Smith v. Equitable ( 2000 )


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  •                                                                                                                            Opinions of the United
    2000 Decisions                                                                                                             States Court of Appeals
    for the Third Circuit
    4-4-2000
    Smith v. Equitable
    Precedential or Non-Precedential:
    Docket 99-1031
    Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_2000
    Recommended Citation
    "Smith v. Equitable" (2000). 2000 Decisions. Paper 71.
    http://digitalcommons.law.villanova.edu/thirdcircuit_2000/71
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    Filed April 4, 2000
    UNITED STATES COURT OF APPEALS
    FOR THE THIRD CIRCUIT
    No. 99-1031
    C. LEON SMITH,
    Appellant
    v.
    THE EQUITABLE
    Appellee
    APPEAL FROM THE
    UNITED STATES DISTRICT COURT
    FOR THE EASTERN DISTRICT OF PENNSYLVANIA
    (D.C. No. 98-cv-01264)
    District Judge: Honorable J. Curtis Joyner
    ARGUED NOVEMBER 1, 1999
    BEFORE: NYGAARD, McKEE, and ROSENN,
    Circuit Judges.
    (Filed: April 4, 2000)
    Joseph T. Wright, Jr., Esq.
    Danielle M. Mulcahey, Esq. (Argued)
    Wright & Associates
    148 Adams Avenue
    Scranton, PA 18503
    Attorneys for Appellant
    Larry Besnoff, Esq.
    Obermayer, Rebmann, Maxwell
    & Hippel
    1617 John F. Kennedy Boulevard
    One Penn Center, 19th Floor
    Philadelphia, PA 19103
    William L. Kandel, Esq. (Argued)
    John D. Giansello, III, Esq.
    Orrick, Herrington & Sutcliffe
    666 Fifth Avenue
    New York, NY 10103-0001
    Attorneys for Appellee
    OPINION OF THE COURT
    NYGAARD, Circuit Judge.
    I.
    This appeal arises from appellant C. Leon Smith's
    attempt to secure employment with appellee, The Equitable.
    He alleges that The Equitable refused to hire him because
    of his race, in violation of Title VII of the Civil Rights Act of
    1964, 42 U.S.C. S 2000e et seq.; 42 U.S.C. S 1981; and the
    Pennsylvania Human Rights Act, 43 P.S. 955, et seq. The
    District Court found that the parties had entered into an
    arbitration agreement that covered Smith's claims. It
    granted The Equitable's motion to compel arbitration, and
    dismissed Smith's claims without prejudice. The District
    Court reasoned that arbitration was the only relief Smith
    was allowed under the Federal Arbitration Act ("FAA"), 9
    U.S.C. SS 3-4. Smith now appeals, arguing that the District
    Court should not have applied or enforced the arbitration
    agreement. Because we lack appellate jurisdiction to hear
    an appeal of this type of interlocutory order, we will
    dismiss.
    II.
    In late 1996, Smith applied for a position selling"Series
    6" annuities for The Equitable, a registered broker-dealer of
    2
    securities. Joseph McDonough, a District Manager for The
    Equitable, interviewed Smith and forwarded his resume to
    an Agency Manager named Joel Albert. Allegedly,
    McDonough wanted to hire Smith but Albert stated he did
    not want Smith to work for The Equitable because he is
    African-American. However, in mid-January of 1997
    McDonough offered Smith a pre-employment contract to
    sell securities as a "prospective agent" of The Equitable.
    As a prospective agent, Smith could attempt to qualify for
    regular employment with The Equitable by selling securities
    for the company during a trial period. The Equitable
    considered prospective agents to be independent
    contractors, and allowed them to solicit offers for the sale
    of securities products on its behalf in order to evaluate
    them. To become a prospective agent, however, Smith was
    first required to register with the National Association of
    Securities Dealers ("NASD"). The NASD in turn required
    him to sign and submit an application called a U-4
    "Uniform Application for Securities Industry Registration or
    Transfer." This application stated that Smith agreed "to
    arbitrate any dispute, claim or controversy that may arise
    between [him] and [his] firm, or a customer, or any other
    person, that is required to be arbitrated under the rules,
    constitutions, or by-laws" listed on the form.
    The NASD Code of Arbitration Procedure, incorporated
    into the U-4 agreement, made the following matters eligible
    for arbitration:
    [A]ny dispute, claim or controversy arising out of or in
    connection with the business of any members of the
    [NASD], or arising out of or in connection with the
    employment or termination of employment of
    associated person(s) with any member . . .:
    (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.
    NASD Manual -- Code of Arbitration Procedure Rule 10101
    (1997).
    3
    Of the disputes that are eligible for arbitration, the NASD
    Code requires that several types always be submitted to
    arbitration. These categories include disputes involving "a
    person associated with a member against a member" and
    vice-versa. NASD Code, Rule 10201(a). A person associated
    with a member is defined as "a natural person registered
    under the Rules of the [NASD] . . . or a natural person
    engaged in the investment banking or securities business
    who is directly or indirectly controlling or controlled by a
    member." NASD By-Laws, Art. 1 (ee).
    At the outset, the District Court correctly noted that the
    strong federal policy favoring arbitration required it to
    resolve all ambiguities in the U-4 agreement in favor of
    arbitration. See Smith v. The Equitable, 
    27 F. Supp. 2d 565
    ,
    568 (E.D. Pa. 1998) (citing Seus v. John Nuveen & Co., Inc.,
    
    146 F.3d 175
    , 178 (3d Cir. 1998), cert. denied , 
    119 S. Ct. 1028
    , 
    143 L. Ed. 2d 38
    , and Gilmer v. Interstate/Johnson
    Lane Corp., 
    500 U.S. 20
    , 26, 
    111 S. Ct. 1647
    , 1652, 114 L.
    Ed. 2d 26 (1991)). The District Court held that the scope of
    the U-4 agreement did cover Smith's claims, because they
    arose out of his pre-employment contract with The
    Equitable:
    Accordingly, we find that Plaintiff 's current claims
    either arise out of or in connection with the business
    of a NASD member or arise out of the employment or
    termination of employment of an associated person
    with any member. Therefore, Plaintiff 's claims
    constitute the type of claims anticipated by the
    language of the U-4 Application and the NASD Code of
    Arbitration Procedure.
    Smith v. The 
    Equitable, 27 F. Supp. 2d at 568
    .
    Smith argued that the U-4 agreement should not apply in
    his case. He claimed that The Equitable fraudulently
    induced him to sign the agreement, when it knew that it
    would not hire him. Smith claims The Equitable thus
    tricked him into waiving his rights under Title VII, and the
    arbitration agreement should not be enforced as a result.
    The District Court agreed that the arbitration agreement
    would not be binding if Smith could demonstrate that it
    was based on fraud, duress, mistake, "or some other
    4
    ground recognized by the law applicable to contracts
    generally." 
    Id. (citing Seus,
    146 F.3d at 184 (quotation
    marks omitted)). However, the District Court also correctly
    noted that the Federal Rules of Civil Procedure require
    allegations of fraud to be pleaded with particularity. See
    Smith v. The 
    Equitable, 27 F. Supp. 2d at 569
    ; Fed. R. Civ.
    P. 9(b). It concluded that Smith had failed to do so.
    The District Court granted The Equitable's motion to
    compel arbitration. It also granted The Equitable's
    alternative motion to dismiss the litigation. The District
    Court reasoned that because all of Smith's claims were
    subject to arbitration, "retaining jurisdiction would serve no
    purpose." Smith v. The 
    Equitable, 27 F. Supp. 2d at 569
    . It
    therefore dismissed Smith's claims without prejudice.
    Smith appeals on the grounds that the District Court
    misconstrued the applicability of the arbitration agreement,
    that he should have been allowed to plead his allegations of
    fraud with greater particularity, and that he did not make
    a knowing and voluntary waiver of his civil rights when he
    signed the arbitration agreement.
    III.
    Before we can consider Smith's arguments on the merits,
    we must address The Equitable's assertion that we lack
    appellate jurisdiction to hear this appeal. See Zosky v.
    Boyer, 
    856 F.2d 554
    , 555 (3d Cir. 1988), cert. denied, 
    488 U.S. 1042
    , 
    109 S. Ct. 868
    , 
    102 L. Ed. 2d 992
    (1989)
    (examining appellate jurisdiction to review order compelling
    arbitration sua sponte). Our jurisdiction depends on
    whether or not the District Court's order compelling
    arbitration was a final (and thus appealable) order, or
    whether it was an interlocutory (and thus non-appealable)
    order.
    Generally, a federal Court of Appeals may not hear an
    appeal from a non-final decision of a District Court. See 28
    U.S.C. S 1291.1 Subject to a limited exception,2 Section
    _________________________________________________________________
    1. Very limited exceptions to the rule that interlocutory orders are not
    immediately appealable may be found in 28 U.S.C.S 1292(a)(1) (for
    interlocutory orders involving injunctions) and 28 U.S.C. S 1292(b) (for
    5
    16(b) of the F.A.A., 9 U.S.C. S 16(b), specifically prevents
    appeal of a District Court's interlocutory order compelling
    arbitration. This section provides that:
    [A]n appeal may not be taken from an interlocutory
    order granting a stay of any action under section 3 of
    this title; directing arbitration to proceed under section
    4 of this title; compelling arbitration under section 2063
    of this title; or refusing to enjoin an arbitration that is
    subject to this title.
    9 U.S.C. S 16(b)(1)-(4) (format altered). Section 16(b) of the
    F.A.A. reflects "the strong federal policy favoring
    arbitration." 
    Seus, 146 F.3d at 179
    . Because the District
    Court did compel arbitration under Section 4 of the F.A.A.,
    Section 16(b) prohibits us from hearing Smith's appeal if
    that order was interlocutory. Whether the order was
    interlocutory or not depends on whether it arose from an
    independent or an embedded proceeding.
    Independent proceedings are those which have been
    brought initially for the sole purpose of compelling
    arbitration pursuant to Section 4 of the FAA, 9 U.S.C. S 4.
    These proceedings arise independently of any other lawsuit,
    and the District Court's resulting order is immediately
    appealable as the final relief sought. As the United States
    Court of Appeals for the Second Circuit has explained,
    _________________________________________________________________
    certain certified questions). These grounds are generally not applicable
    in
    the arbitration context, because "no irreparable harm will be done to
    either party by requiring arbitration without an interlocutory appeal."
    
    Zosky, 856 F.2d at 561
    .
    2. Section 16(b) does not trump 28 U.S.C. S 1292(b), which allows the
    District Court to certify "controlling question of law as to which there
    is
    substantial ground for difference of opinion" such that immediate appeal
    "may materially advance the ultimate termination of the litigation." This
    exception does not apply here.
    3. Section 206 provides that "[a] court having jurisdiction under this
    chapter may direct that arbitration be held in accordance with the
    agreement at any place therein provided for, whether that place is within
    or without the United States. Such court may also appoint arbitrators in
    accordance with the provisions of the agreement." 9 U.S.C. S 206.
    6
    [i]f the suit is "independent," i.e., the plaintiff seeks an
    order compelling or prohibiting arbitration or a
    declaration that a dispute is arbitrable or not
    arbitrable, and no party seeks any other relief, afinal
    judgment ending such litigation is appealable at once
    . . . . If arbitration has been ordered, the objecting
    party need not await the outcome of the arbitration
    before challenging the order to arbitrate.
    Filanto, S.P.A. v. Chilewich Int'l Corp., 
    984 F.2d 58
    , 60 (2d
    Cir. 1993) (citations omitted and format altered); see also
    
    Zosky, 856 F.2d at 557-59
    (citing Rogers v. Schering Corp.,
    
    262 F.2d 180
    , 182 (3d Cir. 1959) (in banc) (recognizing
    distinction between independent proceedings to compel
    arbitration and those arising as a defense to other claims)).
    Embedded proceedings, on the other hand, are those in
    which an agreement to arbitrate forms a defense to a claim
    or claims brought before the court. Orders compelling
    arbitration in an embedded proceeding are interlocutory,
    and thus cannot be appealed according to Section 16(b) of
    the F.A.A. and the final decision rule contained in 28
    U.S.C. S 1291. As we have observed, "[i]t may appear
    anomalous for the appealability of what amounts to the
    same order to depend on the procedural posture of the case
    in the district court." 
    Zosky, 856 F.2d at 560
    . However,
    the underlying rationale . . . is that an order directing
    arbitration is interlocutory and, therefore, not
    appealable if it is made in a lawsuit, such as a suit for
    damages, in which in the normal course of judicial
    procedure there will be a later final order or judgment
    from which an appeal can be taken by a person
    aggrieved by the prior order to arbitrate.
    
    Id., 856 F.2d
    at 558 (quoting 
    Rogers, 262 F.2d at 182
    ).
    The question is which type of proceeding we have in this
    case. Smith filed a lawsuit against The Equitable seeking
    relief under various statutes. The Equitable responded by
    seeking to compel arbitration as a defense to the lawsuit. It
    is clear, therefore, that the motion to compel arbitration
    began as an embedded proceeding because "[a]rbitration is
    not the full relief sought by the plaintiff; indeed, the
    plaintiff opposes arbitration." 
    Zosky, 856 F.2d at 559
    . The
    7
    wrinkle here is that the District Court both compelled
    arbitration and dismissed Smith's complaints.
    Generally, when a District Court grants an order
    compelling arbitration in an embedded proceeding, it will
    also stay the proceedings pursuant to Section 3 of the
    F.A.A., 9 U.S.C. S 3. Indeed, The Equitable argues that the
    District Court only has power to stay the claims, according
    to the mandatory language of Section 3. Although this may
    be the better practice, it was not error to dismiss. We have
    held in the context of an embedded proceeding that for
    reasons of judicial efficiency, when "all the claims involved
    in an action are arbitrable, a court may dismiss the action
    instead of staying it." 
    Seus, 146 F.3d at 179
    (citing Dancu
    v. Coopers & Lybrand, 
    778 F. Supp. 832
    , 835 (E.D. Pa.
    1991), aff 'd, 
    972 F.2d 1330
    (3d Cir. 1992)).
    An argument can thus be made that we should treat the
    present case more like an independent proceeding to
    compel arbitration than as an embedded one, because in
    the present case the District Court did not stay Smith's
    claims. The end result, one could argue, is thus more like
    that of an independent proceeding. We do not find this
    distinction very compelling. Smith's claims were dismissed
    without prejudice so that the arbitration could proceed in
    an efficient manner. He argues the arbitration agreement
    was invalid because he was never employed by The
    Equitable, that The Equitable never intended to employ
    him, and that his signature to the agreement was obtained
    by artifice. However, he can test the validity of the
    arbitration agreement before the arbitrator and still retain
    his rights, if he deems it necessary, to challenge the
    arbitration decision by re-filing his statement in the District
    Court. Because Smith may re-file in this event,"[t]he
    district court's order dismissing the action to the extent
    that it concluded the . . . matter was arbitrable is
    functionally analogous to the grant of a stay in an ongoing
    proceeding pending the outcome of arbitration."
    Communication Workers v. American Tel. & Tel., 
    932 F.2d 199
    , 207 (3d Cir. 1991).
    We thus hold that because the dismissal was the
    functional equivalent of a stay in this context, this is still
    an embedded proceeding. The important point is that the
    8
    District Court did compel arbitration. Where, as here,
    arbitration is a defense to litigation, arbitration provides
    "an expeditious and inexpensive mode of alternative dispute
    resolution." Communication 
    Workers, 932 F.2d at 207
    . It
    would be contrary to Section 16(b) of the F.A.A. to allow an
    appeal of this order. Section 16(b) makes "clear that with
    respect to an interlocutory order issued in an ongoing
    proceeding, any order favoring litigation over arbitration is
    immediately appealable and any order favoring arbitration
    over litigation is not." 
    Id. We are
    satisfied that we lack
    appellate jurisdiction to hear this matter.
    In an effort to circumvent this logic, Smith points out the
    similarities between the complaint in Seus and his own. In
    Seus, a former employee of a brokerage firm alleged that
    the firm violated her rights under Title VII of the Civil
    Rights Act of 1964, 42 U.S.C. SS 2000e et seq., and the Age
    Discrimination in Employment Act of 1967, 29 U.S.C.
    SS 621 et seq. The defendant raised as a defense the Form
    U-4 arbitration agreement that plaintiff had signed. The
    District Court compelled arbitration and dismissed the
    complaint, and this Court affirmed. Smith argues that
    because we reached the merits of an appeal of an order
    compelling arbitration in an embedded proceeding in Seus,
    this at least implicitly demonstrates that we have
    jurisdiction to reach the merits of his appeal as well. We
    disagree. In Zosky, we held that an order compelling
    arbitration arising from an embedded proceeding is not
    immediately appealable. See 
    Zosky, 856 F.2d at 554
    . In
    Seus, we did not address jurisdiction.4
    We will dismiss for lack of appellate jurisdiction.
    _________________________________________________________________
    4. Because a later panel cannot overrule the holding of an earlier panel,
    Seus could not alter our holding in Zosky, implicitly or otherwise, unless
    it found the cases distinguishable. See Internal Operating Procedures
    S 9.1 (3d Cir. 1994) ("no subsequent panel overrules the holding in a
    published opinion of a previous panel. Court in banc consideration is
    required to do so.").
    9
    A True Copy:
    Teste:
    Clerk of the United States Court of Appeals
    for the Third Circuit
    10