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Is it a breach of contract to bypass an agreed-upon, independent alternative dispute resolution (“ADR”) process and commence an arbitration proceeding elsewhere? When two companies enter into a contract, it’s common to include language wherein both parties consent to having any disputes related to the contract decided by an agreed-upon, neutral third party, rather than by a judge in a lengthy, formal court proceeding. The process of ADR-- which may be by arbitration or mediation-- is generally a faster, less formal, and less expensive way to resolve a contractual dispute than commencing a lawsuit for breach of contract. In mediation, an independent facilitator merely assists the parties in an attempt to resolve their dispute without the need for a formal arbitration or court proceeding. A mediator does not render a decision and the parties are free to resolve their dispute as they choose. Conversely, an arbitrator hears both sides of the dispute, reviews evidence, and renders a decision--much like a judge. The parties may or may not be bound by the arbitrator’s decision, depending on the terms of the ADR language in the agreement. But what happens when one of the parties bypasses the agreed-upon independent firm chosen for dispute resolution and commences an arbitration proceeding elsewhere? This issue is at the heart of a dispute between American industrial giant General Electric Co. (“GE”) and Alstom, a French rail transport company, regarding a contract under which Alstom purchased GE’s rail-switching system. The rail-switching system transaction occurred simultaneously with GE’s acquisition of Alstom’s energy business. Rather than submitting the $800 million purchase price adjustment dispute to the agreed-upon independent Deloitte accounting firm, GE instead filed an arbitration proceeding with the International Chamber of Commerce business group. In response and claiming unspecified damages, Alstom filed suit in U.S. District Court in Manhattan in May, 2016 to have the proceeding dismissed and the matter remanded to Deloitte for review and a decision. The case is titled  Alstom et al. v. General Electric Co. , U.S. District Court, Southern District of New York, No. 16-03568. There are many factors to consider in determining whether alternative dispute resolution is beneficial in a business contract, and if so, whether mediation or arbitration is the better option for your business’ needs and goals. Consulting a business law and litigation attorney with ADR experience is advisable for all your business transactions. Freiberger Haber LLP in New York City is experienced in business law and litigation and handles all aspects of business transactions, including contract negotiations and preparation, asset purchase agreements, mergers, and acquisitions. In addition, the practice handles dispute resolution through ADR as well as complex business litigation. Contact the firm today at (212) 209-1005 or online here .

How do anti-money laundering programs detect suspicious activity? The Financial Industry Regulatory Authority ("FINRA") announced in May that it fined two Raymond James entities for systemic flaws in their anti-money laundering programs. The units, Raymond James & Associates (RJA) and Raymond James Financial Service ("RJFS") were fined $8 million and $9 million, respectively. FINRA cited these units for not establishing and implementing adequate procedures over the course of several years. An investigation by the self-regulatory agency revealed that the firms did not conduct required due diligence and periodic risk reviews for foreign financial institutions and that RJFS also failed to establish and maintain an adequate Customer Identification Program. In addition a former AML compliance officer was fined $25,000 and suspended for three months which highlights the growing trend of regulators holding compliance officers personally accountable for compliance breaches. Enhanced Regulatory Scrutiny At the same time, Raymond James success may have made the firm a target of enhanced regulatory scrutiny. In its press release, FINRA noted that the firms achieved significant growth over a ten-year period from 2006 to 2014, but that they failed to establish comprehensive AML programs during this time. Because of this, Raymond James was unable to detect, prevent and report suspicious activity, according to FINRA. FINRA also found that the compliance officer did not establish AML programs that were suited for each business unit and that "red flags" for suspicious activity were missed. This is not the first time Raymond James was cited for its failure to adhere to AML requirements. RJFS was previously sanctioned in 2012 and agreed to beef up its policies and procedures. Brad Bennett, FINRA’s Executive Vice President and Chief of Enforcement, said, “Raymond James had significant systemic AML failures over an extended period of time, made even more egregious by the fact the firm was previously sanctioned in this area." For their part, RJA and RJFS neither admitted nor denied the charges, but consented to the terms of the settlement. In short, this settlement highlights the importance for financial firms to establish and implement sufficient AML measures as part of a comprehensive compliance program. Given the growing attention that is being paid to money laundering, the consequences of failing to weed out suspicious activity can be drastic. In the end, if your firm needs assistance on any compliance or FINRA related matters, you should engage the services of an experienced attorney .

Catastrophic events often bring out the best in people. Sometimes, however, such events bring out the worst in people. The events that followed Hurricaine Katrina stand as reminders of the latter, at least according to Cori and Kerri Rigsby, two sisters who filed a False Claims Act (“FCA”) complaint against State Farm Fire and Casualty Co. (“State Farm”), among others. The Rigsby sisters, two experienced claims adjusters, alleged that State Farm and other insurance companies were falsely billing the federal government for flood insurance claims when, in fact, the claims were based on wind damage. According to the sisters, the insurance companies fraudulently changed the classification of a claim without sending an inspector to the affected site in order to collect reimbursement from the federal government. A few weeks after Hurricane Katrina, the Rigsby sisters inspected the home of Thomas and Pamela McIntosh in Biloxi, Mississippi. The McIntoshes held two insurance policies with State Farm: (1) a Standard Flood Insurance Policy (“SFIP”), which excluded payment for wind damage; and (2) a homeowners’ policy, which excluded payment for flood damage. In September 2005, a State Farm supervisor approved the payment of $350,000 ($250,000 for the home and $100,000 for personal property) under the SFIP. Three days later, State Farm sent checks to the McIntoshes. In April 2006, the Rigsby sisters filed a qui tam complaint against the insurance companies, alleging that the insurers wrongfully sought to maximize their policyholders’ flood claims (which were paid with government funds) in order to minimize wind claims (which are paid by the insurer). Following motion practice, a trial was held on a single, bellwether false claim – the McIntosh claim. The jury concluded, among other things, that the McIntosh property sustained no compensable flood damage and that the government therefore suffered damages of $250,000 as a result of State Farm’s submission of false flood claims for payment on the McIntosh home. The district court denied State Farm’s motions for a new trial and judgment notwithstanding the verdict, and ordered State Farm to pay more than $3 million in damages and attorneys’ fees. After the ruling, State Farm moved to dismiss the action due to alleged violations of the FCA’s seal requirement. State Farm argued that the Rigsby sisters and their attorneys had disclosed the existence of the qui tam action to a variety of news outlets while the case was under seal. State Farm charged that the Rigsby sisters and their then-lawyer, Dickie Scruggs, violated the statutory seal by engaging in a media campaign in which they discussed the allegations in the qui tam complaint in order to “demonize and put pressure on State Farm to settle” the action. The district court declined to dismiss the complaint on the basis of the seal violations, and the U.S. Court of Appeals for the Fifth Circuit affirmed that decision, holding that the seal violations did not warrant dismissal. Thereafter, State Farm filed a writ of certiorari to the Supreme Court. In filing the writ of certiorari, State Farm asked the Supreme Court to review the Fifth Circuit’s affirmance of the district court’s decision, especially since there were three separate circuit court (Ninth, Second and Fourth, and Sixth) standards governing the dismissal of a qui tam complaint following a violation of the FCA’s seal requirement. The Fifth Circuit adopted the Ninth Circuit’s approach, which requires dismissal only if the seal violation caused actual harm to the government – in essence, a “no harm, no foul” approach. The Second and Fourth Circuits, by contrast, require dismissal only when a seal violation “incurably frustrate ” the congressional goals underlying the seal requirement, including the ability of the government to fully evaluate the propriety of an enforcement suit and determine whether the suit involves matters already under investigation. Finally, the Sixth Circuit requires dismissal when there is a violation of the seal requirement no matter the circumstance, thereby rejecting any form of balancing test. On May 31, 2016, the Supreme Court granted certiorari in State Farm Fire and Casualty Co. v. United States ex rel. Cori Rigsby and Kerri Rigsby . IMPLICATIONS: Resolution of the circuit split will materially impact the rights of whistleblowers and defendants to whistleblower claims. If the Sixth Circuit’s approach prevails, then defendants would have a greater ability to seek dismissal of FCA claims when relators violate the seal requirement. By contrast, a ruling in favor of the approach advanced by the Ninth Circuit or the Second and Fourth Circuits would be relator friendly because even when there is a violation of the seal requirement, as long as there is no harm to the government or the government’s ability to investigate is not frustrated in any way, then there would be no dismissal. Of course, there is no way to know how the Supreme Court will rule. However, it is important to note that seal violations occur under many circumstances, including, but not limited to, failing to file the complaint under seal and inadvertently disclosing the allegations. Balancing the violation, the reason for the violation and the impact of the violation on the government’s investigative interests seems to be the most reasonable way to ensure that meritorious cases are not dismissed over a technicality. The Supreme Court is expected to address the case in the next term.

Damages Or Rescission . . . It Makes A Difference. Most people think that they are entitled only to monetary relief when they are the victim of fraud.  That, however, is not always the case.  Sometimes rescission – that is, returning to the status quo ante – is the appropriate form of relief.  Indeed, there are times when a victim of fraud would rather be in the position he/she was in before the fraud occurred.  When that happens, can the victim of fraud assert a claim for equitable rescission? In Board of Managers of The Soundings Condominium v. Foerster , Index No. 153150/14 (1st Dept. Feb. 23, 2016), the Appellate Division, First Department said yes. Foerster arose from the purchase of a condominium.  Under the condominium’s by-laws, the sale of any unit was subject to the condominium’s right of first refusal, giving the managers the right to acquire the unit for the contract price. In the application to purchase the unit submitted by the defendant, the defendant lied about her intended use of the apartment. She told management that she intended to use the apartment for her nanny/nurse; the defendant lived in a nearby building.  In reality, she intended to use, and did use, the apartment as a day care center. The condo managers sued the buyer, seeking both rescission and monetary damages.  The managers claimed that had they known the truth about the defendant’s intention to operate a business in the apartment, they would have rejected the defendant’s application and exercised the condo’s right of first refusal. The defendant moved for summary judgment, contending, among other things, that the managers’ fraud claim should be dismissed because the condo did not incur any monetary damages. The trial court denied the defendant’s motion, finding, among other things, that a triable issue was raised with respect to whether the defendant made any misrepresentation that might have impacted the validity of the purchase agreement. On appeal, the defendant again argued that the managers could not claim fraud because “an essential element , injury, does not exist.” The First Department rejected that argument, holding that pecuniary damages are unnecessary in an action for equitable rescission: Fraud sufficient to support the rescission requires only a misrepresentation that induces a party to enter into a contract resulting in some detriment, and “unlike a cause of action in damages on the same ground, proof of scienter and pecuniary loss is not needed” ( D’Angelo v Bob Hastings Oldsmobile, Inc ., 89 AD2d 785, 785 <4th dept 1982> , aff’d , 59 NY2d 773 <1983> ). Even an innocent misrepresentation will support rescission ( see Seneca Wire & Mfg. Co. v Leach & Co. , 247 NY 1, 8 <1928> ). Foerster is important because it reminds practitioners and litigants that equitable fraud can be a powerful claim. Unlike a fraud claim for money damages, equitable fraud is unencumbered by the limitations of pleading and proving scienter ( i.e. , intent to deceive) and damages.  In fact, the only limitation on a claim of equitable fraud is that the remedy being sought is equitable, like rescission. The managers in Foerster understood the power and breadth of the claim, basing their complaint on extra-contractual representations ( e.g. , the purchase application), rather than the contract of sale itself.  Parties to a contract can try to avoid the situation in Foerster .  For example, they can try to negotiate a limit on the scope of any fraud claim to only the representations and warranties set forth in the contract (thereby excluding extra-contractual fraud claims), and requiring the claim to be based on conduct that was knowingly and deliberately taken with the intention of harming the other party.  To be sure, there are other available options. An experienced business lawyer and litigator can help explore the options. Choosing the Relief that Matters Most Is the Best Course of Action Too often litigants seek relief that is duplicative and unrelated to what they really want.  This was the case with the managers of the condominium in Foerster .  Indeed, the First Department understood this point, distilling the multiple claims alleged in the action to just one – a claim “to rescind the conveyance of a condominium apartment ….” In addition to the rescission claim, the managers sought damages for breach of contract and fraud, as well as other declaratory and equitable relief.  Those claims, however, arose from the same facts as the equitable fraud claim.  As such, under New York law, those claims were duplicative.  Consequently, as noted by the First Department, those claims should have been dismissed: laintiff’s first cause of action for fraud is virtually identical to its fourth cause of action for rescission, and is founded upon the same facts. A tort claim based upon the same facts underlying a contract claim is properly dismissed as merely a duplication of the contract cause of action ( see Richbell Info. Servs. v Jupiter Partners , 309 AD2d 288, 305 <1st dept 2003> ).  The remainder of the complaint seeks various forms of injunctive, declaratory and monetary relief that a court of equity would provide in restoring the parties to status quo ante and duplicates the claim for rescission. The practical litigation takeaway from Foerester , therefore, is to seek the relief that a litigant really wants when asserting a claim against another. An experienced business litigator can work with a litigant to ensure that the relief sought is consistent with the litigant’s objectives.

Do mandatory arbitration clauses prevent class action lawsuits? The Consumer Financial Protection Bureau recently proposed a rule that would scale back mandatory arbitration clauses used by banks and other financial firms to limit their exposure to legal liabilities. While the new rule continues to allow arbitration in cases pursued by individual consumers, class actions would no longer be prevented. “Many banks and financial companies avoid accountability by putting arbitration clauses in their contracts that block groups of their customers from suing them,” CFPB Director Richard Cordray said in a statement. The rule applies to a wide range of consumer financial products and services currently under the Bureau's regulatory umbrella, including lending, storing and moving or exchanging money. The CFPB announced the highly anticipated rule after years of study required by the Dodd-Frank law. There is a 90 day comment period in play until August 5th, and a strong push back by industry groups is highly likely. “Our proposal seeks comment on whether to ban this contract gotcha that effectively denies groups of consumers the right to seek justice and relief for wrongdoing,” said Cordray. While arbitration clauses could still be included in contracts, they would have to state that arbitration cannot be used to stop consumers from joining a class action. In this regard, the CFPB will require  specific language to be used. The Bureau also intends to monitor the arbitration process by requiring firms to submit materials used in these proceedings. Some critics argue that lifting the ban will lead to a wave of litigation and that the only beneficiaries will be trial attorneys. Industry groups opposed to the proposed rule also note that a CFPB study found consumers using arbitration have more successful outcomes than members of a class-action. On the other hand, proponents of the rule contend low income families and students are frequently sold products with higher interest rates. Because they are more vulnerable these groups are forced to accept the restrictions of mandatory arbitration and forfeit their basic legal rights in the process. At this juncture, it is unclear if and when the new rule will be approved. Given the tenor of the times under the Dodd-Frank regime, however, it is likely that class action lawsuits will no longer be prevented by mandatory arbitration clauses. This will invariably pose risk management issues across the financial services sector. Moreover, banks and financial firms will be faced with increased compliance costs associated with revising contracts to contain the required language as well as providing documentation to the CFPB regarding arbitration proceedings. For these reasons, any business engaged in selling financial products to consumers is well advised to engage the services of an experienced arbitration attorney to prepare for the new rule.

What does the Labor Department fiduciary standard mean for financial advisors? After telegraphing its punch for almost 6 years, the Department of Labor recently announced the highly anticipated fiduciary standard regulation that will require financial advisors who provide investment recommendations for retirement accounts, such as 401(k)s and IRAs, to meet a fiduciary standard. These advisors are now required to put their clients’ interests before their own, rather than adhering to the previous standard requiring them to provide clients with suitable recommendations. The suitability standard, some have argued, allowed investment advisors to steer clients into products with higher fees as a means of padding commissions, regardless of whether or not the investments were well suited for the clients' retirement situation. The rule had strong backing from the Obama Administration as officials claimed inappropriate recommendations cost retirement investors $17 billion a year. While commissions and other fees are still permissible, financial firms must commit to charging "reasonable compensation" and cannot give financial incentives to advisors to make inappropriate recommendations.  The new rule is limited to tax-advantaged retirement accounts, however, and does not apply to advisors who manage other types of investments. Why This Matters This action comes in the long wake of the financial crisis of 2008 and continued efforts by the government to rein in the excesses of financial services sector.  While not as far reaching as the Dodd-Frank reform measure, the new fiduciary rule will pose compliance challenges to investment advisors, and there will be additional costs associated with establishing needed policies and procedures. Given the fact that the Labor Department has been working on this rule for years, the investment community has had plenty of time to prepare for the new regulatory regime. That being said, investment advisory firms have time to implement changes since the law becomes effective in 2017. Moreover, certain provisions do not become effective until 2018, such as the requirement that IRA investors enter into contracts with financial advisors in which they acknowledge their role as a fiduciary. At this juncture, it is unclear whether there will be legal challenges to the new rule.  In the meantime, however, investment advisors should speak to an experienced business law attorney for guidance on their new responsibilities as fiduciaries.