A recent decision from the New York Commercial Division decided whether arbitration could be avoided in an investment firm-employee dispute. In CF Notes, LLC v. Weinstein, No. 652206/2015, 2016 BL 352970 (N.Y. Sup. Ct. Oct. 13, 2016), Justice Saliann Scarpulla, of the Commercial Division, compelled a nonsignatory to arbitrate pursuant to a FINRA arbitration agreement. The decision relates to how financial securities firms structure bonuses to employees and to how nonsignatories may be compelled to arbitrate pursuant to arbitration agreements signed by their affiliates.
In CF Notes, LLC v. Weinstein, two contracts were at issue: (1) a six-year Employment Agreement between Cantor Fitzgerald, a FINRA member, and Gregg Weinstein, which contained a clause providing for FINRA arbitration over “any” dispute and “all controversies” arising out of Weinstein’s employment; (2) a Promissory Note between CF Notes, LLC, a Cantor Fitzgerald affiliate, and Weinstein, which contained a forum selection provision providing for litigation in New York state courts over “any and all disputes” under the Note. Ultimately, the arbitration clause prevailed.
The underlying dispute in CF Notes reached the Commercial Division when Cantor Fitzgerald terminated Weinstein roughly a month and half into his six-year employment contract. CF Notes demanded full repayment of a loan plus accrued interest pursuant to the Promissory Note Weinstein executed on the day he started working at Cantor Fitzgerald. Weinstein pointed out that the loan from CF Notes was actually a signing bonus and was tied to the Employment Agreement. The loan was to be forgiven ratably each year over six years. Pursuant to the terms of the Note, the outstanding balance was immediately payable to CF Notes if Weinstein ceased to be employed by Cantor Fitzgerald. CF Notes sued Weinstein in the Commercial Division to enforce the terms of the Promissory Note, and in response, Weinstein argued that Cantor Fitzgerald had breached the Employment Agreement by terminating him without cause and sought to compel arbitration of CF Notes’s action.
CF Notes countered that it was not a signatory to the Employment Agreement. According to CF Notes, since consent is a basic tenet of contract law, only a party that has clearly agreed to arbitrate may be compelled to do so. However, New York law recognizes certain exceptions, such as an “alter ego” exception under which a court may compel the alter ego of a signatory to arbitrate. The Court concluded that another exception, estoppel, precluded CF Notes from disclaiming an obligation to arbitrate.
The Court noted that to compel arbitration on the basis of estoppel, the nonsignatory must derive a direct benefit from the arbitration agreement. An indirect benefit is insufficient. The Court reasoned that CF Notes “derive[d] a direct benefit from the Employment Agreement” because without Weinstein’s employment, Weinstein and CF Notes would never have entered into the Promissory Note. Accordingly, the Court denied CF Notes’s motion for summary judgment to enforce the Promissory Note and granted Weinstein’s motion to compel CF Notes to arbitrate its claims under FINRA rules. The Court stated that although but for causation would typically be insufficient to constitute a direct benefit, the but-for causal connection between the Promissory Note and the Employment Agreement explained why the parties entered into promissory note in the first place.
CF Notes is not alone in finding a direct benefit to compel arbitration over nonsignatories. In BGC Notes, LLC v. Gordon, for example, the Appellate Division affirmed the decision of the Commercial Division to compel a FINRA-affiliate, non-signatory entity to arbitrate its claims against an employee in a bonus claw back action. In that case, the employment agreement provided that the investment firm, the FINRA member, would “cause” the affiliate to make the loan to the employee. In CF Notes, the Employment Agreement between Cantor Fitzgerald and Weinstein did not reference the Promissory Note, but the Promissory Note “relied on the Employment Agreement” to calculate the outstanding balance on the loan. This reliance, the Court concluded, was a direct benefit to CF Notes and drew a direct connection between the Employment Agreement and Promissory Note.