Arbitrators Have Power to Dismiss Claims Before Hearing – Case Briefs

Reed vs. Mutual Service Corp – California – 2003

Reed v. Mutual Service Corp., 2003 Cal. App. LEXIS 395 (Cal. App., 2Dist., 2/21/03). Award Challenge * Confirmation of Award * Exceeding Powers * Arbitrator Bias/Evident Partiality * Timeliness Issues (Eligibility) * Waiver * Arbitrator Authority, Scope of * Res Judicata * Arbitrability * Contractual Issues (Unconscionability) * SRO Rules (NASD Rules 10304, 10305 & 10312) * Duty of Inquiry.

NASD arbitrators have the power to dismiss a case with prejudice during a pre-hearing telephonic conference; that two of the arbitrators failed to reveal that they had granted dispositive motions in the past was not evidence of bias.

After the claim was filed in this case, a pre-hearing telephonic conference was held. During the conference, the respondent moved to dismiss the case because of the six-year eligibility rule. The arbitrators granted the motion and dismissed the case with prejudice, even though both NASD training material and Rule 10305 instruct that the dismissal be without prejudice. Claimants’ motion to vacate was denied and defendants’ motion to confirm was granted.

Claimants appeal, citing three grounds for vacatur. First, the arbitrators exceeded their powers by dismissing the case without a hearing and with prejudice. Second, two of the arbitrators were biased because they had failed to reveal that they had previously dismissed unrelated cases following dispositive motions. Third, the six-year rule is unconscionable because it provides immunity from liability to brokers who successfully conceal their malfeasance.

The Court of Appeal affirms. Although the NASD Code does not explicitly provide that dispositive motions can be made prior to hearing, implicit in the arbitrators’ express power to deem a claim ineligible for arbitration is the corresponding authority to make that determination in advance of and without the necessity for a full hearing on the merits. Moreover, claimants suffered no harm by the dismissal with prejudice. The “with prejudice” dismissal simply states that the arbitration panel could not proceed because it lacked jurisdiction.

With respect to the issue of bias, the record shows that one arbitrator had previously granted a motion to enforce the parties’ settlement agreement and the other had dismissed a case without prejudice after the claimant had failed to prosecute the matter for over three years. Both cases were unrelated to this matter. This information does not indicate that either panelist “has a firm opinion or belief as to the subject of an action for which s/he is an arbitrator” as provided under NASD Rule 10312 standards. Finally, claimants waived the issue of unconscionability.

The question of enforceability of an arbitration clause must be raised before the parties proceed to arbitration. A contrary rule might tempt a party to “play games” with the arbitration and not raise the issue of unconscionablility until and unless it lost. Claimants did not raise this issue either when they initiated the arbitration or in response to the motion to dismiss. (P. Dubow) (EIC: Speaking of waiver, should not initial, post-Award bias objections be waived, if premised on previous rulings that are publicly available and made accessible to the parties as part of the arbitrator disclosure procedures? The underlying Award is NASD ID #00-00849. Incidentally, at least one of the two “accused” Arbitrators was previously on a Panel that denied a pre-hearing motion to dismiss on eligibility grounds (ID #93-05212).) (SLC Ref. No. 2003-12-01)

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Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article. 

Mark J. Astarita, Esq. is a securities lawyer who represents investors, financial professionals and firms in litigation, arbitration and regulatory matters across the country. He is a partner in the national securities law firm of Sallah Astarita & Cox, LLC and can be reached by email at or by phone at 212-509-6544.

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Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.

He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page -, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.