Navigating Between Appeal and Mandamus: The Path from AAA to FINRA

Originally published by Carrington Coleman.

Morford v. Esposito Securities, LLC
Dallas Court of Appeals, No. 05-14-01223-CV (September 18, 2015)
Justices Fillmore, Stoddart (Opinion), and Whitehill

Sara Romine

Esposito, a licensed securities broker and member of FINRA, agreed to help Appellants find investors for their venture, Nemaha, in exchange for a percentage of the money received. The agreement contained a provision requiring any dispute to be resolved through AAA arbitration. After Appellants negotiated two transactions on their own, Esposito filed a claim for arbitration with the AAA, seeking a portion of the total consideration received by Nemaha. Appellants refused to participate in the AAA arbitration. So, Esposito filed suit, and a motion to compel arbitration before the AAA. In response, Appellants moved to compel arbitration before FINRA. The trial court determined that Appellants were not “customers” of Esposito, as required by FINRA, and granted Esposito’s motion to compel arbitration before the AAA. Appellants appealed, asking the Court to reverse the order compelling arbitration before the AAA and to compel arbitration before FINRA instead. In the alternative, Appellants asked the Court to treat their appeal from the order compelling AAA arbitration as a petition for writ of mandamus.

The Dallas Court of Appeals recognized it lacked jurisdiction to review the order compelling AAA arbitration, but concluded it could treat the appeal as a petition for writ of mandamus, while simultaneously reviewing on interlocutory appeal the denial of Appellants’ motion for FINRA arbitration. The Court reasoned—and the parties apparently agreed—that, if Appellants were “customers” of Esposito, they have a contractual right to compel arbitration through FINRA as a third-party beneficiary of Esposito’s member agreement with FINRA. And if that right is erroneously denied by virtue of an order compelling AAA arbitration, Appellants would lack an adequate remedy at law. Thus, the Court concluded that it had mandamus jurisdiction to consider whether the trial court abused its discretion by compelling arbitration before the AAA rather than FINRA.

In addressing the dispositive issue on appeal—whether Esposito was a “customer” of Appellants under FINRA rules—the appellate court rejected the argument that Appellants could only be customers of Esposito if Esposito had actually received payment from Appellants. Instead the Court found the agreement between Appellants and Esposito represented an undertaking to purchase services from Esposito for a fee, which falls within the ordinary definition of “customer” for FINRA purposes. Because the parties agreed that, if Appellants were customers of Esposito under FINRA rules, arbitration before FINRA was proper (notwithstanding the Agreement requiring arbitration before AAA), the Court reversed the trial court’s order denying Appellants’ motion to compel arbitration before FINRA and ordered the parties to proceed to FINRA arbitration. It then conditionally granted the Appellants’ petition for writ of mandamus with respect to the trial court’s order compelling arbitration before the AAA.

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