    the    panel   of   three
    arbitrators required here. First, the Director mails a list of
    potential arbitrators for each of the three panel positions to
    each party “within approximately 30 days after the last answer
    is due.” FINRA Rule 13403. Each “party may strike up to four of
    the arbitrators from each list” and rank the remaining ones.
    FINRA   Rule   13404.     The   parties       must    return   their   preferences
    within twenty days of the lists being sent, and the Director
    then combines the rankings sent by the parties to select the
    arbitration panel. FINRA Rule 13405.
    If a party fails to return its ranked lists within twenty
    days, the Director proceeds as if that party has no preferences.
    FINRA Rule 13404(d). The Code allows the Director to extend any
    deadline set by the Code for good cause. FINRA Rule 13207(c).
    3
    The    Code    also      gives    the     Director      discretion         to     “make    any
    decision that is consistent with the purposes of the Code to
    facilitate the appointment of arbitrators.” FINRA Rule 13412.
    The Director can delegate these duties. FINRA Rule 13100(k).
    In this case, FINRA mailed lists of potential arbitrators
    to the parties on August 21, 2013. UBSFS did not return its
    ranked    lists     by    the    deadline    of      September       10    because,       UBSFS
    claims, it never received them.
    On September 11, UBSFS received a letter, dated September
    3,    that    reminded     the    parties    of      the     impending         deadline    for
    returning      their      lists.     Realizing         that     it     had       missed    the
    deadline, UBSFS filed a motion to extend the time to submit its
    preferences. Padussis opposed this motion. He argued that UBSFS
    notified him in mid-August that it was transferring the case to
    new counsel but that the new counsel had not yet filed a notice
    of    appearance.        Padussis    claimed         that    this     transfer       led    to
    confusion      over      which   counsel     was      responsible          for    submitting
    UBSFS’s preferences.
    FINRA’s      Regional      Director       –    to     whom    the       Director     had
    apparently delegated responsibility – denied UBSFS’s motion for
    an extension. UBSFS appealed to the Director, who affirmed the
    denial.      The    Director      ruled     that      good    cause       to     extend    the
    deadline      did   not    exist    because       FINRA      had     timely      mailed    the
    4
    initial lists of arbitrators as well as a courtesy reminder, and
    had not received any mail returned as undeliverable.
    FINRA   proceeded         to    select    a   panel      of    three    arbitrators
    based on Padussis’s lists of preferences. At the first panel
    hearing, UBSFS challenged the composition of the panel based on
    UBSFS’s     lack     of     participation           in   the        selection       of   the
    arbitrators.       The    panel      reviewed    the     evidence,         denied    UBSFS’s
    challenge, and proceeded with the arbitration.
    On October 27, 2014, the panel issued its final decision.
    The   panel    awarded       UBSFS       $1,683,262         and      awarded        Padussis
    $932,887.     The    decision         denied     “[a]ny      and      all     relief     not
    specifically addressed.” J.A. 24. Pursuant to the FINRA Code,
    the decision did not explain the panel’s reasoning.
    UBSFS was altogether displeased with this outcome. Padussis
    insisted    that    due    to     a    statutory     lien      and    the    prospect     of
    bankruptcy, he would be financially unable to pay the balance of
    the note, which left UBSFS in the position of owing him over
    $900,000 for the damage he claimed it had done to his business.
    UBSFS then filed this action to vacate the arbitral award. It
    argued that the arbitrators were not selected in accordance with
    the   parties’      agreement         because    UBSFS      had      not    provided     its
    preferences to FINRA. In the alternative, UBSFS sought to have
    the   district       court      offset     the       awards,        citing     Padussis’s
    admission that he was unlikely to be able to pay his portion of
    5
    the judgment. The district court confirmed the arbitration award
    in its entirety and declined to impose an offset. UBSFS now
    appeals.
    II.
    The scope of judicial review of an arbitration award “is
    among the narrowest known at law.” Apex Plumbing Supply, Inc. v.
    U.S. Supply Co., Inc., 
    142 F.3d 188
    , 193 (4th Cir. 1998). Courts
    may vacate or modify an arbitration award only under the limited
    circumstances listed in the Federal Arbitration Act, 
    9 U.S.C. § 10-11
    , or under the common law if the award “fails to draw its
    essence from the contract” or “evidences a manifest disregard of
    the law.” Patten v. Signator Ins. Agency, Inc., 
    441 F.3d 230
    ,
    234 (4th Cir. 2006).
    This circumscribed scope of review means that “in reviewing
    such   an   award,   a   district   or       appellate   court   is   limited   to
    determine whether the arbitrators did the job they were told to
    do - not whether they did it well, or correctly, or reasonably,
    but simply whether they did it.” Three S Del., Inc. v. DataQuick
    Info. Sys., Inc., 
    492 F.3d 520
    , 527 (4th Cir. 2007) (internal
    quotation marks omitted). To ensure arbitrators did the job they
    were told to do and did not “exceed[] their powers,” 
    9 U.S.C. § 10
    (a)(4), courts will resolve certain threshold questions of
    arbitrability. For example, a court will decide whether parties
    agreed to arbitrate a particular dispute, AT&T Techs., Inc. v.
    6
    Commc'ns Workers of Am., 
    475 U.S. 643
    , 651 (1986), or whether
    arbitrators were appointed according to the parties’ agreement.
    Cargill   Rice     v.   Empresa      Nicaraguense     Dealimentos        Basicos,      
    25 F.3d 223
    , 225 (4th Cir. 1994).
    Beyond these basic questions of arbitrability, courts defer
    to the arbitral panel both on the merits of the final decision
    and on procedural questions that “grow out of the dispute,” even
    where those questions “bear on its final disposition.” Howsam,
    
    537 U.S. at 84
     (quoting John Wiley & Sons, Inc. v. Livingston,
    
    376 U.S. 543
    ,    557     (1964)).    We    need   not    repair     here    to    the
    standards    of     review    customarily      applied      to   fact    finding      and
    discretionary       procedural       rulings      because    that       would   simply
    constitute us, contrary to the Supreme Court’s admonitions, as a
    typical appellate court.
    The “widely recognized” policy “to encourage the use of
    arbitration”      requires     this     limited    scope    of   judicial       review.
    Remmey v. PaineWebber, Inc., 
    32 F.3d 143
    , 146 (4th Cir. 1994).
    Parties agree to arbitration to avoid the time and expense of
    litigation. But “to allow full scrutiny of such awards would
    frustrate    the     purpose    of    having    arbitration       at    all.”        Apex
    Plumbing, 
    142 F.3d at 193
    .
    Instead, the narrow standard of review acts as a bulwark
    against legal ingenuity. Lawyers can easily find one thing or
    another in almost any proceeding to which they wish to take
    7
    exception. There are benefits to such legal creativity in many
    contexts     but       not   in    the      one   before      us.   Allowing         procedural
    challenges       to    every      award      would    force    parties        into    court   to
    argue    their        dispute     a    second     time,      incurring    the        litigation
    costs      and    delays        they     intended       to    avoid      by     agreeing      to
    arbitration in the first place.
    In     other      words,        the    rules     that     limit     our        review   of
    arbitration awards are meant to avoid exactly what has happened
    here, which is a protracted set of judicial proceedings that
    have sacrificed the very advantages inhering in the arbitral
    forum.
    III.
    UBSFS seeks to vacate the arbitral award on two grounds. It
    first contends that the arbitrators were not selected according
    to the parties’ agreement. Section 5 of the Federal Arbitration
    Act provides that if the parties’ arbitration agreement includes
    a   method       for    appointing          arbitrators,      “such     method        shall   be
    followed.”        
    9 U.S.C. § 5
    .      This     court    will     generally        vacate
    “[a]rbitration awards made by arbitrators not appointed under
    the method provided in the parties’ contract.” Cargill Rice, 
    25 F.3d at 226
    .
    The parties here agreed to arbitrate according to the FINRA
    Code. UBSFS complains that because it never received the lists
    of arbitrators, the process of appointing arbitrators did not
    8
    follow the method in the Code. An examination of the record
    shows, to the contrary, that FINRA adhered to the Code.
    FINRA Rule 13403(b) requires that the Director create three
    lists of potential arbitrators for the panel. FINRA did this.
    Rule 13403(c)(1) requires that the Director mail these lists to
    the parties. FINRA did this. Rule 13404(d) requires that if the
    Director does not receive a party’s ranked lists within twenty
    days of sending the lists, “the Director will proceed as though
    the party did not want to” provide its preferences. FINRA did
    this too. Rules 13405 and 13406 describe how to appoint the
    arbitrators after receiving the lists, and FINRA followed these
    rules as well.
    Unable to find a specific rule FINRA violated, UBSFS argues
    that the Code as a whole “ensure[s] that each party ha[s] the
    opportunity      to   participate     in   the    selection   of    arbitrators.”
    Appellant’s Br. at 23. UBSFS points to the fact that a few rules
    describe   the     parties’   participation        in   selecting    arbitrators,
    but this is unsurprising in a Code that sets forth a process for
    the mutual selection of arbitrators. The Code simply does not
    require    the   participation        of   each   party    prior    to   the    valid
    appointment of an arbitration panel.
    In fact, Rule 13404(d) does the opposite. It requires the
    Director to appoint arbitrators without a party’s input if the
    Director    does      not   receive    that      party’s   preferences     by    the
    9
    deadline. Rule 13404(d) could require the Director to contact
    the party before proceeding, or it could allow the party an
    opportunity to rebut any presumption that it did not wish to
    participate in the selection of the arbitrators. Instead, it
    simply instructs the Director to act as if the party did not
    intend    to   submit      ranked     lists     and    to     proceed        with    the
    appointment of arbitrators. That is exactly what FINRA did here.
    This case, then, does not involve the question of whether
    FINRA failed to follow the rules for appointing an arbitrator.
    FINRA did. Instead, this is a question of whether FINRA properly
    applied those rules. UBSFS seems to believe that the Director
    erred in not finding good cause to extend the deadline for UBSFS
    to   submit    its      preferences     under       Rule     13207     and    in     not
    “exercis[ing] discretionary authority” to ensure that UBSFS had
    a say in the composition of the arbitration panel under Rule
    13412.    These   questions,    though,       are   procedural        questions      and
    “are for arbitral, rather than judicial, resolution.” Dockser v.
    Schwartzberg, 
    433 F.3d 421
    , 425 (4th Cir. 2006).
    While courts decide some questions of arbitrability, the
    Supreme   Court   has     directed    that     “‘procedural        questions        which
    grow out of the dispute and bear on its final disposition’ are
    presumptively     not    for   the    judge,    but    for    an     arbitrator,      to
    decide.” Howsam, 
    537 U.S. at 84
     (quoting John Wiley, 
    376 U.S. at 557
    ). Thus, whether arbitration rules time-bar a claim is for
    10
    the arbitral body to decide. Howsam, 
    537 U.S. at 85
    . Likewise,
    the arbitral body decides whether arbitration rules require a
    panel of one or three arbitrators. Dockser, 
    433 F.3d at 425
    .
    Here, whether good cause existed to extend the deadline was
    for FINRA to decide. UBSFS argues that it did not receive the
    lists of arbitrators. Padussis responds that the mailing was
    never    returned     to      FINRA    as    undeliverable         and       that    the   whole
    problem was due to UBSFS’s negligence – that UBSFS should have
    expected the lists shortly after Padussis filed his Answer and
    Counterclaim       but     that   the    matter       fell    between         the    cracks    at
    UBSFS due to the transfer of the case to different counsel. This
    back    and   forth      is    rather        beside    the    point.         As     with   other
    procedural questions, the parties would have expected FINRA to
    decide    this      issue     because        the    rules    “provide         specific       non-
    judicial procedures for its resolution.” 
    Id. at 426
    . FINRA rules
    expressly give the Director the power to “exercise discretionary
    authority     and    make      any    decision      that     is   consistent          with    the
    purposes      of     the      Code      to     facilitate         the        appointment       of
    arbitrators.” FINRA Rule 13412. UBSFS cannot complain that the
    Director – rather than the appointed arbitrators – resolved the
    issue because the parties expressly granted this authority to
    the Director. Dockser, 
    433 F.3d at 428
    .
    Moreover, this claim concerns “the written rules governing
    the    parties’      arbitration        proceeding,”         
    Id. at 427
    ,    and     the
    11
    arbitral body is “comparatively more expert” in applying those
    rules than courts. Howsam, 
    537 U.S. at 85
    . This is especially
    true here, where the Director can better determine whether an
    extension of a deadline will help reach a more just outcome or
    simply deprive the parties of a timely resolution.
    We will not second-guess FINRA’s decision that there was
    not good cause to extend the deadline. The parties agreed to
    arbitrate their disputes according to rules that clearly gave
    the Director the authority to make that decision. To usurp the
    Director’s    authority      would   be    to    open    courts     to   legions    of
    questions    about   whether    arbitral        bodies    properly       applied   one
    rule or another. This would deprive parties of the very benefits
    they sought by agreeing to arbitration – relatively prompt and
    inexpensive dispute resolution. 1
    IV.
    UBSFS    next   asks    this    court      to   impose    an   offset   on    the
    arbitration    award.   As    discussed        above,    the   arbitration     panel
    here found that (1) Padussis owed UBSFS $1.68 million on the
    promissory note (which Padussis contends he would be unable to
    pay) and that (2) UBSFS was liable to Padussis for $932,000
    1 UBSFS also contends that we should vacate the award on the
    common law ground that the award “fails to draw its essence from
    the contract.” Patten, 
    441 F.3d at 234
    . UBSFS relies on its
    argument that FINRA disregarded the agreed-upon method of
    selecting arbitrators. As discussed above, FINRA followed those
    rules. We thus find UBSFS’s common law claim meritless.
    12
    based on his various employment claims. Offsetting the damages
    granted to Padussis from the $1.68 million would result in a net
    award    to    UBSFS     of    about    $750,000,      entirely       cancelling     out
    Padussis’s award and freeing UBSFS of the need to cut a check.
    This     court    has    previously       recognized         that    “an    offset      of
    arbitration awards might constitute a modification of the award
    in     some    circumstances.”         Nat'l    Risk    Underwriters,         Inc.      v.
    Occidental Fire & Cas. Co. of N.C., 
    931 F.2d 1015
    , 1017 (4th
    Cir. 1991). While such circumstances did not exist in that case,
    they    do    exist    here.   This    arbitration      award       expressly      denied
    “[a]ny and all relief not specifically addressed” by the award,
    and the award did not mention an offset. J.A. 24. Thus, applying
    an offset to this award would be a modification of the award.
    Under the Federal Arbitration Act, a court can modify an
    award only under specific, narrow circumstances. Relevant here,
    a court may modify an award “[w]here the award is imperfect in
    matter of form not affecting the merits of the controversy.” 
    9 U.S.C. § 11
    .   Any     order   to     modify   an   award        must   “effect   the
    intent thereof and promote justice between the parties.” 
    Id.
    Assuming       arguendo    that    imposing      an    offset       would   be    a
    “matter of form not affecting the merits of the controversy,” an
    offset here would not effectuate the intent of the arbitrators,
    and we thus decline to impose one. The award itself is silent on
    the question of an offset, and there is no evidence in the
    13
    record that would enable us to say that the arbitrators intended
    for the award to include one.
    UBSFS     contends       that      an    offset        “would     not    change          the
    arbitrators’ valuation decision” but would provide a “simple,
    fair”     result,     which      must        have     been     the     intent          of     the
    arbitrators. Appellant’s Reply Br. at 25-26. An offset, though,
    changes    the   practical        effect       of     the     award.     In       a     similar
    situation, a FINRA arbitration panel heard arguments for and
    against an offset and declined to provide one. UBS Fin. Servs.,
    Inc. v. Mann, No. 14-10621, 
    2014 WL 1746249
    , at *3 (E.D. Mich.
    Apr. 30, 2014). We cannot know what the arbitration panel in
    this case would have ruled if UBSFS had asked it to provide an
    offset. That decision, though, was for the arbitration panel,
    and UBSFS should have asked the panel to make it. For whatever
    reason, it did not do so, and the question is simply not one for
    the courts to answer.
    UBSFS    also     argues     that        regardless       of    the      arbitrators’
    actual intent, we should recognize a presumption favoring an
    offset.    However,    imposing         such      a   presumption       would          place    a
    judicial     gloss    on   the    arbitration          award.        Such     a       gloss    is
    inappropriate here, where the award expressly limits itself to
    the relief specifically addressed and was rendered pursuant to a
    detailed set of rules. As the Seventh Circuit has noted, the
    “arbitrator’s failure to mention offsets in his ruling means
    14
    that no offset was granted.” Int’l Union of Operating Eng’rs,
    Local No. 841 v. Murphy Co., 
    82 F.3d 185
    , 190 (7th Cir. 1996). 2
    V.
    When   all    is    said   and   done,   UBSFS     plainly   agreed     to   a
    process   and     then   declined     to   abide   by   the   result    of   that
    process. It agreed to arbitration; the dispute was within the
    scope of that agreement; and the rules by which the arbitration
    would proceed were openly declared and followed. The arbitration
    here spanned eighteen hearing sessions over nine separate days.
    We can find no basis for overturning the arbitral decision. The
    district court’s denial of UBSFS’s motion to vacate the award is
    therefore
    AFFIRMED.
    2 In fact, FINRA has since amended its rules to provide for
    a presumption of an offset, but that amendment is effective only
    for arbitration awards rendered after October 24, 2016. Press
    Release, FINRA, Regulatory Notice 16-36: SEC Approves Amendments
    to the Codes of Arbitration Procedure Regarding Award Offsets
    (Sept. 2016); see also Order Approving a Proposed Rule Change to
    Permit Award Offsets in Arbitration, Exchange Act Release No.
    78557, 
    81 Fed. Reg. 54,901
     (Aug. 11, 2016). For us to rewrite
    that amendment to make it effective for an arbitration award
    rendered in October 2014 would be to displace FINRA’s authority
    over its own arbitral proceedings. We must therefore observe the
    rules in place at the time of the arbitration.
    15