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Dodd-Frank Ban on Pre-Dispute Arbitration Agreements under SOX Whistleblower Protection Provision Applies Retroactively

By Jim Hamilton

The Dodd-Frank Act ban on pre-dispute arbitration agreements under SOX whistleblower protection was applied retroactively in a ruling by a federal district court in Massachusetts.(Pezza v Investors Capital Corp, March 1, 2011, Woodlock, D). In the absence of clear legislative intent by Congress to limit the temporal reach of Sec. 922 of the Dodd-Frank Act, and given the procedural character of the provision, the district court concluded that the court, rather than an arbitration panel, had subject matter jurisdiction over the plaintiff?s whistleblower claim when it denied the defendant?s motion to compel arbitration.

The plaintiff in this case claimed that he was wrongfully retaliated against in violation of the Sarbanes-Oxley Act (SOX), after having raised concerns regarding misconduct by the defendants in connection with securities transactions. After having complied with the administrative claims process before the DOL, the plaintiff filed suit alleging retaliation in violation of the SOX?s whistleblower protection. However, the defendants contended that under the plaintiff?s employment agreement he was obligated to submit the dispute to arbitration, and moved to compel arbitration and either stay or dismiss this action. While the defendant?s motion was under advisement, the Dodd-Frank Act enacted a bar to pre-dispute arbitration agreements for whistleblower claims brought under SOX.

In Fernandez-Vargas v Gonzales, the Supreme Court provided a framework for determining whether a statute should be applied retroactively. Nothing in Sec. 922 of the Dodd-Frank Act provided an express congressional intent regarding retroactivity, noted the court. Moreover, applying normal rules of statutory construction, the court found that there was nothing in Sec. 922 to indicate whether Congress intended to apply it to existing arbitration agreements. Further, the fact that Congress expressly vested the new Bureau of Consumer Financial Protection and the Commodity Exchange Commission with authority to restrict pre-dispute arbitration with respect to future disputes was insufficient to show Congress intended Sec. 922 to be applied retroactively.

On the other hand, the Supreme Court in Landgraf v USI Film Prods recognized that, even absent specific legislative authorization, jurisdictional statutes may be applied in suits arising before their enactment without raising concerns about retroactivity. Sec. 922 confers jurisdiction on the courts, rather than to a Financial Industry Regulatory Authority (FINRA) arbitration panel, by voiding arbitration agreements. Moreover, the parties did not claim that a different result would occur merely because the plaintiff?s claim is heard by a court rather than a FINRA arbitration panel. Under such circumstances, the court concluded that Sec. 922 should be applied to conduct that arose prior to its enactment. Thus, the court denied the defendant?s motion to compel arbitration.

This post first appeared in the Wolters Kluwer Law&Business Employment Law Daily

Full post as published by Jim Hamilton's World of Securities Regulation on March 14, 2011 (boomark / email).