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Challenges To An Ongoing Arbitration Proceeding Are Premature

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  • Posted on: Mar 1 2017

This Blog has previously written about the bases upon which the losing party in an arbitration can challenge the award. (Here.) Among the bases discussed include the arbitrator’s impartiality and his/her authority to hear the dispute and rule on the matter.

What happens when a party to an arbitration is unhappy with the rulings and the proceeding before an award is issued? Can the unhappy party challenge the fairness of an ongoing proceeding, and, more particularly, the independence and fairness of the arbitrators and their rulings? In Habliston v. FINRA Regulation, Inc., No. 15-2225 (D.D.C. Jan. 27, 2017), a federal judge in the District of Columbia held that challenges to an ongoing arbitral proceeding are premature and not ripe for judicial review.

Background

The case arose from an arbitration between the claimants Anna Morton Young Habliston and Seymour R. Young, Jr. (collectively, “Habliston”) and the respondent Wells Fargo Advisors, LLC concerning the claimants’ deceased parents’ brokerage accounts.  Dissatisfied with the rulings in the arbitration, Habliston brought the action against FINRA Regulation, Inc. (“FINRA Regulation” or “FINRA”), alleging that it failed to provide a fair arbitration forum “because the arbitrators are biased, and their procedural rulings to date have been unfair; that FINRA Regulation has failed to carry out its regulatory duties properly; and that the binding arbitration provisions contained in the brokerage contracts are void or unenforceable.” Slip op. at 2 (footnotes omitted). Habliston sought damages under 42 U.S.C. § 1983, and the appointment of new arbitrators to hear the pending arbitration.

Defendant’s Motion

FINRA moved to dismiss the complaint pursuant to Federal Rules of Civil Procedure 12(b)(1), 12(b)(6), 12(b)(7), and 12(h)(3), arguing, among other things, that: (a) the claims were premature since the arbitration was ongoing; (b) FINRA was immune from suit under the doctrines of arbitral and regulatory immunity; (c) FINRA was not a state actor for purposes of 42 U.S.C. § 1983; (d) the Securities and Exchange Act (the “Act”) does not create a private right of action for alleged violations of the rules enacted under the Act; and (e) the request for new arbitrators was moot because FINRA had already replaced the arbitrators. Id. at 2-3.

The plaintiffs did not oppose many of FINRA’s arguments. Consequently, the court considered the motion to be “largely conceded.” However, as to the issues for which the plaintiffs put in an opposition (e.g., arbitral immunity, whether FINRA was a state actor for purposes of 42 U.S.C. § 1983, and whether the claim was premature), the court granted the motion, concluding that Habliston’s claims were “not ripe for review, and that [the] defendant [was] entitled to arbitral immunity.”  Id. at 3.

The Court’s Ruling

As an initial matter, the court addressed Habliston’s failure to address all the arguments raised by FINRA’s motion. The court held that “[w]hen a plaintiff fails to address arguments made in a defendant’s motion to dismiss, the Court may [in its discretion] treat those arguments as conceded.” Id. at 7 (internal quotation marks and citations omitted). Because Habliston failed to address many of FINRA’s arguments, the court treated the motion on those grounds “as conceded” and dismissed the claims that corresponded to them. Id. at 8.

Regarding Habliston’s claim that FINRA denied them their due process and equal protection rights (Habliston alleged that FINRA “violated its duty to act objectively and impartially” and acted with the “intent to prejudice” them by influencing “the objectivity and impartiality” of FINRA’s arbitrators), the court found that the claims were not ripe for review.  Noting that the ripeness doctrine is rooted in Article III standing and the “fitness of the issues for judicial decision and the hardship to the parties of withholding court consideration” (citation and internal quotation marks omitted), the court concluded that Habliston did not (and could not) demonstrate any actual injury since the arbitration was ongoing and could result in an award favorable to them:

Since the arbitration is still ongoing, plaintiffs’ challenge to the proceeding is not ripe for review. For Article III purposes, plaintiffs cannot demonstrate that they have suffered an actual injury, or that any harm is “imminent or certainly impending.” And prudential considerations favor dismissal as well. While plaintiffs express fear that they will not receive an objective hearing, and they take issue with certain interlocutory procedural rulings such as the denial of the requested discovery and the postponement of hearing dates, the arbitration has not yet concluded, and the outcome – which could be in plaintiffs’ favor – is unknown. So any alleged bias on the part of FINRA Regulation’s arbitrators has not yet produced any adverse consequences, and the record upon which one would determine whether plaintiffs’ constitutional rights have been violated has not yet been developed.

Id. at 10-11. (Citations omitted.)

Because Habliston’s constitutional claims were deemed not ripe for review, the court declined to decide whether FINRA was a “state actor” for purposes of Section 1983. Nevertheless, in a lengthy footnote, the court concluded that the claim would fail because Habliston did not claim that FINRA acted under state law. In fact, Habliston alleged that FINRA acted “under federal laws” and in violation of “FINRA Rules.” Consequently, as other courts within the jurisdiction had held, FINRA, or its predecessors, were not “state actors” for purposes of a Section 1983 claim.  Id. at n.9.

Regarding arbitral immunity for FINRA, the court found that such immunity was conferred on the organization.  Noting that the D.C. Circuit had not yet decided the issue, the court found that FINRA enjoyed such immunity:

The doctrine of arbitral immunity “rests on the notion that arbitrators acting within their quasi-judicial duties are the functional equivalent of judges, and, as such, should be afforded similar protection.” As the Sixth Circuit noted in Corey, failing to extend immunity to the boards sponsoring the arbitrators would render the immunity “illusionary” because “[i]t would be of little value to the whole arbitral procedure to merely shift the liability to the sponsoring association.” Consistent with the purposes of arbitral immunity, the Court will extend the immunity to FINRA Regulation here.

Id. at 13. (Citations omitted.)

This finding, said the court, was consistent with the decisions in a majority of the circuits, which have “extended arbitral immunity to cover not only the individual arbitrator, but the arbitration forum as well.” Id. at 12. The court found the reasoning of the other circuits “persuasive.” Id. at 13.

Takeaway

The purposes underlying the ripeness doctrine underscore the correctness of the court’s decision: “to prevent the courts, through avoidance of premature adjudication, from entangling themselves in abstract disagreements over administrative policies, and also to protect the agencies from judicial interference until an administrative decision has been formalized and its effects felt in a concrete way by the challenging parties.” Id. at 9 (citation omitted). Parties to an arbitral proceeding undermine these purposes if they are permitted to challenge the proceeding merely because “they are extremely dissatisfied with how it is going so far.” Id. at 1.

Moreover, the judicial endorsement of arbitration “as an effective and expeditious means of resolving disputes between willing parties desirous of avoiding the expense and delay frequently attendant to the judicial process” (Westinghouse v. New York City Tr. Auth., 82 N.Y.2d 47, 54 (1993)) would be rendered meaningless if arbitrators and arbitral forums were not given absolute immunity from civil liability in performing their quasi-judicial duties. As the court in Habliston noted, “[a]bsolute immunity is thus necessary to assure that judges, [arbitrators, arbitral forums, mediators,] advocates, and witnesses can perform their respective functions without harassment or intimidation.”  Id. at 11 (citations omitted).

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