Second Circuit Holds Forum Selection Clauses Trump FINRA Arbitration Rule (with Bondi Comment)
The Second Circuit held that forum selection clauses in broker-dealer agreements that require "all actions and proceedings" to be brought in federal court superseded a Financial Industry Regulatory Authority ("FINRA") rule mandating arbitration in disputes involving FINRA members. The Court decided the case, Goldman, Sachs Co. v. Golden Empire Schools Financing Authority, on Thursday, August 21, 2014.
The Second Circuit affirmed lower court decisions in two separate cases, Goldman, Sachs Co. v. Golden Empire Schools Financing Authority and Citigroup Global Markets Inc. v. North Carolina Eastern Municipal Power Agency (2d Cir. Aug. 21, 2014) (No. 13-2247-cv). Both actions involved disputes regarding the issuance of auction rate securities ("ARS"). The plaintiffs alleged that Goldman Sachs and Citigroup fraudulently induced the plaintiffs to issue the securities.
In the first case, Goldman, Golden Empire, the plaintiff, issued $123 million of ARS with Goldman Sachs as underwriter and broker-dealer from 2004 to 2007. The broker-dealer agreement signed by the parties included a clause stating that they agreed that "all actions and proceedings" arising out of the agreement or any contemplated transactions "shall be brought" in federal court in New York. The broker-dealer agreement also included a merger clause stating that the agreement "contain[ed] the entire agreement" between Goldman Sachs and Golden Empire.
The agreement at issue in the second case, Citigroup, contained an identical clause. In that case, the North Carolina Eastern Municipal Power Agency ("NCEMPA") issued $223 million in ARS in 2004 with Citigroup as underwriter and broker-dealer. The parties' broker-dealer agreement included a forum selection clause and merger clause that were identical to those used by Goldman Sachs.
When Golden Empire and the NCEMPA sought to arbitrate their respective disputes, Goldman Sachs and Citigroup each sought declaratory relief and an injunction against arbitration in district court. They argued that the forum selection clauses in their agreements superseded FINRA Rule 12200, which states that "members 'must arbitrate a dispute' if arbitration is '[r]equested by the customer' and '[t]he dispute arises in connection with the business activities of the member.'" In both cases, the court held that the forum selection clauses superseded the FINRA rule, and the plaintiffs appealed.
The Second Circuit also held that the forum selection clauses superseded FINRA Rule 12200 because the clauses "specifically preclude[d]" arbitration. In both agreements, the forum selection clauses were all-inclusive and mandatory, requiring that all actions and proceedings be brought in federal court. This language precluded arbitration even though the clauses did not mention arbitration. In addition, the merger clauses stated that the agreements "contain[ed] the entire agreement between the parties relating to the subject matter hereof." Thus, the forum selection clauses were sufficient to supplant the FINRA rule.
Bondi Comment: In this decision, the Second Circuit broadly held that a forum selection clause stating that "all actions and proceedings" be brought in federal court encompasses FINRA arbitrations, thereby precluding the plaintiffs from instituting a FINRA arbitration proceeding. Other courts have reached a different holding on similar language. For example, the Fourth Circuit recently held that the phrase "all actions and proceedings" did not include arbitration, thereby allowing the FINRA arbitration to proceed forward. The Fourth Circuit explained in dicta that a valid forum selection clause would need to state explicitly that arbitration was included in order to supersede the FINRA arbitration rule.At first glance, the lesson here seems to be that FINRA members should draft explicit forum selection clauses to avoid any ambiguity that FINRA arbitrations are included. But there is more to learn here.Forum selection clauses have become an area of great controversy. Whether firms should stay in arbitration or go to federal court often depends on where FINRA members believe they can fare better. FINRA member firms often are hoping to avoid federal court, opting instead to arbitrate customer claims to avoid the risk of large judgments that often result in federal actions. Where firms have sought to contractually avoid federal court through agreements, FINRA has aggressively brought enforcement actions. For example, in April 2014, a financial services firm reached a settlement with FINRA regarding clauses in its customer agreements that prohibited investors from initiating class actions or consolidating FINRA arbitration claims. As part of the settlement, the firm agreed to pay a significant penalty and remove the clause from the customer agreements. Thus, the real question is not simply whether courts will enforce forum selection clauses but also whether FINRA will allow the clauses to stand.
See:Decision: Goldman Sachs v. Golden Empire.See also: UBS Fin. Servs., Inc. v. Carilion Clinic, 706 F.3d 319 (4th Cir. 2013) (holding that the forum selection clause at issue did not preclude FINRA arbitration); UBS Sec. LLC v. Allina Health Sys., 2013 WL 500373 (D. Minn. Feb. 11, 2013) (holding that the forum selection clauses at issue did not supersede FINRA rule 12200).