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Federal Court Follows FINRA in Canceling Class Action Waiver: Zoller v. UBS Securities, LLC
Posted on Categories Court Decisions, Securities ArbitrationTags , ,

FINRA's Rule 13204 restriction on enforcing arbitration against class action participants is not a "contrary congressional command" that might override the FAA mandate to enforce pre-dispute arbitration agreements (PDAAs), but it is a requirement incorporated into the agreement to arbitrate; as such, it conditions the scope of arbitrable issues.

Zoller & Biegelman vs. UBS Securities, LLC & UBS Financial Services, Inc., No. 16 C 11277 (N.D. Ill., 3/19/18).

To Arbitrate or Not to Arbitrate?

Plaintiffs' theory in this dispute holds that they were wrongfully terminated as part of a "sinister program" to deprive them of their incentive compensation and not, as UBS alleges, as part of a reduction in force. Plaintiffs further allege that "UBS will pay a terminated employee some withheld compensation -- but only if the employee releases UBS from all employment-related claims." Without joining issue, the three UBS Defendants counter that the two former employees are obliged to arbitrate; in fact, one (Alexander Biegelman) has already commenced arbitration, albeit on a separate set of claims.

Because Plaintiffs would style this matter as a putative class or collective action, both claim that they have no obligation to arbitrate under FINRA Rules. They also claim that the cost of arbitration is prohibitively expensive, assert waiver by UBS, and fraudulent inducement. UBS denies the applicability of FINRA Rule 13204 to this situation, because the prohibition on enforcing PDAAs against participants in a class or collective action does not override the FAA policy favoring arbitration. Moreover, Plaintiffs have waived the opportunity to transform this case into a class or collective action.

FINRA Rule 13204

SRO Rules, such as Rule 13204, do not qualify as "congressional commands," UBS argues, and such a "contrary congressional command" is required, pursuant to U.S. Supreme Court precedent, to override the FAA and frustrate the congressional policy favoring arbitration. Defendants rely upon Second Circuit precedent (Cohen v. UBS Finl., SOLA 2015-25) for this position. The Court accepts that Rule 13204 is not a "contrary congressional command," but it is a part of the Arbitration Code incorporated by reference into the agreement to arbitrate. As such, it serves as a condition limiting the scope of the agreement.

The Waiver

UBS next asserts a class and collective action waiver that the employees adopted in agreeing to UBS' compensation plan. It provides: "the Employee and the Corporation agree that no Covered Claims may be initiated ... on a class action basis, collective action basis, or representative action basis...." Defendants counter that such a waiver violates NLRA policies against organizing and engaging in "concerted activities." The Court adopts the reasoning in the Seventh Circuit's Lewis v. Epic Systems, a decision under review by the U.S. Supreme Court, and finds UBS's waiver inconsistent with the NLRA and unenforceable.

The Court's inquiry continues into whether Plaintiff Biegelman is exempt from NLRA coverage as a "supervisor." The Court examines whether he had the "independent judgment" required for that appellation to apply and, placing the burden on UBS to make it stick, rejects the argument as insufficiently proved. UBS next claims a release signed by Ms. Zoller prevents her from being a qualified "class representative;" the Court tables that objection as premature. For now, both Mr. Biegelman and Ms. Zoller are not precluded from asserting class or collective claims. That Mr. Biegelman is maintaining a separate arbitration proceeding at FINRA does not violate FINRA Rule 13209's injunction against duplicative proceedings, because he cannot bring a collective or class claim in FINRA arbitration.

(ed: *While brokerage houses are not compelled by the regulators to display publicly the arbitration agreements they utilize in employment and customer contexts, we know from the court decisions we cover (and from RN 16-25) that many of the large brokerage houses are naming other forums, besides FINRA, in their employment PDAAs. UBS names JAMS as an alternative, although, here, it specifically sought FINRA arbitration. **By way of disclosure, SOLA Contributing Editor James L. Komie, Howard & Howard (IL), is a member of the legal team representing UBS in these proceedings. ***While the Court's ruling made it unnecessary to decide three tangential issues, it nevertheless rules that: (1) UBS did not litigate the merits of the claims to the point of waiver; (2) Plaintiffs have not, by espousing a theory of fraudulent inducement in the employment relationship, proved that the agreement to arbitrate was fraudulently induced; and finally, (3) the prohibitive expense argument fails, as Plaintiffs have only projected the costs ($118,000) without demonstrating their financial wherewithal. "Because neither plaintiff has shown that the costs are so severe 'as to deter the bringing of claims,' they have not carried their burden on this issue." (citation omitted).)

(SOLA Ref. No. 2018-15-01)

NOTICE: The court decision synopsis published above represents an abbreviated description of the actual decision and is re-printed here for its educational value. The author's effort is to report concisely the substance of the decision or a selected portion of the decision; commentary or analysis is generally reserved for the italicized section at the bottom of the summary. Subscribers to SAC's Online Litigation Alert (SOLA), from which this synopsis is excerpted, have immediate access to the full decision, in addition to the synopsis.

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