Opinion
Case No. 1:04-CV-251.
September 27, 2004
JUDGMENT
In accordance with the Court's Opinion of this date;
IT IS HEREBY ORDERED that Defendant Rodney D. Ellis' Motion to Dismiss and Compel Arbitration (Dkt. No. 28) is GRANTED, and this action is DISMISSED WITHOUT PREJUDICE for the purpose of arbitration.
IT IS FURTHER ORDERED that Plaintiffs' Motion for Entry of Order to Show Cause, For Sanctions, and for Entry of Default Judgment against Defendant Ellis (Dkt. No. 38) is DENIED WITHOUT PREJUDICE and referred for consideration to the arbitrator.
IT IS FURTHER ORDERED that the Hearing scheduled for September 28, 2004 at 2:30 p.m. is canceled as unnecessary.
OPINION
This matter is before the Court on Defendant Rodney D. Ellis' Motion to Dismiss and Compel Arbitration (Dkt. No. 28.) and Plaintiffs' Motion for Entry of Order to Show Cause, for Sanctions, and for Entry of Default Judgment against Defendant Ellis (Dkt. No. 38.).
For the reasons below, this Court grants Defendant Ellis' Motion, denies Plaintiffs' Motion without prejudice, and refers this action to arbitration.
I. BACKGROUND
Defendant Rodney Ellis ("Defendant Ellis") served as an agent of Plaintiff Lincoln National Life Insurance Company pursuant to the terms of an Agent Contract effective July 1, 2000. Defendant Ellis also served as a registered representative and an investment advisor representative of Plaintiff Lincoln Financial Advisors Corporation pursuant to an Investment Advisor Representative Agreement effective July 11, 2000. Plaintiffs brought suit against Defendants Ellis and Lucasse Ellis, Inc. (LEI) for fraud, breach of fiduciary duty, conversion of files, records or data that was the property of Plaintiffs, breach of contract, and tortuous interference with contract and economic advantage on April 13, 2004. (Dkt. No. 1.)
A Temporary Restraining Order ("TRO") was issued by this Court on April 15, 2004. (Dkt. No. 6.) Parties consented to a Preliminary Injunction which was entered on April 21, 2004. (Dkt. No. 17.) Plaintiffs' Motion alleges that Defendant Ellis deleted numerous files in violation of the TRO issued by this Court.
II. ANALYSIS
A. Defendant Ellis' Motion to Compel Arbitration
Defendant Ellis has moved for an order compelling Plaintiffs to arbitrate their claims pursuant to the National Association of Securities Dealers ("NASD") Code of Arbitration Procedure ("Code") and for dismissal of this action pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6). (Def. Mot. at 2.) Plaintiffs Response to Defendant's Motion agrees that, "in general . . . the dispute with [Defendant] Ellis is arbitrable `at the instance of either party.'" (Pls.' Resp. at 2; citing Code Rule 10201(a).) However, Plaintiffs request that the Court rule on Plaintiffs' Motion for Entry of Order to Show Cause, for Sanctions, and for Entry of Judgment or Default against Defendant Ellis prior to compelling arbitration. (Pls.' Resp. at 2.)
The analysis begins with the observation that "arbitration is a matter of contract and a party cannot be required to submit to arbitration and dispute which he has not agreed so to submit." ATT Techs. v. Communications Workers of Am., 475 U.S. 643, 648 (1986).
In lieu of contract language, arbitration in this suit depends on the Code. Rule 10101 of the Code directs "for the arbitration of any dispute, claim, or controversy arising out of or in connection with the business of any member of the Association . . . between or among members and associated persons." Rule 10201(a) addresses submissions which must be arbitrated under the Code. Armijo v. Prudential Ins. Co. of Am., 72 F.3d 793, 798 (10th Cir. 1995). Rule 10201(a) provides:
Except as provided in paragraph (b) or Rule 10216, a dispute, claim, or controversy eligible for submission under the Rule 10100 Series between or among members and/or associated persons, and/or certain others, arising in connection with the business of such member(s) or in connection with the activities of such associated person(s) . . . shall be arbitrated under this Code, at the instance of: (2) a member against a person associated with a member or a person associated with a member against a member[.]
Rule 10216(f), in particular, addresses motions to compel arbitration: "If a member . . . files in court a claim against . . . a current or former associated person of a member that includes matters that are subject to mandatory arbitration . . . the defending party may move to compel arbitration of the claims that are subject to mandatory arbitration."
Thus the Code imposes two requirements for a security dispute to be arbitrable. The first requirement is that the dispute arises between "members and associated persons." The second requirement is that all of the substantive disputes must have arisen "in connection with the business" of members or "in connection with the activities of such associated persons[.]" See First Liberty Inv. Group v. Nicholsberg, 145 F.3d 647, 651 (3rd Cir. 1998).
The first requirement is met because Plaintiffs are NASD members, Defendant Ellis is an associated person and, furthermore, both parties agree that the Code generally applies to their dispute. (Pls.' Resp. at 2; Def.'s Mot. at 2.)
The second requirement is at issue. The question raised goes to the scope of arbitrability and whether an alleged violation of the TRO should be decided by this Court or submitted for arbitration. (Pls.' Resp. at 2.) In determining the scope of arbitrability, this Court examines well-settled principles of federal arbitration law.
It is settled authority that any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration. See, e.g., Stoudt v. J.D. Byrider, 228 F.3d 709, 715 (6th Cir. 2000); Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983); Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626 (1985). When Congress enacted the Arbitration act, it intended to reverse "centuries of judicial hostility to arbitration agreements" and it was "a congressional declaration of a liberal federal policy favoring arbitration agreements." Scherk v. Alberto-Culver Co., 417 U.S. 506, 510 (1974); Moses, 460 U.S. at 24. The Supreme Court held in United Steelworkers of Am. v. Warrior Gulf Navigation Co., 363 U.S. 574 (1960), that "[a]n order to arbitrate [a] particular grievance should not be denied unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute." Id., at 582-83.
In light of those principles, this Court finds that the parties' disputes should be resolved by arbitration. Even without consideration of those general principles of arbitration, this finding is in accordance with the Code and interpreting case law.
The NASD contemplates the possible necessity of the Court issuing a TRO in Rule 10335 which states that "parties may seek a temporary injunctive order . . . from a court of competent jurisdiction." This Court believes the Code is intended to provide immediate relief when there is an impending risk. In this case, the TRO was aimed at protecting against spoliation. The TRO was an attempt to protect information, intellectual property, and documents which Plaintiffs felt would be at risk if they were required to wait until arbitration to address the issue. This reading is consistent with case law on preliminary injunctions in connection with arbitration. See, e.g., RGI Inc. v. Tucker Assoc., 858 F.2d 227, 230 (5th Cir. 1988); Positive Software Solutions Inc. v. New Century Mortgage Corp., 259 F.Supp.2d 561, 563 (N.D. Tex. 2003).
The parties are in agreement that the issues formulating the main dispute between the parties should be addressed in arbitration. There is no immediate threat which could be averted by having the Court rule on Plaintiffs' Motion prior to compelling arbitration, and the relief sought by the Plaintiffs would not merely preserve the status quo pending arbitration. Therefore, this Court finds that it proper to leave the issues of spoliation of evidence, violations of the TRO, and the attendant inferences to the discretion of the arbitrator. This Court wishes to leave the discretion of the arbitrator unscathed since the arbitration process presumes that courts will not deliver to the arbitrator a fait accompli.
B. Defendant Ellis' Motion to Dismiss
Incorporating the above analysis and having granted Defendant Ellis' Motion to Compel Arbitration, this Court now grants Defendant Ellis' Motion to Dismiss. Normally proceedings would be stayed under 9 U.S.C. § 3 (2004), pending the conclusion of arbitration. See, e.g., Margalioth v. Merrill Lynch Pierce, 695 F.Supp. 756, 757 (S.D.N.Y. 1988). However, there are no claims left to be resolved by this Court, and, therefore, there is no reason to stay these proceedings. Accordingly, Defendant Ellis' Motion to Dismiss is granted and this action is dismissed with leave to reopen pending the completion of the arbitration proceedings, on motion of either party. Id.
C. Plaintiffs' Motion for Entry of Order to Show Cause, For Sanctions, and for Entry of Default Judgment.
The Court having found it is proper to leave the issues of spoliation of evidence, violations of the TRO and attendant inferences to the discretion of the arbitrator and having granted Defendant Ellis' Motion to Dismiss and Compel Arbitration, Plaintiffs' Motion for Entry of Order to Show Cause, For Sanctions, and for Entry of Default Judgment is denied without prejudice.
III. CONCLUSION
In light of the above analysis, this Court grants Defendant Ellis' Motion to Dismiss and Compel Arbitration. The Court also denies Plaintiffs' Motion for Entry of Order to Show Cause, for Sanctions, and for Entry of Default Judgment without prejudice, and this matter is referred for consideration to the arbitrator.