Expungement: A Seriously Flawed Process?

In 2017, this blog featured a post examining the standard applied to requests by brokers to cleanse (erase) their public records of customer complaints, a process called "expungement," here.  A recently released (October 2019) study by the investor protection foundation run by the Public Investors Arbitration Bar Association (PIABA) reports that the process is “broken” as a result of being “systematically gamed, exploited and abused” by brokers and brokerage firms. 

Among the problems found, according to PIABA's study are sham cases seeking nominal damages ($1.00) resulting in lower costs and fewer arbitrators, and brokerage firms which almost never (only 2% of the time) oppose brokers' requests for expungement.  Investors only rarely appear to oppose expungement requests, and may not even get notice of expungement hearings.  The result is that the dice are loaded in favor of expungement, with the result that investor complaints, including those that may be settled for a significant payment, never see the light of day.  

Are meritless claims against brokers made by investors?  Without question.  Should brokers be able to unilaterally wipe the slate clean, leaving the appearance that no claim had ever been filed in the first place?  That is a much tougher to justify--especially if the system for vetting such requests lacks sufficient safeguards to ensure that they are granted only in extraordinary cases where the request is truly justified.

Lessons From "Arbitration Nation:" an Empirical Study of 40,000+ Consumer Arbitrations

A recent study identifies a problem -- "we know little about what actually happens in" arbitration -- and offers a solution: find out what happened in more than 40,000 consumer arbitrations administered by four major arbitration forums over the course of six years.

In the study, "Arbitration Nation: Data from Four Providers," Professors Andra Cann Chandrasekher and David Horton analyzed "40,775 consumer, employment, and medical malpractice arbitrations filed between 2010 and 2016 in four major arbitration administrators: the AAA, Judicial Arbitration and Mediation Services (JAMS), ADR Services, Inc., and the Kaiser Health Care Office of Independent Administration (Kaiser)."

Important conclusions:

• consumer arbitration is relatively fast and affordable, with corporate defendants paying the lion's share of the costs;
• although the U.S. Supreme Court has repeatedly and emphatically enforced mandatory arbitration clauses in recent years, the uptick in the volume of arbitration "has been modest;"
• plaintiffs who represent themselves in arbitration rarely win (they only prevail in 10% of employment cases)--"pro se plaintiffs struggle mightily" (but do they fare any better in court?  -- the authors don't comment) and
• arbitration favors repeat players (what I'll call frequent flyers) on both sides--arbitration favors frequent flyer corporate defendants but also frequent flyer plaintiffs' law firms.

To encourage more lawyers to take relatively small value cases to arbitration and thus (presumably) weed out cases without merit and improve outcomes for plaintiffs who have cases with merit, the authors propose "that state lawmakers create rewards for plaintiffs’ lawyers to arbitrate. Specifically, jurisdictions should create a statutory 'arbitration multiplier': an extra bounty for winning a case in arbitration." Intriguing.  And, not likely to be preempted.

What about securities arbitration?  Alas, the authors' study did not include data on FINRA arbitrations.  That is in part because the study relied on data on consumer arbitrations made public as required by Section 1281.96 of the California Code of Civil Procedure--a law that does not cover FINRA.  

New Maine Restrictions on Non-Compete Agreements; Bans Restrictive Employment Agreements

A new Maine law will make it more difficult for Maine employers to enforce non-compete agreements, an issue of particular interest in the securities industry where non-competition agreements often have been used to deter brokers from changing jobs. In enacting the new legislation, Maine joins other New England states, including Rhode Island, Massachusetts, and New Hampshire, which also have new laws on the books limiting the enforceability of non-compete agreements.

On June 28, 2019, Governor Mills signed LD 733 (“An Act to Promote Keeping Workers in Maine”) into law. Under the new law, a noncompete agreement is defined as a contract or contract provision that prohibits an employee or prospective employee from working in the same or a similar profession or in a specified geographic area for a certain period of time following termination of employment.

The new law applies to noncompete agreements entered into or renewed after September 18, 2019.

The new law makes clear that noncompete agreements are “contrary to public policy” and enforceable only to the extent that they are reasonable and are no broader than necessary to protect one or more of the following legitimate business interests of the employer: the employer’s trade secrets, the employer’s confidential information that does not qualify as a trade secret, or the employer’s goodwill. A noncompete agreement may be presumed necessary if the legitimate business interest cannot be adequately protected through an alternative restrictive covenant, including but not limited to a nonsolicitation agreement or a nondisclosure or confidentiality agreement. 

Further, the new law prohibits an employer from requiring or entering into a noncompete agreement with an employee earning wages at or below 400% of the federal poverty level. 

If an employer requires a noncompete agreement for a position of employment, the employer must disclose that requirement in any advertisement for that position, and an employer must provide an employee or prospective employee with a copy of a noncompete agreement at least three business days before requiring that employee or prospective employee to sign the agreement. 

The terms of a noncompete agreement (except for a noncompete agreement with a physician) are not in effect until after an employee has been employed with the employer for at least one year or a period of six months from the date the agreement was signed, whichever is later. 

The law is enforceable as civil violation subject to a fine of $5,000 or more. The Department of Labor is responsible for enforcement of the law. 

LD 733 also addresses “Restrictive employment agreements,” defined as an agreement: (a) between two or more employers, including through a franchise agreement or a contractor and subcontractor agreement; and (b) prohibits or restricts one employer from soliciting or hiring another employer's employees or former employees. With respect to such agreements, an employer may not enter into a restrictive employment agreement or enforce or threaten to enforce a restrictive employment agreement. An employer that does so commits a civil violation subject to a fine of $5,000 or more. The Department of Labor is also responsible for enforcement of this section.