FINRA Proposes Rule Change Limiting Arbitration

FINRA Rule 13204 precludes class action claims from being arbitrated before FINRA.  What it does not preclude, however, are “collective actions.”  Collective actions require covered plaintiffs to opt into the lawsuit, whereas class actions require an opt-out, and are typically brought under various employment statutes such as the Fair Labor Standards Act (“FLSA”), the Age Discrimination in Employment Act (“ADEA”), and the Equal Pay Act (“EPA”).  Although FINRA Rule 13204 only addresses class actions, FINRA has always maintained, even issuing an Interpretive Letter addressed to the National Employment Lawyers’ Association in 1999, that FLSA collective actions should be treated as class actions ineligible for FINRA arbitration.

Nevertheless, in late 2010, the Southern District of New York held that a broker-dealer could compel its employee to arbitrate his collective action (not class action) seeking overtime compensation under the Fair Labor Standards Act.  The Court ignored FINRA’s 1999 Interpretative Material, reasoning that FLSA collective actions were different from class actions and, under the plain language of Rule 13204, were not excluded from eligibility for FINRA arbitration.  As a result, the Court granted the broker-dealer’s motion to compel the employee’s FLSA collective action to arbitration.  Other federal district courts had also found that FLSA collective actions claims were subject to arbitration in FINRA.

In response, FINRA is proposing to change its Code of Arbitration Procedure for Industry Disputes and amend Rule 13204 to include collective actions.   The rule change explicitly provides that collective action claims under the FLSA, ADEA, and EPA are not eligible for arbitration under FINRA’s Code of Arbitration Procedure.  FINRA’s reasons for amending Rule 13204 are twofold: (1) FINRA’s belief that courts are better equipped to manage complex representative actions, and that (2) “preserving access to the courts for these types of claims for associated persons protects the public interest as it permits associated persons and the forum to allocate resources effectively.”

That said, broker-dealers need not despair.  Even if FINRA is successful in amending its rules, employees may, in a separate writing, agree to arbitrate claims otherwise excluded from FINRA’s Code.  And, in light of AT&T Mobility, LLC v. Concepcion, a 2011 Supreme Court case, which held that class action waivers in arbitration are enforceable, employees can agree to waive class or collective actions in arbitration.  In this regard, proposed FINRA Rule 13204 still contains the language from current Rule 13204(d), which states that “[these] paragraph[s] do[] not otherwise affect the enforceability of any rights under the Code or any other agreement.”  Indeed, a district court in the Sixth Circuit (which coversMichigan) has read this Rule to mean that employees can agree to arbitrate their claims and agree to forego their class and collective action remedies.

What Does This Mean to You?  Financial services industry employers should consider developing and distributing new and independent arbitration agreements to their employees.  These agreements, which would supplement the agreement to arbitrate under FINRA rules, would require employees to arbitrate all employment claims, foregoing class and collective action remedies.  Employers should keep in mind, however, that the agreements should carefully identify all covered claims and unambiguously state that the employee has agreed to arbitrate his individual claims only, waiving any right to arbitrate class or collective claims.  Feel free to contact me or any other member of Warner Norcross & Judd LLP’s BD/IA practice group for help drafting these arbitration provisions.