Reading Health System v. Bear Stearns Co Inc
900 F.3d 87
3rd Cir.
2018

Background

  • Reading Health System (Pennsylvania) issued >$500M in auction rate securities (ARS) across four offerings; J.P. Morgan (formerly Bear Stearns) acted as underwriter/broker-dealer and executed separate broker-dealer agreements for each offering.
  • The 2005 and 2007 broker-dealer agreements contained forum-selection clauses requiring that “all actions and proceedings arising out of” the agreements or related transactions be brought in the Southern District of New York; the 2001 and 2002 agreements did not.
  • After the ARS market collapsed, Reading filed state-law claims with FINRA and demanded arbitration under FINRA Rule 12200; J.P. Morgan refused, invoking the forum-selection clauses as a waiver of Reading’s arbitration right.
  • Reading sued in the Eastern District of Pennsylvania for a declaratory judgment to compel FINRA arbitration; J.P. Morgan moved to transfer to SDNY and sought to enjoin the FINRA arbitration.
  • The district court denied transfer and granted Reading’s motion to compel arbitration; the Third Circuit affirmed, holding the declaratory action did not fall within the forum-selection clause’s scope and the clauses did not waive Reading’s Rule 12200 arbitration right.

Issues

Issue Plaintiff's Argument (Reading) Defendant's Argument (J.P. Morgan) Held
Whether district court must transfer a declaratory action to the forum chosen in a contract under Atlantic Marine even if the court finds the clause does not cover the declaratory action Atlantic Marine applies only if the dispute falls within the clause; here the declaratory action is outside the clause so no forced transfer Atlantic Marine requires enforcing forum-selection clauses by transfer unless extraordinary circumstances exist, regardless of scope analysis Court: Atlantic Marine applies only when the claim falls within a valid forum-selection clause; if not, ordinary §1404(a) analysis governs → no mandatory transfer
Whether Reading’s declaratory judgment to compel FINRA arbitration "arises out of" the broker‑dealer agreements (scope of clause) The declaratory claim arises from FINRA Rule 12200 (a regulatory right), not from the broker-dealer agreements, so it is outside the clause The declaratory action references the agreements and thus arises out of them and falls within the clause’s scope Court: “arising out of” means originating from the contract; Reading’s petition originates from FINRA Rule 12200, not the contracts → clause does not cover the declaratory action
Whether the forum-selection clauses waived Reading’s right to FINRA arbitration under Rule 12200 The clauses do not mention arbitration and lack the specificity necessary to waive a customer’s regulatory right to compulsory FINRA arbitration The clauses’ broad language ("all actions and proceedings") supersedes or displaces Rule 12200 and thus bars FINRA arbitration Court: Waiver requires clear, specific agreement; these clauses are silent on arbitration and therefore do not waive Reading’s Rule 12200 right; J.P. Morgan must arbitrate
Which forum decides arbitrability (venue sequencing) Threshold venue/transfer issues can and should be decided before arbitrability; district court properly resolved transfer first Transfer should be enforced first if clause covers the dispute; otherwise venue question remains for district court Court: District court properly resolved transfer/venue first; sequence was permissible and preferable

Key Cases Cited

  • Atl. Marine Constr. Co. v. U.S. Dist. Ct., 571 U.S. 49 (2013) (forum‑selection clause transfer framework; preselected forum generally favored absent extraordinary circumstances)
  • Patten Sec. Corp. v. Diamond Greyhound & Genetics, Inc., 819 F.2d 400 (3d Cir. 1987) (forum clause silent on arbitration insufficient to demonstrate waiver of NASD compulsory arbitration)
  • Golden Empire Sch. Fin. Auth. v. Goldman, Sachs & Co., 764 F.3d 210 (2d Cir. 2014) (contrasting view: forum‑selection clause can supersede FINRA Rule 12200)
  • Carilion Clinic v. UBS Sec., 706 F.3d 319 (4th Cir. 2013) (forum clause that is silent on arbitration does not waive FINRA compulsory arbitration)
  • Phillips v. Audio Active Ltd., 494 F.3d 378 (2d Cir. 2007) (interpretation of “arising out of” as narrower than broader relational phrases)
  • John Wyeth & Bro. Ltd. v. CIGNA Int’l Corp., 119 F.3d 1070 (3d Cir. 1997) (forum‑selection clause interpretation depends on the clause’s specific language)
  • Sinochem Int’l Co. v. Malaysia Int’l Shipping Corp., 549 U.S. 422 (2007) (district courts may resolve threshold forum/venue issues before reaching merits or jurisdiction)
  • Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1 (1983) (strong federal policy favoring arbitration when arbitrability is in doubt)
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