Arbitration is at the Root of all Evil, According to the New York Times

Arbitration is at the Root of all Evil, According to the New York Times

 By George H. Friedman*

 An ongoing multi-part series in the New York Times on its “investigation” of and “exposé” on arbitration seemingly blames arbitration for pretty much everything bad going on in the world.  As an arbitrator, arbitration expert, law professor, author, and Chairman of the Board of Arbitration Resolution Services,[1] I must respond. I must.  I’m like the news anchor in the classic movie, “Network,” starring Faye Dunaway and Peter Finch.  At a pivotal juncture in the movie, the increasingly unhinged Finch urges viewers to open their windows and shout out: “I’m mad as Hell, and I’m not going to take this anymore!

Slanted, one-sided and interminable

First, the long three-part series is one-sided. My law students will back me up on brevity.  A long, repetitive and often rambling paper will be returned with a comment saying, “You really need to be more succinct and focused!”  The series is long on stories, but short on analysis and data.  Anecdotes are not data, and taking stories – especially from only one side – and drawing broad conclusions is intellectually dishonest.  Should readers assume that all Times’ reporting is dishonest because Times Reporter Jason Blair engaged in journalistic fraud?  Just asking.

Also, where is the data showing arbitration harms consumers? The Consumer Financial Protection Bureau’s own data published in a March Report to Congress if anything show arbitration is not harmful and that class actions offer ineffective relief for individual consumers. CFPB’s Report shows that most consumers don’t even bother participating in class actions and when they do get tiny recoveries – cents on the dollar or coupons for future business.  Of course, left unsaid is that class action lawyers tend to do just fine.

 What’s the alternative?

Succinctly stated, litigation stinks, and class actions are even worse for individuals.  I’ve blogged often on this general topic, but I especially recommend Ten Things About Litigation That Arbitration Critics Won’t Tell You. I love this part:  “Arbitration’s detractors like to tout the benefits of a trial by jury, and criticize arbitration for denying consumers their Seventh Amendment right to trial.  But is that so?  The right to a jury trial can be waived, which is what happens when there is clear, mutually-agreed-upon agreement to arbitrate. Also, almost 100% of civil lawsuits never go to trial. That’s right, between motions to dismiss, summary judgments, and other events that happen in court cases, almost no cases go to trial.  Don’t take my word for it.  The American Bar Association conducted a major study of this issue.  How did it come out?  Here’s a spoiler alert: the title of the article describing the results is The Vanishing Trial.  The ABA reports that only 1.8% of civil actions actually went to trial, meaning 98.2% did not.  A later survey upped this to 98.8%. In state courts, the National Center for State Courts reports that civil jury trials are down 28% from 1976 to 2002, and now represent 0.6% of all dispositions.  So much for your day in court.  By contrast, arbitrators are trained to allow the parties to present their case, and some arbitration rules[2] severely limit motions to dismiss in consumer cases.”

 Arbitration is fair and that’s where the focus should be

The Federal Arbitration Act (“FAA”), courts, and established arbitration providers address blatantly unfair clauses and systems.  And the series overlooks the basic fact that arbitration is fair.  Borrowing from my own prior blog posts, in extolling the upside of litigation, arbitration’s critics often paint arbitration as a form of second-class justice.  This is simply not the case.  Says who? Besides me, the Supreme Court says so.  In overturning its own anti-arbitration ruling in Wilko v. Swan[3] issued 36 years earlier, the Court in Rodriguez v. Shearson/American Express, Inc.[4] said “To the extent that Wilko rested on suspicion of arbitration as a method of weakening the protections afforded in the substantive law to would-be complainants, it has fallen far out of step with our current strong endorsement of the federal statutes favoring this method of resolving disputes. Once the outmoded presumption of disfavoring arbitration proceedings is set to one side, it becomes clear that the right to select the judicial forum and the wider choice of courts are not such essential features of the Securities Act…”  Two years later in Gilmer v. Interstate/Johnson Lane Corp.[5] the Court evaluated whether arbitration was a fair process, and concluded it was.  In ordering arbitration of a claim involving the Age Discrimination in Employment Act, the Court goes on at length to review the arbitration process, and concludes that it is “fair” (fair process, right to counsel, right to pick arbitrators, fair panel, fair amount of discovery, written award). In short, the arbitration process is fair and is not an inferior form of justice.

As to courts policing unfair arbitration systems, see for example Hooters v. Phillips,[6] where the U.S. Court of Appeals for the Fourth Circuit held “the promulgation of so many biased rules – especially the scheme whereby one party to the proceeding so controls the arbitral panel — breaches the contract entered into by the parties. The parties agreed to submit their claims to arbitration– a system whereby disputes are fairly resolved by an impartial third party. Hooters by contract took on the obligation of establishing such a system. By creating a sham system unworthy even of the name of arbitration, Hooters completely failed in performing its contractual duty.”

Also, there are established due process fairness protocols for employment, consumer, and health care arbitration, as well as a Code of Ethics for arbitrators.  Established arbitration providers follow them and won’t administer a case under a non-complying arbitration clause.

Inconvenient truths

Also not addressed are some inconvenient truths.  For example, the series fails to mention that even with arbitration clauses and class action waivers, regulators retain their ability to independently address corporate wrongdoing.  In EEOC v. Waffle House,[7] the Supreme Court ruled that the EEOC does NOT stand in the shoes of the employee who has signed an arbitration clause, meaning the EEOC can pursue litigation to address corporate wrongdoing even where individual employee has signed an employment contract containing an arbitration clause.

Also, the argument about “repeat players” ignores the fact there are well-organized consumer, investor, and employee-rights bars who can also “blackball” arbitrators. And, of course, the consumer’s ability to walk away from unfair arbitration clauses and take their business elsewhere is not discussed.

And, there are sometimes bad results in individual law suits, too.  Should we do away with courts?  The series refers to the “dusty” FAA.  The Federal Arbitration Act is a time-tested federal law.  Is the Civil Rights Act “dusty”?  What about the 14th Amendment?  Again, just asking.

 Conclusion

After seemingly blaming arbitration for pretty much everything from ISIS to climate change, the third installment in the series takes on religion-based arbitration.  Is nothing sacred?

_____

*George H. Friedman, an ADR consultant and Chairman of the Board of Directors of Arbitration Resolution Services, Inc., retired in 2013 as FINRA’s Executive Vice President and Director of Arbitration, a position he held from 1998. In his extensive career, he previously held a variety of positions of responsibility at the American Arbitration Association, most recently as Senior Vice President from 1994 to 1998. He is an Adjunct Professor of Law at Fordham Law School. Mr. Friedman serves on the Board of Editors 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.

 

[1] Not speaking for ARS here.  This is just me speaking.

[2] See, for example, FINRA Code of Arbitration Procedure for Customer Claims Rule 12504.

[3] 346 U.S. 427 (1953), available at http://caselaw.lp.findlaw.com/cgi-bin/getcase.pl?friend=kmarx&navby=volpage&court=us&vol=346&page=436.

[4] 490 U.S. 77 (1989), available at https://scholar.google.com/scholar_case?case=4986456804213944237&hl=en&as_sdt=6&as_vis=1&oi=scholarr.

[5] 500 U.S. 20 (1991), available at http://supreme.justia.com/cases/federal/us/500/20/case.html.

[6] 173 F.3d 973 (1999), available at http://caselaw.findlaw.com/us-4th-circuit/1068799.html.

[7] 534 U.S. 279 (2002), available at http://caselaw.findlaw.com/us-supreme-court/534/279.html.




“What’s Past Is Prologue” – What’s Ahead for Arbitration Filings in the Wake of the Market’s Recent Volatility

By George H. Friedman*

Repost from Securities Arbitration Commentator blog

While he prays he is not correct, the author fears that … both the stock and bond markets will crash at the same time. Thereafter, as has happened in the past, FINRA will be inundated with crash-related claims. Case filings will ultimately break the old record of 8,945 set in 2003[1] in the wake of the “tech wreck.”

– George Friedman, 2014[2]

I debated whether to lead with a Yogi Berra quote, “It’s like deja-vu, all over again,” but decided to go with Shakespeare’s quote above from The Tempest. Following recent capital market gyrations and volatility, the focus sooner or later turns to what these events mean for securities arbitration case filings. My short answer is: to predict the future, look to the past. Having served as FINRA’s Director of Arbitration from 1998-2013, and having seen this movie a few times before, I offer my thoughts on what recent market activity, especially the precipitous drops, means for FINRA’s arbitration filings.

Arbitration filings run countercyclical to market performance

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 2011-14, FINRA Dispute Resolution’s arbitration case filings plummeted to 3,822 cases – nearly 50% below the post-crash high of 7,137 cases filed in 2009. In fact, 2014’s filings would have been even lower, but for the surge in cases due to the Puerto Rico bond fund mess (more on that later). 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.

Screen Shot 2015-09-10 at 12.09.44 PM

Sources: FINRA arbitration filings – FINRA Website http://www.finra.org/arbitration-and-mediation/dispute-resolution-statistics. S&P 500 – BigCharts http://bigcharts.marketwatch.com/

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.[3] Three years following the 2000 tech wreck, FINRA arbitration case filings peaked at nearly 9,000. 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 almost half.

More arbitration filings ahead

What does the past tell us? The significant and rapid decline in the markets in recent weeks will lead to arbitration filings going up significantly. If the past is any indication, look for arbitration filings to go up by 50-75%, perhaps more. Why do I say “perhaps more”? Besides general market conditions impacting arbitration filings, discrete product failures will augment filings. It has happened in the past (think: auction rate securities and subprime collateralized debt obligations), it’s happening now (Puerto Rico bond funds), and it will surely happen in the future (we just don’t know the product yet).

What kind of cases?

What issues will the next surge in arbitrations feature? Again, the past can be a guide (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 customer 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 at the time (“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 (“I’m not saying bonds and bond funds were unsuitable investments given my conservative objectives, but why was I so concentrated in Puerto Rico bonds? Or, why was Grandpa so heavily invested in Lehman bonds?”). Again, the firms usually defend with a ratification defense.

Margin – investor claims: When the market drops precipitously and then quickly rebounds, 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 [bad person]! You gave me a margin call when I was in the bathroom, and sold me out 10 minutes later.”) The firms will point out that they really didn’t have to give any notice and their actions were consistent with the account agreement (“We gave you 10 minutes when we really could have given no notice”). 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 debit balances. 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 $25,000”). Customers don’t react well to this (“You [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]!”).

It’s worth noting that margin debt is on the rise. As reported in the SAC blog, “We took a look at the margin statistics FINRA posts monthly on its Website (ed: this is a great resource, albeit one that lags). Margin debt, we know from past SAA reports, have surpassed the half-trillion mark before (four mos. in 2014), but, by January 2015, debit balances in customers’ securities margin accounts had subsided to $485.9 billion. Then, the DJIA stood a bit below 18,000 and the market has progressed through the year, until the recent rupture, in a fairly narrow range. Given that horizontal pitch, we were somewhat surprised to see that margin debt has risen about 17% to $548 billion, as of the end of June 2015 (most recent figures).[4] $548 billion is the highest posting of margin debt we could find in FINRA’s records. We recall the heady days of the 2000 Tech-Crash, when we were exclaiming about a $300 billion margin debt total. In that case, there was a sustained crash and, in the aftermath and before the bounceback, the margin debt halved (Oct. ’01: $152B).”

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.

Conclusion

This is not an exhaustive list. And of course I’ve been wrong before. 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.

———

*George H. Friedman, an ADR consultant and Chairman of the Board of Directors of Arbitration Resolution Services, Inc., retired in 2013 as FINRA’s Executive Vice President and Director of Arbitration, a position he held from 1998. In his extensive career, he previously held a variety of positions of responsibility at the American Arbitration Association, most recently as Senior Vice President from 1994 to 1998. He is an Adjunct Professor of Law at Fordham Law School. Mr. Friedman serves on the Board of Editors 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 (Wharton-FINRA Institute).

 

[1] See http://www.finra.org/ArbitrationAndMediation/FINRADisputeResolution/AdditionalResources/Statistics/ <visited 9/8/2015>.

[2] Friedman, George, Technology, Alternative Dispute Resolution, and the Insurance Industry: the Future Has Arrived (Really this Time), 1 Journal of American Law 22, 32-3 (Fall 2014), available at http://journaloflaw.epubxp.com/i/397972-fall-2014/22 <visited 9/8/2015>.

[3] See Benjamin, Jeff, Advisers scramble to head off sticker shock from clients over ugly August account statements, InvestmentNews (Sept. 4, 2015), available at http://www.investmentnews.com/article/20150904/FREE/150909944/advisers-scramble-to-head-off-sticker-shock-from-clients-over-ugly?utm_source=Morning-20150908&utm_medium=email&utm_campaign=investmentnews&utm_term=text <visited 9/7/2015>.

[4] $530.7 billion as of July.




Back to School on “Deflategate” and Arbitration

By George H. Friedman*

Just yesterday, I blogged “Deflategate” – the Court has Ruled – Now What? where I offered my views on the federal court’s ruling on “Deflategate.” To review, the court reversed National Football League Commissioner Roger Goodell’s arbitration decision upholding New England Patriots quarterback Tom Brady’s four-game suspension.  Having spent the holiday weekend reading, viewing, and hearing various news accounts describing – in my view incorrectly – the decision and its impact, and since it’s back to school time, and because I have taught arbitration at Fordham Law School for the last 20 years, as a public service I thought I would circle back to cover some arbitration basics.  Also, I think my beloved wife Ellen hopes this new blog post will cause me to stop muttering to myself every time I see an incorrect description of the case.

Update

The NFL has already announced that it will appeal Judge Berman’s ruling.  Since the league has also announced that it will not seek a stay of the court’s decision pending its appeal, Tom Brady will be able to play in the Patriots’ opener next Thursday.

What the Federal District Court Decision does NOT Mean

The media have widely reported that Judge Berman has “exonerated” Tom Brady, and has overruled the NFL’s finding that Brady and the Patriots tampered with the footballs, substituting his judgment for that of Arbitrator-Commissioner Goodell.  That is not the case.  The court has not effectively said “Tom, your evidence was more persuasive.  You win.  No suspension.”  Far from it.  Instead, the court has ruled that the Commissioner’s decision is stricken due to procedural errors, and presumably (but not expressly stated) Brady’s appeal has to be reheard.

A reviewing court’s options are pretty much binary:  enforce the award or vacate it.  Indeed, it is hornbook arbitration law that a reviewing court cannot substitute its judgment for the arbitrator’s.  This holds true for business and labor arbitrations. Says who?  The United States Supreme Court.  See, for example, BG Group, PLC v. Republic of Argentina, 134 S.Ct. 1198 (2014), and Steelworkers v. Warrior & Gulf Co., 363 U.S. 574 (1960).  This Texas Court of Appeals case sums it up very well: “We may not substitute our judgment for that of the arbitrators merely because we would have reached a different decision” (see Humitech Development. Corp. v. Perlman, 424 S.W.3d 782 (Tex. App. 2014)).

 What the Federal District Court Decision does mean

The Federal Arbitration Act, 9 U.S.C. §§ 1 et seq. (“FAA”), provides that an arbitration decision – called an award – may be enforced in court.  An arbitration decision may also be challenged on very limited grounds set forth in section 10.  The NFL went to court to enforce the Commissioner’s decision, and the Players’ Association sought to vacate it. The Deflategate court vacated the Commissioner’s arbitration award based on arbitrator misconduct (Federal Arbitration Act, 9 U.S.C§ 10(a)(3)). This section states that an award can be vacated where “the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy…” Specifically, the court held that the Commissioner-Arbitrator improperly denied Brady: 1) “the opportunity to examine designated co-lead investigator Jeff Pash;” and 2)”equal access to investigative files.”

So?  So, what does this all mean?

Commissioner Goodell’s award is for now a nullity.  But that’s not the end of it.  When an arbitration award is vacated, it typically means that the parties start over with a new arbitration (unless they settle – not likely here).  As I wrote yesterday, the court did not address the Commissioner’s ability to serve as a neutral arbitrator, which the Court notes was “central” and “at the very heart” of Brady’s challenge. The FAA provides that an arbitration decision may be challenged under section 10(a)(2) for “evident partiality” of the arbitrator.  And some courts have held that the Commissioner cannot serve as neutral arbitrator (see my blog post on the subject).  There may yet be another arbitration, but the since court’s decision does not address who will serve as arbitrator, the question still remains: who gets to be the arbitrator, the Commissioner or someone else?  The court’s decision was silent on this question.

Summing up

Here are the likely scenarios, barring a settlement or further appeals:

NFL loses its appeal: Judge Berman’s ruling stands.  The Commissioner’s decision remains tossed, and the parties have a new arbitration (but again, before whom?)

NFL wins its appeal: Judge Berman’s ruling is reversed, and the Commissioner’s decision is reinstated.  Tom Brady has to serve his four-game suspension.

A split decision: It’s possible the Court of Appeals will issue a mixed decision saying the judge was correct about some things and wrong about others.  Here’s a tough one: “No, you were wrong about the procedural errors.  So, the arbitration decision was sound in that regard.  Now go back and decide whether the Commissioner could serve as an impartial, unbiased arbitrator.”

Of course, my premise about no appeals may be wrong, in which case as I said yesterday, like the Bill Murray movie “Groundhog Day,” Brady, the union, and the NFL may find themselves reliving this process again and again.


 

*George H. Friedman, an ADR consultant and Chairman of the Board of Directors of Arbitration Resolution Services, Inc., retired in 2013 as FINRA’s Executive Vice President and Director of Arbitration, a position he held from 1998. In his extensive career, he previously held a variety of positions of responsibility at the American Arbitration Association, most recently as Senior Vice President from 1994 to 1998. He is an Adjunct Professor of Law at Fordham Law School. Mr. Friedman serves on the Board of Editors 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 (Wharton-FINRA Institute).




“Deflategate” – the Court has Ruled – Now What?

By George H. Friedman*

By now, football fans know that a federal court has just ruled on “Deflategate,” nullifying National Football League Commissioner Roger Goodell’s arbitration decision upholding New England Patriots quarterback Tom Brady’s four-game suspension. So, what’s next? Having read judge Berman’s 40-page decision, let me offer this very quick and high level analysis.

Background
I’ve previously blogged on the NFL’s appeals process and on “Deflategate.” Cases like this are governed by Article 46 of the Collective Bargaining Agreement between the NFL and the players’ union, the NFL Players Association (“NFLPA”), which states in section 1(a):

All disputes involving a fine or suspension imposed upon a player for conduct on the playing field (other than as described in Subsection (b) below) or involving action taken against a player by the Commissioner for conduct detrimental to the integrity of, or public confidence in, the game of professional football, will be processed exclusively as follows: the Commissioner will promptly send written notice of his action to the player, with a copy to the NFLPA. Within three (3) business days following such written notification, the player affected thereby, or the NFLPA with the player’s approval, may appeal in writing to the Commissioner.

Section 2(a) provides:

For appeals under Section 1(a) above, the Commissioner shall, after consultation with the Executive Director of the NFLPA, appoint one or more designees to serve as hearing officers… Notwithstanding the foregoing, the Commissioner may serve as hearing officer in any appeal under Section 1(a) of this Article at his discretion.

Sitting as the “final arbiter” of disciplinary matters, the Commissioner upheld Brady’s four-game suspension.

The Court’s Decision: What it addressed
The Federal Arbitration Act, 9 U.S.C. §§ 1 et seq., provides that an arbitration decision – called an award – may be enforced in court. It may also be challenged on very limited grounds. The NFL went to court to enforce the Commissioner’s decision, and the Players’ Association sought to vacate it. The Deflategate court vacated the Commissioner’s arbitration award based on arbitrator misconduct (Federal Arbitration Act, 9 U.S.C§ 10(a)(3)). This section states that an award can be vacated where “the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy…”

Specifically, the Court held that the Commissioner-Arbitrator improperly denied Brady: 1) “the opportunity to examine designated co-lead investigator Jeff Pash;” and 2)”equal access to investigative files.”

The Court’s Decision: What it didn’t address
The Court did not address the remaining issues because it had enough to vacate the award. One glaring issue not addressed was the Commissioner’s ability to serve as a neutral arbitrator, which the Court notes was “central” and “at the very heart” of Brady’s challenge. The Federal Arbitration Act provides that an arbitration decision may be challenged under section 10(a)(2) for “evident partiality” of the arbitrator. And some Courts have held that the Commissioner cannot serve as neutral arbitrator (see my blog post on the subject).

Why this is Important: think Groundhog Day the Movie
I suspect the judge was trying to side-step the arbitrator bias issue to avoid disrupting the parties’ disciplinary system, but in my opinion he made a mistake. Why? All the Court’s decision means is that the Commissioner’s decision is nullified, and Brady gets a “do-over.” There may yet be another arbitration, but the Court’s decision does not address who will serve as arbitrator. So, the question still remains: who gets to be the arbitrator? Like the Bill Murray movie “Groundhog Day,” Brady, the union, and the NFL may find themselves reliving this process again and again.


*George H. Friedman, an ADR consultant and Chairman of the Board of Directors of Arbitration Resolution Services, Inc., retired in 2013 as FINRA’s Executive Vice President and Director of Arbitration, a position he held from 1998. In his extensive career, he previously held a variety of positions of responsibility at the American Arbitration Association, most recently as Senior Vice President from 1994 to 1998. He is an Adjunct Professor of Law at Fordham Law School. Mr. Friedman serves on the Board of Editors 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 (Wharton-FINRA Institute).




“Deflategate” – the Commissioner-Arbitrator Has Ruled – Now What?

By George H. Friedman*

By now, football fans know that National Football League Commissioner Roger Goodell has ruled on “Deflategate,” upholding New England Patriots quarterback Tom Brady’s four-game suspension. So, what’s next? I offer below a short primer on what might happen next. Again, in the interest of full disclosure – another cornerstone of arbitration – I hereby state that, as a long suffering New York Jets fan – I despise Brady, Belichick, and the Patriots. On the other hand, I love arbitration, so I think I can remain objective.

The Basics of the NFL’s Appeals Process

I’ve previously blogged on the NFL’s appeals process. Cases like this are governed by Article 46 of the Collective Bargaining Agreement between the NFL and the players’ union, the NFL Players Association (“NFLPA”), which states in section 1(a):

All disputes involving a fine or suspension imposed upon a player for conduct on the playing field (other than as described in Subsection (b) below) or involving action taken against a player by the Commissioner for conduct detrimental to the integrity of, or public confidence in, the game of professional football, will be processed exclusively as follows: the Commissioner will promptly send written notice of his action to the player, with a copy to the NFLPA. Within three (3) business days following such written notification, the player affected thereby, or the NFLPA with the player’s approval, may appeal in writing to the Commissioner.

Section 2(a) provides:

For appeals under Section 1(a) above, the Commissioner shall, after consultation with the Executive Director of the NFLPA, appoint one or more designees to serve as hearing officers… Notwithstanding the foregoing, the Commissioner may serve as hearing officer in any appeal under Section 1(a) of this Article at his discretion.

Sitting as the “final arbiter” of disciplinary matters, the Commissioner upheld Brady’s four-game suspension.

Now What? Some Possibilities

Now the fun begins. Here are some possible if not likely outcomes:

NFL can seek to enforce the Commissioner’s decision: The Federal Arbitration Act (“FAA”), 9 U.S.C. §§ 1 et seq., provides that an arbitration decision – called an award – may be enforced in court. The term of art is “confirmation” of the award. The league has already started this process, filing a petition to confirm the award on Tuesday in U.S. District Court for the Southern District of New York.1

The NFLPA can challenge in court the award issued by the Commissioner: The FAA provides that an arbitration decision may be challenged under section 10(a)(2) for “evident partiality” of the arbitrator. I blogged in June that the NFLPA could challenge an adverse arbitration decision based on the propriety of the Commissioner or his designees being arbitrator. This happened July 29th, with the NFLPA filing in federal court in Minnesota a petition to vacate the Commissioner’s decision. How might this turn out?

Earlier this summer I posted NFL Commissioner Tackled as Arbitrator in Employment Dispute. There, I reported that the Supreme Court of Missouri had disqualified the NFL’s Commissioner as the sole arbitrator in a case involving a non-player employee of the St. Louis Rams. State ex rel. Hewitt v. Hon. Kerr, No. SC93846 (Mo., Apr. 28, 2015), involves multiple issues and shifting concurrences and dissents. But one thing clearly emerges from the court’s opinion: cutting through the clutter of a complex and somewhat convoluted procedural history, the Missouri Supreme Court came to the core issue of whether it was unconscionably unfair to compel a non-player St. Louis Rams employee to arbitrate before the Commissioner who, according to the NFL’s constitution and bylaws, was an employee of the team owners (including the Rams)?

The Court’s answer was “It’s not fair.” Said the opinion, “Based on the facts of the present case, the terms in the contract designating the commissioner, an employee of the team owners, as the sole arbitrator with unfettered discretion to establish the rules for arbitration are unconscionable and, therefore, unenforceable. The constitution and bylaws provide that the ‘League’ consists of the team owners. Under the constitution and bylaws, the league ‘shall select and employ’ the commissioner and set his or her term of employment and compensation. The constitution and bylaws also provide unequivocally that the commissioner is employed by the league; i.e., the team owners… In effect, then, the commissioner is required to arbitrate claims against his employers.”

Now, the Brady case of course involves a player, and as the court noted, players have a much greater bargaining position and are represented by a union, but still it raises an interesting question: should the Commissioner have bowed out and agreed to an independent arbitrator? And, indeed Brady’s team is already advocating this point. His agent, Don Yee said “The Commissioner’s decision is deeply disappointing, but not surprising because the appeal process was thoroughly lacking in procedural fairness… The appeal process was a sham, resulting in the Commissioner rubber-stamping his own decision.” The petition to vacate the award expresses similar sentiments.

Staying on the field via injunction: Is there any way for Brady to stay on the field? Perhaps. Assuming he challenges the Commissioner’s decision, it can take quite some time until the court rules on the union’s motion to vacate the award. In the meantime, the ruling upholding the suspension would remain in effect. Unless Brady obtains an injunction from the court.2 What does the injunction do? It basically would hit the “Pause” button on implementing the suspension until the court rules on whether the award is to be enforced.

But getting an injunction is not easy. Brady would have to prove the likelihood of irreparable injury if the suspension is carried out now. Turning 38 August 3rd, he can argue that there’s no getting back those four games. But he also needs to show that he is likely to succeed in his challenge to the Commissioner’s decision. That may present a major hurdle to clear. It is very difficult to overturn an arbitration award. It matters not whether the arbitration decision in question flows from a labor arbitration or a business arbitration. Who says? The Supreme Court of the United States.3 Here the NFL is asserting that two “grown-up” parties – the NFL and the players’ union – agreed that the Commissioner could serve as arbitrator of disciplinary matters. In other words, the league’s position is “You knew this going in, so you can’t complain now.” The union’s take is “Yes, but not in a case like this.” On balance an injunction for Brady is in my view a long shot.

A Win May Not Be a Win

Even if Brady prevails, he may not win. How’s that? Readers should bear in mind that, if he gets the injunction, this just stops the league from imposing the suspension until the court rules on the challenge to the award. At best this alone just buys time. Next, suppose Brady prevails in getting the court to vacate the Commissioner’s ruling because Goodell could not possibly have been an impartial arbitrator? This does not mean that the court effectively says “Tom, your evidence was more persuasive. You win. No suspension.” Far from it. Instead, the court would rule that the Commissioner’s decision is stricken, and Brady’s appeal has to be reheard before a neutral arbitrator. He would then need to present his case to a new arbitrator and would, for example, be at risk of having to explain why he destroyed his cell phone.

A Daunting Task
Summing up, Brady faces an uphill battle. But you never know….in football sometimes a “Hail Mary” pass4 works.


1The suit is also grounded in section 301 of the Labor Management Relations Act, 29 U.S.C. § 185, which governs suits against unions.

2But which court? Right now the NFL’s petition to enforce the decision is pending in federal court in New York City. The NFLPA’s action to vacate the Commissioner’s decision is pending in federal court in Minnesota. My guess is both cases will eventually be consolidated, most likely in New York. Although the NFL does business in Minnesota, the award was issued by the Manhattan-based Commissioner. The Federal Arbitration Act in section 9 (award enforcement) and section 10 (award challenges) vests authority in the federal court “in and for the district wherein the award was made.”

3See Steelworkers v. Enterprise Wheel & Car Corp., 363 U.S. 593 (1960) (labor case): “The refusal of courts to review the merits of an arbitration award is the proper approach to arbitration under collective bargaining agreements. The federal policy of settling labor disputes by arbitration would be undermined if courts had the final say on the merits of the awards.” Also Hall Street Associates, LLC v. Mattel, Inc., 552 U.S. 576 (2008),) (business arbitration).

4For those readers who are not football fans, this is a long pass attempted in desperation the waning seconds of a game by the team that’s losing. Basically the receivers flood the end zone and the quarterback hurls the ball in their general direction. The term “Hail Mary” was according to NFL legend coined by Dallas Cowboys quarterback Roger Staubach in 1975.


*George H. Friedman, an ADR consultant and Chairman of the Board of Directors of Arbitration Resolution Services, Inc., retired in 2013 as FINRA’s Executive Vice President and Director of Arbitration, a position he held from 1998. In his extensive career, he previously held a variety of positions of responsibility at the American Arbitration Association, most recently as Senior Vice President from 1994 to 1998. He is an Adjunct Professor of Law at Fordham Law School. Mr. Friedman serves on the Board of Editors of the Securities Arbitration Commentator. He is also a member of the AAA’s nation 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 (Wharton-FINRA Institute).




Upon Further Review…Mandatory Arbitration Relief is on the Way for Consumers

By George H. Friedman*

No, this is not another one of my screeds about how it’s not fair for the NFL’s Commissioner to act as arbitrator in the dispute between his own employer and the National Football League Players’ Association over Tom Brady’s suspension. I just can’t keep repeating the same points. But on a different topic, borrowing a football term, upon further review I now believe the days are numbered for mandatory arbitration of most consumer disputes.

I actually predicted this – sort of – ten years ago, when I said to my arbitration class at Fordham Law School:

“A day of reckoning is coming on predispute arbitration agreements in consumer arbitration. A dichotomy is developing between arms-length pre-dispute arbitration agreements and those imposed by the dominant party in an adhesion contract with consumers (and perhaps employees). This will be addressed in the next several years by the Supreme Court, Congress, the SEC or all.”

I say “sort of” because relief for consumers has not come from the Supreme Court or the SEC, and has come only piecemeal from Congress. No, dear readers, the cavalry has charged in from federal administrative agencies, one of which did not exist ten years ago.

No Relief so Far from SCOTUS and the SEC

As I’ve written before, SCOTUS remains steadfast in its support of mandatory predispute arbitration agreements (“PDAAs”). If anything, that support has grown stronger since 2005 (see, for example, AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011)). Barring a change in the Court’s composition, I don’t see a shift on mandatory consumer arbitration.

What of the SEC, which has supervised securities arbitration for decades and since the 2010 enactment of the Dodd-Frank Act has had authority under section 921 to ban PDAAs, or limit or impose conditions for their use? After nearly five years, there has been very little activity. And, as I’ve said before, I don’t see the SEC issuing regs banning PDAAs. Why not? The SEC would have to find that doing so is “in the public interest and for the protection of investors.” Essentially, the SEC would be saying: “We’ve been supervising customer-broker arbitration for decades. But, you know, we just realized it’s a terribly unfair system.” That’s just not going to happen.

But the SEC in my view will surely do something. I think it’s politically untenable for the SEC to do absolutely nothing about PDAAs, especially in light of the pressure that’s been brought to bear on this issue by some in Congress, NASAA, PIABA, and others (for example the AFL-CIO). My view is that, at a minimum, the SEC will study the subject (it has since 2010 been accepting comments on mandatory arbitration), and eventually require some changes (impose limits or conditions).

It’s also possible that investors may get mandatory arbitration relief from FINRA, which convened a Task Force last year to review its dispute resolution program. Literally at the top of the Task Force’s agenda is “mandatory nature of arbitration.”

Congress Lays the Groundwork

Attempts have been made over the years and again this year to amend the Federal Arbitration Act (“FAA”) to ban mandatory consumer or investor arbitration. The proposed Arbitration Fairness Act of 2015 would add a new chapter to the FAA invalidating PDAAs for consumer, investor, employment, or civil rights claims. The proposed legislation is similar to prior failed efforts to similarly amend the FAA going back at least to 2005, including the Arbitration Fairness Act of 2013, which expired with the close of the last Congress. Also, introduced in February was the Investor Choice Act of 2015 (“ICA”), which would ban the use of mandatory pre-dispute agreements by broker-dealers and investment advisers and guarantee class action participation.

These efforts to amend the FAA failed when the Republicans controlled the White House and Congress, and met a similar fate under Democratic control of these institutions as well. For example, in 2009 the Democrats regained the White House and control of both houses of Congress. The capital markets tanked, there were Madoff and other scandals, and the economy crashed. But the Arbitration Fairness Act didn’t make it out of the House Financial Services Committee, which at the time was chaired by Barney Frank, an avowed critic of PDAAs in consumer contracts. If it didn’t happen then, it’s not going to happen today with a Republican Congress. The same holds true for the Investor Choice Act, in my opinion.

But all is not lost in terms of Congressional relief for consumers facing mandatory arbitration clauses. The Supreme Court says that, where a federal statute expressly bars arbitration, the FAA’s presumption of PDAA validity and enforcement will yield to that statute’s proscription of arbitration (see CompuCredit Corp. v Greenwood, 132 S.Ct. 665 (2012)). It turns out Congress has so spoken a few times. Section 922 of Dodd-Frank amends the Securities Exchange Act of 1934 to prohibit use of PDAAs in Sarbanes-Oxley whistleblower disputes. Section 748 amends the Commodity Exchange Act in the same way. Also, Dodd-Frank section 1414 bans outright PDAAs in residential mortgage contracts.

The Federal Regulators – Relief is on the Way

Dodd-Frank also impacts arbitration via regulatory agencies. It established the Consumer Financial Protection Bureau (“CFPB”) and section 1028 directs the CFPB to study the use of PDAAs in consumer financial products and services and later report to Congress. It also vests authority in CFPB to possibly develop regulations banning, limiting, or conditioning PDAA use (the SEC has no study requirement under Dodd-Frank, but it does have similar rule-writing authority). CFPB in December 2013 issued its Preliminary Report on the first phase of its study of arbitration. In May 2014, as required by Dodd-Frank, the Bureau published its Semi-Annual Report to Congress. And last March, the Bureau issued its Final Report to Congress finding that PDAA use is prevalent and may harm consumers. I am convinced that CFPB will eventually write regulations banning or severely curtailing PDAA use in consumer financial products and services such as credit cards, various consumer loans, banking accounts, and cell phones.

The Federal Regulators –Blast from the Past

It turns out Congress planted anti-mandatory consumer arbitration seeds 40 years ago, when it passed the Magnuson-Moss Warranty Act of 1975 (“MMWA”). The purpose of the law was to create several consumer rights regarding warranties. The law also gave the Federal Trade Commission (”FTC”) regulatory authority to protect consumers. The Act in 15 U.S. Code § 2310 encourages establishment of “informal dispute settlement mechanisms” (“IDSM”):

Congress hereby declares it to be its policy to encourage warrantors to establish procedures whereby consumer disputes are fairly and expeditiously settled through informal dispute settlement mechanisms.

In 1975, FTC adopted Rule 703 on IDSM. It later interpreted the rule to ban mandatory binding PDAAs in consumer warranties, although non-binding arbitration as a precondition to litigation was permitted. Section 703.5(j) would seem to support this, where it states: “Decisions of the [ISDM] shall not be legally binding on any person.”

During the FTC’s 1996-97 rule review, some commenters asked the agency to back away from its position that Rule 703 bans mandatory binding arbitration in warranties. “The Commission, however, relying on its previous analysis and the MMWA’s statutory language, reaffirmed its view that the MMWA and Rule 703 prohibit mandatory binding arbitration.” And just last week, the FTC again reaffirmed its interpretation of MMWA and Rule 703.

So, the bottom line with arbitration, warranties and the MMWA is: 1) companies can use a mandatory PDAA that is non-binding, with the consumer’s right to go to court preserved; OR 2) the parties can execute a post-dispute agreement to binding arbitration.

Employees Not Left Out

Although I focus here on consumer arbitration, the federal agencies have not forgotten employees. Both the National Labor Relations Board and the EEOC have come out against mandatory PDAAs in the employment context, and appear more than willing to litigate the issue.

So, what’s the Bottom Line?

Before this year is out, I see mandatory binding arbitration in adhesion contracts eliminated in these areas:

  • Consumer financial products and services like credit cards, prepaid cards, bank accounts, consumer loans, and cell phones.
  • Consumer product warranties.
  • Non-union employment.

The lone survivors for now will be securities arbitration, and consumer matters not involving financial products and services or warranties. On the latter, I predict firms will give up trying to distinguish warranty claims from other consumer complaints and drop mandatory PDAA use.

My modest suggestion as articulated previously is allow PDAAs as long as they are not mandatory. In other words the consumer could be offered arbitration when the contract is signed, but there would have to be clear notice and the consumer could not be denied goods or services if they declined the arbitration option. And of course, online ADR is the way to go!1


1Just had to day that. I chair Arbitration Resolution Services, a cloud-based ADR service.

———
*George H. Friedman, an ADR consultant and Chairman of the Board of Directors of Arbitration Resolution Services, Inc., retired in 2013 as FINRA’s Executive Vice President and Director of Arbitration, a position he held from 1998. In his extensive career, he previously held a variety of positions of responsibility at the American Arbitration Association, most recently as Senior Vice President from 1994 to 1998. He is an Adjunct Professor of Law at Fordham Law School. Mr. Friedman serves on the Board of Editors of the Securities Arbitration Commentator. He is also a member of the AAA’s nation 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 (Wharton-FINRA Institute).




A.M. Best TV Interviews Mark Norych: Tech Remaking Claims Disputes

Recently, A.M. Best interviewed Mark Norych, EVP, Arbitration Resolution Services for their A.M. Best TV Interview series.

Arbitration Resolution Services’ Norych: Tech Remaking Claims Disputes

Mark Norych said insurance claims professionals are benefiting from a move to telephone and video conferencing as an alternative to in-person dispute resolution. Norych was interviewed at the RIMS 2015 Annual Conference & Exhibition.

 




Fixing Mandatory Securities Arbitration: What Part about “Customer Choice” was Unclear?

By George H. Friedman*

[This was originally published in the author’s blog at the Securities Arbitration Commentator]

I recently authored a post in my blog at the Securities Arbitration Commentator, CFPB Issues Final Report on Arbitration, Telegraphing a Ban or Limits on Arbitration. Should SEC follow Suit? While the short answer was “no,” I did go on to explain my thinking. The blog post touched off a lively discussion on LinkedIn in which critics contended that my support of mandatory predispute arbitration agreements (“PDAAs”) in the customer-broker/investment adviser context was misplaced. My response was “I advocate for customer choice on whether to arbitrate. Read what I wrote!” Turns out the commenters and I don’t differ on whether customers should have a choice. We just disagree on timing.

What I Said

In response to whether SEC should use its Dodd-Frank power to limit or abolish PDAA use if CFPB as expected does so, I said it should not. I explained my thinking, pointing out that: 1) Dodd-Frank treats securities arbitration differently than the consumer contracts regulated by CFPB (Dodd-Frank section 921 does not require the SEC to do anything about PDAAs in customer-broker contracts); 2) securities arbitration is already regulated by the SEC; 3) the two main problems cited in the CFPB Report – class action waivers and hidden arbitration clauses – don’t exist at FINRA; and 4) FINRA’s program is fair!

My Plan

I then elaborated on what SEC might do should it decide to exercise its authority under Dodd-Frank section 921, opining that four simple provisions would make for a good rule:

  1. Customer choice, but before a dispute arises: the customer should have a choice about whether to submit disputes to arbitration, but this choice should be made when the contract is signed. Requiring all parties to agree to arbitration after a dispute arises – could actually harm customers because businesses offering services would sometimes decline to arbitrate, making the dispute resolution process unpredictable for the customer.
  1. Clear, knowing, and voluntary agreement to arbitrate: To ensure that customers knowingly and voluntarily agree to arbitrate, SEC’s rule should require that the individual separately initial/click the arbitration agreement. Rule 2268 already governs the content and placement of arbitration clauses.
  1. Promote web-based arbitration systems: an arbitration system that steers consumers to travel to a “brick and mortar” arbitration hearing to resolve disputes that typically involve modest amounts is not a good idea. It’s a particularly poor one when the consumer’s interactions with the business have been entirely online. Customers should have the option of using an online ADR system.
  2. Establish procedural fairness criteria: the new rules should also require that any customer arbitration system adhere to basic standards of procedural fairness. As I’ve already stated, FINRA’s program is that model.

So, what’s the Problem?

My critics have a problem with the first part of my plan. It cannot be because some aspect of “the customer should have a choice about whether to submit disputes to arbitration” was unclear. No, dear readers, the problem lies in this part:

… but this choice should be made when the contract is signed. Requiring all parties to agree to arbitration after a dispute arises – could actually harm customers because businesses offering services would sometimes decline to arbitrate, making the dispute resolution process unpredictable for the customer.

Their point is that retail customers usually don’t have lawyers when they open brokerage accounts, and as a result they will get hoodwinked into agreeing to arbitrate. My point is that after a dispute arises, all parties are usually represented by counsel and typically one party or the other by that point has a strategic or tactical reason not to arbitrate. In plain English, no one will agree to arbitrate after a dispute arises, and that would be bad for all concerned, especially customers.[1] I should elaborate on why I think this is a problem.

Timing is Everything

I blogged recently on the proposed Arbitration Fairness Act of 2015, opining that it’s still a bad idea. Let me borrow heavily from that blog post:

  • The bill would require both sides to agree to arbitration after a consumer dispute arises. First, assuming all sides will agree to arbitrate after a dispute arises is a fool’s paradise. Research shows clearly that, at that juncture, one side or the other has a strategic or tactical reason not to agree to arbitration. [2] And assuming that it will always be the consumer that rejects arbitration is wrong. That door would swing both ways. A business could decide to go scorched-earth litigation on a case by case basis, dragging consumers through protracted and costly litigation.
  • The dispute resolution process would become unpredictable. A consumer would have no way of knowing which disputes would go to arbitration and which would end up in court.
  • Dispute resolution providers may not be there. With caseloads becoming unpredictable and sporadic, alternate dispute resolution providers might find it untenable to maintain their fora. This is not theoretical; it’s already been discussed by a high-ranking FINRA official. Then-FINRA President Linda Fienberg at an SEC Investor Advisory Committee meeting in 2010, “… expressed concern that, if the small claims came to arbitration while the larger claims were pursued in court, FINRA’s arbitration forum would lose money as it relies on the filing fees and costs of the larger claims to fund its operations.”[3] As I wrote in the Securities Arbitration Commentator two years ago, when you break the glass and ring the fire alarm, you want to be sure there’s a fire brigade to respond.[4]
  • Costs would rise. And who would bear the cost of all this uncertainty? The consumer.
  • And litigation stinks. Also, let’s think about where these disputes would end up if PDAAs are banned – in court. Going to court is terrible for all parties, especially consumers. Granted, in some parts of the country litigation is relatively quick and inexpensive, and a consumer occasionally gets a large jury verdict against a business,[5] but in general it takes a long time, is very costly, and is subject to both extensive discovery and relatively liberal dismissal standards. If arbitration is eliminated, I stand by my stated belief that litigation would be a poor way for the parties to resolve their differences.

Sticking to My Guns

Friedmans are a stubborn breed. So is my Mom’s side of the family – perhaps more so. Accordingly, I stand by my previous statements:

  • The customer should have a choice about arbitration, but at the time the contract is signed or clicked.
  • Hoping for a post-dispute agreement is a pipedream and would actually harm consumers.
  • The customer should knowingly agree to arbitrate.
  • The customer should not be denied an account if they opt not to agree to arbitration.
  • Any arbitration system would have to meet established fairness criteria.

Readers of course are free to disagree with my views. I’ve built an ADR career spanning four decades based on the premise that reasonable people can disagree. But if you challenge me on the facts, you’d better get yours lined up.

Conclusion

Borrowing from yet another one of my blog posts, the supporters of consumer arbitration — typically businesses such as brokerage firms — and those that hate it — typically consumer rights advocates — are locked in a polarized death embrace, with each side demanding that their view prevail. Opponents of consumer arbitration want mandatory PDAAs banned outright. Supporters want arbitration left alone. I suggest that by insisting that they get what they want – instead of what they need – they are both wrong. As the Rolling Stones song says, “You can’t always get what you want, but if you try sometimes, you just might find you get what you need.” My approach gives both sides what they need: a fair system that gives consumers the choice they want and businesses the predictability and risk management they crave. Or, somewhat like another song says, “all we are saying is give choice a chance.”

———

*George H. Friedman, an ADR consultant and Chairman of the Board of Directors of Arbitration Resolution Services, Inc., retired in 2013 as FINRA’s Executive Vice President and Director of Arbitration, a position he held from 1998. In his extensive career, he previously held a variety of positions of responsibility at the American Arbitration Association, most recently as Senior Vice President from 1994 to 1998. He is an Adjunct Professor of Law at Fordham Law School. Mr. Friedman serves on the Board of Editors of the Securities Arbitration Commentator. He is also a member of the AAA’s nation 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 (Wharton-FINRA Institute)

 

[1] If what my detractors were really suggesting is that FINRA Rule 12200, which gives customers the right to unilaterally require arbitration with their broker, would survive abolition of PDAAs, they are dreaming. That’s a subject for another blog post.

[2] See generally Black, Barbara, How to Improve Retail Investor Protection After the Dodd-Frank Wall Street Reform and Consumer Protection Act, 13:1 Univ. of Pa. L. Rev. 59, 104 – 106 (2011), available at https://www.law.upenn.edu/journals/jbl/articles/volume13/issue1/Black13U.Pa.J.Bus.L.59%282010%29.pdf <visited April 15, 2015>.

[3] See Securities and Exchange Commission Investor Advisory Committee – Minutes of May 17, 2010 Meeting, available at http://www.sec.gov/news/otherwebcasts/2010/iac051710-minutes.pdf <visited April 15, 2015>.

[4] Friedman, George, The Arbitration Fairness Act: a Well-intentioned but Potentially Dangerous Overreaction to a Legitimate Concern, 2013:1 Securities Arbitration Commentator 1 (June 2013), available at http://www.proffriedman.com/files/SAC_AFA_Article__final_06-2013_.pdf <visited April 15, 2015>.

[5] See, e.g., Barlyn, Suzanne, South Carolina jury awards $8.1 million to investor who was misled by BB&T (June 30, 2014), available at http://www.reuters.com/article/2014/07/01/us-adviser-verdict-exclusive-idUSKBN0F52RF20140701 <visited April 15, 2015>.




South Florida Tech Start-Up Offers Affordable Nationwide Access to Legal Services

Fast and Affordable Resolution to Legal Disputes is Just a Click Away

SOUTH FLORIDA: Arbitration Resolution Services, Inc. (ARS) is the pioneer in online legal dispute resolution services. After two years of software development including alpha and beta testing and pilot programs, the start-up venture already has a number of active arbitrations and mediations in several states, according to Thomas Weber, president and CEO.

“We are on the verge of revolutionizing not only the process of arbitration and mediation, but also helping businesses and consumers to reach settlements with much less time, effort, expense and stress,” said Weber. “We expect that online arbitration will soon be as widely accepted as virtual meetings and online shopping.”

Executive vice president Mark Norych remarked that the widespread use of online arbitration will save taxpayer dollars as well. “Our court system is overburdened, and the legal process can be painfully slow,” he said. “Taking advantage of the option to arbitrate matters online will alleviate the backlog of cases on the dockets, which will ultimately save tax dollars and help our justice system to function more efficiently.”

What It Does

ARS offers simple and cost-effective binding arbitration for businesses and consumers, all without ever having to leave their homes, offices or businesses. Through its proprietary cloud-based software, Arb-IT™, ARS brings the ease of e-commerce to the resolution of disputes for claims involving insurance companies, independent contractors, manufacturers and retailers, banks and mortgage companies, landlords and tenants, and much more. Not only is the service convenient, it is more time and cost effective than litigation. Most cases reach conclusion in 60 days or less and at roughly 20% of the cost of hiring a lawyer and going to court.

ARS provides access to an extensive network of arbitrators and mediators through a cloud-based software system that allows individuals or companies to resolve disputes quickly and avoid the costly and time-consuming process of litigation. The company offers arbitration and mediation nationally across almost all industries.

How It Works

Signing up for the service is quick, easy and free. All that is needed is a name and email address provided through the company’s secure website, https://www.arbresolutions.com. Simply upload the files containing photographs, documents and other evidence via Arb-IT™, describe the claim, and identify the respondent(s). ARS will then assign an arbitrator or mediator to the case. In arbitration, the documents are reviewed by an arbitrator who makes a binding decision. In mediation, a mediator works with the parties to help them reach a settlement. Next, the arbitrator will review all feedback from the application and respondent(s) and render a binding decision. If using mediation, the mediator will attempt a resolution.

The Founders

  • Thomas Weber, president and CEO, has more than 30 years of experience in operations and complex project management serving as executive vice president for Ocwen Financial Corporation.
  • Mark Norych, executive vice president and general counsel for ARS, brings more than 30 years of collection, litigation and arbitration services experience to this innovative new company.
  • George Friedman, chairman of the board, is former executive vice president of dispute resolution of the Financial Industry Regulatory Authority and former senior vice president at the American Arbitration Association. He is also an adjunct professor of law at Fordham Law School where he teaches alternative dispute resolution.
  • Randy Wood, chief operations officer and also a member of the board, was co-founder of Citrix, a global software company that has grown into a multi-billion-dollar publicly-traded Fortune 500 company.



SCOTUS Grants Cert. in another Class Action Waiver Case: Now What?

[This was originally published in the author’s blog at the Securities Arbitration Commentator]

For those who thought the Supreme Court in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), laid to rest any questions about whether the Federal Arbitration Act (“FAA”) preempts state laws barring class action waivers in a consumer predispute arbitration clause, think again. The Court on March 23rd granted certiorari in another class action waiver case, DIRECTV v. Imburgia, No. 14-462 (2014), which involves a California case, Imburgia v. DIRECTV, 225 Cal.App.4th 338 (2014). The petition for cert. was granted without explanation in an Order dated March 23rd.

Back to the Future: a Refresher on Concepcion

Let’s go back a few years. Concepcion was is another unconscionability case that also involved a class action waiver. The underlying case was a class action lawsuit brought by customers who were induced to sign up for cell phone service by getting a “free phone” for which they were charged sales tax. Their contracts had a PDAA and a class action waiver. The customers resisted arbitration on the ground that the arbitration clause/class action waiver was an unconscionable contract of adhesion and was unenforceable under California law. The Ninth Circuit held that California’s decisional law on unconscionability of agreements barring class action participation, articulated in Discover Bank v. Superior Court, 36 Cal.4th 148, 113 P.3d 1100 (2005), was not preempted by the FAA. Said the Ninth Circuit, “The FAA does not bar federal or state courts from applying generally applicable state contract law principles and refusing to enforce an unconscionable class action waiver in an arbitration clause.”

The Supreme Court reversed, holding that California’s rule of law had a disparate impact on arbitration agreements and was preempted because “Although [FAA] § 2’s saving clause preserves generally applicable contract defenses, nothing in it suggests an intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA’s objectives.” Essentially, because the California rule of law had a disparate impact on arbitration agreements, it was preempted by the FAA.

DIRECTV is Not on All Fours with Concepcion

One rarely knows why SCOTUS decides to grant cert., but sometimes looking at the opinion below sheds some light on the subject. The facts in DIRECTV at first blush appear to be very similar to Concepcion, but on closer analysis are not. The contracts contained a PDAA and class action waiver. Aggrieved consumers attempted to bring a class action over allegedly illegal early termination fees, and DIRECTV countered that the contract required individual arbitrations. So far, this is pretty standard fare and at a basic level similar to the facts in Concepcion.

So, what’s different? First, we should remember that a core issue in Concepcion was whether to require a class-wide arbitration, something not at issue in DIRECTV. Also, the contract in DIRECTV contained somewhat unusual language. Specifically, it provided: “The interpretation and enforcement of this Agreement shall be governed by the rules and regulations of the Federal Communications Commission, other applicable federal laws, and the laws of the state and local area where Service is provided to you. This Agreement is subject to modification if required by such laws. Notwithstanding the foregoing, Section 9 [the PDAA]shall be governed by the Federal Arbitration Act.” But, the class action waiver adds “If, however, the law of your state would find this agreement to dispense with class arbitration procedures unenforceable, then this entire Section 9 is unenforceable.” California law, for example Consumers Legal Remedies Act (“CLRA”), Civ. Code, § 1750 et seq., expressly bars class action waivers.

Who’s on First?

What did the parties’ agreement provide? Either California’s law trumped the FAA or the FAA trumped California’s law. A unanimous Court of Appeal embraced the former, ruling “To summarize: Section 9 of the 2007 customer agreement provides that ‘if … the law of your state would find this agreement to dispense with class arbitration procedures unenforceable, then this entire Section 9 is unenforceable.’ The class action waiver is unenforceable under California law, so the entire arbitration agreement is unenforceable. The Superior Court therefore properly denied the motion to compel arbitration.”

The Court acknowledged that its holding was contrary to Murphy v. DIRECTV, Inc., 724 F.3d 1218 (9th Cir. 2013), where the Ninth Circuit — interpreting the same language — went the opposite way. Said the DIRECTV court, “We find the analysis in Murphy unpersuasive… Rather, as we have already observed, if the customer agreement expressly provided that the enforceability of the class action waiver ‘shall be determined under the (nonfederal) law of your state without considering the preemptive effect, if any, of the FAA,’ then that choice of law would be enforceable; Murphy cites no authority to the contrary. Consequently, the dispositive issue is whether the parties intended to make that choice” [footnote omitted]. The California Supreme Court declined to review the case.

What will SCOTUS do?

This one is not as easy to predict. Clearly, the Court perceives a need to clear up the conflicting rulings. But, to me it seems the issue boils down to whether the parties can contractually alter the impact of the FAA. On this issue the Court seems to have gone both ways. In Volt Information Sciences, Inc. v. Stanford University, 489 U.S. 468 (1989), the Court held that the FAA requires courts to enforce the parties’ arbitration agreement according to its terms, including their agreement to apply a state law that might not be arbitration-friendly. In fact, the Concepcion Court acknowledged that the parties could agree to arbitration schemes that states could not impose on them. “Parties could agree to arbitrate pursuant to the Federal Rules of Civil Procedure, or pursuant to a discovery process rivaling that in litigation. Arbitration is a matter of contract, and the FAA requires courts to honor parties’ expectations… But what the parties in the aforementioned examples would have agreed to is not arbitration as envisioned by the FAA, lacks its benefits, and therefore may not be required by state law” [citations omitted].

On the other hand in Hall Street Associates, LLC v. Mattel, Inc., 552 U.S. 576 (2008), the Court ruled that the parties could not contractually agree to expand the scope of review of arbitration awards under the FAA. And of course, most of us thought that Concepcion had nailed down the class action waiver preemption issue.

The pleadings thus far are interesting. The Petition for Certiorari does not cite either Volt or Hall Street, while firing away on Concepcion and Murphy. The Respondents’ Brief, however, extensively cites Volt and the Petitioner’s Reply Brief circles back to discuss Volt.

That said, given that we are on the cusp of a new baseball season, and in light of my lifetime .800 batting average predicting Supreme Court rulings, I’ll go out on a limb and predict that “John Roberts and the Supremes” will reverse the DIRECTV Court. Yes, I know what Volt says, but that case was decided more than 25 years ago. I look at these things as a continuum. The more recent cases clearly support FAA supremacy. Also, I don’t think the Court granted cert. just to interpret a very unusual, one-off arbitration clause. We can compare notes next fall, when this case is expected to be heard. I reserve the right to amend my prediction after the case is fully briefed and argued!

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*George H. Friedman, an ADR consultant and Chairman of the Board of Directors of Arbitration Resolution Services, Inc., retired in 2013 as FINRA’s Executive Vice President and Director of Arbitration, a position he held from 1998. In his extensive career, he previously held a variety of positions of responsibility at the American Arbitration Association, most recently as Senior Vice President from 1994 to 1998. He is an Adjunct Professor of Law at Fordham Law School. Mr. Friedman serves on the Board of Editors 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 (Wharton-FINRA Institute).