All’s Fair When It Comes To Arbitrator Ranking

From Ulmer’s Broker-Dealer Law Corner Blog
By Alan M. Wolper

I just read an article about a research study conducted of FINRA arbitrations by three people associated with Harvard, Stanford, and the University of Texas, respectively, and their overarching conclusion is a doozy. Now, admittedly, I have not read the study itself (as it costs $5 to get a copy), so I only know what I read in the article about the study, which I am assuming is correct. Let me get right to it.

Most notably, the authors complain that the arbitrator selection process is unfair to claimants because “though the selection process gives both firms and clients control,” “firms, especially experienced ones, are better at selecting industry-friendly arbitrators.” This is truly amazing stuff. As you are likely well aware, FINRA arbitration panels are determined by the parties themselves through the “neutral list selection process.” FINRA supplies both sides the same list of names, and the parties then strike those individuals they don’t want, and rank the rest in order of preference. FINRA removes anyone stricken from the lists and populates the panel with the highest ranked names that are left.

Claimants and respondents are provided the exact same universe of information about potential arbitrators, including their bios and a list of any prior awards. In addition, both sides have the ability to do whatever further research is available, including, at a minimum, Google searches. From this, the parties attempt to divine how a potential arbitrator will respond to the anticipated evidence. As defense counsel, I look for people who may be dismissive of a claimant who refuses to take responsibility for his or her own trading decisions. I look for people who are actually willing to apply the law to the facts. I look for people who are not swayed by efforts to appeal to their sympathy, or to “do what’s right” even if not countenanced by the law. There is nothing wrong with what I do; indeed, if I didn’t do it, I would undoubtedly be committing malpractice.

More importantly, the lawyers for the claimant are doing the exact same thing, conducting the exact same analysis, only approaching it from the reverse perspective. They read the tea leaves as best they are able to rank potential panelists who they believe would be most inclined to reject my arguments and award their clients money, and lots of it.

Granted, it is a bit of an art rather than a science, and is something that one tends to get better at the more one does it. But, to suggest that respondents have an unfair advantage over claimants in the arbitrator selection process is absolute nonsense. And I don’t need study data to prove my point; I am made aware of this every day, in every case I work. How? Easy. Let’s take, for instance, the ranking of the panel chairman. FINRA supplies the parties ten names. From those names, both claimant and I each get to strike four of them. That leaves six for each side to rank (which, generally speaking, ensures that there will be at least one person left for FINRA to appoint, since if we each strike four entirely different people, there will still be two names left).

So, I immediately strike the potential panelists whose bios or award histories tell me that they would be claimant friendly. I rank highest those people who I believe would be the opposite, i.e., friendly to my client. But, remember, the claimant is doing the same thing. So, how do I know that the claimant is doing just as good a job as me in evaluating the panelists? Because the people that end up on the panel are not the ones that I ranked highly, because all of those names are stricken by the claimant. In other words, by striking the very same people who I ranked highly, claimant has demonstrated that he/she has evaluated those people’s predilections the same as me, has correctly identified them as respondent friendly.

I will attest that this is the general rule, not the exception. The exceptional case will be the one where I somehow manage to end up with a panelist who I ranked highly. Unfortunately, what this means, that is, what happens when both claimant and respondent do their jobs well in evaluating potential arbitrators, is that the panels end up being comprised of the lowest ranked candidates (since I strike all claimant’s highly ranked names and claimant does the same to mine). But that’s not the point here; the point is that it is absurd for anyone, particularly three researchers who don’t do arbitrator rankings every day, to conclude that I somehow have an advantage over the claimant in the arbitrator ranking process.

And lest we forget, remember that nowadays, there are almost no cases anymore that include an industry panelist. Nearly all customer arbitrations are conducted by “all-public” panels because PIABA convinced FINRA that having someone from the industry on the panel was unfair to claimants. FINRA, characteristically afraid of upsetting PIABA, instituted a rule giving the claimant the absolute right to dictate an all-public panel composition, no matter what I think about it. So, if you want to talk fairness of the arbitrator selection process, how about we remember that little fact.

There are a couple of other things in the article that I cannot refrain from commenting on. First, there is a quote from Christine Lazaro, PIABA’s president. According to the article, she “favors making FINRA arbitrations more public” because “firms can take positions that they wouldn’t take in court. . . . The privacy and the confidentiality of the system can systematically hurt investors because the firms are able to take positions that are inconsistent with their public positions.” I can’t tell you how ironic this is. Just a week or so ago, I was defending an arbitration, and in response to my motion to dismiss based on the statute of limitations, claimant’s counsel repeatedly reminded the hearing panel that they were there to do “equity.” In support of this argument, he handed the panel a printout of a speech that Linda Feinberg, the former president of FINRA Dispute Resolution, gave to NASAA back in 2004, in which she said extolled the virtues of arbitration vs. litigation because in arbitration, panels need not be wedded to the law. The inference the lawyer urged the panel to draw from her remarks was that the panel ought not to apply the statute of limitations if that would, somehow, be “unfair” to the claimant.

If any party is guilty of making arguments in arbitration that are unconnected to the law, arguments that would not be countenanced in court, I can assure you that it is not the respondent’s counsel.

Finally, the article also noted this: “[T]he researchers also found that clients retaining an attorney who is a member of PIABA received awards four to five percentage points closer to the damages requested in their cases. The difference stems from the experience of PIABA attorneys, and legal expertise clearly helps a case.” Putting aside the question whether the methodology chosen to evaluate the potential benefits of using a PIABA attorney makes any sense – and I don’t think it does, given how inflated the requested damages generally are – I can’t tell if this should be construed as an endorsement of PIABA or a condemnation. Yes, PIABA lawyers get bigger awards, but, frankly, I would have expected to see the difference between using a PIABA lawyer to handle an arbitration and someone without any significant securities experience to be much greater than four to five points.