While the COVID-19 pandemic has shuttered much of the country’s judicial machinery, courts have released opinions on matters argued prior to the stoppage. Two recent federal court opinions – Cherdak, out of the D.C. District[1] and Lanza, decided by the First Circuit[2] – touched on an issue with relevance to financial professionals: arbitral immunity. This doctrine bars lawsuits against arbitrators for actions in the “scope of their adjudicative duties.”[3] As financial professionals can find themselves in arbitrations before several different bodies,[4] they may have to confront arbitral immunity.
Scope of Arbitral Immunity
Arbitral immunity grants arbitrators absolute immunity for conduct “within the scope of their adjudicative duties” – even if that conduct is “alleged to be malicious, irregular, or erroneous.”[5] The doctrine evolved from absolute judicial immunity, which grants the same protection to judges.[6] In both circumstances, immunity exists to shield judicial decisionmakers “from undue influence and protect the decision-making process from reprisals by dissatisfied litigants.”[7] The idea is that “most judicial mistakes or wrongs are open to correction through ordinary mechanisms of review, which are largely free of the harmful side-effects inevitably associated with exposing [judicial decisionmakers] to personal liability.”[8]
Arbitral immunity stretches beyond the arbitrators themselves to the sponsoring organizations, like FINRA and the AAA.[9] As multiple courts have concluded, “failing to extend immunity to the boards sponsoring the arbitrators would render the immunity ‘illusionary’ because ‘[i]t would be of little value to the whole arbitral procedure to merely shift the liability to the sponsoring association’.”[10]
Applying Arbitral Immunity
Arbitral immunity only shields conduct within the “scope of [an arbitrator’s] adjudicative duties.”[11] Thus, immunity does not cover every act performed by an arbitrator (or judge), only those deemed “judicial” or “adjudicative.”[12]
Decisional rulings
The clearest example of “judicial acts” are “decisional rulings on the progress or disposition” of an arbitration.[13] So immunity protects arbitrators’ final decisions on the outcome of a dispute.[14] This extends to decisions leading up to the final outcome, such as evidentiary matters, procedural rulings, and disputes over arbitration rules.[15] Along similar lines, courts have also barred claims against sponsoring organizations for failing to provide a “fair arbitration forum”[16] and mismanaging discovery.[17]
“Integrally related” acts
Further, arbitral immunity protects administrative tasks that are “integrally related” to the arbitration.[18] At a general level, these are actions by arbitrators or sponsoring organizations that facilitate the arbitration.[19] IMG offers a good example. In that case, an insured filed a claim with the AAA, alleging IMG and another insurer owed him for certain medical expenses.[20] Upon receiving the claim, the AAA sent letters to the insurers notifying them that the filing requirements had been met and the arbitration would be moving forward.[21] Believing the dispute was not arbitrable, the insurers sued the AAA, in part, for proceeding with the claim despite an alleged lack of jurisdiction.[22] The district court dismissed, and the Seventh Circuit affirmed. In its opinion, the Seventh Circuit held that arbitral immunity covered the AAA because its letters and initial procedure were “integrally related” to the arbitration, like the “administrative tasks of a court clerk accepting a complaint for filing.”[23]
In the FINRA context, Gill is similarly instructive. There, Merrill Lynch won a FINRA arbitration, against Gill, a former financial advisor with the company, which Gill challenged by suing FINRA.[24] His complaints were procedural – namely, that FINRA did not provide him timely notice of Merrill’s claim, did not allow him adequate time to prepare for the arbitration, and did not notify him of a pretrial hearing.[25] The Southern District of New York ruled that arbitral immunity protected FINRA. Specifically, the Court determined that Gill’s complaints about improper notice and scheduling fell into the category of “ensuring that a party responds to a Statement of Claim.” The Court found this “undoubtedly integrally related to the arbitral process.”[26]
Acts that are not immune
Though extensive, arbitral immunity does not cover every action an arbitrator might take. For example, it does not protect an arbitrator who acts without jurisdiction.[27] Nor does it cover an arbitrator’s personnel decisions.[28] As the United States Supreme Court noted in Forrester, while these decisions may be “important in providing the necessary conditions of a sound adjudicative system,” they are “not themselves judicial or adjudicative.”[29]
The Seventh Circuit also suggested immunity would not apply when a sponsoring organization engaged in basic consumer fraud. In Caudle, though not as part of the ultimate holding, Judge Easterbrook raised the hypothetical case of a party that paid the AAA the full cost of an arbitration only to have the AAA “pocket[] the money without arbitrating the dispute.”[30] Here, it would be “unlikely that the AAA could claim ‘immunity’ in response to a demand for a refund (or an order to furnish the arbitration service for which it had been paid).”[31]
Claims like this can be distinguished from immunized claims because they are wholly separate from the adjudication process. The Seventh Circuit explained the distinction in IMG. There, IMG argued the AAA should not get immunity because, as in the Caudle hypothetical, the organization tried to adjudicate a claim against them without a contractual basis.[32] But the Seventh Circuit noted a crucial difference between the two circumstances: Unlike IMG’s claim, Caudle’s hypothetical claim could be stated “entirely without reference to the arbitration.”[33] So in the Caudle hypothetical, the AAA’s conduct was not tied to the adjudicative process the way it was in IMG.
The conduct’s relationship to the adjudication may depend on the claim being advanced in the lawsuit. For example, in Pfannenstiel, Robert Pfannenstiel brought an arbitration claim before the National Association of Securities Dealers (the “NASD”)[34] against Merrill Lynch. Pfannenstiel alleged Merrill miscalculated one of his accounts and, therefore, owed him compensation.[35] The NASD denied his claim. According to Pfannenstiel, after the hearing, the NASD lost a substantial amount of his evidence. So he sued the NASD on the theory that, among other problems, Merrill’s “neglectful” handling of the evidence gave it an “unfair advantage” and prejudiced Pfannenstiel’s chances of getting the award vacated on appeal.[36] Pfannenstiel insisted that arbitral immunity did not apply because his claim related only to the NASD’s loss of his property after the adjudication.[37] But the Tenth Circuit noted that his suit sought to vacate the NASD’s decision and asserted damages equal to his arbitration claim against Merrill. As such, it was “little more than a veiled attack on the decision rendered against him by the arbitration panel.”[38] So arbitral immunity applied.
Challenging an Arbitration Result
At bottom, it is important to remember that arbitral immunity does not prevent parties from challenging arbitrations. That is, even where immunity shields the arbitrator, dissatisfied parties can still fight the arbitration by suing the opposing party in the appropriate court.[39] Again in IMG, the Seventh Circuit provided a helpful explanation:
We found suing an arbitrator to be comparable to suing jurors when a litigant is dissatisfied with the outcome of a lawsuit. Such a suit would place an unfair burden on jurors and would discourage others from jury service. Moreover, the suit would not be necessary for a litigant to obtain relief. The composition of a jury, for example, can be challenged through appellate review of the original action. Similarly, IMG or any party to an arbitration can obtain relief by seeking a stay against the party bringing the arbitration. There is no need to seek a stay against the sponsoring organization.[40] So while arbitral immunity may bar claims against certain parties, it does not necessarily bar those claims. In other words, parties blocked by arbitral immunity may still be able to challenge arbitrations, as long as they target the right opponent.
[1] Cherdak v. American Arbitration Association, No. 2019-cv-3767, at *32-33, 35(D.D.C. March 9, 2020)(Dismissing plaintiffs’ claims for five independent reasons, including arbitral immunity, where plaintiffs claimed the AAA did not follow its own rules)
[2] Lanza v. Financial Industry Regulatory Association,No.’s 2018-cv-2057, 2018-cv-2181, at *8-9(1st Cir. March 24, 2020)(Discussing arbitral immunity but affirming dismissal on other grounds)
[3] Johnson v. Thompson-Smith, 203 F. Supp. 3d 895, 902 (N.D. Ill. 2016)
[4] A non-exhaustive list of these bodies would include the Financial Industry Regulatory Association (“FINRA”), the Securities & Exchange Commission and the American Arbitration Association (the “AAA”).
[5] Id.; Forrester v. White, 484 U.S. 219, 227 (1988); Aku v. Chicago Board of Education, 290 F. Supp. 3d 852, 865 (N.D. Ill. 2017); See Dellenbach v. Letsinger, 889 F.2d 755, 759 (7th Cir.1989)(“A judge will not be deprived of immunity because the action he took was in error, was done maliciously, or was in excess of his authority.”)
[6] Coleman v. Dunlap, 695 F.3d 650, 652 (7th Cir. 2012); See Snyder v. Nolen, 380 F.3d 279, 286-87 (7th Cir. 2004)
[7] Sacks v. Dietrich, 663 F.3d 1065, 1069 (9th Cir.2011); Johnson, 203 F. Supp. 3d at 902 (Arbitral immunity protects decisionmakers from “undue influence and from frivolous and vexatious reprisals by dissatisfied litigants”)
[8] Id.; Forrester, 484 U.S. at 226-27; See also Int’l Med. Group v. American Arbitration Association, 312 F.3d 833, 843 (7th Cir. 2002)
[9] Pfannenstiel v. Merrill Lynch and NASD, 477 F.3d 1155,1159(10th Cir. 2007);New England Cleaning Services v. American Arbitration Association, 199 F.3d 542, 545-546 (1st Dist. 1999)
[10] Habliston v. FINRA Regulation, No. 15-cv-2225, at *13 (D.D.C. 2017), quoting Corey v. New York Stock Exchange, 691 F.2d 1205, 1211 (6th Cir. 1982)
[11] Johnson, 203 F. Supp. 3d at 902
[12] Forrester, 484 U.S. at 226-227;Johnson, 203 F. Supp. 3d at 902; SeeSacks, 663 F.3d at 1070
[13] Johnson, 203 F. Supp. 3d at 902; See Nystedt v. Nigro, 700 F.3d 25, 31(1st Cir. 2012)(“Judicial acts are those that are “intimately associated” with the judicial function. For this purpose, the judicial function has been defined as the adjudication of disputes between parties.”); See Pfannenstiel, 477 F.3d at1159(Holding that, when determining if arbitral immunity applies “the key question…is whether the claim at issue arising out of a decisional act”); See Sacks, 663 F.3d at 1070
[14] Johnson, 203 F. Supp. 3d at 902
[15] See e.g., Sacks, 663 F.3d at 1070 (Pursuant to FINRA rules, panel barred plaintiff from representing respondent.); Honn v. NASD, 182 F.3d 1014, 1017-1018 (8th Cir. 1999)(Granting NASD immunity from where claims related to “allowing certain witnesses to testify in the arbitration, in forwarding materials to the arbitrators, and in formulating and delivering” subpoena responses)
[16] Habliston, at *2
[17] Honn, 182 F.3d at 1017-1018(Granting immunity where the plaintiff’s claims all related to NASD “selecting or allowing certain witnesses to testify in the arbitration…forwarding materials to the arbitrators, and… formulating and delivering responses to subpoenas”);Nystedt, 700 F.3d at 31-32(Granting immunity to court-appointed discovery master); Pfannenstiel, 477 F.3d at1159-1160; Gill v. FINRA and Merrill Lynch, No. 11-cv-2713, 2013 U.S. Dist. LEXIS 44088, at *10 (S.D.N.Y. March 6, 2013)
[18] Int’l Med. Group, 312 F.3d at 844 (7th Cir. 2002); Nystedt, 700 F.3d 25, 31(1st Cir. 2012) (“Judicial acts are those intimately associated with the judicial function.”); Gill, 2013 U.S. Dist. LEXIS at *10
[19] See e.g., Int’l Med. Group, 312 F.3d at 844 (Sending notice letters to parties and processing claim); Honn, 182 F.3d at 1017-1018; Gill,2013 U.S. Dist. LEXIS at *10 (Providing notice of claim and hearings)
[20] Int’l Med. Group, 312 F.3d at 837-838
[21] Id. at 838-839
[22] Id. at 842
[23] Id. at 844
[24] Gill, 2013 U.S. Dist. LEXIS at *3
[25] Id. at *10
[26] Id. (Adding that “questions concerning improper notice and arbitration scheduling are ‘sufficiently associated with the adjudicative phase of the arbitration to justify immunity’.”)
[27] Johnson, 203 F. Supp. 3d at 903 (“To forfeit the protections of absolute immunity, a judge or arbitrator must make an adjudicatory decision knowing that he lacks jurisdiction, or act despite a clearly valid statute or case law expressly depriving him of jurisdiction.”)
[28] Forrester, 484 U.S. at 229;Coleman, 695 F.3d at 652-653 (Refusing immunity to court-appointed administrator of a juvenile prison accused of firing employee for his political views)
[29] Forrester, 484 U.S. at 229
[30] Caudle v. American Arbitration Association, 230 F.3d 920, 922 (7th Cir. 2000)
[31] Id.
[32] Int’l Med. Group, 312 F.3d at 843-844
[33] Id. at 844
[34] The NASD was the precursor to FINRA.
[35] Pfannenstiel, 477 F.3d at1157
[36] Id. at 1159-1160
[37] Id. at 1159
[38] Id. at 1160
[39] Int’l Med. Group, 312 F.3d at 843-844
[40] Id. at 844, citing Tamari v. Conrad, 552 F.2d 778, 780 (7th Cir. 1977)
Terry Brennan Law 