Carlos Legaspy is a respondent in a FINRA arbitration that was scheduled to go to hearing in August. As with all other FINRA cases, it was subject to a sweeping administrative decision by FINRA to postpone all in-person hearings through the summer, due to the pandemic. As I have noted before, that decision imbued hearing panels with the power to compel the parties to conduct the hearing by Zoom, even over the parties’ objections. And that is exactly what the panel did in Mr. Legaspy’s case, it ordered that the final evidentiary hearing take place in August, but by Zoom.
Displeased by that ruling, Mr. Legaspy went to federal court in Illinois to challenge it. In an Order issued last week – and summarily affirmed by the Seventh Circuit Court of Appeals two day later – the Court denied Mr. Legaspy’s request for a TRO enjoining FINRA from proceeding with the Zoom hearing. To my knowledge, this is the first ruling by any court on the legitimacy of FINRA’s delegation to hearing panels of the authority to require that hearings take place over Zoom, rather than in-person. Given that this decision is likely to become precedent in other cases, it is worth reviewing the Court’s logic.
Mr. Legaspy made a number of arguments, all of which were rejected.
First, he argued that FINRA breached two separate agreements, the Uniform Submission Agreement (“USA”) and the Code of Arbitration Procedure. Regarding the USA, Mr. Legaspy relied on language that provides “in the event a hearing is necessary, such hearing shall be held at a time and place as may be designated by the Director of FINRA” and that “the arbitration will be conducted in accordance with the FINRA Code of Arbitration Procedure.” According to Mr. Legaspy, this language requires that the hearing happen in some physical “place,” not via Zoom. Consistent with that argument, he also took the same view of the word “location” as used in the Code of Arbitration Procedure, specifically, Rule 12213(a): “The Director will decide which of FINRA’s hearing locations will be the hearing location for the arbitration.” The Court had answers to these arguments:
- First, and right out of first-year Contracts class at law school, the judge observed that FINRA is not a party to the USA, and, thus, is incapable of breaching it.
- Second, the Court disagreed that either “place” or “location” necessarily means a physical location. According to the Court, “the parties, witnesses, and arbitrators are still ‘located’ somewhere in a remote proceeding, it is simply not all the same location.” The Court also dismissed Mr. Legaspy’s position that “proceedings cannot be remote because parties are entitled to ‘attend all hearings’ under Rule 12602(a)” by noting that “he may still ‘attend’ the hearing remotely, just as he did for the telephonic temporary restraining order hearing in this court.”
Second, Mr. Legaspy argued that FINRA had denied him due process, but, because FINRA is not a “state actor,” it has no obligation under the Fifth Amendment to provide due process.
Next, Mr. Legaspy urged that the Zoom hearing would “be cumbersome and procedurally irregular” because:
- the Claimants are from Argentina and will require an interpreter;
- there are dozens of witnesses and hundreds of documents that would have to be shared remotely; and
- by the time the hearing is over, he will have spent so much on attorneys’ fees that he will have exhausted his insurance coverage.
None of these convinced the Court. In what is really the heart of the Order, the Court dismissed all these arguments:
Legaspy – who bears the burden of persuasion – cites no evidence that defenses cannot be presented remotely. He thus pits his conjecture against this court’s experience holding several remote evidentiary hearings since the pandemic began (once with an interpreter), all of which permitted the parties to air their claims and defenses fully. Remote hearings are admittedly clunkier than in-person hearings but in no way prevent parties from presenting claims or defenses. Moreover, the court sees no reason why the Claimants would fare better than the respondent in a remote hearing. The Claimants will have the burden of proof in the arbitration; if anything, the logistical challenges of a remote hearing is more likely to harm them. Legaspy has established, at most, that he would prefer not to arbitrate remotely, not that remote proceedings make it more likely that he will suffer any harms.
Finally, the Court concluded that the “balance of equities” tilts against Mr. Legaspy. First, it held that “an order holding that FINRA cannot conduct hearings remotely would force it to choose between either holding in-person hearings that expose the arbitrators, Claimants, Legaspy, [the other parties], and witnesses to COVID-19, or indefinitely delaying its hearings, . . . because it is not clear when FINRA will be able to hold in-person hearings again, given the uncertainty around the pandemic.” In light of Mr. Legaspy’s inability to articulate how a Zoom hearing would prevent him from fairly defending himself, the Court seemingly had no choice but to deny the request for the TRO.
This is one decision by one federal judge, and by a judge whose own experiences with virtual hearings seem to have been positive. Conceivably, another judge in another District with different experiences might have come to a different conclusion. But that would be speculation, and we have what have here. In light of the fact that no can identify a date by which time in-person hearings can be conducted safely, the need of FINRA to give claimants a chance to try and recover their losses, and the lack of any solid evidence that Zoom hearings are more than merely “clunkier” than in-person hearings, as respondents’ counsel, I am preparing my clients for what this decision suggests may be the inevitable: that we will be defending cases sitting in front of our computers, not is some smelly hotel conference room.
 The Court was also unhappy that Mr. Legaspy waited until what was essentially the last minute to file for the TRO, even though the hearing panel had ordered the Zoom hearing almost two full months earlier.