333 F. Supp. 3d 11
D.D.C.2018Background
- Plaintiffs (elderly Massachusetts residents) sued their former broker and firm for mishandling two brokerage accounts; they initially filed in federal court but consented to arbitration under FINRA rules after a settlement-mediation episode.
- Plaintiffs later refiled a FINRA arbitration claim when the broker refused to honor a settlement; they signed FINRA's Submission Agreement agreeing to arbitration under FINRA rules.
- A three-member FINRA panel heard the case over three days and issued a two-sentence award dismissing all claims for failure to prove liability or damages; the award contained no detailed reasoning.
- Plaintiffs had requested a written "explained decision" before the hearing; FINRA Rule 12904(g) requires an explained decision only if all parties jointly request it, and the opposing party (Ameriprise) did not consent.
- Plaintiffs sued FINRA for breach of contract and breach of the implied covenant of good faith and fair dealing, seeking an order compelling FINRA to refer the case back for a reasoned award and $200,000 in damages.
- The district court dismissed the complaint, holding FINRA did not breach its contractual duties or the implied covenant because the FINRA rules permitted non-explained awards absent unanimous party request.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether FINRA breached the Submission Agreement by allowing an unexplained award | FINRA promised arbitration under its rules but arbitrators’ failure to provide reasons violated plaintiffs’ expectations and contract | FINRA complied with its rules; Rule 12904(g) conditions explained decisions on unanimous party request, so no contractual duty to explain | Court: No breach — FINRA followed its rules; no contractual duty without opposing party's consent |
| Whether FINRA breached the implied covenant of good faith and fair dealing by not requiring an explained decision | Plaintiffs had a reasonable expectation to receive a reasoned decision necessary to vindicate rights and seek review | Implied covenant cannot create duties contradicting express contract terms; plaintiffs’ expectation was unreasonable given the rule text | Court: No breach — implied covenant cannot add obligations contrary to express rule allowing unexplained awards |
| Whether FINRA is protected by arbitral immunity for the challenged conduct | (Plaintiffs) Argued FINRA’s actions could be actionable despite immunity (limited attack) | FINRA invoked arbitral immunity for administrative acts integral to arbitration | Court: Immunity likely covers the conduct, but decision disposed on contract grounds; immunity not necessary to resolve dismissal |
| Whether the arbitration agreement was unenforceable as an unconscionable adhesion contract | Plaintiffs contended they had no realistic choice and did not read rules | FINRA argued agreement is not unconscionable; parties may contractually limit explained decisions | Court: Agreement not unconscionable; procedure not sufficiently unfair to void contract |
Key Cases Cited
- Foley v. Wells Fargo Bank, N.A., 772 F.3d 63 (1st Cir.) (consideration of complaint attachments and factual-pleading standards)
- New Eng. Cleaning Servs., Inc. v. Am. Arbitration Ass'n, 199 F.3d 542 (1st Cir.) (arbitral sponsor immunity for tasks integral to arbitration)
- Caudle v. Am. Arbitration Ass'n, 230 F.3d 920 (7th Cir.) (limits on arbitral immunity where promised services not provided)
- Zayas v. Bacardi Corp., 524 F.3d 65 (1st Cir.) (arbitrators not generally required to give reasons for awards)
- Rogers v. Ausdal Fin. Partners, Inc., 168 F. Supp. 3d 378 (D. Mass.) (same: no compulsion to explain awards; review via FAA limited)
- Weiler v. PortfolioScope, Inc., 469 Mass. 75 (Mass.) (implied covenant of good faith and fair dealing in contracts)
- A.L. Prime Energy Consultant, Inc. v. Mass. Bay Transp. Auth., 479 Mass. 419 (Mass.) (implied covenant cannot create duties inconsistent with contract)
- Eigerman v. Putnam Invs., Inc., 450 Mass. 281 (Mass.) (limits on implied covenant creating new contractual duties)