Collective Actions in Court: Exactly What the Financial Industry Asked For
Financial institutions have reaped enormous benefits from creating their own system of private law, and the least they can do is follow their rules and allow their employees to respond collectively when they have been wronged. That’s what Public Justice is arguing in an amicus brief we just filed in the United States Court of Appeals for the Second Circuit.
Class action bans in the securities markets have gotten a lot of attention lately. After all, Charles Schwab just agreed to drop class action bans in its contracts with customers under pressure from consumers and a decision from the retail securities market’s self-regulatory body, the Financial Industry Regulatory Authority, stating that FINRA rules prohibit class-action bans.
What’s less well-known is that the FINRA rules regulate not just the relationship between a financial firm and its consumers, but also between the firms and their employees. And just as consumer class-action bans are prohibited by FINRA rules, those same rules say that financial firms must allow their employees to take class and collective actions to court.
Nevertheless, in Lloyd v. JPMorgan Chase, JPMorgan is arguing that its contract with its employees gets it out from under the FINRA rules. The employees brought a collective action in federal court alleging that JPMorgan illegally underpaid them, and the question of whether the employment contract successfully takes away the rights of employees to bring collective actions in court is now pending before the Second Circuit. If the court sides with JPMorgan, the employees will be swiftly kicked out of the court system and, if they choose to proceed, will have to arbitrate their claims individually in a forum designed, funded, and managed by the firms: FINRA arbitration.
Last month, Public Justice filed an amicus brief in the case. In it, we argue that the financial industry has long (and successfully) warded off close government regulation by developing an extensive self-regulatory system. In essence, the securities firms decided they would be better off writing their own rules than letting the government do it.
The firms get all the benefits of not actually being part of the government (avoiding cumbersome rulemaking, transparency) while also taking advantage of FINRA’s role as a regulator (immunity from defamation, preemption over state laws).
Our point is that the financial firms now have to lie in the bed they made: They chose to write their own rules and chose to permit employees to bring collective actions in court. Now they have to comply with it—firms can’t pick and choose which rules to follow and which they’d like to pass on. FINRA rules are not a buffet. Either the industry follows all the rules it created or it benefits from none. It can’t have it both ways.
We hope that the Second Circuit agrees and that cheated employees of white-shoe financial firms will be able to stand up for their rights in court. Just like the industry said they should.