Summary
requiring non-NASD members to arbitrate when they were sufficiently immersed in the litigation to be considered "certain others" under NASD rules
Summary of this case from Westminster Fin. Cos. v. Briarcliff CapOpinion
CIVIL ACTION NO. 03-0860 SECTION "C" (1)
November 3, 2003
Order and Reasons
Paula M. Cino, a third year law student at Tulane Law School, assisted with the research and preparation of this decision.
This matter comes before the Court on motion to dismiss the complaint, filed by Defendants Bayou Management, L.L.C., Bayou Funds, Bayou Securities, L.L.C., Dan Marino, and Sam Israel, III, pursuant to § 3 of the Federal Arbitration Act (FAA). Oral argument was held on October 1, 2003, and the motion was taken under advisement. Having considered the record, the memoranda filed by the parties, the oral argument of counsel, and the applicable law, the defendants' motion is GRANTED, and the plaintiffs are ordered to proceed to arbitration.
I. Introduction
This action arises from an oral employment agreement allegedly entered into by Plaintiff, Paul Westervelt, Jr. (Weslervelt), with the defendants in September 2002 whereby: defendants would pay Westervelt an annual salary of $800,000 through October 31, 2007; defendants would employ Westervelt's son, Paul Westervelt, III, at $90,000 per year through October 31, 2007; and defendants would convey an interest of 25%, and up to 33%, in Bayou Management, L.L.C. to Weslervelt. Westervelt commenced employment with defendants, but their relationship quickly deteriorated. Rec. Doc. 7, pp. 1-3. Westervelt and his son (the Westervelts) were terminated in March 2003, and promptly filed suit on March 26, 2003, claiming breach of contract, infliction of emotional distress, and violation of Louisiana's Whistleblower Statute.
The defendants argue that the Westervelts must arbitrate their claims by virtue of an arbitration clause contained in the Uniform Application for Securities Industry Registration or Transfer (U-4 Registration), which they both signed upon their registration with the National Association of Securities Dealers, Inc. (NASD). Id. at 5. This arbitration clause provides for the arbitration of disputes between NASD members, Associated Persons, and certain others connected with the activities of a member or Associated Persons. See Id. at 5-7. While Bayou Securities, L.L.C. is a registered member with NASD, and the Westervelts and Sam Israel, III are registered as Associated Persons with NASD, the remaining defendants are not registered or required to be registered with NASD. However, defendants contend that Bayou Management, L.L.C., Bayou Funds, and Dan Marino fall squarely within the category of "certain others" who arc allowed to participate in NASD arbitration. Id. at 8-10. Therefore, defendants assert that dismissal is required under § 3 of the Federal Arbitration Act (FAA), which states that a court must stay proceedings upon being satisfied that the underlying issue is referable to arbitration under a written agreement. 9 U.S.C.A. § 3.
The plaintiffs oppose this motion based on the following: 1) Bayou Funds, Bayou Management and Dan Marino do not have a right to compel arbitration because they are not members or Associated Persons of NASD; 2) dismissal of the suit is inappropriate, because FAA § 3 provides for a "stay" of judicial proceedings, not a dismissal; and 3) if arbitration occurs, they believe that it must proceed in this district, as opposed to the anticipated hearing location of New York City, New York. See Rec. Doc. 9.
II. Analysis
Arbitrability
Before granting a stay of judicial proceedings, a court is only required to consider two factors under FAA § 3: (1) whether there is a written arbitration agreement, and (2) if the issue of the suit is referable to arbitration under said agreement. 9 U.S.C.A. § 3.
The plaintiffs do not dispute that their claims against Bayou Securities, L.L.C, and Sam Israel, III are subject to the arbitration provisions in the NASD rules. Further, the judicial enforcement of the arbitration clause under these circumstances comports with current jurisprudence. There is a strong federal policy favoring arbitration, and "any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration." Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983). Additionally, it has been held that the arbitration clause contained in the U-4 Registration constitutes a valid agreement to arbitrate, enforceable under the FAA. Williams v. CIGNA Financial Advisor's, Inc., 56 F.3d 656, 659 (5th Cir. 1995). Finally, in this circuit, the subject matter of the dispute does not preclude arbitrability. Although § 1 of the FAA contains an exclusion exempting employment contract disputes from the scope of the legislation, the Fifth Circuit has narrowly construed this exclusion, limiting its application to employment contracts of seamen, railroad workers, and others actually engaged in the movement of goods. Rojas v. TK Communications, Inc., 87 F.3d 745 (5th Cir. 1996); See also Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991). Nor does plaintiffs' tort claim involving "mental anguish" render the dispute inarbitrable. Grigson v. Creative Artists Agency. LLC, 210 F.3d 524, 526 (5th Cir. 2000), cert denied 531 U.S. 1013 (2003) ( citing Acevedo Maldonado v. PPG Indus., Inc., 514 F.2d 614, 616 (1st Cir. 1975) (stating that parties to arbitration agreements cannot circumvent their enforcement by "casting their claims in tort, rather than in contract.").
However, plaintiffs urge that their claims against Bayou Funds, Bayou Management, and Dan Marino are not subject to compulsory arbitration and, in essence, are not "referable to arbitration" under § 3, given their status as non-signatories to the arbitration agreement. Therefore, they argue that the claims against those defendants should remain within this Court's jurisdiction.
The NASD Code contains two restrictions over the arbitrability of securities industry disputes: First, "the dispute must be `between or among members and/or associated persons, and/or certain others'"; [s]econd, "disputes must be ones arising `in connection with the activities of such associated person(s).'" McMahan Securities Co. v. Forum Capital Markets L.P., 35 F.3d 82, 86 (2nd Cir. 1994) (quoting NASD Code §§ 1,8). The question at hand is whether the three non-signatory defendants qualify as "certain others" under the NASD arbitration agreement. Here, all parties agree that the reference to "certain others" in the NASD Rule was intended to allow for joinder in the arbitration where there were non-members involved in a dispute between members and persons associated with members. Ladd v. Scudder Kemper Investments, Inc., 433 Mass. 240, 246 (2001). Further, the plaintiffs and defendants concede that the NASD Rules allow parties qualifying as "certain others" to participate in NASD arbitration proceedings, but they are not afforded the right to compel arbitration under the NASD Rules.
The defendants argue that the non-signatories are sufficiently immersed in the controversy to be considered "certain others" within the NASD Rules, and therefore, may be properly joined as parties to the NASD arbitration. In the alternative, there is a body of case law favoring a non-signatory's ability to compel arbitration in certain circumstances.
Under an "equitable estoppel doctrine, a non-signatory-to-an-arbitration-agreement-defendant can nevertheless compel arbitration against a signatory-plaintiff." Grigson 210 F.3d at 526. The Fifth Circuit recognizes two circumstances where a non-signatory may compel arbitration: First, "when the signatory to a written agreement containing an arbitration clause must rely on the terms of the written agreement is asserting its claims against a non-signatory . . . Second, . . . when the signatory to the contract containing an arbitration clause raises allegations of substantially interdependent and concerted misconduct by both the non-signatory and one or more of the signatories to the contract. Otherwise the arbitration proceedings between the two signatories would be rendered meaningless and the federal policy in favor of arbitration effectively thwarted." Grigson, 210 F.3d at 527 (quoting MS Dealer Serv. Corp. v. Franklin, 177 F.3d 942, 947 (11th Cir. 1999)).
The facts of the present case are sufficiently intertwined to satisfy the second prong of the Grigson analysis. The plaintiffs' dealings with the non-signatories were not substantially different from those involving the signatories, and their claims against all the defendants arise from the same events. Further, there is a close relationship between the signatory and non-signatory defendants. Sam Israel is the founder and principal officer of Bayou Securities, Bayou Management, and Bayou Funds. Additionally, Bayou's investment literature indicates that Bayou Management is an affiliated company of Bayou Securities, which manages, sponsors, and operates Bayou Funds (of which Sam Israel is the sole manager and primary decision-maker). Similarly, Dan Marino is Bayou's Chief Financial Officer, and is responsible for the business management of all the Bayou entities and affiliates. See Rec. Doc. 7 at Exhibit E. Finally, the contract providing the basis of the dispute at hand was allegedly negotiated between the plaintiffs, Dan Marino, and Sam Israel. Ultimately, the defense of legal action (be it court proceedings or arbitration) against any defendant would require considerable involvement by each defendant.
Although courts have indicated greater reluctance in utilizing equitable estoppel analysis where the plaintiff's claims do not arise from the contract containing the arbitration agreement, Grigson, 210 F.3d at 528, this Court is persuaded that it is applicable here, As previously discussed, the level of interaction and concerted conduct between the defendants is significant. Further, the intertwined relationship of the defendants was fully known to the plaintiffs at the time the arbitration agreement was signed. Finally, acknowledging the strong federal policy favoring arbitration and the interests of judicial economy and efficiency, this Court finds that all the issues of the dispute are arbitrable and that the defendants may compel the plaintiffs into arbitration.
Stay versus dismissal
While § 3 of the FAA states that a court shall "stay" judicial proceedings where the dispute is referable to arbitration, it does not expressly prohibit or even reference dismissal. 9 U.S.C.A. § 3. As such, it has been held that district courts have discretion to dismiss cases in favor of arbitration under 9 U.S.C. § 3, if it is determined that all the issues raised are arbitrable. Alford v. Dean Witter Reynolds, Inc., 975 F.2d 1161, 1164 (5th Cir. 1992). Further, retaining jurisdiction and staying the action serves no purpose, since the right to limited judicial review of the arbitral process and award is maintained through §§ 9-12 of the FAA. Id. Motion to Compel Arbitration
Although the defendants have facially moved this Court to "dismiss" the present suit, this Court interprets this request as containing an implicit "motion to compel" arbitration. The parties' arguments on both sides evidence an understanding that the defendants were seeking to enforce a written arbitration agreement. Therefore, the defendants' motion sufficiently invoked the full spectrum of remedies available under the FAA. See Choice Hotels Int'l, Inc. v. BSR Tropicana Resort, Inc., 252 F.3d 707, 709-10 (4th Cir. 2001) (explaining that a "hypertechnical reading" of parties' pleadings ran contrary to the intent of the FAA). See also Bernstein Seawell Kove v. Bosarge, 813 F.2d 726, 733 (5th Cir. 1987) (stating that "[t]he procedural requirements of 9 U.S.C. § 4 . . . are permissive, not mandatory"). Consequently, in an effort to conserve judicial resources and avoid duplicative litigation, this Court will approach this action as both a motion to dismiss and a motion to compel arbitration.
Situs of arbitration
In anticipation that this Court would superimpose a request to compel arbitration upon defendants' motion to dismiss, the plaintiffs' final opposition to defendants' motion asserts that any arbitration ordered should proceed in this district. Plaintiffs rest their argument on FAA § 4.
First, it is necessary to clarify what law, or more specifically, what procedural rules control the arbitration at hand. At the onset, the well-established statutory construction of FAA § 2 guides this inquiry. Section 2 states that written arbitration agreements "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. Thus, the FAA clearly construes arbitration agreements as contractual documents, which should be analyzed according to established principles of contract law. As such, the contract principle of freedom of contract prevails in the arbitral setting. Parties to an arbitration agreement are free to customize and structure the arbitration process, including the covered subject matter, procedural elements, and rules, as they see fit. Ultimately, the FAA mandates that courts enforce arbitration agreements according to the terms and rules set forth in the arbitration agreement itself. See Volt Information Sciences, Inc. v. Board of Trustees of the Leland Stanford Junior University, 489 U.S. 468, 477 (1989)("[The FAA] simply requires courts to enforce privately negotiated agreements to arbitrate, like other contracts, in accordance with their terms.").
Here, contractual validity is not at issue given the well-established principle that the rules of the securities industry self-regulatory organizations (SROs) (such as NASD) constitute a valid contract between the members of the SRO with each other and with the SRO itself. Muh v. Newburger, Loeb Co., Inc., 540 F.2d 970, 972-73 (9th Cir. 1976). Accordingly, the arbitration provisions embodied in the NASD rules have contractual validity, where the arbitration agreement itself is not part of an alleged fraud. See Tullis v. Kohlmeyer Co., 551 F.2d 632, 635-37 (5th Cir. 1977). See also Roney Company v. Goren, 875 F.2d 1218, 1222 6th Cir. 1989); Muh, 540 F.2d at 972-73; Coenen v. R.W. Pressprich Co., Inc., 453 F.2d 1209, 1211 (2d Cir.), cert denied, 406 U.S. 949 (1972). It then follows that the rules and provisions contained within such an arbitration agreement are enforceable and binding upon NASD members and other defined parties, including a forum selection clause. See Scherk v. Alberto-Culver Co., 417 U.S. 506, 518-20 (1974) (explaining that a forum selection clause, like any other contract provision, is entitled to complete enforcement unless its procurement was obtained through fraud or excessive economic power).
During oral argument, the plaintiffs suggested that the location of any arbitration compelled pursuant to this arbitration agreement was not specified, and thus at the discretion of the court. Oral Argument, Oct. 1, 2003, Rec. Doc. 11. However, the locale of this arbitration is in fact governed by a forum selection clause. The arbitration agreement contained in the U-4, and signed by the parties, states, "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 SROs indicated." See Rec. Doc. 7 at Exhibit G (emphasis added).
In this case, the governing SRO was understood to be the NASD. As part of its operating rules and procedure, NASD has adopted a Code of Arbitration Procedure. In relevant part, the Code provides that: "Any dispute, claim, or controversy eligible for submission under the Rule 10100 Series between a customer and a member and/or associated person arising in connection with the business of such member or in connection with the activities of such associated persons shall be arbitrated under this Code, as provided by any duly executed and enforceable written agreement or upon the demand of the customer." NASD Code of Arbitration Procedure § 10301(a) (emphasis added). Further, the NASD Code provides for the establishment and maintenance of a National Arbitration and Mediation Committee (Arbitration Committee), who will govern the conduct of all arbitration matters. Id. at § 10102. In turn, the Committee appoints a Director of Arbitration (Director) to oversee all matters submitted for arbitration pursuant to the Code. Id. at § 10103. The Director is charged with the responsibility of composing and appointing panels of arbitrators, from an existing pool of arbitrators, to conduct the arbitration of any matter eligible for submission under the Code. Id. at § 10104. Finally, it is the Director who determines the "time and place" of the initial meeting of the arbitration panel and the parties, with the arbitrators themselves determining the time and place of all subsequent meetings. Id. at § 10315. The aforementioned provisions requiring the parties to consent to the application of NASD rules and procedure, and to submit to the authority of the NASD Arbitration Committee serve as a forum selection clause, essentially designating NASD as the forum for their arbitration. Sec Roney, 875 F.2d at 1220, quoting Scherk, 417 U.S. at 519 (establishing that "[a]n agreement to arbitrate before a specified tribunal is, in effect, a specialized kind of forum-selection clause that posits not only the situs of suit but also the procedure to be used in resolving the dispute.") (citations omitted).
This is subject to the authority of the NASD Dispute Resolution Board, which serves as the governing body over the National Arbitration and Mediation Committee.
In conclusion, the parties to this arbitration agreement have delineated contractual obligations. The agreement requires the dispute to be submitted to NASD for arbitration. Then, the parties are required to follow NASD arbitration procedure, which clearly provides that it is NASD who selects the time and location of the arbitration. While the convenience of hearing locations may be a legitimate concern of the plaintiffs, it does not justify departure from their freely incurred, contractual obligations. However, this presents the question of whether this Court may compel arbitration pursuant to NASD rules, which may proceed outside of this district.
This Court's power to compel arbitration
Section 4 of the FAA provides a judicial remedy in situations where a party to a written arbitration agreement fails to participate in the arbitral process, by empowering a district court to compel parties into arbitration. 9 U.S.C. § 4. But, does § 4 limit a district court's authority to compel arbitration? Some courts have construed § 4 to require a geographic link between the site of arbitration and the court issuing an order to compel; therefore, a court may order arbitration to take place only within its own district. See Mgmt. Recruiters Int'l v. Bloor, 129 F.3d 851 (6th Cir. 1997); Merrill Lynch. Pierce, Fenner Smith, Inc. v. Lauer, 49 F,3d 323, 326 (7th Cir. 1995). However, the Fifth Circuit has adopted an interpretation of § 4, which allows a district court to compel arbitration extraterritorially in certain circumstances.
The Fifth Circuit recognizes that § 4 "facially mandates that two conditions must be met before a district court may compel arbitration: (1) that the arbitration be held in the district in which the court sits; and (2) that the arbitration be held in accordance with the agreement of the parties." Nat'l Iranian Oil Co. v. Ashland Oil Inc., 817 F.2d 326, 330 (5th Cir.), cert. denied 484 U.S. 943 (1987). However, a literal construction of this two prong mandate has been rejected by the Fifth Circuit, in favor of a more expansive interpretation which empowers a district court "to compel arbitration notwithstanding the parties' contractually established forum or outside of the district in which the courts sit" Id. at 331 (emphasis added). In Dupuy-Busching General Agency, Inc. v. Ambassador Ins. Co., 524 F.2d 1275 (5th Cir. 1975), the plaintiff filed suit in Mississippi, despite the presence of a forum selection clause providing for arbitration in New Jersey. The district court ordered arbitration in New Jersey and the Fifth Circuit affirmed, reasoning that "where a party seeking to avoid arbitration brings a suit for injunctive relief in a district court other than that in which arbitration is to take place . . . the party seeking arbitration may assert its section 4 right to have arbitration performed in accordance with the terms of the agreement." Id. at 1278.
Dupuy-Busching is particularly applicable here, given that the court compelled arbitration outside of its own district in accordance with a forum selection clause. In the present case, the plaintiffs filed suit in the Eastern District of Louisiana, despite the forum selection provisions of their arbitration agreement specifying NASD as the forum, imbued with the authority to designate the location of arbitration, and now seek to avoid arbitration with some defendants and alter the terms of the arbitration with the remaining defendants. Thus, it is consistent with the Fifth Circuit's interpretation of § 4 to compel arbitration under the auspices of NASD, and expressly designate that NASD select the situs of arbitration in accordance with their Code of Arbitration Procedure.
III. Conclusion
For the reasons specified above,
IT IS ORDERED that Defendants' Motion to Dismiss the Complaint is GRANTED, and the Defendants' Motion, treated as a Motion to Compel Arbitration, is GRANTED. The Plaintiffs shall submit to arbitration in accordance with NASD rules.