Intl Fcstone Fin. Inc. v. Jacobson, Nos. 19-2111

• Citation: 950 F.3d 491
• Decision Date: 24 February 2020
• Docket Number: Nos. 19-2111,19-2123
• Parties: INTL FCSTONE FINANCIAL INC., Plaintiff-Appellee, v. Dave JACOBSON, et al., Defendants-Appellants.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

950 F.3d 491

INTL FCSTONE FINANCIAL INC., Plaintiff-Appellee,

v.Dave JACOBSON, et al., Defendants-Appellants.

Nos. 19-2111

19-2123

United States Court of Appeals, Seventh Circuit.

Argued December 13, 2019

Decided February 24, 2020

Stephen Bedell, Attorney, Thomas P. Krebs, Attorney, Peter James O'Meara, Attorney, Foley & Lardner LLP, Chicago, IL, for Plaintiff - Appellee.

Edmund W. Searby, Attorney, Searby LLP, Pepper Pike, OH, for Defendant - Appellant.

Before Manion, Kanne, and Brennan, Circuit Judges.

Brennan, Circuit Judge.

Investors in commodities futures appeal an order to arbitrate their trading disputes. But they stumble out of the blocks: our review is limited to "final decisions of the district courts." 28 U.S.C. § 1291. Here, the district court ordered arbitration and designated an arbitration forum, then stayed the case to address related issues, including the arbitration venue. Put more simply, the district court made non-final decisions.

Although statutory exceptions exist to the rule of finality, none apply here. Because this case remained open to resolve certain issues, we dismiss defendants' appeal for lack of jurisdiction.

I

Defendants, commodities futures investors, maintained trading accounts with INTL FCStone Financial Inc. ("FCStone"), a clearing firm which handled the confirmation, settlement, and delivery of transactions. In November 2018, extraordinary volatility in the natural gas market wiped out defendants' account balances with FCStone, leaving some defendants in debt. Lawsuits followed: defendants alleged Commodity Exchange Act violations against FCStone; FCStone sought payment from defendants with negative balances.

Defendants drew first blood. They launched arbitration proceedings against FCStone before the Financial Industry Regulatory Authority ("FINRA"). FCStone responded with a declaratory judgment action claiming the parties must arbitrate their disputes before the National Futures Association ("NFA"),¹ and that FINRA lacks jurisdiction over the underlying disputes.

The district court ruled for FCStone. To understand that decision and its impact on our jurisdiction, first we must untangle the parties' district court arguments about the proper arbitration forum.

FCStone argued that arbitration agreements and federal regulations bind defendants to proceed before the NFA. When defendants opened their futures accounts with FCStone, they signed arbitration agreements that said:

Any controversy or claim arising out of or relating to your accounts shall be settled by arbitration, either (1) under the Code of Arbitration of the National Futures Association, or (2) upon the contract market on which the disputed transaction was executed or could have been executed. ... At the time you notify ... [FCStone] ... of your intent to submit a claim to arbitration, ... you will have an opportunity to elect a qualified forum for conducting the proceedings, and will be supplied with a list of qualified organizations.

FCStone reads this provision to limit account disputes to arbitral forums operated by the NFA or the contract market on which the disputed transaction was executed (here, the Chicago Mercantile Exchange). Because the agreements do not provide FINRA arbitration as an option, FCStone argued, defendants have no purported rights to arbitrate before FINRA.

Next, FCStone claimed that Commodity Futures Trading Commission ("CFTC") regulations preclude FINRA arbitration. See 7 U.S.C. § 2(a)(1)(A) (establishing CFTC jurisdiction over "accounts, agreements ... and transactions involving ... contracts of sale of a commodity for future delivery"). FCStone pointed to 17 C.F.R. § 166.5 and reasoned that the CFTC adopted that provision to govern arbitration agreements over CFTC-regulated disputes. See 17 C.F.R. § 166.5(b) – (c) (allowing futures investors to enter binding predispute arbitration agreements with CFTC registrants, so long as they are voluntary and not a condition to opening an account). FCStone submits that investors entering into such agreements must abide by § 166.5 for selecting an arbitration forum, which they summarize in a four-step process:

• Step 1: investor provides the CFTC registrant with notice of intent to arbitrate;

• Step 2: registrant provides the investor a list of three qualified arbitration organizations and the applicable rules for each arbitral option;

• Step 3: investor must select one of the three arbitral options offered within 45 days;

• Step 4: if the investor fails to select one of the three arbitral options offered within 45 days, the registrant has the exclusive right to select one of the arbitral options.

See id. § 166.5(c)(5).

FCStone believes defendants must follow these steps for two reasons. First, FCStone provided services to defendants exclusively out of its futures commission merchant division, which provides services only in connection with futures and options traded on futures exchanges.² Second, that division is registered with and regulated by the CFTC.

Defendants disregarded "Step 1," however, and filed for FINRA arbitration, alleging FCStone violated 7 U.S.C. § 13c of the Commodity Exchange Act.³ After learning about defendants' FINRA filings, FCStone prompted defendants about their obligations under the arbitration agreements and § 166.5. FCStone also stressed that, like the parties' agreements, § 166.5 neither mentions nor contemplates FINRA as an arbitration forum over disputes. In keeping with "Step 2," FCStone sent defendants a list of three forums to arbitrate their disputes: the NFA, the Chicago Mercantile Exchange, and AAA's commercial arbitration forum. Defendants rejected all three. Despite this rejection, FCStone waited 45 days, allowing defendants a chance to comply with "Step 3." By the end of that timeframe, no defendants had selected any of the arbitration forums offered by FCStone. So, invoking "Step 4," FCStone initiated arbitration proceedings before the NFA.

Not surprisingly, defendants refused NFA arbitration. FCStone responded with a complaint for declaratory and injunctive relief. After several FCStone customers not named in that suit tried to initiate FINRA arbitration, FCStone amended its complaint to join them. The amended complaint also added a count under the Federal Arbitration Act ("FAA"), 9 U.S.C. § 4, to compel arbitration. At the same time, FCStone moved to compel defendants to NFA arbitration and requested the entry of "a declaratory judgment to the effect that FINRA is not a valid arbitration forum for the parties' dispute, and NFA is the valid forum for this dispute."

Defendants disagreed with FCStone's claims and insisted the parties must arbitrate their disputes before FINRA. Why? Because separate from its futures commission merchant division, FCStone also maintains a securities brokerage division registered with and regulated by FINRA and the Securities and Exchange Commission ("SEC").

To understand defendants' position, some background about FINRA helps:

FINRA is a private, non-profit corporation that is registered with the [SEC] as a "national securities association." Such private regulation was made possible by the Maloney Act, which provided for the establishment of self-regulatory organizations to oversee the securities markets. 15 U.S.C. §§ 78o et seq . In this capacity FINRA creates and enforces rules that govern the industry alongside the SEC and is subject to significant SEC oversight. The SEC must approve all of FINRA's rules, 15 U.S.C. § 78s(b)(1), and the SEC may abrogate, add to, and delete from all FINRA rules as it deems necessary. 15 U.S.C. § 78s(c).

Aslin v. Fin. Indus. Regulatory Auth., Inc. , 704 F.3d 475, 476 (7th Cir. 2013).

Federal securities laws generally require firms that deal in securities to comply with FINRA rules. Id . Defendants pointed to FINRA Rule 12200, which requires FINRA members to submit to FINRA arbitration when requested by "a customer ... in connection with the business activities of the member." Because FCStone provided services to defendants, and it is a FINRA member through its securities brokerage division, defendants claimed to be customers within the meaning of FINRA Rule 12200.⁴ FCStone countered defendant's position with these undisputed facts:

• Defendants' account agreements did not authorize FCStone to trade in securities products.

• FCStone's futures commission merchant division—which managed defendants' accounts—does not provide securities brokerage services and is not regulated by FINRA or the SEC.

• FCStone's securities brokerage division provided no services to, and did not enter into any transactions with, defendants.

• FCStone's securities brokerage division is wholly distinct from its futures commission merchant division: the products within each division are different; the treasury, account onboarding, and operations departments of each division are different; the divisions have different compliance officers and compliance staff; the divisions have different controllers and accounting staff; and each division's records are kept separate.

Undeterred, defendants argued that FINRA—which regulates the securities industry, not commodity futures markets—is the appropriate forum to arbitrate their commodities-based claims.⁵ Defendants also argued that the arbitration agreements neither waive FINRA arbitration nor supersede FINRA Rule 12200; even if they did, defendants claimed FINRA Rule 2268(d)(1) prohibits such waivers.⁶ To top things off, defendants claimed FCStone repudiated the arbitration agreements. According to defendants' version of events, FCStone offered "AAA arbitration" and then refused to cooperate once defendants chose to arbitrate there. This "inequitable conduct," defendants argued, amounted to a breach and repudiation of the arbitration agreements.

Unlike FCStone, defendants did not move to compel FINRA arbitration. But they did oppose FCStone's arbitration, injunction, and declaratory relief request. Defendants also moved to dismiss FCStone's amended...