A decision Wednesday by a federal judge could help Finra in its fight to force The
Charles Schwab Corp. to stop using class-action waivers in its arbitration agreements with customers.
In the Wednesday ruling, which involved a separate case, judge Harold Baer of the U.S. District Court of the Southern District of New York, denied a request by Merrill Lynch and Bank of America to force a group of bank brokers to arbitrate a proposed class-action lawsuit seeking overtime pay.
The relevant laws and interpretations by the Securities and Exchange Commission “each reject [Merrill's and Bank of America's] contention that arbitration should be compelled at this stage of the litigation,” Mr. Baer wrote in in denying the firms' request.
Merrill and Bank of America sought to move the case into the arbitration system run by the Financial Industry Regulatory Authority Inc.
But Finra rules “explicitly prohibit the enforcement of arbitration agreements against a member of [a continuing] putative class or collective action,” Mr. Baer wrote.
That's the same argument Finra is making in its pending action against Schwab.
The self-regulator brought charges against Schwab last year, claiming that Schwab's arbitration agreement violated Finra rules that ensure customers can pursue class-action claims in court, in lieu of an arbitration.
Earlier this year, a Finra hearing panel agreed with Schwab, saying recent Supreme Court decisions regarding the Federal Arbitration Act prevented Finra from enforcing those rules.
Finra appealed to its internal appeals board, the National Adjudicatory Council, which heard the case Wednesday. The NAC has yet to issue an opinion.
“I think [judge Baer's] decision is going to be influential” in the Schwab case, said plaintiffs' attorney Jacob Zamansky, of Zamansky & Associates LLC.
“It covered the same essential facts — that Finra rules can overrule the [Federal] Arbitration Act,” he said.
Mr. Baer “is a pretty influential judge, and the second circuit is pretty influential” with financial industry cases, Mr. Zamansky added.
“I think it's an extremely important decision,” agreed Paul Bland, a senior attorney at Public Justice, a public interest law firm founded by trial lawyers. “The logic of the district court's decision here [with brokers means] that Schwab's challenge of the Finra rules with respect to investors is also invalid.”
But Schwab spokesman Greg Gable doubted the decision would have an impact on Schwab's case.
“The cases involve different things, in terms of what was in the agreements,” Mr. Gable said. “There was no class-action waiver in Merrill's employment agreement. … If there [had been a] waiver, the court would have, or should have, dismissed the class and compelled arbitration.”
Finra spokeswoman Michelle Ong declined comment.
It's not known whether the Baer decision came up in the NAC hearing or whether the panel will consider it. But it's possible the Merrill case could be cited in future appeals.
Further appeals of the Schwab case would be heard by the Securities and Exchange Commission, then a U.S. court of appeals, and ultimately the U.S. Supreme Court.
