This is one of two posts discussing Lanier v. Bats Exch. Inc., 838 F.3d 139  (2d Cir. 2016). This post will specifically cover the breach of contract claims. The second post covers subject matter jurisdiction.

In Lanier v. Bats Exch. Inc., 2d Cir., No. 15-1683 (2d Cir. Sep. 23, 2016), the United States Court of Appeals for the Second Circuit affirmed the district court’s dismissal of Harold Lanier’s (“Plaintiff”) breach of contract claims against a group of national securities exchanges (“Defendants”) for failure to state a claim.

National security exchanges are self-regulatory organizations (“SRO”) subject to the Securities and Exchange Commission’s (“SEC”) approval and oversight. The SEC has the authority to revoke their status as SROs. The national exchanges are required to comply with the SEC’s rules and regulations, including those addressing the distribution of “[i]nformation with respect to quotations for or transactions in any security.” The quotation and transaction information must be distributed “on terms that are not unreasonably discriminate.”

According to the complaint, Plaintiff contracted with Defendants to receive consolidated data via a securities information processor about securities traded on the Defendants’ exchanges. Plaintiff alleges that Defendants disseminated the same market date sent to the processor directly to a group of preferred customers and, due to the preferred customers’ bandwidth, transfer protocol, and physical location of servers, these customers received data as quickly as “one microsecond” after the data was sent. Plaintiff claimed the preferred customers benefited from the speed at which they received the market data.  Plaintiff and other similarly positioned traders (collectively “Subscribers”), in contrast, received stale data. Plaintiff alleged Defendants breached their contracts because the preferred customers received market data up to 1,499 microseconds faster than Subscribers.

Plaintiff argued Subscribers should have received market data prior to or at the same time as the preferred customer to be fair and nondiscriminatory. The court disagreed and noted that the SEC appeared to interpret the requirement to mean data must be sent at the same time, not received. Moreover, the court found that if Plaintiff’s theory were allowed, it would undermine Congress’ intent to create uniform rules for governing the national market system, a task given to the SEC. Thus, Plaintiff’s interpretation of the contracts was preempted.

The court next turned to the breach of contract claims. To plead a breach of contract claim, the claim must have been premised on failure to fulfill contractual obligations independent of the obligations imposed by the SEC. The court failed to find any basis in the contract for the allegation that the preferred customers could not receive data prior to the processer. Nor could the contract be read to require that the processor be a “single source” of the NBBO. As the court concluded: “As Lanier has failed to identify any contractual promise independent of the relevant regulations that was breached by the prior receipt of data by Preferred Customers, he has failed to state a claim for breach of contract.”

Finally, the court found Plaintiff failed to exhaust all remedies at the administrative level. Under the exhaustion rule, a party may not seek federal judicial review of an adverse administrative determination until the party has first sought all possible review with the agency itself. The court noted Plaintiff still had the right to seek review before the SEC of any breach of contract claim. Consequently, the Plaintiff’s claims were not ripe for review.

Accordingly, the court affirmed the district court’s ruling and dismissed the complaint for failure to state a claim.

The primary materials for this case may be found at the DU Corporate Governance website.