PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
UBS FINANCIAL SERVICES,
INCORPORATED; CITIGROUP GLOBAL
MARKETS, INCORPORATED,
Plaintiffs-Appellants,
No. 12-2066
v.
CARILION CLINIC,
Defendant-Appellee.
Appeal from the United States District Court
for the Eastern District of Virginia, at Richmond.
John A. Gibney, Jr., District Judge.
(3:12-cv-00424-JAG)
Argued: December 4, 2012
Decided: January 23, 2013
Before NIEMEYER, KEENAN, and DIAZ, Circuit Judges.
Affirmed by published opinion. Judge Niemeyer wrote the
opinion, in which Judge Keenan and Judge Diaz joined.
COUNSEL
ARGUED: Jonathan K. Youngwood, SIMPSON THACHER
& BARTLETT, LLP, New York, New York, for Appellants.
James R. Swanson, FISHMAN HAYGOOD PHELPS
2 UBS FINANCIAL SERVICES v. CARILION CLINIC
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, WHAR-
TON & GARRISON LLC, New York, New York, for Appel-
lant Citigroup Global Markets, Inc. Jason W. Burge, Alysson
L. Mills, FISHMAN HAYGOOD PHELPS WALMSLEY &
SWANSON LLP, New Orleans, Louisiana; Patrick T. Fen-
nell, CRANDALL & KATT, Roanoke, Virginia, for Appel-
lee.
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 Corpora-
tion in connection with its multi-million dollar bond issues.
Carilion claimed that during the course of providing those ser-
vices, 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 arbi-
trate disputes with a customer at the customer’s request).
UBS and Citi commenced this action to enjoin the arbitra-
tion proceedings, contending that Carilion was not a "cus-
tomer" 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.
UBS FINANCIAL SERVICES v. CARILION CLINIC 3
We affirm. As explained herein, we conclude that Carilion,
by purchasing UBS and Citi’s services, was indeed a "cus-
tomer" 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 expan-
sion of one of its hospitals and to refinance existing debt. Car-
ilion 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 pur-
chase interest rate swaps to hedge against interest rate fluctua-
tions 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 struc-
ture of the bond issues, Carilion claims that UBS and Citi also
4 UBS FINANCIAL SERVICES v. CARILION CLINIC
(1) served as underwriters for the auction-rate bonds, purchas-
ing 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 Car-
ilion 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 manag-
ing the transaction, and annual broker-dealer fees of 25 basis
points in exchange for managing the auction-rate bond auc-
tions.
The parties documented their business arrangements in two
types of contracts—broker-dealer agreements and underwrit-
ing 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 col-
lapsed 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 pro-
tection. Consequently, Carilion was forced to refinance, los-
ing 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,
UBS FINANCIAL SERVICES v. CARILION CLINIC 5
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 over-
sight over ‘all securities firms that do business with the pub-
lic.’" 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 mem-
bers 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 busi-
ness 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 pre-
liminary 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
6 UBS FINANCIAL SERVICES v. CARILION CLINIC
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 fed-
eral 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 arbitra-
tion; 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
1
FINRA Rule 12200 provides:
Parties must arbitrate a dispute under the Code if:
-Arbitration under the Code is either:
(1) Required by a written agreement, or
(2) Requested by the customer;
UBS FINANCIAL SERVICES v. CARILION CLINIC 7
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 "cus-
tomer" of UBS and Citi, UBS and Citi became contractually
obligated to proceed with arbitration on Carilion’s request
(unless, of course, Carilion waived its right to arbitration, as
claimed by UBS and Citi and as is addressed in Part III,
below). But UBS and Citi claim that Carilion was not a "cus-
tomer," as that term is used in the FINRA Rules, and that
therefore they have no contractual obligation to arbitrate.
They maintain that Carilion’s claims did not "relate to a bro-
kerage account or investment relationship with UBS or Citi"
and that the term customer under the FINRA Rules is limited
to persons who received investment or brokerage services, cit-
ing Fleet Boston Robertson Stephens, Inc. v. Innovex, Inc.,
264 F.3d 770 (8th Cir. 2001) (holding that a party receiving
banking and financial advice was not a "customer" under the
National Association of Securities Dealers ("NASD") Rules
and therefore could not invoke members’ arbitration obliga-
tions).
Carilion argues that "customer," as used in the FINRA
Rules, is a broad term that is not limited to only investors. It
contends that the scope of FINRA’s regulation is broader than
just protecting investors and that courts have not so limited
the term "customer" in construing the FINRA Rules. Relying
on a dictionary definition, Carilion claims that a customer is
anyone "who purchases some commodity or service."2
-The dispute is between a customer and a member or associ-
ated person of a member; and
-The dispute arises in connection with the business activities
of the member or the associated person, except disputes
involving the insurance business activities of a member that
is also an insurance company.
2
Carilion also argues that the federal policy favoring arbitration, see
AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1745 (2011), weighs
8 UBS FINANCIAL SERVICES v. CARILION CLINIC
In becoming members of FINRA, UBS and Citi agreed to
mandatory arbitration of specified disputes with customers
when the customer "requests" such arbitration. Thus, when
Carilion initiated arbitration proceedings, it invoked UBS and
Citi’s obligation under the FINRA Rules, giving rise to a con-
tractual obligation to arbitrate if in fact Carilion qualified as
a "customer," as that term is used in the FINRA Rules. See
Wash. Square Sec., Inc. v. Aune, 385 F.3d 432, 435 (4th Cir.
2004). Thus, what constitutes a "customer" lies at the heart of
whether UBS and Citi have an obligation to arbitrate.
The FINRA Rules do not define "customer." They do limit
the term to exclude from its scope any "broker or dealer."
in favor of a ruling that it is a "customer" of UBS and Citi. That federal
policy creating a presumption in favor of arbitration, however, applies
only where a validly formed and enforceable arbitration agreement exists
and its scope is ambiguous. See Granite Rock Co. v. Int’l Bhd. of Team-
sters, 130 S. Ct. 2847, 2858–59 (2010). The Supreme Court "has never
held that the presumption overrides the principle that a court may submit
to arbitration ‘only those disputes . . . the parties have agreed to submit.’"
Id. (quoting First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943
(1995)).
Here, an agreement to arbitrate exists only if a customer requests arbi-
tration from a member. The question of whether a person requesting arbi-
tration is a customer must be resolved to determine the existence of a
contract to arbitrate, not the scope of an arbitration agreement. Carilion’s
reliance on Washington Square Securities, Inc. v. Aune, 385 F.3d 432 (4th
Cir. 2004), where the court applied a presumption of arbitration in some-
what similar circumstances is not useful here because in Washington
Square, the investors were concededly customers of an associated person.
See id. at 436 (noting that it was "undisputed that the Investors were cus-
tomers of [the broker], and that [the broker] was an associated person of
the member").
Consequently, in this case we address whether Carilion was a customer
as a question of contract law and without considering the presumption in
favor of arbitration. See Concepcion, 131 S. Ct. at 1745 (noting that the
Federal Arbitration Act reflects the "fundamental principle that arbitration
is a matter of contract" (quoting Rent-A-Center, West, Inc. v. Jackson, 130
S. Ct. 2772, 2776 (2010)).
UBS FINANCIAL SERVICES v. CARILION CLINIC 9
FINRA Rule 12100(i).3 But as to non-brokers and non-
dealers, the term is left undefined. Nonetheless, the FINRA
Rules do give an informing context by providing that arbitra-
ble disputes must arise in connection with the "business activ-
ities" of the FINRA member, thus suggesting that for a person
to obtain arbitration, the person must be a customer with
respect to a FINRA member’s business activities. See FINRA
Rule 12200. The FINRA Rules give further context by sug-
gesting that the business activities of a FINRA member
involve "investment banking or securities business." See
FINRA Rule 12100(r).4 Finally, the scope of FINRA’s regula-
tory interest similarly indicates the scope of relevant business
activities. FINRA’s mission, among other things, is "[t]o pro-
mote through cooperative effort the investment banking and
securities business, to standardize its principles and practices,
to promote therein high standards of commercial honor, and
to encourage and promote among members observance of fed-
eral and state securities laws;" "[t]o adopt, administer, and
enforce rules of fair practice and rules to prevent fraudulent
and manipulative acts in practices"; and "[t]o promote self-
discipline among members, and to investigate and adjust
grievances between the public and members and between
members." Restated Certificate of Incorporation of Financial
3
FINRA Rule 12100(i) provides, "A customer shall not include a broker
or dealer."
4
FINRA Rule 12100(r) provides:
The term "person associated with a member" means:
(1) A natural person who is registered or has applied for regis-
tration under the Rules of FINRA; or
(2) A sole proprietor, partner, officer, director, or branch man-
ager of a member, or other natural person occupying a similar
status or performing similar functions, or a natural person
engaged in the investment banking or securities business who is
directly or indirectly controlling or controlled by a member,
whether or not any such person is registered or exempt from reg-
istration with FINRA under the By-Laws or the Rules of FINRA.
(Emphasis added).
10 UBS FINANCIAL SERVICES v. CARILION CLINIC
Industry Regulatory Authority, Inc. § 3 (July 2, 2010)
(emphasis added); see also W. Va. Univ. Hosps., 660 F.3d at
652 (using FINRA’s Restated Certificate of Incorporation to
"reject UBS’s contention that FINRA has a narrow ‘investor-
protection mandate’").
But subject to the scope indicated by its context in the
FINRA Rules, the term "customer" in Rule 12200 still retains
its generally accepted meaning—"one that purchases a com-
modity or service." Merriam-Webster’s Collegiate Dictionary
308 (11th ed. 2007).
Coupling the contextual indicators from FINRA and the
dictionary definition of "customer," we thus conclude that
when FINRA uses "customer" in Rule 12200, it refers to one,
not a broker or dealer, who purchases commodities or services
from a FINRA member in the course of the member’s busi-
ness activities insofar as those activities are covered by
FINRA’s regulation, namely the activities of investment
banking and the securities business. To construe "customer"
in a manner that is consistent with the context of the FINRA
Rules serves not only to provide customers of FINRA mem-
bers the opportunity to arbitrate disputes arising in connection
with FINRA members’ business activities, but also to fulfill
FINRA’s charter "to investigate and adjust grievances
between the public and members."
Our definition is also fully supported by the decisions of
other courts that have faced analogous questions of who is a
"customer" within the meaning of FINRA Rule 12200. See W.
Va. Univ. Hosps., 660 F.3d at 648-53; UBS Fin. Servs. Inc. v.
City of Pasadena, No. CV 12-05019-RGK (JCx), 2012 WL
3132949, at *4-5 (C.D. Cal. July 31, 2012); J.P. Morgan Sec.
Inc. v. La. Citizens Prop. Ins. Corp., 712 F. Supp. 2d 70, 77-
79 (S.D.N.Y. 2010).
In West Virginia University Hospitals, UBS sought to
enjoin arbitration under the FINRA Rules, as it did here, con-
UBS FINANCIAL SERVICES v. CARILION CLINIC 11
tending that West Virginia University Hospitals was not a
"customer." 660 F.3d at 647-48. Just as here, UBS had pro-
vided services to West Virginia University Hospitals in con-
nection with the Hospitals’ issuance of auction-rate bonds.
The court observed that UBS served West Virginia University
Hospitals "as both the lead underwriter and the main broker-
dealer responsible for facilitating the Dutch auctions in which
[the Hospitals’] bonds were resold and their interest rates set."
Id. at 646. In concluding that West Virginia University Hospi-
tals was a "customer" of UBS entitled to FINRA arbitration,
the Second Circuit held that the term "customer" in FINRA
Rule 12200 "includes at least a non-broker or non-dealer who
purchases, or undertakes to purchase, a good or service from
a FINRA member." Id. at 650. Thus, because West Virginia
University Hospitals "purchased a service, specifically auc-
tion services, from UBS," it was UBS’s customer. Id.
In reaching its conclusion, the court rejected the same argu-
ments that UBS and Citi make here—that the term "customer"
is restricted by FINRA’s investor-protection mandate to those
persons receiving investment or brokerage services. The court
explained that while FINRA’s mission does indeed include
investor protection, its role and scope of authority is clearly
broader:
FINRA’s purposes are not limited to investor protec-
tion. Rather, as previously noted, FINRA serves as
the sole self-regulatory organization chartered under
the Exchange Act and exercises comprehensive
oversight of the securities industry. Among its stated
purposes are to "encourage and promote among
members observance of federal and state securities
laws"; "[t]o investigate and adjust grievances
between the public and members and between mem-
bers"; and "[t]o adopt, administer, and enforce rules
of fair practice." UBS does not explain why "cus-
tomer" should be limited to investors in light of
FINRA’s purposes, its other broad definitions of
12 UBS FINANCIAL SERVICES v. CARILION CLINIC
"customer" applicable to other provisions, and the
ordinary usage of the term.
W. Va. Univ. Hosps., 660 F.3d at 652 (citations omitted). We
find the court’s reasoning persuasive and equally applicable
to the circumstances here.
UBS and Citi rely heavily on the Eighth Circuit’s decision
in Fleet Boston to support their more limited definition of
"customer" as referring to investors. In Fleet Boston, the court
construed language in the NASD Rules, a predecessor to the
FINRA Rules, and rejected a claim that "customer" means
broadly "everyone who is not a broker or dealer." 264 F.3d at
772. The court explained, "We do not believe that the NASD
Rules were meant to apply to every sort of financial service
an NASD member might provide, regardless of how remote
that service might be from the investing or brokerage activi-
ties, which the NASD oversees." Id. It then found that the
NASD Rules support a general definition of "customer" as
"one who receives investment and brokerage services or oth-
erwise deals more directly with securities than what occurred
here." Id. (emphasis added). The court, however, did not
explain its definition further by describing what relationship
might deal "more directly with securities than what occurred
here." For this reason and because the court was faced with
a purported customer who had merely received financial
advice, we cannot take its holding to limit the scope of "cus-
tomer" to "one who receives investment and brokerage ser-
vices," as UBS and Citi argue.
UBS and Citi also contend that finding Carilion to be a cus-
tomer "creates an unnecessary conflict between FINRA and
MSRB rules" because Carilion, as a new issuer of securities,
would be a "customer" under the FINRA Rules but not under
the MSRB Rules. The MSRB (Municipal Securities Rulemak-
ing Board) is a self-regulatory organization that, similar to
FINRA, regulates the municipal securities market.
UBS FINANCIAL SERVICES v. CARILION CLINIC 13
MSRB Rule D-9 defines a customer as "any person other
than a broker, dealer, or municipal securities dealer acting in
its capacity as such or an issuer in transactions involving the
sale by the issuer of a new issue of its securities." Thus, while
Carilion is a customer under the FINRA Rules, as we hold, it
might not be a customer under the MSRB Rules. But being
subject to two different regulatory schemes, each of which
defines customer differently, does not necessarily create any
tension. To be sure, Carilion was a new issuer of municipal
securities and therefore might not have been a customer under
the MSRB Rules. But it also purchased underwriting and auc-
tion services from UBS and Citi and therefore was a customer
of those entities for purposes of arbitrating disputes arising
out of the business activities of those FINRA members. UBS
and Citi have not demonstrated how these regulatory differ-
ences create irreconcilable conflicts.
UBS and Citi further contend that the broker-dealer agree-
ments they entered into with Carilion used "customer" to refer
to investors purchasing Carilion’s bonds and thus indicate that
Carilion is not a customer of UBS or Citi. The broker-dealer
agreements, however, were written to serve the purposes of
those agreements such that their labeling the purchasers of
bond securities from Carilion as customers does not foreclose
reaching the conclusion that Carilion itself was also a cus-
tomer of UBS or Citi with respect to their services. Moreover,
even though parties are free to exempt themselves from Rule
12200, their private agreements do not alter the definition of
"customer" in the FINRA Rules.
Finally, UBS and Citi argue that our holding is inconsistent
with FINRA’s stated purpose of "protecting investors." As we
have already pointed out, however, even though FINRA
undertakes in its mission to protect investors, it also serves a
broader purpose, that of serving as "the sole self-regulatory
organization chartered under the Exchange Act to exercise
comprehensive oversight of the securities industry." W. Va.
Univ. Hosps., 660 F.3d at 652. Its mission includes the spe-
14 UBS FINANCIAL SERVICES v. CARILION CLINIC
cific purpose of promoting observance of federal and state
securities laws and investigating and adjusting grievances
between the public and FINRA members under those laws.
See Restated Certificate of Incorporation of Financial Industry
Regulatory Authority, Inc. § 3 (July 2, 2010). FINRA Rule
12200 serves that mission.
In short, we conclude that "customer," as that term is used
in the FINRA Rules, refers to one, not a broker or a dealer,
who purchases commodities or services from a FINRA mem-
ber in the course of the member’s business activities insofar
as those activities are regulated by FINRA—namely invest-
ment banking and securities business activities.
We have little difficulty concluding that Carilion is such a
"customer." To finance the renovation and expansion of its
hospital and refinance debt, Carilion issued over $308 million
in bonds, some $234 million of which were auction-rate
bonds. To assist it in structuring and underwriting the financ-
ing, Carilion retained UBS and Citi, entering into broker-
dealer and underwriting agreements with them. Pursuant to
these agreements, UBS and Citi advised Carilion on the struc-
ture of its financing; served as the underwriters for the
auction-rate bonds, meaning that they purchased the bonds
from Carilion and resold them to investors; served as the lead
broker-dealers for Carilion’s auction-rate bond auctions; sold
to Carilion, through affiliates, interest rate swaps, which they
recommended to protect the financing structure; acted as Cari-
lion’s agents in dealing with the rating agencies; conducted
discussions with bond insurers on Carilion’s behalf; and pro-
vided monitoring and advisory services on the bonds and the
swaps. For their services, UBS and Citi earned an underwrit-
er’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.
Because Carilion, as a customer of UBS and Citi, has
requested arbitration, UBS and Citi as FINRA members are
UBS FINANCIAL SERVICES v. CARILION CLINIC 15
obligated to participate in the arbitration pursuant to the
FINRA Rules.
III
As a separate and distinct argument, UBS and Citi contend
that the broker-dealer agreements signed by the parties specif-
ically provide that all disputes between the parties, including
those disputes at issue in the FINRA arbitration commenced
by Carilion, "must be litigated in federal court," thus displac-
ing UBS and Citi’s more general obligation to arbitrate under
FINRA Rule 12200. They rely on the forum selection clause
which provides at its core, "all actions and proceedings aris-
ing out of this Agreement . . . shall be brought in the United
States District Court the County of New York."5 While the
clause appears only in the broker-dealer agreements and not
in the underwriting agreements, UBS and Citi argue that by
its language, the clause also applies to any of the transactions
"contemplated" by the parties, including the transactions cov-
ered by the underwriting agreements.
At the outset, we agree with UBS and Citi that the obliga-
tion to arbitrate under FINRA Rule 12200 can be superseded
and displaced by a more specific agreement between the par-
ties. See In re Am. Express Fin. Advisors Sec. Litig., 672 F.3d
113, 132 (2d Cir. 2011) (explaining that "different or addi-
tional contractual arrangements for arbitration can supersede
the rights conferred on [a] customer by virtue of [a] broker’s
membership in a self-regulating organization such as
[FINRA]" (quoting Kidder, Peabody & Co. v. Zinsmeyer
Trusts P’ship, 41 F.3d 861, 864 (2d Cir. 1994) (alterations in
original)); see also Smith Barney, Inc. v. Critical Health Sys.
of N.C., Inc., 212 F.3d 858, 862 (4th Cir. 2000) ("We join the
Second and Eleventh Circuits in holding that the [provision in
the American Stock Exchange Constitution allowing for the
5
The County of New York is coterminous with the Borough of Manhat-
tan within the City of New York.
16 UBS FINANCIAL SERVICES v. CARILION CLINIC
customer to elect to arbitrate before the American Arbitration
Association] can be superseded by a more specific agree-
ment"). Any such provision, however, must be sufficiently
specific to impute to the contracting parties the reasonable
expectation that they are superseding, displacing, or waiving
the arbitration obligation created by FINRA Rule 12200. Cf.
Smith Barney, 212 F.3d at 861 (interpreting whether a client
agreement prevented arbitration in the defendant’s desired
forum based on the plain language of the agreement); Applied
Energetics, Inc. v. NewOak Capital Mkts., LLC, 645 F.3d 522,
525 (2d Cir. 2011) (finding that an adjudication clause dis-
placed an arbitration clause because "[b]oth provisions are all-
inclusive, both are mandatory, and neither admits the possibil-
ity of the other").
Therefore, the question presented is whether the forum
selection clause in the broker-dealer agreements provides that
Carilion’s right to arbitrate under FINRA Rule 12200 is
superseded, displaced, or waived. This comes down to a
straightforward issue of contract interpretation.
The forum selection clause in the broker-dealer agreements,
on which UBS and Citi rely, provides:
The parties agree that all actions and proceedings
arising out of this Agreement or any of the transac-
tions contemplated hereby shall be brought in the
United States District Court in the County of New
York. To the extent permitted by law, each of the
parties hereto also irrevocably waives all right to
trial by jury in any action, proceeding or counter-
claim arising out of this Agreement or the transac-
tions contemplated hereby.
(Emphasis added). UBS and Citi argue that this clause means
that all disputes must be resolved by litigation in the United
States District Court in New York County and thus, by impli-
cation, supersedes and displaces their obligation to arbitrate
UBS FINANCIAL SERVICES v. CARILION CLINIC 17
disputes. From the premises that (1) arbitration is an "action
or proceeding"; (2) all actions or proceedings must be brought
in the United States District Court; and (3) FINRA arbitration
cannot take place in the district court, they reason to the con-
clusion that FINRA arbitration therefore is precluded.
There are several problems inherent in this logical con-
struct. First, if the term "actions and proceedings" as used in
the agreements includes arbitration (for indeed an arbitration
is a proceeding), then the sentence would have to be read to
recognize that arbitration remains available but must be
"brought" in court. Under this proposal, the sentence would
state that "all proceedings, including arbitration . . . shall be
brought in" court. In whatever way that sentence could be
read, it could not be read to preclude arbitration; to the con-
trary, it presumes its availability but localizes it, albeit to a
forum where it could not be pursued. But even that proposi-
tion could be questioned because a court plays a role in arbi-
tration proceedings by compelling the arbitration and
enforcing any arbitration award. Regardless of how one might
explain the commitment of an arbitration proceeding to a
court, the sentence surely cannot be read to preclude or waive
arbitration.
Second, one would reasonably expect that a clause
designed to supersede, displace, or waive arbitration would
mention arbitration. To be sure, the sentence might be found
to refer to arbitration through use of the word "proceedings,"
but then again the sentence does not suggest that such arbitra-
tion is superseded, displaced, or waived.
Third, if UBS and Citi are correct in construing "actions
and proceedings" with sufficient breadth to include an arbitra-
tion proceeding, then the remaining portion of the paragraph
becomes nonsensical. Under this construction, an arbitration
proceeding would be "brought in the United States District
Court" and as to any such action or proceeding, "all right to
trial by jury" would be waived. The more reasonable con-
18 UBS FINANCIAL SERVICES v. CARILION CLINIC
struction would take the references to "court" and "jury trials"
as limiting what is meant by "actions and proceedings." Thus,
read in the context of courts and jury trials, the term "actions
and proceedings" would be understood as a term of art, as
used, for example, in Federal Rule of Civil Procedure 1 (pro-
viding in part, "These rules govern the procedure in all civil
actions and proceedings in the United States district courts"
(emphasis added)). Similarly, the New York Civil Practice
Law and Rules primarily use "action" and "proceeding" to
refer to judicial disputes, not to arbitration. See Int’l Union
of Operating Eng’rs, Local No. 463 v. City of Niagara Falls,
743 N.Y.S.2d 236, 238 (N.Y. Sup. Ct. 2002) ("An arbitration
is not considered an action or a proceeding"), aff’d sub nom.
Bathurst v. City of Niagara Falls, 298 A.D.2d 1010 (N.Y.
App. Div. 2002). The approach of construing "actions and
proceedings" when used in the context of courts and jury tri-
als to refer to judicial actions is the approach generally fol-
lowed by other courts. See, e.g., Pers. Sec. & Safety Sys. Inc.
v. Motorola Inc., 297 F.3d 388, 395-96 (5th Cir. 2002) (inter-
preting agreement requiring "any suit or proceeding" to be
subject to the exclusive jurisdiction of the Texas courts not to
include arbitration).
We find it a more natural reading of the forum selection
clause to require that any litigation arising out of the agree-
ment would have to be brought in the United States District
Court in New York County and that as to any such action or
proceeding, a jury trial would be waived. And we believe that
it would never cross a reader’s mind that the clause provides
that the right to FINRA arbitration was being superseded or
waived. No word even suggesting supersedence, waiver, or
preclusion exists in the sentence.
For these reasons, we reject UBS and Citi’s suggestion that
the forum selection clause in the broker-dealer agreements
supersedes, displaces, or waives the arbitration otherwise pro-
vided by FINRA Rule 12200.
UBS FINANCIAL SERVICES v. CARILION CLINIC 19
The judgment of the district court is accordingly
AFFIRMED.