By:  John F. Fullerton III and Matthew J. Tronzano

Mandatory class action waivers may have received an important seal of approval as the result of a recent decision arising in the financial services industry.  On February 21, 2013, a Financial Industry Regulatory Authority (FINRA) disciplinary hearing panel permitted Charles Schwab & Company, Inc. to maintain its predispute arbitration provision in its customer agreement that includes a class action waiver (pdf).  With this development, now may be the time for firms to evaluate and consider class action waivers in their arbitration agreements with both customers and employees.

Schwab included the class action waver in its customer agreement as a direct response to the Supreme Court’s 2011 decision in AT&T Mobility LLC v. Concepcion (pdf).  As the firm has reported previouslyConcepcion held that a company can enforce a contract provision that requires arbitration of disputes individually:  in other words, a class action waiver.  Although the FINRA disciplinary panel noted that Schwab’s agreement technically violates current FINRA Rule 2268 (pdf) and Rule 12204(pdf), which operate in conjunction to preserve the option for customer claims to be resolved in court in a class action, the panel determined these rules are unenforceable pursuant to the Federal Arbitration Act (FAA) and in light of Supreme Court decisions such as Concepcion.  In its decision, the panel interpreted “Supreme Court precedents to mean that countervailing policy concerns that might counsel against arbitration of a particular kind of dispute – whether state or federal, statutory or regulatory – cannot override the FAA’s mandate, unless there is a clear expression of congressional intent to carve out an exception to the FAA.”

The Schwab case involved a customer dispute under FINRA’s Customer Code.   The Industry Code, which applies to employment disputes with associated persons, contains a rule, 13204 (pdf), that is essentially identical to Rule 12204 and serves the same purpose.  Thus, it stands to reason that the rule should be interpreted the same way.  Indeed, the Schwab panel noted that interpretation of that version has been inconsistent, but that at least one recent federal court decision in New York already held that enforcement of a class action waiver was not inconsistent with the FINRA rules governing intra-industry disputes.  The trend seems clear and the time seems right for class action waivers in both customer and employment agreements.

A few final thoughts:  FINRA has appealed the Schwab decision to the National Adjudicatory Council, so the last chapter on the case has not yet been written.  Further, the FINRA panel did find that Schwab’s arbitration provision went too far in attempting to preclude FINRA from consolidating multiple parties’ claims into a single arbitration, as permitted by FINRA Rule 12312 (pdf).  And, of course, the current National Labor Relations Board would find these class waivers unlawful under the National Labor Relations Act, as applied to non-supervisory employees, as our colleagues have noted herebut that view is not finding favor in the federal courts.

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