VOLUME 11, ISSUE 3: ARTICLE SUMMARY
What FINRA Can Learn from Major League Baseball
By Ben Einbinder
Summary by Michael Cummings
Originally published by the Pepperdine Dispute Resolution Law Journal
Read the full article here.
Major League Baseball (“MLB”) has long been hailed as the nation’s pastime. Thanks to its extreme popularity, as well as changes in the way players and their teams resolve contract disputes—primarily free agency and arbitration—baseball has become a multi-billion dollar industry. Today, with over 700 players playing for thirty teams, teams face many of these contract disputes annually.
The Financial Industry Regulatory Authority (“FINRA”) is the largest regulatory body for all securities firms in the U.S. They, like MLB, oversee a great number of employees working for a variety of brokerage firms and branch offices. In 2007, FINRA assumed control of the securities employment arbitration program, which is now the largest dispute resolution program in the securities industry for investors and registered firms.
This article analyzes MLB’s final-offer arbitration system and advocates for adoption of a similar system by the securities industry.
II. HISTORY AND EVOLUTION OF FINAL-OFFER ARBITRATION
In the late 19th century, when professional baseball began, players were prevented from leaving their team by what was essentially a gentlemen’s agreement among the team owners. This agreement was later made official through inclusion of a “reserve clause” in all player contracts. Players, naturally, did not approve of this format and likened their inability to play for the team of their choice to indentured servitude. The disputes that arose from these clauses resulted in three separate lawsuits which all progressed to the Supreme Court. In all three suits, the Supreme Court held that professional baseball was not subject to antitrust laws and upheld the reserve system.
As these lawsuits progressed however, owners sensed that congressional intervention was forthcoming. In hopes of avoiding such intervention, the owners began bargaining with the players union. The most significant concession in the bargaining sessions was the implementation of final-offer arbitration for salary disputes of all players with two or more years of major league service (time spent on the major league team, as opposed to a minor league affiliate). Final-offer arbitration shifted substantial bargaining power to the player in negotiations over their proper value where, previously, they had none.
III. OVERVIEW OF THE CURRENT ARBITRATION SYSTEM
Today, all MLB players are divided into three groups: (1) players who are not eligible for arbitration; (2) players who are arbitration-eligible based on meeting standards of service time; and (3) players with at least six years of major league service who are free to sign a contract with any team. Players in the second and third groups, who are arbitration \-eligible, are able to negotiate their salary with the team at any time. Only when an impasse in such a negotiation arises does the final-offer arbitration take place. In the MLB system, both the team and player submit an offer for a salary to an arbitration panel. Using a set of given criteria, the panel then chooses one salary offer or the other, and may not choose an amount in-between. The chosen offer is binding as the player’s salary for the upcoming season.
IV. THE AFFECTS OF THE ARBITRATION SYSTEM IN MLB
The MLB Arbitration System has largely met the needs for which it was created. The system was created to incentivize teams and players to negotiate in good faith and settle prior to an actual arbitration hearing. The system also encourages both team and player to converge on an offer which is “reasonable” based on the player’s performance.
The system has accomplished these goals. Since its inception, nearly 85% of salary arbitration cases have been settled prior to arbitration. Furthermore, this system has radically altered the landscape of deals upon which players and teams agree. Teams often seek agreement on multi-year contracts for their best players before the players reach their peak earning potential, despite such contracts putting them at risk of those players being injured or suffering a decline in performance.
V. CRITICISMS OF MLB’S ARBITRATION SYSTEM
There are a number of criticisms of MLB’s final-offer arbitration system. Team owners argue that the system unfairly benefits players as those who go through arbitration are all but guaranteed at least some increase in their salary, whether they “win” the hearing or not. Furthermore, the difference in player and team offers for arbitration has been gradually on the rise. This widening gap creates higher stakes for both team and player in the process. Another criticism associated with this offer difference is that the system calls for the team to present evidence at the hearing which is detrimental to the player. This can damage the player/team relationship. Finally, some argue that because the arbitrators do not factor in the economic status of the team, the system is unfair on small-market teams by forcing them to pay more for a player than they otherwise would.
VI. DEFENSES OF MLB’S ARBITRATION SYSTEM
Those who defend the final-offer arbitration system highlight the ways in which the system has accomplished its primary goal: good faith negotiation and settlement of a majority of salary disputes. They point out that free agency and increased revenue have contributed to the great rise in player salary, not just arbitration alone. Proponents also rebut the criticism of increased salaries by asserting that most players are underpaid in their first two or three years of service. The system is also viewed as helping small-market teams. Arbitration allows teams to enter into negotiations with talented players for multi-year contracts before they are able to leave for free agency and potentially more money than they would have made via arbitration.
VII. OVERVIEW OF THE “FINRA” EMPLOYMENT DISPUTE RESOLUTION PROGRAM
In securities industry dispute resolution governed by FINRA (Financial Industry Regulatory Authority), a FINRA registered broker may file a claim against his employer for a number of causes that relate to either a compensation dispute or the employee’s allegation that the company has discriminated against him or her in some fashion. This claim goes through a traditional arbitration process which is similar to a judicial proceeding. The employer can respond to the claim or file to have it dismissed. The sides then choose arbitrators who will hear the case and issue a written opinion. In every case, the employee presents a dollar figure to the arbitration panel and the employer defends, contending that the employee should receive zero compensation. Both sides also have options available for contesting and vacating this award. The average time frame for these claims to reach conclusion is seventeen months.
VIII. A CASE FOR FINAL-OFFER ARBITRATION IN FINRA EMPLOYMENT DISPUTES
FINRA Arbitrations have two distinct processes: determining liability and determining the amount of the award. For cases where liability is found, final-offer arbitration should be used to determine the amount of the award.
A final-offer arbitration system would benefit the securities industry in a variety of ways. Employees often receive approximately 25% of their monetary damage claim, suggesting the two sides are very far apart. The final-offer system would encourage parties to make more reasonable claims and likely lead to more settlements as parties are in a closer bargaining zone. Final-offer arbitration would also decrease the costs of the process by reducing the time spent in arbitration determining the award. Finally, many of the criticisms in final-offer arbitration in MLB are unique to MLB, and therefore do not apply to securities arbitration.
IX. THE IMPACT OF IMPLEMENTING FINAL-OFFER ARBITRATION IN FINRA EMPLOYMENT DISPUTES
The final-offer arbitration system will not lead to a “sacrifice of justice”, as it will not be used to determine liability. As such, the procedure will maintain the same level of due process. The benefits associated with less time consumption, increased settlement, and decreased expenses outweigh any negatives of implementing final-offer arbitration as it applies to determining the award.
Over its forty years in existence, MLB’s final-offer arbitration system has proven to be both efficient and cost effective in settling salary disputes. FINRA would receive the same benefits if it required final-offer arbitration in its dispute resolution program. Implementing final-offer arbitration will lead to quicker and cheaper arbitrations, more settlements, and maintain the standard of justice for participants.
Posted in: Volume 11, Issue 3