The Difficulty of Getting Around Arbitration Clauses
Disputes between a broker and investor—like many other disputes in the commercial and financial world—are often resolved through arbitration. Arbitration, which is a court-free, less formal proceeding resolved by a neutral third party, is commonly required by agreements signed at the outset of the broker/investor relationship (and most commonly carried out by FINRA, the national securities self-regulatory organization).
FINRA and other organizations tout the benefits of arbitration, from its (relative) cost-effectiveness to its (relative) quickness from start to finish. However, situations arise in which those bound by a contractual arbitration clause prefer to litigate in court instead. To the frustration of those looking to get around arbitration, however, federal law quite restrictively enforces these clauses—often making it nearly impossible to resolve relevant disputes in any way but by arbitration.
The Federal Arbitration Act
A long-standing federal law, known as the Federal Arbitration Act (“FAA”), bolsters the strength of arbitration clauses. As courts have long noted, the FAA is designed to further a “national policy favoring arbitration.”
Indeed, half-a-century ago, the United States Supreme Court applied the FAA as including a so-called “doctrine of severability.” This doctrine requires disputes to go to arbitration even if the underlying contract is invalid. As long as an arbitration clause, itself, is valid (and the vast majority of them are), it does not matter if there are other parts of an agreement that are blatantly unlawful. The arbitration clause can be “severed” from the rest of the contract and looked at independently.
The Strength of the Doctrine of Severability
As recently as 2012, the Supreme Court reiterated the power of the severability doctrine in the case of Nitro–Lift Technologies, LLC v. Howard. In Nitro-Lift, two employees of an Oklahoma company were challenging the validity of their employment contracts. Specifically, their former employer was asserting that they were in violation of a “non-compete” clause after they went to work for one of their former employer’s competitors.
Also included in the relevant employment agreement, though, was a requirement that all disputes resulting from the contract be resolved by arbitration. The employer wanted to enforce this clause. And the employees sought to render it void. They pointed out that, under Oklahoma law, the non-compete clause in their contract was entirely illegal and unenforceable. As such, the Oklahoma Supreme Court decided that it had the power to review this contract and not require the dispute be resolved by arbitration.
The United States Supreme Court disagreed.
“It is a mainstay of [the FAA’s] substantive law that attacks on the validity of the contract, as distinct from attacks on the validity of the arbitration clause itself, are to be resolved by the arbitrator in the first instance, not by a federal or state court.”
If you do not want to arbitrate—but have signed an agreement, however unlawful, with an acceptable arbitration clause—you will be hard-pressed to find a way around it.
And if you think that you might need the services of an experienced securities arbitration attorney, contact attorney Gregory Tendrich, P.A. today.