On August 21, 2014, in Goldman, Sachs & Co. v. Golden Empire Schools Financing Authority, the US Court of Appeals for the Second Circuit held that the forum selection clauses in the parties' broker-dealer contracts superseded any right to Financial Industry Regulatory Authority (FINRA) arbitration (Nos. 13-797-cv and 13-2247-cv, (2d Cir. Aug. 21, 2014)). The court joined the Ninth Circuit in reaching this conclusion (Goldman Sachs & Co. v. City of Reno, 747 F.3d 733 (9th Cir. 2014)).

The court considered two appeals concerning disputes that raised the same legal issue.

In one dispute, Golden Empire Schools Financing Authority and Kern High School District (Golden Empire) issued $125 million of securities on three different occasions, for all of which Goldman, Sachs (Goldman) served as an underwriter and broker-dealer. All three broker-dealer agreements between the parties included a forum selection clause stating that "all actions and proceedings" arising out of the agreement would be brought in US District Court in the County of New York. Each agreement also contained a merger clause.

In February 2012, Golden Empire commenced a FINRA arbitration, alleging that Goldman fraudulently induced it to issue the securities. In June 2012, Goldman brought an action in the US District Court for the Southern District of New York seeking declaratory and injunctive relief against arbitration. The district court granted the motion for preliminary injunction, finding that the forum selection clauses overrode the FINRA rule governing arbitration. Golden Empire appealed.

In the other dispute, North Carolina Eastern Municipal Power Agency (NCEMPA) retained Citigroup Global Markets Inc. (Citigroup) to underwrite $223 million of securities issued in 2004. The parties' broker-dealer agreement contained a forum selection and a merger clause identical to those agreed to by Goldman and Golden Empire. In December 2012, NCEMPA commenced a FINRA arbitration in North Carolina against Citigroup. In March 2013, Citigroup brought an action in the Southern District of New York seeking declaratory and injunctive relief against arbitration, which was granted. NCEMPA appealed.

The Second Circuit affirmed the district court decisions, finding that the forum selection clause in the broker-dealer contracts requiring "all actions and proceedings" to be brought in federal court superseded any earlier agreement to submit to FINRA arbitration. While acknowledging the federal policy favoring arbitration, the court held that the presumption of arbitrability does not apply to disputes where, as here, a later-executed agreement between the parties had been made.

The court found the forum selection clause between the parties to be all-inclusive and mandatory. Further, the later-executed agreements all contained a merger clause stating that they contain the entire agreement between the parties. Taken together, the court held that these provisions required that disputes arising out of the broker-dealer agreements be adjudicated in the Southern District of New York, and therefore the right to FINRA arbitration was superseded. In doing so, the court agreed with the Ninth Circuit.

The court also rejected Golden Empire's and NCEMPA's argument that the phrase "all actions and proceedings" does not include arbitrations, disagreeing with a contrary conclusion reached by the Fourth Circuit.

Practitioners in the Second Circuit should be aware that a party may be able to disclaim FINRA arbitration if a forum selection clause in a contract between the parties can supersede the default obligation to arbitrate under FINRA.

For information on drafting choice of forum clauses, see Practice Note, Choice of Law and Choice of Forum: Key Issues.