Reading Health Sys. v. Bear Stearns & Co.
| Decision Date | 07 August 2018 |
| Docket Number | No. 16-4234,16-4234 |
| Citation | 900 F.3d 87 |
| Parties | READING HEALTH SYSTEM v. BEAR STEARNS & CO., n/k/a J.P. Morgan Securities LLC, Appellant |
| Court | U.S. Court of Appeals — Third Circuit |
Jonathan K. Youngwood, Esq. (ARGUED), Simpson Thacher & Bartlett LLP, 425 Lexington Avenue, New York, NY 10017, Counsel for Appellant
Mark A. Strauss, Esq. (ARGUED), Thomas W. Elrod, Esq., Peter S. Linden, Esq., Kirby McInerney LLP, 825 Third Avenue, 16th Floor, New York, NY 10022, Counsel for Appellee
Robert C. Port, Esq., Gaslowitz Frankel LLC, 303 Peachtree Street, N.E., Suite 4500, Atlanta, GA 30308, Counsel for Amicus Appellee Public Investors Arbitration Bar Association
Before: SHWARTZ and ROTH, Circuit Judges and* PAPPERT, District Judge
In this case, we address an emerging trend in the brokerage industry. Ordinarily, broker-dealers, as members of the Financial Industry Regulatory Authority (FINRA),1 are required by FINRA Rule 12200 to arbitrate all claims brought against them by a customer. Seeking to avoid this obligation to arbitrate, broker-dealers have begun inserting forum-selection clauses in their customer agreements, without mentioning the customer’s right to arbitrate. This practice, which has been condoned by several of our sister circuits, deprives investors of the benefits associated with using FINRA’s arbitral forum to resolve brokerage-related disputes.
This case concerns such a forum-selection clause. Over the course of several years, Bear Stearns & Co., now known as J.P. Morgan Securities LLC (hereinafter J.P. Morgan), a broker-dealer and FINRA member, executed several broker-dealer agreements with Reading Health System. The agreements were executed in connection with four separate offerings of auction rate securities (ARS), through which Reading issued more than $500 million in debt.2 Two of those contracts included forum-selection clauses providing that "all actions and proceedings arising out of" the agreements or underlying ARS transactions had to be filed in the District Court for the Southern District of New York.
After the ARS market collapsed, Reading filed a statement of claim with FINRA, alleging that J.P. Morgan engaged in unlawful conduct in connection with the ARS offerings and demanding that those claims be resolved through FINRA arbitration. J.P. Morgan refused to arbitrate, however, contending that Reading had waived its right to arbitrate by agreeing to the forum-selection clauses. To resolve this standoff, Reading filed a declaratory judgment action to compel FINRA arbitration in the District Court for the Eastern District of Pennsylvania. In response, J.P. Morgan moved to transfer the action to New York, based on the forum-selection clauses in some (but not all) of the broker-dealer agreements. The District Court denied the motion to transfer the action and ordered J.P. Morgan to submit to FINRA arbitration. We will affirm both rulings.
Reading is a not-for-profit health system located in Berks County, Pennsylvania. Reading issued ARSs on four occasions in 2001, 2003, 2005, and 2007, offering a total of more than $500 million in debt to finance capital projects relating to the Reading Hospital and Medical Center Project. J.P. Morgan served as the underwriter and broker-dealer for each offering. The parties executed separate broker-dealer agreements in connection with each of the four ARS offerings.
Over time, the ARS offerings did not go as planned for Reading. Reading claims that J.P. Morgan and other broker-dealers artificially propped up the ARS market through undisclosed support bidding that created a false appearance of market demand for ARSs. Allegedly, when the broker-dealers stopped propping up the market in early 2008, the ARS market collapsed. As a result, Reading filed various state law claims against J.P. Morgan relating to the ARS offerings and demanded that those claims be arbitrated before FINRA.
This appeal does not require us to examine the propriety of J.P. Morgan’s handling of the ARS offerings or to apportion fault for the collapse of the ARS market. Rather, we are asked to resolve only the parties' threshold disputes regarding the proper venue in which to adjudicate Reading’s action to compel arbitration and the venue for Reading’s substantive claims against J.P. Morgan.
To do so, we must examine the four broker-dealer agreements. Each of the agreements included a New York choice-of-law clause.3 Both the 2001 and 2002 broker-dealer agreements were executed by J.P. Morgan and Bankers Trust (as auction agent); Reading did not sign either agreement.4 Neither agreement includes a forum-selection clause. The 2005 broker-dealer agreement was executed by Reading Health, J.P. Morgan, and Deutsche Bank Trust Company Americas.5 The 2007 agreement was executed by the same three parties, as well as the Berks County Municipal Authority.6 Both the 2005 and 2007 agreements contain a forum-selection clause that provides, in relevant part, as follows:
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 in the County of New York and that, in connection with any such action or proceeding, submit to the jurisdiction of, and venue in, such court.7
J.P. Morgan asserts that the forum-selection clauses in these agreements required Reading to file both its declaratory action to compel arbitration and its substantive claims in the District Court for the Southern District of New York.
In February 2014, Reading filed a statement of claim with FINRA, asserting claims against J.P. Morgan relating to the ARS offerings and demanding that J.P. Morgan arbitrate those claims in FINRA’s arbitral forum.8 That demand was made pursuant to FINRA Rule 12200, which requires a FINRA member, such as J.P. Morgan, to arbitrate any dispute with a customer, such as Reading, at the customer’s request. J.P. Morgan refused to arbitrate. In J.P. Morgan’s view, the forum-selection clauses in the 2005 and 2007 broker-dealer agreements constituted a waiver of Reading’s right to arbitrate under FINRA Rule 12200.9
In March 2015, Reading filed a single-count declaratory judgment action in the District Court for Eastern District of Pennsylvania.10 The following day, Reading moved to compel arbitration of the claims it had filed with FINRA, arguing that it was entitled to arbitrate those claims pursuant to FINRA Rule 12200. Invoking the forum-selection clauses in the 2005 and 2007 broker-dealer agreements, J.P. Morgan filed two motions: a motion to transfer the declaratory judgment action to the Southern District of New York and, in the event transfer was denied, a cross-motion to enjoin the FINRA arbitration.
In February 2016, the District Court issued a single order (i) denying J.P. Morgan’s motion to transfer, (ii) granting Reading’s motion to compel, and (iii) denying J.P. Morgan’s cross-motion to enjoin.11 The court declined to transfer the declaratory judgment action to New York because, in its view, the forum-selection clauses did not designate the forum in which Reading should seek to compel arbitration. The court then required J.P. Morgan to submit to arbitration because it concluded that FINRA Rule 12200 granted Reading the right to arbitrate; this right was not overridden by the forum-selection clauses.
After we dismissed J.P. Morgan’s initial appeal on jurisdictional grounds, the District Court granted J.P. Morgan’s motion to certify the following question for interlocutory review:
[W]hether the United States Supreme Court decision in Atlantic Marine Construction Company, Inc. v. United States District Court for the Western District of Texas , 134 S.Ct. 568 (2013), requires a district court to enforce a forum selection clause by transferring a declaratory action seeking to compel arbitration, even if the district court determines that the forum selection clause does not cover the underlying arbitration that the plaintiff seeks to compel.12
We then granted J.P. Morgan’s petition for permission to appeal under 28 U.S.C. § 1292(b).
Reading bases its right to arbitrate its disputes with J.P. Morgan on FINRA’s compulsory arbitration rule.
FINRA is an independent, self-regulatory organization (SRO) established pursuant to Section 15A of the Securities Exchange Act, which "created a system of supervised self-regulation in the securities industry."13 FINRA is authorized to "exercise comprehensive oversight over ‘all securities firms that do business with the public,’ "14 including J.P. Morgan and other broker-dealers that participated in the now-defunct ARS market. In its capacity as a securities regulator, FINRA has promulgated various rules governing the brokerage industry, many of which are designed to protect investors who conduct business with FINRA-regulated firms.15 The Securities and Exchange Commission (SEC), which is statutorily authorized to oversee FINRA, must approve all such rules.16 A FINRA member agrees to comply with all of FINRA’s rules and is thus bound to adhere to FINRA’s Code and its relevant arbitration provisions.17
FINRA’s authority includes regulatory oversight over securities arbitration.18 Indeed, "[t]he SEC has long viewed the option of securities arbitration for investors as an important component of its investor protection mandate" and, since its inception, "has urged the SROs it regulates to provide an alternative dispute resolution forum for customers."19 In furtherance of that mandate, FINRA now hosts the largest arbitration forum in the United States for resolving such disputes,20 which, according to FINRA and amicus , provides investors with a "fair, efficient and economical alternative to litigation."21 To ensure that customers can benefit from arbitration, FINRA has promulgated numerous arbitration-related...
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