We may soon see a circuit split on the issue of class action waivers in FINRA employee arbitrations. In 2015, the U.S. Court of Appeals for the Second Circuit in Cohen v. UBS Fin. Services, 799 F.3d 174 (2d Cir. 2015) held that FINRA firms may use class action waivers (class waivers) to bypass FINRA rule 13204 that allows employees to file judicial class actions. The parties in Laver v. Credit Suisse Securities (USA), No. 18-cv-00828 (N.D. Cal. 2018) recently argued the same issue to the Ninth Circuit. If the Ninth Circuit decides the issue differently or if another circuit voids class waivers, the Supreme Court may be asked to resolve the conflict.

Background Facts in 'Laver'

Christopher Laver, a former employee of Credit Suisse, filed a putative class action, seeking compensation after Credit Suisse closed its brokerage business. Credit Suisse moved to dismiss the putative class claims and argued that Laver was required to arbitrate his claims individually under the firm's arbitration agreement that contained a class waiver. The district court followed the Second Circuit's decision in Cohen and granted Credit Suisse's motion.

FINRA Rule 13204(a)(4) prohibits FINRA member firms from "enforce[ing] any arbitration agreement" with respect to employee's class claims, except in four specific circumstances, none of which applied in Laver's case. The District Court in Laver noted Rule 13204's text that allows parties to contract around Rule 13204: "These subparagraphs [that exclude class actions and collective actions from arbitration] do not otherwise affect the enforceability of any rights under the Code or any other agreement" (emphasis added).

The Ninth Circuit will review the district court's decision in Laver de novo.

The Second Circuit's Decision in 'Cohen'

In Cohen, the Second Circuit rejected the employee's argument that Rule 13204 rendered the class waiver unenforceable. The court found that the rule said nothing about the enforceability of class waivers and that Rule 13204's restrictions on arbitration agreements led the employee to conflate FINRA's restriction on enforcing an agreement to arbitrate with a waiver of the right to participate in class actions. The Cohen court also said that Rule 13204 permitted parties to "elect[]" not to participate in a class action and that employees may elect to forgo a procedural right (ability to participate in a class action) before a dispute arises.

The Supreme Court's Decision in 'Epic Systems'

The District Court in Laver also relied on the Supreme Court's 2018 decision in Epic Systems v. Lewis, 138 S. Ct. 1612 (2018) holding that the National Labor Relations Act (NLRA) should be interpreted to not interfere with the enforceability of arbitration agreements under the Federal Arbitration Act (FAA). The court noted that the NLRA said nothing about how judges and arbitrators must try legal disputes and found no congressional command contrary to the FAA's central purpose, which is to enforce agreements to arbitrate in accordance with their terms.

The court found that §7 of the NLRA, which gives employees the right to engage in concerted activities for mutual aid or protection, did not displace the FAA, which requires courts "to respect and enforce the parties' chosen arbitration procedures," including the use of class and collective action waivers.

'Dep't of Enforcement v. Charles Schwab & Co.'

Earlier in 2014, the FINRA Board of Governors decided an enforcement action against Charles Schwab, concerning the firm's use of a class waiver in a putative class action filed by a customer. The decision in Schwab analyzed FINRA Rule 12204 (the customer equivalent to Rule 13204) and found that Schwab's class waiver violated FINRA Rule 12204, which has materially the same wording as Rule 13204. In re Dep't of Enforcement v. Charles Schwab & Co., No. 2011029760201, 2014 WL 1665738 (FINRA Bd. of Governors April 24, 2014). While the decision in Schwab was not grounded solely on Rule 12204, some of FINRA's findings in Schwab support Laver's argument that the purpose of Rule 12204 as indicated by FINRA's response to comments about the rule, and the SEC's approval order, was to preserve judicial class actions after FINRA excluded class action claims from its arbitration forum.

Laver's Principal Arguments

In his appeal, Laver argued that the Second Circuit wrongly decided Cohen and that Credit Suisse's class waiver was invalid because Rule 13204:

• Has the force of federal law and prohibits Credit Suisse from enforcing its arbitration agreement;
• Is not limited to cases in which a party has initiated a FINRA arbitration;
• Has a regulatory history that demonstrates that the rule is intended to preserve employees' rights to participate in judicial class actions;
• Was created under the Securities Exchange Act (the Exchange Act) and overrides the FAA with respect to enforcement of the class waiver; and
• Displaces the FAA Under the Implied Repeal Doctrine.

Laver argued that support for his position is found in the Supreme Court's 2012 decision in CompuCredit v. Greenwood, 565 U.S. 95 (2012), where the court considered whether certain disclosure requirements in the Credit Repair Organizations Act (CROA) prohibited the firm from enforcing its consumer arbitration clause. The Supreme Court found that the CROA was silent on the enforceability of arbitration agreements, and that the firm's arbitration clause was enforceable. The court in CompuCredit recognized, however, that the FAA can be trumped by a specific federal law restricting enforcement of arbitration clauses in a particular context and cited to 12 U.S.C. §5518(b) (§1028(b) of the Dodd-Frank Act), which granted authority to the Consumer Financial Protection Bureau to regulate pre-dispute arbitration agreements in contracts for consumer financial products or services.

Laver's counsel argued that Rule 13204 is equivalent to an act of Congress and cited the Dodd-Frank Act, in which Congress reaffirmed the view that regulation of arbitration in the securities industry was within the authority of the SEC. See 15 U.S.C. §78o(o) (empowering the SEC to prohibit mandatory pre-dispute arbitration clauses in customer agreements).

At oral argument Laver's counsel also said that the court should not allow Rule 13204's language ("These subparagraphs … do not otherwise affect the enforceability of any rights under the Code or any other agreement") to defeat the rule's purpose. Laver's counsel argued that a reading that allows parties to contract around the rule's prohibition on firms enforcing arbitration agreements against employees in class actions would allow the rule's exception to swallow the purpose of the rule.

Credit Suisse's Principal Arguments

Credit Suisse's argued that the Ninth Circuit should enforce its class waiver and affirm the District Court's order because Rule 13204:

• Does not expressly prohibit class waivers and allows parties to agree to class waivers;
• Only applies to cases in which a party has initiated a FINRA arbitration;
• Is not a contrary congressional command sufficient to override the FAA under the Supreme Court's decision in Epic Systems; and
• Does not displace the FAA under the Implied Repeal Doctrine.

In response to Laver's arguments under the Exchange Act, Credit Suisse argued:

• Laver did not raise the issue before the district court (as to whether the Exchange Act, and Rule 13204 expresses a contrary congressional command sufficient to override the "FAA" and waived that issue on appeal and;
• Neither the Securities Act of 1933 nor the Exchange Act conflicts with a waiver of judicial remedies, including class actions, and therefore no FINRA rule approved by the SEC can create one that overrules the FAA.

Analysis of the Parties' Arguments

Laver has not argued why Rule 13204 should be given more force than §7 of the NLRA, which the Epic Systems' court found was not a sufficient contrary congressional command to override the FAA. While FINRA does not have a rule that bans firms from using class waivers, the FINRA Board of Governors' decision in Schwab provides some non-binding authority to that effect in investor cases.

Laver stated that the SEC, under Dodd-Frank, has the power to limit arbitration agreements in customer cases. This argument, however, puts Laver in the position of saying that FINRA, not the SEC, had the authority to issue a contrary congressional command to the enforcement of arbitration agreements under the FAA before Congress expressly granted such authority to the SEC (in the context of customer cases). Is it reasonable to argue that Congress gave the SEC a power that FINRA already had? Also, congress granted the SEC this power only in customer cases suggesting that neither the SEC nor FINRA had or has the power to limit arbitration agreements in employment cases.

To prevail in his appeal to the Ninth Circuit, Laver will have to overcome Rule 13204's language, which allows parties to contract around the rule, the Supreme Court's holding in Epic Systems and the Second Circuit's decision in Cohen. A reasonable reading of Rule 13204 may conclude that the rule prohibits employees from filing class actions in FINRA's arbitration forum but allows employees to participate in judicial class actions unless they waive their participation and agree to individually arbitrate.

Laver's argument that Rule 13204 operates as an Implied Repeal of the FAA may be also be a stretch. In J.E.M. Ag Supply v Pioneer Hi-Bred Int'l, 534 U.S. 124 (2001), the Supreme Court said: "The rarity with which [the court has] discovered implied repeals is due to the relatively stringent standard for such findings, namely, that there be an irreconcilable conflict between the two federal statutes at issue."

Since Rule 13204 does not mention class waivers and includes language that allows parties to contract around the rule, it is unlikely that the Ninth Circuit will find that the FINRA rule impliedly repealed the FAA.

It may be that FINRA firms will be within their rights to use class waivers in employment cases until the SEC, exercising its authority under the Dodd-Frank Act, says otherwise. Dodd-Frank, however, is an enabling statute that empowers the SEC to do what it could not do before the statute's enactment. Dodd Frank limits the SEC's authority to restrict the use of arbitration agreements to customer cases. The SEC may lack the authority to create its own rule or approve a FINRA rule that restricts the use of arbitration agreements in cases involving employees.

David Carey is a former Associate Director of Case Administration at the Financial Industry Regulatory Authority (FINRA) and an attorney in private practice in New York.