SECOND CIRCUIT RULES THAT FORUM SELECTION CLAUSE IN BROKER-DEALER CONTRACTS TRUMPS FINRA ARBITRATION RULES

In a combined opinion, the Second Circuit affirmed two district court judgments, concluding that a forum selection clause in two broker-dealer contracts trumped a Financial Industry Regulatory Authority (“FINRA”) rule mandating arbitration. Goldman Sachs & Co. v. Golden Empire Sch. Fin. Auth., No. 13-797-cv, Citigroup Global Mkts. Inc. v. N.C.E. Mun. Power Agency, No. 13-2247-cv (2d Cir. Aug. 21, 2014). In two separate transactions, Golden Empire Schools Financing Authority (“Golden Empire”) retained Goldman Sachs, and the North Carolina Eastern Municipal Power Agency (“NCEMPA”) retained Citigroup to underwrite auction rate securities (“ARS”). In both transactions, the parties executed a broker-dealer agreement that contained a forum selection clause stating: “all actions and proceedings arising out of . . . any of the transactions contemplated hereby shall be brought in the United States District Court in the County of New York.”

These forum selection clauses conflicted with FINRA Rule 12200 that states that FINRA members (which include Goldman Sachs and Citigroup), if requested by a customer (which includes Golden Empire and NCEMPA), must arbitrate a dispute that “arises in connection with the business activities of the member.” Golden Empire and NCEMPA brought FINRA arbitration proceedings relating to the ARS transactions, and Goldman Sachs and Citigroup filed actions in federal court moving for relief to prevent the arbitration proceedings based on the forum selection clauses. The district courts granted Goldman Sachs’s and Citigroup’s motions.

The Second Circuit agreed that the forum selection clauses trumped FINRA Rule 1220 because the plain meaning of the “all actions and proceedings” phrase required that it apply to the FINRA arbitrations because the clause is all inclusive and mandatory, and thus it superseded the FINRA arbitration rule. In doing so, the court relied upon a previous Second Circuit case holding that a parties’ agreement containing the exact same “all actions and proceedings” phrase prevented the application of an earlier arbitration agreement, and it distinguished an earlier Second Circuit case where the clause “submits to the jurisdiction of any New York State or Federal court” was insufficient to supersede an earlier arbitration agreement. Compare Applied Energetics, Inc. v. NewOak Capital Mkts. LLC, 645 F.3d 522, 526 (2d Cir. 2011), with Bank Julius Baer & Co. v. Waxfield Ltd., 424 F.3d 278, 284 (2d Cir. 2005).

The Second Circuit’s holding is consistent with the Ninth Circuit’s opinion in Goldman, Sachs & Co. v. City of Reno, 747 F.3d 733 (9th Cir. 2014) but inconsistent with the Fourth Circuit’s opinion in UBS Financial Services, Inc. v. Carilion Clinic, 706 F.3d 319 (4th Cir. 2013), which concluded that a nearly identical forum selection clause did not supersede Rule 12200. The Fifth Circuit has yet to weigh in on the issue.