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Full Opinion
IN THE UNITED STATES DISTRICT COURT FOR THE
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
INTL FCSTONE FINANCIAL, INC., )
)
Plaintiff, )
)
v. ) Case No. 19 C 1438
)
DAVE and LINDA JACOBSON, et al., ) Judge Joan H. Lefkow
)
Defendants. )
OPINION AND ORDER
INTL FCStone Financial Inc. has sued several defendants to enjoin them from further
pursuing their pending arbitration at the Financial Industry Regulatory Authority (FINRA),
which FCStone claims is the wrong arbitral forum. FCStone also asks the court to compel
defendants to arbitrate their claims before the National Futures Association (NFA). Defendants
have moved to dismiss the complaint and for sanctions against FCStone for pursuing its claim
for injunctive relief.
Construing the partiesā arbitration agreements and FINRAās rules, the court concludes
that the parties agreed to arbitrate their disputes before the NFA, not FINRA, and enters
declaratory judgment to that effect, as detailed below.1 The court therefore (1) grants FCStoneās
motion to compel arbitration (dkt. 33); (2) denies FCStoneās motion for preliminary injunction
1 Defendants William and Cynthia Motley did not sign an arbitration agreement. They did not
contract to arbitrate anywhere and are not defendants to FCStoneās count to compel arbitration.
(dkt. 7) without prejudice; (3) denies defendantsā motion to dismiss (dkt. 38); and (4) denies
defendantsā motion for sanctions (dkt. 50).2
BACKGROUND
FCStone is a global financial services firm. Among its services is a futures commission
merchant division that helps execute and clear exchange-traded futures, commodities, and
options transactions. Separate from that division, FCStone also engages in securities-related
business and is therefore a member of FINRA, a self-regulatory organization for the securities
and investment banking industry. FINRA members agree to arbitrate before FINRA any disputes
with their ācustomersā that āarise[] in connection with the business activities of the memberā on
the customerās request. FINRA Rule 12200, available at http://finra.complinet.com/en/display/
display_main.html?rbid=2403&element_id=4106 (last visited May 31, 2019).
Between October 2016 and July 2018, defendants opened trading accounts with
FCStoneās futures commission merchant division. Their account agreements did not permit them
to trade any securities. (Dkt. 32-3 at 2 (permitting āpurchase and sale of futures contracts, option
contracts thereon, commodity futures, cash commodities forward contracts, currency
conversions, on-exchange foreign currency-denominated financial instruments, cleared swaps
and transactions related theretoā).) All defendants except William and Cynthia Motley also
signed arbitration agreements with FCStone, agreeing, among other things, that
[a]ny controversy o[r] claim arising out of or relating to your accounts shall be
settled by arbitration, either (1) under the Code of Arbitration of the National
Futures Association, or (2) upon the contract market on which the disputed
transaction was executed or could have been executed. . . . At the time you
notify . . . the FCM Division of INTL FCStone Financial Inc (āFCMā) . . . . of your
intent to submit a claim to arbitration, . . . you will have an opportunity to elect a
qualified forum for conducting the proceedings, and will be supplied with a list of
2 The court has jurisdiction under 28 U.S.C. Ā§ 1331, as discussed below. Venue lies on 28 U.S.C.
Ā§ 1391(b).
qualified organizations. You are required to send notice of your intent to arbitrate
by certified mail to the FCM and/or the Introducing Broker at their respective
addresses, and the Secretary of the National Futures Association.
(Dkt. 32-2.)
The defendants experienced significant losses in their accounts in November 2018 based
on volatility in the natural gas marketāso significant that defendants owed balances to FCStone.
On December 3, 2018, defendants to the original complaintāthe Jacobsons, Musial, the Slanecs,
the Schweigers, the Holcombs, the Rogerses, the Greaveses, and Pradko (and their related trusts)
(āOriginal Defendantsā)āinitiated arbitration against FCStone before FINRA, alleging among
other things that FCStone violated Ā§ 13(a) of the Commodity Exchange Act, 7 U.S.C. Ā§ 13c(a).
Taking this as notice of a dispute under the arbitration agreements, FCStone emailed
defense counsel on December 13, 2018 offering arbitration at any of three forums: (1) the NFA;
(2) the Chicago Mercantile Exchange; or (3) the American Arbitration Association (AAA). (Dkt.
32-7 at 1.) Defense counsel responded that the arbitration agreement was unenforceable because
it did not comply with 17 C.F.R. Ā§ 166.5āthe Commodity Futures Trading Commissionās
(CFTC) regulation governing arbitration agreements between Commission registrants like
FCStone and their customersāand insisted on arbitration before FINRA. (Id.) In February 2019,
more than forty-five days after offering its slate of arbitral options, FCStone initiated arbitration
before the NFA to collect the original defendantsā balances due. (Dkt. 33-2 Ā¶ 8 & Exh. A.)
Late in the briefing on the motions in this case, the parties apprised the court that some of
the defendants also filed notices of claim before the AAA. FCStone offered AAA arbitration in
its December 13, 2018 email to defense counsel, attaching the AAAās commercial arbitration
rules. Eight customers who are not parties to this case or the related case FCStone v. Farmer,
No. 19-cv-1629 (N.D. Ill.), demanded arbitration before the AAA in December 2018 under the
AAAās consumer rather than commercial arbitration rules. (See dkt. 49-2 (FCStoneās objection
to eight nonpartiesā AAA arbitration).) FCStone objected, insisting that it had no agreement with
its customers to arbitrate before the AAA, but did not advise the AAA that it had included the
AAA as one of its three options in the December 13 email. (Id.) The AAA found it lacked
jurisdiction over the nonparty customersā disputes. (Dkt. 65-2.)
On January 29, 2019, more than forty-five days after FCStoneās December 13 email,
defense counsel notified FCStone that all his clientsāincluding most of the defendants here3ā
elected to arbitrate before the AAA. (Dkt. 65-1 at 2 (providing notice); id. at 3 (notice
postmarked Jan. 29, 2019).) In February 2019, the AAA found that FCStone had not agreed to
arbitrate defendantsā disputes before the AAA. (Dkt. 65-2.)
In February 2019, FCStone filed this action for injunctive and declaratory relief, arguing
that FINRA lacks jurisdiction over the underlying disputes. After failing to secure arbitration
before the AAA, many customers filed statements of claim before FINRA in March 2019. In
April, FCStone amended its complaint to add these customers as new defendants, along with a
new count under Ā§ 4 of the Federal Arbitration Act, 9 U.S.C. Ā§ 4, to compel defendants (except
the Motleys) to arbitrate their disputes before the NFA. These motions for preliminary injunction
(dkt. 7) and to compel arbitration (dkt. 33) followed. Defendants have also moved to dismiss the
complaint under Rules 12(b)(1) and 12(b)(6) (dkt. 38) and for Rule 11 sanctions (dkt. 50).
ANALYSIS
I. Jurisdiction
FCStone is a Florida corporation with its principal place of business in New York. The
defendants named in the amended complaint are citizens of two foreign countries and seventeen
3 The record does not suggest that the Original Defendants, Zukel, the Caitlins, Ferrell, Deena
Gandhi, Grady, the Almoses, Johnson, Tristani, Svejdova, the Milnes, Nees, the Gages, the Hrons,
Friesner, Tyrrell, and Mannisto (or any related entities) demanded AAA arbitration. Neither did the
Motleys, who did not sign an arbitration agreement.
states; none is from Florida or New York. But while the individual defendants are completely
diverse from FCStone, some of the individuals are named āindividually and on behalf ofā an
LLC, a limited partnership, or a trust, and FCStone does not plead the citizenship of those
entities. Diversity jurisdiction might exist, but not as FCStone pleads the amended complaint.
The court instead has subject matter jurisdiction under 28 U.S.C. Ā§ 1331, which requires
FCStone to show that the complaint āarises underā federal law. In its amended complaint,
FCStone pleads one count under Ā§ 4 of the Federal Arbitration Act. Section 4 does not itself
confer jurisdiction; instead, it provides that ā[a] party aggrieved by the alleged failure . . . to
arbitrate under a written agreement for arbitration may petition any United States district court
which, save for such agreement, would have jurisdiction under title 28 . . . .ā 9 U.S.C. Ā§ 4. To
determine whether the court would have had jurisdiction save for the arbitration agreement, a
āfederal court may ālook throughā a Section 4 petition to determine whether it is predicated on an
action that āarises underā federal law . . . .ā Vaden v. Discover Bank, 556 U.S. 49, 62, 129 S. Ct.
1262 (2009). Because all underlying disputes include claims under Ā§ 13(a) of the Commodity
Exchange Act, 7 U.S.C. Ā§ 13c(a), the disputes present federal questions and this court has
jurisdiction. To the extent FCStoneās remaining claims arise under state law, the court has
supplemental jurisdiction over those claims under 28 U.S.C. Ā§ 1367.4
In their motion to dismiss, defendants argue that the court lacks jurisdiction to decide
procedural issues before the arbitrator. (Dkt. 38 at 4 (citing Howsam v. Dean Witter Reynolds,
4 FCStoneās claim for injunctive relief might also be considered as arising under Ā§ 4 of the
Federal Arbitration Act, though FCStone does not cite the Act in that count. That would make it a federal
claim as well, because although Vaden concerned actions to compel arbitration, its reasoning applies to
actions to stop arbitration that allegedly do not comply with an arbitration agreement. See Magruder v.
Fidelity Brokerage Servs., 818 F.3d 285, 287 (7th Cir. 2016) (āVaden holds that, when a claim proposed
to be arbitrated arises under federal law, a federal court has subject-matter jurisdiction to rule on a petition
to compel or forbid arbitration.ā).
Inc., 537 U.S. 79, 84, 123 S. Ct. 588 (2002)).) Defendants conflate jurisdiction to hear a case
with the propriety of relief. If the controversy could be in federal court but for the arbitration
agreement, as this one could, the court has subject-matter jurisdiction. Vaden, 556 U.S. at 62.
Whether the court can or should grant certain relief once it has jurisdiction is a separate question,
to which the court now turns.
II. Motion to Compel Arbitration
A. General Arbitration Principles
FCStone has moved to compel defendants (other than the Motleys) to arbitrate their
disputes before the NFA. Under Ā§ 4 of the Federal Arbitration Act, ā[a] party aggrieved by the
alleged failure, neglect, or refusal of another to arbitrate under a written agreement may petition
any United States district court . . . for an order directing that such arbitration proceed in the
manner provided for in such agreement.ā 9 U.S.C. Ā§ 4. Federal courts āwill compel arbitration
under the Federal Arbitration Act āif three elements are present: (1) an enforceable written
agreement to arbitrate, (2) a dispute within the scope of the arbitration agreement, and (3) a
refusal to arbitrate.āā A.D. v. Credit One Bank, N.A., 885 F.3d 1054, 1060 (7th Cir. 2018)
(quoting Scheurer v. Fromm Family Foods LLC, 863 F.3d 748, 752 (7th Cir. 2017)).
Under the Federal Arbitration Act, courts presumptively decide whether parties have
agreed to arbitrate in the first instance, but arbitrators decide any procedural questions that grow
out of the dispute. Howsam, 537 U.S. at 84. Absent clear and unmistakable evidence that the
parties intended to arbitrate the issue of arbitrability (which neither party argues exists here), the
court must determine arbitrability. First Options of Chicago v. Kaplan, 514 U.S. 938, 944, 115
S. Ct. 1920 (1995).
Where to arbitrate is a question of arbitrability, not procedure. FCStone asks the court to
determine whether it agreed under FINRA Rule 12200 to submit these disputes to FINRA and
whether defendants agreed under the arbitration agreements to submit them to the NFA,
quintessential decisions for a court under the Federal Arbitration Act. Howsam, 537 U.S. at 84
(ā[A] disagreement about whether an arbitration clause in a concededly binding contract applies
to a particular type of controversy is for the court.ā). That no party proposes litigation instead of
arbitration is irrelevant. Had defendants tried to litigate the dispute and FCStone moved to
compel arbitration, the court would have had to review the arbitration agreements to determine
whether defendants agreed to arbitrate at the NFA. Had FCStone tried to litigate and defendants
moved to compel arbitration before FINRA, the court would have had to determine whether
FCStone agreed through Rule 12200 to submit its claims to FINRA. The analytical tasks are the
same here as in those cases where the issue is unquestionably committed to the court. Id. The
court must therefore decide whether (1) defendants agreed to submit these disputes to the NFA;
and (2) FCStone agreed to submit these disputes to FINRA.
Defendants urge that even though this case presents an issue of arbitrability for the court,
because FINRA arbitration is already underway, the court is powerless to rule on arbitrability
until that arbitration ends. In AT&T Broadband, LLC v. International Brotherhood of Electrical
Workers, the court held that AT&T had agreed to āa system that postpones until after the arbitral
decision any judicial review of the question whether a particular dispute was arbitrable.ā 317
F.3d 758, 762 (7th Cir. 2003). That described the state of affairs for AT&Tās arbitration clause
with a union under the Norris-LaGuardia Act, which provides that ā[n]o court of the United
States . . . shall have jurisdiction to issue any restraining order or temporary or permanent
injunction in a case involving or growing out of a labor dispute,ā with limited exceptions. Id. at
759 (citing 29 U.S.C. Ā§ 101). But the court also ruled in broad language that because arbitrating a
claim cannot irreparably harm a party, a party cannot ask a court to rule on the arbitrability of an
arbitration already underway. Id. at 762.
In contrast to AT&T Broadband, the parties have initiated two competing arbitrations
here, one of which requires the courtās assistance to proceed, which AT&T Broadband
recognizes as an appropriate case for the court to determine arbitrability before arbitration. Id.
(explaining that court appropriately decides arbitrability before arbitration when party āinvoke[s]
the courtās assistance to oblige a reluctant [counterparty] to arbitrate a disputeā). Deferring a
ruling on arbitrability here would abdicate the courtās duty under Ā§ 4 of the Federal Arbitration
Act. FCStone is therefore not required to complete the FINRA arbitration before seeking the
courtās input on whether it agreed to arbitrate in either FINRA or the NFA.
B. Arbitration Agreements
There is no dispute that all defendants but the Motleys signed arbitration agreements. The
agreements purport to permit arbitration only at the relevant exchange market or at a futures
association. (Dkt. 32-2.) Defendants argue that this makes the agreements unenforceable because
they violate CFTC Rule 166.5, which requires FCStone to offer a third option. See 17 C.F.R.
Ā§ 166.5(c)(5)(i). But the arbitration agreements advise that the customers will be given a choice
among qualified forums, and FCStone in fact offered the three forums required under Rule
166.5(c)(5)(1). (Dkt. 32-2.) This structureāthat the agreement lists only two options, but the
email to the customers provided the required thirdācomplies with Rule 166.5, and the
arbitration agreements are therefore enforceable. Rule 166.5(c)(4) requires that ā[t]he agreement
. . . advise the customer that . . . the customer will have the opportunity to elect a qualified
forum,ā 17 C.F.R. Ā§ 166.5(c)(4), but does not require that the election-of-forum process be set
forth explicitly in the agreement, 17 C.F.R. Ā§ 166.5(c)(5) (election-of-forum process lacks
āagreement must adviseā language). FCStoneās agreements thus complied with the requirement
to advise that the defendants could choose and then providing an appropriate slate of options,
here (1) the NFA; (2) the Chicago Mercantile Exchange; and (3) the AAA. (Dkt. 32-7.) FCStone
has therefore satisfied the first element of enforceable agreements to arbitrate.
Defendants concede that these disputes fall within the scope of the arbitration
agreements, satisfying the second element. As to the third element, defendants did not arbitrate
in accordance with their agreements. After receiving notice of the underlying disputes, FCStone
provided defendants a list of three qualified organizations: (1) the NFA; (2) the Chicago
Mercantile Exchange; and (3) the AAA. (Dkt. 32-7 at 1.) Defendants did not choose among the
three offered forums within forty-five days, which authorized FCStone to pick the NFA. 17
C.F.R. Ā§ 166.5(c)(5). Indeed, the Original Defendants went a step further, immediately rejecting
all three options in favor of FINRA. (Dkt. 32-7.) FCStone thus chose the NFA in compliance
with the arbitration agreements and CFTC Rule 166.5, and defendantsā refusal to arbitrate there
satisfies the third element.
Defendants respond with several alternative theories of compliance, but none persuades
the court. First, they claim that they properly chose the AAA but FCStone reneged on its promise
to arbitrate there, falsely telling the AAA that it had not agreed. (Dkt. 49 at 6ā7 & n.3; dkt. 65-1
at 1.) Unless FCStone provided context that did not find its way into the record here, FCStoneās
representation to the AAA that it did not agree to arbitrate with the first claimants at the AAA
appears misleading. But those claimants are not parties to this case. These defendants either did
not notify FCStone of their election until after the deadline passed (dkt. 65-1 at 3 (notice
postmarked Jan. 29, 2019)), expressly rejected the AAA in favor of FINRA (dkt. 37-6 at 1
(claiming on Dec. 17, 2018 that arbitration agreements violate CFTC Rule 166.5)), or never filed
demands for arbitration before the AAA. (Supra n.3.) As these defendants failed to choose in
time, FCStoneās choice of the NFA stands under the agreements.
Second, defendants argue that FINRA was an option under the arbitration agreements,
emphasizing the agreements gave defendants āan opportunity to elect a qualified forum for
conducting the proceedings . . . .ā (Dkt. 32-2.) But they ignore the crucial context that before
choosing a forum, defendants would ābe supplied with a list of qualified organizations.ā (Id.);
see Curia v. Nelson, 587 F.3d 824, 829 (7th Cir. 2009) (quoting Gallagher v. Lenart, 874 N.E.2d
43, 58, 226 Ill. 2d 208 (2007)) (contractual provisions must be read in context).5 Read in context,
āelect a qualified forumā means elect among the ālist of qualified organizations.ā (Dkt. 32-2
(emphasis added).) Because FINRA was not on the list, defendants could not elect it under the
arbitration agreements.
Defendants also advance a variant of this argument, claiming that under Transatlantic
Lines LLC v. Amergent Techs, LLC, 186 F. Supp. 3d 223 (D. Conn. 2016), a party does not
ārefuseā arbitration if it has initiated arbitration anywhere. In that case, Amergent initiated
arbitration proceedings in California; Transatlantic sought to compel Amergent to instead
arbitrate in Connecticut. Id. at 224ā25. But the partiesā arbitration clause said only that ādisputes
under this Agreement shall be resolved through arbitration.ā Id. at 224. The court thus reasoned
that Amergent did not refuse to arbitrate because the arbitration clause permitted arbitration
anywhere. Id. at 226ā27. Here, the agreement specified particular arbitral forums, FCStone
properly chose one of them, and defendants refuse to arbitrate there.
5 Illinois law governs. See First Options, 514 U.S. at 944.
Finally, citing Belom v. Natāl Futures Assoc., 284 F.3d 795, 797 (7th Cir. 2002),
defendants protest that their disputes cannot be arbitrated before the NFA because arbitration
there must be āvoluntary.ā It is voluntary. Defendants agreed to arbitrate before the NFA when
they signed their arbitration agreements. As the Motleys show, the defendants were not required
to sign the agreements to open their commodity futures and options accounts with FCStone.
Thus, under the arbitration agreements and CFTC Rule 166.5(c), defendants signed
enforceable agreements to arbitrate their disputes at one of three qualified forums and if they
failed to choose within forty-five days, FCStone would choose for them. Having consented to
this procedure and failed to choose a qualified option in time, defendants agreed to submit their
disputes to the NFA.
C. FINRA Rules
Defendants next argue that, notwithstanding the arbitration agreements, FCStone must
arbitrate these disputes before FINRA because it is a FINRA member. FCStone is indeed a
member of FINRA, and FINRA members agree to arbitrate certain disputes before FINRA.
Among eligible disputes are those between members and their customers if the disputes āarise[]
in connection with the business activities of the member . . . .ā FINRA R. 12200; UBS Fin.
Servs., Inc. v. W. Va. Univ. Hosp., Inc., 660 F.3d 643, 649 (2d Cir. 2011) (holding FINRA
membership compels members to arbitrate disputes with customers before FINRA).
Specifically, FINRA members must arbitrate a dispute under the FINRA Code6 if
āeither: (1) Required by a written agreement, or (2) Requested by the customer;ā and if:
ā¢ The dispute is between a customer and a member or associated person of a
member; and
6 Arbitration under the FINRA Code necessarily means arbitration before FINRA. Credit Suisse
Securities (USA) LLC v. Tracy, 812 F.3d 249, 254 (2d Cir. 2016).
ā¢ The dispute arises in connection with the business activities of the member or
the associated person, except disputes involving the insurance business
activities of a member that is also an insurance company.
FINRA R. 12200.
FCStone argues that because FINRA regulates only securities and investment banking,
defendants (including the Motleys) are not ācustomersā under FINRA Rule 12200 because they
held commodity futures and options accounts and dispute commodity futures and options
transactions. Defendants respond that the commodities/securities distinction is only hair splitting.
But securities and commodity futures and options are distinctāso distinct that Congress has
erected different regulatory regimes and enforcement agencies for the different financial
products. See, e.g., Bd. of Trade of City of Chicago v. S.E.C., 187 F.3d 713, 716 (7th Cir. 1999)
(āCongress allocated securities and options on securities to exchanges regulated by the SEC,
futures and options on futures to boards of trade regulated by the CFTC.ā). Amicus Futures
Industry Association helpfully explains these differences and how Congress has given exclusive
jurisdiction over commodity-related financial products to the CFTC. (Dkt. 62 at 5 (citing 7
U.S.C. Ā§ 2(a)(1)(A) and Chicago Mercantile Exch. v. S.E.C., 883 F.2d 537, 539 (7th Cir. 1989)
(āThe CFTC regulates futures and options on futures; the SEC regulates securities and options on
securities; jurisdiction never overlaps.ā).) FINRA, as a self-regulatory organization in the
securities market, is overseen by the U.S. Securities and Exchange Commission and has a
distinct sphere of influence that Congress has carefully separated from the CFTCās sphere. (See
dkt. 62 at 5.) The underlying disputes here concern accounts and transactions of commodity
futures and options, not securities; indeed, defendants were not even authorized to trade
securities through their FCStone accounts. (See dkt. 20-1 at 12.) Defendantsā relationships and
disputes with FCStone do not fall within FINRAās regulatory ambit.
The case thus turns on whether defendants were ācustomersā under FINRA Rule 12200
even though they did not transact with FCStoneās FINRA-regulated business activities. The
FINRA Rules define ācustomerā only by exclusionāthat it āshall not include a broker or
dealer.ā FINRA R. 12100(k). But coupling this definition with the broader structure of the
FINRA Rules, the circuit courts to have addressed this issue have concluded that FINRA
members submit to FINRA arbitration only with customers of their FINRA-regulated business
activities, securities and investment banking. See, e.g., UBS Fin. Servs., Inc. v. Carilion Clinic,
706 F.3d 319, 325 (4th Cir. 2013) (ā[T]he FINRA Rules do give an informing context by
providing that arbitrable disputes must arise in connection with the ābusiness activitiesā of the
FINRA member, thus suggesting that for a person to obtain arbitration, the person must be a
customer with respect to a FINRA memberās business activities.ā). Hence, āācustomer,ā as that
term is used in the FINRA Rules, refers to one, not a broker or a dealer, who purchases
commodities or services from a FINRA member in the course of the memberās business
activities insofar as those activities are regulated by FINRAānamely investment banking and
securities business activities.ā Id. at 327; cf. Goldman, Sachs & Co v. City of Reno, 747 F.3d
733, 741 (9th Cir. 2014) (adopting Carilion definition of ācustomerā); Fleet Boston Robertson
Stephens, Inc. v. Innovex, Inc., 264 F.3d 770, 773 (8th Cir. 2001) (holding FINRA predecessor
National Association of Securities Dealers Rules were limited to membersā regulated business
activities).7 The Seventh Circuit has not addressed this issue, and the court finds the other
circuitsā decisions persuasive.
7 Defendants cite Citigroup Global Markets, Inc. v. Abbar, 761 F.3d 268 (2d Cir. 2014), as
holding that opening any account with a FINRA member makes one a ācustomerā under Rule 12200.
Abbar in fact held that to be a ācustomer,ā one had to open an account with a FINRA member, rather than
an affiliate, and held that the defendant was not a ācustomer.ā Id. at 275ā76. Abbar did not, as defendants
suggest, address whether non-securities or investment banking accounts qualify.
Finally, this interpretation of FINRA rules harmonizes the rules with the carefully hewn
balance between SEC and CFTC regulatory authority. Amicus highlights the danger of requiring
parties to resolve commodity futures and options disputes before FINRA when Congress
committed them to the CFTC. The CFTC has exercised its exclusive jurisdiction over the
commodity futures and options market, see 7 U.S.C. Ā§ 2(a)(1)(A), to require its registrants to
offer customers three arbitral forums in any arbitration agreement. 17 C.F.R. Ā§ 166.5(c). But if
the court reads the FINRA rules to require those companies registered with both FINRA and the
CFTC to arbitrate all customer disputes before FINRA, Rule 166.5 would have no effect as to
some of the largest participants in CFTC-regulated markets. Defendants respond that Rule 166.5
permits arbitration before FINRA if the commission registrant chooses FINRA as its third option
under subsection 5(i)(C), undercutting amicusās claim that FINRA arbitration of this case would
disturb any balance between commodities and securities regulation. But permitting parties to
choose FINRA as an option8 does not harm the regulatory balance as requiring them to offer
FINRA arbitration as a supervening option beyond the CFTCās requirements would. Regardless,
this policy consideration merely buttresses the conclusion the textual analysis produces.
For all these reasons, the court holds that ācustomerā under FINRA Rule 12200 means
ācustomer of the memberās FINRA-regulated activities.ā9 Because commodity futures
accountholders do not qualify as ācustomers,ā FCStone did not agree to arbitrate the underlying
disputes before FINRA. And by signing the arbitration agreements, all defendants except the
8 Unlikely, given the vehemence with which FCStone and amicus oppose it here, but theoretically
possible.
9 Because the court holds that FINRA Rule 12200 does not apply, it need not address the
alternative argument that the arbitration agreements waived or superseded defendantsā right to arbitration
under that rule (or whether this issue is left to the arbitrator).
Motleys agreed to arbitrate their disputes before the NFA. As defendants refuse to arbitrate as
agreed, relief is warranted under Ā§ 4 of the Federal Arbitration Act.
The motion to compel arbitration is granted. All defendants except the Motleys are
ordered to submit their claims to arbitration before the NFA by June 28, 2019. The court also
grants FCStoneās related request for declaratory judgment (dkt. 33 at 15), as specified in the
order below.
III. Preliminary Injunction
The motion for preliminary injunction is denied without prejudice to refiling if FINRA
does not decline jurisdiction in light of this courtās ruling. As the court holds and declares that
FINRA lacks jurisdiction, FINRA should sustain FCStoneās objection to jurisdiction without
further intervention from the court. See Cent. States, Se. & Sw. Areas Pension Fund v. K&M
Equip., Inc., No. 15 C 11586, 2016 WL 4270215, at *4 (N.D. Ill. Aug. 15, 2016) (āMy
finding . . . strips the arbitrator of his jurisdiction, so the pending arbitration and any future ones
cannot go forward even without an injunction.ā). On the current record, therefore, the court
cannot find irreparable injury or lack of a legal remedy.
IV. Motion to Dismiss
As explained above, the court agrees with FCStoneās interpretation of the arbitration
agreements and FINRA rules. They thus state a claim for relief on all counts of the complaint.
Defendantsā motion to dismiss (dkt. 38) is denied.
V. Motion for Sanctions
Defendants also move for Rule 11 sanctions for FCStoneās failure to withdraw its motion
for preliminary injunction. As relevant here, defendants must show that FCStoneās counsel did
not conduct a āreasonable inquiryā into the law or that its legal theory is objectively unwarranted
by existing law or a good-faith argument for the modification of existing law. Thompson v.
Duke, 940 F.2d 192, 195 (7th Cir. 1991) (quoting Szabo Food Serv., Inc. v. Canteen Corp., 823
F.2d 1073, 1080 (7th Cir. 1987)). Defendants insist that under Seventh Circuit precedent, it is
impossible to suffer irreparable harm from arbitrating a claim. See Trustmark Ins. Co. v. John
Hancock Life Ins. Co. (U.S.A.), 631 F.3d 869, 872 (7th Cir. 2011); AT&T Broadband, 317 F.3d
at 762 (ā[W]e have held it sanctionably frivolous to seek an anti-arbitration injunction.ā (citing
PaineWebber Inc. v. Farnam, 843 F.2d 1050 (7th Cir. 1988) and Graphic Commcāns Union v.
Chicago Tribune Co., 779 F.2d 13, 16 (7th Cir. 1986))). On their reading, the worst that can
happen to a party forced to arbitrate a claim it did not agree to arbitrate is to suffer the delay and
expense of adjudication, which is not irreparable injury.
FCStone offers good-faith distinctions of Trustmark and AT&T Broadband based on a
reasonable inquiry into the law. Defendantās expansive reading of Trustmark and AT&T
Broadband is not the only possible one. Both cases expanded upon the strong language that the
Seventh Circuit used in PaineWebber v. Farnam, 843 F.2d at 1052ā53 and Graphic
Communications Union v. Chicago Tribune, 779 F.2d at 16, to dissuade litigants from seeking to
stay orders to compel arbitration pending appeal. If court-ordered arbitration constituted
irreparable harm, many of those orders would have to be stayed pending appeal, thwarting the
goals of the Federal Arbitration Act. Id. at 15ā16; Farnam, 843 F.2d at 1052ā53. In AT&T
Broadband, after holding that the Norris-LaGuardia Actās prohibition on labor injunctions
applied to labor arbitrations, the court cited Farnam and Chicago Tribune to further hold that
AT&T could not prove irreparable injury from being forced to arbitrate. Id. at 762. And in
Trustmark, the plaintiff agreed to arbitrate but sought to enjoin the proceedings mid-arbitration
because it thought one arbitrator was biased. 631 F.3d at 871. The Seventh Circuit vacated the
district courtās preliminary injunction because āTrustmark did agree to arbitrateā and because
delay and expense of arbitration do not constitute irreparable injury. Id. at 872.
Despite their strong language, these cases do not mean that in the Seventh Circuit, courts
may never enjoin arbitrations. At the outset, unlike FCStoneās counterparts in all four cases, it
does not seek an injunction to resist a court order or agreement to arbitrate; it seeks an injunction
to effectuate one. And unlike in Trustmark, FCStone did not agree to arbitrate its disputes in the
forum where it seeks to enjoin further proceedings. FCStoneās motion for preliminary injunction
thus seeks to avoid the distinct harm of a kabuki arbitration at FINRA running parallel to a court-
ordered arbitration at the NFA. Though perhaps such an arbitration is just as expensive and
labor-intensive as a court-ordered or contracted-for arbitration, FCStone can at least say in good
faith that it has a legal case for irreparable harm in duplicative, unauthorized arbitration.
Moreover, FCStone supports these distinctions with authorities showing that injunctions
against arbitration are permissible and common. The Federal Arbitration Act expressly
contemplates them, allowing immediate appeals from orders enjoining arbitration, 9 U.S.C.
Ā§ 16(a)(2), a provision that would make little sense if anti-arbitration injunctions were never
allowed. The Seventh Circuit has indicated that anti-arbitration injunctions are permissible,
including at least once after Trustmark. See, e.g., J.P. Morgan Chase Bank, N.A. v. McDonald,
760 F.3d 646, 654 (7th Cir. 2014) (reversing and remanding denial of injunction against FINRA
arbitration āfor further proceedings . . . including possible reinstatement of injunctive relief
against the arbitrationā); Intāl Med. Grp. v. Am. Arbitration Assān, 312 F.3d 833, 843 (7th Cir.
2002) (ā[A]ny party to an arbitration can obtain relief by seeking a stay against the party
bringing the arbitration.ā). And courts in this district sometimes grant them, including after
Trustmark. E.g., Shore v. Johnson & Bell, No. 16-cv-4363, 2017 WL 714123, at *4 (N.D. Ill.
Feb. 22, 2017) (enjoining class arbitration); Hospira, Inc. v. Therabel Pharma N.V., No. 12 C
8544, 2013 WL 3811488, at *15ā16 (N.D. Ill. July 19, 2013) (enjoining arbitration); Virchow
Krause Capital, LLC v. North, No. 11 C 8169, 2012 WL 123673, at *1 (N.D. Ill. Jan. 17, 2012)
(āForcing a party which did not consent to arbitration to participate in arbitration has been
recognized per se as an irreparable harm.ā).
Defendantsā reading of Trustmark and AT&T Broadband thus creates a paradoxāanti-
arbitration injunctions are expressly contemplated, commonly granted, and categorically
prohibited. This recommends FCStoneās distinctions and at the very least shows that it was not
frivolous to ask for a preliminary injunction.
ORDER
The court enters a declaratory judgment that defendants agreed to arbitrate their disputes
at the NFA and that FINRA Rule 12200 does not apply to the underlying commodity futures and
options accounts and transactions here. It further declares as follows:
1. Defendants are not ācustomersā within the meaning of FINRA Rule 12200.
2. There is no agreement to arbitrate disputes between defendants and FCStone
before FINRA.
3. FINRA lacks jurisdiction over the underlying disputes between defendants and
FCStone.
4. All defendants except the Motleys entered into a valid and enforceable arbitration
agreement with FCStone.
5. Because defendants either rejected or failed to choose a qualified arbitral forum
under the arbitration agreements within forty-five days, FCStone properly chose
the NFA.
6. The NFA is therefore the proper arbitral forum for the underlying disputes under
the arbitration agreements.
Therefore, the court orders as follows: (1) FCStoneās motion to compel arbitration (dkt.
33) is granted. Defendants (except the Motleys) are directed to submit their underlying disputes
to the NFA by July 2, 2019. (2) FCStoneās motion for preliminary injunction (dkt. 7) is denied
without prejudice; (3) defendantsā motion to dismiss (dkt. 38) is denied; (4) defendantsā motion
for sanctions (dkt. 50) is denied. The matter is set for status on July 3, 2019 at 9:30 a.m.
Date: June 4, 2019 J 2 C 7
.S. District Judge Joan H. Lefkow
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