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Dodd Frank’s Revisions To SOX (Part 3)

May 17, 2013

This is our last post today on Dodd Frank’s revisions to SOX.

In addition to the other posts we released today, section 922(c) of Dodd-Frank declared void any “agreement, policy form, or condition of employment, including a predispute arbitration agreement” which waives the rights and remedies afforded to SOX whistleblowers. 18 U.S.C. § 1514A(e) (“No predispute arbitration agreement shall be valid or enforceable, if the agreement requires arbitration of a dispute arising under this section.”). Most courts have held this provision is not retroactive, although two have held that it is retroactive. At this point, the trend is against retroactivity, but the issue is not yet fully resolved issue in the courts.

In Henderson v. Masco Framing Corp., No. 3:11-CV-00088-LLRH, 2011 WL 3022535 (D. Nev. July 22, 2011), the Plaintiff entered into a pre-dispute arbitration agreement with his employer, which governed all claims under federal law, including SOX whistleblower claims. The agreement was entered prior to the passage of Dodd-Frank, which prohibited such agreements. Plaintiff later filed a wrongful termination suit under Section 806 of SOX. He moved to compel arbitration, and the court focused on whether Dodd-Frank applies retroactively. It noted that one court, Pezza v. Investors Capital Corp., 767 F. Supp. 2d 225 (D. Mass. 2011), gave retroactive application to this provision, and found the pre-Dodd-Frank arbitration agreement could not be enforced. The Henderson court, however, rejected the Pezza court’s approach and stressed that the presumption against retroactivity is particularly strong where, as in this case, a retroactive application would eliminate established contractual rights. Accordingly, the court granted the employee’s motion to compel arbitration.

Pezza has also been rejected by most other courts to consider the issue. In January 2012, the court in Holmes v. Air Liquide USA LLC, Civil Action No. H–11–2580, 2012 WL 267194 (S.D. Tex. Jan. 30, 2012), aff’d, No. 12-20129, 2012 WL 5914863 (5th Cir. Nov 26, 2012), agreed with the Henderson court, holding as follows:

The Court begins its analysis by agreeing with both the Pezza and Henderson courts that the portions of Dodd–Frank addressing predispute arbitration do not evidence any intent to apply retroactively. Thus, the Court proceeds to considering whether the presumption against retroactivity is rebutted in this case. Ultimately, the Court cannot agree with the holding in Pezza that the portions of Dodd–Frank at issue affect only procedural rights. Instead, as the court held in Henderson, this Court finds that the rights of contracting parties are substantive, and that a statute affecting those rights undoubtedly impairs rights that existed at the time the parties acted. As the court in Henderson explained, retroactive application in this case “would not merely affect the jurisdictional location in which [the parties’] claims could be brought; it would fundamentally interfere with the parties’ contractual rights and would impair the ‘predictability and stability’ of their earlier agreement.” 2011 WL 3022535, at *13 (quoting Landgraf, 511 U.S. at 271). Indeed, Landgraf explicitly mentioned “contractual or property rights” as “[t]he largest category of cases in which . . . the presumption against retroactivity has been applied,” as these are areas “in which predictability and stability are of prime importance.” 511 U.S. at 271. Because Dodd–Frank would have a “genuinely ‘retroactive’ effect,” 511 U.S. at 277, the Court concludes that neither 7 U.S.C. § 26(n)(2) nor 18 U.S.C. § 1514A(e) affects the enforceability of the arbitration agreement between Plaintiff and Defendants.

Id. at *6 (footnote omitted).

In March 2012, in Taylor v. Fannie Mae, 839 F. Supp. 2d 259, 263 (D.D.C. 2012), the district court also agreed with Henderson, and granted the defendant’s motion to compel arbitration, holding that it would not be permissible to retroactively apply the bar against arbitration agreements under SOX. Id. at *3. That same month, another district court also ruled the same way. See Blackwell v. Bank of America Corp., NO. CIV.A. 7:11-2475-JMC, 2012 WL 1229673, at *4 (D.S.C. Mar 22, 2012).

Going against the trend, in September 2012, the district court in Wong v. CKX, Inc., 890 F. Supp. 2d 411, 421-23 (S.D.N.Y. 2012), agreed with Pezza, and found that Dodd-Frank’s ban of arbitration agreements in SOX disputes did in fact apply retroactively to preclude arbitration of a dispute that arose before the amendment was passed on July 21, 2010.

One final point: in Holmes, the plaintiff argued that Dodd-Frank’s prohibition of arbitration provisions meant that agreements with such provisions are unenforceable, even as to non-Dodd-Frank or SOX claims. In rejecting that argument on appeal, the Fifth Circuit stated:

Any other decision would lead to the untenable conclusion that the Act wholesale invalidates all broadly-worded arbitration agreements (of which there are many) even when plaintiffs bring wholly unrelated claims. We must interpret the Act in a manner that avoids such unreasonable results. See Birdwell v. Skeen, 983 F.2d 1332, 1337 (5th Cir. 1993); cf. Gonzales v. Oregon, 546 U.S. 243, 267 (2006) (“‘Congress, we have held, does not alter the fundamental details of a regulatory scheme in vague terms or ancillary provisions—it does not, one might say, hide elephants in mouseholes.’ “ (citations omitted)).

Holmes, 2012 WL 5914863, at *2.

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