By:  John F. Fullerton III

This is the third 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!

Once upon a time, it was mandatory under Form U4 that registered representatives file any statutory claims of discrimination (such as age, gender, or race discrimination) in arbitration rather than in court.  A well known Supreme Court case decided in 1991, Gilmer v.  Interstate/Johnson Lane Corp., upheld that requirement. Starting in January 1999, however, the requirement for registered persons to arbitrate claims of statutory employment discrimination was eliminated from the rules of the NYSE and NASD, FINRA’s predecessor organizations.  Since then, discrimination claims still can be and often are heard and decided by FINRA arbitrators—but only if both parties voluntarily agree to arbitration, either before or after a dispute arises.  In other words, arbitration of statutory discrimination claims is no longer a required condition of employment for all registered representatives by virtue of language in the U4, but rather, must be agreed to separately in an employment agreement or an employer’s mandatory arbitration program.

Today, Rule 13201 of the FINRA Code of Arbitration for Industry Disputes (PDF) provides:

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.

“Statutory employment discrimination claim” is defined elsewhere in the Rules as “a claim alleging employment discrimination, including a sexual harassment claim, in violation of a statute.”  Because of their unique status, statutory discrimination claims are administered differently than other types of industry disputes involving associated persons employed by FINRA members.  These procedures are set forth in Rule 13802 (PDF).

One difference is that all claims of $100,000 or less are heard by a single arbitrator, unlike other cases, where claims between $25,000 and $100,000 are usually heard by a single arbitrator but can be heard by a panel of three arbitrators upon written agreement of the parties.  If the amount of a discrimination claim is more than $100,000, the panel consists of three arbitrators, unless the parties agree in writing to having the case heard by a single arbitrator.

If a discrimination case is heard by a single arbitrator, the arbitrator is drawn from FINRA’s list of “public” arbitrators (as opposed to the list of non-public or “industry” arbitrators), but must meet certain special qualifications applicable in statutory discrimination cases, unless the parties agree in writing otherwise.  If the panel consists of three arbitrators, the arbitrators are all public arbitrators, unlike other industry disputes involving associated persons, for which the panels are comprised of two public arbitrators and one non-public arbitrator.  Further, one of the three public arbitrators, who serves as the Chairperson, must meet the special qualifications applicable only in statutory discrimination cases, unless the parties agree in writing otherwise.

Under these special requirements, the arbitrator must possess:

  • a law degree (Juris Doctor or equivalent);
  • membership in the Bar of any jurisdiction;
  • substantial familiarity with employment law; and
  • ten or more years of legal experience, of which at least five years must be in either:
    • law practice;
    • law school teaching;
    • government enforcement of equal employment opportunity statutes;
    • experience as a judge, arbitrator, or mediator; or
    • experience as an equal employment opportunity officer or in-house counsel of a corporation;
  • and, in addition, the arbitrator may not, within the five years prior to being appointed, have represented “primarily” the views of employers or of employees, meaning 50% or more of the arbitrator’s business or professional activities cannot have come from representing employers or employees within the previous five years.

The requirements of a law degree and bar membership can be waived if the parties agree to do so, but only after a dispute arises.

In terms of administrative fees, Rule 13802 provides that the party a party who is a current or former associated person and is required to arbitrate pursuant to a pre-dispute arbitration agreement “shall pay a non-refundable filing fee according to the schedule of fees set forth in Rule 13900(a)” (PDF),  subject to a fee cap of $200.  The FINRA member / employer must pay the remainder of all applicable arbitration fees.

The arbitrators are authorized under Rule 13802 to award any relief that would be available in court under the statutes at issue.  The award itself must contain many of the same elements as other FINRA awards—e.g., a summary of the issues, including the type of dispute involved, the damages or other relief requested and awarded, and a statement of any other issues resolved—but must also include a statement regarding the disposition of any statutory claims.  Finally, the panel is explicitly authorized to award reasonable attorneys’ fees, in whole or in part, as part of the remedy in accordance with applicable law.

By:  John F. Fullerton III

This is the second 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!

As a general rule, it is more common to read about employers who have been sued in court by a former employee attempting to compel the claims into arbitration than an employer trying to compel arbitration claims to be filed in court.  Yet, under the occasionally overlooked FINRA Rule 13803, employers who are FINRA members have the ability in appropriate circumstances to compel an arbitration claim filed with the agency to be consolidated with a pending court proceeding.

Tucked away toward the end of the FINRA Code of Arbitration Procedure for Industry Disputes is Rule 13803 (pdf), entitled “Coordination of Statutory Employment Discrimination Claims Filed in Court and in Arbitration.”   The rule reflects the common-sense principle that respondents should not be forced to litigate claims arising from common facts in two different fora when a single forum is available in which all claims can be heard.  This principle applies not only because of the added burden and expense to all parties, but because of the possibility of conflicting rulings and double recovery for the claimant.

The rule provides:

If a current or former associated person files a statutory discrimination claim in court against a member or its associated persons, and asserts related claims in arbitration at FINRA against some or all of the same parties, a respondent who is named in both proceedings may, upon motion, compel the claimant to bring the related arbitration claims in the same court proceeding in which the statutory discrimination claim is pending, to the full extent to which the court will accept jurisdiction over the related claims.

The rules elsewhere broadly define “related claim” asany claim that arises out of the employment or termination of employment of an associated person.”  Thus, Rule 13803 gives broad latitude to employers to compel claims filed with FINRA to be brought in court instead, where employers tend to fare better on breach of contract and statutory wage claims than they do in arbitration, where arbitrators sometimes makes decisions based on considerations other than a strict application of the law.  The only caveat for employers is that if they do require a FINRA claimant to file the claims in court instead, then the employer must also be willing to assert any related claims it has against the claimant in court as well.

The Rule was originally adopted by the NASD, FINRA’s predecessor, effective January 1, 2000, as the direct result of the NASD’s previous elimination of the requirement for registered persons to arbitrate claims of statutory employment discrimination.  By its terms, a  motion under Rule 13803 can be filed by any “respondent who is named in both proceedings,” regardless of the specific type of employment claim at issue, or even whether the respondent is a FINRA member or associated person or otherwise not an appropriate party to the arbitration.

Employers who decide to exercise this option must be sure to provide advance written notice to the claimant or opposing counsel before the time to file an Answer has expired, and must file a copy of such notification with FINRA’s Director of Arbitration.  If the respondent files an answer without having exercised this option, it will have waived its right to compel the claimant to assert the related claims in court.

Similarly, if an employer has filed a statement of claim with FINRA against a former employee, and the employee then files a discrimination claim in court against the employer, the employer has the option under the Rule to pursue its FINRA claims in court instead if it so chooses, provided it gives notice to the employee and Director of its intent to do so before it files an answer to the complaint in court.  Once the arbitration hearing has started, however, the employer cannot exercise this option.

Under Rule 13803, the employer can also compel claims to court when related claims are asserted in an amended statement of claim. Other provisions of Rule 13803 address situations in which there are multiple respondents and not all of them wish to have the claims heard in court, and where the employee certifies that he or she tried, unsuccessfully, to discuss with the employer consolidating the claims in court before the statement of claim was filed with FINRA, which entitles the claimant to a refund of the filing fees if the employer later exercises its rights under Rule 13803.

By: John F. Fullerton III

This is the first of a 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!

More than one lawyer has been burned by a FINRA arbitration panel that seemed ideal on paper, but then, at the hearing, just did not “get it.”  Conversely, a panel that initially looks troubling sometimes does a great job at the hearing and gets the decision right (i.e., in your favor, of course). And there are plenty of times when the arbitrators perform exactly as their experience and background would lead you to expect.  Is there really any proven method of selecting the “best” arbitrators for an employment-related (industry) case  before FINRA (as opposed to a customer dispute, which we do not address here), or might you just as well hang the list of arbitrators you receive from FINRA on your office wall and throw darts at it?

The simple answer is that although you will never be able to predict with certainty, or even a strong probability, how the case will be decided based on the arbitrators you select, we have compiled just a few suggestions that should, at the very least, provide comfort that you have done all you can to obtain the best panel possible under the circumstances.Do Your Due Diligence

The first thing to remember is that, despite your due diligence and thoughtful selection process, there is still a good chance you will not get the arbitrators you preferred on your panel.  This is because of the  manner in which the panel is determined by FINRA, in which each party strikes certain arbitrators from a list tendered by FINRA, ranks the remaining arbitrators numerically by preference, and then FINRA combines the lists and appoints the highest ranked arbitrator in each category (chairperson, public arbitrator and non-public (or “industry”) arbitrator). See, e.g., FINRA Code of Arbitration Procedure Rules 13404, 13405 and 13406.  (pdf)  If there are no matches between the parties, FINRA simply appoints an arbitrator(s) who was not even on the original list.  Nevertheless, it makes sense to begin the process by gathering as much information from as many sources of information as possible, so that you can at least strike those arbitrators you definitely do not want and submit the most informed rankings possible.

  • Read the biographies of each potential arbitrator provided by FINRA to find out the individual’s primary occupation and to obtain a general sense of his or her background.  Look for updated information on the Internet. Social media outlets such as LinkedIn, Facebook and Twitter offer another valuable resource for learning more about the arbitrators on your list.
  • The FINRA biographies also include a list of cases in which the arbitrator has served.  Look for cases in which your company was a party, so that you can find out from colleagues or company records how the arbitrator ruled. If you see a case on the list against another company where you have a contact, call the person; he or she may not be at liberty to share details about the case, but you can ask for his or her impressions of the arbitrator.
  • Next, read through all the publicly available awards from cases in which the arbitrator served, with the caveat that those awards almost never offer any reasoning behind the decision.  But, for example, if someone has never ruled in favor of the employer in any employment case, at least you will find that out.  FINRA awards are available on the FINRA website and through services such as LEXIS and WESTLAW.  In addition, the lawyers who handled the case are identified in the awards and can also be a source of information about the arbitrator.

Reading the Tea Leaves

Once you have compiled all the background information you can find and have a sense of each proposed arbitrator, you must decide whom you should strike, and how to rank the remaining arbitrators. What kind of arbitrator should you be looking for?  While there are many schools of thought, here are a few suggestions (based solely on experience and anecdotal evidence, not on any sort of psychological or statistical study).

  • All things being equal, unless you have already eliminated them for other reasons, choosing more experienced arbitrators—those with numerous awards under their belts—is generally preferable to taking a chance on an unknown quantity. In theory, at least, a more experienced arbitrator should not only be “better” at arbitrating (regardless how the individual tends to rule), but being selected or appointed frequently is a sign that other parties and their lawyers were comfortable using these individuals.
  • Next, choosing a lawyer as the panel chairperson is not a bad idea.  That individual will usually be the one ruling on evidentiary and other objections during the hearing, and may also rule on any pre-hearing discovery disputes.  It is therefore helpful to have someone making that decision who has a sense of the law and common practice in these areas.  In addition, a lawyer may—although not always, of course—have a better sense of how to maintain control over the proceedings and move them along efficiently.
  • From an employer’s perspective, especially in cases in which an employee has been discharged or denied bonus pay, deferred compensation or benefits as a result of his or her own conduct, certain occupational backgrounds may be more appealing.  For example, consider giving a higher ranking to arbitrators who have been compliance officers or in-house counsel, and those with law enforcement or military backgrounds, on the theory that are accustomed to following and enforcing the rules (and contractual agreements) and have the same expectation of others.  In the same vein, those with management experience may have a better appreciation of the demands of running an operation or department, and thus, the need for compliance with rules and policies.
  • Conversely, it often makes sense to avoid arbitrators who appear to have similar backgrounds or have done the same type of work as the opposing party, on the theory that they will more readily put themselves in the opposing party’s shoes and perhaps sympathize with his or her situation.

Of course, these are all just general suggestions for consideration, not to be followed blindly in every specific situation. But you may find that thorough due diligence and a few simple guidelines are better than throwing darts against the wall or picking names out of a hat.  Good luck!

By:  Dena L. Narbaitz

Here is the scenario:  your company, a FINRA Member Firm, terminates a broker for “violation of company policies” and reports this as the reason for termination on the broker’s Form U-5 (Uniform Termination Notice for Securities Industry Registration).  The broker then sues your company in state court asserting several claims, including defamation for the language contained on his Form U-5.  Your company thinks there is a good legal basis to have the broker’s claims dismissed as a matter of law before the case is tried.  Should your company litigate the case in the former employee’s chosen forum (state court) or file a motion to compel FINRA arbitration?

Let’s first look at the option of compelling arbitration.  The broker is an Associated Person under FINRA rules, and, therefore, your company could file a motion to compel arbitration to move the case into FINRA arbitration.  FINRA Code of Arbitration Rule 13200(a).  FINRA Rules, however, only provide for dismissing claims on an extremely limited basis prior to an arbitration hearing.  Under FINRA Rule 13504, motions to dismiss claims prior to an arbitration hearing are “discouraged.”  FINRA Rule 13504 states, a claim can be dismissed if  “(A) the non-moving party previously released the claim(s) in dispute by a signed settlement agreement and/or written release; or (B) the moving party was not associated with the account(s), security(ies), or conduct at issue.”  Under these rules, even if there is no legal basis for the broker’s defamation claim, the claim would not be dismissed.  The company would have to go through the entire FINRA arbitration before it prevails.

Now, let’s look at remaining in state court.  In California, and most state and federal courts, a claim can be dismissed if there is not a material issue of triable fact.  Cal. Code Civ. Proc. § 437c  Also, there are other pre-trial methods for dismissal of claims.  Cal. Code Civ. Proc. § 430.10.  In California, courts would dismiss the former employee’s defamation claim; there would be no issue for a trial on that unfounded cause of action.  See Fontani v. Wells Fargo Investments, 129 Cal.App.4th 719 (2005) (a claim for defamation is dismissed because the Member Firm’s statements on the Form U-5 are absolutely privileged). 

Under the above example, the case – at least some claims – could be knocked out prior to a hearing on the merits.  Often, the choice of compelling FINRA arbitration or staying in state court (the former employee’s chosen forum), will affect the company’s ability to dismiss claims prior to arbitration or trial.  Consequently, the choice is an important one; it should carefully be considered.  By no means, am I suggesting that the Member Firm initiate a case in court versus filing in FINRA.  There are limitations to doing so.  And to do so, could be a bad idea leading to FINRA fines.  (See Blog Post –  FINRA’s $1 Million Dollar Fine of Merrill For Dodging Arbitration of Claims).  However, staying in state court – after the former employee has filed there – may be better for the company.

By: Lauri F. Rasnick

FINRA recently announced that it fined Merrill Lynch, Pierce, Fenner & Smith (“Merrill”) one million dollars for failing to arbitrate claims with employees. See January 25, 2012 News Release.    The disputes at issue arose out of promissory notes executed by Merrill employees in connection with the Bank of America Corporation (“BOA”) acquisition.  After the BOA acquisition, Merrill created a program called the Advisor Transition Program (“ATP”).  Pursuant to this program, Merrill was to pay particular registered representatives lump sum retention payments structured like loans and subject to the execution of promissory notes.  The promissory notes had to be repaid, in part or whole, depending on whether a registered representative was terminated, failed to make payments, or filed for bankruptcy, among other things.   In connection with the ATP, Merrill paid out approximately 2.8 billion to 5,000 registered representatives. 

Pursuant to the ATP, the promissory notes were made between the registered representatives and Merrill Lynch International Finance, Inc. (“MLIFI”), a non-registered affiliate of Merrill, even though the funds were ultimately provided by Merrill’s parent company.  The promissory notes stated that “[t]he undersigned agrees that any actions regarding the [n]ote, shall be brought solely in the Supreme Court of the State of New York in New York County.”  A consent to the jurisdiction of the courts of the state of New York was also contained in each of the promissory notes.  In early 2009, after a number of terminations by Merrill,  Merrill filed over 90 summary collection proceedings in New York state courts against registered representatives who allegedly owed money pursuant to their promissory notes. 

In fining Merrill, FINRA found that Merrill intentionally structured ATP to avoid arbitration for the collection of the loans and allow Merrill to “pursue collections of amounts due under the loans through MLIFI in expedited proceedings in New York state courts.”     FINRA found that by doing so, Merrill violated FINRA Rules 2010 and 13200(a), which require member firms to observe “high standards of commercial honor” and generally require all disputes between a firm and its employees to be arbitrated before FINRA.   Merrill did not admit or deny FINRA’s findings, but did agree to pay a $1 million fine and to refrain from bringing further note collection actions in New York state court. See FINRA Letter of Acceptance, Waiver and Consent, No. 2009020188101

FINRA’s actions raise some interesting issues.  It is not uncommon in the financial services industry for employers to use promissory notes in connection with signing bonuses, forgivable loans, advancements or retention or other bonuses.  Having employees execute promissory notes in which they agree to repay some or all of the amounts in the event of a termination or otherwise gives employers some protection in light of its distribution of funds.   Some registered employers prefer to have their promissory notes entered into by non-registered entities and provide for court as the jurisdiction.  Indeed, as set forth in the article Something to Consider When Deciding Whether to Compel FINRA Arbitration  there may be viewed advantages to having certain contractual claims adjudicated in court.  The recent fine demonstrates that FINRA will take action to protect what it views as the rights of employees to have their disputes heard before FINRA, and avoid expedited proceedings, such as the summary process in New York for collection.  Registered employers (or their non-registered affiliates) with promissory notes providing for court should carefully review them in light of this recent investigation and fine.

By: John F. Fullerton III

A recent New York state court decision granted a fairly unique petition to disqualify the attorney for a group of former employees from representing them in an intra-industry arbitration at FINRA. Why?  Because the lawyer had turned himself into a fact witness by negotiating the termination explanation in the U5 notice of two of the employees. The decision raises an interesting question about whether the same logic could be applied in a U5 expungement hearing at FINRA when there have been discussions between counsel about the U5 language, regardless of whether or not the employee ultimately “accepts” the U5 language the employer reports.

 Disqualifying Counsel Who “Negotiated” U5 Language

In the case, New England Securities Corp. v. Stone (PDF), the employer, a registered broker-dealer of insurance products, discharged two registered salespeople.  They retained the same attorney, who called the company’s in-house counsel to discuss how the terminations would be characterized in the Uniform Termination Notice for Securities Industry Registration (Form U5)  (PDF).  Form U5 requires firms to indicate whether a termination was full, give a Reason for Termination (“Discharged,” “Other,” “Permitted to Resign,” “Deceased,” or “Voluntary”), and a Termination Explanation if the reason for termination was “Permitted to Resign,” “Discharged,” or “Other.”  FINRA requires member firms to “provide sufficient detail when responding to Form U5 questions such that a reasonable person may understand the circumstances that triggered the affirmative response.” In a discussion not uncommon in the financial industry, the in-house attorney made clear that the company did not negotiate U5 language, but “would be open to suggestions if they made sense.”  Extensive discussions ensued, and ultimately, the lawyer for the employees indicated that his clients had “accepted” the U5 language.

Thereafter, the company filed a statement of claim at FINRA against the same two former employees, claiming that they had breached their contractual obligations by soliciting policyholders to cancel their policies and other employees to resign and join them at their new employer.  The former employees, through the same lawyer who “negotiated” their U5 language, asserted several counterclaims, including tortious interference with prospective business advantage, negligence, and failure to supervise—all of which were based on the claim that the U5 language was “false” and “inaccurate”!

The company responded by commencing a special proceeding in state court to disqualify the employees’ attorney under Rule 3.7 of the New York Rules of Professional Conduct  (PDF), which provides in relevant part that a “lawyer shall not act as advocate before a tribunal in a matter in which the lawyer is likely to be a witness on a significant issue of fact.”  After a thorough analysis, the court granted the petition and enjoined the attorney from representing the employees in any manner at or in connection with the arbitration, because he “was a direct participant in the communications that are at issue, rendering his testimony indispensable in order for the Firm to defend [the] counterclaims.”  Only the lawyer could explain why his clients had “accepted” U5 language that they now claimed was “false” and “inaccurate.”

 Other Applications?

While the decision supports a similar strategy in a similar case, it might have broader possibilities as well.  Discussions between in-house counsel and employee’s attorneys about U5 language do occur, notwithstanding the appropriate position taken by most employers that, at the end of the day, the language is non-negotiatiable and the company has an obligation to provide accurate information on the U5 regardless of the employee’s wishes. Indeed, some attorneys encourage employees to be proactive about attempting to discuss the U5 language with the employer at or around the time of discharge; and in many cases the employees are already represented by counsel if they are disputing the discharge itself or the compensation they are owed as a result. What happens in a situation in which such discussions have occurred between the company and employee’s lawyer, and, regardless of the outcome of those discussions, the employee later seeks to challenge the U5 language through the same attorney?

FINRA will expunge information from the Central Registration Depository, without a court order, if an arbitration panel awards expungement relief based on the defamatory nature of the information contained in the U5, and explicitly states in the award that it is recommending expungement on that basis.  Regardless whether the parties came to an “agreement” on the U5 language or not, if the employee later seeks expungement through the same lawyer who engaged in discussions on his behalf with the company, the employee’s lawyer could arguably have become a necessary fact witness in the expungement hearing.  Thus, the New England Securities decision highlights the intriguing possibility of similarly moving to disqualify counsel from a FINRA expungement petition and hearing, if the facts and circumstances support it and it makes strategic sense to make the attempt.