McCarthy v. Citigroup Global Markets CV-04-477-JD 12/15/05 UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE
James W. McCarthy
v. Civil No. 04-cv-477-JD Opinion No. 2005 DNH 165 Citigroup Global Markets. Inc.
O R D E R
James W. McCarthy contends that his former employer,
Citigroup Global Markets, Inc. ("CGMI"), violated the New
Hampshire wage laws in the operation of the Capital Accumulation
Plan ("CAP"), which he participated in while employed at CGMI.
McCarthy and CGMI arbitrated his claims before a panel of the
National Association of Securities Dealers-Dispute Resolution,
Inc., as required by the parties' agreement. The panel denied
McCarthy's claims and requests for relief, and McCarthy brought
an action in this court, moving to vacate the panel's decision.
The court granted McCarthy's motion and remanded the case.
On remand, a new panel considered McCarthy's claims and requests
for relief and again denied them. McCarthy's motion to reopen
the case was granted, and he moves to vacate the panel's award
and to remand the case for a third arbitration proceeding. CGMI
opposes McCarthy's motion to vacate and moves to confirm the
award.1
1CGMI requested oral argument. Given the extensive record and the parties' memoranda, oral argument would not be of assistance to the court. LR 7.1(d). Background
James W. McCarthy was financial consultant at CGMI for
eighteen years, earning commissions and other compensation.
Beginning in 1993, McCarthy participated in the CAP, a stock
purchase plan offered by CGMI. 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. Participating employees
paid income taxes on the value of the stock upon vesting unless
they 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 in May of 2003, 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
2 to CGMI. McCarthy disputed that result and sought arbitration,
as required by his agreement with CGMI. See James W. McCarthy v.
Citigroup Global Markets. Inc.. NASD-DR Case No. 2003-09195.
In the arbitration proceeding, McCarthy claimed that the CAP
vesting provisions 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. Both McCarthy and CGMI argued
their cases under the New Hampshire wage laws, which they agree
apply in this case. The arbitration panel found in favor of CGMI
and against McCarthy. The panel's decision, however, was not
based on the New Hampshire wage laws, which the panel held were
irrelevant, but instead the panel resolved the case based on its
view of common practices in the securities industry.
McCarthy brought suit in this court seeking to have the
decision vacated and the case remanded. The court granted
McCarthy's motion, concluding that the arbitration panel's
decision was based on a manifest disregard for the governing law.
On remand, a second panel was convened to hear McCarthy's claims.
Again, the parties presented arguments based on the New Hampshire
wage laws. CGMI filed a "Motion for Judgment," asking the panel
to dismiss McCarthy's claims. McCarthy objected to the motion
3 and also moved to ■'■'poll" the arbitrators, arguing that CGMI was
asking the panel to disregard the law, despite this court's order
on remand, and asking the arbitrators to affirm that they would
follow the rulings stated in the remand order. The panel denied
both motions.
After a hearing, the panel issued its decision, titled
"Modified Award," denying McCarthy's claims and requests for
relief. The panel reviewed the procedural history of the case,
acknowledging this court's remand order. In the part of the
award titled "Panel's Report," the panel stated that it had
"fully considered all claims and defenses, including the
applicability of the New Hampshire Wage Laws, which were heavily
argued by both sides. After full consideration of the matter,
the Panel decided to deny all claims with prejudice." McCarthy
asks that the "modified award" be vacated and that the case be
remanded for a third arbitration proceeding.
Discussion
As the court explained in the previous order, "[j]udicial
review of an arbitrator's decision is extremely narrow and
deferential." Poland Spring Corp. v. United Food & Commercial
Int'l Union. 314 F.3d 29, 33 (1st Cir. 2002). The Federal
Arbitration Act provides certain limited grounds for vacating an
arbitration award. See 9 U.S.C. § 10. "[T]he statute ■'carefully
4 limits judicial intervention to instances where the arbitration
has been tainted in certain specific ways . . . [and] contains no
express ground upon which an award can be overturned because it
rests on garden-variety factual or legal [errors ] . ' " P .R . T e l .
Co. Inc. v. U.S. Phone Mfg. Corp, 427 F.3d 21, 25 (1st Cir. 2005)
(quoting Advest. Inc. v. McCarthy. 914 F.2d 6, 8 (1st Cir.
1990)); see also Poland Springs. 314 F.3d at 33 (court not
conducting appellate review "to hear claims of factual or legal
error by an arbitrator or to consider the merits of an award").
"An arbitrator's award must be enforced if it is in any way
plausible, even [if the court] think[s] [the panel] committed
serious error." Wonderland Greyhound Park. Inc. v. Autotote
Svs., Inc., 274 F.3d 34, 35 (1st Cir. 2001) (internal quotation
marks omitted).
The stringent standard of review leaves only rare
circumstances when an arbitration award will be vacated, "such as
when there was misconduct by the arbitrator, when the arbitrator
exceeded the scope of her authority, or when the award was made
in manifest disregard of the law." Airline Pilots Ass'n, Int'l
v. Pan Am. Airways Corp.. 405 F.3d 25,30 (1st Cir. 2005). The
court concluded that the first arbitration award was made in
manifest disregard of the governing law, based on the panel's
statement that the New Hampshire wage laws were irrelevant.
McCarthy argues that the second panel's decision was also made in
5 manifest disregard of the law.
" / [M]anifest disregard' means that arbitrators knew the law
and explicitly disregarded it." P . R . T e l . C o ., 427 F.3d at 32
(internal quotation marks omitted). "Put differently, disregard
implies that the arbitrators appreciated the existence of a
governing legal rule but wilfully decided not to apply it." Id.
Because arbitrators are not required to explain or provide
reasoning for their decisions, and frequently do not do so, an
award will be vacated due to a manifest disregard of the law
"only when the award is unfounded in reason and fact, . . . based
on reasoning so palpably faulty that no judge or group of judges
could ever conceivably have made such a ruling, or is mistakenly
based on a crucial assumption which is decidedly a non-fact."
I d . (internal quotation marks omitted).
In the first award, the panel stated that the New Hampshire
wage laws were irrelevant. As such, the panel explicitly
disregarded the governing law so that it was not necessary to
look behind that decision to determine its basis. In vacating
that award and remanding the case, the court held that the New
Hampshire wage laws were the governing law. The second panel
stated in its award that it had "fully considered . . . the
applicability of the New Hampshire Wage Laws." The panel did not
say whether it concluded that the wage laws were applicable or
not applicable or whether it had applied that law in making its
6 decision. Therefore, while the second panel's statement did not
clearly demonstrate a manifest disregard of the governing law, as
the first panel did, the second panel left open the possibility
that, contrary to the court's direction in the remand order, the
panel concluded that the New Hampshire wage laws do not apply.
A. Request for a Poll
McCarthy contends that the panel demonstrated its manifest
disregard of the governing law by refusing his request that the
panel be polled before issuing its award. McCarthy contends that
the poll was necessary because CGMI had urged the panel to
disregard the governing law and argues that the panel's refusal
to affirm that it would follow this court's "legal findings"
indicates that the panel did not intend to apply the governing
wage laws. The panel stated, however, that it did not grant the
motion for the poll because it found no legal basis for such an
action. McCarthy has cited no case or any other legal authority
supporting his request for a poll, and the court has found none.
In the absence of any requirement that the panel submit to such a
request, the panel's denial of McCarthy's motion does not support
his argument that the panel disregarded the governing law.
7 B. Inference of Manifest Disregard
McCarthy contends that the panel's manifest disregard of the
governing law may be inferred from the combination of CGMI's
arguments to the panel, which McCarthy characterizes as urging
the panel to ignore the wage laws, and the panel's resulting
decision, which McCarthy contends cannot be justified under the
governing law. CGMI responds that the panel's statements in its
award mean that it fully considered and applied the wage laws.
CGMI argues that because there is no New Hampshire case directly
on point, it was free to provide legal arguments taken from other
jurisdictions to support its position that the CAP did not
violate the New Hampshire wage laws. CGMI also argues that its
theories, rather than McCarthy's, persuaded the panel.
1. Panel's modified award.
As is explained above, the second panel's modified award
does not expressly state or otherwise show that the panel applied
or did not apply the New Hampshire wage laws in this case.2 When
the case was remanded for further arbitration and was heard by
the second panel, the issue of the applicability of the New
Hampshire wage laws had been resolved by the court in the remand
2An arbitration panel need not, and generally does not, provide reasons for or an explanation of its decision. See, e.g.. P .R . T e l . C o ., 426 F.3d at 32; Keebler Co. v. Truck Drivers. Local 170. 247 F.3d 8, 12 (1st Cir. 2001). order, which stated that the case was to be decided under the New
Hampshire wage laws. Order, Jan. 28, 2005, at 8. Therefore,
the panel's statement that it had considered the applicability of
the New Hampshire wage laws, without any stated resolution of
that question, equally supports a conclusion that the panel
ignored the direction in the court's remand order and again
decided that the wage laws were irrelevant.3
2. Invitation to ignore the law.
McCarthy contends that this case mirrors the circumstances
in Montes v. Shearson Lehman Bros.. Inc.. 128 F.3d 1456, 1464
(11th Cir. 1997), where the court vacated a decision of the
arbitration board as being in manifest disregard of the law.
There, counsel for the defendant, Shearson, asked the arbitration
board not to follow the Fair Labor Standards Act if they found
that the plaintiff, Montes, was not exempt from its coverage; the
board noted Shearson's plea in its decision; and nothing in the
decision or the record indicated that the board did not follow
Shearson's urging. I d . at 1459, 1461, 1462. The court concluded
that Shearson had blatantly urged the board to disregard the
3In fact, CGMI's counsel argued to the second panel that it could conclude that the New Hampshire wage laws did not apply. That is a curious argument given CGMI's position before the court that the wage laws do govern McCarthy's claims, the court's remand order directing further proceedings under the wage laws, and CGMI's statement in its motion to the arbitration panel that the CAP was lawful under New Hampshire law.
9 applicable law in order to rule in its favor and that both the
written decision and the lack of evidentiary support for
Shearson's position demonstrated that the board did as it was
urged to do. I d . at 1461 & 1464.
The concurring judge in Montes summarized the factual
predicate necessary to support the narrow decision in that case
as follows:
1) the party who obtained the favorable award had conceded to the arbitration panel that its position was not supported by the law, which required a different result, and had urged the panel not to follow the law; 2) that blatant appeal to disregard the law was explicitly noted in the arbitration panel's award; 3) neither in the award itself nor anywhere else in the record is there any indication that the panel disapproved or rejected the suggestion that it rule contrary to law; and 4) the evidence to support the award is at best marginal.
I d . at 1464. In this case, CGMI did not concede that its
position was unsupported by the New Hampshire wage laws, which
would require a different result. Instead, CGMI argued the CAP
was lawful. The arbitration panel's decision did not note an
appeal by CGMI to disregard the law. Therefore, the
circumstances in this case are not sufficiently similar to those
in Montes to permit application here of that narrowly limited
decision.
10 3. Arguable or plausible basis for decision.
The court's review of an arbitration award "is extremely
narrow and deferential." Poland Spring. 314 F.3d at 33.
"Nevertheless, acknowledging that [the court's] role is a limited
one is not the equivalent of granting limitless power to the
arbitrator." Id. Although an arbitration award cannot be
vacated due to garden variety legal or factual errors, the award
will be vacated if it is in manifest disregard of the law,
meaning that the arbitrator recognized the applicable law but
ignored it. Bull HN Info. Svs. v. Hutson. 229 F.3d 321, 330-31
(1st Cir. 2000). In other words, an arbitration award will be
confirmed unless it is in no way arguably or plausibly compatible
with the governing law. Wonderland. 274 F.3d at 35. When the
governing standard is clear, arbitrators are not free to
substitute their own view of justice based on practices within
the industry. See Poland Spring. 314 F.3d at 33.
In the remand order, the court set forth the governing legal
principles under the New Hampshire wage laws as follows:
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
11 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.
Order, Jan. 28, 2005, at *2-3.4 In response to CGMI's argument
that it would prevail on the merits of McCarthy's claims, based
on Marsh v. Prudential Secs. Inc.. 802 N.E.2d 610 (N.Y. 2003)
(construing New York Labor Law § 193), the court declined to
address the merits but explained that "[bjecause 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." Order at 8, n.5.
There is no dispute in this case that the CAP was an
incentive compensation plan, and CGMI stated as much to the
arbitration panel. Through McCarthy's authorized participation
in the CAP, he received some of his compensation in cash and the
remainder was deducted or withheld by CGMI to pay for Citigroup
Restricted Stock. The stock did not vest when it was issued but,
instead, vested two years later so that if a participating
employee, such as McCarthy, resigned within the two-year vesting
period, he forfeited the stock to CGMI. Therefore, there is no
4Parts of RSA 275 were amended after 2003, making those changes inapplicable in this case.
12 dispute that CGMI deducted or withheld compensation, with
authorization, that was used to pay for stock, which was subject
to a two-year vesting rule. CGMI also does not dispute that it
did not pay McCarthy the compensation he had earned that was
deducted to pay for stock that was forfeited. In other words,
when McCarthy resigned, CGMI kept both the stock and McCarthy's
compensation that was deducted to purchase it.
In the arbitration proceeding, McCarthy argued that the CAP
violated New Hampshire wage laws because his compensation was
neither paid entirely in cash nor legally deducted and because
the CAP vesting provision caused him to forfeit both the stock
and the compensation deducted to pay for it. He also claimed
that New Hampshire law prohibited private agreements that waived
the requirements of the New Hampshire wage laws. CGMI argued
that the CAP was lawful, analogizing to Marsh, and that McCarthy
had voluntarily undertaken the risk of the CAP and had profited
from i t .
The principles of the New Hampshire wage law are set forth
in the statutes, and McCarthy argued those principles to the
arbitration panel. New Hampshire law requires employers to pay
their employees the wages they have earned, RSA 275:43, I &
275:43-b, and to pay any wages earned to an employee who resigns,
RSA 275:44,11. Lawful deductions are limited to those an
employer is required or empowered to make by federal or state
13 law, those authorized by an employee in writing and provided in
the labor regulations, and those made for certain medical
services pursuant to rules or regulations.5 RSA 275:48, I; N.H.
Admin. Rules, Lab. 803.03(c) (1999). In addition, the
requirements of the New Hampshire wage laws may not be waived by
private agreement. RSA 275:50, I.
CGMI's arguments to the arbitration panel, that the CAP was
lawful because McCarthy's compensation, paid in cash and
restricted stock, conferred a benefit to him, because McCarthy
had agreed to participate in the CAP and was a sophisticated and
intelligent financial consultant, and because McCarthy had
benefitted in the past from the CAP, are not pertinent to the
principles of New Hampshire law. Instead, CGMI's argument is
based on the reasoning of the Court of Appeals of New York in
Marsh, construing New York law. CGMI represented to the
arbitration panel that the New Hampshire wage laws allowed
deductions as long as they accrued "to the benefit of the
employee," Motion for Judgment at 7, that the New Hampshire laws,
like the New York law, allowed a deduction "for the benefit of
51he applicable regulation provides that properly authorized deductions may be made for payroll taxes or as otherwise required by statute; payments for legitimate loans by the employer; union dues; health and pension fund contributions; voluntary contributions to charities; housing and utilities; "[pjayments into savings funds held by someone other than the employer;" voluntary rental fees for non-required clothing; costs of voluntary cleaning of clothing, and for an employee's use of a demonstrator vehicle. N.H. Admin. Rules 803.03(c).
14 the employee," i d . at 8, and that the CAP was a lawful fringe
benefit plan as was held in Marsh, i d .
As this court pointed out in the remand order, which the
arbitration panel noted in the award. New York law, which was at
issue in Marsh, is significantly different from New Hampshire
law. The pertinent provision under New York law, § 193, states
that an employer may make authorized deductions from an
employee's wages for specified purposes and for "similar payments
for the benefit of the employee." The corresponding New
Hampshire statute, RSA 275:48, 1(b), requires that deductions
both accrue to the benefit of the employee and be for oneof the
specified purposes listed in 803.03(c). Therefore, under New
Hampshire law, unlike New York law, a deduction is not lawful
simply because it accrues to the benefit of an employee. Because
Marsh was decided based upon the "benefit of the employee"
provision in § 193, neither its analysis nor its reasoning is
applicable or persuasive here. In addition. Marsh did not
address the issue of forfeiture of earned compensation, which is
part of McCarthy's claim in this case.
CGMI also argued that the CAP was a lawful deduction as a
payment into a savings fund held by someone other than the
employer and that it was empowered by the federal tax treatment
of similar plans to offer the CAP. See N.H. Admin. Rules, Lab.
8 03.03(c)(2)(f) (1999); 26 U.S.C. §§ 83, 125. The argument that
15 the CAP is a savings fund might hold more sway if it did not
require forfeiture of the unvested portion of the compensation
deducted, which would be an unusual provision in a savings fund.
CGMI's argument that the tax code "empowers" it to deduct
compensation for the CAP depends on both an expansive view of
"empowers" and the amendments to RSA 2 75:48 that were not in
effect at the time in question. Neither argument is persuasive.
Nevertheless, it is perhaps arguable that the panel was
sufficiently confused or misled by CGMI's arguments to conclude
that the CAP deductions comported with New Hampshire law. Even
assuming that the CAP deductions were lawful, however, CGMI did
not offer the arbitration panel any justification under New
Hampshire law for its failure to pay McCarthy the compensation
that he had earned before he resigned. That he had profited from
his past participation in the CAP does not excuse CGMI from
paying him as required under New Hampshire law. CGMI's oft-
repeated theory, that McCarthy was intelligent and sophisticated
and voluntarily undertook the risk of forfeiting compensation by
agreeing to participate in the CAP, persuaded the Court of
Appeals of New York but does not comport with New Hampshire law
that requires an employer to pay an employee his earned
compensation. RSA 275:43 & 275:44. New Hampshire law also does
not allow employees and employers to agree to waive the
requirement that wages be paid.
16 Judicial review of the panel's decision is complicated in
this case, as in most arbitration cases, by the lack of any
reasons given for the decision. See Bull HN Info., 229 F.3d at
331 n.7. In the absence of any explanation, there appears to be
no arguable or plausible basis for the panel to have ruled either
that the New Hampshire wage laws did not apply to McCarthy's
claims or that CGMI's failure to pay McCarthy earned
compensation, based on the forfeiture provision in the CAP, was
lawful. In either case, the panel's decision necessarily was
made in manifest disregard of the law.6 See, e.g.. Hardy v.
Walsh Manning Secs.. L.L.C., 341 F.3d 126, 133 (2d Cir. 2003);
Poland Spring. 314 F.3d at 33-37; Halligan v. Piper Jaffrav.
Inc., 148 F .3d 197, 203-04 (2d Cir. 1998).
Once again the case must be remanded to have McCarthy's
claims decided under the New Hampshire wage laws through
arbitration as provided by the National Association of Securities
Dealers, Inc. Before more time and money is spent on litigation,
however, the court expects the parties to use their best efforts
to resolve this matter between them. In the event those efforts
6Because neither alternative basis for the decision is reasonable, given the governing law, a remand for clarification would not be beneficial here. C f . U.S. Energy Corp. v. Nukem. Inc., 400 F.3d 822, 831 (10th Cir. 2005) (holding that where two reasonable alternative interpretations of arbitration award were possible, remand for clarification was necessary); Lanier v. Old Republic Ins. Co.. 936 F. Supp. 839, 845-48 (M.D. Ala. 1996) (discussing availability of remand to arbitration panel for clarification).
17 are not successful and the case returns to arbitration^ the court
asks the parties to request that the arbitration panel provide an
explanation or reasons for its decision to allow meaningful
judicial review, if that again should be necessary.
Conclusion
For the foregoing reasons, the plaintiff's motion to vacate
and remand (document no. 20) is granted. The defendant's cross
motion to confirm (document no. 28) and motion for oral argument
(document no. 29) are 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.
United States District Judge
December 15, 2005
cc: John F. Adkins, Esquire W. Wright Danenbarger, Esquire Carol E. head, Esquire William A. Jacobson, Esquire Shanna L. Pitts, Esquire John R. Skelton, Esuire