Letter from the Editor: Change the Code to Support Virtual Hearings
Posted on Categories Coronavirus, COVID-19, FINRA Code of Arbitration, Rulemaking, Virtual ADRTags , , , ,

We always welcome letters to the editor commenting on current items of interest in the Alert. Here’s one from the editor, suggesting that the FINRA Code of Arbitration Procedure be amended to specifically authorize arbitrators to direct that hearings be held virtually.

In response to the COVID-19 pandemic, FINRA has administratively postponed in-person hearings until July 3. It has also encouraged and facilitated hearings via the popular Zoom videoconferencing platform. Specifically, the latest guidance adds: “Finally, FINRA Dispute Resolution offers virtual hearing services (via Zoom and teleconference) to parties in all cases by joint agreement or by panel order” (emphasis added). While this move is well-intended, in my opinion the italicized part may not be supported by the Code of Arbitration Procedure, which at best is ambiguous as to virtual hearings over party objection.

Code is Ambiguous as to Virtual Hearings

Rule 12100(o) provides: “The term ‘hearing’ means the hearing on the merits of an arbitration under Rule 12600.” Subsection (p) adds: “The term ‘hearing session’ means any meeting between the parties and arbitrator(s) of four hours or less, including a hearing or a prehearing conference.” The aforesaid Rule 12600 (Required Hearings) likewise does not more precisely define a “hearing,” and certainly does not mention videoconferencing. Moreover, the parts of the Code that authorize hearings to be conducted by telephone expressly spell out that authority: six-year eligibility dismissals under Rule 12206(b)(4); IPHCs under Rule 12500(b); other prehearing conferences under Rule 12501(c); dismissals before the case-in-chief under Rule 12504(a)(5); simplified hearings under Rule 12800(c); and expungement hearings under Rule 12805(a).

FAA and “Hearings”

Also, at least one court -- the Eleventh Circuit in Managed Care Advisory Group, LLC v. Cigna Healthcare, Inc., 939 F. 3d 1145 (11th Cir. Sep. 18, 2019) (per curiam) -- has ruled that FAA § 7 does not permit a non-party witness to comply with a subpoena to “attend” a hearing by video- or teleconference: ‘[W]e interpret the plain meaning of [Federal Arbitration Act] Section 7 as (1) requiring summonsed non-parties to appear in the physical presence of the arbitrator as opposed to a video conference or teleconference….’”

Solution: Amend the Code

My bottom line? I served as NASD/FINRA Director of Arbitration for 14 years, and I’m the last FINRA alum to denigrate the use of technology to improve the arbitration process. My former colleagues will attest I spearheaded the move to online arbitration awards and web-based case filing in the early 2000s. Also, I was advocating online ADR when I was senior VP at the AAA a quarter of a century ago. And I currently serve as Chairman of the Board of Arbitration Resolution Services, a cloud-based ADR service. But in my view the Code does not clearly authorize arbitrators to hold hearings by videoconference absent party agreement.

While Rule 12409 authorizes Arbitrators to interpret the Code, methinks the argument that this extends to directing virtual hearings over a party’s objection would rest on a slender reed under the doctrine of expressio unius est exclusio alterius (“when one or more things of a class are expressly mentioned others of the same class are excluded”). In other words, why spell out in several parts of the Code Arbitrator authority to conduct electronic hearings in certain circumstances, but not here?

I suggest FINRA consider a simple rule filing for immediate effectiveness that authorizes Arbitrators – perhaps on a temporary basis or whenever in-person hearings are impractical – to direct that hearings be held by videoconference. AAA’s Commercial Arbitration Rules offer a good model. Rule R-32(c) – Conduct of Proceedings – provides:

When deemed appropriate, the arbitrator may also allow for the presentation of evidence by alternative means including video conferencing, internet communication, telephonic conferences and means other than an in-person presentation. Such alternative means must afford a full opportunity for all parties to present any evidence that the arbitrator deems material and relevant to the resolution of the dispute and, when involving witnesses, provide an opportunity for cross-examination.

I Know, Be Careful What You Ask For

I realize this may touch off an argument that such a rule filing might tacitly prompt court challenges to Awards resulting from virtual hearings already conducted over the objection of a party. My answer to that is: maybe, but if that’s the case why expose more Awards to such challenges by ignoring the possibility? Think about this scenario: The Arbitrators direct a video hearing over a party’s objection. That party then asks for a postponement, which is denied. The party refuses to “attend” the virtual hearing. The resulting ex parte Award is then attacked for violating FAA section 10(a)(3): “where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced….”

Transparency in Rulemaking is Good

Also, the transparency of the 19b rule filing process would make for a better rule, on a subject constituents are passionate about. Gaps would be addressed. For example, should a reluctant or technologically-challenged Arbitrator be obliged to conduct a virtual hearing just because the parties so agreed? Or should the investor have a right to a virtual hearing if they want one? What if both parties object to having a hearing by videoconference? Or a particular platform? Comments to a proposed rule would improve the rule.

In the meantime, the guidance on FINRA’s Webpage can be changed immediately. As I say to my students at Fordham Law school, “Don’t worry about it and hope for the best” is rarely the right course of action.

George H. Friedman, SAA Editor-in-Chief

P.S.: I’m not alone in my thinking. See this May 6 Locke Lord blog post, Can an Arbitrator Require Arbitration by Videoconference?

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