NASDAQ OMX Group, Inc. v. UBS Securities, LLC
770 F.3d 1010
| 2d Cir. | 2014Background
- On May 18, 2012 NASDAQ operated the Facebook IPO; technical failures in its IPO “Cross” delayed the opening, omitted ~30,000 pre‑open orders from the cross, and delayed trade confirmations, producing substantial market disruption and losses to participants. The SEC later sanctioned NASDAQ for rule violations and required rule changes.
- UBS, a NASDAQ member and counterparty in the IPO, claimed it incurred >$350 million in losses and filed an AAA arbitration demand asserting state‑law claims: breach of contract/indemnification (per a Services Agreement), breach of implied covenant of good faith, and gross negligence. UBS’s claims rest on NASDAQ’s alleged failure to operate a fair and orderly market and to follow NASDAQ rules (many SEC‑approved).
- NASDAQ sued in federal district court for declaratory and injunctive relief to enjoin UBS’s arbitration; the district court granted a preliminary injunction precluding UBS from proceeding in arbitration. UBS appealed.
- The Services Agreement contained a broad arbitration clause but carved it out “Except as may be provided in the NASDAQ OMX Requirements” (defined to include NASDAQ rules). The Agreement also gives NASDAQ rules priority over conflicting contract terms.
- NASDAQ Rule 4626(a) generally bars member claims for losses arising from failures of the Nasdaq Market Center to process orders; Rule 4626(b)(3), later SEC‑approved, created a voluntary, limited accommodation program specific to Facebook‑IPO losses.
Issues
| Issue | Plaintiff's Argument (NASDAQ) | Defendant's Argument (UBS) | Held |
|---|---|---|---|
| 1. Subject‑matter jurisdiction: May federal court hear state‑law claims that rest on alleged violation of Exchange Act duties and SEC‑approved exchange rules? | NASDAQ: federal question jurisdiction exists under Grable/Gunn because UBS’s state claims necessarily raise actually disputed, substantial federal issues (scope and breach of the Exchange Act duty to maintain a fair and orderly market and compliance with SEC‑approved rules), and federal adjudication won’t upset the federal‑state balance. | UBS: claims are pure state‑law contract/tort disputes about private exchange rules; no federal cause of action is asserted, so federal jurisdiction is improper. | Court: Affirmed federal jurisdiction — UBS’s claims necessarily raise actually disputed and substantial federal issues tied to Exchange Act duties and SEC‑approved rules; federal adjudication is appropriate. |
| 2. Who decides arbitrability (court or arbitrator)? | NASDAQ: the carve‑out to NASDAQ Requirements in the arbitration clause makes intent ambiguous; arbitrability is for the court. | UBS: incorporation of AAA rules and broad arbitration clause means the arbitrator should decide arbitrability. | Court: Court decides arbitrability because parties did not clearly and unmistakably assign that question to arbitrators; the carve‑out creates ambiguity. |
| 3. Scope of arbitration: Do UBS’s claims fall within arbitration scope given Service Agreement and NASDAQ rules (especially Rule 4626)? | NASDAQ: Agreement limits arbitration by NASDAQ Requirements; Rule 4626(a) precludes member claims for losses from Market Center failures, so UBS’s claims are not subject to arbitration. | UBS: Rule 4626(a) does not expressly bar arbitration; UBS can pursue arbitration and New York law bars contractual immunity for gross negligence. | Court: UBS’s claims fall within Rule 4626(a) preclusion (claims arising from Market Center failures); the Agreement incorporates NASDAQ rules and thus UBS’s claims are not arbitrable. |
| 4. Preliminary injunction to enjoin arbitration | NASDAQ: required to prevent undermining federal forum and ensure federal adjudication of federal issues; injunction appropriate pending resolution. | UBS: injunction improper because arbitration clause governs and disputes belong in arbitration. | Court: Preliminary injunction proper because (1) federal jurisdiction exists, (2) arbitrability is for the court, and (3) claims are non‑arbitrable under Rule 4626. |
Key Cases Cited
- Grable & Sons Metal Prods., Inc. v. Darue Eng’g & Mfg., 545 U.S. 308 (2005) (establishes four‑part test for federal‑question jurisdiction over state claims that embed federal issues)
- Gunn v. Minton, 568 U.S. 251 (2013) (clarifies narrowness of Grable exception; federal issue must be necessarily raised, actually disputed, substantial, and compatible with federal‑state balance)
- Merrell Dow Pharms. Inc. v. Thompson, 478 U.S. 804 (1986) (incorporation of a federal standard into a state cause of action is not alone sufficient to create federal jurisdiction)
- Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002) (arbitrability presumptively for courts unless parties clearly and unmistakably provide otherwise)
- Barbara v. New York Stock Exch., Inc., 99 F.3d 49 (2d Cir. 1996) (stock exchange rules are contractual; federal jurisdiction over state law claims premised on exchange rules is limited)
- D’Alessio v. New York Stock Exch., Inc., 258 F.3d 93 (2d Cir. 2001) (recognizes strong federal interest where state claims implicate violations of federal securities laws and exchange duties)