Securities Litigation

Last week the Fifth Circuit weighed in on how inartfully crafted arbitration and forum-selection clauses might trump one another. Together with recent decisions from the Second and Ninth Circuits - each with cert petitions pending - the issue seems poised for Supreme Court determination. Forum-Selection vs Arbitration Pending Supreme Court? The Second and Ninth Circuits held that a subsequent contractual forum-selection clause requiring all disputes to be resolved in a specified federal-court trumps FINRA's base requirement that FINRA member firms must arbitrate upon a customer's request. The Second Circuit then stayed its mandate to allow the public-pension funds to petition the Supreme Court for review. Goldman, Sachs & Co., v. Golden Empire Schools Financing Auth., Nos. 13-797-cv, 13-2247-cv (2^nd Cir. Aug. 21, 2014); Goldman Sachs & Co., v. City of Reno, 747 F. 3d 733 (9^th Cir. 2014), cert. pending, No. 14-146 (U.S. filed Aug. 7, 2014). I discussed the cases in my August 25 blog post, here, and the stay in my September 22 post, here. Arbitration: Good Idea, Poorly Done. The Fifth Circuit's decision in Sharpe v. AmeriPlan Corp., No. 13-10922 (5^th Cir. Oct. 16, 2014) looked at the same issue through a different lens. AmeriPlan's independent salespersons start as Brokers and can rise to Directors. Along the way, they're governed by a Broker agreement, then a Director agreement, and throughout by the Policies Manual. Most of the Sales Director Agreements had long two-tier dispute-resolution provisions requiring non-binding mediation before "filing such claim … in a court" and a forum-selection clause for all disputes not resolved in mediation to state or federal courts in Dallas (or an adjacent county). None of the Director Agreements had an arbitration clause. An earlier form of the Agreement (by Plaintiff Guarisco) only provided that "any action … shall be maintained in Dallas." All the Agreements said they were a total integration and required modification only by a fully-executed writing. The Policy Manual allowed AmeriPlan to amend it unilaterally; the Manual initially didn't require arbitration. But after suffering a jury loss in 2010, AmeriPlan modified the Policy Manual to require arbitration and used a web log-in to affirm Directors' agreement. Some Directors never logged out, so never confronted the new log-in affirmation. AmeriPlan terminated about 800 Sales Directors in 2011 and a class-action followed. Texas law applied to the initial inquiry - whether there is a valid agreement to arbitrate - and the FAA's presumptions favoring arbitration don't apply to that determination. The Fifth Circuit held that the Director's Agreement forum-selection provisions and the Policy Manual's arbitration provisions couldn't be harmonized, because: (a) Unilateral web-based amendment of the Manual would nullify the no-parol-modification clause of the Directors' Agreements; and (b) AmeriPlan was estopped to argue the Policy Manual superseded the Agreements, because it had relied on the Directors' Agreement forum-selection clause to transfer venue in the class action. The earlier version of the forum-selection clause (not the complicated two-tier dispute-resolution, but only a requirement that any suit be filed in Dallas) could be harmonized with the Manual's arbitration clause, because court litigation often is incident to an arbitration, e.g. to compel or confirm it. The Court required arbitration of the Guarisco dispute, but left the others to proceed in court in the transferred class-action. Dispute-Resolution Drafting Take-Aways. The case offers a good view of how inartful drafting frustrates intent once the claims are filed. Dispute resolution clauses need to be clear. If agreements involve multi-step resolution requirements, they need to work together with forum-selection clauses. When rolling out a new policy, review all prior agreements to ensure they interact with one another to give effect to the new objective. Sharpe shows the perils of stringing together boilerplate contract clauses without reviewing their interaction with each other and prior outstanding agreements. In the end, clients would be well-advised to have a litigator look over the effort to make sure the "gears mesh smoothly" once the shooting starts. The decision in Sharpe v. AmeriPlan Corp., No. 13-10922 (5^th Cir. Oct. 16, 2014) is here. Thomas K. Potter, III (tpotter@burr.com) is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Managing Partner of the Nashville office, Tom is licensed in Tennessee, Texas and Louisiana. He has over 28 years' experience representing financial institutions in litigation, regulatory and compliance matters. © 2014 by Thomas K. Potter, III (all rights reserved)