On August 21, the US Court of Appeals for the Second Circuit decided two closely watched appeals regarding the intersection of Financial Industry Regulatory Authority, Inc. (FINRA) rules mandating arbitration of broker-dealer/customer disputes, and contractual forum selection clauses providing for a judicial forum. Goldman, Sachs & Co. v. Golden Empire Schools Financing Authority, et al., Nos. 13-797-cv; 13-2247-cv (2d Cir. Aug. 21, 2014). The Second Circuit's decision in Golden Empire provides important guidance for broker-dealers and institutional market participants in drafting, interpreting and applying forum selection clauses.

Background -

Over the past few years, broker-dealers and institutional market participants have been engaged in an increasing number of procedural litigations to determine the governing forum for disputes arising in the course of their relationships. Traditionally, the choice between the courtroom and the arbitration forum had often been viewed as a close call, with each forum offering well-known advantages and countervailing disadvantages. Advocates for arbitration frequently cited perceived cost advantages, freedom from onerous discovery demands, more sophisticated fact finders and an absence of public scrutiny as factors favoring the arbitral forum. Litigation proponents, meanwhile, noted greater opportunities for appellate review, broader injunctive and judgment-enforcement rights, and greater adherence to precedent, evidentiary rules and substantive law as reasons to prefer judicial forums. Historically, these offsetting factors occasionally tilted demonstrably one way or another, but litigants often viewed the increased costs of litigating the governing forum as not worth the fight. In recent years, however, pro-claimant rule changes and perceived pro-claimant sentiment within the arbitration wings of many major self-regulatory organizations have arguably tilted the playing field, rendering arbitration a less hospitable forum for the defense, relative to the courtroom, than it was traditionally understood to be prior to the "Great Recession." These developments have led to a flurry of litigation over the governing forum for disputes between broker-dealers and institutional market participants, including the Second Circuit's recent decisions in Suntrust Banks, Inc. et al. v. Turnberry Capital Management, LP, 13-CV-2075 (2d Cir. May 15, 2014) (broker-dealer did not have customer relationship with hedge fund that purchased certificates elsewhere) and Citigroup Global Markets Inc. v. Abbar, 13-CV-2172 (2d Cir. Aug. 1, 2014) (denying mandatory FINRA arbitration to noncustomer and holding that a "customer" under FINRA Rule 12200 is one who, while not a broker or dealer, either purchases a good or service from a FINRA member or has an account with a FINRA member).