Schwab v. FINRA: Federal Court Rebuffs Attempt to Block Class Actions

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In an unexpected trend following on last year’s aggressively pro-arbitration ruling in AT&T Mobility v. Concepcion, which some predicted would prove to be the “death knell” for class actions, federal courts continue to deal defeats to defendants attempting to enforce class-action waivers.  In Schwab v. FINRA, the party arguing for a class action waiver has suffered an indirect, yet critical, defeat.  See Schwab v. Financial Indus. Regulatory Auth., No. 12-518 (N.D. Cal. May 11, 2012) (Order on Motion to Dismiss) (available here).  The brokerage firm Charles Schwab & Co. had sought a declaratory judgment to the effect that the Financial Industry Regulatory Authority (FINRA) could not prevent Schwab from adding a class action waiver to its customer account agreements.  Order at 1.  In a closely reasoned and complex 21-page decision, Magistrate Judge Elizabeth Laporte granted, without leave to amend, FINRA’s motion to dismiss the Schwab lawsuit against it, thus bolstering FINRA’s authority to bring an enforcement action against Schwab focused on the class action waiver in Schwab’s customer agreement.  Because FINRA maintains the arbitration forum in which customers and securities firms often resolve their disputes, it was expected that other firms would have followed Schwab’s lead, had Schwab’s attempt to bar class actions been successful. 

While the ruling is a victory for FINRA as well as Schwab’s investors, as a formal matter the FINRA disciplinary proceeding against Schwab must still be resolved. However, the ruling on FINRA’s motion to dismiss strongly suggests that the class action waiver is likely to be found invalid: “[Schwab] has allegedly already violated a rule by inserting the class action waiver into its account agreement. Regardless of where this dispute is heard, Plaintiff may face sanctions for that violation unless it succeeds in changing the interpretation of or invalidating FINRA Rule 2268(d).”  Order at 20.