Case of the Day: New Jersey v. Merrill Lynch & Co.

It’s been a fairly slow week in judicial assistance, so I’ve reached a little outside the Letters Blogatory scope of coverage for today’s case of the day, New Jersey v. Merrill Lynch & Co. (3d Cir. 2011). The case illustrates a trap for the unwary in drafting forum selection clauses. In an earlier post, I dealt with another aspect of these clauses, namely, appointment of an agent for service of process as a way of simplifying service of process.

In the case of the day, New Jersey purchased $300 million in Merrill Lynch preferred stock in 2008. At Merrill Lynch’s request, the state converted the shares into common stock, provided that the terms of the conversion were at least as favorable as the terms of conversion being offered to other investors. New Jersey later sued Merrill Lynch in the New Jersey Superior Court, alleging that Merrill Lynch had converted another investor’s shares on more favorable terms. Merrill Lynch removed the case to the District of New Jersey.

The stock conversion agreement had a choice of forum provision that provided: “exclusive jurisdiction … shall lie in the appropriate courts of the State [of] New Jersey.” On the state’s motion to remand the case, the District Court, and later the Third Circuit, concluded that the parties had specifically selected the state courts, not the federal courts sitting in the state. Because a party may waive its right to remove by contract, the courts held that Merrill Lynch could not remove the case to federal court.

There is one interesting feature of this case that I’d like to highlight. The state’s complaint pleaded only state law causes of action (breach of contract, negligent misrepresentation, and breach of the covenant of good faith and fair dealing. The case was removable to federal court, if at all, only if it arose under federal law. In the notice of removal, Merrill Lynch asserted that the case was removable because “there are federal law issues under the Securities Exchange Act of 1934, including Sections 10(b) and Securities and Exchange Commission (“SEC”) Rule 10b-5 promulgated thereunder, embedded in certain of the state law claims pleaded in the Complaint.” This is interesting because the federal courts have exclusive jurisdiction of 10b-5 claims. We know that parties may effectively waive their right to have their 10b-5 claims heard in federal court by way of an arbitration agreement. Shearson/American Express v. McMahon, 482 U.S. 220 (1987). Question: Can parties similarly waive the exclusivity of federal jurisdiction in favor of a state court rather than in favor of an arbitral tribunal?

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