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The Ninth Circuit Court of Appeals has upheld an arbitration agreement requiring the use of NASD arbitration rules, even though the NASD refused to administer the case because neither party was an NASD member. Holding that there was no evidence that the naming of the NASD was central to the arbitration agreement, the Court overruled a lower court and allowed the arbitration to proceed.
In Reddam v. KPMG LLP, Nos. 05-56664, 05-56671, 2006 WL 2291299 (9th Cir. Aug. 10, 2006), Reddam sued KPMG, Deutsche Bank, and two other entities, alleging that they recommended a tax reduction strategy which resulted in substantial tax liability.
As part of the tax strategy, Reddam bought securities through a Deutsche Bank subsidiary, Deutsche Bank Securities Investment (“DBSI”), whose customer agreement provided for arbitration “pursuant to the rules” of the NASD. DBSI was not a party to the lawsuit.
The district court ruled that all defendants could enforce the arbitration clause, but the NASD refused jurisdiction because none of the parties were NASD members. Since the NASD was no longer available, the district court ruled that Reddam’s claims were no longer subject to arbitration. KPMG appealed.
The Court first addressed the issue of whether DBSI’s customer agreement contained a forum selection clause. As the Court noted, the agreement did not state that arbitration was to take place before the NASD; instead, it merely selected NASD rules. However, in light of several circuit court decisions holding that forum selection is implicit in such instances, the Court set the issue aside and decided the case on separate grounds.
Specifically, the Court held that the NASD’s refusal to conduct the arbitration did not render the arbitration agreement unenforceable because there was “no evidence that the naming of the NASD was so central to the arbitration agreement that the unavailability of that arbitrator brought the agreement to an end.” In reaching its holding, the Court explicitly rejected a contrary holding in In re Salomon Inc., 68 F.3d 554 (2nd Cir. 1995) because “[i]t presented little reasoning” and “the cases upon which it relied were inapposite.” However, the Court did not explain how the parties were to conduct the arbitration in the wake of the NASD’s refusal to administer the arbitration.
Two weeks earlier, the Idaho Supreme Court reached a similar holding in Deeds v. Regence Blueshield of Idaho, No. 31180, 2006 WL 2089247 (Idaho July 28, 2006). In Deeds, after the American Arbitration Association (“AAA”) refused to accept a health insurance matter for lack of a post-dispute agreement to arbitrate, the court held that the matter remained arbitrable because there was “no evidence the AAA itself [wa]s central to the agreement to arbitrate.”
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