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Providers: Ninth Circuit Finds NASD Refusal Doesn't Prevent an Arbitration (Web)

The Ninth U.S. Circuit Court of Appeals has reversed a lower court order remanding a case to state court because the arbitration provider, the National Association of Securities Dealers, declined jurisdiction. The unanimous appellate panel held that the NASD wasn’t integral to enforcing an arbitration clause in an investment agreement, and reversed the remand, sending the case to arbitration. Reddam, et al., v. KPMG, et al., No. 05-56664 (9th Cir. Aug. 10, 2006)(also available at$file/0556664.pdf?openelement).

Investors J. Paul Reddam, J. Paul Reddam Trust, Clarence Ventures, LLC, and Zed Corp.–collectively, the plaintiffs--entered into a joint venture in which defendants KPMG, Presidio Advisors LLC, Sidley Austin Brown and Wood LLP, and Deutsche Bank AG, agreed to develop, implement and market complex investment programs designed to reduce transactions’ tax impact.

As part of the joint venture, the plaintiffs purchased shares of Deutsche Bank stock, and were required to use a subsidiary securities broker, Deutsche Bank Securities Investments, or DBSI.

The plaintiffs sold an investment firm, and sought to minimize income tax liabilities through one of the joint venture’s investment programs.

The plaintiffs’ agreements with broker DBSI contained an arbitration clause providing that

all controversies which may arise between us concerning any transaction of construction, performance, or breach of this or any other agreement between us . . . shall be determined by arbitration. Any arbitration under this agreement shall be determined pursuant to the rules then in effect of the National Association Securities Dealers, Inc., as the undersigned you may elect. If the undersigned fails to make such election, then you may make such election.

The plaintiffs incurred substantial tax liabilities when the program failed to deliver the tax avoidance effects. They filed a suit against the defendants in Orange County Superior Court. Since the plaintiff did not bring an action against DBSI, Deutche Bank was removed from the suit on the ground that the action related to an arbitration agreement with its subsidiary, according to the Ninth Circuit opinion.

The defendants moved to compel arbitration against the plaintiffs, who responded with a motion to remand the claims against KPMG and Sidley, noting that the district court lacked jurisdiction to remove Deutsche Bank. The district court held that since the NASD had declined jurisdiction over the parties, the claims were no longer subject to arbitration. It remanded the case to the Orange County Superior Court and refused to stay its order pending appeal. Deutsche Bank settled; KMPG and Sidley appealed the district court's remand of this case, which had been removed from the Orange County Superior Court pursuant to 9 U.S.C. § 205, a provision for removal of actions relating to arbitration agreements under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

The issues that came for review before the appeals court were (1) whether the district court lacked subject matter jurisdiction; (2) a determination on the district court's scope and validity of the contractual DBSI arbitration clauses; and (3) a determination by the district court on whether the issues remained arbitrable.

The plaintiffs argued that the Court of Appeals did not have jurisdiction to review the remand to the Orange County Superior Court as per 28 U.S.C. § 1447(d), which provides for remand where there is no subject matter jurisdiction, or there is a defect in the removal. But the opinion notes that the U.S. Supreme Court has strictly limited Section 1447's bar from addressing remands to its terms–that is, where there are removal defects or subject matter issues.

Here, the remand order was based on the decision by NASD to decline jurisdiction. Writing for the panel, Senior Circuit Judge Ferdinand F. Fernandez held that district court's remand order was not based on Section 1447(d), and that the court had "jurisdiction to review the propriety of the remand order."

Regarding the arbitrability issue, the panel raised two questions. First, was there a choice of forum clause in the agreement? Second, if there was a clause, was the choice of forum clause integral? The opinion pointed out that the district court “answered both the questions in the affirmative."

The appeals court applied contract interpretation principles, and held that the DBSI customer agreement provision selects the rules of the NASD, but does not state that the arbitration is to take place before the NASD itself. Therefore; the agreement did not select a forum.

The court also held that there was no evidence that the choice of forum was integral to the clause. It refused to accept the district court's reasoning of implicit choice of forum being integral and exclusive. The panel held that the “customer agreement involved here became unenforceable between the parties when the NASD bowed out. There is no evidence that [the] naming of the NASD was so central to the arbitration agreement that the unavailability of that arbitrator brought the agreement to an end.”

The panel ruled that it will treat a forum selection clause exclusive of all other forums only if the parties have expressly stated it in the agreement, and no other forum would be used other than the one selected by the parties. The Court held that in“the refusal of the NASD to conduct an arbitration neither rendered the district court powerless to require arbitration to proceed nor deprived it of jurisdiction.”

Thus, the district court erred in its ruling. The Ninth Circuit reversed on ground that the evidence in the matter did not support a determination that the parties agreed to refrain from arbitrating “if the implicitly named arbitrator--the NASD--did not consent to act.”

--Ongmu Tshering, CPR Intern