Defeating the Mitigation Defense
The defense of failure to mitigate “is simply that damages are not recoverable for harm that the plaintiff should have foreseen and could have been avoided by reasonable effort without undue risk, expense or humiliation." Theis v. duPont, Glore, Forgan, Inc., 510 P.2d 1212, 1217 (Kan. 1973). The defense of failure to mitigate damages is frequently raised by defense counsel in securities arbitration cases. It is a legal defense. The likelihood of being confronted with such a legal defense is one reason why an aggrieved investor should consult with an experienced Georgia FINRA lawyer regarding any securities arbitration matter.
Although FINRA arbitrators are charged with doing equity and achieving fair results, they are not prohibited from considering legal defenses that arguably are unfair, i.e., inequitable. The mitigation defense flows from the legal doctrine of avoidable consequences. The defense may be raised in securities arbitration cases and in any civil action in which the plaintiff/claimant seeks monetary damages. If the investor could have lessened the loss that was suffered, the mitigation defense allows the court to reduce the investor’s recovery. In a FINRA arbitration case, the mitigation defense might be raised where, for example, there was a point in time when the claimant knew or should have known that his or her investments were losing value. It would be easy to identify that point in time if the claimant sent a letter or email to the broker (meaning the firm or the individual broker) complaining about the losses. Without more, the broker would seem to have a compelling argument to limit the claimant’s recovery to the losses that had occurred at that point in time or soon thereafter, on the grounds that the claimant could have avoided further losses by selling the investments in question.
At the outset, it should be noted that the mitigation defense is inherently unreasonable and inequitable. Having first discovered wrongdoing by the broker, the investor is faced with a dilemma. Recovery of losses, which would end any need for legal action, attorneys and costs, may be just around the corner. All the investor may need to do is wait out the market, sell and move on. Selling immediately only guarantees losses and the need for action. However, while holding positions might mitigate the situation, this also leaves the investor open for additional losses. The investor is thus "darned if he does and darned if he doesn't" liquidate. The law places no such dilemma on investors.
At least one court (the Supreme Court of Delaware) has totally rejected the mitigation defense as inherently unreasonable. See Duncan v. Theratx Inc., 775 A.2d 1019 (Del. 2001). Because the future performance of an investment is unknowable and speculative at best, the suggestion that an investor reasonably could have acted to avoid further losses by selling or retaining the investment falsely assumes that the investor knows that the investment is set to decline or rise at the time the investor makes a decision to sell or hold the investment.
Other courts, while not rejecting the defense entirely, have identified circumstances where the mitigation defense should not be allowed. Consulting with an experienced Georgia FINRA attorney can help investors understand the circumstances that can defeat the mitigation defense, including the following:
Continuing to Hold the Investment Was Reasonable. In Kurke v. Oscar Gruss and Son, Inc., 454 F.3d 350 (D.C. Cir. 2006), the D.C. Circuit Court of Appeals concluded that there was evidence that Kurke acted reasonably even though another reasonable course action would have mitigated his damages. The arbitrators “may well have concluded that it was reasonable for Kurke to believe that churning and unauthorized trading would cease as a result of his complaint to the broker, and that the best way to mitigate his losses was to leave the account in [the broker’s] hands so that he could ‘turn this around’ as he promised to do.”
Broker Has a Fiduciary Duty / Equal Opportunity to Mitigate. One such circumstance is when both parties have the same opportunity to reduce damages. If it can be shown that the broker could have taken action to reduce the damages, the mitigation defense does not apply. Along those same lines, one court held that the stockbroker’s fiduciary duty precluded the mitigation defense, and that the date for imposing the obligation on the plaintiff to mitigate damages was the date the fiduciary relationship terminated. Twomey v. Mitchum, Jones & Templeton, Inc., 262 Cal. App.2d 690, 69 Cal. Rptr. 222 (1968). In other words, as long as the fiduciary broker-customer relationship continued, the broker had an equal opportunity to minimize damages and, therefore, could not avail itself of the mitigation defense.
Fraud and other Intentional Torts. Most of the common claims in FINRA customer arbitration (e.g., unsuitability and misrepresentation) involve a claim of fraud, which is an intentional tort and is often a continuing tort. The rule of avoidable consequences does not apply in cases of intentional or continuous torts involving property. The injured party may recover damages sustained even though by the exercise of ordinary care and diligence those damages could have been avoided. In cases of fraud, the injured party owes no duty to mitigate damages resulting from the fraud as a matter of law and the defense of mitigation should be stricken. This is especially true where a publicly traded stock loses value in reaction to a company’s disclosure, as in Cypress Semiconductors Securities Litigation, 836 F. Supp. 711 (N.D. Cal. 1993). “Since the market adjusted the value of plaintiffs' stock based upon the January 20, 1992 disclosure, plaintiffs could not mitigate their losses by selling.” Id. at 713.
Breach of Contract. Virtually every securities broker-customer agreement constitutes a contract pursuant to which the broker is obligated to abide by FINRA rules as well as state and federal securities laws. It follows that virtually every investor claim in FINRA arbitration has or should have a breach of contract claim. Breach of contract by the broker and/or firm defeats any mitigation defense that might be raised. As one court put it: “[T]he duty to mitigate may not be invoked by one who has breached a contract as grounds for hypercritical examination of the injured party’s conduct, or as evidence that the injured party might have taken steps which seemed wiser or would have been more advantageous to the breaching party.” Pioneer Bank & Trust Co. v. Seiko Sporting Goods, 540 N.E.2d 808, 813 (Ill. App. Ct. 1989).
Mitigation (Selling) Would Cause Harm to Other Investors. There is good authority that one is not required to mitigate damages where that would involve selling a bad investment to an unsuspecting investor. See e.g., Bass v. Janney Montgomery Scott, Inc., 210 F.3d 577 (6th Cir. 2000), where the court bluntly stated: “[T]he mitigation rule does not require parties to unload junk stock on unwitting investors.”
In any event, the burden is on the broker to show that the investor could have reasonably mitigated the damages without undue risk and expense, and not the other way around.
Sam Brannan is an experienced FINRA lawyer serving clients in Georgia and nationwide. If you have questions or concerns about your investment, we would be happy to consult with you at no charge. Call us at (404) 907-4642 for a free consultation.