Goldman, Sachs & Co. v. Golden Empire Schs. Fin. Auth., Nos. 13-797-cv, 13-2247-cv, 2014 U.S. App. LEXIS 16155 (2d Cir. Aug. 21, 2014) [click for opinion]

The Financial Industry Regulatory Authority (“FINRA”), which regulates U.S. securities firms, has a rule that its 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.”  The question in this case—actually two cases consolidated on appeal—was whether a forum-selection clause could trump that rule.  The Second Circuit answered in the affirmative.

Both cases involved the issuance of auction-rate securities, and in both cases the parties—the securities firms and their customers—signed two agreements, an underwriter agreement that was silent on dispute resolution and a broker-dealer agreement that included the following forum-selection clause, which required “all actions and proceedings arising out of this Broker-Dealer Agreement or any of the transactions contemplated” to be “brought in the United States District Court in the County of New York.”

The broker-dealer agreements also contained a merger clause, stating that all agreements executed in connection with the auction-rate securities “contain the entire agreement between the parties….”

When the purchasers of the securities commenced arbitration under theFINRA rules, the firms (Goldman Sachs and Citigroup) each filed a declaratory action and sought injunctive relief to prevent arbitration.  The Southern District of New York in both cases granted the injunction, which the Second Circuit affirmed.

The Second Circuit acknowledged the federal policy favoring arbitration but noted that the presumption of arbitrability does not apply where “an agreement to arbitrate is superseded by a later-executed clause if the clause specifically precludes arbitration,” even if the clause does not expressly mention arbitration.  The FINRA rule constitutes a written agreement to arbitrate with customers, but the parties’ forum-selection clause, together with the merger clause, “require that disputes arising out of the broker-dealer agreements be adjudicated in the Southern District of New York, and they thus supersede” the FINRA rule.

The Second Circuit’s decision adds to a circuit split, with the Ninth Circuit ruling that a forum-selection clause supersedes the FINRA arbitration rule and the Fourth Circuit ruling the opposite.

Kyle Olson of the Chicago office contributed to this summary.