Federal Appeals Court Says Mandatory FINRA Arbitration Isn't Necessarily So

'I know what you're thinking about,' said Tweedledum; 'but it isn't so, nohow.'

'Contrariwise,' continued Tweedledee, 'if it was so, it might be; and if it were so, it would be; but as it isn't, it ain't. That's logic.'

United States employees are subject to the Credit Suisse United States Employment Dispute Resolution Program, as amended from time to time (the"Program"). The Program povides that all employment-related claims, including all statutory claims, an employee may at any time have are to be resolved through a three-step process consisting of an internal grievance procedure; mediation before an independent service provider; and (in the case in which a claim is not resolved through the first two steps) binding arbitration before one of three independent service providers in accordance with its arbitration rules. Any disputes arising hereunder shall be resolved in accordance with such Program. A copy of the Program as currently in effect is annexed hereto.

[a]ll arbitrations under the Program will be conducted by a single arbitrator, or upon written consent of both parties, a panel of three arbitrators, supplied by JAMS or the American Arbitration Association [(the "AAA")].

CODE OF ARBITRATION PROCEDURE FOR INDUSTRY DISPUTES

13200. Required Arbitration

(a) Generally

Except as otherwise provided in the Code, a dispute must be arbitrated under the Code if the dispute arises out of the business activities of a member or an associated person and is between or among:

• Members;
• Members and Associated Persons; or
• Associated Persons.

(b) Insurance Activities

Disputes arising out of the insurance business activities of a member that is also an insurance company are not required to be arbitrated under the Code.

The parties do not dispute that Credit Suisse is a FINRA "member" or that Employees are "associated persons" under Rule 13200. Neither do they question the fact that the Employees' employment‐related claims and Credit Suisse's improper‐solicitation claims "arise[] out of the business activities" of Credit Suisse and Employees. See FINRA Rule 13200. Nor is there any dispute that, as a member of FINRA, Credit Suisse is bound to follow FINRA's arbitration rules. Arbitration rules, as we have previously concluded, bind FINRA members, see UBS Fin. Servs., Inc. v. W. Va. Univ. Hosps., Inc., 660 F.3d 643, 648‐49 (2d Cir. 2011) ("Upon joining FINRA, a member organization agrees to comply with FINRA's rules . . . including its Code and relevant arbitration provisions contained therein.") Nor do the parties dispute that Employees entered into the employment agreements that contained the EDRP provision, or that the EDRP provided for resolution of employment‐related claims in a private non‐FINRA arbitral forum.

The parties do disagree, however, as to whether Rule 13200 requires them to arbitrate their disputes before FINRA. Employees argue that the plain language of Rule 13200 requires arbitration in a FINRA forum and that the rule is not subject to waiver. Credit Suisse contends to the contrary that notwithstanding the mandatory language of Rule 13200, it can be waived by a private pre‐dispute arbitration agreement pursuant to the Federal Arbitration Act ("FAA"), 9 U.S.C. § 1 et seq., such as that included in Employees' employment agreements.

Rule 13200 plainly requires arbitration pursuant to the FINRA code: "a dispute must be arbitrated under the Code." To interpret the plain language of the Rule otherwise would render the phrase "under the Code" of no effect. This Court must construe the text of the rule so that no part is rendered inoperative or superfluous. Cf. Krys v. Farnum Place, LLC (In re Fairfield Sentry Ltd.), 768 F.3d 239, 245 7 (2d Cir. 2014).     

Credit Suisse argues that Rule 13200 makes no mention of a specific forum and so cannot preclude arbitration by JAMS or the AAA. While Rule 13200 does not explicitly require arbitration in a FINRA forum, by requiring that "a dispute must be arbitrated under the Code," the Rule must be read to require arbitration in a FINRA forum because the Code of Arbitration Procedure applies only to FINRA arbitrations. Therefore, Rule 13200 by its own terms requires arbitration in a FINRA forum.

Credit Suisse argues that even if Rule 13200 is inconsistent with the EDRP, this does not preclude waiver of the FINRA forum by the Employees in a pre‐dispute agreement. Employees maintain that FINRA Rule 13200 cannot be waived, in part because FINRA arbitrations contribute to FINRA and the SEC's regulation of the securities markets. Employees also argue that because the SEC has approved the FINRA arbitration procedure, Rule 13200 has the force of law and cannot be superseded by a pre‐dispute private agreement. We disagree. Our case law leads to the conclusion that a pre‐dispute private agreement to arbitrate before a non‐FINRA arbitral forum is enforceable.

Employees also point to a FINRA "guidance letter" regarding a proposed change to Rule 13204. The letter, written by a FINRA assistant chief counsel and addressed to the SEC, states that members may not "prohibit employees from arbitrating their disputes with the firm in FINRA's dispute resolution forum." However, the FINRA Board of Governors expressed a contrary view in In re Dep't of Enforcement v. Charles Schwab & Co., No. 2011029760201, 2014 WL 1665738 (FINRA Bd. of Governors Apr. 24, 2014), which provides that "there are no restrictions upon firms regarding the content of predispute arbitration agreements with employees." Id. at *8.

[T]he Board of Governors of the Financial Industry Regulatory Authority (FINRA) issued a decision today finding Charles Schwab & Co., Inc. violated FINRA rules when the firm attempted to keep investors from participating in judicial class actions by adding waiver language to customer account agreements.

The ruling by the Board affirms in part and reverses in part an earlier FINRA Hearing Panel decision. The Hearing Panel found that Schwab's waiver violated FINRA rules that limit the language that firms may place in predispute arbitration agreements but concluded that FINRA could not enforce those rules because they were in conflict with the Federal Arbitration Act (FAA). The Board overturned this finding and determined that the FAA does not preclude FINRA's enforcement of its rules. .

• SDNY
• 2Cir
• FINRA
• Arbitration
• Credit Suisse
• Merrill Lynch
• EDRP
• Goldman Sachs
• Rule 13200
• JAMS
• AAA
• BrokeAndBroker
• Bill Singer