In light of the COVID-19 pandemic, courts and arbitration tribunals have been forced to grapple with how to safely conduct hearings while ensuring that the results of such hearings stand up to legal challenges. Back in May, we told you about a challenge to a FINRA arbitration award issued in the early days of the pandemic, where eight of nine hearing sessions were held in person and the final hearing session was held via Zoom. Soon after that award was issued, FINRA issued administrative guidance postponing all in-person arbitration hearings. That guidance was eventually updated to allow for arbitration hearings to be conducted via Zoom pursuant to a stipulation by the parties or, crucially, a panel order. The enforceability of such a panel order was recently put to the test.

In a FINRA arbitration between two customers and their broker, the panel issued an order requiring that the hearing commence via Zoom. The order was issued over the broker’s objection. Unsatisfied with the result, the broker attempted filed in federal court for a temporary restraining order and a preliminary injunction against FINRA, prohibiting it from moving forward with the remote arbitration hearing as scheduled.  In support of his case, the broker presented the court with two main arguments, both of which were rejected:

First, the broker argued that a remote hearing would constitute a breach of contract on the part of FINRA.  He pointed to the Uniform Submission Agreement, which states that “in the event a hearing is necessary, such hearing shall be held at a time and place as may be designated by the Director of FINRA.(1)” The broker also pointed to Rule 12213(a) of the FINRA Code of Arbitration Procedure, which states that “[t]he Director will decide which of FINRA’s hearing locations will be the hearing location for the arbitration.” According to the broker, the referenced “place” or “location” must be physical, not virtual. The court disagreed. In holding that the broker was unlikely to succeed on his breach of contract theory, the court noted that FINRA is not a party to the Uniform Submission Agreement. The court also argued that, even if FINRA had been a party to the agreement, the Federal Arbitration Act is generally interpreted as requiring that procedural decisions be left to the arbitration panel.   

Second, the broker made a due process argument. According to the broker, FINRA functions as a “state actor” as a result of its relationship to the U.S. Securities and Exchange Commission (SEC), which holds certain supervisory and regulatory functions over FINRA.  Therefore, the broker argued, FINRA is subject to the Due Process Clause of the Fifth Amendment to the U.S. Constitution. The broker then argued that a virtual hearing does not constitute a meaningful opportunity to be heard (which is required by the Due Process Clause) because it could not properly address the complexity of his case. Among other things, the broker noted that his case required a Spanish interpreter and would include dozens of witnesses with hundreds of documents that would need to be shared remotely. The court was not persuaded, and even pointed to its own experience with remote hearings:

[The broker] – who bears the burden of persuasion – cites no evidence that defenses cannot be presented remotely. He thus pits his conjecture against this court’s experience holding several remote evidentiary hearings since the pandemic began (once with an interpreter), all of which permitted the parties to air their claims and defenses fully. Remote hearings are admittedly clunkier than in-person hearings but in no way prevent parties from presenting claims or defenses.  Moreover, the court sees no reason why the Claimants would fare better than the respondent in a remote hearing.  The Claimants will have the burden of proof in the arbitration; if anything, the logistical challenges of a remote hearing is more likely to harm them.  [The broker] has established, at most, that he would prefer not to arbitrate remotely, not that remote proceedings make it more likely that he will suffer any harms.

In its “balance of equities” analysis, the court also pointed out that, if the broker were to prevail, FINRA would be required to “choose between either holding in-person hearings that exposed [the participants] to COVID-19, or indefinitely delaying its hearings.”  Moreover, the court held that the customers in the arbitration should not be required to wait another six months for a hearing on their claims. The broker immediately appealed the court’s order to the Seventh Circuit Court of Appeals, but the Seventh Circuit summarily affirmed the district court’s order. 

While other challenges to virtual hearings may yet prove successful, this ruling suggests that courts are not likely to allow litigants to use the COVID-19 pandemic and the prospect of a virtual hearing as an excuse to indefinitely delay the resolution of their disputes.  After all, justice requires that claimants be afforded the right to recover their damages, and justice delayed is justice denied.  

The case is captioned Legaspy v. FINRA, No.1:20-cv-4700 (N.D. Ill.).

The attorneys at Chilivis Grubman represent clients of all types and sizes in connection with government investigations and regulatory matters, including matters involving the DOJ, SEC, and FINRA.  If you need assistance with such a matter, please contact us today.

1. All FINRA arbitration participants must sign a Uniform Submission Agreement before proceeding with a FINRA arbitration.