August 09, 2018 practice point

Two Brokers Sue FINRA: The Immunity of Arbitral Institutions

By Mark Kantor

The topic of immunity, not just of arbitrators but also of arbitral institutions, continues to be a focus in the arbitration community. A recent decision from the U.S. Court of Appeals for the Seventh Circuit leaves many important issues about this topic unresolved.

In Webb v. Financial Industry Regulatory Authority, Docket: 17-2526 (7th Cir. May 8, 2018), the appeals court dismissed claims against the Financial Industry Regulatory Authority (FINRA), the securities industry arbitral institution, for lack of diversity jurisdiction. Two securities brokers alleged that FINRA “breached its contract to arbitrate their dispute with [Jefferies & Company Inc.] (Jefferies, the brokers’ former employer)” over allegedly improper termination of employment by “failing to properly train arbitrators, failing to provide arbitrators with appropriate procedural mechanisms, interfering with the arbitrators’ discretion, and failing to permit reasonable discovery.” 

The brokers, Webb and Beversdorf, originally challenged their termination by Jefferies in FINRA arbitration proceedings. After two-and-a-half years in arbitration but before a final award was issued, the two brokers withdrew their claims. By operation of FINRA’s rules, “that withdrawal constituted a dismissal with prejudice.”

Webb and Beversdorf then brought the aforementioned claim against FINRA itself in the state courts of Illinois. They sought damages in “excess of $50,000 and a declaratory judgment.”

FINRA removed the dispute to the U.S. Federal District Court, and then moved for dismissal on grounds inter alia of arbitral immunity. The district court held that FINRA was indeed entitled to arbitral immunity and dismissed the suit. The two disappointed brokers thereafter appealed that judgment to the Seventh Circuit U.S. Court of Appeals.

Although all parties argued that the federal courts had jurisdiction, as courts of limited jurisdiction each federal court has the independent obligation to satisfy itself that jurisdiction exists. The court of appeals correctly noted that the U.S. Federal Arbitration Act does not create federal subject matter jurisdiction by itself. Instead, the underlying dispute must raise issues of federal subject matter or diversity jurisdiction. The appellate judges held that there was no such issue in the case. Moreover, the claim of more than $50,000 in dispute was too low to meet the federal statutory requirement in 28 U.S.C. § 1332 that, in addition to complete diversity of jurisdictions, “the amount in controversy exceeds $75,000, exclusive of interest and costs.” Various claims of attorneys’ fees were held inapplicable to the calculation.

The appeals court accordingly concluded that, while the “complete diversity” jurisdictional requirement had been met, the amount sought in the claim was too low to support statutory federal jurisdiction. The court therefore ordered vacatur of the district court judgment and that the case be remanded back to the Illinois state court.


Mark Kantor is a member of the College of Commercial Arbitrators in Washington, D.C.

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