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S.D.N.Y Denies Motion to Compel Arbitration; Finds FINRA Rules Not Preempted by the Federal Arbitration Act (FAA)

Despite recent cases in the Second Circuit extending the American Express Co. et al. v. Italian Colors Restaurant et. al., 133 S. Ct. 2304 (2013) repudiation of class action waivers to collective actions under the Fair Labor Standards Act (FSLA), the U.S. District Court for the Southern District of New York has nevertheless denied a motion to compel arbitration in an FSLA case involving the Financial Industry Regulatory Authority (FINRA). 

In Zeltser v. Merrill Lynch & Co., No. 13 CV 1531, 2013 U.S. Dist. LEXIS 129743, at *1 (S.D.N.Y. Sept. 11, 2013), plaintiffs had initiated both a class action and FLSA collective action against defendant financial institutions’ alleged refusal to pay financial advisors for overtime work. The plaintiff advisors were registered with FINRA pursuant a Uniform Application for Securities Industry Registration or Transfer, in which they agreed to “arbitrate any dispute, claim or controversy that may arise . . . that is required to be arbitrated under the rules, constitutions or by-laws of [FINRA] . . . .” The defendant financial institutions sought an order compelling arbitration of plaintiffs’ FLSA claims.

 The District Court denied the motion because of a provision in the FINRA rules, section 13204(b), that expressly prohibits the enforcement of arbitration agreements against members of a putative or certified class or collective action. This provision reflects FINRA’s stated view that “collective actions, like class actions, should be handled by the judiciary system, which has extensive procedures to manage such claims,” and had been the subject of a recent public rule change (see Proposed Rule Change to Amend the Code of Arbitration Procedure for Industry Disputes to Preclude Collective Action Claims from Being Arbitrated, 77 Fed. Reg. 1773-01, 1774 (proposed Jan. 11, 2012)).

 The court rejected defendants’ argument that to the extent FINRA did not compel arbitration of class and collective actions, it was preempted by the FAA. Distinguishing American Express and its Second Circuit FLSA progeny, Sutherland v. Ernst & Young LLP, 2013 WL 4033844 (2d Cir. Aug. 9, 2013) and Raniere v. Citigroup lnc., 2013 U.S. App. LEXIS 16765 (2d Cir. Aug. 12, 2013), the court pointed out that neither the Supreme Court nor the Second Circuit had held that FINRA was preempted by the FAA. According to the court, without conflicting precedent, the “language of the statute [sic], buttressed by its legislative history, notice provisions, and agency interpretation” all supported plaintiffs' view that arbitration should not be compelled.

-- Libbie Richards, CPR Legal Intern