March 27, 2008
I SUPPORT the proposed FINRA Code amendments concerning motion practice in arbitration. Please consider the following comments in evaluating the amendments.
I am an attorney in Cleveland, Ohio and concentrate my practice in the area of securities litigation. After representing broker-dealers and financial professionals for many years, my firm's securities practice now is devoted almost exclusively to the representation of individual investors. Thus, I have experience gleaned from having served on both sides of the typical investment-related dispute.
Frankly, because of the limited nature of discovery in arbitration, I do not approve of having any dispositive motions in FINRA arbitrations other than those dealing with such obvious grounds as res judicata,the existence of a prior settlement and release, proof of mistaken identity, or other extremely rare circumstances unrelated to the merits or timing of alleged wrongdoing. However, FINRA's proposed amendments are a significant step in the right direction. I urge their passage for the following reason, and with the hope that additional needed changes will be made in the future.
During the late 1980s and throughout the 1990s, when my firm was primarily representing respondents in arbitration, it was not a common practice for us or our colleagues in the securities defense bar to engage in the filing of dispositive motions, especially early in a proceeding. There were several reasons for this. First, we knew that motions to dismiss were unwarranted in the absence of a legitimate defense to liability, which defense had to be demonstrable from the face of the statement of claim alone. Second, we knew such motions were rarely if ever granted, and we thus felt that filing them in the absence of strong justification would be a waste of our clients' money. Third, we thankfully did not have marching orders from our industry clients to submit dispositive motions in every case, without regard to merit.
Today, the reality of securities arbitration is markedly different. We began focusing on the investors' side in 2000. I would estimate that during the past eight years, respondents have filed motions to dismiss in well over 90% of our cases. The vast majority of these so-called "motions to dismiss" bear no resemblance to the traditional motion of that name.
A motion to dismiss is supposed to be limited to the question of whether, assuming all of the plaintiff's allegations to be true and deciding all factual inferences in the plaintiff's favor, it is clear from the face of the complaint alone that the plaintiff can prove no set of facts entitling him to relief. But the motions to dismiss filed in FINRA arbitration generally are nothing more than lengthy arguments that the claimant's version of the facts is false. Since these motions almost always are filed before any discovery has taken place, the arbitrators are being asked to rule on disputed issues of fact without the benefit of any evidence. While arbitrators generally deny these motions, and properly so, claimant's counsel are forced to engage in the absurd and burdensome exercise of drafting extensive opposition briefs in each instance.
In all of the many cases my firm has handled on behalf of claimants, only once has a panel granted a motion to dismiss, and that dismissal was limited to a single count of a multi-count pleading. The ruling later was wiped out when the panel's award was vacated by an appellate court due to arbitral misconduct.
Why do respondents file these motions when they know they will not be granted? My assumption in this regard was confirmed when I attended an annual seminar presented for industry members and their counsel.
One prominent message emphasized by defense practitioners speaking at this seminar was that a motion to dismiss should be filed in every case and, following the inevitable denial, submitted again later in the case if possible. The stated purpose of this tactic was not to obtain dismissal, but rather, to familiarize the arbitrators with the theme of respondent's defense. The goal was to position the respondent firmly in the role of victim, and thereby predispose the panel to dislike and distrust the claimant. In other words, respondents in FINRA arbitrations see motions to dismiss as a valuable public relations or propaganda tool. Merit often plays little if any role in their use.
Moreover, motions also are used to bludgeon claimants and their counsel in the hope that causing them to invest extensive time, effort, and cost will weaken their resolve. Naturally, since defense counsel receive hourly fees, the habitual filing of motions is, from their perspective, a welcome and lucrative practice.
It is possible that abusive motion practice has become so systematic and so systemic that many respondents and their counsel actually have come to believe it is not abusive at all. No doubt many broker-dealers and defense lawyers would take great umbrage at my statements and opinions regarding their actions, and would vehemently deny the motives I've ascribed to them. But even if the industry and its lawyers are assumed to have the purest of intentions, abuse is still abuse and must be dealt with.
Rampant motion practice by respondents has had an enormously harmful effect on industry arbitration. The process of dispute resolution has become a torturous affair for arbitrators, parties, and their counsel. Cases take longer to reach resolution. Panels are overwhelmed by the increased number of submissions from the parties, most arbitrators dread receiving papers of even moderate length, and it appears that some arbitrators have stopped reading briefs altogether.
This is the backdrop against which FINRA has proposed its new rules designed to restrict pre-hearing motion practice.
The rules are not perfect, but incremental measures to improve the situation are better than no measures at all, and change is long overdue. Thus, I support the proposed amendments and urge their speedy approval.