Second Circuit Permits Arbitration Claims to Proceed Despite $100 Million Class-Action Settlement

November 14, 2011


In a decision that sends mixed signals to defendants in securities class actions, the Court of Appeals for the Second Circuit ruled on November 3, 2011 that class members who failed to opt out of a settled securities class-action against Ameriprise Financial Services, Inc. (“Ameriprise”), may still arbitrate claims against Ameriprise before the Financial Industry Regulatory Authority (“FINRA”), even though a broad Private Securities Litigation Reform Act bar order (the “Bar Order”) appears to preclude them from doing so.[1] The decision, Ameriprise Financial Services, Inc. v. Beland, presents a mixed bag for securities class-action defendants, in that:

  • The court rejected the class members’ attempt to sidestep the Bar Order, holding that their failure to read the Notice of Proposed Settlement of Class Action (“Class Notice”) and reliance on an Ameriprise broker’s advice to ignore the Class Notice does not constitute “excusable neglect.”
  • The court also clarified that the Bar Order not only released claims falling within its scope but also revoked any preexisting arbitration rights related to such released claims.
  • The court confirmed explicitly for the first time that federal district courts in the Second Circuit have the authority under the Federal Arbitration Act (“FAA”) to enjoin private arbitrations where, as here, a party’s consent to arbitrate has been revoked or was never provided.
  • Finally, in a move that may prove particularly disconcerting for financial services companies negotiating class settlements, the court permitted class members to arbitrate individual “suitability” claims even when those claims appear to fall within the intended scope of the Bar Order’s release.


Appellants John and Elaine Beland (the “Belands”), a retired couple, were class members to a $100 million settlement fund established for individuals who paid for Ameriprise financial advisory services or invested in certain Ameriprise investment products between March 10, 1999, and April 1, 2006. The Belands, however, did not share in those proceeds because, despite receiving the 2007 Class Notice, they neither submitted a settlement claim nor opted out of the class as required by Federal Rule of Civil Procedure 23. The Class Notice explained that failing to opt out “will prevent” class members “from suing [Ameriprise] over claims that arise from or are based on the offer and sale of financial planning services or financial advice provided . . . by [Ameriprise], including claims to recover . . . fees . . . paid for financial advisory services or advice and claims that [class members] were ‘steered’ toward particular investments that were more profitable for [Ameriprise].”[2] The Belands alleged that their failure to act was based, in part, on advice they received from their Ameriprise financial consultant.

Notwithstanding, or perhaps because of, their failure to either submit a claim or opt out, the Belands in 2009 brought a FINRA action against Ameriprise and their Ameriprise financial consultant for fraud and breach of contract for failing to adhere to their conservative investment strategy and concealing this alleged mismanagement, which purportedly diminished their investment account from $2.6 million in 1995 to $800,000 by 2009. Ameriprise moved to enjoin the arbitration before the FINRA panel and, again, in the United States District Court for the Southern District of New York after the FINRA panel denied Ameriprise’s motion. In August 2010, U.S. District Court Judge Batts granted Ameriprise’s motion to enjoin the arbitration, ordering the Belands to dismiss their FINRA complaint with prejudice. The Belands appealed.

No “Excusable Neglect”

Perhaps the most favorable aspect of the Second Circuit’s decision for class-action defendants was the court’s rejection of the Belands’ argument that their failure to opt out of the class settlement constitutes “excusable neglect.” Because the Belands did not argue that their due-process rights were violated, “excusable neglect” would have been the only basis to overlook their failure to opt out.[3] The crux of the Belands’ “excusable neglect” argument was that they relied on their Ameriprise financial consultant’s advice to “do nothing” about the Class Notice and that, even if they had read the Class Notice, they would not have fully understood its ramifications. The court rejected both arguments.

First, the court held that the Belands’ blind reliance on their financial consultant was unreasonable because Ameriprise itself was the subject of the Class Notice.[4] In view of the pending litigation, the Belands failed to act properly by taking legal or investment advice from Ameriprise or its agents. Second, the court found that the “admonitions and warnings under boldface, capitalized headings in the Class Notice,”[5] which stated that “[i]f you do nothing, you will get no money from this settlement” and “will not be able to bring a lawsuit . . . asserting any Released Claims,”[6] adequately warned class members that they would not recover from the settlement and would be subject to the Bar Order if they took no action.

Given the Second Circuit’s refusal to deem the Belands’ conduct “excusable neglect,” the court’s decision will likely provide useful ammunition for defendants in the future. At a minimum, the decision will make it harder for class members to avoid a bar order on excusable neglect grounds in the Second Circuit if the settlement notice contains the standard conspicuous warnings about failing to opt out or respond to the notice.

Bar Orders Supersede Arbitration Rights

Among the issues before the Second Circuit was a question of first impression: whether a class-action bar order forecloses future FINRA arbitrations relating to released claims as well as litigation. Relying on Tenth Circuit precedent, the court held that the Bar Order applied equally to arbitrations, explaining that it not only released the Belands’ substantive claims that fell within its terms, but also revoked their right to demand arbitration of such claims—a right conferred by Ameriprise’s FINRA membership.[7] In other words, because of the Bar Order’s release, the “Settlement Agreement amended the contours of the parties’ agreement to arbitrate all disputes between them before FINRA arbitrators.”[8] The court noted, however, that such a result may not follow in every case—as with any question of arbitrability, the outcome depends on the wording of the various agreements.

Federal District Courts Have Power to Enjoin Arbitrations

Although neither the Belands nor Ameriprise raised the issue, the Second Circuit felt compelled to address the extent of district courts’ authority to enjoin arbitrations—an issue its own precedents had not squarely decided. The court acknowledged that while the FAA “explicitly authorize[s] a district court to stay litigation pending arbitration, and to compel arbitration,” the FAA does not by its terms confer any such authority to “enjoin a private arbitration.”[9] While two other circuit courts had inferred that such authority exists under the FAA and prior Second Circuit decisions had “suggest[ed] that a federal court may enjoin an arbitration that [it] determines is not otherwise valid,”[10] the Second Circuit had never clarified once and for all that district courts could step in and stop arbitrations in their tracks. It has done so now. The court explained that arbitration agreements are a matter of consent, and courts cannot be “powerless to prevent one party from foisting upon the other an arbitration process to which the first party had no contractual right.”[11]

Carve-Out for Suitability and Technology Stock Claims

Perhaps the most troublesome—and perplexing—aspect of this opinion was the court’s decision to permit the Belands to arbitrate their suitability claims, which seemed to fall within the scope of claims the Bar Order released. Given the high-fee investment steering claims at issue in the class action,[12] Ameriprise argued that the Belands’ suitability claims had been released by their failure to participate in the class settlement or file an opt-out notice. The Second Circuit disagreed, holding that the Belands’ suitability claims—which alleged “that Ameriprise and [its financial consultant] agreed to invest the Belands’ funds in a conservative fashion, . . . but that [a] conservative asset allocation approach was not taken”—were excluded from the settlement’s “expansive” definition of “Released Claims”[13] because they did not arise out of the common course of conduct that was alleged, or could have been alleged, in the class action.[14] Thus, the court viewed the Belands’ claims that their broker took an overly risky investment approach with “risky small cap or start-up funds” and “technology stocks” as fundamentally different than the released class claims, which primarily concerned Ameriprise’s alleged steering of class members into proprietary mutual funds.[15]

That interpretation, however, appears at odds with the Class Notice’s description of the released claims, including (a) claims that “arise from or are based on the offer and sale of financial planning services or financial advice provided . . . by [Ameriprise]”; (b) “suitability claims” that “arise out of the common course of conduct that was alleged, or could have been alleged, in the [class action]”; and (c) “all claims” that “could have been asserted in any forum by the Plaintiffs or Class Members.”[16] The decision therefore counsels parties to be careful about carve-out language even when such language is limited by a “common course of conduct” exception because a court may interpret the carve-out language broadly.[17]

While this decision sounds a warning bell to parties drafting class settlements, its precedential value may be somewhat limited by the case’s unique factual circumstances. Here, Ameriprise was a broker-dealer and the gravamen of the class action related directly to Ameriprise’s investment advisory and broker-dealer services. Thus, the language carving out “suitability” claims overlapped with the issues certified for class treatment more than might be typical. This, in turn, could enable securities class-action defendants to argue for cabining the decision’s application in future actions.

[1] Ameriprise Fin. Servs., Inc. v. Beland, No. 10-3399, __ F.3d __ (2d Cir. Nov. 3, 2011) (“Opinion”). The Bar Order “permanently barred and enjoined” class members from “from instituting, commencing, or prosecuting, either directly or in any other capacity, any and all Released Claims against any and all Released Persons” and “compromised, settled, released, discharged, and dismissed [Released Claims] as to all Class Members . . . on the merits and with prejudice.” Order & Final Judgment, July 18, 2007, ¶ 10.

[2] Notice of Proposed Settlement of Class Action, Feb. 15, 2007 (“Class Notice”), at 8.

[3] Opinion at 28.

[4] Id. at 30–31.

[5] Id. at 29.

[6] Class Notice at 11.

[7] See Opinion at 37–38 (“[W]here a party initially consents (in this case, by dint of Ameriprise’s FINRA membership) to arbitrate certain types of claims, but later enters into a settlement agreement that releases claims that had been subject to the initial consent to arbitrate, the claims that have been released by such a settlement are no longer subject to arbitration.”).

[8] Id. at 39.

[9] Id. at 54 (emphasis added).

[10] Id. at 56–57 (citing decisions from the First and Third Circuits).

[11] Id. at 57.

[12] See Class Notice at 4–5 (“What is this lawsuit about? . . . [Ameriprise] gave clients plans and/or advice that, Plaintiffs allege, was tainted by inadequately disclosed conflicts of interest. Specifically, clients who purchased financial advice, financial plans, or other financial advisory services were given investment recommendations that were improperly influenced by [Ameriprise’s] financial interests rather than the individual needs of [Ameriprise] clients. . . . [Ameriprise] was paid for selling Preferred Funds . . .[,] benefited from the management fees it charged investors in the AXP Funds[, and] . . . [f]or a portion of the relevant time period, . . . also received revenue sharing payments in connection with the sale of AXP Funds. These arrangements were not sufficiently disclosed to clients.”).

[13] Opinion at 45 & 48. The Class Notice defined Released Claims as “any and all claims, debts, demands, rights or causes of action or liabilities whatsoever . . . , whether based on federal, state, local, statutory or common law or any other law, rule or regulation, . . . including both known claims and Unknown Claims . . . that (i) have been asserted in this Action by the Plaintiffs . . . or (ii) could have been asserted in any forum by the Plaintiffs or Class Members . . . against any of the Released Persons; including claims that arise out of or are based upon (a) the allegations, transactions, facts, matters or occurrences, representations or omissions alleged, involved, set forth, or referred to in the [Class Complaint] . . . , (b) the offer and sale of financial advice, financial planning, and/or financial advisory services pursuant to a Financial Advisory Service Agreement, or the SPS, WMS or SMA programs, (c) fees paid for financial advice, financial planning, and/or other financial advisory services provided pursuant to a Financial Advisory Service Agreement, or the SPS, WMS or SMA programs, (d) the rendering of financial advice, financial planning, and/or other financial advisory services for a fee in connection with the purchase or sale of AXP Funds (as defined) or other proprietary investment products, (e) the rendering of financial advice, financial planning, and/or other financial advisory services for a fee in connection with the purchase or sale of Preferred Funds (as defined), (f) the purchase or sale of AXP Funds and/or Preferred Funds through AEFA by Class Members, or (g) the receipt or payment of revenue sharing and/or directed brokerage in connection with the purchase or sale of AXP Funds or Preferred Funds.” Class Notice at 8.

[14] Opinion at 50. See also Class Notice at 8 (“‘Released Claims’ shall not include suitability claims unless such claims are alleged to arise out of the common course of conduct that was alleged, or could have been alleged, in the [class action].”).

[15] Opinion at 51, 60.

[16] Class Notice at 8.

[17] See, e.g., Opinion at 50 (“The Belands’ claims that [their Ameriprise financial consultant] mismanaged their trusts contrary to their instructions and investment goals do not fall within that ‘common course of conduct.’”).