June 28, 2012 Articles

SEC Shuts Door on FINRA Collective Action Arbitration

Whatever doubt may have remained regarding whether “collective action” employment claims may be subject to arbitration by FINRA has now been extinguished.

By Todd M. Church – June 28, 2012

Whatever doubt may have remained regarding whether “collective action” employment claims may be subject to arbitration by the Financial Industry Regulatory Authority, Inc. (FINRA) has now been extinguished. On April 9, 2012, the Securities and Exchange Commission (SEC) approved on an accelerated basis an amendment to Rule 13204 of the Code of Arbitration Procedure for Industry Disputes (Industry Code) that will preclude arbitration of collective-action claims pursuant to the Fair Labor Standards Act (FLSA), Age Discrimination in Employment Act (ADEA), and the Equal Pay Act (EPA). The amendment was proposed by FINRA in response to recent federal court decisions differentiating collective-action claims from class-action claims, and compelling collective-action claims to FINRA arbitration. While the rule change forecloses FINRA arbitration of collective actions, a subsequent amendment to the rule change clarifies that members and their employees may still agree to arbitrate collective-action claims in other arbitration fora.

Background
Industry Code Rule 13204, currently titled “Class Action Claims,” generally precludes the arbitration of class-action claims. Rule 13204(a) states that “[c]lass action claims may not be arbitrated under the Code.” Rule 13204(b) further provides that any claim that is based upon the same facts and law and involves the same defendants, as in a court-certified class action or putative class action, shall not be arbitrated under the code unless the party bringing the claim opts out of the class action. Rule 13204(c) states that an arbitration panel will resolve any dispute as to whether a claim is part of a class action, unless a party asks the court hearing the class action to resolve the dispute within 10 days of referral of the issue to the arbitration panel. Finally, Rule 13204(d) prevents employers from enforcing any arbitration agreement against a member of a certified or putative class action (with respect to any claim that is the subject of the class action) unless class certification is denied, the class is decertified, the court excludes the member from the class action, or the member opts out of the class.

Rule 13204 does not, on its face, address collective-action claims. However, in a 1999 interpretive letter, FINRA asserted the position that the class-action rule also applied to collective-action claims, and that these claims therefore were not eligible for FINRA arbitration.  Despite this interpretive guidance, a 2003 decision from the U.S. District Court for the Southern District of Florida rejected FINRA’s interpretation and compelled arbitration of a FLSA collective action. See Chapman v. Lehman Brothers, Inc., 279 F.Supp.2d 1286 (S.D. Fla. 2003). Over the course of the next eight years, several other federal district courts followed the Chapman court and also compelled FINRA arbitration of various collective-action claims. See Velez v. Perrin Holden & Davenport Capital Corp., 769 F.Supp.2d 445 (S.D.N.Y. 2011); Gomez v. Brill Secs., Inc., 2010 U.S. Dist. LEXIS 118162 (S.D.N.Y. Nov. 2, 2010); Kozma v. Hunter Scott Fin., LLC, 2010 U.S. Dist. LEXIS 16746 (S.D. Fla. Feb. 25 2010); Suschil v. Ameriprise Fin. Servs., 2008 U.S. Dist. LEXIS 27903 (N.D. Ohio April 7, 2008); Szilassy v. Ameriprise Fin. Servs., 2007 U.S. Dist. LEXIS 97110 (S.D. Fla. Aug. 2, 2007). These courts primarily relied upon the distinction that in collective-action claims, plaintiffs must affirmatively “opt in” to the case, whereas Rule 13204 refers to the “opt out” procedures found in a class action brought under Federal Rule of Civil Procedure 23.

FINRA Seeks To Change Rule 13204
In response to these federal court rulings, FINRA filed a proposal with the SEC on December 22, 2011 to amend Rule 13204. The proposed rule change would revise Rule 13204’s title to “Class Action & Collective Action Claims,” and would expressly preclude collective actions from being arbitrated under the Industry Code. Essentially, Rule 13204 would be separated into two subparagraphs: one for class actions and one for collective actions. The new subparagraph for collective actions largely follows the provisions of the class-action subparagraph and provides that:

(1) collective-action claims under the FLSA, ADEA, or EPA may not be arbitrated under the Industry Code;

(2) any claim that involves similarly situated plaintiffs against the same defendants, as in a court-certified collective action or putative collective action, shall not be arbitrated under the Code if the party bringing the claim has opted in to the collective action;

(3) an arbitration panel will resolve any dispute as to whether a claim is part of a collective action, unless a party asks the court hearing the collective action to resolve the dispute within 10 days of referral of the issue to the arbitration panel; and

(4) employers may not enforce any arbitration agreement against a member of a certified or putative collective action (with respect to any claim that is the subject of the collective action) unless collective-action certification is denied or the collective action is decertified.

The SEC issued its notice to solicit comments on the proposed rule change on January 5, 2012, which was published in the Federal Register on January 11, 2012.

Comments and Proposed Amendment to Rule Change 
The SEC received two comments to the proposed rule change—one from the Pace Law School Investor Rights Clinic and one from the Securities Industry and Financial Markets Association (SIFMA). The comment from Pace supported the proposed rule change. The SIFMA comment did not object to the proposed rule change, but did offer suggested revisions to the proposed rule language. One of these proposed revisions was intended to clarify that FINRA members and their employees may agree to arbitrate collective actions in arbitration fora other than FINRA arbitration, and that these agreements are valid and enforceable. In its March 29, 2012, response to these comments, FINRA agreed to amend the language of the proposed rule change to address this issue. Specifically, FINRA proposed to amend the language of 13204(b)(3) and 13204(b)(4) to clarify that the bar on collective-action arbitration was only applicable to FINRA arbitrations, and recognize that collective actions brought by employees against a FINRA member may be arbitrated in another forum (such change being referred to as “Amendment No. 1”). Notably, however, in a separate response to comments dated April 13, 2012, FINRA rejected SIFMA’s contention that FINRA members may enter into agreements with their employees in which the employees must waive their rights to participate in collective actions altogether. In other words, while FINRA recognizes that parties may agree to arbitrate collective actions in alternative arbitration fora, FINRA has taken the position that employers may not require employees to waive their rights to bring collective-action claims in any forum whatsoever.

On April 9, 2012, the SEC published notice and solicited comment on Amendment No. 1, and also approved the proposed change to Rule 13204, as modified by Amendment No. 1, on an accelerated basis. This comment period regarding Amendment No. 1 ended on May 4, 2012, and it is expected that the rule change will become effective shortly.

Conclusion
While it is clear that collective actions under the FLSA, ADEA, and EPA may no longer be compelled to FINRA arbitration, FINRA member employers have not completely lost the ability to arbitrate collective-action claims. On the contrary, Amendment No. 1 to the revised Rule 13204 leaves open the possibility that employers may include in their arbitration agreements a provision requiring employees to arbitrate any collective-action claims in another arbitration forum.


Keywords: litigation, employment and labor relations law, FINRA, SIFMA, collective action, class action, Industry Code, Rule 13204


Todd M. Church is an associate at Littler Mendelson's Chicago, Illinois, office.


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