Today’s case is an important one which addresses the circumstances, if any, under which a venue selection clause constitutes a waiver of the requirement that a FINRA member arbitrate customer disputes. 

Resolving a Conflict between a Forum Selection Clause and FINRA Regulations

Ladenburg Thalmann & Co., Inc. v. Oragenics, Inc., 2024 U. S. Dist. LEXIS 81333 (S.D. Fla. May 3, 2024)(Goodman, Magistrate Judge), arises from a dispute between an investment banker, Ladenburg, and its customer, Oragenics.  The parties’ contract included a choice of venue provision, under which Oragenics “agrees that the sole and exclusive venue for any matters arising hereunder shall be the court of competent jurisdiction in Miami-Dade County, Florida and agrees to waive any objections to such venue.” (Emphasis added in opinion).  In the course of the dispute, the defendant filed a demand for arbitration under FINRA’s rules.  Plaintiff here moves for a temporary injunction against Oragenics’ proceeding with that arbitration pending a resolution of the question of whether the referenced venue selection provision trumps a FINRA rule mandating arbitration of customer disputes.

Judge Goodman begins by reciting the standard for granting such temporary relief, focusing on the requirement that the movant have a “substantial likelihood of success on the merits.” He, then, concludes that, since Ladenburg is a FINRA member and Oragenics is its customer, FINRA Rule 12200 covers the dispute.  That rule provides that the member “must arbitrate a dispute” if the customer so requests and the dispute arises out of the member’s  business. (Emphasis added).  The twist in this case, however, is the presence of the venue selection clause quoted above, which Ladenburg argued constitutes a waiver of Oragenics’ right to demand arbitration.

The court opines that neither the Eleventh Circuit, which covers Florida, nor SCOTUS has resolved the issue of whether such a venue provision constitutes an enforceable waiver of the FINRA rules. Judge Goodman cites to Goldman, Sachs & Co. v. City of Reno, 747 F. 3d 733 (9^th Cir. 2014), and Goldman, Sachs & Co. v. Golden Empire School Financing Authority, 764 F. 3d 210 (2^nd Cir. 2014), as supporting Plaintiff’s position and Reading Health Systems v. Bear Stearns & Co., 900 F 3d 87 (3^rd Cir. 2018), and UBS Financial Services, Inc. v. Carilion Clinic, 706 F. 3d 319 (4^th Cir. 2013) as support for Defendant.  Since there are two Circuits on each side, the Magistrate Judge concludes that there is no “substantial likelihood” that Ladenburg will succeed on the merits; he, therefore, denies the motion for a TRO. As he writes, “A tie, of course, is not a win.  So, a prediction of victory is overly optimistic when the evidence reveals an even-steven split of 50-50 odds.. . . This is the reality here, where our Plaintiff corporation seeks injunctive relief but two of four appellate courts agree (and the other two disagree) with its legal position.” Such a nose-counting jurisprudential approach is unusual.  It is particularly strange, here, since the court seems to believe, as a factual matter, that Oragenics did not waive its right to a FINRA arbitration.  Judge Goodman quotes from the attestation of Oragenics’ counsel that the parties never discussed such a waiver. Further, he opines, finding that a venue clause implicitly waives the FINRA rules “would . . . undermine FINRA’s ability to regulate, oversee, and remedy . . . misconduct.” Quoting Reading at 103 (Ellipses added). Nor, he points out, does the venue selection provision in the agreement specifically address arbitration. In conclusion, Judge Goodman opines, “Ladenburg’s venue selection clause failed to provide Oragenics with notice that it was purposefully waiving an important right. . . . Had Ladenburg used more-specific language and expressly flagged the waiver result in the clause, then the contractual interpretation scenario would be markedly different.”

The case is useful in several contexts.  First, as a civil procedure precedent, it gives those opposing preliminary relief where an equal number of Circuits disagree on the governing legal issue a holding that such a variance is, in and of itself, a basis to deny relief.  Second, for those seeking to avoid a FINRA arbitration where the parties’ agreement contains a venue selection clause, the opinion provides support for the requirement that any such waiver must be very specific in order to be enforceable.  Finally, for contract drafters, it is a road map for drafting the strongest clause to trump FINRA’s requirements – although any such attempt may be futile.

This is only a recommended decision from the Magistrate Judge and is subject to review by District Judge Gayles.  Before you rely on it, be sure to check the court’s docket to see if it holds up.

“Highlights” for tomorrow, Wednesday, and Thursday will be posted to my website later in the week or early next week.  For the rest of this week, you will find the blog on LinkedIn. 

David Reif, FCIArb
Reif ADR
Dreif@reifadr.com
Reifadr.com