Opinion ID: 4027030
Heading Depth: 2
Heading Rank: 2

Heading: Application of the Well-Pleaded Complaint

Text: Rule Having concluded that we apply the well-pleaded complaint rule to § 10 motions, without look-through, we 23 next address the two arguments that the Goldmans make for why they have nonetheless established federal question jurisdiction.
First, the Goldmans argue that their motion to vacate raises a substantial federal question on its face because it asserts that the arbitration panel showed a manifest disregard for federal law. “Manifest disregard” is a judicially-created doctrine by which “[a] district court may ... vacate an arbitrator’s decision [that] evidences a manifest disregard for the law rather than an erroneous interpretation of the law.” Dluhos v. Strasberg, 321 F.3d 365, 370 (3d Cir. 2003) (internal quotation and editorial marks omitted). The Goldmans say that the FINRA panel “manifestly disregarded” the statutory language of 15 U.S.C. § 78g,11 as well as its implementing regulation 12 C.F.R. § 220.12,12 when it 11 As relevant here, 15 U.S.C. § 78g establishes margin requirements “[f]or the purpose of preventing the excessive use of credit for the purchase or carrying of securities” by mandating that “the Board of Governors of the Federal Reserve System shall ... prescribe rules and regulations with respect to the amount of credit that may be initially extended and subsequently maintained on any security ... .” Id. § 78g(a). 12 In the portion of 12 C.F.R. § 220.12 relied upon by the Goldmans, the regulation provides: The required margin for each security position held in a margin account shall be as follows: 24 concluded that no margin call had occurred. (App. 298.) Without further explanation, they assert that “[t]he plain language” of the regulation demonstrates that a margin call must have occurred, contrary to the FINRA panel’s conclusion. The regulation that the Goldmans invoke sets “initial margin requirements for certain equity securities at ‘50 percent of the current market value of the security or the percentage set by the regulatory authority where the trade occurs, whichever is greater.’” WC Capital Mgmt., LLC v. UBS Sec., LLC, 711 F.3d 322, 328 (2d Cir. 2013) (quoting 12 C.F.R. § 220.12(a)). “If the value of the securities and other acceptable property held in a margin account falls below the required margin level, a broker may issue a ‘margin call’ notifying the account owner that it will need to either post additional collateral or sell some of its securities in the account to satisfy the collateral requirements.” Id. Presumably, the Goldmans are suggesting that their margin account fell below the level required by the regulation, so that a margin call must have been made.
exempted security, money market mutual fund or exempted securities mutual fund, warrant on a securities index or foreign currency or a long position in an option: 50 percent of the current market value of the security or the percentage set by the regulatory authority where the trade occurs, whichever is greater. Id. § 220.12(a). 25 Without taking a position on the merits of that argument, we agree with the District Court that the Goldmans’ invocation of 15 U.S.C. § 78g and 12 C.F.R. § 220.12 is insufficient to raise a substantial question of federal law in their motion to vacate. Even if “manifest disregard” is a valid basis for vacatur,13 it can only support 13 The continued validity of manifest disregard as a basis for vacating arbitration awards has been thrown into doubt by the Supreme Court’s holding in Hall Street Associates, L.L.C. v. Mattel, Inc. that “§§ 10 and 11 respectively provide the FAA’s exclusive grounds for expedited vacatur and modification.” 552 U.S. 576, 584 (2008). Subsequently, the Court expressly declined to “decide whether ‘manifest disregard’ survives ... Hall Street ... as an independent ground for review or as a judicial gloss on the enumerated grounds for vacatur set forth at 9 U.S.C. § 10.” Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 672 n.3 (2010). The Courts of Appeals have divided on the answer to that question. Compare Comedy Club, Inc. v. Improv W. Assocs., 553 F.3d 1277, 1290 (9th Cir. 2009) (holding that manifest disregard survives as “shorthand for ... 9 U.S.C. § 10(a)(4), which states that the court may vacate ‘where the arbitrators exceeded their powers’”), with Affymax, Inc. v. Ortho-McNeil-Janssen Pharm., Inc., 660 F.3d 281, 285 (7th Cir. 2011) (holding that after Hall Street, “‘manifest disregard of the law’ is not a ground on which a court may reject an arbitrator’s award under the Federal Arbitration Act”). Because we conclude that the Goldmans’ manifest disregard claim does not raise a substantial question of federal law, we need not inquire into 26 federal question jurisdiction “where ... the petitioner complains principally and in good faith that the award was rendered in manifest disregard of federal law ... .” Greenberg v. Bear, Stearns & Co., 220 F.3d 22, 27 (2d Cir. 2000) (emphasis added). The Goldmans do not meet that standard because the legal issues they raise are, at most, merely supportive of their principal complaint that partiality, corruption, and ineptitude infected the arbitration process. More broadly, the Goldmans fail to establish any of the four parts of the Grable test with their manifest disregard claim. The claim does not “necessarily raise a ... federal issue,” nor is the federal issue in question “substantial,” Grable, 545 U.S. at 314, because the margin regulations are invoked simply as evidence for the factual claim that a margin call occurred. That alone does not create a basis for federal subject-matter jurisdiction, because determining whether the arbitrator “fail[ed] to consider pertinent and material evidence” “plainly [does] not require resolution of a uniquely federal issue.” Greenberg, 220 F.3d at 27 (internal quotation marks omitted). In reality, no question of federal law is “actually disputed” here. Grable, 545 U.S. at 314. We agree with the District Court that the fundamental dispute is not legal at all, but is factual: “no party contests the existence, applicability, or construction of these statutes and regulations. Instead, the Goldmans argue that the panel erred in its factual determination that no margin call occurred.” (App. 13.) Finally, we are concerned that sweeping this kind of run-of-the-mill arbitration dispute into federal court would upset the “prominent role” that state the continuing validity of manifest disregard as a basis for vacatur. 27 courts “play as enforcers of agreements to arbitrate” under the FAA. Vaden, 556 U.S. at 59. Expanding federal question jurisdiction to contractual disputes like this one runs the risk of “disturbing [the] congressionally approved balance of federal and state judicial responsibilities.” Grable, 545 U.S. at 314.
The Goldmans’ second argument for why they satisfy the well-pleaded complaint rule is that FINRA is a selfregulatory organization authorized by the ’34 Act, and thus the alleged violations of FINRA rules raise questions of federal law. The ’34 Act, they say, provides for pervasive federal oversight of self-regulatory organizations’ internal rules, see 15 U.S.C. § 78s(b)(2)(C), and, consequently, allegations of procedural irregularities in the FINRA proceedings implicate substantial questions of federal law. As support, the Goldmans rely principally on the decision of the United States Court of Appeals for the Second Circuit in NASDAQ OMX Group, Inc. v. UBS Securities, LLC, 770 F.3d 1010 (2d Cir. 2014). In that case, a divided panel of the Second Circuit held that there was federal question jurisdiction to review an arbitration, reasoning that the SEC’s pervasive regulation of NASDAQ as a selfregulatory organization resulted in NASDAQ rules being intertwined with federal law. The NASDAQ case arose from serious problems in Facebook’s initial public offering, which led UBS to initiate arbitration on state law contract and tort claims based on NASDAQ’s alleged failure to follow its own rules. Id. at 1013-15. When NASDAQ sought declaratory judgment in federal court to preclude arbitration, one main 28 issue was whether the case implicated federal question jurisdiction. The Second Circuit concluded that it did, even though the allegations arose from NASDAQ rules and New York common law. The Second Circuit pointed out that NASDAQ was a registered national exchange under 15 U.S.C. § 78f, and thus was required to have “rules ... designed to prevent fraudulent and manipulative acts and practices [and] to promote just and equitable principles of trade ... .” 15 U.S.C. § 78f(b)(5). Because NASDAQ’s rules were pervasively regulated under the ’34 Act, and because they were meant to implement ’34 Act obligations, the court ruled that those federal law obligations were necessarily involved in the arbitration that UBS initiated. NASDAQ, 770 F.3d at 1021-23. As to the substantiality component of the test for federal question jurisdiction, the Second Circuit determined that the disputed federal issue in [the] case – whether NASDAQ violated its Exchange Act obligation to provide a fair and orderly market in conducting an IPO – is sufficiently significant to the development of a uniform body of federal securities regulation to satisfy the requirement of importance to the federal system as a whole. Id. at 1024 (internal quotation marks omitted). Finally, the court ruled that asserting jurisdiction would not upset the federal-state balance because of “Congress’s expressed preference for alleged violations of the Exchange Act, and of rules and regulations promulgated thereunder, to be litigated in a federal forum.” Id. at 1030. 29 None of that, though, changes the outcome here. We agree with the District Court that, even if the NASDAQ opinion’s theory of federal question jurisdiction is correct,14 its facts are easily distinguishable from the Goldmans’ case because it “involved far more substantial questions of federal law.” (App. 15.) Of high importance to the Second Circuit’s substantiality analysis was that NASDAQ was an exchange, implicating the “central role stock exchanges play in the national system of securities markets.” NASDAQ, 770 F.3d at 1024. The proper functioning of a national securities exchange, especially when it comes to its core function of properly issuing stock, is clearly a much more significant 14 Because the Goldmans’ claims are not nearly as substantial for jurisdictional purposes as those in the NASDAQ case, we need not reach the question of whether we would adopt the Second Circuit’s analysis of federal question jurisdiction from the NASDAQ opinion. We do note, however, that the dissenting opinion in NASDAQ makes a compelling argument that “NASDAQ is a shareholder-owned, publicly-traded, for-profit company,” “its rules are not federal regulations or federal law,” and “the rules of a stock exchange are contractual in nature and within the province of state law.” 770 F.3d at 1036 (Straub, J., dissenting). As with the Goldmans’ case, “[t]he only arguably federal issue present” in the NASDAQ case was “a broad duty found in the Exchange Act” that was “not actually disputed.” Id. The strong dissenting argument in NASDAQ suggests that the case was at the borderline of raising a sufficiently substantial issue of federal law to justify federal question jurisdiction. The Goldmans’ claims much less directly implicate federal securities regulation, so that if NASDAQ is close to the border of satisfying the Grable test, the Goldmans are far from it. 30 issue of federal securities law than the arbitration procedures of a non-exchange self-regulatory organization. “The substantiality inquiry ... looks ... to the importance of the issue to the federal system as a whole.” Gunn, 133 S. Ct. at 1066. It “primarily focuse[s] not on the interests of the litigants themselves, but rather on the broader significance ... for the Federal Government.” Id. The Goldmans raise a routine claim for vacatur alleging arbitrator and counterparty misconduct, which is, at bottom, a commonplace state law contract dispute. Unlike the NASDAQ case, which implicated the proper functioning of a major national securities exchange, nothing about the Goldmans’ case is likely to affect the securities markets more broadly. That the allegedly misbehaving arbitration panel happened to be affiliated with a self-regulatory organization does not meaningfully distinguish this case from any other suit alleging arbitrator partiality in a securities dispute. Accordingly, we decline to recognize federal question jurisdiction over the flood of cases that would enter federal courts if the involvement of a self-regulatory organization were itself sufficient to support jurisdiction. See Grable, 545 U.S. at 318 (expressing concern with finding a substantial federal question in a state law claim when that “would have meant a tremendous number of cases” could enter federal court).