On October 31, 2014, in NASDAQ OMX Group, Inc. v. UBS Securities, LLC, the US Court of Appeals for the Second Circuit held that the federal courts have subject matter jurisdiction over state law claims arising out of a securities exchange's handling of an initial public offering because they raise disputed issues of federal law that are of significant interest to the federal system and do not disrupt the federal-state balance. (No. 13-2657, (2d. Cir. Oct. 31, 2014)).

The plaintiffs, the NASDAQ OMX Group, Inc. and the NASDAQ Stock Market LLC (collectively NASDAQ) conducted the initial public offering (IPO) for Facebook, Inc. Major technical issues arose during the IPO. As a result of these issues, with the approval of the Securities and Exchange Commission (SEC), NASDAQ created a new rule establishing procedures for NASDAQ members to seek compensation for injuries arising from the IPO.

The defendant, UBS Securities, LLC (UBS) chose not to pursue compensation under this rule but rather through arbitration. UBS sought indemnification for injuries sustained in the IPO as well as damages for breach of contract, breach of implied duty of good faith and fair dealing and gross negligence.

Instead of answering UBS's arbitration demand, NASDAQ sought declaratory and injunctive relief in the US District Court for the Southern District of New York. The district court granted a preliminary injunction in favor of NASDAQ, which precluded UBS from pursuing arbitration. UBS appealed, arguing that the case only presented state law claims and therefore the court improperly exercised federal question jurisdiction.

A divided panel of the Second Circuit affirmed the injunction, finding that the district court properly exercised federal jurisdiction. Although UBS sought relief against NASDAQ under state law, the court found that federal question jurisdiction exists for "a 'special and small' category of actual state claims that present significant, disputed issues of federal law." The court applied the Gunn-Grable factor analysis (Gunn v. Minton, 133 S. Ct. 1059 (2013); Grable & Sons Metal Products, Inc. v. Darue Eng'g & Mfg., 545 U.S. 308 (2005)) and held that:

The court acknowledged that UBS's claims for relief invoked state tort and contract law. However, all of the claims depended on NASDAQ's "duty to operate a fair and orderly market." Since that duty was dictated by federal law, specifically the Securities Exchange Act of 1934 (15 U.S.C. §§ 78a-78pp), the claims invoking this duty necessarily raise disputed issues of federal law.

The court noted that the substantiality factor of Gunn-Grable is determined case-by-case, without a bright-line test. Facebook's IPO was one of the largest in the Nation's history. The SEC has recognized that the need for fair and orderly markets is greatest when a stock offering is being made to the investing public, as in this case. NASDAQ's alleged violation of its duty to provide a fair and orderly market arose in that context. Accordingly, federal jurisdiction was justified by a strong national interest in preserving and strengthening the operation of national securities markets.

The court looked to congressional intent to determine whether exercising jurisdiction would disrupt the federal-state balance. Congress expressed a preference in litigating Exchange Act claims in federal court (15 U.S.C. § 78aa(a)). While the circuit court declined to extend the same exclusive jurisdiction under § 78aa as the Fifth and Ninth circuits, it concluded that congressional intent, as articulated under this section, was adequate to satisfy the federal-state balance factor of the Gunn-Grable analysis.

UBS argued that even if the district court had jurisdiction over the action, it was the role of an arbitrator, not the court, to decide whether to submit the issue to arbitration. The circuit court rejected this argument. The court held that the parties never clearly and unmistakably expressed an intent to submit to arbitration and that such intent could not be inferred as a result of the broad carve-out provision in their arbitration clause, which could be interpreted as applicable in this case.

The court additionally held that because NASDAQ Rule 4626 disallows members' claims against NASDAQ for losses from securities trading on the exchange, the parties could not have intended to submit such foreclosed claims to binding arbitration.

The dissenting judge asserted that UBS's claims did not satisfy any of the Gunn-Grable factors. Even if there is a federal duty underlying NASDAQ's rules, there is still no disputed issue of federal law in the case. Since there is no issue of federal law to be decided, the case does not satisfy the substantiality factor. The question, according to the dissent, is not the size of the IPO nor the importance of fair and orderly markets to society. Substantiality requires, instead, that a case involve constitutional or statutory interpretation that is important to federal jurisprudence. Finally, the dissent asserted that the majority upsets the federal-state balance because Congress did not intend to create federal jurisdiction for every case involving an exchange's rules. The majority's opinion will pull into federal court many cases that belong in state court.