FINRA Arbitration Requirements Take Priority over Forum Selection Clause

The Third Circuit Court of Appeals recently ruled that Bear Stearns must comply with the Financial Industry Regulatory Authority (FINRA) rules that require arbitration of a customer’s claims despite the existence of a forum selection clause. That ruling, in Reading Health System v. Bear Stearns & Co., n/k/a J.P. Morgan Securities, LLC, involved a broker-dealer agreement between Bear Stearns (now J.P. Morgan Securities) and Reading Health System regarding offerings of certain securities by Reading Health through which J.P. Morgan Securities served as broker-dealer and underwriter. The agreement provided that any actions and proceedings arising out of the agreement or the underlying transactions had to be filed in the U.S. District Court for the Southern District of New York. However, FINRA Rule 12200 generally requires FINRA members to arbitrate disputes with customers at the customers’ request if arbitration is required by written agreement or requested by a customer.

Reading Health filed a Statement of Claim with FINRA, alleging that J.P. Morgan Securities engaged in improper conduct in conjunction with the offerings. J.P. Morgan Securities refused to participate in FINRA arbitration. It cited the forum selection clause in its agreement with Reading Health. In response, Reading Health filed a declaratory judgment action to address the arbitration issue. 

The U.S. District Court ordered J.P. Morgan Securities to arbitrate. On appeal, the Third Circuit affirmed. The court found J.P. Morgan Securities’ argument unpersuasive that, in agreeing to the forum selection clauses included in the broker-dealer agreements, Reading Health waived the right to FINRA arbitration under Rule 12200. The Third Circuit found that the forum selection clause, which did not refer to arbitration, lacked the specificity to support a finding of waiver. Although waiver of FINRA Rule 12200 might be found under different facts, the assertion of waiver would need to be supported by explicit language waiving the specific right to FINRA arbitration. 

The court found that Reading Health System had not waived its right to compel Bear Stearns to arbitrate under FINRA’s rules. 

The deadline to file a writ of certiorari to the U.S. Supreme Court in this case is 90 days from the entry of judgment on August 7, 2018. This ruling widens a circuit split. The Second and Ninth Circuits have enforced forum selection clauses, while the Fourth Circuit has held that the FINRA Rule requires arbitration even in the face of a forum selection clause.