Motion to Dismiss and Eligibility Rules FAQ

A motion to dismiss is a request made by a party to the arbitrator(s) to remove some or all claims raised by another party filing a claim. Rule 12504 of the Code of Arbitration Procedure for Customer Disputes and Rule 13504 of the Code of Arbitration Procedure for Industry Disputes (collectively, the Codes) establish procedures that govern motions to dismiss.

Procedures Relating to Motions to Dismiss

Procedures that specifically address motions to dismiss are listed below:

• Parties must file the motions in writing, separately from the answer, and only after they file the answer.
• Parties must file any Rule 12504(a) motion at least 60 days in advance of a hearing.
• Parties will have 45 days to respond to a Rule 12504(a) motion.
• In the case of an eligibility motion, parties must file any motion to dismiss at least 90 days before a hearing, and the other parties will have 30 days to respond.
• The full panel will decide a Rule 12504(a) motion and an eligibility motion.
• The panel cannot act upon a motion to dismiss a party or claim under Rule 12504(a), unless the panel determines that: (1) the non-moving party signed a settlement and release; (2) the moving party was not associated with the account, security or conduct at issue; or (3) the non-moving party previously brought a claim regarding the same dispute against the same party that was fully and finally adjudicated on the merits and memorialized in an order, judgment, award, or decision.
• The panel cannot act upon a motion to dismiss a party or claim under Rule 12206(b), unless the panel determines that the claim is not eligible for arbitration because it does not meet the six-year eligibility requirement.
• If a party files a motion to dismiss on multiple grounds, including eligibility, the panel must decide eligibility first. If the panel grants the motion on eligibility, it must not rule on any other grounds for the motion.
• The panel must hold a hearing before it grants a Rule 12504(a) motion, unless the parties waive the hearing.
• If the panel grants a Rule 12504(a) motion, the decision must be unanimous and be accompanied by a written explanation.
• If the panel denies a Rule 12504(a) motion, a party may not re-file it, unless specifically permitted by panel order.
• If the panel denies a Rule 12504(a) motion, the panel must assess forum fees against the party who filed the motion.
• If the panel deems a Rule 12504(a) motion frivolous, it must also award reasonable costs and attorneys' fees to the party who opposed the motion.
• If the panel determines that a party filed a motion to dismiss under Rules 12206(b) and 12504(a) in bad faith, it may issue other sanctions under Rules 12212 and 13212 of the Codes.

How do Rules 12504 and 13504 affect motions to dismiss filed in FINRA's arbitration forum?

Rules 12504(a)(1) and 13504(a)(1) reinforce FINRA's position that parties have the right to a hearing in arbitration by clarifying that motions to dismiss filed prior to the conclusion of a party's case in chief, including prehearing motions, are discouraged in arbitration. The rules significantly limit motions to dismiss filed prior to the conclusion of a party's case-in-chief. Under the rules, the panel cannot act upon a motion to dismiss a party or claim, unless the panel determines that:

(1) the non-moving party previously released the claim(s) in dispute by a signed settlement agreement and/or written release;

(2) the moving party was not associated with the account(s), security(ies) or conduct at issue;

(3) the non-moving party previously brought a claim regarding the same dispute against the same party that was fully and finally adjudicated on the merits and memorialized in an order, judgment, award, or decision; or

(4) the claim does not meet the criteria of the eligibility rule.

How should arbitrators apply the four exceptions?

Prior settlement or release

A panel cannot act on a motion to dismiss under Rules 12504(a)(6)(A) and 13504(a)(6)(A) unless the panel determines that the non-moving party previously released the claims in dispute by a signed settlement agreement and/or written release. Parties seeking this exception should provide arbitrators with valid documents that indicate that the claims in the current dispute have been resolved in a previous dispute.

Not associated with the account, security or conduct at issue

A panel cannot act on a motion to dismiss under Rules 12504(a)(6)(B) and 13504(a)(6)(B) unless the panel determines that the moving party was not associated with the accounts, securities or conduct at issue. FINRA intends this exception to apply in cases involving issues of misidentification. For example, the panel could grant a motion to dismiss under this exception if a party files a claim against the wrong person or entity, or a claim names an individual who was not employed by the firm during the time of the dispute.

A claim regarding the same dispute against the same party that was fully and finally adjudicated on the merits and memorialized

A panel may grant a motion to dismiss relating to a particular controversy if they believe the matter was adjudicated fully even in instances where a claimant adds a new cause of action, or adds additional facts. For example, consider a case where a claimant initiated a claim against a firm for $150,000 for suitability based on a broker’s investment in XYZ stock. The arbitrators dismiss the claim after a full hearing. This exception allows arbitrators to hear a motion to dismiss if the claimant subsequently files an arbitration against the same firm relating to the investment in XYZ but in the new case the claimant alleges fraud in inducing the claimant to make the purchase.

Eligibility

A panel may grant a motion to dismiss on eligibility grounds at any stage of the proceeding under Rules 12206(b)(7) and 13206(b)(7), including a prehearing motion, if the claim is not eligible for submission to arbitration because six years have elapsed from the occurrence or event giving rise to the claim. For example, although a customer purchased stock 10 years ago, there are allegations of ongoing fraud starting with the purchase, but continuing to a date within six years of the date the claim was filed. Parties seeking this exception should provide arbitrators with valid documents that indicate when the occurrence or event took place.

FINRA emphasizes that these exceptions do not constitute an invitation to parties to file motions to dismiss. The fact that a motion may be filed under one of these exceptions does not mean that the panel should or will grant a motion that does not have merit.

How should a party file a Rule 12504(a) motion?

If a party wishes to file a Rule 12504(a) motion, the party must file the motion in writing, file it separately from the answer and file it only after the answer is filed. For a Rule 12504(a) motion, the party filing the motion must serve the other parties and the Director of Arbitration with the motion at least 60 days before a scheduled hearing. The parties receiving the Rule 12504(a) motion will have 45 days to respond to the motion.

Are there procedures that a panel must follow to decide a Rule 12504(a) motion?

Yes. The full panel must decide a Rule 12504(a) motion. Moreover, the panel may not grant a Rule 12504(a) motion unless an in-person or telephone prehearing conference on the motion is held or waived by the parties. In addition, prehearing conferences to decide these motions will be recorded.

What happens if the panel grants a Rule 12504(a) motion?

If the panel grants a Rule 12504(a) motion (in whole or part), the decision must be unanimous and accompanied by a written explanation. FINRA believes that the type of relief requested by a Rule 12504(a) motion—the complete dismissal of a claim before an evidentiary hearing is completed—justifies the requirement that all arbitrators on the panel agree, based on the evidence presented by the party filing the motion, that the motion should be granted.

What happens if the panel denies a Rule 12504(a) motion?

If a panel denies a Rule 12504(a) motion, a panel must assess forum fees associated with the hearing(s) on the motion against the party who filed the Rule 12504(a) motion. The panel decision to deny a Rule 12504(a) motion is not required to be unanimous.

FINRA believes that the mandatory assessment of forum fees will deter parties from filing Rule 12504(a) motions that are not meritorious or that fall outside the scope of the three exceptions, and will provide an incentive for parties wishing to file such motions to ensure that their motions to dismiss filed prior to the conclusion of a party's case in chief, including prehearing motions, comply with the intent of the rules.

May a party re-file a Rule 12504(a) motion that has been denied?

A party may not re-file a Rule 12504(a) motion that has been denied, unless specifically permitted by panel order. The panel decision to re-file a Rule 12504(a) motion is not required to be unanimous.

What happens if the panel determines that a party has filed a motion to dismiss frivolously?

If a panel determines that a party filed a Rule 12504(a) or eligibility motion frivolously, the panel must also award reasonable costs and attorneys' fees to any party that opposed the motion. FINRA believes that the risk of monetary penalties and sanctions, imposed either by the panel on its own initiative, or as a result of a party's motion, will deter parties from filing such motions frivolously.

What happens if the panel determines that a party has filed a motion to dismiss in bad faith?

If a panel determines that a party filed a Rule 12504(a) or eligibility motion in bad faith, the panel may also issue sanctions against the party that filed the motion. Under the Codes, the panel may sanction a party for failure to comply with any provision in the Code, or any order of the panel or single arbitrator authorized to act on behalf of the panel. Such sanctions may include but are not limited to: assessing monetary penalties payable to one or more parties; precluding a party from presenting evidence; making an adverse inference against a party; assessing postponement and/or forum fees; and assessing attorneys' fees, costs and expenses.

FINRA believes that the risk of monetary penalties and sanctions, imposed either by the panel on its own initiative, or as a result of a party's motion, will deter parties from filing a Rule 12504(a) motion in bad faith. Moreover, FINRA believes these enforcement mechanisms will help ensure strict compliance with the rules.

Do the rules prohibit a party from filing other motions to dismiss?

No. A party may file a Rule 12504(b) motion and such a motion will not be subject to the exceptions in Rule 12504(a). Thus, a moving party may file a Rule 12504(b) motion based on any applicable theory of law. FINRA expects these motions to be relevant to the case and based on theories that are germane to the issues raised in the non-moving party's case. FINRA believes that by the close of the non-moving party's case, the panel will have heard enough evidence to decide whether a motion filed at this stage of the case should be considered and granted if warranted.

FINRA notes that if a party files a Rule 12504(b) motion, the panel is not required to consider or grant the motion. Arbitrators will continue to control the hearing process, which includes deciding whether to hear such a motion. Further, the rule will not preclude a panel from assessing parties who file these motions with sanctions, costs or attorney's fees, if the panel determines that a Rule 12504(b) motion filed at this time is frivolous or in bad faith.

In addition, a party may file a motion to dismiss based on Rules 12212 and 13212 (for material and intentional failure to comply with a panel order if prior warnings or sanctions have proven ineffective) or based on Rules 12511 and 13511 (for discovery abuse). Such motions will not be subject to the exceptions in Rule 12504(a), and will continue to be governed by their respective rules.

How does the eligibility rule differ from the provisions under the motion to dismiss rule?

Many of the changes under the eligibility rule are the same as those under the motion to dismiss rule, but there are some differences:

• First, the three exceptions to the motion to dismiss rule that prohibit arbitrators from acting on a motion to dismiss prior to the conclusion of a party's case, including a prehearing motion (i.e., (1) a signed settlement agreement and/or written release; (2) the contention that a moving party was not associated with the accounts, securities or conduct at issue; and (3) a claim regarding the same dispute against the same party that was fully and finally adjudicated on the merits and memorialized), will not apply to eligibility motions.
• Second, the filing deadlines for eligibility motions are different from those in the motion to dismiss rule. Under the eligibility rule, a party may file a motion to dismiss on eligibility grounds at any stage of the proceeding, except that a party may not file this motion any later than 90 days before the scheduled hearing on the merits, rather than the 60-day timeframe required under the motion to dismiss rule. The 90-day requirement also applies to eligibility motions that include multiple other grounds (i.e., a mixed motion). The 90-day requirement will encourage parties wishing to file an eligibility motion to determine in the early stages of the case whether to pursue their claims in court or to proceed with the arbitration. Further, the rule also provides parties with 30 days to respond to an eligibility motion, instead of the 45 days permitted under the motion to dismiss rule. The 30-day timeframe to respond to eligibility motions will expedite the process, so that the time between filing a claim and resolution of the dispute is shortened.
• Third, if a party files an eligibility motion that includes multiple other grounds, the panel must decide the eligibility issue first. If the panel grants a mixed motion on eligibility grounds, it must not rule on any other grounds for the motion. Further, if a party files a mixed motion, the party responding to the mixed motion will have 45 days to respond.