Dodd-Frank Act arbitration ban ruled retroactive

A controversial whistleblower provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act that invalidated pre-dispute arbitration clauses applies retroactively, a U.S. District Court judge in Boston has ruled in an issue of first impression.

The defendant investment company argued that the Financial Industry Regulatory Authority, and not the court, should hear the plaintiff’s wrongful termination case because Congress never intended for the arbitration ban to apply to agreements entered into before the law went in effect last July.

But Judge Douglas P. Woodlock disagreed after finding that the provision, which amended the Sarbanes-Oxley whistleblower statute, merely impacted the defendants’ procedural rights.

“The parties do not claim that a different substantive result will obtain merely because [the plaintiff’s] claim will be heard by a court rather than by a FINRA arbitration panel,” he said. “Consequently, I conclude that [the provision] should also be applied to conduct that arose prior to its enactment.”

The 18-page decision is Pezza v. Investors Capital Corporation, et al.

Day in court

Alan H. Crede of Boston, who represented the plaintiff, said there was a “dearth of caselaw out there” on the retroactivity of statutes that invalidate arbitration agreements, and the legislative history was silent on the provision. Thus, Woodlock’s ruling could impact a variety of employment disputes, he noted.

“Conceivably a lawyer could find this decision helpful in any case where they are arguing that a statute, which invalidates a category of arbitration agreements, should be applied retroactively,” Crede said. “The key concept here is that the right to compel arbitration is procedural in nature and does not impair anyone’s substantive rights.”

While the law, when drafted, was clearly aimed at impacting future employment agreements, Crede said, the question before Woodlock was what impact it has on contracts entered into before last July.

“If you represent an employee who has been at a company for a long time [and] who had an arbitration agreement that was signed years ago when he started …, this decision stands for the proposition that he will now be able to file suit and have his day in court as a Sarbanes-Oxley whistleblower,” Crede said. “He is no longer going to be compelled to go to arbitration.”

Richard R. Renner, legal director of the National Whistleblower Center in Washington, D.C., has closely followed the case and expects it to be widely cited by lawyers across the country.

Renner said Woodlock’s ruling marks the first time a judge has addressed the retroactivity of the whistleblower provision in the Dodd-Frank Act.

“This decision should send a real signal to Congress that it has the power to protect the public from the effect of pre-dispute mandatory binding arbitration,” he said. “It is a fairly significant chink in the armor that companies and corporate counsel have put up to shield themselves from accountability. But the bottom line is that they no longer will be able to use forced arbitration as effectively as they had in the past.”

Guy P. Tully of Jackson Lewis in Boston, who represented the defendant, declined to comment.

Ignored complaints

The plaintiff, Paul Pezza, signed an employment agreement in October 2008 with defendant Investors Capital Holdings. The agreement called for all legal disputes to be resolved exclusively through binding arbitration.

Shortly after he began working as a compliance analyst for the company, the plaintiff discovered that an independent broker was earning hundreds of thousands of dollars in fees by allegedly moving client funds between two virtually identical variable annuities.

Pezza, who suspected the broker was engaging in the scheme to net himself broker’s fees, made numerous internal complaints to the CEO of the company. When those concerns were ignored, the plaintiff said, he reported the incident to a state insurance commissioner and the Securities and Exchange Commission.

The plaintiff subsequently claimed he was wrongfully terminated in violation of the Sarbanes-Oxley Act.

The defendants countered that the plaintiff’s employment agreement required him to submit his case to arbitration.

After complying with the administrative claims process before the Department of Labor’s Occupational Safety and Health Administration, the plaintiff filed suit in federal court in January 2010.

While the defendants’ motion to compel arbitration was under advisement by Woodlock, Congress passed the Dodd-Frank Act.

Tell it to the judge

In finding that the arbitration ban applied retroactively, Woodlock wrote in a footnote that he could locate only one reported case in the country discussing the Dodd-Frank Act’s retroactivity.

Although the judge in that case, which was decided in Texas, found that the law was not retroactive, Woodlock said it was not controlling in Pezza because it dealt with a completely different part of the statute.

Woodlock said Congress had not expressed a clear intent to limit the temporal reach of the arbitration provision when it passed the “sprawling” 2,319-page statute.

When laws impact only jurisdictional considerations, Woodlock said, the U.S. Supreme Court has held that arbitration bans like the one before him could properly impact previously entered into agreements.

“The rationale is that this type of statute ‘takes away no substantive right but simply changes the tribunal that is to hear the case,’” he said. “In other words, present law governs in such a case because statutes conferring or ousting jurisdiction ‘speak to the power of the court rather than to the rights or obligations of the parties.’”