Judith Goldman v. Citigroup Global Markets Inc ( 2016 )

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_____________
No. 15-2345
_____________
JUDITH GOLDMAN;
KENNETH B. GOLDMAN,
Appellants
v.
CITIGROUP GLOBAL MARKETS INC; FINRA;
FREDERICK PIERONI; BARRY GUARIGLIA
_______________
On Appeal from the United States District Court
for the Eastern District of Pennsylvania
(D.C. No. 2-12-cv-04469)
District Judge: Hon. Anita B. Brody
_______________
Argued
April 28, 2016
Before: McKEE, Chief Judge, JORDAN, and ROTH, Circuit
Judges.
(Filed: August 22, 2016)
_______________
Richard J. Gerace [ARGUED]
Gerace Law Office
1515 Market Street – Suite 1200
Philadelphia, PA 19102
Counsel for Appellants
Brian T. Feeney [ARGUED]
Christiana L. Signs
Greenberg Traurig, LLP
2001 Market Street – Suite 2700
Philadelphia, PA 19103
Counsel for Appellees
_______________
OPINION OF THE COURT
_______________
JORDAN, Circuit Judge.
Judith and Kenneth Goldman filed a motion in the
United States District Court for the Eastern District of
Pennsylvania to vacate an adverse arbitration award. The
underlying arbitration, before a panel operating under the
auspices of the Financial Industry Regulatory Authority
(“FINRA”), concerned the Goldmans’ allegations that
financial advisor Barry Guariglia and Citigroup Global
Markets Inc. had violated federal securities law in their
management of the Goldmans’ brokerage accounts. The
District Court dismissed the case for lack of subject-matter
jurisdiction because the Goldmans’ motion failed to raise a
substantial federal question. We will affirm.
2
I. Background
A. Factual Background
This case has its roots in the relationship between the
Goldmans and their former financial advisor, Mr. Guariglia, a
relationship that began in the 1990s, when he was working for
the wealth management firm Merrill Lynch. In 2008,
Guariglia changed his employment to Merrill Lynch’s
competitor Citigroup Global Markets Inc. (“CGMI”), and he
persuaded the Goldmans to follow him there.1
After the Goldmans lost money in the stock market,
they alleged that they were pushed into “short-term trading of
high-risk, speculative securities” that were “far outside [their]
investment objectives,” and that Merrill Lynch and CGMI
and their employees “knew it.” (App. 17.) They also alleged
that Guariglia and his colleagues induced the Goldmans to
take on ever more unsustainable risk by trading on margin.
Most important to the case at bar, the Goldmans contend that,
when they transferred their account from Merrill Lynch
(where they say they received favorable margin requirement
treatment) to CGMI (where they allegedly faced a higher
margin requirement), they were subjected to a “devastating
margin call,” leading to the liquidation of a “sizable portion
of their investments” and “the loss of their entire retirement.”
(Opening Br. at 7.)
1
CGMI has since changed its name to Morgan Stanley
Smith Barney LLC. The Goldmans maintained accounts with
a unit of CGMI then called Smith Barney.
3
B. Procedural Background
1. Arbitration Proceedings before
FINRA
Based on those allegations, in 2010 the Goldmans
initiated FINRA arbitration proceedings against Merrill
Lynch, CGMI, Guariglia, and other employees of those
financial institutions. They asserted claims on the following
bases: securities fraud in violation of the Securities Exchange
Act of 1934 (the “’34 Act”), 15 U.S.C. § 78a et seq., and Rule
10b-5, 17 C.F.R. § 240.10b-5; fraudulent misrepresentation;
lack of supervision of employees; lack of suitability of
investment recommendations; breach of fiduciary duty;
breach of contract; and negligence.
The FINRA proceedings began with mediation before
a neutral named Ferdinand Pieroni, and the mediation
succeeded in producing a settlement for the Goldmans with
Merrill Lynch, but not with CGMI.2 The Goldmans now
allege that CGMI refused to negotiate in good faith, left the
mediation when the Goldmans so demanded, and then “snuck
back in[] ... through a side door” to “spy” on the confidential
negotiations between the Goldmans and Merrill Lynch.
(Opening Br. at 9.) CGMI flatly denies those allegations, and
mediator Pieroni filed a sworn affirmation before the FINRA
arbitration panel declaring that CGMI did not refuse to
mediate, was never asked to leave the mediation, and acted in
good faith.
2
At this point and hereafter, for simplicity, we will
refer to Guariglia and CGMI collectively as “CGMI.”
4
The arbitration panel took evidence and heard
argument for 10 days between August 2012 and February
2014. After the Goldmans presented their full case in chief,
CGMI moved to dismiss for lack of evidence. The panel
granted the motion, concluding that, “[w]hile all the claims
were quite stridently argued, not a single claim was proven to
be true by evidence.” (App. 109.) In particular, the panel
noted that the Goldmans “failed to offer a scintilla of proof”
that they were subject to a margin call. (Id.) The panel thus
determined that “there was no margin call” (id.), and, on
October 2, 2014, it issued a final award dismissing the
Goldmans’ claims and assigning administrative fees among
the parties.
2. District Court Proceedings
During the mediation and arbitration proceedings
before FINRA, the Goldmans resorted to the District Court,
claiming a breach of contract. More specifically, in a lengthy
complaint, the Goldmans alleged that CGMI had not honored
its promise to mediate, that “CGMI and its lawyers were
allowed to spy on ... confidential discussion[s] and
negotiation[s]” (App. 47), and that the arbitration panel was
conflicted and partial. Based on those allegations, the
complaint alleged that CGMI, Guariglia, FINRA, and Pieroni
“breached express and implied terms and conditions of the
FINRA[] Arbitration and Mediation contracts” (App. 49), and
acted “[i]n utter defiance of [FINRA mediation] rules” (App.
50). They immediately moved for a temporary restraining
order and preliminary injunction to stay the arbitration and to
have CGMI’s law firm, Greenberg Traurig, barred from the
case. The District Court denied the motion, holding that there
was “no lawful basis” for relief and that the Goldmans had
5
improperly asked the Court to intervene “as an emergency
court of interlocutory appeals from arbitration orders.” (App.
85.) After a different judge was assigned the case, the
District Court denied a second motion for a temporary
restraining order, then subsequently dismissed the case with
instructions to re-file after the arbitration was concluded, if
the Goldmans wished to challenge any resulting arbitration
award. There was another false start in the summer of 2014,
when the Goldmans filed a motion to vacate the arbitration
award before it was actually finalized, and that motion too
was dismissed.
When the arbitration was finally completed, the
Goldmans returned to the District Court by submitting what
they styled as a “refiled” motion to vacate the arbitration
award, which is the motion now at issue.3 In their motion,
they asserted that the District Court had jurisdiction under
§ 10 of the Federal Arbitration Act (“FAA”), 9 U.S.C. § 10,
3
The FAA provides that “the United States court in
and for the district wherein the award was made may make an
order vacating the award upon the application of any party to
the arbitration.” 9 U.S.C. § 10(a). “Notice of a motion to
vacate ... must be served upon the adverse party or his
attorney within three months after the award is filed or
delivered.” 9 U.S.C. § 12. Therefore, unlike in most federal
actions that are initiated with a complaint, when a litigant is
seeking to vacate an arbitration award under the FAA, “such a
request for relief shall be made in the form of a motion,” and
a party need not “initiate a challenge to an arbitration award
by filing a complaint.” O.R. Sec., Inc. v. Prof'l Planning
Assocs., Inc., 857 F.2d 742, 745 (11th Cir. 1988) (internal
quotation marks omitted).
6
and, to justify vacatur of the award, they alleged that the
FINRA arbitration panel behaved improperly in that it
demanded “voluminous” and irrelevant discovery from them
(App. 289), did not permit sufficient discovery of CGMI’s
documents, exhibited partiality towards CGMI, and “refused
to resign” at the Goldmans’ request (App. 295). The
Goldmans also alleged that CGMI’s counsel negotiated in bad
faith and then spied on the meditation proceedings, and that
the mediator perjured himself in denying that the spying
occurred. Resorting to the typographical arts and extravagant
language, the Goldmans practically shout that
the treatment of the FINRA members
demonstrates to the reasonable person that
unavoidably, the Panel was partial to one side
and the favorable treatment unilateral. ...
Defendants use the “BIG LIE” to maximize the
advantage they enjoyed in the FINRA forum as
a FINRA member and associated member. ...
The Biggest of the “Big Lies” is Defendants’
persistent perjury that “THERE WAS NO
MARGIN CALL” upon transfer of the
Goldman accounts from Merrill Lynch to
Defendants in November 2008.
(App. 297-98 (original emphasis and formatting).)
In response to the motion to vacate, CGMI moved to
dismiss for lack of subject-matter jurisdiction, pursuant to
Federal Rule of Civil Procedure 12(b)(1).4 The District Court
4
While litigation proceeded in the District Court,
CGMI separately sought confirmation of the FINRA
7
granted that motion. Its opinion began by observing that the
FAA does not itself create federal subject-matter jurisdiction
and that the parties in this case are not diverse, so that federal
question jurisdiction, independent of the FAA, would be
required for the District Court to consider a motion to vacate
an arbitration award. The Court then rejected the three bases
for federal question jurisdiction that the Goldmans press
before us. It also denied their motion for leave to file an
amended motion to vacate because, in seeking leave to
amend, they simply sought to “assert the same claims they
unsuccessfully brought in their arbitration before FINRA.”5
(App. 3 n.1.)
arbitration award in the Superior Court of Essex County, New
Jersey. After the District Court dismissed the Goldmans’
case for lack of jurisdiction, the New Jersey Superior Court
granted the motion to confirm the arbitration award pursuant
to N.J. Stat. Ann. § 2A:24-7, which provides that
“confirmation shall be granted unless the award is vacated,
modified or corrected.” The Goldmans have appealed that
order, and the appeal is pending in the New Jersey courts. Of
note, “[t]he grounds for vacating an arbitration award under
[New Jersey law] are identical to those set forth ... for
vacating an arbitration award under the Federal Arbitration
Act.” In re City of Camden, 58 A.3d 1186, 1204 (N.J. Super.
Ct. App. Div. 2013).
5
In cursory fashion, the Goldmans ask us to reverse
the District Court’s order denying them leave to file an
amended motion to vacate. They make no specific argument,
however, for why the District Court abused its discretion in
denying them leave to amend. See Great W. Mining &
Mineral Co. v. Fox Rothschild LLP, 615 F.3d 159, 163 (3d
Cir. 2010) (“We review a district court decision refusing
8
The Goldmans timely appealed.
II. Jurisdiction and Standard of Review
Whether the District Court had jurisdiction is precisely
the issue on appeal. We have appellate jurisdiction pursuant
to 28 U.S.C. § 1291. We exercise plenary review over a
district court’s dismissal of an action for lack of subject
matter jurisdiction. Nichole Med. Equip. & Supply, Inc. v.
TriCenturion, Inc., 694 F.3d 340, 347 (3d Cir. 2012).
Because CGMI’s attack on jurisdiction is facial, we consider
only the allegations in the motion to vacate and the
documents referenced in that motion and attached thereto, “in
the light most favorable to the plaintiff.” Id. (internal
quotation marks omitted).
III. Discussion
The Goldmans argue that the District Court had
jurisdiction under 28 U.S.C. § 1331,6 which provides
leave to amend ... for abuse of discretion.”). Because
“arguments raised in passing ..., but not squarely argued, are
considered waived,” John Wyeth & Bro. Ltd. v. CIGNA Int’l
Corp., 119 F.3d 1070, 1076 n.6 (3d Cir. 1997), any argument
about leave to amend “need not be addressed” by us, Kost v.
Kozakiewicz, 1 F.3d 176, 182 (3d Cir. 1993).
6
In their reply brief, the Goldmans also belatedly
assert that the kind of claim they are bringing is “exclusive to
federal courts under 15 U.S.C. § 78aa(a).” (Reply Br. at 6.)
That provision provides exclusive jurisdiction to federal
district courts for “all suits in equity and actions at law
9
jurisdiction for “civil actions arising under” federal law.7
Such “federal question” jurisdiction may arise in two ways.
“Most directly, a case arises under federal law when federal
law creates the cause of action asserted.” Gunn v. Minton,
133 S. Ct. 1059, 1064 (2013) (citing American Well Works
Co. v. Layne & Bowler Co., 241 U.S. 257, 260 (1916)).
However, even if the cause of action is based on state law,
there is a “special and small category of cases in which
arising under jurisdiction still lies.” Id. (internal quotation
marks omitted). In those special cases, which depend for
jurisdiction on the analysis set forth in the Supreme Court’s
opinion in Grable & Sons Metal Products, Inc. v. Darue
Engineering & Manufacturing, 545 U.S. 308, 314 (2005),
“federal jurisdiction over a state law claim will lie if a federal
issue is: (1) necessarily raised, (2) actually disputed, (3)
substantial, and (4) capable of resolution in federal court
without disrupting the federal-state balance approved by
Congress.” Gunn, 133 S. Ct. at 1065 (summarizing the
brought to enforce any liability or duty created by [the ’34
Act] or the rules and regulations thereunder.” 15 U.S.C.
§ 78aa(a). The Supreme Court, however, recently confirmed
our Circuit’s holding that 15 U.S.C. § 78aa(a) should be “read
... as conferring exclusive federal jurisdiction of the same
suits as ‘aris[e] under’ the [’34 Act] pursuant to the general
federal question statute.” Merrill Lynch, Pierce, Fenner &
Smith Inc. v. Manning, No. 14-1132, 2016 WL 2842450, at
*5 (U.S. May 16, 2016). We therefore apply the “arising
under” analysis for 28 U.S.C. § 1331 to this case.
7
Both sides agree that diversity jurisdiction does not
apply in this case, as the Goldmans and Guariglia are all
citizens of New Jersey.
10
jurisdictional test set forth in Grable). For both forms of
federal question jurisdiction – the ordinary variety and the
rarer Grable type – the party asserting jurisdiction must
satisfy the “well-pleaded complaint rule,” which mandates
that the grounds for jurisdiction be clear on the face of the
pleading that initiates the case. Franchise Tax Bd. of State of
Cal. v. Constr. Laborers Vacation Tr. for S. Cal., 463 U.S. 1,
9-11 (1983). In short, “a well-pleaded complaint establishes
either that federal law creates the cause of action or that the
plaintiff’s right to relief necessarily depends on resolution of
a substantial question of federal law.” Id. at 27-28.
The FAA does not itself provide a federal cause of
action for vacatur of an arbitration award. Instead, as the
Supreme Court has explained,
[t]he Arbitration Act is something of an
anomaly in the field of federal-court
jurisdiction. It creates a body of federal
substantive law establishing and regulating the
duty to honor an agreement to arbitrate, yet it
does not create any independent federal-
question jurisdiction under 28 U.S.C. § 1331 or
otherwise. ... [H]ence, there must be diversity of
citizenship or some other independent basis for
federal jurisdiction before [an] order can issue.
... [A]lthough enforcement of the Act is left in
large part to the state courts, it nevertheless
represents federal policy to be vindicated by the
federal courts where otherwise appropriate.
Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460
U.S. 1, 25 n.32 (1983) (internal citations omitted); see also
11
V.I. Hous. Auth. v. Coastal Gen. Constr. Servs. Corp., 27 F.3d
911, 915 (3d Cir. 1994) (“[T]he Arbitration Act does not
supply federal jurisdiction where it does not otherwise
exist.”).8 Therefore, the FAA does not provide a federal
cause of action to ground subject-matter jurisdiction for the
Goldmans’ motion to vacate.
We must look, then, to the Goldmans’ allegations to
see whether they somehow raise a basis for jurisdiction, other
than by the incorrect assertion that § 10 independently
provided the District Court “jurisdiction to hear and decide”
the motion to vacate. (App. 287.) Because the Goldmans’
“‘refiled’ motion to vacate” is the filing that brought the
dispute to the District Court after the Court had dismissed
their requests to stay the arbitration proceedings, the
allegations of that motion are the ones to which we apply the
well-pleaded complaint rule. (App. 284.) Though that
motion meanders, it does make something apparent: the
Goldmans point to no federal law as the reason there should
be a vacatur. Instead, they reference Pennsylvania state law
governing vacatur of arbitration awards and then proceed to
discuss the indignities they allegedly suffered during the
arbitration proceedings. Lengthy though the motion to vacate
is, it is entirely about the arbitration process. The Goldmans
complain of a “bitter prehearing arbitration discovery
process” (App. 289), “evident partiality of the [arbitration]
8
The Goldmans argue that the “plain language” of
§ 10 of the FAA creates a federal cause of action and that we
should read it to do so to give it “the dignity of plain
meaning.” (Opening Br. at 24.) They acknowledge,
however, that their interpretation is contrary to our precedent,
so we do not consider that argument further.
12
Panel” (App. 290), “paltry” discovery production from CGMI
(App. 291), CGMI being “allowed to spy” on confidential
mediation negotiations (App. 292), the mediator’s alleged
perjury, the arbitration panel’s “manifest[] disregard[] [of] the
existence of a margin call” (App. 298), “falsification of
records” (App. 299), and “contemptuous treatment by the
Panel Chair of the Goldmans” (App. 301). All of those
grievances are variations on the theme that the contract to
arbitrate was undermined by “blatant misconduct by” CGMI,
despite CGMI’s obligation “to arbitrate properly under the
FINRA A[rbitration] Submission Agreement,” and that
CGMI’s misconduct was “insidiously tolerated by a panel
sworn to be impartial.” (App. 300 (emphasis omitted).) The
essence of the motion to vacate is therefore a breach of
contract complaint, alleging that CGMI, with the aid of the
FINRA panel, engaged in procedural chicanery and failed to
honor the agreement to arbitrate. That basic contract claim
arises under state, not federal, law.
Lacking a federal cause of action to support
jurisdiction, the Goldmans must rely on Grable to establish
that their “state-law claim necessarily raise[s] a ... federal
issue, actually disputed and substantial, which a federal forum
may entertain without disturbing any congressionally
approved balance of federal and state judicial
responsibilities.” 545 U.S. at 314. They present three
theories for why their motion to vacate does so. First, they
say that federal courts may “look through” a motion to vacate
to the subject matter of the underlying arbitration, and that,
because the underlying arbitration in this case involved
federal securities law claims, the District Court had
jurisdiction. Second, they contend that, because they alleged
that the FINRA panel manifestly disregarded federal law,
13
they have raised a federal question. Finally, they say that the
FINRA procedures at issue here are so integrally related to
federal law that disputes over those procedures raise federal
questions. We consider each jurisdictional theory in turn,
ultimately agreeing with the District Court that none satisfies
the stringent Grable test for federal question jurisdiction in
the absence of a federal cause of action.
A. Look-Through
1. Athena Venture’s Jurisdictional
Statement
To support their argument that a district court should
“look through” a motion to vacate and examine the subject
matter of the underlying arbitration, the Goldmans principally
rely upon an opinion that our Court issued after the District
Court dismissed the motion to vacate. That opinion, from a
case called Goldman, Sachs & Co. v. Athena Venture
Partners, L.P., included a footnote indicating that a district
court has subject-matter jurisdiction over a § 10 motion to
vacate “pursuant to 28 U.S.C. § 1331 and 15 U.S.C. § 78aa(a)
because the underlying arbitration included federal securities
law claims.” 803 F.3d 144, 147 n.5 (3d Cir. 2015).
Were that statement of law binding on us, the
Goldmans would be correct that the District Court had
jurisdiction over their motion to vacate. But we are not
bound to follow Athena Venture, for two independently
sufficient reasons.
First, a summary and unexplained jurisdictional ruling
like the one in that case has no precedential effect. Using a
14
colloquialism, we have previously observed that “[a] drive-by
jurisdictional ruling, in which jurisdiction has been assumed
by the parties, and assumed without discussion by the court,
does not create binding precedent.” United States v. Stoerr,
695 F.3d 271, 277 n.5 (3d Cir. 2012) (internal quotation and
editorial marks omitted). “We therefore are not bound by the
bald jurisdictional statement” in a prior opinion of our Court.
Id. That understanding comports with similar instruction
from the Supreme Court, reaching back to Chief Justice
Marshall, who held that there is nothing binding in “a prior
exercise of jurisdiction in a case where it was not questioned
and it was passed sub silentio.” United States v. L.A. Tucker
Truck Lines, Inc., 344 U.S. 33, 38 (1952); see also Steel Co.
v. Citizens for a Better Env’t, 523 U.S. 83, 91 (1998) (“We
have often said that drive-by jurisdictional rulings ... have no
precedential effect.”).
The Athena Venture footnote represents just such an
unexamined exercise of jurisdiction and so is without
precedential effect. Jurisdiction was not disputed, and the
case instead revolved entirely around a merits question of
whether constructive knowledge of an arbitrator’s
misrepresentation could trigger forfeiture of a misconduct
claim in a subsequent motion to vacate. See Athena Venture,
803 F.3d at 147-48. The jurisdictional footnote was merely a
recapitulation of the jurisdictional statement from the
appellants’ brief, which was itself unaddressed by the
appellees. Compare id. at 147 n.5 with Brief of Appellants at
1, Goldman, Sachs & Co. v. Athena Venture Partners, L.P.,
803 F.3d 144 (3d Cir. 2015) (No. 13-3461), 2014 WL
1315263. Had the adversarial process properly put
jurisdiction in issue, we doubt that the jurisdictional ruling
15
would have been the same. Indeed, it could not have been,9
which is the second reason that Athena Venture does not bind
us on the question of jurisdiction: it is contrary to our own
prior precedent.
“In the unique circumstance when our panel decisions
conflict and our Court has not spoken en banc, ... the earlier
decision is generally the controlling authority.” United States
v. Tann, 577 F.3d 533, 541 (3d Cir. 2009). Long before
Athena Venture, in a case called Virgin Islands Housing
Authority v. Coastal General Construction Services Corp., we
applied the well-pleaded complaint rule to a § 10 motion to
vacate and refused to look through to the claims in the
underlying arbitration, so that jurisdiction would not lie where
the allegations “did not include any reference to a federal
statute other than the Arbitration Act.” 27 F.3d at 915.
“[N]ot only must federal jurisdiction exist aside from the
Arbitration Act, but the independent basis must appear on the
face of the complaint.” Id. We found jurisdiction lacking
where the pleadings did not “contain allegations sufficient
under the well-pleaded complaint rule to support a finding of
a substantial federal question.” Id. Therefore, even if the
Athena Venture jurisdictional statement were anything more
than our Court’s unexplained acceptance of the parties’
representations about jurisdiction, it would nonetheless be
trumped by the prior holding in Coastal General.
9
That is not to say that the Court could not have
determined there was jurisdiction on some other theory, only
that it could not have relied on the look-through theory.
16
2. Vaden and the Difference Between § 4
and § 10 of the FAA
To overcome the precedential force of Coastal
General, the Goldmans need to point to some intervening
change in the law. The closest they come is their invocation
of the Supreme Court’s opinion in Vaden v. Discover Bank,
556 U.S. 49, 62 (2009), which held that “[a] federal court
may ‘look through’ a § 4 petition [to compel arbitration] to
determine whether it is predicated on an action that ‘arises
under’ federal law.” The Goldmans argue that we should
apply that same look-through treatment to § 10 motions to
vacate arbitration awards. While there may be some
superficial appeal to treating a § 10 motion to vacate an
arbitration award in the same manner as a § 4 motion to
compel arbitration, a close reading of Vaden and the relevant
provisions of the FAA undercuts the Goldmans’ argument.
To begin with, the Vaden opinion made clear that it
was doing nothing to disturb the well-pleaded complaint rule
or the general proposition that the FAA provides no federal
cause of action. Specifically, the Court reaffirmed that
federal question jurisdiction under 28 U.S.C. § 1331 works
the same for FAA suits as for any others, so that, “[u]nder the
longstanding well-pleaded complaint rule, ... a suit ‘arises
under’ federal law ‘only when the plaintiff’s statement of his
own cause of action shows that it is based upon [federal
law].’” Id. at 60 (quoting Louisville & Nashville R. Co. v.
Mottley, 211 U.S. 149, 152 (1908)). The Court also said,
[t]he body of federal substantive law generated
by [the FAA] is equally binding on state and
federal courts. ... [The FAA] bestows no
17
federal jurisdiction but rather requires for access
to a federal forum an independent jurisdictional
basis over the parties’ dispute. Given the
substantive supremacy of the FAA, but the
Act’s nonjurisdictional cast, state courts have a
prominent role to play as enforcers of
agreements to arbitrate.
Id. at 59 (internal quotation marks, editorial marks, and
citations omitted).
In explaining why the well-pleaded complaint rule was
relaxed for § 4 petitions to allow look-through to the
underlying dispute’s subject-matter, the Court focused on the
unique language of that portion of the statute, saying, “[t]he
text of § 4 drives our conclusion that a federal court should
determine its jurisdiction by ‘looking through’ a § 4 petition
to the parties’ underlying substantive controversy.” Id. at 62.
According to that text:
A party aggrieved by the alleged failure,
neglect, or refusal of another to arbitrate under a
written agreement for arbitration may petition
any United States district court which, save for
such agreement, would have jurisdiction under
Title 28, in a civil action or in admiralty of the
subject matter of a suit arising out of the
controversy between the parties, for an order
directing that such arbitration proceed in the
manner provided for in such agreement.
9 U.S.C. § 4 (emphasis added). The Supreme Court
concluded that “[t]he phrase ‘save for [the arbitration]
18
agreement’ indicates that the district court should assume the
absence of the arbitration agreement and determine whether it
‘would have jurisdiction under title 28’ without it.” Vaden,
556 U.S. at 62.
In addition to giving effect to the words of that
provision, the Court reasoned that failing to look through a
§ 4 petition to the underlying dispute would have “curious
practical consequences”:
It would permit a federal court to entertain a § 4
petition only when a federal-question suit is
already before the court, when the parties
satisfy the requirements for diversity-of-
citizenship jurisdiction, or when the dispute
over arbitrability involves a maritime contract.
[Failing to look through] would not
accommodate a § 4 petitioner who could file a
federal-question suit in (or remove such a suit
to) federal court, but who has not done so. In
contrast, when the parties’ underlying dispute
arises under federal law, the “look through”
approach permits a § 4 petitioner to ask a
federal court to compel arbitration without first
taking the formal step of initiating or removing
a federal-question suit – that is, without seeking
federal adjudication of the very questions it
wants to arbitrate rather than litigate.
Id. at 65.
Neither the textual nor practical considerations noted
by the Court in Vaden apply in a case relying on § 10 of the
19
FAA. Section 10 lacks the critical “save for such agreement”
language that was central to the Supreme Court’s Vaden
opinion. It provides that “the United States court in and for
the district wherein the award was made may make an order
vacating the award upon the application of any party to the
arbitration ... .” 9 U.S.C. § 10. There is no reference to the
subject matter of the underlying dispute. Thus, while § 4
calls for a court to consider whether it would have jurisdiction
over the “subject matter of a suit arising out of the
controversy between the parties,” § 10 makes no such
demand.
We therefore join other courts in holding that § 4 of
the FAA should be read differently than § 10 for
jurisdictional purposes. Before Vaden, the United States
Court of Appeals for the D.C. Circuit had noted that, even if §
4 provides look-through federal question jurisdiction, “the
same words are not in § 10.” Kasap v. Folger Nolan Fleming
& Douglas, Inc., 166 F.3d 1243, 1247 (D.C. Cir. 1999).
Earlier still, the United States Court of Appeals for the
Seventh Circuit ruled that there was “no reason to artificially
import the language” of § 4 “into § 10, since we do not
believe it is necessarily anomalous for Congress to have
intended that federal courts take jurisdiction for purposes of a
motion to compel where the underlying dispute is federal, but
not take jurisdiction on a parallel motion to vacate.” Minor v.
Prudential Sec., Inc., 94 F.3d 1103, 1107 (7th Cir. 1996).
Explaining why Congress may have treated petitions to
compel arbitration and motions to vacate differently, the
Seventh Circuit opined that:
The central federal interest was enforcement of
agreements to arbitrate, not review of
20
arbitration decisions. Thus it would be
reasonable for Congress to give federal courts
the responsibility of ensuring arbitration
agreements are upheld in cases where the courts
would otherwise have jurisdiction. However,
once the arbitration agreement is enforced, there
exists no compelling need for the federal courts
to be involved, unless a federal question is
actually at issue or diversity is established. The
central goal of the FAA will already have been
addressed, and well-established rules of federal
jurisdiction, including the well-pleaded
complaint rule, should govern. Accordingly,
merely because a district court may have
jurisdiction over a motion to compel arbitration
where an underlying federal question is at stake
... does not mean the same holds true in the
context of a § 10 motion to vacate.
Id. (internal quotation marks, editorial marks, and citation
omitted).
The Seventh Circuit’s policy rationale meshes exactly
with the Vaden Court’s subsequent “practical consequences”
argument, 556 U.S. at 65, in explaining why look-through
need not apply in the § 10 context. As the Supreme Court
noted in Vaden, the reason for a petition to compel arbitration
is to resolve the dispute through arbitration rather than going
to court, so it would be contrary to the purpose of § 4 to
require the petitioner to first bring suit. Id.
That logic, however, does not apply to § 10, which
takes effect only when the arbitration has concluded. When
21
seeking to vacate the result of an arbitration that has already
occurred, the movant is challenging the procedural propriety
of the arbitration, which is unrelated to the subject matter of
the underlying dispute. The present case is a prime example.
The Goldmans complain that they were subject to
“voluminous” and “oppressive” discovery demands (App.
289), a “blatantly partial” arbitration panel (App. 289),
respondents who “blatantly conceal[ed] evidence” (App.
292), “reprehensible conduct” from CGMI’s lawyers (App.
293), and mediator “perjury” (App. 293). Those are
procedural criticisms. There is, in other words, no federal
question which a district court could consider in a § 10
dispute such as this one; whereas, in a § 4 case, the petitioner
always could have brought a federal question suit before
requesting that the court send the matter to arbitration.
In concluding that Vaden’s “look-through” basis for
jurisdiction does not extend to § 10 motions to vacate, we
adopt the reasoning of the Seventh Circuit’s recent decision in
Magruder v. Fidelity Brokerage Services LLC, No. 15-1846,
2016 WL 1059469 (7th Cir. Mar. 17, 2016). As discussed
there, rejecting look-through in cases involving §§ 9 and 10
of the FAA “harmonizes the law of arbitration with the law of
contracts.”10 Id. at *3.
10
Section 9 of the FAA governs confirmation of
arbitration awards and provides that “at any time within one
year after the award is made any party to the arbitration may
apply to the court ... for an order confirming the award, and
thereupon the court must grant such an order unless the award
is vacated, modified, or corrected ... .” 9 U.S.C. § 9. Like
§ 10, § 9 has none of the look-through language of § 4 that
undergirds the Vaden opinion.
22
Put FINRA and its rules aside for a moment and
consider what would have happened if [the
plaintiff] had sued [the defendant] under the
federal securities laws ... . Most litigation ends
in settlement – which is to say, in a contract. If
[the parties] had reached a contractual solution
but later disagreed about performance, could
they return to federal court under the securities
laws? The answer is no.
Id. (citing Kokkonen v. Guardian Life Ins. Co., 511 U.S. 375
(1994)). In short, “[the] conclusion ... that a federal question
can suffice to order arbitration under § 4, but not to enforce or
set aside the decision under § 9 or § 10, parallels the
distinction ... between an original federal claim and a dispute
about its contractual resolution.” Id.
We therefore hold that a district court may not look
through a § 10 motion to vacate to the underlying subject
matter of the arbitration in order to establish federal question
jurisdiction. Instead, the traditional well-pleaded complaint
rule applies so that the motion to vacate must, on its face,
“necessarily raise a stated federal issue, actually disputed and
substantial, which a federal forum may entertain without
disturbing any congressionally approved balance of federal
and state judicial responsibilities.” Grable, 545 U.S. at 314.
B. Application of the Well-Pleaded Complaint
Rule
Having concluded that we apply the well-pleaded
complaint rule to § 10 motions, without look-through, we
23
next address the two arguments that the Goldmans make for
why they have nonetheless established federal question
jurisdiction.
1. Manifest Disregard
First, the Goldmans argue that their motion to vacate
raises a substantial federal question on its face because it
asserts that the arbitration panel showed a manifest disregard
for federal law. “Manifest disregard” is a judicially-created
doctrine by which “[a] district court may ... vacate an
arbitrator’s decision [that] evidences a manifest disregard for
the law rather than an erroneous interpretation of the law.”
Dluhos v. Strasberg, 321 F.3d 365, 370 (3d Cir. 2003)
(internal quotation and editorial marks omitted). The
Goldmans say that the FINRA panel “manifestly disregarded”
the statutory language of 15 U.S.C. § 78g,11 as well as its
implementing regulation 12 C.F.R. § 220.12,12 when it
11
As relevant here, 15 U.S.C. § 78g establishes margin
requirements “[f]or the purpose of preventing the excessive
use of credit for the purchase or carrying of securities” by
mandating that “the Board of Governors of the Federal
Reserve System shall ... prescribe rules and regulations with
respect to the amount of credit that may be initially extended
and subsequently maintained on any security ... .” Id.
§ 78g(a).
12
In the portion of 12 C.F.R. § 220.12 relied upon by
the Goldmans, the regulation provides:
The required margin for each security position
held in a margin account shall be as follows:
24
concluded that no margin call had occurred. (App. 298.)
Without further explanation, they assert that “[t]he plain
language” of the regulation demonstrates that a margin call
must have occurred, contrary to the FINRA panel’s
conclusion.
The regulation that the Goldmans invoke sets “initial
margin requirements for certain equity securities at ‘50
percent of the current market value of the security or the
percentage set by the regulatory authority where the trade
occurs, whichever is greater.’” WC Capital Mgmt., LLC v.
UBS Sec., LLC, 711 F.3d 322, 328 (2d Cir. 2013) (quoting 12
C.F.R. § 220.12(a)). “If the value of the securities and other
acceptable property held in a margin account falls below the
required margin level, a broker may issue a ‘margin call’
notifying the account owner that it will need to either post
additional collateral or sell some of its securities in the
account to satisfy the collateral requirements.” Id.
Presumably, the Goldmans are suggesting that their margin
account fell below the level required by the regulation, so that
a margin call must have been made.
(a) Margin equity security, except for an
exempted security, money market
mutual fund or exempted securities
mutual fund, warrant on a securities
index or foreign currency or a long
position in an option: 50 percent of the
current market value of the security or
the percentage set by the regulatory
authority where the trade occurs,
whichever is greater.
Id. § 220.12(a).
25
Without taking a position on the merits of that
argument, we agree with the District Court that the
Goldmans’ invocation of 15 U.S.C. § 78g and 12 C.F.R.
§ 220.12 is insufficient to raise a substantial question of
federal law in their motion to vacate. Even if “manifest
disregard” is a valid basis for vacatur,13 it can only support
13
The continued validity of manifest disregard as a
basis for vacating arbitration awards has been thrown into
doubt by the Supreme Court’s holding in Hall Street
Associates, L.L.C. v. Mattel, Inc. that “§§ 10 and 11
respectively provide the FAA’s exclusive grounds for
expedited vacatur and modification.” 552 U.S. 576, 584
(2008). Subsequently, the Court expressly declined to
“decide whether ‘manifest disregard’ survives ... Hall Street
... as an independent ground for review or as a judicial gloss
on the enumerated grounds for vacatur set forth at 9 U.S.C.
§ 10.” Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559
U.S. 662, 672 n.3 (2010). The Courts of Appeals have
divided on the answer to that question. Compare Comedy
Club, Inc. v. Improv W. Assocs., 553 F.3d 1277, 1290 (9th
Cir. 2009) (holding that manifest disregard survives as
“shorthand for ... 9 U.S.C. § 10(a)(4), which states that the
court may vacate ‘where the arbitrators exceeded their
powers’”), with Affymax, Inc. v. Ortho-McNeil-Janssen
Pharm., Inc., 660 F.3d 281, 285 (7th Cir. 2011) (holding that
after Hall Street, “‘manifest disregard of the law’ is not a
ground on which a court may reject an arbitrator’s award
under the Federal Arbitration Act”). Because we conclude
that the Goldmans’ manifest disregard claim does not raise a
substantial question of federal law, we need not inquire into
26
federal question jurisdiction “where ... the petitioner
complains principally and in good faith that the award was
rendered in manifest disregard of federal law ... .” Greenberg
v. Bear, Stearns & Co., 220 F.3d 22, 27 (2d Cir. 2000)
(emphasis added).
The Goldmans do not meet that standard because the
legal issues they raise are, at most, merely supportive of their
principal complaint that partiality, corruption, and ineptitude
infected the arbitration process. More broadly, the Goldmans
fail to establish any of the four parts of the Grable test with
their manifest disregard claim. The claim does not
“necessarily raise a ... federal issue,” nor is the federal issue
in question “substantial,” Grable, 545 U.S. at 314, because
the margin regulations are invoked simply as evidence for the
factual claim that a margin call occurred. That alone does not
create a basis for federal subject-matter jurisdiction, because
determining whether the arbitrator “fail[ed] to consider
pertinent and material evidence” “plainly [does] not require
resolution of a uniquely federal issue.” Greenberg, 220 F.3d
at 27 (internal quotation marks omitted). In reality, no
question of federal law is “actually disputed” here. Grable,
545 U.S. at 314. We agree with the District Court that the
fundamental dispute is not legal at all, but is factual: “no
party contests the existence, applicability, or construction of
these statutes and regulations. Instead, the Goldmans argue
that the panel erred in its factual determination that no margin
call occurred.” (App. 13.) Finally, we are concerned that
sweeping this kind of run-of-the-mill arbitration dispute into
federal court would upset the “prominent role” that state
the continuing validity of manifest disregard as a basis for
vacatur.
27
courts “play as enforcers of agreements to arbitrate” under the
FAA. Vaden, 556 U.S. at 59. Expanding federal question
jurisdiction to contractual disputes like this one runs the risk
of “disturbing [the] congressionally approved balance of
federal and state judicial responsibilities.” Grable, 545 U.S.
at 314.
2. FINRA Rules as Federal Law
The Goldmans’ second argument for why they satisfy
the well-pleaded complaint rule is that FINRA is a self-
regulatory organization authorized by the ’34 Act, and thus
the alleged violations of FINRA rules raise questions of
federal law. The ’34 Act, they say, provides for pervasive
federal oversight of self-regulatory organizations’ internal
rules, see 15 U.S.C. § 78s(b)(2)(C), and, consequently,
allegations of procedural irregularities in the FINRA
proceedings implicate substantial questions of federal law.
As support, the Goldmans rely principally on the
decision of the United States Court of Appeals for the Second
Circuit in NASDAQ OMX Group, Inc. v. UBS Securities,
LLC, 770 F.3d 1010 (2d Cir. 2014). In that case, a divided
panel of the Second Circuit held that there was federal
question jurisdiction to review an arbitration, reasoning that
the SEC’s pervasive regulation of NASDAQ as a self-
regulatory organization resulted in NASDAQ rules being
intertwined with federal law. The NASDAQ case arose from
serious problems in Facebook’s initial public offering, which
led UBS to initiate arbitration on state law contract and tort
claims based on NASDAQ’s alleged failure to follow its own
rules. Id. at 1013-15. When NASDAQ sought declaratory
judgment in federal court to preclude arbitration, one main
28
issue was whether the case implicated federal question
jurisdiction. The Second Circuit concluded that it did, even
though the allegations arose from NASDAQ rules and New
York common law. The Second Circuit pointed out that
NASDAQ was a registered national exchange under 15
U.S.C. § 78f, and thus was required to have “rules ... designed
to prevent fraudulent and manipulative acts and practices
[and] to promote just and equitable principles of trade ... .”
15 U.S.C. § 78f(b)(5). Because NASDAQ’s rules were
pervasively regulated under the ’34 Act, and because they
were meant to implement ’34 Act obligations, the court ruled
that those federal law obligations were necessarily involved
in the arbitration that UBS initiated. NASDAQ, 770 F.3d at
1021-23. As to the substantiality component of the test for
federal question jurisdiction, the Second Circuit determined
that
the disputed federal issue in [the] case –
whether NASDAQ violated its Exchange Act
obligation to provide a fair and orderly market
in conducting an IPO – is sufficiently
significant to the development of a uniform
body of federal securities regulation to satisfy
the requirement of importance to the federal
system as a whole.
Id. at 1024 (internal quotation marks omitted). Finally, the
court ruled that asserting jurisdiction would not upset the
federal-state balance because of “Congress’s expressed
preference for alleged violations of the Exchange Act, and of
rules and regulations promulgated thereunder, to be litigated
in a federal forum.” Id. at 1030.
29
None of that, though, changes the outcome here. We
agree with the District Court that, even if the NASDAQ
opinion’s theory of federal question jurisdiction is correct,14
its facts are easily distinguishable from the Goldmans’ case
because it “involved far more substantial questions of federal
law.” (App. 15.) Of high importance to the Second Circuit’s
substantiality analysis was that NASDAQ was an exchange,
implicating the “central role stock exchanges play in the
national system of securities markets.” NASDAQ, 770 F.3d at
1024. The proper functioning of a national securities
exchange, especially when it comes to its core function of
properly issuing stock, is clearly a much more significant
14
Because the Goldmans’ claims are not nearly as
substantial for jurisdictional purposes as those in the
NASDAQ case, we need not reach the question of whether we
would adopt the Second Circuit’s analysis of federal question
jurisdiction from the NASDAQ opinion. We do note,
however, that the dissenting opinion in NASDAQ makes a
compelling argument that “NASDAQ is a shareholder-owned,
publicly-traded, for-profit company,” “its rules are not federal
regulations or federal law,” and “the rules of a stock exchange
are contractual in nature and within the province of state
law.” 770 F.3d at 1036 (Straub, J., dissenting). As with the
Goldmans’ case, “[t]he only arguably federal issue present” in
the NASDAQ case was “a broad duty found in the Exchange
Act” that was “not actually disputed.” Id. The strong
dissenting argument in NASDAQ suggests that the case was at
the borderline of raising a sufficiently substantial issue of
federal law to justify federal question jurisdiction. The
Goldmans’ claims much less directly implicate federal
securities regulation, so that if NASDAQ is close to the border
of satisfying the Grable test, the Goldmans are far from it.
30
issue of federal securities law than the arbitration procedures
of a non-exchange self-regulatory organization.
“The substantiality inquiry ... looks ... to the
importance of the issue to the federal system as a whole.”
Gunn, 133 S. Ct. at 1066. It “primarily focuse[s] not on the
interests of the litigants themselves, but rather on the broader
significance ... for the Federal Government.” Id. The
Goldmans raise a routine claim for vacatur alleging arbitrator
and counterparty misconduct, which is, at bottom, a
commonplace state law contract dispute. Unlike the
NASDAQ case, which implicated the proper functioning of a
major national securities exchange, nothing about the
Goldmans’ case is likely to affect the securities markets more
broadly. That the allegedly misbehaving arbitration panel
happened to be affiliated with a self-regulatory organization
does not meaningfully distinguish this case from any other
suit alleging arbitrator partiality in a securities dispute.
Accordingly, we decline to recognize federal question
jurisdiction over the flood of cases that would enter federal
courts if the involvement of a self-regulatory organization
were itself sufficient to support jurisdiction. See Grable, 545
U.S. at 318 (expressing concern with finding a substantial
federal question in a state law claim when that “would have
meant a tremendous number of cases” could enter federal
court).
IV. Conclusion
For the foregoing reasons, we will affirm the District
Court’s order dismissing the Goldmans’ suit for lack of
subject-matter jurisdiction.
31