Matthew W. Woodruff ()
As if following Voltaire,1 a number of federal judges have now opined that if the power to enjoin arbitration does not exist under the Federal Arbitration Act (FAA), it is up to the courts to invent one.2 As explained below, however, except in exceptional circumstances—such as where a court must issue an injunction to protect an existing order or judgment3—a federal court does not have a general power to enjoin arbitration.
The controlling authority is Pennsylvania Bureau of Correction v. U.S. Marshals Service.4 In that case, the Supreme Court held that the All Writs Act, 28 U.S.C. §1651, does not authorize federal courts “to issue ad hoc writs whenever compliance with statutory procedures appears inconvenient or less appropriate.” The problem there was how to move an inmate from a state prison to the federal courthouse. A magistrate judge issued an order that (i) directed state officials to transport the prisoner to the county jail; and then (ii) directed federal marshals to take custody of the prisoner and transport him to court.
Upon the objection of the U.S. Marshal Service, the Supreme Court ruled that the letter of the habeas corpus statute required any order to be directed to “the person having custody of the person detained.” Since the Marshal Service did not have custody of the prisoner, the Supreme Court held that the marshals could not be required to transport him. Pennsylvania Bureau of Correction stands for the proposition that “Where a statute specifically addresses the particular issue at hand, it is that authority, and not the All Writs Act, that is controlling.”5
In the case of arbitration, the procedure created by Congress under Section 4 of the FAA specifically addresses the question of whether a party can (or cannot) be required to arbitrate. Under these circumstances, there is no basis for a federal court to grant “ad hoc” injunctive relief.
‘Anti’-Motions to Compel
Every year, thousands of investors file claims with the Financial Industry Regulatory Authority (FINRA) seeking arbitration under FINRA Rule 12200 either by “written agreement” or by “request.” By and large, the respondent member does not contest its obligation to arbitrate. From time to time, however, a member of FINRA will contend that a claimant is not a “customer” within the meaning of FINRA Rule 12200 and that a valid and enforceable “agreement in writing for arbitration” under the FAA therefore does not exist.
Congress has created a specific procedure for resolving this kind of dispute. Under Section 4 of the FAA, a district court’s inquiry is limited to exactly two issues: (1) “the making of the arbitration agreement” and (2) “the failure, neglect, or refusal to perform the same.”6 Congress has also limited relief to the party “aggrieved by the alleged failure, neglect, or refusal of another to arbitrate.” Under the plain terms of Section 4, that is, only the “aggrieved” party can petition the court for relief.
Confronted with this state of affairs, members of the securities industry have adopted the tactic of bringing an action for “declaratory judgment” under 28 U.S.C. §2201 coupled with a demand for either a preliminary or a mandatory injunction (in effect, an “anti”-motion to compel). The premise is that unless a court intervenes, the member will be “forced to expend time and resources arbitrating an issue that is not arbitrable.”7
Because arbitration is a matter of contract, however, and “a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit,”8 it is plain that unless and until a court determines that an agreement to arbitrate has been “made,” the recalcitrant party (hereafter, the respondent) will not be forced to do anything. The same is true with other common-law contracts: Having made a demand for performance that has been refused, the aggrieved party must seek relief from the courts. If the aggrieved party does not seek relief—or if the relief is denied—the status quo will remain unchanged.
It is equally well settled that the FAA does not create a federal cause of action.9 Instead, Section 4 authorizes federal district courts to award the substantive remedy of specific performance in a case in which a district court would otherwise have jurisdiction.10 Significantly, the FAA does not characterize the neglect, failure or refusal of the respondent as a “breach” of the parties’ agreement, but only as “a default in proceeding.” Whether the respondent’s non-performance is excused or justified, in other words, is not at issue. Contract defenses that assume the “existence” of an agreement but challenge its enforceability (such as waiver, release, timeliness, etc.) are not relevant to the threshold question of whether an agreement was “made.”
Thus, where the aggrieved party (hereafter, the claimant) seeks only the statutory remedy of specific performance, the claimant can proceed by expedited notice of motion (as opposed to a full-blown action for breach of contract) and the court’s inquiry is confined to questions of contract formation only.11 Nor can a respondent expand the court’s inquiry by seeking a declaratory judgment on a more generalized “question of arbitrability.”
Simply as a matter of common-law contract analysis, the respondent must first take a position as to whether an agreement in writing for arbitration was “made.” If the court finds that an agreement was not made, additional contentions by the respondent about “arbitrability” are moot. Conversely, if the court determines that an agreement was “made,” the condition for relief under Section 4 of the FAA has been met and a court must (“shall”) order arbitration.12
In the latter case, of course, the respondent’s expenditure of time and resources will not constitute “harm.” In either event, the procedure provided by Section 4 of the FAA “specifically addresses the particular issue at hand” and affords complete relief to the prevailing party.13 Any demand for an “ad hoc” mandatory injunction is superfluous.
The standard for a preliminary injunction is essentially the same as for a mandatory injunction “with the exception that the plaintiff must show a likelihood of success on the merits rather than actual success.”14 Unlike a mandatory injunction, however, a preliminary injunction is not a remedy; its purpose is merely “to preserve the relative positions of the parties until a trial on the merits can be held.”15 Because the respondent’s motion for a preliminary injunction obviously constitutes a refusal to arbitrate, the “merits” in such a case again boil down to the issue of whether the requisite “agreement in writing for arbitration” has been “made.”
A claimant, however, cannot force a member to expend time and resources merely by “requesting” arbitration under FINRA Rule 12200. Unlike a commercial arbitration forum, FINRA conducts its own review of the dispute and will reject a dispute for arbitration if the claim (or claimant) is barred by one or more express exclusions in the FINRA Code.16 Although FINRA’s review stops short of an agreement by the parties to “arbitrate arbitrability,”17 it does represent a member’s delegation to FINRA of the threshold question of contract formation. At common law as well, a party—having decided to make an offer on specified terms—can delegate to an agent the determination of whether that offer has been properly accepted.18 This is what a member does when it becomes a “member” of FINRA and adopts FINRA’s industry-wide standardized terms and definitions.19 A claimant does the same by requesting arbitration at FINRA “under the Code” and by executing FINRA’s Submission Agreement (which is an “agreement in writing for arbitration”).20
FINRA gives its members 45 days to answer a statement of claim, during which time the “relative positions” of the parties will not change. While a member that waits 44 days before seeking relief may be said to have courted the “harm” that it seeks to enjoin,21 a member’s expenditure of time and resources is only what the member bargained for when it authorized FINRA to make contracts on the member’s behalf. In such a case, the member’s “anti”-motion to compel is essentially a demand that a federal court step in and substitute its own judgment for that of the member’s agent.
Stripped of the respondent’s demand for injunctive relief, a member’s contention that an agreement to arbitrate does not “exist” is a claim that FINRA—as the member’s agent, the industry’s self-regulatory organization, the draftsman of the FINRA Code and the common-law “master of the offer”—erred in applying FINRA’s own terms and definitions. While such a claim is not beyond the realm of possibility (particularly if the member contends that FINRA erred as a matter of fact), the issue of law is the familiar one of “misunderstanding” and is as old as the Peerless (Raffles) case.22 In effect, the member contends that a contract does not exist because the member had one understanding of FINRA’s terms (e.g., “customer”) and the Claimant had another. Under FINRA Rule 12200, however, an agreement to arbitrate “under the Code” is formed on the basis of FINRA’s published terms and definitions. Either party’s “private” understanding is immaterial.23 In this case too, there is nothing “exceptional” that would warrant the issuance of injunctive relief.
A member’s “anti”-motion to compel does not invite a court to frame a new “law of arbitrability” but only to apply settled principles of contract formation. A member’s demand for injunctive relief is a red herring that should not detract from the sole dispositive issue under Section 4 of the FAA, which is whether an agreement in writing for arbitration has been “made.”
Matthew W. Woodruff practices in New York City and represents individual and institutional investors in securities arbitration and litigation.
1. Somewhat blasphemously, Voltaire wrote: “Si Dieu n’existait pas, il faudrait l’inventer,” which means: “If God did not exist, it would be necessary to invent Him.” François-Marie Arouet (Voltaire) , Epître à l’auteur du livre des Trois imposteurs [Epistle to the Author of the Book "The Three Imposters"] (OEuvres complètes de Voltaire, ed. Louis Moland [Paris: Garnier, 1877-1885], tome 10, pp. 402-405).
2. See, e.g., Societe Generale de Surveillance, S.A. v. Raytheon European Management and Systems, 643 F.2d 863, 868 (1st Cir. 1981) (“to enjoin a party from arbitrating where an agreement to arbitrate is absent is the concomitant of the power to compel arbitration where it is present.”) (Breyer, C.J.).
3. See In re American Express Fin. Advisors Sec. Litig., 672 F.3d 113 (2nd Cir. 2011).
4. 474 U.S. 34 (1985).
5. 474 U.S. at 43.
6. 9 U.S.C. §4.
7. Merrill Lynch Inv. Managers v. Optibase, 337 F.3d 125, 129 (2d Cir. 2003).
8. AT&T Technologies v. Communications Workers of America, 475 U.S. 643, 648 (1986) (quoting United Steelworkers of America v. Warrior & Gulf Nav. Co., 363 U.S. 574, 582 (1960)).
9. See generally Moses H. Cone Memorial Hospital v. Mercury Constr. Corp., 460 U.S. 1, 25, n. 32 (1983).
10. Previously, courts had held that only “damages” could be awarded for breach of an arbitration agreement. See Red Cross Line v. Atlantic Fruit Co., 264 U.S. 109 (1924).
11. Compare Hall Street Associates v. Mattel, 552 U.S. 576, 582 (2008) (for vacatur, FAA provides for “streamlined treatment as a motion, obviating the separate contract action that would usually be necessary to enforce or tinker with an arbitral award in court.”).
12. Leadertex v. Morganton Dyeing & Finishing, 67 F.3d 20, 25 (2d Cir. 1995).
13. Pennsylvania Bureau of Correction, 474 U.S. at 43.
14. Winter v. Natural Resources Defense Council, 555 U.S. 7, 32 (2008) (citation omitted).
15. University of Texas v. Camenisch, 451 U.S. 390, 395 (1981).
16. FINRA Rules 12200, 12204 and 12205. For the concept of an “express exclusion,” see AT&T Technologies and United Steelworkers, supra.
17. First Options of Chicago, v. Kaplan, 514 U.S. 938 (1995).
18. Restatement (Third) of Agency §6.01 and 6.02.
19. This follows under either the Second Circuit’s “third-party beneficiary” or “standing offer” theory of contract formation. Compare Spear, Leeds & Kellogg v. Central Life Ins., 85 F.3d 21, 27 (2d Cir. 1996) with Republic of Ecuador v. Chevron, 638 F.3d 384, 392 (2d Cir. 2011).
20. See FINRA Rule 12200.
21. Citibank, N.A. v. Citytrust, 756 F.2d 273, 276 (2d Cir. 1985).
22. See Raffles v. Wichelhaus & Anor  EWHC Exch J19 (April 1864).
23. Restatement (Second) of Contracts §20.