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FINRA Member Avoids Arbitration With Forum Selection Clause: Goldman Sachs & Co. vs. Golden Empire Schools Financing Authority
Posted on Categories Court Decisions, Securities ArbitrationTags , ,

Nos. 13-797 & 13-2247 (2nd Cir., 8/21/14). Arbitrability * Agreement to Arbitrate * Contract Enforceability (Public Policy) * Forum Selection Clause * Remedies (Injunctive Relief) * SRO Rules (FINRA Rule 12200) * Stay of Arbitration * Jurisdiction Issues (Federal Question; Diversity). * SRO Rules (FINRA Rule 12200) * Standard of Review (De Novo; Abuse of Discretion) * Competing Agreements * Scope of Agreement * Statutory Definitions ("Proceedings"). A valid forum selection clause requiring that “all actions and proceedings” between the parties be brought in court supersedes an earlier agreement to arbitrate.

In separate actions, Goldman, Sachs & Co., and Citigroup Global Markets Inc., sought to enjoin FINRA arbitrations that had been commenced against them by issuers of auction rate securities (“ARS”). In both cases, the parties had entered into broker-dealer agreements containing forum selection clauses directing that “all actions and proceedings” arising out of the transactions “shall be brought” in the Southern District of New York. The contracts also contained merger clauses stating that the agreements constituted the entire agreement between the parties. When the issuers commenced FINRA arbitrations alleging that they had been defrauded into issuing the ARS, Goldman and Citigroup filed court actions and successfully enjoined the arbitrations.
On appeal, the Second Circuit first notes that it has jurisdiction over the appeals because the “underlying substantive controversies” in each case involved claims under the Securities Exchange Act of 1934 (federal question) and because the parties were diverse and the matters in controversy exceeded $75,000 (diversity). Next, the Court concludes that the district court in New York had authority to enjoin both of the arbitrations. With respect to the Citigroup matter, the arbitration of which was sitused in North Carolina, the Court notes that it is well settled that a district court may enjoin an arbitration proceeding outside of its own district.
Turning to the issue of arbitrability, the Court considers whether the parties’ all inclusive forum selection clauses superseded FINRA Rule 12200, which requires member firms to arbitrate a dispute at the insistence of a customer if the “dispute arises in connection with the business activities of the member.” Noting the split of authority between the Ninth Circuit (holding that forum selection clauses supersede Rule 12200) and Fourth Circuit (holding that forum selection clauses do not supersede Rule 12200), the Second Circuit determined that, under its own precedent, an “all-inclusive and mandatory” forum selection clause supersedes the FINRA rule if the clause “specifically precludes” arbitration. The Court stops short of requiring that the clause specifically mention arbitration.
The Court rejects the issuers’ argument that the broker-dealer agreements do not cover the entire relationship of the parties, finding that the agreements clearly include the ARS issuances because they apply to “any actions and proceedings arising out of . . . any of the transactions contemplated” by the agreement. The Court also rejects the argument that arbitrations are not “proceedings” within the meaning of the forum selection clauses, noting that arbitrations “are regularly described as ‘proceedings’” by, among others, the United States Supreme Court, the Second Circuit, New York state courts and FINRA’s Rules.

(Ed: The parties must be careful to use compulsory language in the forum selection clause or they run the risk that a reviewing court may find the clause to be an either/or option and one party or the other may find itself an unwilling participant in an arbitration.) (EIC: We welcome this week Chris Lazarini, Bass Berry & SIms, Memphis, TN, who is serving as a guest author for the next several weeks and who wrote this decision synopsis.) (SLC Ref. No. 2014-32-01)

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