Arbitration Clause Did not Bar Class and Collective Civil Action for Overtime Under Fair Labor Standards Act and New York Labor Law

In an apparent case of first impression, Judge Harold Baer of the United States District Court for the Southern District of New York, denied defendants’ motion to compel the arbitration of a collective and class action for overtime pay filed by financial advisors under the Fair Labor Standards Act (“FLSA”) and the New York Labor Law (“NYLL”).

In Zeltser, et. al v. Merril Lynch, 13 CV 1531, Judge Baer rejected motions to compel arbitration filed by Merrill Lynch, Pierce, Fenner & Smith, Inc; and Bank of America Corporation.  In Zeltser, former and current Financial Solutions Advisors (“FSAs”) alleged that they were entitled to overtime pay for working overtime hours.  FSAs were required to register with the Financial Industry Regulatory Authority (“FINRA”) and sign a Uniform Application for Securities Industry Registration or Transfer, which is referred to as a “Form U-4.”

Form U-4s contain an arbitration clause requiring registered representatives, like the FSAs, to “agree to arbitrate any dispute, claim or controversy that may arise between [the registered representative] and [his or her] firm. . . .that is required to be arbitrated under the rules, constitutions or by-laws of [FINRA]. . . .”  However, FINRA rules, which also govern Form U-4s, provide that an agreement to arbitrate may not be enforced against any registered representative who is a “member of a certified or putative class action with respect to “any claim that is the subject of the certified or putative class action until: [t]he class certification is denied, [t]he class is decertified; [t]he member of the certified or putative class is excluded from the class by the court; or [t]he member of the certified or putative class elects not to participate in the class or withdraws from the class according to conditions set by the court, if any.”

In addition, FINRA Rule 12304(b)(4) provides that “[a] member or associated person may not enforce an agreement to arbitrate in this forum against a member of a certified or putative collective action with respect to any claim that is the subject of the certified or putative collective action until the collective action certification is denied or the collective action is decertified.”  These rules clearly preclude the enforcement of the arbitration provisions at issue to class action participants.  Nevertheless, defendants argued that the FINRA Rules were preempted (or superseded) by the Federal Arbitration Act (“FAA”), and that therefore the FAA, which permits arbitrations of class disputes, trumped the FINRA Rules prohibiting them.  Judge Baer rejected this argument, stating that “[n]either the Supreme Court nor the Second Circuit has held that FINRA is preempted by the FAA in a fact pattern such as the one before me.”

In recent years, courts have strongly favored the enforcement of pre-dispute arbitration clauses, which generally prevent a claimant from going to court in favor of a private arbitration.  Zeltser demonstrates, however, the enforcement of such clauses is not without limits, and that in order to hold a party to an arbitration clause, the claim at issue must also be deemed arbitrable under all relevant statutes, rules and regulations.

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