3rd Circuit Upholds Ex-Bank Employee’s Right to Avoid Arbitration of Sarbanes-Oxley Claim for Retaliatory Termination

Weiner Brodsky Kider PC

Weiner Brodsky Kider PC

The Third Circuit Court of Appeals recently issued an opinion upholding the right of a former bank employee to proceed with a Sarbanes-Oxley claim that he was retaliated against by his former employer, a national bank, without being subject to arbitration, as the bank’s employee handbook during his term of employment had previously required.  The court looked to both state law as well as Dodd-Frank’s specific language prohibiting pre-dispute agreements to arbitrate whistleblower claims under Sarbanes-Oxley.

The bank employee was terminated in 2013 after he reported improprieties in the bank’s internal complaint monitoring system.  He believed the bank was failing to report or underreporting compliance issues to federal regulators, and considered his employment termination to be an act of retaliation.

In 2015, he brought retaliation claims in the Middle District of Pennsylvania under both RICO and Sarbanes-Oxley.  The bank moved to compel arbitration of the claims, relying on employee handbooks from 2009 and 2011 that contained arbitration agreements.  Notably, Sarbanes-Oxley claims were subject to arbitration under the 2009 handbook, but the 2011 handbook excluded claims from arbitration as required by statute without mentioning Sarbanes-Oxley specifically.  Nevertheless, the district court found that applying Dodd-Frank’s prohibition of arbitration for the Sarbanes-Oxley claim was impermissibly retroactive, and ruled plaintiff’s RICO and Sarbanes-Oxley retaliation claims were subject to arbitration.

On appeal, the court found the plaintiff’s RICO claims were subject to arbitration but overruled the district court as to the Sarbanes-Oxley claim.  The plaintiff argued that the 2011 employee handbook’s recognition of Dodd-Frank’s prohibition of arbitrating Sarbanes-Oxley claims, superseded the 2009 handbook.  He also relied on Pennsylvania law to argue that a subsequent arbitration agreement supersedes a prior arbitration agreement between the same parties covering the same subject matter.  The bank argued that, collectively, the arbitration agreements from both employee handbooks did not specifically exclude Sarbanes-Oxley claims from arbitration and were consistent.

The Third Circuit disagreed with the bank and found that the 2011 handbook’s arbitration agreement superseded the 2009 version.  In deciding whether arbitration is required, the court recognized that it would normally analyze 1) whether there was an agreement to arbitrate, and 2) whether the dispute falls within the scope of the agreement.

As to the first question of that analysis, the court found there was an agreement to arbitrate under the 2009 agreement; as to the second, the court found that because there was no dispute about whether there was an agreement to arbitrate under the 2009 agreement, the question of whether the dispute falls within the scope of the dispute was moot.  Rather, the court looked to Pennsylvania state law principles governing the formation of contracts to determine that the later of two agreements between the same parties and subject matter generally supersedes the prior agreement.  By doing so, the court recognized the supremacy of the 2011 agreement’s language prohibiting the Sarbanes-Oxley claim from being subject to arbitration.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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