What’s Past is Prologue – All Over Again. What’s Ahead for Arbitration Filings in the Wake of Recent Volatility

By George H. Friedman, ARS Chairman of the Board and SAA Editor-in-Chief
and Richard P. Ryder, SAC Founder and President

This blog post is adapted from one that ran in the Securities Arbitration Commentator blog on March 2, 2020. Republished here with thanks to SAC.

The crashing capital markets in the wake of the worldwide Coronavirus outbreak causes the Alert’s George H. Friedman and Rick Ryder to reflect on what this might mean for FINRA’s arbitration caseload. It wasn’t that hard; dusting off and updating a 2015 blog post was all that was needed.

We debated whether to lead with a Yogi Berra quote, “It’s like déjà-vu, all over again,” or with Shakespeare’s quote from The Tempest. We decided to go with both. Following recent capital market gyrations and volatility, the focus sooner or later turns to what these events mean for securities arbitration case filings and the participants. Having been involved in the financial services and ADR worlds for more years than we care to remember, and having seen this movie a few times before, we offer our thoughts on what recent market activity, especially the precipitous drops and rapid recoveries (ed: as we went to press, the Dow had recovered more than 1,300 points in less than three trading hours) might mean for FINRA’s arbitration filings.

Arbitration Filings Run Countercyclical to Market Performance

Sources: FINRA arbitration filings – https://www.finra.org/arbitration-mediation/dispute-resolution-statistics#arbitrationstats. S&P 500 – https://www.multpl.com/s-p-500-historical-prices/table/by-year

FINRA’s arbitration case filings tend to run countercyclical to the capital markets. So it is not surprising that, with the markets enjoying a robust 2011-19, FINRA Dispute Resolution’s arbitration case filings plummeted to 3,757 cases by the end of 2019 – nearly halving the post-crash high of 7,137 cases filed in 2009. In fact, 2019’s filings would have been even lower, but for the surge in “under the wire” cases due to the Puerto Rico bond fund mess. The chart below shows the number of arbitrations filed at FINRA each year, compared with the S&P 500’s close at the end of the year. The trend lines are unmistakable: When the markets perform well, arbitration filings decline. When there are prolonged, significant market declines, the case filings surge as surely as the swallows return to Capistrano.

People Don’t Fight So Much When Times are Good

Why is this the case? Simply put, people fight less when they are making money, and they fight more when they are losing money. And already, there are media reports of concerns about investor backlashes. For perspective, harken back to the 1987-1988 arbitration case filing surge at the SROs. It was the October 1987 “Black Monday Crash” plus the Supreme Court’s OK of securities predispute arbitration agreements in Shearson/American Express, Inc. v. McMahon, 482 U.S. 220 (1987), that drove that big escalation in claims filed. Three years following the 2000 “Tech Wreck,” FINRA arbitration case filings peaked at 8,945. Then the markets recovered, and arbitration case filings plummeted through the beginning of 2008. Next, the Great Recession hit, the markets tanked and arbitration filings more than doubled. Finally, the recent bull market followed, and arbitrations dwindled from about 7,000 to current levels.

More Arbitration Filings Ahead?

What does the past tell us? The significant and rapid decline in the markets in recent days will likely lead to arbitration filings going up significantly. The markets’ retreat has certainly produced enough losses; news reports say that investors have lost more than $3 trillion by the end of February, but will the decline be sustained? That, only time will tell. If so, then the past as prologue suggests arbitration filings could go up 50-75%, perhaps more. Why do we say “perhaps more”? Besides general market conditions impacting arbitration filings, discrete product failures will surely augment filings. It has happened in the past (think: auction rate securities and subprime collateralized debt obligations), it’s still happening now (Puerto Rico bond funds), and it will surely happen in the future (we just don’t know the product yet).

What Kinds of Cases?

What issues will the next surge in arbitrations feature? We’re not market prognosticators and it’s too early to say what the fallout will be from the recent “Coronavirus Crash” in terms of claims, but our short answer is: to predict the future, look to the past. Here’s our current thinking (the parenthetical is a pithy summary of each side’s position):

Suitability: These customer claims tend to rise after significant market declines (“My investment strategy was preservation of capital; why did you have me in these risky, unsuitable investments?”). The firms tend to offer ratification defenses (“Odd that you got statements every month and never complained when you were making money”).

Execution – technical: Here, the customer complains about not being able to reach their broker by phone or online during rapid market declines (“I called and called trying to sell and could not get through. And your online trading platform was useless.”). Firms tend to say that the investor’s experience was not unusual given market conditions (“Our performance was not unusual given market conditions at that time”). Think of the technical glitches when Facebook went public in 2012.

Execution – general: These customer claims often involve stop-loss orders, with the investor complaining that their stock was sold at a much lower price than they anticipated. Suppose, for example, the investor has a stop-loss order for XYZ stock at $100. In a rapidly declining market, the trade finally ends up being executed at $90 a share. The investor contends that the broker cost them $10 a share (“What part about $100 was unclear?”). The broker’s defense is that the trade was executed in a timely manner given market conditions (“XYZ’s price was dropping like a stone, and it was not that easy quickly matching buyers and sellers under those conditions. And, our performance was consistent with peers”).

Overconcentration: The cases tend to be associated with sector or individual stock declines. The customer doesn’t necessarily raise suitability issues but instead contends their account was overconcentrated (“Why was I so concentrated in travel and leisure stocks? Or emerging market-China ETFs? Or, I’m not saying bonds and bond funds were unsuitable investments, but why was Grandpa so heavily invested in airline bonds?”). Again, the firms usually defend with a ratification defense.

 Margin – general: Arbitration claims generally rely upon realized losses. If investors hold through a downturn and the market quickly recovers, potential losses evaporate. Margin trading increases the chances of realized losses in market declines, because that’s when margin calls test investors’ resolve (and financial wherewithal). In our 2015 blog post, we quoted FINRA reports tagging total debit balances in customer accounts at $485.9 million at the end of January 2015. FINRA posts margin statistics on its Website (ed: this is a great resource, and it lags less than in the past). Margin debt, we know from past SAA reports, have surpassed the half-trillion mark before (four months in 2014), but, by January 2015, debit balances in customers’ securities margin accounts had subsided to $485.9 billion. That number hit a high of $668.9 billion in May 2018, during a time when the Dow Jones rose from about 18,000 to 24,000. A four-month, 9% downdraft from September to December 2018 shaved $100 billion off that high. During 2019, the Dow climbed fairly steadily — almost 5,000 points — closing above 28,000 at the end of the year, but margin debt rose only about 5% year-over-year to $579 billion. Interestingly, in 2020, while the market continued to rise for a month and a half more, debit balances in aggregate started a slide in January and we expect the margin statistics in February to reflect a substantial consolidation. 

Margin – investor claims: When the capital markets drop precipitously and then quickly rebound, margin customers may be sold out near the bottom, only to see the stock’s price come all the way back a short time later (“You [terrible, awful, evil, bad person]! You gave me a margin call when I was taking a lunch break, and sold me out 10 minutes later”). This is exemplified in the extreme by the 36-minute long “Flash Crash” of May 6, 2010… or that of 2015. The firms will point out that they really didn’t have to give any notice and their actions were consistent with the account agreement and FINRA rules (“We gave you 10 minutes when we really could have given no notice”). Firms will also point out that, had they waited any longer, the losses would have been worse, possibly resulting in a margin deficit. Arbitrators often look to past practice.

Margin – brokerage firm claims: When the markets suffer significant drops and don’t recover, customers may end up with margin deficits. In other words, even taking into account the stocks sold off, the investor still has a negative margin balance (“So, after deducting the stocks we sold off to address your margin deficiency, you still have a debit balance of $50,000”). Customers don’t react well to this (“You [terrible, awful, evil, bad person]! You gave me a margin call when I was in the bathroom, and sold me out 10 minutes later. Go [engage in a physically impossible act]!”).

Employment: If there’s a prolonged bear market, look for employment cases, especially promissory note cases, to increase. This happened after the bear market that started fall 2008, as firms contracted, merged, or simply went out of business.

Other? Besides margin calls, some of the other likely culprits may be players getting whip-sawed by the VIX and option strategies (short puts especially, but long calls as well) that presumed a continued up market. 

And of Course there will be Frauds and Scams

It seems that, when there are natural disasters and health crises, scams targeted at investors follow shortly thereafter. So it comes as no surprise that, on the heels of the Coronavirus outbreak, the SEC’s Office of Investor Education and Advocacy issued an Investor Alert warning of scams arising out of this health crisis. The February 4, 2020 Investor Alert, titled Look Out for Coronavirus-Related Investment Scams, warns: “Fraudsters often use the latest news developments to lure investors into scams. We have become aware of a number of Internet promotions, including on social media, claiming that the products or services of publicly-traded companies can prevent, detect, or cure coronavirus, and that the stock of these companies will dramatically increase in value as a result. The promotions often take the form of so-called ‘research reports’ and make predictions of a specific ‘target price.’ We urge investors to be wary of these promotions, and to be aware of the substantial potential for fraud at this time” (emphasis in original).

Time for Another Look at Online ADR?

Absent an effective vaccination or treatment, we expect that as time goes by there will be growing resistance from arbitration participants to physically assemble for a hearing. ADR providers may also have similar qualms. To us, this portends increasing interest in and usage of online ADR.[1] It’s not a huge leap to envision FINRA reacting to growing contagion by temporarily halting cases and requiring hearings to be conducted by teleconference or video. Again turning to the past to see the future, we recall that FINRA in September 2017 posted on its Website, Hurricane Maria Update: Accommodations for Hearings Scheduled in Puerto Rico. Said the Notice:

“FINRA Office of Dispute Resolution has continued to monitor the situation in Puerto Rico and based upon the latest information available, is administratively staying all cases venued in Puerto Rico until October 20, 2017. This includes canceling all hearings, conference calls and deadlines scheduled during this time. FINRA will begin the process of rescheduling any impacted hearings and pre-hearings as soon as reasonably practicable, once the stay is lifted.”

This reminded us of when NASD Dispute Resolution took a similar approach to New York-area cases in the wake of 9-11. In that instance, the agency temporarily postponed and stayed hearings in that region, relying on then-Rule 10308(e), which provided: “The Director may exercise discretionary authority and make any decision that is consistent with the purposes of this Rule and the Rule 10000 Series to facilitate the appointment of arbitration panels and the resolution of arbitration disputes.” If FINRA was comfortable temporarily postponing case administration and hearings in response to regional emergencies, we suggest it would consider requiring hearings to temporarily be conducted by electronic means in response to a global pandemic. It’s already happening; China in late January began to require trials to be conducted by videoconference,

Conclusion

We hope and pray the virus is contained, the markets recover, and that our major concern in the near future is arbitration processing times. As that great baseball philosopher Yogi Berra said, “It’s tough to make predictions, especially about the future.” We can compare notes in a year.

(ed: *Interestingly, we haven’t seen that much from the SEC or FINRA warning BDs to check their margin policies, etc. — not like back in the earlier 2000s where the regulators and consequently the BDs were on top of the market break in terms of margin control. **We’ll be keeping an eye on the “Margin Calls” Controversy Type on FINRA’s monthly report — the figure is modest, but has been up the last few years (85, 79 and 58, respectively). **Already, there is media speculation that margin debt will rise because of virus-related market volatility.)

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A Final Assessment of My 2019 Consumer and Employment Arbitration Predictions

This is adapted from a post originally published in the author’s blog at the Securities Arbitration Commentator. Reposted with permission of and thanks to SAC!

About a  year ago, I authored a blog post, The New Year is Here: What’s in Store for Arbitration and the Financial Services Field. In the wake of the 2018 midterm elections, the Democrats had taken over House leadership in the new Congress, while the Republicans enjoyed an expanded majority in the Senate. My main themes? “What might this mean for arbitration and the financial services? Not much in terms of legislation being enacted, but lots in terms of process.” Below were my views on what was coming in 2019.

Predictions Made a Year Ago:

  • The anti-Arbitration Bills will be Back, with the Same Outcomes
  • FINRA and SEC Staff Should Invest in Good Walking Shoes
  • … and the CFPB Folks, Too
  • Repeal of Dodd-Frank is Kaput
  • The SEC will Finalize Reg Best Interest
  • Smooth Sailing for President Trump’s Nominees

I cover below how my predictions have fared. My late Mom told me not to brag, so for each prediction I’ll just mention one or two examples that illustrate the accuracy of my evaluation, but trust me, there are plenty.

1. The anti-Arbitration Bills will be Back, with the Same Outcomes 

What I wrote: The Democrats in 2017 introduced several anti-arbitration bills that have predictably gone nowhere far as described in my blog post, Baseball Season is Here! You Can’t Tell the Anti-Arbitration Bills Without a Scorecard. These bills again went nowhere in the 215th Congress, which expired early January, just as occurred in 2016… and 2015… and 2014…

What I predicted: The bills will undoubtedly be reintroduced in the new Congress, and some may pass the House. They will, however, for the most part be DOA in the Senate.

What happened: They’re baaacck! Over 100 anti-arbitration bills have been introduced so far in this Congress.[1] The new bills seek to amend the Federal Arbitration Act (“FAA”), specific statutes like Dodd-Frank, Sarbanes-Oxley, or the National Labor Relations Act, or combinations thereof. To one extent or another, the bills aim to protect consumers – including investors – employees, civil rights claimants, servicemembers, and/or whistleblowers, from what is perceived to be an unfair arbitration process. Some bills ban predispute arbitration agreements (“PDAA”), while some create procedural safeguards. Finally, some are prospective but most are retroactive by invalidating existing PDAAs.

The Forced Arbitration Injustice Repeal (FAIR) Act of 2019 H.R. 1423 and S. 610 this Congress’ iteration of the dear, departed, Arbitration Fairness Act, or as I call it, “The AFA on Steroids,” was approved by the House of Representatives on September 20 by a mostly party-line 225-186 vote. It has gone nowhere in the Senate; as of today, it is stuck at 38 co-sponsors, with zero Republican support. And the other bills are for the most part languishing. The lone exception is the Taxpayer First ActH.R. 3151 – which was signed into law July 1 by President Trump. Nestled in the text of this omnibus bill is section 1405, which bans mandatory arbitration of IRS whistleblower claims.

2. FINRA and SEC Staff Should Invest in Good Walking Shoes

What I wrote: Just because the anti-arbitration Bills were not be enacted doesn’t mean the road to oblivion will be smooth. How so? Rep. Jerrold Nadler (D-NY) now chairs the Judiciary Committee and Rep. Maxine Waters (D-CA) the Financial Services Committee. 

What I predicted: There should be lots of hearings in 2019 on SRO oversight, and on bills like the certain-to-be-reintroduced Arbitration Fairness Act.

What happened? Oh, there have been hearings galore, but not all have been run by on the House side by the Democrats. For example, the Senate Judiciary Committee held an April 2nd hearing titled “Arbitration in America. And the Senate Committee on Banking, Housing, and Urban Affairs held a hearing December 10, titled Oversight of the Securities and Exchange Commission. The sole witness was SEC Chairman Jay Clayton.

3. … and the CFPB Folks, Too 

What I wrote: As for the Consumer Financial Protection Bureau,[2] a bipartisan coalition of over thirty State and Territorial Attorneys General wrote to then-Acting Director Mick Mulvaney urging the Bureau to reconsider its policy on enforcing the Military Lending Act (“MLA”). The October 24th [2018] letter came in response to a CFPB announcement last summer that it would only investigate specific complaints based on the MLA, a step back from its former practice of systemic inspections and investigations.

What I predicted: The MLA is a George W. Bush-era statute that among other things bans mandatory predispute arbitration agreements. Dodd-Frank gives the CFPB enforcement authority. Again, expect Congressional hearings. This is a truly purple initiative that should cause the Bureau to pay attention. This is especially so given the President’s strong support of servicemembers. There will be hearings.

What happened: Kathy Kraninger was confirmed as CFPB Director last December after a bruising confirmation process (old Senate) and immediately paid attention when on January 17 announced via a Press Release and letters to Congressional leadership that she is taking the Bureau in a different direction on the issue. Says the Release: “The Bureau is committed to the financial well-being of America’s service members. This commitment includes ensuring that lenders subject to our jurisdiction comply with the Military Lending Act so our service members and their families are provided with the protections of that law. That’s why I have asked Congress[3] to explicitly grant the Bureau authority to conduct examinations specifically intended to review compliance with the MLA. The requested authority would complement the work the Bureau currently does to enforce the MLA.”

4. Repeal of Dodd-Frank is Kaput

What I wrote: In June 2017, the House of Representatives by a 233–186 strictly party-line vote approved the Financial CHOICE Act. Not a single Democrat voted “Yea” and only one Republican voted “Nay.” Among other things, the 602-page Act (H.R. 10) would have repealed and replaced Dodd-Frank, and would have eliminated the authority granted to both the CFPB and SEC to limit or eliminate predispute arbitration agreements, or set conditions for their use.

What I predicted: The Senate Banking Committee held hearings, but the full Senate did not act[4] and the bill expired with the old Congress. I very much doubt the new Democratic House would approve a reintroduced FCA. 

What happened: Nothing. Repeal is indeed kaput until at least the 117th Congress in 2021.

5. The SEC will Finalize Reg Best Interest

What I wrote: With the Department of Labor’s fiduciary standard rule dead and buried by the Fifth Circuit in Chamber of Commerce of the United States v. Department of Labor, 885 F.3d 360 (5th Cir. 2018),  the SEC is indeed moving ahead with its own Rule, as authorized by Dodd-Frank section 913(g)(1).

What I predicted: At some point in 2019, the proposed SEC rule will be finalized. 

What happened: “Some point in 2019” turned out to be June 5, when the SEC moved ahead with its own fiduciary standard rule. Specifically, the SEC voted 3-1 to approve Regulation Best Interest (Reg BI) and three related proposed regulations at an open meeting held June 5 (Commissioner Jackson dissented). The revised, final package, which was accompanied by a Press Release containing a Fact Sheet, and the massive final rulemaking package, was published that day. Two items were effective immediately on Federal Register publication in July: Commission Interpretation Regarding Standard of Conduct for Investment Advisers (84 FR 33669) and Commission Interpretation Regarding the Solely Incidental Prong of the Broker-Dealer Exclusion From the Definition of Investment Adviser (84 FR 33681). Two other rules went into effect September 10, specifically Reg BI (84 FR 33318) and Final Rule – Form CRS Relationship Summary and Form ADV Amendments (84 FR 33492). Of key importance: “by June 30, 2020, registered broker-dealers must begin complying with Regulation Best Interest and broker-dealers and investment advisers registered with the Commission will be required to prepare, deliver to retail investors, and file a relationship summary.”

Also, the DOL updated its Spring Regulatory Agenda to indicate that its own, new, final fiduciary standard rule would be proposed in December 2019. So far, there’s been no rulemaking activity, but Senator Elizabeth Warren (D-MA) has written DOL Secretary Eugene Scalia a December 11 letter expressing her concern that the DOL “may simply copy the wholly inadequate standards of conduct framework developed by the SEC in its recently-finalized Regulation Best Interest….” That, says Sen. Warren, would be a “costly mistake.”

6.  Smooth Sailing for President Trump’s Nominees

What I wrote: With an expanded GOP 53-47 majority in the Senate … the President should have an easier time getting his judicial and agency head nominees approved by the next Senate.

What I predicted: For example, the President’s nominee for the SEC Commissioner vacancy coming later this year with the imminent departure of Democrat Kara M. Stein should sail through a solidly-GOP Senate. And, last but by no means least, President Trump added to SCOTUS two pro-arbitration Justices, Neil Gorsuch[5] and Brett M. Kavanaugh, and I’m certain if there are any further vacancies on the Court, Mr. Trump’s nominees will be pro-arbitration and will be approved by the new Senate. In the meantime, federal District Court and Court of Appeals nominees should have relatively smooth sailing.

What happened: Democrat Allison H. Lee was nominated in April 2019 to replace Ms. Stein. The announcement describes her vita as follows: “Allison Herren Lee is a veteran securities law practitioner of more than two decades. She served at the Securities and Exchange Commission from 2005 to 2018 in various roles including Senior Counsel in the Complex Financial Instruments Unit, and as Counsel to Commissioner Kara M. Stein. She has also served as a Special Assistant United States Attorney, and prior to government service, was a litigation partner at Sherman & Howard, LLC in Denver, Colorado. Since leaving the SEC, she has, among other things, lectured and taught courses in financial regulation and corporate law at Universidad de Navarra in Pamplona, Spain, and LUISS Universita Guido Carli, Dipartimento di Giurisprudenza in Rome, Italy.” Ms. Lee was sworn in on July 8.

Also, President Trump has appointed and the GOP-controlled Senate has confirmed a record number of federal judges this year.[6]

Bonus: An Unstated “Needless to Say” Prediction

In past years I’ve said consistently that President Trump was pro-arbitration. I didn’t bother to predict this a year ago because that one was a layup. But here’s a little bonus offer-of-proof: the EEOC on December 17 issued Recission of Mandatory Binding Arbitration of Employment Discrimination Disputes as a Condition of Employment, formally abrogating its 1997 Clinton-era policy “that had disapproved of the practice of requiring workers to enter into arbitration agreements to resolve workplace discrimination claims and instructed its staff to proceed with claims against employers despite the existence of such agreements.” It’s about time. I’ve for years had a hard time understanding how the EEOC, “the federal agency charged with the interpretation and enforcement of this nation’s employment discrimination laws,” could take a position contrary to those laws as defined by SCOTUS.

Also, in the first Opinion authored by Justice Kavanaugh the Supreme Court on January 8 held unanimously in Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct. 524, that there is no delegation carveout for “wholly groundless” assertions of arbitrability under the FAA. See what I mean?

Conclusion

What’s my overall report card? As Larry David says, my predictions were “Pretty, pretty, pretty, pretty good.” I’ll be back soon with my fearless prognostications for 2020. Spoiler alert: I think some iteration of the FAIR Act has a shot at enactment.

*George H. Friedman, Chairman of the Board of Directors of Arbitration Resolution Services, Inc. and an ADR consultant, 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 as Editor-in-Chief of the online Securities Arbitration Alert. 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, and is admitted to practice in New Jersey and New York, several U.S. District Courts, and the United States Supreme Court.

Endnotes:

[1] I analyzed the original batch in a SAC Blog post, Democrats Introduce Several Anti-Mandatory Arbitration Bills. What You Need To Know (Mar. 22, 2019).

[2] Speaking of the CFPB, former Director Richard Cordray lost his bid to become Governor of Ohio.

[3] Alas, the Financial Protection for Our Military Families Act (H.R. 442) has gone nowhere.

[4] (New footnote): Why the Senate failed to act during the lame duck session is a bit of a surprise. My guess is that with a slim 51-49 GOP Senate majority in the last Congress, the votes just weren’t there.

[5] Need proof? Justice Gorsuch authored the majority Opinion in Epic Systems.

[6] See, e.g., Senate Confirms Avalanche of Trump-backed Judges Despite Impeachment (NY Post Dec. 22, 2019), and Trump Secures 50th Appellate Court Appointment, with Another 9th Circuit Judge Confirmed (True Pundit, Dec. 11, 2019).

 

 




A Final Assessment of My 2018 Consumer and Employment Arbitration Predictions – Part II

[This blog post was originally published in the Securities Arbitration Commentator blog. Republished with permission of and thanks to SAC!]

Toward the end of last year, I authored a blog post, Consumer and Employment Arbitration: Six Things to look for in 2018Below were my views on what was coming in 2018, and how these predictions have turned out as we hit the year’s end What are the results? As Larry David says, “Pretty, pretty, pretty, pretty good.”

Predictions made a Year Ago:

  • President Trump Still Likes Arbitration
  • The Anti-Arbitration Legislation is Still (Mostly) Dead
  • SCOTUS’ Support for Arbitration Will Still Continue Unabated
  • Still Expect Dodd-Frank to be Repealed and Replaced
  • Say Goodbye to the Department of Labor’s Fiduciary Rule
  • The President Eventually Will Win the War over CFPB’s Leadership

I covered predictions 1 to 3 in a recent blog post. Here’s Part II. Spoiler alert: I’m still doing “pretty, pretty, pretty, pretty good.”

  1. Still Expect Dodd-Frank to be Repealed and Replaced

What I wrote: On June 8th [2017] the House of Representatives by a 233–186 strictly party-line vote approved the reintroduced Financial CHOICE Act. Not a single Democrat voted “Yea” and only one Republican – Rep. Walter Jones (NC) – voted “Nay.” Among other things, the 602-page Act (H.R. 10) would repeal and replace Dodd-Frank, and would eliminate the authority granted to both the CFPB and SEC to limit or eliminate predispute arbitration agreements, or set conditions for their use. Also, the Act would rename the Consumer Financial Protection Bureau the Consumer Law Enforcement Agency and transform it into an executive agency with a Director terminable at will by the President. The Senate has yet to act.

What I predicted: Sooner or later, Dodd-Frank will in word or deed be repealed and replaced this year with a statute along the lines of the Financial CHOICE Act (“FCA”) (H.R. 10). While the new law will incorporate some features of Dodd-Frank, the current law’s authority for SEC and CFPB to possibly develop regulations banning, limiting, or conditioning predispute arbitration clause use will not make the cut, in my view.

What happened? Mixed bag at best. The Senate Banking Committee held hearings on the FCA, but the full Senate did not act. There was conjecture in some parts that the Republicans would try to pass the bill in lame duck session, but it never happened. I doubt the new Democratic House will approve a reintroduced FCA, so this one is kaput.

It seems the Republicans instead adopted a strategy of “repeal by a thousand papercuts,” by passing bills aimed at discrete parts of Dodd-Frank. For example, President Trump on May 24th signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155) partially rolling back some aspects of Dodd-Frank. The new law is much less far reaching than the FCA.

Other bills were introduced, such as the Financial Product Safety Commission Act of 2018 (H.R. 5266), that would have amended Dodd-Frank to restructure the Consumer Financial Protection Bureau (“CFPB”) to an SEC-like five-member independent commission. No more than three Commissioners could be from the same political party and as the Bill’s title implies, the CFPB would be renamed the “Financial Product Safety Commission.” H.R. 5266 had bipartisan co-sponsorship, but went nowhere and will expire with the 115th Congress on January 3.

  1. Say Goodbye to the Department of Labor’s Fiduciary Rule

What I wrote: The Department of Labor in April 2016 approved a 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 permitted. President Trump on February 3rd [2017] ordered the Secretary of Labor to undertake a review of the Rule, that had been scheduled to go into effect in phases starting April 10. DOL announced on April 4th that it was delaying for 60 days the Rule’s implementation. Thus, the first phase of the Fiduciary Standard Rule went into effect starting June 9thand a second phase was to be implemented January 2018.

DOL later filed a proposal to delay until July 2019 the planned January 2018 implementation of Phase II of the Rule (“18-Month Extension of Transition Period and Delay of Applicability Dates; Best Interest Contract Exemption; Class Exemption for Principal Transactions; PTE 84-24”). The delay became official on November 29 when a Notice was published in the Federal Register.[1]

What I predicted: The review ordered by the President almost a year ago will conclude that the DOL’s Fiduciary Standards Rule is confusing, costly, and duplicative. It will recommend the Rule be scrapped in favor of a unified Rule to be promulgated by the SEC.

What happened? Ding, dong, the DOL Fiduciary Rule is dead, and the SEC is moving ahead with its own regulation. The review ordered by President Trump is still not complete, but other events caused the Rule’s demise. What happened?

  • In Chamber of Commerce of the United States v. Department of Labor,885 F.3d 360 (5th Cir. Mar. 15, 2018), a split Court vacated in its entirety the Department’s  Fiduciary Standard Rule. Then, the Fifth Circuit on May 2 unanimously denied motions by California, New York, and Oregon and AARP to intervene and seek en banc review. Thereafter, the three States on May 16th filed a Motion for Reconsideration or in the alternative permission to petition for en bancOn May 22nd the Panel ruled 2-1 to deny both requests. The DOL’s time to Petition for Certiorari expired June 13th, and on June 21st the Fifth Circuit issued the Mandate, providing: “It is ordered and adjudged that the judgment of the District Court is reversed, and vacate the Fiduciary Rule in toto.” The Rule is officially dead.

Also, the SEC is indeed moving ahead with its own Rule, as authorized by Dodd-Frank section 913(g)(1). Specifically, the SEC published on May 9th three proposals to establish a uniform fiduciary standard:  Regulation Best Interests, Vol. 83, No. 90, Page 21574 (17 CFR Part 240); Standard of Conduct for Investment Advisers, Vol. 83, No. 90, Page 21203 (17 CFR Part 275); and Form CRS Relationship Summary and Form ADV, Vol. 83, No. 90, Page 21416 (17 CFR Parts 240, 249, 275 and 279). Federal Register Publication triggered a 90-day public comment period that expired August 7, 2018.

The SEC’s Investor Advisory Committee (“IAC”) met by conference call on November 7th. The sole Agenda item for the 35-minute meeting was: “Discussion of the SEC’s Proposed Regulation Best Interest and Form CRS Relationship Summary (which may include a Recommendation of the Investor as Purchaser Subcommittee).” The IAC voted 16-3 with one recusal to adopt the recommendationssubmitted by a majority of the Investor as Purchaser Subcommittee “to strengthen and clarify” the proposed rules. Next is consideration by the SEC staff, along with the public comments received and the Committee’s recommendations. The SEC received over 6,000 comments (3,000 of which were unique) on Reg-BI and related materials.

  1. The President Eventually will Win the War over CFPB’s Leadership

What I wrote: Before he could be fired by the President, CFPB Director Richard Cordray announced via a November 15th email to staff that he would be departing the Bureau by the end of the month.[2]This immediately led to conjecture that the President would name as Acting Director the current head of Office of Management and Budget, Mick Mulvaney. Later, Mr. Cordray suddenly announced on November 24 that he was leaving at the end of the day. However, before he left Mr. Cordray named as Acting Director staffer Leandra English. President Trump later that same day issued a Statement making official Mr. Mulvaney’s designation as Acting Director, touching off an ugly power struggle over who was in charge of the agency. How ugly? Some highlights are offered below, but for chapter and verse, see my blog postRichard, Here’s Another Nice Mess You’ve Gotten Us Into!

What I predicted: Sooner or letter, one way or the other, the President will prevail. Either he will win the legal challenges – which I predict he will – or he will simply nominate a new Director whom the Senate will confirm.

What happened? Both, pretty much. The President on June 18thnominated  Kathy Kraninger to a five-year term as Director. Ms. Kraninger was Associate Director for General Government at the OMB, a position she’s held since March 2017 according to her LinkedIn bio. Just weeks after President Trump nominated Ms. Kraninger, Ms. English dropped her suit challenging Mr. Mulvaney’s appointment as the Bureau’s Acting Director. At the same time, she announced her resignation. Judge Timothy J. Kelly declined to issue an injunction and on January 10th ruled against Ms. English on the merits in English v. Trump and Mulvaney, No. 1:17-cv-02534 (D.D.C.). The decision was appealed to the D.C. Circuit and argued April 12. Why did Ms. English resign her post and give up the appeal? Her July 6th announcementcites “the recent nomination of a new Director.” My take? The passage of time and the facts on the ground made persisting a Quixotic effort. And, the Senate on December 6th approved the Ms. Kraninger’s nomination for a five-year term as Director of the Consumer Financial Protection Bureau (“CFPB”). The vote was a tight 50-49 split along party lines.

Bottom line: The CFPB leadership war is over and as predicted the President won.

Conclusion

Mostly straight “A” grades except for Dodd-Frank being repealed and replaced. As I’ve written in past years, the arbitration world is constantly changing, and will evolve yet again in 2019. Doubtless there are some things that will happen this year that I just didn’t see coming (such as DOL’s Fiduciary Rule being killed by the courts and Justice Kennedy retiring). In the meantime, see you in the future!

_________________

*George H. Friedman, Chairman of the Board of Directors of Arbitration Resolution Services, Inc. and an ADR consultantretired 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. His proud Mother, Gloria Friedman, undoubtedly has taped this blog post to the fridge.

[1] 82 FR 56545 (Vol. 82, No. 228, P. 56545, November 29, 2017).

[2] Mr. Cordray announced December 2017 that he was running for Ohio Governor. He lost.

 

 




A Final Assessment of My 2018 Consumer and Employment Arbitration Predictions – Part I

[This blog post was originally published in the Securities Arbitration Commentator blog. Republished with permission of and thanks to SAC!]

SAC Contributing Legal Editor and Board of Editors Member

Toward the end of last year, I authored a blog post, Consumer and Employment Arbitration: Six Things to look for in 2018Below were my views on what was coming in 2018, and how these predictions have turned out as we hit the year’s end What are the results? As Larry David says, “Pretty, pretty, pretty, pretty good.”

Predictions made a Year Ago:

  • President Trump Still Likes Arbitration
  • The Anti-Arbitration Legislation is Still (Mostly) Dead
  • SCOTUS’ Support for Arbitration Will Still Continue Unabated
  • Still Expect Dodd-Frank to be Repealed and Replaced
  • Say Goodbye to the Department of Labor’s Fiduciary Rule
  • The President Eventually Will Win the War over CFPB’s Leadership

I cover below the first three predictions. The last three will be the subject of my next blog post.

  1. President Trump Still Likes Arbitration

What I wrote: As I detailed in last year’s “report card” [1] it is at this point undisputed that President Trump believes in the arbitration process, and will defend it when the need arises. Also, candidate Trump in 2016 promised that there would be less regulation, and that certainly proved to be the truth in 2017 with President Trump. Several anti-arbitration Obama-era regulations were rolled back either by Executive Order or Congressional nullification, and various federal agencies have done an about-face on predispute arbitration agreements.

What I predicted: Any anti-arbitration bills that somehow reach the President’s desk will almost invariably[2] be vetoed, and any Congressional Nullification Resolutions involving rollbacks of anti-arbitration regulations will be signed. Also look for more Executive Orders from Mr. Trump expanding use of arbitration by the federal government, and undoing any remaining anti-arbitration directives issued by his predecessor. And, we shouldn’t be surprised if the Department of Justice switches sides again in other court cases involving arbitration.

 What happened? Spot on. Since becoming President, Mr. Trump has demonstrated unwavering support for arbitration.  Here are just a few examples:

  • In June 2017, the Centers for Medicare and Medicaid Serviceseliminated its regulation banning predispute arbitration agreements in nursing home admission agreements, and has dropped its appeal of a District Court preliminary injunction banning implementation of the original rule. The amended regulation was published in the Federal Register in June 2017. A CMS Factsheet leads with news that the prohibition on PDAAs is out, and then states the proposed regulation adds several requirements for PDAA use, all focused on clear notice and fairness.
  • The Department of Education published a Notice in June 2017 announcing that it was postponing indefinitely the planned July 1, 2017 effective date of another Obama-era regulation, that would have banned mandatory predispute arbitration agreements and class action waivers in college enrollment agreements for schools receiving federal financial aid for student borrowers. The other shoe dropped on this one last summer. The Trump DOE followed through with a proposed Regulation officially killing the old Obama-era Rule and replacing it with a proposal allowing predispute arbitration agreements and class action waivers in college enrollment agreements and requiring robust disclosures. The 89-page proposed Rule, Student Assistance General Provisions, Federal Perkins Loan Program, Federal Family Education Loan Program, and William D. Ford Federal Direct Loan Program, was[3] in the Federal Register on July 31. It cites the Supreme Court’s May 2018 decision in Epic Systems Corp. v. Lewis137 S. Ct. 809 (2017) (more on that later), and the Congressionally nullified CFPB anti-class action waiver Rule as a rationale for the new proposal.
  • President Trump nominated to the Supreme Court Justice Neil Gorsuch, who as predicted has been pro-arbitration (more on that later).
  • The Trump Administration Department of Justice has been switching sides in some court cases, taking pro-arbitration positions againstthose taken by federal agencies. For example, the Acting Solicitor General filed an Amicus Brief siding with the employers and against the National Labor Relations Board (“NLRB”) in Epic Systems, three cases that were pending at the Supreme Court involving whether the Federal Arbitration Act prevails over the National Labor Relations Act when it comes to enforcing class action waivers in employment arbitration agreements. The NLRB had to represent itself,[4] which reminded me of a scene[5] from “Blazing Saddles.”
  • What ultimately happened in Epic Systems? In a narrow 5-4 decision splitalong ideological lines, the Supreme Court on May 21st that the FAA permits employers to use arbitration clauses containing class action waivers, notwithstanding the National Labor Relations Act’s protections of workers’ rights to act collectively. And who wrote the majority Opinion? None other than Justice Gorsuch.
  • President Trump on July 9th nominated, and the Senate later confirmed, Judge Brett M. Kavanaugh to fill the open Supreme Court seat created by the retirement of Justice Anthony Kennedy. Based on a review of the new Justice’s cases[6] involving arbitration, it’s pretty clear he is pro-arbitration.

And, last but by no means least, the Trump-Stormy Daniels settlement agreement[7] contained an arbitration clause! Trust me, folks. President Trump is all-in on arbitration.[8]

  1. All the Anti-Arbitration Legislation is Still (Mostly) Dead

What I wrote: The Democrats in 2017 introduced several anti-arbitration Bills in the new Congress, that have predictably gone nowhere so far as described in my blog postBaseball Season is Here! You Can’t Tell the Anti-Arbitration Bills Without a Scorecard.

What I predicted: For the most part, these Bills will continue to go nowhere; they are “mostly dead.”[9] Just as occurred in 2016… and 2015… and 2014. Why the “for the most part” qualification? In the wake of seemingly daily accusations of workplace sexual harassment, bipartisan Bills were introduced December 6th [2017] in both Houses of Congress that would amend the Federal Arbitration Act to ban predispute arbitration agreements covering sexual discrimination disputes. Specifically, S. 2203 and H.R. 4570 — the Ending Forced Arbitration of Sexual Harassment Act — were introduced by Sen. Kirsten Gillibrand (D-NY) and Rep. Cheri Bustos (D-IL). The Bills, which have bipartisan support in both institutions, would ban PDAAs for “a dispute between an employer and employee arising out of conduct that would form the basis of a claim based on sex under title VII of the Civil Rights Act of 1964 (42 U.S.C.2000e et seq.) if the employment were employment as defined in section 701(b) of that title regardless of whether a violation of title VII is alleged…” I predict some iteration[10]of the law will be passed by Congress, and I sense that the President will sign it.

What happened? As predicted, these Bills have gone nowhere and will expire January 3rd when the 116th Congress takes over (just as occurred many time before). I am a bit surprised that the Gillibrand-Bustos Bill did not advance. The other anti-arbitration Bills will undoubtedly be reintroduced in the next Congress, and some may pass the House. They will, however, be DOA in the Senate.

  1. SCOTUS’ Support for Arbitration Will Still Continue Unabated

What I wrote: President Trump in 2017 nominated and the Senate confirmed the apparently pro-arbitration[11] Justice Neil Gorsuch. The first real test of Justice Gorsuch’s arbitration views will be in Epic Systems Corp. v. Lewis, [137 S. Ct. 809 (2018)], three consolidated cases pending at the Supreme Court involving whether the Federal Arbitration Act prevails over the National Labor Relations Act when it comes to enforcing class action waivers in employment arbitration agreements. The case was heard October 2, with the Department of Justice arguing against its own federal agency.[12]

What I predicted: I predict a close decision from SCOTUS in Epic Systems reaffirming the preemptive effect of the FAA over other federal laws that do not expressly preclude arbitration, with Justice Gorsuch voting with the pro-arbitration camp. Mind you, I wouldn’t be completely shocked by a narrow 5-4 decision in the opposite direction. Further, I think Justice Gorsuch will reaffirm this year that he is indeed pro-arbitration.

What happened? Bingo! Justice Gorsuch, who asked no questions at the oral argument, wrote the majority Opinion in Epic Systems, reaffirming the supremacy of the FAA over conflicting federal statutes not expressly barring arbitration. This passage sums up his pro-arbitration bona fides:

“As a matter of policy these questions are surely debatable. But as a matter of law the answer is clear. In the Federal Arbitration Act, Congress has instructed federal courts to enforce arbitration agreements according to their terms – including terms providing for individualized proceedings. Congress has likewise shown that it knows how to override the Arbitration Act when it wishes…. What all these textual and contextual clues indicate, our precedents confirm…. Throughout, we have made clear that even a statute’s express provision for collective legal actions does not necessarily mean that it precludes ‘individual attempts at conciliation’ through arbitration…. And we’ve stressed that the absence of any specific statutory discussion of arbitration or class actions is an important and telling clue that Congress has not displaced the Arbitration Act” (citations omitted).

Also, the Supreme Court in October heard three arbitration-centric cases in October, setting up the first arbitration “trilogy”[13] in over fifty years:

  • Certiorari granted February 26th in New Prime, Inc. v. Oliveira, No. 17-340. The Petition defined the questions presented as: “1. Whether a dispute over applicability of the [Federal Arbitration Act] FAA’s Section 1 exemption is an arbitrability issue that must be resolved in arbitration pursuant to a valid delegation clause; and 2. Whether the FAA’s Section 1 exemption, which applies on its face only to ‘contracts of employment,’ is inapplicable to independent contractor agreements.”
  • Certiorari granted April 26th in Lamps Plus v. Varela, 17-988. As described in the Petition, the issue presented is: “Whether the Federal Arbitration Act forecloses a state-law interpretation of an arbitration agreement that would authorize class arbitration based solely on general language commonly used in arbitration agreements.”
  • Petition for Certiorari granted June 25th in Henry Schein, Inc. v. Archer & White Sales, Inc., 878 F.3d 488 (5th Cir. Dec. 21, 2017). The issue before the Court is: “Whether the Federal Arbitration Act permits a court to decline to enforce an agreement delegating questions of arbitrability to an arbitrator if the court concludes the claim of arbitrability is ‘wholly groundless.’”

Conclusion

Pretty good grades so far. I’ll discuss the status of my last three predictions in my next post.

_________________

*George H. Friedman, Chairman of the Board of Directors of Arbitration Resolution Services, Inc. and an ADR consultantretired 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. His proud Mother, Gloria Friedman, undoubtedly has taped this blog post to the fridge.

[1] See Friedman, G., A Final Report Card on My 2017 Arbitration Predictions: “Pretty, Pretty, Pretty, Pretty Good!” (December 27, 2017).

[2] As described in Prediction # 2, there’s one proposed anti-arbitration law that has a reasonably good chance of being enacted.

[3] Vol. 83, No. 147, Page 37242.

[4] The NLRB issued a Statement reporting that the Acting Solicitor General had given the Agency authority to represent itself.

[5] No, not that scene!

[6] See Securities Arbitration Commentator, Supreme Court Nominee Kavanaugh Seems to Be Pro-Arbitration (or so We Think), Part I (July 13, 2018).

[7] See B. Farkas, Donald Trump and Stormy Daniels: An Arbitration Case Study, ABA DR Magazine p. 12 (Summer 2018)/

[8] Some of the NAFTA dispute resolution mechanisms did not survive in the new US-Mexico-Canada Agreement announced by President Trump on October 1, but on closer review this is not shocking. Why? Ceding authority to a foreign tribunal has elements of globalism, which this Administration clearly opposes

[9] No George Friedman blog post is complete without a video clip. This one is Billy Crystal’s classic “mostly dead” routine from The Princess Bride.

[10] Right now, the Bill is too broadly drafted. It will I’m sure be cleaned up before a vote.

[11] See Friedman, G., Supreme Court Nominee Gorsuch Seems to be Pro-Arbitration! (February 1, 2017).

[12] See for yourself by reading the oral argument transcript or listening to the audio recording.

[13] In 1960, the Court decided three landmark arbitration cases involving the United Steelworkers union. These decisions were later dubbed, the “Steelworkers Trilogy.” The Court has not since heard that many cases in the same Term.

 

 




The Midterm Elections are Over: What’s in Store for Arbitration and the Financial Services Field?

This blog post was originally published in the Securities Arbitration Commentator blog. Republished with permission of and thanks to SAC!

At long last, the midterm elections are behind us [bipartisan cheer]. The Democrats will be taking over House leadership in the next Congress, while the Republicans will expand their majority in the Senate. What might this mean for arbitration and the financial services industry? Not much in terms of legislation being enacted, but lots in terms of process:

  • The anti-Arbitration Bills will be Back, with the Same Outcomes
  • FINRA and SEC Staff Should Invest in Good Walking Shoes
  • … and the CFPB Folks, Too
  • Repeal of Dodd-Frank is Kaput – or is it?
  • Smooth Sailing for President Trump’s Nominees

Read on, my friends.

The anti-Arbitration Bills will be Back, with the Same Outcomes

The Democrats in 2017 introduced several anti-arbitration Bills that have predictably gone nowhere far as described in my blog post, Baseball Season is Here! You Can’t Tell the Anti-Arbitration Bills Without a Scorecard. These Bills will continue to go nowhere in this Congress, which expires in early January, just as occurred in 2016… and 2015… and 2014. The Bills will undoubtedly be reintroduced in the next Congress, and some may pass the House. They will, however, be DOA in the Senate.

Might there be one lone exception? In the wake of seemingly daily accusations of workplace sexual harassment, bipartisan Bills were introduced last December in both Houses of Congress that would amend the Federal Arbitration Act to ban predispute arbitration agreements (“PDAAs”) covering sexual discrimination disputes. Specifically, S. 2203 and H.R. 4570 — the Ending Forced Arbitration of Sexual Harassment Act — were introduced by Sen. Kirsten Gillibrand (D-NY) and Rep. Cheri Bustos (D-IL). Specifically, the Bills, which have bipartisan support in both institutions, would ban PDAAs for “a dispute between an employer and employee arising out of conduct that would form the basis of a claim based on sex under title VII of the Civil Rights Act of 1964 (42 U.S.C.2000e et seq.) if the employment were employment as defined in section 701(b) of that title regardless of whether a violation of title VII is alleged…” I predict some iteration[1] of the law will be passed by the new Congress when it’s reintroduced, and I sense that the President will sign it. 

FINRA and SEC Staff Should Invest in Good Walking Shoes

Just because the anti-arbitration Bills will not be enacted doesn’t mean the road to oblivion will be smooth. How so? Rep. Jerrold Nadler (D-NY) is set to take over the Judiciary Committee and Rep. Maxine Waters (D-CA) the Financial Services Committee. There should be lots of hearings next year on SRO oversight, and on Bills like the certain-to-be-reintroduced Arbitration Fairness Act.

Consider this: SCOTUS in Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (May 21, 2018), held that the Federal Arbitration Act (“FAA”) permits employers to use arbitration clauses containing class action waivers, notwithstanding the National Labor Relations Act’s (“NLRA”) protections of workers’ rights to act collectively. On October 30th Rep. Nadler introduced H.R. 7109, the Restoring Justice for Workers Act, that would amend both the FAA and the NLRA to ban mandatory predispute arbitration agreements with class action waivers in the employment context. The preamble states that the proposed legislation intends to overrule Epic Systems, which it says was decided “contrary to the plain text of the law and congressional intent.” The Bill would also ban retaliation against an employee refusing to agree to a post-dispute arbitration agreement. It has 58 cosponsors, all Democrat.

Because Rep. Nadler is in line to chair the Judiciary Committee – to which this Bill has been referred – there will be Committee hearings next year when the Bill is inevitably reintroduced. And of course SRO and financial services industry oversight is by the Financial Services Committee. There will be lots of House hearings, including some on the SEC’s proposed Regulation Best Interest. Also, look for increased Government Accountability Office examination and oversight activity of FINRA, the SEC, and the financial services industry, after Chairpersons Waters and Nadler assume power.

… and the CFPB Folks, Too

As for the Consumer Financial Protection Bureau (“CFPB”),[2] a bipartisan coalition of over thirty State and Territorial Attorneys General have written to Acting Director Mick Mulvaney urging the Bureau to reconsider its policy on enforcing the Military Lending Act (“MLA”). The October 24th letter came in response to a CFPB announcement last summer that it would only investigate specific complaints based on the MLA, a step back from its former practice of systemic inspections and investigations. Say the AGs: “We write to express our concern about recent reports that the Consumer Financial Protection Bureau (CFPB) will no longer ensure that lenders are complying with the Military Lending Act (MLA) as part of its regular, statutorily mandated supervisory examinations. We believe that such a move would significantly harm the servicemembers who live and work in our states and that it would be contrary to the CFPB’s statutory mandate.”

The MLA is a George W. Bush-era statute that among other things bans mandatory predispute arbitration agreements. Dodd-Frank gives the CFPB enforcement authority. Again, expect Congressional hearings. This is a truly purple initiative that should cause the Bureau to pay attention. This is especially so given the President’s strong support of servicemembers. 

Repeal of Dodd-Frank is Kaput – or is it?

In June 2017, the House of Representatives by a 233–186 strictly party-line vote approved the reintroduced Financial CHOICE Act. Not a single Democrat voted “Yea” and only one Republican – Rep. Walter Jones (NC) – voted “Nay.” Among other things, the 602-page Act (H.R. 10) would repeal and replace Dodd-Frank, and would eliminate the authority granted to both the CFPB and SEC to limit or eliminate predispute arbitration agreements, or set conditions for their use. Also, the Act would rename the Consumer Financial Protection Bureau the Consumer Law Enforcement Agency and transform it into an executive agency with a Director terminable at will by the President.

The Senate Banking Committee held hearings, but the full Senate has yet to act. I expect Senate Republicans will try to pass the Bill in the upcoming lame-duck session of Congress. I doubt the new Democratic House would approve a reintroduced FCA, and with this Congress expiring January 3rd, it’s likely now or never for this proposed legislation. 

Smooth Sailing for President Trump’s Nominees 

With an expanded GOP majority in the Senate – and with Senators Corker (R-TN), Flake (R-AZ) and the late John McCain (R-AZ) replaced by more reliably pro-Trump Senators – the President should have an easier time getting his judicial and agency head nominees approved by the next Senate. For example, the President’s nominee for the SEC Commissioner vacancy coming with the imminent departure of Democrat Kara M. Stein should sail through a solidly-GOP Senate. Also, the nomination of Kathy Kraninger[3] for a five-year term as CFPB Director, which was approved by the Senate Banking Committee on August 23, will doubtless be approved by either the lame duck or next Senate.[4] And, last but by no means least, President Trump added to SCOTUS two pro-arbitration Justices, Neil Gorsuch[5] and Brett M. Kavanaugh, and I’m certain if there are any further vacancies on the Court, Mr. Trump’s nominees will be pro-arbitration and will be approved by the new Senate.

Conclusion

I’m a bit reluctant to make so many bold predictions, given how wrong the pollsters and pundits were on election night (again). On the other hand, my past arbitration predictions over the years have been pretty good, so here they are.

——————— 

*George H. Friedman, Chairman of the Board of Directors of Arbitration Resolution Services, Inc., and an ADR consultant 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 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, is a Certified Regulatory and Compliance Professional, and is admitted to practice in New Jersey and New York, several U.S. District Courts, and the United States Supreme Court.

[1] Right now, the Bill is too broadly drafted. It will I’m sure be cleaned up before a vote.

[2] Speaking of the CFPB, former Director Richard Cordray lost his bid to become Governor of Ohio.

[3] Ms. Kraninger is currently Associate Director for General Government at the OMB, a position she’s held since March 2017, according to her LinkedIn bio

[4] Until she is sworn in, Mick Mulvaney will continue as Acting CFPB Director.

[5] Need proof? Justice Gorsuch authored the majority Opinion in Epic Systems.




Exactly Where is an Arbitration Award in Cyberspace Made? Time to Modernize the Federal Arbitration Act.

By George H. Friedman*

Chairman of the Board, Arbitration Resolution Services

 

The other day I was researching the split in the federal Circuits on whether Federal Arbitration Act(“FAA”) section 7 empowers Arbitrators to compel third-parties to produce documents outside the formal evidentiary arbitration hearing.[1]It occurred to me that, based on a strict, literal reading of the statute, arbitrators have no authority to subpoena women under any circumstance. How’s that? FAA section 7 provides that the Arbitrator “may summon in writing any person to attend before them or any of them as a witness and in a proper case to bring with himor them any book, record, document, or paper which may be deemed material as evidence in the case” (emphasis added throughout). Now, I know any Court interpreting this part of the Federal Arbitration Act would hold that women, too, may be the subject of an arbitral subpoena, but as I delved into the Act it became very clear that the venerable Federal Arbitration Act is in need of modernization, for reasons that go beyond linguistic.

A Cold War Relic

The FAA was passed by both houses of Congress, without a dissenting vote(my, how things have changed), signed into law[2]by President Calvin Coolidge on February 12, 1925, and went into effect January 1, 1926. The FAA was codified at 9 U.S.C. §§ 1 et seq. on July 30, 1947.[3]Lots has changed over the ensuing seven decades, but other than a few amendments, 1947[4]saw the last major overhaul of the law.

Archaic Language, Gender Bias, and Technological Obsolescence

The FAA can sure use some updating. I focus only on Chapter 1; Chapters 2 (1970) and 3 (1990) are of more recent vintage. I’ll cover briefly the archaic language used throughout the statute, the gender bias evident on the face of the Act, and then close with a look at some parts that have become obsolete as technology advances.

Linguistic Update

The FAA’s text is a far cry from Plain English, with many long sentences using stilted language. For example, in section 1,the definition of “Maritime transactions” consists of a single, run-on sentence of 131 words.[5]

In addition, as mentioned previously, the FAA is by no measure gender neutral, with several parts referring to men only. For example, Sections 5, 7 and 12 repeatedly use male pronouns.[6]

Technically Obsolete Sections

The potential improvements suggested so far are “nice to haves.” What follows is an analysis of parts of the FAA that have been overtaken by time and technology, and which if not fixed portend problems in the future as more and more of the arbitration process migrates online. Here are some examples:

  • Section 4 empowers a court to issue an Order compelling arbitration. But the court can only direct the arbitration to be conducted “within the district in which the petition for an order directing such arbitration is filed.”[7]In what federal district is an online arbitration held? For example, Arbitration Resolution Services, Inc.’s servers are in Coral Springs Florida, and arbitrators and staff are located throughout the United States.

 

  • Section 7 permits arbitrators to subpoena witnesses “to attend before them or any of them as a witness and in a proper case to bring with him or them any book, record, document, or paperwhich may be deemed material as evidence in the case.” Where precisely is an arbitrator serving online located? The computer’s location? The server? The arbitrator’s home? Office? And how does the witness bring items to cyberspace?

 

  • Section 7 also allows a Party to use the court system to compel a recalcitrant entity to obey a subpoena. Which court? “[T]he United States district court for the district in which such arbitrators, or a majority of them, are sitting…” Again, where does a Cloud-based arbitrator “sit?”

 

  • Section 9, governing award enforcement, states that “if no court is specified in the agreement of the parties, then such application may be made to the United States court in and for the district within which such award was made. Again, where is an online arbitration “made”? Section 12 uses the same verbiage for court correction or modification of awards.

 

  • Section 13, which covers the procedure for arbitration-related motions, makes several references to “papers.”

 

Conclusion

Codified in 1947, the Federal Arbitration Act, like any septuagenarian, is in need of a checkup. For example, the references to district court venue could be changed to “any district in which a party, arbitrator, or arbitration administrator may be found.” While we’re at it, also in order is a general modernization similar to the Revised Uniform Arbitration Act of 2000, which reflected developments over the 45 years following the original Uniform Arbitration Act’s promulgation in 1955. The Federal Arbitration Act turns 100 in 2025. The statute should be modernized well before then.

 

———————-

 

*George H. Friedman, Chairman of the Board of Directors of Arbitration Resolution Services, Inc., and an ADR consultant 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 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, is a Certified Regulatory and Compliance Professional, and is admitted to practice in New Jersey and New York, several U.S. District Courts, and the United States Supreme Court.

 

[1]The Eighth Circuit says “yes.” The Second, Third, Fourth, and Ninth say “no.”

 

[2]43 Stat. 883.

 

[3]61 Stat. 669.

[4]Noteworthy events from 1947 include the Kon-Tiki expedition, the breaking of the sound barrier, the Roswell UFO incident, India and Pakistan gaining independence, creation of the CIA and IMF, the start of the Cold War, and invention of the tubeless tire, transistor radio, mobile phone. Source: http://www.thepeoplehistory.com/1947.html.

[5]“Maritime transactions”, as herein defined, means charter parties, bills of lading of water carriers, agreements relating to wharfage, supplies furnished vessels or repairs to vessels, collisions, or any other matters in foreign commerce which, if the subject of controversy, would be embraced within admiralty jurisdiction;  “commerce”, as herein defined, means commerce among the several States or with foreign nations, or in any Territory of the United States or in the District of Columbia, or between any such Territory and another, or between any such Territory and any State or foreign nation, or between the District of Columbia and any State or Territory or foreign nation, but nothing herein contained shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.

 

[6]Section 5(appointment of arbitrators or umpires):… then upon the application of either party to the controversy the court shall designate and appoint an arbitrator or arbitrators or umpire, as the case may require, who shall act under the said agreement with the same force and effect as if heor they had been specifically named therein…”

 

Section 7 (witnesses before arbitrators;  fees;  compelling attendance):already discussed above.

 

Section 12(notice of motions to vacate or modify;  service;  stay of proceedings): Notice of a motion to vacate, modify, or correct an award must be served upon the adverse party or his attorneywithin three months after the award is filed or delivered.

 

[7]This is contrasted with Chapter 2,section 206, governing international arbitrations. In such instances, the court can order “arbitration be held in accordance with the agreement at any place therein provided for, whether that place is within or without the United States.”




Arbitration – Still the Wave of the Future?

By George H. Friedman, Chairman of the Board of Directors of Arbitration Resolution Services*

When I entered the dispute resolution field back in 1976, I was compelled as part of my orientation to watch a film about arbitration (yes, film; there was no consumer video back then, let alone DVDs or on-demand video streaming). It closed with a rather stern-looking gray-haired man right out of the Central Casting Judge Department staring into the camera and intoning “And remember, young man [this was before the advent of full women’s rights in the workplace], arbitration is the wave of the future…. wave of the future…. wave of the future…” [fade to black]. But in actuality arbitration isn’t so new, as I demonstrate below, working backwards.

“Modern” Arbitration is More than 90 years old

Before 1925, enforcing predispute arbitration agreements and arbitration awards was very difficult.[1] Parties could walk away from their promise to arbitrate, and arbitration awards were virtually unenforceable. Then the Federal Arbitration Act (“FAA”)[2] was enacted in 1925, and went into effect a year later. The FAA is referred to as a “modern” arbitration statute, because it abrogated the existing law, which was based on Common Law hostility to arbitration. It made written promises to arbitrate matters involving interstate commerce specifically enforceable,[3]and established very limited judicial review of arbitration awards.[4] The FAA was passed by both houses of Congress, without a dissenting vote(my, how things have changed), signed into law by President Calvin Coolidge on February 12, 1925, and went into effect January 1, 1926. Not so new.

 

Begetting the American Arbitration Association

With new alternative dispute resolution organizations seemingly coming into creation these days on a weekly basis, we tend to think that these entities are relatively recent inventions. Not, so. The granddaddy of them all, the American Arbitration Association, celebrated its ninetieth birthday in 2016. Spurred in large part by the FAA’s enactment and New York’s “modern” arbitration law in 1920, the AAA was created by the merger of two competing organizations, the Arbitration Foundation and the Arbitration Conference. “Despite differences in their approaches, the early arbitration organizations saw a common ground. Representatives negotiated for more than a year to reconcile their differences before reaching an agreement to merge and, on January 29, 1926, formed the American Arbitration Association. Anson W. Burchard, president of General Electric, became the first president of the Association. Felix M. Warburg, a leading New York banker, was the first chair.”[5]

The fledgling AAA evidently did quite well. In its first Annual Report, published in 1927, the president reports:

But I should be wanting in fairness if I did not point out the inestimable value of the support which the NY Judiciary gives to arbitration by the manner in which it is upholding the Arbitration Law and by the liberality of its interpretations of that Law…. Equally important is the fact that the past year has witnessed a much more cordial attitude on the part of members of the Bar. Attorneys are coming to realize that arbitration is a mode of trial which affords immediate relief to their clients; scarcely a week passes without one or more law firms requesting a set of our rules, forms, and instructions….

Not so new; let’s keep looking back.

George Washington: think arbitration is new?         

Let’s look at our first Commander in Chief’s Last Will and Testament. That’s right, George Washington’s Will, from July 1799 calls for arbitration to resolve disputes among his heirs:

 

I hope and trust that no disputes will arise concerning [my Will]; but if, contrary to expectation, the case should be otherwise from the want of legal expression, or the unusual technical terms, or because too much or too little has been said on any of the devises to be consonant with the law, my will and direction expressly is, that all disputes (if unhappily any should arise) shall be decided by three impartial and intelligent men, known for their probity and good understanding; — two to be chosen by the disputants — each having the choice of one — and the third by those two — which three men thus chosen, shall unfettered by Law, or legal constructions, declare their sense of the Testator’s intention … and shall be binding as if issued by the U.S. Supreme Court.

Not so new; let’s keep looking back.

Emperor K’ang-Hsi – Manchu Dynasty (1661-1722)

Apparently, litigation was a problem in China going way back. This prompted the Emperor to weigh in with some very strong language:

This Emperor, considering the immense population of the empire, the great division of territorial property and the notoriously litigious character of the Chinese, is of the opinion that lawsuits would tend to increase to frightful extent if people were not afraid of the [courts] and if they felt confident of always finding in them ready and perfect justice… I desire, therefore, that those who have recourse to the courts should be treated without pity and in such a manner that they shall be disgusted with law and tremble to appear before a magistrate. In this manner … the good citizens who may have difficulties among themselves will settle them like brothers by referring them to the arbitration of some old man.[6]

Not so new; let’s keep looking back.

Et tu, Rabbi?

Travelling back over a millennium, we find references to arbitration in the Jewish Talmud, which was compiled around the year 400. In Tractate Sanhedrin, page 6b,[7] we find this reference:

 

Where there is strict justice there is no peace, and where there is peace, you will find there is no strict justice. Peace abodes in the use of arbitration.

Not so new; let’s take one last look back.

King Solomon, the original arbitrator?

The Old Testament in 1 Kings 3:16-28 tells of King Solomon suggesting that he will split the baby in half to resolve the competing claims of two women claiming to be the baby’s mother. And because of this, arbitration critics frequently say that, in the end, arbitrators will end up splitting the baby and award equal shares to both parties. But of course, King Solomon didn’t split the baby and neither do arbitrators, according to research. Come to think of it, Solomon wasn’t an arbitrator at all. I think he invented Med-Arb, using the mediator’s “agent of reality” tactic to get the parties to settle!

 

Conclusion

While arbitration isn’t new by any means, new ways of arbitrating are proliferating. Chief among them in my view is Web-based dispute resolution. It’s my firm belief[8] that virtually all aspects of arbitrations and mediations will within a few years be Cloud-based and people will think it’s quaintly anachronistic to drag themselves off to a brick-and-mortar facility to attend hearings, and use paper to file cases, pick arbitrators, schedule hearings, and exchange information. As I’ve predicted previously, as ADR providers expand their online services for case filing, case management, document, image and video uploading, arbitrator selection, calendaring, and bill payment, fewer dispute resolution providers, parties, and arbitrators will be willing to use paper. In fact, I predict that extra fees will eventually be assessed to those who insist on using paper for correspondence or bill payment.

Trust me, the future belongs to those who embrace Web-based, online dispute resolution, with the emphasis being on complete, comprehensive, online alternative dispute resolution. If you disagree, we can debate it five years from now!

*George H. Friedman, Chairman of the Board of Directors of Arbitration Resolution Services, Inc., and an ADR consultant 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 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, is a Certified Regulatory and Compliance Professional, and is admitted to practice in New Jersey and New York, several U.S. District Courts, and the United States Supreme Court.

 

[1] See A Brief History of Commercial Arbitration, available at https://dynalex.wordpress.com/2012/12/28/a-brief-history-of-commercial-arbitration/.

[2] See 9 U.S.C. §§ 1 et seq., available at http://codes.lp.findlaw.com/uscode/9/1.

[3] See 9 U.S.C. §§ 1 and 2. Note, too, that almost every state has enacted arbitration laws covering intra-state commerce. See https://www.law.cornell.edu/wex/table_alternative_dispute_resolution.

[4] See 9 U.S.C. § 10.

[5] See Fazzi, Labor of Love: A Commemorative History of the American Arbitration Association and the Labor-Management Community, at 4.

[6] See http://www.icpartners.it/en/arbitration-and-mediation-for-the-resolution-of-disputes-with-chinese-companies/.

[7] See http://www.come-and-hear.com/sanhedrin/sanhedrin_6.html.

[8] Now, in the interest of full disclosure, I point out that I am Chairman of the Arbitration Resolution Services, Inc. Board of Directors. I also point out, however, that I would not be the Chairman if I didn’t believe in the organization.




Enforcing International Arbitration Awards

By George H. Friedman*

Chairman of the Board, Arbitration Resolution Services

 

We have blogged in the past about enforcing domestic arbitration awards. The key takeaway? Prior to passage of the Federal Arbitration Act(“FAA”)[1]in 1925, enforcing predispute arbitration agreements and arbitration awards was very difficult.[2]The FAA abrogated the existing law and made written promises to arbitrate matters in the U.S. involving interstate commerce specifically enforceable,[3]and established very limited judicial review of arbitration awards.[4]

 

But what about enforcing business arbitration awards abroad? Or enforcing in the United States awards rendered in other countries? In both instances, the answer is that arbitration awards are indeed enforceable.

 

The UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards

 

The United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards(“New York Convention”), was promulgated June 10, 1958[5]and went into effect June 7, 1959. It has since been adopted by 159 nations, including the United States. As the name implies, countries signing the Convention agree to enforce arbitration awards issued in other nations. Countries adopting the Convention may do so: 1) with one of two reservations or exceptions; 2) with both; or 3) with neither. Under the reciprocity exception,the signatory country will only enforce awards coming from another signatory country. The commercial reservation means that the signatory country will only enforce foreign awards involving “commercial” dealings. The United States adopted the Convention subject to both reservations, meaning that U.S. courts will enforce a foreign arbitration award that involves a “commercial” matter and was rendered in a signatory country.

Very Limited Review of Awards

Nations that have adopted the UN Convention agree to apply very limited judicial review of arbitration awards rendered abroad. Article V of the Convention lists only the following grounds for refusing enforcement: 1) incapacity of a party or illegality of contract under the law of the country where the award was rendered (the “host country”); 2) “due process” violations regarding notice of the arbitration; 3) the award is in excess of the arbitrator’s authority under the arbitration agreement; 4) violation of the host country’s arbitration law; 5) the award is not yet binding on the parties or a court in the host country has set aside the award; 6) the subject matter is “not capable of settlement” by arbitration in the enforcing country; and 7) the award violates the enforcing country’s public policy.

U.S. Implementation

Implementing legislation, in the form of FAA Chapter 2,[6]was enacted July 31, 1970. The U.S. then ratified the Convention on September 30, 1970. This FAA chapter is fairly compact, as the summary below indicates:

Section 201: Purpose is enforcement of the Convention.

Section 202:Chapter 2 is not applicable to cases between U.S. citizens, unless property, enforcement, or some other relationship exists abroad.

Section 203: U.S. district courts have original jurisdiction, irrespective of the amount in dispute. An action under the Convention is tantamount to an action arising under the laws and treaties of the U.S.

Section 204: Venue is the district court which would have had jurisdiction over the dispute, save for the arbitration agreement – OR – per the clause itself, if the location is in the U.S.

Section 205: Defendants can remove cases from State courts.

Section 206: The court can compel arbitration anywhere per the agreement, either in the U.S. or abroad. Courts can also appoint arbitrators.

Section 207: Awards must be confirmed within three years (contrasted to one year under Chapter 1 of the FAA for domestic cases); grounds to vacate are as per the Convention.

Section 208: Chapter 1 of the FAA applies, except to the extent it expressly conflicts with Chapter 2 or the Convention.

Conclusion

Just as with domestic awards, parties involved in international business disputes can rest assured that arbitration awards will be enforced here and abroad under the UN Convention,[7]subject to very limited judicial review. And of course, the many benefits of online arbitration are magnified when arbitrations are conducted abroad!

*George H. Friedman, Chairman of the Board of Directors of Arbitration Resolution Services, Inc., and an ADR consultant 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 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, is a Certified Regulatory and Compliance Professional, and is admitted to practice in New Jersey and New York, several U.S. District Courts, and the United States Supreme Court.

 

[1]See 9 U.S.C. §§ 1 et seq., available at http://codes.lp.findlaw.com/uscode/9/1.

 

[2]See A Brief History of Commercial Arbitration,available at https://dynalex.wordpress.com/2012/12/28/a-brief-history-of-commercial-arbitration/.

 

[3]See 9 U.S.C. §§ 1 and 2. Note, too, that almost every state has enacted state arbitration laws covering intra-state commerce.

 

[4]See 9 U.S.C. § 10.

 

[5]The Convention’s 60thanniversary was celebratedat the United Nations in late June.

 

[6]84 Stat. 692.

[7]There are other specialized Conventions, such as the Inter-American Convention on International Commercial Arbitration, and the Convention for the Settlement of Investment Disputes between States & Nationals of Other States, but the New York Convention is by far the most utilized.

 

 




PART II – A Midyear Assessment of My 2018 Consumer and Employment Arbitration Predictions

In my last blog post,I began comparing the predictions I made last year regarding consumer and employment arbitration to what has happened so far this year. Below are more of my views on the subject and my predictions are still as Larry David says, “Pretty, pretty, pretty, pretty good.”

 

  1. Still Expect Dodd-Frank to be Repealed and Replaced

What I wrote: On June 8th[2017] the House of Representatives by a 233–186 strictly party-line vote approved the reintroduced Financial CHOICE ActNot a single Democrat voted “Yea” and only one Republican – Rep. Walter Jones (NC) – voted “Nay.” Among other things, the 602-page Act (H.R. 10) would repeal and replace Dodd-Frank, and would eliminate the authority granted to both the CFPB and SEC to limit or eliminate predispute arbitration agreements, or set conditions for their use. Also, the Actwould rename the Consumer Financial Protection Bureau the Consumer Law Enforcement Agency and transform it into an executive agency with a Director terminable at will by the President. The Senate has yet to act.

What I predicted: Sooner or later, Dodd-Frank will in word or deed be repealed and replaced this year with a statute along the lines of the Financial CHOICE Act(“FCA”) (H.R. 10). While the new law will incorporate some features of Dodd-Frank, the current law’s authority for SEC and CFPB to possibly develop regulations banning, limiting, or conditioning predispute arbitration clause use will not make the cut, in my view.

What happened? So far, so good. It seems the Republicans have adopted a strategy of “repeal by a thousand papercuts,” by passing bills aimed at discrete parts of Dodd-Frank. For example, President Trump on May 24thsigned into law the Economic Growth, Regulatory Relief, and Consumer Protection Act(S. 2155)partially rolling back some aspects of Dodd-Frank. The statute is much less far reaching than the FCA, passed by the House June 2017, which would have stripped out Dodd-Frank’s anti-arbitration sections. The Senate has not acted yet on this one.

Other bills are pending, such as the Financial Product Safety Commission Act of 2018(H.R. 5266), that would amend Dodd-Frank to restructure the Consumer Financial Protection Bureau (“CFPB”) to an SEC-like five-member independent commission. No more than three Commissioners could be from the same political party and as the Bill’s title implies, the CFPB would be renamed the “Financial Product Safety Commission.” H.R. 5266 has bipartisan co-sponsorship. The March 14thBallard-Spahr LLP Consumer Finance Monitor blog reported that the Bill “is likely to have the strong support of consumer finance and banking trade groups. Industry, which has long viewed a commission as a more appropriate structure for bringing stability and predictability to the CFPB over the long run, has previously urged Congress to change the CFPB’s leadership from a single director to a commission.” The Bill has been referred to the Financial Services Committee.

 

  1. Say Goodbye to the Department of Labor’s Fiduciary Rule

What I wrote: TheDepartment of Labor in April 2016 approved a 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 permitted. President Trump on February 3rd[2017] ordered the Secretary of Labor to undertake a review of the Rule, that had been scheduled to go into effect in phases starting April 10.DOL announced on April 4ththat it was delaying for 60 days the Rule’s implementation. Thus, the first phase of the Fiduciary Standard Rule went into effect starting June 9th and a second phase was to be implemented January 2018.

DOL later fileda proposal to delay until July 2019 the planned January 2018 implementation of Phase II of the Rule(“18-Month Extension of Transition Period and Delay of Applicability Dates; Best Interest Contract Exemption; Class Exemption for Principal Transactions; PTE 84-24”). The delay became official on November 29 when a Notice was published in the Federal Register.[1]

What I predicted: The review ordered by the President almost a year ago will conclude that the DOL’s Fiduciary Standards Rule is confusing, costly, and duplicative. It will recommend the Rule be scrapped in favor of a unified Rule to be promulgated by the SEC.

What happened? Ding, dong, the DOL Fiduciary Rule is dead, and the SEC is moving ahead with its own regulation. The review ordered by President Trump is still not complete, but other events have caused the rule’s demise. What happened?

 

  • In Chamber of Commerce of the United States v. Acosta, 17-10238 (5th Cir. Mar. 15, 2018), a split Court vacated in its entirety the Department’s Fiduciary Standard Rule.Then, the Fifth Circuit on May 2ndunanimously denied motions by California, New York, and Oregon and AARP to intervene and seek en banc review. Thereafter, the three States on May 16thfiled a Motion for Reconsideration or in the alternative permission to petition for en bancreview. On May 22nd, the Panel ruled2-1 to deny both requests. The DOL’s time to Petition for Certiorariexpired June 13th, and on June 21stthe Fifth Circuit issued the Mandate, providing: “It is ordered and adjudged that the judgment of the District Court is reversed, and vacate the Fiduciary Rule in toto.” The Rule is officially dead.

 

Also, the SEC is indeed moving ahead with its own Rule, as authorized by Dodd-Frank section 913(g)(1). Specifically, the SEC published on May 9th , three proposals to establish a uniform fiduciary standard: Regulation Best Interests, Vol. 83, No. 90, Page 21574 (17 CFR Part 240); Standard of Conduct for Investment Advisers, Vol. 83, No. 90, Page 21203 (17 CFR Part 275); and Form CRS Relationship Summary and Form ADV, Vol. 83, No. 90, Page 21416 (17 CFR Parts 240, 249, 275 and 279). Federal RegisterPublication has triggered a 90-day public comment period, making the due date for all three August 7, 2018.

 

  1. The President Eventually Will Win the War over CFPB’s Leadership

What I wrote: Before he could be fired by the President, Director Richard Cordray announced via a November 15themail to staff that he would be departing the Bureau by the end of the month.[2]This immediately led to conjecture that the President would name as Acting Director the current head of Office of Management and Budget, Mick Mulvaney.Later, Mr. Cordray suddenly announced on November 24 that he was leaving at the end of the day. However, before he left Mr. Cordray named as Acting Director staffer Leandra English. President Trump later that same day issued a Statement making official Mr. Mulvaney’sdesignation as Acting Director, touching off an ugly power struggle over who was in charge of the agency. How ugly? Some highlights are offered below, but for chapter and verse, see my blog post, Richard, Here’s Another Nice Mess You’ve Gotten Us Into!

What I predicted:Sooner or letter, one way or the other, the President will prevail. Either he will win the legal challenges – which I predict he will – or he will simply nominate a new Director whom the Senate will confirm.

What happened? Both. The President on June 18thnominated Kathy Kraninger to a five-year term as Director.[3]Ms. Kraninger is currently Associate Director for General Government at the OMB, a position she’s held since March 2017 according to her LinkedIn bio. Just weeks after President Trump nominated Ms. Kraninger, Ms. English dropped her suit challenging Mr. Mulvaney’s appointment as the Bureau’s Acting Director. At the same time, she announced her resignation. Judge Timothy J. Kelly declined to issue an injunction and on January 10thruled against Ms. English on the merits in English v. Trump and Mulvaney, No. 1:17-cv-02534 (D.D.C.). The decision was appealed to theD.C. Circuit and argued April 12.Why did Ms. English resign her post and give up the appeal? Her July 6thannouncement cites “the recent nomination of a new Director.” My take? The passage of time and the facts on the ground made persisting a Quixotic effort.

 

Conclusion

Straight “A” grades so far, Mom. As I’ve written in past years, the consumer and employment arbitration world is constantly changing, and will evolve yet again in the rest of 2018. Doubtless there are some things that will happen this year that I just didn’t see coming (such as DOL’s Fiduciary Rule being killed by the courts and Justice Kennedy retiring). And of course, some of my predictions may not come to pass, at least not yet. We will again compare notes at the end of the year. In the meantime, see you in the future!

_________________

*George H. Friedman, Chairman of the Board of Directors of Arbitration Resolution Services, Inc.and an ADR consultant, 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.His proud Mother, Gloria Friedman, undoubtedly has taped this blog post to the fridge.

 

 

[1]82 FR 56545 (Vol. 82, No. 228, P. 56545, November 29, 2017).

 

[2]Mr. Cordray announced in December that he was running for Ohio Governor.

 

[3]Her confirmation hearingat the Senate Banking Committee was July 19th.




PART I – A Midyear Assessment of My 2018 Consumer and Employment Arbitration Predictions

By George H. Friedman*

Chairman of the Board, Arbitration Resolution Services

 

Toward the end of last year, I authored a blog post, Consumer and Employment Arbitration: Six Things to look for in 2018. Below are my views on what was coming in 2018, and how these arbitration predictions are turning out as we hit the year’s midpoint. What are the results so far? As Larry David says, “Pretty, pretty, pretty, pretty good.”

Predictions made in December:

  • President Trump Still Likes Arbitration
  • The Anti-Arbitration Legislation is Still(Mostly) Dead
  • SCOTUS’ Support for Arbitration Will Still Continue Unabated
  • Still Expect Dodd-Frank to be Repealed and Replaced
  • Say Goodbye to the Department of Labor’s Fiduciary Rule
  • The President Eventually Will Win the War over CFPB’s Leadership
  1. President Trump Still Likes Arbitration

What I wrote: As I detailed in last year’s “report card” blog post,[1]it is at this point undisputed that President Trump believes in the arbitration process, and will defend it if the need arises. Also, candidate Trump in 2016 promised that there would be less regulation, and that certainly proved to be the truth in 2017 with President Trump. Several anti-arbitration Obama-era regulations were rolled back either by Executive Order or Congressional nullification, and various federal agencies have done an about-face on predispute arbitration agreements.

What I predicted: Any anti-arbitration bills that somehow reach the President’s desk will almost invariably[2]be vetoed, and any Congressional Nullification Resolutions involving rollbacks of anti-arbitration regulations will be signed.Also look for more Executive Orders from Mr. Trump expandinguse of arbitration by the federal government, and undoing any remaining anti-arbitration directives issued by his predecessor. And, we shouldn’t be surprised if the Department of Justice switches sides again in other court cases involving arbitration.

What happened? Spot on. Since becoming President, Mr. Trump has demonstrated unwavering support for arbitration. Here are just a few examples:

  • In June 2017, the Centers for Medicare and Medicaid Services eliminated its regulation banning predispute arbitration agreements in nursing home admission agreements, and has dropped its appeal of a District Court preliminary injunction banning implementation of the original rule. The amended regulation was published in the Federal Register in June 2017. A CMS Factsheet leads with news that the prohibition on PDAAs is out, and then states the proposed regulation adds several requirements for PDAA use, all focused on clear notice and fairness.
  • The Department of Education published a Notice in June 2017 announcing that it was postponing indefinitely the planned July 1, 2017 effective date of another Obama-era regulation,that would have banned mandatory predispute arbitration agreements and class action waivers incollege enrollment agreements for schools receiving federal financial aid for student borrowers.
  • President Trump nominated to the Supreme Court Justice Neil Gorsuch, who as predicted has been pro-arbitration (more on that later).
  • The Trump Administration Department of Justice has been switching sides in some court cases, taking pro-arbitration positions againstthose taken by federal agencies. For example,the Acting Solicitor General filed an AmicusBrief siding with the employers and against the National Labor Relations Board (“NLRB”) in Epic Systems Corp. v. Lewis, 137 S. Ct. 809 (2017), three cases that were pending at the Supreme Court involving whether the Federal Arbitration Act prevails over the National Labor Relations Act when it comes to enforcing class action waivers in employment arbitration agreements. The NLRB had to represent itself,[3]which reminded me of a scene[4]from “Blazing Saddles.”
  • What ultimately happened in that case? In a narrow 5-4 decision splitalong ideological lines, the Supreme Court on May 21stheld in Epic Systems, No. 16-285, that the FAA permits employers to use arbitration clauses containing class action waivers, notwithstanding the National Labor Relations Act’s protections of workers’ rights to act collectively.And who wrote the majority Opinion in the aforementioned Epic Systems case? None other than Justice Gorsuch.
  • And, last but by no means least, President Trump on July 9thnominated Judge Brett M. Kavanaugh of the District of Columbia Circuit to fill the open Supreme Court seat created by the retirement of Justice Anthony Kennedy. Based on a review of the Judge’s cases[5]involving arbitration, it’s pretty clear he is pro-arbitration.

Trust me, folks. President Trump is all-in on arbitration.

  1. All the Anti-Arbitration Legislation is Still(Mostly) Dead

What I wrote: The Democrats in 2017 introduced several anti-arbitration Bills in the new Congress, that have predictably gone nowhere so far as described in my blog post, Baseball Season is Here! You Can’t Tell the Anti-Arbitration Bills Without a Scorecard.

What I predicted: For the most part, these Bills will continue to go nowhere; they are “mostly dead.”[6]Just as occurred in 2016… and 2015… and 2014. Why the “for the most part” qualification? In the wake of seemingly daily accusations of workplace sexual harassment, bipartisan Bills were introduced December 6thin both Houses of Congress that would amend the Federal Arbitration Act to ban predispute arbitration agreements covering sexual discrimination disputes. Specifically, S. 2203and H.R. 4570— the Ending Forced Arbitration of Sexual Harassment Act— were introduced by Sen. Kirsten Gillibrand (D-NY) and Rep. Cheri Bustos (D-IL). The Bills, which have bipartisan support in both institutions, would ban PDAAs for “a dispute between an employer and employee arising out of conduct that would form the basis of a claim based on sex under title VII of the Civil Rights Act of 1964 (42 U.S.C.2000e et seq.) if the employment were employment as defined in section 701(b) of that title regardless of whether a violation of title VII is alleged…” I predict some iteration[7]of the law will be passed by Congress, and I sense that the President will sign it.

What happened? As predicted, these Bills have gone nowhere. I am a bit surprised that the Gillibrand-Bustos Bill has not advanced, but time will tell.

  1. SCOTUS’ Support for Arbitration Will Still Continue Unabated

What I wrote:President Trump in 2017 nominated and the Senate confirmed the apparently pro-arbitration[8]Justice Neil Gorsuch. The first real test of Justice Gorsuch’s arbitration views will be in Epic Systems Corp. v. Lewis, 137 S. Ct. 809 (2017), three consolidated cases pending at the Supreme Court involving whether the Federal Arbitration Act prevails over the National Labor Relations Act when it comes to enforcing class action waivers in employment arbitration agreements. The case was heard October 2, with the Department of Justice arguing againstits own federal agency.[9]

What I predicted: I predict a close decision from SCOTUS in Epic Systems reaffirming the preemptive effect of the FAA over other federal laws that do not expressly preclude arbitration, with Justice Gorsuch voting with the pro-arbitration camp. Mind you, I wouldn’t be completely shocked by a narrow 5-4 decision in the opposite direction. Further, I think Justice Gorsuch will reaffirm this year that he is indeed pro-arbitration.

What happened? Bingo! Justice Gorsuch, who asked no questions at the oral argument, wrote the majority Opinion in Epic Systems, reaffirming the supremacy of the FAA over conflicting federal statutes not expressly barring arbitration. This passage sums up his pro-arbitration bona fides:

“As a matter of policy these questions are surely debatable. But as a matter of law the answer is clear. In the Federal Arbitration Act, Congress has instructed federal courts to enforce arbitration agreements according to their terms –including terms providing for individualized proceedings. Congress has likewise shown that it knows how to override the Arbitration Act when it wishes…. What all these textual and contextual clues indicate, our precedents confirm…. Throughout, we have made clear that even a statute’s express provision for collective legal actions does not necessarily mean that it precludes ‘individual attempts at conciliation’ through arbitration…. And we’ve stressed that the absence of any specific statutory discussion of arbitration or class actions is an important and telling clue that Congress has not displaced the Arbitration Act” (citations omitted).”

Also, the Supreme Court has agreed to review three arbitration-centric cases next Term, setting up the first arbitration “trilogy”[10]in over fifty years:

  • Certiorari granted February 26thinNew Prime, Inc. v. Oliveira, No. 17-340. The Petition defined the questions presented as: “1. Whether a dispute over applicability of the [Federal Arbitration Act] FAA’s Section 1 exemption is an arbitrability issue that must be resolved in arbitration pursuant to a valid delegation clause; and 2. Whether the FAA’s Section 1exemption, which applies on its face only to ‘contracts of employment,’ is inapplicable to independent contractor agreements.” The case is setfor oral argument October 3.
  • Certiorari grantedApril 26thinLamps Plus v. Varela, 17-988. As described in the Petition, the issue presented is: “Whether the Federal Arbitration Act forecloses a state-law interpretation of an arbitration agreement that would authorize class arbitration based solely on general language commonly used in arbitration agreements.”
  • PetitionforCertiorari grantedJune 25thin Sales v. Henry Schein, Inc.,878 F.3d 488(5th Cir. Dec. 21, 2017).The issue before the Court is: “Whether the Federal Arbitration Act permits a court to decline to enforce an agreement delegating questions of arbitrability to an arbitrator if the court concludes the claim of arbitrability is ‘wholly groundless.’”

I’m getting ahead of myself with a 2019 prediction, but I have no doubt that when the dust settles, the Court will have reaffirmed and indeed strengthened its support of the FAA

I’ll discuss the status of 3 more predictions in my next post.

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*George H. Friedman, Chairman of the Board of Directors of Arbitration Resolution Services, Inc.and an ADR consultant, 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.His proud Mother, Gloria Friedman, undoubtedly has taped this blog post to the fridge.

[1]See Friedman, G., A Final Report Card on My 2017 Arbitration Predictions: “Pretty, Pretty, Pretty, Pretty Good!” (December 27, 2017).

[2]As described in Prediction # 2, there’s one proposed anti-arbitration law that has a reasonably good chance of being enacted.

[3]The NLRB issued a Statementreporting that the Acting Solicitor General had given the Agency authority to represent itself.

[4]No, not thatscene!

[5]See Securities Arbitration Commentator, Supreme Court Nominee Kavanaugh Seems to Be Pro-Arbitration (or so We Think), Part I(July 13, 2018).

[6]No George Friedman blog post is complete without a video clip. This oneis Billy Crystal’s classic “mostly dead” routine from The Princess Bride.

[7]Right now, the Bill is too broadly drafted. It will I’m sure be cleaned up before a vote.

[8]See Friedman, G., Supreme Court Nominee Gorsuch Seems to be Pro-Arbitration!(February 1, 2017).

[9]See for yourself by reading the oral argument transcriptor listening to the audio recording.

[10]In 1960, the Court decided three landmark arbitration cases involving the United Steelworkers union. These decisions were later dubbed, the “Steelworkers Trilogy.” The Court has not since heard that many cases in the same Term.