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Belom v. National Futures Association

March 28, 2002


Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 01 C 3951--Suzanne B. Conlon, Judge.

Before Flaum, Chief Judge, and Bauer and Evans, Circuit Judges.

The opinion of the court was delivered by: Evans, Circuit Judge

Argued February 14, 2002

Belom was company counsel for LFG (we've shortened its name), a registered Futures Commission Merchant and a member of the National Futures Association (NFA), an association registered with the Commodity Futures Trading Commission (CFTC). Joy Ju, an LFG customer, filed an arbitration demand against LFG and Belom for damages allegedly resulting from the wrongful termination of Ju's ability to place orders directly with LFG's personnel at the Chicago Mercantile Exchange. Ju sought significant damages (about $7.3 million) against LFG and Belom for what was claimed to be negligence, recklessness, conversion, constructive fraud, and the violation of numerous federal and state statutes and regulations. Whether any of these claims have merit, of course, is not before us.

Belom sought to avoid arbitration, alleging that he had not consented to resolve Ju's dispute in that forum. The NFA denied his request, determining that its rules required Belom's participation in arbitration as an employee of LFG. Belom then filed a complaint against the NFA and Ju in federal court seeking declaratory and injunctive relief excluding him from the Ju arbitration proceeding. The district court dismissed his complaint under Rule 12(b)(6) for failure to state a claim for which relief can be granted, a decision that we review de novo. Antonelli v. Sheahan, 81 F.3d 1422, 1427 (7th Cir. 1996).

NFA rules allow a customer to initiate arbitration against any NFA member and its employees for disputes involving commodity future contracts. Belom argues that the NFA rules in this regard violate the Commodity Exchange Act (CEA). Congress amended the CEA in 1974 to establish a comprehensive regulatory structure. To implement this structure, Congress created the CFTC as an independent agency vested with broad authority to adopt rules that, in its judgment, are necessary to carry out the purposes of the CEA. See Geldermann, Inc. v. Commodity Futures Trading Comm'n, 836 F.2d 310, 312 (7th Cir. 1987). The CEArequires a registered futures association to provide for arbitration as a dispute resolution mechanism for its customers. The NFA enacted its arbitration rules to comply with this requirement. Section 2(a) of the NFA code of arbitration reads:

Mandatory Arbitration.

(1) Claims. Except as provided in Sections 5 and 6 of this Code with respect to timeliness requirements, the following disputes shall be arbitrated under this Code if the dispute involves commodity futures contracts:

(i) a dispute for which arbitration is sought by a customer against a Member or employee thereof . . . [.]

Belom argues that this provision violates the CEA and CFTC regulations because they require a member's consent to arbitrate. This argument is undermined by the plain language of the CEA. The CEA provides that an association cannot be registered as a futures association unless the CFTC finds that the rules of the association provide a fair, equitable, and expeditious procedure through arbitration orotherwise for the settlement of customers' claims and grievances against any member or employee thereof: Provided, That (A) the use of such procedure by a customer shall be voluntary[.] 7 U.S.C. sec. 21(b)(10) (emphasis in original).

This language requires the consent only of the customer, not of the futures association member or employee. The plain language of the CFTC regulation implementing this statutory provision also indicates that only the customer's consent to arbitrate is necessary:

A futures association must be able to demonstrate its capability to promulgate rules and to conduct proceedings that provide a fair, equitable and expeditious procedure, through arbitration or otherwise, for the voluntary settlement of a customer's claim or grievance brought against any member of the association or any employee of a member of the association. 17 C.F.R. sec. 170.8.

Belom argues that the C.F.R. section's use of the term "voluntary settlement" applies to both the customer and the futures association member or employee. This interpretation, however, is undermined by the plain language of the CEA provision that the C.F.R. regulation was meant to implement. As noted, the CEA's plain language makes it crystal clear that only the customer's consent is required.

Our case law dealing with a parallel provision of the CEA undermines Belom's consent argument. In Geldermann, the plaintiff argued that 7 U.S.C. sec. 7a(11),*fn1 which required a registered contract market to provide for customer-initiated arbitration, required a member's consent to arbitrate. In holding that the statute did not require a member's consent to arbitrate, we relied on the canon that courts should accord considerable weight to an executive department's construction of a statutory scheme that it has been entrusted to administer. See Geldermann, 836 F.2d at 315 (citing Chevron U.S.A. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 844 (1984)). In Geldermann, the CFTC construed sec. 7a(11) to require commodity exchange members to submit to customer-initiated arbitration. See id. We also relied on the CEA's legislative history, noting that Congress amended the CEA twice without overturning the CFTC's position. See id. at 316. ...

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