SAC Contributing Legal Editor and Board of Editors Member
[This blog in part incorporates material originally published in the author’s blog at the Securities Arbitration Commentator. Reposted with permission of and thanks to SAC!]
Last week I blogged on the state of mandatory or “forced” arbitration as we were about to elect the next President of the United States. I also promised to write another blog post this week on what the election results mean, just like I did in 2014. Well, here we are.
A Simpler Task
The Venn diagram for the article that I attempted before the election ended up looking like I dropped a box of spaghetti on the floor. So, I gave up and decided to just wait for the results. Donald Trump’s historic victory and the Republicans retaining control of both houses of Congress make my task much simpler. Let me start by addressing some of the questions I posed at the end of my pre-election blog post:
What if Congress in whole or in part goes Democratic? Didn’t happen.
Or what if the Republicans get filibuster-proof majorities? Nope.
Will the Arbitration Fairness Act finally be enacted? No chance.
What’s the fate of the CFPB? Muddled. Read on.
What happens to the Supreme Court? Read on.
Will there be a Justice Ted Cruz? Could be. Or Obama?Um…no. Or Christie? Probably not.
Will there be another Justice Warren? I don’t think so!
Here are my other thoughts on what may be in store. I can summarize my views by quoting President Obama: “Elections have consequences.”
We Will Have a President Who Likes and Uses Arbitration!
As I’ve blogged before, President-elect Trump believes in arbitration and uses the process. In 2012, he won $5 million in a dispute with a former Miss USA contestant who defamed the pageant, which he owned. Last year, Mr. Trump filed an arbitration claim against NBC after the network cancelled a contract to televise the Miss USA and Miss Universe pageants. This followed Mr. Trump’s negative comments about Mexican immigrants. He also won an Internet domain name arbitration, back in 2010. And I read in the Indisputably blog that even Mr. Trump’s agreement with campaign volunteers had a PDAA giving the campaign the unilateral right to require arbitration of disputes.
Prediction: Look for Executive Orders expanding use of arbitration by the federal government, and EOs undoing President Obama’s anti-arbitration directives. For example, President Obama in July 2014 signed Executive Order 13673, barring companies with federal contracts valued at over $1 million from mandating arbitration of Title VII or sexual harassment or assault claims. More on this one below.
All the Anti-Arbitration Legislation is Really DOA
As we entered 2016, I wrote Consumer Arbitration: Five Things to look for in 2016. Among my fearless predictions was that legislative efforts by Democrats to amend section 2 of the Federal Arbitration Act to ban mandatory predispute arbitration agreements in contracts involving consumers and employees were doomed to fail. Said my blog: “The Arbitration Fairness Act is still DOA; so is the Investor Choice Act.” At that time. A new, albeit more focused, candidate emerged for my DOA list, to wit the Restoring Statutory Rights Act (“RSRA”), introduced February 4th by Senator Patrick Leahy (D-VT) and co-sponsored by Senator Al Franken (D-MN). Not only did I think there was no chance the RSRA would be approved, but if the bill defied the odds and was somehow enacted, I was sure it will be held unconstitutional. In other words, the RSRA was not only “Dead-on-Arrival,” but if it somehow it was revived, I predicted that it would be “Dead Man Walking.” Or maybe the “Walking Dead.”
I have the same views about the Justice for Telecommunications Consumers Act – S. 2897 – which would amend the FAA to ban mandatory PDAAs in a wide range of telecommunications contracts involving consumers, such as cell phones, land lines and cable and internet service. There has been no action on this bill, which was introduced in April, and has been read twice and referred to the Judiciary Committee.
Prediction: These anti-arbitration bills will die when this Congress fades to black the end of this year. And there is zero chance they will be enacted in the next Congress. And if any of them are reintroduced and by some miracle enacted, President Trump will surely veto the legislation.
SCOTUS’ Support for Arbitration Will Continue Unabated
With the current Supreme Court vacancy and because some of the major cases involving arbitration were 5-4 decisions, a Clinton victory might have portended a shift away from the Court’s long-standing support of arbitration and the FAA. For example, potential Clinton nominee Senator Elizabeth Warren has been a long-term critic of mandatory arbitration. Any Warren nomination is now off the table, as is Judge Merrick Garland’s nomination.
Prediction: Who will President Trump nominate? While at this point it’s hard to suggest a single name – who may or may not come from the list compiled by candidate Trump – it’s a safe assumption in my view that whoever it is will be supportive of arbitration.
Expect Dodd-Frank to be Repealed and Replaced
On September 9, Financial Services Committee Chairman Jeb Hensarling (R-TX) introduced the Financial CHOICE Act, H.R. 5983. If enacted, the 513-page legislation would have far-ranging impact. Dodd-Frank would essentially be repealed and replaced. For example, a Committee Release from June announcing the plan to introduce the CHOICE Act promised to “fix the Dodd-Frank-Volker Rule… Concocted in 2010, the rule was designed to prevent banks from engaging in proprietary trading. Of course, not one of the 450 institutions that failed in 2008 and 2009 failed due to proprietary trading.”
Prediction: While this bill will not be enacted this year because of the certainty of a presidential veto, look for something like it to reintroduced next year and likely enacted. The current law’s authority for SEC and CFPB to possibly develop regulations banning, limiting, or conditioning predispute arbitration clauses will not make the cut, in my view.
Expect Less Regulation – Starting with the CFPB
President-elect Trump promises there will be less regulation, starting on January 20 when he intends to issue Executive Orders rolling back many of President Obama’s EOs, and declaring a temporary moratorium on new regulations. Regulatory burdens not assailable by EOs will be addressed by orders to the new agency heads to initiate corrective rulemaking. Here are some likely targets:
- Consumer Financial Protection Bureau: Dodd-Frank section 1028 directs the CFPB to study the use of PDAAs in contracts for consumer financial products and services and later report to Congress, and to ban, limit or impose conditions on their use if such action “is in the public interest and for the protection of consumers.” What would be covered? Any regulation “would apply generally to the consumer financial products and services that the Bureau oversees, including credit cards, checking and deposit accounts, certain auto loans, small-dollar or payday loans, private student loans, and some other products and services as well.”
After issuing the required Report to Congress, the CFPB in May 2016 issued a proposed rule that would: 1) ban class action waivers (“CAWs”) in predispute arbitration agreements in contracts for consumer financial goods and services; and 2) require regulated financial institutions to file customer claims and awards data with the CFPB, which the Bureau may choose to publish. In support of the proposed CAW ban, CFPB’s 34-page outline references FINRA’s class action rule on page 17. While there’s no final rule yet (CFPB is analyzing the 51,801 comments contained in 6,246 comment letters), and thus no suits have yet been filed against it, the entire status of the Bureau is now somewhat up in the air. A divided DC Circuit in PHH Corporation v. Consumer Financial Protection Bureau, No. 15-1177 (DC Cir. Oct. 11, 2016), held that the Consumer Financial Protection Bureau’s structure, which has a single Director with virtually unlimited, unchecked authority, is unconstitutional. Rather than Order the Bureau’s dismantling, the Court restructured it by declaring the CFPB an executive agency reporting to the President, headed by a Director terminable at will – not for cause – by the President. CFPB has until November 28th to decide if it wants to appeal or seek a rehearing en banc.
Prediction: I believe President Trump will terminate Director Cordray, acting under authority of the PHH case. The new CFPB Director I suspect will be much more arbitration-friendly, and I believe the reg will go back to the drawing board.
- Department of Education: The DOE in late October issued final regulations that will ban mandatory predispute arbitration agreements and class action waivers in college enrollment agreements. Specifically, the DOE on October 28th announced final regulations via a Press Release. The regulations cover a wide array of higher ed student protections, with arbitration being one of them. The final regs “strengthen the limitations on pre-dispute arbitration agreements that prevent students from taking institutions to court by permanently banning any pre-dispute arbitration agreements for all Direct Loan borrowers for disputes related to the educational services provided or the making of Direct Loans, regardless of whether such clauses are a condition of enrollment.”
Prediction: I see the reg will going back to the drawing board.
- Centers for Medicare and Medicaid Services: The agency issued a final regulation on September 28th banning nursing homes and long-term care facilities receiving federal funds from using mandatory predispute arbitration agreements. Section 70(n)(1), appearing on page 689 of the massive regulation, states: “A facility must not enter into a pre-dispute agreement for binding arbitration with any resident or resident’s representative nor require that a resident sign an arbitration agreement as a condition of admission to the LTC facility.”
Prediction: This regulation has already been enjoined, and one can bet that President Trump will direct the agency to drop its opposition.
- Department of Labor – Employment Contracts: President Obama signed the Fair Pay and Safe Workplaces Executive Order 13673 in July 2014 barring companies with federal contracts valued at over $1 million from mandating arbitration of Title VII or sexual harassment or assault claims; a slightly revised Order was issued last August. The Department of Labor issued Final Guidance and the Federal Acquisition Regulatory Council published the Final Rule a day later. In late October, implementation of the rules was enjoined. The 32-page Order in Associated Builders and Contractors of Southeast Texas v. Rung, 1:16-cv-00425 (E.D. Tex. Oct. 24, 2016), finds that there’s a “substantial likelihood of success on the merits” on the Plaintiffs’ claim that the Federal Arbitration Act prohibits the ban on PDAAs.
Prediction: Look for the Obama EOs to be rescinded and the agency to drop its opposition to the injunction.
- Department of Labor – Fiduciary Standards: The Department approved a new fiduciary standard rule for those providing investment advice in connection with retirement accounts. The regulation allows for use of a Best Interests Contract (“BIC’) with investors containing a predispute arbitration agreement, but class action waivers are not In late October, the court denied an application of an injunction asserting that, in purporting to adopt the BIC Exemption, DOL exceeded its authority under the APA [Administrative Procedure Act].” Other similar suits are pending in various federal courts.
Prediction: Hard to see where President Trump will land on this one, but the Reg is viewed as anti-business, so I don’t think it’s long for this world.
- Federal Trade Commission: An August 22nd Press Release and letter from Public Citizen urged the Federal Trade Commission to ban mandatory PDAAs in solar leasing contracts. So far, there has been no action.
Prediction: Again, look for a “stand down” directive from President Trump.
Financial Arbitration – New Love for FINRA Arbitration?
DOL acted favorably – at least neutrally – about PDAAs in Best Interest Contracts for ERISA accounts when all these other federal regulatory agencies were taking hostile action. Perhaps the Department sees the securities business as a case apart? Right now, CFPB, DOL, and SEC/FINRA have a consistent approach to the financial arbitration area: PDAAs are OK but class action waivers are not. I point out here that this is precisely the approach FINRA has taken for years in Rule 2268(d), and Rule 12204(d). The latter provides that an industry party “may not enforce any arbitration agreement against a member of a certified or putative class action with respect to any claim that is the subject of the certified or putative class action until: the class certification is denied; the class is decertified; the member of the certified or putative class is excluded from the class by the court; [or] the member of the certified or putative class elects not to participate in the class or withdraws from the class …”
Predictions: I’ve said for years FINRA has very investor-friendly rules. Given the new political landscape, I believe opponents of arbitration will give up the anti-arbitration ghost and instead focus on ensuring a fair process incorporating the many consumer protections in FINRA’s arbitration rules. For example:
- FINRA serves the claim on the broker with whom the investor has a complaint. This rule saves the investor time and money. Typically, other dispute resolution providers do not serve the claim on the respondent.
- The fee structure favors the investor;
- The hearing is sited where the investor lived when the underlying events occurred;
- There are hearing locations in all 50 states (at least one in each state);
- The process includes a motion-to-dismiss rule that severely limits motions made prior to the claimant resting his/her case and provides sanctions for frivolous motions;
- Parties have access to the FINRA discovery guides and codified discovery provisions in the rules
- The customer has the option of an all-public panel;
- In close calls, if the investor wants an arbitrator removed for bias, he or she is removed;
- FINRA will enforce arbitration awards in the investor’s favor;
- Awards are public, in a searchable database, and available free of charge on the web; Statistical data on the program are available on the web; and
- Investors can opt out of arbitration and into a class action.
Also, while the SEC has authority under Dodd-Frank section 921 to ban or impose limitations on PDAA use in customer agreements, so far, it has not acted. I predict that it probably will finally act at some point next year by doing a study of FINRA arbitration. It will not, in my opinion, ban PDAAs outright. Think about it. To ban PDAAs in customer-broker contracts, the SEC would have to find that doing so is “in the public interest and for the protection of investors.” Essentially, the SEC would be saying: “We’ve been supervising customer-broker arbitration for decades. But, you know, we just realized it’s a terribly unfair system.” On the other hand, a finding that says, “We’ve studied customer-broker arbitration and we’ve concluded that it’s a fair process. But, you know, these few changes will make it even better” is politically tenable.
I’m a bit reluctant to make so many bold predictions, given how wrong the pollsters and pundits were on November 8. On the other hand, my past arbitration predictions over the years have been good. And yes, my family and my colleagues will attest that I correctly called the election!
*George H. Friedman, an ADR consultant and Chairman of the Board of Directors of Arbitration Resolution Services, Inc., retired in 2013 as FINRA’s Executive Vice President and Director of Arbitration, a position he held from 1998. In his extensive career, he previously held a variety of positions of responsibility at the American Arbitration Association, most recently as Senior Vice President from 1994 to 1998. He is an Adjunct Professor of Law at Fordham Law School. Mr. Friedman serves on the Board of Editors and is a Contributing Legal Editor of the Securities Arbitration Commentator. He is also a member of the AAA’s national roster of arbitrators. He holds a B.A. from Queens College, a J.D. from Rutgers Law School, and is a Certified Regulatory and Compliance Professional.
 The Court in late October granted certiorari in another preemption case, this one involving an arbitration agreement in a nursing home admission agreement signed by an attorney-in-fact. The case on appeal is Extendicare Homes, Inc. v. Whisman, 478 S.W.3d 306 (Ky. 2015), reh. den. (Feb. 28, 2016). The petition for cert. was granted without explanation in an Order dated October 28th (see case no. 16-32, sub nom. Kindred Nursing Centers v. Clark, page 1).
 I think deep down our current president has a fondness for arbitration. As a young attorney with Davis, Miner, Barnhill & Galland, in Chicago, President Obama in 1994 argued successfully to enforce an NASD arbitration Award in the Seventh Circuit in Baravati v. Josephthal, Lyon & Ross, Inc., 28 F.3d 704 (7th Cir. 1994).
 Based on a very limited sampling, Chief Judge Garland seemed to be pro-arbitration
 See American Health Care Association v. Centers for Medicare, No. 3:16-CV-00233 (N.D. Miss. Oct. 17, 2016), which sought an injunction, asserted that CMS exceeded its statutory authority and that the regulation runs afoul of the Federal Arbitration Act. On November 7th Judge Michael Mills issued a 40-page decision granting the request for an injunction.