Procedural Protections
The new rules seek to address the criticisms of the old NASD rules made by claimants' counsel and some courts concerning the application of the NASD's mandatory arbitration rules to statutory discrimination claims. These concerns include (1) inadequate disclosure to employees that their claims would be arbitrated and that they would be waiving their right to a jury; (2) limited discovery; (3) litigating outside of the public eye so that problems remained "secret;" and (4) arbitrators who did not understand employment law and were biased in favor of the securities industry. All of these concerns were addressed in some way by the new rules.
One important change that would affect all employment disputes concerns disclosures provided to a new employee who registers with the NASD by signing a Form U-4. (NASD Rule 3000.) The disclosure would explicitly state that all of an employee's employment-related claims, other than those for employment discrimination, are subject to mandatory arbitration and that employment discrimination claims may be arbitrated. The disclosure also advises the employee that an arbitrator's decision is subject to limited review and that the arbitrator need not explain the basis for his or her decision.
The new procedures also seek to make certain adjustments to the composition and qualifications of arbitrators deciding the disputes. Under the procedures concerning statutory claims, if the claimant's demand is $100,000 or less, one arbitrator will decide the dispute, whereas if the demand exceeds $100,000, three arbitrators will decide the dispute. (NASD Rule 10212.) Both the single arbitrator or the chair of a three-person panel must be an attorney who has practiced for a minimum of 10 years (including academia) and who has "substantial familiarity with employment law." (NASD Rule 10211.) However, an attorney may not serve as the sole arbitrator or panel chair if more than 50 percent of his or her business in the past five years involved the representation of either employees or employers. The parties can agree to waive any of these requirements. One interesting change in the requirements for composition of panel members is that no arbitrator hearing a discrimination charge may be an industry representative. (Id.) Previously, an all-industry panel would be permitted to hear claims of employment disputes.
Possible Consolidation of Statutory and Common Law Claims
Frequently, a potential claimant will assert both statutory and non-statutory claims. Under the NASD's existing rules, the claimant must bring the non-statutory claims before the NASD. Since bringing statutory claims in arbitration is optional, a company may be faced with a statutory claim in court and a non-statutory claim in arbitration. The new rules provide that in those circumstances, the company may compel the claimant to bring the non-statutory claims in the same court proceeding, provided that the court would have jurisdiction over those new claims. (NASD Rule 10215.) However, once a company requires a claimant to bring all claims in court, the company may only assert counterclaims against the claimant in court and may not bring a separate arbitration proceeding.
Where the employee brings statutory claims and non-statutory claims against more than one person -- i.e., the employer and a supervisor -- all respondents are not obligated to remove all claims to court even if one does. For example, if claims are brought by a female employee against her supervisor and the employer for sexual harassment in court and for negligent and intentional infliction of emotional distress in NASD arbitration, the company may choose to force the claimant to bring the emotional distress claim in court. The supervisor, however, may decide that he does not want to try the emotional distress claim to a jury and may elect to keep it in arbitration, resulting in two separate actions proceeding regarding the same claim.
In deciding whether to consolidate the statutory and non-statutory claims in court, an employer should consider several factors. As an initial matter, the employer should examine the nature of the allegations. To the extent that the non-statutory claims involve issues that might seem offensive to a jury, an employer might consider keeping those claims in the arbitration proceeding. Even if those same facts might be admissible in the statutory claim, an employer may want to remove alternative avenues of recovery from the jury.
A related concern is the likelihood of obtaining summary judgment against the plaintiff. If the employer believes it has a strong chance of prevailing on summary judgment on the statutory claim but not the common law claims, it may elect to leave the common law claims before an arbitrator.
The principles of res judicata also may affect the decision of whether to consolidate the statutory and common law claims. Under collateral estoppel, if a party has had a full and fair opportunity to litigate an issue in another proceeding, it is not permitted to re-litigate it in a different forum. The United States Court of Appeals for the Second Circuit held in Benjamin v. Traffic Executive Ass'n Eastern Railroads, 869 F.2d 107 (2d Cir. 1989), that a federal trial court in a subsequent action was bound by an arbitrator's earlier findings that the plaintiffs were not rate bureau employees. The new rules provide that ordinarily an arbitration would be stayed pending the outcome of the court case. (NASD Rule 10216(d)(2).) As a result, the jury's finding of certain facts may be binding on an arbitrator. Similarly, if the arbitration is not stayed, an arbitrator's finding of fact may be binding in a later court case.
The last - but by no means the least - important consideration is cost. If the plaintiff's potential recovery is small, an employer may want to consolidate all the claims in court. If the employer feels its greater liability is in the common law claims, it might want to consider keeping those claims in arbitration. It still will have some benefit of the discovery in the litigation process and even may propose that both sides conduct joint discovery applicable to both cases. However, if the arbitration is stayed during the pendency of the litigation, then the cost factor may be less important.
Enhanced Discovery
The new statutory procedures also provide enhanced discovery, including limited depositions. (NASD Rule 10213.) The changes to the rules leave unchanged the provisions regarding document discovery that allow parties to get documents from other parties or other NASD member institutions. (Id.)
No Restriction On Damages Permitted By Statute
Finally, the new rules clarify that an arbitrator may award any damages permitted under the statute, including reasonable attorney's fees, to the extent permitted by law. (NASD Rules 10214, 10215).
Conclusion
The changes to the NASD rules may benefit employers. For example, the enhanced disclosures make it less likely that a court will void an arbitration agreement for those claims that must be brought in arbitration. Further, although most plaintiff's lawyers are unlikely to bring statutory claims in arbitration, the improvements may increase the likelihood that a plaintiff's lawyer might opt for arbitration in an appropriate situation - i.e., where certain pertinent facts may be embarrassing to the potential plaintiff. Further information about the NASD's rules may be found at www.sec.gov.