Lanza v. FINRA

• Court: Court of Appeals for the First Circuit
• Decided: March 24, 2020
• Docket: 18-2057P
• Status: Published

Opinion

United States Court of Appeals For the First Circuit

Nos. 18-2057 18-2181

GIOVANNI LANZA and MARIANTONIA LANZA,

Plaintiffs, Appellants,

v.

FINANCIAL INDUSTRY REGULATORY AUTHORITY (FINRA),

Defendant, Appellee.

APPEALS FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Patti B. Saris, U.S. District Judge]

Before

Lynch, Selya, and Barron, Circuit Judges.

Robert D. Loventhal on brief for appellants. Ian D. Roffman, Melanie L. Todman, Nutter, McClennen & Fish LLP, and Terri L. Reicher, Office of General Counsel, on brief for appellee.

March 24, 2020 SELYA, Circuit Judge. Entering their golden years,

Giovanni and Mariantonia Lanza, a married couple, found themselves

involved in a dispute with their quondam stockbroker over the

handling of their brokerage accounts. After submission of the

dispute to the Financial Industry Regulatory Authority (FINRA) for

arbitration, a panel of arbitrators summarily dismissed the

Lanzas' claims. Chafing at the lack of an explained decision, the

Lanzas unsuccessfully sued FINRA in the federal district court.

They now appeal.

In this court — as below — the Lanzas contend that the

arbitrators' failure to issue an explained decision violated the

covenant of good faith and fair dealing implied under Massachusetts

law. Concluding, as we do, that the Lanzas' complaint fails to

state a plausible claim for breach of the implied covenant, we

affirm.

I. BACKGROUND

We briefly rehearse the events leading up to this appeal.

Because the district court's dispositive ruling was on a motion to

dismiss under Federal Rule of Civil Procedure 12(b)(6), we draw

the facts from the complaint and its attachments. See Katz v.

Pershing, LLC, 672 F.3d 64, 69 (1st Cir. 2012).

The Lanzas are both retired professors. FINRA is a

private entity that monitors the relationship between financial

services companies and consumers. Of particular pertinence for

- 2 - present purposes, FINRA's Office of Dispute Resolution (ODR)

settles financial and business disputes through arbitrations

administered pursuant to FINRA's bylaws, rules, and Code of

Arbitration Procedure (the FINRA Code).

Beginning in 2006, the Lanzas maintained brokerage

accounts with a securities firm, Ameriprise Financial Services,

Inc. (Ameriprise). Richard Ewing, an Ameriprise broker, oversaw

these accounts. The relationship soured in 2014, when the Lanzas

came to believe their accounts had been mismanaged. They then

terminated the relationship and sued Ameriprise and Ewing in the

United States District Court for the District of Massachusetts.

This initial suit was short-lived. The Lanzas

previously had agreed to resolve any dispute with Ameriprise

through arbitration, and their suit came within the scope of the

arbitration clause. Faced with this reality, the Lanzas consented

to the dismissal of their suit, albeit without prejudice. They

subsequently submitted their claims for arbitration by FINRA's

ODR.1 The Lanzas' claims comprised an array of tort and contract

claims, as well as claims alleging violations of federal and state

securities laws.

1 The Lanzas originally sought arbitration only against Ewing and reached a tentative settlement through mediation. When Ewing refused to honor the terms of the settlement, the Lanzas reconfigured their arbitration claims to encompass both Ewing and Ameriprise.

- 3 - When filing their claims, the Lanzas signed an

arbitration submission agreement, which acknowledged that they

were submitting their dispute for "arbitration in accordance with

the FINRA By-Laws, Rules, and Code of Arbitration Procedure." They

also acknowledged that they (or their representatives) had "read

the procedures and rules of FINRA relating to arbitration" and

agreed "to be bound by these procedures and rules."

Prior to the scheduled arbitration hearing, the Lanzas

settled their claims against Ewing. As to their remaining claims

against Ameriprise, they requested that the arbitrators issue an

"explained decision" delineating the reasoning underlying any

arbitral award. Ameriprise did not join this request.

In December of 2017, a panel of three arbitrators

conducted a three-day hearing on the Lanzas' claims against

Ameriprise. In due course, the panel issued a written decision

summarily dismissing the Lanzas' claims. The panel stated only

that the Lanzas had failed either to "sustain their burden of

proving" any of their claims or to "establish any damages by any

competent or credible evidence." The panel offered no further

elucidation of its decision. Its refusal to issue an explained

decision comported with FINRA Code Rule 12904(g)(1), which

- 4 - requires FINRA arbitrators to issue such a decision only upon the

joint request of all parties to the arbitration.2

After an unsuccessful attempt to secure the arbitrators'

reasoning, the Lanzas again repaired to the federal district court

and instituted a new proceeding: a breach-of-contract suit against

FINRA. The Lanzas alleged that the arbitrators' failure to provide

an explained decision amounted to a breach of contract on FINRA's

part.3 Specifically, they alleged a breach of the implied covenant

of good faith and fair dealing inherent in every contract under

state law. See, e.g., Ayash v. Dana-Farber Cancer Inst., 822

N.E.2d 667, 683 (Mass. 2005).

As relevant here, FINRA moved to dismiss the complaint,

pursuant to Rule 12(b)(6), for failure to state a claim upon which

relief could be granted. The district court granted FINRA's motion

to dismiss on two independently sufficient grounds. First, it

held that arbitral immunity protected FINRA from liability. See

Lanza v. FINRA, 333 F. Supp. 3d 11, 16 (D. Mass. 2018). Second,

it held that, in all events, the Lanzas had failed to state a

2 The Lanzas' district court complaint alludes to FINRA Code Rule 13904, which applies only to industry disputes. Rule 12904, which otherwise is identical to Rule 13904, applies to consumer disputes. On appeal, the Lanzas refer only to Rule 12904, and we treat their earlier reference to Rule 13904 as a scrivener's error. 3 Although the complaint is not a model of clarity, the

contract upon which the Lanzas rely is apparently the arbitration submission agreement. FINRA and the Lanzas are among the parties to that agreement.

- 5 - plausible claim for breach of the implied covenant of good faith

and fair dealing. See id. at 16-18. The Lanzas moved for

reconsideration and subsequently filed a notice of appeal. After

the district court denied reconsideration, they filed a second

notice of appeal.

II. ANALYSIS

We review de novo a district court's decision to grant

a motion to dismiss under Rule 12(b)(6). See González v. Vélez,

864 F.3d 45, 50 (1st Cir. 2017). In undertaking this review, "we

accept as true all well-pleaded facts alleged in the complaint and

draw all reasonable inferences therefrom in the pleader's favor."

Nystedt v. Nigro, 700 F.3d 25, 30 (1st Cir. 2012) (quoting Santiago

v. Puerto Rico, 655 F.3d 61, 72 (1st Cir. 2011)). Generally, a

complaint need only contain "a short and plain statement of the

claim showing that the pleader is entitled to relief." Fed. R.

Civ. P. 8(a)(2). Although a complaint need not include exhaustive

factual allegations, "it must nonetheless 'contain sufficient

factual matter, accepted as true, to state a claim to relief that

is plausible on its face.'" SEC v. Tambone, 597 F.3d 436, 442

(1st Cir. 2010) (en banc) (quoting Ashcroft v. Iqbal, 556 U.S.

662, 678 (2009)). If the factual allegations set forth in the

complaint "are too meager, vague, or conclusory to remove the

possibility of relief from the realm of mere conjecture, the

complaint is open to dismissal." Id.

- 6 - When filing suit, the Lanzas invoked the district

court's diversity jurisdiction.4 See 28 U.S.C. § 1332(a)(1).

Accordingly, state law supplies the substantive rules of decision.

See Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78 (1938); Zeigler v.

Rater, 939 F.3d 385, 392 (1st Cir. 2019). The district court —

noting that the Lanzas lived in Massachusetts and that the

arbitration took place there — reasonably assumed that

Massachusetts law governed the Lanzas' breach of contract claim.

See Lanza, 333 F. Supp. 3d at 16 n.4. On appeal, the parties do

not contest this choice of law. Consequently, we accept the

parties' implicit agreement that Massachusetts law controls. See

Borden v. Paul Revere Life Ins. Co., 935 F.2d 370, 375 (1st Cir.

1991) (explaining that courts may eschew independent choice-of-

law analysis and accept parties' reasonable agreement about which

state's law governs).

Before us, the Lanzas pursue two lines of attack. First,

they assail the district court's conclusion that arbitral immunity

shields FINRA from suit. Second, they quarrel with the court's

conclusion that their complaint fails to state a plausible claim

for breach of the implied covenant of good faith and fair dealing.

4 The record is less than precise as to the jurisdictional facts. We are able to glean, though, that FINRA is incorporated in Delaware and is said to be a citizen of New York (allegedly "headquartered" in New York and/or Washington D.C.). Since the Lanzas are apparently citizens of either Massachusetts or New Hampshire (they have homes in both places), diversity is complete.

- 7 - We start with the Lanzas' contention that the district

court erroneously permitted FINRA to take refuge in the doctrine

of arbitral immunity. Because the role of an arbitrator is

functionally equivalent to that of a judge, courts (including this

court) consistently have extended quasi-judicial immunity to

arbitrators and organizations that sponsor arbitrations. See,

e.g., Pfannenstiel v. Merrill Lynch, Pierce, Fenner & Smith, 477

F.3d 1155, 1158-60 (10th Cir. 2007); Int'l Med. Grp., Inc. v. Am.

Arbitration Ass'n, 312 F.3d 833, 843-44 (7th Cir. 2002); New Eng.

Cleaning Servs., Inc. v. Am. Arbitration Ass'n, 199 F.3d 542, 545-

46 (1st Cir. 1999); Olson v. Nat'l Ass'n of Sec. Dealers, 85 F.3d

381, 382-83 (8th Cir. 1996). The purpose of this immunity is to

"protect decision-makers from undue influence and protect the

decision-making process from reprisals by dissatisfied litigants."

New Eng. Cleaning Servs., 199 F.3d at 545.

In general terms, arbitral immunity covers "all acts

within the scope of the arbitral process." Id. (quoting Olson, 85

F.3d at 383). A sponsoring entity's immunity ordinarily "extends

to the administrative tasks it performs, insofar as these are

integrally related to the arbitration." Id. Examples of tasks

that we have recognized as "sufficiently related to the arbitration

to be protected by immunity" include choosing an arbitrator,

scheduling a hearing, and billing for services. Id.

- 8 - Although the protective carapace created by the doctrine

of arbitral immunity is sturdy, it is not impervious to all

incursions. For example, arbitral immunity does not extend to

actions taken in the absence of any colorable claim of

jurisdiction. Cf. Nystedt, 700 F.3d at 31. So, too, we doubt

that such immunity would afford shelter to an arbitrator who, say,

decided a matter after accepting a bribe. Cf. 9 U.S.C. § 10

(providing that court may vacate arbitral award procured by fraud,

corruption, partiality, or other misconduct on arbitrator's part).

More to the point, arbitral immunity is an awkward fit in

situations — like this one — in which it is alleged that

arbitrators (or an entity that stands in the shoes of arbitrators)

have broken a contractual promise. Cf. Caudle v. Am. Arbitration

Ass'n, 230 F.3d 920, 922 (7th Cir. 2000) (suggesting that issue

may be whether arbitrators and organizing bodies are real parties

in interest, not whether immunity applies). Here, however, we

need not pursue the limits of the doctrine of arbitral immunity

because the district court has identified an alternative basis for

dismissing the underlying action — a basis that, by itself,

suffices to resolve this appeal.

This brings us to the district court's alternative

holding: that even apart from arbitral immunity, the complaint

failed to state a claim upon which relief could be granted. See

Lanza, 333 F. Supp. 3d at 16-17. The baseline is familiar. Under

- 9 - Massachusetts law, every contract "is subject, to some extent, to

an implied covenant of good faith and fair dealing." Ayash, 822

N.E.2d at 683. This implied covenant provides "that neither party

shall do anything which will have the effect of destroying or

injuring the right of the other party to receive the fruits of the

contract." A.L. Prime Energy Consultant, Inc. v. Mass. Bay Transp.

Auth., 95 N.E.3d 547, 560 (Mass. 2018) (quoting Weiler v.

PortfolioScope, Inc., 12 N.E.3d 354, 361 (Mass. 2014)). A breach

of the implied covenant "occurs when one party violates the

reasonable expectations of the other." Id. (quoting Weiler, 12

N.E.3d at 362).

It is clear beyond hope of contradiction that the implied

covenant of good faith and fair dealing "does not create rights or

duties beyond those the parties agreed to when they entered into

the contract." Bos. Med. Ctr. Corp. v. Sec'y of Exec. Office of

Health & Human Servs., 974 N.E.2d 1114, 1126-27 (Mass. 2012)

(quoting Curtis v. Herb Chambers I-95, Inc., 940 N.E.2d 413, 419

(Mass. 2011)). Similarly, it is clear that a party cannot

weaponize the implied covenant in a manner that contradicts the

plain terms of a contract. See id. (finding no breach of implied

covenant when contract specified reimbursement rates and defendant

refused to pay more).

In the case at hand, the Lanzas concede — as they must

— that FINRA Code Rule 12904(g)(1) requires an arbitrator to render

- 10 - an explained decision only upon the joint request of all parties.

Attempting to avoid the obvious implications of this rule, the

Lanzas pivot to Rule 12904(f). The latter rule provides that an

arbitration award "may contain a rationale underlying the award."

This rule, the Lanzas say, engendered a reasonable expectation

that the arbitrators would exercise their discretion to issue an

explained decision. Elsewise, they would be unable to understand

the basis for (and, by extension, appeal) the award.5

We conclude that these allegations are insufficient to

state a plausible claim that FINRA breached the implied covenant.

Rule 12904(f) must be read as part of the FINRA rules as a whole,

not in some sort of splendid isolation. And at any rate, the word

"may" is permissive, not mandatory. To cinch the matter, any

expectation that the arbitrators would issue an explained decision

upon the Lanzas' unilateral request was unreasonable in light of

the express provisions of the FINRA Code. Although Rule 12904(f)

affords arbitrators discretion to issue an explained decision at

the request of a single party, Rule 12904(g)(1) makes it abundantly

5The Lanzas' argument that the arbitrators' failure to render a reasoned decision resulted in a "complete loss of [their] statutory appellate rights" is incorrect. Nothing in either the Federal Arbitration Act or Massachusetts law prevents the Lanzas from seeking judicial review of FINRA's arbitration award notwithstanding the absence of an explained decision. See Federal Arbitration Act, 9 U.S.C. §§ 1-16; Uniform Arbitration Act for Commercial Disputes, Mass. Gen. Laws ch. 251, §§ 1-19.

- 11 - clear that they are required to do so if — and only if — an

explained decision is requested by all parties.

Refined to bare essence, the Lanzas' argument is

essentially an attempt to rewrite the FINRA rules and add a new

contractual obligation: the duty to issue an explained decision

upon the unilateral request of a single party. When they executed

the arbitration submission agreement, though, the Lanzas

acknowledged that the FINRA Code and the accompanying rules were

part and parcel of the agreement to arbitrate. The construction

of the arbitration agreement espoused by the Lanzas directly

contradicts the express terms of Rule 12904(g)(1) and, therefore,

exceeds the reach of the implied covenant. See Bos. Med. Ctr.,

974 N.E.2d at 1126-27.

To say more would be pointless. The scope of the implied

covenant of good faith and fair dealing "is only as broad as the

contract that governs the particular relationship." Ayash, 822

N.E.2d at 684. Here, the Lanzas agreed to be bound by the FINRA

Code, and that Code requires an explained decision only upon the

joint request of all parties.6 Consequently, the Lanzas have not

6For the sake of completeness, we add that the result — a summary decision in an arbitration proceeding — is not out of the ordinary. Absent a statutory directive or a binding contractual commitment — and none pertain here — it is typical that arbitrators are not required to furnish a reasoned decision for an arbitration award. See United Steelworkers v. Enter. Wheel & Car Corp., 363 U.S. 593, 598 (1960) ("Arbitrators have no obligation . . . to give their reasons for an award."); Zayas v. Bacardi Corp., 524

- 12 - plausibly alleged a breach of the implied covenant, and the

district court appropriately dismissed their complaint for failure

to state a claim under Rule 12(b)(6).

III. CONCLUSION

We need go no further. For the reasons elucidated above,

the judgment of the district court is

Affirmed.

F.3d 65, 70 (1st Cir. 2008) ("Although arbitrators frequently elect to explain their decisions in written opinions, they are under no compulsion to do so.").

- 13 -