Securities Industry Employment Disputes

In order to decide whether 'baseball arbitration' works for any litigants, one needs to understand how and why the process works. Major League Baseball and the Players' Association adopted 'final-offer' arbitration over 30 years ago to deal with a multitude of salary disputes arising each year under the parties' collective bargaining agreement. The system was designed to discourage players and clubs from using final and binding arbitration. Instead, the process was designed to promote settlement through direct negotiations. For the baseball industry, the process works. While more than 100 baseball players file for salary arbitration each year, less than a handful are resolved through the arbitration process.

The question is, why does 'baseball arbitration' pose problems as an alternative dispute resolution ('ADR') process for employment litigants in the securities industry? Unlike other ADR processes, 'baseball arbitration' is a 'win-lose' procedure, which forces the arbitrator to select either the salary proposal of the player or that of the club. In baseball, this process effectively forces each side to select a salary number that is supportable by statistical and anecdotal evidence. The parties exchange salary proposals in writing, and negotiate up to and including the date of the arbitration hearing. A panel of three arbitrators holds a hearing where time limits are strictly enforced. Arbitrators are provided with no information about the salary dispute in advance of the hearing and have only 24 hours to decide the matter.

The criteria for decision-making have been negotiated by the parties and must be applied by the arbitrators. The criteria include, but are not limited to: 'comparative baseball salaries'; the player's contribution to the club both during the last season and throughout his career; and the performance of the club.

The Midpoint

In practice, many arbitrators look to the midpoint of the two proposals. For example, the club's offer of $4 million and the player's proposal of $8 million results in a midpoint of $6 million. Thereafter, the evidence is evaluated, based upon agreed criteria, before deciding whether the player has established that he is more comparable to others who earn in excess of $6 million, or whether the club has proven that the comparables support a finding that the player is more comparable to others earning $6 million or less. Theoretically, the parties could make final salary proposals that do not reflect the value of the player to the club. Instead, the parties present final offers that mirror a fair evaluation of the criteria to be applied by the arbitrator. Why? There are several reasons:

• The parties have a continuing relationship. Win or lose, the player will remain with the club during the upcoming season. The player wants to feel valued by the club, and the club wants the player to be a committed member of the team. This gives the parties a compelling reason to moderate their final offers.
• The parties are extremely sophisticated in this process. They know how to craft a 'final offer' that is supported by statistics for comparable players.
• There are prior salary arbitration awards that have been issued over the years that tell the parties how cases have been decided in the past and by which arbitrators. This information helps the parties craft their final offers wisely.
• There is a continuity of arbitrators that increases the predictability of the outcome because many arbitrators are invited to serve year after year.
• The effects of the arbitrators' decision is short-lived. For the most part, salary arbitrators determine a player's salary only for the upcoming season. Therefore, the decision does not affect the player over the lifetime of his career.

Lost in Translation

Why does this process not translate well to employment-related financial disputes in the securities industry? Take the example of a partner who leaves his/her firm with an equity interest, and there is a conflict about whether the partner left voluntarily or was forced out. There is no moderating element affecting one's final offer once the relationship is breached. Although it may be reasonable for each side to present a carefully crafted final offer based upon the equities of the case, they are just as likely to present final offers that are unreasonable or unsupported by the evidence. The goal is a single one: to win.

For example, the securities firm that has lost the partner is free to make a final offer of zero, based upon the fact that the departing partner left with a client base. The partner who has left the firm is equally free to inflate his value to the partnership to reflect the partner's expected losses going forward into the next decade. In this example, the midpoint does not reflect the equities involved and either decision by the arbitrator will be perceived as unfair and insupportable. Nevertheless, the arbitrator must choose and allow one side to win and the other to lose.

What critical elements are missing from the securities partnership that are present in 'baseball arbitration'?

• There is no continuing relationship that encourages the parties to present realistic proposals based upon the merits.
• There are no agreed-upon criteria. Instead, it is left to the arbitrator to apply the criteria that he/she determines to be the most appropriate based upon the specific facts and circumstances of the dispute.
• There is no body of precedent; no review of similar cases that might assist the parties when they craft their final offers.
• The decision may affect a party's finances for years to come.
• There is no guarantee that the result will be an equitable one.

Take another example of a financial dispute where there is precedent. Can 'baseball arbitration' be more successful if there is a body of arbitration awards in financial disputes one can review before submitting one's final offer? A financial adviser is laid off in December, based solely on a decline in business generally, and not on his/her performance. The financial adviser is not paid a bonus for the year, because the firm policy requires him/her to be employed at the time the bonus is awarded, in February of the following year. The financial adviser files for arbitration, on the grounds of breach of promise and quantum meruit. The financial adviser's argument is that his/her total compensation each year is a reflection of base salary plus bonus, with bonus being the greater amount.

The financial adviser argues that the denial of a bonus is inequitable because the yearly base pay does not fairly compensate him/her for the year's performance and that the firm timed his/her dismissal to avoid paying the bonus. The firm relies on its policy that a bonus is discretionary; that a bonus guarantee must be in writing; that to be eligible, one must be employed at the time the bonus is paid; and that it had legitimate business reasons to terminate the adviser when it did. Both parties are aware that arbitration decisions on this issue vary greatly from arbitrator to arbitrator and from panel to panel.

'Precedent'

At first blush, 'baseball arbitration' might seem more likely to succeed in this securities case because the parties have precedent to rely upon. Nevertheless, because the 'precedent' is so varied and based upon individual circumstances, the parties do not have a high probability of predicting the outcome. Precedent suggests that the claimant has reason to believe his/her proposal will be accepted as the more reasonable, based on equity. Similarly, precedent can lead the securities firm to conclude that an arbitrator will rule in its favor by relying upon and applying the clear language of its bonus policy.

The fact is that these disputes are decided on a case-by-case basis based upon the applicable language governing the parties' relationship and the equities of the situation. They are decided by individual arbitrators, each of whom comes to the case fresh. This is very different from 'baseball arbitration,' where there is a similarity between cases, where the criteria and statistics to be applied to the dispute are known and where the arbitration panel is relatively stable.

For those who embrace final-offer arbitration, there is a belief that facing a 'win-lose' proposition will force the parties to fashion more reasonable proposals. However, that is often not the case. Parties are just as likely to submit unrealistic offers in the hope that the other side's proposal is so unreasonable that they will prevail.

Why then does 'baseball arbitration' appear to be appealing to parties in the securities industry facing financial disputes? Many voice a concern that traditional arbitration will result in an outcome that falls outside the range of acceptability. There is an alternative to baseball arbitration that meets this need; it's called 'high-low' arbitration. Specifically, parties discuss and agree upon two numbers within which the arbitrator will have the authority to decide. The outcome may not be predictable, but it falls within a range of acceptability. In general, parties tend to be more satisfied with the result under 'high-low' arbitration than with a 'win-loss' under 'baseball arbitration.'

Conclusion

In conclusion, financial disputes in the securities industry are costly, time consuming and unpredictable. Although 'baseball arbitration' holds out the prospect that the process itself will force the parties to either settle or moderate their proposals, the results are often disappointing. Instead of focusing on a 'win-lose' process, securities industry executives and counsel would be better served by adopting 'high-low' arbitration which is more likely to result in an outcome that is more equitable, predictable and, therefore, acceptable.

Carol A. Wittenberg, who has been an arbitrator and mediator for 25 years, is known for the resolution of labor, employment, and securities disputes, and for the design of ADR systems. She has served on the Major League Baseball/Players' Association salary arbitration panel for the past eight years, as well as mediating and arbitrating numerous financial disputes in the securities industry.

Due to its volatility, the securities industry probably faces more terminations than any other. Regardless of whether the terminations result from a reduction in force, a need to make room for lateral hires, or misconduct, it is likely that securities firms will have to expend time and money to resolve resulting financial conflicts that may also cause unfavorable publicity.

Increasingly, parties in the securities industry facing litigation over significant employment-related financial disputes have turned to the 'baseball arbitration' model, also known as 'final-offer' arbitration. On the surface, 'baseball arbitration' appears to be a good choice to resolve these matters. The reality of 'baseball arbitration' is that this 'win-lose' method often disappoints. Why does a process that has been so successful in sports present pitfalls when invoked for terminations of broker/dealers, financial advisers and managers?

The 'Baseball Arbitration' Process

In order to decide whether 'baseball arbitration' works for any litigants, one needs to understand how and why the process works. Major League Baseball and the Players' Association adopted 'final-offer' arbitration over 30 years ago to deal with a multitude of salary disputes arising each year under the parties' collective bargaining agreement. The system was designed to discourage players and clubs from using final and binding arbitration. Instead, the process was designed to promote settlement through direct negotiations. For the baseball industry, the process works. While more than 100 baseball players file for salary arbitration each year, less than a handful are resolved through the arbitration process.

The question is, why does 'baseball arbitration' pose problems as an alternative dispute resolution ('ADR') process for employment litigants in the securities industry? Unlike other ADR processes, 'baseball arbitration' is a 'win-lose' procedure, which forces the arbitrator to select either the salary proposal of the player or that of the club. In baseball, this process effectively forces each side to select a salary number that is supportable by statistical and anecdotal evidence. The parties exchange salary proposals in writing, and negotiate up to and including the date of the arbitration hearing. A panel of three arbitrators holds a hearing where time limits are strictly enforced. Arbitrators are provided with no information about the salary dispute in advance of the hearing and have only 24 hours to decide the matter.

The criteria for decision-making have been negotiated by the parties and must be applied by the arbitrators. The criteria include, but are not limited to: 'comparative baseball salaries'; the player's contribution to the club both during the last season and throughout his career; and the performance of the club.

The Midpoint

In practice, many arbitrators look to the midpoint of the two proposals. For example, the club's offer of $4 million and the player's proposal of $8 million results in a midpoint of $6 million. Thereafter, the evidence is evaluated, based upon agreed criteria, before deciding whether the player has established that he is more comparable to others who earn in excess of $6 million, or whether the club has proven that the comparables support a finding that the player is more comparable to others earning $6 million or less. Theoretically, the parties could make final salary proposals that do not reflect the value of the player to the club. Instead, the parties present final offers that mirror a fair evaluation of the criteria to be applied by the arbitrator. Why? There are several reasons:

• The parties have a continuing relationship. Win or lose, the player will remain with the club during the upcoming season. The player wants to feel valued by the club, and the club wants the player to be a committed member of the team. This gives the parties a compelling reason to moderate their final offers.
• The parties are extremely sophisticated in this process. They know how to craft a 'final offer' that is supported by statistics for comparable players.
• There are prior salary arbitration awards that have been issued over the years that tell the parties how cases have been decided in the past and by which arbitrators. This information helps the parties craft their final offers wisely.
• There is a continuity of arbitrators that increases the predictability of the outcome because many arbitrators are invited to serve year after year.
• The effects of the arbitrators' decision is short-lived. For the most part, salary arbitrators determine a player's salary only for the upcoming season. Therefore, the decision does not affect the player over the lifetime of his career.

Lost in Translation

Why does this process not translate well to employment-related financial disputes in the securities industry? Take the example of a partner who leaves his/her firm with an equity interest, and there is a conflict about whether the partner left voluntarily or was forced out. There is no moderating element affecting one's final offer once the relationship is breached. Although it may be reasonable for each side to present a carefully crafted final offer based upon the equities of the case, they are just as likely to present final offers that are unreasonable or unsupported by the evidence. The goal is a single one: to win.

For example, the securities firm that has lost the partner is free to make a final offer of zero, based upon the fact that the departing partner left with a client base. The partner who has left the firm is equally free to inflate his value to the partnership to reflect the partner's expected losses going forward into the next decade. In this example, the midpoint does not reflect the equities involved and either decision by the arbitrator will be perceived as unfair and insupportable. Nevertheless, the arbitrator must choose and allow one side to win and the other to lose.

What critical elements are missing from the securities partnership that are present in 'baseball arbitration'?

• There is no continuing relationship that encourages the parties to present realistic proposals based upon the merits.
• There are no agreed-upon criteria. Instead, it is left to the arbitrator to apply the criteria that he/she determines to be the most appropriate based upon the specific facts and circumstances of the dispute.
• There is no body of precedent; no review of similar cases that might assist the parties when they craft their final offers.
• The decision may affect a party's finances for years to come.
• There is no guarantee that the result will be an equitable one.

Take another example of a financial dispute where there is precedent. Can 'baseball arbitration' be more successful if there is a body of arbitration awards in financial disputes one can review before submitting one's final offer? A financial adviser is laid off in December, based solely on a decline in business generally, and not on his/her performance. The financial adviser is not paid a bonus for the year, because the firm policy requires him/her to be employed at the time the bonus is awarded, in February of the following year. The financial adviser files for arbitration, on the grounds of breach of promise and quantum meruit. The financial adviser's argument is that his/her total compensation each year is a reflection of base salary plus bonus, with bonus being the greater amount.

The financial adviser argues that the denial of a bonus is inequitable because the yearly base pay does not fairly compensate him/her for the year's performance and that the firm timed his/her dismissal to avoid paying the bonus. The firm relies on its policy that a bonus is discretionary; that a bonus guarantee must be in writing; that to be eligible, one must be employed at the time the bonus is paid; and that it had legitimate business reasons to terminate the adviser when it did. Both parties are aware that arbitration decisions on this issue vary greatly from arbitrator to arbitrator and from panel to panel.

'Precedent'

At first blush, 'baseball arbitration' might seem more likely to succeed in this securities case because the parties have precedent to rely upon. Nevertheless, because the 'precedent' is so varied and based upon individual circumstances, the parties do not have a high probability of predicting the outcome. Precedent suggests that the claimant has reason to believe his/her proposal will be accepted as the more reasonable, based on equity. Similarly, precedent can lead the securities firm to conclude that an arbitrator will rule in its favor by relying upon and applying the clear language of its bonus policy.

The fact is that these disputes are decided on a case-by-case basis based upon the applicable language governing the parties' relationship and the equities of the situation. They are decided by individual arbitrators, each of whom comes to the case fresh. This is very different from 'baseball arbitration,' where there is a similarity between cases, where the criteria and statistics to be applied to the dispute are known and where the arbitration panel is relatively stable.

For those who embrace final-offer arbitration, there is a belief that facing a 'win-lose' proposition will force the parties to fashion more reasonable proposals. However, that is often not the case. Parties are just as likely to submit unrealistic offers in the hope that the other side's proposal is so unreasonable that they will prevail.

Why then does 'baseball arbitration' appear to be appealing to parties in the securities industry facing financial disputes? Many voice a concern that traditional arbitration will result in an outcome that falls outside the range of acceptability. There is an alternative to baseball arbitration that meets this need; it's called 'high-low' arbitration. Specifically, parties discuss and agree upon two numbers within which the arbitrator will have the authority to decide. The outcome may not be predictable, but it falls within a range of acceptability. In general, parties tend to be more satisfied with the result under 'high-low' arbitration than with a 'win-loss' under 'baseball arbitration.'

Conclusion

In conclusion, financial disputes in the securities industry are costly, time consuming and unpredictable. Although 'baseball arbitration' holds out the prospect that the process itself will force the parties to either settle or moderate their proposals, the results are often disappointing. Instead of focusing on a 'win-lose' process, securities industry executives and counsel would be better served by adopting 'high-low' arbitration which is more likely to result in an outcome that is more equitable, predictable and, therefore, acceptable.

Carol A. Wittenberg, who has been an arbitrator and mediator for 25 years, is known for the resolution of labor, employment, and securities disputes, and for the design of ADR systems. She has served on the Major League Baseball/Players' Association salary arbitration panel for the past eight years, as well as mediating and arbitrating numerous financial disputes in the securities industry.