Opinion

Alison Frankel

Can banks force clients to litigate, not arbitrate?

Alison Frankel
Apr 3, 2014 20:38 UTC

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.

Halliburton alert! New briefs argue Congress never endorsed Basic

Alison Frankel
Jan 7, 2014 20:47 UTC

Last February, when Chief Justice John Roberts and Justice Samuel Alito of the U.S. Supreme Court sided with the court’s liberal wing in Amgen v. Connecticut Retirement Plans, they joined an opinion that left intact the standard for certification of a class of securities fraud plaintiffs. Amgen, as you probably recall, had asked the court to impose a requirement that shareholders prove the materiality of supposed corporate misrepresentations in order to win class certification. The majority refused, in a decision written by Justice Ruth Ginsburg. Among other things, Justice Ginsburg said that if Congress had wanted to tinker with the Supreme Court’s 1988 precedent on securities class certification, Basic v. Levinson, it could have done so in 1995, when lawmakers passed the Private Securities Litigation Reform Act, or again in 1998, when the Securities Litigation Uniform Standards Act became law. Instead, Justice Ginsburg wrote in Amgen, “Congress rejected calls to undo the fraud-on-the-market presumption of classwide reliance endorsed in Basic.”

But is that really what Congress did in 1995? The answer to that question could have a big impact on the future of securities class actions.

The Amgen case, as you know, led directly to this term’s securities blockbuster: Halliburton v. Erica P. John Fund, which puts Basic’s presumption of shareholder reliance on supposed corporate misstatements – and thus the foundation of most securities fraud class actions – directly before the justices. Halliburton’s lawyers at Baker Botts filed their merits brief last week, urging the court to undo Basic as bad law based on misguided economic theory. On Monday, Halliburton’s amici joined in. They’re mostly the usual suspects: the U.S. Chamber of Commerce and other pro-business organizations; the Securities Industry and Financial Markets Association; the American Institute of Certified Public Accountants; the Washington Legal Foundation; and DRI – The Voice of the Defense Bar. Two different groups of law professors filed briefs, one a technical argument about the efficient-market theory underlying Basic and the other a scholarly condemnation of securities class action litigation.

Kiobel brief shows State/DOJ split over human rights litigation

Alison Frankel
Jun 15, 2012 04:00 UTC

When John Bellinger of Arnold & Porter was the legal adviser to the State Department in the administration of George W. Bush, the Justice Department filed about a dozen amicus briefs addressing the Alien Tort Statute, a 1789 law that has become a modern vehicle for international human rights litigation. Bellinger told me on Thursday that he signed every one. When foreign nationals use the ATS to bring cases in U.S. courts for conduct that took place overseas, foreign policy is implicated, and the State Department wants a voice. That’s why Bellinger believes it’s so significant that when the Justice Department filed its new amicus brief in the reformulated Kiobel v. Royal Dutch Petroleum case at the U.S. Supreme Court, State Department legal adviser Harold Koh did not sign it.

“That seemed to be a not-so-subtle message — more to the human rights community than the Supreme Court — that State did not agree with the Justice Department position,” said Bellinger, who blogged about the DOJ brief on Wednesday night at Lawfare. “The Obama administration was in a tight spot in this one.”

The DOJ brief, signed by Solicitor General Donald Verrilli, argues, tepidly, against the application of the Alien Tort Statute against Shell by Nigerian nationals who claim the oil company was complicit in state-sponsored torture and murder in their country. That’s a switch in sides for the government, which had supported the Nigerians in Kiobel‘s first trip to the Supreme Court, when the issue was whether corporations could be liable under the Alien Tort Statute. The Justice Department said they could, in an amicus brief that State Department adviser Koh signed.

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