New York Law Review

Credit Suisse First Boston Corp. v. Pitofsky, 4 N.Y.3d 149 (2005): Superseding Arbitration Agreements with Registered Representatives

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Credit Suisse First Boston Corp. v. Pitofsky, 4 N.Y.3d 149 (2005)

An arbitration agreement between a broker-dealer and a registered representative can supersede a prior arbitration agreement between the registered representative and a stock exchange, but only if the subsequent agreement clearly applies to the specific dispute.

Summary

The New York Court of Appeals addressed whether a privately negotiated employment agreement’s arbitration clause between a broker-dealer (CSFB) and its registered representatives (Pitofsky and Santoro) superseded the arbitration provisions of an earlier agreement (Form U-4) between the employees and the New York Stock Exchange (NYSE). The court held that such an agreement could supersede the earlier one. However, in this specific case, the employment agreement contained a carve-out provision that preserved the NYSE arbitration requirement. Therefore, the dispute was required to be arbitrated before the NYSE.

Facts

CSFB hired Pitofsky and Santoro as real estate salespersons. As a condition of employment, they executed Form U-4s, which contained a standard arbitration clause requiring them to arbitrate disputes with their firm as required by the rules of self-regulatory organizations (SROs) like the NYSE. Later, CSFB adopted an Employment Dispute Resolution Program (EDRP), incorporated into Pitofsky and Santoro’s employment agreements, with a three-stage grievance process culminating in binding arbitration before JAMS/Endispute, the American Arbitration Association or the Center for Public Resources Institute for Dispute Resolution. The EDRP had a carve-out provision stating that if a registered representative was subject to a “legal requirement” to arbitrate under particular rules or in a particular forum (e.g., a stock exchange), that requirement would prevail.

Procedural History

After CSFB terminated Pitofsky and Santoro, they sought arbitration before the NYSE based on their Forms U-4. CSFB sought a stay of the NYSE arbitration, arguing the EDRP superseded the Form U-4 and the carve-out was inapplicable. Supreme Court granted CSFB’s application. The Appellate Division reversed, holding that the employment agreements could not supersede the previously executed Form U-4 agreements. The Court of Appeals granted leave to appeal.

Issue(s)

1. Can an arbitration clause in a privately negotiated employment agreement between a broker-dealer and its registered representative supersede the arbitration provisions of an earlier Form U-4 agreement between the employees and the NYSE?

2. Under the specific terms of the EDRP at issue, did the parties supersede the pre-existing Form U-4 agreement as it applies to this dispute?

Holding

1. Yes, because established principles of contract law permit modification of an earlier agreement by a later one, supported by valuable consideration (continued employment).

2. No, because the EDRP contained a carve-out provision that preserved the registered representatives’ obligation to arbitrate before the NYSE where a “legal requirement” to do so existed.

Court’s Reasoning

The Court of Appeals held that an arbitration agreement between a broker-dealer and a registered representative could supersede a prior agreement with an SRO. The court reasoned that the EDRP effectively modified the Form U-4 arbitration requirements. The court emphasized that “arbitration is a creature of contract, and it has long been the policy of this State to ‘interfere as little as possible with the freedom of consenting parties’ in structuring their arbitration relationship.”

However, the court found that the EDRP carve-out applied in this case. The Form U-4 requires registered representatives to arbitrate disputes as required by the rules of the SROs. NYSE Rule 347(a) states that controversies arising out of employment termination “shall be settled by arbitration, at the instance of any such party…” The court disagreed with federal district court cases that interpreted the phrase “at the instance of any such party” as negating a binding obligation. The Court of Appeals stated: “That the parties could, in theory, agree to modify their obligation to arbitrate before the NYSE pursuant to rule 347 does not make the rule any less of a ‘legal requirement.’ Because arbitration agreements are inherently contractual, the parties may agree to modify them.” The court also noted CSFB’s prior communication indicating that the carve-out applied to claims brought by registered representatives.

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