Schwab's Bid to Avoid FINRA Arbitration Rejected by Federal Court

Tuesday, May 15, 2012

A federal judge has dismissed a federal lawsuit brought by Charles Schwab, Inc. (Schwab) against the Financial Industry Regulatory Authority, Inc. (FINRA) in the United States District Court for the Northern District of California.  U.S. Magistrate Judge Elizabeth LaPorte found that federal court was not the proper forum for the dispute between Schwab and FINRA, which instead must first be adjudicated by FINRA's internal arbitration process.  The court's finding means that the industry cannot have it's cake and eat it too by aggressively enforcing the binding arbitration provision in its customer agreements while simultaneously running to federal court when it wants an injunction to stop a proceeding pending against itself.

The Schwab/FINRA dispute may still make its way to federal court since FINRA arbitration decisions can  ultimately be appealed to a federal appeals court.  A federal court, however, under this decision, cannot be the court of first instance for such a dispute.

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