Opinion
Civil Action No. 04-540.
October 4, 2004
MAGISTRATE JUDGE'S REPORT AND RECOMMENDATION
I. RECOMMENDATION
For the reasons stated below, it is respectfully recommended that Defendant's Motion to Dismiss (Doc. 5) pursuant to Federal Rules of Civil Procedure 12(b)(1), 12(h)(3), and 12(b)(6) be granted in its entirety.
II. REPORT
BACKGROUND 1. Procedural History
Ann Matyuf ("the Plaintiff") commenced this civil action against NASD Dispute Resolution, Inc. ("the NASD-DR") in the Court of Common Pleas of Allegheny County on December 12, 2003. See Notice of Removal (Doc. 1); see also Petition to Vacate Arbitration Award (attached as Ex. A to Notice of Removal; hereinafter cited as "Compl.").
Defense counsel accidentally omitted a page of the Plaintiff's Complaint in its Notice of Removal. See generally Compl. For the purposes of ruling on the instant motion, the court contacted defense counsel and requested her to fax a copy of the omitted page. Counsel has done so, and a copy of the faxed page appears as an attachment to this Report and Recommendation. To the extent that the Plaintiff may seek to challenge the authenticity of this submission, she may do so during the objections period. Otherwise, the court will assume that it is accurate and thereby incorporate it into the record.
The Complaint seeks to vacate an arbitration award of forum fees rendered in favor of the NASD-DR and against the Plaintiff in the amount of $1,687.50. See generally Compl. The Plaintiff maintains that these fees bore no "reasonable relationship" to the costs incurred by the NASD-DR to conduct the Plaintiff's arbitration, and were otherwise "unjust, inequitable[,] and unconscionable." See Compl. ¶¶ 8, 11.
The underlying arbitration proceeding was based on the Plaintiff's "causes of action relat[ing] to the purchase and sale of various securities" against various respondents, including "breach of fiduciary duties; suitability; fraudulent misrepresentations; omissions; churning; negligence; breach of contract; and, unauthorized trading." See generally Award NASD Dispute Resolution, Case No. 02-04699 (attached as Ex. 1 to Compl.). The arbitration panel ruled in the Plaintiff's favor and awarded her $50,000.00. See id., "Award." The Plaintiff has not alleged any error in terms of the substance of the ruling; but only seeks relief from the forum fees identified above. See generally Compl.
The Defendant removed the action to the United States District Court for the Western District of Pennsylvania on the basis of federal question jurisdiction — that is, the "action ar[ose] out of[,] and it s[ought] to enforce a duty or liability created pursuant to the provisions of the [Securities] Exchange Act [of 1934] [("the SEA")], 15 [United States Code Section] 78a, et seq." See Notice of Removal ¶ 5; see also 28 U.S.C. Sections 1441 1331.
Now before the court is the Defendant's Motion to Dismiss (Doc. 5; "the Defendant's Motion") pursuant to Federal Rules of Procedure 12(b)(1), 12(h)(3), and 12(b)(6). The briefing has come to a close, and this matter is now ripe for adjudication. See generally Def.'s Br. in Supp. of Mot. to Dismiss (Doc. 6; hereinafter cited as "Def.'s Br."); Br. in Supp. of Pl.'s Resp. to Def.'s Mot. to Dismiss (Doc. 9; hereinafter cites as "Pl.'s Br.").
ANALYSIS 1. Subject Matter Jurisdiction
The NASD-DR is a subsidiary of the National Association of Securities Dealers ("the NASD"), which is registered with the Securities and Exchange Commission ("the SEC") as a self-regulating organization ("SRO"). See, e.g., Lowe v. NASD Regulation, Inc., 1999 WL 1680653, *2 (D.D.C. Dec. 14, 1999). As an SRO, the NASD is subject to "extensive, ongoing oversights and control by the SEC." See Swirsky v. NASD, 124 F.3d 59, 62 (1st Cir. 1997) (citation omitted).
As part of this oversight, the NASD must file all proposed rules — including rules contained in its Code of Arbitration Procedure — with the SEC prior to implementation. See, e.g., Whitehall Wellington Invs., Inc. v. NASD, Inc., 2000 WL 1846129, *1 (S.D. Fla. Dec. 7, 2000). Once proposed, the rules must be approved by the SEC — specifically, "the SEC must determine that the proposed rule is consistent with the purposes of the Securities Exchange Act." See id. The SEC may abrogate or amend the NASD's rules at any time, and interested parties may submit comments concerning the proposed NASD rules directly to the SEC. See id. (citations omitted).
The exclusive means to challenge an SEC-approved NASD rule in federal court is through filing a petition to the United States Court of Appeals. See, e.g., id. ("Judicial Review of SEC-approved NASD rules are limited exclusively to the United States Courts of Appeals.") (citing 15 U.S.C. § 78y); Desiderio v. NASD, Inc., 2 F.Supp.2d 516, 522 (S.D.N.Y 1998) ("Section 25 of the Exchange Act, which governs the `form of proceeding for judicial review' . . . requires that any party aggrieved or adversely affected by the entry of an order or promulgation of a rule must file a written petition with a United States Court of Appeals within 60 days after entry of the order or rule") (citing 15 U.S.C. §§ 78y(a)(1), (b)(1)); Lang v. French, 974 F.Supp. 567, 569 (E.D. La. 1997) ("The statutory scheme with respect to an SEC order of this nature provides for an appeal by a person adversely affected by a rule of the SEC . . . to be lodged directly in the United States Court of Appeals for the circuit in which he resides or has his principal place of business or for the District of Columbia Circuit with[in] 60 days of the promulgation of the rule.") (emphasis in original; citations omitted). The District Court lacks subject matter jurisdiction to review the propriety of such rules, or otherwise overturn or modify them. See Desiderio, 2 F.Supp.2d at 522 (dismissing the plaintiff's complaint filed in district court, which attempted to collaterally attack SEC-approved rule, for lack of subject matter jurisdiction); Lang v. French, 974 F.Supp. at 569 ("A district court is not empowered with respect to the review of the [SEC's] findings. Thus, had [the plaintiff] sought relief [from the adverse effect from an SEC rule], this Court would not have had the power to entertain the matter.") (citation omitted).
Despite counsel's musings to the contrary, the Plaintiff's Complaint is at its essence nothing more than a thinly-veiled collateral attack on the reasonableness of the fee schedule contained in the NASD's Code of Arbitration Procedure ("the Code") Rule 10332 ("Rule 10332"), which authorizes "arbitrators, in their awards, [to] determine the amount chargeable to the parties as forum fees and [to] determine who shall pay such forum fees." See, e.g., Pl.'s Br. at 1 (stating that the Complaint sought to "vacate that portion of the NASD-DR's forum fees awarded to [the] NASD-DR [pursuant to the arbitrators' authority under Rule 10332], which are unreasonable within the meaning of [S]ection 15A(b)(5) of the [SEA] . . ., which require that the rules of an [SRO] provide for the `equitable allocation of reasonable fees'") (emphasis added); id. at 2 ("The NASD-DR's fee schedule codified in Rule 10332 . . . allows the NASD-DR to charge the parties to an NASD arbitration more than the average direct costs incurred by [the] NASD-DR to provide arbitration services to them, which is patently unreasonable under [S]ection 15A(b)(5) of the [SEA], . . . which requires that the [NASD-DR's] rules provide for the `equitable allocation of reasonable fees'") (emphasis added); id. at 17 (restating that "the NASD-DR's fee schedules required the arbitrators . . . to assess forum fees . . . that w[ere] substantially more than the average direct costs incurred by [the] NASD-DR to provide arbitration services to them, which is patently unreasonable under [S]ection 15A(b)(5) of the [SEA], ". . . which require that the [NASD-DR's] rules provide for the `equitable allocation of reasonable fees'") (emphasis added).
See NASD's Code of Arbitration Procedure Rule 10332 (attached as Ex. A to Def.'s Br.). The full text of the Code is also available electronically at http://www.nasdadr.com/arb_code/arb_code.asp.
The fee structure contained in Rule 10332 has been approved twice by the SEC — initially in 1990, and in its revised form in 1999. See SEC Release No. 34-28086 (June 1, 1990), 55 FR 23493-02 (June 8, 1990), available at 1990 WL 342529 (adopting proposed fee schedule in precursor to Rule 10332, finding that it "was consistent with the requirements of the [SEA] and the rules and regulations thereunder applicable to the NASD and, in particular . . . section 15A(b)(5) of the Act which requires that the rules of the Association provide for the equitable allocation of reasonable dues, fees, and other charges . . ."); SEC Release No. 34-41056 (Feb. 16, 1999), 64 FR 10041-01 (March 1, 1999), available at 1999 WL 97498 (F.R.) (adopting proposed increases in fee schedule as "reasonable under the Act because they are designed to cover the direct costs of administering the arbitration program").
As the cases cited supra make clear, the Plaintiff's sole recourse to modify and/or abrogate the NASD-DR's fee schedule — and Rule 10332 in particular — would have been to file a petition with the United States Court of Appeals for the Third Circuit or for the District of Columbia. In light of this clearly defined statutory scheme, the District Court cannot assume subject matter jurisdiction to entertain such an action. See cases cited supra. Thus, the Defendant's Motion should be granted to the extent that it seeks dismissal for lack of jurisdiction under Federal Rules of Civil Procedure 12(b)(1) and 12(h)(3). See Fed.R.Civ.P. 12(h)(3) ("Whenever it appears by suggestion of the parties or otherwise that the court lacks jurisdiction of the subject matter, the court shall dismiss the action").
The Plaintiff's attempt to invoke Section 27 of the SEA ("Section 27") as a potential basis for jurisdiction is something of a red herring. See Pl.'s Br. at 8-10; see also 15 U.S.C. § 78aa ("The district court . . . shall have exclusive jurisdiction of . . . all suits in equity and actions at law brought to enforce any liability or duty created by [the SEA] or the rules and regulations thereunder."). That is, even if this case could be characterized as an action to enforce the NASD-DR's duty to follows its own rules, i.e., the Code — a characterization which the court finds to be implausible in itself, see discussion supra — it is well-established that neither Sections 15A and 19 of the SEA, nor the Code, create a private cause of action to enforce such rights. See MMS Fin., Inc. v. NASD, Inc., 364 F.3d 908, 910-912 (8th Cir. 2004) (implicitly finding federal jurisdiction in enforcement case, but agreeing with "the weight of authority" that "the [SEA] does not create a private right of action against the NASD defendants for violating their own rules") (citations omitted); Sparta Surgical Corp. v. NASD, Inc., 159 F.3d 1209, 1213 (9th Cir. 1998) (finding federal jurisdiction but concluding that "[i]t is undisputed . . . that a party has no private right of action against [the NASD] for violating its own rules or for actions taken to perform its self-regulatory duties under the [SEA] [;] . . . [t]hus, to the extent that [the plaintiff] seeks private relief for NASD['s] . . . breach of [its] own rules, its claims are barred"); Lowe, 1999 WL 1680653 at *3 (finding federal jurisdiction where plaintiff sought "to enforce the [NASD-DR's] duty to follow its own Rules of Arbitration[,]" but acknowledging that there "is no private right of action under Sections 15A and 19 for violations of NASD rules" and that "no private right of action can be conferred by the [NASD's] rules themselves"). Nor can the Plaintiff assert state law causes of action to "evade the doctrine that no private right of action exists [under the SEA or NASD rules] against the NASD[-DR]" for failure to follow its own rules. See, e.g., MMS Fin., Inc., 364 F.3d at 911-912 (citations and internal quotations omitted). Put simply, even if the court were to assume jurisdiction under Section 27, the Complaint would then be dismissed under Rule 12(b)(6) grounds for failure to state a claim. 2. The Merits
The sole case cited by the Plaintiff to support her theory of jurisdiction/implied right of action under Section 27 isBright v. Philadelphia-Baltimore-Washington Stock Exchange, 327 F.Supp. 495 (E.D. Pa. 1971). Bright, however, is inapposite to instant law suit. First, as a matter of fact, the Plaintiff inBright specifically alleged that the defendant stock exchange had failed to comply with its own constitution. As stated above, the Plaintiff here does not allege that the NASD-DR failed to comply with its own rules, i.e., the Code; rather, the Plaintiff's sole contention is that the Code, and the fee schedule therein, is unreasonable within the meaning of the SEA. See discussion supra. Second, as a matter of law, the Plaintiff conveniently fails to mention that holding in Bright — specifically its conclusion that Section 6 of the SEA gave rise to an implied right of action — was substantively overturned by the 1975 Amendments to the SEA. See Spicer v. Chicago Bd. of Options Exchange, Inc., 977 F.2d 255, 260-261 (7th Cir. 1992) (listing pre-1975 amendment cases recognizing an implied right of action under Section 6(b), including Bright, and concluding "[t]o the the extent, if any, that § 6(b) once provided an implied remedy against an exchange for failing to comply with or enforce its own rules, the 1975 Amendments conclusively demonstrate that Congress did not intend to preserve that remedy, at least in § 6(b)").
Even if the court were to exercise jurisdiction over the instant action, the Plaintiff's Complaint fails to state a claim under the substantive law that it cites as the basis of its cause of action — that is, Section 7341 of the Pennsylvania Uniform Arbitration Act ("Section 7341"), 42 Pa.C.S.A. § 7341, et seq. See generally Compl. ¶ 11 "Wherefore Clause."
The court notes parenthetically that the Plaintiff does seek to vacate the award under the Federal Arbitration Act, 9 U.S.C. § 10 ("the FAA"), which the court believes would have been the proper statutory vehicle for the Plaintiff's cause of action here. Nevertheless, as the Plaintiff has failed to comply with any of the procedural prerequisites to an FAA claim, the Plaintiff has forfeited her rights to that type of judicial review. See, e.g., Kruse v. Sands Brothers Co., Ltd., 226 F.Supp.2d 484, 485-86 (S.D.N.Y. 2002) (outlining procedure to vacate an arbitration under the FAA, including the requirements that vacatur must be made in the form of a motion — not a complaint — and that a notice of a motion to vacate must be served on the adverse party within three months).
Under Section 7341, an arbitration award "may not be vacated or modified unless it is clearly shown that a party was denied a hearing or that fraud, misconduct, corruption or other irregularity caused the rendition of an unjust, inequitable or unconscionable award." See McKenna v. Sosso, 745 A.2d 1, 4 (Pa.Super.Ct. 1999) (emphasis added; citing 42 Pa.C.S. § 7341). Pennsylvania courts have characterized the scope of judicial review as "extremely narrow." See id.
In order to vacate and award based on "fraud," as defined by the statute, the plaintiff must demonstrate "[the arbitrator's] collusion with the benefitted party[.]" See Mark Silverstein v. Lutheran Hous. and Dev. Corp., 1985 WL 384560, *1 (Pa. Com. Pl. July 18, 1985) (citing Allstate Ins. Co. v. Fioravanti, 299 A.2d 585, 589 (Pa. 1973)). Mere "evidence of partiality and some improper conduct will not suffice." See id. (citation omitted). To vacate an award for an "other irregularity," the plaintiff must show that the award "imports extreme bad faith, ignorance of the law and indifference to the justice of the result." See id. (citation omitted).
Common sense dictates that in order to prevail on such a claim, the plaintiff must identify some conduct — either by the arbitrator(s) or by the parties — within the immediate context of the arbitration that rendered the disputed award "unjust, inequitable or unconscionable." The case law that has developed around Section 7431 confirms this to be true. See, e.g., Nationwide Ins. Co. v. Frazier, 39 Pa. D. C.3d 254, 259 (Pa. Com. Pl. 1986) (stating that in order to prevail, the plaintiff must demonstrate by "clear, precise and indubitable evidence" that "fraud, misconduct, corruption or some other irregularity of that nature on the part of the arbiter which caused the arbiter to render an unjust, inequitable, or unconscionable award.) (emphasis added; citation omitted); see also, e.g., Louis J. Viglione Contracting Inc. v. F.F. Monroeville Associates, 43 Pa. D. C.4th 292, 297 (Pa. Com. Pl. 1999) (stating that an "other irregularity" may be found "only when there is a defect in the process or procedure employed in the arbitration which rises to a level commensurate with fraud, misconduct, or corruption") (emphasis added; citation omitted); McKenna, 745 A.2d at 4 (In this context, "irregularity refers to the process employed in reaching the result of the arbitration, not to the result itself[;] . . . [moreover, a] cognizable irregularity may appear in the conduct of either the arbitrators or the parties") (emphasis added; citation omitted).
The Plaintiff concedes that there was no fraud or collusion by the arbitrators within the context of the challenged arbitration. See Pl.'s Br. at 13-14 (stating "it is true that the Plaintiff's [Complaint] did not allege [any] fraud by the arbitrators, [or] collusion with the NASD-DR"). The only "irregularities" commensurate with fraud identified by the Plaintiff fall far outside of the context of the arbitration, and relate exclusively to the NASD's conduct when it presented the proposed changes to its fee schedules to the SEC. See Pl.'s Br. at 2-3 (arguing that the NASD-DR's predecessor induced the SEC to adopt the "NASD-DR's unreasonable forum fee schedule" by submitting a "false or misleading `costing study' . . . which grossly overstated [the] costs of conducting arbitration hearings, and was commensurate with fraud, misconduct or corruption within the meaning of Section 7431 . . ."); id. at 5-7 (elaborating on the allegedly fraudulent costing-study submitted to the SEC in order to adopt Rule 10332); id. at 11-12 (identifying the "fraud" alleged in this case to be the "NASD Regulation Inc.'s costing study [that] presented false or misleading evidence to the SEC in order to persuade the SEC to approve the feeschedule increases incorporated into Rule 103[3]2 of the NASD's Code of Arbitration Procedure . . .") (internal quotations omitted); id. at 17-18 (again referencing the allegedly fraudulent costing study). If there is any authority supporting the Plaintiff's attenuated theory of fraud or "other irregularity," the Plaintiff has failed to cite it.
Nor can fraud simply be inferred from the "facts and circumstances alleged by the Plaintiff" suggesting that the forums fees were "substantially more than the average direct costs incurred by NASD-DR." Compare Pl.'s Br. at 17 with East Nottingham Tp. v. Fisher, 482 A.2d 291, 293 (Pa.Commw. Ct. 1984) (rejecting the plaintiff's argument "that the award was so excessive that [inferentially] it [must have] amounted to misconduct on the part of the arbitrator[,]" reasoning "[m]erely characterizing an arbitration award as excessive is insufficient to justify setting aside the award") (internal quotations and citation omitted).
In sum, there is no conceivable merit to the Plaintiff's claims, and they should be dismissed to the extent that the court has any jurisdiction to do so. See Conley v. Gibson, 355 U.S. 41, 45-46 (1957) (dismissal of a complaint under Rule 12(b)(6) is proper where "it appears beyond a doubt that plaintiff can prove no set of facts in support of his claim that would entitle him to relief") (citations omitted). Accordingly, the District Court should grant the Defendant's Motion to the extent that it alternatively seeks dismissal based on the Plaintiff's failure to state a claim.
III. CONCLUSION
For the reasons stated above, it is recommended that the District Court grant the Defendant's Motion to Dismiss (Doc. 5) in its entirety.
In accordance with the Magistrates Act, 28 U.S.C. § 636(b) (1) (B) and (C), and Rule 72.1.4 (B) of the Local Rules for Magistrates, objections to this report and recommendation are due by October 20, 2004. Response to objections are due by November 1, 2004.