Many practitioners wrestle with the temptation, when they file FINRA Statements of Claim, to request a Reasoned or ‘Explained Award.’ From the standpoint of customer attorneys, a common reason they don’t request one is the fear that it will unwittingly provide ammunition for a Petition to Vacate a favorable Award by the ‘deep pocketed’ Respondent brokerage firms. This article explores this issue and offers guidance and suggestions primarily, for customer attorneys.
But first, it must be stated for those who don’t know, that FINRA has no appeals process in place. Parties who wish to appeal a FINRA Award and seek to have it vacated are left to the mercy of the courts. Along with significant costs and long time frames for resolution. This should not be so.
FINRA should have an in-house appeals process to deal with dissatisfied counsels who want to re-test the merits of their positions. This new process would be far less expensive than the court petition process, quicker and not loaded with motions and counter-motions. A FINRA appeals process could be an alternative to the courts and structured to accommodate the predicted increase in appeals, especially from customer attorneys. I will leave the detailed mechanics to those far more enlightened about litigation appeals than myself. As to the make-up, panelists only being lawyers, and a number of panelists on the appeals bench. FINRA should have a process that gives parties a choice: FINRA appeals venue or the courts.
Before we leave this sub-topic of appeals, and for those who don’t know, the petition to vacate a FINRA Award can generally only prevail if the appellant successfully argues and proves one of two basic themes. A bias on the part of one or more of the arbitrators or a manifest disregard for the law.
[1] I am Chair-qualified in FINRA and this is what I was taught during my FINRA Chair training. There might be other subsets of an appeal that could be argued, but the courts have generally held firm that those two allegations must be proven in order for the vacatur of an Award. And, for those rare appeals that do prevail in court, the FINRA process then requires an entirely new arbitration filing, with a new panel, discovery and hearing. This is simply unfair to the generally under-financed customer and attorney. It also provides brokerage firm Respondents with a negotiation advantage in pre-hearing settlement discussions.
From the FINRA Web site regarding appeals, [2] we learn the following:
Under what circumstances can an arbitration award ruling be appealed?
Arbitration is final and binding, subject to review by a court only on a very limited basis. However, a party may file a motion to vacate the arbitration award in a federal or state court of competent jurisdiction pursuant to the Federal Arbitration Act or applicable state statute. There are limited grounds for vacating an arbitration award. In addition, the motion to vacate must be filed within the time period specified by the applicable statute.
Now, back to Reasoned Awards, or, as FINRA calls them: ‘Explained Decisions.’ From the FINRA Dispute Resolution Arbitrator’s Guide[3]:
Explained Decisions
FINRA Rule 12904 provides that parties may require the arbitrators to write an explained decision. If the parties submit a joint request for an explained decision at least 20 days before the first scheduled hearing date, the chairperson is required to draft an explained decision and will receive an additional honorarium of $400.
Of course, requiring adversaries to agree to this process means it is rarely required of Chairs to write such a Award. The more responsible and experienced ones do it without being asked and without extra compensation.
The explained decision is fact-based, stating the general reason(s) for the panel’s decision. Arbitrators are not required to include legal authorities or damage calculations..
Absent a joint request from the parties for an explained decision, arbitrators may still include a written decision to be published within the body of the Award if they believe that an explanation would benefit the parties. However, if the panel decides on its own to write an explained decision, or at the request of only one party, then no panel member will receive an honorarium for writing the decision. That said, few arbitrators agree to be panelists for the pay, even though it has recently been increased.
Explained Decisions are referenced in another rule:Rule 12514. Again, from the manual:
(d) Explained Decision Request
At least 20 days before the first scheduled hearing date, all parties must submit to the panel any joint request for an explained decision under Rule 12904(g).
And, from FINRA Rule 12904:
(g) Explained Decisions
(1) This paragraph (g) applies only when all parties jointly request an explained decision.
(2) An explained decision is a fact-based award stating the general reason(s) for the arbitrators’ decision. Inclusion of legal authorities and damage calculations is not required.
(3) Parties must make any request for an explained decision no later than the time for the prehearing exchange of documents and witness lists under Rule 12514(d).
(4) The chairperson of the panel will be responsible for writing the explained decision.
(5) The chairperson will receive an additional honorarium of $400 for writing the explained decision, as required by this paragraph (g). The panel will allocate the cost of the chairperson’s honorarium to the parties as part of the final award.
(6) This paragraph (g) will not apply to simplified cases decided without a hearing under Rule 12800 or to default cases conducted under Rule 12801.
There are two important aspects to these Rules.
One is that it requires both sides to agree upon a request to receive an Explained Award from the panel. I think this is wrong and unfair to both sides.
Two, it does not require the panel to explain the rationale for an award involving monetary damages. I also think this is wrong as damages are the foundation for many appeals.
So, what’s the problem? In my opinion, there are several dynamics at work and here they are:
1. Most arbitrators I know, and have served with, have a fear of the their Awards being overturned by a court. When an Award is appealed, FINRA can require the Chair to submit an internal report regarding the hearing. As well as to give FINRA the reasons for the panel’s decision. This has happened to me twice where I was a panelist and the decision was appealed. I then spent a lot of time with the Chair helping him reconstruct the testimony and the evidence, as well as our rulings during the hearing, for his report. He was not paid additional compensation for his internal report; nor was I. One of appeals was rare in that it was initiated by the customer Claimants who were unhappy with the amount of the Award.
2. It is my opinion that most Panelists enjoy their panel assignment and try to be neutral, but want to be chosen again. Given the ‘strike’ mechanisms of FINRA’s ranking process, I think there is a tendency to not grant attorney’s fees, award full compensatory damages or award punitive damages even when appropriate.
The Biblical ‘split the baby’ syndrome is often employed by panels when it comes to awarding damages. A panelist who has given punitive damages will predictably be ‘struck’ during rankings by the Respondent’s Counsels. Thus, my suspicion is that many panelists are sensitive to this ranking system and not only limit damages but also may be inclined to deny a claim altogether in the hopes of not being struck in the future. And, on this point, why is it that Panels, when awarding monetary damages, also order that all hearing expenses be split between the parties. This doesn’t make sense to me. If Respondents are at fault, then why should Claimants have to absorb hearing costs in bringing their action in which a panel agrees they were mistreated? That has never made sense to me.
3. The very case in which I was a panelist subsequently appealed, noted the damages as the reason for appeal. The motion to appeal was based on our ‘inadequate’ damages. This is another example why Awards should not only be explained but also the amount of the damages should be explained with reasoning and foundations. As an expert witness, I am expected to provide damage analysis and theories in my testimony.
I have testified over 60 times in FINRA arbitration hearings and have done just that. And, when damages are awarded in the cases in which I have testified, I am often dumbfounded as to the methodology (if there was one) how those monetary Awards were comprised. Even in a jury trial, you are free to ask jurors after their verdict how they arrived at the damages. And, if an arbitration panel had to explain their monetary damages, it would be helpful, in my opinion, for subsequent cases and panels to be aware of various damage models that were previously used or rejected. Even though, under law, arbitration Awards have no precedential value. Arbitrators shouldn’t be allowed to hide from their deliberations as to how they arrived at a damage number.
4. A lot of practitioners representing customer Claimants are fearful that if they prevail with a large Award, Respondents will most certainly appeal it. I am not a believer in this fear. First of all, very few Awards are vacated. Second, yes, the Respondents typically have ‘deeper pockets’ than the Claimants. However, I think Claimant’s attorneys overlook the fact that the Respondents’ attorneys actually file very few appeals as a percentage of issued Awards. And, in big cases, Claimant’s attorneys should pursue their cases and introduce facts and evidence with the assumption that if they prevail, they will be appealed. Several attorneys interviewed in preparation of this article told me they request reasoned awards in every case. Additionally, Respondents object in every case in which the customer prevails. This is a good example of why FINRA should permit Reasoned Awards if only one party requests it.
5. Respondent brokerage firms rarely file appeals for small cases. With this in mind, I suggest Claimant’s Counsels request a reasoned Award in all small cases. If nothing else, it sends a message to the panel that you believe your case is solid and you are not afraid of a panel’s reasoning in deciding an Award, and, for how much, and why. Admittedly, this may be simplistic, but a message (request for ‘reasoned Award’) is not.
6. What is missing in FINRA Awards is transparency. When judges instruct juries, there is transparency. When jurors are interviewed after a court decision, there is transparency. There should be similar transparency in FINRA Awards. I testified as an expert in a Federal case in New York where the jury found for the Plaintiff. The Judge overruled the decision. Saying the jury made a math error and an entirely new trial had to take place. That’s transparency – especially in dealing with damages.
CONCLUSIONS
FINRA rules should be changed to allow reasoned Awards if only one party requests them. FINRA panels should explain their methodology or reasoning in arriving at monetary damages. And, lastly, there should be an appeals process within FINRA that could be an alternative to the courts as a choice.
