Early Takeaways From FINRA's Virtual Hearings

By Joel Everest and Patrick Mulligan
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Law360 (September 9, 2020, 5:14 PM EDT) --
Joel Everest
Joel Everest
Patrick Mulligan
Patrick Mulligan
As the COVID-19 pandemic hit the nation, the Financial Industry Regulatory Authority announced on March 25 that all in-person arbitration hearings were postponed. The postponement has been extended through Oct. 30, and further postponements are most certainly forthcoming. 

FINRA recently stated that, at an unspecified time in the future, it would begin assessing the viability of in-person hearings on a location-by-location basis.[1] However, FINRA also noted that "only a handful" of its 70 hearing locations across the country currently demonstrate "public health conditions that are consistent with [Centers for Disease Control and Prevention] guidance for activities such as in-person hearings."

While FINRA did not specify which locations might allow for in-person hearings in the relatively near future, the states that currently have the lowest per capita rates of transmission with low positivity rates and new cases remaining flat or trending downward are: Vermont, New Hampshire, Maine and Connecticut. These four states serve as the venue for about 1% of FINRA's 5,065 open cases as of the end of July.[2]

The vast majority of FINRA's hearing locations — including many locations with a high number of open cases such as Florida, Texas, California and Puerto Rico — are continuing to experience relatively high rates of infection. In addition, nearly half of the states, plus some cities, have placed restrictions on anyone traveling from higher risk areas.

For example, while New Hampshire is among the states that could conceivably host an in-person hearing in the near future, it requires visitors from 45 states to quarantine for 14 days upon arrival.

These requirements create substantial barriers to resuming in-person FINRA arbitrations, which frequently involve lawyers, fact witnesses, experts and arbitrators spread among multiple states. Accordingly, it is difficult to imagine the large-scale return of in-person arbitrations in the near future.

Hotly Contested Virtual Hearings

In connection with its initial postponement announcement in late March, FINRA provided parties with the option of proceeding with their hearings virtually via Zoom videoconferencing. According to FINRA, cases proceed virtually if all parties agree or if the arbitrators order it. 

Not surprisingly, parties frequently disagree about whether to proceed with a virtual hearing. As of Aug. 18, requests for a virtual hearing had been filed in about 2% of open cases — 118 total requests: 64 in customer cases and 54 in intraindustry cases.[3]

In customer cases, motions to proceed virtually had been contested 80% of the time. Notably, parties in intraindustry cases have been much more agreeable, with motions to proceed virtually contested just 33% of the time. 

When virtual hearing motions are contested, arbitrators have ordered parties to proceed to a virtual hearing in 70% of cases — 76% in customer cases and 56% in intraindustry cases.

Forcing parties to proceed virtually has had broader consequences in some instances. In one matter where a virtual hearing was ordered by the panel, the party whose objection was overruled filed an action in federal court seeking a temporary restraining order and injunction to stop the virtual hearing.[4]

Following a denial of the injunction request by the lower court, the issue was appealed to the U.S. Court of Appeals for the Seventh Circuit. On Aug. 27, the appeal was voluntarily withdrawn as moot due to the fact that the arbitration had already proceeded.

Time will tell if the objecting party will pursue a different avenue of relief such as a motion to vacate any award issued by the arbitrators.

Virtual Hearing Results: Key Takeaways

By analyzing the results of the cases that have proceeded to a virtual hearing, several key takeaways are apparent.

Almost two-thirds of cases in which a virtual hearing begins result in a settlement.

Almost two-thirds of cases in which a virtual hearing has begun ended up settling before a final award. On Aug. 12, FINRA stated that a virtual hearing had commenced in 17 cases, with six, or 35%, of those cases resulting in a final award and 11, or 65%, resulting in a settlement after the virtual hearing had begun.[5]

While the sample size is small, this settlement rate for parties who have already invested the time and expense of preparing for and commencing a final hearing is surprisingly high. 

FINRA does not publish statistics on settlement rates after an in-person hearing has begun, but experience suggests that the typical rate is in the neighborhood of 5%-10%. A settlement rate of 65% for virtual hearings could mean that many parties who have started a virtual hearing were not comfortable with the process.

One matter that ultimately settled after the hearing began provides a unique look into potential issues. At the conclusion of the hearing, the arbitrators awarded $7.5 million in compensatory damages, $3 million in interest, and $800,000 in attorney fees.[6]

The respondent sought to vacate the award by asserting, among other claims, that the arbitrators were "inattentive ... looking at other screens, typing, and eating during the course of the presentation," with one arbitrator who "even blocked her screen during the hearing," and a chairperson who "walked away from his screen" during closing arguments.[7]

The case ultimately settled while the petition to vacate was pending. It should be noted that virtual issues were not the only grounds cited in the vacatur request; indeed, eight of the nine hearing days were held in-person prior to the pandemic.

Very few virtual hearings have been held.

In addition to the settlement rate, it is noteworthy how few virtual hearings have been held to date. In fact, as detailed below, just three FINRA cases have reached a final award after being conducted entirely over Zoom.[8] 

Between the end of March and Aug. 18, a total of 41 cases had at least one virtual hearing session.[9] By contrast, FINRA typically sees around 40 to 50 in-person final hearings conclude each month. Of the 41 virtual cases, just seven final awards have been issued to date: four customer cases and three intraindustry cases.

Like the case detailed above in which just one of the nine hearing days was virtual, four of these seven hearings were conducted largely in person prior to the pandemic. So, five months after the option was first announced, just three awards have been issued following a fully virtual hearing.

Fully virtual hearings have been relatively short.

The three cases that were decided entirely over Zoom were all relatively short hearings. While the average FINRA hearing length is four days,[10] these three virtual hearings were completed, respectively, in half a day, two days and three days.

While few cases of any type have been heard over Zoom, complex cases requiring longer hearings, more witnesses and more evidence have not yet been put to the test in the virtual context. Indeed, even an average case has not yet been put to the test in a virtual-only hearing.

Virtual hearing awards have been atypical.

All seven of the hearings that involved at least one virtual hearing session and proceeded to a final award resulted in damages, compared to FINRA's average of around 45% of cases resulting in damages. In fact, three of these cases resulted in awards beyond compensatory damages: one awarded attorney fees and interest, one awarded punitive damages and sanctions, and another awarded attorney fees and costs.

These results further suggest that the few cases that have proceeded to a virtual hearing are not typical arbitrations. 

Conclusion

Virtual FINRA hearings are still far from being a part of the new normal. Parties have been reluctant to proceed with virtual hearings, and the early results suggest that the few cases that have been decided by a virtual hearing have been unusual cases. While virtual hearings will likely be around for months to come, many uncertainties remain surrounding the process.



Joel M. Everest is a principal and Patrick J. Mulligan is an associate at Bressler Amery & Ross PC.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.


[1] https://www.finra.org/rules-guidance/key-topics/covid-19/hearings/impact-on-arbitration-mediation.

[2] https://www.finra.org/arbitration-mediation/dispute-resolution-statistics/hearing-location-statistics.

[3] https://www.finra.org/events-training/virtual-conference-panels/covid-19-impact-on-arbitration.

[4] Legaspy v. FINRA, Case No. 20-CV-4700, 2020 U.S. Dist. LEXIS 145735 (N.D. Ill. Aug. 12, 2020).

[5] Legaspy v. FINRA, Case No. 20-CV-4700, DE 19 (N.D. Ill. Aug. 12, 2020). FINRA did not specify how current these statistics were as of August 12.

[6] https://www.finra.org/sites/default/files/aao_documents/17-01930.pdf.

[7] Wunderlich Securities, Inc. et al. v. Dominick & Dickerman, LLC et al., Case No. 1:20-cv-03507 (S.D.N.Y. May 5, 2020).

[8] Two other cases resulted in a final award following a fully virtual hearing, but both of those matters were simply unopposed presentations by one side where the other party never entered an appearance in the arbitration.

[9] https://www.finra.org/arbitration-mediation/dispute-resolution-statistics#virtual.

[10] https://www.finra.org/sites/default/files/Education/p117487_0_0.pdf.

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