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    132657cvNASDAQOMXGrp.,Inc.v.UBSSec.,LLC

    UNITEDSTATESCOURTOFAPPEALS

    FORTHESECONDCIRCUIT

    ________________

    AugustTerm,2013

    (Argued:June17,2014Decided:October31,2014)

    DocketNo.132657cv________________

    THENASDAQOMXGROUP,INC.ANDTHENASDAQSTOCKMARKETLLC,

    PlaintiffsAppellees,

    v.

    UBSSECURITIES,LLC,

    DefendantAppellant.*________________

    Before:LEVAL,STRAUB,ANDRAGGI,CircuitJudges.

    ________________

    Onappeal fromapreliminary injunctionentered in theSouthernDistrict

    of New York (Sweet, J.), barring appellant from compelling appellees

    participation in arbitration pertaining to how it conducted the Facebook IPO,

    *TheClerkofCourtisdirectedtoamendtheofficialcaptionasshownabove.

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    appellant challenges the district courts (1) exercise of federal question

    jurisdiction,(2)determinationthatarbitrabilityisaquestionforthecourtrather

    thananarbitrator,and(3)conclusionthatappellantsunderlyingclaimsarenot

    arbitrable.

    AFFIRMED.

    JudgeSTRAUBdissentsinaseparateopinion.________________

    STEPHEN J.KASTENBERG (PaulLantieri, III,WilliamA.Slaughter,onthe brief), Ballard SpahrLLP, Philadelphia, Pennsylvania, forPlaintiffsAppellees.

    CHARLES E.DAVIDOW (LeslieGordon Fagen,Daniel J. Toal, Paul,

    Weiss, Rifkind, Wharton & Garrison LLP, New York,NewYork, on the brief), Paul, Weiss, Rifkind, Wharton &GarrisonLLP,Washington,D.C.,forDefendantAppellant.

    ________________REENARAGGI,CircuitJudge:

    On May 18, 2012, plaintiffs, the NASDAQ OMX Group, Inc. and the

    NASDAQ StockMarket LLC (collectively NASDAQ), conducted the initial

    public offering (IPO) for Facebook, Inc. The IPOwas one of the largest in

    history,with 421million sharesofFacebook common stockoffered at $38per

    share,foratotalvalueofover$16billion.Inconductingtheoffering,NASDAQ

    encountered and addressed various problems, prompting a number of

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    subsequent actions, including disciplinary proceedings by the Securities and

    Exchange Commission (SEC), see Order Instituting Admin. & Ceaseand

    DesistProceeding,SECReleaseNo.3469655,2013WL2326683,at*23(May29,

    2013) (SECReleaseNo. 3469655), and SECapproved changes toNASDAQ

    rules. Among the latter is a new rule subsection establishing a voluntary

    procedure for NASDAQ members injured in the Facebook IPO to seek

    compensation. SeeOrderGrantingApproval of a ProposedRuleChange To

    AmendRule 4626Limitation of Liability, SECReleaseNo. 3469216, 78 Fed.

    Reg.19,040,19,041(Mar.22,2013)(SECReleaseNo.3469216).DefendantUBS

    Securities, LLC (UBS) chose not to pursue that avenue for relief, instead

    initiating an arbitration proceeding againstNASDAQ seeking indemnification

    for injuries sustained in the Facebook IPO, aswell as damages for breach of

    contract, breach of an implied duty of good faith and fair dealing, and gross

    negligence.

    NASDAQinitiatedthisdeclaratoryjudgmentactiontoprecludeUBSfrom

    pursuing arbitration. UBS now appeals from apreliminary injunction to that

    effect, entered on June 28, 2013, in the United States District Court for the

    SouthernDistrictofNewYork (RobertW.Sweet, Judge). SeeNASDAQOMX

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    Grp., Inc. v.UBS Sec. LLC, 957 F. Supp. 2d 388 (S.D.N.Y. 2013). In seeking

    vacatur of the injunction, UBS contends that the district court erred in

    (1)exercising federal question jurisdiction in a case presenting only state law

    claims; (2)determining that the arbitrability ofUBSs claims is a question for

    decisionby the court, rather than an arbitrator; and (3) concluding thatUBSs

    claimsarenotsubjecttoarbitration.Forthereasonssetforthinthisopinion,we

    identify no error in these rulings and, therefore, affirm the challenged

    preliminaryinjunction.Ourcolleague,JudgeStraub,dissentsfromtherulingas

    tofederaljurisdictionand,thus,doesnotreachtheothertwoissues.

    I. Background

    A. TheFacebookIPO

    NASDAQ is a publiclytraded, selfregulatory organization (SRO)

    registered as a national securities exchange under Section 6 of the Securities

    ExchangeActof1934(ExchangeAct).See15U.S.C.78f.Itoperatesoneof

    thelargestnationalsecuritiesexchanges,executingapproximately15%ofU.S.

    equity securities transactionseveryday. SECReleaseNo.3469655,2013WL

    2326683,at*1.UBSisaregisteredbrokerdealerandinvestmentadviser,aswell

    asamemberoftheNASDAQexchange.

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    On May 18, 2012, NASDAQ was scheduled to conduct the highly

    anticipatedFacebook IPO. The initialEasternStandardstart timeof11:00a.m.

    wasdelayed approximately onehalfhour, largelydue to technicaldifficulties

    thatNASDAQencounteredwiththeIPOCross,thecomputerizedsystemthat

    typicallylaunchesIPOtradingbymatchingbuyandsellorderstodeterminethe

    opening price. See id. at *2, *56. At 11:30:09 a.m.,NASDAQ switched to a

    backup failover system that completed the IPO Cross, whereupon

    [c]ontinuous trading in Facebook shares then commenced onNASDAQ and

    otherexchanges.Id.at*7.

    Thedelayedstart intradinghadcertainadverseeffects,twoofparticular

    relevance here. First, over 30,000 orders entered between 11:11:00 a.m. and

    11:30:09 a.m.were not included in the completed IPO Cross. See id. at *10.

    Theseordersweredealtwithinvariousways,includingsomebeingcancelledby

    NASDAQandothersbeingreleasedintothemarketat1:50p.m.Seeid.Second,

    certaintradeconfirmationmessagesforordersplacedbefore11:30:09a.m.were

    nottransmitted,asaresultofwhichsomeNASDAQmembers...werenotable

    todeterminewhethertheirordershadbeenincludedinthecrossand,therefore

    didnotknowwhatpositiontheyheldinFacebooksecurities.Id.at*8.Despite

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    suggestionsthatithalttradingintheFacebookIPO,NASDAQdidnotdoso.See

    id.at*9.1

    B. NASDAQRules

    In conducting securities trading generally, including the Facebook IPO

    specifically,NASDAQoperatedpursuant tocertain internalrulesmandatedby

    federallaw. SomebackgroundastoNASDAQsinternalrulesishelpfultoour

    discussionofissuesraisedonthisappeal.2

    1. ExchangeActMandateswithRespecttoInternalRules

    Inorder to registerasanexchange, federal law requiresanSRO suchas

    NASDAQtodemonstratetotheSECthatitsinternaloperatingrulessatisfythe

    requirements of the Exchange Act and all federal rules and regulations

    thereunder.See15U.S.C.78s(b)(2)(C).TheExchangeActspecificallyrequires

    thataregisteredexchangesrulesbedesigned

    1Thesystemserror in launching theFacebook IPOalsocausedotherproblemsnotdirectlyrelevanttothisappeal,e.g.,(a)NASDAQinadvertentlyassumedanerror position in Facebook . . . massively greater than NASDAQ hadenvisioned, SECReleaseNo. 3469655, 2013WL 2326683, at *10; and (b) thetechnicaldifficultiesthatplaguedtheFacebookIPOCrossaffectednonFacebookstock thatNASDAQhad chosen tohalt because halt crossesused the sameapplications,id.at*11.2 NASDAQ Rules are available at the following website:http://nasdaq.cchwallstreet.com/.

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    to promote just and equitable principles of trade, to fostercooperation and coordinationwithpersons engaged in regulating,clearing, settling, processing information with respect to, andfacilitatingtransactionsinsecurities,toremoveimpedimentstoandperfect themechanism of a free and openmarket and a nationalmarketsystem,and, ingeneral, toprotect investorsand thepublicinterest.

    Id. 78f(b)(5) (emphasis added). Thehighlighted requirement isofparticular

    significancetothiscase.

    With certainexceptionsnot relevanthere,anexchangemust secureSEC

    approvalforeveryproposedruleorrulechangeaccordingtoadetailedstatutory

    procedure thatprovides forpublicnoticeandcomment,possiblehearings,and

    agencyfindings. See id.78s(b),17C.F.R.240.19b4. TheExchangeActalso

    provides for theSEC itself toabrogate,add to,ordelete fromanexchanges

    rulesinspecifiedcircumstances.See15U.S.C.78s(c).

    TheActmakesanexchangescompliancewithitsownrulesarequirement

    offederallaw,seeid.78s(g)(1),andruleviolationscanresultinSECrevocation

    ofanSROsregistration,censure,orothersanctions,seeid.78s(h)(1).TheAct

    further requires an exchange to enforce its members compliance with the

    Exchange Act, SEC regulations, and the exchanges internal rules. See id.

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    78f(b)(1).Moreover,itprecludespartiesfromcontractingaround,orotherwise

    waivingcompliancewith,SECapprovedexchangerules.Seeid.78cc(a).

    2. SEC SanctionsNASDAQ forRulesViolations inConnectionwiththeFacebookIPO

    The SEC conducted an investigation into NASDAQs handling of the

    FacebookIPO,whichresultedintheagencysanctioningNASDAQforviolating

    theExchangeActbynotcomplyingwithitsownSECapprovedrules.Notably,

    theSEC foundNASDAQnot tohavecompliedwithNASDAQRule4120(c)(7),

    whichmandatesthattradingcommenceimmediatelyafteranIPOdisplayonly

    period and limits extension of the display period to specified circumstances

    foundnot tohavebeenpresent in theFacebook IPO. SeeSECReleaseNo.34

    69655,2013WL2326683,at*2,*14. TheSECalso foundNASDAQnot tohave

    complied with its own Rule 4757(a)(1) by failing to adhere to its specified

    price/time prioritywith respect to approximately 30,000 orders placed before

    completionof theFacebook IPOCross. See id.at *2, *1415 TheSEC further

    identifiedanExchangeActviolation insofarasNASDAQ rulesdidnotpermit

    NASDAQ to assume an error position in its own account, an action that, in

    connectionwiththeFacebookIPO,yieldedNASDAQaprofitofapproximately

    $10.8million.Seeid.*14.

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    To address these and other concerns, NASDAQ agreed, inter alia, to

    amendRule4120andtomakecertaintechnicalchangestoitsIPOCrosssystem.

    See id. at *15. The SEC endorsed these remedial proposals but, nevertheless,

    sanctionedNASDAQby,interalia,censuringtheexchange,orderingittocease

    and desist from violating the Exchange Acts requirement that an exchange

    adheretoitsownrules,andimposinga$10millioncivilpenalty.Seeid.at*17.

    C. ThePartiesServicesAgreement

    NASDAQandUBSarepartiestoabilateralServicesAgreement,several

    sectionsofwhicharerelevanthere.3

    Section12.Bof theServicesAgreement,entitledIndemnification, is the

    basis forUBSsunderlyingclaim forbreachofcontractand indemnification. It

    statesasfollows:

    NASDAQ OMX shall be liable to, indemnify against, and holdSubscriber [i.e., UBS], its employees, directors, and other agentsharmless from, any and all Claims or Losses (as those terms aredefined . . . herein) imposed on, incurred by or asserted against[UBS], itsemployees,directors,andotheragents to theextent thattheClaimsandLossesresult...fromactsoromissionsofNASDAQOMX,itsemployees,directors,agentsorassociatedpersons;orfromthe receiptoruseof [UBS]sData (including representationsabout

    3 Like the parties,we refer to the latest version of theAgreement, as revisedFebruary20,2013,whichdoesnotdiffermateriallyfromthatineffectatthetimeoftheFacebookIPO.

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    [UBS]sData)byNASDAQOMX,itsemployees,directors,oragents....

    A. 136. The referenced Claims orLosses aredefined in Section 12.G of the

    ServicesAgreementasfollows:

    anyandallliabilities,obligations,losses,damages,penalties,claims,actions, suits, judgments, and reasonable costs and expenses ofwhatever nature, whether incurred by or issued against anindemnifiedParty,includingwithoutlimitation:(i)indirect,special,punitive,consequential,orincidentallossordamage(including,butnot limited to, trading losses, loss of anticipated profits, loss byreasonofshutdowninoperationorincreasedexpensesofoperation,orotherindirectlossordamage);and(ii)reasonableadministrativecosts, litigation costs, and auditors and attorneys fees, both inhouseandoutsidecounsel,andrelateddisbursements.

    A.137.

    UBSs demand for arbitration derives from Section 18 of the Services

    Agreement,entitledArbitration,whichstatesinrelevantpart:

    A. Except as may be provided in the NASDAQ OMXRequirements,allclaims,disputes,controversies,andothermattersinquestionbetween theParties to thisAgreementand thePartiesemployees,directors,agentsandassociatedpersonsarisingoutof,orrelatingtothisAgreement,ortothebreachhereof,shallbesettledbyfinalbindingarbitration inaccordancewiththisAgreementandthe following procedure or such other procedures as may bemutuallyagreeduponbytheParties.B. Exceptasotherwiseprovidedhereinorbyagreementof theParties,anyarbitrationproceedingshallbeconductedinaccordancewiththeCommercialArbitrationRulesoftheAmericanArbitration

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    Associationor inaccordancewithsuchotherrulesandproceduresasareagreedtobytheParties....D. The arbitrationproceeding shallbeheld in theCityofNewYork,unlessotherwiseagreedbytheParties.Thedecisionrenderedthrough arbitration shall be final and binding upon the Partiesheretoand judgmentmaybeenteredinaccordancewithapplicablelawinanycourthavingjurisdictionthereof.

    A. 139. The NASDAQ OMX Requirements, referenced in the opening

    qualifyingphraseof theArbitrationprovision,aredefinedat theoutsetof the

    ServicesAgreement,inSection1.A,asfollows:

    (i)therules,regulations,interpretations,decisions,opinions,ordersandotherrequirementsoftheSecuritiesandExchangeCommission(SEC);(ii)theapplicablerules,regulations,disciplinarydecisions,and rule interpretations of selfregulatory organizations;(iii)NASDAQ OMXs operating procedures, specifications,requirements, and other documentation that is regulatory ortechnical innature(including,butnot limitedto,userguides) . . . ;(iv) all other applicable laws, statutes, rules, regulations, orders,decisions, interpretations, opinions, and other requirements,whetherpromulgatedby theUnitedStatesoranyotherapplicablejurisdiction (including in the area of intellectual property); and(v)thesuccessors,astheymayexistatthetime,ofthecomponentsoftheNASDAQOMXRequirements.

    A.12223.

    Furthernoteworthy isSection17of theServicesAgreement,whichstates

    that [i]n the event of any conflict between the provisions of the [Services

    Agreement],theAttachments,ortheNASDAQOMXRequirements,theorderof

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    preferenceshallbetheNASDAQOMXRequirements,theAttachments,andthe

    [ServicesAgreement].A.138.

    D. ProceduralHistory

    1. UBSDemandsArbitration

    OnMarch15,2013,UBSfiledademandforarbitrationagainstNASDAQ

    with the American Arbitration Association (AAA). See Demand for

    ArbitrationandStatementofClaims (Demand),A.46. The18pagedemand

    asserts that UBSs dispute with NASDAQ originates in the exchanges

    catastrophic mismanagement of the Facebook IPO. Demand 1, A. 46.

    Specifically,UBS alleges thatNASDAQ was not up to the task of handling

    such a large,highdemand IPO: [i]ts systems buckledunder the strain, and

    proved incapableofcompleting theallimportant IPOCross. Id.3,A.47.

    As a result,NASDAQ not only was forced repeatedly to delay the open of

    tradinginFacebookstock,butalsodecidedtoconceal[]fromthemarketwhyit

    wasdoing so,and that itwas switching toariskyanduntestedalternative

    system, therebypreventing customers from evaluatinghow that systemmight

    affect theirown. Id.45,A.47. Moreover,because thealternative system

    impaired NASDAQs ability to confirm executed trades, market participants

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    were left in the dark for more than two hours as to the state of tens of

    thousandsoftrades,sothat[c]haosandmassconfusionensuedthroughoutthe

    market.Id.7,28,3233,A.4748,53.

    Basedon these allegations,UBS chargesNASDAQwith violat[ing] its

    primary obligation to the investing public and to entities such asUBS: to

    operate a fair and orderlymarket. Id. 37, A. 55. UBS asserts that how

    NASDAQ shouldhave responsiblymet this obligationwas bydelaying or

    haltingtrading.Id.38,A.55.

    UBSalsoallegesthatitwasgrosslynegligentforNASDAQtodepart[]

    fromprovensoftware inconductingsucha large IPOand tocontinue trading

    with new and inadequately tested solutions, without advising market

    participantsofwhatwashappeningorwhatactionsitwastakingsotheycould

    evaluate the potential consequences for themselves, their systems and take

    appropriateactioninresponse.Id.36,A.5455.

    As to its own injuries, UBS asserts that NASDAQs failure to provide

    prompt execution records prevented UBSs own computers from confirming

    whatordershadbeenexecuted,resultinginUBSsplacementofduplicateorders

    oritsacceptanceofcancellationsforpurchasesthathad,infact,beenmade.See

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    id. 4448, A. 57. As a result, UBS unintentionally amassed a net long

    positionofapproximately40.2millionFacebooksharesbytheendofthetrading

    day,andultimatelyincurredlossesinexcessof$350million.Id.8,50,A.

    48,58.

    UBS seeks to recover these losses from NASDAQ based on (1) the

    indemnification provision of the parties Services Agreement, (2)NASDAQs

    breach of contract in refusingUBSs indemnification demand, (3)NASDAQs

    breach of the Services Agreements implied covenant of good faith and fair

    dealing in failing to declare certainUBS transactions clearly erroneous under

    NASDAQ Rule 11890, and (4) NASDAQs gross negligence in using

    insufficiently testedand inadequatesystems toconduct theFacebookIPO. See

    id.5276,A.5862.

    2. NASDAQsDeclaratoryJudgmentAction

    In lieu of an answer toUBSsdemand for arbitration, onApril 4, 2013,

    NASDAQ filed this action in the Southern District of New York seeking

    declaratoryandinjunctiverelief.OnApril16,NASDAQmovedpreliminarilyto

    enjoinUBS from proceedingwith arbitration. UBS promptly crossmoved to

    dismissNASDAQscomplaintandopposedthepreliminaryinjunctionmotion.

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    On June 18, 2013, the district court granted NASDAQs motion for a

    preliminaryinjunctionanddeniedUBSscrossmotiontodismiss.SeeNASDAQ

    OMXGrp., Inc.v.UBSSec.LLC,957F.Supp.2dat407. UBS timely filed this

    appeal.

    II. Discussion

    Title 28 U.S.C. 1292(a)(1) affords appellate jurisdiction to review the

    grant of a preliminary injunction. Our standard of review is abuse of

    discretion, which we will identify only when the grant of equitable relief

    (1)rests on an error of law or a clearly erroneous factual finding, or

    (2)otherwise cannot be located within the range of permissible decisions.

    EvergreenAssnv.CityofNewYork,740F.3d233,242 (2dCir.2014) (internal

    quotation marks and citations omitted). UBS urges us to identify abuse of

    discretion here based on the district courts purported legal errors in

    (1)exercising jurisdiction in a case raising only state law claimsbetweennon

    diverseparties, (2)deciding the arbitrability ofUBSs claims itself rather than

    leavingthat issue toanarbitrator,and(3)concluding thatUBSsclaimsarenot

    arbitrable.Wearenotpersuadedforreasonswediscussinturn.

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    A. SubjectMatterJurisdiction

    1. FederalJurisdictionOverStateLawClaims

    We review a district courts challenged determination of subjectmatter

    jurisdictiondenovo.SeeCutronev.Mortg.Elec.RegistrationSys.,Inc.,749F.3d

    137,142(2dCir.2014).Indoingso,wearemindfulofthefundamentalprecept

    that federal courts are courts of limited jurisdiction and lack the power to

    disregard such limitsashavebeen imposedby theConstitutionorCongress.

    Durant,Nichols,Houston,Hodgson,&CorteseCosta,P.C.v.Dupont,565F.3d

    56,62(2dCir.2009)(quotingOwenEquip.&ErectionCo.v.Kroger,437U.S.365,

    374 (1978)). Where, as here, there is no diversity of citizenship between the

    parties,we look towhether the case aris[es]under theConstitution, laws,or

    treaties of the United States to determine whether federal jurisdiction is

    properlyexercised. 28U.S.C.1331;seeFracassev.PeoplesUnitedBank,747

    F.3d141,14344(2dCir.2014).

    Itislongsettledlawthatacauseofactionarisesunderfederallawonly

    when the plaintiffs wellpleaded complaint raises issues of federal law.

    MetropolitanLife Ins.Co.v.Taylor,481U.S.58,63 (1987). Nevertheless, ina

    declaratory judgmentactionsuchas thisone,whichseeksarulingestablishing

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    plaintiffsnonliabilityonthedefendantsclaim(forarbitration),acomplaint...

    is tobe tested, forpurposesof thewellpleadedcomplaint rule,as if theparty

    whose adverse action the declaratory judgment plaintiff apprehends had

    initiatedalawsuitagainstthedeclaratory judgmentplaintiff. GarantiFinansal

    KiralamaA.S. v.AquaMarine& Trading Inc., 697 F.3d 59, 68 (2dCir. 2012)

    (internalquotationmarksomitted).Underthisconceptual[]realign[ment],we

    analyzethepartiesclaimsastheywouldappearinacoercivesuit. Id.at67.

    Accordingly,here,wemustlooktoUBSsunderlyingdemandforarbitrationto

    determinethenatureoftheclaimsatissue.

    UBSsdemanddoesnotassertanyclaimscreatedby federal lawsoas to

    admit federal jurisdictionmost directly on the principle articulated by Justice

    HolmesinAmericanWellWorksCo.v.Layne&BowlerCo.,that[a]suitarises

    underthelawthatcreatesthecauseofaction.241U.S.257,260(1916);seeGunn

    v.Minton,133S.Ct.1059,1064(2013)(notingthatcase[m]ostdirectly...arises

    underfederallawwhenfederallawcreatesthecauseofactionasserted,arule

    of inclusion that accounts for thevast bulk of suits that ariseunder federal

    law and admits of only extremely rare exceptions). Rather,UBS seeks to

    arbitrate claimsfor breach of contract, indemnification, breach of implied

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    duties of good faith and fair dealing, and gross negligencecreated byNew

    York State law. This, however, does not necessarily preclude the exercise of

    federaljurisdiction.

    As we have frequently observed, [t]he artfulpleading doctrine, [a]

    corollaryto thewellpleadedcomplaintrule,preventsaplaintiff fromavoiding

    [federaljurisdiction]byframingintermsofstatelawacomplainttherealnature

    of[which]isfederal,...orbyomittingtopleadnecessaryfederalquestionsina

    complaint. Marcus v.AT&T Corp., 138 F.3d 46, 55 (2d Cir. 1998) (internal

    quotationmarksomitted);accordRomanov.Kazacos,609F.3d512,51819 (2d

    Cir.2010).Moreover,evenintheabsenceofartfulpleading,federaljurisdiction

    mayproperly be exercised over a special and small category of actual state

    claimsthatpresentsignificant,disputedissuesoffederallaw. Gunnv.Minton,

    133S.Ct.at1064. At issue in this case iswhetherUBSs state law claims fall

    within this special and small category so as to admit federal question

    jurisdiction.

    The category, which dates back nearly 100 years in Supreme Court

    precedent,isrootedinthecommonsensenotionthatafederalcourtoughttobe

    able to hear claims recognized under state law that nonetheless turn on

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    substantial questions of federal law, and thus justify resort to the experience,

    solicitude,andhopeofuniformitythatafederalforumoffersonfederalissues.

    Grable&SonsMetalProds.,Inc.v.DarueEngg&Mfg.,545U.S.308,312(2005)

    (citingHopkinsv.Walker,244U.S.486,49091(1917),andclassicexampleof

    Smith v. Kansas City Title & Trust Co., 255 U.S. 180, 201 (1921)). Still, the

    Supreme Court has been sparing in recognizing state law claims fitting this

    criterion. See R. Fallon, J. Manning, D. Meltzer, & D. Shapiro, Hart and

    WechslersTheFederalCourtsandTheFederalSystem(Hart&Wechsler)799

    (6thed.2009)(observingthatCourthasexplicitlyupheldfederal jurisdiction in

    absenceof federal causeofactiononly four times, citingGrable&SonsMetal

    Prods., Inc.v.DarueEngg&Mfg.,545U.S.at31416,andCityofChicagov.

    Intl College of Surgeons, 522 U.S. 156, 164 (1997), in addition to Smith and

    Hopkins). Indeed, delineating the parameters of federal jurisdiction in such

    circumstanceshaspresentedaconstantchallenge.SeeGunnv.Minton,133S.Ct.

    at 1065 (describing Supreme Courts efforts to bring order to this unruly

    doctrine);MerrellDowPharms. Inc.v.Thompson,478U.S.804,80910 (1986)

    (referencinglitigationprovokingproblem createdbypresenceofa federal

    issueinastatecreatedcauseofaction(quotingTextileWorkersv.LincolnMills,

  • 20

    353 U.S. 448, 470 (1957) (Frankfurter, J., dissenting)). This, in turn, has

    engenderedpersistentskepticismastothevalueoftheendeavor.SeeGrable&

    SonsMetal Prods., Inc. v. Darue Engg &Mfg., 545 U.S. at 320 (Thomas, J.,

    concurring) (signalingopenness to reconsiderationofwhether federalquestion

    jurisdiction should be limited to cases inwhich federal law creates cause of

    action because [j]urisdictional rules should be clear and [w]hatever the

    virtues of the Smith standard, it is anythingbut clear); Smithv.KansasCity

    Title&TrustCo.,255U.S.at214(Holmes,J.,dissenting)([I]tseemstomethata

    suitcannotbesaidtoariseunderanyotherlawthanthatwhichcreatesthecause

    ofaction.);seealsoHartandWechsler799800(observingthatJusticeHolmes

    causeofactiontestissimplerandclearerandwhileexcludingcaseslikeSmith

    orGrable,itavoidstheneedinamuchlargernumberofcasestoengageinwhat

    canbearefinedanduncertainanalysis).

    This background properly signals caution in identifying the narrow

    categoryofstateclaimsoverwhichfederaljurisdictionmaybeexercised.Itdoes

    not, however, absolve federal courts of theduty to exercise jurisdictionwhen

    they identify state claims fallingwithin that limited sphere. To facilitate such

    identification,theSupremeCourthaspronouncedadeterminativefourparttest:

  • 21

    [F]ederaljurisdictionoverastatelawclaimwilllieifafederalissueis: (1)necessarily raised, (2) actuallydisputed, (3) substantial, and(4)capable of resolution in federal court without disrupting thefederalstatebalanceapprovedbyCongress.Whereallfouroftheserequirements aremet . . . jurisdiction isproperbecause there is aserious federal interest in claiming the advantages thought to beinherent in a federal forum, which can be vindicated withoutdisruptingCongresss intendeddivisionof laborbetweenstateandfederalcourts.

    Gunnv.Minton,133S.Ct.at1065(quotingGrable&SonsMetalProds.,Inc.v.

    Darue Engg&Mfg., 545U.S. at 31314); accord Fracasse v. PeoplesUnited

    Bank,747F.3dat144.

    Applying thisGunnGrable testhere,we conclude that thedistrict court

    correctlyexercised federalquestion jurisdiction in thiscase. Indeed,while that

    conclusiononlyrequiresus to identifyfederalquestion jurisdictionoveroneof

    UBSs state law claims, see 28 U.S.C. 1367 (providing for supplemental

    jurisdiction over claims related to one giving rise to original jurisdiction);

    Franchise Tax Bd. v. Constr. Laborers Vacation Trust, 463 U.S. 1, 13 (1983)

    (statingthat,ifeitheroftwocausesofactioncomeswithinoriginaljurisdictionof

    federalcourts,removalwasproperastowholecase),forreasonsdiscussedinthe

    nextsection,weconcludethatfederalquestion jurisdictionappliestoallfourof

    UBSsstateclaims.

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    2. ApplyingtheGunnGrableTesttoUBSsClaims

    a. The Presence of a Necessarily Raised and ActuallyDisputedFederalIssue

    In determiningwhether UBSs four state law claims againstNASDAQ

    raiseafederalissue,webeginbyconsideringthedutyunderlyingeachclaim.It

    istheviolationofadutythatwouldtriggeranycontractrighttoindemnification,

    orsupporttortclaimsfornegligenceorafailureofgoodfaithandfairdealingin

    the circumstancespresented. SeeAegis Ins.Servs., Inc.v.7WorldTradeCo.,

    L.P., 737 F.3d 166, 177 (2d Cir. 2013) (stating that, under New York law,

    negligenceclaimdependsontheexistenceofadutyondefendantspartas to

    plaintiff (internalcitationomitted));HavanaCent.NY2LLCv.LunneysPub,

    Inc., 49A.D.3d 70, 77, 852N.Y.S.2d 32, 37 (1stDept 2007) (observing that if

    thereisnocontractualobligationtoperformanact,thefailuretoperformtheact

    cannot be a breach of the contract (citingRestatement (Second) ofContracts

    235(b)(1981)(definingbreachofcontractasnonperformanceofadutywhen

    performanceisdue)));Thyroffv.NationwideMut.Ins.Co.,460F.3d400,40708

    (2dCir.2006)(recognizingthatimplieddutyofgoodfaithandfairdealingclaim

    requires an obligation thatmay be presumed to have been intended by the

    partiestotheunderlyingcontract).

  • 23

    UBSsarbitrationdemandmakesplain thata singulardutyunderliesall

    fourofitsstatelawclaims:NASDAQsdutytooperateafairandorderlymarket.

    An exchange is required to operate a fair and orderly market. This is its

    primaryobligationtothe investingpublicandtoentitiessuchasUBS. Nasdaq

    violatedthisobligation.Demand37,A.55.

    ThedutyUBS identifiesindeed, thevery language itemploysderives

    directly from federal law. In the Exchange Act, Congressmakes plain that

    maintenance of fair and orderly markets is the animating goal of federal

    securities law. 15U.S.C.78k1(a)(1)(C). Toward thisend,andasdetailed in

    Part I.B.1., supra, the Exchange Act requires, as a specific condition of

    registrationasanationalexchange,thatanSROsatisfactorilydemonstratetothe

    SEC that its internal operating rules remove impediments to and perfect the

    mechanism of a free and openmarket and a nationalmarket system. Id.

    78f(b)(5).4 The Act further makes an exchanges compliance with its SEC

    approved rules amandateof federal law, see id. 78s(g)(1), andprovides for

    4Initsarbitrationdemand,UBSeffectivelyacknowledgesthefederallaworiginofNASDAQsmarket dutywhen it describesNASDAQ as a selfregulatoryorganization...withinthemeaningoftheSecuritiesExchangeActof1934andisresponsible for operating andmaintaining the integrity of the Nasdaq stockmarket.Demand14(a),A.50.

  • 24

    violators to be sanctioned, see id. 78u(d),(f), 78s(h)(1),(4). Thus,whether a

    registered securities exchange such as NASDAQ has violated its federally

    prescribed duty to operate a fair and orderly exchange necessarily raises a

    disputedquestionoffederallaw.

    Moreover,thatfederallawquestioncanonlybeansweredbyconsidering

    another: howNASDAQsduty to operate a fair and orderlymarketaduty

    sourced in theExchangeAct, amplifiedby SEC regulations, and implemented

    through SECapproved NASDAQ rulesapplies in the context of an IPO

    generally,andparticularlywithrespect to theFacebook IPO. Thus,even if,as

    ourdissentingcolleagueJudgeStraubobserves,thereisnodisputehereastothe

    existenceofafederalduty,seeDissentingOp.,postat[78],thereiscertainlya

    dispute as to theviolationof thatduty,particularly in causingUBSs injuries.

    Resolution of that disputewill require construction of a federal statute, rules

    promulgated pursuant to the statutes mandates, and the statutes

    implementation by the SEC.5 In short, it is the propriety of [NASDAQs]

    5Weneednotdecidewhether, as Judge Straubmaintains, federal jurisdictionoverstateclaimsinvariablydependsonthedisputedvalidityorconstructionofa federalstatute. SeeDissentingOp.,postat [2021]. Wenote,however, thatthiscourthasconcludedthatfederaljurisdictionoverastateclaimwasproperlyexercised where the dispute required a construction of exchange rules

  • 25

    actions, as prescribed under federal law, that is at the heart of [UBSs]

    allegations.DAlessiov.N.Y.StockExch.,Inc.,258F.3d93,103(2dCir.2001).6

    InreportingonitsinquiryintoNASDAQscompliancewiththeExchange

    Act in conducting theFacebook IPO, theSEC stated that[w]hen initiatingan

    IPO, an exchange has an obligation to ensure that its systems, processes and

    contingency planning are robust and adequate to manage the IPO without

    disruption to themarket,and that it complieswithall rules regarding,among

    otherthings,orderpriceandtimepriority.SECReleaseNo.3469655,2013WL

    2326683,at*1. ThesearetheveryobligationsthatUBSchargesNASDAQwith

    failingtomeetinviolatingitsdutytoprovideafairandorderlymarketforthe

    FacebookIPO.SeesupraPartI.D.1(discussingUBSDemandallegations).Thus,

    althoughUBSs claims for reliefmay invoke state lawof contractand tort, the

    dutyonwhichtheseclaimsturnandtheirparticularscopeasitpertainstoUBS

    implicating the exchanges statutoryduty tomonitor itsmembers compliancewith federal law, the identified substantial issue. SeeDAlessiov.N.Y. StockExch.,Inc.,258F.3d93,10102(2dCir.2001).6AsinDAlessio,exchangerulesareatissueinthiscasetotheextenttheyinformthe statutory dutyto operate a fair and orderlymarketthatUBS assertsNASDAQviolated.Demand37,A.55.

  • 26

    in participating in the Facebook IPOnecessarily raises disputed issues of

    federalsecuritieslaw.

    For example, in pursuing its claim for indemnification and breach of

    contract for failure to indemnify (collectively indemnification claims), UBS

    submitsthatthepartiesServicesAgreementobligatesNASDAQtocompensate

    UBS for losses sustained as a result of technical errors in conducting the

    Facebook IPO, includingNASDAQs failure timely and accurately to fill and

    confirmorders.SeeDemand5859,66,A.5960.ButtheServicesAgreement

    doesnotitselfspecifyhowNASDAQwastofillandconfirmordersorotherwise

    conduct an IPO. Those obligations are delineated inNASDAQs own rules,

    notably,Rules4120(LimitUpLimitDownPlanandTradingHalts)and4753

    (HaltandImbalanceCross),whichprescribehowNASDAQwastoconductan

    IPOCross,tofillorders,toprovidedisclosures,andtomakedecisionsregarding

    initiating,halting,andresuming trading. TheServicesAgreement incorporates

    NASDAQs rules by reference, see Services Agreement 17, A. 138, but

    NASDAQsduties topromulgate those rulesand then toadhere to themwere

    dictated by federal law, see 15 U.S.C. 78s(b)(2) (mandating exchanges to

    promulgate rules consistent with the requirements of the [Exchange Act]),

  • 27

    78s(g)(1) (requiring exchange compliance with own rules). Thus, UBSs

    indemnification claims are reasonably understood to seek compensation for

    losses allegedly caused by NASDAQs violation of its federal law duties to

    operatefairandorderlymarketsandtoadheretoitsownSECapprovedinternal

    rules ensuring such operation. As such, the claims necessarily raisedisputed

    issuesoffederallaw.7

    The sameconclusionobtainsas toUBSsclaim forbreachof the implied

    dutyofgoodfaithandfairdealing,insofarasNASDAQfailedtocancelcertain

    UBStradesplacedduringtheFacebookIPO. Althoughpleadedbyreferenceto

    7The incorporationofa federalstandard inastatelawprivateactiondoesnotnecessarily trigger federal jurisdiction,but thatconclusionderivesnot from theabsenceofadisputedfederallawissueattheinitialstepofGunnGrableanalysisbutfromdoubtastothesubstantialityofthefederalissueindisputeatthenextstepofanalysis.SeeMerrellDowPharms.Inc.v.Thompson,478U.S.at80506,81416.AsweexplaininPartII.A.2.b,infra,MerrillDowdoesnotsupportanycategorical conclusions as to substantiality, as suggested by Judge Straub, seeDissentingOp.,postat[2627].Indeed,inGrable,theSupremeCourtdescribedMerrellDowasdisclaim[ing]theadoptionofanybrightlinerule,aswhentheCourt reiterated that in exploring the outer reaches of 1331,determinationsaboutfederaljurisdictionrequiresensitivejudgmentsaboutcongressionalintent,judicialpower,andthefederalsystemandcareful judgments, ...aboutthenature of the federal interest at stake. Grable& SonsMetal Prods., Inc. v.Darue Engg & Mfg., 545 U.S. at 317 (quoting Merrell Dow Pharm. Inc. v.Thompson,478U.S.at810,814&n.12).

  • 28

    NewYork law, the claim ispremised onNASDAQRule 11890. SeeDemand

    6873,A,612(repeatedlyreferencingRule11890).

    Rule11890authorizesNASDAQtocancelanytransactiondeemedclearly

    erroneous.Apartyseekingcancellationmustsubmitawrittencomplaintwithin

    30minutes of the time atwhich the erroneous transactionwas executed. See

    Rule11890(a)(2)(A)(i). Alternatively,NASDAQ, in itsdiscretion,mayconsider

    cancellationrequestsreceivedup to60minutesafterexecutionofanerroneous

    transaction.SeeRule11890(a)(2)(A)(iii).

    UBSalleges that,on thedayof theFacebook IPO, itprovidedNASDAQ

    with notice of certain erroneous transactions. To the extent its request for

    cancellationwasuntimely,UBSchargesthatitwasNASDAQsownconductthat

    depriveditoftherulesbenefit,therebybreachingthedutyofgoodfaithandfair

    dealing implicit in theServicesAgreements incorporationofRule11890: By

    failing to inform UBS or the market of its system malfunctions in a timely

    manner, Nasdaq denied UBS the opportunity to provide notice of clearly

    erroneous trades in a manner consistent with Nasdaq Rule 11890, and thus

    denieditthebenefitofthatprovision.Demand73,A.61.

  • 29

    UBSsgood faith and fairdealing claim thusnecessarily raisesdisputed

    questionsastoNASDAQsobligationsunderRule11890,notonlygenerally,but

    in the particular circumstances where NASDAQ has allegedly violated its

    ExchangeActduty toprovidea fairandorderlymarket for securities trading.

    Thus,thisclaimalsonecessarilypresentsadisputedissueoffederallaw.

    Finally, UBS charges NASDAQ with gross negligence insofar as it

    employedunprecedented,untested,and inadequatesystemsandprocedures to

    conduct theFacebook IPO. SeeDemand7476,A.62. Asearliernoted,an

    essential element of a negligence claim is the existence of a duty owed by

    defendanttoplaintiff.SeeAegisIns.Servs.,Inc.v.7WorldTradeCo.,L.P.,737

    F.3d at 177. The source of the duty NASDAQ owed its members and the

    investingpublicinconductinganIPOisfederallaw.SeeDAlessiov.N.Y.Stock

    Exch.,Inc.,258F.3dat103(observingthatsourceofexchangesdutytomonitor

    compliancewith federal securities law and rules and regulationspromulgated

    thereunderisfoundinfederallaw,namely,intheExchangeAct(emphasisin

    original)); SEC Release No. 3469655, 2013WL 2326683, at *1 (summarizing

    exchangesobligationsunderfederallawwheninitiatinganIPO).Insofarasthe

    partiesdisputewhetherNASDAQbreached itsduty toUBS in conducting the

  • 30

    FacebookIPO,thenegligenceclaimthusalsonecessarilyraisesdisputedissuesof

    federallaw.8

    Insum,UBSsclaimsagainstNASDAQnecessarilyraisemultipledisputed

    issues of federal law, including the contours of NASDAQs federal duty to

    maintain a fair and orderlymarket, the scope of that duty, andwhether the

    failureofNASDAQssystemsduringtheFacebookIPOamountedtoabreachof

    thatduty. Accordingly,wedeem thisprongof theGunnGrable test satisfied

    andweturntothenextrequirement:substantiality.

    b. Substantiality

    The exercise of federal jurisdiction over state law claims demands not

    only a contested federal issue, but a substantial one. Grable& SonsMetal

    Prods., Inc.v.DarueEngg&Mfg., 545U.S. at 313. Substantiality ensures a

    serious federal interest in claiming the advantages thought tobe inherent ina

    federal forum. Id. Consistentwith this objective, it isnot enough that the

    federalissuebesignificanttotheparticularpartiesintheimmediatesuit;rather,

    8AlthoughUBS suggested at oral argument that its negligence claim did notdepend on federal law, the argument is defeated by the cited precedents, byUBSsspecificreferenceinitsDemandtotheExchangeActdutytooperateafairandorderlymarket,andbyitsfailuretopointustoanydistinctstatelawdutyapplicabletoNASDAQsconductoftheFacebookIPO.

  • 31

    substantiality...lookstotheimportanceoftheissuetothefederalsystemasa

    whole. Gunnv.Minton,133S.Ct.at1066;accordFracassev.PeoplesUnited

    Bank,747F.3dat144. Wehereconcludethatthedisputedfederal issue inthis

    casewhetherNASDAQviolated itsExchangeActobligation toprovidea fair

    and orderly market in conducting an IPOis sufficiently significant to the

    development of a uniform body of federal securities regulation to satisfy the

    requirementofimportancetothefederalsystemasawhole.9

    Inreaching thisconclusion,webeginwith language in theExchangeAct

    statingCongresssexpressfindingthat[t]hesecuritiesmarketsareanimportant

    national assetwhichmust be preserved and strengthened. 15U.S.C. 78k

    9JudgeStraubsuggeststhatissuesimportanttothefederalsystemasawholemustbeissuesoffederaljurisprudence.DissentingOp.,postat[20].Wenotethat the Supreme Court has not referenced jurisprudencethe study of thegeneralor fundamentalelementsofaparticular legalsystem,asopposed to itspractical and concrete details, Blacks LawDictionary 932 (9th ed. 2009)inexplicatingGunnGrable analysis. Thematter requires nodetaileddiscussionhere, however, because the federal law requirement that national exchangesprovidefairandorderlymarketsisafundamentalelement,andnotaperipheraldetail,ofthefederalsystemofsecuritiesregulation.AccordingtothestandardslaidoutinGunn,thisissufficienttoestablishimportancetothefederalsystemasawhole. SeeGunnv.Minton,133S.Ct.at1067(suggestingthatdevelopmentofauniformbodyof[patent]lawwasofimportancetothefederalsystemasawhole(alterationsinoriginal));seealsoGrable&SonsMetalProds.,Inc.v.DarueEngg&Mfg.,545U.S.at309 (holding thatdisputeovermeaningofa federaltaxprovisionisimportantfederallawissuethatbelongsinfederalcourt).

  • 32

    1(a)(1)(A). The central role stock exchanges play in the national system of

    securitiesmarketsisbeyondquestion:

    Stockexchangesperformanimportantfunctionintheeconomiclifeof this country. They serve, first of all, as an indispensablemechanism throughwhich corporate securities canbebought andsold. To corporate enterprise such a market mechanism is afundamental element in facilitating the successful marshaling oflarge aggregations of funds that would otherwise be extremelydifficultof access. To thepublic the exchangesarean investmentchannelwhichpromises readyconvertibilityofstockholdings intocash.Theimportanceofthesefunctionsindollartermsisvast....Moreover, because trading on the exchanges, in addition toestablishing the price level of listed securities, affects securitiesprices ingeneral,andbecausesuch transactionsareoftenregardedasan indicatorofournationaleconomichealth, thesignificanceoftheexchangesinoureconomycannotbemeasuredonlyintermsofthedollarvolumeoftrading.

    Silver v. N.Y. Stock Exch., 373 U.S. 341, 34950 (1963). The SEC recently

    reiteratedthispoint:Nationalsecuritiesexchanges...arecriticalcomponents

    of the National Market System, which provides the foundation for investor

    confidence in the integrity and stabilityof theUnitedStates capitalmarkets.

    SECReleaseNo.3469655,2013WL2326683,at *1. Thus,whileexchangesare

    selfregulatory organizations, their selfregulation isnot independent. Federal

    law imposesspecificpreconditions to,ongoingrequirements for,andoversight

    of, theoperationsof registeredexchanges in furtheranceof the strongnational

  • 33

    interestinpreserv[ing]andstrengthen[ing]theoperationofnationalsecurities

    markets.15U.S.C.78k1(a)(1)(A).

    Even if the importanceof stock exchanges and securitiesmarkets to the

    nationaleconomydoesnotnecessarilyrendereveryfederalquestionpertaining

    theretosufficientlysubstantialtosatisfythisprongofGunnGrableanalysis,itis

    noteworthyhere that theSECs justquotedstatementwasmade,notgenerally,

    butinthespecificcontextofassessingtheveryfederalissuedisputedinthiscase,

    namely,whetherNASDAQ,inconductingoneofthelargestIPOsinthenations

    history,hadcompliedwithmandatesof theExchangeAct, includingmandates

    that itoperatea fairandorderlymarketandadhere to itsownSECapproved

    rules.Thisstronglysignalsthesubstantialimportanceofthesefederalissues,not

    simply to theparties in thisaction,but to thedevelopmentofuniform federal

    securities regulation, and thus to the federal system as awhole. Gunn v.

    Minton,133S.Ct.at1066.10

    10OurdissentingcolleaguesuggeststhatthefactthatUBSchallengesNASDAQsmarketoperations in the contextofoneof the largest IPOs inhistory isofnoimporttooursubstantialityanalysis.SeeDissentingOp.,postat[2122].Tothecontrary, it is these circumstances that demonstrate NASDAQs challengedactions to have reached well beyond UBS to affect every member of theNASDAQexchangeandhundredsofthousandsofinvestors. Thus,thepartiesdisputeastotheparametersofNASDAQsExchangeActdutytoprovideafair

  • 34

    UBSurgesotherwise,citingBarbarav.NewYorkStockExchange,Inc.,99

    F.3d49(2dCir.1996).Inthereholdingthatadisputedissueaboutanexchanges

    compliance with an internal rule was not sufficiently substantial to support

    federal jurisdiction over state claims, this court observed that such rules are

    essentiallycontractualinnature,andarethusinterpretedpursuanttoordinary

    principlesof contract law, an area inwhich the federal courtshaveno special

    expertise. Id.at5455 (internalquotationmarksomitted). UBSsuggests,and

    Judge Straub appears to agree, see Dissenting Op., post at [1213], that this

    pronouncement categorically precludes identifying exchange rules disputes as

    substantial federal issues. ThisnotonlyoverreadsBarbara,butalso fails to

    heed SupremeCourt precedent disavowing categorical assessments of federal

    jurisdictionoverstatelawclaims.

    AstoBarbara,wefirstnotethatthiscourtthererecognizedthatstatelaw

    claims turning on an exchanges compliance with its internal rules do raise

    disputedquestionsoffederallaw;itwasatthenextstepofanalysisthatBarbara

    and orderlymarket in the context of this IPOmust be viewed as a federalquestionimportanttothenationalsystemofsecuritiesregulationasawholeand,therefore,asubstantialfederaldispute. Indeed,weexplainthispointfurtherinPartII.A.2.b,infra.

  • 35

    concluded that the particular federal questions raised in that case were

    insufficiently substantial, i.e., important to the federal system as awhole, to

    supporttheexerciseoffederaljurisdiction.See99F.3dat54.

    Second,thesourceofBarbarasobservationaboutthecontractualnatureof

    securities rules,Merrill Lynch, Pierce, Fenner& Smith Inc. v.Georgiadis, 903

    F.2d109,112(2dCir.1990),isworthnoting.InMerrillLynch,thiscourthadto

    decidewhichof twoagreementscontrolledanarbitrationdispute: thegeneral

    arbitration provision in the American Stock Exchanges SECapproved

    constitution or the parties more specific customer agreement pertaining to

    arbitration. Viewingbothagreementsascontractual, thiscourtconcluded that

    federalarbitrationlaw,see9U.S.C.2,requiredthatthemorespecificcustomer

    agreement control. This case presents us with no comparable separate

    agreement between the partiesmuch less one subject to a unique statutory

    mandate,suchas federalarbitration lawthatmightaffordUBSrightsdistinct

    from those reflected inNASDAQs SECapproved rules for satisfying the fair

    andorderlymarketrequirementsoftheExchangeAct.

    Barbara made no mention of these circumstances in applying Merrill

    Lynchsanalogyofexchangerulestocontractsevenintheabsenceofastatutory

  • 36

    conflict.Nordidithaveoccasiontoconsiderordiscussthefactthat,unlikemost

    contractsbetweenprivateparties, exchange rules are subject to SEC approval.

    This is hardly surprising given that the particular rules dispute at issue in

    Barbarawas of trifling significance to the overall system of federal securities

    regulation, especially in comparison to the far more important question of

    whetherNASDAQbreacheditsdutytomaintainafairandorderlymarketinthe

    Facebook IPOa point discussed further in the next paragraph.11 In fact,

    however, theordinaryprincipleofcontract law that looksonly to the intentof

    private contractors to construe their agreements, seeGoldmanv.WhitePlains

    Ctr.forNursingCare,LLC,11N.Y.3d173,176,867N.Y.S.2d27,29(2008),isnot

    sosimplyappliedtoSECapprovedrules,particularlyrulesintendedtoeffectthe

    ExchangeActsprescribedduty toprovide fairandorderlymarketsthepoint

    11Barbara acknowledged SECapproval ofNASDAQ rules in setting forth thecases background, see 99 F.3d at 51, but the court had no need thereafter toconsiderordiscusshow thisstatutorilymandatedapprovalprocessmightbearon substantiality because the rules dispute at issue in Barbarawas importantonly to theparties,not to the federalsystemasawhole. Thus, theconclusionBarbaradrewfromMerrillLynchspronouncementthattherulesofasecuritiesexchangearecontractualinnature,MerrillLynch,Pierce,Fenner&SmithInc.v.Georgiadis,903F.2dat113,i.e.,thatsuchrulesarethusinterpretedpursuanttoordinaryprinciplesofcontractlaw,anareainwhichthefederalcourtshavenospecial expertise, Barbara v.New York Stock Exchange, Inc., 99 F.3d at 55,supportsatmostageneral,butnotacategorical,conclusionthatexchangerulesdisputesdonotraisesubstantialfederalquestions.

  • 37

    atissuehere. WhileNASDAQandUBShereincorporatedNASDAQrulesinto

    theirownServicesAgreement,federallawdidnotpermitthemtodootherwise

    or toagreeonadifferentruleconstructionwithin theServicesAgreementthan

    that recognized by the SEC. See 15U.S.C. 78cc(a) (precluding parties from

    contractingaroundSECapprovedexchangerules);ServicesAgreement17,A.

    138 (providing that NASDAQ OMX Requirements, which include all SEC

    approvedNASDAQrules,shallhavepreferenceoveranyconflictingAgreement

    provisions). Thus, Exchange Act mandates for NASDAQs rules, the SECs

    particularroleinapprovingNASDAQsrules,itsauthorityitselftochangethose

    rules,itsresponsibilityforoverseeingNASDAQscompliancewiththerules,and

    itspower todisciplineNASDAQ for rulesviolationsas itdidwith respect to

    theFacebook IPOhereat issueall indicate thatNASDAQ rulesarepartofa

    morecomplexscheme(implicatinggreaterfederalinterests)thanthatpresented

    bymostprivatepartyagreements,even those thatborrow federalstandards to

    resolvestatelawcontractclaims.SeeDAlessiov.N.Y.StockExch.,Inc.,258F.3d

    at 104 (The comprehensive scheme of statutes and regulations designed to

    policethesecurities industry is indicativeofastrongfederal interest.(internal

    quotationmarksomitted)).Accordingly,thecontractualnatureofExchangeAct

  • 38

    mandated exchange rulesdoesnot, by itself,mean that all ruledisputes raise

    insubstantial questions of federal law. Rather, substantiality depends on a

    carefulassessmentofhowtheruledisputeaffectsthefederalsystemasawhole.

    SeegenerallyFracassev.PeoplesUnitedBank,747F.3dat14445 (concluding

    that disputed issue under Fair Labor Standards Actwas insubstantialwhere

    plaintiffs referenced federal law for public policy considerations and not as

    basisfortheirclaims).

    Thisbringsustoourthird,andmostimportantpointindistinguishingthis

    case fromBarbara: the context of the rulesdisputes in these two cases. The

    disputeinBarbarapertainedtoanexchangesaction,allegedlyinviolationofthe

    exchanges rules, in provisionally barring a floor clerk from the trading floor

    whiledisciplinaryproceedingswerependingagainsthim,and then inrefusing

    toliftthebanevenafteralldisciplinarychargesagainsttheclerkweredismissed.

    SeeBarbarav.N.Y.StockExch.,Inc.,99F.3dat5152.

    Withoutbelittling the importanceofeither themaintenanceofdiscipline

    amongmarketplacepersonnel,orofanexchangesadherencetoitsdisciplinary

    rules, the parties dispute in Barbara did not implicate one of the most

    fundamental functionsofanationalsecuritiesexchange. SECReleaseNo.34

  • 39

    69655,2013WL2326683,at*1.Incontrast,UBSsclaimshere,whethersounding

    incontractorintort,chargeNASDAQwithviolatingthecoredutyofafederally

    registeredSROundertheExchangeAct:toprovideafairandorderlymarketfor

    apublicstockoffering.TheSECemphasizedtheimportanceofthatdutytothe

    overall system of federal securities regulationwhen it observed in connection

    with NASDAQs conduct of the Facebook IPO, [t]he orderly initiation of

    secondarymarkettradingafteranIPOisoneofthemostfundamentalfunctions

    of a national securities exchange, and affects not only the market for those

    individual companies but also investor confidence in themarket as awhole.

    SECReleaseNo.3469655,2013WL2326683,at*1.Indeed,therecanbenodoubt

    astothatconclusiongiventhatNASDAQsallegedfailuretoprovideafairand

    orderlymarketwasinthecontextofoneofthelargestpublicstockofofferingsin

    historyinvolving421millionsharesvaluedat$16billion. Inshort,UBSdoes

    notchargeNASDAQwithviolatingitsExchangeActdutytoprovideafairand

    orderlymarketforasmallordiscretenumberofsecuritiestransactions;ratherit

    charges amassive failure ofNASDAQs systems. Thus, the federal question

  • 40

    raised byUBSs claims as toNASDAQs performance of its critical, federally

    mandateddutycannotbedeemedlessthansubstantial.12

    That conclusion is reinforced by the fact that the particular NASDAQ

    actionsfaultedbyUBSinstartingandstoppingtrading,cancellingtrades,and

    informing thepublicof itsactionsimplicateexchangepowers thathavebeen

    deemedquasigovernmental.DLCapitalGrp.,LLCv.NasdaqStockMkt.,409

    F.3d 93, 98 (2d Cir. 2005) (listing among such powers Nasdaqs regulatory

    decisionstosuspendtrading,resumetrading,orcanceltradesandnotingthat

    evenchoiceofwhenandhowtoannouncethosedecisionswasconsistentwith

    NasdaqsquasigovernmentalpowersasanSRO(emphasisinoriginal)(internal

    quotationmarksandbracketsomitted).Tobesure,thisdoesnotequatethiscase

    tothosepresentingdisputesastothevalidityofactualgovernmentalaction.See

    12 Our dissenting colleague downplays the pervasive effects on the nationalsecuritiesmarketsofNASDAQsallegedfailuresinconductingtheFacebookIPOon the ground that substantialitymeans not large or significant but onlyimportant to federal jurisprudence. SeeDissentingOp.,post,at [2122]. Wehavealreadyexplainedwhyadisputeaboutthescopeofanexchangesdutytooperate a fair and orderly market is fundamental to the development of auniformbodyoffederalsecuritiesregulationand,thus,importanttothefederalsystemasawhole.Seesupranote9andaccompanyingtext.ThefactthatUBSchargesNASDAQwith a failure of thatduty in connectionwith such a largepublicofferingonlyconfirmsthatthequestionhereisimportanttothefederalsystemasawhole,thestandardforsubstantialitysetforthinGunnv.Minton,133S.Ct.at1066.

  • 41

    Grable& SonsMetal Prods., Inc. v.Darue Engg&Mfg., 545U.S. at 31516

    (approvingexerciseoffederaljurisdictionoverstateclaimswherevalidityofIRS

    actionwascentraltodispute);Smithv.KansasCityTitle&TrustCo.,255U.S.at

    201 (identifying federal jurisdictionover state law claim that requireddecision

    on constitutional validity of federal bond issuance). Nevertheless,where, as

    here,UBSsstatelawclaimsalreadypresentasubstantialdisputeoffederallaw

    insofarastheychargeNASDAQwithviolatingitsExchangeActdutytoprovide

    afairandorderlymarketfortheFacebookIPO,thefactthatUBSattributesthat

    violation toNASDAQsmalfeasance inperformingquasigovernmentalpowers

    conferredonitbytheExchangeActreinforcesoursubstantialityconclusion.

    Further, characteristics that in some cases have signaled against

    substantialitye.g.,theretrospectivenatureofaclaim,theproprietyofresolving

    thefederaldisputeinastateforum,andtheabsenceofafederalremedydonot

    support that conclusion here. See Gunn v. Minton, 133 S. Ct. at 106667

    (referencingretrospectivenatureofclaimandstatesabilitytoresolvedisputeat

    issuewithout threateninguniformityof federal lawas factors thatmightsignal

    lackof substantiality);MerrellDowPharms. Inc.v.Thompson,478U.S.at814

    (construingCongresssdecisionnot toprovide federal remedy forviolationof

  • 42

    federal law as tantamount to conclusion that presence of claimed violation in

    state cause of action is insufficiently substantial to confer federal question

    jurisdiction). To thecontrary,resolutionof thedisputed federal law issuehere

    would likely have farreaching prospective consequences for the operation of

    national securities exchanges, particularly in conducting IPOs. Further, as

    discussed in thenext sectionaddressing the federalstatebalanceprongof the

    GunnGrabletest,seeinfraPartII.A.3,Congresshasattemptedtoplacedisputes

    allegingviolationsof federal securities lawobligations exclusively in a federal

    forum. Finally, since Merrell Dow Pharmaceuticals Inc. v. Thompson, the

    SupremeCourt has clarified that the absence of a federal cause of action is a

    factor relevant to,butnotdispositiveof, thequestionofwhethera federal law

    dispute raised by a state law claim can properly be deemed substantial. See

    Grable&SonsMetalProds.,Inc.v.DarueEngg&Mfg.,545U.S.at310,318.

    In short,UBS cannot urge that Barbara or any other case establishes a

    categoricalruleforassessingsubstantialitybecausetheSupremeCourthasruled

    thattheconcept isnotsusceptibletobrightlineanalysis. Rather,substantiality

    mustbedeterminedbasedonacareful,casebycasejudgment.Seeid.at31718;

    see also Gully v. First Natl Bank in Meridian, 299 U.S. 109, 11718 (1936)

  • 43

    (Cardozo, J.) (observing that substantiality assessment requires something of

    that commonsense accommodation of judgment to kaleidoscopic situations

    whichcharacterizes the law in its treatmentofproblemsofcausation);accord

    Greenblattv.DeltaPlumbing&HeatingCorp.,68F.3d561,570 (2dCir.1996)

    (referencing need for court to make principled, pragmatic distinctions in

    assessingsubstantiality(internalquotationsomitted)).

    Becausethecategoryofcasesadmittingfederaljurisdictionoverstatelaw

    claims is special and small,Gunn v.Minton, 133 S.Ct. at 1064, it is to be

    expected that, after such careful, casespecific consideration,most federal law

    questions raised in connection with state law claims will not be deemed

    substantial,seeid.at106465;Greenblattv.DeltaPlumbing&HeatingCorp.,68

    F.3dat57071;Gullyv.FirstNatlBank inMeridian,299U.S.at118. But the

    federallawdisputeinthiscasewhetherNASDAQviolateditsdutytoprovide

    afairandorderlymarketfortheFacebookIPOisofadifferentsort.13

    13 Judge Straubpredicts that exercising federal jurisdictionherewill lead to ahordeofincreasedlitigation,tryingtosweepintofederalcourteverystatelawclaim that turns on the interpretation of a stock exchange rule, includingcountless arbitration proceedings before the Financial Industry RegulatoryAuthority (FINRA). See Dissenting Op, post Part III.B. This concern isunwarranted. Few, if any, such cases are likely to present issues of suchimportancetothefederalsystemofsecuritiesregulationastheallegedwholesale

  • 44

    Asalreadyexplained, thatduty isnotsimplycoincidental toUBSsstate

    lawclaims; it is thedutyonwhich theclaimsrest. Thus, thiscase isnotatall

    akin to Gunn in which the Supreme Court ruled that a federal patent law

    questionarising in thecontextofastatemalpracticeactionwasnotsufficiently

    substantialtosupportfederaljurisdictionoverthemalpracticeaction.See133S.

    Ct.at106668.NotonlywasthepatentquestioninGunnderivativeratherthan

    direct;itwasalsomerelyhypotheticalbecauseofthebackwardlookingnature

    of the claim. See id. at 1066 (noting that state courtwould, atmost, consider

    whatwouldhavehappened inprior federalproceeding ifargumenthadbeen

    made). There isnothing indirectorhypothetical inUBSsclaim thatNASDAQ

    failedinitsprimarydutytoprovideafairandorderlymarketfortheFacebook

    IPO.Moreover,thestrongfederalinterestinanexchangesperformanceofthat

    dutyisevidentfromtheExchangeActsspecificidentificationoffairandorderly

    marketsasananimatingobjectofthatlegislation,see15U.S.C.78k1(a)(1)(C),

    and from its provision conditioning national exchange registration on a

    demonstrationof(andsubsequentcompliancewith)internalrulesthatpromote

    fair and orderlymarkets, see id. 78s(g)(1), 78u(d) (f), 78s(h)(1) (4); see also

    failurechargedhereofastockexchangesExchangeActduty toprovidea fairandorderlymarketforamajorIPO.

  • 45

    DAlessiov.N.Y.StockExch.,Inc.,258F.3dat100(statingthatissuesrequiring

    interpretationandapplicationoffederalsecuritieslawsandrelatedstatutoryand

    regulatory requirements are areas of undisputed strong federal interest);

    Friedlanderv.Troutman,Sanders,Lockerman&Ashmore,788F.2d1500,1504

    (11th Cir. 1986) (The comprehensive scheme of statutes and regulations

    designed to police the securities industry is indicative of a strong federal

    interest.).TheSEChasrecognizedthattheneedforfairandorderlymarketsis

    greatestwhenastockofferingisbeingmadetotheinvestingpublic.NASDAQs

    allegedviolationof itsduty toprovidea fairandorderlymarketarises in just

    that context, indeed, in connectionwith one of the largest public offerings of

    securitiesinthenationshistory.Suchcircumstancescompeltheconclusionthat

    UBSs state law claims raise substantial, disputed federal issuesissues

    importanttothefederalsystemasawhole.

    3. FederalStateBalance

    ThefinalGunnGrablefactorisconcernedwiththeappropriate balance

    offederalandstatejudicialresponsibilities.Gunnv.Minton,133S.Ct.at1068

    (quotingGrable&SonsMetalProds., Inc.v.DarueEngg&Mfg., 545U.S. at

    314). Here, this factor strongly supports federal jurisdiction. Far from

  • 46

    threatening the federalstate balance envisioned byCongress in this area, the

    exercise of federal jurisdiction here comports with Congresss expressed

    preference for alleged violations of the Exchange Act, and of rules and

    regulationspromulgated thereunder, tobe litigated ina federal forum. See15

    U.S.C. 78aa(a) (providing federal courts with exclusive jurisdiction of

    violationsof [ExchangeAct]or therulesandregulations thereunder,andofall

    suitsinequityandactionsatlawbroughttoenforceanyliabilityordutycreated

    by[ExchangeAct]ortherulesandregulationsthereunder).

    Indeed,amongoursistercircuits,theFifthandNinthhaveconcludedthat

    certaindisputesinvolvingstatelawclaimsagainstSROsconferexclusivefederal

    jurisdictionunder78aa.SeeSacksv.Dietrich,663F.3d1065,106869(9thCir.

    2011) (concluding that, thoughplaintiffpleadedonlystate lawcausesofaction

    and did not name as defendant SRO or SRO employees, liability turns on

    interpretationof rules thatareapprovedby theSECandwhoseviolationsare

    subjecttoexclusivefederal jurisdiction,citing78aa);SpartaSurgicalCorp.v.

    NatlAssnofSec.Dealers,Inc.,159F.3d1209,121112 (9thCir.1998) (holding

    that although [plaintiffs] theories are posited as state law claims, they are

    founded on the defendants conduct in suspending trading and delisting the

  • 47

    offering,theproprietyofwhichmustbeexclusivelydeterminedbyfederallaw

    and therefore 78aa provided for exclusive jurisdiction in federal court);

    Hawkinsv.NatlAssnofSec.Dealers,Inc.,149F.3d330,33132(5thCir.1998)

    (concluding thatplaintiffsclaimsagainstSROofbreachofduty,conspiracy to

    deny relief, and failure to supervise, though carefully articulated in terms of

    state law, are actions at law seeking to enforce liabilities orduties created by

    federal securities laws which are governed exclusively by federal courts

    pursuantto15U.S.C.78aa).

    InBarbara,wedeclined toadoptsuchabroadreadingof78aa. See99

    F.3d at 55 (holding that federal jurisdiction over state claims could not be

    premisedon78aabecausethatstatutereferstoclaimscreatedbytheExchange

    Actandrulespromulgatedthereunder,nottoclaimscreatedbystatelaw). See

    alsoKarsnerv.Lothian,532F.3d876,88788 (D.C.Cir.2008) (concluding that

    SECapprovalofNationalAssociationofSecuritiesDealers (NASD)rulesdid

    notbringallrulesquestionswithin78aagrantofexclusivefederaljurisdiction);

    Fordv.HamiltonInvestments,Inc.,29F.3d255,25859(6thCir.1994)(holding

    thatdisputeaboutarbitrationcompliancewithNASDrulesdidnotgiveriseto

    federalquestion jurisdictionbasedonSECapprovalofrules,particularlywhere

  • 48

    claim did not allege violation of securities laws or seek to enforce any duty

    createdbysuchlaws).Weneednotrevisitthatconclusionhere.Atthisstepof

    theGunnGrable testwhichpostdatesBarbarait suffices forus to identify

    thejurisdictiongrantof78aaasasignalthatwewillnotupsettheappropriate

    balance of federal and state judicial responsibilities by exercising federal

    jurisdiction in this case,where state claims necessarily raise a disputed issue

    aboutNASDAQscompliancewithitsExchangeActdutytohaveprovidedafair

    andorderlymarketfortheFacebookIPO.SeeDAlessiov.N.Y.StockExch.,Inc.,

    258 F.3d at 104 (noting that exclusive jurisdiction grant of 78aa signals

    recognition of strong federal interest in regulation of securities industry and

    exchanges). Indeed,thatconclusionisonlyreinforcedwhere,ashere,apartys

    efforts to have that federal law duty assessed by reference to state law

    principlese.g., good faith, fair dealing, negligencecould undermine

    Congresssexpectationsforuniformityinanexchangesperformanceofspecified

    ExchangeActduties.Cf.Gunnv.Minton133S.Ct.at1067(observingthatstate

    courtshypotheticalassessmentofhowpatentissuemighthavebeenresolvedin

    prior federal proceeding did not upset federalstate balance favoring uniform

  • 49

    bodyofpatentlawbecauseitwouldresultneitherinabindingrulingoffederal

    lawnoraconflictingrulingofstatelaw).

    In sum, upon conducting the analysis prescribed by GunnGrable, we

    conclude thatUBSs state claims againstNASDAQ necessarily raise disputed

    issuesoffederallawofsignificantinteresttothefederalsystemasawhole,and

    that the adjudication of state claims presenting such disputes in the federal

    courtswouldnotdisruptanyfederalstatebalanceenvisionedbyCongress.See

    Grable& SonsMetal Prods., Inc. v.Darue Engg&Mfg., 545U.S. at 31415.

    Accordingly, we conclude that the district court correctly exercised federal

    jurisdictionhere.

    B. Arbitrability

    1. WhoDecidesArbitrability

    UBScontendsthat,evenifthedistrictcourtproperlyexercisedjurisdiction

    inthiscase,iterredinconcludingthatit,ratherthananarbitrator,shoulddecide

    whetherUBSsclaimsaresubjecttoarbitration.SeeNASDAQOMXGrp.,Inc.v.

    UBS Sec.LLC, 957 F. Supp. 2d at 40305. We review this issuedenovo, see

    Contecv.RemoteSolutionCo.,398F.3d205,208(2dCir.2005),andweconclude

  • 50

    thatthedistrictcourtcorrectlyidentifiedarbitrabilityasaquestionforthecourt

    todecideinthiscase.

    Thelawgenerallytreatsarbitrabilityasanissueforjudicialdetermination

    unless theparties clearly andunmistakablyprovide otherwise. Howsamv.

    DeanWitterReynolds,Inc.,537U.S.79,83(2002)(internalquotationmarksand

    brackets omitted); accord VRG Linhas Aereas S.A. v.MatlinPatterson Global

    Opportunities Partners II L.P., 717 F.3d 322, 32526 (2dCir. 2013). UBS and

    NASDAQ made no such alternative provision here. Rather, their Services

    Agreementissilentastowhoshoulddecidearbitrability.

    Wehave found theclearandunmistakableprovisionsatisfiedwherea

    broadarbitrationclauseexpresslycommitsalldisputestoarbitration,concluding

    that all disputes necessarily includes disputes as to arbitrability. See

    PayneWebberInc.v.Bybyk,81F.3d1193,1199(2dCir.1996). Butwehavenot

    reached the same conclusionwhere a broad arbitration clause is subject to a

    qualifyingprovisionthatatleastarguablycoversthepresentdispute. SeeKatz

    v. Feinberg, 290 F.3d 95, 97 (2d Cir. 2002). In such circumstances,we have

    identifiedambiguityastothepartiesintenttohavequestionsofarbitrability

    whichwould includewhetheradisputefallswithinoroutsidethescopeofthe

  • 51

    qualifierdecidedbyanarbitrator.Seeid.Here,thebroadarbitrationclausein

    theparties ServicesAgreement is subject toqualification: Except asmaybe

    providedintheNASDAQOMXRequirements,allclaims,disputes,controversies

    andothermattersinquestionbetweenthePartiestothisAgreement...shallbe

    settled by final and binding arbitration. ServicesAgreement, 18.A,A. 139

    (emphasisadded). Asexplained in thenextsectionof thisopinion,oneof the

    provisions of theNASDAQOMX Requirements at least arguably immunizes

    NASDAQfromliabilityforthetypeofclaimassertedbyUBS,makingitfarfrom

    clear and unmistakable that the ServicesAgreement providesUBSwith an

    arbitrableclaim.Thus,wecannotconcludethatUBSandNASDAQclearlyand

    unmistakablycommittedquestionsofarbitrabilitytoanarbitratorratherthanthe

    court.

    Inurging otherwise,UBS submits that the ServicesAgreements quoted

    carveoutprovisionisirrelevantbecauseNASDAQneveradoptedthereferenced

    limitingrequirements.Thismisapprehendstherelevantstandard.TheServices

    Agreementneednotclearlyremovethequestionofarbitrabilityfromarbitration

    inorderforthatquestiontobeoneforjudicialdetermination.Rather,UBSmust

    point to a clear and unmistakable expression of the parties intent to submit

  • 52

    arbitrabilitydisputestoarbitration.SeeHowsamv.DeanWitterReynolds,Inc.,

    537U.S.at83. UBScannotcarrythatburdenbypointingtoabroadarbitration

    clausethatthepartiessubjectedtoacarveoutprovision.

    UBS neverthelessmaintains that any ambiguity as to the parties intent

    respecting resolution ofquestions of arbitrability is eliminatedby the Services

    Agreements incorporationofAAA rules,whichprovide forarbitrability tobe

    decidedby the arbitrator. See ServicesAgreement, 18.B,A. 139 (Except as

    otherwise provided herein or by agreement of the Parties, any arbitration

    proceeding shallbe conducted in accordancewith theCommercialArbitration

    RulesoftheAmericanArbitrationAssociationorinaccordancewithsuchother

    rules and procedures as are agreed to by the parties.); AAA Commercial

    Arbitration Rules&Mediation Procedures, R7 (Oct. 1, 2013) (The arbitrator

    shall have the power to rule on his or her own jurisdiction, including any

    objections with respect to the existence, scope, or validity of the arbitration

    agreementortothearbitrabilityofanyclaimorcounterclaim.).

    In fact, theServicesAgreementdoesnotclearlyandunmistakablydirect

    thatquestionsofarbitrabilitybedecidedbyAAA rules; rather, itprovides for

    AAArulestoapplytosucharbitrationsasmayariseundertheAgreement. As

  • 53

    noted, Section 18.A of the ServicesAgreement carves out certain issues from

    arbitration, a circumstance that thus delays application ofAAA rules until a

    decision ismade as to whether a question does or does not fall within the

    intendedscopeofarbitration, inshort,untilarbitrability isdecided. Thus, this

    caseisnotakintothoseinwhichwehaveconstruedtheincorporationofAAA

    rulesintoanagreementwithabroadarbitrationclausetosignalthepartiesclear

    andunmistakableintenttosubmitarbitrabilitydisputestoarbitration.See,e.g.,

    ContecCorpv.RemoteSolutionCo.,398F.3dat208;cf.Zachariouv.Manios,68

    A.D.3d539,539,891N.Y.S.2d54,55 (1stDept2009) (holding that reference to

    AAArulesinconjunctionwithnarrowarbitrationprovisiondoesnotconstitute

    clearandunmistakableevidenceofintenttohavearbitratordecidearbitrability).

    Accordingly,weconcludethatthedistrictcourtcorrectlydeterminedthat

    it should resolve the arbitrability of UBSs claims rather than commit that

    questiontoanarbitrator.

    C. ArbitrabilityofUBSsClaims

    InsofarasUBSchallengesthedistrictcourtsdeterminationthatitsclaims

    against NASDAQ are not arbitrable, our review is de novo. See Specht v.

    NetscapeCommcnsCorp., 306F.3d 17, 26 (2dCir. 2002). Two questions are

  • 54

    relevanttodeterminingarbitrability:(1)whetherthepartieshaveenteredintoa

    validagreement toarbitrate,and, if so, (2)whether thedisputeat issuecomes

    withinthescopeofthearbitrationagreement.InreAm.ExpressFin.Advisors

    Sec.Litig.,672F.3d113,128(2dCir.2011).NeitherUBSnorNASDAQdisputes

    the validity of their agreement to arbitrate; thus, the sole issue on appeal is

    whetherthatagreementreachesUBSsclaims.

    Indeciding thatquestion,we aremindful that federal and statepolicies

    favoringarbitration,seeCompuCreditCorp.v.Greenwood,132S.Ct.665,669

    (2012);Sutherlandv.Ernst&YoungLLP,726F.3d290,295(2dCir.2013);Matter

    ofBrady v.WilliamsCapitalGrp.,L.P., 14N.Y.3d 459, 468, 902N.Y.S.2d 1, 6

    (2010)(notingstrongstatepolicyfavoringarbitrationagreements),giveriseto

    an important presumption[] that any doubts concerning the scope of

    arbitrable issuesberesolved infavorofarbitration,TelenorMobileCommcns

    AS v. Storm LLC, 584 F.3d 396, 406 (2d Cir. 2009) (internal quotationmarks

    omitted). At thesame time,however,we recognize theoverarchingprinciple

    thatarbitration isamatterofcontract,AmericanExpressCo.v. ItalianColors

    Rest.,133S.Ct.2304,2309(2013),andthatitisthelanguageofthecontractthat

    definesthescopeofdisputessubjecttoarbitration,EEOCv.WaffleHouse,Inc.,

  • 55

    534U.S.279,289(2002).Thus,partiesmaybecompelledtoarbitratedisputes

    but only thosedisputesthat theyhave contracted to submit to arbitration.

    FirstOptionsofChi., Inc.v.Kaplan,514U.S.938,943 (1995); seeStoltNielsen

    S.A.v.AnimalFeedsIntlCorp.,559U.S.662,684(2010)(observingthatcourts

    andarbitratorsmustnotlosesightofthepurposeoftheexercise:togiveeffectto

    theintentoftheparties);Bellv.CendantCorp.,293F.3d563,566(2dCir.2002)

    ([A]rbitrationisacreatureofcontract,andapersonmayonlybecompelledto

    arbitrateadisputetotheextentthathehasagreedtodoso.);MatterofSalvano

    v.MerrillLynch,Pierce,Fenner&Smith,85N.Y.2d173,182,623N.Y.S.2d790,

    794(1995)(holdingwithrespecttocontractualagreementregardingarbitration,

    thatcourtsroleislimitedtointerpretationandenforcementofthetermsagreed

    tobytheparties).

    Inthiscase,theServicesAgreementstatesthepartiesintenttosubmitall

    disputes to arbitration except as provided in the NASDAQ OMX

    Requirements. ServicesAgreement, 18.A,A. 139. TheAgreement defines

    NASDAQ OMX Requirements to include NASDAQ rules and rule

    interpretations.Seeid.1.A.,A.12223.

  • 56

    TheNASDAQrulepertinenthereisRule4626,whichgenerallyprecludes

    NASDAQmembers from seeking compensation for losses attributable to the

    exchangeshandlingofsecuritiestransactions:

    Except as provided for in paragraph (b) below, Nasdaq and itsaffiliatesshallnotbeliableforanylosses,damages,orotherclaimsarising out of theNasdaqMarketCenter or its use. Any losses,damages,orotherclaims,relatedtoafailureoftheNasdaqMarketCenter to deliver, display, transmit, execute, compare, submit forclearance and settlement, adjust, retain priority for, or otherwisecorrectly process an order, Quote/Order, message, or other dataentered into, or created by, the Nasdaq Market Center shall beabsorbedby themember,or themembersponsoring thecustomer,thatenteredtheorder,Quote/Order,message,orotherdataintotheNasdaqMarketCenter.

    Rule 4626(a). Because the parties subjected their otherwise broad arbitration

    agreementtothelimitationsimposedbyNASDAQrules,weconcludethatthere

    couldnothavebeenanyintenttoarbitrateclaimsprecludedbyRule4626(a).

    UBSdisputes that its claimsagainstNASDAQ fallwithin thepreclusive

    languageofRule4626(a).Theargumentisdefeatedbytheplainlanguageofthe

    rule,which reaches any losses, damages, or other claims arising out of the

    NasdaqMarketCenteror itsuse,exceptasprovided insubparagraph (b). As

    earliernoted,allofUBSsclaimsallegedlyderivefromitsuseofthepurportedly

    malfunctioning Nasdaq Market Center to participate in the Facebook IPO.

  • 57

    Moreover,UBSclaimsthatasaresultofNASDAQsmarketfailures,NASDAQ

    didnotcorrectlyprocessUBSsFacebookordersinthatitdidnotprovidetimely

    noticeofconfirmation. Rule4626(a)specifically identifies lossesattributable to

    NASDAQs failure correctly [to] process an order as ones that must be

    absorbedbytheexchangemember. Thus,weconcludethatUBSsclaimsfall

    withinRule4626(a).14

    UBS nevertheless argues that because Rule 4626 does not explicitly

    precludearbitration,acourtcannotconclude that thepartiesdidnot intend to

    arbitrate UBSs claims. UBS cites no authority for the proposition that an

    14UBSarguesthatarbitrationofitsgrossnegligenceclaimscannotbeprecludedbyRule4626(a)becauseNewYorkdoesnotpermitapartytoinsulateitselffromgrossnegligencebycontract.SeeAbacusFed.Sav.Bankv.ADTSec.Servs.,Inc.,18N.Y.3d 675, 683, 944N.Y.S.2d 443, 446 (2012). UBSpoints tono authority,however, extending this policy to exchange rules promulgated with SECapprovalpursuantto federal law. Asweobserved inPartII.A.2.b,supra,suchrulesmay be contractual in nature, but they differ significantly from generalprivate party contracts in that exchanges and theirmembers are not free tocontractoutoforaroundSECapprovedrulerequirementsorlimitations.See15U.S.C.78cc(a). Indeed, theServicesAgreementbetweenNASDAQandUBSgives effect to this federal statutory requirement by expressly stating thatNASDAQ rules takeprecedenceoverAgreementprovisions inestablishing thepartiesobligations.SeeServicesAgreement17,A.138.Thus,thereisnobasisin law to conclude that thebroad language ofRule 4626(a)doesnot apply togrossnegligenceclaims,muchlessthatthepartiesdidorcouldhavereachedameeting of theminds to that effectwhen they agreed that their arbitrationobligationswouldbelimitedbyNASDAQrules.

  • 58

    affirmativerejectionofarbitration isrequiredtodemonstratea lackof intentto

    arbitrate. In any event, such a requirement is particularly unwarranted here

    where the agreed limit on arbitration is a rule that precludes not simply

    arbitrationofaclaim,buttheclaimitself.Insuchcircumstances,thequestionof

    arbitrabilitydependsonwhetherthechallengedclaimsdoordonotfallwithin

    thelimitingrulespreclusion.UBSsclaimsfallwithinthepreclusivelanguageof

    Rule4626(a)and,thus,arenotarbitrable.

    ThatconclusionfindsfurthersupportinthesingleRule4626(b)exception

    relevanthere: subsection(b)(3),aprovisionspecificallyaddressedtoFacebook

    IPO losses. ProposedbyNASDAQ and approvedby theSEC inMarch 2013,

    Rule 4626(b)(3) establishes a voluntary accommodation program for certain

    member claims arising from theFacebook IPO. SECReleaseNo. 3469216, 78

    Fed.Reg.at19,041. Towardthatend, itprovidesaprocessforclaimsof injury

    resultingfromtheNasdaqHaltandImbalanceCrossProcessinconnectionwith

    the initialpublicofferingofFacebook, . . . includinganydelay indeliveringof

    confirmationsoforders. Rule4626(b)(3). Thenewsubsectionprescribes,inter

    alia,how losseswillbemeasured, therequirements forsubmittingaclaim, the

  • 59

    evaluator of the claim, the priority in which claims will be paid, and the

    maximumtotalprogrampayment$62million.SeeRule4626(b)(3)(A)(G).

    The need to amend Rule 4626and to secure SEC approval for the

    amendmentto afford NASDAQ members some compensation for losses

    incurred in the Facebook IPO reinforces the conclusion that when UBS and

    NASDAQagreedtosubjectthearbitrationclauseintheirServicesAgreementto

    the limitations of Rule 4626(a), they signaled that it was not their intent to

    arbitrateclaimsprecludedbythatrule.

    In urging otherwise, UBS emphasizes that participation in the Rule

    4626(b)(3) accommodation program is voluntary and that both the SEC and

    NASDAQ acknowledged thatmemberswere free to forego the program and

    pursue alternative remedies. See SEC ReleaseNo. 3469216, 78 Fed. Reg. at

    19,046([A]memberisfreetoelectnottosubmitaclaimforcompensationunder

    the accommodation program and choose instead to pursue other remedies.);

    NASDAQLtr. toSEC,Sept.17,2012,at5,A.337(Members thatwouldprefer

    not to release Nasdaq and instead to attempt to pursue claims against it,

    notwithstanding the otherwise applicable provisions of Rule 4626 [and other

    potentialdefenses],areobviouslyfreetodoso.).Thesestatementswereissued

  • 60

    inresponse tocertainconcernsraisedduring therulespubliccommentperiod

    abouttheprogramsliabilityreleaserequirement.SeeRule4626(b)(3)(H).These

    statements do not identifywhat claimsmembersmight alternatively pursue,

    much less suggest thatmembers canpursue claims foreclosedbyRule4626(a)

    exceptasprovidedina4626(b)exception.

    Inanyevent,ourconcernhere isnot to identifywhat, ifany,alternative

    judicial remedies aNASDAQmembermight pursue against that exchange in

    connectionwiththeFacebookIPO.NorisittodiscernwhatdefensesNASDAQ

    might raise to such claims. Our singularpurpose is todiscern the scopeof a

    broad arbitrationprovision that is specifically limitedby, amongother things,

    NASDAQ rules. Because Rule 4626(a) specifically disallows member claims

    againstNASDAQforlossessustainedintradingsecuritiesonthatexchange,we

    conclude that the parties did not intend to submit such foreclosed claims to

    bindingarbitration. TheonlyruleexceptionapplicablehereRule4626(b)(3)

    does not support a different conclusion. Thus, like the district court, we

    concludethatUBSsclaimsagainstNASDAQarenotsubjecttoarbitration.

  • 61

    Because we thus identify no merit in any of UBSs challenges to the

    preliminary injunction entered against it in this case, we hereby affirm that

    injunction.

    III. Conclusion

    Tosummarize,weconcludeasfollows:

    1.Federaljurisdictionisproperlyexercisedinthiscasebecause,although

    UBSs challenged arbitration demand against NASDAQ asserts only claims

    createdbystate law, (a) theclaimsnecessarilyraiseactuallydisputed issuesof

    federalsecuritieslaw,(b)thoseissuesareofsubstantialimportancetothefederal

    system as a whole, and (c) the exercise of federal jurisdiction in these

    circumstanceswillnotdisruptanyfederalstatebalanceapprovedbyCongress.

    2.Thedistrictcourtproperlydecidedthequestionofarbitrabilitybecause

    thepartiesnever clearly andunmistakably expressed an intent to submit that

    question toarbitration,andsuchan intentcannotbe inferredwhere,ashere,a

    broad arbitration clause contains a carveoutprovision that, at least arguably,

    coverstheinstantdispute.

    3. UBSs claimsagainstNASDAQarenot subject to arbitrationbecause

    they fall within the preclusive language of NASDAQ Rule 4626(a), and the

  • 62

    parties specifically agreed that their arbitration agreement was subject to

    limitationsidentifiedin,amongotherthings,NASDAQRules.

    TheorderofthedistrictcourtpreliminarilyenjoiningUBSfrompursuing

    arbitrationagainstNASDAQisherebyAFFIRMED,andthecaseisremandedto

    thedistrictcourt forsuch furtherproceedingsasarewarrantedconsistentwith

    thisopinion.

  • STRAUB,CircuitJudge,dissenting:

    Sixteenbilliondollars.Overfourhundredmillionshares.

    Facebook.Thehighprofilenatureofthiscaseswaysthemajoritys

    analysis.ItistruethattheFacebookIPOwasfrontpagenews.Butit

    simplycannotbetruethateverytimeacaseinvolvesafamouscompanyor

    amultibilliondollarIPO,federalcourtshavejurisdiction.

    Byexercisingfederalquestionjurisdictionoverstatelawclaimsthat

    arepremisedontheinternalrulesofaprivatecorporation,theCourt

    extendsfederalcourtjurisdictionfarbeyonditspermissiblebounds.The

    majoritysexpansionofourjurisdictionfliesinthefaceofthedictatesof

    thisCircuitandtheSupremeCourturgingrestraint.Itherefore

    respectfullydissent.

    DISCUSSION

    ThiscaseisaboutUBSsstatelawclaimsagainstNASDAQ

    stemmingfromFacebooksIPO.Themajoritycontendsthatwehave

    jurisdictionbecausethestatelawclaimsarepremisedonthecontention

  • 2

    thatNASDAQbreacheditsExchangeActdutytomaintainafairand

    orderlymarketbyviolatingitsowninternalrules.Thisconclusionruns

    afoulofnearlyeveryGrableGunnrequirement.Thereisnoactually

    disputedfederalissue,totheextentoneexists,itisnotsubstantial,and

    exercisingjurisdictiondisruptsthefederalstatebalanceapprovedby

    Congress.

    First,NASDAQisashareholderowned,publiclytraded,forprofit

    company.ItisnottheSECanditsrulesarenotfederalregulationsor

    federallaw.Infact,wehaveexplicitlyheldthattherulesofastock

    exchangearecontractualinnatureandwithintheprovinceofstatelaw.

    Theonlyarguablyfederalissuepresentisabroaddutyfoundinthe

    ExchangeActandthatdutyisnotactuallydisputed.

    Second,UBSsstatelawclaimsdonotpresentasubstantialfederal

    question.Indrawingthecontraryconclusion,themajorityignoresor

    misappliescontrollingcaselawfromtheSupremeCourtandthisCircuit.

    Wehaveheldthatstatelawclaimspremisedonviolationsoftherulesofa

  • 3

    stockexchangedonotgiverisetoasubstantialfederalissue.The

    majorityholdingrendersourcaselawincoherent.

    Moreover,SupremeCourtprecedentindependentlyforeclosesthe

    exerciseoffederaljurisdiction.Substantialdoesnotmeanlargeor

    significantasthemajoritysuggests.Rather,itmeansthattheissueis

    importanttofederaljurisprudence.TheCourthasrepeatedlyadmonished

    thatfederalcourtsmayentertainthisextremelyrareexception[]onlyin

    casesthatposeadiscretequestionoflawastotheconstructionorvalidity

    ofafederalstatuteortheU.S.Constitution.SeeGunnv.Minton,133S.Ct.

    1059,1064(2013).Thatkindofissueisnotpresenthere.

    Finally,exercisingjurisdictionherewouldupsetCongressional

    intentastothebalanceoffederalstateresponsibility.Idisagreewiththe

    majoritythatCongresssdecisiontograntfederalcourtsexclusive

    jurisdictionoverExchangeActviolationssuggestsasimilarintenttogrant

    jurisdictionoverstockexchangeruleviolations.Infact,Ibelieveit

    suggeststheopposite.

  • 4

    Themajoritysuncabinedholdingcouldleadtoatremendous

    numberofcasesbeingpulledintofederalcourtapossibilitythatshould

    giveuspause.SeeGrable&SonsMetalProds.,Inc.v.DarueEngg&Mfg.,

    545U.S.308,318(2005).Themajorityoffersnoresponsetothisconcern

    otherthanaconclusoryassertionthatthisshifttofederalcourtwillnot

    occur.

    Forthesereasons,IwouldreversethedecisionoftheDistrictCourt

    anddismissthecomplaintforlackofjurisdiction.

    I. UBSsstatelawclaimspresentnoactuallydisputedfederalissue.

    GrableandGunnrequireafederalissuetobeactuallydisputed.

    Themajorityidentifiestwodifferent,thoughrelated,issuesunderlying

    UBSsclaims:whetherNASDAQviolateditsownrulesandwhether

    NASDAQviolateditsExchangeActdutytomaintainafairandorderly

    market.ButNASDAQsrulesarenotfederalandtheExchangeActisnot

    actuallyindispute.

  • 5

    A. NASDAQsrulesarenotfederal.

    Therulesatissuetherulesofastockexchangearemattersof

    statelaw.WeheldasmuchinBarbarav.NewYorkStockExchange,Inc.,

    wherewestated:[T]herulesofasecuritiesexchangearecontractualin

    nature,andarethusinterpretedpursuanttoordinaryprinciplesofcontract

    law,anareainwhichthefederalcourtshavenospecialexpertise.99F.3d

    49,5455(2dCir.1996)(internalcitationomitted).Wethenreaffirmedour

    holdingthatstockexchangerulesarecontractualinDAlessiov.NewYork

    StockExchange,Inc.,258F.3d93,101(2dCir.2001).Themajoritydoesnot

    challengeorrejectourholdingthattherulesofastockexchangeare

    creaturesofstatelaw.

    ThemajorityopinionstronglyimpliesthatbecauseNASDAQis

    subjecttoheavyfederalregulation,itsinternalrulesaresufficientlyfederal

    tosustainfederalquestionjurisdiction.SeeOpinion(Op.)at2330.But

    NASDAQisashareholderowned,publiclytraded,forprofitcompany.

    SeeWhatisNASDAQ?availableathttp://www.nasdaqomx.com/aboutus/

  • 6

    companyinformation/whatisnasdaq.Itisnotafederalagency,norareits

    rulesfederallaworfederalregulations.Indeed,theprimaryresponsibility

    forpromulgatingandenforcingtherulesofastockexchangelieswiththe

    stockexchangeitself.SeeUnitedStatesv.Solomon,509F.2d863,868(2dCir.

    1975)(quotingSilverv.NewYorkStockExch.,373U.S.341,352(1963)).The

    federalgovernmentactsonlyasabackstop,bolsteringtheexchanges

    traditionalprocessofselfregulation.Id.;seealsoUnitedStatesv.Stein,440

    F.Supp.2d315,3