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Securities and Exchange Commission chair Gary Gensler has endorsed banning forced arbitration for investors.
This article appears in the September/October 2021 issue of The American Prospect magazine. Subscribe here.
It sounds like a scene from an out-of-touch political miniseries, but over the summer, six lawmakers—from both parties and both houses of Congress—introduced a bill seeking to prevent companies from forcing arbitration of sexual harassment and assault claims.
It was the latest in a string of developments that has several veterans in the arbitration field wondering if the tide finally has turned in favor of Americans who have lost their rights to take employment, investment, and consumer claims to court after they sign take-it-or-leave-it arbitration agreements.
With a newfound movement of sexual harassment and discrimination victims, advocates, and innovative legal experts forcing the issue, several high-profile tech companies have dropped their requirement that sexual harassment cases be heard behind closed doors. Amazon even ended arbitration for customer complaints. And numerous legislative and administrative efforts are pushing to go even further.
“I think we may be seeing the beginning of the end” of mandatory arbitration, said George Friedman, who spent 37 years running dispute resolution programs at the American Arbitration Association and the Financial Industry Regulatory Authority (FINRA), which is Wall Street’s self-regulator.
These individual examples may be encouraging, but there remain formidable challenges for plaintiffs who are battling to get access to the courts.
American companies have fought long and hard for the power to hijack the public’s right to sue them. Not only do forced arbitration agreements bar individuals from filing their own court claim, they often forbid litigants from pursuing any group claims, whether in court or in a private arbitration forum. If you get fired because you’re Black, or you lose money at the hands of a corrupt stockbroker, you could wind up telling your sorry story to a couple of 60-something white arbitrators at the local Holiday Inn. And you’ll probably lose.
It was Wall Street that got the mandatory arbitration racket going in the first place.
The bill introduced this summer was an important step in the right direction, said F. Paul Bland Jr., executive director of the public-interest advocacy group Public Justice. But it was an easy call for elected officials. Sexual assault and harassment cases are low-hanging fruit for arbitration reform, because the public has a visceral reaction to the idea of forcing those claims into closed-door forums.
Companies under fire for forcing arbitration of sexual harassment cases, like Uber and other tech companies, are trying to preserve a portion of the system, said Bland: “What you saw from Silicon Valley is them saying, ‘OK, here’s an issue that when people find out, they have a strong moral reaction, so let’s carve that out.’” In the meantime, most discrimination cases over unequal pay, racism, and other egregious practices continue to be filed confidentially and heard in private.
Still, there are signs of progress. As the Prospect wrote in early 2020, companies have been subject to “mass arbitration,” where workers and employees who have been cut off from access to class litigation in court file thousands of arbitrations at once. This triggers millions of dollars in unexpected filing fees for the companies—a jolt considering they set the system up to hear one case at a time. Sometimes they refuse to pay, but that doesn’t always fly. Alerted to the actions of corporate deadbeats, California passed a law in January 2020 requiring companies to pay within 30 days of an arbitration forum’s due date or waive their right to compel arbitration.
Mass arbitration has been effective in cases where large numbers of consumers or employees face a similar issue, such as wage and hour claims that impact many workers in the same way. It can lead companies to consider changing their arbitration policies.
But it has not been a game-changer for class action cases where plaintiffs complain of race or gender discrimination. Even Warren Postman, a Washington, D.C., lawyer who says his firm has secured more than $375 million in mass arbitration settlements for more than 150,000 people, is cautious about the strategy’s reach. “I don’t think forced arbitration agreements are going away entirely or even that the majority of them is going away,” he said.
Vigilant business lobbyists aren’t taking any chances. The U.S. Chamber of Commerce, which keeps a running scorecard of lawmakers’ positions on business issues, said earlier this year that they’d issue leadership “credit” to members of Congress who declined to co-sponsor the Forced Arbitration Injustice Repeal Act, known as the FAIR Act. That more wide-ranging bill would prohibit forced arbitration of employment, consumer, antitrust, or civil rights disputes, as well as any agreements that prohibited class actions. The FAIR Act was also the motivation behind a bizarre email to a plaintiff’s lawyer last month that offered a $2,000 payment in return for finding a client who’d had a good experience in arbitration and was willing to sign a pro-arbitration op-ed, the Prospect reported in August.
Companies under fire for forcing arbitration of sexual harassment cases, like Uber and other tech companies, are trying to preserve a portion of the system.
Battles over arbitration have not lacked for drama over the past three decades, but the clashes thus far won’t hold a candle to the brouhaha that will unfold if Wall Street’s arbitration machine comes under threat. It was Wall Street that got the mandatory arbitration racket going in the first place, beginning in the 1980s after a suburban New York couple tried to sue the firm then known as Shearson/American Express, even though they’d signed an arbitration agreement. In 1987, Shearson won that case before the Supreme Court. Within four years, the industry was celebrating another Supreme Court decision when a Wall Street employee who’d signed a similar document tried to sue for age discrimination and also lost. The two cases ushered in a new era of opacity for securities professionals accused of wrongdoing.
The rest, as they say, is history, as other industries witnessed and copied Wall Street’s successful strategy to quiet embarrassing accusations.
Today, Wall Street faces arbitration challenges on several fronts. The Investor Choice Act would ban mandatory arbitration in brokerage and investment advisory contracts, and forbid public companies from forcing shareholder suits into arbitration. Despite strong opposition from Wall Street trade groups, the backdrop of national populism offers a window of opportunity. Defense lawyer Joseph L. Calabrese told the Prospect that it’s the first time he’s seen a proposal to get rid of investment arbitration “where I think there’s an appetite in Congress to consider it.”
A second threat is that the Securities and Exchange Commission (SEC) could simply pull the plug on forced arbitration. Eleven years ago, the Dodd-Frank Act gave the agency the power to limit or ban mandatory arbitration of securities industry disputes, although none of the chairs during the Obama and Trump administrations moved to use it. There’s speculation that under President Biden’s SEC chair, Gary Gensler, that could change. During his confirmation hearing earlier this year, Gensler told Sen. Elizabeth Warren (D-MA) that investors should have a way to “redress their claims in the courts.” That was a clue that Gensler might take the issue on, said Calabrese. “If anyone is gonna do it, it’s gonna be him.”
Lynn Turner, a former chief accountant at the SEC, said Gensler “is the type of person who I think will be willing to address the lack of fairness of arbitration,” but warns that the SEC chair is certain to get pushback. The agency may have the authority to eliminate mandatory arbitration, Turner said, “but that does not change that Congress will call Gary up and hold hearings and introduce legislation to kill that portion of Dodd-Frank.”
The SEC’s ombudsman, Tracey L. McNeil, said in a report over the summer that her office would be examining data on brokers who withhold information from their accusers during arbitration to help determine “whether the arbitration process is a beneficial alternative to litigation for retail investors.” Brokers can have an informational advantage over small investors in arbitration, the report said, and if they strategically withhold documents, investors may face “disproportionately negative outcomes.”
The industry is bracing for unwelcome change. In April, Goldman Sachs narrowly defeated a shareholder vote that would have required a study of the impact of mandatory arbitration on employees, then said it would conduct the study anyway, “in consideration of the feedback” it received. It was a critical moment showing financial firms’ emerging weakness on arbitration. Firms are “contemplating a day where mandatory arbitration won’t be allowed or customers will have a choice [between arbitration and court],” said Friedman.
Should investors get that choice, look for a big battle over how, exactly, that would work. FINRA operates the largest securities dispute resolution system in the U.S., and investor advocates who have successfully fought for reforms to its dispute system are concerned it could be replaced with something worse. “My concern is whether reform is going too far, especially where there are protections,” said Christine Lazaro, a board member of the Public Investors Advocate Bar Association and director of the Securities Arbitration Clinic at St. John’s University.
New York lawyer Timothy Dennin, who represents investors in securities arbitrations, argues that if investors were to get access to the courts, they should still be able to choose arbitration if they wish—even after a dispute arises.
In drab rooms like these, arbitrators handle cases that companies do not allow to be heard in courts.
That would allow plaintiffs to decide when the procedural rules of one forum or the other worked best for them, said Wall Street defense lawyer Alan M. Wolper. He said he’d rather be in court for a weak case with a sympathetic victim, for example, because a judge might throw it out in summary judgment before he ever met the plaintiff. Summary judgment motions, though, are not allowed in FINRA arbitration, according to a FINRA spokeswoman. And there are only narrow grounds to dismiss a case, such as evidence that the claim has already been settled. That means arbitrators are more likely than judges to hear a sympathetic case brought by a fragile investor who’d lost money.
So if investors wind up getting a choice, Wall Street wants them to make it when they sign a contract to open an account, not after they’ve decided to file a claim. To ensure that investors could not access FINRA arbitration after a conflict, though, would mean getting rid of a FINRA rule that says customers have the right to demand arbitration, a potential “battle royal,” in Friedman’s view.
Investors who gain access to the courts may be surprised by some of its downsides, said New York securities lawyer and law professor Seth Lipner. “There’s a lot of bad law out there that arbitrators don’t pay attention to,” Lipner said, which would be unavoidable in court. And, as Wolper explained, individual investors are likely to have many cases thrown out of court that would have been able to proceed at FINRA.
That said, “we would have more huge wins than we see now” if investors could take claims to court, said Lisa Bragança, a former SEC lawyer who represents plaintiffs in investor arbitration cases. Settlements could also go up because Wall Street would want to avoid having its secrets exposed in open court, or having legal precedents set on its conduct, which don’t apply in arbitration.
But will any of this even happen? Calabrese said it could, but the people pushing to get rid of arbitration had better hurry up. “The clock is ticking,” he said. “For the stars to align like this again is unlikely.”
