Usually, it is the broker dealer who seeks to compel arbitration, but not always. On August 7, 2018, in a precedential opinion, the Third Circuit affirmed the lower court decision that the Reading Health System n/k/a Tower Health did not waive the right to arbitration before FINRA due to forum-selection clauses contained in its broker dealer agreements.
In Reading Health System v Bear Stearns & Co, n/k/a J.P. Morgan Securities LLC, JP Morgan appealed the lower court decision compelling arbitration of Reading’s claims, arguing that the Southern District of New York was the appropriate venue pursuant to the forum-selection clauses found in broker dealer agreements executed by the parties, and that those clauses superseded the right to arbitration under FINRA Rule 12200.
The Third Circuit disagreed, finding that the forum selection clauses made no specific reference to arbitration, and thus could not waive a regulatory right to arbitration.
The decision widened the circuit split over the issue. As noted in the decision, “the Second and Ninth Circuit Courts of Appeals have held that a materially identical forum-selection clause requires the parties to litigate in federal court, while the Fourth Circuit Court of Appeals has held that [FINRA] Rule 12200 requires the parties to arbitrate, notwithstanding the presence of a forum-selection clause.” Reading Health System v Bear Stearns & Co, n/k/a J.P. Morgan Securities LLC, 2018 U.S. App. LEXIS 21910, at *22 (3rd Cir. Aug. 7, 2018).
In agreeing with the Fourth Circuit and its decision in UBS Fin. Servs. v. Carilion Clinic, 706 F.3d 319 (4th Cir. 2013), the panel found that a party must know what rights it is waiving, and the forum-selection clause here made no mention of arbitration, let alone a specific waiver of rights under FINRA Rule 12200. Additionally, the panel declined to find an implied waiver, as the right to arbitrate “is not contractual in nature, but rather arises out of a binding, regulatory rule that has been adopted by FINRA and approved by the SEC.” Id. at *26.
Now that the Third Circuit has voiced its opinion on the issue, time will tell whether the other Circuits will weigh in on whether a party can contractually waive its right to arbitrate before FINRA without specific affirmative language or whether the Supreme Court will resolve the split.
Opinion available here: http://www.ca3.uscourts.gov/recent-precedential-opinion