FINRA Arbitration of Employment Discrimination Claims

Can an employee waive his/her right to access to a court for statutory discrimination claims and be required to arbitrate such a claim?

The answer is maybe. The U.S. Supreme Court in Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 24, 111 S.Ct. 1647, 1651 (1991) enforced an arbitration agreement with respect to an employee’s Age Discrimination in Employment Act (“ADEA”) claim. The Court found that arbitration of an ADEA claim did not contravene the purposes of the ADEA.

Additionally, the Court found that the procedures governing arbitration were not so inadequate as to make the arbitration agreement unenforceable. The Court also found that unequal bargaining power between an employer and an employee, in general, did not make arbitration agreements unenforceable.

The Courts, however, have since been split on this issue. For example, the Fifth, Sixth, Seventh and Tenth Circuits have generally upheld the arbitrability of statutory claims based only on a general arbitration agreement covering “any and all claims.”

The First, Second, Fourth, and Ninth Circuits, on the other hand, have generally refused to require an employee to arbitrate statutory claims based only on a general arbitration clause requiring arbitration “of any and all claims.” The Courts in these circuits have added an additional requirement that such waivers be knowing and voluntary. See Nelson v. Cypress Bagdad Copper Corporation. 119 F.3d 756 (9th Cir. 1997) (The Court found that the employee did not knowingly agree to arbitrate his ADA claim by signing a form acknowledging receipt of the revised employee handbook, where nothing in the form notified the employee either that the handbook contained an arbitration clause or that the acceptance of the handbook was a waiver of a judicial forum for a possible ADA claim).

The Court in Brisentine v. Stone & Webster Engineering Corp. has further established a three-part test for determining whether statutory claims are covered by an arbitration agreement: (a) Did the employee give his individual consent? (consent by a union in a collective bargaining agreement is not enough); (b) Does the agreement authorize the arbitrator to resolve statutory claims? (c) Does the employee have the right to insist upon arbitration if the grievance is not resolved to his satisfaction in the preliminary steps of the grievance procedure? See Brisentine v. Stone & Webster Engineering Corp., 117 F.3d 519 (11th Cir. 1997).

What about arbitrating discrimination claims through the FINRA/NASD arbitration process?

FINRA (formerly the National Association of Securities Dealers), recognizing the split on this issue in the courts, has adopted regulations regarding the arbitration of statutory employment discrimination claims. Effective January 1, 1999, FINRA excluded statutory claims from the mandatory arbitration agreements covering all employment disputes between its members and their FINRA registered employees.

FINRA has also provided that if an employer wishes to continue to arbitrate statutory employment discrimination claims they may still require all employees to sign an arbitration agreement concerning those specific claims (thereby effectively bypassing the FINRA’s new rules on the exclusion of statutory discrimination claims from mandatory arbitration).

Accordingly, the primary effect of the rule change was to render the U-4’s basic disclosure language and arbitration clause (“any and all claims”) insufficient to compel arbitration of a statutory discrimination claim. However, pursuant to FINRA rules, if the employee executes a pre-dispute arbitration clause that specifically mentions the employees waiver of bringing a statutory discrimination claim in Court (such that a reasonable employee would realize that he/she is waiving his/her right to the claim), then the statutory claim is not excluded from arbitration through FINRA.

VARIOUS COURT HOLDINGS ON THIS ISSUE
DC Circuit
Cole v. Burns Int’l Security Services, 105 F.3d 1465 (D.C. Cir. 1997). An arbitration agreement which subjected at the employer’s option all claims including the employee’s statutory employment discrimination claims was valid under Gilmer because the agreement incorporated AAA rules, provided for neutral arbitrators, allowed for “more than minimal” discovery, required a written award, provided for all relief that would be available in court, did not require employee to pay any part of the arbitrator’s fee, and did not require employee to pay unreasonable costs.
1st Circuit
Rosenberg v. Merill-Lynch, No. 96-12267-NG (D. Mass., Jan. 26, 1998). Form U-4, the same one involved in Gilmer, does not require arbitration of Title VII sexual harassment and ADEA claims. The court holds that the 1991 amendments make it clear that Gilmer should not be applied to Title VII claims, as opposed to ADEA claims. The court also held that Rosenberg presented evidence proving that the NYSE system was institutionally biased in favor of employers. The court therefore refused to apply Gilmer.
2nd Circuit
Desiderio v NASD, 191 F3d 198 (1999). Expressly rejecting Duffield, found no evidence that Congress in Title VII intended to preclude waiver of judicial forum. U-4 found not to be unconscionable. Constitutional claims rejected for lack of state action.
3rd Circuit
US v John Nuveen & Co., 146 F3d 175 (1999). Enforced a U-4 arbitration agreement, rejecting arguments alleging unconscionable adhesion or yellow dog contract.
4th Circuit
Hooters of America Inc. v Phillips, Case, 173 F3d 933 (1999) Found mandatory pre-dispute agreements generally enforceable, expressly rejecting Ninth Circuit’’s Duffield analysis, but found that no binding agreement existed in this case because one-sidedness of employer’s system breached contract to arbitrate.
Carson v. Giant Foods, Inc., 175 F.3d 325 (1999). Found that CBA language did not present clear and unmistakable waiver of employee’s right to a judicial forum as required by Wright. Therefore, arbitration of statutory claim was not required. Court outlined ways in which Wright standard for effective waiver could be met.
5th Circuit
Williams v Cigna Financial Advisors, Inc., 56 F3d 656 (1995). Enforced securities industry pre-dispute agreement. Rejected OWBPA argument regarding waiver. On appeal after remand, the court applied (and defined) the standard of manifest disregard of the law and declined to adopt a deferral concept in affirming the district court’s decision upholding the arbitration award which rejected the employee’s discrimination and retaliation claims.
6th Circuit
EEOC v Frank’’s Nursery & Crafts, 177 F3d 448 (1999). Found that while employee may waive right to sue by agreeing to arbitration, that action cannot preclude the EEOC from pursuing both monetary and injunctive relief on employee’s behalf.
Willis v Dean Witter Reynolds, Inc., 948 F2d 305 (1991). Enforced securities industry’s U-4 arbitration agreement
7th Circuit
Koveleski v SBC Capital Markets, 167 F3d 361 (1999). Enforced pre-dispute agreement, relying heavily on Seus and Rosenberg, rejecting Duffield.
Michalski v Circuit City Stores, 177 F.3d 634 (1999). Building on Koveleski, enforced pre-dispute agreement imposed after employment. Adequate consideration found in employer’s commitment to be bound by arbitration award.
Gibson v Neighborhood Health Clinics, Inc., 121 F3d 1126 (1997) Found arbitration provision unenforceable for lack of consideration where employee signed contract referring to arbitration agreement in manual, but manual was not given to her at time of signing; manual specifically stated that it created no contractual obligation on the part of the employer.
8th Circuit
Patterson v Tenet Healthcare, Inc., 113 F3d 832 (1997) Held that separate handbook provision established binding agreement to arbitrate.
9th Circuit
Duffield v Robertson Stephens & Co., 144 F3d 1182 (1999). Found pre-dispute securities agreement to arbitrate not enforceable as to Title VII. Held that Congress, through CRA of 1991, intended to preclude compulsory arbitration of Title VII disputes.
10th Circuit
Metz v Merrill Lynch Pierce Fenner & Smith, 39 F3d 1482 (1994). Held that employer had waived right to compel arbitration in this case. Recognized general validity of pre-dispute agreements to arbitrate statutory claims.
11th Circuit
Paladino v Avnet Computer Technologies, Inc., 134 F3d 1054 (1998). Held that pre-dispute arbitration agreement set forth in handbook not enforceable because of restrictions on remedies. Concurring opinion makes reference to the problems posed by the employee”s responsibility for half of the “hefty cost” of arbitration under commercial rules.
Brisentine v. Stone & Webster Engineering Corp., 117 F.3d 519 (11th Cir. 1997) announced a three-part test for determining whether statutory claims are covered by an arbitration agreement: (a) Did the employee give his individual consent? (consent by a union in a collective bargaining agreement is not enough); (b) Does the agreement authorize the arbitrator to resolve statutory claims? (c) Does the employee have the right to insist upon arbitration if the grievance is not resolved to his satisfaction in the preliminary steps of the grievance procedure? This test is borrowed from the Supreme Court’s Mitsubishi opinion regarding commercial arbitration. Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, 473 U.S. 614 (1985).

If you have questions about an employment arbitration agreement that you signed with an employer or FINRA member firm, The White Law Group may be able to help.  To speak with a securities employment attorney, call the firm at 312-238-9650.

The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Boca Raton, Florida. With over 30 years of securities law experience, including experience working at FINRA (f/k/a the NASD) and the SEC, The White Law Group has the expertise to help investors defrauded in securities, investment and financial business transactions.

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