Opinion
Civil Action No. 03-4460.
June 29, 2004
MEMORANDUM
Plaintiff David H. Leslie-Hughes began this action by writ of summons in the Court of Common Pleas of Philadelphia County against American Express Financial Advisors, Inc. ("AEFA") and IDS Life Insurance Co. ("IDS"). Defendants removed that action to this Court. Before Plaintiff began the action in the Court of Common Pleas, he began arbitration proceedings against AEFA before the National Association of Securities Dealers ("NASD"). Defendants now move to compel arbitration, or, in the alternative, for summary judgement and the imposition of sanctions against Plaintiff.
The case arises, primarily, from allegations of 1) tortious conduct in the filing of certain registries and 2) constructive termination. Plaintiff asserts claims for breach of contract, tortious interference with contractual relations, intentional interference with business relations, fraudulent misrepresentation, negligent misrepresentation, negligent hiring, training, and supervision, fraud in the inducement, negligent inducement, and intentional infliction of emotional distress.
When an action involves "an arbitration agreement connected to a transaction involving interstate commerce," the courts must look at "the federal Arbitration Act, 9 U.S.C. § 1 et seq., and the case law that has evolved thereunder." PaineWebber, Inc. v. Hartmann, 921 F.2d 507, 510 (3d Cir. 1990) (overruled by implication on other grounds by Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002), as recognized by Dean Witter Reynolds, Inc. v. Druz, 2003 U.S. App. LEXIS 15523 (3d Cir. Aug 4, 2003)); see also Forms, Inc. v. American Standard, Inc., 550 F. Supp. 556, n. 1 (E.D. Pa. 1982). Under federal law, in determining whether to compel arbitration, courts must determine if there is a valid agreement to arbitrate and whether "the specific dispute falls within the substantive scope of that agreement." Berkery v. Cross Country Bank, 256 F. Supp.2d 359, 365, citing PaineWebber, 921 F.2d at 511.
Pennsylvania rules mirror federal rules governing arbitration and, as a result, the outcome would not vary regardless of whose law is applied. See State Farm Auto. Ins. Co. v. Coviello, 233 F.3d 710, 713, n. 1 (finding that it is harmless error not to address whether the FAA applies "because there is no meaningful difference between federal and Pennsylvania law when reviewing the scope of an arbitration clause.") Under Pennsylvania law, the parties must submit claims to arbitration if the parties entered into an agreement to arbitrate and the dispute falls within the scope of the agreement. Messa v. State Farm Ins. Co., 641 A.2d 1167, 1168 (Pa.Super. 1994); Rocca v. Pennsylvania Gen. Ins. Co., 516 A.2d 772, 774 (Pa. Super 1986). Once a court determines that an agreement to arbitrate exists and that the dispute falls within the agreement, pursuant to the Uniform Arbitration Act, 42 Pa. C.S. § 7301, et seq., the court must compel the parties to arbitration. Messa, 641 A.2d at 1168. The second question focuses on whether or not the claim is arbitrable.
Defendants filed a motion for summary judgement, arguing that an application for Securities Industry Registration or Transfer Form (Form U-4) signed by Plaintiff requires Leslie-Hughes to submit his claims to arbitration. Form U-4 contains a statement that
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 organizations indicated in Item 10 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.
Form U-4 at 4. The organization listed at item 10 is the NASD. The NASD, which is a self-regulatory organization for security dealers and brokers, has an arbitration code that governs what types of disputes must be arbitrated. Those regulations state, in pertinent part, that
a dispute, claim, or controversy . . . 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 [sic] of . . . a member against a person associated with a member or a person associated with a member against a member . . .
NASD Arb. Code 10201 (last viewed on May 20, 2004 at http://www.nasdadr.com/arb_code/arb_code.asp).
The parties have not contested the existence or validity of the agreement to arbitrate, nor has either party asserted that this dispute does not come within the terms of the agreement. The parties also now agree that the agreement applies to all the parties to this action. Plaintiff conceded in a telephone conference that the claims against AEFA should be submitted to arbitration rather than determined by this Court. Tel. Conf. Tr. at 7 (Nov. 25, 2003). The contentions between the parties arise from Plaintiff Leslie-Hughes's argument that IDS should be equitably estopped from compelling arbitration and Defendant AEFA's argument that claims against AEFA are barred by the doctrine of res judicata.
Plaintiff Leslie-Hughes contends that IDS should be equitably estopped from asserting its right to arbitration of the claims against IDS because IDS's attorney represented to Leslie-Hughes in a fax, dated February 11, 2003, that IDS is not a member of NASD and that the NASD, therefore, had no jurisdiction over IDS. IDS has asserted in its pleadings that it is a member of the NASD and the agreement between the parties lists IDS as a party to the agreement to arbitrate with IDS's Central Registration Depository ("CRD") number. (Doc. no. 15, exhibit C). Plaintiff concedes that IDS is an NASD member, but asserts that, as a result of the earlier representation that IDS is not a member of NASD and not subject to NASD jurisdiction, Plaintiff invested a significant amount of time and money into the present litigation. Plaintiff further asserts that the delay as a result of the representation about IDS may materially affect his rights because the delay may bear on a statute of limitations defense that IDS raised before the NASD.
Whether IDS should be estopped from asserting the arbitration agreement as a defense is essentially a question about whether IDS waived that agreement. The United States Supreme Court found that "the presumption is that the arbitrator should decide `allegations of waiver, delay, or a like defense to arbitrability.'" Howsam, 537 U.S. at 84, citing Moses H. Cone Mem. Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983). Because there is an agreement to arbitrate and Plaintiff's claims fall within the scope of that agreement, Plaintiff should assert to the arbitrator in the first place that the statute of limitations, if currently a bar to the claims, should be tolled based on IDS's allegedly inequitable conduct.
Defendant AEFA requests a dismissal of the claims against it, as barred under the doctrine of res judicata. This very issue, i.e., whether the res judicata effect of a prior arbitration decision should be decided by an arbitrator or by the court, was presented to the Third Circuit Court of Appeals in John Hancock Mut. Life Ins. Co. v. Olick, 151 F.3d 132 (3d Cir. 1998). Finding that the effect of a prior arbitration award should be submitted to the arbitrator in the first instance, the Third Circuit explained that, when parties enter an agreement to arbitrate governed by the NASD rules, the procedural rules of the NASD:
demonstrate the parties' intentional adherence to a binding principle of finality similar to res judicata as applied to arbitration awards rendered by the NASD. It is equally quite clear from the arbitration procedure adopted here that the parties intended the NASD, and not the district court, to determine the nature and extent, if any, of that finality. Accordingly, the district court correctly declined to decide [the party's] res judicata objection based on a prior NASD award.Id., at 140. In the present case, it is not entirely clear what, if any, claims currently before the Court were decided by the earlier NASD arbitration. These threshold issues form the contour within which to determine whether or not and to what extent the doctrine of res judicata bars Plaintiff's claims. Therefore, because the claims before this Court are within the scope of the arbitration agreement entered into by the parties, the current claims should be submitted to arbitration to determine the preclusive effect that the earlier NASD decision has on the current claims against AEFA.
As set forth above, the parties should present to the NASD arbitration panel under NASD rules the issue of whether IDS is equitably estopped from asserting a statute of limitations defense (whether the statute of limitations should be tolled because of IDS's allegedly inequitable conduct) and whether the claims against AEFA are barred by res judicata. This case will be stayed, the parties will be compelled to arbitrate, and the parties shall submit their defenses of equitable estoppel and res judicata for decision by the arbitrator. An appropriate order follows.
ORDER
AND NOW, this 29th day of MAY, 2004, it is hereby ORDERED as follows:
1. Defendants' Motion to Compel Arbitration and to Stay Proceedings (doc. no. 12) is GRANTED;
2. Defendants's Motion, in the Alternative, for Summary Judgement and Sanctions (doc. no. 12) is DENIED without prejudice.
It is FURTHER ORDERED that these proceedings are STAYED and the parties shall proceed to arbitration before the National Association of Securities Dealers. This case shall be placed in SUSPENSE until further order of the Court.