Doscher v. Sea Port Grp. Sec., LLC

• Decision Date: 11 August 2016
• Docket Number: August Term 2015,Docket No. 15–2814
• Citation: 832 F.3d 372
• Parties: Drew Doscher, Petitioner–Appellant, v. Sea Port Group Securities, LLC, Stephen Smith, Michael Meagher, Michael Meyer, The Seaport Group, LLC, Armory Advisers, LLC, Armory Fund, LP, and Seaport V, LLC, Respondents–Appellees.
• Court: U.S. Court of Appeals — Second Circuit

832 F.3d 372

Drew Doscher, Petitioner–Appellant,

v.Sea Port Group Securities, LLC, Stephen Smith, Michael Meagher, Michael Meyer, The Seaport Group, LLC, Armory Advisers, LLC, Armory Fund, LP, and Seaport V, LLC, Respondents–Appellees.

Docket No. 15–2814

August Term 2015

United States Court of Appeals, Second Circuit.

Argued: March 8, 2016

Decided: August 11, 2016

A. Todd Merolla, Merolla & Gold, LLP, Atlanta, GA, for Petitioner–Appellant.

Ronald G. Blum(Benjamin J. Wolfert, on the brief), Manatt, Phelps & Phillips, LLP, New York, NY, for Respondents–Appellees.

Before: POOLERand WESLEY, Circuit Judges, and EATON, Judge.^*

WESLEY, Circuit Judge:

This case arises from the dismissal of a petition to vacate an arbitral award pursuant to section 10 of the Federal Arbitration Act (the "FAA" or the "Act"), 9 U.S.C. § 10. It requires us to reconsider the continuing viability of our Court's precedent in Greenberg v. Bear, Stearns & Co. , 220 F.3d 22 (2d Cir. 2000), in which we held that a district court may exercise federal-question jurisdiction over a § 10petition only if the petition states a substantial federal question on its face—i.e. , a district court may not "look through" the petition to determine if the underlying dispute that was subject to arbitration involved substantial questions of federal law. Greenberg premised its conclusion on a now-overruled decision of this Court that rejected a look-through approach as applied to section 4 of the Act, 9 U.S.C. § 4. See Westmoreland Capital Corp. v. Findlay , 100 F.3d 263 (2d Cir. 1996), overruled by Vaden v. Discover Bank , 556 U.S. 49, 129 S.Ct. 1262, 173 L.Ed.2d 206 (2009).

We would not need to decide whether Greenberg remains good law if, as Appellant argues, federal-question jurisdiction exists on the face of the petition because of an arbitration panel's alleged manifest disregard of a self-regulatory organization's internal rule. But because the arbitration panel's conduct implicates no federal law and thus cannot form the basis of jurisdiction, Greenberg 's continued viability takes center stage. We conclude that Greenberg cannot survive Vaden 's later-established precedent; accordingly, we vacate the order and the judgment of the District Court.

BACKGROUND¹

In June 2013, Petitioner–Appellant Drew Doscher—the onetime co-head of sales and trading for The Seaport Group, LLC and Sea Port Group Securities, LLC (together, "Seaport")—commenced arbitration against his former employers; both are members of the Financial Industry Regulatory Authority ("FINRA").² Doscher also included the individual Respondents–Appellees—the two founders of Seaport and his former co-head of sales and trading—as well as the other three entity Respondents–Appellees. His initial statement of claim against his counterparties alleged breach of contract, retaliatory discharge, and unjust enrichment, but he later amended his statement to add a claim for securities fraud under section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b–5 of the Securities and Exchange Commission ("SEC"), 17 C.F.R. § 240.10b–5. Doscher sought more than $15 million in damages; ultimately, on October 22, 2013, the arbitral panel awarded him almost $2.3 million, with a potential additional commission.

On January 20, 2015, Doscher filed a § 10petition to vacate and modify in part the award in the United States District Court for the Southern District of New York (Furman, J. ). His petition identified two grounds for vacatur: (1) the arbitration panel failed to ensure that documentary evidence was fully and timely made available to Doscher, thereby warranting vacatur under § 10(a)(3), and (2)the arbitration panel acted in manifest disregard of FINRA Rule 13505 requiring parties to cooperate in discovery. Doscher asserted that the District Court possessed subject matter jurisdiction because, first, FINRA Rule 13505 was a rule of federal law and the petition thus stated a federal question on its face, and, second, that his section 10(b)claim in the underlying arbitration conferred federal-question jurisdiction. On August 5, 2015, the District Court issued a memorandum opinion and order rejecting both arguments. First, it held that violations of internal FINRA rules do not present questions of federal law, and second, it held that Doscher's reliance on his section 10(b)claim was "squarely foreclosed" by Greenberg , which the District Court concluded remained good law. Doscher , 2015 WL 4643159, at *2–4. Finding no subject matter jurisdiction, the District Court dismissed the petition in its entirety and entered judgment in Appellees' favor on August 7, 2015.

DISCUSSION

Both grounds for subject matter jurisdiction asserted by Doscher turn on questions of law, which we review de novo . See Hachamovitch v. DeBuono , 159 F.3d 687, 693 (2d Cir. 1998). Doscher's argument that a substantial federal question appears on the face of the petition receives our initial attention; if his contention were correct, we would have no need to address Greenberg 's continued vitality.

I.

As explained in Greenberg , federal-question jurisdiction lies on the face of the petition where "the petitioner complains principally and in good faith that the award was rendered in manifest disregard of federal law." Greenberg , 220 F.3d at 27; accord Perpetual Sec., Inc. v. Tang , 290 F.3d 132, 139 (2d Cir. 2002).³ Implicit in this holding is the requirement that the legal rule that the arbitration panel allegedly manifestly disregarded is in fact a rule of federal law.

Doscher argues that the internal rules of self-regulatory organizations ("SROs") such as FINRA are federal law, because those rules are subject to SEC approval, abrogation, or modification, see 15 U.S.C. § 78s(b)–(c), and because SROs are obligated both to abide by and to enforce their own internal rules, see id. § 78s(g). He specifically alleges that the arbitration panel failed to enforce FINRA Rule 13505, which provides, in full, that "[t]he parties must cooperate to the fullest extent practicable in the exchange of documents and information to expedite the arbitration."

In support of his argument, Doscher relies on a recent decision of our Court, NASDAQ OMX Group, Inc. v. UBS Securities, LLC , 770 F.3d 1010 (2d Cir. 2014). In NASDAQ , although the plaintiffs alleged four claims arising under state law, "a singular duty underl[ay] all four"—namely, "NASDAQ's duty to operate a fair and orderly market—a duty sourced in the Exchange Act, amplified by SEC regulations, and implemented through SEC-approved NASDAQ rules." Id. at 1021. Thus, we concluded, any inquiry into whether this duty was violated—an essential element of the four state-law claims—necessarily raised substantial and disputed questions of federal law. Id. at 1023(applying Gunn v. Minton , ––– U.S. ––––, 133 S.Ct. 1059, 1065, 185 L.Ed.2d 72 (2013)).

Doscher's case is built on a distinctly different and, unfortunately for him, unstable foundation. As discussed above, the Exchange Act requires FINRA to subject its internal rules to SEC approval, abrogation, or modification. See 15 U.S.C. § 78s(b)(1), (c).⁴ The Exchange Act also requires FINRA to comply with its own internal rules and to enforce compliance by its members and associated persons. Id. § 78s(g)(1)(B). While Doscher must allege that the arbitration panel manifestly disregarded a rule of federal law, federal law imposes obligations only on self-regulatory organizations—not on arbitration panels applying their rules. Moreover, the rule implicated here is one step further removed: it directs "[t]he parties [to] cooperate to the fullest extent practicable." FINRA Rule 13505 (emphasis added). Doscher's claim is, in essence, that the Exchange Act requires FINRA to require the arbitration panel to require the parties to cooperate, and the parties did not cooperate. The only federal obligation is the one imposed by the Exchange Act on FINRA, and none of FINRA's conduct is implicated by Doscher's petition. Doscher's asserted violation is simply too attenuated to constitute a colorable claim that any obligation or duty of federal law was manifestly disregarded. Thus, this case is wholly unlike NASDAQ , in which an obligation imposed by federal law on an SRO—to operate a fair and orderly market—was a necessary element of the state law actions.

Doscher's position is not without some support. He directs our attention to Sacks v. Dietrich , 663 F.3d 1065, 1069 (9th Cir. 2011), in which the Ninth Circuit ruled that federal-question jurisdiction extended to claims premised on violations of internal FINRA rules by arbitrators. Specifically, the plaintiff in Sacks filed a suit in state court, challenging the arbitrators' decision to disqualify him as a party's representative in a FINRA arbitration, because he had been barred from the securities industry twenty years prior. Id. at 1067; see also FINRA Rule 13208(c) (precluding persons "currently suspended or barred from the securities industry in any capacity" from representing a party in FINRA arbitration). The defendants removed the case to federal court. The Ninth Circuit concluded that the removal was proper "because the central question of this case [was] whether FINRA rules were violated" and thus "application of federal law [was] necessary to resolve each of the state law theories." Sacks , 663 F.3d at 1069.

In reaching this conclusion, the court relied heavily on a prior Ninth Circuit precedent, Sparta Surgical Corp. v. National Ass'n of Securities Dealers, Inc. , 159 F.3d 1209 (9th Cir. 1998). In Sparta , the plaintiffs had asserted state common-law claims that alleged, as a necessary component of the claims, conduct by the National Association of Securities Dealers ("NASD")⁵ that violated its internal rules. The Ninth Circuit concluded that "[b]ecause federal courts are vested by 15 U.S.C. § 78aawith the exclusive jurisdiction over actions brought 'to enforce any liability or duty'...