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Five Developing Trends Financial Services Employers Need to Know

Take 5 Newsletter November 2019

As certain long-standing issues of interest to financial services employers seem to be receiving a degree of reactive attention, other cutting-edge issues continue to force such employers to revisit and update policies to meet societal trends. In this edition of Take 5, we look at moves to curtail non-compete agreements and mandatory arbitration provisions, as well as a limitation to the application of the attorney-client privilege to internal investigations. By contrast, we discuss the expansion of legalized medical and non-medical marijuana and the growing protections for employees in that regard, as well as the recent flow of Employee Retirement Income Security Act of 1974 (“ERISA”) class action claims holding fiduciaries liable.


Legislation Introduced in Senate Seeks to Ban Non-Competes

David J. Clark

Employers in the financial services industry should be aware that political winds continue to blow against the enforcement and even the use of non-competition clauses in employment agreements. On October 17, 2019, Senator Chris Murphy (D.-Conn.) and Todd Young (R.-Ind.) introduced a bipartisan bill, the Workforce Mobility Act of 2019 (the “bill”), to limit the use of non-compete agreements. As drafted, the bill is remarkably far-reaching: “[N]o person shall enter into, enforce, or threaten to enforce a non-compete agreement with any individual who performs work for the person and who in any workweek is engaged in commerce or in the production of goods for commerce . . . .” If enacted, the only exceptions to this prohibition would be for non-competes agreed in connection with the dissolution of a partnership or the sale of a business.

While enactment of this bill is by no means imminent, there could be significant support for it. In the last couple of years, at the federal level, Senators Elizabeth Warren (D.-Mass.) and Marco Rubio (R.-Fla.) have introduced other bills to limit or prohibit non-competes. At the state level, in 2019 alone, at least seven state legislatures enacted laws setting some limits on employers using non-competes, particularly with respect to low-wage and entry-level workers. Employers thus should not discount the possibility of enactment of some federal limitations on non-competes in the coming months or years.


Maintaining Attorney-Client Privilege Over Communications with Consultants Involved in Internal Investigations

John F. Fullerton III

When a company retains outside counsel to conduct an internal investigation of alleged wrongdoing, attorney investigators sometimes need or require the assistance of outside consultants, such as forensic accountants or technology specialists, to effectively represent and communicate with their client. While the extension of the attorney-client privilege to communications between counsel and such outside consultants has been recognized, the consultant must be integral to counsel’s ability to perform the investigation and convey and discuss the results to the client, and privileged communications with the consultant should be narrowly restricted. In a recent case, SEC v. Navellier & Assocs., Civil Action No. 17-11633-DJC (D. Mass. Jan. 22, 2019), the court held that the attorney-client privilege did not extend to an outside consultant hired as part of an internal company review to assist counsel in advising clients regarding possible future litigation with the Securities and Exchange Commission regarding exchange traded funds. According to the court, the third party “must be ‘necessary, or at least highly useful, for the effective consultation between the client and the lawyer which the privilege is designed to permit.’” The court emphasized that the third-party consultant’s involvement must be nearly indispensable or serve some specialized purpose in facilitating the attorney-client communications. The court found that the consultant’s role in that case, while helpful in assisting counsel, did not rise to the required level of necessity; thus, communications between counsel and consultant were not privileged. The Navellier decision serves as a reminder to both companies and counsel to analyze as a threshold matter whether the consultant is truly necessary or merely helpful or convenient, and tailor communications with the consultant accordingly.


It’s Time to Revisit Your Arbitration Agreements: Limitations on Mandatory Arbitration Agreements Continue to Spread Throughout the Country

Lauri F. Rasnick and Eduardo J. Quiroga*

Financial services firms—which commonly have agreements and policies mandating arbitration for discrimination and harassment claims—should take stock of recent developments regarding mandatory arbitration. State legislative enactments prohibiting the use of mandatory arbitration with employees continue to roll out as legislatures face pressure from their constituents. The pressure is also erupting in recent headlines, which put a spotlight on mandatory arbitration clauses. Employers, ranging from global law firms to Fortune 500 companies, have received a loud outcry over their use of mandatory arbitration provisions. Arguments against the use of mandatory arbitration provisions have now even made their way into the Presidential debates. Undoubtedly, in light of pressure from employees, scrutiny from the public, and the increasing litany of statutory prohibitions, some employers—such as Google, Uber (for sexual misconduct claims), and Microsoft (for gender discrimination and harassment)—are eliminating or reducing mandatory arbitration of discrimination claims.

The number of states imposing limitations on mandatory pre-dispute arbitration agreements in the employment context has been increasing and includes Illinois, New Jersey, New York, Washington, Vermont, and Maryland. The types of limitations vary by state. For example, Vermont’s law applies only to claims of sexual harassment, while others, such as New York’s, purport to prohibit required arbitration of all claims of discrimination or harassment based on any protected characteristic.

To add even more complexity to the landscape of mandatory arbitration, preemption challenges may narrow the scope of these state limitations, given potential conflicts with the Federal Arbitration Act (“FAA”). In June of this year, for example, a New York federal court held that the FAA preempted New York’s prohibition on mandatory arbitration provisions covering sexual harassment claims. We expect similar challenges to arise in state courts and in other states where limitations have been enacted.

In light of the new laws and the increasingly vocal public outcry, employers should review their arbitration provisions, whether in employment agreements, offer letters, standards of conduct, or other employment-related documents. Not only should employers review these provisions for compliance with the evolving laws, but they should consider the pros and cons of arbitration programs and how mandatory arbitration fits into the current employment culture. This may require employers to revise their agreements, create carve outs, and implement new practices, particularly in cases where an employee did not sign, but is otherwise bound by, arbitration agreements.

*Eduardo J. Quiroga, a Law Clerk – Admission Pending (not admitted to the practice of law) in the firm’s New York office, contributed to the preparation of this Take 5 article.


Limitations on Pre-Employment Testing for Marijuana

James D. Mackinson

As of September 2019, 33 states and Washington, DC, have legalized medical marijuana use, and 10 states and Washington, DC, have legalized both medical and recreational marijuana use. Many of these states have enacted laws that protect employees and job applicants from discrimination based on their status as medical marijuana users. However, on May 10, 2019, New York City went a step further and became the first municipality in the country to prohibit employers from requiring prospective employees to submit to testing for marijuana and tetrahydrocannabinols (“THC,” the active ingredient in marijuana).

New amendments to the New York City Human Rights Law prohibit employers, labor organizations, and employment agencies from requiring prospective employees to submit to marijuana or THC drug testing as a condition of employment. The law describes such pre-employment testing as an “unlawful discriminatory practice.”

The law carves out several types of jobs for which pre-employment drug testing for marijuana and THC will be permitted, including (1) safety-related positions; (2) transportation-related positions; (3) caregivers; (4) positions for which drug testing is required by any federal or state statute, regulation, or order for purposes of safety or security; (5) positions for which drug testing is required by a contract with the federal government, or for which the federal government provides funding; and (6) positions for which drug testing is required pursuant to a collective bargaining agreement. Notably, the law does not provide any exceptions specific to financial services employers.

Before the law takes effect on May 10, 2020, financial services firms should review their drug- testing policies and any other documents relating to pre-employment drug testing (e.g., employment applications or offer letters) in order to ensure that they do not violate the new restrictions, and they should consider that New York City may just be an early adopter of this type of law. Additionally, firms should train human resources personnel, as well as supervisors and managers, on any changes made to current policies and practices in response to the changing landscape regarding marijuana and any changes pursuant to the new New York City law.


Arbitration and Class Action Waivers of ERISA Fiduciary Claims After Dorman

Janene M. Marasciullo

Recently, there has been a surge in ERISA class actions seeking to hold plan fiduciaries liable for selecting poor or unduly expensive investments. However, a decision by the U.S. Court of Appeals for the Ninth Circuit in Dorman v. Charles Schwab Corp., 934 F.3d 1107 (9th Cir. 2019), may halt the proliferation of these cases. Dorman found that ERISA breach of fiduciary claims must be arbitrated when plan documents contain an arbitration agreement, and an unpublished companion decision enforced a class action wavier and held that the plaintiff must pursue any claim in individual arbitration.

Dorman thus allows plan sponsors and other fiduciaries to avoid costly class actions. Moreover, even though ERISA authorizes awards of “reasonable attorney’s fees,” 29 U.S.C. § 1129(g), the limited damages available to individual plaintiffs due to poor investment choices or fees may deter individual arbitrations. While employers may applaud these developments, they should keep in mind that there is a motion for rehearing in Dorman, and that, in 2014, FINRA disciplined a brokerage firm for including a class action wavier in its pre-dispute arbitration agreements with customers, which may deter FINRA members providing investment advice to ERISA plans from enforcing class action waivers.