Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), enacted on July 21, 2010, amended the whistleblower provisions in Section 806 of the Sarbanes-Oxley Act of 2002 (“SOX”) by invalidating pre-dispute arbitration agreements covering SOX whistleblower retaliation claims. In a case of first impression, the United States District Court for the District of Massachusetts applied this amendment retroactively. Pezza v. Investors Capital Corp., Case No. 10-CV-10113 (D. Mass. Mar. 1, 2011).
In Pezza, the plaintiff alleged that he suffered retaliation in violation of Section 806 after having voiced concerns regarding the defendants’ alleged misconduct in connection with securities transactions. The defendants raised as an affirmative defense the plaintiff’s obligation to submit his claim to arbitration pursuant to his employment agreements, and then moved to compel arbitration and either stay or dismiss the federal lawsuit. While the motion to compel arbitration was pending, Congress enacted the Dodd-Frank Act, and the plaintiff argued that Section 922 foreclosed the defendants’ arbitration demand. Defendants responded that Section 922 may not be applied retroactively.
The court turned to Landgraf v. USI Film Prods., 511 U.S. 244 (1994) and Fernandez-Vargas v. Gonzales, 548 U.S. 30 (2006), where the Supreme Court provided the following framework for determining whether to apply a statutory amendment retroactively: (i) the court first should examine whether Congress expressly set forth the statute’s temporal reach; (ii) if no such express language exists, the court should attempt to determine whether Congress intended a retroactive application through principles of statutory construction; and (iii) if the court still is unable to determine Congress’s intent, it should consider the consequences of applying a statute retroactively, focusing on whether such application would affect a party’s substantive rights, liabilities or duties.
Applying this framework to Section 922, the court first noted that nothing in that section illustrates a clear congressional intent with respect to retroactivity. The court then noted that the Dodd-Frank Act contains some provisions that expressly apply to future disputes only, some provisions that expressly apply to future disputes and arbitration agreements entered into after a certain prescribed time period, and some provisions for which no intent as to retroactivity has been expressed by Congress. The court determined that Section 922 fell into this last category, but found that Congress’s silence as to the temporal reach of Section 922 did not evidence an intent to apply this section retroactively. In so concluding, the court noted the “national policy favoring arbitration of claims that parties contract to settle in that manner.”
The court then considered whether Section 922 would have a prohibited “retroactive effect.” It acknowledged that Section 922 does indeed impact contractual rights by voiding arbitration provisions upon which the parties agreed, and acknowledged that statutes affecting contractual rights comprise the largest category of cases in which the Supreme Court has applied the presumption against retroactivity. Nevertheless, the court emphasized that Section 922 confers jurisdiction on the courts, rather than on arbitration panels, and that jurisdictional statutes may be applied retroactively because they do not abrogate a party’s substantive rights, but simply change the forum in which the case is heard. On this basis, the court ultimately determined that Section 922 “principally concerns the type of jurisdictional statute envisioned in Landgraf,” and that a party agreeing to arbitrate a statutory claim does not forgo substantive rights provided by the statute, but rather merely submits to the resolution of such a claim in an arbitral forum. The court thus gave Section 922 a retroactive application and denied the defendants’ motion to compel arbitration.
Arguably, it is unclear how the court’s conclusion that it was resolving an issue that is principally jurisdictional may be reconciled with the ruling’s impact on the substantial rights an employer obtains through an arbitration agreement. Query whether certain benefits of arbitration on which the decision does not specifically focus -- e.g., cost-efficiency, privacy and finality -- might lead other courts to reach a different outcome. Still, employers would be well served by operating under the assumption that pre-dispute arbitration agreements executed even before the Dodd-Frank Act was signed into law may not require a SOX whistleblower retaliation claim to be arbitrated.