The three-judge panel of California 4th District Court of Appeal this week unanimously agreed with lawyers for brokers John Paladino and Todd Vitale, who argued that a lower court was wrong to overturn a 2012 securities arbitration decision in the brokers' favor.

"We disagree with ruling and are considering our options," a Morgan Stanley spokeswoman said.

Neither Paladino, Vitale nor their lawyer could be immediately reached for comment.

Morgan Stanley had argued that one of the three Financial Industry Regulatory Authority (FINRA) arbitrators who heard the case did not disclose ties between some of his family members and the securities industry. Among those details: the arbitrator's daughter had previously worked in the brokerage industry and also had an account at Morgan Stanley at the time of the arbitration, according to court documents.

A judge of the Superior Court of California in San Diego agreed with Morgan Stanley in 2012, reasoning that FINRA's arbitration rules required arbitrators to disclose those details, according to court documents.

The appellate court acknowledged that the arbitrator failed to disclose those details, but ruled in an opinion on Monday that the information "could not cause an objective observer to doubt the arbitrator's impartiality."

Brokers must typically resolve legal disputes with their employers in FINRA's arbitration forum. Arbitration rulings are generally binding, but courts can overturn them in some instances, such as when arbitrators are biased.

"It's very rare that you can ever overturn a FINRA award," said Jeffrey Riffer, a securities lawyer in Los Angeles who was not involved in the case. But brokerages usually try when a large sum is at stake, Riffer said.

Morgan Stanley recruited Paladino and Vitale from a UBS AG brokerage unit in 2008, according to the appeals court opinion. The two alleged that Morgan Stanley promised that Vitale would become a salaried sales manager within six months of joining the firm and a branch manager within a year. Paladino was to take over their combined clients when Vitale became salaried.

But Morgan Stanley did not make Vitale a salaried manager. Paladino, as a result, was never able to take over the clients.

Vitale still works for Morgan Stanley in Rancho Santa Fe, California. Paladino left Morgan Stanley in late 2012, according to regulatory filings. He is now executive director of wealth management for Sterling Wealth Management Group in Carlsbad, California.

(Reporting by Suzanne Barlyn in New York; editing by Matthew Lewis)

By Suzanne Barlyn