SCOTTSDALE CAPITAL ADVISORS CORPORATION; John J. Hurry; Timothy B. Diblasi; Darrel Michael Cruz, Plaintiffs-Appellants, v. FINANCIAL INDUSTRY REGULATORY AUTHORITY, INC., Defendant-Appellee.
No. 16-1497
United States Court of Appeals, Fourth Circuit
December 20, 2016
844 F.3d 414
Securities and Exchange Commission, Amicus Supporting Appellee. Argued: October 28, 2016
To recapitulate: We hold that the Department‘s social networking policy was unconstitutional and that the disciplinary measures taken against plaintiffs pursuant to that policy were likewise impermissible. The patent overbreadth of the policy negates Chief Dixon‘s qualified immunity defense. We find no merit, however, in plaintiffs’ retaliation claims, which involved investigations for alleged police misconduct independent of any issues of free speech. As to municipal liability, we remand for further proceedings in accordance with the foregoing directions. Remedial issues are also best left for remand, although in light of all that has transpired, reinstatement is not an equitable option. The calculation of attorneys’ fees must of course await the conclusion of proceedings on remand.
The judgment of the district court is accordingly affirmed in part, reversed in part, and remanded for further proceedings consistent with this decision.
AFFIRMED IN PART, REVERSED IN PART, AND REMANDED.
Before MOTZ, KING, and DUNCAN, Circuit Judges.
Affirmed by published opinion. Judge DUNCAN wrote the opinion, in which Judge MOTZ and Judge KING joined.
DUNCAN, Circuit Judge:
Scottsdale Capital Advisors Corporation and three of its current and former officers (collectively, “Scottsdale“) are respondents in an ongoing disciplinary proceeding before the Financial Industry Regulatory Authority, Inc. (“FINRA“) for allegedly selling unregistered securities in violation of Section 5 of the Securities Act of 1933,
I.
A.
Congress, through the Exchange Act, delegated the power to register national securities associations (“RSAs” or “associations“) to the Securities and Exchange Commission (“SEC“). Pursuant to this authority, the SEC registered FINRA as an RSA.1 FINRA, comprised of financial brokers and dealers, promulgates rules to enforce broker-dealer compliance with the
Despite FINRA‘s seemingly broad power, Congress mandated that the SEC exercise close supervision over the association. Before any FINRA rule goes into effect, the SEC must approve the rule and specifically determine that it is consistent with the purposes of the Exchange Act.
B.
The Exchange Act sets out the process by which FINRA may initiate disciplinary proceedings, which is codified in FINRA‘s Code of Procedure.
Review of final FINRA action invokes the SEC‘s role under the Exchange Act in overseeing FINRA‘s authority to discipline members. FINRA must “promptly file notice” with the SEC when it “imposes any final disciplinary sanction” on any member and FINRA members may appeal adverse final FINRA actions to the SEC for review.
C.
On May 15, 2015, FINRA initiated a disciplinary proceeding against Scottsdale, alleging it had liquidated over 74 million shares of unregistered stocks in violation of Section 5 of the Securities Act,
Scottsdale then filed for declaratory and injunctive relief in the United States District Court for the District of Maryland, alleging, as it had before FINRA, that the disciplinary proceeding was ultra vires. FINRA filed a motion to dismiss for lack of subject-matter jurisdiction and failure to state a claim.
On April 26, 2016, the district court held a hearing on the motion to dismiss. Assuming without deciding that Scottsdale had a cause of action under the Exchange Act, the district court nonetheless found it “clear” that “Congress intended to channel judicial review through th[e] comprehensive scheme” found in
II.
A.
Scottsdale argues FINRA exceeded its authority by charging it with violations of the Securities Act and, therefore, the proceeding is ultra vires. FINRA counters that, as a threshold matter, Scottsdale must first press its claim through the administrative process and then seek review in the appropriate court of appeals. We review a district court‘s dismissal of a complaint for lack of subject-matter jurisdiction de novo. Nat‘l Taxpayers Union v. U.S. Soc. Sec. Admin., 376 F.3d 239, 241 (4th Cir. 2004).
B.
Article III courts are “courts of limited jurisdiction,” possessing “only that power authorized by Constitution and statute.” Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994). “Congress may, in its discretion, grant, withhold, or otherwise limit the jurisdiction of the lower federal courts.” Wade v. Blue, 369 F.3d 407, 410 (4th Cir. 2004). We are bound by those limitations unless they offend the Constitution. See Bowles v. Russell, 551 U.S. 205, 212 (2007).
Notwithstanding the exclusive grant of jurisdiction to the courts of appeals in the Exchange Act, Scottsdale argues the district court had jurisdiction to consider its claim because FINRA lacked authority to initiate the disciplinary proceeding. Scottsdale believes it need not, as it describes it, exhaust administrative remedies before seeking review in this court for two reasons.3 First, Scottsdale claims the limited exception to jurisdiction-strip-
C.
1.
Scottsdale first argues the district court had jurisdiction under Leedom. Leedom involved a challenge to the National Labor Relations Board‘s (“NLRB“) decision—in direct violation of the National Labor Relations Act (“NLRA“)—to include both professional and nonprofessional employees in a collective bargaining unit. 358 U.S. at 184-86. Before the Court, the NLRB conceded that it “had acted in excess of its powers and had thereby worked injury to the statutory rights” of the petitioners. Id. at 187. Even though the NLRA precluded district court jurisdiction of such an action, the Supreme Court held that the district court had jurisdiction because the NLRB had acted “in excess of its delegated powers and contrary to a specific prohibition in the Act.”4 Id. at 188 (emphasis added). In such a case, the Court reasoned, the suit is not to “review” as the term is used in the governing statute because the agency has acted without authority. Id.
Scottsdale contends that, similar to the action in Leedom, FINRA has exceeded its delegated authority, thereby removing the statutory bar to jurisdiction. However, such a reading extends Leedom beyond its “painstakingly delineated procedural boundaries.” Boire v. Greyhound Corp., 376 U.S. 473, 481 (1964). Leedom relied on the presumption that when “Congress has given a ‘right’ . . . it must be held that it intended that right to be enforced” and that intention supersedes congressional jurisdiction-stripping provisions. 358 U.S. at 191. If the district court in Leedom did not exercise jurisdiction, petitioners would have “no other means, within their control, to protect and enforce” a congressionally given right. Id. at 190. By contrast, Scottsdale does not identify a congressionally authorized right of action.5
Leedom is also factually distinguishable in that FINRA does not concede that it acted in excess of its statutory authority. Before the district court and on appeal, FINRA maintains it has authority to sanction members for violations of all
2.
In addition to being procedurally and factually dissimilar to Leedom, Scottsdale cannot satisfy this court‘s two-pronged test to invoke the Leedom exception. To do so, a petitioner must make (1) a “strong and clear demonstration that a clear, specific and mandatory [statutory provision] has been violated,” Long Term Care Partners, LLC v. United States, 516 F.3d 225, 234 (4th Cir. 2008) (quoting Newport News Shipbuilding & Dry Dock Co. v. NLRB, 633 F.2d 1079, 1081 (4th Cir. 1980)), and (2) “the absence of federal court jurisdiction over an agency action ‘would wholly deprive’ the aggrieved party ‘of a meaningful and adequate means of vindicating its statutory rights.‘” Id. at 233 (quoting Bd. of Governors of Fed. Reserve Sys. v. MCorp Fin., Inc., 502 U.S. 32, 43 (1991)). After considering these criteria, we conclude that the Leedom exception does not apply.
First, FINRA has not violated a clear statutory prohibition. “When a party invokes Leedom as the basis for this court‘s jurisdiction, we conduct a ‘cursory review of the merits’ to determine if the agency acted ‘clearly beyond the boundaries of its authority.‘” Id. at 234 (quoting Champion Int‘l Corp. v. EPA, 850 F.2d 182, 186 (4th Cir. 1988)). So long as the agency‘s interpretation of the statute is “plausible” . . . we will find that it did not “violate a clear statutory mandate.” Id. (quoting Hanauer v. Reich, 82 F.3d 1304, 1311 (4th Cir. 1996)).7
Scottsdale points to numerous references in the Exchange Act that limit the authority of FINRA to discipline members for violations of “this chapter,” that is, the Exchange Act. See, e.g.,
Scottsdale also cannot satisfy the second criterion because the Exchange Act provides Scottsdale a “meaningful and adequate opportunity for judicial review” of its claims. MCorp, 502 U.S. at 43. Congress established a comprehensive system whereby Scottsdale can appeal an adverse FINRA decision to the SEC and a final adverse SEC decision in the appropriate court of appeals.
Because FINRA‘s interpretation of its authority to charge its members with violations of the Securities Act is plausible and the Exchange Act provides for meaningful judicial review, the Leedom exception does not apply. In so holding, we have not decided the “ultimate merits,” Long Term Care, 516 F.3d at 234-35, of FINRA‘s position, but simply conclude that Scottsdale‘s claim does not fall within the “narrow limits” of Leedom. Boire, 376 U.S. at 481.
D.
Scottsdale next argues that, even if Leedom does not apply, and notwithstanding the comprehensive judicial-review provisions, Congress did not intend to strip district courts of jurisdiction over this particular type of claim. When deciding whether a particular claim falls outside of the congressionally enacted review scheme, we employ the two-step analysis outlined in Thunder Basin. First, we ask whether Congress‘s intent to divest district courts of jurisdiction is “fairly discernible” from the statute‘s text, structure, and purpose. Thunder Basin, 510 U.S. at 207 (quoting Block v. Cmty. Nutrition Inst., 467 U.S. 340, 351 (1984)); see also Bennett, No. 15-2584, slip op. at 19). Neither party disputes that it is “fairly discernible” that Congress intended to preclude district court jurisdiction. See Appellant‘s Br. at 27.
We therefore turn to step two of Thunder Basin and ask whether Scottsdale‘s “claims are of the type Congress intended to be reviewed within this statutory structure.” 510 U.S. at 212. This claim-specific analysis considers three factors: (1) whether “adjudication of petitioner‘s claims through the statutory-review provisions will violate due process by depriving petitioner of meaningful judicial review“; (2) whether the claims are “wholly collateral” to the statute‘s review provisions; and (3) whether the claims are “outside of the agency‘s expertise.” Id. at 212-14. Applying each of these factors to Scottsdale‘s claim, we
First, Scottsdale can obtain meaningful judicial review. The Exchange Act sets out a comprehensive review scheme through which Scottsdale could have ultimate judicial review in this court.
Scottsdale‘s desire to “prevent the per se irreparable harm of being forced to submit to the orders of an organization acting beyond the limits of its statutory authority,” Appellant‘s Br. at 28-29, conflicts with the long-standing principle that “the expense and annoyance of litigation is ‘part of the social burden of living under government.‘” Bennett, slip op. at 22 (quoting FTC v. Standard Oil of Cal., 449 U.S. 232, 244 (1980)). The same is true of Scottsdale‘s allegations of potential reputational harm. See Sampson v. Murray, 415 U.S. 61, 89 (1974).
Scottsdale‘s concern that it will be unable to press its claims if it prevails before FINRA also lacks merit. Federal regulations “specifically provide[]” mechanisms by which Scottsdale could challenge FINRA Rule 2010 outside of the disciplinary proceeding. Standard Oil, 449 U.S. at 245. Scottsdale could petition the SEC—apart from any disciplinary action—to amend or repeal FINRA Rule 2010. See
Turning to the second Thunder Basin factor, Scottsdale‘s claims are not wholly collateral to the Exchange Act. In Bennett, we explained that a claim is not wholly collateral when it is “‘the vehicle by which [petitioners] seek to reverse’ agency action.” Bennett, No. 15-2584, slip op. at 26 (quoting Elgin v. Dep‘t of Treasury, 567 U.S. 1, 21 (2012)). Scottsdale challenges “FINRA‘S statutory authority to prosecute disciplinary actions premised on alleged violations of the Securities Act.” Appellant‘s Br. at 30. As Scottsdale‘s claim arises out of the proceeding against it and provides an affirmative defense, it is not wholly collateral to the statute.
Finally, Congress has expressly determined the SEC‘s expertise is relevant to the claim at issue here. Scottsdale argues its claim, like the petitioners’ claim in Free Enterprise, is outside of the SEC‘s “competence and expertise.” 561 U.S. at 491. In Free Enterprise, the Supreme Court permitted a petitioner to bring a pre-enforcement constitutional challenge to the existence of the Public Company Accounting Oversight Board despite Congress‘s intent to channel claims through the statutory scheme laid out in § 78y. Id. at 490. The Free
Scottsdale‘s argument that this claim lies outside of the agency‘s expertise is belied by the text of the Exchange Act. Section 19 of the Exchange Act lays out a comprehensive oversight scheme whereby Congress gives the SEC the authority to supervise FINRA‘s rules, including approving or modifying FINRA rules in any way the agency deems appropriate or necessary.
III.
When Congress provides a comprehensive review scheme our judicial review must comport with those statutory provisions unless doing so would violate the Constitution. Congress, through the Exchange Act, intended to channel objections to FINRA‘s authority through the agency and the courts of appeals. In so doing, it is clear Congress sought to preclude federal district-court jurisdiction. Because Scottsdale can obtain meaningful judicial review of its claim in this court following the appeal process outlined in the Exchange Act, we hold its challenge to FINRA‘s authority is the type of claim Congress intended to be reviewed within the statutory scheme. Accordingly, the district court properly dismissed for lack of subject-matter jurisdiction. For these reasons, the judgment of the district court is
AFFIRMED.
ALLYSON K. DUNCAN
UNITED STATES CIRCUIT JUDGE