The Dodd-Frank Wall Street Reform and Consumer Protection Act has cast the enforceability of many employer arbitration agreements into doubt. Although the Act purports to invalidate every predispute arbitration agreement that would require the arbitration of a Sarbanes-Oxley whistleblower claim,1 federal courts have split on whether this bar on mandatory arbitration is retroactive. Given the resulting uncertainty, companies with employees subject to an arbitration agreement should be prepared to defend against whistleblower retaliation claims in court, regardless of whether the agreement in question was signed before Dodd-Frank’s effective date of July 21, 2010.
The Sarbanes-Oxley Act of 2002 (SOX) broadly prohibits publicly traded companies from discharging, demoting, or otherwise discriminating against an employee for disclosing information about a potential violation of the federal securities laws.2 Until 2010, courts had generally held that arbitration agreements covering SOX retaliation claims were enforceable.3
Dodd-Frank’s changes to the federal whistleblower laws overturned this rule by making agreements that purport to require the arbitration of SOX retaliation claims invalid and unenforceable.4 Yet Dodd-Frank’s silence about the retroactive effect of its whistleblower amendments raises an important question: Are arbitration agreements that were executed before Dodd-Frank’s effective date unenforceable as well?
The courts that have addressed this question agree that the Dodd-Frank whistleblower amendments contain neither an explicit statement of their temporal reach nor firm textual evidence of congressional intent. As a result, these courts have turned to the standard inquiry for determining a statute’s retroactive effect: whether it would “impair rights a party possessed when he acted, increase a party’s liability for past conduct, or impose new duties with respect to transactions already completed.”5 If the answer to any of these questions is yes, the presumption against retroactivity applies, and in the absence of a clear indication to the contrary from Congress, the law has solely prospective effect.6
Courts applying this retroactivity test have disagreed, however, on how it applies to Dodd-Frank’s whistleblower amendments. The U.S. District Court for the District of Massachusetts, the first court to address the question, held in Pezza v. Investors Capital Corp.7 that the arbitration ban does apply retroactively. In reaching that conclusion, the court reasoned that the primary purpose of an arbitration clause is to specify a forum for dispute resolution, not to affect substantive rights. Given the supposedly “procedural” character of the prohibition on mandatory arbitration for SOX retaliation claims, the court concluded that Dodd-Frank’s whistleblower amendments “should also be applied to conduct that arose prior to its enactment.”8
In Henderson v. Masco Framing Corp.,9 however, the U.S. District Court for the District of Nevada reached the opposite conclusion. The court explained that because the right to agree to mandatory arbitration is contractual in nature, “[a] retroactive application of Dodd-Frank’s SOX provisions would not merely affect the jurisdictional location in which such claims could be brought; it would fundamentally interfere with the parties’ contractual rights and would impair the ‘predictability and stability’ of their earlier agreement.”10 The court thus held that Dodd-Frank’s whistleblower amendments do not apply retroactively and granted the defendant’s motion to compel the arbitration of a former employee’s retaliation claim.
A Developing Trend?
The three courts that have addressed this question since the Pezza-Henderson split have all sided with Henderson. In Holmes v. Air Liquide USA LLC,11 the defendant moved to compel the arbitration of a former employee’s discrimination claims under the Americans with Disabilities Act, Title VII, and state law. In opposition, the employee argued that Dodd-Frank’s whistleblower amendments had rendered the defendant’s arbitration agreement unenforceable, regardless of the fact that her claims did not arise under SOX. Specifically, the employee relied on language from Dodd-Frank providing that “[n]o predispute arbitration agreement shall be valid or enforceable, if the agreement requires arbitration of a dispute arising under [SOX].”12 Given this ostensibly unqualified statutory language, and the fact that the defendant’s arbitration agreement required the arbitration of all federal statutory claims, the employee contended that the entire agreement was invalid.
Although the court noted the novelty of the employee’s argument, it ultimately avoided the issue she raised by holding that Dodd-Frank’s whistleblower amendments do not apply to arbitration agreements, like the defendant’s, that were executed before the amendments took effect. Like the court in Henderson, the Holmes court reasoned that “the rights of contracting parties are substantive, and that a statute affecting those rights undoubtedly impairs rights that existed at the time the parties acted.”13 Because the whistleblower amendments themselves did not reveal any intent to apply them retroactively, the court concluded that they had solely prospective effect.
In Taylor v. Fannie Mae,14 the U.S. District Court for the District of Columbia reached the same conclusion. After considering both Pezza and Henderson, the court explained that retroactively applying Dodd-Frank’s whistleblower amendments would impair substantive rights that existed before Dodd-Frank to contract for the arbitration of claims under SOX. Accordingly, the court enforced the defendant’s arbitration agreement and granted a motion to compel the arbitration of the plaintiff’s retaliation claim.
Finally, Blackwell v. Bank of America Corp.15 is yet another case in which the court refused to apply Dodd-Frank’s whistleblower amendments retroactively. In particular, the court reasoned that “a retroactive revocation of plaintiff’s obligation to arbitrate his claims, including his SOX claim, would ‘impair rights [the parties] possessed when [they] acted.’ ”16
Although four of the five courts to consider this issue have held that Dodd-Frank’s whistleblower amendments are not retroactive, it is too soon to tell whether this trend will develop into a more widespread rule. Until more courts—and, in particular, appellate courts—have addressed the retroactivity question, employers should not assume that their arbitration agreements will be upheld in the face of a SOX retaliation claim.