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Goldman, Sachs & Co. v. City of Reno

United States Court of Appeals, Ninth Circuit

March 31, 2014

GOLDMAN, SACHS & CO., Plaintiff-Appellant,
v.
CITY OF RENO, Defendant-Appellee

Argued and Submitted, San Francisco, California: September 9, 2013.

Petition for certiorari filed at, 08/07/2014

Page 734

Appeal from the United States District Court for the District of Nevada. D.C. No. 3:12-cv-00327-RCJ-WGC. Robert Clive Jones, Chief District Judge, Presiding.

Matthew A. Schwartz (argued), David H. Braff, and Andrew H. Reynard, Sullivan & Cromwell LLP, New York, New York; Stanley W. Parry and Jon T. Pearson, Ballard Spahr LLP, Las Vegas, Nevada, for Plaintiff-Appellant.

James R. Swanson (argued) and Alysson L. Mills, Fishman Haygood Phelps Walmsley Willis & Swanson, LLP, New Orleans, Louisiana; Robert A. Winner, Winner & Carson, PC, Las Vegas, Nevada, for Defendant-Appellee.

Before: Mary M. Schroeder and Jay S. Bybee, Circuit Judges, and Anthony J. Battaglia, District Judge.[*]. Opinion by Judge Bybee; Partial Concurrence and Partial Dissent by Judge Battaglia.

OPINION

Page 735

BYBEE, Circuit Judge:

In 2005 and 2006, the City of Reno issued approximately $211 million in complex securities and employed Goldman, Sachs & Co. (" Goldman" ) as its sole underwriter and broker-dealer. Years after Reno's financing collapsed, Reno initiated an arbitration before the Financial Industry Regulatory Authority (" FINRA" ) to resolve its claims against Goldman arising out of their contractual relationship. Goldman then filed this action to enjoin the FINRA arbitration, arguing that (1) Reno was not a " customer" entitled to arbitrate under FINRA Rule 12200 and (2), at any rate, Reno had disclaimed any right to arbitrate by agreeing to forum selection clauses in the contracts between the parties. Reno responded that FINRA had the right in the first instance to determine

Page 736

arbitrability. The district court agreed with Reno and disagreed with Goldman. It therefore denied Goldman's motion for injunctive relief and entered final judgment in favor of Reno.

We have little difficulty determining that Reno was Goldman's " customer" under the FINRA Rules. However, the second question--whether the forum selection clauses superseded Goldman's obligation to arbitrate under FINRA Rule 12200--has been the subject of litigation in multiple circuits, with decidedly mixed results. The Fourth Circuit and the District of Minnesota have held that an identical forum selection clause does not supersede a FINRA member's obligation to arbitrate under the FINRA Rules, see UBS Fin. Servs., Inc. v. Carilion Clinic, 706 F.3d 319 (4th Cir. 2013); UBS Sec. LLC v. Allina Health Sys., No. 12-2090, 2013 WL 500373 (D. Minn. Feb. 11, 2013), while two judges within the Southern District of New York have held that materially identical forum selection clauses trump FINRA Rule 12200 such that the customer must bring its claims in federal court, see Goldman, Sachs & Co v. N.C. Mun. Power Agency No. One, No. 13-CV-1319, 2013 WL 6409348, at *7 (S.D.N.Y. Dec. 9, 2013); Goldman, Sachs & Co. v. Golden Empire Schools Fin. Auth., 922 F.Supp.2d 435 (S.D.N.Y. 2013). Because we find that the forum selection clauses in the parties' contracts superseded any right to FINRA arbitration, we reverse the district court's order and final judgment, and remand for further proceedings consistent with this opinion.

I. BACKGROUND

In 2005, Reno undertook a series of city projects. To finance these projects, Reno chose to issue municipal bonds. Reno approached Goldman to discuss financing options, and Goldman advised Reno to issue the debt in the form of auction rate securities (" ARS" ).

ARS are long-term, variable-rate instruments with interest rates that reset at periodic auctions. At each auction, ARS investors submit a bid setting forth the number of ARS that they wish to purchase, hold, or sell, and the lowest interest rate that they will accept. The lowest interest rate at which the entire issue can be sold at par establishes the new interest rate to be paid until the next auction. This new interest rate is known as the " clearing rate." If there are insufficient bids to cover the bonds available for sale at the auction, however, the auction " fails," and the interest rate is set at a contractual " maximum rate" until the next auction.

With Goldman's assistance, Reno issued $73.45 million in ARS in October 2005 (the " 2005 Bonds" ). At that time, Reno and Goldman entered into two written agreements that governed their relationship: (1) an underwriter agreement that outlined Goldman's duty to purchase and offer the 2005 Bonds (the " 2005 Underwriter Agreement" ) and (2) a separate, but contemporaneously executed, broker-dealer agreement that outlined Goldman's duty to manage the auctions for the 2005 Bonds (the " 2005 Broker-Dealer Agreement). The contracts were entered into after arm's-length negotiations in which both parties were represented by counsel.

For purposes of our analysis, the 2005 Broker-Dealer Agreement contains two significant clauses. First, it contains a forum selection clause providing that:

The parties agree that all actions and proceedings arising out of this Broker-Dealer Agreement or any of the transactions contemplated hereby shall be brought in the United States District Court for the District of Nevada and that, in connection with any such action or proceeding, the parties shall submit

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to the jurisdiction of, and venue in, such court.

Second, the 2005 Broker-Dealer Agreement contains a merger clause providing that:

This Broker-Dealer Agreement, and the other agreements and instruments executed and delivered in connection with the issuance of the ARS, contain the entire agreement between the parties relating to the subject matter hereof, and there are no other representations, endorsements, promises, agreements or understandings, oral, written or inferred, between the parties relating to the subject matter hereof.

Reno and Goldman entered into substantially identical contracts in 2006 (the " 2006 Underwriter Agreement" and the " 2006 Broker-Dealer Agreement" ) when Reno financed a new city project by issuing $137.43 million in ARS (the " 2006 Bonds" ).

Reno compensated Goldman for its services under each of these four agreements. Pursuant to the 2005 and 2006 Underwriter Agreements, Goldman received an underwriter's discount by purchasing the 2005 and 2006 Bonds for less than their face value. In addition, pursuant to the 2005 and 2006 Broker-Dealer Agreements, Goldman received annual broker-dealer fees in exchange for its management of the ARS auctions.

In 2008, the ARS market collapsed, and Reno's ARS auctions began to fail. As a result, Reno was forced to refinance the 2005 and 2006 Bonds at considerable cost. According to Reno, these costs should be attributed to Goldman's conduct. Specifically, Reno alleges that, where Goldman served as underwriter, it had a general practice of placing support bids in ARS auctions to ensure that these auctions did not fail; that Goldman did not disclose this general practice to Reno before Reno issued the 2005 and 2006 Bonds; that, consistent with Goldman's general practice, it placed support bids in Reno's ARS auctions until 2008; that Goldman's decision to stop placing support bids in 2008 caused Reno's ARS auctions to fail; and that, if Goldman had told Reno about this general practice, Reno would not have issued ARS to finance its city projects. Based on these allegations, Reno claims that Goldman's conduct breached its fiduciary duty, amounted to fraud and negligent misrepresentation, violated the Securities Exchange Act of 1934, violated the Nevada Securities Act, and violated Municipal Securities Rulemaking Board and FINRA Rules.

In order to resolve these claims through arbitration, Reno filed a Statement of Claim against Goldman before FINRA on February 10, 2012. FINRA is a self-regulatory organization that has " the authority to exercise comprehensive oversight over 'all securities firms that do business with the public.'" 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)). To exercise this oversight, FINRA has instituted rules with which its members, including Goldman, agree to comply. See FINRA Bylaws, art. IV, § 1(a). And one of these rules provides that FINRA members and their customers " must arbitrate a dispute . . . [i]f [a]rbitration . . . [is] [r]equested by the customer; [t]he dispute is between a customer and a member . . . ; and [t]he dispute arises in connection with the business activities of the member . . . ." FINRA Rule 12200.

In response to Reno's Statement of Claim, Goldman filed this action in the United States District Court for the District of Nevada, seeking a declaratory judgment that FINRA lacks jurisdiction over the dispute and an injunction against the arbitration proceedings. In Goldman's motion for preliminary injunction, filed

Page 738

shortly after its complaint, Goldman argued that Reno was not a " customer" entitled to arbitrate under FINRA Rule 12200 and that, at any rate, Reno had disclaimed any right to arbitrate by agreeing to the forum selection clauses in the 2005 and 2006 Broker-Dealer Agreements.

The district court denied Goldman's motion for preliminary injunction. Goldman, Sachs & Co. v. City of Reno, No. 3:12-CV-00327, 2012 WL 5944966 (D. Nev. Nov. 26, 2012). In so doing, the district court reached three legal conclusions that are at issue on appeal. First, the district court found that FINRA had jurisdiction to decide the arbitrability of Reno's claims. Second, the district court determined that Reno was a " customer" under FINRA Rule 12200. And third, the district court found that the forum selection clauses in the 2005 and 2006 Broker-Dealer Agreements did not supersede Reno's right to FINRA arbitration. Accordingly, the district court ruled that Goldman was not likely to succeed on the merits.

Following the district court's ruling, the parties agreed that there was nothing further to litigate, and the district court entered final judgment in favor of Reno. Goldman then filed this appeal.

II. STANDARD OF REVIEW

In order to obtain a preliminary injunction, Goldman must demonstrate that (1) it is likely to succeed on the merits, (2) it is likely to suffer irreparable harm in the absence of preliminary relief, (3) the balance of equities tips in its favor, and (4) an injunction is in the public interest. Winter v. NRDC, Inc.., 555 U.S. 7, 20, 129 S.Ct. 365, 172 L.Ed.2d 249 (2008).

We review the district court's denial of a preliminary injunction for an abuse of discretion, its factual findings for clear error, and its conclusions of law de novo. See Perfect 10, Inc. v. Amazon.com, Inc., 508 F.3d 1146, 1157 (9th Cir. 2007).

III. DISCUSSION

There are three issues on appeal. First, we address whether FINRA must determine the arbitrability of this matter in the first instance. Because we conclude that we, rather than FINRA, have jurisdiction to determine arbitrability, we reach the remaining two issues. Second, we consider whether Reno was a " customer" of Goldman, giving it the right to invoke arbitration under the FINRA Rules. Third, we examine whether Reno and Goldman contracted around FINRA Rule 12200 through forum selection clauses and agreed to litigate any claims in the United States District Court for the District of Nevada.

A. Jurisdiction to determine arbitrability

Both the arbitrability of the merits of a dispute and the question of who has the primary power to decide arbitrability depend on the agreement of the parties. See First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 943, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995). " But, unlike the arbitrability of claims in general, whether the court or the arbitrator decides arbitrability is an issue for judicial determination unless the parties clearly and unmistakably provide otherwise." Oracle Am., Inc. v. Myriad Group A.G., 724 F.3d 1069, 1072 (9th Cir. 2013) (internal quotation marks and citations omitted). Thus, " there is a presumption that courts will decide which issues are arbitrable." Id.

The district court concluded that, because Goldman is a FINRA member, it has agreed to FINRA arbitration on the issue of arbitrability itself. As support for ...


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