Firms Have Roadmap for Expanding Litigation of Customer Disputes After Second Circuit Holds Forum Selection Clauses Trump FINRA’s Mandatory Arbitration Rule

In the recent decision, Goldman Sachs & Co. v. Golden Empire Sch. Fin. Auth., 764 F.3d 210 (2d Cir. 2014), the Second Circuit held that nearly-identical forum selection clauses in broker-dealer agreements between the broker-dealers/underwriters of auction rate securities ("ARS") and the public financing authorities who issued the ARS superseded the Financial Industry Regulatory Authority, Inc. ("FINRA") rule mandating arbitration between a customer and member. In so holding, the Second Circuit potentially has opened an avenue for firms seeking to litigate - rather than arbitrate - customer disputes subject to FINRA's mandatory arbitration rule.

In Golden Empire, the Second Circuitdecided two district court cases, Goldman Sachs & Co. v. Golden Empire Sch. Fin. Auth., 922 F. Supp. 2d 435 (S.D.N.Y. 2013) and Citigroup Global Mkts. Inc. v. N.C. E. Mun. Power Agency, No. 13 CV 1703 (S.D.N.Y. May 10, 2013). In those cases, the parties' broker-dealer agreements ("BDAs") included a forum selection clause providing that, "all actions and proceedings arising out of this [BDA] or any of the transactions contemplated hereby shall be brought in the United States District Court in the County of New York and that, in connection with any such action or proceeding, submit to the jurisdiction of, and venue in, such court." In 2012, the municipal authorities instituted separate FINRA arbitrations in connection with the ARS market collapse during the financial crisis. Goldman Sachs and Citibank then sought to enjoin those arbitrations in the Southern District of New York. In both cases, the district court found that the forum selection clauses in the BDAs superseded FINRA's Rule 12200 governing arbitration.

In affirming the decisions below, the Second Circuit noted that whether similar forum selection clauses supersede the mandatory obligation to arbitrate under FINRA Rule 12200 "has been the subject of litigation in multiple circuits, with decidedly mixed results," highlighting the Ninth Circuit decision, City of Reno v. Goldman Sachs & Co., 747 F.3d 733 (9th Cir. 2014), holding that "such a forum selection clause supersedes Rule 12200," and contrasting the Fourth Circuit decision, UBS Fin. Servs., Inc. v. Carilion Clinic, 706 F.3d 319 (4th Cir. 2013), holding that "a nearly identical forum selection does not supersede Rule 12200." The Second Circuit held that "an agreement to arbitrate is superseded by a later-executed agreement containing a forum selection...