Opinion
Civil No. 04-477-JD.
January 28, 2005
ORDER
James C. McCarthy and Citigroup Global Markets, Inc., ("CGMI") arbitrated McCarthy's claims that CGMI violated the New Hampshire wage laws by failing to pay him certain compensation and causing him to forfeit the unvested portion of his Capital Accumulation Plan ("CAP"). The arbitration panel denied McCarthy's requests for relief. McCarthy petitions to vacate the arbitration panel's decision, and CGMI petitions to confirm it.
McCarthy's "Statement of Claim" alleges a "First Claim" for monetary relief and a "Second Claim" for declaratory and injunctive relief. Although the First Claim includes a paragraph of "Other Causes of Action," both claims focus on the New Hampshire wage laws and will be addressed together as a single claim.
Discussion
"Judicial review of the arbitrator's decision is extremely narrow and exceedingly deferential." Wonderland Greyhound Park, Inc. v. Autotote Sys., Inc., 274 F.3d 34, 35 (1st Cir. 2001) (internal quotation marks omitted). Section ten of the Federal Arbitration Act lists certain limited circumstances when the court may vacate an arbitration award. 9 U.S.C. § 10. If § 10 does not apply, review is possible only: "(1) where an award is contrary to the plain language of the contract, or (2) where it is clear from the record that the arbitrator recognized the applicable law, but ignored it." Gupta v. Cisco Sys., Inc., 274 1, 3 (1st Cir. 2001); see also Bull HN Info. Sys., Inc. v. Hutson, 229 F.3d 321, 330-31 (1st Cir. 2000). Therefore, "[a] court may only vacate an arbitrator's award in very rare circumstances, such as where there was misconduct by the arbitrator, where the arbitrator exceeded the scope of his arbitral authority, or when the award was made in manifest disregard of the law." Wonderland, 274 F.3d at 35.
McCarthy contends that the arbitration panel in his case recognized that the New Hampshire wage laws applied to his claim but ignored that governing body of law. To succeed on a theory of manifest disregard of the governing law, McCarthy must show, based on the record rather than the result, that the arbitrators "appreciated the existence of a governing legal rule but wilfully decided not to apply it." Advest, Inc. v. McCarthy, 914 F.2d 6, 10 (1st Cir. 1990); accord Trs. of Boston Univ. v. Beacon Labs., Inc., 270 F. Supp. 2d 88, 90-91 (D. Mass. 2003); Trs. of Lawrence Acad. v. Merrill Lynch Pierce Fenner Smith, Inc., 821 F. Supp. 59, 62 (D.N.H. 1993). Although arbitrators are not required to give reasons for their decisions and frequently do not do so, "[i]n certain circumstances, the governing law may have such widespread familiarity, pristine clarity, and irrefutable applicability that a court could assume the arbitrators knew the rule and, notwithstanding, swept it under the rug." Advest, 914 F.2d at 10; accord Prudential-Bache Secs., Inc. v. Tanner, 72 F.3d 234, 240 (1st Cir. 1995).
The New Hampshire wage laws are found at New Hampshire Revised Statutes Annotated ("RSA") § 275:42, et seq.
A. Governing Law
The parties do not dispute that New Hampshire wage laws govern McCarthy's claim in this case, although they disagree as to whether any violation occurred. The pertinent New Hampshire statutes impose restrictions on employers and provide a cause of action for employees to claim unpaid wages. See RSA 275:42, et seq. The New Hampshire wage laws apply to "compensation . . . for labor or services rendered by an employee, whether the amount is determined on a time, task, piece, commission, or other basis of calculation." RSA 275:42, III. Incentive compensation plans and profit sharing plans are compensation covered by the wage laws. See In re Coffey, 144 N.H. 531 (1999); Ives v. Manchester Subaru, Inc., 126 N.H. 796, 799-800 (1985). Among other restrictions and requirements provided by the New Hampshire statutes, RSA 275:43 governs the payment of wages and salaries; RSA 275:48 restricts deductions that may be made from an employee's compensation, limiting authorized deductions to those listed in the New Hampshire Department of Labor regulations, and RSA 275:50 prohibits waiver of the wage laws by private agreement.
McCarthy was a financial consultant at CGMI for eighteen years, earning commissions and other compensation. The CAP permitted certain employees, including McCarthy, to designate a portion of their compensation to be used to buy restricted stock at a discounted price. Participating employees, including McCarthy, elected in writing to have income withheld from their payroll checks to be used to buy shares of restricted stock. A participating employee would pay income taxes on the value of the stock upon vesting unless he elected, as McCarthy did, to pay payroll taxes at the time the money was deducted. The "quid pro quo" for the discounted price of the stock was that the shares did not vest when they were purchased, requiring the participating employee to remain employed for two years after the purchase before vesting would occur. If the employee did not remain employed for that time, both the unvested shares and the compensation that was used to buy them were forfeited to CGMI.
McCarthy left his employment with CGMI before some of the restricted shares of stock he had elected to purchase under the CAP had vested. As a result, those shares, along with the compensation that was used to purchase them, were forfeited to CGMI. McCarthy claimed that the CAP provisions on vesting unlawfully caused him to forfeit $257,346 in compensation. He also claimed that CGMI violated the New Hampshire wage laws by making unlawful deductions from his compensation to purchase the shares, by failing to pay him compensation in cash, and by withholding compensation after the termination of his employment.
In support of his contention that the arbitration panel denied his claims by ignoring the governing law, McCarthy demonstrates that he provided the panel with the legal bases of his New Hampshire wage law claim in his written materials, including copies of the pertinent statutes. CGMI also addressed the New Hampshire wage laws in its motion to dismiss, which the panel denied without explanation. Both McCarthy and CGMI addressed the New Hampshire wage laws at the hearing. Indeed, CGMI does not dispute that the wage laws govern McCarthy's claim. Under these circumstances, the panel was informed that the New Hampshire wage laws governed McCarthy's claim.
B. Manifest Disregard
McCarthy contends that the panel acknowledged the governing New Hampshire law and expressly decided to ignore it based on the following part of the decision:
The Claimant's request for relief is denied. The evidence and documents presented in evidence at the hearing demonstrated that the Claimant knowingly and willingly participated in the Capital Accumulation Plan by signing the election forms twice a year for several years. The Claimant benefited [sic] financially from participation in the Capital Accumulation Plan to a substantial degree over the years. While the Claimant invoked New Hampshire wage law to support his case, the Panel considered it to be irrelevant because the Panel considered the case to be a contract dispute regarding an incentive compensation plan commonly used at the firm and commonly used in the securities industry.
Dec. at 2 (emphasis added). CGMI responds that the panel's statement does not mean that it disregarded the law but instead means that it did not agree with McCarthy's interpretation of the law and instead concluded that he had been paid everything to which he was entitled.
The panel does not appear to have intended "irrelevant" to have its usual meaning. Instead, the panel concluded that McCarthy was not protected by the wage laws because he had profited from the CAP in the past and had voluntarily agreed to its terms. As such, the panel acknowledged the applicability of the wage laws but decided not to apply them because of the circumstances attending McCarthy's claim. The panel also decided not to consider the wage laws because plans like the CAP are commonly used in the securities industry. In doing so, the panel set aside the governing law in favor of its perception of an equitable result and industry practices. The panel's decision not to consider the New Hampshire wage laws demonstrates its disregard for the governing law.
Irrelevance is defined as not being applicable to a matter under consideration, as having no substantial relation to the action, and as something that would not affect the decision to be made. Black's Law Dictionary 848 (8th ed. 2004).
McCarthy contends that CGMI encouraged the panel to ignore New Hampshire wage law by arguing that if wages had to be paid in cash under New Hampshire law "every single person who's participated in CAPs since the beginning of time in New Hampshire has violated the law and the CAP plan has violated the law." Ex. L at 112. McCarthy asserts that the panel took CGMI's suggestion and ignored the governing law. See Montes v. Shearson Lehman Bros., Inc., 128 F.3d 1456, 1459-60 (11th Cir. 1997).
This is one of the exceedingly rare cases where an arbitration decision was based on a manifest disregard of the governing law.See, e.g., Wallace v. Buttar, 378 F.3d 182, 189 (2d Cir. 2004) (discussing the rarity of such determinations). CGMI argues that the panel's decision should be confirmed because the CAP did not violate the New Hampshire wage laws. When the arbitrators give no reason for a decision that appears to be based on a manifest disregard of the law, the court may consider whether the result nevertheless comported with the governing law or whether any plausible interpretation would justify the result under the governing law. See Hardy v. Walsh Manning Sec., L.L.C., 341 F.3d 126, 130-31 (2d Cir. 2003); Duferco Int'l Steel Trading v. T. Klaveness Shipping A/S, 333 F.3d 383, 390 (2d Cir. 2003). That is not the case here where the arbitration panel provided a written decision that included the statement that it did not consider the New Hampshire wage laws. Because the parties agreed to resolve their dispute by arbitration, it would not be appropriate for the court to decide the merits of the dispute under the governing law. Instead, the case must be remanded to have McCarthy's claim decided under the New Hampshire wage laws through arbitration as provided by the National Association of Securities Dealers, Inc.
Even if the court were to consider the merits, as CGMI urges, it is far from clear that CGMI would prevail. CGMI bases its argument in large part on the decision of the Court of Appeals in Marsh v. Prudential Secs. Inc., 802 N.E.2d 610 (N.Y. 2003), in which the court found that a similar plan did not violate the New York statute pertaining to deductions from wages, New York Labor Law § 193. Because the Marsh decision is based on a provision in § 193 that broadens the circumstances when such deductions may be made, which the New Hampshire statute does not include, that decision is not on point as to the deduction issue.
Having agreed to arbitration as part of the regulatory framework of his profession, McCarthy is bound by the NASD-DR rules.
Conclusion
For the foregoing reasons, the plaintiff's petition to vacate the arbitration decision and remand for further proceedings (document no. 1) is granted. The defendants' petition to confirm the decision (document no. 7) is denied. The case is remanded for further arbitration proceedings as provided by National Association of Securities Dealers — Dispute Resolution, Inc.The clerk of court shall enter judgment accordingly and close the case.
SO ORDERED.