Posts belonging to Category Uncategorized

On April 24, 2014, Charles Schwab & Co., the financial services brokerage firm, agreed to pay $500,000 in fines and acknowledged a ruling by the Financial Industry Regulatory Authority (“FINRA”) Board of Governors, which concluded that Charles Schwab had violated FINRA rules by including a class action waiver clause in its customer agreement. See FINRA Decision, Department of Enforcement v. Charles Schwab & Co., Complaint No. 2011029760201 (April 24, 2014) (available here).

In 2012, FINRA brought an administrative enforcement action against Schwab for violating its rules after Schwab, in October 2011, added a class action waiver to its customer account agreements. Decision, at 1-2. FINRA Rule 2268(d)(3) of the Customer Code prohibits member firms from placing in predispute arbitration agreements “any condition that . . . limits the ability of a party to file any claim in court permitted to be filed in court under the rules of the forums in which a claim may be filed under the agreement.” Additionally, Rule 2268(d)(1) states, “[n]o predispute arbitration agreement shall include any condition that . . . limits or contradicts the rules of any self-regulatory organization”; the waiver limited and contradicted Rule 12204(d), which provides that a FINRA member may not enforce an arbitration agreement against a member of a certified or putative class action until: class certification is denied; the class is decertified; the class member is excluded from the class by the court; or the class member elects not to participate in or withdraws from the class.

Schwab’s attempt to ban customer class actions arose following a $235 million class action settlement that had alleged that it misled thousands of clients about its YieldPlus money-market fund. In February 2013, a FINRA Hearing Panel held that although Schwab had violated FINRA rules by banning class action lawsuits, the Federal Arbitration Act (“FAA”) preempted such rules. Id. at 2. The Hearing Panel had also found that Schwab had violated Rule 2268(d)(1) by preventing arbitrators from consolidating claims in arbitration (contradicting Rule 12312(b), which provides that they have such authority), and that the FAA did not preclude enforcement of those rules governing the powers of arbitrators and the procedures for FINRA arbitration. Id. at 3. For this violation, the Panel ordered Schwab to remove this language, notify all customers, and pay a fine of $500,000. Id.

FINRA appealed the Hearing Panel’s decision to the Board of Governors. The board considered two central questions:

The first is whether . . . FINRA rules preserve for customers the ability to bring or participate in judicial class actions and FINRA arbitrators the ability to consolidate more than one party’s claims in arbitration. The second is whether the . . . FAA[], which applies to arbitrations of commercial transactions, applies to NASD and FINRA arbitration rules and preempts enforcement of those rules.

Id. at 2. The Board affirmed the part of the Hearing Panel’s ruling concluding that Schwab had broken FINRA’s rules by inserting the class action waiver. Id. at 28. The Board reversed the Panel’s prior holding that the FINRA rule on this point was preempted, finding that the FAA does not dictate specific arbitration procedures and that FINRA’s procedures do not “act as an obstacle to the FAA’s goals”; thus, FINRA “may enforce” the rules against Schwab. Id.

As part of the settlement, Charles Schwab was required to notify all of its customers that the waiver has been withdrawn and is no longer in effect.

With U.S. business owners celebrating the Supreme Court’s embrace of “the liberal federal policy favoring arbitration” and hastening to add arbitration clauses with class action waivers to the stack of first-day paperwork for new hires to sign, news from China suggests an approach far more aggressive than anything Rule 23 contemplates. Charles Starnes, co-owner of Florida-based Specialty Medical Supplies, arrived at his Beijing factory last week intending to lay off 30 employees. However, Starnes was preempted by the employees, who rather than being escorted out of the building by an officious HR employee, took Starnes hostage. The employees/captors have since benefitted from the Chinese government’s apparent indifference, if not its affirmative support, as Starnes remains in captivity.

Accounts vary as to exactly what happened, though it seems that Starnes’ meeting with employees went awry like an unsuccessful mediation writ large, with employees having expected a more generous severance package. Instead of responding with the usual counter-offer, they put Starnes in something that looks a lot like a conventional jail, albeit with more elegant bar beveling than is usually seen in prisons. Apparently, according to the Washington Post, “a lot of CEOs get taken hostage in China.”

The paper documents a similar incident that took place in Shanghai, in January of this year, but no others, noting only that workers taking their boss hostage “doesn’t make for international headlines.” This time, however, it did make headlines. Even so, Starnes remains in captivity, as no international groundswell has demanded his release. No word on whether Starnes will be required to resolve the dispute with his captors under the efficient, streamlined auspices of arbitration.

Now that we’ve said goodbye to 2012 and 2013 has begun, employers and employees alike should take note of the various changes to California’s labor and employment laws. Among the legislation which took effect on January 1, 2013, are the following, each of which is likely to rely principally on private litigation for its enforcement.

• Pay Stub Statute Clarified: Labor Code section 226 is clarified, by SB 1255, to specify that “suffering injury” is generally coextensive with an employer’s violation of one of the nine enumerated requirements of wage statements issued in California. This is expected to foreclose the argument that the “suffering injury” requirement gives rise to individual inquiries, thereby precluding class treatment of pay stub claims.
• Social Media Privacy: AB 1844 prohibits employers from requiring that either job applicants or employees disclose user names and/or passwords to provide the employer with access to private social media information.
• Enhanced “Whistleblower” Protection: AB 2492 expands the cover age of California’s False Claims Act (aka “Baby Qui Tam”) beyond employees, to cover all contractors and agents.
• Right to Inspect Personnel Files: AB 2674 clarifies that employers must retain employee personnel files for at least three years after an employee’s tenure ends.
• Breastfeeding Discrimination: AB 2386 expands the California Fair Employment and Housing Act (FEHA) definition of “sex” to include breastfeeding, thereby making discrimination based on breastfeeding actionable.
• Religious Clothing: FEHA’s coverage of employers’ reasonable accommodation of employees’ religious beliefs is expanded by AB 1964 to include dress and grooming under the rubric of “beliefs and observances.”

Federal courts continue to interpret last year’s Wal-Mart v. Dukes Supreme Court decision more narrowly than many had expected, surprising those who viewed Dukes (in concert with AT&T v. Concepcion) as a virtual death knell for class actions.  In Myles v. Prosperity Mortgage Co., Judge Catherine C. Blake granted conditional class certification in an action alleging that the defendant misclassified its loan officers as exempt from overtime pay.  See Myles, No. 11-01234 (D. Md. May 31, 2012) (memorandum opinion re: class certification) (available here).  And of greater general significance, the court held that Dukes is inapplicable at the certification stage of an FLSA action.  Id. at 10-11.  Although Dukes did not address FLSA claims, the Myles defendant, Prosperity Mortgage Company (PMC), argued for the application of the more rigorous certification criteria articulated in Dukes, which would result in a radical remaking of the long-established, two-stage FLSA certification process.  Id. at 9-10.  PMC maintained that Dukes applies to “all aggregate claims,” including both class actions and collective FLSA actions. Id. at 9.

After considerable reasoning, however, the Myles court concluded that Dukes not only does not apply to FLSA certification determinations, but is also factually distinguishable from Myles, stating, “Dukes does not mention the FLSA or the two-step certification process, and such a conclusion does not necessarily follow from any particular language in the opinion.”  Id. at 9.  Judge Blake also pointed out that the first stage of FLSA certification requires only “relatively modest” evidence of commonality, in contrast to the far more demanding Dukes criteria.  Id. at 8-9.  Finally, she noted that in Dukes, there was no corporate discriminatory policy common to the class, and the class claims were based on individual, discretionary decisions made by many different managers, whereas in Myles, “PMC has acknowledged that it had an express policy of considering its loan officers to be exempt under the FLSA; thus, no local management discretion is at issue and no individualized inquiry is necessary to determine why individual loan officers were disfavored.”  Id. at 11.

Buttressing its analysis, the court noted that “‘numerous courts . . . have refused to apply Dukes on motions for conditional certification under the FLSA, concluding that the Rule 23 analysis had no place at this stage of the litigation.’”  Id. at 10, citing Winfield v. Citibank, N.A., ¬¬___ F. Supp. 2d ___, 2012 WL 423346 at *10 (S.D.N.Y. Feb. 9, 2012).