Section 922 of the Dodd-Frank Act, enacted on July 21, 2010, amended the whistleblower provisions in the Sarbanes-Oxley Act of 2002 (SOX) by invalidating predispute arbitration agreements covering SOX whistleblower retaliation claims. In Pezza v. Investors Capital Corporation, a case of first impression, the District Court applied this amendment retroactively.
The plaintiff in this action alleged that he suffered SOX retaliation after he voiced concerns regarding the defendants’ alleged misconduct in connection with securities transactions. The defendants raised as an affirmative defense the plaintiff’s contractual obligation to submit his claim to arbitration, and then moved to compel arbitration. Congress enacted the Dodd-Frank Act while the defendants’ motion was pending, and the plaintiff submitted a letter to the Court arguing that Section 922 foreclosed the defendants’ arbitration demand. The defendants responded that Section 922 does not apply retroactively.
The Court turned to Landgraf v. USI Film Products, 511 U.S. 244 (1994), in which the U.S. Supreme Court laid out factors for determining whether to apply an amendment retroactively: (i) whether Congress expressly set forth the statute’s temporal reach; (ii) if no such express language exists, whether the principles of statutory construction lead to the conclusion that Congress intended retroactive application; and (iii) whether retroactive application would affect a party’s substantive rights.
Applying this framework to Section 922, the Court first noted that nothing in that section illustrates a clear congressional intent regarding retroactivity. The Court then found that the Dodd-Frank Act contains some provisions that expressly apply to future disputes only, some provisions that expressly apply only after a certain prescribed time period, and some provisions for which Congress expressed no intent as to retroactivity. The District Court determined that Section 922 fell into this last category.
The Court then considered whether Section 922 would have a prohibited “retroactive effect.” It acknowledged that Section 922 impacts contractual rights by voiding agreed-upon arbitration provisions and that statutes affecting contractual rights comprise the largest category of cases applying the presumption against retroactivity. Nevertheless, the Court found that Section 922 merely confers jurisdiction on the courts rather than on arbitration panels, and that jurisdictional statutes may apply retroactively because they simply change the forum in which a case is heard. The Court thus gave Section 922 retroactive application and denied the defendants’ motion to compel arbitration.
It is difficult to reconcile the District Court’s conclusion that the issue before it was principally jurisdictional with the ruling’s impact on the substantial rights an employer obtains through an arbitration agreement. Certain benefits of arbitration on which the decision does not specifically focus—e.g., cost-efficiency, privacy, and finality—may lead other courts to a different outcome. However, employers should operate under the assumption that courts will not enforce predispute arbitration agreements executed before enactment of Dodd-Frank that require arbitration of SOX whistleblower retaliation claims.