Gilman v. Wheat, First Securities, Inc.

WILNER, Judge. Appellant, Michael Gilman, had a brokerage account with appellee, Wheat, First Securities, Inc. He filed a class action complaint in the Circuit Court for Montgomery County charging Wheat with violations of Maryland securities laws, breach of fiduciary duty, breach of contract, and conversion. The court dismissed the complaint based on a forum-selection clause in the contracts governing the brokerage account, which required that all actions arising under those contracts be conducted in a Federal or State court in Richmond, Virginia. Gilman acknowledges the forum selection clause but contends that it should not be enforced because (1) his damages from the alleged misconduct of appellee are minuscule, (2) the only practical way he has of recovering his small loss is through a class action proceeding, and (3) such a proceeding is ³⁶⁴ not available to him in Federal court or in the Virginia State courts.

We find no error and shall therefore affirm. I. UNDERLYING FACTS Gilman is a Maryland resident. He is also an attorney and a member of the Virginia Bar and had previously been an instructor at a Virginia law school. Wheat is a securities brokerage firm.

It is a Virginia corporation, headquartered in Richmond, but has offices in a number of States, including Maryland. Gilman opened an account with Wheat at the latter’s branch office in Bethesda, Maryland, in April, 1992. Two Securities Account Agreements were signed—one pertaining to a cash account, the other governing a margin account. Both contracts were signed by Gilman at Wheat’s Bethesda office; they were then sent to Richmond, where they were accepted and signed by Wheat.

Each contract contained a choice-of-law clause stating that the agreement and all transactions made in the account were to be governed by Virginia law. More importantly, for purposes of this appeal, each agreement contained a prominently displayed dispute resolution provision, printed in capital letters. Under that provision, the parties agreed that all controversies arising between them concerning any transaction or concerning the construction, performance, or breach of the contract were to be determined by arbitration. Indeed, as part of that provision the parties acknowledged that they were “waiving their right to seek remedies in court, including the right to jury trial.” The arbitration was to take place, at Gilman’s election, before the New York Stock Exchange, Inc., the National Association of Security Dealers, Inc., or any other national securities exchange forum of which Wheat was a member and on which a transaction giving rise to the claim took place.

The provision went on to set forth some of the preliminary procedures for the arbitration and ended with this statement: “ANY JUDICIAL PROCEEDING RELATING TO THE ARBITRATION OR TO THIS AGREEMENT SHALL BE ³⁶⁵ CONDUCTED IN A STATE OR FEDERAL COURT IN RICHMOND, VIRGINIA AND I AGREE (A) TO SUBMIT TO THE JURISDICTION OF SUCH COURTS (B) THAT SUCH COURTS CONSTITUTE A CONVENIENT FORUM AND (C) THAT PROCESS MAY BE SERVED BY CERTIFIED MAIL RETURN RECEIPT REQUESTED AT MY LAST ADDRESS KNOWN TO YOU.” The record indicates that this provision is standard in Wheat’s securities account agreements and is included in the agreements with each member of the class Gilman attempted to create. The record also indicates that all of Gilman’s orders for the purchase or sale of securities on the account were executed by Wheat’s trading desk in Richmond and that confirmations of those transactions were mailed to Gilman from Richmond. Records of the transactions are maintained at both the Richmond and Bethesda offices. In May, 1994, Gilman filed a class action lawsuit against Wheat in the Supreme Court of New York, complaining about what has become known in the industry as order flow payments, i.e., the practice of a broker routing customer buy and sell orders through a particular dealer, who compensates the broker for that business.

The essence of the complaint, as characterized by Gilman, was that “in return for cash payments and other inducements, Wheat directed its customer orders, including those of the plaintiff, to market makers who paid Wheat ... kickbacks.” The most common of those “kickbacks,” according to Gilman, was the payment of two cents a share by the dealer to Wheat in return for Wheat’s executing the customer’s order with that dealer. He complained that Wheat kept the two cents and failed to disclose these “secret profits,” although he acknowledged that Wheat did disclose, on the confirmation notices sent after the transaction, that it “receives remuneration on the transaction and that the source and amount of such remuneration would be disclosed upon request.” The class asserted by Gilman consisted of “all persons who maintain, or have maintained [since January 1, 1990] broker ³⁶⁶ age accounts at Wheat and for whom Wheat executed transactions in securities with Wheat receiving kickbacks from the market makers with whom Wheat executed those transactions.” He averred that there were several thousand such persons. Alleging that a broker engaged in such activity-forfeits its right to compensation, Gilman sought not just the allegedly unlawful secret profits but the full amount of all commissions paid by the class members, along with punitive damages and attorneys’ fees. Seven causes of action were pled: breach of a fiduciary relationship, commercial bribery in violation of § 180.05 of the New York Penal Law, fraud or deception in violation of art. 23-A of the New York General Business Law, breach of contract, common law fraud, conversion, and breach of fiduciary duty.

On November 30,1994, the court dismissed the complaint on the ground that New York was an inconvenient forum. Without definitively resolving the validity of the forum-selection clause (much less the exclusivity of the arbitration provision) the court simply held that “the action lacks any connection to the New York forum chosen by plaintiff.” Although an appeal was noted, it was not perfected. In March, 1995, Gilman filed a similar class action lawsuit in the Circuit Court for Montgomery County. In contrast to the New York action, in which jurisdiction and venue were founded principally upon Wheat being a member of the New York Stock Exchange, in this action, he stressed the Maryland connections—his being a resident of the State, Wheat having an office and doing business here, the account being maintained in Bethesda, and the orders being placed at that office.

The factual averments, however, were nearly identical to those stated in the New York action. Five causes were pled—two for fraud, in violation of Maryland Code, § 11-301 of the Corporations and Associations article, and one each for breach of fiduciary duty, breach of contract, and conversion. He sought as relief a declaratory judgment that Wheat had engaged in fraudulent and deceptive activities, an injunction to prohibit it from continuing to do so, and damages “in an amount as yet undetermined.” In contrast to the relief sought ³⁶⁷ in the New York case, he did not seek the return of all commissions paid by the class members. Wheat responded to the Maryland complaint by having it removed to the U.S. District Court, alleging both Federal question and diversity jurisdiction.

That court found neither and therefore remanded the case back to the circuit court. Gilman v. Wheat, First Securities, Inc., 896 F.Supp. 507 (D.Md.1995). The finding of no diversity jurisdiction was based, not on the residences of the parties, but on Gilman’s failure to state a claim for at least $50,000 in damages. In that regard, and in clear contrast to both the relief sought in New York and the information report he filed in the circuit court pursuant to Maryland Rule 2-111 (a), he did “not dispute that the actual damages claims are for one to two cents per share traded, amounting to a total of a few dollars per plaintiff.” Id. at 510 . 1 Judge Motz concluded that, even in a class action, the requisite amount in controversy “cannot be met by aggregating the separate claims of individual class plaintiffs.” Id. at 509 .

Nor could the $50,000 threshold be met by the cost of injunctive relief to Wheat, as that cost also would be insignificant as to any one plaintiff. Federal question jurisdiction hinged on Wheat’s assertion of Federal preemption, which Judge Motz rejected. When the case returned to the circuit court, Wheat moved to dismiss the complaint on the grounds (1) of improper venue, based on the forum-selection clause in the two contracts, and (2) res judicata, based on the New York decision. With respect to the forum-selection clause, Wheat argued that the clause was valid, that there was no fraud or duress in its inclusion, that Gilman, as a Virginia lawyer, was aware of the clause and what it required, that Gilman did not have to deal with Wheat if he objected to that provision, and that the Virginia courts will afford him an appropriate remedy if he ³⁶⁸ proves his claim.

The only ground for ignoring the clause asserted by Gilman was that Virginia did not have a class action procedure, which Wheat urged was an insufficient basis for not enforcing the clause. Gilman argued in response that the class action procedure is in the nature of a remedy, one that is unavailable in Virginia. 2 The damages suffered by any one plaintiff, he claimed, were essentially minuscule—a few dollars—and that “[i]f he is going to recover $10.00, the only way to do it is through a class action.” Wheat rejoined that Virginia has a procedure for resolving small claims and that it would not be necessary for Gilman even to have a lawyer in small claims court. The court granted Wheat’s motion, based on the forum-selection clause. It concluded that “parties ought to be bound by their agreements unless there is some fairly compelling reason that they shouldn’t,” and it did not regard the lack of a class action procedure in Virginia as such a compelling reason.

Gilman appealed, arguing that (1) the forum-selection clause is “an inadequate basis for dismissal because it frustrates the public policy embodied in class actions and insulates the defendant from responsibility for its misconduct,” and (2) Wheat had not sustained “its heavy burden of demonstrating that dismissal for improper venue is appropriate where jurisdiction is not lacking.” We granted certiorari before proceedings in the Court of Special Appeals.

II

DISCUSSION A. Order Flow Payments The issue before us is not the legality of order flow payments but the enforceability of the forum-selection clause. ³⁶⁹ Nonetheless, at least for context, it is helpful to have some understanding of what the underlying case is about. As we indicated, order flow payments are those received by a broker for routing customer buy and sell orders through a particular wholesale dealer or other market maker. Relying in part on a public comment letter sent to the Securities and Exchange Commission by the New York Stock Exchange in December, 1993, Gilman obviously believes that the practice is heinous and unlawful. The history of the practice and the limited regulation of it by the Securities and Exchange Commission were described in some detail by the New York Court of Appeals in Guice v. Charles Schwab & Co., Inc., 89 N.Y.2d 31 , 651 N.Y.S.2d 352 , 674 N.E.2d 282 (1996), cert. denied, -U.S.-, 117 S.Ct. 1250 , 137 L.Ed.2d 331 (1997).

The court noted that the practice originated years ago in the over-the-counter (OTC) market but that, with advances in computer technology making possible an entirely automated market system independent of the floor of any stock exchange, and automated trading systems permitting accelerated execution of orders, OTC market makers and members of regional exchanges could compete for orders in listed stocks with the New York and American Stock Exchanges. Thus, it observed, “routing orders in listed stocks to OTC market makers and regional exchange specialists has more recently become a major source of order flow payments to retail broker-dealers.” Id. at 354, 674 N.E.2d at 284 (footnote omitted). The Guice Court recounted that the SEC had monitored and studied the practice for over a decade and, after conducting a round table discussion in 1989 and considering public comment to a proposed rule change in 1993, the Commission decided not to prohibit the practice but rather to require additional disclosure of it. At 287-88, the Court noted that, in adopting its final rule for regulating order flow payments in 1994, “[the Commission] explained that it rejected elimination of order flow payments entirely because the practice did not necessarily violate a broker-dealer’s best execution obli ³⁷⁰ gation, and that the practice benefited the securities industry in lowering execution costs, in facilitating technological advances in retail customer order handling practices and in enhancing competition among broker-dealers and the various exchange and nonexchange securities markets and, thus, also worked to the advantage of investors....

The SEC also noted the serious enforcement problems that elimination of the practice would entail and the drastic impact that an outright ban would have on the securities industry____” In its 1993 proposed amendment to Rule 10b-10, the SEC would have required brokers to disclose on their confirmation statements the specific dollar amount of any order flow payment received for that transaction, but it retreated from that position in the final 1994 rule, being “apprehensive that mandatory disclosure of specific monetary receipts might be ‘unworkable’ ... and would, at the least, impose ‘an extreme burden’ upon broker-dealers ‘to determine the amount of order flow received for each order in time for a confirmation’ and would entail expenses disproportionately high in relation to the potential benefits to customers.... ” Id. at 358, 674 N.E.2d at 288 (quoting in part from Payment For Order Flow, Securities and Exchange Release No. 34-34902 [Oct. 27, 1994], reprinted in 59 Fed.Reg. 55006, 55010 n. 39). See also Orman v. Charles Schwab & Company, Inc., 285 Ill.App.3d 937 , 221 Ill.Dec. 720, 721 , 676 N.E.2d 241, 242 (1996), noting as well that order flow payments are “a recognized and widespread practice in the industry and part of the competitive market.” B. The Forum-Selection Clause There have been a plethora of cases involving the validity and enforceability of forum-selection clauses. This Court has considered the issue, directly, only once, in Stockley v. Thomas, 89 Md. 663 , 43 A. 766 (1899). The action there was to have a Maryland receiver appointed for an insolvent Pennsylvania insurance company that was already under receivership in Pennsylvania.

The plaintiffs horse was insured by the company, and, when the horse had to be destroyed and the company ³⁷¹ did not pay the claim, the plaintiff succeeded in having a Maryland court appoint a Maryland receiver to take charge of the company’s assets in this State, to collect debts due the company within the State, and to pay the claims of Maryland creditors. The Pennsylvania receiver appealed. This Court reversed. Our first concern was with the fact that there was no practical way in which a Maryland receiver could carry out his duties.

The only source of funds for the payment of claims under the policy was assessments made against policyholders, and a Maryland receiver would have no ability to make such assessments. All of the information that would be necessary to make the assessments was in Pennsylvania. We noted, further, that the making of assessments would require the court to assume the management of the internal affairs of a foreign corporation, which, we held, was beyond its jurisdiction. Finally, we noted that the policy upon which the claim was based required that any action brought against the company be filed in Philadelphia, which was where the records were kept, the company was headquartered, and the policies were issued.

For all of those reasons, “and especially in the absence of any allegation to show that the Court selected by the agreement of the parties is not able and willing to afford full relief,” we found “no good reason” why the complaint “should, even if it could, be entertained by a Court of this State.” Id. at 668-69 , 43 A. at 768 . At least since 1972, most of the discussion regarding the enforceability of forum-selection clauses has centered around two cases decided by the United States Supreme Court, and we shall therefore commence our discussion with those cases. In The Bremen v. Zapata Off-Shore Co., 407 U.S. 1 , 92 S.Ct. 1907 , 32 L.Ed.2d 513 (1972), the Court held enforceable a forum-selection clause in an international towage contract. The agreement called for a German company, Unterweser, to tow an oceangoing drilling rig owned by an American company, Zapata, from Louisiana to Ravenna, Italy.

The contract contained one clause exculpating Unterweser from liability for damages to the rig and another providing that “[a]ny dispute ³⁷² arising must be treated before the London Court of Justice.” While the rig was under tow in international waters in the Gulf of Mexico, a storm arose and the rig was damaged. At Zapata’s direction, Unterweser’s tug, the Bremen, towed the rig to Tampa, Florida, the nearest port of refuge. 407 U.S. at 2-3 , 92 S.Ct. at 1909-10 , 32 L.Ed.2d at 516-17 . In derogation of the forum-selection clause, Zapata filed suit in Federal court in Tampa, seeking in personam damages against Unterweser and in rem damages against the Bremen. Unterweser filed its own action, for breach of the towing contract, in the High Court of Justice in London and moved to dismiss Zapata’s American action on both jurisdictional and forum non conveniens grounds.

Zapata moved to dismiss the English action. The English court acted first, rejecting Zapata’s jurisdictional challenge and holding that the forum-selection clause conferred jurisdiction. The District Court eventually denied Unterweser’s motion to dismiss. Following the ruling in Carbon Black Export, Inc. v. The Monrosa, 254 F.2d 297, 300-01 (5th Cir.1958), cert. dismissed, 359 U.S. 180 , 79 S.Ct. 710 , 3 L.Ed.2d 723 (1959), that “agreements in advance of controversy whose object is to oust the jurisdiction of the courts are contrary to public policy and will not be enforced[,]” the court gave little or no weight to the forum-selection clause.

It then decided, under normal forum non conveniens principles, that the plaintiffs choice of forum should not be disturbed unless the balance was strongly in favor of the defendant and that such was not the case. A divided Court of Appeals for the Fifth Circuit affirmed, noting, among other things, that the casualty occurred in close proximity to the District Court, Zapata was an American citizen, England had no interest in or contact with the controversy, other than the forum-selection clause, and that England would enforce the exculpation clause which, under American law, was unenforceable as being against public policy. In re Unterweser Reederei, Gmbh, 428 F.2d 888 (5th Cir.1970), aff'd en banc, 446 F.2d 907 (5th Cir.1971). ³⁷³ The Supreme Court reversed. Acknowledging that forum-selection clauses had historically not been favored by American courts and had often been declared unenforceable as being against public policy, the Court concluded that the better view was that such clauses “should be enforced unless enforcement is shown by the resisting party to be ‘unreasonable’ under the circumstances.” 407 U.S. at 10 , 92 S.Ct. at 1913 , 32 L.Ed.2d at 520 .

That view, it said, was simply “the other side” of the proposition recognized in National Equipment Rental, Ltd. v. Szukhent, 375 U.S. 311, 315 , 84 S.Ct. 411, 414 , 11 L.Ed.2d 354, 357 (1964), that “parties to a contract may agree in advance to submit to the jurisdiction of a given court,” that it was substantially followed in other common law countries, that it was the view adopted by the Restatement (Second) of Conflict of Laws, 3 that it was in accord with “ancient precepts of freedom of contract,” and that it reflected an appreciation of the “expanding horizons of American contractors who seek business in all parts of the world.” 407 U.S. at 11 , 92 S.Ct. at 1914 , 32 L.Ed.2d at 521 . The Court dismissed the argument that forum-selection clauses are improper because they tend to oust a court of jurisdiction as “hardly more than a vestigial legal fiction.” Id. at 12 , 92 S.Ct. at 1914 , 32 L.Ed.2d at 521 . The clause did not divest the American court of jurisdiction but rather put the question of whether the court “should have exercised its jurisdiction to do more than give effect to the legitimate expectations of the parties, manifested in their freely negotiated agreement, by specifically enforcing the forum clause.” Id., 407 U.S. at 12 , 92 S.Ct. at 1914 , 32 L.Ed.2d at 521-22 . In light of current commercial realities and expanding international trade, the Court concluded that “the forum clause should control absent a strong showing that it should be set aside” and that the burden was on Zapata to show clearly “that