Today, the Second Circuit followed an April 2014 decision by the Ninth Circuit in Goldman Sachs & Co. v. Reno (described here) — and rejected an opposite holding by the Fourth Circuit — and held that a forum selection clause in a contract supersedes a broker-dealer’s obligation to arbitrate disputes with a customer under FINRA Rule 12200. The Court of Appeals, in a single opinion, resolved two cases: Goldman Sachs & Co. v. Golden Empire Sch. Fin. Auth., No. 13-797-cv (2d Cir. Aug. 21, 2014) and Citigroup Global Mkts. Inc. v. N.C. E. Mun. Power Agency, No. 13-2247-cv (2d Cir. Aug. 21, 2014). The respective forum selection clauses at issue required “all actions and proceedings” related to the transactions between the parties be brought in court.
FINRA’s Rule 12200 has been the source of much litigation recently, as broker-dealers have tried to elude their obligations to arbitrate with customers, by asking courts to construe the word “customer” narrowly. To aid lower courts, the Second Circuit recently adopted a bright-line definition of “customer.”. See here.
I don’t understand why recently amended sec. 29(A) of the Exchange Act doesn’t void the parties’ forum selection clause. That provision voids “any condition, stipulation, or provision binding any person to waive compliance … with any provision of the Exchange Act or its rules.” Dodd-Frank (2010) amended § 29(a) to include rules issued by all SROs. Thus, since 2010, § 29(A) explicitly invalidates provisions in brokerage agreements that require customers to waive compliance with FINRA rules. To the extent courts have held in the past that parties could contract around FINRA rules, that line of cases seems to be vitiated by amended § 29(A).
An equally important issue is whether a broker-dealer’s conduct in trying to avoid arbitration with a customer by inserting a forum selection clause in its contracts with that customer violates FINRA IM-12000, which states that it “may be deemed conduct inconsistent with just and equitable principles of trade and a violation of [FINRA Conduct] Rule 2010 for a member… to…(a) fail to submit a dispute to arbitration under the [FINRA Arbitration] Code.” FINRA Enforcement should pursue these broker-dealers for including these clauses in customer agreements.
Little did I know that I was on NHL.com’s email list. I guess having a son wild about all things hockey must have had something to do with it. So you can imagine my surprise on Saturday morning when I woke up to an email from NHL.com informing me of the new arbitration clause it was adding to its “Terms of Service,” effective August 13, 2014 (three days earlier).
The arbitration clause contains an agreement to arbitrate before the AAA in New York all disputes arising out of the “Services” or “Terms of Service.” The clause also includes a class action waiver, a collective action waiver, a New York choice of law clause, a New York forum selection clause for all non-arbitrable disputes, and an agreement to shorten ALL applicable limitations period to ONE YEAR. Here are relevant excerpts:
Last Updated and Effective Date — August 13, 2014
THESE TERMS CONTAIN DISCLAIMERS OF WARRANTIES (SECTION 12), DISCLAIMERS OF LIABILITY AND AN EXCLUSIVE REMEDY (SECTION 13), AND AN ARBITRATION CLAUSE AND CLASS WAIVER (SECTION 18). PLEASE READ THEM CAREFULLY.
These Terms of Service (the “Terms”) are a legal agreement between you and NHL Interactive CyberEnterprises, LLC and its affiliates, including NHL Enterprises, L.P., NHL Enterprises Canada, L.P., NHL Enterprises B.V., and the National Hockey League (“NHL”, “we” or “us”) governing your access to and use of the websites and online services that display or provide an authorized link to these Terms (collectively, the “Services”). The Services include, without limitation, nhl.com, the NHL app, NHL GameCenter LIVE™, and NHL Vault™.
18. Location, Governing Law, Arbitration, and Time Period Limitation for Bringing Claim
These Terms are governed by, and must be construed in accordance with, the laws of the United States and the State of New York, as applicable, without giving effect to their principles of conflicts of law. By using the Services, you waive any claims that may arise under the laws of other states, countries, territories, or jurisdictions.
Any proceedings to resolve or litigate any dispute in any forum will be conducted solely on an individual basis. Neither you nor the NHL will seek to have any dispute heard as a class action or in any other proceeding in which either party acts or proposes to act in a representative capacity. No arbitration or proceeding will be combined with another without the prior written consent of all parties to all affected arbitrations or proceedings.
The NHL and you agree that all disputes arising under these Terms that cannot be settled through informal negotiation will be settled exclusively through confidential binding arbitration in accordance with the commercial rules of arbitration of the American Arbitration Association in New York. The arbitrator’s award shall be binding and may be entered as a judgment in a court of competent jurisdiction. You agree that the NHL may seek any interim or preliminary relief from a court of competent jurisdiction in New York, necessary to protect its rights or property pending the completion of arbitration.
Any claims not subject to arbitration shall be subject to the exclusive jurisdiction of state or federal courts in New York County, New York.
To the extent permitted by law, any claim or dispute under these Terms must be filed within one year in an arbitration proceeding. The one-year period begins when the claim or notice of dispute first could be filed. If a claim or dispute is not filed within one year, it is permanently barred.
Unconscionable? Let’s discuss.
Five days ago, an unarmed eighteen year old, Michael Brown, was killed by a police officer in Ferguson, Missouri. As is all too commonly the situation, Mr. Brown was African American and the police officer who did the shooting (as with most of the police in Ferguson) was white. An investigation is on-going, but the reports of what happened are disturbing enough that there have been protests since Mr. Brown’s death. For five nights those protests turned violent and ugly. Police officers have fired tear gas into the crowds. They have arrested people. Police Officers in combat gear faced off against demonstrators in scenes that looked more like something from apartheid South Africa or the Jim Crow South. From my vantage point many miles, and several states away, it looked like the police response was inciting violence, not quelling it.
That changed today when the governor of Missouri put Capt. Johnson, of the Missouri Highway Patrol in charge. What a difference a day can make. Johnson is using basic dispute resolution techniques we all recognize. He is listening. He is talking with, not at, the demonstrators. He is standing and walking with them. And, he is acknowledging mistakes. One man asked Johnson what he would say to his niece who had been tear-gassed during the demonstrations. Johnson didn’t say, “well, those men weren’t under my command” (which they weren’t). He didn’t say, “well, that won’t happen now” (which we can hope it won’t). He gave a simple, not qualified, apology: “Tell her Capt. Johnson is sorry and he apologizes.”
It is not surprising that listening, talking, and an apology can go a long way to diffuse a conflict. It is surprising it has taken five days to do these very simple things. I can only hope that today’s change of tone and actions by the new police captain in charge in Ferguson, Missouri, will help to bring peace as the shooting is investigated.
Over the years, to respond to criticism that its arbitrators are biased in favor of the securities industry, FINRA has implemented a series of reforms to its arbitration rules. It tweaked the definition of “public” and “non-public” arbitrators (the two classifications FINRA uses) to decrease the chance that a “public” arbitrator would have any affiliation with the securities industry, it adjusted the composition of panels in customer cases to guarantee an investor an “all-public” panel, and it improved methods of arbitrator selection to increase choice for disputants (i.e., increased number of strikes; “short list” selection). The two animating principles behind these reforms were increased party choice of neutrals and ensuring neutrality – both actual and perceived – of panelists. FINRA justified the dual classification system as a means to make available to parties arbitrators with expertise in the practices of the securities industry who could apply industry norms and practices to the decision (labeled by FINRA as the non-public arbitrator, but known by practitioners as the “industry” arbitrator).
Most recently, FINRA has filed a rule change proposal with the SEC to once again change the definitions of the two classifications. For the first time, however, it has proposed that an attorney who represents investors in securities disputes be classified as “non-public.” If the SEC approves the proposal, FINRA’s “non-public” arbitrator roster will include arbitrators without industry expertise or experience. This proposal appears to place at a premium (rather than balance equally) the animating principle of actual and perceived neutrality at the expense of party choice of neutrals. But the more “neutral” an arbitrator is (because of his or her distance from the subject matter of and parties to the dispute), the less expertise the arbitrator has in the subject matter of the dispute.
In my view, this is a perversion of the whole purpose of FINRA’s arbitrator classification system. Arbitration is supposed to be a private dispute resolution process using third-party neutrals who have — if the parties choose — expertise in the subject matter of the dispute. If the arbitration forum cannot supply neutrals with expertise, then the parties don’t get one of the primary benefits of arbitration. The forum should throw in the garbage its classification system and start from scratch with just one roster of arbitrators, and add far more party choice (via a larger list; more strikes; easier challenges for cause, etc.). If the forum insists on having two arbitrator classifications, it should call a spade a spade and label them “expertise” and “novice.”
George Friedman, formerly of FINRA Dispute Resolution, in his comment letter to the rule proposal (in the form of an article), offers this and additional persuasive arguments why this rule proposal is a bad idea. The SEC should take heed.