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

• Citation: 660 F.3d 643
• Decision Date: 22 September 2011
• Docket Number: Docket No. 11–235–cv.
• Parties: UBS FINANCIAL SERVICES, INC., UBS Securities LLC, Plaintiffs–Appellants, v. WEST VIRGINIA UNIVERSITY HOSPITALS, INC., West Virginia University Hospitals–East, Inc., United Hospital Center, Inc., City Hospital Foundation, Inc., West Virginia United Health System, Inc., Defendants–Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

660 F.3d 643

UBS FINANCIAL SERVICES, INC., UBS Securities LLC, Plaintiffs–Appellants,

v.WEST VIRGINIA UNIVERSITY HOSPITALS, INC., West Virginia University Hospitals–East, Inc., United Hospital Center, Inc., City Hospital Foundation, Inc., West Virginia United Health System, Inc., Defendants–Appellees.

Docket No. 11–235–cv.

United States Court of Appeals, Second Circuit.

Argued: April 14, 2011.Decided: Sept. 22, 2011.

Andrew J. Ceresney, Debevoise & Plimpton LLP, New York, N.Y. (Jeremy Feigelson, on the brief), for Plaintiffs–Appellants.

James R. Swanson, Fishman Haygood Phelps Walmsley Willis & Swanson, LLP, New Orleans, LA (Joseph C. Peiffer; Athanasios Basdekis, Bailey & Glasser, LLP, Charleston, WV, on the brief), for Defendants–Appellees.

Jenice L. Malecki, Malecki Law, New York, N.Y. (Braden W. Sparks, Dallas, TX; Lisa A. Catalano, St. John's University School of Law, Jamaica, NY; Robert C. Port, Cohen Goldstein Port & Gottlieb, LLP, on the brief), for Amicus Curiae The Public Investors Arbitration Bar Association.Robert J. Giuffra, Jr., Sullivan & Cromwell LLP, New York, N.Y. (Brent J. McIntosh; Ira D. Hammerman, Kevin Carroll, The Securities Industry and Financial Markets Association, Washington, DC, on the brief), for Amicus Curiae The Securities Industry and Financial Markets Association.Before: RAGGI and LOHIER, Circuit Judges, and PRESKA, Chief District Judge.^*

Chief Judge PRESKA dissents by separate opinion.

LOHIER, Circuit Judge:

Plaintiff–Appellant UBS Financial Services, Inc. (“UBS”) appeals from a judgment of the United States District Court for the Southern District of New York (Marrero, J.) dismissing its action to enjoin the arbitration of claims filed by Defendant–Appellee West Virginia University Hospitals, Inc. (“WVUH”) ¹ before the Financial Industry Regulatory Authority, Inc. (“FINRA”) and declining to enjoin WVUH from proceeding with any action outside New York County pursuant to an agreement between the parties purportedly selecting New York as the applicable forum. We conclude, as a matter of law, that WVUH was UBS's “customer” under FINRA's arbitration rules and that WVUH's claims relating to its agreement to purchase UBS's auction services arise from its business dealings with UBS. We therefore affirm the District Court's judgment dismissing UBS's claims and affirm its order denying UBS's motion to enjoin arbitration. We further conclude that the enforceability of the forum selection clause at issue is a procedural question for FINRA arbitrators, not the courts, to decide in the first instance. We therefore vacate the District Court's order denying UBS's motion to enjoin WVUH from proceeding with any action outside New York County, and we remand with instructions to the District Court to dismiss that motion for lack of subject matter jurisdiction.

BACKGROUND

The relevant facts are limited and not in dispute. UBS is a corporation engaged in a range of finance-based businesses. In particular, it has underwritten municipal bonds and similar securities and served as a broker-dealer responsible for facilitating auctions for certain auction rate securities (“ARS”) in the form of auction rate certificates. At all relevant times, UBS was a FINRA member subject to FINRA's Code of Arbitration Procedure for Customer Disputes (the “FINRA Code” or the “Code”). WVUH is a not-for-profit health consortium that has issued bonds to finance capital improvements and refinance existing debt.

In three separate offerings in 2003, 2005, and 2006, WVUH issued a total of $329 million of bonds, a significant portion of which were, at UBS's suggestion, structured as ARS and issued in the form of auction rate certificates, which are floating-rate debt securities with long-term maturities. The offering documents associated with the issuances provided that the interest rates on the bonds would be set through periodic Dutch auctions, in which buyers would submit orders specifying the number of bonds they wished to purchase and the maximum interest rate they were willing to pay. As we recently explained:

ARS are long-term bonds and stocks whose interest rates or dividend yields are periodically reset through auction. At each auction, holders and buyers of the securities specify the minimum interest rate at which they want to hold or buy. If buy/hold orders meet or exceed sell orders, the auction succeeds. If supply exceeds demand, however, the auction fails and the issuer is forced to pay a higher rate of interest in order to penalize it and to increase investor demand.

Ashland Inc. v. Morgan Stanley & Co., 652 F.3d 333, 335 (2d Cir.2011).² At UBS's recommendation, WVUH entered into derivative transactions in the form of swap agreements, which were intended to create a synthetic fixed rate of interest payments for a portion of the bonds and thereby protect WVUH against high interest rates.

For each offering, UBS served as both the lead underwriter and the main broker-dealer responsible for facilitating the Dutch auctions in which WVUH's bonds were resold and their interest rates set. To establish the parties' rights and obligations in both contexts, the parties executed a pair of contracts for each of the three offerings: first, a broker-dealer agreement explaining UBS's duties in its capacity as a broker-dealer, and second, a purchase contract establishing the underwriter/issuer relationship and pursuant to which WVUH's bonds, termed “auction rate certificates,” were sold to UBS. Each year, the same representatives of UBS and WVUH executed both the broker-dealer and purchase agreements, and the agreements were executed at nearly the same time. For the 2003 and 2005 offerings, the broker-dealer agreements were executed over three weeks prior to the purchase agreements. The purchase and broker-dealer agreements for the 2006 offering were executed within two days, on June 6, 2006 and June 8, 2006, respectively.

As the underwriter, UBS agreed to purchase the auction rate securities outright from WVUH at a discounted price and resell a substantial portion of them to UBS's customers and other dealers. UBS profited by exploiting the difference between the discounted price at which it purchased the bonds from WVUH and the price at which it resold them to the market. As the broker-dealer, UBS facilitated the auctions that determined the interest payable on the same bonds that it underwrote—for example, by soliciting and processing purchase and sale orders. In a provision entitled either “Compensation” or “Broker–Dealer Fee” that appears in each of the broker-dealer agreements in 2003, 2005, and 2006, WVUH agreed to pay UBS a substantial fee equal to either (1) 0.25 percent of the principal amount of bonds held or purchased pursuant to orders submitted for a particular auction, or (2) if no auction took place on a particular auction date, 0.25 percent of the principal amount of bonds held by holders through UBS, prorated to reflect the number of days in the applicable auction period, to compensate UBS for facilitating the auctions. The same provision in all three broker-dealer agreements added that “the fee for the [auction rate certificates] shall be paid by [WVUH] and represents compensation for the services of [the] Broker–Dealer [UBS] in facilitating Auctions for the benefit of the beneficial owners of the [auction rate certificates].”

Although the broker-dealer agreements for the 2003 and 2005 issuances do not contain a forum selection clause, the 2006 broker-dealer agreement provides the following:

The parties agree that all actions and proceedings arising out of this Broker–Dealer Agreement and any of the transactions contemplated hereby shall be brought in the County of New York and, in connection with any such action or proceeding, submit to the jurisdiction of, and venue in, such County.

14 J.A. 1036.

In February 2008, the ARS market collapsed, and the auctions for WVUH's bonds promptly failed. Thereafter, the swap agreements UBS had recommended failed to shield WVUH from high interest rates, forcing WVUH to pay significantly higher rates on the bonds until October 2008, when it refinanced its payments.

On February 12, 2010, WVUH initiated the FINRA arbitration that is the subject of this appeal by filing an arbitration Statement of Claim against UBS under Rule 12200 of the FINRA Code. Among other claims, WVUH alleged that UBS violated the Securities Exchange Act of 1934 and the Uniform Securities Act by advising WVUH to issue ARS while withholding critical information about the ARS market and UBS's role in it. The Statement of Claim also alleged that UBS fraudulently induced WVUH to purchase auction services, again by withholding critical information about the ARS market and UBS's role. For example, WVUH claimed that UBS failed to disclose its practice of placing support bids in the Dutch auctions for ARS it underwrote (including WVUH's ARS), the significance of that support to the success of the auctions, and that the auctions for WVUH's bonds would fail as soon as UBS stopped submitting support bids. In addition to the substantive claims, WVUH alleged that FINRA had jurisdiction over the claims because WVUH was a “customer[ ] of [UBS] and this dispute [arose] from the business activities of [UBS], including but not limited to underwriting and broker-dealing.” J.A.1065.

In May 2010, UBS filed this action in district court seeking a declaration that it had not violated any legal duty to WVUH and owed it no damages or other relief. With respect to both the bond issuances it underwrote and the auctions it agreed to facilitate, UBS asserted that WVUH was not its “customer” entitled to arbitration under FINRA Rule 12200. It moved for a preliminary injunction to halt the pending FINRA arbitration, or at least prohibit it from proceeding outside New York County in accordance with the forum selection clause in the 2006 broker-dealer agreement. Both parties submitted limited documentary evidence...