Supreme Court decision likely to prevent brokers from filing class-action lawsuits

However, it likely won't bar employees from filing 401(k) lawsuits against their employers

May 22, 2018 @ 2:55 pm

By Greg Iacurci

A Supreme Court decision handed down yesterday will likely curb brokers' ability to band together in lawsuits against broker-dealers to fight perceived wrongdoing in the workplace.

In a 5-4 decision, the Supreme Court on Monday ruled that companies can include arbitration clauses in employment contracts that prohibit employees from participating in class-action lawsuits.

Michael Taaffe, a partner at Shumaker, Loop & Kendrick who has represented both brokers and broker-dealers in class-action litigation, said brokerage firms will likely force brokers into individual arbitration more as a result of the ruling.

"I would assume after this decision, in the brokerage industry, employment agreements will in the future contain class-action waivers," said Mr. Taaffe.

The result, he said, could have implications for a broad swath of workplace issues affecting brokers, ranging from racial and gender discrimination issues to those involving changes in compensation policies or the forced closure of a division or department.

The Supreme Court case, Epic Systems v. Lewis, seems to affect both brokers who count themselves as employees at brokerage houses and independent contractors affiliated with independent broker-dealers.

"[The ruling] upholds the broad enforceability of all arbitration provisions," said Mr. Taafe. "Both employees and independent contractors will continue to have very limited options to get out of arbitrating on the terms they agreed to," he added.

Mandatory arbitration clauses had been a growing trend among employers even prior to the high court's ruling yesterday. The Economic Policy Institute, a left-leaning think tank, found that the share of workers subject to mandatory arbitration has more than doubled since the early 2000s, to 55% of the private-sector, non-union workforce — or about 60 million Americans.

The group found that 30% of the employers requiring mandatory arbitration include a class-action waiver, meaning workers are barred from filing lawsuits on their own behalf or collectively as a group.

Brokerage firms have reached big settlements with employees in past class-action litigation. Merrill Lynch, for example, agreed in 2013 to settle two separate lawsuits, one for $160 million alleging racial discrimination and another for $39 million alleging gender discrimination. Morgan Stanley also paid $16 million in 2007 to settle a racial discrimination lawsuit.

Linda Friedman, managing partner at Stowell & Friedman, which has represented brokers in several class-action discrimination cases, said it will be up to the Financial Industry Regulatory Authority Inc. to uphold its rules in light of the Supreme Court's decision. Finra currently bars broker-dealers from moving to compel arbitration of individual claims when a class-action lawsuit is pending, which has allowed some discrimination lawsuits to move forward in the past.

"It will be up to Finra whether, through its enforcement, it holds member firms to this provision," Ms. Friedman said.

Separately, in potentially unwelcome news to advisers serving retirement plans, legal experts don't believe the Supreme Court's ruling will prevent employees from filing class-action litigation against 401(k) plan sponsors.

Litigation brought by employees participating in their workplace retirement plans has increased dramatically since 2006, when such lawsuits began emerging en masse.

"On its face, it would have no implication for an ERISA case, I wouldn't think," said Carl Engstrom, an associate attorney at Nichols Kaster, which has represented plaintiffs in such retirement-plan litigation.

That's because when plan participants sue their employers for fiduciary breach under the Employee Retirement Income Security Act of 1974, they're seeking relief on behalf of the retirement plan. That differs from suits in which employees sue on their own behalf and request class-action status on behalf of other employees, experts said.

Marcia Wagner, principal at The Wagner Law Group, said employers who want to try to avoid class action suits in 401(k) cases may have to include mandatory-arbitration language in the 401(k) plan document, in addition to employment agreements. Even if an employer were to do so, it's questionable whether such a provision would bar claims by former plan participants, she said.

However, given the Supreme Court's favorable view of arbitration clauses in past cases as well, Mr. Engstrom doesn't think parties can "conclusively conclude that the courts would still not allow a class-action waiver of a 401(k) lawsuit."

"I think it would be naïve and sort of ignorant of the history of the court over the past 20 plus years to say we couldn't get to that point," he said.


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