Law and Insurance

Texas Supreme Court Affirms Arbitration Agreement, As Usual

In re NEXT Financial Group, Inc., #08-0192 (Tex. November 14, 2008) see In re NEXT Decision

The Texas Supreme Court breaks no new ground here, showing once again that it is easier for a longhorn steer to go through the eye of a needle than a plaintiff to wiggle out of an arbitration agreement.  While not strictly an insurance issue, insurers benefit from the arguably lower awards from arbitrations than juries hand down. 

This is a wrongful discharge case. The employee was regional manager of a securities brokerage firm, who fired him for poor performance. The employee said he was fired for refusing to conceal a trader's fraudulent "churning" transactions.  Even since Sabine Pilot Serv. Inc. v. Hauck, 687 S.W.2d 733 (Tex. 1985), an employer may not fire an employee for refusing perform an illegal act, and keeping mum about fraudulent trading practices is illegal.  So, the employee sued for wrongful termination under Sabine Pilot.

As a registered broker-dealer in the regulated securities industry (yes, despite all recent evidence to the contrary, financial securities is a federally regulated industry), the employee had signed a Uniform Application for Securities Industry Registration or Transfer form that included an agreement to arbitrate "any dispute, claim or controversy that may arise between [employee] and [employer] . . . that is required to be arbitrated under the rules . . . of the National Association of Securities Dealers (NASD)."  The employer invoked the arbitration clause.

The NASD arbitration requirement has an exception.  Claims alleging employment discrimination in violation of a statute are not subject to mandatory arbitration.  The plaintiff jumped on this exception and argued that his Sabine Pilot case was just what NASD had in mind.  It was a case of employee discrimination, and termination for refusing to commit a criminal act violates a statute -- Section 36.06(a) of the Texas Penal Code.  So, said the employee, send me back to court.

Not so fast, said the Texas High Court.  The regulators clearly meant to exclude only violations of statutes proscribing employment discrimination, not common law actions.  Thus, a Sabine Pilot action is not converted into a statutory discrimination claim merely because the underlying conduct might constitute a violation of some other type of statute.

The employee must therefore make his case before a three-person arbitration panel comprising, usually, industry experts, not a jury of his peers.

U.S. Supreme Court Rejects Contractual Expansion of Judicial Review of Arbitration Awards

Hall Street Assocs., L.L.C. v. Mattel, Inc., No. 06-989 (U.S., March 25, 2008) See Hall Street Decision

In a landmark decision, the United States Supreme Court held that the increasingly popular practice of contracting for expanded judicial review of arbitration awards is not permissible under the Federal Arbitration Act (the "FAA").  This practice was seen as a way to obtain the benefits of arbitration while eliminating one of its drawbacks: limited judicial review.  The Hall Street decision may have the unintended consequence of driving parties away from arbitration.  Since expanded judicial review is now much less available, more parties may opt for traditional litigation with its right to appeal a bad result.

For a fuller discussion of this decision, see Client Alert, published by Thompson & Knight Appellate Practice Specialty Group.