WealthManagement Magazine

Forced Arbitration Under Attack

The industrys system of requiring arbitration of harassment and discrimination claims is under attack, and things will be coming to a boil soon as Congress, the courts and firms further address the issue.In June, the SEC approved the NASDRs proposed rule change exempting discrimination and sexual harassment complaints from arbitration, with an effective date of Jan. 1, 1999. From that date forward,

The industrys system of requiring arbitration of harassment and discrimination claims is under attack, and things will be coming to a boil soon as Congress, the courts and firms further address the issue.

In June, the SEC approved the NASDRs proposed rule change exempting discrimination and sexual harassment complaints from arbitration, with an effective date of Jan. 1, 1999. From that date forward, registered reps--and all others licensed with the NASD under the U-4--will be able to reserve their right to go to court on civil rights violations, though all other employment disputes will still be bound to mandatory arbitration.

Within hours of the SECs announcement, the NYSE confirmed that it would be considering a parallel rule change at its September board meeting. Its now considered to be a pretty good bet that by the time the new year rolls around, the NYSE will have instituted the same sort of exemption for Title VII claims, the federal law covering discrimination and harassment.

The move isnt surprising. In approving the NASDs change, SEC Chairman Arthur Levitt Jr. urged other SROs to promptly change their rules to conform to those of the NASD.

If the NYSE did not amend its mandatory arbitration rule to be in sync with the NASD, then employers would be able to demand arbitration at the NYSE. Nothing in the rule change would prevent a firm from asking an employee or prospective employee to sign a private employment contract that calls for discrimination complaints to be arbitrated at one of the SROs. So long as the Supreme Court decision in Gilmer v. Interstate/Johnson Lane remains the final word from the courts on predispute mandatory arbitration agreements, theres nothing that prevents companies from putting such agreements in place.

What Will the Street Do? Several major events have occurred, however, that bring into question whether most securities firms will try to substitute their own agreements mandating arbitration at an SRO.

What may be the most significant is Merrill Lynchs announcement of its new alternative dispute resolution program, which went into effect July 1. Merrill now offers mediation and arbitration (either industry arbitration or one of two non-industry forums) as alternatives. Since July 1, Merrills registered employees were free to pursue civil rights claims in court.

That opens the door to allowing other employment claims to be heard in court as well. As New York State Attorney General Dennis Vacco argued in his comment letter to the SEC, splitting various employment claims into separate forums duplicates the fact-finding process of claims which, by nature, inextricably intertwine. Such bifurcation of disputes would prove extremely costly and time-consuming to employees, and would impose undue hardship on them, Vacco wrote. He has called for an end to mandatory arbitration on all employment claims in the securities industry.

The NASD notes in its rule release that it hasnt addressed the issue of employment claims in general. However, the SEC, in its statement issued approving the rule, said that the NASDR will continue to observe developments in this area (as will the Commission).

Merrill still wont allow non-discrimination employment claims to proceed to court, but it will allow these other claims to be heard at two, non-industry arbitration forums--the American Arbitration Association or JAMS/ Endispute, a private company headquartered in Irvine, Calif. And, it will pick up the tab for a non-industry arbitration forum, or for mediation prior to arbitration on all employment issues, a firm spokesperson says. (If the arbitration goes to the NASDR or the NYSE, the arbitrators decide who pays the forum fees, Merrill notes.)

Meanwhile, the industrys arbitration rule-making body, the Securities Industry Conference on Arbitration (SICA), also has been looking into alternatives to industry-run forums (see OddLot item).

Then, theres the court activity. This issue [of whether predispute employment contracts are enforceable] is heating up dramatically in the courts, says Ellen Varygas, the Equal Employment Opportunity Commissions (EEOC) legal counsel in Washington, D.C. If you had asked people a year or a year-and-a-half ago, whether the courts would step in and put some limitations on what businesses could do [in terms of imposing predispute agreements], the conventional wisdom was no. The courts were letting just about anything go but that has changed dramatically.

In May, a three-judge panel in the U.S. Court of Appeals for the Ninth Circuit in San Francisco issued a long-awaited decision in the case of Tonyja Duffield v. Robertson Stephens & Co. The court ruled in favor of the plaintiff on her claim that she could not be denied her right to pursue a claim in court under Title VII by virtue of having signed the U-4.

Since that was an appeals court decision, Duffield is now the law in all of the states that are part of the Ninth Circuit--California, Oregon, Washington, Arizona, Montana, Idaho, Nevada, Alaska and Hawaii.

That means if youre a rep in any of those states, you can now assert your right to pursue a Title VII claim in court. You need not wait for the NASDRs new rule to take effect on Jan. 1.

With that big block of states, it would be difficult--if not impossible--for any firm in the industry to institute a firmwide, predispute mandatory arbitration agreement at this point.

Robertson Stephens is going to file an appeal in the Duffield case to the Supreme Court in early August, says Curt Kirschner, a partner in OMelveny & Myers of San Francisco and the firms lead attorney on the case. That appeal will be based on the claim that the Duffield decision is inconsistent with Gilmer and just wrong, Kirschner says, noting there have been a number of other decisions where circuit courts have enforced arbitration [agreements], including the Eighth Circuit and the Washington, D.C., circuit.

The Supreme Court will announce in October which cases it has decided to review during its next term. If the Duffield case is selected, an opinion would be issued no later than the end of the term--sometime next year between April and the end of June, though it could come sooner, Kirschner notes.

This could be the opportunity plaintiffs lawyers have sought--to get back before the Supreme Court for a reconsideration of Gilmer.

Kirschner says a reversal of Gilmer would be extremely unlikely to occur because the Supreme Court, as part of its normal procedures, is very reticent to overrule its prior decisions.

But, at this point, the courts are all over the lot on the question of whether predispute mandatory arbitration agreements are enforceable--not just in the securities industry but in any industry. Since these cases are now popping up all over, and the circuit court decisions are inconsistent with one another, sooner or later the Supreme Court is going to have to reconsider the issue and become final arbiter of these differing, or split decisions.

Its my opinion that a split has already occurred, Kirschner says.

Two other cases could be significant in terms of creating a split thats specific to the securities industry. In the Third Circuit in Philadelphia, which covers Pennsylvania, New Jersey, Delaware and the Virgin Islands, theres the case of Sheila Warnock Sues v. John Nuveen & Co. That decision, issued in June, was in direct opposition to the Duffield decision. In Sues, the court upheld mandatory arbitration.

The Sues case is now going to be resubmitted to the Third Circuit for an en banc review, or an appeal to all of the judges in that circuit. If the original decision is sustained, then that case would also be eligible for a review by the Supreme Court.

Stephen Richman, Sues lawyer at Markowitz & Richman in Philadelphia, says no decision has been made yet as to whether the plaintiff would file with the Supreme Court if the decision is sustained in the Third Circuit. But Sues should know relatively quickly where she stands. Circuit courts usually issue en banc decisions rather promptly, Richman says.

Meanwhile, Merrill has filed an appeal to the decision in Rosenberg v. Merrill Lynch in the First Circuit (see March 98 RR, Page 36). In that case, a federal judge in Boston ruled that due to possible structural bias in the NYSEs arbitration system, former Merrill rep Susan Rosenberg could have her harassment case heard in court. Even though the firm has instituted its alternative dispute system and now allows such cases to go to court, We believe that employees should be governed by the policies that were in place at the time of their employment, says a spokesperson, noting that Rosenberg was employed at Merrill in 1994.

The Rosenberg decision was at the trial court level, so it does not set precedent. But the decision that results from the appeal would set law in the First Circuit, and would be on par with the Duffield and Sues decisions.

Congress Takes a Look While these cases are winding their way through the courts, Congress is also taking a look at arbitration agreements. At press time in early July, the Senate Banking Committee was expected to hold hearings prior to the August recess on the Civil Rights Procedures Protection Act, which would outlaw predispute arbitration agreements.

That bill, which was originally sponsored by Rep. Edward Markey, D-Mass., in the House four years ago, is still in committee on the House side.

The Republicans have refused to hold hearings on it, says Tamara Fucile, Markeys spokesperson.

But, meanwhile, on the Senate side, Sen. Russell Feingold, D-Wis., has agreed to sponsor the bill, and Sen. Alfonse DAmato, R-N.Y., as chairman of the banking committee, has promised to hold hearings before the summer recess.

The Senate Banking Committee is an influential committee, Fucile notes. The hearings should bring this issue to a larger range of radar screens, she says. And the banking committee is one of the key committees that has oversight over the securities industry.

Last July, the EEOC issued a major policy statement, to the effect that predispute arbitration contracts are intrinsically unfair and a violation of Title VII. But on this issue the EEOC has only advisory power, so there has to be legislation, or a [Supreme] court decision reconsidering its Gilmer decision, Fucile says. The EEOC doesnt feel that any company should be allowed to enforce these, and we strongly agree with them, but right now, the judicial presumption allows enforcement of these [predispute] contracts.

In the interim, Varygas believes that if Merrill already has made a decision that it will not ask its registered employees to sign predispute agreements, theres a real question as to whether any of its competitors will. That could put its competitors at a disadvantage in recruiting.

Basically, whats happening here is that this is being thrown into the [free] market, and probably, what will happen is that we will have different employers adopting different programs, Varygas says. Whats always been interesting to me is that the securities industry, which, in many ways, is based on pure capitalism and free markets, has had this extra interest in protective legislation.

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