Page 6 - Alternative Dispute Resolution

S6 | Monday, March 30, 2015 | Alternative Dispute Resolution
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Second Circuit Makes It Easier and therefore bound by FInRA Rule 12200,

which states that members “must arbitrate
a dispute” if the arbitration is [r]equested
To Avoid FINRA Arbitration
by the customer” and [t]he dispute arises in
connection with the business activities of the
member.”4 FInRA is a self-regulating organiza-
tion that has “the authority to exercise com-
prehensive oversight over ‘all securities firms
that do business with the public.’”5 neither
Goldman Sachs nor Citigroup disputed that

FInRA Rule 12200 was a written agreement
to arbitration with customers. Instead, each
argued that the broad judicial forum clause
in the broker-dealer agreements superseded
FInRA Rule 12200. Id. at 212.
The Second Circuit held that the forum
selection clauses at issue requiring “all
actions and proceedings” to be brought in
federal court superseded the earlier agree-

ment to arbitration under FInRA Rule 12200
because “[i]n this Circuit, an agreement to
arbitrate is superseded by a later-executed
agreement containing a forum selection
clause if the clause ‘specifically precludes’
arbitration.” Id. at 214. The Second Circuit
reviewed case precedent and concluded that
forum selection clauses that were “all inclu-

sive” and “mandatory,” such as the clauses in
Goldman, Sachs that required “all actions and
proceedings” to be brought in court, super-
seded the arbitration agreement. Conversely,
a forum selection or jurisdiction clause that
can co-exist with the arbitration agreement,
for example by providing that a customer
merely “submits to the jurisdiction of any
new York State or Federal Court” or “agrees

that any Action may be heard in state court,”
does not supersede FInRA Rule 12200. Id. at
214-16. “The forum selection clauses need OCK
only be sufficiently specific to impute to the GST
contracting parties the reasonable expecta- BI
tion that they would litigate any disputes in
federal court, thereby superseding ... [the]
default obligation to arbitrate under FInRA
Rule 12200.” Id. at 216 (internal citations
submit to the jurisdiction of, and venue
omitted).
‘Goldman, Sachs v. Golden Empire’
In addition, the Second Circuit noted the By CHad B. HolTZman, in, such court.
Federal Arbitration Act’s policy toward favor- ruTH E. HarloW
In Goldman, Sachs, the Second Circuit Id. at 212 (emphasis added). Each broker-
ing arbitration did not apply to the issue at and BrIan a. BErklEy
affirmed decisions rejecting FInRA arbitra- dealer agreement also contained a merger
hand. “Because the question presented here tions in two consolidated appeals by issuers clause “stating that it and any other agree-
concerns whether an arbitration agreement In an effort to avoid otherwise mandatory of auction rate securities. In the first case, ments executed in connection with that [auc-
remains in force in light of a later-executed arbitration before the Financial Industry appellant Golden Empire Schools Financ- tion rate securities] issuance ‘contain the
agreement, the presumption does not apply.” Regulatory Authority (FInRA), broker-deal- ing Authority and Kern High School Dis- entire agreement between the parties relating

Id. at 216.
er FInRA members have used broad judicial trict (collectively, Golden Empire)1 issued to the subject matter hereof.’” Id. Both Golden
forum selection clauses. These clauses aim approximately $125 million of auction rate Empire and nCEMPA commenced a FInRA
‘UBS v. Carilion’
to remove disputes that broker-dealers have securities2 over multiple years. In the second, arbitration under FInRA Rule 12200, alleg-
with their customers from the arguably cus- appellant north Carolina Eastern Municipal ing that they had been fraudulently induced
The Second Circuit’s holding, however, is tomer-friendly confines of FInRA arbitration Power Agency (nCEMPA)3 issued $223 mil- to issue auction rate securities. In response,
at odds with the Fourth Circuit in a similar and instead place those disputes in court. lion of auction rate securities. In doing so, Goldman Sachs and Citigroup sought injunc-
case, UBS Fin. Servs. v. Carilion Clinic, 706 The circuit courts are split as to the efficacy Golden Empire hired Goldman Sachs and tive and declaratory relief barring the FInRA
F.3d 319 (4th Cir. 2013). In UBS, the Fourth of these agreements, with the Second Circuit nCEMPA hired Citigroup Global Markets as arbitration by arguing that the broad forum
Circuit recognized that the obligation to recently weighing in on the side of broker- their respective underwriters and brokers selection clause in the broker-dealer agree-

arbitrate under FInRA Rule 12200 could be dealers in Goldman, Sachs & Co. v. Golden for the deal. The auction rate securities issu- ment overruled the mandatory arbitration
superseded and displaced by a specific forum Empire Schools Financing Authority, 764 F.3d ance procedure involved each set of parties language in FInRA Rule 12200. The District
selection clause. That court emphasized that 210 (2d Cir. 2014). The Second Circuit’s deci- executing both an underwriter agreement, Court for the Southern District of new York
“[a]ny such provision, however, must be suf- sion provides helpful lessons on how to draft which was silent on dispute resolution, and ruled in both cases that the forum selection
ficiently specific to impute to the contract- an effective forum selection clause and acts a broker-dealer agreement, which contained clause trumped FInRA Rule 12200, and the
ing parties the reasonable expectation that as a good reminder of limits to the federal the following forum selection clause:
U.S. Court of Appeals for the Second Circuit
they are superseding, displacing, or waiving policy in favor of arbitration as embodied The parties agree that all actions and pro- consolidated the appeals for the purpose of
the arbitration obligations created by FInRA by the Federal Arbitration Act.
deciding this issue. Id. at 212-13.
ceedings arising out of this Broker-Dealer The Second Circuit framed the issue as
Rule 12200.” Id. at 319. But unlike the Sec- Agreement or any of the transactions
ond Circuit, the Fourth Circuit found that contemplated hereby shall be brought “the arbitrability of these disputes under
the phrase “all actions and proceedings” in Chad B. holtzman is an associate at Pepper Hamil- in the United States District Court in the the [Federal Arbitration Act] in light of the
the forum selection clause was not specific ton in Philadelphia. ruth E. harlow is a partner in County of new York and that, in connec- all-inclusive forum selection clause signed
enough because it did not include arbitration the New York office. Brian a. BErklEy is an associate tion with any such action or proceeding,
by the parties.” Id. at 214. Both Goldman
proceedings mandated by FInRA. Instead, the
in the Philadelphia office.
Sachs and Citigroup are FInRA members