Mandatory Arbitration in the Securities Industry: Efficiency at the Cost of Justice for All?

By Lim, Sung J. | Journal of Corporation Law, Spring 2001 | Go to article overview

Mandatory Arbitration in the Securities Industry: Efficiency at the Cost of Justice for All?


Lim, Sung J., Journal of Corporation Law


I. INTRODUCTION

Christine Litaker was an African-American administrative assistant working for Lehman Brothers, one of the major brokerage houses in the United States.1 Because of her gender and race, her boss regularly called her a "black bitch,"2 and other employees

frequently used the term "lazy nigger."3 Moreover, one senior vice president constantly touched her and also grabbed other female employees.4 After years of blatant sexual harassment, Lehman Brothers fired Litaker the week her maternity leave was set to begin, despite an "excellent" performance evaluation.5 Litaker subsequently brought suit in federal court against Lehman Brothers for sex and race discrimination, but the court dismissed the case and granted Lehman Brothers' motion to compel arbitration.6 Litaker now faced the prospect of presenting her case not to a jury of her peers, but rather to a homogenous industry arbitration panel comprised of mostly white, older males.7

This frightening scenario represents a common problem in the securities industry. Christine Litaker slammed into a little known, but extremely daunting roadblock many employees working in the securities industry face: predispute arbitration clauses.8 As an employee in the securities industry, Litaker had to sign, at the commencement of her employment, the Uniform Application for Securities Industry Registration or Transfer, more commonly called the Form U-4.9 The National Association of Securities Dealers (NASD), through the Form U-4, requires every employee who deals directly with the public in the purchase and sale of securities to resolve all employment-related disputes through arbitration. 10

In signing the mandatory arbitration agreement, employees within the industry are denied court-provided rights such as due process, trial by jury, appellate review, and full discovery. 11 "In essence, mandatory arbitration contracts reduce civil rights protections to the status of the company car: a perk which can be denied at will."12 While seemingly unfair, arbitration as a method of alternative dispute resolution (ADR) has a long tradition in American jurisprudence. In 1925, Congress established a policy favoring arbitration when it enacted the United States Arbitration Act,13 today called the Federal Arbitration Act (FAA).14 The FAA provides for the enforcement of valid, written arbitration clauses in contracts involving transactions in interstate commerce.15 Accordingly, the FAA expresses a strong federal policy favoring arbitration.16 That policy has been articulated at all levels of the federal judicial system, including the U.S. Supreme Court. 17

Moreover, the use of arbitration in the securities industry to resolve disputes has a tradition that even predates the FAA.18 Participants in the securities industry have created their own organizations, rules, and practices to promote the fair and efficient operation of financial markets (namely, mandatory arbitration procedures) for over 150 years.19 Use of arbitration, rather than litigation, to resolve disputes is a long-established industry practice used in the securities industry since at least 1817.20

Nevertheless, despite Congress's policy favoring arbitration, the enforceability of mandatory arbitration clauses is under siege in the courts, administrative agencies, and even in legislatures. For example, the Ninth Circuit Court of Appeals recently held that the 1991 amendments to the Civil Rights Act of 1964 preclude compulsory arbitration of claims arising under Title VII of that Act.21 Other courts continue to find that mandatory arbitration agreements are enforceable and consistent with the strong federal policy favoring arbitration, making this issue ripe for Supreme Court review.

This Note focuses on mandatory arbitration within the securities industry and argues that the practice fails to comport with the current status of our nation's civil rights laws. Mandatory arbitration creates a disparate impact on and undermines the statutory rights of minorities and women. …

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