Post Image
SCOTUS Hits the Arbitration Certiorari Trifecta: What’s in Store for Financial Industry Arbitration?
Posted on Categories Arbitration, Arbitration Agreements, Class Action/Collective Waivers, News, Non-Securities ArbitrationTags , , , , ,


By George H. Friedman*

SAC Board Member and Contributing Legal Editor

Having already agreed to review two arbitration-centric cases next Term, the Supreme Court on June 25 granted Certiorari in a third case, setting up the first arbitration “trilogy”[1] in over fifty years. This blog post examines the three cases the Court has agreed to review and suggests what impact the decisions may have on securities arbitration. Spoiler Alert: Not much if a case is administered under the FINRA Rules; potentially significant if under the AAA’s Rules.

The FAA Supremacy War is Over

What to me is most interesting about the three cases lined up for next Term is not what they are about, but what they are not about. For the first time in a while, the Court is not reviewing a case involving whether the Federal Arbitration Act (“FAA”) preempts conflicting State laws (statutory or decisional) or prevails over another federal statute protecting individual rights. Why is that? The Court has made clear that the preemption/statutory supremacy war is over. The Court’s decision last year in Kindred Nursing Centers L. P. v. Clark, 581 U. S. ___ (2017), drove home the final nail in the State law preemption coffin, and the 5-4 decision in Epic Systems Corp. v. Lewis, No. 16-285, announced on May 21 did the same regarding the FAA and other federal statutes, with some breathtaking language:

In many cases over many years, this Court has heard and rejected efforts to conjure conflicts between the Arbitration Act and other federal statutes. In fact, this Court has rejected every such effort to date (save one temporary exception since overruled[2]), with statutes ranging from the Sherman and Clayton Acts to the Age Discrimination in Employment Act, the Credit Repair Organizations Act, the Securities Act of 1933, the Securities Exchange Act of 1934, and the Racketeer Influenced and Corrupt Organizations Act…. Throughout, we have made clear that even a statute’s express provision for collective legal actions does not necessarily mean that it precludes “individual attempts at conciliation” through arbitration.… And we’ve stressed that the absence of any specific statutory discussion of arbitration or class actions is an important and telling clue that Congress has not displaced the Arbitration Act.… Given so much precedent pointing so strongly in one direction, we do not see how we might faithfully turn the other way here (citations omitted).

With the war clearly over, the Court appears to be cleaning up pockets of procedural skirmishes, as described below.

The Big Three and Potential Impact on Securities Arbitration

New Prime, Inc. v. Oliveira, No. 17-340: SCOTUS on February 26th granted Certiorari, which seeks review of Oliveira v. New Prime, Inc., 857 F. 3d 7 (1st Cir. 2017), one of those cases where the core issues and holdings were best summarized by simply quoting the Opinion (emphasis added): “This case raises two questions of first impression in this Circuit. First, when a federal district court is confronted with a motion to compel arbitration under the Federal Arbitration Act (FAA or Act), 9 U.S.C. §§ 1-16, in a case where the parties have delegated questions of arbitrability to the arbitrator, must the court first determine whether the FAA applies or must it grant the motion and let the arbitrator determine the applicability of the Act? We hold that the applicability of the FAA is a threshold question for the court to determine before compelling arbitration under the Act. Second, we must decide whether a provision of the FAA that exempts contracts of employment of transportation workers from the Act's coverage, see id. § 1 (the § 1 exemption), applies to a transportation-worker agreement that establishes or purports to establish an independent-contractor relationship. We answer this question in the affirmative.”

FAA section 1 provides that the Act covers transactions involving interstate commerce, but does not apply “to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” The Petition defined the questions presented as: “1. Whether a dispute over applicability of the [Federal Arbitration Act] FAA’s section 1 exemption is an arbitrability issue that must be resolved in arbitration pursuant to a valid delegation clause; and 2. Whether the FAA’s Section 1 exemption, which applies on its face only to ‘contracts of employment,’ is inapplicable to independent contractor agreements.”

Potential impact at FINRA: Insignificant. The narrow[3] issue for the Court’s consideration focuses on independent contactors, and whether they are covered under FAA section 1’s exemption for contracts of employment for workers engaged in commerce. It’s important to remember that the Court in Circuit City Stores, Inc. v. Adams, 195 F.3d 1131 (9th Cir. 1999), rev’d 532 U.S. 105 (2001), already construed narrowly Section 1. The issue in that case was whether section 1 bars from the Act’s coverage all employment contracts touching interstate commerce or only the contracts of individuals who move goods in interstate commerce. The Court’s 5-4 Opinion held that employment arbitration clauses are enforceable under the FAA unless the employee is literally involved moving goods in interstate commerce (the so-called “Schlepper[4] Rule”).You just don’t see m(any) independent contractor relationships in the financial services sector for individuals hauling goods in interstate commerce. Also, employees have rights to seek FINRA arbitration in any event. How so? In July 2016, the Authority issued Regulatory Notice 16-25, Forum Selection Provisions Involving Customers, Associated Persons and Member Firms.[5] As the title indicates, a good part of the Notice focused on employment predispute arbitration agreement (“PDAA”) use:

FINRA is also concerned that member firms are including in predispute agreements with associated persons provisions that have the effect of waiving the associated person’s right to obtain FINRA arbitration of any disputes arising out of the agreement. For example, these provisions might require associated persons to resolve employment, business, commercial, or competition disputes at a private arbitration forum or in civil litigation. In FINRA’s view, FINRA rules do not allow for the waiver of the Industry Code requirement to arbitrate disputes at FINRA in advance of a dispute (footnote omitted).

The bottom line? I just don’t see a SCOTUS decision either way having a very significant impact on FINRA securities arbitration.

Potential impact at AAA: Significant. There’s a huge potential impact for Registered Investment Advisers and their clients, because: 1) many RIA customer agreements call for AAA arbitration; 2) the Association’s Rules expressly delegate arbitrability;[6] and 3) Oliveira involved the Association’s Commercial Arbitration Rules (“CAR”), which in Rule 7(a) provides: “The arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim.” The Supreme Court established in Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002), and Rent-A-Center West, Inc. v. Jackson, 561 U.S. 63 (2010), that gateway arbitrability issues are to be decided by a court, unless the parties “clearly and unmistakably” have delegated them to an arbitrator. So, while the independent contractor prong of any eventual SCOTUS decision in this case will have little if any impact in the financial services sector (again, few financial services individuals are involved hauling goods in interstate commerce), a broad holding that by incorporating the AAA’s Rules the parties have “clearly and unmistakably” delegated arbitrability would be significant, because right now there’s a split in the Circuits and State courts.

Lamps Plus v. Varela, No. 17-988: On April 30th, SCOTUS granted Certiorari of the case by the same name reported at 701 F. App’x 670 (9th Cir. 2017), which involved a class action brought by Lamps Plus employees who alleged that their personal data was breached when their employer was victimized by a phishing scam. Lamps Plus moved to compel individual, bilateral arbitrations, per the PDAA in the employment agreements (which called for arbitration at either the AAA or JAMS under the institution’s employment rules). The employees countered that any arbitrations should be conducted on a class basis, while Lamps Plus contended that nothing in the PDAA authorized class arbitrations. Construing the ambiguity against the drafter, the District Court ordered classwide arbitration and a divided Ninth Circuit affirmed. As described in the Petition, the issue presented is: “Whether the Federal Arbitration Act forecloses a state-law interpretation of an arbitration agreement that would authorize class arbitration based solely on general language commonly used in arbitration agreements.”

Potential impact at FINRA: Little. The Authority doesn’t do class arbitrations.[7]

Potential impact at AAA: Significant. Once again, there’s a significant potential impact for Registered Investment Advisers and their clients, because many of these customer agreements call for AAA arbitration, and the Association does administer class arbitrations. Specifically, the Association has Supplementary Rules for Class Arbitrations and its policy provides: “The AAA administers class arbitrations for cases where the underlying agreement specifies that disputes arising out of the parties’ agreement should be resolved by arbitration and the agreement is silent with respect to class claims, consolidation, or joinder of claims.” And what do these Rules say about delegation? The arbitrator is directed to determine, “as a threshold matter, in a reasoned, partial final award on the construction of the arbitration clause, whether the applicable arbitration clause permits the arbitration to proceed on behalf of ... a class.”

Archer & White Sales v. Henry Schein, Inc., No.17-1272. On June 25th, SCOTUS granted the Petition for Certiorari in Archer, 878 F.3d 488 (5th Cir. Dec. 21, 2017). The issue before the Court in this “who decides arbitrability?” case is: “Whether the Federal Arbitration Act permits a court to decline to enforce an agreement delegating questions of arbitrability to an arbitrator if the court concludes the claim of arbitrability is ‘wholly groundless.’” In Archer, the Fifth Circuit held that the court, not an arbitrator, should decide whether an assertion of arbitration rights is “wholly groundless,” even though there was a delegation provision by virtue of incorporation of the AAA’s Rules. Why? The arbitration agreement expressly carved out injunctive relief applications, which on its face were involved in the dispute.

Potential impact at FINRA: Some. The Court in Howsam already held that “gateway” arbitrability issues are for the Court unless there’s a clear and unequivocal delegation to arbitrators, such as in FINRA’s six-year eligibility rule. But if the Court eliminates the “wholly groundless” exception, then one can see virtually every arbitrability issue under the FINRA Rules going to arbitrators. Why? Because the Code of Arbitration procedure provides in Rule 12409 (Jurisdiction of Panel and Authority to Interpret the Code): “The panel has the authority to interpret and determine the applicability of all provisions under the Code. Such interpretations are final and binding upon the parties.” Rule 13413 of the Industry Code is identical.

Potential impact at AAA: Significant. See the discussion of New Prime, above. Again there’s a very large potential impact for Registered Investment Advisers and their clients, again because many of the customer agreements call for AAA arbitration, and the Association’s Rules expressly delegate arbitrability issues to the arbitrator. There is a decided split in the Circuits on whether incorporation into a PDAA of ADR organization rules like AAA’s that provide for delegation is “clear and unmistakable” evidence of intent to delegate to arbitrators arbitrability issues, so this case will have a big impact at AAA either way.

And of Course, the Vacancy at SCOTUS will have an Impact

Overarching any discussion of these three cases is who will replace the retiring Justice Anthony Kennedy. Many of the landmark arbitration-related decisions from SCOTUS were 5-4 votes, and President Trump’s list of potential nominees to me indicates that the individual will be a pro-arbitration “Gorsuch 2.0” constitutional literalist. And let’s remember that Justice Neil Gorsuch authored the majority Opinion in Epic Systems, holding that the FAA permits employers to use arbitration clauses containing class action waivers, notwithstanding the National Labor Relations Act’s protections of workers’ rights to act collectively.


I wouldn’t assume that these cases will be decided seriatim, based on when the Certiorari Petitions were filed or granted. My guess is the Court will dispose of the delegation cases first before moving on to employment or class actions. Time will tell. I’m reasonably confident that the 2018-19 “Arbitration Trilogy” will reaffirm without ambiguity the Court’s support for arbitration, and clear up several splits. I’m also pretty sure that the President’s nominee will be pro-arbitration. But of this, I am absolutely certain: legal scholars will be writing about these decisions for years to come.


*George H. Friedman, Chairman of the Board of Directors of Arbitration Resolution Services, Inc. and an ADR consultant, retired in 2013 as FINRA’s Executive Vice President and Director of Arbitration, a position he held from 1998. In his extensive career, he previously held a variety of positions of responsibility at the American Arbitration Association, most recently as Senior Vice President from 1994 to 1998. He is an Adjunct Professor of Law at Fordham Law School. Mr. Friedman serves on the Board of Editors and is a Contributing Legal Editor of the Securities Arbitration Commentator.  He is also a member of the AAA’s national roster of arbitrators.  He holds a B.A. from Queens College, a J.D. from Rutgers Law School, and is a Certified Regulatory and Compliance Professional.

 [1] In 1960, the Court decided three landmark arbitration cases involving the United Steelworkers union. These decisions were later dubbed, the “Steelworkers Trilogy.” The Court has not since heard that many cases in the same Term.

[2] I assume this is a reference to arbitration of disputes involving the 1933 and 1934 securities acts.

[3] The first issue as framed in the Petition is narrower than that identified by the First Circuit, being restricted to section 1 arbitrability delegation. The First Circuit referred more broadly to delegation in general.

[4] Yiddish for one who literally drags things. See

[5] See

[6] As does JAMS Rule 11(b), which Circuit Courts have held is “clear and unmistakable” evidence of arbitrability delegation. See, e.g., Simply Wireless, Inc. v. T-Mobile US, Inc., 877 F. 3d 522 (4th Cir. Dec. 13, 2017), and Green Tree Servicing, L.L.C. v. House, No. 17-60164 (5th Cir. May 14, 2018).

[7] See Customer Rule 12204(a): “Class action claims may not be arbitrated under the Code.” Industry Rule 13204(a) is identical.