If you are a customer of a big bank — let’s say a merchant unhappy about the fees you’re being charged to process credit card transactions — good luck trying to bring claims in federal court when you’re subject to an arbitration provision. As you probably recall, in last term’s opinion in American Express v. Italian Colors, the U.S. Supreme Court continued its genuflection at the altar of the Federal Arbitration Act, holding definitively that if you’ve signed an agreement requiring you to arbitrate your claims, you’re stuck with it even if you can’t afford to vindicate your statutory rights via individual arbitration.
But what if you’re a bank customer who wants to go to arbitration — and, in a weird role-reversal, the bank is insisting that you must instead bring a federal district court suit? Will courts show the same deference to arbitration when a plaintiff, rather than a defendant, is invoking the right to arbitrate and not litigate?
On Friday, the 2nd Circuit Court of Appeals will hear a rare tandem argument in two cases that present the question of whether bank clients have the right to arbitrate their claims even though they’ve signed contracts with forum selection clauses directing disputes to federal court. Believe it or not, the 2nd Circuit will be the third federal appellate court to answer this question, which has divided its predecessors. In January 2013, the 4th Circuit ruled that a UBS client may proceed to arbitration, but on Friday, the 9th Circuit held that a Goldman Sachs customer who agreed to a nearly identical forum selection clause must sue in federal court. To add to the confusion, the 9th Circuit panel was split, which led the majority to call the case “a close question.”
All of the appellate cases date back to the days when banks were hawking auction-rate securities as convenient instruments for clients who wanted to issue debt. Interest rates on the long-range, purported liquid securities would be periodically reset through an auction process, and banks told clients that they could hedge against a rise in rates through swap agreements. What they didn’t mention — at least according to clients — is that banks were artificially propping up the ARS market with their own bids on the securities. The whole wobbly structure collapsed in February 2008, and clients were marooned with debt carrying fast-rising interest rates that their swaps couldn’t offset.
Those debt issuer clients, to be clear, were different from bank brokerage customers who bought auction-rate securities under the misimpression that they were safe and liquid investments. Regulators made sure that banks bought back ARS from most of their brokerage customers. Other customers won great results in arbitrations before Financial Industry Regulatory Authority panels. (They fared less well in federal courts, where judges mostly ruled that banks were protected by website disclaimers about the ARS market that they’d posted after an investigation by the Securities and Exchange Commission in 2006.) Debt issuers, however, had a more subtle theory than investors in auction-rate securities, developed by the New Orleans firm Fishman Haygood Phelps Walmsley Willis & Swanson: They claimed that their financial advisers were responsible for the high interest rates they had to pay on bonds structured as ARS.