Opinion
CV 01-1124-BR.
April 15, 2004
DAVID P. ROSSMILLER, Dunn Carney Allen Higgins Tongue LLP, Portland, OR, Attorneys for Plaintiff.
JOSEPH C. ARELLANO, DANIEL L. KEPPLER, Kennedy, Watts, Arellano Ricks LLP, Portland, OR, Attorneys for Defendant James W. Toma.
STEVEN O. ROSEN, ELIZABETH M. CLINE, The Rosen Law Firm, Portland, OR, EDWARD S. ZUSMAN, KEVIN K. ENG, Liner Yankelevitz Sunshine Regenstreif LLP, San Francisco, CA, Attorneys for Defendant United Pacific Securities.
OPINION AND ORDER
This matter comes before the Court on Defendant United Pacific Securities' Motion to Dismiss for Lack of Personal Jurisdiction (Fed.R.Civ.P. 12(b)(2))(#73), United Pacific's Objections to [Plaintiff's] Evidence (#83) relating to the issue of personal jurisdiction, United Pacific's Motion to Dismiss for Failure to State a Claim (Fed.R.Civ.P. 12(b)(6))(#73), and United Pacific's Motion to Compel Arbitration (#73). In addition, in his response to United Pacific's Motion to Dismiss for failure to state a claim, Plaintiff Arthur S. Elston requests leave to amend his Complaint.
For the following reasons, the Court DENIES United Pacific's Motion to Dismiss for Lack of Personal Jurisdiction, DENIES United Pacific's Objections to [Plaintiff's] Evidence relating to personal jurisdiction, GRANTS United Pacific's Motion to Dismiss for Failure to State a Claim, DENIES United Pacific's Motion to Compel Arbitration, and GRANTS Plaintiff leave to amend his Complaint consistent with this Opinion and Order.
BACKGROUND
On or about March 26, 1998, Plaintiff, a Colorado resident, paid $500,000 to Defendant James W. Toma for 250,000 shares of Skylink Communications Corporation. United Pacific recommended Plaintiff purchase the stock.
A default judgment has been entered against Skylink.
Toma is an Oregon resident. Skylink is an Oregon corporation with its principal place of business in Oregon. United Pacific, a California corporation, is a securities broker/dealer.
In his Third Amended Complaint, Plaintiff alleges Defendants, including United Pacific, fraudulently and/or negligently induced him to purchase the stock by misrepresenting that Skylink's stock would increase significantly following an initial public offering (IPO). Plaintiff alleges Defendants, including United Pacific, were "sellers" of the Skylink securities. He asserts five claims against Defendants: violation of Oregon's securities law, fraud, negligent misrepresentation, breach of contract, and breach of fiduciary duty.
UNITED PACIFIC'S MOTION TO DISMISS FOR LACK OF PERSONAL JURISDICTION Standards
"In order to establish the existence of personal jurisdiction in a diversity case, the plaintiff must show (1) the statute of the forum confers personal jurisdiction over the nonresident defendant and (2) the exercise of jurisdiction accords with federal constitutional principles of due process. Lake v. Lake, 817 F.2d 1416, 1420 (9th Cir. 1987). Oregon's long-arm statute confers jurisdiction to the "outer limits of due process under the United States Constitution." State ex rel. Hydraulic Servocontrols, Inc. v. Dale, 294 Or. 381, 384, 657 P.2d 211 (1982). See also Or. R. Civ. P. 4L. Oregon's long-arm statute, therefore, is co-extensive with the limits of due process. Gray Co. v. Firstenberg Mach. Co., 913 F.2d 760 (9th Cir. 1990). In order for personal jurisdiction to lie, a defendant must have "meaningful `contacts, ties, or relations' with the forum." Hirsch v. Blue Cross, Blue Shield of Kansas City, 800 F.2d 1474, 1477 (9th Cir. 1986) (citing Burger King Corp. v. Rudzewicz, 471 U.S. 462, 471 (1986)). These ties may be formed by activities that create either general or specific jurisdiction. Id.
1. General Jurisdiction.
"Due process is satisfied when jurisdiction is asserted over a defendant who has certain minimum contacts with the forum state such that the maintenance of the action does not offend the `traditional notions of fair play and substantial justice.'" Lake, 817 F.2d at 1420. A district court has general jurisdiction over the defendant if the plaintiff shows the defendant has "substantial" or "continuous and systematic" contacts with the forum state. Bancroft Masters, Inc. v. Augusta Nat'l, Inc., 223 F.3d 1082, 1086 (9th Cir. 2000) (quoting Helicopteros Nacionales de Colombia, S.A. v. Hall, 466 U.S. 408, 415 (1984)). This standard is "fairly high" and requires the contacts to be of the sort that approximate physical presence within the state. Id. (citations omitted). Pertinent factors are whether the defendant "makes sales, solicits, or engages in business in the state, serves the state's markets, designates an agent for service of process, holds a license, has employees, or is incorporated in the state." Hirsch, 800 F.2d at 1478 (9th Cir. 1986).
2. Specific Jurisdiction.
Even if the district court does not have general jurisdiction over the defendant, the court may have specific jurisdiction "if the controversy [was] sufficiently related to or arose out of the defendants' contacts with the forum." Omeluk v. Langsten Slip Batbyggeri A/S, 52 F.3d 267, 270 (9th Cir. 1995). The Ninth Circuit applies the following three-part test to determine whether a district court constitutionally may exercise specific jurisdiction over a nonresident defendant:
(1) The nonresident defendant must do some act or consummate some transaction with the forum or perform some act by which he purposefully avails himself of the privilege of conducting activities in the forum, thereby invoking the benefits and protections of its laws; (2) the claim must be one which arises out of or results from the defendant's forum-related activities; and (3) exercise of jurisdiction must be reasonable.Panavision Int'l, L.P. v. Toeppen, 141 F.3d 1316, 1320 (9th Cir. 1998) (quoting Omeluk, 52 F.3d at 270).
3. Burden of Proof — Prima Facie Case.
The party seeking to invoke personal jurisdiction of the federal court has the burden to establish that jurisdiction exists. Data Disc, Inc. v. Sys. Tech. Assoc., Inc., 557 F.2d 1280, 1285 (9th Cir. 1977). "Ordinarily, a [motion to dismiss for lack of personal jurisdiction] is resolved on the basis of affidavits and discovery materials." Overby v. Oregonian Publishing, 882 F. Supp. 964, 965 (D. Or. 1995). The court must assume the truth of uncontroverted allegations in the complaint. Id. If the court makes a jurisdictional decision based only on pleadings and affidavits submitted by the parties and does not conduct an evidentiary hearing, "the plaintiff merely has to make a prima facie showing that the court has personal jurisdiction to defeat a defendant's motion to dismiss." Data Disc, 557 F.2d at 1285.
United Pacific's Objection to Evidence in Plaintiff's Response to United Pacific's Motion to Dismiss for Lack of Personal Jurisdiction
Plaintiff did not respond to United Pacific's objections.
Plaintiff relies on the allegations in his Third Amended Complaint and the Affidavit of David Rossmiller with attached exhibits to establish a prima facie showing of personal jurisdiction. United Pacific objects to some of the evidence set forth in Rossmiller's Affidavit.
1. Minutes of Skylink Board of Directors.
Plaintiff submits a document that he characterizes as "a true and correct copy of Minutes of the Skylink Board of Directors." United Pacific objects to the document on the ground that it is not authenticated. The Bates stamp "Toma" on the document, however, reflects the document was produced in discovery by Toma. At oral argument, counsel for United Pacific acknowledged the document was produced in the course of discovery. Documents produced by a party in discovery are deemed authentic when offered by the party-opponent. Orr v. Bank of Am., 285 F.3d 764, 777 n. 20 (9th Cir. 2002).
United Pacific further asserts the document does not support the contention for which Plaintiff offers it: i.e., that "United Pacific made a contract with an Oregon company, Skylink Communications, to sell its unregistered stock to individuals." The Court, however, will determine whether the document supports Plaintiff's assertion of personal jurisdiction when it reaches that issue. The Court, therefore, overrules United Pacific's objection to the admissibility of the Skylink minutes.
2. Toma's Response to Plaintiff's Interrogatory Number 4.
United Pacific objects to Plaintiff's characterization of Toma's answer to a discovery interrogatory as establishing that "Joe Miller of [United Pacific] traveled to Oregon to discuss sales of Skylink securities with Skylink officials, Skylink's attorney, and a representative of Schroder Co., an investment house advising Skylink about stock sales." The interrogatory and the language objected to in the answer is underlined below:
INTERROGATORY No. 4: At any time, did Schroeder's [an investment bank working on the IPO] state that an initial public offering of Skylink stock would definitely happen, or was an initial public offering contingent on the existence of some future condition that did not occur? If Schroeder's stated that an IPO would occur, identify the dates of these statements and who made them. If an IPO remained contingent on the existence of some future condition, identify the condition and explain why it did not occur.
ANSWER: Toma objects to the compound nature of the interrogatory. Without waiving this objection, Toma answers as follows: Schroeder's representative, Simon Gil, stated something to the effect that Schroeder's intended to take Skylink public. The statement was made in a meeting at the Shilo Inn near the Portland Airport. Toma does not recall the date. It was made in the presence of Toma, Robert Campbell, Mike Morgan, Joe Miller and others. Toma is not aware of the existence of any future condition required by Schroeder's as a condition for the IPO that was not met by Skylink.
United Pacific objects to Plaintiff's use of Toma's reference to the presence of Joe Miller, United Pacific's Vice-President and CFO, at the meeting. United Pacific asserts the statement "contains no indication of the purpose of the meeting or Mr. Miller's reasons for traveling and attending the meeting" and, therefore, is inadmissible because no inference can be drawn regarding Miller's presence at the meeting. The Court, however, will draw its own inferences when it reaches the issue of personal jurisdiction. The Court, therefore, overrules United Pacific's objection to the admissibility of the evidence on this basis.
United Pacific next objects to the same evidence on the ground that it is hearsay to the extent Plaintiff offers it to prove the purpose of United Pacific's representative traveling to Oregon. Plaintiff, however, does not offer the statement that "Schroeder's intended to take Skylink public" to prove the truth of the matter asserted, but only to suggest the purpose of the meeting was to discuss securities. The statement, therefore, is not hearsay, and the Court finds this objection without merit.
Finally, United Pacific asserts Plaintiff has failed to establish that Toma, the declarant, "possesses personal knowledge of the matters for which the evidence is offered." The Court, however, finds Toma's statements regarding the meeting are based on personal knowledge because he was there and over-rules the objection on this basis.
3. Robert Campbell's Responses to Plaintiff's Interrogatories Nos. 5 and 6.
United Pacific objects to the admissibility of answers to interrogatories made by Robert Campbell, the former President and CEO of Skylink:
INTERROGATORY No. 5. Provide a list of purchasers and holders of Nendels stock (common and preferred) during the period from January 1994 to December 1996. Such list shall include each investor's name, address, amount of purchase, number of shares, date of purchase, salesperson and the commission or amount of compensation paid to each salesperson on the transaction.
ANSWER. Since this financing was completed prior to my employment, I have no knowledge of any investors or specifics of this question. As far as I know, all security sales were completed by United Pacific Securities (address unknown-please refer to company documents). I am not aware of any other security sales from other entities.
INTERROGATORY 6. Provide a list of purchasers and holders of Skylink Communications Corporation and Skylink Telecommunications Corporation stock (common and preferred), promissory notes, debentures or other investments from January 1, 1996 to present. Such list shall include each investor's name, address, amount of purchase, number of shares, date of purchase, salesperson and the commission or amount of compensation paid to each salesperson on the transaction.
ANSWER. Please refer to response # 5. In addition to United Pacific Securities sale of securities as part of a "Reg" D, the company entered into relationships with Matthew Samwick and James Oh of Cascade Asset Management and Cascade Venture Partners. Matthew Samwick eventually became (and I believe still is) the CEO and President of Skylink. Please refer Please refer to documents referred to Response #3. The company also entered into an agreement with Schroder Co., a New York Financial entity, to provide advice and financing activities related to security sales (see attached documents).
Plaintiff asserts the above answers to interrogatories establish that "United Pacific was intimately tied to Skylink entities as far back as 1994 and was the exclusive agent of Skylink (previously known as Nendels) in completing sales."
United Pacific objects to Campbell's answers on the ground they do not support Plaintiff's contention that United Pacific was intimately tied to Skylink from as far back as 1994 and was the exclusive agent of Skylink for completing securities sales. The Court, however, finds United Pacific's objection addresses the weight rather than the admissibility of Campbell's answers, an issue the Court will resolve when it considers the merits.
United Pacific also asserts Plaintiff did not present any evidence to establish Campbell's personal knowledge of the matters for which the evidence is offered. Campbell, however, testified: "As far as I know, all Security sales were completed by United Pacific Securities." The Court, therefore, finds Campbell's answers were based sufficiently on his personal knowledge.
In addition, United Pacific objects to Campbell's statements as hearsay. Hearsay is a statement "other than one made by the declarant." Fed.R.Evid. 801(c). The statements United Pacific objects to in Campbell's answers are those made by Campbell as declarant, and, therefore, the Court finds Campbell's statements are not hearsay.
Finally, United Pacific objects to the admissibility of Campbell's subpoena, the Interrogatories, and Campbell's answers on the ground that they are not authenticated. At oral argument, however, counsel confirmed the interrogatories were prepared and served during the course of discovery by Plaintiff's counsel, and the responses were received by Plaintiff's counsel. As noted, documents produced by a party in discovery are deemed authentic when offered by the party-opponent. Orr v. Bank of Am., 285 F.3d at 777 n. 20. The Court, therefore, finds Campbell's answers to interrogatories are admissible.
Discussion — Personal Jurisdiction
United Pacific contends the Court does not have jurisdiction over it. In support of its contention, United Pacific submits the Affidavit of its Vice-President, Joe H. Miller, in which he testifies United Pacific is not now licensed to do business in Oregon and has not done business, maintained offices, paid taxes, maintained bank accounts, or engaged in direct advertising in Oregon since at least November 1998. Miller further testifies United Pacific has had no employees or agents in Oregon since 1997.
Plaintiff, however, alleges this Court has personal jurisdiction over United Pacific in light of the fact that United Pacific contracted with Skylink, an Oregon company, to sell unregistered securities, and Miller traveled to Oregon to discuss sales of Skylink securities. Plaintiff also alleges United Pacific served as an advisor to Skylink, United Pacific was intimately tied to Skylink entities as far back as 1994, and United Pacific was Skylink's exclusive agent for completing sales.
1. General Jurisdiction.
United Pacific asserts it is not subject to general jurisdiction because it ceased selling securities in 1998 and its contacts with Oregon are neither substantial nor continuous.
To support its contention that this Court has general jurisdiction over United Pacific, Plaintiff only offers evidence that United Pacific participated in a meeting in Oregon that ultimately led to Plaintiff's purchase of Toma's Skylink shares and that United Pacific was Skylink's agent for the sale of securities. Plaintiff does not present specific evidence to establish the extent of United Pacific's activities in Oregon.
Although a reasonable inference can be drawn from Campbell's answers to interrogatories that United Pacific's contacts with Skylink were not limited to Miller's presence at one meeting in Oregon to discuss the sale of Toma's shares to Plaintiff, the Court concludes Plaintiff has not produced sufficient evidence of "continuous" or "systematic" contacts to make a prima facie showing that the Court has general jurisdiction over United Pacific.
2. Specific Jurisdiction.
United Pacific asserts its only contact with Oregon relevant to the issue of personal jurisdiction is Miller's presence at a single meeting in Wilsonville, Oregon, which was arranged and funded by Toma.
According to Plaintiff, however, the Court has specific jurisdiction over United Pacific based on two Oregon jurisdictional provisions: Or. R. Civ. P. 4C and 4J(2). Rule 4C provides Oregon courts have personal jurisdiction "in any action claiming injury to person or property . . . arising out of an act or omission within this state by the defendant." Rule 4J(2) provides for personal jurisdiction "[i]n any action arising under the Oregon Securities Law . . . over any person, a resident or non-resident of this state, who has engaged in conduct prohibited or made actionable under the Oregon Securities Law." Thus, Plaintiff asserts the Court need not engage in any further due process inquiry in light of the applicability of these two provisions. See State ex rel. Hydraulic Servocontrols Corp. v. Dale, 294 Or. 381, 384 (1982) (after a plaintiff alleges facts bringing his case within a specific jurisdictional provision, further due process inquiry is ordinarily unnecessary because Oregon's specific jurisdictional provisions are based on "facts which the United States Supreme Court has held to be adequate bases for jurisdiction."). In Gray Co. v. Firstenberg Mach. Co., 913 F.2d at 760, however, the Ninth Circuit rejected Hydraulic Servocontrols Corp's analysis and held "the courts, not the state legislature, must ultimately decide whether the requirements of due process have been met in a particular case."
As noted, Plaintiff presented evidence that Joe Miller, an officer of United Pacific, attended a meeting in Oregon in March 1998 at which a proposed IPO by Skylink was discussed. In addition, Plaintiff alleges the following facts that the Court accepts as true for purposes of this Motion: United Pacific told Plaintiff he would receive "a significant and substantial return" if he purchased Toma's shares, the purpose of the March 1998 meeting was for Toma to solicit Plaintiff's purchase of Toma's shares, and Plaintiff relied on representations made by Toma and United Pacific at that meeting when he decided to purchase Toma's shares.
Finally, notwithstanding United Pacific's assertion that it has not had any significant business activities or financial ties and responsibilities in Oregon since November 1998, the Court notes the events giving rise to this action occurred before that date. In addition, the Court infers from Campbell's answers to interrogatories and Miller's Affidavit that United Pacific's contacts with Skylink and, therefore, Oregon were not limited to an isolated transaction. Even though the extent of these contacts was not sufficiently proven to establish general jurisdiction, the Court is satisfied the contacts meet the requirements of specific jurisdiction.
In summary, the Court concludes Plaintiff has made a prima facie showing that this Court's exercise of specific jurisdiction over United Pacific is reasonable and comports with due process. The Court, therefore, denies United Pacific's Motion to Dismiss for Lack of Personal Jurisdiction.
UNITED PACIFIC'S MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM Standards
Dismissal under Fed.R.Civ.P. 12(b)(6) "for failure to state a claim is proper `only if it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations.'" Cervantes v. City of San Diego, 5 F.3d 1273, 1274 (9th Cir. 1993) (quoting Hishon v. King Spalding, 467 U.S. 69, 73 (1984)). A court must limit its review to the contents of the complaint, take all allegations of material fact as true, and view the facts in the light most favorable to the nonmoving party. Cooper v. Pickett, 137 F.3d 616, 622 (9th Cir. 1998). A court should not dismiss a complaint, thus depriving the plaintiff of an opportunity to establish his or her claims at trial "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001) (quoting Conley v. Gibson, 355 U.S. 41, 45-46 (1957)). In addition, if a court dismisses a claim pursuant to Rule 12(b)(6), the Court should grant leave to amend unless the court determines the allegation of other facts consistent with the operative pleading could not possibly cure the deficiency. Schreiber Distrib. Co. v. Serv-Well Furniture Co., 806 F.2d 1393, 1401 (9th Cir. 1986). See also Reddy v. Litton Indus., 912 F.2d 291 (9th Cir. 1990), cert. denied, 502 U.S. 921 (1991).Discussion
United Pacific asserts Plaintiff fails to state a claim under Oregon securities law because United Pacific was not a "seller" of stock to Plaintiff. Or. Rev. Stat. § 59.115(1)(a) and (b) provide "a person who sells a security . . . is liable to a purchaser of the security" under certain circumstances set forth in that section.
Plaintiff alleges United Pacific was a seller of Toma's Skylink securities to Plaintiff. Plaintiff, however, also alleges Toma sold Plaintiff the Skylink securities. In his Response, Plaintiff essentially concedes this inconsistency in his Complaint and acknowledges United Pacific did not sell these securities to him within the meaning of Oregon securities law. Instead Plaintiff contends he has alleged sufficient facts to establish that United Pacific participated or materially aided in the sale of Toma's Skylink securities to Plaintiff and that United Pacific, therefore, is liable under Oregon securities law to the same extent as Toma. See Or. Rev. Stat. § 59.115(3). Nevertheless, Plaintiff requests leave under Fed.R.Civ.P. 15(a) to file a Fourth Amended Complaint specifically to include this claim "to the degree the pleadings require amplification."
Although Plaintiff cannot prevail on his claim that United Pacific sold Toma's securities to him under any set of facts consistent with the allegations in the current Complaint, the Court finds Plaintiff has alleged sufficient facts to support a claim that United Pacific participated or materially aided Toma in the sale of securities to Plaintiff. The Court also concludes United Pacific would not be prejudiced if the Court permitted Plaintiff to amend his Complaint for the purpose of explicitly alleging United Pacific's participation in the sale of Toma's securities to Plaintiff. See Schreiber Distrib. Co., 806 F.2d at 1401.
The Court, therefore, grants United Pacific's Motion to Dismiss for Failure to State a Claim and also grants Plaintiff leave to file a Fourth Amended Complaint consistent with this Opinion and Order.
UNITED PACIFIC'S MOTION TO COMPEL ARBITRATION
United Pacific asserts Plaintiff agreed to arbitrate all disputes he had with United Pacific and is bound by that agreement even though it was premised on United Pacific's membership in the National Association of Securities Dealers (NASD), and United Pacific is no longer a member of that association.
Standards
Under the Federal Arbitration Act (FAA), written agreements to arbitrate disputes that arise out of transactions involving interstate commerce "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. Pursuant to Section 4 of the FAA:
A party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court which, save for such agreement, would have jurisdiction under Title 28, in a civil action or in admiralty of the subject matter of a suit arising out of the controversy between the parties, for an order directing that such arbitration proceed in the manner provided for in such agreement.
Pursuant to Section 3:
The court shall hear the parties, and upon being satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue, the court shall make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement. . . .
(Emphasis added.)
The court's role is to determine (1) whether a valid agreement to arbitrate exists and, if it does, (2) whether the agreement encompasses the dispute at issue. Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1130 (9th Cir. 2000).
Background
The following chronology of events sets out the tortuous path of the arbitration dispute between Plaintiff and United Pacific.On March 23, 1998, three days before Plaintiff purchased Toma's stock, Plaintiff opened a client account with United Pacific. On the Client Account Form signed by Plaintiff, United Pacific identified itself as a member of the National Association of Securities Dealers (NASD). The Client Account Form had the following "Predispute Arbitration Agreement":
THE FOLLOWING GENERAL PROVISIONS APPLY TO ALL ARBITRATIONS UNDER THIS AGREEMENT:
1. Arbitration is final and binding on the parties in arbitration.
2. The parties are waiving their right to seek remedies in court, including the right to jury trial.
3. Pre-arbitration discovery is generally more limited than and different from court proceedings.
4. The arbitrator's award is not required to include factual findings or legal reasoning and any party's right to appear or to seek modification of rulings by arbitrators is strictly limited.
5. No persons shall bring putative or certified class action to arbitration, nor seek to enforce any pre-dispute arbitration against any person who has initiated in court a putative class action; or who is a member of a putative class action until (i) the class certification is denied; or (ii) the class is decertified; or (iii) the customer is excluded from the class by court. Such forbearance to enforce an agreement to arbitrate shall not constitute a waiver of any right under this agreement except stated herein.
The undersigned agree(s) that any and all controversies which may arise between me/us and United Pacific Securities, Inc., any of its officers, employees or agents concerning or relating to my/our accounts or any transaction(s) or the construction, performance or breach of this or any other agreements between us, shall be settled by arbitration in accordance with the rules, then in effect, of the National Association of Securities Dealers (NASD).
(Emphasis added.)
Plaintiff initially brought this action against Defendants in early 2001 in the United States District Court for the District of Colorado. The Colorado District Court granted Defendant Toma's motion to change venue and transferred the case to this district.
On October 9, 2001, the Court held a scheduling conference at which it ordered United Pacific to appear or Plaintiff to dismiss United Pacific from the action by November 6, 2001.
On November 5, 2001, Plaintiff and United Pacific entered into a stipulation to stay this action pending arbitration in accordance with the NASD arbitration provisions in the Client Account Form. On November 27, 2001, the Court held a status conference to determine whether to stay or to dismiss the proceedings against United Pacific in light of the fact that the Arbitration Clause required the parties to submit to binding arbitration.
On December 6, 2001, Plaintiff and United Pacific entered into a second stipulation in which the claims against United Pacific were dismissed without prejudice and submitted to arbitration before the NASD in accordance with the arbitration provisions in the Client Account Form.
On February 15, 2002, the NASD sent a letter to Plaintiff's counsel that indicated United Pacific's membership with the NASD had been terminated. As a result, the NASD informed Plaintiff he "may, but is not required to, arbitrate this claim in the NASD Dispute Resolution forum, even if [he] previously signed a predispute arbitration agreement with United Pacific Securities to arbitrate the claim here." The NASD letter essentially indicated United Pacific, however, was not entitled to enforce the Arbitration Clause against Plaintiff. The NASD, nonetheless, assumed Plaintiff would proceed with arbitration unless he notified the NASD by March 22, 2002, that he did not want to arbitrate his claim in that forum.
The NASD also indicated in its letter that arbitration awards against terminated members "have a much higher incidence of non-payment than those against active members, and that the NASD has only limited disciplinary authority over inactive member firms that fail to satisfy arbitration awards."
On March 19, 2002, Plaintiff signed the NASD's Notice of Rescission of Uniform Submission Agreement in which he confirmed he no longer wished to proceed with his claim against United Pacific in the NASD arbitration forum.
On March 20, 2002, the Court entered a Judgment of Dismissal without prejudice based on the various stipulated dismissals submitted by the parties.
On April 2, 2002, United Pacific notified Plaintiff in writing that, in United Pacific's opinion, Plaintiff's "only options are to submit to arbitration or dismiss his claims altogether." United Pacific stated it would "consider a JAMS or AAA forum as long as the panel includes individuals with some expertise in the securities industry."
On June 10, 2002, Plaintiff agreed to arbitrate his disputes with United Pacific in a forum other than the NASD and designated one of three arbitrators to sit on the arbitration panel.
On July 2, 2002, Plaintiff rejected United Pacific's position that Plaintiff was "required to bring his arbitration action at NASD" and demanded United Pacific designate an arbitrator by July 8, 2002, if it wished "to avoid this suit."
There is no evidence of further discussions between Plaintiff and United Pacific regarding arbitration and, therefore, no evidence that the parties agreed to arbitrate their disputes other than the original agreement in United Pacific's Client Account Form.
Discussion
As noted, the arbitration agreement between Plaintiff and United Pacific specifically provided the arbitration "shall be settled by arbitration in accordance with the rules, then in effect, of the National Association of Securities Dealers (NASD)."
In December 1998, United Pacific's NASD membership was terminated. NASD Rule 10301(a) provides as follows:
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. A claim involving a member in the following categories shall be ineligible for submission to arbitration under the Code unless the customer agrees in writing to arbitrate the claim after it has arisen:
(1) A member whose membership is terminated, suspended, canceled, or revoked.
(Emphasis added.)
The NASD promulgated Rule 10301(a) in June 2001. The NASD explained:
NASD Dispute Resolution believes that the proposed rule change is consistent with the provisions of Section 15A(b)(6) of the [Securities and Exchange Act of 1934] which requires, among other things, that the Association's rules must be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. Because terminated, suspended, barred or otherwise defunct firms have a significantly higher incidence of non-payment of arbitration awards than do active firms, NASD Dispute Resolution believes that the proposed rule change will protect investors and the general public by giving customers greater flexibility to seek remedies against such firms.
66 Fed. Reg. 13362, 13364 (Mar. 5, 2001) (emphasis added). As reflected in the legislative history, Rule 10301(a) is a substantive rule designed to protect a plaintiff under circumstances such as those present in this case.
Plaintiff's agreement to arbitrate his claims with United Pacific included the requirement that NASD rules at the time of arbitration would apply. Plaintiff and United Pacific agreed to be bound by the rule.
Nevertheless, United Pacific argues "Plaintiff's desire to circumvent his express waiver of judicial remedies would deprive United Pacific not only of its reasonable expectations with respect to its agreement with Plaintiff, but of its express remedy under the FAA." The Court disagrees.
When Rule 10301(a) became effective in June 2001, United Pacific had no reasonable expectation that it could enforce the arbitration agreement. The only other authority United Pacific relies on to support its argument is Brown v. ITT Consumer Financial Corp. The Brown court held the lack of availability of the chosen forum will not preclude enforcement of the arbitration agreement when, in the context of securities arbitrations, there are several "specifically listed fora." 211 F.3d 1217, 1222 (11th Cir. 2000). The court, however, added:
Only if the choice of forum is an integral part of the agreement to arbitrate, rather than an "ancillary logistical concern" will the failure of the chosen forum preclude arbitration.Id. The holding in Brown, therefore, does not support United Pacific's position.
The NASD promulgated Rule 10301(a) specifically to provide customers such as Plaintiff with the opportunity to opt out of arbitration agreements entered into with subsequently terminated NASD members. Rule 10301(a) reflects the fact that the NASD viewed the NASD forum as an integral part of the arbitration agreement rather than as a mere "ancillary logistical concern."
In light of these considerations, the Court concludes Plaintiff is not required to arbitrate his dispute with United Pacific. The Court, therefore, denies United Pacific's Motion to Compel Arbitration.
CONCLUSION
For these reasons, the Court DENIES Defendant United Pacific's Motion to Dismiss for Lack of Personal Jurisdiction (#73); DENIES Defendant United Pacific's Objections to [Plaintiff's] Evidence (#83) relating to personal jurisdiction; GRANTS Defendant United Pacific's Motion to Dismiss for Failure to State a Claim (#73); DENIES Defendant United Pacific's Motion to Compel Arbitration(#73); and GRANTS Plaintiff Elston leave to amend his Complaint (#73) no later than April 26, 2004, consistent with this Opinion and Order.
IT IS SO ORDERED.