Lanza v. FINRA ( 2020 )

United States Court of Appeals
For the First Circuit
Nos. 18-2057
18-2181
GIOVANNI LANZA and MARIANTONIA LANZA,
Plaintiffs, Appellants,
v.
FINANCIAL INDUSTRY REGULATORY AUTHORITY (FINRA),
Defendant, Appellee.
APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Patti B. Saris, U.S. District Judge]
Before
Lynch, Selya, and Barron,
Circuit Judges.
Robert D. Loventhal on brief for appellants.
Ian D. Roffman, Melanie L. Todman, Nutter, McClennen & Fish
LLP, and Terri L. Reicher, Office of General Counsel, on brief for
appellee.
March 24, 2020
SELYA, Circuit Judge. Entering their golden years,
Giovanni and Mariantonia Lanza, a married couple, found themselves
involved in a dispute with their quondam stockbroker over the
handling of their brokerage accounts. After submission of the
dispute to the Financial Industry Regulatory Authority (FINRA) for
arbitration, a panel of arbitrators summarily dismissed the
Lanzas' claims. Chafing at the lack of an explained decision, the
Lanzas unsuccessfully sued FINRA in the federal district court.
They now appeal.
In this court — as below — the Lanzas contend that the
arbitrators' failure to issue an explained decision violated the
covenant of good faith and fair dealing implied under Massachusetts
law. Concluding, as we do, that the Lanzas' complaint fails to
state a plausible claim for breach of the implied covenant, we
affirm.
I. BACKGROUND
We briefly rehearse the events leading up to this appeal.
Because the district court's dispositive ruling was on a motion to
dismiss under Federal Rule of Civil Procedure 12(b)(6), we draw
the facts from the complaint and its attachments. See Katz v.
Pershing, LLC, 672 F.3d 64, 69 (1st Cir. 2012).
The Lanzas are both retired professors. FINRA is a
private entity that monitors the relationship between financial
services companies and consumers. Of particular pertinence for
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present purposes, FINRA's Office of Dispute Resolution (ODR)
settles financial and business disputes through arbitrations
administered pursuant to FINRA's bylaws, rules, and Code of
Arbitration Procedure (the FINRA Code).
Beginning in 2006, the Lanzas maintained brokerage
accounts with a securities firm, Ameriprise Financial Services,
Inc. (Ameriprise). Richard Ewing, an Ameriprise broker, oversaw
these accounts. The relationship soured in 2014, when the Lanzas
came to believe their accounts had been mismanaged. They then
terminated the relationship and sued Ameriprise and Ewing in the
United States District Court for the District of Massachusetts.
This initial suit was short-lived. The Lanzas
previously had agreed to resolve any dispute with Ameriprise
through arbitration, and their suit came within the scope of the
arbitration clause. Faced with this reality, the Lanzas consented
to the dismissal of their suit, albeit without prejudice. They
subsequently submitted their claims for arbitration by FINRA's
ODR.1 The Lanzas' claims comprised an array of tort and contract
claims, as well as claims alleging violations of federal and state
securities laws.
1
The Lanzas originally sought arbitration only against Ewing
and reached a tentative settlement through mediation. When Ewing
refused to honor the terms of the settlement, the Lanzas
reconfigured their arbitration claims to encompass both Ewing and
Ameriprise.
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When filing their claims, the Lanzas signed an
arbitration submission agreement, which acknowledged that they
were submitting their dispute for "arbitration in accordance with
the FINRA By-Laws, Rules, and Code of Arbitration Procedure." They
also acknowledged that they (or their representatives) had "read
the procedures and rules of FINRA relating to arbitration" and
agreed "to be bound by these procedures and rules."
Prior to the scheduled arbitration hearing, the Lanzas
settled their claims against Ewing. As to their remaining claims
against Ameriprise, they requested that the arbitrators issue an
"explained decision" delineating the reasoning underlying any
arbitral award. Ameriprise did not join this request.
In December of 2017, a panel of three arbitrators
conducted a three-day hearing on the Lanzas' claims against
Ameriprise. In due course, the panel issued a written decision
summarily dismissing the Lanzas' claims. The panel stated only
that the Lanzas had failed either to "sustain their burden of
proving" any of their claims or to "establish any damages by any
competent or credible evidence." The panel offered no further
elucidation of its decision. Its refusal to issue an explained
decision comported with FINRA Code Rule 12904(g)(1), which
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requires FINRA arbitrators to issue such a decision only upon the
joint request of all parties to the arbitration.2
After an unsuccessful attempt to secure the arbitrators'
reasoning, the Lanzas again repaired to the federal district court
and instituted a new proceeding: a breach-of-contract suit against
FINRA. The Lanzas alleged that the arbitrators' failure to provide
an explained decision amounted to a breach of contract on FINRA's
part.3 Specifically, they alleged a breach of the implied covenant
of good faith and fair dealing inherent in every contract under
state law. See, e.g., Ayash v. Dana-Farber Cancer Inst., 822
N.E.2d 667, 683 (Mass. 2005).
As relevant here, FINRA moved to dismiss the complaint,
pursuant to Rule 12(b)(6), for failure to state a claim upon which
relief could be granted. The district court granted FINRA's motion
to dismiss on two independently sufficient grounds. First, it
held that arbitral immunity protected FINRA from liability. See
Lanza v. FINRA, 333 F. Supp. 3d 11, 16 (D. Mass. 2018). Second,
it held that, in all events, the Lanzas had failed to state a
2 The Lanzas' district court complaint alludes to FINRA Code
Rule 13904, which applies only to industry disputes. Rule 12904,
which otherwise is identical to Rule 13904, applies to consumer
disputes. On appeal, the Lanzas refer only to Rule 12904, and we
treat their earlier reference to Rule 13904 as a scrivener's error.
3 Although the complaint is not a model of clarity, the
contract upon which the Lanzas rely is apparently the arbitration
submission agreement. FINRA and the Lanzas are among the parties
to that agreement.
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plausible claim for breach of the implied covenant of good faith
and fair dealing. See id. at 16-18. The Lanzas moved for
reconsideration and subsequently filed a notice of appeal. After
the district court denied reconsideration, they filed a second
notice of appeal.
II. ANALYSIS
We review de novo a district court's decision to grant
a motion to dismiss under Rule 12(b)(6). See González v. Vélez,
864 F.3d 45, 50 (1st Cir. 2017). In undertaking this review, "we
accept as true all well-pleaded facts alleged in the complaint and
draw all reasonable inferences therefrom in the pleader's favor."
Nystedt v. Nigro, 700 F.3d 25, 30 (1st Cir. 2012) (quoting Santiago
v. Puerto Rico, 655 F.3d 61, 72 (1st Cir. 2011)). Generally, a
complaint need only contain "a short and plain statement of the
claim showing that the pleader is entitled to relief." Fed. R.
Civ. P. 8(a)(2). Although a complaint need not include exhaustive
factual allegations, "it must nonetheless 'contain sufficient
factual matter, accepted as true, to state a claim to relief that
is plausible on its face.'" SEC v. Tambone, 597 F.3d 436, 442
(1st Cir. 2010) (en banc) (quoting Ashcroft v. Iqbal, 556 U.S.
662, 678 (2009)). If the factual allegations set forth in the
complaint "are too meager, vague, or conclusory to remove the
possibility of relief from the realm of mere conjecture, the
complaint is open to dismissal." Id.
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When filing suit, the Lanzas invoked the district
court's diversity jurisdiction.4 See 28 U.S.C. § 1332(a)(1).
Accordingly, state law supplies the substantive rules of decision.
See Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78 (1938); Zeigler v.
Rater, 939 F.3d 385, 392 (1st Cir. 2019). The district court —
noting that the Lanzas lived in Massachusetts and that the
arbitration took place there — reasonably assumed that
Massachusetts law governed the Lanzas' breach of contract claim.
See Lanza, 333 F. Supp. 3d at 16 n.4. On appeal, the parties do
not contest this choice of law. Consequently, we accept the
parties' implicit agreement that Massachusetts law controls. See
Borden v. Paul Revere Life Ins. Co., 935 F.2d 370, 375 (1st Cir.
1991) (explaining that courts may eschew independent choice-of-
law analysis and accept parties' reasonable agreement about which
state's law governs).
Before us, the Lanzas pursue two lines of attack. First,
they assail the district court's conclusion that arbitral immunity
shields FINRA from suit. Second, they quarrel with the court's
conclusion that their complaint fails to state a plausible claim
for breach of the implied covenant of good faith and fair dealing.
4 The record is less than precise as to the jurisdictional
facts. We are able to glean, though, that FINRA is incorporated
in Delaware and is said to be a citizen of New York (allegedly
"headquartered" in New York and/or Washington D.C.). Since the
Lanzas are apparently citizens of either Massachusetts or New
Hampshire (they have homes in both places), diversity is complete.
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We start with the Lanzas' contention that the district
court erroneously permitted FINRA to take refuge in the doctrine
of arbitral immunity. Because the role of an arbitrator is
functionally equivalent to that of a judge, courts (including this
court) consistently have extended quasi-judicial immunity to
arbitrators and organizations that sponsor arbitrations. See,
e.g., Pfannenstiel v. Merrill Lynch, Pierce, Fenner & Smith, 477
F.3d 1155, 1158-60 (10th Cir. 2007); Int'l Med. Grp., Inc. v. Am.
Arbitration Ass'n, 312 F.3d 833, 843-44 (7th Cir. 2002); New Eng.
Cleaning Servs., Inc. v. Am. Arbitration Ass'n, 199 F.3d 542, 545-
46 (1st Cir. 1999); Olson v. Nat'l Ass'n of Sec. Dealers, 85 F.3d
381, 382-83 (8th Cir. 1996). The purpose of this immunity is to
"protect decision-makers from undue influence and protect the
decision-making process from reprisals by dissatisfied litigants."
New Eng. Cleaning Servs., 199 F.3d at 545.
In general terms, arbitral immunity covers "all acts
within the scope of the arbitral process." Id. (quoting Olson, 85
F.3d at 383). A sponsoring entity's immunity ordinarily "extends
to the administrative tasks it performs, insofar as these are
integrally related to the arbitration." Id. Examples of tasks
that we have recognized as "sufficiently related to the arbitration
to be protected by immunity" include choosing an arbitrator,
scheduling a hearing, and billing for services. Id.
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Although the protective carapace created by the doctrine
of arbitral immunity is sturdy, it is not impervious to all
incursions. For example, arbitral immunity does not extend to
actions taken in the absence of any colorable claim of
jurisdiction. Cf. Nystedt, 700 F.3d at 31. So, too, we doubt
that such immunity would afford shelter to an arbitrator who, say,
decided a matter after accepting a bribe. Cf. 9 U.S.C. § 10
(providing that court may vacate arbitral award procured by fraud,
corruption, partiality, or other misconduct on arbitrator's part).
More to the point, arbitral immunity is an awkward fit in
situations — like this one — in which it is alleged that
arbitrators (or an entity that stands in the shoes of arbitrators)
have broken a contractual promise. Cf. Caudle v. Am. Arbitration
Ass'n, 230 F.3d 920, 922 (7th Cir. 2000) (suggesting that issue
may be whether arbitrators and organizing bodies are real parties
in interest, not whether immunity applies). Here, however, we
need not pursue the limits of the doctrine of arbitral immunity
because the district court has identified an alternative basis for
dismissing the underlying action — a basis that, by itself,
suffices to resolve this appeal.
This brings us to the district court's alternative
holding: that even apart from arbitral immunity, the complaint
failed to state a claim upon which relief could be granted. See
Lanza, 333 F. Supp. 3d at 16-17. The baseline is familiar. Under
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Massachusetts law, every contract "is subject, to some extent, to
an implied covenant of good faith and fair dealing." Ayash, 822
N.E.2d at 683. This implied covenant provides "that neither party
shall do anything which will have the effect of destroying or
injuring the right of the other party to receive the fruits of the
contract." A.L. Prime Energy Consultant, Inc. v. Mass. Bay Transp.
Auth., 95 N.E.3d 547, 560 (Mass. 2018) (quoting Weiler v.
PortfolioScope, Inc., 12 N.E.3d 354, 361 (Mass. 2014)). A breach
of the implied covenant "occurs when one party violates the
reasonable expectations of the other." Id. (quoting Weiler, 12
N.E.3d at 362).
It is clear beyond hope of contradiction that the implied
covenant of good faith and fair dealing "does not create rights or
duties beyond those the parties agreed to when they entered into
the contract." Bos. Med. Ctr. Corp. v. Sec'y of Exec. Office of
Health & Human Servs., 974 N.E.2d 1114, 1126-27 (Mass. 2012)
(quoting Curtis v. Herb Chambers I-95, Inc., 940 N.E.2d 413, 419
(Mass. 2011)). Similarly, it is clear that a party cannot
weaponize the implied covenant in a manner that contradicts the
plain terms of a contract. See id. (finding no breach of implied
covenant when contract specified reimbursement rates and defendant
refused to pay more).
In the case at hand, the Lanzas concede — as they must
— that FINRA Code Rule 12904(g)(1) requires an arbitrator to render
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an explained decision only upon the joint request of all parties.
Attempting to avoid the obvious implications of this rule, the
Lanzas pivot to Rule 12904(f). The latter rule provides that an
arbitration award "may contain a rationale underlying the award."
This rule, the Lanzas say, engendered a reasonable expectation
that the arbitrators would exercise their discretion to issue an
explained decision. Elsewise, they would be unable to understand
the basis for (and, by extension, appeal) the award.5
We conclude that these allegations are insufficient to
state a plausible claim that FINRA breached the implied covenant.
Rule 12904(f) must be read as part of the FINRA rules as a whole,
not in some sort of splendid isolation. And at any rate, the word
"may" is permissive, not mandatory. To cinch the matter, any
expectation that the arbitrators would issue an explained decision
upon the Lanzas' unilateral request was unreasonable in light of
the express provisions of the FINRA Code. Although Rule 12904(f)
affords arbitrators discretion to issue an explained decision at
the request of a single party, Rule 12904(g)(1) makes it abundantly
5The Lanzas' argument that the arbitrators' failure to render
a reasoned decision resulted in a "complete loss of [their]
statutory appellate rights" is incorrect. Nothing in either the
Federal Arbitration Act or Massachusetts law prevents the Lanzas
from seeking judicial review of FINRA's arbitration award
notwithstanding the absence of an explained decision. See Federal
Arbitration Act, 9 U.S.C. §§ 1-16; Uniform Arbitration Act for
Commercial Disputes, Mass. Gen. Laws ch. 251, §§ 1-19.
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clear that they are required to do so if — and only if — an
explained decision is requested by all parties.
Refined to bare essence, the Lanzas' argument is
essentially an attempt to rewrite the FINRA rules and add a new
contractual obligation: the duty to issue an explained decision
upon the unilateral request of a single party. When they executed
the arbitration submission agreement, though, the Lanzas
acknowledged that the FINRA Code and the accompanying rules were
part and parcel of the agreement to arbitrate. The construction
of the arbitration agreement espoused by the Lanzas directly
contradicts the express terms of Rule 12904(g)(1) and, therefore,
exceeds the reach of the implied covenant. See Bos. Med. Ctr.,
974 N.E.2d at 1126-27.
To say more would be pointless. The scope of the implied
covenant of good faith and fair dealing "is only as broad as the
contract that governs the particular relationship." Ayash, 822
N.E.2d at 684. Here, the Lanzas agreed to be bound by the FINRA
Code, and that Code requires an explained decision only upon the
joint request of all parties.6 Consequently, the Lanzas have not
6For the sake of completeness, we add that the result — a
summary decision in an arbitration proceeding — is not out of the
ordinary. Absent a statutory directive or a binding contractual
commitment — and none pertain here — it is typical that arbitrators
are not required to furnish a reasoned decision for an arbitration
award. See United Steelworkers v. Enter. Wheel & Car Corp., 363
U.S. 593, 598 (1960) ("Arbitrators have no obligation . . . to
give their reasons for an award."); Zayas v. Bacardi Corp., 524
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plausibly alleged a breach of the implied covenant, and the
district court appropriately dismissed their complaint for failure
to state a claim under Rule 12(b)(6).
III. CONCLUSION
We need go no further. For the reasons elucidated above,
the judgment of the district court is
Affirmed.
F.3d 65, 70 (1st Cir. 2008) ("Although arbitrators frequently elect
to explain their decisions in written opinions, they are under no
compulsion to do so.").
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