Lanza v. Fin. Indus. Regulatory Auth.

• Decision Date: 24 March 2020
• Docket Number: 18-2181,Nos. 18-2057,s. 18-2057
• Citation: 953 F.3d 159
• Parties: Giovanni LANZA and Mariantonia Lanza, Plaintiffs, Appellants, v. FINANCIAL INDUSTRY REGULATORY AUTHORITY (FINRA), Defendant, Appellee.
• Court: U.S. Court of Appeals — First Circuit

953 F.3d 159

Giovanni LANZA and Mariantonia Lanza, Plaintiffs, Appellants,

v.FINANCIAL INDUSTRY REGULATORY AUTHORITY (FINRA), Defendant, Appellee.

Nos. 18-2057

18-2181

United States Court of Appeals, First Circuit.

March 24, 2020

Robert D. Loventhal on brief for appellants.

Ian D. Roffman, Melanie L. Todman, Nutter, McClennen & Fish LLP, Boston, MA, and Terri L. Reicher, Office of General Counsel, on brief for appellee.

Before Lynch, Selya, and Barron, Circuit Judges.

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 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.

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 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., 443 Mass. 367, 822 N.E.2d 667, 683 (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 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, 129 S.Ct. 1937, 173 L.Ed.2d 868 (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.

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, 58 S.Ct. 817, 82 L.Ed. 1188 (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.

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.

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...