We reported previously in Alert that a federal judge declined to stay a FINRA case featuring a hearing to be conducted by Zoom over a party’s objection. Here’s the promised update.
Recall that, as we were finalizing SAA 2020-30 (Aug. 12), we learned that an AP was suing FINRA for scheduling -- over his objection -- a Zoom hearing set for August 17 in a customer case. Legaspy v. FINRA, No. 1:20-cv-04700, was filed August 11 in the U.S. District Court for the Northern District of Illinois, alleging breach of contract because the FINRA Code of Arbitration Procedure doesn’t expressly authorize hearings to be held by videoconference absent party agreement. The Complaint also sought to enjoin the scheduled hearing and the case proper. His major concerns? “[R]emote proceedings will be cumbersome and procedurally irregular. The [arbitration] Claimants are from Argentina and will require an interpreter. There are dozens of witnesses and hundreds of documents that would have to be shared remotely. He also argues that by the time the hearing is over, he will have spent so much on attorneys’ fees that he will have exhausted his insurance coverage. And if he loses the arbitration, FINRA will deduct any award against his net capital, immediately making Insight undercapitalized under the FINRA rules” (internal citations omitted).
No Temporary or Preliminary Injunctions from District Court
We monitored the telephonic argument held August 12, that included as participants counsel for FINRA, Legaspy, and the other parties in the underlying arbitration. Some members of the public also listened in and were required to identify themselves. The Court took the case under advisement, but promised a ruling by August 13. Our take after listening to the arguments and District Judge Joan H. Lefkow’s questions was that neither a temporary nor preliminary injunction would issue, and that turned out to be correct. In a thorough 10-page decision issued August 14, Judge Lefkow goes through each of the Plaintiff’s assertions and rejects them.
Likelihood of Success on the Merits
Legaspy’s breach of contract claim against FINRA was not likely to succeed, because neither the Code or Submission Agreement forms a contact between FINRA and Legaspy: “Even if the court could review FINRA’s arbitral procedures mid-arbitration, Legaspy likely would not succeed. FINRA Rule 12409 gives ‘the panel . . . the authority to interpret and determine the applicability of all provisions under the Code. Such interpretations are final and binding upon the parties.’ The panel did precisely that, concluding that the ‘location’ for its hearing under Rule 12213(a) will be remote. Even on the court’s independent review, Rule 12213(a) appears to permit such an interpretation. That rule provides, ‘The Director will decide which of FINRA’s hearing locations will be the hearing location for the arbitration.’” The Court also rejected Plaintiff’s argument that a Zoom hearing would deprive him of due process, because while FINRA is closely regulated by the SEC, “FINRA is a private corporation, not a state actor, and thus cannot be sued for violating the Fifth Amendment.”
Irreparable Harm and Legal Remedies
The Court rejected Legaspy’s contention that he would suffer irreparable injury if the Zoom arbitration hearings were not stayed. After noting that a dissatisfied party can always move to vacate, the Court notes: “Legaspy argues that he cannot vindicate that right if he is forced to arbitrate remotely starting next week because he will face a cascade of financial consequences that will put him out of business before he could file such a petition…. But the harms of Legaspy’s losing the arbitration are not at issue. Legaspy might lose no matter when the arbitration starts and how it is conducted. His risk of going out of business if the Claimants prove that he caused them $2.6 million in damages is no reason to stop them from pursuing their case.”
Balance of Equities
Last, the Court finds that the equities don’t weigh in Plaintiff’s favor. Noting that the investors in the underlying arbitration would be prejudiced by delaying the hearing, the Court holds: “In short, even if Legaspy met the threshold requirements [for an injunction], the equities would not come out in his favor. At the last moment, he asked the court to accommodate his preference for the conduct of arbitration by delaying indefinitely the resolution of his opponents’ claim against him. Such a request does not meet the high bar for an injunction, let alone against a pending arbitration, which is immensely disfavored.”
But There’s More
Legaspy appealed on August 14 to the Seventh Circuit, which in a one-page Order posted the same day declined to issue either a temporary or preliminary injunction or to expedite briefing. It thus appears that the hearing via Zoom went ahead as scheduled on August 17.
(ed: *Email us at Help@SecArbAlert.com for a copy of the Complaint or Order.**The Alert’s Editor-in-Chief authored a Letter from the Editor: Change the Code to Support Virtual Hearings, predicting that the lack of a rule would eventually cause litigation in this scenario. ***Speaking of virtual hearings, FINRA DRS has unveiled a new stats category, “Virtual Arbitration Hearings.” Through July: 32 cases were conducted with one or more hearings via Zoom (14 customer and 18 industry). There were 32 joint motions for virtual hearings (7 customer and 25 industry cases).
