Opinion
Case No. A1-03-55
October 15, 2003
ORDER
Summary: The Plaintiffs filed a Motion for a Stay and to Compel Arbitration or, in the alternative, to Dismiss Defendant-Intervenors' Counterclaims. In response, the Defendant-Intervenors filed a Motion to Enjoin Arbitration. The Court granted the Plaintiffs' motion and ordered the NASD Arbitration Panel to address and resolve all pending claims between the parties to this litigation in accordance with the NASD Code of Arbitration Procedure. The Court denied the Defendant-Intervenors' motion.
This action arises out of Defendant Robert Montgomery's alleged breach of a covenant not to compete with the plaintiffs, Pruco Securities Corporation and Prudential Insurance Company of America. On July 21, 2003, the Plaintiffs filed a Motion for a Stay and to Compel Arbitration or, in the alternative, to Dismiss Defendant-Intervenors' Counterclaims. On August, 29, 2003, the Defendant-Intervenors filed a Motion to Enjoin Arbitration. For the reasons outlined below, the Plaintiffs' Motion for a Stay is granted and the Defendant-Intervenors' Motion to Enjoin Arbitration is denied.
I. BACKGROUND OF THE CASE
The plaintiffs, Prudential Insurance Company of America ("Prudential") and its wholly-owned subsidiary, Pruco Securities Corporation ("Pruco"), employed the defendant, Robert Montgomery, from February 1987 until April 2003. The Defendant-Intervenors, Minnesota Life Insurance Company ("Minnesota Life") and Securian Financial Services, Inc. ("Securian") are Montgomery's current employers.
Montgomery resigned from Prudential/Pruco on April 18, 2003. Before resigning, he signed a "Field Manager Agreement" and a "Statutory Agent Agreement." These agreements contained covenants which provided that Montgomery would not induce, attempt to induce, or facilitate the termination of the relationship between Prudential/Pruco and their sales associates. These agreements also contained choice-of-law clauses, which provided that New Jersey law would govern, as well as arbitration clauses, which provided that Montgomery would settle any dispute with Prudential/Pruco in accordance with the rules of the National Association of Securities Dealers, Inc. ("NASD"). NASD has written rules requiring members to arbitrate most of their disputes with one another.
Following his resignation from Prudential/Pruco, Montgomery went to work for Minnesota Life Insurance Company ("Minnesota Life") and Securian Financial Services, Inc. ("Securian"). Three other Prudential/Pruco employees subsequently followed suit. Prudential agents Kasey Gilliss and Brian Neuhardt resigned on April 30 and May 5, 2003. Diane Enger, a marketing assistant with a leading agent in the Bismarck area, resigned on May 6, 2003. Gilliss, Neuhardt, and Enger now work for Minnesota Life and Securian.
On May 9, 2003, Prudential/Pruco filed suit against Montgomery, asserting claims of breach of contract, misappropriation of trade secrets, breach of fiduciary duty, breach of duty of loyalty, conversion, and unfair competition. According to Prudential/Pruco, Montgomery and Minnesota Life sought to gain access to Prudential's proprietary client list by recruiting experienced Prudential agents. Prudential/Pruco attributed the defection of Gillis, Neuhardt, and Enger to Montgomery's alleged recruitment efforts. Additionally, Prudential/Pruco asserted that Montgomery (1) helped Minnesota Life organize a recruitment meeting in Bismarck on April 10, 2003, before resigning from Prudential, and (2) contacted Prudential agents in Fargo shortly after tendering his resignation to inquire of their interest in joining him at Minnesota Life.
On May 9, 2003, Prudential filed a Motion for Temporary Restraining Order and Preliminary Injunction. The Court granted Prudential's Motion for Temporary Restraining Order on May 13, 2003. Minnesota Life and Securian subsequently filed a Motion to Intervene, which the Court granted on May 22, 2003. On June 9, 2003, Minnesota Life and Securian filed their answer to Prudential's complaint along with counterclaims of (1) abuse of process, (2) tortious interference with business relations, and (3) a request for a declaratory judgment that the covenants relied upon are null and void.
On May 27, 2003, the Court conducted a hearing on Prudential/Pruco's Motion for a Preliminary Injunction. After giving consideration to the factors set forth in Dataphase Systems, Inc. v. C L Sys. Inc., 640 F.2d 109, 114 (8th Cir. 1981), the Court concluded that a preliminary injunction was inappropriate under the circumstances. On May 29, 2003, the Court denied Prudential/Pruco's Motion for Preliminary Injunction and dissolved the Temporary Restraining Order. Additionally, based upon Prudential/Pruco's representations, the Court referred the dispute to arbitration before the NASD. The Court left it to the NASD Arbitration Panel to determine (1) whether Prudential, a non-NASD member, could require Minnesota Life, a non-NASD member to arbitrate, and (2) whether Securian, an NASD member, could be compelled to arbitrate with non-NASD member Prudential Insurance Company of America.
On May 30, 2003, the NASD Arbitration Panel ruled that Minnesota Life, Securian Financial, Montgomery, and Prudential/Pruco were parties required to arbitrate their claims. Thereafter, all such parties have fully participated in the arbitration proceedings. An arbitration hearing is scheduled to commence on November 17, 2003.
On July 21, 2003, Prudential/Pruco filed a Motion for a Stay and to Compel Arbitration or, in the alternative, to Dismiss Defendant-Intervenors' Counterclaims. In their motion Prudential/Pruco asked the Court to stay this action pending the parties' arbitration before NASD Dispute Resolution, Inc. In the event that the Court is not inclined to grant a mandatory stay, Prudential/Pruco asked the Court to stay the action on a discretionary basis. In the alternative, Prudential/Pruco asserted that Minnesota Life's and Securian's counterclaims should be dismissed pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. When informed of the pendency of Prudential/Pruco's Motion to Stay and Compel Arbitration, the NASD Arbitration Panel referred the decision of whether Minnesota Life and Securian can be compelled to arbitrate back to this Court.
On August 29, 2003, Minnesota Life and Securian filed their response to Prudential/Pruco's motion. Additionally, Minnesota Life and Securian filed a Motion to Enjoin Arbitration, asserting that they are not contractually obligated to arbitrate; that they cannot be compelled to arbitrate under the Federal Arbitration Act; and that they cannot be compelled to arbitrate under the NASD Code of Arbitration Procedure.
II. STANDARD OF REVIEW
The Federal Arbitration Act requires a federal court to enforce arbitration agreements and to stay litigation that contravenes such agreements. 9 U.S.C. § 3. The Federal Arbitration Act requires district courts to stay proceedings if they are satisfied that the parties have agreed in writing to arbitrate an issue underlying the district court proceeding. See Burns v. New York Life Ins. Co., 202 F.3d 616, 620 (2d Cir. 2000); McMahan Sec. Co. v. Forum Capital Markets, 35 F.3d 82, 85-86 (2d Cir. 1994). ("The FAA leaves no discretion with the district court in this matter.") (citing Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 218 (1985). While the Federal Arbitration Act does not require parties to arbitrate when they have not agreed to do so, district courts are to construe any doubts concerning the scope of arbitrable issues in favor of arbitration. Id. (citing Volt Info. Sciences, Inc. v. Board of Trustees, 489 U.S. 468, 478 (1989); and Moses H. Cone Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983).
III. LEGAL ANALYSIS A. MANDATORY STAY
As previously noted, the NASD Arbitration Panel has deferred to this Court the issue of the proper parties to the pending arbitration. It is well-established that the Court has the power to determine whether non-parties to a contract may be subjected to arbitration against their will. See Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002). The "question of arbitrability" is clearly an issue for judicial determination.
It is undisputed and the parties agree that Prudential Insurance Company and Montgomery contracted in writing to arbitrate any dispute arising out of either the "Field Manager Agreement" or the "Statutory Agent Agreement." In addition, Securian acknowledges that, as an NASD member, it agreed to arbitrate disputes with other NASD members such as Pruco Securities. However, the parties disagree as to whether the counterclaims asserted by Securian against Prudential Insurance, and the counterclaims asserted by Minnesota Life (a non-NASD member) against Prudential Insurance and Pruco, are required to be arbitrated under the NASD.
The relevant rules are those of the NASD and, specifically, the NASD Code of Arbitration Procedure (the "Code"). Rule 10101 of the NASD Code defines the issues and subject matter that may be arbitrated as follows:
10101. Matters Eligible for Submission
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 [NASD], 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;
(a) between or among members;
(b) between or among members and associated persons;
(c) between or among members or associated persons and public customers, or others.
Rule 10201(a) of the NASD Code describes a subset of issues as to which certain specified parties may compel arbitration and provides in relevant part as follows:
10201. Required Submission
(a) 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), or arising out of the employment or termination of employment of such associated person(s) with such member, shall be arbitrated under this Code, at the instance of:
(1) a member against another member;
(2) a member against a person associated with a member or a person associated with a member against a member; and
(3) a person associated with a member against a person associated with a member.
Rule 10101 describes the scope of permissive arbitration as any dispute "arising out of or in connection with the business" of any NASD member or the employment activities of associated person(s). Rule 10201 operates to limit the scope of mandatory arbitration to disputes initiated by a specified class of persons (a "member" or "a person associated with a member") against specified classes of persons, and that are "between or among members and/or associated persons, and/or certain others" (emphasis added). Neither the NASD nor the Eighth Circuit have clearly defined the term "certain others." However, the Second Circuit Court of Appeals has held that a person who is sufficiently immersed in the underlying controversy may be considered a "certain other" under the Code.
A person who is neither a member nor an associated person is nevertheless appropriately joined in the arbitration where that party plays an active role in the securities industry, is a signatory to a securities-industry arbitration agreement (or is an instrument of another party to the arbitration), and has voluntarily participated in the particular events giving rise to the controversy underlying the arbitration.
McMahan Sec. Co. v. Forum Capital Markets, 35 F.3d 82, 88 (2d Cir. 1994). Thus, a "certain other" may be joined as a party in NASD arbitration if the above three-identified conditions are met.
According to Prudential/Pruco, Minnesota Life constitutes a "certain other" and should be compelled to arbitrate. Prudential/Pruco contends that Minnesota Life and Securian play active roles in the securities industry-the former being a vehicle of the latter. Second, Prudential states that Minnesota Life is Securian's financial instrument insofar as Securian offers its financial products through Minnesota Life. Third, Prudential states that Minnesota Life and Securian have voluntarily participated in the events giving rise to the controversy underlying the parallel NASD arbitration.
In response, Minnesota Life contends that, under NASD Rule 10201, only NASD members or persons associated with a member can initiate mandatory arbitration. Next, it points out that neither itself nor Prudential are members of NASD and, as both are corporate entities, neither can be considered a "person associated with a member." See Paul Revere Variable Annunity Ins. Co. v. Kirschofer, 226 F.3d 15, 20 (1st Cir. 2000); Burns v. New York Life Ins. Co., 202 F.3d 616, 620-21 (2d Cir. 2000). Consequently, it maintains that it cannot be compelled to arbitrate and that Prudential cannot compel arbitration.
As previously noted, NASD Rule 10201(a) provides for the arbitration of disputes, claims, or controversies eligible for submission "between or among members and/or associated persons, and/or certain others." On its face, the NASD Code clearly requires the arbitration of disputes between Prudential/Pruco and Montgomery; and between Securian Financial and Pruco, both of whom are NASD members. Pruco is clearly an entity that can initiate and compel the present action into arbitration under Rule 10201(a). That includes the power to compel Montgomery into arbitration for he agreed in writing to arbitrate and he is also a "member" or "a person associated with a member." Prudential Insurance is also a proper party to the arbitration. Montgomery agreed to arbitrate his employment dispute with Prudential when he signed the Uniform Application for Securities Industry Registration or Transfer ("Form U-4"). By signing, he implicitly agreed to arbitrate disputes with both Pruco (an NASD member) and Prudential. See In re The Prudential Company of America Sales Practice Litigation, 133 F.3d 225 (3rd Cir. 1998). Close More important, it includes Securian Financial as an NASD "member" and a "certain other" contemplated within the meaning of Rule 10201.
The Court concludes, as a matter of law, that Minnesota Life qualifies as a "certain other" within the meaning of NASD Rule 10201 such that arbitration is appropriate and required. All of the required conditions outlined in McMahan Sec. Co. v. Forum Capital Markets, are met. Specifically, both Minnesota Life and Securian Financial play actives roles in the securities industry. Minnesota Life is Securian's "instrument" within the meaning of McMahan. Further, Minnesota Life/Securian voluntarily participated in the events that gave rise to the controversy underlying the arbitration proceedings. Each of the three conditions set forth in McMahan have been satisfied. The Court concludes and expressly finds that Minnesota Life qualifies as a "certain other" as contemplated by Rule 10201 and within the meaning of Rule 10201. These "certain others" may be compelled to arbitrate under the Code and Minnesota Life needs to be joined in arbitration. Although Minesota Life is a non-signatory to the arbitration agreement, its interests are directly related to and congruent with those of a signatory. As such, a stay of the present action is warranted and the arbitration of all claims and counterclaims is required under the circumstances.
The case of World Financial Group, Inc. v. Steel, cited by Minnesota Life/Securian in their responsive pleadings is neither controlling nor persuasive. The Court concludes that all claims and counterclaims of the parties are "arbitrable". The Court also expressly finds that this case falls within the plain language of NASD Rule 10201 regarding when a dispute must be arbitrated.
On May 30, 2003, the NASD Arbitration Panel ruled that both Minnesota Life and Securian were proper parties to the arbitration proceedings and were required to arbitrate their claims. The Court agrees. Minnesota Life and Securian have fully participated in the arbitration proceedings to date and have asserted counterclaims in arbitration that are virtually identical to the counterclaims being asserted in this litigation. There has been extensive and ongoing discovery in the arbitration proceedings currently pending before the NASD. The arbitration hearing is scheduled for November 17, 2003, approximately one month from today.
Finally, the Court concludes that Minnesota Life and Securian's voluntary participation in the arbitration proceedings to date has been ongoing and that such participation effectively results in a waiver of the right to now complain and seek to enjoin the jurisdiction of the arbitral forum. See Teamsters Local Union No. 764 v. J.H. Merritt Co., 770 F.2d 40, 43 (3rd Cir. 1985); Cobb v. Lewis, 488 F.2d 41, 49 (5th Cir. 1974); Galt v. Libbey-Owens-Ford Glass Co, 376 F.2d 711, 714-15 (7th Cir. 1967).
B. DISCRETIONARY STAY
Prudential/Pruco has also requested that the Court exercise its discretion and grant a discretionary stay in favor of arbitration if a mandatory stay is not granted. Minnesota Life and Securian oppose a discretionary stay on the grounds that it would be prejudicial and would only serve to waste the Court's resources.
It is clear that federal courts have the discretion to stay a proceeding in favor of arbitration even when all of the parties to the judicial action are not signatories to an arbitration agreement. See Agrow Oils, L.L.C. v. National Union Fire Ins. Co., 242 F.3d 777, 782 n. 5 (8th Cir. 2001); IDS Life Ins. Co. v. SunAmerica, Inc., 103 F.3d 524, 530 (7th Cir. 1996).
For the reasons outlined above, the Court further concludes that a discretionary stay is also warranted in favor of arbitration of all pending claims and counterclaims between the parties. The Court, in its discretion, concludes that all pending claims are appropriate for arbitration. Arbitration is the most reasonable approach to putting closure to the litany of claims being pursued in this dispute.
IV. CONCLUSION
The Plaintiffs' Motion for a Stay and to Compel Arbitration (Docket No. 38) is GRANTED. The Defendant-Intervenors Motion to Enjoin Arbitration (Docket No. 43) is DENIED. The NASD Arbitration Panel is ordered to address and resolve all pending claims between the parties to this litigation in accordance with the NASD Code of Arbitration Procedure. Minnesota Life Insurance Company qualifies as, and satisfies the criteria for, a "certain other" within the meaning of NASD Rule 10201. Both Minnesota Life and Securian Financial Services also satisfy the three McMahan Securities requirements needed to be met before a "certain other" can be joined in arbitration. All of the claims of the parties are "arbitrable" and the Court concludes that the NASD Arbitration Panel is the appropriate forum to address such claims. To hold otherwise would only result in a needless expenditure of time and resources and would further serve to prolong this arbitrable dispute. IT IS SO ORDERED.