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Mandatory FINRA Arbitration Is Under Attack Again

By George C. Miller, Partner and Amanda Herron, Law Clerk of Shustak Reynolds & Partners, P.C. posted on Wednesday, March 31, 2021.

George C. Miller

George C. Miller


Location: San Diego, California
Phone: (619) 696-9500 (Ext. 105)
Direct: (619) 501-8270
Email[email protected]

Mandatory pre-dispute arbitration agreements ("PDAA's") have long been under fire but now face potential extinction. Congress’s latest attempt to eliminate mandatory arbitration, the Forced Arbitration Injustice Repeal Act ("FAIR Act"), already has passed in the House of Representatives. If enacted, the FAIR Act will ban mandatory arbitration between public investors and FINRA member firms. Under the current rule, employees and representatives of FINRA firms also must arbitrate their claims.

Over thirty years have passed since the Supreme Court ruled that mandatory agreements to arbitrate securities disputes were binding on investors. See Shearson v. McMahon, 482 U.S. 220 (1987). Since the seminal Shearson v. McMahon decision, virtually all FINRA member broker-dealers have required customers to agree in advance to arbitrate securities disputes before FINRA’s arbitration division. In 2018, the Supreme Court spoke out in favor of mandatory arbitration again in Epic Systems v. Lewis, where the Court upheld employers' use of mandatory PDAA’s in employment contracts. See Epic Systems Corp. v. Lewis, 138 S.Ct. 1612 (2018).

The FAIR Act threatens to retroactively nullify existing PDAA's that govern consumer, investor, and employment disputes. 9 U.S.C. §2. The proposed definition of "consumer dispute" encompasses "real or personal property, services (including services related to digital technology), securities or other investments, money, or credit." H.R. 1423. In a letter to Congress published earlier this month, the U.S. Chamber of Commerce indicated that it "strongly opposes" the FAIR Act, which threatens to invalidate millions of existing contracts and ignores "the due process protections built into the design of consumer and employment arbitration systems."  U.S. Chamber of Commerce, U.S. Chamber Letter on the "Forced Arbitration Injustice Repeal Act" (Mar. 8, 2021).

In an earlier blog posted on March 19, 2019, Shustak Reynolds’ managing partner, Erwin J. Shustak, predicted the FAIR Act could face serious challenges in the divided 116th Congress. As it stands, the FAIR Act has a better chance of passing in the newly unified 117th Congress, but will still face challenges as long as the Senate filibuster remains intact. Investors, brokerage firms, and their employees and representatives should pay close attention to the FAIR Act, as it could radically change the way both customer and intra-industry employment disputes are resolved.

Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. 
We represent many broker-dealers, registered representatives, investment advisors, investors and businesses. 
Attorney George C. Miller can be reached in the firm’s San Diego office at (619) 696-9500. 





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