RSS Feed LinkedIn Instagram Twitter Facebook
FMG Law Blog Line

Archive for April, 2015

The War Against Pre-Dispute Arbitration Clauses Rages On

Posted on: April 30th, 2015

By: John H. Goselin, II and Benjamin Keck

On March 10, 2015, the Consumer Financial Protection Bureau (CFPB) released a 728-page “Arbitration Study.” According to the CFPB’s Arbitration Study, which primarily focused on credit card contracts, consumers are generally unaware of whether or not their credit card agreements include arbitration clauses. CFPB concluded that most consumers, subject to arbitration clauses, wrongly believe they can participate in class action lawsuits, despite the fact that nearly all arbitration clauses now include provisions prohibiting the consumer from participating in such actions.

In the class-action cases involving credit cards, corporate defendants filed motions to compel arbitration in about 2/3 of the cases. In contrast, the arbitration clauses are invoked in under 1% of individual cases. Most arbitration clauses have “carve-outs” for small-claims cases, which are far more likely to be filed by the company than the other way around.

CFPB’s study was mandated by Congress when this new agency was created as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act). The CFPB’s regulatory focus is primarily on consumer lending products such as mortgages, credit cards, student loans, and auto loans, but also appears to reach such products as prepaid wireless phones. The CFPB’s findings seem to support what many consumer advocates have been arguing for years: that the primary purpose of mandatory arbitration clauses in consumer contracts is to shield corporate defendants from class-action lawsuits.

The Securities and Exchange Commission (SEC) remains the primary regulator for broker-dealers and investment advisors, but the SEC was also directed by the Dodd-Frank Act to study the impact of mandatory arbitration clauses in the financial sector. After five years, the SEC still has not issued a report. The Public Investors Arbitration Bar Association (PIABA), the trade group for plaintiff’s lawyers who sue broker-dealers and investment advisors, wants the SEC to follow the CFPB’s lead and make negative findings against mandatory arbitration.

The big question going forward is whether the CFPB study and the pending SEC study will result in any substantive changes in the way business is conducted. The battle lines are drawn regarding whether mandatory arbitration continues as a viable method for corporate America to contain the costs of litigation or whether consumer advocates will get their way and open the doors for more litigation in state and federal courts.  The studies are just the early rounds in the ongoing battle of wills. Stay tuned!


BlackRock Advisors LLC and its Chief Compliance Officer Slapped for Failing to Properly Handle Conflicts of Interest Issues

Posted on: April 28th, 2015

By: John H. Goselin, II

Conflicts, conflicts as far as the eye can see!   On April 20, 2015, the Securities and Exchange Commission announced a settlement with BlackRock Advisors LLC and its chief compliance officer arising from a failure to disclose a conflict of interest created by the outside business activities of one of BlackRock’s top fund managers.

The fund manager at issue created, financed and managed an energy company which entered into a joint venture with a publicly traded company whose shares were owned by the BlackRock funds being managed by the fund manager.  Pursuant to the settlement, BlackRock is paying a $12 million civil penalty and BlackRock’s chief compliance officer is individually paying an additional $60,000 civil penalty.  BlackRock must also engage an independent compliance consultant to review and propose changes to BlackRock’s compliance policies and procedures.

The S.E.C. found three specific violations: (i) a willful violation of Section 206(2) of the Investment Advisors Act of 1940, which prohibits an investment advisor from engaging in any transaction, practice, or course of business which operates as a fraud or deceit upon a client or prospective client; (ii) a willful violation Section 206(4) of the Advisors Act and Rule 206(4)-7 thereunder by failing to implement written policies and procedures reasonably designed to prevent violations of the Advisors Act; and (iii) a violation of Rule 38a-1(a) pursuant to which BlackRock’s chief compliance officer is required to provide a written report at least annually to a fund’s board of directors that addresses each material compliance matter that occurred since the prior year’s report.

Outside business activities used to be a headache primarily reserved for independent channel broker-dealers, however, the growing national sensitivity regarding conflicts of interest and the action taken against BlackRock illustrate that everyone in the financial services industry, whether an investment advisory firm or a broker-dealer, should take a step back and re-calibrate their sensitivity meter regarding how to handle potential conflicts of interest.  Stunningly, the S.E.C. not only penalized BlackRock for failing to fully appreciate the conflict of interest that the actions of its fund manager presented, but also held BlackRock’s chief compliance officer personally responsible for the Firm’s failure to be more diligent with regard to this matter.  The S.E.C.’s Order demonstrates the new emphasis for written policies and procedures to not simply define acceptable and unacceptable behavior, but also to clearly delineate follow up monitoring procedures to confirm that specific activities are monitored over time as the scope and breadth of the activity evolves.   Moreover, the Order against BlackRock’s chief compliance officer cautions chief compliance officers in all financial services entities to be over-inclusive in their report of potential compliance issues whether to management or to the pertinent board of directors.

Conflicts of interest present challenges for professionals to fully appreciate their import.  Considering multiple perspectives tends to lead to better decisions than a solitary approach.  But, as the S.E.C. states in its Order: “As an investment advisor, BlackRock has a fiduciary duty to exercise the utmost good faith in dealing with its clients – including to fully and fairly disclose all material facts and to employ reasonable care to avoid misleading its clients.  It is the client, not the investment advisor, who is entitled to determine whether a conflict of interest might cause a portfolio manager – consciously or unconsciously – to render advice that is not disinterested.”  (Emphasis added).  Best practice clearly points to erring on the side of disclosure.   And for chief compliance officers, you better err on the side of providing written reports of potential issues to management and the board of directors if you want to avoid having to open your personal checkbook.


Eight Minutes Too Many: Supreme Court Decides that Traffic Stop Prolonged for Use of a Drug Detection Dog Violated the Fourth Amendment

Posted on: April 24th, 2015

By: Brian R. Dempsey

During a lawful traffic stop, a police officer can ask a driver to exit a vehicle, conduct a free-air drug sniff with a trained canine, and even investigate the possibility of criminal conduct which is unrelated to the original purpose of the traffic stop.  The Supreme Court has held that these are “de minimis” intrusions on personal liberty that do not require reasonable suspicion of criminal activity in order to comport with the Fourth Amendment.

In Rodriguez v. United States, the Supreme Court was asked to decide whether the same rule applies after the tasks relating to the traffic stop have been completed.

The case arose from a midnight traffic stop which was conducted by an officer who was accompanied by a trained drug-sniffing dog.  After the officer issued a warning to the driver (and thereby completed the traffic stop), he called another officer to come to the scene to provide security while he had his canine conduct a free-air sniff around the car.  The traffic stop was prolonged for seven or eight minutes until the dog alerted on the car.  The officers then discovered a bag of methamphetamine, leading to a federal prosecution which ultimately led to this appeal from the denial of the driver’s motion to suppress the incriminating evidence.

In a 6-3 decision which was handed down earlier this week, the Court concluded that an officer’s authority to detain a driver for a traffic stop “ends when tasks tied to the traffic infraction are — or reasonably should have been – completed.” Justice Ruth Bader Ginsburg wrote for the majority, and was joined by Chief Justice John Roberts and Justices Antonin Scalia, Stephen Breyer, Sonia Sotomayor, and Elena Kagan.

Justices Samuel Alito, Clarence Thomas, and Anthony Kennedy dissented.  In his dissent, Alito concluded that independent suspicion existed for the continued investigation – an issue which the majority left open for the lower courts to decide.  Alito also found it “perverse” that if the officer had not waited for a back-up officer for safety reasons, he could have performed a solo dog sniff without any constitutional problem.  For his part, Justice Thomas criticized the majority’s rule because it appears to be linked to the efficiency of the individual officer conducting the stop.  After all, the Court’s prior Fourth Amendment jurisprudence had consistently emphasized that the Fourth Amendment reasonableness inquiry does not hinge on the characteristics of the individual officer conducting the seizure.

In sum, the Court concluded that law enforcement activities unrelated to the traffic stop, while not illegal in and of themselves, are permitted only if they do not measurably extend the duration of the stop.  In the wake of this opinion, it is likely that future cases involving roadside investigations will turn on fact-intensive determinations regarding whether officers have completed traffic stops with reasonable efficiency, or whether they have dragged their feet to accommodate unrelated investigative tasks.

The full opinion can be found at the Court’s website:


New York AG Targets Rise of “On-Call” Retail Employees

Posted on: April 15th, 2015

By: Amanda M. Cash

New York’s Attorney General, Eric T. Schneiderman, recently launched an inquiry into 13 major retailers, including Gap, Abercrombie & Fitch, J. Crew Group, L. Brands, Burlington Coat Factory, TJX Companies, Urban Outfitters, Target, Sears, Williams Sonoma, Crocs, Ann Inc. and J.C. Penney.

The Attorney General sent letters to these retailers questioning a practice where retailers keep workers “on call” for shifts.  According to the Attorney General, these “on-call” shifts require employees to report by phone, text, or email prior to their shift.  Hourly employees sometimes will not find out until the night before or the morning of the shift whether they will actually work a shift.

Employers prefer these types of “on-call” shifts as it helps retailers staff their shifts based on store traffic forecasts.  Of course, for employees, it causes difficulties in planning for things such as childcare or school schedules.  Reportedly, JCPenny, Ann Inc., and Sears Holding have denied utilizing “on-call” scheduling, while it is unclear whether the other retailers have utilized such “on-call” scheduling.

The New York Attorney General is targeting this “on call” practice based on a New York state law that requires employers to pay hourly workers who report for a scheduled shift for at least 4 hours of work.  The emails, texts, and phone calls are being interpreted by the New York Attorney General as “reporting” for a scheduled shift.

These 13 retailers now have until May 4 to provide the New York Attorney General with information regarding the processes they follow to schedule on-call shifts, such as whether they use computerized systems and penalize employees who do not follow on-call procedures.  He also asked the companies for any analysis they might have conducted on cost savings associated with on-call shifts and the impact on workers’ wellbeing. We will keep you updated with any new developments on this story.

FCC Commissioner Reiterates Need for FCC to Address TCPA Issues

Posted on: April 9th, 2015

By: Matthew N. Foree

Michael O’Rielly, the Commissioner of the Federal Communications Commission (FCC) addressed the Association of National Advertisers (ANA) last week.  During his remarks, he discussed litigation under the Telephone Consumer Protection Act (TCPA), which he described as “an important issue that is impacting all sectors of the community.”

O’Rielly’s remarks reiterate the statements he published last year on the FCC’s blog regarding the need to provide clarity about the TCPA in the wake of a 30% increase in TCPA lawsuits.  During his address to the ANA, O’Rielly admitted that “FCC decisions and court rulings have broadened the scope of the TCPA, creating uncertainty and litigation risk for legitimate businesses.”  He noted that this has resulted in businesses avoiding making calls to existing customers or clients, “even if the purpose of the call could directly and immediately help the consumer.”

He noted that certain consumer groups have expressed fear that “the FCC will ‘gut the TCPA’ and lead us down a slippery slope of more robocalls.”  O’Rielly played down those fears, stating that “[n]othing could be further from the truth, and I am concerned that catering to this unfounded fear will end up hurting the people they are trying to help.”

O’Reilly’s remarks recognized the need for the TCPA to be more adaptive to technology.  As he recognized during his address, “FCC involvement occurs at the speed of regulation, not innovation.”  Reassuringly, O’Rielly cast aside as unrealistic consumer groups’ arguments that companies can simply manually dial each and every telephone number rather than use electronic means.

In conclusion, he stated, “We can’t paint all legitimate companies with the brush that every call from a private company is a form of harassment.  It is time for the FCC to act to provide clear rules of the road that will benefit everyone, and that means acting on TCPA petitions before us.”

O’Rielly’s remarks give hope that one day the TCPA will enter the 21st century and curtail the rising trend of overly punitive lawsuits.