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Court is not the answer for securities arbitration disputes.

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Kathleen A. Bryan
International Institute for
Conflict Prevention and Resolution
Susan E. Lewis
John Wiley & Sons, Inc.
VOL. 25 NO. 8 SEPTEMBER 2007
Russ Bleemer
Jossey-Bass Editor:
David Famiano
Production Editor:
Ross Horowitz
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Robert A. de By and Amy L. Rudd, of
London, analyze where this summer’s
Congressional criticisms of securities arbitration fall short, and propose reforms for
an SRO regulatory system many view as
broken..........................................Page 129
Behind the CPR 2007 Corporate
Leadership Award, a top ConocoPhillips
Inc. attorney discusses the oil giant’s ADRfirst strategy..................................Page 130
Citing ADR’s effectiveness and civic duty,
Richard M. Rosenbleeth, of Philadelphia,
writes that the U.S. Department of
Veterans Affairs needs to adapt programs it
already uses elsewhere to deal with the
backlog of injured and sick veterans’ disability claims ................................Page 131
More on Congress’s activities on mandatory
arbitration in securities and consumer claims,
by Carol Bahan, of New York, as well as the
continuing California state court examination
of the limits on mediation confidentiality.
Also: details on a new international neutrals’
list for the energy industry..............Page 134
CPR News ..................................Page 130
Subscription Info..........................Page 130
ADR Briefs ..................................Page 134
Cartoon by Cullum......................Page 140
Correction....................................Page 141
VOL. 25 NO. 8 SEPTEMBER 2007
Court Is Not the Answer For
Securities Arbitration Disputes
arbitration agreements in all consumer disputes, including any disputes involving
personal financial services.
A similar House bill would treat all arbitration agreements appearing in boilerplate consumer contracts as an unfair trade
practice. But while current criticisms of securities industry arbitration
might have merit, investors
should not forsake arbitration
just yet.
Recent calls for the prohibition of mandatory arbitration clauses in brokerage
account agreements should have the brokerage industry clamoring for alternative
In May, Senate Judiciary
Committee members Patrick
J. Leahy, D., Vt., who is
committee chairman, and
Russell D. Feingold, D.,
Wis., asked the U.S. Securi‘INHERENT BIAS’
ties and Exchange Commission to prohibit broker-dealRecent criticism of securities
ers from requiring investors
arbitration stems largely from
to sign a mandatory arbitrastatistics published by the National Assocition clause when opening a brokerage acation of Securities Dealers Inc. and the
count. In making their request, the senaNew York Stock Exchange Inc. that inditors emphasized investors’ “rights to judicate a decreasing number of awards to incial process.”
dividual investors in NASD/NYSE-adSince May, commentators, including
ministered arbitrations over the past severmembers of the Public Investors Arbitraal years.
tion Bar Association, referred to in this arAccording to Piaba, these statistics
ticle as Piaba, have jumped on the band“strongly suggest an inherent bias against
wagon, insisting that investors have more
individual investors and an overt deprivadifficulty achieving fair adjudication of
tion of traditional due process.” Recent
their claims in arbitration before self-regutestimony before the U.S. House of Reprelatory brokerage industry organizations
sentatives suggests that the bias is driven by
like the NASD and NYSE. The result has
the need for repeat business: Arbitrators
been more calls on Congress to put an end
must rule in favor of corporations, or risk
to mandatory arbitration of securities-rebeing blackballed from future panels.
lated disputes.
Some commentators say that the presRecently, Sen. Feingold introduced a
ence of a securities industry insider on
Senate bill, the Arbitration Fairness Act of
every arbitration panel leads to bias, liken2007, that seeks to invalidate predispute
ing that presence to “having a police officer on a jury hearing a police brutality
Robert A. de By is a partner and chair of the
The NASD, on the other hand, disputes
Global Arbitration Group at the international law
the existence of bias, noting that statistics
firm Dewey Ballantine, based in London and New
York. Amy L. Rudd is a London associate at the
Published online in Wiley InterScience (
Alternatives DOI: 10.1002/alt
(continued on page 133)
VOL. 25 NO. 8
Securities Arbitration
(continued from front page)
reflecting fewer awards for investors simply
mean that many investors are settling their
disputes outside of the arbitration process.
Regardless of the statistics’ significance, investors and legislators alike are questioning
the fairness of arbitrations administered by
self-regulatory organizations—the SROs—
like the NASD and NYSE.
Undoubtedly, arbitration needs to earn
its place as a fair alternative to litigation.
But that doesn’t necessarily mean that investors are better served by going to court.
On the contrary, opening the floodgates for investor-broker litigation would
not only threaten to clog the courts, but
would represent a significant cost to investors. As an initial matter, the majority of
investor-complainants, who presumably already lost significant money in the market,
stand to spend even greater sums on courtbased litigation.
This is particularly true if brokerage
houses and investment banks bring their
full financial might to bear on investor-instigated court proceedings.
Moreover, to the extent that brokerage
houses are forced to regularly spend money
defending investor suits in court, fees for
investment services will rise as the industry
passes its costs on to investors.
In other words, with few exceptions, it
is the investors who stand to lose the most
from taking their disputes to court.
tration agreements in employment contracts are procedurally and substantively
unconscionable. And in July, an Illinois
court held that an arbitration clause contained in a standard satellite television customer service agreement was procedurally
and substantively unconscionable because
the arbitration clause, the court found, was
“hidden in a maze of fine print,” the parties were in disparate bargaining positions,
and the contract was offered on a take-it-
It’s About Fairness
The issue: Two Senate leaders ask
the SEC to prohibit the longstanding securities industry reliance on arbitration to resolve
investor-broker disputes.
What’s next? If the SEC doesn’t
act, then it’s up to Congress.
Would investors be better off
without arbitration? Even if
the SEC or Congress acts, investors will be able to arbitrate
disputes voluntarily. The writers
of this article say that investors
stand to lose the most by a ban.
The problem with the current push to
eliminate mandatory arbitration in securities disputes is that most people who call
for change offer court-based justice as the
only alternative to industry-administered
arbitration. Critics believe that where an
arbitration clause appears in a standard
consumer contract, the take-it-or-leave-it
nature of the contract makes the agreement
to arbitrate inherently involuntary.
The choice to file suit in a court of law,
on the other hand, is lauded as every consumer’s natural right. Several courts have
espoused this viewpoint, emphasizing that
arbitration agreements must be truly voluntary.
In particular, California courts have repeatedly held that take-it-or-leave-it arbi-
or-leave-it basis. Bess v. DirecTV Inc., No.
5-03-0290 (Ill. App. Ct. July 18, 2007).
But the notion that an investor or consumer acts involuntarily when he or she
signs a take-it-or-leave-it form contract
containing an arbitration clause is flawed.
As the California and Illinois consumer
cases demonstrate, take-it-or-leave-it adhesion contracts are not a new beast, nor are
they particular to the securities industry.
They are common in a wide variety of consumer transactions. The law historically
has recognized their enforceability, even
though—by their very nature—they are
unilaterally imposed on the consumer.
That courts, politicians, and commentators are now deriding arbitration clauses
as involuntary and unlawful simply because they are contained in an adhesion
contract seems misguided. Even in California—the state now leading the charge
against mandatory arbitration clauses in
consumer contracts—at least one court has
enforced an arbitration provision in a standard investment account contract. The
court noted that the investor always has a
“meaningful choice” to go elsewhere for
the services, or to invest by other means.
Dean Witter Reynolds, Inc. v. Super. Ct., 211
Cal.App.3d 758 (Cal. Ct. App. 1989).
In other words, the consumer has a
choice, and therefore acts voluntarily, even
where an adhesion contract is concerned.
The consumer can choose to simply walk
away from the contract, or choose a different provider.
It seems that the real impetus behind the
current movement away from standard arbitration agreements is critics’ belief that
consumers simply are not getting fair treatment in current SRO-administered arbitration. But as Senators Leahy and Feingold
rightly point out, arbitration can be a fair
and efficient way to resolve disputes.
In securities disputes, the problem is
not that arbitration is a flawed concept, but
that there is a widespread perception—
right or wrong—that industry-administered arbitrations are flawed and unfair to
The brokerage industry is ill-served by
investors’ current mistrust of NASD/
NYSE and similar SRO arbitration. The
perceived imbalance of power between investors and broker-dealers in such arbitrations undermines clients’ confidence in
their securities brokers and, to some extent,
discourages investors from seeking formal
investment advice and services.
Additionally, public distrust of the securities arbitration process could undercut
confidence in the U.S. capital markets in
general, and discourage investment. If
Congressional action now becomes necessary to restore investor confidence, the brokerage industry will suffer a major setback
to its reputation.
The industry should act to restore investor confidence in the dispute resolution
system before political will forces a solution that neither investors nor brokers real-
Published online in Wiley InterScience (
Alternatives DOI: 10.1002/alt
(continued on next page)
VOL. 25 NO. 8
Securities Arbitration
(continued from previous page)
ly want. The first step is realizing that investors and brokers actually share a common goal: fair, speedy, and cheap adjudication of their differences. In other words,
the question is not whether to litigate or arbitrate investor disputes, but how to resolve those disputes efficiently.
Senators Leahy and Feingold seem primarily concerned with eliminating the “involuntary” mandatory arbitration agreement. In their original letter to the SEC,
they suggested the SEC either (1) implement a rule banning all predispute mandatory arbitration clauses, or (2) require all
brokerage account agreements to include a
“check the box” choice between traditional
judicial process and SRO arbitration.
But these solutions similarly inhibit investor choice. One eliminates an investor’s
ability to enter into a predispute arbitration agreement, and the other essentially
forces the investor to choose between the
lesser of two evils.
What Congress and the solutions offered so far fail to appreciate sufficiently is
that, for the system to work properly, investors must be given choices that foster
the common goal of cheap and speedy resolution of their disputes. The brokerage industry can promote that goal by giving in-
vestors the opportunity to specify the type
of arbitration or alternative dispute resolution preferred.
For example, designating the administration of securities disputes by the American Arbitration Association for U.S.-based
disputes, or the International Institute for
Conflict Prevention and Resolution (which
publishes this newsletter) for European and
other foreign clients, offers a viable alternative to NASD- and NYSE-administered arbitration. Fair or not, one thing is clear: the
public and Congress no longer see industryadministered arbitration as a fair way to resolve investor-broker disputes.
Arbitration under either the AAA or
CPR rules, and administered by these
highly respected institutions, will eliminate
the perception of bias from the process.
Moreover, it would provide access to a
wide group of commercially sophisticated
arbitrators and prevent the perception that
the system is an insiders’ game.
Furthermore, investors and brokers
could agree to mediate any disputes that
might arise prior to engaging in arbitration
or litigation. That would eliminate the
need to choose between either alternative.
Mediation is a tool used successfully in
many complex commercial and industrial
arbitration cases. There is no reason it cannot work more broadly for securities disputes, where both the NYSE and the
NASD have used the practice successfully,
though far less often than arbitration.
In short, restoring investor choice does not
have to mean the death-knell of arbitration. It simply requires brokers to tailor the
dispute resolution procedure to the particular investor in a manner that serves the
common goal of efficient and cost-effective
dispute resolution.
Regardless of the solution espoused,
brokerage houses should take the initiative
to address public discontent before millions are spent lobbying Congress to prevent the Leahy/Feingold initiatives and accompanying legislation, and additional
millions are spent defending the ensuing
wave of investor litigation.
With market confidence and industry
image and reputation on the line, it is time
for the securities industry to take its head
out of the sand and propose a mutually
beneficial dispute resolution scheme that
keeps investor-broker disputes out of
court. The industry needs an arbitrationoriented solution before it is too late and
the arbitration baby is thrown out with the
bathwater soiled by investor discontent. DOI 10.1002/alt.20191
(For bulk reprints of this article,
please call (201) 748-8789.)
There’s new vitality to the ever-present
movements, political and otherwise, to end
mandatory predispute arbitration clauses.
The focus as usual is consumer and employment contracts. Corporations continue to rely on the clauses to defray litigation
costs, and consumer advocacy groups conThe author was a CPR Summer 2007 Intern. She is
a student at New York Law School. This material
was expanded and updated from items originally
appearing on the Recent News scroll at
tinue to rail against clauses that they say
cut off rights.
Likewise, ADR practitioners are finding themselves caught in the crossfire,
wanting fair arbitration practice without
supporting allegedly unjust, or even controversial, programs.
Last November’s Congressional swing
to the Democrats has produced a renewed
effort to resolve what Rep. Hank Johnson,
D., Ga., has deemed as an “albatross” for
Whether the bills introduced will be
nonstarters, or will change the arbitration
landscape, remains to be seen.
In response to consumer advocacy
groups, various Congressional committees
and subcommittees have held hearings on
the topic this year. “Mandatory Binding Arbitration Agreements: Are They Fair for
Consumers?” was held June 12 by the House
Judiciary Subcommittee on Commercial
and Administrative Law. It examined the
types of problems faced by consumers bound
by mandatory arbitration agreements, and
whether changes should be made.
The hearing provided a snapshot of the
fissure between corporate advocates and
consumers’ groups. The majority of the witnesses seemed disillusioned—or worse—
with current mandatory arbitration practice
in consumer disputes:
Texas writer Jordan Fogal, recounting the
tale of her defectively built new home,
called arbitration “an atrocity.” See testi-
Published online in Wiley InterScience (
Alternatives DOI: 10.1002/alt
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