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Ex-Credit Suisse Adviser’s Pay Case Tests Reach of FINRA Rule

Feb. 13, 2020, 11:31 AM

A federal appeals court in San Francisco could send shock waves through Wall Street with its decision in a case that weighs whether a financial industry regulation prevents Credit Suisse Securities from forcing a former employee’s class action into individual arbitration.

Christopher Laver, a former Credit Suisse financial adviser, is challenging a federal judge’s ruling that enforced his arbitration agreement. That decision blocked his class action, which accuses Credit Suisse of withholding hundreds of millions of dollars in pay owed to workers who lost their jobs when the company shuttered its domestic brokerage house. The U.S. Court of Appeals for the Ninth Circuit will hear oral argument Feb. 13.

The circuit court’s ruling could have a significant impact on class action exposure for the more than 4,000 broker-dealer firms overseen by the Financial Industry Regulatory Authority, a private corporation that wields regulatory power delegated by the Securities and Exchange Commission. Firms must register with FINRA in order to buy or sell securities. The case pits the Federal Arbitration Act’s command to honor arbitration agreements as written against a FINRA rule that forbids registered firms from using such pacts on class claims brought by employees.

A ruling that rejects Credit Suisse’s bid to compel Laver’s class claims into solo arbitration would create a circuit split with a Second Circuit decision to the contrary, potentially paving the way for the U.S. Supreme Court to take up the issue. The high court’s conservative majority—which has authored several rulings bolstering Federal Arbitration Act preemption and rolling back class actions—could be hostile to a pro-worker ruling.

“I think the Supreme Court would ultimately conclude that the FINRA rule is preempted,” said Sarah Rudolph Cole, a law professor at Ohio State University and director of the school’s Program on Dispute Resolution.

Nevertheless, the specter of FINRA intervention looms over Credit Suisse’s effort, and those of other broker-dealer firms, to force employee class claims into individual arbitration, said Jill Gross, a Pace University law professor who’s written extensively on regulation and dispute resolution in the securities industry.

FINRA has the authority to discipline the firms it regulates for failing to follow its rules, including revoking their membership, which would effectively put them out of business, Gross said.

The regulatory body has used that power to police the use of class action waivers, finding in 2014 that Charles Schwab & Co. violated its rule prohibiting forced arbitration of consumer class actions. The company’s settlement with FINRA included rescinding a waiver it had added to more than 6.8 million customer agreements.

“The same FINRA sanction hangs in the background for employment arbitration agreements,” Gross said. “But there is a difference: FINRA policy has more of a focus on protecting investors than employees in the securities industry.”

A FINRA spokeswoman declined to comment about the Ninth Circuit case and whether the agency has any pending enforcement cases related to class action waivers in the employment context.

Credit Suisse Wins in District Court

Laver worked for 13 years as a financial adviser in Credit Suisse’s private banking division in San Francisco. Like others in his position, a significant chunk of his compensation was deferred and scheduled to be paid out in later years, Laver said in his lawsuit.

Credit Suisse announced the imminent closure of its private banking division in October 2015, making it clear that financial advisers needed to find a new job and functionally shutting down the division weeks later, Laver said. He accepted a position with UBS Securities in November 2015.

But Credit Suisse refused to pay Laver’s outstanding deferred compensation, saying he forfeited it by resigning from the company, according to his complaint.

Laver sued Credit Suisse in 2018 on behalf of “hundreds” of other financial advisers who lost out on deferred compensation, alleging breach of contract and other tort claims. He also accused Credit Suisse of violating New York labor law, because the company’s employment contracts with financial advisers said an employee’s rights were governed by that state’s laws.

Credit Suisse convinced U.S. District Judge William Orrick, an Obama administration appointee, to send Laver’s class action claims to individual arbitration.

Orrick followed the Second Circuit’s 2015 ruling in Cohen v. UBS, which enforced that company’s arbitration agreement despite the FINRA rule prohibiting the enforcement of such agreements on a worker’s class action claims. The rule doesn’t address pre-dispute waivers of class action procedures and allows arbitration of individual claims, the Second Circuit said.

“True, the Rule bars arbitration of a claim so long as it is embedded in a class action or collective action; but it does not preserve the right to assert a claim in class or collective form notwithstanding a contractual waiver,” the court said in Cohen.

Challenge at the Ninth Circuit

Laver, in his brief to the Ninth Circuit, argued the Cohen ruling drew a false distinction between arbitration agreements and waivers embedded within such pacts. By following that nonbinding decision, he said, the district court ignored the FINRA rule, its history, SEC and FINRA statements about arbitration of class claims, and the enforcement action against Charles Schwab—all of which show the rule is designed to ban mandatory individual arbitration of class claims.

The Supreme Court said in its 2018 ruling in Epic Systems v. Lewis that class action waivers in employment arbitration agreements are valid despite federal labor law’s protections for workers banding together. But the court also said there could be exceptions that override the Federal Arbitration Act’s general mandate to enforce arbitration contracts, Laver said.

The FINRA rule fits that Epic Systems model for trumping the law, Laver said. The rule specifically mentions class action procedures and explicitly prohibits forcing arbitration of class claims, he argued, adding that evidence shows it was intended to safeguard litigation of class actions in court.

Laver also pointed to the Supreme Court’s 2012 opinion in CompuCredit v. Greenwood, saying that the Federal Arbitration Act can be overridden by specific federal law that restricts arbitration agreements in particular contexts.

Credit Suisse, however, said in its brief that the FINRA rule isn’t the type of contrary congressional command necessary to override the Federal Arbitration Act under Epic Systems. Neither FINRA nor the SEC have the authority to displace the law’s mandate to enforce arbitration contracts, the company said.

But the Ninth Circuit need not rule on Laver’s argument about the FINRA rule trumping the Federal Arbitration Act, Credit Suisse said. He never raised it in earlier proceedings, so he forfeited the right to make that claim at the circuit court, the company said.

Moreover, the Second Circuit’s Cohen decision was correct, as the rule’s plain language doesn’t bar class action waivers, the company said.

Credit Suisse believes the rationale for class action waivers from Epic Systems “as well as other relevant federal legal authority, strongly favor the affirmance of the district court’s decision to dismiss Laver’s complaint,” a company spokesman said via email.

Laver’s attorney didn’t respond to a request for comment.

The case is Laver v. Credit Suisse, 9th Cir., No. 18-16328, Oral argument 2/13/20.

To contact the reporter on this story: Robert Iafolla in Washington at riafolla@bloomberglaw.com

To contact the editors responsible for this story: John Lauinger at jlauinger@bloomberglaw.com; Karl Hardy at khardy@bloomberglaw.com

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