FINRA’s ban on formal class-style employment claims is now complete. On May 4, 2012, the comment period will close on a proposed change to Rule 13204 of the FINRA Code of Arbitration Procedure for Industry Disputes (“Industry Rule 13204”). See S.E.C. Release No. 34-66774. The change, approved by the Securities and Exchange Commission, will expand FINRA’s existing prohibition of class-action arbitrations to bar collective actions as well. 

Rule Change Explained

The current version of Industry Rule 13204 states that: (1) no claim may be arbitrated as a class action in FINRA; (2) no claim that could be pursued as part of a court-certified class action or a putative class action may be arbitrated individually in FINRA, unless the potential claimant opts out of the class action; and (3) no employer may compel a claim that falls within a certified or putative class action to FINRA arbitration until the class is decertified, class certification is denied, or the potential claimant opts out of the class.

According to a 1999 FINRA letter of interpretation, FINRA Industry Rule 13204 was to apply equally to class actions under Fed. R. Civ. P. 23, and to collective actions authorized by the Fair Labor Standards Act (“FLSA”). FINRA Interpretive Letter to Cliff Palefsky, Esq., dated September 21, 1999. FINRA’s view was that courts had already fashioned rules and procedures designed to manage formal large-scale litigation effectively, and that it would be wasteful, difficult, and duplicative to try to do the same in securities arbitration. Id.

Over the next ten years, several U.S. District courts disagreed, deciding that Rule 13204 does not bar FLSA collective actions, and compelling FLSA collective actions to FINRA arbitration. See Velez v. Perrin Holden & Davenport Capital Corp., 769 F. Supp. 2d 445 (S.D.N.Y. 2011); Gomez v. Brill Securities, Inc., No. 10 Civ. 3503, 2010 U.S. Dist. LEXIS 118162 (S.D.N.Y. Nov. 2, 2010); Suschil v. Ameriprise Financial Servs., Inc., No. 07 Civ. 2655, 2008 U.S. Dist. LEXIS 27903 (N.D. Ohio Apr. 7, 2008); Chapman v. Lehman Bros., Inc., 279 F. Supp. 2d 1286, 1290 (S.D. Fla. 2003). The Southern District of New York recently summarized the reasoning for this trend: because Industry Rule 13204 refers specifically to the opt-out procedures in traditional Rule 23 class actions, Industry Rule 13204 cannot apply to opt-in collective actions. Velez, 769 F. Supp. 2d at 447. Formalized, class-style collective action claims under three major employment statutes, including the FLSA, the Age Discrimination in Employment Act (“ADEA”), and the Equal Pay Act (“EPA”), have therefore been excluded from FINRA’s class action bar.

The recently approved change will resolve this conflict by adding language to Industry Rule 13204 stating that: (1) no claim may be arbitrated as a collective action in FINRA; (2) if a potential claimant has already opted in to a collective action, that individual may not pursue those claims in FINRA arbitration; and (3) no employer may enforce an arbitration agreement to compel FINRA arbitration of a claim from a claimant who has opted in to a certified or putative collective action until the collective action’s certification is denied or the collective action is decertified.  

The change will take effect thirty days following publication of the Regulatory Notice announcing Commission approval.

Bottom Line

Parties will no longer be able to compel FLSA, ADEA, or EPA collective actions to FINRA arbitration, nor will employers be able to compel an employee’s individual wage and hour, age discrimination, or equal pay claim to FINRA when the employee prefers to pursue the claim as part of an asserted court action.

Practice Tip

Review your standard-issue arbitration agreements. The goal of these agreements is generally to provide for a less expensive, less time-consuming alternative to a court proceeding, and to resolve employee claims on an individual, rather than class-wide basis. FINRA rules still provide for small-scale, informal multi-party litigation, but FINRA is no longer an appropriate venue for claims that an employee could pursue in a formalized, large-scale court action.

The proposed change does not control whether a member firm attempts to achieve these goals in another forum, such as the American Arbitration Association (“AAA"). Therefore, some employers may consider seeking agreements with employees to arbitrate employment claims individually in the AAA, though recent developments in this area raise questions about the extent to which such agreements would ultimately be enforceable. For example, in D.R. Horton, 357 NLRB No. 184 (Jan. 3, 2012), the National Labor Relations Board announced that it considers some agreements of this type to be violations of the National Labor Relations Act.

When the pending change to Industry Rule 13204 is finalized, one thing will be certain: neither class nor collective action claims will have a place in FINRA.