Court Opinion

ID: 814597
Source: CourtListenerOpinion
Date Created: 2013-01-02 15:19:56+00
Date Added: 2024-06-11T18:00:52.471136
License: Public Domain

In the

 United States Court of Appeals
                   For the Seventh Circuit

No. 12-2250

N EIL J. A SLIN,
                                                   Plaintiff-Appellant,
                                   v.

F INANCIAL INDUSTRY R EGULATORY
A UTHORITY, INCORPORATED ,
                                                  Defendant-Appellee.

              Appeal from the United States District Court
         for the Northern District of Illinois, Eastern Division.
            No. 1:11-cv-04123—Ronald A. Guzman, Judge.

    A RGUED N OVEMBER 2, 2012—D ECIDED JANUARY 2, 2013

  Before M ANION, W ILLIAMS, and H AMILTON, Circuit Judges.
   H AMILTON, Circuit Judge. On May 4, 2011, BEST Direct
fired Neil Aslin from his job as a securities broker in
order to remain compliant with a Financial Industry
Regulatory Authority (FINRA) rule known as the
“Taping Rule.” The rule requires a securities firm to adopt
significant monitoring measures when too many of its
brokers have recently worked for “Disciplined Firms.”
2                                                No. 12-2250

Instead of adopting those monitoring measures, the
employer also has the choice of terminating the employ-
ment of enough such brokers, and that is what BEST
Direct did. Aslin then filed this suit alleging that
FINRA violated his Fifth Amendment right to due
process by including him on the list of brokers from
Disciplined Firms without providing him the oppor-
tunity to challenge the designation. He sought declara-
tory and injunctive relief to stop FINRA from including
him on the list.
  The district court dismissed the case, concluding
that Aslin failed to state a claim because he was not
deprived of a property or liberty interest protected by
the Due Process Clause of the Fifth Amendment.1 We
agree with the district court’s dismissal of Aslin’s com-
plaint but on different grounds. Since Aslin sought only
injunctive and declaratory relief to prevent applica-
tion of the rule to him, the controversy ended in
March 2012, after which Aslin was no longer included
on the list of brokers from Disciplined Firms. Because
of this, the case was moot when the district court
issued its decision in April 2012. Accordingly, we
vacate the district court’s opinion and modify the
dismissal to one for lack of subject matter jurisdiction.

1
  The district court assumed arguendo — and with a fair bit of
skepticism — that FINRA’s action constituted government
action. We do not reach the issue.
No. 12-2250                                              3

I. Factual and Regulatory Background
 A. FINRA
  FINRA is a private, non-profit corporation that is regis-
tered with the Securities and Exchange Commission (SEC)
as a “national securities association.” Such private reg-
ulation was made possible by the Maloney Act,
which provided for the establishment of self-regulatory
organizations to oversee the securities markets. 15 U.S.C.
§§ 78o et seq. In this capacity FINRA creates and enforces
rules that govern the industry alongside the SEC and is
subject to significant SEC oversight. The SEC must
approve all of FINRA’s rules, 15 U.S.C. § 78s(b)(1), and
the SEC may abrogate, add to, and delete from all
FINRA rules as it deems necessary. 15 U.S.C. § 78s(c).
  Firms that deal in securities must comply with FINRA
rules because federal law requires them to do so. Federal
securities law requires most securities firms to register
with a national securities association and to follow the
association’s rules. 15 U.S.C. § 78o(b)(11). FINRA is cur-
rently the only national securities association, so all
such brokerage firms must register with FINRA. In addi-
tion to firms, FINRA regulates individual securities
brokers by requiring them to register and abide by
FINRA’s rules. FINRA Rule 1031. Employees required to
register with FINRA must pass an examination and are
referred to as “registered persons” in FINRA’s rules.

 B. The Taping Rule
  Aslin’s suit challenges a FINRA rule known as the
“Taping Rule,” which requires securities firms employing
4                                               No. 12-2250

a certain number persons who previously worked at
Disciplined Firms to “establish, maintain, and enforce
special written procedures for supervising the tele-
marketing activities” of their employees. FINRA Rule
3010(b)(2), available at http://finra.complinet.com/ (last
accessed Dec. 27, 2012).2 A firm is considered to be “Disci-
plined Firm” if, among other reasons, the firm has been
expelled from membership in FINRA in connection with
securities sales practices. FINRA Rule 3010(b)(2)(J). A
broker counts toward a firm’s number of brokers
from Disciplined Firms if he or she was registered for
at least 90 days with a Disciplined Firm within the
past three years. FINRA Rule 3010(b)(2)(H). The rule is
intended to prevent brokers from moving en mass from
a firm that engaged in unlawful telemarketing practices
to a new firm where they might start the illegal activity
anew. SEC Release No. 34-39361, 62 Fed. Reg. 64422,
at 64424 (Dec. 5, 1997).
  FINRA determines when a firm is subject to the Taping
Rule by using a list of the brokers who previously
worked at Disciplined Firms. Inclusion on the list is
automatic; FINRA makes no determination of individual
wrongdoing and gives the broker no opportunity to
avoid inclusion. For firms with between ten and twenty
registered persons, a firm is subject to the Taping Rule

2
  The rule can be found in the section titled “NASD Rules.”
NASD refers to the National Association of Securities
Dealers, a self-regulatory organization that was FINRA’s
predecessor. FINRA adopted the NASD rules as its own
when it was established.
No. 12-2250                                              5

“where four or more of its registered persons have
been associated with one or more Disciplined Firms in a
registered capacity within the last three years.” FINRA
Rule 3010(b)(2)(H). A firm that becomes subject to the
rule must then either institute the required monitoring
procedures, which we are told can be quite expensive,
especially for smaller firms like BEST Direct, or reduce
the number of employed brokers who previously
worked for Disciplined Firms. The latter is what
happened to Aslin.
  Aslin worked at Brewer Financial from May 2005
through March 2009. He then moved to BEST Direct in
April 2009. On March 5, 2011, Brewer Financial became a
Disciplined Firm when it agreed to be expelled from
FINRA to settle a disciplinary matter relating to private
security offerings. Even though Aslin was no longer
working at Brewer Financial when it became a
Disciplined Firm, he was counted for purposes of the
Taping Rule because he had worked there within the
past three years. On April 1, 2011, FINRA notified
BEST Direct that it was subject to the Taping Rule
because 11 of its 17 registered brokers had worked for
Brewer Financial — a Disciplined Firm — within the past
three years. On May 4, 2011, BEST Direct fired Aslin
(and presumably a few other former Brewer Financial
brokers) to avoid instituting the monitoring system.

II. Mootness
  A case becomes moot, and the federal courts lose
subject matter jurisdiction, when a justiciable controversy
6                                              No. 12-2250

ceases to exist between the parties. See Honig v. Doe, 484
U.S. 305, 317 (1988) (grounding mootness doctrine in the
Constitution’s Article III requirement that courts adjudi-
cate only “actual, ongoing cases or controversies”); Stotts
v. Community Unit School Dist. No. 1, 230 F.3d 989, 990-91
(7th Cir. 2000) (dismissing appeal as moot). Mootness
commonly arises where a federal court becomes unable
to award meaningful relief in the case. This is often so
where a plaintiff seeks only injunctive or declaratory
relief and the defendant discontinues the conduct in
dispute. See, e.g., Board of Education of Oak Park v.
Nathan R., 199 F.3d 377, 378 (7th Cir. 2000) (“issue of
whether the School was obliged to provide special ed-
ucation services to [student] during his expulsion is
moot because he has graduated from high school”). In
such a case there is no longer any ongoing wrongdoing
to remedy, so a justiciable controversy no longer
exists, unless the dispute is “capable of repetition yet
evading review.” We conclude that this action must
be dismissed as moot. There is no longer an ongoing
controversy, nor does this dispute fit into the narrow
exception for disputes likely to be capable of repetition
yet evading review.

    A. Ongoing Controversy
  Aslin’s case is moot because he no longer has the desig-
nation that he claims violates his due process rights, and
he is not seeking any retrospective relief. As we know, a
broker is included on the list of brokers who worked
at Disciplined Firms only if the broker worked at a Disci-
No. 12-2250                                                   7

plined Firm within the last three years. Aslin last
worked at a Disciplined Firm — Brewer Financial — in
March 2009. By the end of March 2012 FINRA no
longer counted him as a member of a Disciplined Firm
under the Taping Rule. When the district court decided
the case in April 2012, Aslin no longer had the designa-
tion he challenged.
  Because Aslin was no longer being counted adversely
under the rule, there was no justiciable controversy.
Aslin’s complaint seeks only: (1) a declaration that the
Taping Rule denied him due process of law and (2) an
injunction preventing the application of the rule to him
unless and until he is afforded an opportunity to chal-
lenge the designation. The court could not grant or
effect the relief Aslin sought — to prevent FINRA from
designating him as a member of a Disciplined Firm with-
out process — since FINRA is no longer designating
Aslin as such or threatening to designate him in the
immediate future. If this suit were to continue, Aslin
would be asking a court either to tell FINRA to stop
doing something that it is not doing, or to declare
rights and obligations about a controversy that no
longer exists. In either case there is no longer an
ongoing controversy and no jurisdiction.3

3
   This is not a case where a defendant has voluntarily discon-
tinued the challenged activity or policy but reserved the
right to change its mind. In such cases the question of
mootness may be more difficult because dismissal would
leave the defendant free to return to its old ways. E.g., United
                                                 (continued...)
8                                                   No. 12-2250

  Aslin contends, however, that the alleged violation of
his due process rights is continuing to cause him harm
that this suit may remedy. He contends that the rule
caused him to be terminated from his employment, and
that he has not yet been reinstated or found other work
as a broker. He also claims that this fact will make it
more difficult for him to get employment in the future.
But these injuries, significant though they may be,
could not be remedied by the relief sought in this case. A
declaration that a rule not currently being applied to
Aslin violates his due process rights does not address
the problem of lingering harm from the actions of
private persons. Such a declaration would not require
BEST Direct to rehire Aslin or prohibit a prospective
employer from considering the fact that he was fired
because of the Taping Rule.
  Aslin cites the Supreme Court’s decision in Wisconsin
v. Constantineau, 400 U.S. 433, 437 (1971), for the proposi-
tion that he has a right to remove the stigma of the rule
from his name. Aslin’s reliance on Constantineau is mis-
placed. The decision held that there is a due process
right to contest a present government designation that
challenges “a person’s good name, reputation, honor, or
integrity . . . .” Id. at 437. The case did not say that a suit
seeking to enjoin conduct alleged to violate the Due

3
  (...continued)
States v. W.T. Grant Co., 345 U.S. 629, 632-33 (1953). Under
the terms of the challenged FINRA Taping Rule, the rule’s
application to plaintiff Aslin simply expired by passage of time.
No. 12-2250                                             9

Process Clause remains justiciable when the defendant
is no longer engaging, or threatening to engage, in the
conduct.
  In Constantineau a police chief posted a notice in local
liquor stores that Constantineau was prohibited from
purchasing liquor. The chief did this under authority of
a Wisconsin statute that permitted him to “forbid the
sale or gift of intoxicating liquors to one who ‘by exces-
sive drinking’ produces described conditions or exhibits
specified traits, such as exposing himself or family ‘to
want’ or becoming ‘dangerous to the peace’ of the com-
munity.” Id. at 434, quoting Wis. Stat. § 176.26 (1967).
Constantineau sought an injunction against the statute
on the ground that the statute violated her right to
due process because it attached a stigma of wrongdoing
to her without affording her any process to challenge
the designation. In effect, the posting was a “quasi-
judicial determination” that the police chief “ ‘found the
particular individual’s behavior to fall within one of the
categories enumerated in the statutes’ ” that permitted
such posting. Id. at 436, quoting Constantineau v. Grager,
302 F. Supp. 861, 864 (E.D. Wis. 1969).
  Constantineau brought suit seeking to invalidate a
state law that was currently depriving her of her due
process rights. A decision holding the law unconstitu-
tional could provide immediate relief from the application
of the law. Here, Aslin no longer has the designation
that he complains violates his right to due process. A
possible decision that the Taping Rule is unconstitutional
would not provide him relief from the rule, because the
10                                                No. 12-2250

rule is no longer being applied to him, and he is not
seeking redress for the past harm.4

    B. Capable of Repetition Yet Evading Review
  The Supreme Court has long recognized a narrow
exception to the doctrine of mootness for disputes that
are “capable of repetition, yet evading review.” Norman v.
Reed, 502 U.S. 279, 287-88 (1992) (challenge to law restrict-
ing political party access to ballot), quoting Moore v.
Ogilvie, 394 U.S. 814, 816 (1969) (same), quoting in
turn Southern Pacific Terminal Co. v. Interstate Commerce
Comm’n, 219 U.S. 498, 515 (1911) (challenge to ICC cease-
and-desist orders in effect for no more than two years);
Wirtz v. City of South Bend, 669 F.3d 860, 862 (7th Cir.
2012) (reviewing case law). This pragmatic exception is
kept under tight control to keep it from swallowing the
general prohibition on deciding moot cases. A case
can avoid dismissal for mootness as capable of repetition
yet evading review when: “(1) the challenged action [is]
in its duration too short to be fully litigated prior to its

4
  Where a person acting under color of federal law violates
clearly established constitutional rights, a damages remedy
may be available under Bivens v. Six Unknown Named Agents,
403 U.S. 388 (1971), and its progeny. Aslin has not pursued
such a claim or indicated any desire to do so. The difficulty
of showing that application of the Taping Rule to him
amounted to a violation of clearly established constitutional
law would seem to be an insuperable obstacle to such a claim.
No. 12-2250                                              11

cessation or expiration, and (2) there [is] a reasonable
expectation that the same complaining party would be
subjected to the same action again.” Weinstein v.
Bradford, 423 U.S. 147, 149 (1975) (per curiam). Aslin
has not presented any argument or evidence that he is
likely to be affected by the Taping Rule in the future,
and we see nothing in the record to suggest otherwise.
We therefore conclude that this case does not fall
within this exception.
   For Aslin to be subject to the Taping Rule again, a
firm that he works for in the future would need to
become a Disciplined Firm. It is not enough, as Aslin
suggests in his brief, that someone will be subject to the
rule in the future; there must be a reasonable expecta-
tion that the plaintiff himself will be. City of Los Angeles
v. Lyons, 461 U.S. 95, 109 (1983). This would require one
of these firms to meet the criteria in FINRA Rule
3010(b)(2)(J). These criteria are stringent and require a
firm to be either expelled from FINRA or barred from
the securities industry by a federal regulator. See FINRA
Rule 3010(b)(2)(J). Such expulsions and bars seem to be
unusual events. Aslin has not shown that they occur
with such frequency as to create a “reasonable expecta-
tion” that Aslin himself will be subject to the rule
again. Accordingly, there is no reasonable expectation of
repetition, and the dispute here cannot avoid dismissal
as moot on the theory that it is capable of repetition
yet evading review.
12                                            No. 12-2250

                       Conclusion
  The district court’s opinion is V ACATED and the case is
R EMANDED with instructions to dismiss the action for
lack of subject matter jurisdiction.

                          1-2-13