Reading Health System v. Bear Stearns Co Inc , 900 F.3d 87 ( 2018 )

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
________________
No. 16-4234
________________
READING HEALTH SYSTEM
v.
BEAR STEARNS & CO., n/k/a
J.P. MORGAN SECURITIES LLC,
Appellant
________________
On Appeal from the United States District Court
for the Eastern District of Pennsylvania
(D. C. Civil Action No. 5-15-cv-01412)
District Judge: Honorable Lawrence F. Stengel
________________
Argued on October 10, 2017
Before: SHWARTZ and ROTH, Circuit Judges and

PAPPERT, District Judge

The Honorable Gerald J. Pappert, United States District
Judge for the Eastern District of Pennsylvania, sitting by
designation.
(Opinion filed August 7, 2018)
Jonathan K. Youngwood, Esq. (ARGUED)
Simpson Thacher & Bartlett LLP
425 Lexington Avenue
New York, NY 10017
Counsel for Appellant
Mark A. Strauss, Esq. (ARGUED)
Thomas W. Elrod, Esq.
Peter S. Linden, Esq.
Kirby McInerney LLP
825 Third Avenue, 16th Floor
New York, NY 10022
Counsel for Appellee
Robert C. Port, Esq.
Gaslowitz Frankel LLC
303 Peachtree Street, N.E.
Suite 4500
Atlanta, GA 30308
Counsel for Amicus Appellee
Public Investors Arbitration Bar Association
________________
OPINION
_______________
2
ROTH, Circuit Judge.
INTRODUCTION
In this case, we address an emerging trend in the
brokerage industry. Ordinarily, broker-dealers, as members
of the Financial Industry Regulatory Authority (FINRA),1 are
required by FINRA Rule 12200 to arbitrate all claims brought
against them by a customer. Seeking to avoid this obligation
to arbitrate, broker-dealers have begun inserting forum-
selection clauses in their customer agreements, without
mentioning the customer’s right to arbitrate. This practice,
which has been condoned by several of our sister circuits,
deprives investors of the benefits associated with using
FINRA’s arbitral forum to resolve brokerage-related disputes.
This case concerns such a forum-selection clause.
Over the course of several years, Bear Stearns & Co., now
known as J.P. Morgan Securities LLC (hereinafter J.P.
Morgan), a broker-dealer and FINRA member, executed
several broker-dealer agreements with Reading Health
System. The agreements were executed in connection with
four separate offerings of auction rate securities (ARS),
through which Reading issued more than $500 million in
debt.2 Two of those contracts included forum-selection
1
FINRA is a self-regulatory organization (SRO) that is
statutorily authorized “to exercise comprehensive oversight
over all securities firms that do business with the public.”
Goldman, Sachs & Co. v. City of Reno, 747 F.3d 733, 737
(9th Cir. 2014) (internal quotation marks omitted).
2
In simplified terms, ARS are long-term bonds (or
preferred securities) that pay either interest or dividends to the
bondholders at rates set by periodically held “Dutch”
3
clauses providing that “all actions and proceedings arising out
of” the agreements or underlying ARS transactions had to be
filed in the District Court for the Southern District of New
York.
After the ARS market collapsed, Reading filed a
statement of claim with FINRA, alleging that J.P. Morgan
engaged in unlawful conduct in connection with the ARS
offerings and demanding that those claims be resolved
through FINRA arbitration. J.P. Morgan refused to arbitrate,
however, contending that Reading had waived its right to
arbitrate by agreeing to the forum-selection clauses. To
resolve this standoff, Reading filed a declaratory judgment
action to compel FINRA arbitration in the District Court for
the Eastern District of Pennsylvania. In response, J.P.
Morgan moved to transfer the action to New York, based on
the forum-selection clauses in some (but not all) of the
broker-dealer agreements. The District Court denied the
motion to transfer the action and ordered J.P. Morgan to
submit to FINRA arbitration. We will affirm both rulings.
BACKGROUND
I. Factual Background
Reading is a not-for-profit health system located in
Berks County, Pennsylvania. Reading issued ARSs on four
occasions in 2001, 2003, 2005, and 2007, offering a total of
more than $500 million in debt to finance capital projects
relating to the Reading Hospital and Medical Center Project.
auctions. See Anschutz Corp. v. Merrill Lynch & Co., 690
F.3d 98, 102 (2d Cir. 2012).
4
J.P. Morgan served as the underwriter and broker-dealer for
each offering. The parties executed separate broker-dealer
agreements in connection with each of the four ARS
offerings.
Over time, the ARS offerings did not go as planned for
Reading. Reading claims that J.P. Morgan and other broker-
dealers artificially propped up the ARS market through
undisclosed support bidding that created a false appearance of
market demand for ARSs. Allegedly, when the broker-
dealers stopped propping up the market in early 2008, the
ARS market collapsed. As a result, Reading filed various
state law claims against J.P. Morgan relating to the ARS
offerings and demanded that those claims be arbitrated before
FINRA.
This appeal does not require us to examine the
propriety of J.P. Morgan’s handling of the ARS offerings or
to apportion fault for the collapse of the ARS market. Rather,
we are asked to resolve only the parties’ threshold disputes
regarding the proper venue in which to adjudicate Reading’s
action to compel arbitration and the venue for Reading’s
substantive claims against J.P. Morgan.
To do so, we must examine the four broker-dealer
agreements. Each of the agreements included a New York
choice-of-law clause.3 Both the 2001 and 2002 broker-dealer
agreements were executed by J.P. Morgan and Bankers Trust
(as auction agent); Reading did not sign either agreement.4
3
J.A. 95, 120, 165, 187.
4
J.A. 154-67 (2001 broker-dealer agreement); 175-88 (2002
broker-dealer agreement).
5
Neither agreement includes a forum-selection clause. The
2005 broker-dealer agreement was executed by Reading
Health, J.P. Morgan, and Deutsche Bank Trust Company
Americas.5 The 2007 agreement was executed by the same
three parties, as well as the Berks County Municipal
Authority.6 Both the 2005 and 2007 agreements contain a
forum-selection clause that provides, in relevant part, as
follows:
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 in the County of
New York and that, in connection with any such
action or proceeding, submit to the jurisdiction
of, and venue in, such court.7
J.P. Morgan asserts that the forum-selection clauses in these
agreements required Reading to file both its declaratory
action to compel arbitration and its substantive claims in the
District Court for the Southern District of New York.
5
J.A. 79-96.
6
J.A. 106-24.
7
J.A. 95, 120. There are distinctions between the two
clauses that are immaterial to this appeal. For example, the
2007 agreement, unlike the 2005 agreement, provides that all
actions and proceedings shall be “brought in the County of
New York,” without explicitly referring to federal court.
Both agreements explicitly provide that the parties waive any
right to a jury trial but do not mention waiver of the right to
arbitration. Id.
6
II. Procedural Background
In February 2014, Reading filed a statement of claim
with FINRA, asserting claims against J.P. Morgan relating to
the ARS offerings and demanding that J.P. Morgan arbitrate
those claims in FINRA’s arbitral forum.8 That demand was
made pursuant to FINRA Rule 12200, which requires a
FINRA member, such as J.P. Morgan, to arbitrate any dispute
with a customer, such as Reading, at the customer’s request.
J.P. Morgan refused to arbitrate. In J.P. Morgan’s view, the
forum-selection clauses in the 2005 and 2007 broker-dealer
agreements constituted a waiver of Reading’s right to
arbitrate under FINRA Rule 12200.9
In March 2015, Reading filed a single-count
declaratory judgment action in the District Court for Eastern
District of Pennsylvania.10 The following day, Reading
moved to compel arbitration of the claims it had filed with
FINRA, arguing that it was entitled to arbitrate those claims
8
Reading’s statement of claim pleaded several state law
causes of action against J.P. Morgan, including fraud,
negligent misrepresentation, and breach of fiduciary duty and
other rule-based duties. J.A. 206-34.
9
Recognizing that they had reached an impasse, the parties
agreed to stay the FINRA arbitration pending the Second
Circuit’s resolution of a near-identical arbitrability issue. J.A.
235-36. As discussed below, the Second Circuit eventually
endorsed the view that the forum-selection clauses supersede
the right to arbitrate under FINRA Rule 12200. See
Goldman, Sachs & Co. v. Golden Empire Schools Fin. Auth.
(Golden Empire), 764 F.3d 210, 212 (2d Cir. 2014).
10
J.A. 13-22.
7
pursuant to FINRA Rule 12200. Invoking the forum-
selection clauses in the 2005 and 2007 broker-dealer
agreements, J.P. Morgan filed two motions: a motion to
transfer the declaratory judgment action to the Southern
District of New York and, in the event transfer was denied, a
cross-motion to enjoin the FINRA arbitration.
In February 2016, the District Court issued a single
order (i) denying J.P. Morgan’s motion to transfer, (ii)
granting Reading’s motion to compel, and (iii) denying J.P.
Morgan’s cross-motion to enjoin.11 The court declined to
transfer the declaratory judgment action to New York
because, in its view, the forum-selection clauses did not
designate the forum in which Reading should seek to compel
arbitration. The court then required J.P. Morgan to submit to
arbitration because it concluded that FINRA Rule 12200
granted Reading the right to arbitrate; this right was not
overridden by the forum-selection clauses.
After we dismissed J.P. Morgan’s initial appeal on
jurisdictional grounds, the District Court granted J.P.
Morgan’s motion to certify the following question for
interlocutory review:
[W]hether the United States Supreme Court
decision in Atlantic Marine Construction
Company, Inc. v. United States District Court
for the Western District of Texas, 134 S. Ct. 568
(2013), requires a district court to enforce a
forum selection clause by transferring a
declaratory action seeking to compel arbitration,
11
J.A. 3-4.
8
even if the district court determines that the
forum selection clause does not cover the
underlying arbitration that the plaintiff seeks to
compel.12
We then granted J.P. Morgan’s petition for permission to
appeal under 28 U.S.C. § 1292(b).
III. Regulatory Background
Reading bases its right to arbitrate its disputes with J.P.
Morgan on FINRA’s compulsory arbitration rule.
FINRA is an independent, self-regulatory organization
(SRO) established pursuant to Section 15A of the Securities
Exchange Act, which “created a system of supervised self-
regulation in the securities industry.”13 FINRA is authorized
to “exercise comprehensive oversight over ‘all securities
firms that do business with the public,’”14 including J.P.
Morgan and other broker-dealers that participated in the now-
defunct ARS market. In its capacity as a securities regulator,
FINRA has promulgated various rules governing the
brokerage industry, many of which are designed to protect
investors who conduct business with FINRA-regulated
12
J.A. 5, 348, 350; see 28 U.S.C. § 1292(b).
13
Credit Suisse First Boston Corp. v. Grunwald, 400 F.3d
1119, 1128 (9th Cir. 2005).
14
City of Reno, 747 F.3d at 737 (quoting UBS Fin. Servs.,
Inc. v. W. Va. Univ. Hosps., Inc., 660 F.3d 643, 648 (2d Cir.
2011); 72 Fed. Reg. 42,169, 42,170 (Aug. 1, 2007)); see 15
U.S.C. § 78o(b)(8) (requiring broker-dealers to be FINRA
members).
9
firms.15 The Securities and Exchange Commission (SEC),
which is statutorily authorized to oversee FINRA, must
approve all such rules.16 A FINRA member agrees to comply
with all of FINRA’s rules and is thus bound to adhere to
FINRA’s Code and its relevant arbitration provisions.17
FINRA’s authority includes regulatory oversight over
securities arbitration.18 Indeed, “[t]he SEC has long viewed
the option of securities arbitration for investors as an
15
See 15 U.S.C. § 78o-3(b)(6) (requiring FINRA to adopt
rules designed, inter alia, to “prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, . . . and, in general, to protect investors
and the public interest”).
16
15 U.S.C. § 78s(b)(1)-(2); 17 C.F.R. § 200.30-3(a)(12);
see Amicus Brief of Pub. Invests. Arb. Bar Assoc. (PIABA
Br.), at 9-10 (outlining FINRA rulemaking process).
17
FINRA Rule 140 (Applicability); FINRA Bylaws, art IV,
§ 1 (Membership); see, e.g., W. Va. Univ. Hosps., Inc., 660
F.3d at 648-49; Birkelbach v. S.E.C., 751 F.3d 472, 475 n.2
(7th Cir. 2014); cf. Patten Sec. Corp. v. Diamond Greyhound
& Genetics, Inc. (Patten), 819 F.2d 400, 402 (3d Cir. 1987),
abrogated on other grounds.
18
See 72 Fed. Reg. at 42,170. FINRA’s predecessor
SRO—i.e., the National Association of Securities Dealers,
Inc. (NASD)—gained SEC approval of its revamped
arbitration procedures decades ago. Grunwald, 400 F.3d at
1132; see Shearson/Am. Exp., Inc. v. McMahon, 482 U.S.
220, 234 (1987). NASD exercised this oversight role in
conjunction with the regulatory arm of the New York Stock
Exchange until July 2007, at which point they merged to form
FINRA. See 72 Fed. Reg. at 42,170.
10
important component of its investor protection mandate” and,
since its inception, “has urged the SROs it regulates to
provide an alternative dispute resolution forum for
customers.”19 In furtherance of that mandate, FINRA now
hosts the largest arbitration forum in the United States for
resolving such disputes,20 which, according to FINRA and
amicus, provides investors with a “fair, efficient and
economical alternative to litigation.”21 To ensure that
customers can benefit from arbitration, FINRA has
promulgated numerous arbitration-related rules,22 including
FINRA Rule 12200, which requires FINRA members to
submit customer disputes to FINRA arbitration whenever a
customer demands arbitration.23 Given the compulsory
19
Jill I. Gross, The Customer’s Nonwaivable Right to
Choose Arbitration in the Securities Industry, 10 BROOK. J.
CORP. FIN. & COM. L. 383, 394 (2016) (detailing SEC’s
support for securities arbitration); see McMahon, 482 U.S. at
233 (recognizing SEC’s “expansive power to ensure the
adequacy of arbitration procedures employed” by SROs).
20
FIN. INDUS. REG. AUTH. (FINRA), Final Report and
Recommendations of the FINRA Dispute Resolution Task
Force, at 1 (Dec. 7, 2015), http://www.finra.org/sites/default
/files/Final-DR-task-force-report.pdf.
21
FINRA, Reg. Notice 16-25, at 1 (July 2016); PIABA Br.
at 12.
22
These rules are set out in the FINRA Code of Arbitration
Procedure for Customer Disputes (FINRA Arbitration Code).
See FINRA Rules 12000-12905.
23
FINRA Rule 12200 provides, in relevant part, that a
FINRA member “must arbitrate a dispute” with one of its
customers if (i) FINRA arbitration is “requested by the
customer” or “required by written agreement,” and (ii) the
11
nature of the Rule, courts have held that, even in the absence
of a written arbitration agreement, Rule 12200 constitutes a
binding arbitration agreement between a FINRA member and
customer.24
A customer can initiate FINRA arbitration and invoke
its arbitration rights under Rule 12200 by filing a “statement
of claim” with the FINRA Director.25 Although Reading
dispute “arises in connection with the business activities of
the member.” FINRA Rule 12200; see S.E.C., Reg. Notice
08-57 (2008) (approving Rule 12200); see also Gross, supra
note 19, at 396 (noting that brokerages have had a duty to
arbitrate upon the demand of a customer since the 1800s).
In July 2016, FINRA issued a regulatory notice,
reminding its members “that customers have a right to request
arbitration at FINRA’s arbitration forum at any time and do
not forfeit that right under FINRA rules by signing any
agreement with a forum selection provision specifying
another dispute resolution process or an arbitration venue
other than the FINRA arbitration forum.” FINRA, Reg.
Notice 16-25, at 1.
24
See, e.g., Golden Empire, 764 F.3d at 214; Waterford Inv.
Servs., Inc. v. Bosco, 682 F.3d 348, 353 (4th Cir. 2012). J.P.
Morgan concedes that Reading is a “customer” within the
meaning of FINRA Rule 12200.
25
FINRA Rule 12302(a). Once initiated, the arbitration is
comprehensively governed by the FINRA Arbitration Code,
which contemplates that the parties will submit to arbitration
and comply with the Code. Indeed, Rule 12212 permits an
arbitration panel to “sanction a party for failure to comply
with any provision of the Code,” and FINRA IM-12200
provides that “[i]t may be deemed conduct inconsistent with
12
properly invoked its right to arbitrate by filing its statement of
claim with FINRA, J.P. Morgan contends that it had no duty
to arbitrate because Reading waived its rights under Rule
12200 by agreeing to the forum-selection clauses. It is
against this backdrop that we consider the merits of the
District Court’s order.
DISCUSSION26
In this appeal, we must answer two questions:
(i) whether J.P. Morgan, as a FINRA member, is obligated to
resolve Reading’s substantive claims through FINRA
arbitration; and (ii) which court decides that question of
arbitrability. To answer those questions we must resolve the
inherent tension between Reading’s right to arbitrate its
claims pursuant to FINRA Rule 12200 and J.P. Morgan’s
purported contractual right to litigate those same claims
pursuant to the forum-selection clauses in the broker-dealer
agreements. Complicating this inquiry, the parties do not
agree which of these questions must be resolved first; each
side argues that the District Court lacked authority to resolve
one of the two disputes at issue.
We agree with J.P. Morgan that the transfer dispute, as
a threshold question of venue, was properly resolved before
the arbitrability dispute. We thus begin by discussing
just and equitable principles of trade . . . for a member . . . to:
(a) fail to submit a dispute to arbitration under the Code as
required by the Code.”
26
The District Court had subject matter jurisdiction under
28 U.S.C. § 1332. We have jurisdiction over this
interlocutory appeal under 28 U.S.C. § 1292(b).
13
whether the District Court was required to transfer Reading’s
declaratory judgment action to the District Court for the
Southern District of New York.
I. The District Court Properly Resolved the Transfer
Dispute Before the Arbitrability Dispute
When Reading filed its single-count, declaratory
judgment action in the District Court, the only merits issue
before the court was whether FINRA Rule 12200 required
J.P. Morgan to submit to FINRA arbitration. However, once
J.P. Morgan moved to transfer that action, the District Court
was presented with a threshold issue regarding the propriety
of the venue in which Reading filed its action to compel
arbitration—namely, whether the declaratory judgment action
should be transferred to New York in light of the forum-
selection clauses. The parties spill much ink on which of
these two issues should be resolved first. In J.P. Morgan’s
view, the transfer dispute must be resolved first and, since the
District Court was required to transfer the action, it lacked
authority to resolve the arbitrability dispute. By contrast,
Reading argues that the Federal Arbitration Act (FAA)
required the District Court to enforce FINRA Rule 12200 by
compelling arbitration and, therefore, the court was divested
of its discretion to transfer. The District Court declined to
transfer the case before turning to the question of arbitrability.
We agree that threshold disputes over venue and jurisdiction
should be resolved before merits disputes. Thus, we conclude
that the District Court’s sequence of decision-making was not
only permissible, but also preferable.
In In re: Howmedica Osteonics Corp, we endorsed the
view that district courts have “discretion to address
14
convenience-based venue issues” in the first instance and that
they “should suspend concerns about other threshold issues”
while doing so.27 That view is supported by the principle that
federal courts have flexibility to choose among alternate
“grounds for denying audience to a case on the merits.”28 For
instance, the Supreme Court has upheld the authority of a
district court to dismiss an action under the doctrine of forum
non conveniens, without first determining whether the action
should be dismissed on jurisdictional grounds.29 The Court
granted such leeway to district courts because a forum non
conveniens dismissal—much like the parties’ dispute over
transfer30—is a “nonmerits issue” that “does not entail any
assumption by the court of substantive law-declaring
power.”31 Venue disputes involve only a threshold
determination “that the merits should [or should not] be
27
867 F.3d 390, 404 n.8 (3d Cir. 2017); see In re
LimitNone, LLC, 551 F.3d 572, 576-78 (7th Cir. 2008).
28
Sinochem Int’l Co. v. Malaysia Int’l Shipping Corp., 549
U.S. 422, 431 (2007) (quoting Ruhrgas AG v. Marathon Oil
Co., 526 U.S. 574, 585 (1999)).
29
Id. at 436; see Leroy v. Great W. United Corp., 443 U.S.
173, 180 (1979) (permitting courts to address venue before
personal jurisdiction).
30
See Atl. Marine Constr. Co., Inc. v. U.S. Dist. Ct. for the
W. Dist. of Texas (Alt. Marine), 571 U.S. 49, 60 (2013)
(explaining federal transfer statute “is merely a codification
of the doctrine of forum non conveniens for the subset of
cases in which the transferee forum is within the federal court
system”).
31
Sinochem Int’l Co., 549 U.S. at 433 (citation and internal
quotation marks omitted).
15
adjudicated elsewhere.”32 By contrast, resolving a dispute
over arbitrability requires a district court to apply its law-
declaring power regarding the parties’ right to arbitrate. This
determination may be frustrated if the threshold issue of
venue is not decided first.
Moreover, resolving merits disputes at the outset,
without first ensuring that venue is proper, would in certain
cases nullify the very right afforded by the forum-section
clause—i.e., the right to resolve the merits in a contractually
designated forum.33 In addition, ensuring venue is proper
before turning to the merits promotes finality interests and
judicial economy by ensuring the facial validity of any
subsequent order compelling (or denying) arbitration.34 Such
concerns are alleviated, however, by resolving threshold
challenges to venue before secondary disputes over
arbitrability.
The District Court, confronted with a plaintiff seeking
to compel arbitration and a defendant moving to transfer the
action to compel arbitration based on a forum-selection
clause, properly addressed the transfer question before the
question of arbitrability. We will turn then to the propriety of
the denial of the motion to transfer.
32
Id. at 432.
33
See Atl. Marine, 571 U.S. at 63-64; see also Puleo v.
Chase Bank USA, N.A., 605 F.3d 172, 178 (3d Cir. 2010) (en
banc).
34
See, e.g., Jumara v. State Farm Ins. Co., 55 F.3d 873, 883
(3d Cir. 1995) (vacating a district court’s order denying a
motion to compel arbitration after concluding that the court
erred by failing to transfer the action to another district).
16
II. The District Court Properly Declined to Transfer
Reading’s Action to Compel Arbitration
A. The Supreme Court’s decision in Atlantic
Marine does not require transfer.
J.P. Morgan moved to transfer Reading’s declaratory
judgment action, arguing that the Supreme Court’s transfer
framework announced in Atlantic Marine required the District
Court to enforce the forum-selection clause by transferring
the action to the Southern District of New York. The court
disagreed that the forum-selection clause required transfer
because, in its view, the clause does “not establish the judicial
forum” in which Reading “must compel arbitration.”35 In
response to that ruling, J.P. Morgan asked us to determine, on
interlocutory review, whether Atlantic Marine requires a
district court to enforce a forum-selection clause by
transferring a declaratory judgment action to compel
arbitration, even if the district court concludes that the clause
does not encompass the underlying arbitration.36 In other
words, the question instructs us to assume that even if
Reading’s declaratory judgment action and statement of claim
filed with FINRA fall outside the scope of the forum-
selection clause, nevertheless Atlantic Marine required
transfer.
Absent a forum-selection clause, a district court
ordinarily assesses whether to transfer a case to another
federal district by considering the factors set out in 28 U.S.C.
§ 1404(a), including “various public-interest considerations”
35
J.A. 3.
36
J.A. 5, 348, 350; see supra note 12 and corresponding
text for certified question.
17
and the private interests of the parties to the litigation.37 In
Atlantic Marine, however, the Supreme Court explained that
the presence of a forum-selection clause alters the traditional
analysis in several respects.38 Most significantly, a court
considering a “motion to transfer based on a forum-selection
clause should not consider arguments about the parties’
private interests,” since forum-selection provisions
“represent[] the parties’ agreement as to the most proper
forum.”39 As a result, when a court is confronted with a valid
forum-selection clause that covers the dispute, it must
consider only the public-interest factors and “deem the
private-interest factors to weigh entirely in favor the
preselected forum.”40 For these reasons, the Atlantic Marine
Court held that when a party invokes a forum-selection clause
to transfer an action under § 1404(a), “a district court should
transfer the case unless extraordinary circumstances unrelated
to the convenience of the parties clearly disfavor transfer.”41
Focusing on these words, J.P. Morgan contends that
the District Court had to transfer this action because no
extraordinary circumstances are present. But a central
37
28 U.S.C. § 1404(a) (allowing a district court to transfer a
civil action to another district—in which the case could have
been brought or to which the parties have consented—“[f]or
the convenience of parties and witnesses” and “in the interest
of justice”); see Atl. Marine, 571 U.S. at 62-63; Jumara, 55
F.3d at 879.
38
Atl. Marine, 571 U.S. at 62-63 (internal quotation marks
omitted).
39
Id. at 63-64 (internal citation omitted).
40
Id. at 64.
41
Id. at 52.
18
premise of J.P. Morgan’s reliance on Atlantic Marine—and
the requirement that district courts honor the parties’
contractual choice of forum in all but extraordinary
circumstances—is that Reading’s action to compel arbitration
falls within the scope of the forum-selection clauses. Nothing
in Atlantic Marine disturbs the long-standing body of law
clarifying that a court need not transfer an action based on a
forum-selection clause if the clause is invalid (i.e., an
enforceability challenge) or if it does not cover the action or
claims that the defendant is seeking to transfer (i.e., a scope
challenge).42 Rather, the transfer framework announced in
Atlantic Marine presupposes the existence of an action that
falls within the scope of a valid forum-selection clause.43
42
See, e.g., Collins v. Mary Kay, Inc., 874 F.3d 176, 181
(3d Cir. 2017) (explaining that questions regarding the scope
of a forum-selection clause are “analytically distinct” from
questions regarding that clause’s enforceability); Cottman
Transmission Sys., Inc. v. Martino, 36 F.3d 291, 293 (3d Cir.
1994); see also John Wyeth & Bro. Ltd. v. CIGNA Int’l Corp.
(John Wyeth), 119 F.3d 1070, 1075 (3d Cir. 1997).
43
Atl. Marine, 571 U.S. at 62 n.5; see, e.g., Mary Kay, Inc.,
874 F.3d at 186 (applying the forum non convenience
framework only after “[h]aving concluded that [the
plaintiff’s] claim falls within the scope of the . . . enforceable
forum selection clauses”). The forum-selection clause at
issue in Atlantic Marine provided that “all disputes between
the parties shall be litigated” in a specific forum. 571 U.S. at
53 (internal quotation marks omitted). By the time the case
reached the Supreme Court, it was undisputed that the
litigation between the parties fell within the scope of the
forum-selection clauses. See Br. for Resp., Atl. Marine, 571
U.S. 49 (No. 12-929), 2013 WL 4495148, at *6 (conceding
19
This conclusion answers the question we certified for
interlocutory review:
[Does] . . . Atlantic Marine . . . require[] a
district court to enforce a forum selection clause
by transferring a declaratory action seeking to
compel arbitration, even if the district court
determines that the forum selection clause does
not cover the underlying arbitration that the
plaintiff seeks to compel.
The answer is, “No, it does not.” If a party invokes a forum-
selection clause to transfer an action—here, Reading’s action
to compel arbitration—but the district court concludes that
the action does not fall within the scope of the clause, the
traditional § 1404(a) framework applies, not the framework
set forth in Atlantic Marine.
Accordingly, the District Court was required to apply
Atlantic Marine and transfer the action to New York only if
Reading’s declaratory judgment action fell within the scope
of the forum-selection clause.
that the parties’ agreement favored transferring the case); Br.
for Pet., Atl. Marine, 571 U.S. 49 (No. 12-929), 2013 WL
3166391, at *4 (noting that the party resisting transfer “does
not dispute that its claims against Atlantic Marine fall within
the scope of the mandatory forum selection clause”).
20
B. Reading’s action to compel arbitration does not
fall within the scope of the forum-selection
clause.
A scope-based challenge to the applicability of a
forum-selection clause presents a quintessential question of
contract interpretation.44 We have stressed that “whether or
not a forum selection clause applies” to a particular dispute
“depends on what the specific clause at issue says.”45 The
forum-selection clause in the 2005 and 2007 broker-dealer
agreements provides 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 in the County of New York.”46
J.P. Morgan maintains that the District Court was required to
transfer the case because Reading’s petition to compel
arbitration is an “action . . . arising out of” the broker-dealer
agreements and the related ARS offerings. Reading counters
that the action “arise[s] out of” FINRA Rule 12200—not the
broker-dealer agreements or related transactions—and
therefore the District Court appropriately denied the motion
to transfer. We agree with Reading.
44
We exercise plenary review over legal questions relating
to “[t]he interpretation and enforcement of a forum selection
clause,” which includes the District Court’s order denying
J.P. Morgan’s motion to transfer. Salovaara v. Jackson Nat.
Life Ins. Co., 246 F.3d 289, 295 (3d Cir. 2001); Jumara, 55
F.3d at 880-81.
45
John Wyeth, 119 F.3d at 1075; Mary Kay, Inc., 874 F.3d
at 180-81.
46
J.A. 95, 120.
21
We begin with the meaning of the phrase “arising out
of” in the forum-selection clauses. Because we have
admonished that “[d]rawing analogy to other cases is useful
only to the extent those other cases address contract language
that is the same or substantially similar to that at issue,”47 we
look to the decisions of our sister circuit courts of appeals that
have construed the phrase “arising out of” in a forum-
selection clause.48 In Coregis Insurance Co. v. American
Health Foundation, Inc., the Second Circuit Court of Appeals
defined the phrase in accordance with its ordinary meaning:
“To ‘arise’ out of means ‘to originate from a specified
source.’”49 In a subsequent decision, Phillips v. Audio Active
Ltd., the Second Circuit rejected the overbroad contention
that the phrase arising out of “encompass[es] all claims that
have some possible relationship with the contract, including
claims that may only ‘relate to,’ be ‘associated with,’ or ‘arise
47
John Wyeth, 119 F.3d at 1075.
48
Although we have held that state law governs the
interpretation of a forum-selection clause in a diversity suit,
see Mary Kay, Inc., 874 F.3d at 181-83, the parties have
waived any choice-of-law issue by failing to address it in
their briefs and by relying on cases that apply different bodies
of law than that designated in the broker-dealer agreements’
New York choice-of-law clauses. See Williams v. BASF
Catalysts LLC, 765 F.3d 306, 316-17 (3d Cir. 2014); see also
John Wyeth, 119 F.3d at 1074.
49
241 F.3d 123, 128 (2d Cir. 2001) (quoting Webster’s
Third New Int’l Dictionary 117 (1986)); see, e.g., United
States v. Husmann, 765 F.3d 169, 173 (3d Cir. 2014) (“We
look to dictionary definitions to determine the ordinary
meaning of a word.”).
22
in connection with’ the contract.”50 Likewise, the Seventh
Circuit Court of Appeals has observed that “courts have
resisted the siren call of” equating the term “arising out of”
with the concept of but-for causation.51 We agree that
“arising out of” in a forum-selection clause should be
interpreted in accordance with the ordinary meaning of that
phrase—i.e., to originate from a specified source.
Interpreting a forum-selection clause in accordance with its
50
494 F.3d 378, 389-91 (2d Cir. 2007) (“[W]e approve of
the approach outlined by the Third Circuit, which highlights
the language-specific nature of this inquiry and discounts the
precedential weight of cases that deal with dissimilarly
worded clauses.” (citing John Wyeth, 119 F.3d at 1075)). We
agree that the phrase “arising out of” is narrower in scope
than other clauses we have addressed, such as those
encompassing all actions “arising in connection with,”
“relating to,” or “with respect to” an agreement. See, e.g.,
John Wyeth, 119 F.3d at 1075 (observing that “the phrase
‘arising in relation to’ is broader than ‘arising under’”); see
Carlyle Inv. Mgmt. LLC v. Moonmouth Co. SA, 779 F.3d 214,
217-20 (3d Cir. 2015) (construing broadly forum-selection
clause covering all disputes arising “with respect” to an
agreement); Mary Kay, Inc., 874 F.3d at 179 (addressing
clause covering any “dispute or controversy [that] arises
between [the parties] concerning any matter relating to this
Agreement”).
51
Omron Healthcare, Inc. v. Maclaren Exports Ltd., 28
F.3d 600, 602 (7th Cir. 1994) (“[B]ut for the existence of
federal drug safety standards, it would not be possible to
contend that noncompliance with the standards is tortious, but
it does not follow that a tort suit ‘arises under’ those standards
and thus activates federal jurisdiction.”).
23
plain meaning comports with well-established principles of
interpretation.52 And, as in Phillips, we see “no reason to
presume the parties meant anything other than the dictionary
definition of the term.”53
The propriety of transfer thus turns on the following
inquiry: Is Reading’s declaratory judgment action to compel
arbitration—not to be mistaken with the separate action it
filed with FINRA—an action or proceeding that originates
from the broker-dealer agreements or the related ARS
offerings? In answering that question, we are again guided by
Phillips. There, the court held that a plaintiff’s federal
copyright “claims d[id] not arise out of” a recording contract
because those claims did not involve an assertion of the
plaintiff’s “rights or duties under that contract.”54 Instead, the
claims arose out of the Copyright Act. Likewise, here,
Reading’s action to compel FINRA arbitration does not “arise
out of” the broker-dealer agreements because Reading’s sole
claim for declaratory relief does not involve an assertion of
Reading’s contractual “rights or duties.”55 The only right
Reading seeks to enforce in its complaint is its right to
arbitrate its claims against J.P. Morgan. That right does not
originate from the broker-dealer agreements, but rather from
FINRA Rule 12200, which gives Reading the right to demand
52
See, e.g., Illinois Nat. Ins. Co. v. Wyndham Worldwide
Operations, Inc., 653 F.3d 225, 231 (3d Cir. 2011); Great
Am. Ins. Co. v. Norwin Sch. Dist., 544 F.3d 229, 243 (3d Cir.
2008); RESTATEMENT (SECOND) OF CONTRACTS § 202
(1981).
53
494 F.3d at 390.
54
Phillips, 494 F.3d at 390-92.
55
See, e.g., J.A. 14, ¶ 3; J.A. 15 ¶¶ 5, 10; J.A. 21, ¶¶ 36-40.
24
FINRA arbitration and imposes a corresponding duty on J.P.
Morgan to arbitrate.56 Because the sole source for Reading’s
right to arbitrate is FINRA Rule 12200—without which
Reading would not be entitled to compel arbitration, and J.P.
Morgan would not have a duty to arbitrate—Reading’s
declaratory judgment action does not “arise out of” the
broker-dealer agreements.
The broker-dealer agreements come into play only
because J.P. Morgan has invoked the forum-selection clauses
in those agreements as a defense to Reading’s declaratory
judgment action. “The answer to the question whether a
‘defense’ based on a contract that contains a forum selection
clause implicates that clause depends on the language of the
clause.”57 Where, as here, the clause encompasses only
disputes “arising out of” the contract, courts have rejected the
argument that a contractual defense alone is sufficient to
bring the dispute within the scope of the clause.58 We
therefore decline J.P. Morgan’s invitation to expand the scope
56
J.P. Morgan urges that Reading’s declaratory judgment
action falls within the scope of the forum-selection clauses
because Reading’s complaint explicitly refers to the broker-
dealer agreements. But those references alone, which merely
contextualize the parties’ dispute over arbitrability, do not
establish that the petition to compel arbitration “aris[es] out
of” those agreements. See, e.g., Phillips, 494 F.3d at 390-91.
57
John Wyeth, 119 F.3d at 1076.
58
See, e.g., Phillips, 494 F.3d at 391; Omron Healthcare,
Inc., 28 F.3d at 601-02; Rovi Guides, Inc. v. Comcast Corp.,
2016 WL 6217201, at *3 (E.D. Tex. Oct. 25, 2016) (citing
cases); see also John Wyeth, 119 F.3d at 1076 n.5.
25
of the forum-selection clause, under the guise of interpreting
it, to encompass a contractual defense.59
Because Reading’s declaratory judgment action to
compel arbitration is not one “arising out of” the broker-
dealer agreements, it does not fall within the scope of the
forum-selection clause. We will therefore affirm the District
Court’s order denying J.P. Morgan’s motion to transfer the
action to the Southern District of New York.60
59
J.P. Morgan argues for the first time in its reply brief that
the agreements are not relevant only as a defense “because
they create the customer relationship between” the parties and
are therefore the “source” of Reading’s arbitration demand.
Reply. Br. at 6. J.P. Morgan waived this argument, however,
by failing to present it in the District Court and by presenting
it to this court only in passing. See, e.g., John Wyeth, 119
F.3d at 1076 n.6 (citing Commonwealth of Pa. v. HHS, 101
F.3d 939, 945 (3d Cir. 1996)). And, in any event, we decline
to accept this argument—i.e., the view that but-for the
customer relationship created by the agreements Reading
would have no right to arbitrate—because it improperly
equates the meaning of “arising out of” with the concept of
but-for causation. See Omron Healthcare, Inc., 28 F.3d at
602.
60
We note, however, our disagreement with certain aspects
of the District Court’s rationale for declining to transfer the
action. Instead of examining the language of the forum-
selection clauses and asking whether Reading’s action fell
within their scope, as required by our case law, John Wyeth,
119 F.3d at 1075-76, the District Court denied transfer based
entirely on our decision in Patten Securities Corporation v.
Diamond Greyhound & Genetics, Inc., 819 F.2d 400 (3d Cir.
26
III. The District Court Properly Required J.P. Morgan
to Submit to FINRA Arbitration Because the
Forum-Selection Clause Did Not Waive Reading’s
Right to Arbitrate Under FINRA Rule 12200
Having concluded that the Eastern District of
Pennsylvania was an appropriate venue in which to resolve
the arbitrability dispute, we must decide whether to affirm the
court’s order requiring J.P. Morgan to submit to FINRA
arbitration.61 This question requires us to reconcile the two
competing rights at stake. On the one hand, FINRA Rule
12200 grants Reading the right to resolve its substantive
claims against J.P. Morgan through FINRA arbitration.62 On
the other hand, the forum-selection clause grants to J.P.
Morgan the contractual right to litigate those claims. Unlike
Reading’s petition to compel arbitration, the statement of
1987). See J.A. 3 (Dist. Ct. Op.). But the forum-selection
clause at issue in Patten is materially different than the
clauses at issue here. Patten, 819 F.2d at 407 n.3. And,
unlike here, Patten did not involve any threshold question of
transfer, since the petition to enjoin arbitration at issue in
Patten had been filed in the contractually designated forum.
61
We review the court’s order compelling arbitration de
novo, as it presents a question of law. See Century Indem.
Co. v. Certain Underwriters at Lloyd’s, London, 584 F.3d
513, 521 (3d Cir. 2009); Gay v. CreditInform, 511 F.3d 369,
376 (3d Cir. 2007).
62
Numerous courts have held that FINRA Rule 12200
constitutes an enforceable arbitration agreement within the
meaning of the FAA. See, e.g., Golden Empire, 764 F.3d at
214; Bosco, 682 F.3d at 353; Berthel Fisher & Co. Fin.
Servs., Inc. v. Larmon, 695 F.3d 749, 752 (8th Cir. 2012).
27
claim Reading filed with FINRA qualifies as an “action [or]
proceeding . . . arising out of” the broker-dealer agreements
and related ARS transactions.63
Attempts to reconcile the tension between a broker-
dealer’s right to litigate pursuant to a forum-selection clause
and a customer’s corresponding right to arbitrate under
FINRA Rule 12200 have divided our sister circuit courts.
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,64 while the Fourth Circuit
Court of Appeals has held that Rule 12200 requires the
parties to arbitrate, notwithstanding the presence of a forum-
selection clause.65 We agree with the Fourth Circuit that the
forum-selection clauses in the broker-dealer agreements are
insufficient to waive Reading’s right to arbitrate under
FINRA Rule 12200.
63
Although several courts have read the phrase “all actions
and proceedings” as limited to judicial proceedings, not
arbitrations, see, e.g., UBS Fin. Servs., Inc. v. Carilion Clinic,
706 F.3d 319, 329-30 (4th Cir. 2013), Reading does not press
that argument here. And that narrow interpretation of the
terms “actions” and “proceedings” conflicts with the ordinary
meaning of those terms. See Golden Empire, 764 F.3d at 216.
64
Golden Empire, 764 F.3d at 214-17; City of Reno, 747
F.3d at 741-47; see also Presbyterian Healthcare Servs. v.
Goldman, Sachs & Co., 122 F. Supp. 3d 1157 (D.N.M. 2015).
65
Carilion Clinic, 706 F.3d at 329-30; see also COR
Clearing, LLC v. Jarvis, 2014 WL 98799, at *7 (D. Neb. Jan.
9, 2014); UBS Sec. LLC v. Allina Health Sys., 2013 WL
500373, at *4 (D. Minn. Feb. 11, 2013).
28
On one side of the divide, both the Second Circuit (in
Golden Empire) and the Ninth Circuit (in City of Reno) have
held that “a forum selection clause requiring ‘all actions and
proceedings’ to be brought in federal court supersedes an
earlier agreement to arbitrate” embodied in FINRA Rule
12200.66 Treating Rule 12200 as a mere “default obligation”
to arbitrate, the Ninth Circuit reasoned (over a dissent) that
the customer “clearly and unambiguously disclaimed any
right it might otherwise have had to FINRA arbitration” when
it assented to the forum-selection clause.67 The Second
Circuit likewise viewed the issue as “whether an arbitration
agreement remains in force in light of a later-executed
agreement,”68 concluding that the forum-selection clause in
66
Golden Empire, 764 F.3d at 215; see City of Reno, 747
F.3d at 747. This rationale presumes that FINRA Rule 12200
imposes a mere contractual duty on J.P. Morgan to arbitrate.
Conflating a duty imposed by regulation with one imposed by
contract, however, overlooks that FINRA Rule 12200 was
adopted pursuant to authority delegated by Congress under
the Exchange Act and approved by the SEC. Because FINRA
Rule 12200 imposes on broker-dealers a federal regulatory
duty to arbitrate and confers on customers a regulatory right
to arbitrate, it differs significantly in kind from private
contractual arbitration agreements. See FINRA, Reg. Notice
16-25, at 5.
67
City of Reno, 747 F.3d at 743. But see id. at 748-49
(Battaglia, J., concurring in part, dissenting in part) (rejecting
view that the forum-selection clause was sufficiently specific
to supersede, displace, or waive the right to arbitrate under
FINRA Rule 12200).
68
Even if Rule 12200 is the functional equivalent of a
private contract, this analysis presumes that the “agreement to
29
that agreement “supersede[d] the background FINRA
arbitration rule.”69 These courts accordingly concluded that
the forum-selection clauses were controlling and the parties
were required to litigate their dispute.
On the other side of the divide, the Fourth Circuit (in
Carilion Clinic) rejected the contention that the forum-
selection clause operated to waive a customer’s right to
arbitrate under FINRA Rule 12200.70 The court began with
the principle that an agreement waives the right to arbitrate
only if it is “sufficiently specific to impute to the contracting
parties the reasonable expectation that they are superseding,
displacing, or waiving the arbitration obligation created by
arbitrate” embodied in FINRA Rule 12200 predates the
execution of the broker-dealer agreements. That position is
hard to reconcile with the fact that an investor’s right to
demand arbitration under FINRA Rule 12200 stems from its
status as a “customer,” a status that J.P. Morgan contends is
created by the broker-dealer agreements. Reply Br. at 6. J.P.
Morgan’s position in that regard implies that the agreement to
arbitrate under Rule 12200 comes into existence only after
the parties executed the broker-dealer agreements, not
beforehand, which contradicts the notion that the agreements
are somehow later-in-time agreements that “superseded” or
“displaced” Rule 12200. See Gross, supra note 19, at 400-
401.
69
Golden Empire, 764 F.3d at 216.
70
Carilion Clinic, 706 F.3d at 328-30; see also City of
Reno, 747 F.3d at 754 (Battaglia, J., dissenting); UBS Sec.
LLC v. Allina Health Sys., 2013 WL 500373, at *1 (D. Minn.
Feb. 11, 2013).
30
FINRA Rule 12200.”71 Although the court acknowledged
that “the obligation to arbitrate under FINRA Rule 12200 can
be superseded and displaced by a more specific agreement
between the parties,” it still concluded that the forum-
selection clause was not such an agreement, as it was entirely
silent on the issue of arbitration.72 Thus, the court held that
the customer had not waived its right to arbitrate and that the
broker-dealer had to submit to FINRA arbitration.73
71
Carilion Clinic, 706 F.3d at 328-29 (citing cases). This
principle generally aligns with our waiver precedent. See
Patten, 819 F.2d at 406-07.
72
Carilion Clinic, 706 F.3d at 328. But see Golden Empire,
764 F.3d at 215 (agreeing that the forum selection clause
must “specifically preclude[]” arbitration, but disagreeing that
the clause must actually mention arbitration to do so).
73
In July 2016, FINRA issued a regulatory notice,
disagreeing with the reasoning of Golden Empire and City of
Reno and reminding its members “that customers have a right
to request arbitration at FINRA’s arbitration forum at any
time and do not forfeit that right under FINRA rules by
signing any agreement with a forum selection provision
specifying another dispute resolution process or an arbitration
venue other than the FINRA arbitration forum.” FINRA,
Reg. Notice 16-25, at 1. FINRA concluded that “any member
firm’s denial, limitation or attempt to deny or limit a
customer’s right to request FINRA arbitration, even if the
customer seeks to exercise that right after having agreed to a
forum selection clause specifying a venue other than a
FINRA arbitration forum, would violate FINRA Rules 2268
and 12200.” Id. Nothing in this Opinion precludes FINRA
from sanctioning one of its members for attempting to avoid
its duty to arbitrate via contract. See FINRA Rule 12212
31
We agree with the Fourth Circuit that the question is
one of waiver, and that the forum-selection clauses did not
implicitly waive Reading’s right to FINRA arbitration. This
conclusion stems in part from our decision in Patten, where
we had to determine whether a broker-dealer agreement
containing a provision in which the parties consented to the
jurisdiction of the New Jersey courts implicitly waived the
customer’s right to arbitration under NASD’s compulsory
arbitration rule (i.e., the progenitor of Rule 12200).74 We
rejected such an expansive view of waiver by relying on two
well-established principles. First, we explained that a “party
signing a waiver must know what rights it is waiving.”75
Second, we invoked the strong federal policy, embodied in
the FAA, favoring arbitration whenever doubts arise as to
whether a dispute is arbitrable.76 Because the forum-
(permitting an arbitration panel to “sanction a party for failure
to comply with any provision of the Code”); FINRA IM-
12200 (providing that “[i]t may be deemed conduct
inconsistent with just and equitable principles of trade and a
violation of Rule 2010 for a member . . . to: (a) fail to submit
a dispute to arbitration under the Code as required by the
Code”); see also FINRA, Reg. Notice 16-25, at 5 (“FINRA
Rules. . . . are not default rules that may be overridden by
more specific or separate contractual terms without
consequences under FINRA rules.”).
74
Patten, 819 F.2d at 406-07 (characterizing the issue as
“whether a forum selection clause is a waiver of NASD
arbitration”). NASD is FINRA’s predecessor SRO.
75
Id. at 407.
76
Id. (quoting Moses H. Cone Mem’l Hosp. v. Mercury
Constr. Corp., 460 U.S. 1, 24-25 (1983)); see Ehleiter v.
32
selection clause in Patten was silent as to the issue of
arbitration, raising doubts about whether the parties’ had
waived arbitration and whether the dispute was arbitrable, we
held that it was insufficient to waive the customer’s right to
arbitrate under NASD rules.77
Although Patten involved a forum-selection clause
with permissive language,78 its reasoning leads us to the same
conclusion here: Reading did not waive its right to arbitrate
by agreeing to the broker-dealer agreements. As in Patten,
we begin by noting that any reference to arbitration is
“[c]onspicuously absent from” the forum-selection clauses.
Without a specific reference to arbitration, the forum-
selection clause requiring parties to litigate actions “arising
out of” the contract and related transactions lacks the
specificity required to advise Reading that it was waiving its
affirmative right to arbitrate under FINRA 12200.79 Indeed,
the Fourth Circuit stressed in Carilion Clinic that “[n]o word
even suggesting supersedence, waiver, or preclusion [of the
Grapetree Shores, Inc., 482 F.3d 207, 216 (3d Cir. 2007);
Gay, 511 F.3d at 394.
77
Id.; see Personal Sec. & Safety Sys. Inc. v. Motorola Inc.,
297 F.3d 388, 395 (5th Cir. 2002) (similar).
78
Patten, 819 F.2d at 406-07. The provision provided that
“the Company hereby consents and will submit to the
jurisdiction of the courts of the State of New Jersey and of
any federal court sitting in the State of New Jersey with
respect to controversies arising under this Agreement.” Id. at
407 n.3.
79
Id. at 407 (“A party signing a waiver must know what
rights it is waiving.”).
33
right to arbitrate] exists” in the forum-selection clause.80 As
we explained in Patten, had J.P. Morgan wanted Reading to
waive its right to arbitrate, it should “have made a reference
to arbitration” in either the waiver provision or forum-
selection provisions of the broker-dealer agreements.81
Finally, we are reluctant to find an implied waiver
here. Reading’s 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. By condoning
an implicit waiver of Reading’s regulatory right to arbitrate,
we would erode investors’ ability to use an efficient and cost-
effective means of resolving allegations of misconduct in the
brokerage industry and thus undermine FINRA’s ability to
regulate, oversee, and remedy any such misconduct.82 In so
holding, we split with some of our sister circuits, but begin
80
706 F.3d at 330.
81
See Patten, 819 F.2d at 406-07.
82
As FINRA has observed, enforcing purported contractual
waivers of the right to arbitrate under FINRA rules would
impermissibly permit “FINRA member firms to deny
investors the benefits of FINRA’s arbitration program, which
may, as a practical matter, foreclose customers from asserting
their claims, particularly small claims.” FINRA, Reg. Notice
16-25, at 4. And as amicus explains in its brief, if “brokerage
firms are allowed to selectively and unilaterally force certain
customers into court, the increased time and cost of going to
court will most certainly result in brokerage firms avoiding
otherwise meritorious claims.” PIABA Br. at 23.
34
the process of closing this contractual loophole to FINRA’s
compulsory arbitration rule.83
The District Court properly concluded that, under
FINRA Rule 12200, J.P. Morgan is required to arbitrate
Reading’s claims regarding the ARS offerings.84
83
Given this conclusion, we need not address whether an
explicit waiver of the right to arbitrate would be invalid and
unenforceable under Section 29(a) of the Exchange Act, as
amicus and Reading argue. See 15 U.S.C. § 78cc(a)
(providing that any contractual “provision binding any person
to waive compliance with any provision of this chapter or of
any rule or regulation thereunder, or of any rule of a self-
regulatory organization, shall be void” (emphasis added)); S.
REP. NO. 111-176, at 114 (2010) (amending the Act to ensure
“equal treatment for the rules of all SROs under Section
29(a)”); see also McMahon, 482 U.S. at 228-30; Gross, supra
note 19, at 388.
84
J.P. Morgan also argues that the District Court lacked
authority to compel arbitration because Section 4 of the FAA
limits the power of district courts “to order arbitration outside
of the district,” Econo-Car Intern., Inc. v. Antilles Car
Rentals, Inc., 499 F.2d 1391, 1394 (3d Cir. 1974); but FINRA
has not yet selected the location of the arbitration hearing.
J.A. 199. In fact, courts have read those geographical
limitations into the FAA in cases “where the arbitration
agreement contains a forum selection clause.” Merrill Lynch,
Pierce, Fenner & Smith, Inc. v. Lauer, 49 F.3d 323, 327 (7th
Cir. 1995); see Econo-Car Intern., Inc., 499 F.2d at 1394.
J.P. Morgan provides no support for the proposition that those
limitations apply here where the “arbitration agreement” at
issue is a regulatory rule, not a contract containing a forum-
35
CONCLUSION
For these reasons, we will affirm the District Court’s
order, declining to transfer Reading’s declaratory judgment
action and compelling J.P. Morgan to submit to FINRA
arbitration.
selection clause. Moreover, we have no reason to believe that
the District Court would compel the parties to arbitration
outside of the Eastern District of Pennsylvania. FINRA Rule
12213(a)(1) provides that the arbitration hearing generally
will be held at “the hearing location closest to the customer’s
residence at the time of the events giving rise to the
dispute”—i.e., FINRA District 9 in Philadelphia, PA. Given
the substantial likelihood that the hearing will be held within
the Eastern District of Pennsylvania, the District Court did
not exceed its authority by issuing an order that merely
“directed [the parties] to arbitrate their dispute under the
provisions of [the FINRA Arbitration Code].” J.A. 4.
36