UBS Financial Services, Inc. v. West Virginia University Hospi

Filing

OPINION, Dissenting, by LAP, D.J., FILED.[397886] [11-235]

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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,”

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(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,

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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,”
expenses,” and “bond insurance.”

(Id. ¶¶ 100-103.)

“refinancing
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

1

WVUH had engaged

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.
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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

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“link the grievance WVUH asserts in arbitration to the
transaction that established its customer status.”
at 20.

This is not so.

Majority Op.

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.
action.

The grievance is being duped into taking a particular

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.

5

Yet the majority

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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

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...)
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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.

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)).
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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

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.
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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

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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.
their essential character.

The transactions are different in

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

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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

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.
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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.
20.

Majority Op. at 7,

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

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.”
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agreement among the members.

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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.
strictly a matter of consent.”

“Arbitration is

Granite Rock Co. v. Int’l Bhd. of

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

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omitted).

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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).
agreement in myriad ways.

Parties may limit such an

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

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arbitrators must not lose sight of the purpose of the exercise:
to give effect to the intent of the parties.”
S. Ct. at 1774-75.

Stolt-Nielsen, 130

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

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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

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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

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entitlement and not for other transactions.

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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

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).
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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

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1774-75.

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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.
horse.

That is putting the cart before the

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”).

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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 broker-

dealer 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

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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.

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