You Can (Maybe) Arbitrate That: Arbitration and the Dodd-Frank Act


Mandatory arbitration agreements as a condition of employment are a key tool used by employers to avoid costly and protracted litigation with their employees. Unsurprisingly, many employees are not eager to submit their claims against employers to arbitration, perceiving that arbitrators are more likely than courts to favor employers.

Congress included a ban on mandatory arbitration in the context of corporate and financial whistle-blower litigation when it enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. As a result, employees can no longer be compelled to arbitrate their retaliation claims under the Sarbanes-Oxley Act (SOX), the Commodity Exchange Act or the new Consumer Financial Protection Act.

However, a federal appeals court ruled in December 2014 that this prohibition on mandatory arbitration does not apply to the powerful new causes of actions that Dodd-Frank created to protect whistle-blowers.

This distinction may be important to employee-side attorneys in deciding how to proceed on behalf of a financial whistle-blower client. There appears to be some overlap between SOX and the new Dodd-Frank claims, but an employee may have no judicial remedy if they are subject to mandatory arbitration and also fail to exhaust the administrative remedies necessary to bring a SOX claim.

The Contract Calls for Arbitration

The U.S. Court of Appeals for the Third Circuit, in Khazin v. TD Ameritrade Holding Corp., 39 IER Cases 819, 2014 BL 343692 (3d Cir. 2014), ruled that TD Ameritrade could compel arbitration of a former employee’s Dodd-Frank whistle-blower claim, because he had a written employment contract that required him to arbitrate all employment-related disputes and that was enforceable under the act.

The employee, Boris Khazin, sued TD Ameritrade in federal court in New Jersey, alleging that he was fired for recommending a change in the pricing of one the company’s financial products in order to comply with federal regulations. The district and appeals courts both ruled that Khazin must arbitrate his claims, but for different reasons.

Amending All But the Act Itself

While the district court based its reasoning on the fact that Khazin’s employment contract predated the passage of Dodd-Frank, the Third Circuit instead found on appeal that the Dodd-Frank legislation’s anti-arbitration section expressly amended SOX but did not contain any reference to Dodd-Frank’s own anti-retaliation cause of action, codified at 15 U.S.C. § 78u-6(h).

The court left unexplained why Congress would add a ban on mandatory arbitration to SOX but not do so for a new cause of action that otherwise provides for significantly higher damages and contains fewer procedural hurdles for employees. Khazin argued unsuccessfully that this result is “counterintuitive” and that it must have been the result of a “gap” in the language of such a massive bill.

The Third Circuit is the first appeals court to squarely address the issue of arbitrability of Dodd-Frank claims, but district courts in New York and Connecticut have reached the same conclusion.

Since other aspects of the Dodd-Frank anti-retaliation claims, especially the interplay between SOX and Dodd-Frank, have generated splits of authority in the federal courts, it will be interesting to see whether other courts adopt Khazin’s argument and reject the Third Circuit’s approach.

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