The United States Supreme Court of Appeals for the Second Circuit (“Second Circuit”) handed down a decision yesterday permitting Financial Industry Regulatory Authority (“FINRA”) members to avoid arbitration by including in an agreement with a customer a forum selection clause requiring “all actions and proceedings” related to a transaction between the parties to be brought in court. Goldman Sachs & Co. v. Golden Empire Sch. Fin. Auth., No. 13-797-cv (2d Cir. Aug. 21, 2014) and Citigroup Global Mkts. Inc. v. N.C. E. Mun. Power Agency, No. 13-2247-cv (2d Cir. Aug. 21, 2014)
Hello Sword of Damocles.
The decision on its face may be held as a victory by Goldman and other banks, just as Dionysius surely felt the victory of being able to switch places with his king, Damocles. By enforcing the forum provision, the banks are now able to litigate within the court system, utilizing the process to delay the normal year-long process of an arbitration to what will be years tied up in litigation. For those litigants that do not have the wherewithal to finance the dispute, banks will use their vast resources to challenge the litigant’s resolve with multiple motions followed by significant discovery costs.
But beware of the horse string. For those litigants with the resolve and financial ability to withstand a court case, they hold a threat for the banks. Unlike an arbitration that is a private proceeding, where arbitration awards do not carry the weight of a precedential decision that a subsequent arbitration panel must follow, banks are taking a significant risk litigating matters that ordinarily would be private and before FINRA.
Take the discovery process, by way of example. In a FINRA proceeding, discovery is limited. Interrogatories and depositions are rarely permitted. Sworn statements by parties are not asked for or required in the discovery process, but only at the hearing on the merits. Conversely, in a court proceeding, the banks will be subject to submitting sworn statements from the outset of the proceedings. Smart plaintiff’s counsel will file verified complaints, requiring verified answers. Interrogatories will be served, again requiring a verification as to the truthfulness of the responses. Thereafter bank employees will be required to sit for depositions. A deposition is an oral examination of a witness after the witness is sworn in – – the testimony at a deposition carries the same weight as testimony at a trial. Also, banks will be subject to court discovery orders.
The peril of the recent decision is that plaintiffs’ counsel may very well be able to utilize these sworn statements obtained in the first case won for every other case filed on the same issue. And here is the nightmare for the banks: the moment a decision is rendered against a bank, that decision, unlike an arbitration award, is publicly available. Every litigant with similar facts will utilize the decision, with precedential value, to the detriment of the banks.
In a day and age when Wall Street is not the most popular street in America, one would think the last thing the banks would want is the public gaining access to these proceedings.
The Law Offices of Barry M. Bordetsky represents customers and industry representatives in FINRA arbitrations as well as before state and federal courts. If you have questions regarding the process, please contact The Law Offices of Barry M. Bordetsky by calling Barry Bordetsky at (800) 998-7705 or email firstname.lastname@example.org.