by George H. Friedman, SAA Publisher and Editor-in-Chief
President Biden on March 3 signed into law the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act. It became effective immediately. This article explores the features of the new law, potential problems, and how it might impact financial services arbitration. In sum: 1) employees/class reps can opt out of PDAAs and class action waivers in cases involving claims of sexual harassment or assault; 2) arbitrability is for the court, even if there’s a delegation clause; 3) the “cases” and “disputes/claims” ambiguity will lead to problems unless the Act is quickly cleaned up in this regard; 4) FINRA and other ADR institutions will need to address opting out and bifurcation; 5) the law is effective immediately for: “any dispute or claim that arises or accrues on or after the date of enactment of this Act;” and 6) the Investor Choice Act may show new life.
World events caused a bit of a delay, but President Biden on March 3 finally signed into law the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act. As reported in SAAs 2022-07 (Feb. 24) and -05 (Feb. 10), H.R. 4445 passed the House on February 7 by a bipartisan vote of 335-97, and the Senate approved the bill by voice vote on February 10. As we observed in # 07: “the Constitution provides that the President has ten days from “presentment” of the approved bill (not including Sundays and holidays or the day or presentment), so we assume President Biden will act soon.” We also said that his approval was a foregone conclusion since the President has issued a February 2 statement supporting the legislation. “Soon” turned out to be March 3, when the bill was signed into law at a White House ceremony that included Vice President Harris and former Fox News reporter Gretchen Carlson. Full details on the Act are contained in this feature article, but in short: the new law amends the Federal Arbitration Act (“FAA”) to give the employee or class/collective representative the right to invalidate after a dispute arises predispute arbitration agreements (“PDAA”) or class action waivers covering sexual assault or harassment claims (see the House text).
The Basics: What You Need to Know
As reported in SAA 2021-29 (Aug. 5), the Act was reintroduced in the House (H.R. 4445 on July 16 by Reps. Cheri Bustos (D-IL), and Morgan Griffith (R-VA)) and in the Senate (S. 2342 on July 14 by Sens. Kirsten Gillibrand (D-NY) and Lindsey Graham (R-SC)). Here are the main elements of the new law:
Amends the FAA: The new law avoids any questions about conflicts between the Federal Arbitration Act (“FAA”) and other federal statutes by amending the FAA itself. The core changes are in a new Chapter 4, titled Arbitration of Disputes Involving Sexual Assault and Sexual Harassment.
Employee/Class Rep Right to Invalidate PDAAs: It is important to note that the new law does not ban predispute arbitration agreements (“PDAA”) or class action waivers covering sexual assault or harassment claims. The statute instead gives the employee or class/collective representative the right to opt out of PDAAs by invalidating them after a dispute arises. Specifically, the new law (see, e.g., the House text) provides:
“Notwithstanding any other provision of this title, at the election of the person alleging conduct constituting a sexual harassment dispute or sexual assault dispute, or the named representative of a class or in a collective action alleging such conduct, no predispute arbitration agreement or predispute joint-action waiver shall be valid or enforceable with respect to a case which is filed under Federal, Tribal, or State law” (see, e.g., the House text; italics added; more on that later).
Arbitrability Issues Are for the Court: As to arbitrability, the Act removes any ambiguity about who and how such issues are decided:
“An issue as to whether this chapter applies with respect to a dispute shall be determined under Federal law. The applicability of this chapter to an agreement to arbitrate and the validity and enforceability of an agreement to which this chapter applies shall be determined by a court, rather than an arbitrator, irrespective of whether the party resisting arbitration challenges the arbitration agreement specifically or in conjunction with other terms of the contract containing such agreement, and irrespective of whether the agreement purports to delegate such determinations to an arbitrator.”
Retroactive Application: The law is effective immediately for: “any dispute or claim that arises or accrues on or after the date of enactment of this Act” (italics added; more on that later).
Impact on Securities Arbitration
The new law definitely affects securities arbitrations, since the Act amended the FAA. I think the impact at FINRA will be in two main areas: 1) opting out; and 2) intertwining.
Opting Out: I suggest that FINRA will need to amend the Industry Code and its administrative procedures to accommodate the Act’s PDAA opt-out provisions. How so? For example, Rule 13204 essentially provides that the FINRA forum does not do class or collective arbitrations, and that employees may opt out of arbitration to participate in a class or collective action. A good model to address this aspect of the Act is Rule 13204(a)(4), which provides: “A member or associated person may not enforce any arbitration agreement against a member of a certified or putative class action with respect to any claim that is the subject of the certified or putative class action until … The member of the certified or putative class elects not to participate in the class or withdraws from the class according to conditions set by the court, if any.” Another model is Customer Code Rule 12202(a), which allows customers to opt out of arbitration with defunct firms, and go to court: “A claim by or against a member or an associated person who is inactive at the time the claim is filed is ineligible for arbitration under the Code unless the customer agrees in writing to arbitrate after the claim arises.”
Intertwining: FINRA will need to address the intertwining issues identified above. A good model to emulate is the approach taken with statutory employment discrimination claims. In 1999, the Authority rolled out a rule change focused on an associated person’s obligation to arbitrate statutory employment discrimination disputes at the FINRA dispute resolution forum pursuant to the Form U-4 agreement. As a result of this change, the Form U-4 and the Code no longer required that an associated person arbitrate statutory employment discrimination claims. The employee and firm could, however, enter into a PDAA that required arbitration of all employment disputes, including statutory discrimination claims. The Act now gives the employee the option of taking to court a subset of statutory employment discrimination claims – i.e., sexual harassment or assault – irrespective of the existence of a PDAA. I suggest that the Industry Code will need to address this, in a manner similar to the procedure laid out in Rule 13803. There, the Respondent has the right to require all intertwined claims – arbitrable and non-arbitrable – to be heard in court.
As enacted, the new law raises many questions in our view. The language italicized in the statute sections quoted above may prove to be problematic, since the Act alternatively refers to “cases” and “disputes or claims.” In any event, courts or ADR provider rules will need to address bifurcation and intertwining. For example, what if in an existing employment arbitration, a claim is later added asserting sexual harassment or assault: is the dispute bifurcated, with the former remining in arbitration and the latter going to court? The same question applies when a new arbitration is filed with intertwined claims. Are claims to be bifurcated between court and arbitration? It also seems that the employee would be locked in to arbitration once they sign the submission agreement (a post-dispute agreement to arbitrate). Does that mean FINRA has an obligation to warn the employee when a case is filed? What if there is no submission agreement? Can the employee go all the way through the arbitration and just before an award is rendered decide they want covered claims to go to court?
What About the Other Bills Targeting Mandatory PDAAs? Generally No Enactments
The Alert has reported episodically on efforts afoot in Congress to regulate, limit, or ban, mandatory predispute arbitration agreement use or enforcement in certain situations (see for example our December 2021 blog post, Legislative Update: The Latest from Congress.) Does the enactment of the new law mean the dominos will fall with the passage of these other bills? While the new law clearly gives these bills some momentum, I don’t think it translates to large-scale enactments. Why not? I see the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act as one-off in that it involved a sensitive issue that cut across party lines. I just don’t sense that with all but one of the other bills, at least as to garnering the ten Republican Senate votes needed to advance the legislation. On the other hand, the President and Vice President made clear at the bill signing ceremony that this just the start of an effort to ban PDAAs in a wide range of disputes.
For Example, the FAIR Act
Recall that the Alert reported in SAA 2021-06 (Feb. 18) that Democrats had reintroduced several bills to curb use of mandatory predispute arbitration agreements (“PDAA”). Among them was H.R. 963 – the Forced Arbitration Injustice Repeal (FAIR) Act – introduced February 11 by Rep. Henry “Hank” Johnson Jr. of Georgia. If enacted it would ban mandatory arbitration for almost every conceivable transaction that’s not a business-to-business or union-management matter. Specifically, this bill would amend the FAA to eliminate mandatory predispute arbitration agreements for disputes involving consumer, investor, employment (including independent contractors), and antitrust matters. It would cover brokers and investment advisers; bar class action/collective action waivers in or out of a PDAA; apply to “digital technology” disputes; reserve for court determination any arbitrability or delegation issues “irrespective of whether the agreement purported to delegate such determinations to an arbitrator;” and extend to a broad range of civil rights matters, including sexual harassment claims. We reviewed the bill’s text and offered a detailed analysis in SAA 2021-10 (Mar. 18) and our blog. The proposed FAIR Act seems to be inexorably moving toward at least House passage; it already has 202 cosponsors (all but one are Democrats), with 218 votes needed for passage. The companion Senate bill – S. 505 – has been stuck at 39 cosponsors (all Democrats) since March 1. While I think the FAIR Act will eventually pass the House – as it did in the last Congress – I don’t see this attempt to amend the FAA to invalidate a broad swath of PDAAs passing the Senate (same as last time).
One Big Possible Exception: the Investor Choice Act
As reported in SAA 2021-43 (Nov. 18), the House Financial Services Committee in November 2021 passed the Investor Choice Act of 2021 (“ICA”) by a party-line vote of 27-23. As reported in SAA 2021-14 (Apr. 22), the ICA was reintroduced April 2021 by Sen. Jeff Merkley (D-OR) and by Rep. Bill Foster (D-IL). The Committee action was announced in a Press Release, Committee Passes Legislation to Protect Retail Investors from Predatory Practices and Promote Fair Hiring Opportunities. This iteration of the ICA – H.R. 2620 and S. 1171 – is essentially the same as the old one introduced in the last Congress in that it would amend the FAA, the Securities Exchange Act of 1934, and the Investment Adviser Act of 1940, to ban the use of mandatory predispute agreements by broker-dealers and investment advisers and guarantee class action participation.
Specifically, the bills would declare it unlawful for BDs, funding portals, municipal securities dealers, or investment advisers: “to enter into, modify, or extend an agreement with customers or clients of that entity with respect to a future dispute between the parties that:
(1) mandates arbitration for that dispute;
(2) restricts, limits, or conditions the ability of a customer or client of that entity to select or designate a forum for resolution of that dispute; or
(3) restricts, limits, or conditions the ability of a customer or client of that entity to pursue a claim relating to that dispute in an individual or representative capacity or on a class action or consolidated basis.”
The ICA also retains a section amending the Securities Act of 1933 to state: “A security may not be registered with the Commission if the issuer, in its bylaws, registration statement, or other governing documents mandates arbitration for any disputes between the issuer and the shareholders of the issuer.” If enacted, the changes would be retroactive, rendering void existing non-conforming arbitration agreements. Pending arbitrations would not be impacted.
I think that, with FINRA’s recent “rigged panels” troubles, there may be bipartisan traction for at least the choice-of-ADR-forum provision in the ICA. Also, Dodd-Frank section 921 gives the SEC authority to limit or eliminate PDAAs or set conditions for their use, but it has not done so. The swirl of activity surrounding the panels accusation may prompt the Commission to do something about investor choice of forum.
Not to brag, but I predicted this outcome several times. One past editorial comment said: “Although neither bill has many cosponsors right now, we continue to think these bipartisan bills have a really good shot at becoming law.” And I said in February: "[The Act] has very good odds of enactment because ten Senate Republicans – enough to reach the 60-vote threshold – are cosponsors, and President Biden issued a statement stating he will sign the bill if it is passed by Congress." I continue to think that allowing retroactive nullification of existing PDAAs invites legal challenges based on the Constitution’s Takings Clause.