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Printer-Friendly Notice to Parties - Notice to Parties on Motions to Dismiss Claims Prior to Award (Dispositive Motions) under the Code of Arbitration Procedure for Customer Disputes and Industry Disputes

FINRA is aware that parties increasingly are filing motions to decide claims before a hearing (commonly referred to as dispositive motions) in arbitration cases. Even though nearly 90% of these motions are denied, FINRA is concerned that parties are spending additional resources to defend against these motions, thus increasing the costs and processing times of the arbitration process.

The FINRA Board of Governors recently approved a proposal to limit significantly the number of dispositive motions filed in its arbitration forum and impose strict sanctions against parties who engage in abusive motions practices. This proposal, which shortly will be filed with the Securities and Exchange Commission (SEC) for its review and approval after an opportunity for public comment, will replace a prior proposal that was filed with the SEC in July 2006.1 The proposal may be amended further before it becomes final.

Under FINRA's proposal, if a party (typically a respondent firm) files a dispositive motion before a claimant finishes presenting its case, the arbitration panel would be limited to three grounds on which to grant the motion: (1) if the parties previously had settled their dispute in writing; (2) "factual impossibility," meaning the party could not have been associated with the conduct at issue; or (3) the existing six-year time limit on the submission of arbitration claims. The rule proposal also would require that arbitrators hold a hearing on such motions and that any decision to grant a motion to dismiss be unanimous, and be accompanied by a written explanation.

The proposed amendments also would require the panel to assess against the filing party all forum fees associated with hearings on dispositive motions if the panel denies the motion, and would require the panel to award costs and attorneys' fees to the party that opposed a dispositive motion deemed frivolous by the panel. Under the rule proposal, when a respondent files a dispositive motion after the conclusion of the claimant's case, the provisions above would not apply. However, the rule would not preclude the arbitrators from issuing an explanation or awarding costs or fees.

Until the new proposal is approved, Rule 12503 of the Code of Arbitration Procedure for Customer Disputes and Rule 13503 of the Code of Arbitration Procedure for Industry Disputes will govern all motions, including dispositive motions, except that a party's response to a dispositive motion will not be due until the panel sets a deadline for the response. FINRA recognizes that, in some limited circumstances, dispositive motions may be warranted. FINRA is concerned, however, that dispositive motions often result in delay of the hearing on the merits. FINRA reminds parties that filing dispositive motions in bad faith may result in sanctions imposed by the panel. Under Rules 12212 and 13212 of the Codes, the panel may sanction a party for failure to comply with any provision of the Codes, or any order of the panel or single arbitrator authorized to act on behalf of the panel. Sanctions may include, but are not limited to:

Assessing monetary penalties payable to one or more parties;
Precluding a party from presenting evidence;
Making an adverse inference against a party;
Assessing postponement and/or forum fees; and
Assessing attorneys' fees, costs and expenses.

FINRA also reminds parties and other users of the forum that Rules 12212 and 13212 of the Codes permit a panel to initiate a disciplinary referral at the conclusion of an arbitration. For example, depending on the facts and circumstances involving the filing of a dispositive motion, a member could be in violation of Rule 2110, which states that "a member, in conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade."

Finally, FINRA reminds parties and members that a panel may dismiss a claim, defense or arbitration with prejudice as a sanction for material and intentional failure to comply with an order of the panel if prior warnings or sanctions have proven ineffective.

1 The text of the previously filed rule proposal, SR-NASD-2006-088, may be found on the SEC’s Web site.

Resources for Parties

Notice to Parties - Notice to Parties on Motions to Dismiss Claims Prior to Award (Dispositive Motions) under the Code of Arbitration Procedure for Customer Disputes and Industry Disputes