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Are We an Arbitration Nation? Then Morgan Stanley Should be Happy and Advisors Should Worry ...

By Miriam Rozen November 5, 2018

The Trump administration has repealed many of the Obama-era regulations issued to counter the U.S. Supreme Court’s rulings that force employees and customers into taking claims – including potential class actions – against corporate defendants to private, single-plaintiff arbitrations, rather than en masse to public courts.

Some analysts predicted Trump administration rollbacks and the court’s rulings would prompt plaintiffs — including financial advisors, other financial service industry employees and investors — to seize in great numbers the relatively low-cost options of arbitrating their claims.

But that has not happened, according to two University of California at Davis School of Law professors, who released in preliminary form recently and scheduled for 2019 publication a review of more than 40,000 arbitrated cases.

The reluctance on the potential plaintiffs’ part makes sense given their low odds of success, particularly if they represent themselves and attend arbitrations without a seasoned attorney, according to the coauthors’ study.

“One of our most striking findings is that pro se plaintiffs struggle mightily," write Andrea Cann Chandrasekher and David Horton in their study entitled “Arbitration Nation.” The victory rate for self-represented individuals is just 6% in consumer disputes brought before Judicial Arbitration and Mediation Services (JAMS) panels, and only 10% in employment cases brought before both the American Arbitration Associations (AAA) and JAMS panels, according to the coauthors.

Meanwhile, corporate defendants, who appear repeatedly in those same forums, more often than not, prevail in arbitrations, the coauthors conclude. “[A]rbitration does indeed favor repeat playing businesses,” they write.

Jurisdictions should create an ‘arbitration multiplier’: a bounty for winning a case in arbitration.
Chandrasekher and Horton
UC-Davis School of Law

But the coauthors add: “[T]hat is just half of the repeat player story. Repeat playing plaintiff’s law firms also fare well.”

Given those last two findings, Horton and Chandrasekher propose reforms for state legislatures to enact. (Spoiler alert: Horton says he and his coauthor have already contacted one of their California state lawmakers.) “Specifically, jurisdictions should create an ‘arbitration multiplier’: a bounty for winning a case in arbitration. By encouraging skilled plaintiffs’ lawyers to capitalize on arbitration’s accessibility, this approach would counteract the corporate repeat player advantage,” the authors write.

Such state laws would also have better odds of withstanding court challenges than previously enacted state rules aimed at extricating employees and consumers from arbitration forums, which the high court tossed, ruling that they pre-empted the Federal Arbitration Act.

Boiled down, the coauthors’ proposal is an attempt to make lemonade out of the lemons that the nation’s high court and Republican-led Congress have handed plaintiffs and their counsel.

“It’s not a substitute for a class action but it’s better than leaving plaintiffs alone in arbitrations,” author Horton says.

Horton and his coauthor included in their statistics arbitrations held before AAA and JAMS panels. They did not include statistics from Finra arbitration panels, which they plan to review in the future, Horton says.

The financial services industry is rife with examples of advisors thwarted from trying claims in court and sent instead to private arbitration. At the beginning of last month, a Manhattan federal judge issued a ruling compelling John Lockette, one of Morgan Stanley’s former financial advisors, to take his race discrimination claims against the wirehouse to an arbitration panel, rather than letting the advisor present those allegations in a public court. Then, on Oct. 15, a New Jersey federal judge ordered Craig Schmell, a former Morgan Stanley senior vice president, to take to his discrimination and wrongful termination claims to arbitration, rather than try them in court.

Arbitrations where there are no rules and no exposure are inherently disheartening for plaintiffs.
Linda Friedman
Stowell & Friedman

But a prominent plaintiff lawyer, who represents Lockette and is well-known for representing financial advisors at Finra and other forums, rejects the UC-Davis law professors’ proposal, arguing no amount of tweaking can stop the sourness of the arbitration experience for plaintiffs.

“It does not address the horrible experience of having to endure one of those arbitrations,” says Linda Friedman, a law partner in Chicago’s Stowell & Friedman, who has won more than $300 million in class action settlements based on discrimination lawsuits it has filed against other wirehouses, including Merrill Lynch and Wells Fargo.

Arbitrations where “there are no rules and no exposure” are inherently disheartening for plaintiffs, even when they win, Friedman says. “Federal court is no panacea,” for plaintiffs either, but it’s better than arbitration overall, she says.

“There is something about the dignity of a courtroom, where there are rules of engagement,” that satisfies plaintiffs who often, when they reach the stage of wanting to litigate a claim, are seeking more than just money but also a sense of justice delivered, she says.

Friedman views as the only worthwhile solution to the spate of court rulings and the Trump era rollbacks: a political turnabout in Washington, so Democrats can reintroduce successfully a bill previously sponsored by then U.S. Senator Al Franken (D-Minn.) which proposed barring mandatory arbitration in civil rights cases.

“It is an interesting concept ... It sounds very Californian.”
Oliver Armas
Hogan Lovells

Oliver Armas, managing partner in the New York office of Hogan Lovells, who regularly represents corporate defendants in arbitrations, expresses more openness than Friedman to the UC-Davis coauthors’ proposal.

“That repeat players have an advantage does not surprise me. It is still pretty much an insiders’ world,” Armas says about arbitrations. “The repeat players know the arbitrators. They know procedures that work, and what are nonstarters,” he says. (But, likewise in plaintiff-friendly public courts identified by an annual U.S. Chamber of Commerce report as “Judicial Hellholes,” there are advantages for the repeat players there — local plaintiffs lawyers, Armas adds.)

About the coauthors’ proposed multiplier for arbitration winners, Armas says: “It is an interesting concept – one that I had never thought of. It sounds very Californian.”

“Unless there is a sea change in Washington, D.C.,” he cannot envision the plaintiff bar getting any other type of recourse for their beefs against forced arbitration, Armas says. Their other alternative: “to beat their head against the wall,” he jokes. “The federal pro-Federal Arbitration Act stance has really taken hold in our court systems. I don’t know if there is a political will or ability to get through that anytime soon,” Armas adds.

Would his corporate defendant clients fight against the coauthors’ proposal to add a multiplier to arbitration awards to induce more plaintiff counsel to use the forums?

“I think you’ll get a mixed reaction,” Armas says. The proposal may “reduce concerns that people have about the fairness of arbitration,” he says, noting that he and most of his clients don’t view arbitrations as unfair but recognize many plaintiff bar members have characterized them that way.

The proposal, however, would add to the costs of arbitrations, he says. Typically, corporate defendants already bear the brunt of paying most of the costs of arbitrations. Most corporate defendants “will always want the lower-cost option,” Armas says.

But if momentum builds behind a political movement to return more claims to federal courts, Armas expresses confidence more corporate defendants would support the coauthors’ proposal as a lesser evil.

There's often a question of whether the defendants will even pay the awards.

If states enact multipliers for arbitration awards, Philip Vujanov, an attorney at Cleveland-based law firm ChapmanAlbin, who represents plaintiff investors, says, “I may take some more smaller arbitration cases.”

Under the existing systems, the disadvantages for investors making claims against broker-dealers in the private tribunals, including Finra hearings, make him reluctant to represent investors in those forums – even though he does so on occasion, Vujanov says.

Arbitration's procedural headaches often outweigh the attraction of any awards that plaintiffs win, Vujanov says. In arbitration, getting evidence from defendants – or what’s known as discovery – “is always a big hassle,” Vujanov says.

Even when plaintiffs win an award, that doesn’t mean it was worth the trouble, he says. Historical studies of arbitration awards for investors making claims against broker-dealers have shown if they prevail, they often only get half the damages they request. And then there is often a question of whether the defendants will even pay the awards. Defendant broker-dealers may withdraw from Finra or other arbitration forums or go bankrupt, making plaintiffs’ awards uncollectible, Vujanov says.