UBS Fin. Servs., Inc. v. Carilion Clinic

Decision Date23 January 2013
Docket NumberNo. 12–2066.,12–2066.
PartiesUBS FINANCIAL SERVICES, INCORPORATED; Citigroup Global Markets, Incorporated, Plaintiffs–Appellants, v. CARILION CLINIC, Defendant–Appellee.
CourtU.S. Court of Appeals — Fourth Circuit

OPINION TEXT STARTS HERE

ARGUED:Jonathan K. Youngwood, Simpson Thacher & Bartlett, LLP, New York, New York, for Appellants. James R. Swanson, Fishman Haygood Phelps Walmsley & Swanson LLP, New Orleans, Louisiana, for Appellee. ON BRIEF:Hugh McCoy Fain, III, Edward E. Bagnell, Jr., Spotts Fain PC, Richmond, Virginia, for Appellants; Jay Cohen, Paul, Weiss, Rifkind, Wharton & Garrison LLC, New York, New York, for Appellant Citigroup Global Markets, Inc. Jason W. Burge, Alysson L. Mills, Fishman Haygood Phelps Walmsley & Swanson LLP, New Orleans, Louisiana; Patrick T. Fennell, Crandall & Katt, Roanoke, Virginia, for Appellee.

Before NIEMEYER, KEENAN, and DIAZ, Circuit Judges.

Affirmed by published opinion. Judge NIEMEYER wrote the opinion, in which Judge KEENAN and Judge DIAZ joined.

OPINION

NIEMEYER, Circuit Judge:

This case presents the question of whether UBS Financial Services, Inc. (UBS) and Citigroup Global Markets, Inc. (Citi) are required, as members of the Financial Industry Regulatory Authority, Inc. (“FINRA”), to arbitrate disputes arising out of the services they provided to Carilion Corporation in connection with its multi-million dollar bond issues. Carilion claimed that during the course of providing those services, UBS and Citi made numerous misrepresentations to it and breached numerous duties. To resolve its claims, Carilion initiated an arbitration proceeding against UBS and Citi under FINRA Rule 12200 (which requires FINRA members to arbitrate disputes with a customer at the customer's request).

UBS and Citi commenced this action to enjoin the arbitration proceedings, contending that Carilion was not a “customer” as that term is used in FINRA Rule 12200 and that, in any event, Carilion waived any right to arbitrate by agreeing to the forum selection clause contained in written agreements with UBS and Citi. The district court rejected these arguments and denied UBS and Citi's motion for injunctive relief.

We affirm. As explained herein, we conclude that Carilion, by purchasing UBS and Citi's services, was indeed a “customer” entitled to arbitration under FINRA Rule 12200 and that the forum selection clause relied on by UBS and Citi did not have the effect of superseding or waiving Carilion's right to arbitrate.

I

Carilion is a not-for-profit healthcare organization that operates hospitals and clinics in Virginia. In 2005, it decided to issue municipal bonds to finance the renovation and expansion of one of its hospitals and to refinance existing debt. Carilion retained UBS and Citi to advise it on the structure of the bond issues and to assist it in implementing the financing plan.

As Carilion alleges in its statement of claim filed with FINRA, UBS and Citi recommended that Carilion issue a large percentage of its bonds as “auction-rate bonds” and purchase interest rate swaps to hedge against interest rate fluctuations on those bonds. Auction-rate bonds are long-term, variable-rate instruments for which the interest rates are reset periodically through an auction process. During the process, bidders place purchase and sell orders for the bonds through broker-dealers who have contracted with the issuer. The bonds are then sold at the lowest rate at which they can be sold at par. If there are insufficient orders to purchase all of the bonds being sold at auction, the auction “fails,” and the interest rate jumps to a contractual maximum rate until the next auction.

Carilion followed UBS and Citi's advice and accordingly, in December 2005, issued $234,225,000 in face value of auction-rate bonds and $74,240,000 in face value of daily-rate bonds (which are not at issue in this case).

In addition to providing Carilion with advice on the structure of the bond issues, Carilion claims that UBS and Citi also (1) served as underwriters for the auction-rate bonds, purchasing the bonds from Carilion and reselling them to investors; (2) served as lead broker-dealers for Carilion's auction-rate bond auctions; (3) sold to Carilion, through their affiliates, interest rate swaps that they had recommended to protect Carilion from fluctuations in the bonds' interest rates; (4) acted as Carilion's agents in dealing with the rating agencies; (5) conducted discussions with bond insurers on Carilion's behalf; and (6) provided monitoring and advisory services on the bonds and the swaps. For their services, UBS and Citi earned an underwriter's discount, part of which constituted a management fee for their assistance in structuring and managing the transaction, and annual broker-dealer fees of 25 basis points in exchange for managing the auction-rate bond auctions.

The parties documented their business arrangements in two types of contracts—broker-dealer agreements and underwriting agreements. The broker-dealer agreements, executed on December 1, 2005—two with UBS and two with Citi—provided that UBS and Citi would run the periodic auctions. The underwriting agreements, executed on December 13, 2005—one with UBS and one with Citi—provided that UBS and Citi would purchase the auction-rate bonds from Carilion and resell them to the public.

As Carilion alleges in its arbitration claim, in February 2008, the auction-rate bond market for Carilion's bonds collapsed when UBS and Citi stopped submitting support bids for the bonds at the auctions. Carilion's interest payments skyrocketed, and the swaps did not provide the designed protection. Consequently, Carilion was forced to refinance, losing millions of dollars in the process. Carilion claimed that UBS and Citi misled it on the true nature of the auction-rate bond market by failing to disclose that they had a practice of placing support bids to prevent failure at every auction for which they were the lead broker-dealer. Carilion claimed that UBS and Citi's conduct violated their fiduciary duty, amounted to fraud and negligent misrepresentation, violated the Securities Exchange Act of 1934, violated the Virginia Securities Act, and violated Municipal Securities Rulemaking Board (“MSRB”) and FINRA duties. To resolve these claims, Carilion initiated the arbitration proceedings with FINRA on February 11, 2012, naming UBS and Citi as respondents.

FINRA is a private self-regulatory organization, formed in 2007, that has “the authority to exercise comprehensive oversight over ‘all securities firms that do business with the public.’ UBS Fin. Servs., Inc. v. W. Va. Univ. Hosps., Inc., 660 F.3d 643, 648 (2d Cir.2011) (quoting 72 Fed.Reg. 42169, 42170 (Aug. 1, 2007)). Both UBS and Citi are FINRA members and, when becoming FINRA members, agreed to comply with its rules. See FINRA Bylaws, art. IV, § 1(a). FINRA Rule 12200 provides that when customers so request, FINRA members must participate in arbitration under the FINRA Code of Arbitration Procedures, so long as [t]he dispute is between a customer and a member or associated person of a member; and [t]he dispute arises in connection with the business activities of the member or the associated person.”

After Carilion initiated arbitration proceedings, UBS and Citi commenced this action, seeking a declaratory judgment that FINRA lacks jurisdiction over the arbitration and an injunction against the arbitration proceedings. In a motion for a preliminary injunction, UBS and Citi contended (1) that Carilion was not a “customer” entitled to arbitration under the FINRA Rules; and (2) that Carilion, in any event, agreed, in the forum selection clause of the broker-dealer agreements, to litigate, rather than arbitrate, all disputes in a federal court in New York County.

The district court denied UBS and Citi's motion for a preliminary injunction, focusing primarily on why UBS and Citi were unlikely to succeed on the merits. UBS Fin. Servs., Inc. v. Carilion Clinic, No. 3:12CV424–JAG, 2012 WL 3112010 (E.D.Va. July 30, 2012). The court concluded that Carilion was a “customer” under the FINRA Rules because (1) there is a federal policy favoring arbitration; (2) Carilion was within the plain meaning of the term “customer”; (3) “other courts have consistently held that an issuer of municipal securities who purchased financial services from a FINRA member is a customer under FINRA rules”; and (4) “FINRA itself seems to have rejected the plaintiffs' argument.” Id. at *3–6. The court also concluded that the forum selection clause in the broker-dealer agreements did not displace UBS and Citi's arbitration obligation, concluding that (1) there is a federal policy favoring arbitration; (2) “the language of the forum selection clause is susceptible to an interpretation favoring arbitration” because it only requires “actions and proceedings” to be brought in federal court and does not mention arbitration; and (3) UBS and Citi's interpretation “conflicts with FINRA's practices with respect to scheduling arbitration.” Id. at *6–7.

When, following the district court's ruling, the parties agreed that there was nothing further to litigate, the court entered final judgment on August 24, 2012, dismissing the action. This appeal followed.

II

UBS and Citi, as FINRA members, are generally required by the FINRA Rules to arbitrate disputes with customers when (1) arbitration is “requested” by the customer and (2) the dispute “arises in connection with the business activities of the member.” FINRA Rule 12200.1 Carilion, claiming to be a “customer” of UBS and Citi, requested arbitration of its claims that UBS and Citi breached duties in connection with services they provided to Carilion on its auction-rate bond issues. The parties agree that if Carilion was indeed a “customer” of UBS and Citi, UBS and Citi became contractually obligated to proceed with arbitration on Carilion's request (unless, of course, Carilion...

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