9th Circuit Reverses Goldman Sachs v. Reno

April 4, 2014

Now Online at BrokeAndBroker.com:

Below is the "Summary" and verbatim extracts
from the 9th Circuit Opinion.

Before: Mary M. Schroeder and Jay S. Bybee, Circuit 
Judges, and Anthony J. Battaglia, District Judge. 
Opinion by Judge Bybee; 
Partial Concurrence and Partial Dissent by Judge Battaglia

This summary constitutes no part of the opinion of the court. It has been prepared by court staff for the convenience of the reader.  

Arbitration / Forum Selection

The panel reversed the district court's denial of a preliminary injunction, and its final judgment in favor of the City of Reno, in an action brought by Goldman, Sachs & Co. to enjoin Financial Industry Regulatory Authority arbitration.

The panel held that the forum selection clauses in the parties' contracts superseded any right to Financial Industry Regulatory Authority ("FINRA") arbitration. The panel held that the court, rather than FINRA, must determine the arbitrability of the dispute. The panel further held that although Reno qualified as Goldman's customer under FINRA Rule 12200, Reno disclaimed its right to FINRA arbitration by agreeing to the forum selection clauses in the parties' agreements. The panel remanded to the district court to consider whether a preliminary injunction is warranted.

District Judge Battaglia concurred with Parts III-A and III-B of the majority's opinion, and dissented from the finding that the contracting parties' forum selection clauses superseded Goldman's pre-existing obligation to arbitrate under the FINRA Rules. Judge Battaglia would affirm the district court's denial of Goldman's motion to preliminarily enjoin the FINRA arbitration.

With Goldman's assistance, Reno issued $73.45 million in ARS in October 2005 (the "2005 Bonds"). At that time, Reno and Goldman entered into two written agreements that governed their relationship: (1) an underwriter agreement that outlined Goldman's duty to purchase and offer the 2005 Bonds (the "2005 Underwriter Agreement") and (2) a separate, but contemporaneously executed, broker-dealer agreement that outlined Goldman's duty to manage the auctions for the 2005 Bonds (the "2005 Broker-Dealer Agreement). The contracts were entered into after arm's length negotiations in which both parties were represented by counsel.


For purposes of our analysis, the 2005 Broker-Dealer Agreement contains two significant clauses. First, it contains a forum selection clause providing that:

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 District of Nevada and that, in connection with any such action or proceeding, the parties shall submit to the jurisdiction of, and venue in, such court.

Second, the 2005 Broker-Dealer Agreement contains a merger clause providing that:

This Broker-Dealer Agreement, and the other agreements and instruments executed and delivered in connection with the issuance of the ARS, contain the entire agreement between the parties relating to the subject matter hereof, and there are no other representations, endorsements, promises, agreements or understandings, oral, written or inferred, between the parties relating to the subject matter hereof.

Pages 5-6 of the Opinion

The district court concluded that, because Goldman is a FINRA member, it has agreed to FINRA arbitration on the issue of arbitrability itself. As support for this conclusion, the district court relied on FINRA Rule 12203(a), which states that "[t]he Director may decline to permit the use of the FINRA arbitration forum if the Director determines that . . . the subject matter of the dispute is inappropriate, or that accepting the matter would pose a risk to the health or safety of arbitrators, staff, or parties or their representatives." 

This legal conclusion was incorrect. FINRA Rule 12203(a) does not provide "clear and unmistakable" evidence that FINRA members like Goldman have consented to FINRA determination of the issue of arbitrability. Instead, FINRA Rule 12203(a) simply describes certain circumstances under which the FINRA Director may deny access to the FINRA arbitration forum. Furthermore, neither the underwriter nor the broker-dealer agreements provide "clear and unmistakable" evidence that the parties intended that FINRA would determine the issue of arbitrability. The presumption that the court will decide which issues are arbitrable remains unrebutted, and we must make the call.  

Page 10 of the Opinion

The FINRA Rules define "customer" only in the negative: 
"A customer shall not include a broker or dealer." FINRA 
Rule 12100(i). This definition does not tell us what a 
"customer" is, and because Reno is neither a broker nor a 
dealer, the FINRA Rules' definition, standing alone, cannot 
tell us whether Reno fits the bill.

Page 12 of the Opinion

We find the Second and Fourth Circuits' analysis 
persuasive. Accordingly, we conclude that a "customer" is a 
non-broker and non-dealer who purchases commodities or
services from a FINRA member in the course of the 
member's FINRA-regulated business activities, i.e., the 
member's investment banking and securities business

With this definition in mind, we find that Reno easily qualifies as Goldman's "customer." . . . 

Page 14 of the Opinion

We conclude that we, rather than FINRA, must determine 
the arbitrability of this dispute. Although we agree with the 
district court that Reno qualifies as Goldman's customer 
under FINRA Rule 12200, we hold that Reno disclaimed its 
right to FINRA arbitration by agreeing to the forum selection 
clauses in the 2005 and 2006 Broker-Dealer Agreements.

Consequently, we reverse the district court's order and final 
judgment. And despite Goldman's "overwhelming likelihood 
of success on the merits," we remand this case to the district 
court  . . .

Page 27-28 of the Opinion