UBS Financial Services, Inc., et al. v. West Virginia University Hospitals (WVUH), et al., Dkt. No. 11-235-cv (2d Cir. Sept. 2011), involves three issues of relevance to the development of international dispute resolution and international litigation. UBS acted as an underwriter and broker of auction rate securities and was a member of the Financial Industry Regulatory Authority (FINRA). WVUH issues $329 million in bonds, a significant portion of which were issued in the form of auction rate securities (ARS). UBS served as lead underwrite and main broker-dealer. WVUH wanted to arbitrate its dispute with UBS after the ARS market collapsed, and UBS sued in federal court to enjoin the arbitrarion claiming that, as an issuer, WVUH was not a customer and hence not entitled to demand arbitration under the FINRA regulations.
The three noteworthy rulings from the Second Circuit are:
First, the Court of Appeals heard this appeal from a decision on a motion for a preliminary injunction. The parties had stipulated, and the Circuit did not disturb the agreement, that having to arbitrate in the absence of a binding agreement to arbitrate consituted irreparable injury.
Second, the first substantive question presented was whether WVUH was a customer of UBS’s under FINRA regulations. The Second Circuit did not decide the issue on the same ground as the District Court but rather affirmed the finding of the District Court on different grounds available, stating that it had authority to “affirm the judgment of the district court no any ground appearing on the record”. The Court of Appeals found that WVUH had purchased brokerage services from UBS and hence could take advantage of the arbitration provision of the FINRA rules. (It was this issue that Chief District Judge Preska (sitting by designation) dissented from.)
Third, and most interesting from an international practice perspective, one of the brokerage agreements contained a forum selection clause, stating:
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.
FINRA, however, also had rules on venue, providing that the arbitrator could decide the issue of venue. The Court of Appeals observed: “Because the FINRA Rules ‘constitute[d] the arbitration contract between UBS and [WVUH],” the District Court concluded that “its provision on the hearing location’ – and not the 2006 forum selection clause – determined the location of the arbitration” . The Court of Appeals reversed this holding, finding that the question of venue was for the arbirator to decide. The Circuit discussed the two Supreme Court decision, Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002), and Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003), found that its decision in Bear, Stearns & Co. v. Bennett, 938 F.2d 31 (2d Cir. 1991), was abrogated by these Supreme Court decisions, and determined tha the “forum selection clause arises only after the question of the arbitrability of the dispute has been resolved in favor of arbitration” and hence was for the arbitrator to interpret and apply (the Court did not address the question whether the words of the forum selection clause might itself be used to support the argument that the parties did not intend to arbitrate but rather litigation their dispute).