Federal Appeals Court Says Mandatory FINRA Arbitration Isn't Necessarily So

January 29, 2016

In "Alice's Adventures in Wonderland & Through the Looking Glass" by Lewis Carroll, we find these remarks:

'I know what you're thinking about,' said Tweedledum; 'but it isn't so, nohow.'

'Contrariwise,' continued Tweedledee, 'if it was so, it might be; and if it were so, it would be; but as it isn't, it ain't. That's logic.'

Not to be outdone by Tweedledum or Tweedledee, the normally august United States Court of Appeals for the Second Circuit has just rendered an Opinion about Wall Street's mandatory, intra-industry arbitration that isn't so but contrariwise might be but for that fact that it isn't and ain't. Frankly, the Court's logic seems to have fallen down a rabbit hole.

The Team Signs On

Los Angeles-based financial advisors John David Tracy, Charles Tharnstrom, Leonard Kortekaas, Christopher Chapin, and investment analyst Steven Lazny (the "Team") began working at Credit Suisse in April 2008 after resigning from Goldman Sachs & Co. Prior to starting employment, the Team entered into a Credit Suisse Employment Agreement, which, among other provisions, contained an employment-dispute arbitration provision as set forth under the Credit Suisse Employment Dispute Resolution Program ("EDRP"):

United States employees are subject to the Credit Suisse United States Employment Dispute Resolution Program, as amended from time to time (the"Program"). The Program povides that all employment-related claims, including all statutory claims, an employee may at any time have are to be resolved through a three-step process consisting of an internal grievance procedure; mediation before an independent service provider; and (in the case in which a claim is not resolved through the first two steps) binding arbitration before one of three independent service providers in accordance with its arbitration rules. Any disputes arising hereunder shall be resolved in accordance with such Program. A copy of the Program as currently in effect is annexed hereto.

Under the EDRP:

[a]ll arbitrations under the Program will be conducted by a single arbitrator, or upon written consent of both parties, a panel of three arbitrators, supplied by JAMS or the American Arbitration Association [(the "AAA")].

The Dispute

During the Team's employment, a dispute arose between the employees (exclusive of Lazny) and Credit Suisse concerning the amounts that were owed Credit Suisse under the Credit Suisse "Currency Facility" plan by which the employees had hedged exchange rates pertaining to the equity portions of their compensation.  

Off to Merrill

After failing to resolve this dispute through the first two-stages of the EDRP (concluding with a failed mediation), on March 27, 2014, the Team resigned from Credit Suisse and became employed by Merrill Lynch.

Getting JAMSed Up

Following the team's resignation, Credit Suisse commenced arbitration before JAMS on April 15, 2014, in an effort to obtain payment of the disputed balance. Thereafter, on May 14, 2014, Credit Suisse initiated a JAMS mediation claiming that the Team had improperly solicited the firm's clients and employees in connection with the transition to Merrill Lynch. 

Filing at FINRA

Following the unsuccessful mediation of the claims, on October 7, 2014, the Team and Merrill Lynch initiated a FINRA arbitration against Credit Suisse. The FINRA Claimants asserted that Credit Suisse had breached the Protocol for Broker Recruiting by wrongly inhibiting the employees' ability to relocate. The FINRA Arbitration Statement of Claim also sought damages for defamation, tortious interference, and unfair competition.


Opting to not participate in the FINRA arbitration, Credit Suisse sought an Order to Stay or Dismiss and an Order to Compel Arbitration at JAMS from the United States District Court for the Southern District of New York ("SDNY"). Credit Suisse asserted that the Team's FINRA arbitration claims fell under EDRP and, as such, were required to be arbitrated before JAMS or the AAA.

In contrast to Credit Suisse's efforts to compel a JAMS or AAA arbitration pursuant to the EDRP, the Team cited to FINRA Code of Arbitration Procedure for Industry Disputes Rule 13200, which purportedly mandates intra-industry arbitration of disputes arising out of the business activities of a member firm or an associated person.


13200. Required Arbitration

(a) Generally
Except as otherwise provided in the Code, a dispute must be arbitrated under the Code if the dispute arises out of the business activities of a member or an associated person and is between or among:
  • Members;
  • Members and Associated Persons; or
  • Associated Persons.
(b) Insurance Activities
Disputes arising out of the insurance business activities of a member that is also an insurance company are not required to be arbitrated under the Code.

SDNY granted Credit Suisse's petition, ordered the Team to dismiss their FINRA arbitration claims, and compelled JAMS arbitration. 


The FINRA Claimants appealed to the , United States Court of Appeals for the Second Circuit ("2 Cir") In John David Tracy, Charles Tharnstrom, Leonard Kortekaas, Christopher Chapin, and Steven Lazny, Respondents/Appellants, vs.Credit Suisse Securities (USA) LLC, Petitioner/Appellee (Opinion, 2Cir, 15-CV-0345 / January 28, 2016).

2Cir found that FINRA Rule 13200 does not prohibit a pre‐dispute waiver of a FINRA arbitral forum, and, accordingly, affirmed SDNY. In analyzing the facts, 2Cir explains that [Ed: footnotes omitted]:

The parties do not dispute that Credit Suisse is a FINRA "member" or that Employees are "associated persons" under Rule 13200. Neither do they question the fact that the Employees' employment‐related claims and Credit Suisse's improper‐solicitation claims "arise[] out of the business activities" of Credit Suisse and Employees. See FINRA Rule 13200. Nor is there any dispute that, as a member of FINRA, Credit Suisse is bound to follow FINRA's arbitration rules. Arbitration rules, as we have previously concluded, bind FINRA members, see UBS Fin. Servs., Inc. v. W. Va. Univ. Hosps., Inc., 660 F.3d 643, 648‐49 (2d Cir. 2011) ("Upon joining FINRA, a member organization agrees to comply with FINRA's rules . . . including its Code and relevant arbitration provisions contained therein.") Nor do the parties dispute that Employees entered into the employment agreements that contained the EDRP provision, or that the EDRP provided for resolution of employment‐related claims in a private non‐FINRA arbitral forum.

The parties do disagree, however, as to whether Rule 13200 requires them to arbitrate their disputes before FINRA. Employees argue that the plain language of Rule 13200 requires arbitration in a FINRA forum and that the rule is not subject to waiver. Credit Suisse contends to the contrary that notwithstanding the mandatory language of Rule 13200, it can be waived by a private pre‐dispute arbitration agreement pursuant to the Federal Arbitration Act ("FAA"), 9 U.S.C. § 1 et seq., such as that included in Employees' employment agreements.

Pages 11 -12 of 2Cir Opinion

Additionally, 2Cir notes that [Ed: footnotes omitted]:

Rule 13200 plainly requires arbitration pursuant to the FINRA code: "a dispute must be arbitrated under the Code." To interpret the plain language of the Rule otherwise would render the phrase "under the Code" of no effect. This Court must construe the text of the rule so that no part is rendered inoperative or superfluous. Cf. Krys v. Farnum Place, LLC (In re Fairfield Sentry Ltd.), 768 F.3d 239, 245 7 (2d Cir. 2014).     
Credit Suisse argues that Rule 13200 makes no mention of a specific forum and so cannot preclude arbitration by JAMS or the AAA. While Rule 13200 does not explicitly require arbitration in a FINRA forum, by requiring that "a dispute must be arbitrated under the Code," the Rule must be read to require arbitration in a FINRA forum because the Code of Arbitration Procedure applies only to FINRA arbitrations. Therefore, Rule 13200 by its own terms requires arbitration in a FINRA forum.

Page 14 of 2Cir Opinion

In offering the rationale for its affirmation of SDNY's order compelling JAMS arbitration, 2CIR, in part, explains:

Credit Suisse argues that even if Rule 13200 is inconsistent with the EDRP, this does not preclude waiver of the FINRA forum by the Employees in a pre‐dispute agreement. Employees maintain that FINRA Rule 13200 cannot be waived, in part because FINRA arbitrations contribute to FINRA and the SEC's regulation of the securities markets. Employees also argue that because the SEC has approved the FINRA arbitration procedure, Rule 13200 has the force of law and cannot be superseded by a pre‐dispute private agreement. We disagree. Our case law leads to the conclusion that a pre‐dispute private agreement to arbitrate before a non‐FINRA arbitral forum is enforceable.

Pages 15 - 16 of the 2Cir Opinion

Perhaps best illustrating the inherent inconsistencies in the posture upon which this employment dispute now rests, 2Cir offers this observation in Footnote 14

Employees also point to a FINRA "guidance letter" regarding a proposed change to Rule 13204. The letter, written by a FINRA assistant chief counsel and addressed to the SEC, states that members may not "prohibit employees from arbitrating their disputes with the firm in FINRA's dispute resolution forum." However, the FINRA Board of Governors expressed a contrary view in In re Dep't of Enforcement v. Charles Schwab & Co., No. 2011029760201, 2014 WL 1665738 (FINRA Bd. of Governors Apr. 24, 2014), which provides that "there are no restrictions upon firms regarding the content of predispute arbitration agreements with employees." Id. at *8.

Bill Singer's Comment

I do not like this 2Cir ruling. I don't agree with it. I don't understand how 2Cir reached its conclusion based upon the mandatory nature of FINRA intra-industry arbitration. 

What part of "Required Arbitration" in FINRA Rule 13200: Required Arbitration even remotely suggests that there is some option as to where an intra-industry dispute is supposed to take place, as in "FINRA"? We have the inconsistency that 2Cir seems to concede that Rule 13200 is a mandatory obligation imposed by the self-regulatory organization FINRA upon its member firms and associated person; however, those regulated parties may enter into a waiver of the mandatory rule imposed upon them by FINRA.

[T]he Board of Governors of the Financial Industry Regulatory Authority (FINRA) issued a decision today finding Charles Schwab & Co., Inc. violated FINRA rules when the firm attempted to keep investors from participating in judicial class actions by adding waiver language to customer account agreements.

The ruling by the Board affirms in part and reverses in part an earlier FINRA Hearing Panel decision. The Hearing Panel found that Schwab's waiver violated FINRA rules that limit the language that firms may place in predispute arbitration agreements but concluded that FINRA could not enforce those rules because they were in conflict with the Federal Arbitration Act (FAA). The Board overturned this finding and determined that the FAA does not preclude FINRA's enforcement of its rules. .

According to FINRA's Press Release above, the regulator's Board of Governors found that the Federal Arbitration Act "does not preclude FINRA's enforcement of its rules" in a case involving the attempt by a member firm to have customers agree to waive their rights to participate in a class action through the operation of language in a predispute arbitration agreement. READ the Board of Governors Decision 

Rather than burden you with my frustration and fury, I urge you to draw your own conclusions from your own reading of the 2Cir Opinion.