Iowa Supreme Court Defers to Arbitrators
Posted on 02/03/2025 at 01:04 PM by Mollie Pawlosky
In Principal Securities, Inc. v. Gelbman, No. 23-0439 (Iowa Jan. 31, 2025), the Iowa Supreme Court reiterated its “highly deferential standard of review,” toward arbitrations, concluding that substantial evidence supported a securities arbitration award.
Gelbman worked for Principal Securities Incorporated (“Principal”) and his employment agreement stated that any dispute with Principal was subject to arbitration. Principal terminated Gelbman after determining that he had not been correctly obtaining client consent.
Regulations required Principal to report the termination to the Financial Industry Regulatory Authority (“FINRA”) with a Form U5, and the information then was used in background checks. Gelbman’s profile stated he was “discharged” due to “failure to adhere to firm’s policies and procedures regarding discretionary trading.”
Gelbman argued that the Form U5 did not fairly portray his exit from Principal, and that the Form U5 was misleading and potentially defamatory. Gelbman initiated arbitration proceedings through FINRA’s dispute resolution services, asking that the Form U5 be revised.
A single arbitrator conducted an evidentiary hearing. Gelbman testified that he did not know he was required to obtain the client’s consent for this process, blaming Principal for poor training, and testifying that no one noticed his failure for well over a year. On cross examination, Gelbman conceded that the information on the Form U5 was “technically not unfactual.” The arbitrator issued an award in Gelbman’s favor, recommending changes to the Form U5.
Iowa Code chapter 679A limits judicial review of arbitration awards. An Iowa court may vacate or amend an arbitration award for certain reasons, including a finding that the award was not supported by substantial evidence. Iowa Code § 679A.12(1)(f) (2022). Principal filed suit in Iowa District Court, seeking to vacate the arbitration award on this basis. The District Court agreed with Principal and vacated the award. Gelbman appealed.
On appeal, the case was transferred to the Iowa Court of Appeals. A divided three-judge panel affirmed the District Court. The majority held that the information on the Form U5 was not defamatory or misleading, concluding that the award was not supported by substantial evidence.
The Iowa Supreme Court granted further review. Review of an arbitration award is limited. The Court’s function is not to determine whether the arbitrator correctly resolved the grievance. Allowing the court to “second guess” an arbitrator by using broad judicial review would nullify arbitration’s advantages of avoiding the expense and delay of traditional civil litigation. The fact that the relief awarded could not or would not be granted by a court is not ground for vacating or refusing to confirm the award. Iowa Code § 679A.12(2). As long as the award does not violate one of the provisions of Iowa Code § 679A.12(1), the Court will not correct errors of fact or law.
The Court found that substantial evidence supported the arbitrator’s decision that Principal’s language in the Form U5 was misleading, and that substantial evidence supported the arbitrator’s recommended revisions. Adopting the reasoning of the Court of Appeals dissent, the Iowa Supreme Court held that a reasonable person could easily conclude that Principal’s statements would lead a third party to a mistaken belief about the circumstances of Gelbman’s termination. It was recognized that a reasonable arbitrator could have chosen not to believe Gelbman, but, that’s not the question under the Iowa Code. Because substantial evidence supported the arbitration award, confirmation of the award was required.
Importantly, the vacation ground upon which Gelbman was premised was only available because the arbitration was not conducted under the auspices of the American Arbitration Association and the hearing was reported. Iowa Code § 679A.12(1)(f). Moreover, the “lack of substantial evidence” ground is not allowed under the Federal Arbitration Act, which governs the procedure of many arbitrations.
Principal Securities, Inc. v. Gelbman is the first Iowa Supreme Court opinion addressing in depth the court’s deferential standard toward arbitration awards in recent years. Parties agreeing to arbitrate their disputes should be aware of the court’s limited review of arbitration awards, and should recognize that only in rare situations will a court second-guess an arbitrator.
Categories: Commercial Litigation, Dickinson Bradshaw News
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