3rd Circuit Rules that Forum Selection Clause Does Not Supersede FINRA Arbitration Obligation

The Court of Appeals for the Third Circuit recently held that forum selection clauses that do not reference arbitration do not implicitly waive a party’s right to FINRA Arbitration under FINRA Rule 12200.

The case involved a not-for-profit customer that signed a number of broker-dealer agreements with a large broker-dealer for four separate offerings of auction rate securities. The not-for-profit alleged the broker-dealer engaged in unlawful conduct and demanded the claims be resolved through the arbitration mandated by FINRA Rule 12200.  The broker-dealer contended that the not-for-profit waived its right to arbitrate by agreeing to forum selection clauses within the broker-dealer agreements.

Under FINRA Rule 12200, FINRA members are required to submit customer disputes to FINRA arbitration whenever a customer demands arbitration. The Second and Ninth Circuits, however, previously held that a forum selection clause requiring all actions and proceedings to be brought in federal court supersedes an earlier agreement to arbitrate under FINRA Rule 12200. Both circuits reasoned that the customer disclaimed the right to FINRA arbitration when it assented to the forum selection clause. Subsequently, in July 2016, FINRA issued a regulatory notice disagreeing with the Second Circuit.  FINRA reminded its members that customers have a right to request arbitration at FINRA’s arbitration forum at any time and that customers do not forfeit that right under FINRA rules by signing any agreement with a forum selection provision specifying another dispute resolution process or an arbitration venue other than the FINRA arbitration forum.

The Fourth Circuit, and now the Third Circuit, held that forum selection clauses do not implicitly waive a customer’s right to FINRA arbitration.  These courts reasoned that the party signing a waiver must know what rights are being waived and that federal policy embodied in the Federal Arbitration Act favors arbitration whenever doubts arise to whether a dispute is arbitrable. Therefore, forum selection clauses that do not reference arbitration cannot supersede the FINRA arbitration obligation.

The Third Circuit’s opinion can be found here.