Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Sunday, August 12, 2007

What is the Problem with Securities Arbitration?

Critics of the securities arbitration process frequently express concerns about bias -- the fact that in a three-person panel one arbitrator will be a member of the securities industry and the fact that public arbitrators may have ties to the industry.  See Gretchen Morgenson's article in today's New York Times for an expression of these concerns.  However, in my opinion, a more serious concern goes to the competence of arbitration panels, or, more charitably, whether it is reasonable to expect individuals who serve as occasional arbitrators for minimal pay, to perform the functions of a judge.  A recent 2d Circuit opinion, Porzig v. Dresdner, Kleinwort, Benson, North America, LLC, provides a good illustration.  In this arbitration, the panel found that "age was a factor" in the termination of Porzig's employment by Dresdner.  Despite the fact that the federal statute requires an award of attorney's fees and costs to a prevailing plaintiff in an age discrimination claim, as Porzig's attorney advised the panel, the panel originally denied both to Porzig.  The federal district court concluded that denial of attorney's fees and costs was in manifest disregard of the law and remanded the case to the arbitration panel to award attorney's fees and assess costs against Dresdner, not Porzig.  On remand, Porzig's attorney submitted detailed information of his services, the time spent, and the rate charged, documenting $250,000 in attorney's fees and another $12,000 in costs.  Porzig's attorney also provided the panel with clear legal authority supporting his costs.  Dresdner's attorneys submitted an opposing affidavit, arguing that Porzig's contingency fee agreement with his attorney should set the maximum amount of the attorney's fee; that an award of attorney's fees may be unnecessary to achieve the statutory purpose; and that Porzig's fee application should be substantially reduced, if not denied in its entirety.  After requiring submission of Porzig's contingency fee agreement, the panel awarded $75,000 in attorney's fees and another $8,5000 in costs, an amount approximately the same as the amount of the award Porzig's attorney retained as his contingency fee and costs.  The panel also ordered Porzig's attorney to remit to his client the amount of the award that he retained as his contingency fee and costs.

Porzig again sought vacatur and modification of the award, and, in vacating the modified award, the Second Circuit clearly expressly its annoyance at the behavior of both Dresdner's counsel and the arbitration panel.  The court comes close to accusing Dresdner's counsel of misstating the applicable law to the panel; the law is clear that the prevailing party in an age discrimination case is entitled to attorney's fees, not limited by the amount of any agreed contingency fee, and that amount includes time spent in litigating the fee.  The court emphasizes that vacatur of an award for manifest disregard is rarely granted, and that the law does not require arbitrators to give reasons.  However, in the absence of any explanation, the award of an amount approximating the amount of the contingency fee demonstrated that the panel acted in manifest disregard of the law, particularly in this case, when the award had been partially vacated and the case remanded to the panel for the purpose of calculating attorney's fees and costs.  The court clearly expected the arbitration panel to pay closer attention to the district court's instructions.

The opinion nicely illustrates a common problem facing arbitrators -- what are they to do when each side presents legal arguments that are (as is frequently the case when material issues are disputed) completely opposed to each other?  NASD Regulation (and presumably now Finra as well) instructed arbitrators that they were not to conduct independent research on any legal issue, but rely on parties to brief them on the law, and, of course, arbitrators, unlike judges, do not have support staff to research the law for them.  How are arbitrators, particularly those without legal training, supposed to assess strengths and weaknesses of the proponents' legal assertions?

The Second Circuit also deals with another issue that has been much debated in recent years -- whether an arbitration panel has any authority over the attorneys who represent parties to an arbitration.  The Second Circuit held that the arbitration panel had no authority to order Porzig's attorney to return his contingency fee to Porzig.  While the opinion specifically prohibits interference with the attorney-client relationship, it may have broader applicability.  The recent debate focused on whether the SRO rules could authorize panels to impose sanctions on attorneys for discovery or other violations; NASD Regulation withdrew the rule when many (including me) filed comment letters challenging the SRO's power to sanction private party's attorneys.      

Thanks to Jill Gross, for calling this case to my attention.

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