Welcome to Financial Advisor IQ

SCOTUS Decision Likely to Curb Broker Suits Against Firms

May 24, 2018

A Supreme Court ruling from earlier this week will likely prevent brokers from launching class-action lawsuits at brokerage firms, InvestmentNews reports.

The ruling isn’t likely to bar employees from filing class-action suits against 401(k) plan sponsors, according to the same source.

The Supreme Court ruled 5 to 4 to let companies have arbitration clauses in employment agreements that bar workers from filing class-actions, the publication writes.

The case, Epic Systems v. Lewis, appears to apply to FAs at captive brokerages and independent broker-dealers, Michael Taaffe, a partner at Shumaker, Loop & Kendrick, tells InvestmentNews. The decision could prompt brokerages to include class-action waivers and force brokers into arbitration more often, he adds.

But it will be up to Finra to uphold the Supreme Court’s decision, Linda Friedman, managing partner at Stowell & Friedman, tells InvestmentNews. The industry-funded regulator now prohibits member firms from moving claims to arbitration when facing a class-action lawsuit.

U.S. companies have been increasingly resorting to mandatory arbitration clauses in work contracts, with the percentage of U.S. employees subject to such clauses reaching 55% of the private sector, or about double what it was in the early 2000s, writes InvestmentNews, citing the Economic Policy Institute.

Of companies that require mandatory arbitration, 30% also bar employees from filing lawsuits on their own or collectively, according to the publication.

U.S. Supreme Court (Getty)

Brokerages could benefit from moves to keep employees from taking class actions against them, says InvestmentNews. In 2013, for example, Merrill Lynch paid out $160 million in a class action alleging racial discrimination and $39 million more in a suit alleging gender discrimination, according to the publication. Morgan Stanley paid out $16 million in a racial discrimination suit in 2007, InvestmentNews writes.

By Alex Padalka
  • To read the InvestmentNews article cited in this story, click here.