SCOTUS ruling not expected to affect FINRA ban on class-action waivers
For years, some speculated that a ruling protecting restrictive arbitration agreements could extend to the investment brokerage industry.
In a 5-to-4 decision this week, the Supreme Court of the United States ruled that employers can include class-action waivers in contracts with employees.
The decision resolved three consolidated claims, one of which was National Labor Relations Board v. Murphy Oil USA. In each case, employees who signed arbitration agreements waiving class-action rights sought class relief in federal courts. The employers in the cases argued the contracts were allowable under the Federal Arbitration Act.
In the years leading up to the decision, some have speculated that a ruling protecting restrictive arbitration agreements could extend to the investment brokerage industry.
In 2014, FINRA, the broker-dealer industry’s self regulator, fined Charles Schwab & Co. $500,000 for crafting language in customer agreements that prohibited investors from bringing class actions. That action overturned a previous panel decision that said FINRA could not enforce its prohibition on class-action waivers because it was in conflict with the Federal Arbitration Act.
This week’s Supreme Court decision upholding the FAA in employer contracts was expected, said Jill Fisch, co-director of the Institute for Law and Economics at the University of Pennsylvania Law School.
“The ruling on Murphy Oil really wasn’t a surprise. It’s the latest in a long line of FAA claims addressed by the Supreme Court,” said Fisch.
Fisch, and other attorneys who spoke on background, defined the scope of the Supreme Court’s ruling in the consolidated cases as narrow, and do not expect it to impact FINRA’s ban on class-action waivers in broker-dealer contracts with investors.
“The ruling does not automatically extend beyond its narrow scope,” explained Fisch. “All the FAA does is recognize contractual agreements. Nothing prevents FINRA or other industry regulators from putting class-action provisions in its rules.”
This week’s Supreme Court decision, while highly disputed by employee advocates, does not introduce new ambiguity into FINRA’s restrictions on class action waivers, Fisch added. FINRA declined comment for this story.
In 2011, the Supreme Court, again in a 5-to-4 decision, overturned a Ninth Circuit ruling the found California state contract law could make some class-action waivers unenforceable.
In July of 2017, the Department of Justice and Department of Labor dropped its defense of a provision in Labor’s fiduciary rule that prohibited class-action waivers in the Best Interest Contract Exemption. That decision was based on the Trump administration’s Solicitor General’s position in NLRB v. Murphy Oil.
Writing for the majority in this week’s Supreme Court decision, Justice Neil Gorsuch said the “law is clear” on the enforceability of arbitration agreements with employees under the FAA, but also acknowledged the fairness of the law “may be debatable,” according to reporting on SCOTUSblog.com.
Changing the law on arbitration agreements and class-action restrictions would be a matter for Congress, not the High Court, the majority said.