Opinion
1:23-CV-1178-DII
07-30-2024
RICK FUCHS and GRAHAM HECK, Plaintiffs, v. STEWARD PARTNERS GLOBAL ADVISORY, LLC, STEWARD PARTNERS MANAGEMENT HOLDINGS, LLC, Defendants.
REPORT AND RECOMMENDATION OF THE UNITED STATES MAGISTRATE JUDGE
MARK LANE UNITED STATES MAGISTRATE JUDGE
TO THE HONORABLE ROBERT PITMAN UNITED STATES DISTRICT JUDGE:
Before the Court are Defendants' Steward Partners Global Advisory, LLC (“Steward Global Advisory”) and Steward Partners Management Holdings, LLC's (“Steward Management Holdings”) Motion to Compel Arbitration (Dkts. 17 & 21 (unredacted)) and all related briefing.The Court has reviewed the pleadings, motions, and record in this proceeding, and after conducting a hearing on May 15, 2024 issues this Report and Recommendation.
United States District Judge Robert Pitman referred the Motion to the undersigned for a Report and Recommendation as to the merits pursuant to 28 U.S.C. § 636(b)(1)(B), Rule 72 of the Federal Rules of Civil Procedure, and Rule 1(d) of Appendix C of the Local Rules of the United States District Court for the Western District of Texas. Text order, Jan. 22, 2024.
I. Factual Background
Plaintiffs are registered financial advisors with the Financial Industry National Regulatory Authority (“FINRA”), the self-regulatory body for financial services and investment industry authorized by the U.S. Securities and Exchange Commission to regulate the applicable financial service industries member firms and associated persons and resolve disputes among members and associated persons.
Plaintiffs joined Steward Global in October 2020, along with colleagues Vincent Connor Fuchs and Colton Jacob, as a team of wealth financial advisors from Wells Fargo, their previous employer. In connection with Plaintiffs' employment with Steward Partners, each Plaintiff signed an Employment Agreement with several Steward Partners affiliates and subsidiaries.
The Employment Agreements are between each Plaintiff and Defendant Steward Global Advisory as well as Defendant Steward Management Holdings, Steward Partners Holdings, LLC (the subsidiary of Steward Management Holdings), Steward Partners Investment Solutions, LLC (a member of FINRA), and Steward Partners Advisory, LLC (an affiliate of Steward Partners Global).
As part of Plaintiffs' compensation for joining Steward Partners, each Plaintiff entered into a Subscription Agreement concerning shares of limited partnership interests (“LP Units”) in Defendant Steward Management Holdings. Dkt. 1 at 14 (Exhibit A). The rights of partners or members of Steward Management Holdings are subject to the Third Amended Operating Agreement dated May 10, 2019 (the “Operating Agreement”). Id. In conjunction with the Subscription Agreement, Plaintiffs entered a joinder agreement (“Joinder Agreement”) of Steward Management Holdings Operating Agreement. Dkt. 1 at 21 (Exhibit B).
It is uncontested that Plaintiffs received the LP Units in question, see Dkt. 1 ¶28, and Plaintiffs do not seek relief for breach of the Subscription Agreement in this lawsuit. Defendant Steward Global Advisory was not a party to the Subscription Agreement. See id. at 14. Rather, the only parties to the Subscription Agreement were each Plaintiff and Steward Management. Id.
Plaintiffs voluntarily terminated their employment with Steward Partners on September 28, 2023. On the day of their termination, they filed two lawsuits. The first lawsuit was this action (the “Federal Action”), and the second lawsuit was a demand for arbitration in the form of a Statement of Claim before FINRA (the “FINRA Action”). Steward Global Advisory is a party in both actions. In the FINRA Action, Steward Partners Investment Solutions, LLC (“Steward Investment Solutions”) is the other Respondent. Steward Investment Solutions is a FINRA member firm. Defendant Steward Management Holdings is not a party to the FINRA Action.
The Federal Action contains a single count for a violation of the Securities Act of 1933 Section 12(a)(2). The Complaint alleges that Defendants made misrepresentations related to the issuance of the limited partnership interests and the valuation of said LP Unit interests during their recruitment to join Steward Partners. See, E.g., Dkt. 1 ¶40.
The allegations and relief sought are virtually identical in the Federal Action and the FINRA Action. While Plaintiffs' FINRA Statement of Claim seeks relief for fraud and fraud in the inducement rather than Section 12(a)(2) of the Securities Act, the actions, representations, and statements of Defendants that form the bases for their FINRA fraud claims are the same. Compare Dkt. 1 (Complaint) with Dkt. 21 at 10-26 (FINRA. Statement of Claim). Plaintiffs also requested rescission of their LP Units and the same $4,488,300 in damages Plaintiffs allege are owed on account of those LP Units. Dkt. 21 at 25.
In December 2023, Defendants filed this Motion to Compel Arbitration and dismiss this matter based on the arbitration clause in the Employment Agreement, the Operating Agreement, a FINRA Form U-4 Agreement, and employment agreements that each Plaintiff signed in 2022.
Plaintiffs contend that the claims against Defendants should be litigated in court on grounds that the Subscription Agreement does not contain an arbitration clause and that the Employment Agreement, Operating Agreement, and U-4 forms address different disputes, claims or controversies than those Plaintiffs agreed to arbitrate. Plaintiffs argue they have not consented to arbitrate this dispute and that the jurisdiction and venue clause of the Subscription Agreement conflicts with the arbitration clauses in the Employment Agreement and Operating Agreement. According to Plaintiffs, there was no “meeting of the minds” with respect to arbitrability of claims arising out of issuance and valuation of the LP Units.
II. Discussion
Section 3 of the Federal Arbitration Act provides:
If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.9 U.S.C. § 3.
The Federal Arbitration Act establishes a liberal policy favoring arbitration and a strong federal policy enforcing arbitration agreements. AT&T Tech. v. Comm's Workers of Am., 475 U.S. 643, 648 (1986); Texaco Expl. and Prod. Co. v. Am Clyde Engineered Prod. Co., 243 F.3d 906, 909 (5th Cir. 2001) (citations and internal quotation marks omitted). In drafting the FAA, Congress intended “to move the parties to an arbitrable dispute out of court and into arbitration as quickly and easily as possible.” Bell v Koch Foods of Miss., 358 Fed.Appx. 498, 500-01 (5th Cir. 2009) (quoting Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 22 (1983)).
The Fifth Circuit uses a two-step analysis to determine whether the parties have agreed to arbitrate a particular claim: (1) whether there is a valid agreement to arbitrate between the parties; and (2) whether that dispute falls within the scope of that arbitration agreement. OPE Int'l LP v. Chet Morrison Contractors, 258 F.3d 443, 445 (5th Cir. 2001).
A. Arbitration Agreement
Whether an arbitration clause imposes a duty to arbitrate is a matter of contract interpretation and a question of law for the court. Tex. Petrochemicals LP v. ISP Water Mgmt. Svcs, 301 S.W.3d 879, 884 (Tex. App.-Beaumont 2009). If the trial court finds that a valid arbitration agreement exists, the burden shifts to the party opposing arbitration to raise an affirmative defense to enforce arbitration. J.M. Davidson v. Webster, 128 S.W.3d 223, 227 (Tex. 2003).
1. Plaintiffs Admitted Employment Agreements Contain Valid Arbitration Agreement.
Plaintiffs are the only Claimants in the FINRA Action. Steward Global Advisory is one Respondent and Steward Investment Solutions is the other Respondent. In the first footnote to the Statement of Claim, Plaintiffs allege:
Steward Investment is a FINRA member firm and each of the Claimants was an associated person registered with Steward Investment and thus, any dispute between Claimants and Steward Investment is required to be heard by FINRA Dispute Resolution. Steward Advisory is an SEC Registered Investment Advisory firm and is not a FINRA member. Claimants' Employment Agreement with Steward Advisory specifically designates FINRA Dispute Resolution as the forum for disputes between Claimants and Steward Advisory related to Claimants' employment Steward Advisory. Accordingly, Steward Advisory is contractually required to submit to FINRA jurisdiction with regard to this matter.Dkt. 21 at 10 n.1.
The footnote then cites § 5(h)(i), id., of Plaintiff Heck's Employment Agreement which provides:
(h)(i) Any dispute, claim or controversy between or among the FA and/or Associated Persons (as defined in the FINRA rules and regulations), and/or any others, arising in connection with the business of the FA or in connection with activities of such Associated Person(s), relating primarily to or arising with respect to FINRA, shall be submitted to FINRA arbitration under the FINRA rules and regulations. Each Party will bear its own expenses of arbitration and will jointly and equally bear the expense of the FINRA arbitration. However, the arbitrator will have the discretion to award the prevailing Party reasonable fees, including reasonable attorney's fees and expenses arising from the arbitration. Any arbitration will take place in Washinton D.C., unless otherwise agreed in writing, signed and
acknowledged by the Parties hereto at the time or before the arbitrators are appointed.Dkt. 21 at 33 (Heck Employment Agreement).
Plaintiffs admit that the Arbitration Clause in their Employment Agreements are valid. Indeed, they alleged as much in Footnote 1 in their Statement of Claim as the basis for FINRA jurisdiction. Id. at 21 n.1. Section 5(h)(i) is a valid agreement between Plaintiffs and both Steward Global Advisory and Steward Management Holdings because both Steward entities are parties to the Employment Agreement. Id. at 29.
2. Plaintiffs Agreed to Arbitrate Three Other Agreements
Plaintiffs signed other agreements in which they agreed to arbitrate the dispute in the Federal Action. The arbitration clause in the Operating Agreement provides:
16.12 Arbitration.
(a) Any dispute, claim or controversy between or among Members and/or Associated Persons (as defined in the FINRA Code), and/or certain others, arising in connection with the business of such Member(s) or in connection with the activities of such Associated Person(s), related primarily to or arising with respect to FINRA, shall be submitted to FINRA arbitration under the FINRA Code. Each party will bear its own expenses of arbitration and will jointly and equally bear the expense of the FINRA arbitration....
(b) Any dispute claim or controversy between or among Members and/or Associated Persons other than those subject to Section 16.12(a) will be submitted to arbitration under the rules of the American Arbitration Association (“AAA”) in New York City, NY, which will be the only forum for the resolution of disputes arising hereunder...Dkt. 23-2 (Operating Agreement) at 61.
Each Plaintiff also signed a FINRA Form U-4 when they became employed with Steward Partners in October 2020. That form provides:
I agree to arbitrate any dispute, claim or controversy that may arise between me and my firm, or a customer, or any other person, that is required to be arbitrated under
the rules, constitutions, or by-laws of the SROs indicated in Section 4 (SRO REGISTRATION) as may be amended from time to time and that any arbitration award rendered against me may be entered as a judgment in any court of competent jurisdiction.Dkt. 33 at 26 (Form U-4 § 15A(5)).
Finally, Plaintiffs both signed a second employment agreement with Steward Partners on May 27, 2022 (the “2022 Employment Agreement”). The 2022 Employment Agreement contains identical language to the 2020 Employment Agreements regarding the Parties' agreement to Arbitrate. Section 8(h)(i) of the 2022 Employment Agreements provides:
Any dispute, claim or controversy between or among the FA and/or Associated Persons (as defined in the FINRA rules and regulations), and/or any others, arising in connection with the business of the FA or in connection with activities of such Associated Person(s), relating primarily to or arising with respect to FINRA, shall be submitted to FINRA arbitration under the FINRA rules and regulations. Each Party will bear its own expenses of arbitration and will jointly and equally bear the expense of the FINRA arbitration. However, the arbitrator will have the discretion to award the prevailing Party reasonable fees, including reasonable attorney's fees and expenses arising from the arbitration. Any arbitration will take place in New York, New York unless otherwise agreed in writing, signed and acknowledged by the Parties hereto at the time or before the arbitrators are appointed.Dkt. 33 at 58.
3. Plaintiffs' Arguments
Again, Plaintiffs contend that there was no meeting of the minds because the Subscription Agreement does not contain an arbitration clause and requires litigation to be brought in a state or federal court. Because the provision in the Subscription Agreement conflicts with the arbitration clause in the four other agreements, Plaintiffs argue, there can be no “meeting of the minds” with respect to where certain disputes are to be litigated or arbitrated. Dkt. 25 at 8-11.
This argument is flawed for several reasons. At the outset, in filing the FINRA Arbitration Plaintiffs alleged that FINRA has jurisdiction over the same allegations under the Employment Agreement. As such, there had to have been a meeting of the minds that: (1) there was a valid agreement to arbitrate; and (2) the claims relating to the LP Units were arbitrable. There is no ambiguity. Even if this Court were to determine that there is ambiguity, the Court must resolve the ambiguity in favor of arbitration. Banc One Acceptance Corp. v. Hill, 367 F.3d 426, 429 (5th Cir. 2004).
As for the Subscription Agreement, the pertinent provisions provide as follows:
3.3 THE SUBSCRIBER EXPRESSLY AGREES THAT ALL THE TERMS AND PROVISIONS HEREOF SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF DELAWARE WITHOUT REGARD TO SUCH STATE'S PRINCIPLES OF CONFLICTS OF LAW. IN THE EVENT THAT A JUDICIAL PROCEEDING IS NECESSARY, THE SOLE FORUM FOR RESOLVING DISPUTES ARISING OUT OF OR RELATING TO THIS AGREEMENT ARE THE LOCAL OR THE FEDERAL COURTS LOCATED IN NEW YORK CITY, NEW YORK, AND ALL RELATED APPELLATE COURTS. THE PARTIES HEREBY IRREVOCABLY CONSENT TO THE JURISDICTION OF SUCH COURTS AND AGREE TO SAID VENUE, THE PARTIES WAIVE TO THE EXTENT PERMITTED UNDER APPLICABLE LAW THE RIGHT TO TRIAL BY JURY IN ANY SUCH PROCEEDING.Dkt. 1 at 17.
Steward Global Advisory was never a party to the Subscription Agreement, Dkt. 1 at 14, a fact Plaintiffs concede. So there is no conflict between the terms of that agreement and the other agreements as it pertains to Steward Global Advisory.
Plaintiffs also agreed in the Subscription Agreement to be bound to the terms of the Operating Agreement. The Subscription Agreement contains a legend at Section 1.8:
THE MEMBERSHIP UNITS REPRESENTED BY THIS CERTIFICATE ARE ACCEPTED AND HELD SUBJECT TO THE TERMS AND CONDITIONS OF THE AMENDED RESTATED LIMITED LIABILITY COMPANY AGREEMENT DATED AS OF MAY 10, 2019 BY AND BETWEEN THE COMPANY AND THE MEMBERS, FROM TIME TO TIME, PARTY THERETO . . .Id. at 15-16.
The Subscription Agreement provides at Section 1.2:
Subscriber agrees and acknowledges that the Granted Units are subject to the terms and conditions of the Operating Agreement, including, among other things, (a) limitations on the ability to transfer the Granted Units, (b) that the Granted Units are non-voting Unit, and therefore, the Subscriber will have little or no ability to affect the management or financing of the Company in the future, (c) that the Granted Units are subject to vesting and eligibility requirements, and (d) that the Granted Units are subject to repurchase by the Company upon the occurrence of certain events, including termination of the Subscriber's employment with the Company or its Subsidiaries (including the Operating Affiliate).Id. at 14-15.
The Joinder Agreement, signed along with the Subscription Agreement, provides “[h]aving reviewed the Operating Agreement and subscribed for Partner Class Units, the undersigned hereby agrees to be bound by all of the terms, conditions and obligations set forth in the Operating Agreement as a Partner Class Member of the Company.” Dkt. 1 at 21.
Plaintiffs agreed “the grant of Granted Units is subject to Subscriber's prior execution and delivery of the Joinder Agreement and Accredited Investor Questionnaire.” Dkt. 1 at 17. The Employment Agreement also expressly references the Subscription Agreement and Operating Agreement in Section 1(d) which states:
(d) In addition, subject to the approval of its Board of Directors, Steward Management Holdings will issue to the FA Partner Class Units of Steward Management Holdings (the “Equity Grant”) pursuant to a Subscription Agreement by and between the FA and Steward Management Holdings (“Subscription Agreement”). The Equity Grant will be subject to the terms and conditions of the Amended and Restated Limited Liability Company Agreement for Steward Management Holdings, as the same may be amended from time to time (the “Operating Agreement”) and the Subscription Agreement, and subject to the sole and absolute discretion of Steward Global.Dkt. 21 at 30.
Fourth, Plaintiffs' claim in the Federal Action does not “arise out” of a breach of the Subscription Agreement. The Complaint does not allege that Defendants breached the Subscription Agreement. The Subscription Agreement is not even alleged to be the offering document and was not attached as an exhibit. In fact, the agreement is only mentioned once. Plaintiffs received their units. Rather, Plaintiffs' claims in the Federal Action arise out of alleged oral misrepresentations made during the recruiting process as to the value of the LP Units.
It is undisputed that the Subscription Agreement, the Operating Agreement, and the Employment Agreement were drafted by Defendants Steward Partners, and therefore Plaintiffs contend the arbitrability issue should be construed against Defendants. But when the terms of an agreement are unambiguous the doctrine of contra proferentem is inapplicable. Shiftan v. Morgan Joseph Holdings, 57 A.3d 928, 936-38 (Del. Ch. 2012); Barton v. Club Ventures Invs., C. A. No. 8864-VCN (Del. Ch. Nov. 19, 2013).
Even if a conflict existed between the Subscription Agreement and the four other agreements, the conflict can be harmonized because the Subscription Agreement does not require the parties to litigate all claims in the courts located in New York City.
The Subscription Agreement provides “IN THE EVENT THAT A JUDICIAL PROCEEDING IS NECESSARY” the forum to resolve disputes arising out of the Subscription Agreement are the local and federal courts located in New York, New York only.” Dkt. 1 at 17. At this point, a judicial proceeding is not necessary because the Parties agreed to arbitrate the claims beforehand.
Should the parties seek an action to confirm the award after the arbitration or take legal action related to any arbitration award, then and only then shall a judicial proceeding before courts in New York become necessary. Pers. Sec. & Safety Sys. v. Motorola, 297 F.3d 388 (5th Cir. 2002).
The Fifth Circuit's opinion in Motorola is controlling. In Motorola, an electronic security systems developer (“PSSI”) and Motorola Inc. (“Motorola”) entered into a Stock Purchase Agreement (“Stock Purchase Agreement”) and a product development and licensing agreement (“Licensing Agreement”), which “was executed alongside the [Stock Purchase Agreement] as part of the broader contractual arrangement.” Id. at 390. The Licensing Agreement contained an arbitration clause for “any and all claims . . . arising out of or relating to this Agreement.” Id. at 392. The Stock Purchase Agreement, meanwhile, contained a forum selection clause stating that any suit or proceeding must be brought in Texas courts. Id. at 395. A dispute arose over the Stock Purchase Agreement, and PSSI brought the lawsuit. Motorola moved to compel arbitration, which the district court denied. Id. at 391. The Fifth Circuit reversed. Id. at 389.
In reversing the lower court, the Fifth Circuit held that “where the parties include a broad arbitration provision in an agreement that is ‘essential' to the overall transaction, we will presume that they intended the clause to reach all aspects of the transaction-including those aspects governed by other contemporaneously executed agreements that are part of the same transaction.” Id. at 394-95. The Motorola court rejected the argument that the claims needed to be heard in a Texas court under the Stock Purchase Agreement because each of the “agreements must be construed together because they were executed at the same time and part of the same overall transaction.” Id. at 393. The Motorola court opined that the forum selection clause, when read with the arbitration clause in the Licensing Agreement, did “not require the parties to litigate all claims in Texas courts, nor does it expressly forbid arbitration of claims arising under the [Purchase Agreement].” Id. at 395-96. Instead, the court determined that the clauses, read together, meant that the “parties must litigate in Texas courts only those disputes that are not subject to arbitration-for example . . . an action to enforce an arbitration award.” Id. at 396.
The same reasoning applies here. Plaintiffs and Steward Partners entered into four agreements relating to Plaintiffs' employment with Steward Partners: (1) the 2020 Employment Agreement; (2) the Operating Agreement; (3) the Subscription Agreement; and (4) the 2022 Employment Agreement. These three agreements should be construed together as part of the same overall transaction relating to Plaintiffs employment with Steward Partners. Id.
The 2020 Employment Agreement and 2022 Employment Agreement contain the broad arbitration clause-“any dispute”-just as the Licensing Agreement in Motorola. Following Motorola's guidance, the broad arbitration clause in the Employment Agreement governs the claims relating to Plaintiffs' employment with Steward Partners, including claims arising out of the Subscription Agreement. The 2022 Employment Agreement replaced and superseded the 2020 Employment Agreement.
Plaintiffs argue the recent decision Burnstein v. Autolotto, A-21-cv-793-LY, 2022 WL 1229291, at *2 (W.D. Tex. Apr. 26, 2022), R&R adopted, 1:21-cv-793-LY, 2022 WL 3337808 (W.D. Tex. May 31, 2022) is distinguishable from the present proceeding because the applicable subscription agreement in Burnstein contained an arbitration clause. While the Subscription contract did not contain an arbitration clause, the Operating Agreement of Steward Management Holdings did. Dkt. 21 at 33. Plaintiffs agreed to join as members under the Joinder Agreement Exhibit of the Subscription Agreement. Dkt. 1 at 21. Plaintiffs agreed to be bound under the agreements they voluntarily entered into in connection with their employment and compensation with Steward Partners. Plaintiffs gave their consent freely.
B. Plaintiffs' claim and the arbitration agreements
After determining that an arbitration agreement is enforceable, the Court moves on to the second question: “whether the claim at issue is covered by the arbitration agreement.” JP Morgan
Chase & Co., v. Conegie ex rel. Lee, 492 F.3d 596, 598 (5th Cir. 2007); Jha v. Asuragen, 1:19-CV-1070-RP at *7.
1. Plaintiffs' claim is covered by the arbitration agreement because the factual allegations and relief sought in the FINRA Action and this lawsuit are the same
Plaintiffs' claim in the Federal Action is covered by the arbitration agreement. This is a unique situation. Plaintiffs initiated the FINRA Action, they are the Claimants. Plaintiffs' Statement of Claim in the FINRA Action makes the same allegations and seeks the same relief as made in this lawsuit. Plaintiffs' Complaint contains a single count for violation of § 12(a)(2) of the Securities Act of 1933. Dkt. 1 at 10. The Complaint sums up the alleged factual predicate for the count:
Steward relentlessly pursued Plaintiffs and their team throughout 2019 and 2020, continuing to represent to Plaintiffs that the LP units which were priced at $17.50 per unit were truly worth between $20 and $25 per unit. Steward's recruitment efforts culminated in the entire team joining Steward. Unfortunately, the representations Steward made to Plaintiffs-particularly with regard to the imputed value of the LP unit-were knowingly and materially false. As a result of Plaintiffs' reasonable reliance on Steward's material misrepresentations regarding the value of the securities, they have suffered significant damages.Id. ¶4.
The same factual allegations are littered throughout Plaintiffs' FINRA Action Statement of Claim. For example, Plaintiffs allege that “[w]hen luring Claimants to transfer their business, Steward Advisory had made an array of promises which ranged from millions of dollars in upfront cash payments to Claimants, to the unconditional grant of securities in the form of 7 year vesting limited partnership (“LP”) units.” Dkt. 21 at 11.
The Statement of Claim and the Complaint are rife with identical allegations. Paragraphs 8-20 of the Statement of Claim discuss a dinner that occurred between Plaintiffs and Steward Partners personnel in March 2019; the same allegations are found in the Complaint. Compare Id. ¶¶8-20 with Dkt. 1 ¶¶'s 17-20; compare also Dkt. FINRA. ¶¶25-26, 32 & 60 with e.g., Dkt. 1 ¶4.
In the FINRA Action, Plaintiffs seek the same relief of rescission related to the LP units and seek identical damages of nearly $4.5 million that they seek here. Compare Dkt. 1 at 11-12 with Dkt. 21 at 25.
Plaintiffs' counsel at oral argument acknowledged that he would not have included a request for the return of the LP units or payment of nearly $4.5 million dollars in the prayer for relief in the FINRA Action, the request has not been withdrawn.
2. The Employment Agreements cover Plaintiffs' Claim
The arbitration clause in Plaintiffs' Employment Agreements covers the claim in the Federal Action. Paragraph 5(h)(i) in the Employment Agreement states that “any dispute, claim, or controversy between Plaintiffs and Steward Partners must be arbitrated before FINRA.” Dkt. 21 at 33. “[I]t is difficult to imagine broader general language” in an arbitration clause. In re Complaint of Hornbeck Offshore Corp., 981 F.2d 752, 755 (5th Cir. 1993) (quoting Sedco v. Petroleos Mexicanos Mexican Nat'l Oil Co. (Pemex), 767 F.2d 1140, 1145 (5th Cir. 1985)).
The Fifth Circuit routinely reiterates that “when parties choose . . . broad language [in an arbitration provision such as ‘any controversy or claim arising out of or relating to this agreement'], only the ‘absence of any express provision excluding a particular grievance from arbitration' or ‘the most forceful evidence of a purpose to exclude the claim from arbitration' would render the dispute non-arbitrable.” United Offshore Co. v. S. Deepwater Pipeline Co., 899 F.2d 405, 410 (5th Cir. 1990) (quoting Mar-Len of La., Inc. v. Parsons- Gilbane, 773 F.2d 633, 636 (5th Cir. 1985)); see also Saturn Dist. Corp. v. Paramount Saturn, 326 F.3d 684, 687 (5th Cir. 2003).
An alleged violation of the Securities Act is a “dispute, claim or controversy” between Plaintiffs and Steward Partners under the Employment Agreement. As such, Plaintiffs' single count falls within the broad scope of the arbitration clause in the Employment Agreements.
3. Plaintiffs' Arguments
Plaintiffs contend that even if a valid arbitration agreement exists, the scope of this claim falls outside the scope of the arbitration clauses among the Parties. Plaintiffs cite several cases to support their argument on the second prong on scope of the dispute. Dkt. 25 (unredacted Response) at 13-14 (citing O'Shaughnessy v. Young Living Essential Oils, L.C., 810 Fed.Appx. 308, 311 (5th Cir. 2020); Carey v. 24 Hour Fitness, USA, 669 F.3d 202, 205 (5th Cir. 2012); Sherer v. Green Tree Servicing, 548 F.3d 379, 381 (5th Cir. 2008); IQ Prods. Co. v. WD-40 Co., 871 F.3d 344, 348 (5th Cir. 2017, cert. denied, 138 S.Ct. 2620 (2018)).
O'Shaughnessy concerned a putative class action brought against the defendant for violation of RICO arising from a company allegedly involved in a pyramid scheme. The Fifth Circuit held there was no meeting of the minds with respect to arbitration. O'Shaughnessy, 810 Fed.Appx. at 311. The agreement at issue in O'Shaughnessy contained a Utah choice of forum and venue clause but a separate document referenced in the agreement contained an arbitration provision. Id. at 309. The separate document also contained a choice of forum and venue clause designating Salt Lake City, Utah as the selected forum and venue for any dispute not subject to arbitration. Id. The separate document did not contain language specifying it superseded any other agreement in the event of a conflict. Id. The O'Shaughnessy court ruled that the arbitration language contained in the separate document directly conflicted with the choice of forum and venue provisions of the disputed agreement and thus could not be harmonized. Id. at 312.
In this case, to the contrary, the Subscription Agreement is expressly subject to the Operating Agreement. Dkt. 1 at 14 (“the Subscriber submits to the terms and conditions of the Operating Agreement”). Indeed, Plaintiffs executed the Joinder Agreement Exhibit B to the Subscription Agreement thereby agreeing to be subject to the arbitration clauses contained therein. And Plaintiffs are not suing for breach of the Subscription Agreement. See id. at 21. Instead, Plaintiffs seek relief for representations and statements allegedly made by Defendants' personnel in connection with the valuation of the LP Units. Because Plaintiffs agreed to arbitrate disputes as employees of Steward Partners and members of Steward Partners Management Holdings, the Court will hold Plaintiffs to their bargain, which requires arbitration of this dispute.
The Carey case cited by Plaintiffs is also not on point because the holding there rested on the employer being able to unilaterally modify the arbitration requirements contained in the employee handbook and was thus illusory. Carey, 669 F.3d at 205. The circumstances of the applicable Employment Agreement, the Operating Agreement, and the Subscription Agreement are distinguishable. Plaintiffs do not contend the Subscription Agreement is illusory; they argue narrowly that there was no meeting of the minds with respect to arbitrability of this dispute. Dkt. 25 (Response) at 17 (“there is no ‘meeting of the minds' with respect to arbitration ....”).
Plaintiffs maintain that because the Employment Agreement states that the LP Units are issued “pursuant to the Subscription Agreement” and that the Employment Agreement is “subject to the terms and conditions of the Operating Agreement and the Subscription Agreement” this lawsuit represents a carve-out of the arbitration provision requirements. Id. at 16.
That said, as noted above, the Subscription Agreement issuance of LP Units is expressly subject to the Operating Agreement, including the arbitration clauses for all disputes, claims or controversies between or among the Members and/or Associated Persons via the Joinder Agreement Exhibit B as well as the express terms of the Subscription Agreement Section 1.2. Moreover, the reason Plaintiffs were entitled to the LP Units in the first instance was in connection with their employment compensation with Steward Partners as financial advisors, placing this dispute squarely “within the business of the FA or in connection with activities of such Associated Persons relating primarily to or arising with respect to FINRA.” Dkt. 21 at 33.
4. Conclusion
Plaintiffs filed their Statement of Claim with FINRA raising the same claims, relief, and damages as those sought in this lawsuit. Plaintiffs have thus agreed to arbitrate their dispute, claim, or controversy with Defendants by not only binding arbitration clauses contained in the applicable agreements, but also by their own acts and conduct in pursuing their claims in arbitration. This court is merely holding the parties to the benefit of their bargain-a bargain that includes binding arbitration to resolve their disputes.
C. Plaintiffs have not met the threshold of establishing “Positive Assurance” that the Arbitration Clauses are not susceptible of an interpretation which would cover the dispute at issue
Once the court determines that there is a valid arbitration agreement, the strong federal policy favoring the enforcement of the arbitration agreements applies, and all ambiguities must be resolved in favor of arbitration. Banc One Acceptance Corp. v. Hill, 367 F.3d 426, 429 (5th Cir. 2004). “An order to arbitrate the particular grievance should not be denied unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute. Doubts should be resolved in favor of coverage.” AT & T Techs. v. Commc'ns Workers of Am., 475 U.S. 643, 650 (1986) (quoting Steelworkers v. Warrior & Gulf Navigation Co., 363 U.S. 574, 583 (1960) (emphasis added)).
It is clear from the reasoning employed by the Fifth Circuit in Motorola that Plaintiffs cannot say with “positive assurance” that the arbitration clauses in the two Employment Agreements, the Operating Agreement, and Fuchs's and Heck's Form U-4's are not susceptible of an interpretation which cover the dispute over the LP units. All four agreements provide arbitration for “any dispute” between the parties. Plaintiffs have also admitted that the dispute over the LP units is covered by under the 2020 Employment Agreement because they filed a FINRA arbitration seeking damages arising out of the issuance of the LP units. The FINRA Action will involve the same documents, same witnesses, same testimony, and same burden of proofs. One cannot say with “positive assurance,” let alone any assurance, that the arbitration clauses do not cover the claim in Plaintiffs' Complaint.
Finally, doubts concerning the scope of coverage of an arbitration clause are resolved in favor of arbitration. AT & T, 475 U.S. at 650. This is of course consistent with the national policy favoring arbitration embodied in the Federal Arbitration Act (“FAA”). Buckeye Check Cashing v. Cardegna, 546 U.S. 440, 443 (2006).
This Court will not depart from this fundamental rule. While the Court concludes that Plaintiffs' claim is subject to arbitration, if any doubt did exist, it would be required to err on the side of arbitration.
D. Waiver
In these types of situations, the issue of waiver typically arises when the party seeking arbitration has substantially litigated in the judicial process to the extent where compelling the case to arbitration would prejudice the opposing party. See, E.g., Pepe Int'l Dev. Co. v. Pub Brewing Co., 915 S.W.2d 925, 931 (Tex. App.-Houston [1st Dist.] 1996); In re Bruce Terminix Co., 988 S.W.2d 702, 704 (Tex. 1998). That is not this situation. In all events, waiver depends on the individual circumstances of each case. Pepe Int'l, 915 S.W.2d at 931.
Plaintiffs waived the right to litigate the claim here with they filed the FINRA Action, alleging the same set of facts and seeking the identical relief. By voluntarily selecting to arbitrate the securities dispute in FINRA-which was required under the Employment Agreements, Operating Agreement and Form U-4-Plaintiffs have waived their right to litigate their Section 12(a)(2) Securities Act claim in this court.
This is not a case in which an injustice might be worked on a plaintiff. This is not a situation where a Plaintiff would have to initiate a new arbitration and be barred from asserting claims because of jurisdictional or procedural issues. To the contrary, Plaintiffs' need only add Steward Management Holdings as a party to the FINRA Action. While Steward Management Holdings would be entitled to answer the Statement of Claim and otherwise defend itself in the FINRA Action, there is no prejudice to Plaintiffs.
On the other hand, if the Federal Action were to proceed, Plaintiffs would get two bites at the apple to recover damages based on the same allegations. And Steward Global Advisory would be required to defend the same case twice. The judicial system does not permit parties to do such a Texas two-step.
III. Recommendation
For the reasons given above, the undersigned RECOMMENDS the District Court GRANT Defendants' Motion to Compel Arbitration (Dkt. 21) and REFER the entire action to arbitration.
The undersigned FURTHER RECOMMENDS that this matter be DISMISSED with prejudice. Upon conclusion of the FINRA Arbitration, this Court will not need to take any further action. See Mayton v. Tempoe, No. SA-17-CV-179-XR at *13 (W.D. Tex. Jun 07, 2017). Under Section 3 of the FAA, courts should dismiss an action when all the issues raised in a lawsuit should be submitted to arbitration. 9 U.S.C. § 3; Alford v. Dean Witter Reynolds, 975 F.2d 1161, 1164 (5th Cir. 1992) (“The weight of authority clearly supports dismissal of the case when all of the issues raised in the district court must be submitted to arbitration.”); Lauzon v. Pulte Homes, Inc., No. SA-12-CV-177-XR, 2012 WL 4434761, at *5 (W.D. Tex. Sept. 24, 2012) (dismissing case compelled to arbitration because the Fifth Circuit encourages district courts to dismiss cases in instances where “staying the action serves no purpose.”). Thus, there is no need to stay the litigation.
IV. OBJECTIONS
The parties may file objections to this Report and Recommendation. A party filing objections must specifically identify those findings or recommendations to which objections are being made. The District Court need not consider frivolous, conclusive, or general objections. See Battles v. U.S. Parole Comm'n, 834 F.2d 419, 421 (5th Cir. 1987).
A party's failure to file written objections to the proposed findings and recommendations contained in this Report within 14 days after the party is served with a copy of the Report shall bar that party from de novo review by the District Court of the proposed findings and recommendations in the Report and, except upon grounds of plain error, shall bar the party from appellate review of unobjected-to proposed factual findings and legal conclusions accepted by the District Court. See 28 U.S.C. § 636(b)(1)(C); Thomas v. Arn, 474 U.S. 140, 150-53 (1985); Douglass v. United Services Auto. Ass'n, 79 F.3d 1415 (5th Cir. 1996) (en banc).