In May, the U.S. Supreme Court ruled in Epic Systems Corp. v. Lewis that employers may lawfully require employees to sign arbitration agreements that include a waiver of the right to participate in an employee class action lawsuit or arbitration. Below, we discuss the significance of this decision and highlight issues that employers may wish to consider in the wake of it.

Epic Systems—a Pivotal Win for Employers

The NLRB planted the seed for Epic Systems in 2012, when it first took the position that Section 7 of the National Labor relations Act (“NLRA”)—which affords employees the right to self-organize, bargain collectively, and “engage in other concerted activities”—precludes enforcement of employee class action waivers. The federal Circuit Courts of Appeal split on the NLRB’s position in the ensuing years. Deepening the divide, the DOJ under the current administration broke with the NLRB.

In Epic Systems the Supreme Court rejected the notion that class actions are “concerted activities” inviolable under Section 7 of the NLRA, opining that the term is not a broad catchall. The Court observed that, while the NLRA includes many specific procedural rules, rules relating to class or collective actions are not among them. Absent clear Congressional intent, the Court reasoned that the NLRA could not “displace” the Federal Arbitration Act (“FAA”) and its edict promoting the enforceability of arbitration agreements.

Further, even if the employees could show that “the NLRA actually renders class and collective action waivers illegal[,]” the Court stated that the employees still could not properly invoke the FAA’s “saving” clause, which permits annulment of arbitration agreements “upon such grounds as exist at law or in equity for the revocation of any contract.” The Court characterized this as an “‘equal-treatment’ rule for arbitration contracts”—i.e., an arbitration contract (including a class action waiver) will be nullified only if it suffers from an elemental flaw in its formation, such as fraud.

In sum, Epic Systems represents a continuation of the Supreme Court’s recent trend of favoring arbitration agreements.

What Employers Should Consider Next

Though Epic Systems marks a resonant victory for employers, issues around the scope and effectiveness of class action waivers remain. Financial services employers may wish to consider:

Can our firm implement a class action waiver?

In implementing waivers, the financial services sector must be mindful of FINRA’s regulatory authority. Though any doubt about the lawfulness of consumer class action waivers was erased in 2011, FINRA has since said that a member firm’s use of waivers in customer contracts violates FINRA’s rules “intended to preserve investor access to . . . judicial class actions[.]”

FINRA has not, however, announced a parallel prohibition on waivers in employment agreements. Indeed, the Second Circuit Court of Appeals in 2015 held that FINRA’s arbitral rules—though they preclude arbitration of claims subject to class actions and certain types of collective actions—do not bar employers from enforcing employee waivers.

Should our firm implement a class action waiver?

Although Epic Systems confirms that employers may require employees to waive the right to participate in a class actions, employers still must consider the practical implications. The environment around arbitration agreements and class action waivers is politically-charged, and firms implementing a class action waiver may receive backlash from employees and advocacy groups. Accordingly, any program rollout should be given due consideration.

What is the appropriate vehicle for the waiver?

A class action waiver may be included in an employment policy made available to—and acknowledged indirectly by—employees, or it could be included in a specific agreement that itself requires an employee’s signature.   The former may be an easier rollout, but the latter could be less susceptible to a claim that the employee(s) never agreed to the waiver.

Employers also should note that, although Epic Systems addressed class action waivers in the context of arbitration agreements, a class action waiver could also appear in an agreement that permits the parties to choose litigation instead of arbitration, if that is the preference.

To whom will the waiver apply?

Employers should consider whether a waiver will apply to all or some employees. Conditioning a new hire’s employment on a waiver could be fairly straightforward, but rolling out a new requirement to current employees might be more difficult from a practical and legal perspective. As noted in Epic Systems, arbitration agreements (and concomitant waivers) may be nullified under the FAA on fundamental grounds—including, potentially, a lack of “consideration” given in exchange for the waiver. Hence, employers might consider presenting existing employees with waivers in connection with a raise, bonus, promotion, etc.

What form should the waiver take?

Class action waivers should be as simple and concise as possible. Ambiguity may open the door to an adverse interpretation by a court or arbitral panel skeptical of waivers as a general matter. Epic Systems does not offer much guidance in this regard, but various trial and appellate court opinions do.

Might any class or collection actions be outside the scope of even a well-drafted a waiver?

Lastly, even a well-crafted class action waiver may not fully insulate employers. In this vein, the financial services sector—with its nucleus in New York—should keep an eye on a bill introduced in the New York State legislature, the “Empowering People in Rights Enforcement (EMPIRE) Worker Protection Act” (“EWPA”). It would amend New York’s Labor Law such that complainant employee(s) could step into NYSDOL’s shoes and pursue civil penalties “on behalf of . . . other current or former employees” and “allege multiple violations that have affected different employees.” If passed, employees could attempt to use the EWPA as an end-run around class action waivers. Employees may contend that, as NYSDOL itself is not bound by a contractual waiver, employee(s) cloaked with NYSDOL’s authority likewise would be unhindered by that waiver. Employees have made essentially that argument, with success thus far, in relation to California’s Private Attorneys General Act (“PAGA”), after which the EWPA is modeled.

We published an article with Thomson Reuters Practical Law summarizing key employment issues for financial services employers, highlighting those rules applicable to registered representatives regulated by Financial Industry Regulatory Authority (FINRA). With Thomson Reuters Practical Law’s permission, we have attached it here.

By Aime Dempsey and John F. Fullerton III

For financial services industry employers that participate in arbitrations administered by FINRA, the composition of the arbitration panel may have as much, or more, of an impact on the outcome of the dispute than the facts or the law. This is because FINRA arbitrators are not bound to follow case precedent or strictly apply principals of law and can render awards based on their own notions of “fairness” or “justice.” The important process of selecting an acceptable arbitration panel, however, can be opaque, as the information that FINRA provides about prospective arbitrators often gives limited assistance to employers trying to make informed selections. Further, recent changes to the rules affecting the composition of FINRA arbitration panels, particularly in customer cases, make it even less likely that the dispute will be heard by an experienced panel.

Current Selection Procedures

Traditionally, FINRA administrators provided all parties with three lists of arbitrators from which to select a panel: 10 “public” arbitrators, 10 “non-public” arbitrators, and 10 “public” arbitrators qualified to serve as the panel chairperson. The parties would strike a certain number of arbitrators from each list and rank the remaining arbitrators in order of preference. FINRA would then choose the highest-ranked arbitrator from the two lists to form the panel, which would consist of a “public” chairperson and two panelists, one “public” and the other “non-public.”

Pursuant to a rule change that took effect on February 1, 2011, and was modified on September 30, 2013, either side in a customer dispute can designate an “all-public” panel by striking all of the arbitrators on the “non-public” list. The change may negatively impact employers because “non-public” arbitrators generally have certain defined connections to, or experience in, the securities industry and can bring an insider’s perspective to bear on the dispute that may be useful in understanding an employer’s position. “Public” arbitrators, on the other hand, generally have limited knowledge of securities or financial services and are perceived as being more sympathetic to customers. In fact, according to Regulatory Notice 13-30, FINRA found that “customers were awarded damages significantly more often when an all-public panel decided their case.”

New Rules

On February 26, 2015, the SEC accepted proposed changes to FINRA rules 12100(p), 12100(u), 13100(p), and 13100(u),which set forth new definitions of “public” and “non-public” arbitrators in customer and industry disputes. The new definitions significantly limit the financial industry experience a person can have and still be permitted to serve as a “public” arbitrator. Further, the rules substantially limit the circumstances under which a “non-public” arbitrator can be reclassified as a “public” arbitrator. Under former rule 12100(p) of the Customer Code (and 13100(p) of the Industry Code), there was a “cooling off” period that prohibited an individual who was classified as a “non-public” arbitrator due to his or her affiliation with certain financial services entities from becoming eligible to serve as a “public” arbitrator until five years after he or she retired from the securities industry. Under the revised rules, the “cooling off” period is eliminated and the same individual may be permanently classified as “non-public” and, therefore, ineligible to serve as a “public” arbitrator.

Employers should be aware that these new rules will significantly reduce the number of individuals who can serve as “public” arbitrators and dramatically decrease the likelihood that an assigned “public” arbitrator will have the financial industry experience and understanding that employers in FINRA disputes often seek. For customer disputes in particular, the new rules, taken together with the “all-public” panel rule, greatly increase an employer’s chances of drawing a panel of inexperienced arbitrators with limited understanding of the industry. For industry disputes, where panels still must have one non-public member, the recent rule change further shifts the balance of the panel toward “public” arbitrators with no industry experience.

By Kenneth DiGia and Lauri F. Rasnick

FINRA just issued a reminder regarding its views on confidentiality provisions and confidentiality stipulations.

Settlement Agreements

In Regulatory Notice 14-40, FINRA follows up on its prior Notice to Members 04-44, in which it had cautioned firms about the use of certain provisions in settlement agreements that impede, or have the potential to impede, FINRA investigations and the enforcement of FINRA actions.  Specifically, FINRA had addressed settlement agreement provisions which limited, prohibited or discouraged employees from disclosing settlement terms or underlying facts in dispute to FINRA or securities regulators.  FINRA proposed acceptable language to be included in settlement agreements or similar contracts which contain confidentiality obligations.

FINRA now takes its position a step further and proposes revised sample language for employers to include.  The new sample provision is as follows:

Any non-disclosure provision in this agreement does not prohibit or restrict you (or your attorney) from initiating communications directly with, or responding to an inquiry from, or providing testimony before, the SEC, FINRA, any other self-regulatory organization or any other state or federal regulatory authority, regarding this settlement or its underlying facts or circumstances.

The primary difference in the language that FINRA has now suggested as opposed to the prior provision it set forth is with regard to maintaining an employee’s ability to initiate communications directly with the SEC, FINRA or any other self-regulatory organization or any other state or federal regulatory authority.  Indeed, FINRA’s recent notice was meant to remind firms that confidentiality provisions – whether contained in settlement agreements, confidentiality agreements or other contracts – cannot be used to prohibit or restrict individuals from initiating communications.  According to FINRA, confidentiality provisions should expressly authorize such communications.

Confidentiality Stipulations

The Recent Notice also discussed the need for clarity in confidentiality stipulations or orders which may be entered into during arbitration proceedings to protect the confidentiality of proprietary/confidential materials exchanged by the parties or produced by third parties during arbitration. Such confidentiality orders or stipulations generally prohibit the use of materials designated as confidential outside of the arbitration proceeding.  Notice 14-40 warns that such stipulations or orders cannot restrict or prohibit the disclosure of documents to the SEC, FINRA or other self-regulatory organization or any other state or federal regulatory authority.  While the Notice focuses on stipulations and orders entered into during arbitration proceedings, the message would apply equally to stipulations entered into during, for example, court or administrative proceedings.

Regulatory Notice 14-40 is at least the fourth reminder by FINRA (and its predecessor the NASD) that separation agreements entered into must not impede its investigatory functions.  Given these repeated reminders, employers should review their separation agreements to ensure that former employees are told that they remain free to communicate with FINRA (and other related entities) regarding any such terms or their underlying facts and circumstances.  Other employment documents containing confidentiality provisions, such as confidentiality agreements, handbooks, and employment agreements should similarly be reviewed for compliance.  Employers should also ensure that confidentiality agreements used in arbitrations or other proceedings likewise do not restrict the investigatory authority of FINRA (and other related entities).  Failure to do so may result in FINRA disciplinary proceedings on the basis that such conduct is “inconsistent with just and equitable principles of trade.”

At the Firm’s 33rd Annual Labor and Employment Client Briefing, Lauri Rasnick and John Fullerton spoke on the financial services industry panel about the impact of increased compliance obligations on the employment relationship and developments in the areas of applicant screening, whistleblower complaints, internal investigations, and diversity and inclusion.

Here are a few takeaways from that session:

  • Eleven states have enacted legislation prohibiting the use of consumer credit reports in making employment decisions.  There has been a dramatic increase in state and local “ban the box” legislation prohibiting inquiry into criminal history on employment applications, as 13 states and over 70 cities and counties now have “ban the box” laws.  Most of these statutes, however, provide important exceptions for certain types of financial services industry employers, and / or recognize that financial services employers may have certain criminal background screening obligations imposed by federal law or FINRA
  • The pace of monetary awards by SEC under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) whistleblower program has increased in 2014; the most recent of which, and the largest to date, was an award of over $30 million to a single whistleblower.  As this incentive program receives increasing attention and publicity, it creates tremendous tension for employers seeking to encourage employees to report any alleged compliance issues or violations internally before reporting them to the SEC, without impeding employees from reporting to the SEC if they so choose.
  • In light of the diversity and inclusion assessment standards proposed in October 2013 by the Federal Reserve Board, CFPB, FDIC, NCUA, OCC, and SEC, pursuant to Section 342 of Dodd-Frank, it is important that financial services industry employers promote diversity and inclusion in the workplace.  There is increasing pressure on employers who do not otherwise have an obligation to do so (as the result, for example, of being a federal contractor) to create concrete diversity and inclusion policies, use metrics to track diversity in their workforces, and incorporate diversity considerations into strategic plans for hiring, retention, and promotion.
  • Complaints from employees or third parties have the potential to lead to costly, protracted litigation.  Accordingly, it is critical that internal investigations are handled properly.  Employers conducting internal investigations should: appropriately define the objectives of the investigation at the outset; select the right investigator (considering the investigator’s relationship to the complainant, relationship to decision-makers, ability to assert privilege against disclosure of information obtained, etc.); control communications among witnesses that could taint the investigation or give rise to more complaints; keep an accurate and complete factual record; and prepare a comprehensive investigative report that takes into account the applicable legal considerations.

For more on the client briefing generally, we welcome you to review the following articles for a summary of the remarks given by guest speakers M. Solicitor Smith, Solicitor of Labor of the U.S. Department of Labor, and Victoria Lipnic, Commissioner of the U.S. Equal Employment Opportunity Commission: 3 Top Labor and Employment Enforcement Priorities – Corporate Counsel; DOL’s Smith Says Proposed OT Rule is Still Months Away – Law360; and Don’t Expect Wellness Program Guidance: EEOC Commish – Law360.

 

By:  John F. Fullerton III

The Second Circuit has given class action waivers another shot in the arm.  In Parisi v. Goldman, Sachs & Co. (pdf), plaintiff argued that because she had agreed to arbitrate statutory employment discrimination claims against her employer, but could not proceed in a class-wide arbitration, she must be permitted to pursue her Title VII pattern-or-practice sex discrimination claim as a class action plaintiff in court; otherwise, her arbitration agreement would constitute an impermissible waiver of a substantive statutory right.   The Court firmly rejected this argument, holding that there is no substantive statutory right to pursue a pattern-or-practice claim in court.  The Court reversed the lower court’s ruling that had refused to compel arbitration of plaintiff’s claim individually.

When plaintiff was promoted to managing director, she signed an agreement that included a mandatory arbitration clause.  She was required to pursue “any dispute, controversy or claim arising out of or based upon or relating to Employment Related Matters,” which included Title VII discrimination claims, before NYSE or NASD (the predecessors of FINRA Dispute Resolution), or, if they declined to administer the case, before the American Arbitration Association.  The agreement was silent, however, regarding the possibility of proceeding in a class-wide arbitration.  Because the Supreme Court subsequently held in Stolt-Nielsen S.A. v. AnimalFeeds International Corp., (pdf) that a party cannot be compelled to arbitrate on a class-wide basis unless it has expressly agreed to do so, and the arbitration provision in question was silent on that issue, plaintiff argued, and the lower court agreed, that “the agreement’s preclusion of class arbitration would make it impossible for Paris to arbitrate a Title VII pattern-or-practice claim, and that consequently, the clause effectively operated as a waiver of a substantive right under Title VII.”

The Second Circuit reversed.  Relying on previous Second Circuit case law, the Court noted that “in Title VII jurisprudence ‘pattern-or-practice’ simply refers to a method of proof and does not constitute a ‘freestanding cause of action.’”  Further, because Fed. R. Civ. P. 23, which governs federal class actions, is only a procedural vehicle “ancillary to the litigation of substantive claims,” the undisputed fact that private, non-governmental plaintiffs do not have a substantive a right to bring individual pattern-or-practice claims in court means that there is “no entitlement to the ancillary class action procedural mechanism.”

The decision is another great outcome in favor of class action waivers.  (We recently reported here, for example, that a FINRA disciplinary hearing panel permitted Charles Schwab & Company, Inc. to maintain its predispute arbitration provision in its customer agreement that includes a class action waiver).   It also sets the stage for the Supreme Court’s pending decision in American Express Company v. Italian Colors Restaurant, which, reviewing another Second Circuit decision, will decide whether the Federal Arbitration Act permits courts, invoking the “federal substantive law of arbitrability,” to invalidate arbitration agreements on the ground that they do not permit class arbitration of a federal law claim.  Depending on the outcome of that decision, expected before the end of the current term in June, we could see a dramatic increase in the use of class action waivers in both the employment and consumer context.

By:  John F. Fullerton III and Matthew J. Tronzano

Mandatory class action waivers may have received an important seal of approval as the result of a recent decision arising in the financial services industry.  On February 21, 2013, a Financial Industry Regulatory Authority (FINRA) disciplinary hearing panel permitted Charles Schwab & Company, Inc. to maintain its predispute arbitration provision in its customer agreement that includes a class action waiver (pdf).  With this development, now may be the time for firms to evaluate and consider class action waivers in their arbitration agreements with both customers and employees.

Schwab included the class action waver in its customer agreement as a direct response to the Supreme Court’s 2011 decision in AT&T Mobility LLC v. Concepcion (pdf).  As the firm has reported previouslyConcepcion held that a company can enforce a contract provision that requires arbitration of disputes individually:  in other words, a class action waiver.  Although the FINRA disciplinary panel noted that Schwab’s agreement technically violates current FINRA Rule 2268 (pdf) and Rule 12204(pdf), which operate in conjunction to preserve the option for customer claims to be resolved in court in a class action, the panel determined these rules are unenforceable pursuant to the Federal Arbitration Act (FAA) and in light of Supreme Court decisions such as Concepcion.  In its decision, the panel interpreted “Supreme Court precedents to mean that countervailing policy concerns that might counsel against arbitration of a particular kind of dispute – whether state or federal, statutory or regulatory – cannot override the FAA’s mandate, unless there is a clear expression of congressional intent to carve out an exception to the FAA.”

The Schwab case involved a customer dispute under FINRA’s Customer Code.   The Industry Code, which applies to employment disputes with associated persons, contains a rule, 13204 (pdf), that is essentially identical to Rule 12204 and serves the same purpose.  Thus, it stands to reason that the rule should be interpreted the same way.  Indeed, the Schwab panel noted that interpretation of that version has been inconsistent, but that at least one recent federal court decision in New York already held that enforcement of a class action waiver was not inconsistent with the FINRA rules governing intra-industry disputes.  The trend seems clear and the time seems right for class action waivers in both customer and employment agreements.

A few final thoughts:  FINRA has appealed the Schwab decision to the National Adjudicatory Council, so the last chapter on the case has not yet been written.  Further, the FINRA panel did find that Schwab’s arbitration provision went too far in attempting to preclude FINRA from consolidating multiple parties’ claims into a single arbitration, as permitted by FINRA Rule 12312 (pdf).  And, of course, the current National Labor Relations Board would find these class waivers unlawful under the National Labor Relations Act, as applied to non-supervisory employees, as our colleagues have noted herebut that view is not finding favor in the federal courts.

by Lauri F. Rasnick

FINRA is contemplating a new rule that would require brokers transferring firms to inform clients about their signing bonuses or other compensation they are receiving in connection with their moves.  The potential rule, which is now out for public comment, is being considered to protect customers.   By mandating disclosure of the money offered in connection with a move, the client can consider the true motivation behind the move and whether it is in the client’s best interest to transfer all of his or her business.  Indeed, many firms luring over brokers offer forgivable loans or signing bonuses that are contingent on hitting certain targets.  In order to hit such targets brokers may arguably be incentivized to perform more trades or shift business into particular funds.  With full knowledge of the “enhanced compensation” being provided or promised, the client will therefore be able to make a fully informed decision whether to follow the broker or not, or at least that is the theory behind the rule.  At this point, FINRA’s Board of Governors has given authority for FINRA to seek comment on the possible rule.

Firms need not be concerned about small bonuses or about informing their institutional customers about pay.  The contemplated rule would not apply to institutional customers nor would it apply to bonuses or similar additional compensation less than $50,000.  The disclosure requirement would last for one year.

The proposed rule is already generating a hearty debate with firms voicing concerns that the process will give brokers more control over compensation negotiations, and brokers concerned that their clients could be unduly influenced based on hearing what compensation they may be receiving.  While it remains to be seen whether the rule will ultimately go into effect, such a rule could add transparency to the compensation process and provide employers more information about the deals in the marketplace.

Before the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd Frank”) was enacted, whistleblower claims by registered representatives, including those arising pursuant to the Sarbanes-Oxley Act of 2002 (“SOX”) were subject to mandatory arbitration at FINRA.  See FINRA Notice 12-21 (PDF).  Dodd Frank changed that.  Dodd Frank specifically amended SOX to provide that “[n]o dispute arbitration agreement shall be valid or enforceable, if the agreement requires arbitration of a dispute arising under this section.”  In addition, SOX was also amended to provide that rights and remedies provided for in the statute cannot be waived, including by having a predispute arbitration agreement.  In order to be consistent with SOX and to make it clear that FINRA will not require the arbitration of other similar statutory claims, as of May 21, 2012, FINRA amended Rule 13201 of the Code of Arbitration Procedure for Industry Disputes (the “FINRA Code”) to address the arbitrability of statutory whistleblower claims.

Prior to the amendment, Rule 13201 made it clear that statutory employment discrimination claims were not subject to mandatory arbitration unless the parties to the dispute specifically agreed to arbitrate such claims.  See FINRA Rules 13201 and 13802: Arbitrating Statutory Employment Discrimination Claims.

In that regard, Rule 13201 of the FINRA Code (PDF) provided:

A claim alleging employment discrimination, including sexual harassment, in violation of a statute, is not required to be arbitrated under the Code. Such a claim may be arbitrated only if the parties have agreed to arbitrate it, either before or after the dispute arose. If the parties agree to arbitrate such a claim, the claim will be administered under Rule 13802.

Rule 13201 has now been supplemented with regard to statutory whistleblower claims:   “a dispute arising under a whistleblower statute that prohibits the use of predispute arbitration agreements is not required to be arbitrated under the Code. Such a dispute may be arbitrated only if the parties have agreed to arbitrate it after the dispute arose.”

It should be noted that unlike Rule 13201’s provision regarding statutory discrimination claims, FINRA’s new provision regarding whistleblower statutes only covers claims arising under those whistleblower statutes that prohibit the use of predispute arbitration.  Accordingly, whistleblower claims that arise under laws with no such limitations may still be subject to mandatory arbitration before FINRA.  In addition, unlike statutory discrimination claims which parties can agree to arbitrate before or after a dispute arises, covered whistleblower claims may only be arbitrated if the parties agree after the dispute arises.

Together with the change to Rule 13201, FINRA revised the disclosure requirement for registered representatives signing new or amended Form U4s.  See FINRA Rule 2263 (PDF).  FINRA’s new disclosure form explicitly sets forth that certain statutory whistleblower claims are not required to be arbitrated.

What employers should do now? 

  • Review arbitration agreements. Employers should make sure that their current or proposed arbitration agreements do not include SOX claims or claims under other whistleblower laws that prohibit predispute arbitration.  Employers should keep in mind, however, that predispute arbitration agreements may still require the arbitration of statutory employment discrimination claims.  While there are pros and cons of arbitration, employers who wish to require it for employment discrimination claims should make sure to draft the inclusion of such claims into an arbitration agreement specifically.
  • Use the New Disclosure Form.  When registered representatives sign new or amended Form U4s, they should be given the revised FINRA disclosure form pursuant to Rule 2263.
  • Review policies and employment agreements. Employers should review their written policies and outstanding employment agreements to determine whether any policy or contract is too broadly drafted and could be interpreted to include the prohibited whistleblower claims.

By:  Dena L. Narbaitz

 This is the fourth in our series of posts on practice and procedure in employment-related arbitrations before FINRA.  Check back often for future posts, subscribe by e-mail (see the sidebar), or follow @FSemployer on Twitter so you don’t miss any updates!

The FINRA Code of Arbitration Procedure provides for a simplified arbitration process in both employment and customer disputes if the dollar amount in controversy is below a certain threshold. The SEC recently approved FINRA’s proposal to raise the dollar limit eligible for simplified arbitration procedures from $25,000 to $50,000.  Also, FINRA gained approval to have cases with alleged damages between $50,001 and $100,000, to be heard by one arbitrator – unless the parties mutually agree to three panelists.

The dollar limits apply exclusive of interest and expenses.  If any pleading increases the amount of the dispute over the threshold, however, the case is elevated.  So, if any part of the claims – whether the initial claim or a counterclaim – cause the threshold to be exceeded, the case steps up to the next panel composition level.  For example, if a former employee files a claim for commissions in the amount of $20,000, the case falls under simplified arbitration.  But if a counterclaim is filed in the amount of $40,000, then the case will be elevated to the point where the parties can agree to have three panelists.

According to FINRA (PDF), the advantages of the simplified arbitration – permitting the parties to have their case resolved on the papers, without a hearing – allows parties to: (1) pay reduced the forum fees; (2) save the time and money on things such as hearing preparation; and (3) circumvent delays and receive an expedited outcome.

FINRA’s points are certainly true, but the decision whether to file a claim that pushes the alleged damages amount “over the top” should also take into account the overall case strategy.  What if the former employee is likely to be a bad witness, thereby making a hearing more beneficial to the employer?  Is the documentation strong enough to stand alone to win the case without a hearing?  A short, expedited decision is not is not necessarily the best option for resolution of the dispute.  In deciding whether the simplified arbitration process is the best option, the employer should weigh all these factors.

This proposal amends Customer Code Rules 12401 and 12800 and Industry Code Rules 13401 and 13800.  Text and more information on the rule (SR-FINRA-2012-012) can be found here.