Lanier v. Bats Exch., Inc.
| Decision Date | 23 September 2016 |
| Docket Number | Docket No. 15-1683, Docket No. 15-1700,Docket No. 15-1693,August Term, 2015 |
| Citation | 838 F.3d 139 |
| Parties | Harold R. Lanier, on behalf of himself individually and on behalf of others similarly situated, Plaintiff–Appellant, v. Bats Exchange, Inc., Bats Y–Exchange Inc., Chicago Board Options Exchange Inc., Chicago Stock Exchange Inc., EDGA Exchange Inc., EDGX Exchange Inc., International Securities Exchange, LLC, NASDAQ OMX BX Inc., NASDAQ OMX PHLX LLC, The Nasdaq Stock Market, LLC, National Stock Exchange, Inc., New York Stock Exchange LLC, NYSE ARCA Inc., NYSE MKT LLC, Defendants–Appellees. Harold R. Lanier, on behalf of himself individually and on behalf of others similarly situated, Plaintiff–Appellant, v. Bats Exchange, Inc., Bats Y–Exchange Inc., Chicago Board Options Exchange Inc., Chicago Stock Exchange Inc., EDGA Exchange Inc., EDGX Exchange Inc., International Securities Exchange, LLC, NASDAQ OMX BX Inc., NASDAQ OMX Group, Inc., NASDAQ OMX PHLX LLC, The Nasdaq Stock Market, LLC, National Stock Exchange, Inc., New York Stock Exchange LLC, Nyse Arca Inc., Nyse Mkt LLC, Defendants–Appellees. Harold R. Lanier, on behalf of himself individually and on behalf of others similarly situated, Plaintiff–Appellant, v. Bats Exchange, Inc., Box Options Exchange LLC, C2 Options Exchange, Incorporated, Chicago Board Options Exchange Inc., International Securities Exchange, LLC, ISE Gemini, LLC, Miami International Securities Exchange, LLC, NASDAQ OMX BX Inc., NASDAQ OMX PHLX LLC, The Nasdaq Stock Market, LLC, NYSE ARCA Inc., NYSE MKT LLC, Defendants–Appellees. |
| Court | U.S. Court of Appeals — Second Circuit |
Michael T. Lewis, Sr. (Pauline Shuler Lewis, on the brief), Lewis and Lewis, Oxford, Mississippi, for Plaintiff–Appellant.
Douglas R. Cox (Scott P. Martin, Michael R. Huston, Alex Gesch, on the brief), Gibson, Dunn & Crutcher LLP, Washington, D.C., for Defendants–Appellees NASDAQ OMX BX Inc., NASDAQ OMX Group, Inc., NASDAQ OMX PHLX LLC, and The Nasdaq Stock Market, LLC.
Douglas W. Henkin, Baker Botts LLP, New York, New York, for Defendants–Appellees New York Stock Exchange LLC, NYSE ARCA Inc., and NYSE MKT LLC.
Paul E. Greenwalt, III, Schiff Hardin LLP, Chicago, Illinois for Defendants–Appellees C2 Options Exchange, Incorporated and Chicago Board Options Exchange, Inc.
Seth L. Levine and Christos G. Papapetrou, Levine Lee LLP, New York, New York, for Defendant–Appellee Chicago Stock Exchange Inc.
Charles E. Dorkey, III, Dentons US LLP, New York, New York, for Defendant–Appellee National Stock Exchange, Inc.
James A. Murphy and Theodore R. Snyder, Murphy & McGonigle, P.C., New York, New York, Joseph Lombard, Murphy & McGonigle, P.C., Washington, D.C., for Defendants–Appellees BATS Exchange, Inc., BATS Y–Exchange, Inc., EDGA Exchange Inc., EDGX Exchange Inc., ISE Gemini, LLC, and International Securities Exchange, LLC.
Michael D. Blanchard and Christopher Wasil, Morgan, Lewis & Bockius LLP, Hartford, Connecticut, for Defendant–Appellee Box Options Exchange LLC.
David John Ball, Michael Craig Hefter, and Mark N. Mutterperl, Bracewell & Guiliani LLP, New York, New York, for Defendant–Appellee Miami International Securities Exchange, LLC.
Before: Cabranes, Livingston, and Lynch, Circuit Judges.
Gerard E. Lynch
, Circuit Judge:
Plaintiff–Appellant Harold Lanier subscribes to data feeds through which the Defendants–Appellees Securities Exchanges (“the Exchanges”) provide information about securities traded on the Exchanges to an exclusive securities information processor (“Processor”) pursuant to a plan approved by the Securities and Exchange Commission (“SEC”). The Processor consolidates the data and makes it available to subscribers (“Subscribers”). See 15 U.S.C. § 78c(a)(22)(B)
(); id. § 78k–1(b) (). Lanier filed three materially identical lawsuits in the United States District Court for the Southern District of New York on behalf of himself and others similarly situated (collectively “the Complaints”), alleging that the Exchanges had breached their contracts with him by providing preferentially fast access to the so-called “Preferred Customers,” who purchase data and receive it from an Exchange directly via its proprietary feed.
The Exchanges moved to dismiss and the district court (Katherine B. Forrest, J. ) granted the motion, dismissing all of the Complaints in one opinion. The district court held that it lacked subject matter jurisdiction and that, in any event, Lanier's factual allegations were insufficient to state a claim. See Lanier v. BATS Exch., Inc. , 105 F.Supp.3d 353 (S.D.N.Y. 2015)
. Lanier appealed in each case, and we resolve all three appeals together in this opinion.1
We affirm the district court's decision to grant the Exchanges' motion to dismiss but for somewhat different reasons than those expressed by the district court. We conclude that the court erred in holding that it lacked subject matter jurisdiction to consider Lanier's breach of contract claims, but affirm the dismissal of the Complaints for failure to state a claim. Lanier has not plausibly alleged that the Exchanges violated any contractual obligation by simultaneously sending data to both the Processor and the Preferred Customers that is received earlier by the Preferred Customers. To the extent that Lanier alleges that such a contractual obligation arises from the incorporation of SEC regulations into the contracts, his claims are preempted because Lanier's interpretation conflicts with the SEC's interpretation and stands as an obstacle to the accomplishment of congressional purposes. To the extent that Lanier alleges that the Exchanges undertook self-imposed contractual obligations, distinct from their regulatory obligations, to ensure that market data is not received by any customer before it is received by the Processor, that claim fails because it has no basis in the text of the contracts. To the extent that Lanier argues that the SEC has interpreted the Exchanges' obligations under the Exchange Act or SEC regulations incorrectly, any such argument must first be administratively exhausted before the SEC before it can be considered by this Court.
National securities exchanges, like the defendants in this case, must register with the SEC, and, if approved by that agency, they become self-regulatory organizations (“SROs”). See 15 U.S.C. §§ 78f(a)
, 78c(a)(26). SROs exercise considerable authority, subject to SEC approval, oversight, and possible revocation of SRO status. See, e.g. , id. §§ 78f(b)(5), 78k–1(a)(3)(B) ; see also
DL Capital Grp., LLC v. Nasdaq Stock Mkt., Inc. , 409 F.3d 93, 95 (2d Cir. 2005). The SEC may not register a national securities exchange unless it finds that the “rules of the exchange are designed ... to protect investors and the public interest; and are not designed to permit unfair discrimination between customers, issuers, brokers, or dealers....” 15 U.S.C. § 78f(b)(5).
One duty of the Exchanges is to distribute market data about the trades of securities made on their platforms. In 1975, Congress amended the Exchange Act to regulate market information by requiring the creation of a national market system “linking [ ] all markets for qualified securities through communication and data processing facilities.” 15 U.S.C. § 78k–1(a)(1)(D)
. Thus, “market information, at least since 1975, has been subject to comprehensive regulation under the Exchange Act.” Regulation of Market Information Fees and Revenues, 64 Fed. Reg. 70613–01, 70615 (Dec. 17, 1999) ; see also Securities Act Amendments of 1975, H.R. Conf. Rep. No. 94–229, reprinted in 1975 U.S.C.C.A.N. 321.
To accomplish that objective, Congress authorized the SEC “by rule or order, to authorize or require [SROs] to act jointly with respect to matters as to which they share authority under this chapter in planning, developing, operating, or regulating a national market system.” 15 U.S.C. § 78k–1(a)(3)(B)
. The SEC is authorized to impose rules “as necessary or appropriate in the public interest, for the protection of investors,” or otherwise in furtherance of the statute's purpose, id. § 78k–1(c)(1), to ensure that investors “may obtain on terms which are not unreasonably discriminatory ... information with respect to” securities transactions “as is published or distributed by any [SRO],” id. § 78k–1(c)(1)(D). SROs are required to comply with the SEC's rules and regulations regarding distribution of “information with respect to quotations for or transactions in any security other than an exempted security.” Id. § 78k–1(c)(1).
The SEC adopted Regulation NMS in 2005 “to modernize and strengthen the national market system (‘NMS') for equity securities.” Regulation NMS, 70 Fed. Reg. 37496, 37496 (June 29, 2005)
(). Regulation NMS amended and updated regulations that had governed distribution of market data through joint plans since 1975. See
Every exchange that trades NMS securities must file a transaction reporting plan (“NMS Plan”) with the SEC for its approval. See 17 C.F.R. § 242.601
. The proposed NMS Plan must include “[t]he terms and conditions under which brokers, dealers, and/or self-regulatory organizations will be granted or denied access” and the fees the Exchanges will charge, among many other requirements. Id. §§ 242.608(a)(5)(i), (ii). With respect to the dissemination of data, Regulation NMS provides:
Every national securities exchange on which an NMS stock is traded and national securities association shall act jointly pursuant to one or more effective national market system plans to disseminate consolidated information, including a national best bid and national best offer, on quotations for and transactions in NMS stocks. Such plan or plans shall provide for the dissemination of all consolidated information for an individual NMS stock through a single plan processor.
Id. §...
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