UBS Financial Services, Inc. v. Carilion Clinic

Carilion Clinic (Carilion) (defendant) operated hospitals and clinics. Carilion retained UBS Financial Services, Inc. (UBS) and Citigroup Global Markets, Inc. (Citi) (collectively, UBS/Citi) (plaintiffs) to help structure municipal-bond issues and implement a refinancing plan. UBS/Citi were members of the Financial Industry Regulatory Authority, Inc. (FINRA). UBS/Citi and Carilion entered into broker-dealer and underwriting agreements pursuant to which UBS/Citi ran periodic auctions and purchased auction-rate bonds from Carilion and resold them to the public. UBS/Citi earned an underwriter’s discount and annual broker-dealer fees for structuring and managing the transaction and bond auctions. Carilion suffered substantial losses after UBS/Citi stopped submitting supporting bids and the market for Carilion’s bonds collapsed. Carilion initiated arbitration proceedings, alleging misrepresentations and fiduciary-duty breaches. UBS/Citi sued to enjoin arbitration, maintaining that Carilion was not a customer within the meaning of FINRA Rule 12200. Rule 12200 required arbitration if the customer requested it, the dispute was between a customer and a member, and the dispute arose in connection with the business activities of the member. The district court denied UBS/Citi’s motion for preliminary injunctive relief and entered a final judgment dismissing the action. On appeal, UBS/Citi argued that the term “customer” under the FINRA rules was limited to persons who received investment or brokerage services from a member firm. Carilion argued that “customer” should be broadly construed in accordance with the dictionary definition as anyone who purchased a commodity or service.