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Illinois App. Court Affirms $11 Million FINRA Award, Holds ‘Public Policy’ Exception of Arbitration Act is Limited to Awards Arising From a CBA

arbitrationThe Appellate Court of Illinois, First District, recently affirmed an $11 million arbitration award entered by a Financial Industry Regulatory Authority panel in favor of a financial advisor and against his former employer, a financial services company. In doing so, the Court held that the “public policy” exception of the Illinois Uniform Arbitration Act is limited to arbitration awards arising from a collective bargaining agreement (CBA).

A copy of the opinion in Munizzi v. UBS Financial Services, Inc. is available at: Link to Opinion.

The financial advisor was hired by the financial services company (the “company”) in 2003 and became the Chicago-area market supervisory officer in 2016. In February 2018, two company accounts holding options suffered losses resulting in margin calls that lead to unsecured losses in excess of $3 million. Following an investigation into the losses, the company terminated the advisor in April 2018. As required by FINRA rules, the company filed a form U5, the Uniform Termination Notice for Securities Industry Registration, disclosing that he was “discharged after firm review determined that (1) he failed to adequately supervise employees in association with risks of an uncovered options strategy in employee and employee related accounts and (2) gave varied responses during the review.”

Following his termination, the advisor filed a Statement of Claim with FINRA alleging claims of defamation per se, violation of the Illinois Wage Payment and Collection Act, and tortious interference with prospective economic advantage against the company. The advisor alleged that he had been “permanently injured by the company’s false and inaccurate reasons for termination” and that the company had injured him “knowingly and with reckless disregard for [his] wellbeing and future ability to find employment.” Following a 13-day hearing, the arbitration panel found the company liable for $3,149,656 in compensatory damages plus interest on the portion of the award that represented the advisor’s severance pay; $7.5 million in punitive damages; $496,753.36 in attorney fees; and $24,381.50 in costs (the “award”). As is common in FINRA arbitrations, the panel did not provide an explained decision.

In December 2019, the advisor filed a motion to confirm the award in the circuit court pursuant to Section 11 of the Illinois Uniform Arbitration Act, 710 ILCS 5/1 et al. The company subsequently filed a motion to vacate or modify the award, arguing the award violated public policy favoring the protection of the public through disclosure of information concerning negligent or dishonest securities professionals. In October 2020, the circuit court granted the advisor’s motion and denied the company’s motion to vacate, holding that the company had not shown the award was against the manifest weight of the evidence and, if the public policy exception was applicable, the company had not made the requisite showing that it was entitled to have the award vacated.

The limited circumstances under which a reviewing court can modify or vacate an arbitration award are set forth in the Arbitration Act, which are “(1) The award was procured by corruption, fraud or other undue means; (2) There was evident partiality by an arbitrator appointed as a neutral or corruption in any one of the arbitrators or misconduct prejudicing the rights of any party; (3) The arbitrators exceeded their powers; (4) The arbitrators refused to postpone the hearing upon sufficient cause being shown thereof or refused to hear evidence material to the controversy or otherwise so conducted the hearing, contrary to the provisions of Section 5, as to prejudice substantially the rights of a party; or (5) There was no arbitration agreement and the issue was not adversely determined in proceedings under Section 2 and the party did not participate in the arbitration hearing without raising the objection.” 710 ILCS 5/12.

Here, the company did not cite any of the bases set out in 710. ILCS 5/12, but instead urged the Court to vacate or modify the award because it violated a “well-defined and dominant” public policy favoring disclosure of information regarding negligent or dishonest conduct of securities professionals or, in the alternative, because it was excessive and contrary to public policy and the law regarding defamation. In response, the advisor argued that public policy arguments are limited to arbitration awards arising from a CBA, and thus inapplicable since the award did not arise from a CBA.

In rejecting the company’s argument, the Court noted that, “[s]ince the Arbitration Act was enacted in Illinois in 1961, our courts have continued to recognize the rationale, grounded in common law, to vacate arbitration awards that are ‘repugnant to public policy’ when they arise in collective bargaining cases.” The Court further noted that the Illinois “[s]upreme court cases that have applied the public policy exception have stressed the fact that there is an ongoing CBA and that it would be contrary to the public policy of this state to apply that CBA in the manner that the arbitrator’s ruling mandated.” On appeal, the company offered no precedent in which a court vacated an arbitration award on public policy grounds outside of the collective bargaining context. Thus, the Court rejected the company’s public policy argument. In addition, the Court noted that, even if the public policy exception applied, the award did not violate any “well-defined and dominant” public policy favoring “full and frank” disclosures since the arbitration panel found that the company made false statements about the advisor. Therefore, the disclosures on the form U5 were neither “frank” nor “accurate.”

The Court also rejected the company’s argument that the circuit court erred in determining that the arbitration panel’s factual findings “were binding on the court.” The company argued that courts can overturn arbitration awards when “the record belies the arbitrator’s conclusions.” The Court held the company’s argument was forfeited when it failed to supply the Court with a complete record of the arbitration hearing. Illinois Supreme Court Rule 323(a) requires that the record on appeal “include all the evidence pertinent on the issues on appeal.” Therefore, because the company only provided portions of documents and excerpts of testimony, the Court held that it had no basis for comparing the arbitrators’ factual conclusions with the evidence presented.

The Court also rejected the company’s argument, relying again on public policy, that the award should be modified to eliminate punitive damages because enforcing punitive damage awards on form U5 disclosures “would eviscerate” Illinois public policy favoring protecting the public by encouraging disclosure of information about the competence of securities professionals. The Court again noted that it was bound by the arbitrators’ findings that the disclosures were defamatory and could not accept the company’s premise that it disclosed information that was “fully supported by the facts.” Even if the full record was provided, however, the Court again noted that it was not convinced a public policy argument plays any role in this case.

The Court was also not persuaded by the company’s argument that it was an error of law to award punitive damages. As an initial matter, “an error of law does not provide a basis for overturning an arbitration decision.” Notwithstanding, the Court was not convinced any legal error occurred since the award stated that punitive damages were awarded pursuant to Republic Tobacco Co. v. North Atlantic Trading Co., 381 F.3d 717 (7th Cir. 2004), which provides that “[p]unitive damages are available under Illinois law upon proof of actual malice.” This statement by the arbitrators reflects their understanding that punitive damages are available when there is proof of actual malice and defeats the company’s argument that that the panel failed to find such proof in the case before them.

Accordingly, the Court affirmed the decision of the circuit court.

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Brady Hermann is senior counsel in the Boston and New York offices of Maurice Wutscher LLP. He regularly represents financial services companies including banks, broker-dealers, financial advisors, financial asset buyers and third party debt collectors in individual, class action and regulatory matters. He has successfully represented clients throughout the country against claims for violations of securities laws, the Fair Debt Collection Practices Act, the Telephone Consumer Protection Act, the Fair Credit Reporting Act, and various state consumer protection statutes. For more information, see https://mauricewutscher.com/attorneys/brady-hermann/

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