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Wednesday
Jan252017

Doscher v. Sea Port Grp. Sec., LLC: The Second Circuits’ “Look Through” Approach in Determining Federal Question Jurisdiction in Federal Arbitration Act claims related to SROs 

 In Doscher v. Sea Port Grp. Sec., LLC, 832 F.3d 372 (2d Cir. 2016), the United States Court of Appeals for the Second Circuit dismissed, for lack of subject matter jurisdiction, Plaintiff Drew Doscher’s (“Appellant”) petition to vacate a Financial Industry Regulatory Authority (“FINRA”) arbitration award under section 10 of the Federal Arbitration Act (“FAA”). The Second Circuit remanded the case and instructed the district court that it could “look through” the petition to the underlying dispute in determining federal-question jurisdiction.    

According to the allegations, Appellant commenced arbitration against his former employers following his termination from Sea Port Group LLC and Sea Port Group Securities LLC. Appellant sought more than $15 million in damages, claiming breach of contract, retaliatory discharge, unjust enrichment, and securities fraud. The arbitration panel, however, awarded Appellant approximately $2.3 million in damages with the opportunity for additional commissions on a pending trade.  

In January 2015, Appellant filed a federal lawsuit pursuant to FAA section 10 to vacate and modify in part the low arbitral award. Appellant argued for vacatur on two grounds: “(1) the arbitration panel failed to ensure that documentary evidence was fully and timely made available to [Appellant], thereby warranting vacatur under § 10, and (2) the arbitration panel acted in manifest disregard of FINRA Rule 13505 requiring parties to cooperate in discovery.” Appellant asserted the district court had subject matter jurisdiction under two theories of federal question jurisdiction: (1) that the petition allows for the exercise of federal question jurisdiction on its face because FINRA Rule 13505 is federal law, and (2) the § 10 argument creates federal question jurisdiction. 

The Second Circuit rejected Appellant’s argument that the arbitration panel acted in manifest disregard of federal law.  The court declined to find that violations of internal rules of FINRA constituted federal law.  Instead, the allegations had to show a violation of the Exchange Act.  Plaintiff, however, had not done so.  As the court reasoned, “the Exchange Act itself imposes no duty to comply with FINRA rules either on the arbitrators or non-SRO parties to arbitration.”  

 In considering whether the petition created a federal question, the court addressed precedent holding that the issue had to be determined on the face of the petition and that a court could not “look through” the petition do determine whether the underlying dispute involved substantial questions of federal law.  The court, however, determined that the approach was no longer valid as a result of the Supreme Court’s decision in Vaden v. Discover Bank. As a result, district courts were no longer limited by the content of the petition but could “look through” the to the underlying claim.  As a result, the court vacated the district court decision and remanded for application of the look through doctrine “in the first instance.”      

The primary materials for this case may be found on the DU Corporate Governance website.

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