Arbitration Provision in Form U-4 Agreements Unenforceable in the Absence of Express Language Waiving Statutory Right to Seek Relief in Court

In a case of immense importance to financial institutions which normally resolve employment disputes with their employees through arbitration under the auspices of the Financial Industry Regulatory Authority (“FINRA”), the New Jersey Appellate Division recently affirmed a trial court’s refusal to enforce an arbitration agreement in an employment dispute between a brokerage firm and its stockbroker employee because the arbitration agreements did not contain express language waiving the statutory right to a jury trial. Barr v. Bishop Rosen & Co. [1] In Barr, the stockbroker employee brought a lawsuit against his Broker/Dealer employer seeking indemnification for attorneys’ fees and costs arising out of the defense in an arbitration arising from a customer complaint. The employer moved to dismiss the lawsuit pending an arbitration before FINRA. The employer relied on two forms, known as the Uniform Application for Securities Industry Registration or Transfer Form U-4 (“Form U-4”), that the employee executed in 1999 and 2009, both of which contained clauses requiring the employee to arbitrate “any dispute, claim or controversy that may arise between me and my firm, or a customer, or any other person . . .” The employee was required to sign the Form U-4 as a condition of employment. The trial court denied the employer’s motion to dismiss because neither arbitration clause stated that the employee understood that he was waiving a jury trial. The Appellate Division affirmed, holding that the clauses were unenforceable because they “failed to clearly and unambiguously inform plaintiff of his waiver of the right to pursue his claims in a judicial forum.”

Barr follows on the heels of a 2014 New Jersey Supreme Court case in which the Court held that an arbitration agreement contained in a consumer contract was not enforceable because “it did not clearly and unambiguously signal to plaintiff that she was surrendering her right to pursue statutory claims in court,” which rendered the provision unenforceable. Atalese v. U.S. Legal Services Group. [2] One year later, the Appellate Division refused to enforce an arbitration agreement in an employment discrimination lawsuit because the agreement did not contain a particularly clear waiver of the right to trial regarding an LAD claim. “[A]n employee’s right to know that arbitration includes a waiver of his or her right to a trial in court is equally as important as their right to know the type of claims they are agreeing to arbitrate.” The Appellate Division found that an arbitration provision in an employment agreement must include specific language that the employee is waiving a right to trial in court, which must be in a “simple, clear, understandable, and easily readable way.” Milloul v. Knight Capital Group, Inc. [3]

The Bottom Line:

The current Form U-4 contains a consent to arbitrate that is notcompliant with New Jersey law. The applicable language reads:

15A. INDIVIDUAL/APPLICANT'S ACKNOWLEDGEMENT AND CONSENT

5. I agree to arbitrate any dispute, claim or controversy that may arise between me and my firm, or a customer, or any other person, that is required to be arbitrated under the rules, constitutions, or by-laws of the SROs indicated in Section 4 (SRO REGISTRATION) as may be amended from time to time and that any arbitration award rendered against me may be entered as a judgment in any court of competent jurisdiction. [4]

According to Barr, this clause is unenforceable in New Jersey precisely because it fails to "explain what arbitration is," nor do they "indicate how arbitration is different from a proceeding in a court of law." [5] The import of Atalese, Milloul and Barr, when read together, threaten to render arbitration agreements involving employees or customers unenforceable. Therefore, absent a change to the language of Item 5, employers should promulgate and distribute for execution arbitration agreements that are compliant with New Jersey law. There is nothing unlawful about expanding arbitration in a separate document. For example, while FINRA does not specifically require the arbitration of statutory employment discrimination claims, it permits member organizations to enter into separate, private arbitration agreements that cover statutory employment discrimination claims with their employees. Chanchani v. Salomon/Smith Barney, Inc. [6]