WealthManagement Magazine

The Pendulum Swings Our Way

Markets go up. Markets go down. It's like breathing - you need to inhale as well as exhale. In other words, the pendulum swings both ways.The maxim also applies to other areas. In the 1980s, there was a rash of Supreme Court decisions favoring arbitration. Even though it seemed the court didn't completely understand how arbitration works in our industry, it favored it as a way to expedite solutions

Markets go up. Markets go down. It's like breathing - you need to inhale as well as exhale. In other words, the pendulum swings both ways.

The maxim also applies to other areas. In the 1980s, there was a rash of Supreme Court decisions favoring arbitration. Even though it seemed the court didn't completely understand how arbitration works in our industry, it favored it as a way to expedite solutions to problems. But now, the pendulum is beginning to swing the other way.

Since the early 1990s, other companies started to adopt a version of securities industry dispute resolution. Leaders outside our industry knew they weren't subject to the complexity or ambiguity of securities regulation, but they started to insert mandatory predispute arbitration clauses in their employment contracts nonetheless. This insidious cancer of employment policy has now spread to the restaurant and retail industries.

But as the cancer spread, so did abuses in our courts - much to the chagrin of the powers in our industry. In fact, there are two cases heading for the Supreme Court that the National Association of Investment Professionals (NAIP) is monitoring with a great deal of interest. The first case is Circuit City Stores v. Saint Clair Adams. The second case is Green Tree Financial v. Larketta Randolph. Both involve mandatory predispute arbitration clauses.

At issue in the Circuit City case is how broadly the ambiguous Federal Arbitration Act (FAA) of 1929 applies to current rules for arbitration.

Mr. Adams sued Circuit City in state court over employment-related claims. Circuit City then filed a petition to block the lawsuit in court and compel arbitration under the arbitration agreement.

A district court sided with Circuit City, but the 9th Circuit U.S. Court of Appeals reversed that ruling.

In making its ruling, the appellate court said the FAA does not cover labor or employment contracts. "As a threshold matter, therefore, the District Court lacked the authority under Section 4 of the FAA to compel arbitration." Because of this, the court ruled Adams could pursue his claim in civil court.

At issue in the Green Tree case are claims that the firm failed to label certain charges properly and that the company's arbitration clause is "unenforceable" because it was in small print in an "inconspicuous place" on the last page of a four-page contract. Attorneys for Ms. Randolph also claim that Green Tree failed to specify which side would pay the administrative fees in arbitration.

A district court judge threw out the suit and ordered Randolph to submit to arbitration. Randolph, however, took her case to the 11th Circuit U.S. Court of Appeals, which reversed the decision. The appellate court ruled that Green Tree's failure to explain how any arbitration process would be paid for negated the arbitration agreement. The omission raised the possibility that Randolph's rights would be undone by steep filing fees, steep arbitrator fees or other high costs of arbitration, according to the appeals court.

The NAIP will be watching these cases closely to determine how they might help brokers who have been treated unjustly. Depending on which way the Supreme Court rules, the association may consider a possible class-action suit. And at the very least, the NAIP will be looking for ways to prevent the abuses by eliminating mandatory arbitration and bonded servant-like employment contracts.

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