11-235-cv

UBS Fin. Servs. Inc. v. West Virginia Univ. Hosps., Inc.

*

 Chief Judge Loretta A. Preska of United States District Court for the Southern District

of New York, sitting by designation.

1

1

2 UNITED STATES COURT OF APPEALS

3 FOR THE SECOND CIRCUIT

4

5

6 August Term, 2010

7

8 (Argued: April 14, 2011 Decided: September 22, 2011)

9

10

11 Docket No. 11-235-cv

12

13

14 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -X

15

16 UBS FINANCIAL SERVICES, INC., UBS SECURITIES LLC,

17

18 Plaintiffs-Appellants,

19

20 v.

21

22 WEST VIRGINIA UNIVERSITY HOSPITALS, INC., WEST VIRGINIA UNIVERSITY

23 HOSPITALS-EAST, INC., UNITED HOSPITAL CENTER, INC., CITY HOSPITAL

24 FOUNDATION, INC., WEST VIRGINIA UNITED HEALTH SYSTEM, INC.,

25

26 Defendants-Appellees.

27

28 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - X

29

30

Before: RAGGI and LOHIER, Circuit Judges, and PRESKA, Chief District Judge.

* 31

32

33 UBS Financial Services, Inc. and UBS Securities LLC (collectively, “UBS”) appeal the

34 denial of their motion for a preliminary injunction enjoining the defendants from proceeding

35 with an arbitration before the Financial Industry Regulatory Authority (“FINRA”), and

36 alternatively requiring that the arbitration proceed in New York County. In the arbitration, the

37 defendants seek damages for UBS’s alleged fraud in connection with the defendants’ issuances

38 of auction rate securities. The District Court for the Southern District of New York (Marrero, J.)
2

1 denied the requested injunction, held that a forum selection clause in one of the agreements

2 between the parties was unenforceable because it conflicts with FINRA’s rules, and ordered that

3 the arbitration proceed in West Virginia. We hold that the defendants are entitled to arbitration

4 because they became UBS’s “customer” under FINRA’s rules when they undertook to purchase

5 auction services from UBS. We also conclude that the enforceability of the forum selection

6 clause is a procedural issue for FINRA arbitrators to address and that the District Court lacked

7 jurisdiction to resolve it. 

8

9 AFFIRMED in part and VACATED and REMANDED in part.

10

11 ANDREW J. CERESNEY, Debevoise & Plimpton LLP,

12 New York, NY (Jeremy Feigelson, on the brief), for

13 Plaintiffs-Appellants.

14

15 JAMES R. SWANSON, Fishman Haygood Phelps

16 Walmsley Willis & Swanson, LLP, New Orleans,

17 LA (Joseph C. Peiffer; Athanasios Basdekis, Bailey

18 & Glasser, LLP, Charleston, WV, on the brief), for

19 Defendants-Appellees.

20

21 Jenice L. Malecki, Malecki Law, New York, NY

22 (Braden W. Sparks, Dallas, TX; Lisa A. Catalano,

23 St. John’s University School of Law, Jamaica, NY;

24 Robert C. Port, Cohen Goldstein Port & Gottlieb,

25 LLP, on the brief), for Amicus Curiae The Public

26 Investors Arbitration Bar Association. 

27

28 Robert J. Giuffra, Jr., Sullivan & Cromwell LLP,

29 New York, NY (Brent J. McIntosh; Ira D.

30 Hammerman, Kevin Carroll, The Securities

31 Industry and Financial Markets Association,

32 Washington, DC, on the brief), for Amicus Curiae

33 The Securities Industry and Financial Markets

34 Association.

35

36

37 LOHIER, Circuit Judge:

38

39 Plaintiff-Appellant UBS Financial Services, Inc. (“UBS”) appeals from a judgment of the

40 United States District Court for the Southern District of New York (Marrero, J.) dismissing its

41 action to enjoin the arbitration of claims filed by Defendant-Appellee West Virginia University
1

 In addition to UBS Financial Services, Inc., UBS Securities LLC is also an Appellant

and was a Plaintiff in the District Court. Defendants-Appellees also include West Virginia

University Hospitals-East, Inc., United Hospital Center, Inc., City Hospital Foundation, Inc., and

West Virginia United Health System, Inc. The individual corporate identity of the Appellants

and Appellees does not affect our analysis of the issues presented in this appeal. For

convenience, we refer to the Appellants collectively as “UBS” and to the Appellees collectively

as “WVUH.”

3

Hospitals, Inc. (“WVUH”)1 1 before the Financial Industry Regulatory Authority, Inc. (“FINRA”)

2 and declining to enjoin WVUH from proceeding with any action outside New York County

3 pursuant to an agreement between the parties purportedly selecting New York as the applicable

4 forum. We conclude, as a matter of law, that WVUH was UBS’s “customer” under FINRA’s

5 arbitration rules and that WVUH’s claims relating to its agreement to purchase UBS’s auction

6 services arise from its business dealings with UBS. We therefore affirm the District Court’s

7 judgment dismissing UBS’s claims and affirm its order denying UBS’s motion to enjoin

8 arbitration. We further conclude that the enforceability of the forum selection clause at issue is a

9 procedural question for FINRA arbitrators, not the courts, to decide in the first instance. We

10 therefore vacate the District Court’s order denying UBS’s motion to enjoin WVUH from

11 proceeding with any action outside New York County, and we remand with instructions to the

12 District Court to dismiss that motion for lack of subject matter jurisdiction. 

13 BACKGROUND

14 The relevant facts are limited and not in dispute. UBS is a corporation engaged in a

15 range of finance-based businesses. In particular, it has underwritten municipal bonds and similar

16 securities and served as a broker-dealer responsible for facilitating auctions for certain auction

17 rate securities (“ARS”) in the form of auction rate certificates. At all relevant times, UBS was a

18 FINRA member subject to FINRA’s Code of Arbitration Procedure for Customer Disputes (the
2

 More specifically, in the type of auctions used for WVUH’s bonds, purchase orders

were filled beginning with the lowest interest rate bid until all bonds offered for sale were

matched with purchase orders. The interest rate at which the final order was filled then applied

to all of the bonds until the next auction occurred. Insufficient demand for all the bonds offered

for sale, as occurred with WVUH’s bonds beginning in 2008, resulted in the interest rate

resetting to a “penalty” or “maximum” rate until the next auction. 

4

1 “FINRA Code” or the “Code”). WVUH is a not-for-profit health consortium that has issued

2 bonds to finance capital improvements and refinance existing debt. 

3 In three separate offerings in 2003, 2005, and 2006, WVUH issued a total of $329

4 million of bonds, a significant portion of which were, at UBS’s suggestion, structured as ARS

5 and issued in the form of auction rate certificates, which are floating-rate debt securities with

6 long-term maturities. The offering documents associated with the issuances provided that the

7 interest rates on the bonds would be set through periodic Dutch auctions, in which buyers would

8 submit orders specifying the number of bonds they wished to purchase and the maximum interest

9 rate they were willing to pay. As we recently explained:

10 ARS are long-term bonds and stocks whose interest rates or dividend

11 yields are periodically reset through auction. At each auction,

12 holders and buyers of the securities specify the minimum interest rate

13 at which they want to hold or buy. If buy/hold orders meet or exceed

14 sell orders, the auction succeeds. If supply exceeds demand,

15 however, the auction fails and the issuer is forced to pay a higher rate

16 of interest in order to penalize it and to increase investor demand.

17

18 Ashland Inc. v. Morgan Stanley & Co., --- F.3d ----, 2011 WL 3190448, at *1 (2d Cir. July 28,

2011).2 19 At UBS’s recommendation, WVUH entered into derivative transactions in the form of

20 swap agreements, which were intended to create a synthetic fixed rate of interest payments for a

21 portion of the bonds and thereby protect WVUH against high interest rates.

22 For each offering, UBS served as both the lead underwriter and the main broker-dealer
5

1 responsible for facilitating the Dutch auctions in which WVUH’s bonds were resold and their

2 interest rates set. To establish the parties’ rights and obligations in both contexts, the parties

3 executed a pair of contracts for each of the three offerings: first, a broker-dealer agreement

4 explaining UBS’s duties in its capacity as a broker-dealer, and second, a purchase contract

5 establishing the underwriter/issuer relationship and pursuant to which WVUH’s bonds, termed

6 “auction rate certificates,” were sold to UBS. Each year, the same representatives of UBS and

7 WVUH executed both the broker-dealer and purchase agreements, and the agreements were

8 executed at nearly the same time. For the 2003 and 2005 offerings, the broker-dealer agreements

9 were executed over three weeks prior to the purchase agreements. The purchase and broker10 dealer agreements for the 2006 offering were executed within two days, on June 6, 2006 and

11 June 8, 2006, respectively. 

12 As the underwriter, UBS agreed to purchase the auction rate securities outright from

13 WVUH at a discounted price and resell a substantial portion of them to UBS’s customers and

14 other dealers. UBS profited by exploiting the difference between the discounted price at which it

15 purchased the bonds from WVUH and the price at which it resold them to the market. As the

16 broker-dealer, UBS facilitated the auctions that determined the interest payable on the same

17 bonds that it underwrote – for example, by soliciting and processing purchase and sale orders. In

18 a provision entitled either “Compensation” or “Broker-Dealer Fee” that appears in each of the

19 broker-dealer agreements in 2003, 2005, and 2006, WVUH agreed to pay UBS a substantial fee

20 equal to either (1) 0.25 percent of the principal amount of bonds held or purchased pursuant to

21 orders submitted for a particular auction, or (2) if no auction took place on a particular auction

22 date, 0.25 percent of the principal amount of bonds held by holders through UBS, prorated to
6

1 reflect the number of days in the applicable auction period, to compensate UBS for facilitating

2 the auctions. The same provision in all three broker-dealer agreements added that “the fee for

3 the [auction rate certificates] shall be paid by [WVUH] and represents compensation for the

4 services of [the] Broker-Dealer [UBS] in facilitating Auctions for the benefit of the beneficial

5 owners of the [auction rate certificates].” 

6 Although the broker-dealer agreements for the 2003 and 2005 issuances do not contain a

7 forum selection clause, the 2006 broker-dealer agreement provides the following:

8 The parties agree that all actions and proceedings arising out of this

9 Broker-Dealer Agreement and any of the transactions contemplated

10 hereby shall be brought in the County of New York and, in

11 connection with any such action or proceeding, submit to the

12 jurisdiction of, and venue in, such County.

13

14 J.A. 1036.

15 In February 2008, the ARS market collapsed, and the auctions for WVUH’s bonds

16 promptly failed. Thereafter, the swap agreements UBS had recommended failed to shield

17 WVUH from high interest rates, forcing WVUH to pay significantly higher rates on the bonds

18 until October 2008, when it refinanced its payments. 

19 On February 12, 2010, WVUH initiated the FINRA arbitration that is the subject of this

20 appeal by filing an arbitration Statement of Claim against UBS under Rule 12200 of the FINRA

21 Code. Among other claims, WVUH alleged that UBS violated the Securities Exchange Act of

22 1934 and the Uniform Securities Act by advising WVUH to issue ARS while withholding

23 critical information about the ARS market and UBS’s role in it. The Statement of Claim also

24 alleged that UBS fraudulently induced WVUH to purchase auction services, again by

25 withholding critical information about the ARS market and UBS’s role. For example, WVUH
7

1 claimed that UBS failed to disclose its practice of placing support bids in the Dutch auctions for

2 ARS it underwrote (including WVUH’s ARS), the significance of that support to the success of

3 the auctions, and that the auctions for WVUH’s bonds would fail as soon as UBS stopped

4 submitting support bids. In addition to the substantive claims, WVUH alleged that FINRA had

5 jurisdiction over the claims because WVUH was a “customer[] of [UBS] and this dispute [arose]

6 from the business activities of [UBS], including but not limited to underwriting and broker7 dealing.” J.A.1065.

8 In May 2010, UBS filed this action in district court seeking a declaration that it had not

9 violated any legal duty to WVUH and owed it no damages or other relief. With respect to both

10 the bond issuances it underwrote and the auctions it agreed to facilitate, UBS asserted that

11 WVUH was not its “customer” entitled to arbitration under FINRA Rule 12200. It moved for a

12 preliminary injunction to halt the pending FINRA arbitration, or at least prohibit it from

13 proceeding outside New York County in accordance with the forum selection clause in the 2006

14 broker-dealer agreement. Both parties submitted limited documentary evidence concerning the

15 bond offerings and the parties’ business dealings, including the underwriting agreements and the

16 broker-dealer agreements between the parties from 2003 through 2006, none of which contains

17 an arbitration clause or refers to the FINRA Code. For its part, WVUH relied principally on two

18 declarations submitted by the Chief Financial Officer (“CFO”) of United Health Center, Inc. and

19 the CFO of West Virginia University Hospitals, Inc. Both declarations stated that UBS advised

20 WVUH on the appropriate bond-issuance structure, facilitated the auctions at which the bonds’

21 interest rates were set, and “performed various other tasks as WVUH’s advisor, partner, agent,

22 and fiduciary” in connection with the issuances. J.A. 1174.
8

1 On January 4, 2011, the District Court denied UBS’s motion for a preliminary injunction. 

2 UBS Fin. Servs., Inc. v. W. Va. Univ. Hosps., Inc., 760 F. Supp. 2d 373 (S.D.N.Y. 2011). 

3 Although it determined that UBS would suffer irreparable harm if it were “‘forced to expend

4 time and resources arbitrating an issue that is not arbitrable,’” id. at 377 (quoting UBS Sec. LLC

5 v. Voegeli, 684 F.Supp.2d 351, 355 (S.D.N.Y. 2010)), the District Court concluded that UBS

6 had not demonstrated a likelihood of success on the merits or serious questions going to the

7 merits. With respect to whether WVUH became UBS’s customer, the court concluded that the

8 existence of an issuer-underwriter relationship between WVUH and UBS sufficed to establish

9 WVUH’s status as UBS’s customer under FINRA’s rules. Relying on Patten Securities Corp. v.

10 Diamond Greyhound & Genetics, Inc., 819 F.2d 400 (3d Cir. 1987), and J.P. Morgan Securities

11 Inc. v. Louisiana Citizens Property Insurance Corp., 712 F. Supp. 2d 70 (S.D.N.Y. 2010), the

12 District Court held that “FINRA intended for an issuer to be a customer of an underwriter.” 760

13 F. Supp. 2d at 378.

14 The District Court then turned to the 2006 forum selection clause and ruled that it

15 conflicted with FINRA Rule 12213(a)(1), which provides that “[t]he Director [of FINRA

16 Dispute Resolution] will decide which of [the] hearing locations will be the hearing location for

17 the arbitration.” J.A. 1313. Because the FINRA Rules “constitute[d] the arbitration contract

18 between UBS and [WVUH],” the District Court concluded that “its provision on the hearing

19 location” – and not the 2006 forum selection clause – determined the location of the arbitration. 

20 760 F. Supp. 2d at 380.
9

1 By letter dated January 11, 2011, UBS informed the District Court that it did not intend

2 to prosecute the case further and requested entry of a final order of dismissal. The District Court

3 entered judgment on January 13, 2011. This appeal followed.

4 DISCUSSION

5 On appeal, UBS principally contends that the District Court should have enjoined the

6 arbitration proceedings because there is no record evidence that WVUH was UBS’s customer

7 either when UBS underwrote the WVUH securities at issue or when it served as a broker-dealer

8 for the ARS auctions. With respect to services UBS rendered in its capacity as a broker-dealer

9 charged with facilitating the ARS auctions, we disagree and conclude that WVUH was UBS’s

10 customer under the applicable FINRA rules. We therefore affirm the District Court’s order

11 denying an injunction on that alternative ground. 

12 “When reviewing a district court’s denial of a preliminary injunction, we review the

13 district court’s legal holdings de novo and its ultimate decision for abuse of discretion.” Cnty. of

14 Nassau, N.Y. v. Leavitt, 524 F.3d 408, 414 (2d Cir. 2008) (citation and quotation marks

15 omitted). “A preliminary injunction is an extraordinary remedy never awarded as of right.” 

16 Winter v. Natural Res. Def. Council, Inc., 555 U.S. 7, 24 (2008). To prevail on its motion for a

17 preliminary injunction, UBS was required to demonstrate “‘(a) irreparable harm and (b) either

18 (1) likelihood of success on the merits or (2) sufficiently serious questions going to the merits to

19 make them a fair ground for litigation and a balance of hardships tipping decidedly toward the

20 party requesting the preliminary relief.’” Citigroup Global Mkts., Inc. v. VCG Special

21 Opportunities Master Fund Ltd., 598 F.3d 30, 35 (2d Cir. 2010) (quoting Jackson Dairy, Inc. v.

22 H.P. Hood & Sons, Inc., 596 F.2d 70, 72 (2d Cir. 1979)). 
10

1 Since the parties agree that UBS will suffer irreparable harm if it is wrongfully required

2 to arbitrate this dispute, we focus exclusively on UBS’s claim that WVUH is not entitled to

3 arbitration under FINRA’s rules because WVUH did not become UBS’s “customer” in

4 connection with WVUH’s issuances of ARS. For the reasons that follow, UBS has failed to

5 demonstrate either a likelihood of success on the merits of that claim or sufficiently serious

6 questions going to the merits to make a fair ground for litigation.

7 1. Customer-Member Arbitration Under FINRA’s Rules

8 Since 2007, FINRA has been a self-regulatory organization established under Section

9 15A of the Securities Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. § 78o-3; Karsner

10 v. Lothian, 532 F.3d 876, 879 n.1 (D.C. Cir. 2008); SEC Release No. 34-56145 (July 26, 2007),

11 and has had the authority to exercise comprehensive oversight over “all securities firms that do

12 business with the public.” Sacks v. SEC, --- F.3d ---, 2011 WL 3437088, at *2 (9th Cir. Aug. 8,

13 2011) (quoting 72 Fed. Reg. 42170 (Aug. 1, 2007)). Upon joining FINRA, a member

14 organization agrees to comply with FINRA’s rules. See FINRA Bylaws art. 4 § 1, available at

15 http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=4609 (last

16 visited Sept. 19, 2011). As a FINRA member, therefore, UBS is bound to adhere to FINRA’s

17 rules and regulations, including its Code and relevant arbitration provisions contained therein. 

18 With respect to these provisions, the Federal Arbitration Act, 9 U.S.C. §§ 1 et seq., “requires

19 courts to enforce privately negotiated agreements to arbitrate, like other contracts, in accordance

20 with their terms.” Volt Info. Scis., Inc. v. Bd. of Trs. of Leland Stanford Junior Univ., 489 U.S.

21 468, 478 (1989); see also Bensadoun v. Jobe-Riat, 316 F.3d 171, 176 (2d Cir. 2003) (FINRA

22 Rules must be interpreted in accordance with principles of contract interpretation). In
3

 A number of agreements pursuant to which FINRA was formed state that they are

governed by Delaware law. See, e.g., FINRA Manual 1061 (July 2008 ed.) (Limited Liability

Company Agreement of the Trade Reporting Facility LLC). 

11

1 interpreting the FINRA Rules, we need not reach the issue of which state law applies. Under

New York, West Virginia, or Delaware3 2 law, “a written agreement that is complete, clear and

3 unambiguous on its face must be enforced according to the plain meaning of its terms[.]” 

4 Greenfield v. Philles Records, Inc., 780 N.E.2d 166, 170 (N.Y. 2002); accord Babcock Coal &

5 Coke Co. v. Brackens Creek Coal Land Co., 37 S.E.2d 519, 522 (W. Va. 1946); Osborn v.

6 Kemp, 991 A.2d 1153, 1159-60 (Del. 2010); 11 Williston on Contracts § 32:3 (4th ed. 2010).

7 With these principles in mind, we look to Rule 12200 of the FINRA Code, which

8 obligates UBS to arbitrate a dispute with a “customer” at the customer’s demand, subject to an

9 exception not relevant here:

10 Parties must arbitrate a dispute under the Code if:

11 • Arbitration under the Code is either:

12 (1) Required by a written agreement, or

13 (2) Requested by the customer;

14 • The dispute is between a customer and a member or

15 associated person of a member; and

16 • The dispute arises in connection with the business

17 activities of the member or the associated person, except

18 disputes involving the insurance business activities of a

19 member that is also an insurance company. 

20 FINRA Code, Rule 12200 (emphasis added) (all FINRA Rules available at

21 http://finra.complinet.com/en/display/display_viewall.html?rbid=2403&element_id=607&record

22 _id=609) (last visited Sept. 19, 2011).
12

1 We have observed that “if the rules of an exchange (or similar organization) require

2 arbitration of customer disputes, a broker’s membership obligation confers upon the customer an

3 option to arbitrate as the exchange rules provide.” Kidder, Peabody & Co. v. Zinsmeyer Trusts

4 P’ship, 41 F.3d 861, 864 (2d Cir. 1994) (citing Merrill Lynch, Pierce, Fenner & Smith, Inc. v.

5 Georgiadis, 903 F.2d 109, 113 (2d Cir. 1990)). A customer under the exchange’s rules is

6 entitled to invoke the arbitration provision “as an intended third-party beneficiary” in a dispute

7 with a member. Id.

8 Although UBS is indisputably a “member” under the Code, neither FINRA nor the courts

9 have “offer[ed] [a] precise definition of ‘customer.’” Oppenheimer & Co. v. Neidhardt, 56 F.3d

10 352, 357 (2d Cir. 1995). The Code states only that “[a] customer shall not include a broker or

11 dealer.” FINRA Code, Rule 12100(i). An online FINRA glossary, to which no reference is

12 made in the FINRA rules, states that a “customer” is “[a] person or entity (not acting in the

13 capacity of an associated person or member) that transacts business with any member firm

14 and/or associated person.” FINRA, Glossary of Arbitration Terms,

15 http://www.finra.org/ArbitrationMediation/Glossary/ (last visited Sept. 19, 2011). In cases

16 interpreting FINRA’s rules as well as predecessor rules promulgated by the National Association

17 of Securities Dealers, Inc. (“NASD”), we have avoided offering an exhaustive definition of the

18 term. See, e.g., Bensadoun, 316 F.3d at 176; Citigroup Global Mkts., Inc., 598 F.3d at 39; John

19 Hancock Life Ins. Co. v. Wilson, 254 F.3d 48, 59 (2d Cir. 2001) (noting that NASD Code

20 “defines ‘customer’ broadly”). UBS asserts, and the parties conceded at oral argument, that

21 “customer” means “someone who buys goods or services.” Appellant’s Br. at 18 (internal

22 quotation marks omitted). See Webster’s Third New International Dictionary 559 (3d ed. 2002)

23 (defining “customer” as “one that purchases some commodity or service” (def. 2a)); id. at 1844
4

 The court in Patten focused on a 1983 statement made by the NASD’s National

Arbitration Committee that “[a]n issuer of securities should be considered a public customer of a

member firm where a dispute arises over a proposed underwriting,” and held that the statement

constituted a binding interpretation of the NASD rules. 819 F.2d at 405-406; accord J.P.

Morgan, 712 F. Supp. 2d at 79. FINRA has not issued a comparable interpretive statement

addressing the status of issuers vis-á-vis underwriters. Although we do not address whether

every issuer is a customer of its underwriter, we disagree with the dissent’s categorical assertion

that issuers can never be customers “under any reasonable definition” of the term. Preska, C.J.,

Dissenting Op., post at [8] (“Dissent”).

13

1 (defining “purchase” as “buy for a price” (def. 1d)); American Heritage Dictionary of the

2 English Language 450 (4th ed. 2000) (defining customer as “[o]ne that buys goods and services”

3 (def. 1)). Because the term is unambiguous with respect to this core definition, we need not here

4 provide a comprehensive definition of the term under Rule 12200. The term “customer”

5 includes at least a non-broker or non-dealer who purchases, or undertakes to purchase, a good or

6 service from a FINRA member. 

7 2. Application of FINRA Rule 12200

8 Under this framework, we consider UBS’s argument that WVUH was not its customer. 

9 Relying principally on the Third Circuit’s decision in Patten, which held that an issuer

10 was an underwriter’s customer under the predecessor rules promulgated by the NASD, the

11 District Court concluded that WVUH became UBS’s customer because UBS served as the

12 underwriter for those issuances. We need not resolve whether its ruling on this ground was

correct,4 13 since we affirm on the different ground that WVUH was UBS’s customer because

14 WVUH purchased a service, specifically auction services, from UBS. See, e.g., Boy Scouts of

15 Am. v. Wyman, 335 F.3d 80, 90 (2d Cir. 2003) (“[W]e may affirm the judgment of the district

16 court on any ground appearing in the record.”).
14

1 The section entitled “Compensation” or “Broker-Dealer Fee” in all three broker-dealer

2 agreements reflects an undertaking by WVUH to pay UBS a fee for its services in facilitating the

3 auctions at which the bonds were resold and their interest rates set. In view of that undertaking

4 and a definition of customer that at least includes an entity that undertakes to purchase a good or

5 service, WVUH became UBS’s customer under Rule 12200 by contracting with UBS to obtain

6 auction services for a fee. 

7 In urging otherwise, UBS points to language in the broker-dealer agreements to suggest

8 that WVUH agreed to compensate UBS “for the benefit of . . . investors” “who are buying and

9 selling [WVUH’s] auction rate[]” securities, not for WVUH’s benefit. Tr. of Oral Arg. 6. Both

10 the agreements taken as a whole and the specific compensation provisions on which UBS relies

11 make plain that UBS’s broker-dealer fee is for facilitating the auctions for the purpose of, among

12 other things, “achieving the lowest possible interest rate on the [auction rate certificates]” for

13 WVUH’s benefit. J.A. 303. We reject UBS’s suggestion that WVUH, a sophisticated party

14 seeking to raise capital, charitably undertook to pay a substantial fee for the benefit of unknown

15 investors rather than itself.

16 UBS also argues that WVUH is not its customer because the FINRA Rules do not

17 contemplate arbitration for sophisticated parties such as WVUH, WVUH did not purchase

18 investment or brokerage services, and UBS was not a fiduciary of WVUH. For support, it points

19 to provisions of FINRA’s rules intended to facilitate the arbitration of disputes between retail

20 investors and brokerages, and to our decision in Bensadoun, 316 F.3d at 177, where we noted the

21 Eighth Circuit’s holding in Fleet Boston Robertson Stephens, Inc. v. Innovex, Inc., 264 F.3d 770,

22 772 (8th Cir. 2001), “that banking advice did not give rise to a ‘customer’ relationship within the

23 meaning of the NASD [rules].” We reject the argument for the following reasons. 
5

 FINRA Rule 12510 is based on former NASD Rule 12510, which became effective in

April 2007. See Order Approving Proposed Rule Change and Amendments 1, 2, 3, and 4 to

Amend NASD Arbitration Rules for Customer Disputes, 72 Fed. Reg. 4574, 4594 (Jan. 31,

2007). The rule postdated the Eighth Circuit’s decision in Fleet Boston by over five years and

our decision in Bensadoun by four years.

15

1 UBS’s argument about sophisticated parties ignores provisions of the FINRA Code, such

2 as the rule governing depositions, that explicitly contemplate arbitration in “large or complex

cases.” FINRA Rule 12510.5 3 See also FINRA Rule 12901 (specifying member surcharges for

4 arbitrations involving $10,000,000 or more). Several FINRA rules expressly contemplate

5 customers who are well-capitalized or sophisticated institutions and individuals. E.g., FINRA

6 Rule 2124(e)(1) (“[For purposes of this rule,] ‘institutional customer’ shall mean a customer

7 whose account qualifies as an ‘institutional account’ under NASD Rule 3110(c)(4).”); see also

8 NASD Rule 3110(c)(4) (“[T]he term ‘institutional account’ shall mean the account of . . . a bank,

9 savings and loan association, insurance company, or registered investment company; . . . or . . .

10 any other entity (whether a natural person, corporation, partnership, trust, or otherwise) with

11 total assets of at least $50 million.”), available at

12 http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=3734 (last

13 visited Sept. 20, 2011). Other rules define “customer” broadly, with no restriction to

14 unsophisticated, individual, or small investors. E.g., FINRA Rule 1250(b)(1) (“‘Customer’ shall

15 mean any natural person and any organization, other than another broker or dealer, executing

16 securities transactions with or through or receiving investment banking services from a

17 member.”); FINRA Rule 4530, n.08 (“[For purposes of this rule,] a ‘customer’ includes any

18 person, other than a broker or dealer, with whom the member has engaged, or has sought to

19 engage, in securities activities.”). Consistent with these definitions, FINRA arbitration has been
16

1 employed to resolve complex claims arising out of the failure of the ARS market without any

2 suggestion that the dispute was rendered non-arbitrable because of the parties’ financial

3 sophistication. E.g., STMicroelectronics, N.V. v. Credit Suisse Secs. (USA) LLC, 648 F.3d 68

4 (2d Cir. 2011) (upholding confirmation of $400 million award). We cannot say, therefore, that

5 FINRA’s rules exclude the arbitration of complex cases or those initiated by financially

6 sophisticated parties. 

7 We also reject UBS’s contention that FINRA has a narrow “investor-protection

8 mandate,” such that “customers” should include only those receiving “investment or brokerage

9 services.” Appellant Br. at 24-25. FINRA’s purposes are not limited to investor protection. 

10 Rather, as previously noted, FINRA serves as the sole self-regulatory organization chartered

11 under the Exchange Act and exercises comprehensive oversight of the securities industry. See

12 NASD v. SEC, 431 F.3d 803, 804 (D.C. Cir. 2005). Among its stated purposes are to

13 “encourage and promote among members observance of federal and state securities laws”; “[t]o

14 investigate and adjust grievances between the public and members and between members”; and

15 “[t]o adopt, administer, and enforce rules of fair practice.” Restated Certificate of Incorporation

16 of Financial Industry Regulatory Authority, Inc. § 3 (July 2, 2010), available at

17 http://finra.complinet.com/en/display/display.html?rbid=2403&element_id=4589. UBS does not

18 explain why “customer” should be limited to investors in light of FINRA’s purposes, its other

19 broad definitions of “customer” applicable to other provisions, and the ordinary usage of the

20 term. 

21 Similarly, we reject UBS’s contention that a customer relationship requires a fiduciary

22 relationship and cannot be founded on arm’s-length transactions. UBS points to no support for

23 this limitation in the text or structure of the FINRA Rules. 
17

1 Finally, FINRA appears to have rejected the interpretation of FINRA’s rules advanced by

2 UBS and the dissent. While this appeal was pending, UBS raised the very argument it raises

3 here in seeking a stay of arbitration from the Director of FINRA Dispute Resolution, who

4 “perform[s] all the administrative duties relating to arbitrations submitted under the Code.” 

5 FINRA Rule 12103. That motion was summarily denied. Though we need not rely on FINRA’s

6 decisions to conclude that WVUH was UBS’s customer, we note that FINRA’s practical

7 application of its own rules in this case does not support UBS’s position. 

8 3. “In Connection with” UBS’s Business Activities

9 Having determined that WVUH was UBS’s customer by virtue of its undertaking to pay

10 for UBS’s auction services, we turn to whether its dispute with UBS “arises in connection with

11 the business activities of” UBS, as Rule 12200 requires. UBS argues, and the dissent asserts,

12 that there is no nexus between the auction service transactions, which establish customer status,

13 and the alleged fraud involving the bond issuances, which both UBS and the dissent regard as

14 forming the basis of WVUH’s arbitration demand. More particularly, the dissent declares that

15 our decision permits arbitration of the dispute between UBS and WVUH based on “the provision

16 of ancillary services” (namely, the auction services) rather than the “gravamen” of the claim

17 (that is, according to the dissent, the dispute concerning UBS's role as underwriter). Dissent at

18 [1].

19 We are not persuaded. The auction services transactions that establish WVUH’s

20 customer status are integrally related to and of a piece with the underwriting services UBS

21 provided. For example, all three purchase agreements between the parties termed WVUH’s

22 bonds “auction rate certificates,” clearly envisioning that the bonds WVUH issued would be

23 auctioned. J.A. 260, 938, 953. The “Official Statements” publicly announcing and providing
18

1 information about each bond issuance simultaneously detailed the terms of the issuance and

2 underwriting arrangement and the auction procedures and UBS’s role as auction broker-dealer. 

3 WVUH’s Statement of Claim similarly characterizes UBS’s underwriting and auction services as

4 part of an integrated whole, alleging that “[t]he misrepresentations and omissions made by UBS

5 . . . induced [WVUH] to enter into the recommended component transactions” – including

6 underwriting, auction services and swap transactions – “using the structure proposed by UBS,”

7 J.A. 1090, and WVUH accordingly asserts claims for intentional misrepresentation, negligent

8 misrepresentation, and fraud. 

9 Nor are we persuaded by the dissent’s suggestion that WVUH’s claims relate to the

10 underwriting arrangement alone, without reference to UBS’s auction services. WVUH’s

11 Statement of Claim specifically asserts that UBS fraudulently induced WVUH to purchase

12 auction services by misrepresenting the structure of the ARS market and UBS’s role therein. 

13 The Statement of Claim variously alleges that “UBS represented that the ARS market was stable

14 and would provide sufficient liquidity for WVUH’s bonds,” that “UBS did not inform WVUH

15 that UBS had a policy of placing support bids in every auction to prevent auction failures,” and

16 that “UBS ultimately recommended that WVUH issue the majority of its 2003 ARS using a

17 ‘synthetic fixed rate structure.’” J.A. 1067-68. Furthermore, it demands “[r]estitution and

18 disgorgement of all fees and costs associated with issuing the ARS, conducting the auctions, and

19 any and all other associated fees and costs.” J.A. 1098 (emphasis added). Under any

20 conceivable interpretation of Rule 12200’s nexus requirement that the dispute “arises in

21 connection with the business activities of the member,” the allegations here satisfy the

22 requirement for purposes of defeating a motion for preliminary injunction and link the grievance

23 WVUH asserts in arbitration to the transaction that established its customer status.
6

 Contrary to the dissent’s characterization, we do not here establish a bright line rule or

broadly pronounce that “once ‘customer’ status is established through a single transaction or

agreement, any related matter may be arbitrated.” Dissent at [15]. Our holding is that, in this

case, UBS cannot avoid arbitration by arguing that WVUH was a customer only in a limited

respect when the customer relationship is part of a series of interrelated transactions serving a

common purpose and when there is a “contractual basis for concluding that the party agreed to”

arbitration with a party that was its customer under the FINRA Rules. Stolt-Nielsen S.A. v.

AnimalFeeds Int’l Corp., 130 S. Ct. 1758, 1775 (2010) (emphasis omitted). Nor does StoltNielsen otherwise support UBS’s position. The Court held in that case that class arbitration

could not be inferred from an arbitration agreement that did not mention it; it hardly precludes

arbitration where, as here, the text of the relevant agreement plainly covers it. Id.

19

1 Lastly, the dissent endorses a “foreseeable consequences” test to assert that the dispute

2 relating to the underwriting services is not arbitrable, even if the claims relating to auction

3 services may be. While acknowledging that, “[i]f anything, the broker-dealer transaction flows

4 from the underwriting transaction,” the dissent states that “the underwriting transaction does not

5 flow from the broker-dealer transaction” and is therefore not a “foreseeable consequence[] of the

6 transaction for which arbitration is available.” Dissent at [20]-[21]. The dissent’s test has no

7 apparent basis in the text of Rule 12200 or any other provision of the FINRA Code relating to

8 arbitration. Even if we were to employ that test, moreover, arbitration of the underwriting

9 services would be appropriate, as both the underwriting and auction services transactions were

10 “foreseeable” when the purchase and broker-dealer agreements were executed. Indeed, the

11 purchase agreements in 2003 and 2005 were entered over three weeks after the respective

12 broker-dealer agreements, and the 2006 purchase agreement was entered within two days of the

2006 broker-dealer agreement.6 13

14 4. Forum Selection Clause

15 UBS also contends that, in the event it is compelled to arbitrate its dispute with WVUH,

16 the forum selection clause in the 2006 broker-dealer agreement prohibits WVUH from
20

1 proceeding with the arbitration outside of New York County. That clause states that “all actions

2 and proceedings arising out of this Broker-Dealer Agreement and any of the transactions

3 contemplated hereby shall be brought in the County of New York and, in connection with any

4 such action or proceeding, [the parties] submit to the jurisdiction of, and venue in, such County.” 

5

6 UBS’s argument finds some support in our decision in Bear, Stearns & Co. v. Bennett,

7 938 F.2d 31, 31-32 (2d Cir. 1991), where we enforced an agreement between two parties to

8 arbitrate their disputes in New York City under the rules of the American Stock Exchange on the

9 ground that “[w]here there is a valid agreement for arbitration, Congress has directed the district

10 courts to order that arbitration proceed ‘in accordance with the terms of the agreement.’” Id. at

11 32 (quoting 9 U.S.C. § 4). Two subsequent Supreme Court decisions have cast doubt on the

12 continued viability of Bear Stearns. In Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79

13 (2002), the Court distinguished between (1) a “relatively narrow category” of “‘questions of

14 arbitrability’” that “include[] disputes about . . . ‘whether an arbitration clause in a concededly

15 binding contract applies to a particular type of controversy,’” Mulvaney Mech., Inc. v. Sheet

16 Metal Workers Int’l Ass’n, Local 38, 351 F.3d 43, 45 (2d Cir. 2003) (quoting Howsam, 537 U.S.

17 at 84), and (2) “other kinds of general circumstances where parties would likely expect that an

18 arbitrator would decide the gateway matter,” including “‘procedural’ questions which grow out

19 of the dispute and bear on its final disposition.” Howsam, 537 U.S. at 84 (quoting John Wiley &

20 Sons, Inc. v. Livingston, 376 U.S. 543, 557 (1964)). In Howsam, the Court held that, unlike the

21 former, the latter questions are “presumptively not for the judge, but for an arbitrator, to decide.” 

22 Id. (dispute over applicability of an NASD time limit for filing claims is a presumptively

23 arbitrable issue) (emphasis in original). 
7

 Other courts have held that Justice Stevens’s concurrence in the judgment, read together

with the plurality opinion, produces a controlling rationale on this question. See Certain

Underwriters at Lloyd’s London v. Westchester Fire Ins. Co., 489 F.3d 580, 586 n.2 (3d Cir.

2007); Pedcor Mgmt. Co. Welfare Benefit Plan v. Nations Pers. of Texas, Inc., 343 F.3d 355,

358-59 (5th Cir. 2003). But see Emp’rs Ins. Co. of Wausau v. Century Indem. Co., 443 F.3d

573, 580 (7th Cir. 2006). Because Howsam controls this case, we need not decide whether

Green Tree is also controlling in this regard. 

21

1 In Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003), a plurality of the Supreme

2 Court held that whether an arbitration agreement forbids class arbitration is a procedural matter

3 that under Howsam should be decided by an arbitrator, not a court. Id. at 452-53. The plurality

4 emphasized that the relevant question was “what kind of arbitration proceeding the parties

5 agreed to” (a procedural question), not “whether [the parties] agreed to arbitrate a matter” in the

6 first instance (a question of arbitrability), and concluded that an arbitrator is better equipped to

7 decide the procedural question. Id. (emphasis in original; citing First Options of Chicago, Inc. v.

8 Kaplan, 514 U.S. 938, 942-45 (1995); Volt Info. Scis., 489 U.S. at 474-76)); see also Howsam,

9 537 U.S. at 85 (observing the superior competence of NASD arbitrators, respective to courts, in

10 interpreting and applying NASD arbitration rules). We are guided by the rationale of Green

Tree, which helps clarify Howsam.

7 11 

12 Here, UBS acknowledges that the issue relating to the 2006 forum selection clause arises

13 only after the question of the arbitrability of the dispute has been resolved in favor of arbitration. 

14 In any event, the clause does not mention arbitration or the FINRA Rules or limit the tribunal in

15 which a dispute may be initiated. It simply concerns the site of arbitration. Having now

16 determined that WVUH was UBS’s customer and that the dispute arises in connection with

17 UBS’s business activities, the question to be resolved is not “whether to proceed by arbitration,

18 but which arbitration panel should decide certain issues.” Cent. W. Va. Energy, Inc. v. Bayer
8

 Without citing either Howsam or Green Tree or using the framework established in

those cases, the Eleventh Circuit followed our decision in Bear, Stearns to conclude that venue is

a matter for judicial rather than arbitral determination. Sterling Fin. Inv. Grp., Inc. v. Hammer,

393 F.3d 1223, 1225 (11th Cir. 2004). To the extent that arbitrators, not courts, presumptively

have jurisdiction to adjudicate disputes over the enforceability of forum selection clauses, our

holding to the contrary in Bear, Stearns was abrogated by Howsam, as clarified by Green Tree.

22

1 Cropscience LP, 645 F.3d 267, 274 (4th Cir. 2011). Keeping in mind both this question and the

2 federal policy in favor of arbitration, see Green Tree, 539 U.S. at 452, we hold that venue is a

3 procedural issue that FINRA’s arbitrators should address in the first instance, and that the

4 District Court lacked subject matter jurisdiction to resolve it. 

5 Our holding accords with the decisions of other sister courts in similar cases involving

6 forum selection clauses. Relying on Howsam and Green Tree, the First and Fourth Circuits have

7 both held that disputes over the interpretation of forum selection clauses in arbitration

8 agreements raise presumptively arbitrable procedural questions. See Cent. W. Va. Energy, 645

9 F.3d at 276; Richard C. Young & Co. v. Leventhal, 389 F.3d 1, 4-5 (1st Cir. 2004) (“Since the

10 dispute between the parties is concededly arbitrable, determining the place of the arbitration is

simply a procedural matter and hence for the arbitrator.”).8 11 

12 CONCLUSION

13 For the reasons stated, we AFFIRM the District Court’s judgment dismissing UBS’s

14 claims. In so doing, we AFFIRM the District Court’s January 4, 2011 order to the extent it

15 denies UBS’s motion for a preliminary injunction restraining WVUH from proceeding with

16 FINRA arbitration. However, we VACATE that order to the extent it denies a preliminary

17 injunction with respect to the forum selection clause and REMAND with instructions for the

18 District Court to dismiss that challenge for lack of subject matter jurisdiction. We DENY as
23

1 moot UBS’s motion, made after oral argument, for an order staying arbitration during the

2 pendency of this appeal. 
1

PRESKA, Chief District Judge, dissenting:

Puzzlingly, the majority declines to answer the

question squarely presented in this appeal — whether an issuer of

securities is entitled under the FINRA Rules to arbitrate a

dispute with its underwriter regarding the underwriting. More

puzzlingly yet, the majority affirms a decision that such a

dispute is subject to mandatory arbitration by answering a

different question. It transforms this case into one where the

provision of ancillary services about which there is no dispute

entitles the issuer to arbitrate — and collect damages related to

— a different dispute about a different transaction under a

different contract. This cannot be. Judges may not employ this

type of metamorphosis to decide contract cases. The majority

errs in judgment and in law, so I respectfully dissent.

I.

The gravamen of WVUH’s notice of claim is summarized in

the first paragraph: WVUH alleges that UBS’s misinformation

defrauded WVUH into issuing ARS. Virtually the entire notice of

claim is dedicated to allegations about the alleged fraud in

causing WVUH to issue ARS, and the claimed damages are about the

issuance transaction. Almost no other claim asserted discusses

the purchase of ancillary auction services. One sentence in

paragraph 114 of a 143-paragraph, 40-page notice of claim alleges

that UBS’s “misrepresentations and omissions ... induced

Claimants to enter into the recommended component transactions,”
2

(Notice of Claim ¶ 114), presumably including UBS’s ancillary

auction services under separate broker-dealer agreements. 

Fixating on this single sentence, the majority effectively

ignores the point of the notice of claim and requires UBS to

arbitrate wide-ranging claims involving damages that are not

consequential to the fraud alleged in the sentence in paragraph

114.

As in most of the ARS-related cases filed in the U.S.

District Court for the Southern District of New York and appealed

in this Court, WVUH’s main claims are that in the course of

underwriting WVUH’s ARS issuance, UBS misrepresented the demand

for ARS and manipulated the market for ARS with its own bids,

artificially setting a low interest rate for ARS bonds. This

state of affairs caused WVUH to issue ARS rather than traditional

fixed- or variable-rate bonds. When UBS stopped submitting

support bids for WVUH’s ARS, the market for those ARS failed,

causing interest rates on WVUH’s ARS to soar to the “penalty

rate” of 12-15%. Primarily, the resulting damages were

significantly increased debt-service payments and significantly

increased funding costs because WVUH’s debt had to be refinanced

to non-ARS bonds. This is an expensive undertaking in itself —

another underwriting transaction — and, after the ARS debacle,

WVUH had to purchase expensive bond insurance to reassure

investors. Based on these facts, WVUH claimed breach of

fiduciary duty, intentional and negligent misrepresentation,
1

 The “component transactions” are never specified, and this

term also probably covers interest-rate swaps, credit

enhancements, and the like, which were provided under the

underwriting and/or other agreements apart from the broker-dealer

agreements. While the notice of claim offers no further

explanation, the majority now defines “component transactions” to

include “underwriting, auction services and swap transactions.” 

Majority Op. at 20. 

3

breach of the underwriting agreement, violation of the securities

laws, breach of warranty, and unjust enrichment. Indeed, the

breach of contract count states that “[a]s a result of UBS’

agreement to serve as underwriter,” (Notice of Claim ¶ 116

(emphasis added)), WVUH sustained damages; it does not discuss

the broker-dealer agreements at all. As WVUH framed the damages

for these claims in the notice of claim, it sought “tens of

millions of dollars . . . in increased interest charges and other

funding costs.” (Id. ¶ 1.) Specifically, WVUH says it is

entitled to recover “all extra interest expenses,” “refinancing

expenses,” and “bond insurance.” (Id. ¶¶ 100-103.) Fees paid

for auction services, which form the basis of the majority’s

holding, are not mentioned in the section of the notice of claim

entitled “Claimants’ Damages.” 

To be sure, WVUH tucks a claim for damages for fees

paid for “component transactions” into the single count of the

notice of claim containing the single sentence upon which the

majority relies. This presumably includes WVUH’s ancillary claim

for damages related to payment of fees for broker-dealer services

provided under the broker-dealer agreements.1 WVUH had engaged
4

UBS as its broker-dealer under separate contracts for a fee. As

broker-dealer, UBS agreed to solicit bids for WVUH’s ARS, and it

hired an agent then to collect and tally the bids and to match

buyers and sellers under certain criteria to set the interest

rate for the ARS for the next period. There is no evidence in

the record that UBS breached its broker-dealer agreements in any

way, and WVUH did not make such an allegation.

In short, WVUH’s notice of claim rings familiar to

those involved in ARS-related litigation, of which there has been

much. The allegations involve UBS’s alleged failure to disclose

material information about the ARS market and UBS’s bidding

practices for its own account. Here, WVUH has two sets of

distinct grievances: one related to the underwriting and issuance

of ARS, with damages consisting primarily of increased interest

payments and refinancing costs, and another related to the

alleged fraudulently induced purchase of “recommended component

transactions,” including broker-dealer services, with damages

consisting of fees paid for those services. 

The majority ignores these fundamental distinctions and

concludes that by purchasing UBS’s broker-dealer/auction

services, WVUH is entitled to arbitrate — and obtain damages

related to — a dispute not about being duped into purchasing

UBS’s broker-dealer services, but about being duped into

purchasing UBS’s underwriting services. It says that conclusory

allegations involving the purchase of broker-dealer services
5

“link the grievance WVUH asserts in arbitration to the

transaction that established its customer status.” Majority Op.

at 20. This is not so. Both the claim for damages related to

underwriting and the claim for damages related to the purchase of

broker-dealer services involve proving that WVUH was duped. But

the grievance asserted in arbitration is not being duped

generally. The grievance is being duped into taking a particular

action. See Restatement (Second) of Torts § 531 (1977) (stating

that liability for fraudulent misrepresentation attaches “for

pecuniary loss suffered by [the intended or foreseeable victims]

through their justifiable reliance in the type of transaction in

which [the tortfeasor] intends or has reason to expect their

conduct to be influenced”); id. § 538 (stating that

misrepresentation only actionable if a reasonable person would

attach importance to the representation “in determining his

choice of action in the transaction in question” (emphasis

added)). 

Based on the alleged fraud, WVUH took at least two

separate actions for which it now seeks damages: it issued ARS,

and it purchased broker-dealer services. The causes of action

supporting and damages asserted for each grievance are wholly

different and involve different evidence. Arbitration is

unavailable for the issuance-related grievance because, as

explained below, WVUH does not satisfy the definition of

“customer” in the underwriting transaction. Yet the majority
2

 E.g., WVUH Br. at 18 (“The gravamen of [WVUH’s] claims is

that UBS inveigled [WVUH] . . . to employ a financial product

(ARS) to raise capital . . . . UBS did this by concealing from

[WVUH] that [WVUH] would pay [the projected low interest rates

with ARS] only so long as UBS provided continuing bidding support

in [WVUH’s] ARS auctions. When UBS stopped providing this

support, [WVUH’s] auctions failed.”); id. at 26 (“[WVUH] engaged

(continued...)

6

permits an arbitration not only for the claim and damages related

to the fees paid for broker-dealer services but also for the full

panoply of claims and damages related to UBS’s underwriting of

these ARS. Put another way, the majority concludes that buying

the services of a pilot entitles the buyer to arbitrate and

obtain damages for a dispute about the purchase of an airplane,

for which arbitration is independently unavailable. This is

mistaken judgment.

On appeal, WVUH sums up the issue in its brief as

follows:

[WVUH] engaged [UBS] to recommend, design and implement

an optimal financial structure for the issuances. UBS

ultimately recommended that [WVUH] issue a portion of

each bond offering as auction rate securities (“ARS”). 

UBS did not disclose to [WVUH], however, that UBS had

been propping up the market for ARS through a

ubiquitous support bid practice, and that if UBS

stopped providing support the market for [WVUH’s] ARS

would collapse. When UBS stopped supporting the ARS

market in February 2008, the market did in fact

collapse, and [WVUH] suffered significant damages as a

direct result.

[WVUH] sought to recover those damages

through a FINRA arbitration against UBS . . . .

(WVUH Br. at 11.) Accordingly, the parties’ briefs focus on

WVUH’s allegations that UBS misled WVUH about the ARS market and

about UBS’s participation in it, which caused WVUH to issue ARS.2
2(...continued)

UBS to structure the three bond issuance at issue here and . . .

advised [WVUH] to issue” ARS “in a structure proposed by UBS.”

(internal quotation marks omitted)).

7

The parties dedicate a few stray sentences in their

briefs to the broker-dealer agreements. WVUH suggests that UBS

may have had a motive to recommend an ARS issuance because, aside

from its profit on the underwriting spread, it could also earn

fees from conducting the auctions. (WVUH Br. at 16.) But even

when arguing that the broker-dealer agreements provide a basis

for a “customer” relationship, WVUH returns to its “real”

complaint here: that UBS misrepresented the fundamentals of the

ARS market to induce WVUH to issue ARS. WVUH says, incorrectly,

that UBS was engaged in misconduct in its role as broker-dealer

“in submitting undisclosed bids to prop up the ARS market,” which

is the basis for WVUH’s claim for damages relating to

underwriting. (Id. at 27.) However, UBS, as broker-dealer, was

not submitting but, rather, soliciting bids. In submitting bids,

UBS (whether properly or not) was acting as a marketplace bidder,

not an auctioneer. UBS’s role in submitting bids for its own

account thus cannot be a basis for damages for fraudulently

inducing WVUH to buy broker-dealer services. WVUH’s argument on

appeal is a nonstarter.

The majority concludes that this Court does not have to

resolve whether WVUH became UBS’s “customer” because of UBS’s

underwriting services or advice that caused WVUH to issue ARS. 
3 Contrary to the majority’s characterization, this dissent

makes no “categorical assertion” that issuers can never be

customers, merely that there exists no basis in this record to

conclude that WVUH became UBS’s “customer” in connection with the

underwriting agreement. Majority Op. at 15 n.4.

8

However, as WVUH framed it, this is the question presented in

this appeal, and this is the question WVUH submitted to FINRA

arbitration for which it seeks related damages. I disagree with

declining to answer this question and instead answering the

question of whether WVUH’s purchase of broker-dealer services

entitles WVUH to arbitration on all of WVUH’s claims.

The majority’s approach is of concern because there is

no basis in this record to conclude here that WVUH became UBS’s

“customer” in connection with the underwriting under any

reasonable definition of the term.3 The majority focuses on the

plain-meaning definition of “customer”: one who “purchases, or

undertakes to purchase a good or service from a FINRA member.” 

Majority Op. at 14. There is no record evidence in this case

that WVUH undertook to pay or paid, in any form, UBS for

underwriting the issuance of WVUH ARS or providing advice in

connection with the issuance. As in any other negotiated

underwriting transaction, UBS purchased the WVUH ARS from WVUH at

a discount and resold the ARS in the market to UBS’s customers. 

In that transaction, UBS took on the risks inherent in an

offering of securities, and there is no record evidence that WVUH

carried a cost for this transaction on its books. Thus, as

explained below, WVUH did not “purchase” any goods or services
9

from UBS pursuant to the underwriting agreement and thus did not

become UBS’s customer pursuant to that agreement. In contrast,

the record reflects that WVUH undertook to pay UBS a specific fee

for the provision of broker-dealer services pursuant to the

broker-dealer agreements. Nevertheless, the majority permits

WVUH to compel arbitration to seek damages from UBS not only for

the broker-dealer transaction but also for the underwriting

transaction.

The underwriting dispute and the broker-dealer dispute

contain allegations about some of the same basic facts about

nondisclosure of supply and demand for ARS and UBS’s bidding

practices. However, there are significant differences. The

underwriting dispute involves allegations of breach of fiduciary

duty, breach of the underwriting agreement, and securities law

violations. The underwriting dispute necessarily would involve

determining whether, because of the basic facts upon which it

relied, WVUH issued ARS and is owed for increased interest

payments made, missed opportunities on alternative options,

advisory fees, debt restructuring costs, and debt insurance. The

damages for these claims are in the tens of millions of dollars

annually.

The facts involved in the broker-dealer dispute are

entirely different. The broker-dealer dispute necessarily

involves determining only whether, because of the basic facts

upon which it relied, WVUH purchased broker-dealer services and
10

is owed for payment of a set 25 basis point fee on WVUH’s

issuance amount annually. Because of this decision made by WVUH

premised on the allegedly misrepresented facts, WVUH asserts a

different claim of fraud for entering into a different

transaction. The damages for this claim are in the hundreds of

thousands of dollars annually. The transactions are different in

their essential character. See Restatement (Second) of Torts

§ 531 cmt. g (stating that the transaction induced by fraud “may

differ in matters of detail or in extent [from that contemplated

by defendant], unless these differences are so great as to amount

to a change in the essential character of the transaction.”).

If underwriting does not establish a “customer”

relationship, it is not appropriate to allow a party to shoehorn

a dispute about that transaction into an arbitration about a

different transaction. The fact that WVUH undertook to pay UBS

to collect and tally ARS bids was not the primary aim of the

alleged fraud. The alleged fraud, as all of the materials before

the Court allege, caused WVUH to enter into a transaction to

issue ARS. The issuance, not the broker-dealer agreement,

resulted in increased interest and refinancing costs. The fact

that UBS, as underwriter, supposedly coaxed WVUH to issue ARS is

the point of the notice of claim. As an additional, necessary

consequence of that transaction, WVUH also entered into a

separate transaction to purchase broker-dealer services. There

is nothing in the record to suggest that WVUH had to purchase
4

 See, e.g., In re Citigroup, Inc., No. 09 MD 2043, 2011 WL

744745, at *2 (S.D.N.Y. Mar. 1, 2011) (“Investors submit buy,

sell, or hold orders through broker-dealers selected by issuers

of the ARS [here, Citigroup].” (emphasis added)); In re Merrill

Lynch ARS Litig., 758 F. Supp. 2d 264, 271-72 (S.D.N.Y. 2010)

(Merrill Lynch serving as broker-dealer). Indeed, in this case,

Deutsche Bank provided the auction-related services for UBS as

its agent. A. 296-323.

11

these services from UBS; as the ARS-related litigation shows,

many broker-dealers were available to perform these services.4

That the three purchase agreements termed the WVUH bonds “auction

rate certificates,” Majority Op. at 19, contemplated only that

the bonds would necessarily be auctioned, not that UBS in its

capacity as an underwriter would undertake to auction them absent

a separate agreement. It cannot be that this separate

transaction that is downstream from the alleged fraud allows for

arbitration of the upstream consequences of the alleged fraud

when the upstream consequences are not arbitrable on their own. 

The law and logic permit a party to obtain damages consequential

to the claimed wrong. They do not permit the converse. The

damages related to WVUH’s purchasing the broker-dealer services

were possibly a consequence of the underwriting. But the damages

related to the underwriting were not a consequence of WVUH’s

purchasing broker-dealer services. It is for this same reason

that UBS’s subsequent release of “Official Statements” detailing

both the underwriting arrangement and its role as auction brokerdealer is insignificant. The majority’s re-characterization of

this multi-part ARS process as an “integrated whole,” Majority
5 It is not entirely clear to me that this result is

required. The 2006 broker-dealer agreement states that the

parties shall “submit to the jurisdiction of . . . [New York]

County.” 

12

Op. at 20, does not alter the facts that WVUH and UBS entered

into two separate and distinct transactions and there was no

requirement that WVUH had to retain UBS to perform the component

services. See n.4 supra.

The majority relies on the seemingly stray sentences in

the notice of claim alleging fraud in the inducement to enter

into the agreement for component services. Majority Op. at 7,

20. To the extent an arbitration based on those allegations were

permitted to proceed,5 it would be limited to the claim that

arises from the broker-dealer transaction creating “customer”

status. Damages would be limited to the fees paid for the

purchase of broker-dealer services (and any consequential damages

allowable). The result the majority reaches allows WVUH to

obtain damages for another claim by using a Trojan Horse. It

allows the arbitration of one claim (alleged fraudulent

inducement to buy broker-dealer services) to become a basis for

damages for a different claim entirely (misstatements or

omissions in connection with an underwriting transaction). I do

not concur in this error of judgment.

II.

The majority also commits an error of law. FINRA is a

self-regulatory organization, and its rules are creatures of
13

agreement among the members. As the majority correctly points

out, the FINRA Rules are interpreted as contracts are. The

majority also correctly concludes that because FINRA Rule 12200

gives “customers,” who are not FINRA members, an option to

arbitrate, “customers” are intended third-party beneficiaries. 

Because the term “customer” is not defined in the FINRA Rules,

determining whether a party invoking the right to arbitrate is a

“customer” resolves whether that party is entitled to arbitration

under the FINRA Rules in any given case. Making this

determination is no different from ordinary contract

interpretation: the question is whether the contracting parties

intended to confer the right to arbitrate. Subaru Distribs.

Corp. v. Subaru of Am., Inc., 425 F.3d 119, 124-25 (2d Cir. 2005)

(third-party beneficiary claim may be dismissed when “language in

the contract or other circumstances . . . will not support the

inference that the parties intended to confer a benefit on the

claimant”); 9 Corbin on Contracts § 44.6 (Joseph M. Perillo ed.,

2009) (“Whether a promisor and promisee intend to confer upon the

third party a right to enforce the contract against the promisor

will depend upon the same rules and guides to interpretation as

are applied in other contexts.”).

The contractual nature of the FINRA “customer’s”

entitlement to arbitration is essential. “Arbitration is

strictly a matter of consent.” Granite Rock Co. v. Int’l Bhd. of

Teamsters, 130 S. Ct. 2847, 2857 (2010) (internal quotation marks
14

omitted). When the arbitration agreement’s “enforceability or

applicability to the dispute is in issue,” the court “must

resolve the disagreement.” Id. “In this endeavor, as with any

other contract, the parties’ intentions control.” Stolt-Nielsen

S.A. v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758, 1774 (2010)

(internal quotation marks omitted); see Bensadoun v. Jobe-Riat,

316 F.3d 171, 176 (2d Cir. 2003).

Therefore, parties may “structure their agreements [to

arbitrate] as they see fit.” Stolt-Nielsen, 130 S. Ct. at 1774

(internal quotation marks omitted). Parties may limit such an

agreement in myriad ways. They may “agree to limit the issues

they choose to arbitrate,” “choose who will resolve specific

disputes,” and “specify with whom they choose to arbitrate their

disputes,” among other things. Id. Indeed, they may specify

that only certain disputes are subject to arbitration. Id. at

1774-76; EEOC v. Waffle House, Inc., 534 U.S. 279, 289 (2002)

(“[N]othing in the statute authorizes a court to compel

arbitration of any issues, or by any parties, that are not

already covered in the agreement.”). In other words, arbitration

by contract “is a way to resolve those disputes — but only those

disputes — that the parties have agreed to submit to

arbitration.” First Options of Chi. v. Kaplan, 514 U.S. 938, 943

(1995) (emphasis added).

“It falls to courts . . . to give effect to these

contractual limitations, and when doing so, courts and
15

arbitrators must not lose sight of the purpose of the exercise:

to give effect to the intent of the parties.” Stolt-Nielsen, 130

S. Ct. at 1774-75. In my view, the majority has lost sight of

these principles in deciding this case.

Although the majority discusses a “nexus requirement”

inherent in FINRA Rule 12200 — a proposition with which I fully

agree because there must be a relationship between the dispute

giving rise to “customer” status and the dispute the “customer”

seeks to arbitrate — the majority’s analysis does not comport

with principles of contract. The definition of “customer” and

the “nexus requirement” are at best loosely defined in the FINRA

Rules. As the Supreme Court pointed out in Stolt Nielsen,

“[w]hen the parties to a bargain sufficiently defined to be a

contract have not agreed with respect to a term which is

essential to a determination of their rights and duties, a term

which is reasonable in the circumstances is supplied by the

court.” Id. at 1775 (quoting Restatement (Second) of Contracts

§ 204 (1979)).

It is not reasonable, as the majority opinion presumes,

to think that the parties to the FINRA Rules agreed that once

“customer” status is established through a single transaction or

agreement, any related matter may be arbitrated. It is not

reasonable to find, as the majority does, that just because an

underwriting transaction between WVUH and UBS made it foreseeable

that WVUH would purchase ancillary services from someone, not
16

necessarily UBS, the agreement to arbitrate disputes arising out

of the purchase of those services can somehow be construed as an

agreement to arbitrate disputes arising out of the underwriting

agreement. The Supreme Court in Stolt-Nielsen rejected similar

reasoning. In that case, an arbitration panel determined that

because an uncontested bilateral arbitration agreement did not

contain any language precluding class arbitration, the party to

the bilateral agreement had agreed to class arbitration. Id.

The Court rejected the view that once an entitlement to

arbitration is established, any claim may be arbitrated. Id.

Instead, the Court required that there must be “a contractual

basis for concluding that the party agreed to” the particular

arbitration. Id. The same concerns addressed in Stolt-Nielsen

are applicable here and in future ARS disputes. The majority’s

attempt to limit its holding to the facts of “this case,”

Majority Op. at 21 n.6, evidences its continued misunderstanding

of the individual and separate agreements comprising ARS

transactions generally.

In an analogous scenario to this case, the Court of

Appeals for the Eleventh Circuit, interpreting the precursor NASD

Rules, held that the transaction creating “customer” status must

occur at the time of the events constituting the alleged fraud. 

Wheat, First Sec., Inc. v. Green, 993 F.2d 814, 820 (11th Cir.

1993). Where a broker-dealer that entered into the challenged

transaction conferring “customer” status becomes a NASD member
17

only after the transaction is complete, the court held that it

would “do significant injustice to the reasonable expectations of

NASD members” to require the newly minted NASD member to

arbitrate. Id. Its reasoning anticipated the later admonition

of the Supreme Court in Stolt-Nielsen that arbitration may be

ordered only when there is a contractual basis for finding an

agreement to arbitrate the claim in question. See id. (“We

cannot imagine that any NASD member would have contemplated that

its NASD membership alone would require it to arbitrate claims

which arose while a claimant was a customer of another member

merely because the claimant subsequently became its customer.”). 

I cannot imagine that a FINRA member would have contemplated that

a separate transaction involving a different agreement, different

facts, and different damages would entitle a party that became a

“customer” because of that transaction to require arbitration of

claims arising out of a different transaction.

In the FINRA context, a single party may have a host of

business dealings with a FINRA member, and each of those dealings

could — or could not — give rise to “customer” status

independently. Each dealing, in effect, contains a possible

entitlement to arbitration under the FINRA Rules because a

business transaction with a member gives rise to “customer”

status. It is reasonable in the circumstances to construe the

intent of the FINRA Rules as allowing “customers” to compel

arbitration for the transaction that gives them such an
6 Because a party may transact business with a FINRA member

and be a “customer” in some instances but not in others, this is

not a situation where the presumption in favor of arbitrability

applies. See Granite Rock, 130 S. Ct. at 2858; Applied

Energetics, Inc. v. NewOak Capital Mkts., LLC, 645 F.3d 522, 526

(2d Cir. 2011). Instead, in challenging a complainant’s

“customer” status, the FINRA member is, in essence, “challenging

the enforceability of the arbitration clause itself” in that

transaction. Granite Rock, 130 S. Ct. at 2858. In other words,

the question is whether a third-party beneficiary right was

conferred for that transaction, not whether, in the face of a

clear third-party beneficiary entitlement to arbitration, a

certain dispute is arbitrable. In any event, the policy favoring

arbitration does not “override the principle that a court may

submit to arbitration only those disputes that the parties have

agreed to submit.” Id. at 2859 (internal quotation marks and

alteration omitted).

18

entitlement and not for other transactions. See Consol. Edison,

Inc. v. Ne. Utils., 426 F.3d 524, 529 n.2 (2d Cir. 2005)

(distinguishing between transactions to determine whether thirdparty beneficiary rights bestowed for specific transactions);

Leawood Bancshares Inc. v. Alesco Preferred Fundings X, Ltd., No.

10 Civ. 5637, 2011 WL 1842295, at *4 (S.D.N.Y. May 10, 2011)

(same). Therefore, whether a certain transaction with a FINRA

member makes the other party a “customer” must be determined for

that transaction to find an agreement to arbitrate in any

particular case. See Stolt-Nielsen, 130 S. Ct. at 1775; First

Options, 514 U.S. at 943; cf. Wheat, First, 993 F.2d 814 at 820. 

This is all the more true when, as here, the agreement to

arbitrate is an ill-defined third-party beneficiary right under

the FINRA Rules.6 See Howsam v. Dean Witter Reynolds, Inc., 537

U.S. 79, 84 (2002) (“[A] disagreement about whether an
19

arbitration clause in a concededly binding contract applies to a

particular type of controversy is for the court.”).

Because of this vagueness, other cases, including some

in this Circuit, have similarly looked for aids in determining

what transactions reasonably give rise to “customer” status under

the NASD Rules when presented with unique claims. See Bensadoun,

316 F.3d at 177 (citing with approval the proposition that a

“customer” is only “one involved in a business relationship with

an NASD member that is related directly to investment or

brokerage services”). Most cases finding an entitlement to

arbitration are run-of-the-mill “customer” disputes — even in ARS

cases — where a party uses a broker-dealer to purchase securities

and disputes the purchase transaction. E.g., STMicroelectronics,

N.V. v. Credit Suisse Secs. (USA) LLC, 2011 WL 2151008 (2d Cir.

June 2, 2011) (cited by the majority at 17). The ARS context

aside, this case does not involve a dispute about the purchase of

securities from a broker-dealer, and an agreement to arbitrate

the disputed transaction must be found before arbitration is

mandated.

To find an agreement to arbitrate, a stronger nexus is

required between the transaction creating “customer” status and

the dispute than that found by the majority. Otherwise, no

principled limits on a FINRA member’s agreement to arbitrate

would exist. The Supreme Court has not condoned ignoring limits

on agreements to arbitrate. See Stolt-Nielsen, 130 S. Ct. at
20

1774-75. And it is appropriate to consider the circumstances and

logical basis for determining whether a party is or is not a

“customer” with respect to a certain dispute. Restatement

(Second) of Contracts § 302, cmt. a (“A court in determining the

parties’ intention should consider the circumstances surrounding

the transaction as well as the actual language of the

contract.”).

A reasonable construction of a “nexus requirement” is

that a “customer’s” complaint must arise out of the transaction

conferring “customer” status. This rule would ensure that in any

specific transaction, the FINRA member intended to entitle its

counterparty to arbitrate a dispute arising out of the

transaction. As I explained in Part I, supra, it cannot be that

the transaction conferring “customer” status arises out of the

transaction complained of. That is putting the cart before the

horse. Only the foreseeable consequences of the transaction for

which arbitration is available — not some other transaction — are

includable within that arbitration. Cf. Restatement (Second) of

Contracts § 347 (stating that only losses “incidental or

consequential” to the breach are available as damages);

Restatement (Second) of Torts § 549 (damages available for

fraudulent misrepresentation for losses “suffered otherwise as a

consequence of the recipient’s reliance upon the

mispresentation”). 
21

In this case, purchasing broker-dealer services may be

a foreseeable consequence of issuing ARS, but issuing ARS is not

a foreseeable consequence of purchasing broker-dealer services. 

Thus, although damages relating to the purchase of broker-dealer

services could be included in an arbitration about underwriting,

damages relating to the issuance of ARS cannot be included in an

arbitration about purchasing broker-dealer services. The

underwriting, issuance, and auctions are all related, but the

purchase of broker-dealer services was done by way of an

agreement separate from the underwriting agreement for a separate

fee. To be sure, engaging a broker-dealer was necessary for the

ARS to function. But, as noted above, those services could have

been sourced elsewhere (indeed, Deutsche Bank provided the bulk

of them in this case as UBS’s agent). The underwriting and the

broker-dealer transactions are different. Even if the brokerdealer transaction gives rise to “customer” status, the

underwriting transaction does not flow from the broker-dealer

transaction. If anything, the broker-dealer transaction flows

from the underwriting transaction. The underwriting transaction

cannot be the basis for mandatory FINRA arbitration because there

is no evidence that WVUH undertook to pay or paid UBS for any

underwriting service. Because the underwriting transaction is

not subject to mandatory arbitration, the claims for damages

related to underwriting cannot be included, as a matter of

contract, in a mandatory arbitration over the transaction for
22

broker-dealer services. Therefore, the majority’s holding fails

to determine satisfactorily that the parties “agreed to

authorize” arbitration about the underwriting. Stolt-Nielsen,

130 S. Ct. at 1776.

For all of these reasons, UBS satisfies the standard

for granting a preliminary injunction, which is the operative

question reviewed here. It has at least demonstrated that there

are sufficiently serious questions about the merits to make the

case “fair ground for litigation,” and the balance of hardships

tips in favor of UBS because being required to arbitrate a claim

means that the party forfeits a substantial right.

Respectfully, I dissent.