New Arbitrator Standards Held Inapplicable to Securities Industry
Panel Upholds Judicial Council’s Authority, but Sides With SEC, NASD, and NYSE on Preemption Issue
By KENNETH OFGANG, Staff Writer/Appellate Courts
California’s new standards for neutral arbitrators cannot be applied to securities industry arbitrations, which must follow rules established by the National Association of Securities Dealers and the Securities and Exchange Commission, the Ninth U.S. Circuit Court of Appeals ruled yesterday.
The panel agreed with the brokerage firm of Credit Suisse First Boston—backed by the SEC, the NASD, and the New York Stock Exchange as amici—that said it could not be forced to apply the state’s new rules to a dispute with a fired employee. The court, in an opinion by Judge Richard A. Paez, affirmed a lower court ruling barring the employee from challenging his firing before any forum other than the NASD.
Paez disagreed with U.S. District Judge Saundra B. Armstrong of the Northern District of California on one point. The appellate jurist concluded that the Judicial Council—which filed an amicus brief limited to the issue—did not exceed the scope of its legislative mandate by including dispute resolution provider organizations within the rules’ coverage.
But the panel agreed with Armstrong on the preemption issue and found no error in the issuance of the injunction.
The Ninth Circuit’s resolution of both issues was the same as that of Div. Seven of this district’s Court of Appeal in Jevne v. Superior Court (2003) 113 Cal. App. 4th 486, which the state Supreme Court has agreed to review.
The Ethics Standards for Neutral Arbitrators in Contractual Arbitration, as they are officially known, took effect July 1, 2002. They were adopted by the Judicial Council in compliance with SB 475, a 2001 bill authored by Sen. Martha Escutia, D-Los Angeles, Assemblywoman Hannah-Beth Jackson, D-Santa Barbara, and then-Assemblyman Darrell Steinberg, D-Sacramento.
The standards, set forth as an appendix to the California Rules of Court, include new requirements that potential arbitrators disclose facts that might tend to indicate a conflict of interest, such as whether the person has arbitrated another matter involving a party or attorney involved in the new proceeding in the previous five years. The new rules also broaden the previous grounds for disqualification of an arbitrator.
The case ruled on yesterday involved a former executive at Credit Suisse who claimed that he was wrongfully terminated.
Michael S. Grunwald, after exhausting the company’s internal grievance procedures and failing to resolve the dispute in mediation with JAMS/Endispute, demanded arbitration before the American Arbitration Association. The firm, however, sued for injunctive relief on the ground that Grunwald’s contract contained the standard clause requiring that all disputes related to his employment be arbitrated by the NASD.
Before the arbitration panel was appointed, however, the NASD stopped appointing arbitrators in California as a result of the adoption of the ethics standards. The association eventually adopted a policy of not arbitrating California-based disputes unless the parties agreed to have the case heard outside the state or to waive the California standards.
Grunwald’s attorneys responded with a motion before Armstrong to modify or dissolve the injunction so that they could proceed before the AAA or in state court. The judge denied the motion, concluding that the NASD could arbitrate the case in California without a waiver because the new standards were either preempted or inapplicable to the NASD.
Paez, in concluding that the judge was correct as to preemption, agreed with Credit Suisse and its amici that rules adopted by “self-regulating organizations” like the NASD preempt conflicting state laws under a 1973 Supreme Court decision.
The judge also concluded that the California rules on disclosure and disqualification conflict with the NASD rules and are thus preempted by federal securities laws to the extent that the industry rules have been approved by the SEC.
Under the NASD’s rules, the judge explained, disqualification of an arbitrator who fails to make a required disclosure or has a conflict of interest is discretionary on the part of the association, while under the California standards it is mandatory if demanded by a party.
The Judicial Council’s disclosure rules, Paez went on to say, are also preempted because they require more extensive disclosures—with attendant increases in costs, either to the parties or the NASD—than the NASD requires.
Senior Judge Edward Leavy concurred in Paez’s opinion.
Judge Marsha Berzon concurred separately. She questioned whether the 1973 ruling cited by Paez should be applied to employment, as opposed to investor, disputes, but acknowledged that a Second Circuit decision holds that it does and said she could not “conclude with any reasonable certainty” that the Second Circuit reached the wrong result.
The case is Credit Suisse First Boston v. Grunwald, 03-15695.
Copyright 2005, Metropolitan News Company