The Second Circuit recently issued a single opinion for two cases [Goldman Sachs & Co. v. Golden Empire Sch. Fin. Auth., No. 13-797-cv (2d Cir. Aug. 21, 2014) and Citigroup Global Mkts. Inc. v. N.C.E. Mun. Power Agency, No. 13-2247-cv (2d Cir. Aug 21, 2014)], holding that a forum selection clause in a contract supersedes a broker-dealer’s obligation to arbitrate disputes with a customer under FINRA Rule 12200.
In each case, the agreements between the contracting parties contained similar forum selection clauses that applied to “all actions and proceedings arising out of … any of the transactions contemplated.” The forum selection clauses in the agreements clearly conflict with FINRA Rule 12200, which requires parties to arbitrate a dispute under the Code if (1) arbitration under the Code is requested by the customer, (2) the dispute is between a customer and a member, and (3) the dispute arises in connection with the business activities of the member.
The Second Circuit reasoned that since the agreements contemplated the transactions at issue in the case, the forum selection clauses were applicable to this dispute. The Second Circuit applied a “plain meaning” analysis and held that the phrase “all actions and proceedings” contained in the forum selection clauses includes “arbitrations,” reasoning that “arbitrations are regularly described as ‘proceedings’ by the United States Supreme Court, our Circuit, New York state courts, the C.P.L.R., and the FINRA Rules.”
In reaching its decision, the Second Circuit reconciled its prior conflicting decisions in Bank Julius Baer & Co. v. Waxfield Ltd., 424 F.3d 278, 284 (2d Cir. 2005) (holding the forum selection clause did not supersede agreement to arbitrate) and Applied Energetics, Inc. v. NewOak Capital Mkts. LLC, 645 F.3d 522, 526 (2d Cir. 2011) (holding the forum selection clause superseded FINRA Rule 12200). The Second Circuit distinguished Bank Julius because it lacked language that provided that it “constitute[d] the entire understanding and agreement” because it stated that a customer “submits to the jurisdiction of any New York State or Federal Court” and that “any Actionmay be heard” in such court. The Second Circuit contrasted the Bank Julius language with that inApplied Energetics, which provided that “any dispute arising out of this Agreement shall be adjudicated in” New York.
The Second Circuit decision follows the Ninth Circuit decision in Goldman, Sachs & Co. v. City of Reno, 2014 WL 1272784 (9th Cir. Mar. 31, 2014), wherein Reno initiated a FINRA arbitration alleging common law and statutory claims against Goldman regarding underwriting and advising services that Goldman provided to Reno for auction-rate securities (ARS). The Ninth Circuit held that the forum selection clauses in the parties’ agreements trumped Goldman’s duty to arbitrate.
Customer advocates have criticized the Second and Ninth Circuits and questioned whether the forum selection clauses in broker-dealer contracts with customers also violate FINRA IM-12000, which states that it “may be deemed conduct inconsistent with just and equitable principles of trade and a violation of [FINRA Conduct] Rule 2010 for a member … to … (a) fail to submit a dispute to arbitration under the [FINRA Arbitration] Code.”