Tuesday, April 14, 2015

Securities Law: Forum Selection Clause Trumps Obligation to Arbitrate

By Lonnie L. Simpson

The U.S. Court of Appeals for the Second Circuit recently considered whether a forum selection clause defeated a customer’s right to arbitrate under the Financial Industry Regulatory Authority (FINRA) rules. In Goldman, Sachs & Co. v. Golden Empire Schools Financing Authority, 764 F.3d 210 (2d Cir. 2014), the Second Circuit concluded that an all-inclusive and mandatory forum selection clause superseded the FINRA arbitration rule, precluding customers from arbitrating their claims through the FINRA dispute resolution process.

In Golden Empire, two public financing authorities retained two financial services firms to underwrite issues of auction rate securities (ARS) through written underwriting agreements. The underwriting agreements were silent as to arbitration. In separate written broker-dealer agreements, the public financing authorities also retained the financial services firms to manage the auctions for the securities issued, among other services. The broker-dealer agreements contained forum selection clauses that required “all actions and proceedings” related to the transactions between the parties to be brought in the United States District Court for the Southern District of New York. The broker-dealer agreements also contained merger clauses stating that they and any other agreements executed in connection with the ARS contained the entire agreement between the respective parties to those agreements.

The public financing authorities brought FINRA arbitration proceedings against their respective financial services firms, alleging that the FINRA-member firms had fraudulently induced the public financing authorities to issue the ARS. Both financial services firms sued in federal district court to enjoin the FINRA arbitrations, arguing in part that the forum selection and merger clauses in the broker-dealer agreements superseded the FINRA rule that required arbitration. Finding that the forum selection clauses in the broker-dealer agreements overrode the FINRA rule governing arbitration, the district court granted the financial services firms’ motions for preliminary injunction.

The Second Circuit affirmed, first noting that FINRA’s arbitration rule, Rule 12200, supplied written agreements to arbitrate between the financial services firms and the respective public financing authorities. As such, the financial services firms would be required to arbitrate the public financing authorities’ claims if their agreements were not otherwise superseded. The appellate court observed that an agreement to arbitrate is superseded by a later-executed agreement containing a forum selection clause if the clause specifically precludes arbitration, although the forum selection clause need not mention arbitration to specifically preclude it. Rather, to supersede the default obligation to arbitrate under FINRA Rule 12200, the forum selection clause need only be “sufficiently specific to impute to the contracting parties the reasonable expectation that they would litigate any disputes in federal court.” Id. at 216 (quoting Goldman v. City of Reno, 747 F.3d 733, 744 (9th Cir. 2014)).

The Golden Empire court found the forum selection clause at issue, which stated “all actions and proceedings … shall be brought” in the Southern District of New York, to be all inclusive and mandatory. As such, the court concluded that the forum selection clause, buttressed by a merger clause, superseded the FINRA arbitration rule.