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Do Statutes of Limitation Apply to FINRA Arbitrations?

As attorneys who represent customers of brokerage firms, we often receive calls from potential clients who appear to have a substantive case of merit. And then we ask them when the investment was made and that often raises the question: Do statutes of limitation apply to arbitrations as they apply in courts?

On the first day of every Civil Procedure law school class across the country, aspiring lawyers are taught to ask one fundamental question of any potential case: Has the statute of limitations run? A simple yes or no answer is the difference between turning down the case or moving forward with further inquiry. However, when dealing with FINRA arbitrations, the answer to this straight-forward, threshold question becomes much murkier. FINRA Rule 12206 provides little to no guidance on the matter. Aside from setting the well-known six year arbitration eligibility limit for filing a claim - a time period far greater than typical statutes of limitation regarding securities or contracts - Rule 12206 confuses many people by stating, "This rule does not extend applicable statutes of limitations."[1] Essentially, FINRA has left the issue up to the arbitrators and the courts to decide, which is the where things get interesting.

Statute of limitations questions typically arise during two stages of a FINRA arbitration: (1) after a Claimant has presented his/her case-in-chief and the Respondent(s) presents the arbitrators with a motion to dismiss or (2) after the conclusion of the arbitration, the courts are presented with a motion to vacate the Award on the grounds that the arbitrators exceeded their authority[2] or acted in manifest disregard of the law.[3]

Courts have long held that arbitration is a forum of equity and arbitrators are not bound by the rules of evidence and their Awards have no precedential value. Thus, the question confronting arbitrators and the courts is whether to apply a statute of limitations to such an equitable forum. A majority of courts around the country appear to draw no distinction between litigation and arbitration, ruling that such statutes should be applied to arbitration. That said, arbitrators are given a great deal of discretion by the courts and unless the reasons for granting an Award are specifically stated in the Award by the arbitrators, the courts only require that there be any legal argument to support the Award in order to deny a request to vacate. This is a critical point in FINRA arbitrations since arbitrators do not have to set forth their reasons for granting an Award unless both parties request an Explained Decision[4] and from our experience, very few Explained Awards are issued.

The Majority View

Most courts view arbitrations as no different from litigation and have applied the statute of limitations. What follows is a partial list of courts that have applied such statutes to arbitration.

Fourth Circuit - Frieda Miller v. Prudential Bache Securities, Inc.[5] - NASD arbitrators applied Maryland's statute of limitations after applying New York's borrowing statute and the Fourth Circuit affirmed the Award.

Sixth Circuit - Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Jaros[6] - NASD arbitrators did not act in manifest disregard of the law when they ruled that the Claimant's federal securities claims and Ohio common law claims were not barred by applicable statute of limitations.

Federal District Court in Pennsylvania - Hasbro, Inc. v. Alan Amron[7] - The arbitrators' failure to apply the correct statute of limitations to a fraudulent conveyance claim constituted a manifest disregard of the law.

Federal District Court in Ohio - Terry Berkley v. Merrill Lynch[8]- Brokerage firm argued that the state's statute of limitations was applicable and that the investor's claims were time barred. The court agreed and held that the Award should not be vacated. But see (below) an earlier Ohio Federal Court decision in NCR Corporation v. CBS Liquor Control, Inc., which followed the minority view.

Ninth Circuit - Robert J. Knight v. Merrill Lynch, Pierce, Fenner & Smith[9] - FINRA arbitrators did not exceed their authority when they applied the state's statute of limitations.

Florida - Raymond James Financial Services, Inc. v. Barbara J. Phillips[10] - Arbitration Claimants were subject to Florida's statute of limitations because an arbitration is an "action" as broadly defined in §95.011, Fla. Stat. (2005), to encompass any "civil action or proceeding," including arbitration proceedings.

The Minority View

Whereas the court in Raymond James v. Philips, above, held that arbitrations are defined as an "action" under Florida law, the minority of courts that hold statutes of limitation to be inapplicable, typically support such a finding with state statutes that more narrowly define the term "action." Such statutes limit "actions" to lawsuits or civil proceedings, since statutes of limitation often refer to "actions" when imposing time limits. These decisions distinguish "actions" from "arbitrations." Such courts include, but are not limited to:

Washington - Broom v. Morgan Stanley DW Inc.[11] - Statutes of limitation in Washington do not bar claims in arbitration because arbitrations are not considered "actions" with respect to statutes of limitation.

Arizona - Morgan v. Carillon Investments, Inc.[12] - Statutes of limitation do not apply in arbitration unless the contract requiring arbitration makes a specific reference to statutes of limitation or the rules of arbitration refer to the application of statutes of limitations.

Ohio Federal District Court - NCR Corporation v. CBS Liquor Control, Inc.[13] - Refusing to apply statute of limitation was not in manifest disregard of the law. "In Son Shipping Co. v. DeFosse & Tanghe,[14] relied upon by the Arbitrator, the Second Circuit specifically held a statute of limitations on an underlying claim did not apply when the claim was to be arbitrated." This decision predates a different Ohio Federal District Court's decision in Terry Berkley v. Merrill Lynch, which followed by majority view.

Massachusetts - Edward Carpenter v. Michael H. Pomerantz[15] - Agreement to arbitrate was not subject to six-year contractual statute of limitations and a seven year delay in asserting arbitration rights did not otherwise bar employee's right to arbitration. "As used in statutes of limitation, the word 'action' has been consistently construed to pertain to court proceedings."

Conclusion

The lists and analyses provided above are not complete. They are intended to provide insight into a hotly debated area of securities arbitration. It is well established that courts are reticent to hold that an arbitrator exceeded his or her authority and have set a nearly insurmountable standard for vacating Awards. Therefore, arbitrators are usually free to rule however they please with little to no fear of judicial repercussions. For this reason, it has been my experience that if arbitrators believe a wrong has taken place, are sympathetic to the Claimant and believe an Award in favor of the Claimant will right the wrong, they will not feel bound by the statute of limitations.


[1]http://finra.complinet.com/en/display/display.html?rbid=2403&record_id=13769&element_id=4112&highlight=12206#r13769

[2] For court decisions based on assertions that arbitrators exceeded their power or authority, see David E. Robbins, Securities Arbitration Procedure Manual § 13-21 Statutory Grounds for Vacating an Award. (Matthew Bender 2014).

[3] For court decisions dealing with claims of arbitrators manifesting disregarding the law, see David E. Robbins, Securities Arbitration Procedure Manual § 13-22 Judicially Created Grounds for Vacating an Award. (Matthew Bender 2014).

[4] See FINRA Rule 12904(g) Explained Decisions

http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=4192

[5] 884 F.2d 128 (4th Cir. 1989).

[6] 70 F.3d 418, 1995 Fed. App. 0329 (6th Cir. 1995).

[7] 419 F.Supp.2d 678 (E.D. Pa. 2006).

[8] 2008 WL 755875 (D.C. S.D. Ohio 2008).

[9] 350 Fed. Appx. 119 (9th Cir. 2009).

[10] 126 So. 3d 186; 2013 Fla. LEXIS 2493 (Fla. Supreme Court, Decided May 2013, Revised Nov. 2013).

[11] 169 Wash.2d 231, 236 P.3d 182 (Sup. Ct. Wash. 2010).

[12] Case No. CV02-012785, 2005 WL 5533924 (Ariz. Super. Ct. Sept. 13, 2005).

[13] 874 F.Supp. 168 (S.D. Ohio, Western Division 1993).

[14] 199 F.2d 687 (2d Cir, 1952).

[15] 634 N.E.2d 587, 36 Mass.App.Ct. 627 (1994).

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