The Case For Dismissing The Case: Why Dispositive Prehearing Motions Should Remain An Integral Part Of The Arbitral Process

  1. Introduction

    It has been more than twenty years since the Supreme Court decided the seminal case of Celotex Corp. v. Catrett, 417 U.S. 317 (1986), in which Justice Rehnquist, for the majority, wrote:

    Summary judgment procedure is properly regarded not as a disfavored procedural shortcut, but rather as an integral part of the Federal Rules as a whole, which are designed "to secure the just, speedy and inexpensive determination of every action."1

    Celotex is recognized as changing the landscape. Prior to it, many courts were wary of summary adjudications and viewed the process as threatening fundamental rights to jury trials. Difficult standards had evolved - such as denying summary judgment if there was the "slightest doubt" about its appropriateness in a case. "The oft-recounted tale of the sign posted in a New Orleans district court, 'No Spitting, No Summary Judgments,' encapsulates the extreme version of judicial antipathy to summary judgment [prior to Celotex]."2

    Yet today, the securities arbitration community still struggles with the appropriateness of dispositive motions. Despite the long and consistent line of legal precedent recognizing that NASD arbitrators have implicit authority to grant prehearing motions to dismiss or for summary judgment, the response to such motions invariably includes arguments that the arbitrators lack the authority to grant the motion and/or policy arguments that such motions are inherently pernicious or contradict the goals and spirit of arbitration. Indeed, when in 2003 the NASD proposed amending the Code of Arbitration Procedure to explicitly recognize its arbitrators' authority to grant such motions, it suggested language which was replete with cautions and genuinely hostile to such motions. Even that ignited a storm of comments and disagreement that led to the rule's withdrawal to allow the approval of the other proposed amendments to the code.3

    This hostility toward dispositive motions in arbitration deserves the same fate as the Federal Courts' erstwhile disfavor for summary judgment. Properly understood and in the right circumstances, prehearing motions to dismiss further advance the goals of making arbitration as inexpensive and efficient as possible for all parties. The perceived potential for abuse of such motions can be adequately dealt with by sanctions or other means. The fear of abuse should not chill the use of such motions in the proper case.

  2. Arbitrators Have Implicit Authority to Grant Dispositive Motions

    Every court to have considered the question of whether arbitrators may grant dispositive motions without holding an evidentiary hearing has answered in the affirmative, and the list of courts to have reached that conclusion has been growing. In Sheldon v. Vermonty, 269 F.3d 1202 (10th Cir. 2001), the Tenth Circuit ruled on an appeal from the confirmation of an NASD arbitration award granting pre-hearing dismissal to the broker-dealer defendants. The Claimant, who had alleged violations of state and federal securities laws, common law fraud, negligent misrepresentation, breach of fiduciary duty and unjust enrichment in connection with the sale of shares of a phone company, argued that the panel had exceeded its authority in granting the prehearing motion to dismiss and that warranted vacateur. Id. at 1205-1206. The Tenth Circuit disagreed:

    a NASD arbitration panel has full authority to grant a pre-hearing motion to dismiss with prejudice based solely on the parties' pleadings so long as the dismissal does not deny a party fundamental fairness.

    Id. at 1206. In Vento v. Quick & Reilly, Inc., 128 Fed. Appx. 719 (10th Cir., April 20, 2005), the Tenth Circuit reaffirmed its holding in Sheldon, citing it in affirming confirmation of an arbitration award granting prehearing dismissal of the Claimant's claim that Quick & Reilly had violated various legal duties in complying with a facially valid writ of garnishment and order directing that it turn over the proceeds of Vento's account. Id. at 721-3.

    Similarly, in Tricome v. Success Trade Securities, No. 05-4746, 2006 U.S. Dist. LEXIS 33412 (E.D.Pa May 25, 2006), the Claimant sought to vacate an NASD arbitration panel's pre-hearing dismissal of his claim that the defendant online brokerage service had engaged in securities fraud by providing flawed software for his trading. Id. at *2. According to Tricome, the software was flawed because it "allowed him to make purchases in excess of the amount of money in his account" - in other words, because it allowed him to trade on margin. Id. Unsurprisingly, the panel dismissed the claim, and the court refused to vacate the award. Id. at *9-11 ("arbitrators may grant a motion to dismiss without holding a full evidentiary hearing . . . Tricome was not denied fundamental fairness because he was given opportunities to respond to the motions to dismiss that were before the arbitration panel, both in writing and during the telephone conference").

    In Warren v. Tacher, 114 F. Supp. 2d 600 (W.D. Ky. 2000), the Western District of Kentucky refused to vacate the prehearing dismissal of Claimants' claims against their clearing firm, Bear Stearns. Responding to the Claimants' complaint that the arbitrators were guilty of misconduct and exceeded their powers in dismissing their claim prior to discovery or an evidentiary hearing, the court wrote:

    While the granting of such motions usually means that the arbitrator "refused to hear evidence," that, by itself, is insufficient to vacate the award. Petitioners must also show that the excluded evidence was material to the panel's determination and that the arbitrator's refusal to hear the evidence was so prejudicial that the party was denied fundamental fairness. . . . In the instant case, Petitioners fail to show how any evidence that they would have obtained in discovery would overcome the panel's decision. Petitioners are not entitled to costly full-blown discovery when it would not change the outcome and the claim could be decided on a pre-hearing motion.

    Id. at 602 (emphasis added, internal citations omitted).

    In Intercarbon Bermuda Ltd. v. Caltex Trading and Transport Corporation, 146 F.R.D. 64 (S.D.N.Y. 1993), the Southern District of New York explicitly linked an arbitrator's duty to hear evidence to the standard of materiality underlying summary judgment motions under the Federal Rules of Civil Procedure:

    "Misconduct" within the meaning of Section 10 will not be found unless the aggrieved party was denied a "fundamentally fair hearing." . . . InterCarbon asserts that the "paper hearing" it received was not fundamentally fair. Caltraport, on the other hand, points out that the procedure followed by the arbitrator is analogous to the unquestionably fair procedure for summary judgment under Rule 56 of the Federal Rules of Civil Procedure. . . Like Rule 56, which precludes summary judgment if there is a "genuine issue as to any material fact," Section 10 requires an arbitrator to hear evidence that is "pertinent and material." . . . Although the exact standards for a Rule 56 determination do not apply here, the propriety of the arbitrator's action does depend on the same underlying concern: the extent to which issues of fact were in dispute, so that a fuller hearing -- including live testimony -- would be required to reach a just decision.

    Id. at 72-73 (emphasis added, internal citations omitted) Six years later, in Max Marx Color & Chemical Co. v. Barnes, 37 F. Supp. 2d 248 (S.D.N.Y. 1999), the Southern District held that an NASD arbitration panel could decline to hear certain evidence before granting a motion to dismiss:

    Petitioners, however, do not explain the materiality...

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