The Enforceability of Predispute Arbitration Agreements With Respect to Dodd-Frank and SOX Whistleblower Retaliation Claims Continues to be a Puzzle

By John F. Fullerton III and Jason Kaufman

Almost four years after it was enacted in 2010, the full impact of the Dodd Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) on the enforceability of predispute arbitration agreements is not completely clear.  Some whistleblower retaliation claims are still subject to mandatory arbitration agreements, while others plainly are not, depending upon when the arbitration agreement was executed, the statute under which the claim is brought, and the jurisdiction in which the employer and employee find themselves.

First, prior to the passage of Dodd-Frank, courts had held that whistleblower retaliation claims filed under Section 806 of the Sarbanes-Oxley Act (“SOX”) could be compelled to arbitrate under mandatory arbitration agreements between an employer and employee.  Dodd-Frank amended Section 806 to include an explicit ban on agreements to arbitrate SOX claims: “No predispute arbitration agreement shall be valid or enforceable, if the agreement requires arbitration of a dispute arising under this section.”  There is a split in authority, however, regarding whether this provision applies retroactively to invalidate arbitration agreements executed before Dodd-Frank was enacted.  Federal courts in Massachusetts and New York [pdf] have reasoned that retroactive application is appropriate because congressional intent as to the temporal scope of the statute is unclear, and because the right to arbitrate is jurisdictional – i.e., relates only to the forum in which claims can be heard – rather than substantive.  Courts in New Jersey (most recently) [pdf], Nevada, Colorado, South Carolina, and the District of Columbia, on the other hand, have rejected this rationale based on the well-settled presumption against statutory retroactivity, and their determination that the right to arbitrate is not merely a question of jurisdiction, but a vested contractual right that cannot be withdrawn retroactively absent clear congressional intent.  Thus, in the latter jurisdictions, some SOX claims remain arbitrable if the arbitration agreement pre-dates Dodd-Frank.

Second, there is also a question, at least, as to whether agreements requiring predispute arbitration of whistleblower retaliation claims made under the Securities Exchange Act are enforceable in the post-Dodd-Frank era.  Dodd-Frank amended both the Commodity Exchange Act and the Securities Exchange Act, in very similar terms, to include incentives for whistleblowers to report violations to the Commodity Futures Trading Commission and Securities Exchange Commission, as well as provisions protecting them from retaliation for doing so.  Although the Commodity Exchange Act was amended expressly to invalidate predispute arbitration agreements in language identical to that now contained in Section 806 of SOX, as explained above, no such language was added to the anti-retaliation provision of Section 21F of the Securities Exchange Act.

As a result, agreements requiring arbitration of whistleblower retaliation claims brought under the Section 21F appear to remain enforceable although the same agreement would be unenforceable with respect to claims under the Commodity Exchange Act.  At the same time, the SEC regulations state that “employers may not require employees to waive or limit their anti-retaliation rights under Section 21F,” which some have interpreted as precluding predispute arbitration agreements as well.  In fact, some plaintiffs have argued that the omission of a predispute arbitration provision from Section 21F was simply a drafting error and that courts should read the SOX arbitration provision into Section 21F. Nevertheless, notwithstanding the SEC regulations, the few court decisions that have addressed the issue, including one from the Southern District of New York [pdf], have compelled arbitration of whistleblower retaliation claims under Section 21F of the Securities Exchange Act based on the plain language of the statute, i.e. the absence of any provision rendering pre-dispute arbitration agreements unenforceable.

Employers should therefore be aware that until these ambiguities are finally clarified – whether by Congress or the courts – it appears that a case-by-case determination will be necessary regarding when and where their mandatory arbitration agreements are enforceable with respect to whistleblower retaliation claims under these statutes.