Lanier v. BATS Exch. Inc.: Court Finds It Has Proper Subject Matter Jurisdiction

This is one of two posts discussing Lanier v. BATS Exch. Inc., 838 F.3d 139 (2d Cir. 2016). This post will specifically cover subject matter jurisdiction. The second post covers failure to state a contract claim.

In Lanier v. BATS Exch. Inc., 2d Cir., No. 151683 (2d Cir. Sep. 23, 2016), the United States Court of Appeals for the Second Circuit held it had proper subject matter jurisdiction to consider the claims.

Defendants, national Securities Exchanges (the “Exchanges”), provide information about securities traded on the Exchanges to an exclusive securities processor (“Processor”) pursuant to Regulation National Market System (”Reg NMS”). Reg NMS standardizes the dissemination of market information by all exchanges trading U.S. securities under the authority of the Securities and Exchange Commission (“SEC”). The Processor consolidates data and makes it available to subscribers (“Subscribers”), who pay fees for access. The Exchanges also provided access to market data on proprietary distribution channels to customers who paid higher fees (“Preferred Customers”) than standard Subscribers. According to the complaint, Preferred Customers could access market data up to 1,499 microseconds faster than Subscribers due to the difference in processing time between the two services, and therefore trade on the data earlier.

Harold Lanier, on behalf of himself and others similarly situated (collectively, the “Plaintiffs”), filed suit against the Exchanges alleging that the Exchanges had breached their contract with the Plaintiffs by providing preferentially fast access to the Preferred Customers. The Exchanges argued that the district court lacked subject matter jurisdiction because the Plaintiffs were required to seek SEC review of their claims first, and then appeal any adverse decision directly to the court of appeals.

A district court lacks subject matter jurisdiction to hear claims when Congress creates a comprehensive regulatory scheme where it is fairly discernable Congress intended agency expertise would be brought to bear prior to any court review. In determining whether Congress implicitly precluded federal district court jurisdiction, the court must first determine if preclusion is discernable from the text, structure, and purpose of the statute. Second, the court must then decide whether the claim is of the type Congress intended to be reviewed within the statutory structure. Tilton v. Sec. & Exch. Comm’n, 824 F.3d 276, 281 (2d Cir. 2016). This second step is guided by three factors: (1) whether “a finding of preclusion could foreclose all meaningful judicial review”; (2) whether the suit is “wholly collateral to a statute’s review provisions”; and (3) whether the claims are outside of the agency’s expertise. Thunder Basin Coal Co. v. Reich, 510 U.S. 200, (1994).

The court elected not to address the first step of the Tilton analysis, as it determined the Plaintiffs’ contract claims are not the type Congress intended to be precluded from district court jurisdiction. Under the second step of the Tilton analysis, the court held the Plaintiffs’ claims were not “wholly collateral” because the claims were not substantively intertwined with the merits of an issue that, under the statute’s provisions, must first be heard by the SEC. The court further held that the SEC possessed no “agency expertise” that would make a district court less competent to hear the case, as the Plaintiffs’ claims are rooted in contract law, an area of law squarely within the district court’s competency. Finally, the court found the preclusion of district court jurisdiction would foreclose the Plaintiffs’ ability to obtain meaningful judicial review as the Plaintiffs principally seek monetary damages and the administrative review provisions of the Securities and Exchange Act do not provide for such damages.

Accordingly, the court held it had proper subject matter jurisdiction to hear the Plaintiffs’ claims.

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

Ryan Sharkey