Arguing For Arbitration Clauses In Customer Agreements

In a landmark decision with potentially wide implications, a Financial Industry Regulatory Authority hearing panel recently ruled that Charles Schwab & Company Inc. could include a provision in its customer agreements prohibiting customers from bringing class action claims against Schwab and requiring customers to arbitrate their claims. The decision should come as welcome news to brokerage firms and likely will prompt other firms to amend their customer agreements to include similar clauses.


In early October, 2011, Schwab amended its customer account agreements to include a waiver of Schwab customers' right to initiate class action proceedings against Schwab.1 In particular, Schwab amended the section of its customer agreements titled "Waiver of Class Action or Representative Action" to provide:

Neither you nor Schwab shall be entitled to arbitrate any claims as a class action or representative action, and the arbitrator(s) shall have no authority to consolidate more than one parties' claims or to proceed on a representative or class basis.

You and Schwab agree that any actions between us and/or Related Third Parties shall be brought solely in our individual capacities. You and Schwab hereby waive any right to bring a class action, or any type of representative action against each other or any Related Third Parties in court. You and Schwab waive any right to participate as a class member, or in any other capacity, in any class action or representative action brought by any other person, entity or agency against Schwab or you.2

The practical effect of the change was to eliminate class actions and force all customer claims to go to arbitration.3

In enacting the changes, Schwab seized upon the U.S. Supreme Court's recent decision in AT&T Mobility LLP v. Concepcion as the basis for the class action waiver.4 In Concepcion, the Supreme Court struck down a judicially created exception in California, which excepted certain consumer disputes involving relatively small damages from the Federal Arbitration Act's requirement that agreements to arbitrate be enforced.5 In doing so, the Supreme Court relied in part on the "liberal federal policy favoring arbitration" and the "fundamental principal that arbitration is a matter of contract."6

Disciplinary Proceeding

Shortly after Schwab amended its customer agreements, FINRA's Department of Enforcement ("FINRA Enforcement") filed a complaint on Feb. 1, 2012, challenging the enforceability of the changes. FINRA Enforcement brought three causes of action arising from two components of Schwab's amended customer agreements. In its first two causes of action, FINRA Enforcement claimed that Schwab improperly violated FINRA rules preserving customers' options to join in class action litigation.7 In the third cause of action, FINRA Enforcement claimed that Schwab's prohibition against consolidating the claims of multiple parties in arbitration impermissibly limited the power of FINRA arbitrators in violation of FINRA rules.8

Class Action Prohibition

FINRA Enforcement's first two causes of action implicated two sets of FINRA rules. The first set of rules, FINRA Rules 2268(d)(1) and (d)(3), and their predecessors, NASD Rules 3110(f)(4)(A) and 4(C), which are identical to the FINRA rules, generally prevent any effort to limit or contradict FINRA rules. The rules specifically provide:

No predispute arbitration agreement shall include any condition that:

(1) limits or contradicts the rules of any self-regulatory organization;


(3) limits the ability of a party to file any claim in court permitted to be filed in court under the rules of the forums in which a claim may be filed under the agreement;

The second set of rules implicated by Schwab's class action waiver were FINRA Arbitration...

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