Webb et al v. Financial Industry Regulatory Authority, Inc.
Filing
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MEMORANDUM Opinion and Order signed by the Honorable Andrea R. Wood on 7/5/2017. Mailed notice(ef, )
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
NICHOLAS WEBB, et al.,
Plaintiffs,
v.
FINANCIAL INDUSTRY REGULATORY
AUTHORITY, INC.,
Defendant.
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No. 16-cv-04664
Judge Andrea R. Wood
MEMORANDUM OPINION AND ORDER
Plaintiffs Nicholas Webb and Thad Beversdorf agreed to use Defendant Financial Industry
Regulatory Authority (“FINRA”) to arbitrate a dispute with their former employer. Plaintiffs’
contract with FINRA included a promise that the arbitration would achieve fair, just, and
equitable results. Plaintiffs now claim that FINRA failed to fulfill this promise—and thus
breached the contract—by failing to provide its arbitrators with requisite sources of authority, by
not properly training the arbitrators, and by not having certain procedural mechanisms in place to
accomplish a just and equitable arbitration. Before this Court is FINRA’s motion to dismiss the
complaint. (Dkt. No. 9.) FINRA argues, first, that Plaintiffs’ claim is barred by the doctrine of
arbitral immunity; second, that Plaintiffs were required to exhaust their administrative remedies
prior to filing suit yet failed to do so; and third, that FINRA is not a proper party to this suit and
Plaintiffs have failed to name an indispensable party. Because the Court agrees that FINRA is
entitled to arbitral immunity, FINRA’s motion to dismiss is granted without need to reach the
other arguments.
BACKGROUND
Plaintiffs went to work for Jeffries & Company, Inc. (“Jeffries”), a financial services firm,
in June 2012. (Compl. ¶¶ 11–13, Dkt. No. 1-1.) Their employment contracts with Jeffries each
contained the same arbitration provision referencing FINRA. (Id. ¶ 14.) That arbitration provision
required any arbitration proceeding with respect to Plaintiffs’ employment or their employment
agreements to be brought before FINRA. (Id. ¶ 15.) In November 2012, Plaintiffs entered into a
contract with FINRA to arbitrate disputes with Jeffries (“Arbitration Submission Agreement”).
(Id. ¶ 25.) The Arbitration Submission Agreement provides that claims are to be submitted in
accordance with FINRA By-Laws, Rules, and Code of Arbitration Procedure and also
incorporates promises to enforce and promote just and equitable principles of trade and business,
to maintain high standards of commercial honor and integrity and to prevent fraudulent and
manipulative acts and practices. (Id. ¶¶ 30, 33.)
Jeffries fired Plaintiffs for “poor performance” in October 2013. (Id. ¶ 22) Plaintiffs then
immediately began to prepare claims against their former employer alleging breach of contract,
retaliation, violations of wage and hour statutes, and fraudulent conduct. (Id. ¶¶ 21–24.) Upon
submission of Plaintiffs’ claims against Jeffries, FINRA applied the Code of Arbitration
Procedure for Industry Disputes (“FINRA rules”). (Id. ¶ 35.) It is unclear what exactly went
wrong during the arbitration proceedings, but Plaintiffs ultimately “were forced to withdraw their
claims.” (Id. ¶ 38.) Plaintiffs now allege that FINRA breached the Arbitration Submission
Agreement in at least the following ways:
a.
by failing to provide the requisite sources of authority to its arbitrators to
facilitate a just and equitable resolution of the pending disputes;
b.
by failing to provide arbitrators the appropriate procedural mechanisms and
safeguards to fulfill FINRA’s contractual promises;
c.
by failing to provide its arbitrators with procedural mechanisms to certify
and authorize the exchange of information between the parties to a dispute;
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d.
by failing to properly train its arbitrators;
e.
by interfering in its arbitrators’ exercise of their discretion and imposing
interpretations of its Rules that are contrary to the facilitation of a just and
equitable resolution of disputes submitted to FINRA; and,
d.
by failing to provide arbitrators with the necessary authority to enforce just
and equitable principles of trade and business, to maintain high standards of
commercial honor and integrity and to prevent fraudulent and manipulative
acts and practices.
(Id. ¶ 36.)
After Plaintiffs withdrew their claims from arbitration, they sued FINRA in the Circuit
Court of Cook County, Illinois. Plaintiffs’ complaint asks for monetary damages for the alleged
breach of contract (Count I) and requests a declaratory judgement that FINRA rules are unable “to
enforce and promote just and equitable principles of trade and business, to maintain high
standards of commercial honor and integrity and to prevent fraudulent and manipulative acts and
practices” and “to create fair, just, and equitable results for disputes to be decided on their merits”
(Count II). (Id. ¶ 50(a).) FINRA subsequently removed the case to this Court.1
DISCUSSION
To survive motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), a
complaint must “state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly,
550 U.S. 544, 570 (2007). “A claim has facial plausibility when the plaintiff pleads factual
content that allows the court to draw the reasonable inference that the defendant is liable for the
misconduct alleged.” Adams v. City of Indianapolis, 742 F.3d 720, 728 (7th Cir. 2014) (quoting
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This Court has subject-matter jurisdiction over this case based on diversity of citizenship. See 28 U.S.C.
§ 1332. Plaintiffs are residents of Illinois while FINRA is a Delaware corporation with its principal place
of business in Washington, D.C. (Notice of Removal ¶ 10, Dkt. No. 1.) Although the Complaint is unclear
as to the amount of damages being sought, the Court accepts representations made by Plaintiffs’ counsel
during the June 7, 2017 status hearing that the amount in controversy exceeds $75,000 (without reliance on
the amount at issue in the underlying arbitration). It is questionable whether this Court also has federal
question jurisdiction as suggested in the Notice of Removal, but there is no need for the Court to resolve
that issue as the basis for diversity jurisdiction is sound.
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Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)). And in analyzing a Rule 12(b)(6) motion, the Court
“must construe [the complaint] in the light most favorable to the plaintiff, accept well-pleaded
facts as true, and draw all inferences in the plaintiff’s favor.” Carlson v. CSX Transp., Inc., 758
F.3d 819, 826 (7th Cir. 2014) (internal citations omitted).
FINRA argues that it is immune from liability for the claims asserted by Plaintiffs here
due to the doctrine of arbitral immunity. Arbitrators have immunity from suit analogous to
judicial immunity because they perform quasi-judicial functions. See Tamari v. Conrad, 552 F.2d
778, 780 (7th Cir. 1977) (citing Cahn v. Int’l Ladies’ Garment Union, 311 F.2d 113, 114–15 (3d
Cir. 1962) (per curiam)). Although the Seventh Circuit has not yet fully articulated the outer limits
of arbitral immunity, the case law suggests that the immunity attaches to acts taken within the
scope of the arbitral process. See, e.g., Int’l Med. Grp., Inc. v. Am. Arbitration Ass’n, Inc., 312
F.3d 833, 843 (7th Cir. 2002) (summarizing decisions from other courts). And it extends to cases
where an arbitrator’s authority to resolve a dispute is challenged. Id. The immunity also protects
organizations sponsoring arbitrations against claims based on administrative tasks they perform
that are “integrally related” to arbitration. See, e.g., id. at 844. The doctrine of arbitral immunity
recognizes that “arbitrators have no interest in the outcome of the matter, and thus should not be
compelled to become parties to the dispute.” Id. (citing Tamari, 552 F.2d at 781). Suing
arbitrators is “comparable to suing jurors when a litigant is dissatisfied with the outcome of a
lawsuit”—“[s]uch a suit would place an unfair burden on jurors and would discourage others from
jury service.” Id.
In Caudle v. American Arbitration Association, 230 F.3d 920 (7th Cir. 2000), the Seventh
Circuit questioned whether the doctrine of arbitral immunity was “properly understood as an
‘immunity’ rather than a conclusion that arbitrators and organizing bodies are not the real parties
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in interest.” Id. at 922; see also Int’l Med. Grp., Inc., 312 F.3d at 844 (discussing Caudle). In
many cases, a suit against an arbitrator or an organization sponsoring arbitration is not necessary
for a litigant to obtain relief. See, e.g., Int’l Med. Grp., Inc., 312 F.3d at 844; Tamari, 552 F.2d at
781. But under certain circumstances, such a suit might be proper. For example, the Seventh
Circuit hypothesized in Caudle that if the plaintiffs paid the entire amount requested by a
sponsoring organization to conduct an arbitration form them and the organization then pocketed
the money without arbitrating the dispute, the organization might be held liable. Caudle, 230 F.3d
at 922; see also Int’l Med. Grp., 312 F.3d at 844.
Importantly, however, Caudle did not actually hold that such a suit would necessarily
proceed—the scenario was only proposed by the court as a hypothetical situation.2 Caudle, 230
F.3d at 922. Moreover, Caudle does not suggest that plaintiffs can avoid arbitral immunity by
simply re-framing a complaint about the handling of their arbitration proceedings as a breach of
contract dispute with the sponsoring organization. As the Seventh Circuit has explained, “[i]n the
Caudle hypothetical, the facts giving rise to the potential claim have nothing to do with
arbitrability or with the administrative duties of the [sponsoring organization]. The claim that one
may not retain a payment for services that are never rendered can be stated entirely without
reference to the arbitration.” Int’l Med. Grp., Inc., 312 F.3d at 844. In contrast, where the claim is
“integrally related to the administrative tasks” of the sponsoring organization (e.g., where a suit is
based on a wrongful exercise of jurisdiction by the organization), the immunity applies. Id. (citing
New England Cleaning Servs., Inc. v. Am. Arbitration Ass’n, 199 F.3d 542, 545 (1st Cir. 1999)
2
The plaintiff in Caudle sued the sponsoring organization for breach of contract, alleging that the
organization charged unreasonably high fees for arbitration. The district court dismissed the suit, finding
that the organization was immune. But on appeal, the Seventh Circuit declined to decide whether arbitral
immunity applied, instead determining that there was no subject-matter jurisdiction. Caudle, 230 F.3d at
922–23; see also Int’l Med. Grp., Inc., 312 F.3d at 844 (discussing Caudle).
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(stating that “[a] sponsoring organization’s immunity extends to the administrative tasks it
performs, insofar as these are integrally related to the arbitration”)).
Plaintiffs in this case do not cite any legal authority to support their argument that arbitral
immunity does not apply to their claims against FINRA. Instead, they attempt to distinguish cases
cited by FINRA on two grounds.
First, Plaintiffs argue that arbitral immunity does not apply because their suit is simply a
contract dispute. They do not pinpoint exactly why this characterization should make a difference,
instead pointing out that the International Medical Group and Tamari cases cited by FINRA deal
with challenges to the jurisdiction of an arbitral body while no such challenge has been brought
here. But although International Medical Group and Tamari arose out of different circumstances
than those here, the cases are instructive on the difference between situations when arbitral
immunity applies (e.g., when a claim is “integrally related” to the administrative tasks of a
sponsoring organization) and when it does not (e.g., when a claim can be stated entirely without
reference to the arbitration). See Int’l Med. Grp., Inc., 312 F.3d at 844. And the fact that the
present complaint raises no challenge to FINRA’s jurisdiction does not mean that it has nothing to
do with FINRA’s administrative duties and can be resolved without reference to the arbitration.
To the contrary, Plaintiffs themselves admit that the crux of their complaint is that FINRA
“has not given the arbitrators or administrators the ‘toolbox’ needed . . . ‘[t]o promote and enforce
just and equitable principles of trade and business.’” (Pls.’ Resp. at 10–11, Dk. No. 23.) Hence,
although Plaintiffs have framed their complaint carefully in an attempt to avoid the immunity
issue, what they really ask this Court to do is to drag FINRA into their employment dispute based
on FINRA’s performance of tasks integrally related to the underlying arbitration. Plaintiffs are not
asking this Court to decide an issue outside of the arbitration process; they desire for this Court to
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second-guess how FINRA administers disputes. This is exactly what Tamari and International
Medical Group warned against—allowing dissatisfied litigants to sue someone based on the
performance of duties analogous to those of a jury or a court clerk. See Tamari, 552 F.2d at 781;
see also Int’l Med. Grp., Inc., 312 F.3d at 844. Allowing such a suit would place an unfair burden
on FINRA and would discourage arbitrations. Hence, the present case is quite different from the
Caudle hypothetical and more in line with Tamari and International Medical Group.
Second, Plaintiffs attack a number of the cases cited by FINRA where courts have
extended arbitral immunity to cover the administration of sponsoring organizations. According to
Plaintiffs, those cases challenge the performance of arbitrators while the present case concerns
FINRA’s failure to provide their arbitrators with a proper “toolbox” to comply with contractual
terms. But this argument overlooks the broader teachings of the cases cited by FINRA. For
example, in Honn v. NASD, Inc., 182 F.3d 1014 (8th Cir. 1999), the claims against a sponsoring
organization arose out of its alleged misconduct in selecting or allowing certain witnesses to
testify at the arbitration, in forwarding materials to the arbitrators, and in formulating and
delivering responses to subpoenas. Id. at 1017. The plaintiff alleged that arbitral immunity did not
apply because the misconduct was committed by the “non-arbitration arm” of the organization
and was outside of the organization’s arbitration-sponsoring role. Id. The Honn court held that
arbitral immunity extended to organizations sponsoring arbitrations and that the organization in
that case “was performing functions that were necessary to arbitration administration at the time
of the alleged wrongdoing, and therefore [its] acts were within the scope of the arbitral process.”
Id. at 1017–18. Thus, even if the organization carried out those functions improperly, it was
“protected by arbitral immunity because the acts upon which [Plaintiff’s] claims are based were
taken while [the organization] was carrying out its normal administrative functions.” Id. at 1018.
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Similarly, in the present case, FINRA was carrying out its normal administrative functions in
support of an arbitration at the time of the alleged “breach contract.” As in Honn, arbitral
immunity applies.
In Corey v. New York Stock Exchange, 691 F.2d 1205, 1208 (6th Cir. 1982), the plaintiff
challenged the composition of an arbitration panel and alleged that procedural irregularities
prevented him from submitting evidence and caused hearings to be postponed. Id. at 1208. In
affirming the district court’s grant of summary judgment in favor of the defendant, the court
explained that “[e]xtension of arbitral immunity to encompass boards which sponsor arbitration is
a natural and necessary product of the policies underlying arbitral immunity; otherwise the
immunity extended to arbitrators is illusionary.” Id. at 1211. The court further concluded that “[i]t
would be of little value to the whole arbitral procedure to merely shift the liability to the
sponsoring association.” Id. But this is precisely what Plaintiffs would like to do here—to shift
liability to FINRA by stating that their case is not about the performance of arbitrators or
administrators, but is rather about the FINRA’s failure to provide arbitrators and administrators
with the “toolbox.”
In short, despite Plaintiffs’ protestations to the contrary, arbitral immunity applies in this
case. As a result, Plaintiffs’ claims for breach of contract against FINRA are dismissed with
prejudice.
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CONCLUSION
For the reasons stated above, FINRA’s motion to dismiss (Dkt. No. 9) is granted on the
ground that FINRA is immune from suit. All claims are dismissed with prejudice.
Date: July 5, 2017
_______________________________
Andrea R. Wood
United States District Judge
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