Opinion ID: 369670
Heading Depth: 2
Heading Rank: 2

Heading: The Exceptions

Text: 20 Even when the exhaustion doctrine would normally apply, extraordinary circumstances, nevertheless, may compel a court to hear a case. See, e. g., McKart v. United States, 395 U.S. 185, 192-201, 89 S.Ct. 1657, 23 L.Ed.2d 194 (1969). (W)here 'an immediate appeal is necessary to give realistic protection to the claimed right,' . . . a court may properly carve an exception to the doctrine. Only rarely, however, will 'preliminary (or) procedural . . . agency action' threaten so irreparable an injury as to justify interlocutory resort to corrective judicial process . . . . Bristol-Myers Co. v. FTC, 469 F.2d 1116, 1118 (2d Cir. 1972). In this Circuit, we have recognized two situations in which the exhaustion requirement will not be adhered to: 1) when the administrative procedure is clearly shown to be inadequate to prevent irreparable injury; or 2) when there is a clear and unambiguous statutory or constitutional violation. Barnes v. Chatterton, 515 F.2d 916, 920 (3d Cir. 1975); American Federation of Government Employees, Local 1904 v. Resor, 442 F.2d 993, 994-95 (3d Cir. 1971).
21 First Jersey alleges that irreparable harm will result from requiring exhaustion of administrative remedies because an adverse ruling by the NASD would in all probability be terminal to First Jersey. Furthermore, such a ruling would likely cause panic selling in securities in which First Jersey makes a market, thereby causing great harm to an unsuspecting public. The sole evidence presented by First Jersey in support of these allegations is the affidavit of Robert Brennan, president of the company. 22 In our view, these allegations are insufficient to bring this case within the narrow exception. First, NASD proceedings are kept confidential which should prevent damaging publicity to First Jersey or the specific securities involved. Second, if the NASD decides to impose sanctions, they would be subject to the statutorily prescribed review procedure, including review by the court of appeals. Finally, and most importantly, if this exception were to be applied in this case, it would likewise apply in every case where the NASD contemplated disciplinary proceedings. Any company threatened by an NASD hearing could run into district court claiming that the imposition of sanctions would result in irreparable injury. To allow such interruption would frustrate the self-regulatory scheme envisioned by Congress in passing the Maloney Act. Although we recognize the potential for harm that exists, we believe that the integrity of the administrative process requires us to reject this justification for intrusion. 4
23 Under the second exception, a mere allegation of a constitutional deprivation is insufficient to entitle the plaintiff to relief. See Aircraft & Diesel Equipment Corp. v. Hirsch, 331 U.S. 752, 771-72, 67 S.Ct. 1493, 91 L.Ed. 1796 (1947); Montana Chapter of Association of Civilian Technicians, Inc. v. Young, 514 F.2d 1165, 1167 (9th Cir. 1975); Wallace v. Lynn, 165 U.S.App.D.C. 363, 507 F.2d 1186 (D.C.Cir. 1974). The plaintiff must present a clear and unambiguous constitutional violation by the agency. See Barnes v. Chatterton, supra, 515 F.2d at 920. First Jersey makes several allegations of unconstitutionality, none of which are sufficient to excuse the failure to exhaust administrative remedies. 24
25 First Jersey claims that the Maloney Act is an unconstitutional delegation of legislative power to a private institution. In Todd & Co. v. SEC, 557 F.2d 1008 (3d Cir. 1977), we found no merit to this argument, because the SEC 26 (1) has the power, according to reasonably fixed statutory standards, to approve or disapprove the Association's rules; (2) must make De novo findings aided by additional evidence if necessary, and (3) must make an independent decision on the violation and penalty . . . . 27 Id. at 1012; See R. H. Johnson & Co. v. SEC, 198 F.2d 690 (2d Cir.), Cert. denied, 344 U.S. 855, 73 S.Ct. 94, 97 L.Ed. 664 (1952). 28 First Jersey points out, however, that the statute was amended in 1975 and the Todd court specifically refused to rule on the constitutionality of the amendment. See 557 F.2d at 1012 n.6. Prior to 1975, the review provision of the statute called for the SEC to render its decision upon consideration of the record before the association and such other evidence as it may deem relevant . . . . 15 U.S.C. § 78O -3(h)(1) (1970). The statute now provides that the SEC hearing may consist solely of consideration of the record before the self-regulatory organization and opportunity for the presentation of supporting reasons to affirm, modify, or set aside the sanction . . . . 15 U.S.C. § 78s(e)(1) (1976). We need not now decide whether this statutory change effects a significant alteration in the SEC's power to review NASD disciplinary proceedings. It suffices to say that to the extent the amendment restricts the SEC's ability to receive additional evidence not presented below, this does not alter our conclusion in Todd that there is no unconstitutional delegation of legislative authority. 29
30 The major thrust of First Jersey's contentions of unconstitutionality deal with the alleged bias of NASD and its inability to conduct a fair hearing before an impartial tribunal. This attack is carried at two levels: 1) because the Business Conduct Committee is composed of members of the industry, any panel of judges, as competitors of First Jersey, will have a personal pecuniary interest in seeing sanctions imposed against First Jersey; and 2) specific allegations portray Bergen's and the NASD staff's long-standing bias against Brennan and First Jersey. 31 (1.) Structural Bias 32 The first, which amounts to an allegation of structural bias and was expounded for the first time in a supplemental brief requested by the Court at oral argument, relies primarily on the Supreme Court decision in Gibson v. Berryhill, 411 U.S. 564, 93 S.Ct. 1689, 36 L.Ed.2d 488 (1973). In Gibson, the Alabama Board of Optometry intended to revoke the licenses which were required to practice of all optometrists employed by corporations, a group comprising about one-half of all the optometrists in the state. Members of the Board were drawn exclusively from the Alabama Optometric Association, whose membership was limited to independent practitioners. The district court found that the Board members, along with other private practitioners of optometry, would fall heir to the corporate practices if the licenses were revoked. The Supreme Court affirmed the district court's conclusion that this amounted to a deprivation of due process, holding that those with substantial pecuniary interest in legal proceedings should not adjudicate these disputes. Id. at 579, 93 S.Ct. at 1698. See also Carter v. Carter Coal Co., 298 U.S. 238, 56 S.Ct. 855, 80 L.Ed. 1160 (1936); Wall v. American Optometric Association, 379 F.Supp. 175 (N.D.Ga.), Aff'd, 419 U.S. 888, 95 S.Ct. 166, 42 L.Ed.2d 134 (1974). 33 Reliance on Gibson cannot provide First Jersey with a clear and unambiguous constitutional violation in this case. We believe that the NASD system of self-regulation is sufficiently dissimilar in crucial respects from the Alabama Board of Optometry's method of regulation to render the former constitutionally sound. NASD is a voluntary association, not a state agency. Unlike the Alabama Board of Optometry, NASD approval is not required to practice the trade. Neither NASD nor the industry it regulates is divided into factions or identifiable groups in a manner comparable to the independent practitioners versus the optometrists employed by corporations in Gibson. Neither First Jersey nor firms like it are excluded from membership in the association and, unlike the optometrists in Alabama, they were not denied participation in the governance of their own profession. In Wall v. American Optometric Association, 379 F.Supp. 175, 189 (N.D.Ga.), Aff'd, 419 U.S. 888, 95 S.Ct. 166, 42 L.Ed.2d 134 (1974), the court pointed out that (e)very member of the tribunal is a member of a group which opposes the continuation of the plaintiffs' businesses. That division is not present here. 34 Furthermore, the NASD hearing has been transferred to District 8, meaning that members of the panel will be drawn from the Chicago area. First Jersey does not have any offices in that area, but if it believed that one or more members of the panel were direct competitors with a personal interest in the outcome, it could file a motion to have those members disqualified through the administrative process. In addition, the basis for the disciplinary proceeding is not a status violation, similar to Gibson or Wall, which could lead to the demise of a substantial block of the industry; it stems instead from specific allegations of misconduct applicable only to First Jersey. 35 Finally, to uphold First Jersey's contention would destroy the valuable congressional scheme for self-regulation in the securities area and the destruction could very well extend to other areas employing intramural controls. The Maloney Act expresses Congress's thoughtful view that self-regulation is the best first-line defense against unethical or illegal securities practices. It allows the industry to set its own standards of proper conduct and permits their members to discipline themselves applying their own expertise and experience. 36 Although Congress preferred self-regulation by a private body over direct involvement of a governmental agency, it established safeguards to prevent abuse of the system. The Maloney Act requires specific procedural protections, some of which are drafted by the association. For example, the NASD Code of Procedure, unlike the proceedings before the Alabama Optometric Board in Gibson, requires the disqualification of any panel member who may have a personal interest in the outcome of the case. Further insurance against abuse is provided by the supervisory role of the SEC. The SEC is required to approve all the NASD rules and regulations, including those concerning discipline of NASD members. This oversight function also encompasses review of specific cases imposing sanctions. We believe that the intrinsic benefits of a system of self-regulation, insulated with extensive procedural and substantive protections and subject to judicial review, renders insignificant objections of bias to the system which inherently involves disciplining by potential competitors. We therefore reject First Jersey's contention that the NASD scheme for self-regulation is unconstitutional. 37 (2.) Specific Bias 38 The second prong of First Jersey's assault for bias against NASD deals with specific allegations of animosity on the part of Bergen and the NASD against First Jersey. The evidence of bias recited in First Jersey's complaint includes among other things the allegations that Bergen has said that he is out to get Brennan, that he has called Brennan slippery, that he has personally devote(d) his full concentration and energies to First Jersey and Brennan, that NASD agents have referred to Brennan as a crook and have threatened uncooperative witnesses with reprisals. Regardless of the merit of First Jersey's claim, we hold that absent a showing of irreparable harm, allegations of personal bias are insufficient to excuse a plaintiff from the requirements of the exhaustion doctrine. 5 39 In Touche Ross & Co. v. SEC, supra, the Second Circuit refused to allow an allegation of agency bias to excuse the failure to exhaust administrative remedies. 40 If the claim of bias were the only basis for appellants' demand for injunctive relief, it would be unnecessary for us to go further than to hold, with respect to that claim, that exhaustion of administrative remedies is required. As the Court of Appeals for the District of Columbia Circuit has held, allegations of agency bias or prejudgment based on ex parte communications are insufficient for injunctive relief and cannot be reviewed until the agency has made an adverse determination and an appeal has been taken raising these claims on the record as a whole. R. A. Holman & Co., v. SEC (112 U.S.App.D.C. 43, 45), 299 F.2d 127, 129 (D.C.Cir.), Cert. denied, 370 U.S. 911 (82 S.Ct. 1257, 8 L.Ed.2d 404) (1962); National Lawyers Guild v. Brownell (96 U.S.App.D.C. 252, 255), 225 F.2d 552, 555 (D.C.Cir. 1955), Cert. denied, 351 U.S. 927 (76 S.Ct. 778, 100 L.Ed. 1457) (1956). We agree. Until the Commission has acted and actual bias has been demonstrated, the orderly administrative procedures of the agency should not be interrupted by judicial intervention. 41 Id. at 2568-69 (slip opinion); see supra at 694-695. 42 The principles underlying the exhaustion doctrine are particularly apt when applied to a claim of bias. 6 See United States v. Litton Industries, Inc., 462 F.2d 14, 17-18 (9th Cir. 1972). First, an allegation of bias is usually controverted; resolution of the dispute requires extensive discovery and evidentiary hearings before the district court. This results in substantial interference with the administrative process, which often, as in this case, cannot continue during the pendency of the suit. See SEC v. R. A. Holman & Co., supra, 116 U.S.App.D.C. at 282, 323 F.2d at 287. See also Maremont Corp. v. FTC, 431 F.2d 124, 128 (7th Cir. 1970). Furthermore, where the facts are in dispute, it is difficult for the plaintiff to assert a clear and unambiguous constitutional violation. See Sterling Drug, Inc. v. FTC, 146 U.S.App.D.C. 237, 239-40, 450 F.2d 698, 710-11 (D.C.Cir. 1971). 43 Second, a claim of bias tendered during the course of an investigatory proceeding is unlikely to allege a constitutional violation that has already occurred. First Jersey claims that its due process rights have been infringed, but fails to point to any specific deprivation of liberty or property that has occurred at this time. Such a deprivation as a result of the alleged bias and investigative irregularities would only occur if and when sanctions are imposed by the NASD and upheld through all levels of review. See National Lawyers Guild v. Brownell, 96 U.S.App.D.C. 252, 255, 225 F.2d 552, 555 (D.C.Cir. 1955), Cert. denied, 351 U.S. 927, 76 S.Ct. 778, 100 L.Ed. 1457 (1956). 44 Finally, if exhaustion is required, the agency will often have the opportunity to correct or prevent an error as a result of bias. Most agencies provide for disqualification of members who may be biased. Other remedies may also be available. Here, for example, the transfer of the hearing to District 8 would appear to negate the effectiveness of Bergen's alleged ability to influence the result against First Jersey. 7 45 We conclude therefore that First Jersey's failure to exhaust its administrative remedies rendered the district court without jurisdiction to entertain the suit. The proper response by the district court would have been to grant NASD's motion for dismissal. If and when sanctions are imposed on First Jersey, the company would have full and ample opportunity to present its due process and statutory claims to the court of appeals.