In an effort to avoid otherwise mandatory arbitration before the Financial Industry Regulatory Authority (FINRA), broker-dealer FINRA members have used broad judicial forum selection clauses. These clauses aim to remove disputes that broker-dealers have with their customers from the arguably customer-friendly confines of FINRA arbitration and instead place those disputes in court. The circuit courts are split as to the efficacy of these agreements, with the Second Circuit recently weighing in on the side of broker-dealers in Goldman, Sachs & Co. v. Golden Empire Schools Financing Authority, 764 F.3d 210 (2d Cir. 2014). The Second Circuit’s decision provides helpful lessons on how to draft an effective forum selection clause and acts as a good reminder of limits to the federal policy in favor of arbitration as embodied by the Federal Arbitration Act.
‘Goldman, Sachs v. Golden Empire’
In Goldman, Sachs, the Second Circuit affirmed decisions rejecting FINRA arbitrations in two consolidated appeals by issuers of auction rate securities. In the first case, appellant Golden Empire Schools Financing Authority and Kern High School District (collectively, Golden Empire)1 issued approximately $125 million of auction rate securities2 over multiple years. In the second, appellant North Carolina Eastern Municipal Power Agency (NCEMPA)3 issued $223 million of auction rate securities. In doing so, Golden Empire hired Goldman Sachs and NCEMPA hired Citigroup Global Markets as their respective underwriters and brokers for the deal. The auction rate securities issuance procedure involved each set of parties executing both an underwriter agreement, which was silent on dispute resolution, and a broker-dealer agreement, which contained the following forum selection clause:
