Opinion
Civ. No. 99-3497, SECTION "C" (4).
January 31, 2000.
ORDER AND REASONS
Defendants Massachusetts Mutual Life Insurance Company ("Mass. Mutual") and MML Investors Services, Inc. ("MMLISI") move the Court to stay proceedings before this Court in favor of arbitration. For the reasons articulated below, the Court GRANTS Defendants' motion.
I. CASE HISTORY
Plaintiff Hunter W. Brannon is in the profession of selling securities. In 1992, he associated himself with Defendant Ralph C. Freibert, III, a general agent for Mass. Mutual and/or MMLISI, a wholly-owned subsidiary of Mass. Mutual. On January 20, 1993, Brannon executed a Form U-4 to complete his National Association of Securities Dealers ("NASD") registration. Brannon thereafter received a "Sales Representative's Agreement," which authorized him to sell securities offered by MMLISI.
The record is somewhat unclear as to whether Freibert is a general agent for one or for both entities.
Forms U-4 and U-S referred to throughout this opinion are standard forms issued by NASD.
Brannon alleges that Mass. Mutual made an unconditional offer of supplemental disability insurance to its agents by memorandum dated August 18, 1998 and that he responded by submitting a completed application for coverage one day later. Brannon further alleges that Mass. Mutual issued him the insurance thereafter. One month later, according to Brannon's complaint, he suffered a stroke in his left eye causing permanent and near-total blindness. Soon thereafter, Brannon claimed coverage for his alleged disability under the aforementioned disability policy. Mass. Mutual allegedly denied Brannon's claim.
By letter dated July 23, 1999, Freibert terminated Brannon's brokerage contract, allegedly with the verbal explanation that Freibert "did not like the manner in which [Brannon] pursued his disability insurance coverage." Pl.'s Cmpl. at ¶ 11, reproduced within Rec. Doc. 1. On July 30, 1999, MMLISI allegedly provided Brannon with a copy of a Form U-5 submitted to NASD terminating his Sales Representative's Agreement and registration. The form allegedly noted the reason for Brannon's termination was "filing a false disability income insurance claim" and further stated that Brannon "currently is, or at termination was, an individual under internal review for fraud or wrongful taking of property, or violating investment related statutes, regulations, rules or industry standards of conduct." Id. at ¶ 15.
Two months later, Brannon filed suit in the Civil District Court for the Parish of Orleans to recover damages allegedly incurred as a result of the termination of his broker contract. Freibert forthrightly removed the case to this Court on the basis of this court's diversity jurisdiction, 28 U.S.C. § 1332, or alternatively under this Court's federal question jurisdiction, 28 U.S.C. § 1331, pursuant to the Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1001, et seq. In his Notice of Removal, Freibert argued that there is complete diversity of citizenship in this matter because Brannon joined him fraudulently in order to destroy diversity. Before the case proceeded any further, Mass. Mutual and MMLISI, apparently with the approval of Freibert, moved the Court to stay proceedings pending arbitration allegedly mandated by Form U-4 and NASD rules. The Court must now consider Defendants' motion to stay.
See below for further explanation of the specific claims Brannon alleges against the Defendants.
Freibert claimed possible federal question jurisdiction pursuant to ERISA because Brannon alleges damages related to disability benefits. See Def.'s Notice of Removal, Rec. Doc. 1, at ¶ 5.
In support of his fraudulent joinder claim, Freibert asserts that Brannon could not possibly assert a cause of action against him in state court. See Def.'s Notice of Removal, Rec. Doc. 1, at ¶ 4.
II. ANALYSIS
A. Plaintiffs and Defendants' Claims
Brannon primarily alleges the following: (1) bad faith breach of his broker contract with Freibert; (2) defamation based on statements within a Form U-5 Report submitted by Freibert to MMLISI and then filed with NASD as required by that organization's internal rules; (3) deprivation of his "fundamental property right guaranteed by the Fifth and Fourteenth Amendments," Pl.'s Amended Cmpl., Red. Doc. 11, at ¶ 16b; and (4) invalidity of the arbitration clause in his brokerage contract due to (a) overbreadth, vagueness, and ambiguity and/or (b) unequal bargaining power.
Brannon asserts his fourth allegation in his Amended Complaint. The Court recognizes that Brannon sets forth this allegation to invalidate the arbitration clause in his brokerage contract rather than as independent allegation in support of his claim for damages.
Defendants, without reaching the merits of the claims asserted, claim that the Form U-4 securities registration Brannon signed mandates NASD arbitration of Brannon's claims. Page 4, Clause 5 of that Form reads as follows:
I agree to arbitrate any dispute, claim or controversy that may arise between me and my firm, or a customer, or any other person, that is required to be arbitrated under the rules, constitutions, or by-laws of the [NASD] . . . as may be amended from time to time and that any arbitration award rendered against me may be entered as a judgement in any court of competent jurisdiction.
Defs.'s Mtn. to Stay, Rec. Doc. 4, Ex. A, at 4.
Two sections of the NASD Manual are relevant here. Section 10101, entitled "Matters Eligible for Submission" provides the following:
This Code of Arbitration Procedure is prescribed and adopted . . . for the arbitration of any dispute, claim, or controversy arising out of or in connection with the business of any member of the Association or arising out of the employment or termination of employment of associated person(s) with any member, with the exception of disputes involving the insurance business of any member which is also an insurance company . . . (b) between or among members and associated persons.
NASD Manual, Code of Arbitration Procedure § 10101,http://www.nasdr.com (visited Jan. 6, 2000). Section 10201, entitled "Required Submission" further provides:
Except [for certain exceptions not relevant to the instant case] . . ., 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) with such member, 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. . . .Id. at § 10201.
The parties' main dispute centers on whether the insurance exception in Section 10101 prevents arbitration of Brannon's claims. Before the Court proceeds to analyze this somewhat difficult issue, it must first consider the general federal policy favoring arbitration.
B. Federal Policy Favoring Arbitration
Federal courts vigorously enforce "a liberal federal policy favoring arbitration agreements," Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 941, 74 L.Ed.2d 765 (1983), as an alternative to the costly and timely process of litigation. See, e.g., Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 225-26, 107 S.Ct. 2332, 2337, 96 L.Ed.2d 185 (1987) (securities and RICO claims arbitrable under predispute arbitration agreements); Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 625, 105 S.Ct. 2246, 3353, 87 L.Ed.2d 444 (1985) (antitrust dispute subject to arbitration). See also Commerce Park at DFW Freeport v. Mardian Construction Co., 729 F.2d 334, 338 (5th Cir. 1984) (construction contract subject to arbitration); City of Meridian v. Algernon Blair, Inc., 721 F.2d 525, 527-28 (5th Cir. 1983) (general contractor's claim against city subject to arbitration). This Court, in particular, has explained this federal policy favoring arbitration and ruled accordingly. See, e.g., Japan Sun Oil Co., Ltd. v. M/V MAASDIJK, 864 F. Supp. 561 (E.D. La. 1994).
Congress set forth this liberal policy in the Federal Arbitration Act ("FAA"), 9 U.S.C. § 1, et seq. Section 2 is the primary substantive provision of the Act. It provides that:
A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.9 U.S.C. § 2. Section 3 then explains that a court, after examination of the contract in question, shall stay proceedings "upon any issue referable to arbitration under an agreement in writing for such arbitration." 9 U.S.C. § 3. After the court hears the parties and determines that the arbitration agreement encompasses the parties' claims, section 4 directs that the court shall then "make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement." 9 U.S.C. § 4.
To determine whether a claim is arbitrable, a court must determine: (1) whether there is an agreement to arbitrate; (2) whether the claims asserted fall within the scope of that agreement; and (3) whether there has been waiver of the right to arbitrate. See Wojcik v. Aetna Life Ins. and Annuity Co., 901 F. Supp. 1282, 1286 (N.D. Ill. 1995) (citing Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 24-34, 111 S.Ct. 1647, 1651-56, 114 L.Ed.2d 26 (1991)).
Where a question arises as to whether a dispute is arbitrable, a court's sole function is to determine whether arbitration applies. After making that determination, the court should not reach any of the merits of the underlying litigation. See 9 U.S.C. § 3; City of Meridian, 721 F.2d at 528.
"[A]s a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay or a like defense to arbitrability." Moses Cone, 460 U.S. at 24-25, 103 S.Ct. at 941. "Whenever the scope of an arbitration clause is in question, the court should construe the clause in favor of arbitration." City of Meridian, 721 F.2d at 527 (citing United Steelworkers v. Warrior Gulf Nav. Co., 363 U.S. 574, 582-83, 80 S.Ct. 1347, 1353, 4 L.Ed.2d 1409 (1960)). Consequently, "[a]rbitration should not be denied `unless it can be said with positive assurance that an arbitration clause is not susceptible of an interpretation which would cover the dispute at issue.'" Commerce Park, 729 F.2d at 338 (quoting Wick v. Atlantic Marine, Inc., 605 F.2d 166, 168 (5th Cir. 1979)).
C. Arbitration of Brannon's Claims
Individual employees who have agreed to arbitrate their disputes with their employers must arbitrate their claims. See generally Gilmer. Several courts have held that the Form U-4 securities registration at issue in this case mandates arbitration of employment disputes lodged by registered securities representatives. See id. (age discrimination claim subject to compulsory arbitration pursuant to arbitration agreement in securities registration application). See also Kovelevskie v. SBC Capital Markets, Inc., 167 F.3d 361 (7th Cir.), cert. denied, ___ U.S. ___, 120 S.Ct. 44, ___ L.Ed.2d ___ (1999) (sex discrimination claim); Seus v. John Nuveen Co., 146 F.3d 175 (3d Cir. 1998), cert. denied, ___ U.S. ___, 119 S.Ct. 1028, 143 L.Ed.2d 38 (1999) (sex and age discrimination claims); Williams v. Cigna Financial Advisors, Inc., 56 F.3d 656 (5th Cir. 1995) (age discrimination claim).
1. There is a Valid Arbitration Agreement Between Brannon and the Defendants .
Brannon variously argues the invalidity of the arbitration clause in his brokerage contract due to (a) over breadth, vagueness, and ambiguity and/or (b) unequal bargaining power. As explained above, many other courts, considering the same standard form, have held that arbitration is mandatory where a registered securities representative consents by signing Form U-4. Therefore, those courts, including the United States Supreme Court, have approved, ipso facto, of the very language Brannon now challenges. See Kovelevskie, 167 F.3d at 366-68 (enforcing arbitration agreement in Form U-4 over plaintiffs allegations of unconscionability); Seus, 146 F.3d at 183-84 (enforcing arbitration agreement in Form U-4 in face of allegations that plaintiff did not enter the contract knowingly and voluntarily and that contract was adhesive, oppressive, unconscionable, and unreasonable). See also Gilmer (generally enforcing arbitration agreement in "Uniform Application for Securities Industry Registration or Transfer," which is title of Form U-4); Williams (generally enforcing Form U-4 agreement to arbitrate). Likewise, this Court accepts the language in Form U-4's arbitration clause and finds the arbitration clause and the applicable sections of the NASD Manual free from over breadth, vagueness, or ambiguity.
The Court will analyze Section 10101's insurance exception clause below.
Similarly, other courts have considered and rejected securities representatives' arguments that the arbitration clause is invalid due to unequal or unfair bargaining power. See, e.g., Gilmer, 500 U.S. at 32-33, 111 S.Ct. at 1655-56; Seus, 146 F.3d at 184. Moreover, a sophisticated party, such as a registrant with a securities brokerage, must be presumed to be intelligent enough to understand the type of contract into which he is entering. Brannon has offered no new evidence of unequal bargaining power not argued before and rejected by other courts. This Court, therefore, refuses to depart from the reasoned opinions of other courts to find the arbitration clause invalid.
2. The Claims Asserted by Brannon Falls Within the Scope of the Arbitration Agreement .
Brannon also urges the Court to adopt Justice Stevens's dissent in Gilmer, which argued that employment disputes should not be arbitrable as a matter of public policy. Whether or not this Court agrees with Justice Stevens, joined by Justice Marshall in dissent, is irrelevant. As another court has already ruled, "[g]iven the [Supreme] Court's decision in Gilmer and the weight of cases upholding agreements to arbitrate contained in U-4 forms, even disputes involving employment claims, the Court will decline to adopt the public policy argument to invalidate the arbitration agreement." Battle v. Prudential Ins. Co. of America, 973 F. Supp. 861, 869 (D. Minn. 1997).
a. Constitutional Claims
In his Amended Complaint, Brannon asserts a claim for deprivation of his "fundamental property right guaranteed by the Fifth and Fourteenth Amendments." Pl.'s Amended Cmpl., Rec. Doc. 11, at ¶ 16b. Then, against Defendants' current motion to stay, Brannon argues that it would be improper for a claim asserting a fundamental constitutional right to be decided by arbitration.
It is not necessary for the Court to consider whether a claim for deprivation of one's constitutional rights to property is arbitrable because constitutional restraints, except for the Thirteenth Amendment banning slavery, apply only to state actors. See Civil Rights Cases, 109 U.S. 3, 12-15, 3 S.Ct. 18, 22-26, 27 L.Ed. 835 (1883); Laurence H. Tribe, American Constitutional Law § 18-1 (1988). Because the United States Constitution restrains only state action, Brannon cannot assert a claim for deprivation of a constitutional right to property. Therefore, Brannon's invalid constitutional claim cannot bar the controversy from proceeding to arbitration.
Even if Brannon were in some way able to characterize Defendants as state actors, he would still be left without a cause of action on his constitutional claim because employees in Louisiana have no protected right to employment absent express statutory or contractual provisions to the contrary. In other words, employment in Louisiana, in the absence of external constraints, is on an at-will basis. See Brannan v. Wyeth Laboratories, Inc., 526 So.2d 1101, 1103-04 (La. 1988).
b. The Insurance Exception
The central question for this Court to determine in this case is whether the insurance exception in NASD Manual Section 10101 applies in this case. If the exception applies, the case should remain before this Court for adjudication on the merits. However, if the exception does not apply, this Court must defer to mandatory arbitration.
Several courts have already considered the insurance exception. Almost uniformly, they have held that a case which simply involves an insurance company in an employment dispute does not trigger the exception. Rather, only a dispute fundamentally concerning insurance will invoke the exception and thereby bypass compulsory arbitration. See Mouton v. Metropolitan Life Ins. Co., 147 F.3d 453, 456-57 (5th Cir. 1998) (Title VII retaliation case filed against insurance company employer deemed an employment dispute for which insurance exception was not applicable); Armijo v. Prudential Ins. Co. of America, 72 F.3d 793, 800 (10th Cir. 1995) (case based on federal and state employment discrimination laws, not insurance laws, did not qualify for exception); Wojcik, 901 F. Supp. at 1292 (claims of intentional interference with prospective business advantage, deceptive business practices, and civil conspiracy were claims of wrongful misconduct rather than unlawful insurance practices and thus did not trigger the exception). "Courts that have grappled with this conundrum generally attempt to isolate certain aspects of the dispute and ascertain whether they pose central insurance questions." In re Prudential Ins. Co. of Anierica Sales Practice Litigation, 133 F.3d 225, 233 (3d Cir. 1998). In those close cases, courts have held that underlying facts and concepts involving insurance practices are not sufficient to trigger the insurance exception. See Paul Revere, 66 F. Supp.2d at 228; Battle, 973 F. Supp. at 869. Rather, the actual claims asserted must allege unlawful insurance practices. See Wojcik, 901 F. Supp. at 1292.
At least one court has read the insurance exception broadly to preclude arbitration in any case involving an insurance company and its insurance business, whether or not insurance concepts are in dispute. See Ex Parte Hagan, 721 So.2d 167, 173 (Ala. 1998); cert. dismissed sub nom Minnesota Mutual Life Ins. Co. v. Hagan, ___ US. ___, 119S.Ct. 921, 142 L.Ed.2d 899 (1999). While Brannon argues that the Hagan court's interpretation is the correct one, this Court agrees with the wealth of federal precedent, especially the binding precedent of the Fifth Circuit's opinion in Mouton, and thus declines to adopt the wide interpretation of the insurance exception espoused by the Alabama Supreme Court. See Paul Revere Variable Annuity Ins. Co. v. Thomas, 66 F. Supp.2d 217, 228 (D. Mass. 1999) (declining to adopt Hagan's wide interpretation of the insurance exception).
In the case at bar, Brannon's essential claims are for relief from alleged wrongful discharge and defamation. While he bases those claims in facts that invoke a disability insurance policy, the claims fundamentally concern an employment dispute. These basic tort claims do not "involv[e] the insurance business" of Mass. Mutual or MMLISI. NASD Manual § 10101. Accordingly, the insurance exception does not apply to Brannon's claim. Therefore, the claims asserted by Brannon fall within the scope of the arbitration agreement.
While this Court does not find the insurance exception vague or ambiguous either generally or as applied in this case, the Court does note that even if it were to find the clause ambiguous it would be bound by federal arbitration law to resolve any doubts in favor of arbitration.
The Third Circuit found likewise in a case that was a much closer call than the case at bar. In In re Prudential, sales agents for an NASD member insurance company alleged that their employer fired them in retaliation for refusing to participate in insurance sales fraud. In resolving the difficult question before it, the court wrote the following:
We ultimately cannot say with positive assurance that the language of Form U-4 and the NASD Code, as well as their drafting histories, indicate the parties' desire not to arbitrate employment disputes that require the resolution of an insurance business issue. There is only one clear expression of intent here — that employment disputes are subject to arbitration while "intrinsically insurance" claims are not. Because this court cannot say with certainty what is meant by "intrinsically insurance" claims, and whether it embraces employment disputes, our mandate is clear: a presumption in favor of arbitration applies and doubts in construction are resolved against the resisting parties.133 F.3d at 234.
III. CONCLUSION
For the reasons stated above, the Court finds that (1) the Form U-4 signed by Brannon and the applicable sections of the NASD Manual constitute a valid agreement by the parties to arbitrate; (2) the claims asserted fall within the scope of that agreement; and (3) there has been no waiver of the right to arbitrate. Therefore, Brannon's claims must proceed to arbitration under the NASD Code of Arbitration Procedure.
The parties have never asserted that any party waived the right to arbitrate, and the Court has not found any such waiver in its review of the case record. Accordingly, it is unnecessary to analyze this third prong of the three-part test used to determine arbitrability.
The Court notes, as explained in Section II.B. above, that its sole function in this case is to determine whether the arbitration clause applies in the instant dispute. In resolving the scope of the arbitration clause, the Court must construe the clause in favor of arbitration it is not susceptible of an interpretation that would cover the dispute at issue. While this Court has determined that the arbitration clause in question is susceptible of an interpretation covering the instant dispute, Brannon may still argue the scope of the insurance exception before the arbiters. If the arbiters should decide that the insurance exception does apply to bar arbitration of his claims, Brannon can then reopen the case in this Court.
Accordingly, IT IS ORDERED that Defendants' Motion to Stay Action Pending Arbitration is hereby GRANTED. The Clerk's Office shall statistically close this matter, to be reopened upon motion by the parties at a later date if necessary.
New Orleans, Louisiana, this 31st day of January, 2000.