The merger between the New York Stock Exchange, Inc. and the National Association of Securities Dealers, Inc. is expected to become final in the second quarter of 2007, and the resulting Self-Regulatory Organization will begin operations under a new name. As the merger draws closer, brokerage firms should consider reviewing the forum-selection language in the arbitration clauses of their customer agreements. An arbitration clause that is very narrow in its forum selection provision can fail, forcing the brokerage firm to litigate a dispute in court. For example, in the recent case of Yates v. GunnAllen Financial, the court refused to enforce an arbitration clause where the chosen forum was not available to the customer.
In Yates v. GunnAllen Financial, the pre-dispute arbitration agreement executed by plaintiff Yates provided that disputes “shall be determined by arbitration before a panel of independent arbitrators set up by either the New York Stock Exchange, Inc., or National Association of Securities Dealers, Inc., as [plaintiff] may designate.” Yates v. GunnAllen Financial, No. 05-1510 (N.D. Cal. Jul. 8, 2005). The plaintiff filed with the NYSE, which refused to hear the dispute because GunnAllen was not a member. The plaintiff then sued in federal court and GunnAllen filed a Motion to Compel Arbitration, arguing that the dispute should be arbitrated before the NASD. The plaintiff countered that under the arbitration agreement, it was his right to choose the forum. The court agreed with the plaintiff and held that the plaintiff could not be required to forgo his right to arbitrate the dispute before an arbitration forum he had knowingly and voluntarily chosen. Id., citing Aviall, Inc. v. Ryder Sys., Inc., 913 F. Supp. 826, 836 (S.D.N.Y. 1996). The dispute remained in court, where the jury awarded the plaintiff both compensatory and significant punitive damages. The court recently denied GunnAllen’s motion for reconsideration of the denial of its Motion to Compel Arbitration, and the jury verdict stands. Yates v. GunnAllen Financial.
In denying the motion for reconsideration, the court distinguished the facts of the case from Reddam v. KPMG, where the arbitration agreement stated that any arbitration “shall be determined pursuant to the rules then in effect of the National Association of Securities Dealers, Inc.” In that case, the NASD declined jurisdiction over the dispute, but the court held that arbitration could go forward in another forum that applies the rules of the NASD. Id. at 1061. In contrast, in Yates v. GunnAllen Financial, the clause permits the customer to choose arbitration before the NYSE. Declining to follow the Reddam court’s holding, the court also held that the plaintiff’s choice of the forum was an integral part of the agreement to arbitrate not severable from that agreement, meaning that the clause failed when the NYSE declined jurisdiction. Yates v. GunnAllen Financial.
Another case with a similar holding (and cited in the GunnAllen case) is In Re Salomon, Inc. Shareholders’ Derivative Litigation. The defendants argued that the district judge overseeing the dispute in court should have assigned substitute arbitrators under the Federal Arbitration Act when the NYSE declined to arbitrate the dispute. The Second Circuit disagreed, holding that per the parties’ arbitration agreements, the dispute could only be arbitrated before the NYSE, and there was no further promise to arbitrate in another forum. The parties’ agreement outweighed the court’s standard obligation under federal policy to resolve any doubts in favor of arbitration.
With the upcoming NASD/NYSE merger, brokerage firms may consider reviewing their arbitration agreements to identify any forum limitations (i.e., NYSE or NASD) that might be affected by the merger because the new organization will operate under a different name. It will also be important to determine that any designated forum exists and will not decline to arbitrate the dispute for one reason or another. In the case of any agreement revisions for NASD member firms, the chosen language must comport with NASD Conduct Rule 3110(f), which contains requirements for pre-dispute arbitration agreements.