Arbitrability of Whistle-blower Claim

Dispute Resolution Journal, May-Jul 2006

SECURITIES EMPLOYMENT

The 2nd Circuit held that arbitrators should determine the arbitrability of a whistle-blower claim under the Sarbanes-Oxley Act (SOX) because the National Association of securities Dealers (NASD) Code was expressly incorporated into the parties' arbitration agreement and this fact clearly and unmistakably evinced the parties' intent to arbitrate arbitrability disputes that turn on an interpretation of the NASD Code.

Charles Schaffran's 10-year employment relationship with Alliance Bernstein Investment Research led to this case. Schaffran said he was discharged in violation of SOX § 806(a) because he cooperated in an sec investigation of the company. Alliance argued that Schaffran resigned. Schaffran commenced NASD arbitration proceedings and Alliance responded by filing a declaratory judgment action in court. The court held that an arbitration panel rather than a court should decide whether Schaffran's SOX claim was arbitrable.

The 2nd Circuit affirmed on de novo review. It noted that the NASD Code unequivocally provides in Rule 10324 for disputes over the interpretation and applicability of a provision of the Code to be decided in arbitration rather than in court. This case involved a Code interpretation issue-whether Schaffran's SOX claim was excluded from the Code's mandatory arbitration requirement by Rule 10201(b), which exempts "[a] claim alleging employment discrimination ... in violation of a statute." The 2nd Circuit stated: When "parties explicitly incorporate rules that empower an arbitrator to decide issues of arbitrability, incorporation serves as clear and unmistakable evidence of the parties' intent to delegate such issues to an arbitrator." Hence, the court held that the parties unequivocally agreed to submit disputes of this type to arbitration.

Alliance Bernstein Investment Research & Management, Inc., 445 F.3d 121 (2d Cir. 2006).