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Webb v. Financial Industry Regulatory Authority, Inc.

United States Court of Appeals, Seventh Circuit

May 8, 2018

Nicholas Webb, et al., Plaintiffs-Appellants,
Financial Industry Regulatory Authority, Inc., Defendant-Appellee.

          Argued February 6, 2018

          Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 1:16-cv-04664 - Andrea R. Wood, Judge.

          Before Ripple, Sykes, and Barrett, Circuit Judges.


         The parties cast this case as one about arbitral immunity, which is the ground on which the district court dismissed the complaint. It turns out, however, that the case is really about federal jurisdiction. We asked the parties to submit supplemental briefs on this question, and they both contend that subject matter jurisdiction exists. Their strongest argument is grounded in the diversity statute, but the amount in controversy requirement presents an obstacle: the complaint satisfies it only if Illinois law permits the plaintiffs to recover their legal expenses from the underlying arbitration, this suit, or both. We conclude that while Illinois law permits the recovery of legal fees as damages in limited circumstances, those circumstances are not present here.


         In October 2013, brokers Nicholas Webb and Thad Bev-ersdorf were fired by their employer, Jefferies & Company, Inc. ("Jefferies"). They decided to challenge their termination, and, as their employment contracts with Jefferies demanded, they filed their claims in the Financial Industry Regulatory Authority's ("FINRA") arbitration forum. FINRA required them to sign an "Arbitration Submission Agreement, " which they did, and their dispute with Jefferies proceeded in arbitration for the next two-and-a-half years. They withdrew their claims before a final decision was rendered. Under FINRA's rules, that withdrawal constituted a dismissal with prejudice.

         After the arbitration failed, Webb and Beversdorf sued FINRA in the Circuit Court of Cook County, Illinois, alleging that FINRA breached its contract to arbitrate their dispute with Jefferies. They faulted FINRA for a number of things, including failing to properly train arbitrators, failing to provide arbitrators with appropriate procedural mechanisms, interfering with the arbitrators' discretion, and failing to permit reasonable discovery. They sought damages "in an amount in excess of $50, 000" and a declaratory judgment identifying specified flaws in FINRA's Code of Arbitration Procedure. FINRA removed the dispute to federal court, where it moved to dismiss on multiple grounds, including arbitral immunity. The district court held that FINRA was entitled to arbitral immunity and dismissed the suit. Webb and Beversdorf appeal this judgment.


         Neither side has raised a jurisdictional challenge, but we have an independent obligation to determine whether we have authority to resolve this dispute. Smith v. American Gen. Life & Acc. Ins. Co., 337 F.3d 888, 892 (7th Cir. 2003) (citing St. Paul Mercury Indem. Co. v. Red Cab Co., 303 U.S. 283, 287 n.10 (1938)). At oral argument, we ordered the parties to submit supplemental briefs on this issue. Both sides argue that diversity jurisdiction exists, and FINRA argues that federal question jurisdiction exists as well. Because the argument for diversity is the stronger of the two, we begin there.

         The diversity statute, 28 U.S.C. § 1332, grants jurisdiction when there is complete diversity of citizenship between the parties and the amount in controversy exceeds $75, 000, exclusive of interest and costs. Complete diversity is not a problem: Webb and Beversdorf are citizens of Illinois and FINRA is a Delaware corporation with its principal place of business in Washington, D.C. Identifying the amount in controversy is more complicated.

         After it removed the case to federal court, FINRA initially claimed that the amount in controversy was satisfied because Webb and Beversdorf sought more than $1, 000, 000 from Jefferies. The district court properly rejected this argument, because we have held that the amount at stake in an underlying arbitration does not count toward the amount in controversy in a suit between a party to the arbitration and the arbitrator. Caudle v. American Arbitration Ass'n, 230 F.3d 920, 922-23 (7th Cir. 2000). Jurisdiction turns on what is at stake between the parties to this suit-Webb and Beversdorf, the plaintiffs, and FINRA, the defendant.

         Webb and Beversdorf paid FINRA $1800 at the start of the arbitration; if that is all they lost, the amount in controversy is obviously far short of the jurisdictional mark. They also, however, seek to recover the legal fees that they incurred both in the course of arbitrating against Jefferies and in preparing this lawsuit against FINRA.[1] Webb and Bevers-dorf say that these fees-which exceed $75, 000-were a reasonably foreseeable consequence of FINRA's breach of the Arbitration Submission Agreement. See 24 Williston on Contracts § 64.12 (4th ed. 2017) ("Consequential damages … include those damages that … were reasonably foreseeable or contemplated by the parties at the time the contract was entered into as a probable result of a breach."). The district court accepted this argument and concluded that it had authority to adjudicate the suit.

         Legal fees may count toward the amount in controversy if the plaintiff has a right to them "based on contract, statute, or other legal authority." Ross v. Inter-Ocean Ins. Co., 693 F.2d 659, 661 (7th Cir. 1982), abrogated on other grounds by Hart v. Schering-Plough Corp., 253 F.3d 272, 274 (7th Cir. 2001). Webb and Beversdorf do not contend that FINRA assumed a contractual obligation to cover either the fees that they incurred in arbitration or those that they incurred in this lawsuit. That leaves statute or other authority. The parties agree that Illinois law governs, so we look there to determine whether Webb and Beversdorf could plausibly recover any of these legal fees as damages.

         It is clear that Webb and Beversdorf cannot recover the money spent preparing to litigate against FINRA. Illinois generally adheres to the American Rule that each party bears its own litigation costs. Duignan v. Lincoln Towers Ins. Agency, Inc., 667 N.E.2d 608, 613 (Ill.App.Ct. 1996). Its common law does not authorize a prevailing party to recover attorneys' fees from an opponent. Ritter v. Ritter, 46 N.E.2d 41, 43 (Ill. 1943); see also Keefe-Shea Joint Venture v. City of Evanston, 845 N.E.2d 689, 702 (Ill.App.Ct. 2005). Any right to recovery must derive from contract or statute, Ritter, 46 N.E.2d at 43; Fednav Int'l Ltd. v. Cont'l Ins. Co., 624 F.3d 834, 839 (7th Cir. 2010), and Webb and Beversdorf have not identified any contractual or statutory provision giving them that right. They are thus stuck with the longstanding rule that they must bear their own litigation expenses in this suit against FINRA, even if they ultimately win.

         But Webb and Beversdorf do not just seek recovery of the legal fees they have incurred litigating against FINRA; they also seek recovery of the legal fees they incurred arbitrating against Jefferies. This is a more plausible ground for recovery, because Illinois recognizes a "third party litigation exception" to the American Rule. The Illinois Supreme Court has held that "where the wrongful acts of a defendant in- volve the plaintiff in litigation with third parties or place him in such relation with others as to make it necessary to incur expense to protect his interest, the plaintiff can then recover damages against such wrongdoer, measured by the reasonable expenses of such litigation, including attorney fees." Rit-ter, 46 N.E.2d at 44; see also Restatement (Second) of Torts § 914 ("One who through the tort of another has been required to act in the protection of his interests by bringing or defending an action against a third person is entitled to recover reasonable compensation for loss of time, attorney fees, and other expenditures thereby suffered or incurred in the earlier action."). While the exception arises more frequently in the context of torts than contracts, we assume that Illinois courts would recognize it in the latter context as well. See Colvin v. Monticello Communications, Inc., No. 91-C-2498, 1994 WL 113051, at *8-9 (N.D. Ill. Apr. 1, 1994) (allowing the recovery of legal fees when the defendant's breach of contract placed the plaintiff in litigation with a third party); see also City of Cedarburg Light & Water Comm'n v. Glen Falls Ins. Co., 166 N.W.2d 165, 168 (Wis. 1969) ("[A] breach of contract as well as tort may be a basis for allowing the present plaintiff ...

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