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Federal Court Rules SOX Whistleblower Amendment’s Ban on Predispute Arbitration Agreements Retroactive

March 24, 2011

In Pezza v. Investors Capital Corp., Judge Douglas P. Woodlock of the United States District Court for the District of Massachusetts ruled that Section 922(e) of the Dodd-Frank Act, which bans predispute arbitration agreements regarding the Sarbanes-Oxley Act (SOX) whistleblower protection, is retroactive. The statutory language is as follows:

(e)NONENFORCEABILITY OF CERTAIN PROVISIONS WAIVING RIGHTS AND REMEDIES OR REQUIRING ARBITRATION OF DISPUTES – –

(1) WAIVER OF RIGHTS AND REMEDIES.–The rights and remedies provided for in this section may not be waived by any agreement, policy form, or condition of employment, including by a predispute arbitration agreement.

(2) PREDISPUTE ARBITRATION AGREEMENTS.–No predispute arbitration agreement shall be valid or enforceable, if the agreement requires arbitration of a dispute arising under this section.

The defendants raised the obligation to arbitrate as an affirmative defense and moved to compel arbitration. While the defendant’s motion to compel arbitration was under advisement, the Dodd-Frank Act was enacted, raising the issue of whether the ban on predispute arbitration agreements applies to disputes occurring prior to the law’s enactment. The court applied the following framework from the Supreme Court’s decision in Fernandez-Vargas v. Gonzales, 548 U.S. 30, 37-38 (2006) to this case:

We first look to whether Congress has expressly prescribed the statute’s proper reach, and in the absence of language as helpful as that we try to draw a comparably firm conclusion about the temporal reach specifically intended by applying our normal rules of construction. If that effort fails, we ask whether applying the statute to the person objecting would have a retroactive consequence in the disfavored sense of affecting substantive rights, liabilities, or duties on the basis of conduct arising before its enactment. If the answer is yes, we then apply the presumption against retroactivity by construing the statute as inapplicable to the event or act in question owing to the absence of a clear indication from Congress that it intended such a result.

In applying this framework, the court concluded that congressional intent regarding the temporal reach of the ban was at best unclear. However, since the ban merely confers jurisdiction and does not affect the parties’ substantive rights, the court held the ban applies to conduct arising prior to its enactment:

The rationale is that this type of statute “takes away no substantive right but simply changes the tribunal that is to hear the case.” In other words, present law governs in such a case because statutes conferring or ousting jurisdiction “speak to the power of the court rather than to the rights or obligations of the parties.”

While Section 922 affects the validity of the arbitration clause, a contractual term agreed upon by the parties, I am of the view that this section principally concerns the type of jurisdictional statute envisioned in Landgraf. As the Supreme Court held, “[b]y agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by the statute; it only submits to their resolution in an arbitral, rather than a judicial, forum.”

(citations omitted).

Based on that rationale, the court quashed defendants’ motion to compel arbitration and allowed plaintiff’s SOX whistleblower lawsuit to proceed in federal court – a win for employee rights.

Tagged: Dodd-Frank Act, Sarbanes-Oxley Act (SOX), Whistleblower Laws (Federal)