New York Law Review

Tag: NYSE Rules

  • Salvano v. Merrill Lynch, Pierce, Fenner & Smith, 85 N.Y.2d 173 (1995): Enforceability of Arbitration Agreements and Expedited Arbitration

    Salvano v. Merrill Lynch, Pierce, Fenner & Smith, 85 N.Y.2d 173 (1995)

    In the absence of an explicit contractual provision, a court cannot compel parties to expedited arbitration; the Federal Arbitration Act (FAA) mandates enforcement of private arbitration agreements according to their terms.

    Summary

    Former Merrill Lynch account executives sought expedited arbitration to lift injunctions preventing them from soliciting former clients. The New York Supreme Court ordered expedited arbitration. The New York Court of Appeals reversed, holding that neither state nor federal law authorized the court to compel expedited arbitration because the parties’ arbitration agreement (NYSE rules) did not provide for it. The FAA’s primary purpose is to enforce private agreements to arbitrate according to their terms. The court emphasized that arbitration is a matter of consent, and courts should not impose additional terms or rewrite contracts.

    Facts

    Three account executives (Salvano, Coon, and Tate) resigned from Merrill Lynch to work for a competitor, Prudential Bache. Merrill Lynch initiated actions in federal courts in Illinois and Kentucky to enjoin them from soliciting former clients and using confidential records. The Illinois and Kentucky courts issued temporary injunctions. The employees then sought expedited arbitration through the New York Stock Exchange (NYSE).

    Procedural History

    The employees moved in New York Supreme Court to compel expedited arbitration. The Supreme Court granted the motion. The Appellate Division affirmed. The New York Court of Appeals granted Merrill Lynch leave to appeal.

    Issue(s)

    Whether a court has the authority to order parties to proceed to expedited arbitration when the parties’ arbitration agreement does not explicitly authorize expedited arbitration.

    Holding

    No, because neither state nor federal law grants such authority in the absence of an explicit agreement for expedited arbitration; the FAA requires enforcing arbitration agreements according to their terms.

    Court’s Reasoning

    The court held that the FAA governs disputes concerning employment in the securities industry. The FAA’s primary policy is to ensure the enforceability of private agreements to arbitrate, according to their terms. The Constitution and Rules of the New York Stock Exchange, which governed the arbitration, did not provide for expedited arbitration. CPLR 7506(b) authorizes the court to direct the arbitrator, not the parties, to proceed promptly. CPLR 7503(a) allows the court to compel arbitration if one party fails to arbitrate, which wasn’t the case here. CPLR 7502(c) only allows for attachment or preliminary injunctions. “Arbitration under the [FAA] is a matter of consent, not coercion, and parties are generally free to structure their arbitration agreements as they see fit. Just as they may limit by contract the issues which they will arbitrate [citation omitted] so too may they specify by contract the rules under which that arbitration will be conducted” (see, Volt Information Sciences v Leland Stanford Jr. Univ., 489 US 468, 479, supra). The court rejected the argument that NYSE Rule 621, giving arbitrators power to interpret provisions, implicitly allows them to compel expedited arbitration. The award was vacated because an erroneous court order compelled expedited proceedings, violating Merrill Lynch’s contract rights.

  • Crawford v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 35 N.Y.2d 290 (1974): Enforceability of Arbitration Agreements

    Crawford v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 35 N.Y.2d 290 (1974)

    An agreement to arbitrate, even if unsigned, is enforceable if there is proof that the parties actually agreed to it, and courts may consider undisputed facts outside the initial record to resolve protracted litigation and promote the speedy resolution of arbitrable controversies.

    Summary

    James Crawford, a former registered representative of Merrill Lynch, sought to recover commissions. Merrill Lynch moved to compel arbitration based on Crawford’s employment contract. Crawford then served a notice demanding arbitration before the American Arbitration Association, while simultaneously opposing Merrill Lynch’s motion. The Court of Appeals held that Crawford was required to arbitrate before the New York Stock Exchange (NYSE) based on his agreement to abide by NYSE rules when he became a registered representative, and the court considered NYSE rules submitted on appeal to resolve the issue.

    Facts

    James Crawford, a former Merrill Lynch registered representative, sued Merrill Lynch to recover commissions allegedly owed to him. Merrill Lynch moved to dismiss the action and compel arbitration before the NYSE, citing Crawford’s employment contract. Crawford then served Merrill Lynch with a “Notice of Intention to Arbitrate” before the American Arbitration Association (AAA), referencing the same agreement and Pierson’s affidavit that arbitration was the exclusive remedy. The notice was sent to Merrill Lynch’s headquarters in New York City.

    Procedural History

    The Supreme Court granted Merrill Lynch’s motion to compel arbitration before the NYSE and vacated Crawford’s arbitration before the AAA. The Appellate Division reversed, holding that Merrill Lynch’s failure to move to stay arbitration within 10 days precluded them from objecting to the validity of the agreement. The Court of Appeals reversed the Appellate Division’s order, directing the parties to arbitrate before the NYSE and vacating the AAA arbitration.

    Issue(s)

    1. Whether Merrill Lynch’s failure to move to stay arbitration within 10 days after receiving Crawford’s notice precluded them from objecting to the validity of the arbitration agreement.
    2. Whether the arbitration clause in Crawford’s Stock Exchange application constituted a “written agreement” to arbitrate, even though it was not signed by Merrill Lynch.
    3. Whether the court can consider the Exchange rules, submitted for the first time on appeal, to determine the forum for arbitration.

    Holding

    1. No, because the notice was misleading and did not provide Merrill Lynch with a fair opportunity to respond.
    2. Yes, because the statute only requires “a written agreement” and does not require that the writing be signed, “so long as there is other proof that the parties actually agreed on it”.
    3. Yes, because considering the rules would resolve the protracted litigation and further the policy favoring speedy resolution of arbitrable controversies.

    Court’s Reasoning

    The Court found that the notice of intention to arbitrate was misleading, suggesting Crawford was merely joining Merrill Lynch’s motion to compel arbitration before the Exchange, and that serving the notice at Merrill Lynch’s New York City headquarters effectively deprived Merrill Lynch of a fair opportunity to respond within the 10-day period. The Court noted, “.If this service is effective to bar contest to the arbitration, [a party who] did a nationwide business could be served anywhere, with the practical certainty that it be precluded from opposing arbitration. Such practice should not be countenanced, on the principle that service not designed to give notice cannot be grounds for a default.”
    Regarding the written agreement, the Court emphasized that CPLR 7501 only requires “A written agreement” to arbitrate and that there is no requirement that the writing be signed. The court cited to Matter of Helen Whiting, Inc. [Trojan Textile Corp.], 307 N.Y. 360, 368, stating that a signature is unnecessary “so long as there is other proof that the parties actually agreed on it”. The Court distinguished this case from Johnson v. Equitable Life Assur. Soc. of U. S. because accepting the Exchange rules would not generate factual questions needing resolution by other courts, and would instead conclude the protracted litigation and return the case to arbitrators. The Court found that the rules of the NYSE were properly before the court to ensure the speedy resolution of the case.