Opponents of Mandatory Arbitration See Window of Opportunity
With a new administration in Washington, D.C. and changes in public opinion, opponents of mandatory arbitration could make headway in their bid to outlaw such clauses in customer and employment agreements, experts say.
“There’s been a slight movement towards greater suspicion of arbitration, just in general,” said David Horton, a law professor at the University of California–Davis School of Law who has criticized the lack of fairness and transparency of arbitration proceedings. “This is an issue where because of things like #MeToo, and advocacy by employment groups, there’s been a generalized awareness about the evils of arbitration that I don’t think existed five years ago.”
Also encouraging for reform advocates: the warmth that newly installed Securities and Exchange Commission Chair Gary Gensler has expressed for the principle of court access for all.
“The American public needs to be able to have redress to their courts,” Gensler told lawmakers at a congressional hearing this month after being asked about mandatory arbitration clauses inserted in corporate issuers’ governance language, echoing a statement he had made at his confirmation hearing a month earlier. “That’s sort of a fundamental piece to be able to go straight to the courts.”
The push sets the stage for a battle, however, with industry proponents of arbitration who say that the process is fair and speedier for investors than going through the courts.
At the same hearing, Robert Cook, the president of the Financial Industry Regulatory Authority, frustrated a Republican lawmaker, when he declined to step into the fray on the issue. Finra administers its own arbitration forum that oversees many of the brokerage industry’s disputes.
“We work hard to administer an arbitration program that’s fair for investors,” Cook said, declining to publicly object though to proposed reforms.
“I understand that you’re not willing to say whether there would be a negative impact” from the reforms, Rep. Bill Huizenga (R-Michigan) said, seemingly disappointed, after Cook made his middle-of-the road comment.
In mid-April, the president and chief executive of the industry’s largest trade group, the Securities Industry and Financial Markets Association, issued a statement opposing reforms.
“The securities arbitration system has worked effectively for decades because it is subject to public oversight, regulatory oversight by multiple independent regulators, and rules of procedure that are designed to benefit investors,” Kenneth E. Bentsen wrote, labeling them as “vital.”
Former Finra enforcement chief Brad Bennett notes that both brokers and investors have waged fierce battles about the issue. “The industry has fought tooth and nail to keep arbitration mandatory,” Bennett said. “On the other hand the claimants bar believes that they will do better in court because the incentives to settle are much greater.”
Democratic lawmakers have long fought mandatory arbitration but the two most prominent proposals are the Investor Choice Act and the Forced Arbitration Injustice Repeal or FAIR Act.
The Investor Choice Act aims to ban all existing and future mandatory arbitration clauses by amending the Securities Exchange Act to make it illegal for any “broker, dealer, funding portal or any municipal securities dealer” to restrict or condition to particular forum selection for a dispute, or class action or consolidated proceeding.
“[N]o one should be surprised by the ascendance of the Investors Choice Act,” acknowledges Joseph Calabrese, a principal in the broker-dealer defense firm Bressler, Amery & Ross, in a recent blog post highlighting the shifting attitudes toward arbitration.
The FAIR Act, which has been introduced unsuccessfully before, is broader. If passed, it would eliminate forced arbitration in employment, consumer, antitrust, and civil rights disputes.
“Unlike in past years, the make-up of the new Congress, plus a more receptive Presidential administration, means efforts at the federal level have a greater chance of enactment than ever before,” write Robert S. Whitman and John P. Phillips, a partner and associate respectively at Chicago-based Seyfarth Shaw, in a blog they posted which is dedicated to following the legislation’s progress.
If the reforms are enacted, the forum competition will be “healthy,” former SEC lawyer Jacob Frenkel, a Washington, D.C.-based partner at Dickinson Wright said, with no “clogging of the courts” as pro mandatory arbitration advocates argue, and smaller claims likely landing with Finra.
“This law will result in greater transparency to disputes with firms and regulated persons, and be potentially more costly and reputation-risk concerning to those who have hid within the arbitration framework,” said Frenkel, who represents investors.