In a Financial Industry Regulatory Authority (FINRA) Arbitration Statement of Claim filed in February 2010, Claimant Wells Fargo alleged that upon his termination from employment, former employee Shaffer failed to repay money owed on an executed promissory note dated January 8, 2008. Accordingly, Claimant Wells Fargo sought the $74,617.76 balance due on the Note plus interest, costs, and attorneys’ fees. In the Matter of the FINRA Arbitration Between Wells Fargo Investments, LLC, Claimant/Counter-Respondent v.Kenneth C. Shaffer, Respondent/Counter-Claimant (FINRA Arbitration 10-00773, January 18, 2011).

In his Answer, Respondent Shaffer, proceeding pro se, requested that the Note be found void and unenforceable. Respondent generally denied the allegations and asserted various affirmative defenses.

Counter Punching

However, Shaffer wasn't content to simply say "no." To the contrary, he filed a Counterclaim against Wells Fargo seeking $170,000 in compensatory damages, $830,000 in punitive damages, $500 in attorneys’ fees, $1,575 in costs, amendment of his Form U5, and various Panel orders.  For good measure, Respondent tossed in a host of allegations: 

1. denial of disability benefits;
2. wrongful temnination;
3. failure to pay commissions;
4. breach of the covenant of good faith and fair dealing;
5. breach of fiduciary responsibility;
6. violation of Article 75, Bills of Exchange and Promissory Note Act; and
7. libel and slander on his Form U5.

Unconscionable

The FINRA Panel denied Claimant Wells Fargo's claim and found the Note to be both procedurally and substantively unconscionable, as delineated in Armendariz v. Foundation Health Psychcare, 6 P. 3d 669, 99 Cal.Rptr.2d 745 (Cal. Supreme Court 2000).  According to that seminal decision:

In this case, we consider a number of issues related to the validity of a mandatory employment arbitration agreement, i.e., an agreement by an employee to arbitrate wrongful termination or employment discrimination claims rather than filing suit in court, which an employer imposes on a prospective or current employee as a condition of employment. The employees in this case claim that employees may not be compelled to arbitrate antidiscrimination claims brought under the California Fair Employment and Housing Act (FEHA) (Gov.Code, § 12900 et seq.) We conclude that such claims are in fact arbitrable if the arbitration permits an employee to vindicate his or her statutory rights. As explained, in order for such vindication to occur, the arbitration must meet certain minimum requirements, including neutrality of the arbitrator, the provision of adequate discovery, a written decision that will permit a limited form of judicial review, and limitations on the costs of arbitration.

The employees further claim that several provisions of the arbitration agreement are unconscionable, both because they fail to meet these minimum requirements and because the arbitration agreement is not bilateral. We conclude that the agreement possesses a damages limitation that is contrary to public policy, and that it is unconscionably unilateral.

Finally, the employees contend that the presence of these unconscionable provisions renders the entire arbitration agreement unenforceable. The employer argues that even if some of the provisions are unconscionable or contrary to public policy, the proper remedy is to strike or restrict those clauses pursuant to Civil Code section 1670.5, and to enforce the rest of the arbitration agreement. The trial court chose the employees' preferred solution of refusing to enforce the arbitration agreement, but the Court of Appeal sided with the employer and enforced the agreement minus the one provision it found unconscionable. We conclude, for reasons explained below, that the arbitration agreement is unenforceable and that therefore the Court of Appeal's judgment must be reversed.

Expungement

Although the FINRA Panel did not alter the October 16,2009, Form U5 disclosure of "Reason for Termination: Discharged," the Panel recommended the expungement of the Termination Comment in Section 3.  That objectionable commentary, which the Panel deemed to be defamatory, read:

VIOLATION OF COMPANY POLICIES: 1) REPRESENTATIVE LACKED JUSTIFICATION FOR CHARGING EQUITY SECURITIES MARKUP THAT EXCEEDED THE FIRM'S FULL SERVICE EQUITY SCHEDULE; AND 2) REPRESENTATIVE RECEIVED A WRITTEN CUSTOMER COMPLAINT AND DID NOT FORWARD TO SUPERVISORY PRINCIPAL.

The Panel recommended the following language:

VIOLATION OF COMPANY POLICIES REGARDING INTRA-COMPANY EMAILS

Finally, the Panel found Claimant Wells Fargo liable for and ordered it to pay to Respondent Shaffer $75,000.00 in damages as a result of the defamatory nature of the cited Form U5 language.

Bill Singer's Comment:

Not only does Wells Fargo get shut out by the FINRA Panel in terms of getting back the alleged loan balance of some $75,000, but the former employee is awarded what essentially equals that entire dollar amount.  Moreover, the FINRA arbitrators were clearly ticked off by the U5 language and ordered it amended and expunged. Also, keep in mind that Shaffer represented himself.  

The recap: The Champ, Wells Fargo, entered the ring the clear favorite, outweighing his opponent by 50 pounds and with an additional six-inch reach. The plucky challenger, Ken Shaffer, was not intimidated. The two fighters circled each other. Fargo jabbed but Shaffer danced out of danger. The Champ then threw a right cross followed by a left. Shaffer ducked under the right, leaned away from the follow-up left, and landed his own counterpunch — a stunning left uppercut that sent Fargo to the mat and for the count. Shaffer by knock-out.