Nicholas Webb v. Financial Industry Regulatory
889 F.3d 853
7th Cir.2018Background
- Brokers Nicholas Webb and Thad Beversdorf filed FINRA arbitration claims against their employer Jefferies after being fired; they later withdrew the arbitration (treated as dismissal with prejudice under FINRA rules).
- Webb and Beversdorf sued FINRA in Illinois state court for breach of the Arbitration Submission Agreement (alleging procedural/administrative failures) and sought damages in excess of $50,000, including recovery of attorneys’ fees from the arbitration and this litigation.
- FINRA removed the suit to federal court and the district court dismissed on the ground of arbitral immunity after finding diversity jurisdiction existed.
- The Seventh Circuit sua sponte raised subject-matter-jurisdiction concerns, solicited supplemental briefs, and analyzed whether the amount-in-controversy requirement ($75,000) was met given Illinois law on recovery of attorney fees.
- The majority held Illinois law does not permit recovery here of the arbitration attorneys’ fees under the third-party litigation exception to the American Rule, so diversity jurisdiction is lacking; it also rejected federal-question jurisdiction under Grable.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether amount-in-controversy meets §1332 because plaintiffs seek attorneys’ fees (arbitration + this suit) | Webb/Beversdorf: fees were reasonably foreseeable consequential damages from FINRA’s breach, totaling > $75,000 | FINRA: underlying arbitration amounts cannot be counted; only fees recoverable under contract/statute/other authority count | Held: Fees for this suit cannot be recovered under Illinois law; arbitration fees likewise cannot be recovered here under Illinois third-party litigation exception — amount in controversy fails; diversity jurisdiction lacking |
| Whether Illinois law allows recovery of attorneys’ fees as consequential damages where defendant increased costs of an existing third-party litigation | Plaintiffs: Illinois recognizes an exception allowing recovery of fees that are direct consequences of defendant’s wrong | FINRA: Illinois exception applies only when defendant forced plaintiff into third-party litigation (not when it merely increased costs of an existing suit) | Held: Illinois courts limit the third-party-litigation exception to cases where defendant’s wrongful act forced the plaintiff into the third-party suit; exception does not apply here |
| Whether federal-question (arising-under) jurisdiction exists under Grable/Manning because FINRA’s SEC‑approved code/ securities regulation issues are implicated | FINRA: the dispute implicates duties arising from FINRA’s SEC‑approved Code and thus raises federal securities law issues | Plaintiffs: state contract claim; federal law not necessarily raised | Held: No federal-question jurisdiction — no necessarily raised federal issue; Grable factors not satisfied |
| Whether district court should accept parties’ good-faith amount-in-controversy estimates at removal | Plaintiffs: their estimate of fees > $75,000 supports jurisdiction | FINRA: removal allegations must be tested against what state law permits; defendant’s removal burden met but legal‑certainty test can defeat jurisdiction if recovery legally impossible | Held: Where state law makes recovery legally impossible, the removal estimate cannot establish jurisdiction; here legal-certainty defeats diversity |
Key Cases Cited
- St. Paul Mercury Indem. Co. v. Red Cab Co., 303 U.S. 283 (federal court must dismiss if it is a legal certainty that claim < jurisdictional amount)
- Caudle v. American Arbitration Ass'n, 230 F.3d 920 (7th Cir. 2000) (amount at stake in underlying arbitration does not count toward amount in controversy against an arbitrator)
- Ross v. Inter-Ocean Ins. Co., 693 F.2d 659 (7th Cir. 1982) (attorney fees count toward amount in controversy only when recoverable by contract, statute, or other legal authority)
- Ritter v. Ritter, 46 N.E.2d 41 (Ill. 1943) (Illinois recognizes exception to American Rule where defendant’s wrongful act forces plaintiff into third-party litigation and plaintiff may recover reasonable litigation expenses)
- Sorenson v. Fio Rito, 413 N.E.2d 47 (Ill. App. Ct. 1980) (losses directly caused by defendant may include attorneys’ fees incurred to remedy defendant’s misconduct)
- Grable & Sons Metal Prods., Inc. v. Darue Eng'g & Mfg., 545 U.S. 308 (state-law claim can arise under federal law only if federal issue is necessarily raised, actually disputed, substantial, and capable of resolution in federal court without disturbing federal-state balance)
- Gunn v. Minton, 568 U.S. 251 (federal‑question arising-under test under Grable articulated and applied)
- Merrill Lynch, Pierce, Fenner & Smith Inc. v. Manning, 136 S. Ct. 1562 (2016) (explains Grable test’s application to federal securities contexts)