To Arbitrate, or Not to Arbitrate: A Question of Contractual Interpretation

Author: Collin L. Ryan, Associate Member, University of Cincinnati Law Review

Arbitration. Most know and understand the term and its function for resolving differences. Yet if asked to classify the act of arbitrating a legal dispute under a broader category, where would the term fit? Is it an action? Is it a proceeding? Or is it something entirely separate and apart from such umbrella terminology, incapable of categorization? A current circuit split exists regarding that precise issue.[1] Specifically at issue is whether a party’s right to arbitrate a dispute is encompassed and superseded by a forum selection clause stating that “all actions and proceedings” be brought in a particular court, thus precluding the party’s right to commence arbitration.[2] The correct approach is that of the Fourth Circuit, which has held that arbitration rights are not precluded by this forum selection clause.

“The Obligation to Arbitrate”

The Financial Industry Regulatory Authority (FINRA) is a “private self-regulatory organization . . . that has that authority to exercise comprehensive oversight over all securities firms that do business with the public.”[3] Securities firms that are members of FINRA must, in accordance with FINRA’s bylaws, “agree to comply with [FINRA’s] rules.”[4] Accordingly, “FINRA Rule 12200 states that members must arbitrate a dispute if arbitration is requested by the customer and the dispute arises in connection with the business activities of the member.”[5]

FINRA’s Rule that its members must arbitrate disputes with customers if they so request, however, is more of a default obligation than an absolute requirement.[6] Parties can agree to handle their disputes in an alternative manner, and “the obligation to arbitrate under FINRA Rule 12200 can be superseded and displaced by a more specific agreement between the parties.”[7] Such an agreement must be “sufficiently specific” to give the parties a “reasonable expectation that they are superseding, displacing, or waiving the arbitration obligation created by FINRA Rule 12200.”[8] But it is not clear at what point an alternative agreement—i.e., a forum selection clause—is specific enough to supersede the FINRA arbitration obligation.[9]

The Circuit Split

The facts in all three cases at issue are essentially identical.[10] In each case, a party entered into a broker-dealer agreement with a certain FINRA-member organization.[11] The agreements contained a forum selection clause stating that “all actions and proceedings” that arose out of the agreement would be brought in a certain federal court.[12] When the securities deals resulted in disputes, the parties sought resolution through FINRA arbitration.[13] The FINRA-members, however, brought legal action against arbitration in federal court.[14]

The Fourth Circuit’s Interpretation in Favor of Arbitration

The Fourth Circuit Court of Appeals held that a forum selection clause pertaining to “all actions and proceedings” does not include arbitration, and therefore does not preclude a party’s right to commence FINRA arbitration.[15] The Fourth Circuit first identified that the forum selection clause lacked the “sufficient specificity” required for FINRA arbitration supersession.[16] The court also reasoned that if arbitration is indeed an action or proceeding, “then the sentence would have to be read to recognize that arbitration remains available but must be ‘brought’ in court.”[17] And because arbitration exists as a channel of dispute resolution outside the courtroom, a reading of the forum selection clause that restricts arbitration to a certain court—where it cannot actually be pursued—is illogical.[18] Furthermore, the phrase “all actions and proceedings” is a term of art, generally understood to refer to only “judicial disputes, not to arbitration.”[19] Thus, the proper and “more natural reading” of the clause is to taper its application to “any litigation arising out of the agreement.”[20] Any other reading that supersedes and waives FINRA arbitration under the forum selection clause “would never cross the reader’s mind.”[21]

The Second & Ninth Circuits’ Interpretation Against Arbitration

In contrast, both the Second and Ninth Circuit Courts of Appeal have held that the “actions and proceedings” forum selection clause does supersede and preclude a party from seeking FINRA arbitration.[22] First, both circuits reasoned that the clause on its face can still preclude arbitration without ever mentioning the word “arbitration.”[23] Second, both circuits interpreted the clause as an agreement between the parties to resolve disputes through litigation alone in the specified federal court.[24] That arbitration cannot be “brought” in any court and therefore cannot be encompassed by the forum selection clause was rejected as basic wordplay trickery.[25] Lastly, both circuits cited the FINRA rules, the Supreme Court’s language, and language of the parties’ own briefs to support the conclusion that “arbitration,” as it is generally understood, falls under the forum selection clause’s umbrella language.[26]

The Correct Interpretation

In the context of the present issue, arbitration is neither an action nor a proceeding. The forum selection clause states that “all actions and proceedings” must be brought in a certain federal court, and the Fourth Circuit is correct in its holding that the clause restricts only litigious actions and proceedings. The interpretation of Second and Ninth Circuits, however, improperly blur the distinction between litigation and other out-of-court avenues of dispute resolution.

First, while parties can contractually waive arbitration rights, the forum selection clause at issue here is not sufficiently specific enough to provide a party with a reasonable expectation that, by agreeing to the clause, arbitration will be waived. A plain reading of the clause does not suggest that the scope of “all actions and proceedings” includes all other legal avenues that exist outside of litigation and cannot be brought in the clause’s selected forum. The two terms—litigation and arbitration—operate in separate legal spheres. A reasonable person would not read the forum selection clause and think that a restriction on litigation would constitute the preclusion of arbitration.

Second, to include “arbitration” under the clause’s umbrella terminology and to interpret the clause as a waiver of a party’s right to arbitrate a dispute ignores the purpose of arbitration’s within the system’s legal framework. Courts can compel parties to arbitrate their dispute and courts can enforce arbitration awards.[27] But arbitration exists for the purpose of providing a separate alternative to litigation. Synonymously interpreting arbitration with all other litigious “actions and proceedings” misinterprets the fundamental meaning of the word itself.

The Second and Ninth Circuits both relied on the language of the FINRA Rules, the Supreme Court, and the parties themselves to support the interpretation that arbitration falls under the clause’s language. That the referenced entities all described arbitration as either ‘actions’ or ‘proceedings’ throughout their common discourse, however, bears no relevance because there is a significant difference between a description and a classification. While describing “arbitration” as either an “action” or a “proceeding” may be appropriate, classifying it as either is erroneous. An example of this linguistic nuance is evident in the common parlance description of tomatoes. People repeatedly refer to tomatoes as vegetables. But this ubiquitous description does not support the argument that tomatoes are, indeed, vegetables.[28] By relying on the descriptive language mentioned, the Second and Ninth Circuits improperly equate the mere description of “arbitration” as a legal classification.

Conclusion

Arbitration is unique form of out-of-court dispute resolution that exists separate and apart from litigation. Any clause that suggests precluding a party from its right to arbitrate a dispute ought to specifically include the word “arbitration” in the waiver. Classifying it for purposes of preclusion as “an action or proceeding” that must be filed in a certain court incorrectly labels the term and ignores the reason for its existence.

 

 

[1] Goldman, Sachs & Co. v. Golden Empire Schs. Fin. Auth., 764 F.3d 210, 214 (2d Cir. 2014) (“[W]hether [similar] forum selection clauses superseded [financial services firms’] obligation to arbitrate under FINRA Rule 12200 . . . has been the subject of litigation in multiple circuits, with decidedly mixed results”) (quoting Goldman, Sachs & Co. v. City of Reno, 747 F.3d 733, 736 (9th Cir. 2014)).

[2] Goldman v. Golden Empire, 764 F.3d at 212.

[3] UBS Fin. Servs. v. Carilion Clinic, 706 F.3d 319, 322 (4th Cir. 2013) (citing UBS Fin. Servs., Inc. v. W. Va. Univ. Hosps., Inc., 660 F.3d 643, 648 (2d Cir. 2011)); see also Financial Industry Regulatory Authority: About Finra (“In 2013, through [FINRA’s] aggressive vigilance, [FINRA] brought 1,535 disciplinary actions against registered brokers and firms. [FINRA] levied more that $65 million in fines. And [FINRA] ordered more than $9.5 million in restitution to harmed investors”), available at http://www.finra.org/AboutFINRA/.

[4] Carilion Clinic, 706 F.3d at 322.

[5] Goldman v. Golden Empire, 764 F.3d at 214 (citing Financial Industry Regulatory Authority, Rule 12200, available at http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=4106) (internal quotations omitted) (emphasis added) (hereinafter “Golden Empire”).

[6] See Carilion Clinic, 706 F.3d at 328; see also Goldman v. City of Reno,7474 F.3d 733, 742 (9th Cir. 2014) (quoting Granite Rock Co. v. Int’l Bhd. Of Teamsters, 561 U.S. 287, 130 S. Ct. 2847, 2857 (2010)) (The United States Supreme Court states that “[a]rbitration is strictly a matter of consent and thus is a way to resolve those disputes—but only those disputes—that the parties have agreed to submit to arbitration”) (emphasis omitted).

[7] Carilion Clinic, 706 F.3d at 328.

[8] Id. (emphasis added).

[9] See id.; see also Goldman v. Golden Empire, 764 F.3d at 215 (“[A]n agreement to arbitrate is superseded by a later-executed agreement containing a forum selection clause if the clause specifically precludes arbitration . . . ”) (internal quotations omitted); Goldman v. City of Reno, 747 F.3d at 744 (“[T]he forum selection clauses need only be sufficiently specific to impute to the contracting parties the reasonable expectation that they would litigate any disputes in federal court . . .”) (emphasis added).

[10] See Carilion Clinic, 706 F.3d at 321-23; Goldman v. City of Reno, 747 F.3d at 735-38; Goldman v. Golden Empire, 764 F.3d at 212-13.

[11] E.g., Goldman v. Golden Empire, 746 F.3d at 212-13;

[12] Goldman v. Golden Empire, 746 F.3d at 212 (emphasis added); see also Carilion Clinic, 706 F.3d at 329 (“The parties agree that all actions and proceedings arising out of this Agreement or any of the transactions contemplated hereby shall be brought in the United States District Court in the . . .”) (emphasis in original); Goldman v. City of Reno, 747 F.3d at 736-37 (“The parties agree that all actions and proceedings arising out of this Broker-Dealer Agreement or any of the transactions contemplated hereby shall be brought in the United States District Court for the . . .”).

[13] See e.g., Goldman v. Golden Empire, 746 F.3d at 212-13

[14] Id.

[15] See Carilion Clinic, 706 F.3d at 330.

[16] See id. at 328-29 (That court stated that facially, “one would reasonably expect that a clause designed to supersede, displace, or waive arbitration would [at least] mention arbitration”).

[17] Id. at 329 (quotations in original).

[18] See Id.

[19] Id. at 330 (emphasis omitted).

[20] Id.

[21] Id.

[22] Goldman, Sachs & Co. v. Golden Empire Schs. Fin. Auth., 746 F.3d, 215 (2d Cir. 2014); Goldman, Sachs & Co. v. City of Reno, 747 F.3d 733, 746 (9th Cir. 2014).

[23] See Goldman v. Golden Empire, 764 F.3d at 215 (“[T]here is no requirement that the forum selection clause mention arbitration”); see also Goldman v. City of Reno, 747 F.3d at 744 (“While this certainly would be an easier case if the parties had included an express [arbitration] waiver, we know of no requirement that they do so”).

[24] See Goldman v. City of Reno, 747 F.3d at 746 (The Ninth Circuit found that “the parties ha[d] agreed to litigate their disputes in federal court, and that [such agreement] is incompatible with any prior obligation to arbitrate such disputes in another forum”); See also Goldman v. Golden Empire, 764 F.3d at 217 (The Second Circuit argued that “[s]tate court proceedings also cannot be ‘brought’ in federal court, but it is undisputed that they are encompassed within” the clauses language concerning “all actions and proceedings”) (quotations in original).

[25]See Goldman v. Golden Empire, 764 F.3d at 217 (“But as district court judges in this Circuit have noted, this is little more than a linguistic trick” (citing Citigroup v. All Children’s, 2014??

[26] See Goldman v. City of Reno, 747 F.3d at 744 (“[The party seeking arbitration] itself refers to the FINRA arbitration as a ‘proceeding[]’ and an ‘action’ in its Statement of Claim”) (quotations in original); see also Goldman v. Golden Empire, 764 F.3d at 216 (“Arbitrations are regularly described as ‘proceedings’ by the United States Supreme Court, [the Second] Circuit, New York state courts, the C.P.L.R., and the FINRA Rules.”) (quotations in original).

[27] See Carilion Clinic, 706 F.3d at 329.

[28] Tomatoes are fruits, notwithstanding Supreme Court precedent to the contrary. Compare Oxford Dictionaries, Is a Tomato a Fruit or a Vegetable?, http://www.oxforddictionaries.com/us/words/is-a-tomato-a-fruit-or-a-vegetable (last visited Nov. 4, 2014), with Nix v.Hedden, 149 U.S. 304 (1893).

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