United States District Court, S.D. New York
December 1, 2014
PICTET FUNDS (EUROPE) S.A. and PICTET OVERSEAS INC., Plaintiffs,
EMERGING MANAGERS GROUP, L.P. and EMG CAPITAL, LLC, Defendants
For Plaintiffs: Mark G. Hanchet, Esq., Jeremy D. Schildcrout, Esq., Mayer Brown LLP, New York, NY.
For Defendants: Rishi Bhandari, Esq., Evan Mandel, Esq., Benjamin R. Delson, Esq., Robert Glunt, Esq., Mandel Bhandari LLP, New York, NY.
OPINION AND ORDER
Shira A. Scheindlin, United States District Judge.
Pictet Funds (Europe) S.A. (" PFE") and Pictet Overseas Inc. (" Pictet Overseas") bring this action pursuant to the Federal Arbitration Act (" FAA") to enjoin a Financial Industry Regulatory Authority (" FINRA") arbitration in which they were named respondents by Emerging Managers Group, L.P. (" EMG") and EMG Capital, LLC (" EMG Capital"). The arbitration was commenced by the filing of a Statement of Claims and Demand for Arbitration (" SOC") in which EMG and EMG Capital bring a single claim for breach of contract against PFE and Pictet Overseas. The Claim arises out of a contract entered into by PFE and non-party Atlantic Financial Partners LLC (" AFP"). The Agreement contains a general dispute resolution clause, as well as a provision permitting FINRA arbitration for disputes initiated by AFP " related solely to fees payable." 
Plaintiffs move to preliminarily enjoin the arbitration pursuant to Federal Rule of Civil Procedure 65(a). They contend that the arbitration cannot proceed against Pictet Overseas because it is not party to the Agreement, or against PFE, as the Claim is beyond the limited scope of the Agreement's arbitration clause.
Defendants now move to dismiss this case for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6) or, alternatively, to compel arbitration under the FAA. They argue that the arbitrator -- not this Court -- must resolve the issues raised by plaintiffs, including the scope of the arbitration clause. Moreover, they assert that plaintiffs' action is time-barred under the statute of limitations set forth in section 7503(c) of New York's Civil Practice Law and Rules (" section 7503(c)").
During a telephone conference held on October 28, 2014, the parties agreed that an evidentiary hearing on the request for a preliminary injunction was not required. They contend that there are two dispositive issues that can be decided as a matter of law. For plaintiffs, this issue is whether the Claim is arbitrable; for defendants, whether the suit is time-barred by section 7503(c).
For the reasons discussed below, I conclude that the question of arbitrability is properly before this Court and that section 7503(c) does not bar plaintiffs' suit for injunctive relief. Based on the parties' submissions, I further conclude that plaintiffs are entitled to a preliminary injunction. Accordingly, plaintiffs' motion is GRANTED, and defendants' motion is DENIED.
II. BACKGROUND AND FINDINGS OF FACT
A. The Parties
PFE is a Luxembourg corporation based in Luxembourg. Among other things, PFE manages certain investment funds outside of the United States. It entered into the Agreement -- with non-party AFP -- in June 2010. PFE is not a member of FINRA.
Pictet Overseas is a Canadian corporation based in Montreal, Canada. It is a member of FINRA, but it is not a party to the Agreement.
EMG is a Delaware limited partnership with its principal place of business in New York. It is not a member of FINRA. AFP's members transferred their ownership interests to EMG in April 2012.
EMG Capital is a Florida limited liability corporation with its principal place of business in Miami, Florida. It is a FINRA member.
B. The Agreement
Under the Agreement, AFP agreed to provide sales and support services to PFE, which included introducing and promoting PFE funds to broker-dealer networks -- such as Merrill Lynch's Global Private Client Group -- in the United States. AFP was paid fees and commissions for its services. 
The Agreement states that " [a]ny party may terminate this Agreement by the giving of no less than three months written notice to the other ."  However, PFE could terminate the Agreement with " immediate effect" if AFP failed to " observe or perform [its] obligations" under the " Investment Acquisition" and " Supporting Services" provisions of the Agreement. Likewise, AFP could terminate the agreement without notice if PFE failed to perform its obligations under the " Remuneration" provision.
The Agreement further provides that:
In the case of termination of this Agreement by [PFE] due to AFP having breached any of its material obligations under this Agreement or otherwise materially jeopardizes [sic] the interests of [PFE], the latter shall be entitled to retain any earned but unpaid commissions.
In the event of termination of this Agreement by [PFE] which is not due to AFP's material breach of this Agreement, [PFE] shall continue to pay the remuneration for a period of 12 (twelve) months following the effective date of termination, based on the assets still held by the Distributors during that period.
Thus, under the Agreement, termination based on material breach under section 8(b)(ii), as opposed to termination with notice under section 8(a), results in fifteen fewer monthly payments to AFP -- three months for the notice period, and twelve months for the year following the effective date of termination.
The Agreement's " Governing Law / Place of Jurisdiction" provision states that:
This Agreement including all matters related to its validity, construction, performance and enforcement shall be governed by the laws of the [sic] Switzerland. The Parties expressly agree that Geneva shall be the exclusive place of jurisdiction; provided, however, that in the event of a dispute related solely to fees payable, then AFP shall have the right to initiate an arbitration action to be settled by binding and non-appealable arbitration administered by FINRA Dispute Resolution, NY, in accordance with its securities arbitration rules then in force, and judgment upon such award may be entered in any court of competent jurisdiction.
Should the above mentioned dispute be initiated by [PFE], the latter shall have the choice about the appointment of the institution administering the international arbitration.
C. The Parties' Dispute
On April 30, 2014, PFE terminated the Agreement -- effective May 1 -- citing, among other things, AFP's and EMG's poor performance. On May 29, defendants commenced the Arbitration by filing the SOC. The SOC alleges that " [b]ecause EMG [ ] performed all of its obligations under the Agreement . . . . [PFE's] purported termination of the Agreement" for cause -- i.e., without notice -- constitutes a breach by PFE.
Defendants seek $339, 000 in compensatory damages, the bulk of which represents the fifteen months of commissions defendants would have received had the Agreement been terminated with notice. They also seek attorneys' fees and punitive damages.
III. STANDARD OF REVIEW
A. Preliminary Injunction
" 'The district court has wide discretion in determining whether to grant a preliminary injunction . . . .'"  Nonetheless, " '[a] preliminary injunction is an extraordinary remedy never awarded as of right.'"  " 'A party seeking a preliminary injunction in this circuit must show: (1) irreparable harm in the absence of the injunction and (2) either (a) a likelihood of success on the merits or (b) sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly in the movant's favor.'"  " A preliminary injunction preserves the status quo pending final resolution of litigation." 
" 'To satisfy the irreparable harm requirement, [petitioner] must demonstrate that absent a preliminary injunction [it] will suffer an injury that is neither remote nor speculative, but actual and imminent, and one that cannot be remedied if a court waits until the end of trial to resolve the harm.'"  Moreover, irreparable harm by definition " 'cannot be remedied by an award of monetary damages.'"  In determining whether a plaintiff has demonstrated a likelihood of success on the merits of the " ultimate case, a court is not called upon finally to decide the merits of the controversy[; ] . . . [i]t is necessary only that the court find that the plaintiff has presented a strong prima facie case to justify the discretionary issuance of preliminary relief." 
B. Rule 12(b)(6) Motion to Dismiss
1. General Standard
In deciding a motion to dismiss pursuant to Rule 12(b)(6), the court must " construe the complaint liberally, accept all [non-conclusory] factual allegations in the complaint as true, and draw all reasonable inferences in the plaintiff s favor."  " When there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement for relief."  A claim is plausible " when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged."  Plausibility requires " more than a sheer possibility that a defendant has acted unlawfully." 
When deciding a motion to dismiss, a district court may consider the facts alleged in the complaint, as well as " 'documents attached to the complaint as exhibits[ ] and documents incorporated by reference in the complaint.'"  A court may also consider a document that is not incorporated by reference " where the complaint 'relies heavily upon its terms and effect, ' thereby rendering the document 'integral' to the complaint." 
2. Application to Statute of Limitations
" The lapse of a limitations period is an affirmative defense that a defendant must plead and prove."  " However, a defendant may raise an affirmative defense in a pre-answer Rule 12(b)(6) motion if the defense appears on the face of the complaint."  Thus, " [i]f the allegations . . . show that relief is barred by the applicable statute of limitations, the complaint is subject to dismissal for failure to state a claim . . ." 
As a threshold matter, I conclude that there is subject matter jurisdiction over this dispute. The FAA " creates a body of federal substantive law of arbitrability applicable to arbitration agreements affecting interstate commerce."  However, it does not " independently confer subject matter jurisdiction on the federal courts."  Accordingly, " there must be an independent basis of jurisdiction before a district court may entertain petitions under the [FAA]"  Here, subject matter jurisdiction is premised on diversity pursuant to section 1332 of title 28 of the United States Code. The Complaint alleges, and defendants do not dispute, that the Court has diversity jurisdiction, as the amount in controversy exceeds $75, 000, and complete diversity exists among the parties.
B. Questions of Arbitrability Are for This Court
The " '[q]uestion[ ] of arbitrability' is a term of art covering 'dispute[s] about whether the parties are bound by a given arbitration clause' [i.e., formation] as well as 'disagreements] about whether an arbitration clause in a concededly binding contract applies to a particular type of controversy' [i.e., scope]."  It is " 'an issue for judicial determination unless the parties clearly and unmistakably provide otherwise.'"  In other words, " [t]he proper inquiry is whether 'there is clear and unmistakable evidence from the arbitration agreement, as construed by the relevant state law, that the parties intended that the question of arbitrability shall be decided by the arbitrators].'"  And although federal policy favors arbitration, it is a matter of consent under the FAA. Thus, when doubts concern who shall decide issues of arbitrability, " the law then reverses the presumption to favor judicial rather than arbitral resolution." 
1. The Agreement Does Not Clearly and Unmistakably Submit the Issue of Arbitrability to FINRA Arbitrators
Defendants contend that because the Agreement makes FINRA's rules applicable to the arbitration of disputes, PFE agreed to be bound by FINRA Rule 13134, which states that the " [p]anel has the authority to interpret and determine the applicability of all provisions under the" FINRA Code of Arbitration Procedure for Industry Disputes (the " Code"). It is true that the Second Circuit has stated that the predecessor to Rule 13134, " clearly and unmistakably evinces the parties' intent to submit to arbitration disputes over arbitrability that turn on interpretations of provisions of the Code ."  However, the reference to FINRA's rules in the Agreement does not by itself evince a clear and unmistakable intent to submit questions of arbitrability to FINRA arbitrators.
FINRA's rules are mentioned in connection with the arbitration carve-out for disputes related solely to fees payable -- but not in connection with the more general dispute resolution provision that calls for the resolution of disputes in Geneva, in accordance with the laws of Switzerland. In other words, FINRA's rules only apply to disputes that are within the scope of the arbitration carve-out provision. As explained by the Second Circuit, this means that FINRA's rules do not apply " until a decision is made as to whether a question does or does not fall within the intended scope of arbitration, in short, until arbitrability is decided."  Accordingly, this Court is the proper forum to determine the two questions of aribitrability raised by plaintiffs with respect to PFE -- whether the Claim falls within the arbitration carve-out and whether defendants, neither of which is a named party in the arbitration agreement, can enforce the Agreement.
2. Pictet Overseas's Membership in FINRA Does Not Constitute Clear and Unmistakable Intent to Submit the Issue of Arbitrability to FINRA Arbitrators
Defendants argue that Pictet Overseas agreed to be bound by FINRA rules -- including Rule 13134 -- by virtue of its membership in FINRA. However, Rule 13134 does not apply unless the parties agreed to arbitrate. This is because " the Code does not evidence a 'clear and unmistakable' intent to submit the issue of arbitrability to arbitrators where only one party is a [FINRA] member and the parties do not have a separate agreement to arbitrate. . . ."  Thus, as with the objection raised by PFE regarding the scope of the arbitration provision in the Agreement, the initial determination of whether the parties agreed to arbitrate under FINRA's rules must be made by this Court.
C. New York's Statute of Limitations
1. New York Law and Section 7503(c)
A party bringing an arbitration has the option under section 7503(c) to serve a demand for arbitration or a notice of intent to arbitrate both of which trigger a time limit for bringing a proceeding to stay the arbitration. Section 7503(c) provides that:
A party may serve upon another party a demand for arbitration or a notice of intention to arbitrate . . . stating that unless the party served applies to stay the arbitration within twenty days after such service [it] shall thereafter be precluded from objecting that a valid agreement was not made or has not been complied with and from asserting in court the bar of a limitation of time. . . . An application to stay arbitration must be made by the party served within twenty days after service upon [it] of the notice or demand, or [it] shall be so precluded.
By its terms, section 7503(c) covers three categories of objections -- the validity of the agreement to arbitrate, compliance with the agreement, and whether the arbitration is time-barred. The statute is strictly construed.
The first two categories are most relevant here. The validity prong involves consideration of the viability or enforceability of the agreement. For example, in Fiveco, Inc. v. Haber the New York Court of Appeals held that section 7503(c) barred an untimely action to stay an arbitration on the ground that the contract had expired.
The second type of objection included in section 7503(c) -- whether the agreement " has not been complied with" -- requires
a judicial determination as to whether there is any preliminary requirement or condition precedent to arbitration to be complied with and, if so, whether there has been compliance with such requirement or condition precedent. Thus, the parties may have erected a prerequisite to the submission of any dispute to arbitration, in effect a precondition to access to the arbitral forum.
The condition precedent can also be created by statute. As many of the New York cases arise in the insurance context, a particularly germane example of this is that under New York's Insurance Law, " [p]hysical contact is a condition precedent to an arbitration based upon a hit-and-run accident involving an unidentified vehicle." 
Thus, in Aetna Life & Casualty Co. v. Stekardis, New York's Court of Appeals held that an untimely objection based on the failure to meet such a statutory condition precedent is precluded. The Court of Appeals stated that such a challenge " raises an issue whether the agreement to arbitrate has been 'complied with, ' thus posing an instance of the so-called second threshold question under CPLR 7503." 
Significantly, whether an agreement is valid or has been complied with are separate and distinct from the question of whether there has been an agreement to arbitrate. Thus, New York's Court of Appeals held in Matter of Matarasso, that " where the application for a stay is made on the ground that no agreement to arbitrate exists, it may be entertained notwithstanding the fact that the stay was sought after the 20-day period had elapsed."  In addition, the New York Court of Appeals -- in a case not concerned with the time limitation in section 7503(c) -- has explained that on a motion to stay arbitration, validity is not the same as whether " the particular agreement . . . was of limited or restricted scope and [whether] the particular claim sought to be arbitrated is outside that scope." 
2. Section 7503(c) Does Not Bar Plaintiffs' Objections
As explained by the Supreme Court, " the first principle that underscores all of [its] arbitration decisions [is that arbitration is strictly a matter of consent, and thus is a way to resolve those disputes -- but only those disputes -- that the parties have agreed to submit to arbitration."  Thus, " courts should order arbitration of a dispute only where the court is satisfied that neither the formation of the parties' arbitration agreement nor (absent a valid provision specifically committing such disputes to an arbitrator) its enforceability or applicability to the dispute is in issue."  And " [w]hen a contract contains both a broad dispute [resolution] provision permitting lawsuits and also an arbitration requirement set forth in one narrow context, courts routinely limit the arbitration requirement to disputes arising squarely in that narrow context." 
Thus, there is a threshold question of whether defendants initiated suit in the correct forum, and under the correct law. To resolve that question I must determine whether the parties agreed to arbitrate the Claim. In making this determination, there is no basis to favor the arbitration clause over the forum selection clause -- as a narrow arbitration provision there is no presumption in favor of arbitrability.
A review of the Agreement and the SOC reveals that the parties did not agree to arbitrate the Claim. Indeed, defendants have transparently sought to circumvent the parties' dispute resolution provision, which calls for disputes to be resolved in Geneva under Swiss law. The SOC alleges, among other things, that while plaintiffs " [p]urported to terminate the Agreement pursuant to Clause 8(b)(ii)[, ]" the defendants " performed all of [their] obligations under the Agreement, " and therefore PFE " may not terminate the Agreement pursuant to Clause 8(b)(ii)."  Likewise, defendants allege that " [p]ursuant to Clause 8(d), because [PFE] is terminating for reasons other than [EMG's] material breach of the Agreement, [plaintiffs] must pay [defendants] the remuneration owing under Section 5 . . . ." 
Thus, the crux of the SOC's allegations is that because EMG " perform[ed]" all of its obligations under the Agreement, PFE improperly invoked the " enforcement" mechanism in section 8(b)(ii) of the Agreement -- which permits termination with immediate effect -- instead of providing the required three-months notice under section 8(a). But under the Agreement " all matters related to its [ ] construction, performance and enforcement shall be governed by [Swiss law and] Geneva shall be the exclusive place of jurisdiction[, ]" and arbitration is only permitted with respect to disputes " related solely to fees payable."  In addition, defendants named Pictet Overseas -- a Canadian entity that does not appear to have any relationship to the dispute between PFE and EMG -- as a respondent. The most likely explanation is that this was done for the sole purpose of compelling arbitration based on Pictet Overseas's status as a FINRA Member.
Under these circumstances, defendants cannot rely on the time limitation set forth in section 7503(c). I cannot treat the parties' narrow carve-out for disputes related to fees payable as governing the present dispute and thereby ignore the parties' forum selection and choice of law provision. And I cannot compel the arbitration of issues the parties did not agree to arbitrate.
Moreover, section 7503(c) does not preclude either Pictet Overseas's objections or PFE's objection that the dispute is beyond the scope of the parties' narrow arbitration provision. Pictet Overseas's objections -- that it was not a party to the Agreement and that its status as a FINRA member does not constitute an agreement to arbitrate the Claim -- relate to the existence of an agreement to arbitrate, not its validity . Accordingly, these objections fall within the Matarasso exception and are not time-barred.
Likewise, section 7503(c) does not bar PFE's objection that it did not agree to arbitrate the Claim by agreeing to the narrow arbitration carve-out. In Pitcairn, the Second Circuit held that where an objection is " that the agreement to arbitrate is limited to specified issues, " section 7503(c) does not apply. Pitcairn is controlling.
Contrary to defendants' suggestion, Stekardis is not inconsistent with Pitcairn . Although Stekardis uses the term " scope, " it concerned an objection based on the failure of a statutory condition precedent, not an objection based on whether a claim fell within the scope of a narrow arbitration provision. The other authorities cited by defendants are also inapposite because they do not consider the application of section 7503(c) to a narrow arbitration clause and/or where an underlying agreement contains both a narrow arbitration clause and a broad dispute resolution provision. They are also contradicted by the holdings of other appellate courts.
However, I am unaware of any decision by a New York court holding that section 7503(c) bars review of the arbitrability of a claim where the parties have entered into a narrow arbitration clause and/or where the parties have also entered into a broad dispute resolution provision. This is not surprising. First, the issue is not likely to arise. This is because narrow arbitration clauses are exceedingly rare and " something of an endangered species."  Most arbitration clauses are broad, such that they cover all disputes " arising out of" or " relating to" the underlying agreement. Second, courts play a limited role when a case involves a broad arbitration clause. Finally, when an arbitration clause is broad, the " exclu[sion of] a substantive issue from arbitration, [ ] generally requires specific enumeration in the arbitration clause itself of the subjects intended to be put beyond the arbitrator's reach." 
At the same time, New York courts -- like the Supreme Court and Second Circuit in the FAA context -- follow " 'the rule . . . that unless the agreement to arbitrate expressly and unequivocally encompasses the subject matter of the particular dispute, a party cannot be compelled to forego the right to seek judicial relief and instead submit to arbitration.'"  Here, a review of the Agreement shows that PFE did not agree to arbitrate the Claim. Accordingly, section 7503(c) does not bar PFE's objection that it did not agree to arbitrate the Claim.
D. The Arbitration Is Enjoined
Based on the undisputed facts, a hearing is not necessary to determine that plaintiffs have established each of the preliminary injunction factors. First, plaintiffs are likely to succeed on the merits. With respect to Pictet Overseas, the dispute at issue concerns the Agreement, a contract between PFE and either AFP or EMG. Thus, Pictet Overseas can only be compelled to arbitrate if it agreed to arbitrate the Claim by virtue of its FINRA membership.
Under FINRA Rule 13200(a), arbitration is required if the dispute is between FINRA Members and concerns Pictet Overseas's business. While Pictet Overseas is a FINRA Member, none of the parties to the Agreement -- PFE, AFP, and possibly EMG -- are FINRA Members. Defendants do not claim that the only two FINRA members referred to in the Statement of Claim -- Pictet Overseas and EMG Capital -- did any business together, much less with respect to the activities described in the Agreement. According to a representative from Pictet Overseas, it has never done any business with AFP or either of the EMG defendants, and it is not engaged in the type of business described in the Agreement. Defendants have not offered any argument or evidence to suggest otherwise. Accordingly, there is no basis to conclude that Pictet Overseas agreed to be bound by FINRA's rules in connection with any dispute with defendants.
PFE's objection is also likely to succeed on the merits. " Faced with a narrow arbitration clause, a court considering the appropriate range of arbitrable issues must consider whether the [question at] issue is on its face within the purview of the clause."  On its face, this Claim dispute does not fall within the purview of the arbitration clause.
The Claim is not solely related to fees payable. Rather, the SOC asserts a claim based on PFE's alleged failure to comply with the terms of the Agreement's termination provisions. By its nature, this dispute concerns issues of construction, performance, and enforcement, and under the dispute resolution clause must be brought in Geneva and decided under Swiss law.
Second, defendants did not respond to plaintiffs' argument and evidence concerning irreparable harm or the balance of hardships. In the context of arbitration, it is generally held that a party suffers irreparable harm when it is " 'forced to expend time and resources arbitrating an issue that is not arbitrable, and for which any award would not be enforceable.'"  A similar principle applies to the hardship prong. Here, plaintiffs -- both foreign entities -- did not agree to arbitrate the Claim, and I find that these two factors are satisfied.
Accordingly, plaintiffs have established the elements necessary for a preliminary injunction of the FINRA arbitration.
For the foregoing reasons, plaintiffs' motion for a preliminary injunction is GRANTED and defendants' motion to dismiss is DENIED. The Clerk of Court is directed to close these motions [Docket Nos. 5 and 10]. The parties are directed to confer and report back to the court by December 8, 2014, indicating whether they consent to the preliminary injunction being made permanent and to the entry of a final judgment in this case.