Consumer Arbitration: A Report From The Future | by George Friedman

296 views

Published on

"Consumer Arbitration: A Report From The Future" a keynote address by George Friedman - member, Board of Directors, Arbitration Resolution Services. Presented June 2013. For more information, visit https://arbresolutions.com or Follow us on Twitter @ARS_ARBS.

Published in: Business
0 Comments
1 Like
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total views
296
On SlideShare
0
From Embeds
0
Number of Embeds
45
Actions
Shares
0
Downloads
0
Comments
0
Likes
1
Embeds 0
No embeds

No notes for slide

Consumer Arbitration: A Report From The Future | by George Friedman

  1. 1. First Annual ADR ExecuSummitMohegan Sun Resort, Connecticut, June 11 – 12, 2013Keynote Address: “Consumer Arbitration: A Reportfrom the Future”© 2013 by George Friedman, Board Member – Arbitration ResolutionServices, Inc.
  2. 2. Arbitration Resolution Services  Copyright © 2013A Prediction“A day of reckoning is coming on predispute arbitrationagreements in consumer arbitration.“A dichotomy is developing between arms-length pre-dispute arbitration agreements and those imposed in anadhesion contract with consumers (and perhapsemployees).“This will be addressed in the next several years by theSupreme Court, Congress, the SEC or all.”- George Friedman –Law Class Lecture at Fordham Law School…from 20052
  3. 3. Arbitration Resolution Services  Copyright © 2013The Future (2013 - 18)My bold and fearless predictions for thefuture.You can disagree, but you can’tdefinitively say I’m wrong.Unless you claim to be from the future.In which case, let’s talk later…3
  4. 4. Arbitration Resolution Services  Copyright © 2013The Future (2013 - 18)And now, let’s go……….4
  5. 5. Arbitration Resolution Services  Copyright © 2013The Future (late 2013-18)5
  6. 6. Arbitration Resolution Services  Copyright © 2013The Future: headlines from 2013-2018…2013-5:The new Consumer Financial Protection Bureaubanned PDAAs in many types of consumer financialcontracts, but SRO programs were carved out for the SEC.2014: FINRA better defined “customer” for arbitrationpurposes.2015: The SEC acted on predispute arbitration agreementsunder Dodd-Frank.2017: The Arbitration Fairness Act was finally enacted (sortof).2013-18: The Supreme Court continued its strong supportfor arbitration, but this began to shift in 2017.6
  7. 7. Arbitration Resolution Services  Copyright © 20132013-15: Consumer Financial Protection Bureaubanned PDAAs in many types of consumer contracts Background: Dodd-Frank established a new Consumer FinancialProtection Bureau, required it to study PDAAs in consumercontracts (section 1028(a)), and authorized it to limit or ban theiruse (section 1028(b)). By February 2013, CFPB had already banned PDAAs for mortgagesand home equity loans, as Dodd-Frank mandated. Later, CFPB banned PDAAs in many types of consumer financialcontracts: Car loans, consumer loans, credit card agreements, payday loans, rent-to-own contracts SRO securities arbitration programs were carved out for the SEC7
  8. 8. Arbitration Resolution Services  Copyright © 20132014: FINRA better defined “customer” forarbitration purposes Anticipating that PDAAs might be banned, FINRA in 2014 clarified itsdefinition of “customer” for purposes of its Rule 12200. This rule allows a customer to require a broker to arbitrate disputes arising outof the business activities of the broker After predispute arbitration agreements were banned -- first by the SECin 2015 and later by Congress in 2017 -- FINRA Rule 12200 wouldbecome the investor’s only practical way into arbitration. There was a huge battle, with the securities industry saying it was unfairto let investors “cherry pick” which cases to take to arbitration. It calledfor the abolition of Rule 12200. In the end, FINRA and SEC stuck to their guns and Rule 12200 stayed. The securities industry sued FINRA and the SEC (more on that later) .8
  9. 9. Arbitration Resolution Services  Copyright © 20132015: The SEC acted on predispute arbitrationagreements under Dodd-Frank Background: Section 921 amended the Securities Exchange Actof 1934 and the Investment Advisers Act of 1940 to authorize butnot require the SEC to: limit or prohibit use of pre-dispute arbitration agreements (PDAAs)arising under the Federal securities laws, the rules and regulationsthereunder, or the rules of a self-regulatory organization “if it finds that such prohibition, imposition of conditions, orlimitations are in the public interest and for the protection ofinvestors.”9
  10. 10. Arbitration Resolution Services  Copyright © 2013SEC acted on predispute arbitration agreementsunder Dodd-Frank (cont’d) The Timeline (a/k/a “The Letter of the Month Club”): February 2013: Massachusettss Secretary of the CommonwealthWilliam F. Galvin urged the SEC to ban PDAAs in brokerage and IAagreements. March 2013: The North American Securities AdministratorsAssociation, the association of state securities regulators, urged theSEC to act under Dodd-Frank to ban mandatory PDAAs. April 2013: SEC Commissioner Luis Aguilar came out againstmandatory PDAAs in brokerage and investment adviseragreements.10
  11. 11. Arbitration Resolution Services  Copyright © 2013SEC acted on predispute arbitration agreementsunder Dodd-Frank (cont’d) April 2013: Thirty-seven Democratic Senators and House membersurged the SEC to prohibit brokerage firms from requiring customersto submit to arbitration. May 2013: The Public Investors Arbitration Bar Association,attorneys who represent investors in arbitration, urged the SEC toban mandatory PDAAs. May 2013: SEC Commissioner Elisse Walter said that the SEC wasunlikely to get to the PDAA issue in 2013. February 2014: A consortium of anti-arbitration types produced aSuper Bowl ad featuring….11
  12. 12. Arbitration Resolution Services  Copyright © 2013SEC acted on predispute arbitration agreementsunder Dodd-Frank (cont’d)…. Clint Eastwood and an empty chair singing “All we are saying, isgive choice a chance.”12
  13. 13. Arbitration Resolution Services  Copyright © 2013SEC acted on predispute arbitration agreementsunder Dodd-Frank (cont’d)…. And this became the group’s logo.”13
  14. 14. Arbitration Resolution Services  Copyright © 2013SEC acted on predispute arbitration agreementsunder Dodd-Frank (cont’d)So, here’s what happened: SEC studied mandatory PDAAs. It started in 2011 and finished in2014. The rule went into effect in 2015. SEC found that securities arbitration was fair for investors. After allowing PDAAs in customer-broker contracts since 1987 (McMahonand Rodriguez), SEC would have been hard pressed to say securitiesarbitration was unfair. SEC’s Report to Congress cited everything George Friedman had beensaying for years about fairness of the FINRA forum. But the SEC’s 2015 rule provided that “perceptions of fairness dictatethat investors have a choice of forum” – that is, going to court orarbitration. Turns out Commissioner Aguilar knew he had the votes.14
  15. 15. Arbitration Resolution Services  Copyright © 2013SEC acted on predispute arbitration agreementsunder Dodd-Frank (cont’d) So, the rule prohibiting brokerage firms and IAs from using or enforcingPDAAs in customer account agreements was a one-way street. Itpreserved FINRA Rule 12200, which gives customers of brokeragefirms the right to take a dispute to arbitration. This immediately spurred litigation initiated by the securities industryagainst SEC and FINRA over whether FINRA Rule 12200 violates the“Takings Clause” of the US Constitution. Two years later, the industry challenged whether the Franken-SteinArbitration Fair Play Act of 2017 (more on that later) trumped theSEC’s rule, meaning the investor had no right to require arbitrationwith their brokers under FINRA Rule 12200. Both matters are still unresolved.15
  16. 16. Arbitration Resolution Services  Copyright © 20132017: The Arbitration Fairness Act was finallyenacted (sort of) There were prior failed efforts -- going back at least to 2005 -- toamend the Federal Arbitration Act (“FAA”) to ban mandatory PDAAs inconsumer, employment, and sometimes franchise contracts and civilrights claims. The FAA – 9 U.S.C. §1 et seq. – is a 1925 federal law enforcing predisputearbitration agreements and arbitration decisions involving interstatecommerce. It enjoys strong support from the US Supreme Court. Even in 2009, when the Democrats controlled the White House andboth houses of Congress (and Barney Frank, an avowed opponent ofPDAAs in consumer contracts, chaired the House Financial ServicesCommittee), the bills died.16
  17. 17. Arbitration Resolution Services  Copyright © 2013The Arbitration Fairness Act was finally enacted (sort of) So, here’s what happened: AFA was reintroduced in 2013: it was introduced in both houses ofCongress on 5-7-2013 (Franken-S; Johnson –H). Hearings were held. Itfailed to get out of committee. Reintroduced in 2015: AFA failed to get out of committee. Finally in 2017: spurred on by George Friedman’s ground-breakingcompromise proposed in an article published in the Securities ArbitrationCommentator in the summer of 2013, the Franken-Stein Arbitration FairPlay Act of 2017 was enacted.– after the Democrats regained control of Congress in the 2016 elections– over the veto of President Christie It amended the Federal Arbitration Act to require that:17
  18. 18. Arbitration Resolution Services  Copyright © 2013The Arbitration Fairness Act was finally enacted(sort of) in a consumer contract, any predispute arbitration agreement must beseparately signed or clicked by the consumer; a consumer cannot be denied goods or services if the consumerdeclines the arbitration option; in an employment contract that is not individually negotiated, anypredispute arbitration agreement must be separately signed by theemployee; a prospective or current employee cannot be denied employment ifthe employee declines the arbitration option; AND clear procedural fairness guidelines be followed in any consumeror employment arbitration. To avoid Constitutional challenges, the law was prospective. It applied tocontracts entered into or revised after the effective date, but required thatcontracts be revised within two years of the effective date.18
  19. 19. Arbitration Resolution Services  Copyright © 20132013-8: The Supreme Court continued its strongsupport for arbitration The Supreme Court continued its strong support for arbitration: continued erosion of the non-arbitrability doctrine supremacy of arbitration clauses over class action participation strong support of FAA preemption of state anti-arbitration laws even further restrictions on court review of arbitration decisions continued impatience with frivolous motions to vacate This began to shift in a series of 5-4 decisions after Justice HillaryClinton replaced Justice Scalia on the Court in late 2016. In 2017 Justice Clinton wrote the majority opinion holding that arbitratorsmust apply the law in deciding claims alleging violations of federal statutes The Court heard oral argument five years from now in June 2018 inSIFMA v. SEC and FINRA, a case dealing with the securitiesindustry’s challenge to FINRA rule 12200. I had to head back to 2013 before the case was decided. Sorry19
  20. 20. Arbitration Resolution Services  Copyright © 2013In conclusion Like the scene at the end of Back to the Future III:“The future hasn’t been written yet.No one’s has.Your future is whatever you make it.So make it a good one.” In my case, it turned out joining the Board of Arbitration ResolutionServices was a good move. In 2015 I traded in my Chevy Volt for…20
  21. 21. Arbitration Resolution Services  Copyright © 2013In conclusion (cont’d)05/02/201521A Tesla Model S!
  22. 22. Arbitration Resolution Services  Copyright © 2013In conclusion (cont’d)See you in the future!22

×