In Re: Prudential ( 1998 )

Opinions of the United
1998 Decisions States Court of Appeals
for the Third Circuit
1-7-1998
In Re: Prudential
Precedential or Non-Precedential:
Docket 96-5329
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Filed January 7, 1998
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 96-5329
*IN RE: THE PRUDENTIAL INSURANCE COMPANY
OF AMERICA SALES PRACTICE LITIGATION
ALL AGENT ACTIONS
HERBERT SCHULTE, MDL transfer; S.D. Illinois; DNJ Civ.
95-4740; MICHAEL D. GORDON, MDL Transfer; W.D.
Kentucky (Paducah); DNJ Civil Action 95-4738; RICK A.
MARTIN, MDL transfer, W.D. Kentucky (Paducah), DNJ
Civil Action 95-5013; KENNETH R. YOUNG, MDL transfer,
M.D. Florida (Tampa), DNJ Civil Action 95-5010;
MICHAEL WEAVER, MDL transfer, S.D. Illinois
(E. St. Louis), DNJ Civil Action 95-5011
v.
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA,
Appellant
*(Amended as per the Clerk's 6/20/96 Order)
ON APPEAL FROM THE
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY
(D.C. Civil No. 95-cv-04704)
Argued September 8, 1997
BEFORE: GREENBERG, ALITO and SEITZ,
Circuit Judges.
(Opinion Filed: January 7, 1998)
Neil J. Maune, Esquire (ARGUED
FOR ALL APPELLEES)
2013B Johnson Road
P.O. Drawer B.
Granite City, Illinois 62040
Attorney for Appellee
Michael R. Weaver
J. Bruce Miller, Esquire
4th Floor
621 West Main Street
Louisville, Kentucky, 40202
Attorney for Appellee
Rick A. Martin
Delmar O. Koebel, Esquire
6 Joshua Drive
O'Fallon, Illinois 62269
Attorney for Appellee
Herbert Schulte
Kenneth W. Scott, Esquire
Scott & Jahn
7415 Burlington Pike
P.O. Box 671
Florence, Kentucky 41022
Attorney for Appellee
Michael D. Gordon
Karla R. Spaulding, Esquire
James, Hoyer & Newcomer
4830 West Kennedy Boulevard
One Urban Center, Suite 147
Tampa, Florida 33609
Attorney for Appellee
Kenneth R. Young
2
Michael H. Barr, Esquire (ARGUED)
Reid L. Ashinoff, Esquire
William M. Walsh, Esquire
Sonnenschein Nath & Rosenthal
1221 Avenue of The Americas
New York, New York 10020
Alan E. Kraus, Esquire
Riker, Danzig, Scherer, Hyland
& Perretti
Headquarters Plaza
One Speedwell Avenue
Morristown, New Jersey 07960
Attorneys for Appellant
OPINION OF THE COURT
SEITZ, Circuit Judge.
This appeal presents a novel question in this court of
whether the "insurance business" exception found in the
National Association of Securities Dealers ("NASD") Code of
Arbitration Procedure precludes arbitration of employment
disputes that implicate insurance issues.1
I. Background
A. Facts and Procedural History
Certain questionable sales practices of the Prudential
Insurance Company of America ("Prudential") gave rise to
_________________________________________________________________
1. The district court relied on diversity jurisdiction, 28 U.S.C. S 1332,
and federal question jurisdiction, 28 U.S.C. S 1331, to entertain
plaintiffs' state law claims and causes of action under the Racketeer
Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. SS 1961-
1968. We exercise jurisdiction under the Federal Arbitration Act, 9
U.S.C. SS 16(a)(1)(A) and 16(a)(1)(C). Because this appeal presents a
legal
question concerning the applicability and scope of an arbitration
agreement, our standard of review is plenary. See Pritzker v. Merrill
Lynch, Pierce, Fenner & Smith, Inc. 7 F.3d 1110, 1113 (3d Cir. 1993).
3
several lawsuits against it by former employees.2 Plaintiffs
are former Prudential sales agents who brought suit
alleging that Prudential took adverse employment action
against them in alleged retaliation for their refusal to
participate in the company's insurance sales fraud. In
response to the plaintiffs' action, Prudential moved, under
section 3 of the Federal Arbitration Act, to compel
arbitration of plaintiffs' claims. Prudential relied upon the
fact that each plaintiff had signed a Uniform Application for
Securities Industry Registration or Transfer ("Form U-4")
which incorporated by reference the arbitration provisions
of the NASD Code. The plaintiffs opposed the motion,
arguing that Prudential could not invoke Form U-4 because
it is not a party to that agreement, and, in the alternative,
that the Code contains an exception for disputes involving
the "insurance business" which would preclude arbitration
in this case.
Upon considering the contested motion, the district court
held that Prudential could seek to enforce the arbitration
agreement even though it is not a signatory to Form U-4.
Having ruled that Form U-4 applied to the appropriate
parties, the court addressed whether the arbitration
agreement covered the legal claims pressed by the
plaintiffs. Interpreting the scope of the agreement embodied
in Form U-4, the court found that the relevant language
applied to the plaintiffs' causes of action.
Finally, the court examined the insurance business
exception, which would potentially exempt arbitration in
this case. While recognizing a liberal federal policy in favor
of arbitration, the court nevertheless held that the
exception applied on the ground that plaintiffs' claims are
"intricately related" to Prudential's insurance business. It
added that the looming class action suits against
Prudential may raise the same issues as those subject to
arbitration. This consideration, in the district court's view,
compelled a finding favoring the application of the
_________________________________________________________________
2. These lawsuits were consolidated with actions brought by Prudential
policyholders before the District Court pursuant to 28 U.S.C. S 1407.
Because Prudential sought to compel arbitration only against the
plaintiffs, the policyholder claims are not before us in this proceeding.
4
exception. Accordingly, the court denied Prudential's
motion under the Arbitration Act. This appeal followed.
B. The Arbitration Provisions
The resolution of the issues in this appeal first calls for
a parsing of the relevant documentation and, in particular,
the language of Form U-4 itself.3 This form provides that
the applicant agreed 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 ...[NASD] as
may be amended from time to time.
Form U-4 further states that each applicant will:
abide by, comply with, and adhere to all the provisions,
conditions and covenants of the statutes, constitutions,
certificates of incorporation, by-laws and rules and
regulations of the ... [NASD] as they are and may be
adopted, changed or amended from time to time....
Incorporated by reference through these two provisions is
the NASD Code of Arbitration. Part I Section One of the
Code articulates which matters are eligible for arbitration:
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 persons(s)
with any member, with the exception of disputes
involving the insurance business of any member which
is also an insurance company:
(1) between or among members;
(2) between or among members and associated
persons;
_________________________________________________________________
3. The relevant language at issue refers to the most current Form U-4
and the NASD Code of Arbitration, as amended in 1993. Although the
plaintiffs had argued before the district court that the pre-1993 Code of
Arbitration applied, they do not raise that contention on appeal.
5
(3) between or among members or associated persons
and public customers, or others; and
(4) between or among members, registered clearing
agencies with which the [NASD] has entered into
an agreement to utilize the [NASD] arbitration
facilities and procedures, and participants,
pledges, or other persons using the facilities of a
registered clearing agency, as these terms are
defined under the rules of such a registered
clearing agency.
Part II Section 8 of the Code mandates arbitration for "[a]ny
dispute, claim, or controversy eligible for submission under
Part I of this Code between or among members and/or
associated persons...."
All the plaintiffs signed Form U-4 as a condition
precedent to their employment at Prudential.4 Prudential,
however, is not a signatory to the agreement.5 Rather, the
"firm" identified in Form U-4, is Pruco Securities Corp., a
wholly-owned Prudential subsidiary.
II. Arbitration
A. Prudential's Standing
A threshold inquiry under the Federal Arbitration Act is
to determine, under recognized principles of contract law,
the validity of, and the parties bound by, the arbitration
agreement. As explained by the Supreme Court,
" `arbitration is a matter of contract and a party cannot be
required to submit to arbitration any dispute which he has
not agreed so to submit.' " AT&T Technologies v.
Communications Workers of America, et al., 475 U.S. 643,
_________________________________________________________________
4. We note that plaintiffs Martin and Schulte signed an earlier version of
Form U-4, which differed slightly from the agreement signed by the
remaining plaintiffs. The provisions at issue in this appeal, however, are
materially identical.
5. The Form U-4 agreement is more correctly understood as between the
plaintiffs and the NASD. See Gilmer v. Interstate/Johnson Lane Corp.,
500 U.S. 20, 25 n.2. (1985).
6
648 (1986) (quoting United Steelworkers of America v.
Warrior and Gulf Navigation Co., 363 U.S. 574, 582 (1960)).
The identification of the parties bound by the agreement to
arbitrate need not be confined to the limited inquiry of
identifying the signatories to the arbitration agreement.
Rather, the dispositive finding is an " `express' and
`unequivocal' " agreement between parties to arbitrate their
disputes. Kaplan v. First Options of Chicago, Inc., 19 F.3d
1503, 1512 (3d Cir. 1994) (citations omitted), aff'd, 514
U.S. 938 (1995).
As this court has previously recognized, "a variety of non-
signatories of arbitration agreements have been held to be
bound by such agreements under ordinary common law
contract and agency principles." Barrowclough v. Kidder,
Peabody & Co., Inc., 752 F.2d 923, 938 (1985) (citations
omitted), overruled on other grounds by Pritzker v. Merrill
Lynch, Pierce, Fenner & Smith, Inc., 7 F.3d 1110, 1112 (3d
Cir. 1993). Indeed, courts have been willing to apply third
party beneficiary law in examining the contractual standing
of a non-signatory party to a dispute, provided there is an
expression of the requisite intent between the third party
and the plaintiff to arbitrate their claims. See McPheeters v.
McGinn, Smith & Co., 953 F.2d 771, 772-73 (2d Cir. 1992)
(per curiam); Nesslage v. York Sec., Inc., 823 F.2d 231, 233-
34 (8th Cir. 1987); Letizia v. Prudential Bache Sec., Inc.,
802 F.2d 1185, 1187 (9th Cir. 1986); Mowbray v. Moseley,
Hallgarten, Estabrook & Weeden, Inc., 795 F.2d 1111,
1116-17 (1st Cir. 1986); Stone v. Pennsylvania Merchant
Group, Ltd., 949 F. Supp. 316, 320-21 (E.D.Pa. 1996).
The parties in this case do not contest the validity of the
arbitration clause itself. Rather, they dispute the identity of
the parties bound by Form U-4.6 At the outset, we do not
find Prudential is without standing here simply because it
is not a signatory to the arbitration argument; nor will we
deny standing because Pruco is listed as the only"firm"
referenced in Form U-4. Instead, we turn to the text of the
Form U-4 arbitration agreement to see if there is an express
_________________________________________________________________
6. The parties raise this issue in response to this court's direction to
address the significance, if any, of Dayhoff Inc. v. H.J. Heinz Co., 86
F.3d
1287 (3d Cir.), cert. denied, 117 S. Ct. 583 (1996), to this case.
7
and unequivocal intent that the plaintiffs would arbitrate
their claims against, inter alia, Prudential, and whether
"both parties to the contract express an intention to benefit
the third party in the contract itself...." Scarpitti v. Weborg,
530 Pa. 366, 372-73, 609 A.2d 147, 150 (1992); see also
Restatement (Second) of Contracts S 302(1)(b) (1981).
As stated in Form U-4, the plaintiffs agreed to arbitrate
any dispute not only with Pruco, but also with "any other
person" where the claim itself would be subject to
arbitration under the NASD Code. Pursuant to section 8 of
the NASD Code, plaintiffs agreed to arbitrate certain
disputes "between or among members and/or associated
persons...." There is no question that Prudential is a
member of the NASD, and the plaintiffs are associated
persons within the meaning of the Code.7 Thus, we
conclude, as did the district court, there is a clear and
unequivocal intent to arbitrate claims with third parties
such as Prudential, and not just Pruco, to the extent they
are eligible for arbitration under S 1. Cf. Armijo v. Prudential
Insurance Co. of America, 72 F.3d 793, 799 n.7 (10th Cir.
1995) (finding an intent to arbitrate with Prudential as well
_________________________________________________________________
7. An "associated person" is defined as:
every sole proprietor, partner, officer, director, or branch
manager of
any member, or any natural person occupying a similar status or
performing similar functions, or any natural person engaged in the
investment banking or securities business who is directly or
indirectly controlling or controlled by such member....
NASD By-Laws P 1101(q). We find no merit to plaintiff Young's argument
that he is not an "associated person" within the meaning of the NASD
Code. Indeed, Young's entire theory of recovery is premised on the fact
that he was a Prudential employee with authority to trade in securities.
Young would certainly be an "associated person" for purposes of the
Securities Exchange Act, which uses similar language as the NASD's
definition and provides the statutory basis for the NASD. See 15 U.S.C.
S 78c(a)(21); Kaplan, 19 F.3d at 1517; Cular v. Metropolitan Life Ins.
Co.,
961 F. Supp. 550, 556-57 (S.D.N.Y. 1997). Even if Young, as an
employee, is not an associated person for purposes of the NASD
definition, his degree of involvement in these disputes would, at the very
least, place him as a "certain other" under Section 8 of the NASD Code.
See Thomas James Associates, Inc. v. Jameson, 102 F.3d 60, 67-68 (2d
Cir. 1996).
8
as Pruco through the maintenance of registration with
Prudential).
Moreover, it is clear from the text and purpose of Form
U-4, that the parties to the agreement intended to benefit
such non-signatory, third parties as Prudential. While Form
U-4 is only an agreement between the NASD and the
applicant, it was adopted as a broader effort by self-
regulatory organizations, including the NASD, to regulate
the securities industry.8 See 1 Ian R. MacNeil, et al.,
Federal Arbitration Law: Agreements, Awards, and
Remedies under the Federal Arbitration Act S 13, at 3-8,
43-44 (1996); Stephen J. Ware, Employment Arbitration and
Voluntary Consent, 25 Hofstra L.Rev. 83, 146 (1996). The
intention, as Form U-4 unambiguously indicates, was not
limited to arbitrating disputes between the NASD and the
applicant or member "firms" explicitly recognized in the
text. Rather, the arbitration agreement and the NASD Code
of Arbitration establish certain classes of individuals --
member firms of the NASD, customers, and so on -- who
would benefit from the applicant's agreement with the
NASD. The applicant, in return, would become a registered
broker with the NASD and could properly conduct business
under the federal securities laws. Therefore, we have no
doubts that the parties to Form U-4 unequivocally intended
that each applicant would submit to arbitration against
non-signatory third parties such as Prudential. A holding
that would restrict the right of these third parties to invoke
arbitration because they had not signed Form U-4 would
essentially require the NASD and the applicants to seek
explicit textual recognition of all intended beneficiaries,
whether known or unknown. We think such a requirement
would frustrate the purpose and text of Form U-4 and
accordingly hold that Prudential may properly seek
enforcement of the arbitration clause against the plaintiffs.
This case is distinguishable from Dayhoff Inc. v. H.J.
Heinz Co., 86 F.3d 1287 (3d Cir.), cert. denied, 117 S. Ct.
583 (1996), where we held that a non-signatory parent
_________________________________________________________________
8. In fact, the Securities Exchange Act of 1934 requires brokers and
dealers to register with, and submit to the rules of, the NASD as a
condition to trading in securities. 15 U.S.C. S 78o(b)(8).
9
corporation cannot "by reason of their corporate
relationship" enforce an arbitration clause, signed by a
wholly-owned subsidiary, absent an express agreement to
that effect. Id. at 1297. In Dayhoff, unlike the scenario
before us, there was no unambiguous expression of intent
between the parties to the arbitration agreement to create
a class of intended beneficiaries who might invoke
arbitration. Id. at 1296-97. In addition, the Dayhoff panel
was particularly concerned that the non-signatory parent
corporation had essentially created an "option to accept or
reject the arbitration and forum selection clauses...." Id. at
1297. The panel found that the existence of "such a choice
belie[d] the existence of an agreement" to arbitrate. Id. Such
is not the case here.
B. The Nature of the Dispute
Having found that Prudential has standing to seek
enforcement of the arbitration agreement against the
plaintiffs, the next step in the analysis is to identify the
nature of the dispute at issue and the scope of the
arbitration clause. Because arbitration clauses are
fundamentally a creature of contract law, the critical focus
is on a clear intention to arbitrate a specific claim or
dispute between the parties. In the court's undertaking to
determine the parties' intent, the analytical tools of
ordinary contractual interpretation become relevant. First
Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995)
(citations omitted).
It is important to note that the Federal Arbitration Act
provides the authority for the enforcement of arbitration
clauses as a matter of federal law and, as such, federal
policies govern. Moses H. Cone Memorial Hospital v.
Mercury Constr. Corp., 460 U.S. 1, 24 (1982). The Federal
Arbitration Act reflects a pervasive federal interest in
promoting arbitration and encouraging courts to uphold
arbitration clauses. See id. The underpinnings of this
strong federal policy in favor of arbitration have been
exhaustively reviewed by the Supreme Court, and need not
be reiterated here. See, e.g., Gilmer v. Interstate/Johnson
Lane Corp., 500 U.S. 20, 24-26 (1991); Dean Witter
Reynolds Inc. v. Byrd, 470 U.S. 213, 219-220 (1985); Moses
10
H. Cone, 460 U.S. at 24-25. However, we will emphasize
certain settled principles of federal arbitration law that are
relevant here.
Any inquiry into the scope of an arbitration clause must
necessarily begin with the presumption that arbitration
applies. In considering the nature of the dispute and the
scope of the arbitration clause, this court must operate
under a "presumption of arbitrability in the sense that `[a]n
order to arbitrate the particular grievance should not be
denied unless it may be said with positive assurance that
the arbitration clause is not susceptible of an interpretation
that covers the asserted dispute.' " AT&T Technologies, 475
U.S. at 650 (quoting Warrior & Gulf, 363 U.S. at 582-83).
Thus, when it cannot be said "with positive assurance" that
the parties have clearly and unequivocally excepted a
certain dispute from arbitration, the court must compel
arbitration. A necessary corollary of this axiomatic rule in
favor of arbitration is that doubts in interpreting the precise
scope of the arbitration agreement are to be resolved in
favor of arbitration. Moses H. Cone, 460 U.S. at 24. While
this approach is not a mandate for courts to ignore explicit
textual agreements or to reshape the parties' obvious
intent, it nevertheless weighs genuine ambiguities against
the resisting party. Painewebber Inc. v. Hartmann, 921 F.2d
507, 512-13 (3d Cir. 1990).
With these principles in mind, we turn to the nature of
the disputes here in order to determine whether they fall
within the scope of the relevant arbitration clause. The
plaintiffs have alleged various state violations --
employment, contractual, and tortious in nature -- based
on their discharge in retaliation for their refusal to
participate in the alleged fraudulent insurance practices of
Prudential. Several plaintiffs have also alleged RICO
violations in which the requisite predicate acts of
racketeering activity involve Prudential's insurance fraud.
These plaintiffs allege that RICO standing under 18 U.S.C.
S 1964(c) stems from the injury caused by wrongful
employment termination.
No party contests the employment nature of the plaintiffs'
claims. Indeed, all the causes of action set forth revolve
around the damage suffered through Prudential's decision
11
to terminate employment or intentionally interfere with the
plaintiffs' business expectations as insurance agents.
Unique to these claims, however, is the involvement of
Prudential's insurance business in the dispute. The
plaintiffs cannot recover under their various theories of
liability without necessarily implicating the illegal nature of
Prudential's insurance practices. To this extent, the
grievances cited by the plaintiffs are accurately described
as arising out of the employment or termination of
employment, but they nevertheless implicate the legality of
certain insurance practices. We cannot simply ignore, as
some other courts seem to have done, the insurance
aspects of this case. See, e.g., Metropolitan Life Ins. Co. v.
Lindsay, 920 S.W.2d 720 (Tex. App. Ct. 1996); Prudential
Ins. Co. Of America v. Shammas, 865 F. Supp. 429, 432
(W.D. Mich. 1993); Trumbetta v. Metropolitan Life Ins. Co.,
1994 WL 481152 (E.D. Pa. 1994) (unreported disposition).
Rather, we identify the issues raised by the plaintiffs in
order to determine whether they fall within the intended
scope of arbitration.
C. Scope of the Arbitration Agreement and the
Insurance Exception
Given the nature of the dispute, we address the
agreement embodied in Form U-4 and the NASD Code
incorporated by reference in order to ascertain whether this
controversy falls within the intended scope of arbitration.
Form U-4 itself merely provides that the parties agree to
arbitrate any dispute that is required to be arbitrated under
the NASD Code. The Code's language is broadly drafted and
covers:
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....
NASD Code S 1. At the very least, the section's plain
language differentiates between two types of disputes, both
12
of which are arbitrable. There is no question that the
parties intended to arbitrate any dispute "arising out of the
employment or termination of employment". Beyond these
employment disputes, claims "in connection with the
business of members" are also within the intended scope of
arbitration.
The language of the Code carves out an exception where
the dispute involves the "insurance business of any
member." In these situations, there is a clear intent not to
arbitrate but rather to leave the matter within the province
of the courts. Less clear, however, is the coverage of this
exception, as several ambiguities immediately arise in the
clause's interpretation. For example, it is not clear whether
the business of insurance exception applies to employment
related disputes, to disputes in connection with a member's
business, or to both.9 More importantly, neither the Code
nor NASD by-laws defines what is meant by the "insurance
business" and the intended scope of its coverage. 10
The history of NASD Code S 1 reflects the above
conclusions, but sheds little light on the scope of
arbitration or the insurance business exception. Before
1993, S 1 made the following claims eligible for arbitration:
"any dispute, claim or controversy arising out of or in
connection with the business of any member of the
Association, with the exception of disputes involving the
insurance business of any member which is also an
insurance company...." 58 Fed. Reg. 39,070 (1993). At this
point, it was clear that the insurance business exception
_________________________________________________________________
9. We note that under settled principles of statutory construction, the
doctrine of the last antecedent phrase would suggest that the business
of insurance exception applies only to the phrase immediately preceding
it which, in this case, is employment disputes. See Norma J. Singer,
Statutes and Statutory Construction S 47.26, at 240-41 (5th ed. 1992);
24 Words and Phrases, Last Antecedent 453-66 (1966).
10. Counsel for Prudential would have us rely on such Supreme Court
cases as Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119 (1982) which
define the "business of insurance" for purposes of the McCarran-
Ferguson Act, 15 U.S.C. S 1011 et seq. This suggestion, however, is
beside the mark. What Congress intended by "insurance" for purposes of
the McCarran-Ferguson Act is simply irrelevant to how the parties before
us define insurance and the scope of disputes subject to arbitration.
13
only applied to disputes in connection with a member's
business. The stated purpose of the exception was to:
exclude ... disputes on [the] belief that the number of
insurance-only claims involving insurance companies
is so disproportionately large in relation to their
securities business that to include such claims would
unduly burden the arbitration system. In addition, the
inclusion of such claims could result in a requirement
to arbitrate matters that are intrinsically insurance,
that is, matters with respect to which the Association
does not believe it should mandate arbitration.
44 Fed. Reg. 75,255 (1979). The intent to be inferred from
this phrase is that where the dispute is "insurance-only" or
even "intrinsically insurance" it falls beyond the scope of
arbitration. But apart from a stated concern regarding the
sheer volume of insurance claims, nothing further suggests
what is meant by an "intrinsically insurance" dispute or a
claim that is "insurance only".
In 1993, however, the NASD amended the section to
include the phrase, "or arising out of the employment or
termination of employment of associated person(s) with any
member". 58 Fed. Reg. at 39,070. The stated intent behind
this amendment was to "assure that the arbitration of
industry employment disputes may be compelled at the
instance of one of the parties to the dispute." Id. at 39,071.
Moreover, the NASD intended the newly proposed clause to
be read broadly so that employment disputes that also
invoked matters "involving public policy issues" would still
be arbitrated. Id. at 39,071-72. To illustrate, the
amendment provided "that in cases involving employment
discrimination claims or claims involving public policy
issues, the panel should consist of a majority of public
arbitrators." Id. at 39,071. Nevertheless, the NASD did not
comment as to the potential interplay between the
employment clause and the insurance business exception
so as to illuminate the intended scope of arbitrable disputes
in that context.
As a result, we are left with an unanswered question that
is at the heart of this case -- namely, whether employment
disputes that implicate a member's insurance business fall
14
under the insurance business exception. On the one hand,
it is clear, from both the language of the text and its
history, that employment disputes were unequivocally
intended to be arbitrated. This is so even if the employment
claim raises policy matters well beyond the narrow legal
issue of contract breach or ordinary employment torts.
These would include, for instance, discrimination based on
age, sex, or race. See 58 Fed. Reg. at 39,071.
On the other hand, the NASD has expressed a clear and
unequivocal intent not to arbitrate "insurance-only" or
"intrinsically insurance" claims. The contours of an
"insurance-only" or "intrinsically insurance" claim are too
amorphous to define with precision in the present factual
context, especially where it is the exception to a broad
arbitration provision. We can easily imagine scenarios, such
as the one before us, where a claimant, in order to recover
on normally arbitrable disputes, would require the
arbitrator to decide insurance issues. Thus, it would be
difficult to unambiguously announce, on the basis of the
NASD Code and its drafting history, whether the parties
intended that these sorts of controversies are "intrinsically
insurance" without any further indication of the meaning of
the phrase. In the end, we are left wondering to what
extent, if any, the desire not to arbitrate "intrinsically
insurance" disputes was meant to override the parties'
intention to arbitrate employment disputes -- broadly read
-- when the controversy implicates both employment and
insurance aspects.
Courts that have grappled with this conundrum generally
attempt to isolate certain aspects of the dispute and
ascertain whether they pose central insurance questions.
See, e.g., Young v. Prudential Ins. Co. of America, 688 A.2d
1069, 1081 (N.J. Super. Ct. App. Div. 1997) (looking to
whether insurance practices are "at the heart of[the] case");
Vitone v. Metropolitan Life Ins. Co., 943 F. Supp. 192, 198
(D.R.I. 1996) (inquiring whether a "comprehensive
evaluation" of the defendant's insurance business would be
required to resolve plaintiff's claims); Wojcik v. Aetna Life
Ins. and Annuity Co., 901 F. Supp. 1282, 1291-92 (N.D.Ill.
1995) (requiring plaintiff to allege unlawful insurance
practices and not merely wrongful employment conduct
15
directed toward plaintiff); Prudential Ins. Co. of America v.
Shammas, 865 F. Supp. 429, 432 (W.D.Mich. 1993) (looking
for claims that invoke a "specific[ ]" relationship with
insurance); Trumbetta v. Metropolitan Life Ins. Co., 1994 WL
481152 (E.D. Pa. 1994) (unreported disposition) (looking to
the "actual basis" of plaintiff's claim).
While it is possible to construe the insurance business
exception so that an employee's claim is "intrinsically
insurance" or "insurance-only" once the claim requires a
resolution of a central insurance question, such an
interpretation fails for several reasons. Assuming that the
business of insurance exception applies to employment
disputes, there is nothing in the NASD Code or its drafting
history to indicate the degree of insurance involvement in a
dispute that would constitute an "intrinsically insurance"
claim. Looking to the purpose behind the exception -- a
concern for case volume -- does not aid the inquiry, as no
party has made the contention that the types of claims
involved here would threaten an overload on securities
arbitrators.11
If this court were to determine how the insurance
exception applies to employment disputes, without any
guidance as to the meaning of the phrase "intrinsically
insurance," our decision very well might frustrate the intent
of the parties. However, because federal arbitration law
requires doubts to be resolved against the resisting party,
we need not grope for a rule that would resolve the
ambiguity here.12 Instead, we are not inclined to expand the
_________________________________________________________________
11. The district court surmised that the driving force behind the
exception is a general lack of expertise by securities arbitrators to
consider insurance claims. Although this may be true, neither the NASD
Code nor its drafting history posits this as a concern to the parties.
12. In fact, the text of the Code itself phrases the exception as any
dispute "involving" the insurance business while the NASD's expression
of purpose seems to limit the exception to "insurance-only" or
"intrinsically insurance" claims. Because the word "involvement"
indicates a more relaxed relationship to insurance issues than does the
word "intrinsically" we are faced with a patent ambiguity of the parties'
intent. Under settled contract principles, we must give effect to "all
circumstances" behind the contractual term including "the principal
purpose of the parties." Restatement (Second) Contracts S 202(1).
16
exception without a clear indication of the parties' purpose
and intended scope of coverage.13
We ultimately cannot say with positive assurance that
the language of Form U-4 and the NASD Code, as well as
their drafting histories, indicate the parties' desire not to
arbitrate employment disputes that require the resolution
of an insurance business issue. There is only one clear
expression of intent here -- that employment disputes are
subject to arbitration while "intrinsically insurance" claims
are not. Because this court cannot say with certainty what
is meant by "intrinsically insurance" claims, and whether it
embraces employment disputes, our mandate is clear: a
presumption in favor of arbitration applies and doubts in
construction are resolved against the resisting parties.
Thus, we will reverse the district court's ruling that the
insurance business exception exempted the plaintiffs'
claims from arbitration in this case.14
III. Policy Grounds and Arbitration
In addition to the textual interpretation of the insurance
business exception, the district court offered another
reason for its denial of arbitration: a concern for potential
"inconsistent results and inefficiencies" given the dozens of
putative class actions against Prudential. Although the
court recognized that this factor alone cannot justify a
reformation of a binding arbitration contract, it
nevertheless considered the peculiar class action
ramifications as a persuasive factor against committing the
disputes to an arbitration forum.
While we share the district court's apprehension toward
inconsistent results and inefficiencies caused by
_________________________________________________________________
13. Indeed, if this text were a statute, the ordinary canons of statutory
interpretation would mandate a narrow construction of the exception in
the presence of ambiguity. See Norma J. Singer, Statutes and Statutory
Construction S 47.11 (5th ed. 1992).
14. With respect to the plaintiffs' RICO cause of action, we note that the
Supreme Court has already approved arbitration of RICO claims
pursuant to a pre-existing arbitration agreement. See Shearson /
American Express, Inc. v. McMahon, 482 U.S. 220 (1987).
17
arbitration, we cannot frustrate the enforcement of the
arbitration clause pursuant to the Federal Arbitration Act
on the basis of this concern. As the Supreme Court noted
in Moses H. Cone:
[F]ederal law requires piecemeal resolution when
necessary to give effect to an arbitration agreement.
Under the Arbitration Act, an arbitration agreement
must be enforced notwithstanding the presence of
other persons who are parties to the underlying
dispute but not to the arbitration agreement.
460 U.S. at 20 (emphasis in original) (footnotes omitted).
Although the Court in Moses H. Cone considered the
possibilities of duplicative and piecemeal litigation in terms
of federal abstention doctrine, the interest in enforcing
federal arbitration law is the same in other situations. See,
e.g., Barrowclough, 752 F.2d at 938 (holding that an
arbitration clause against certain parties may be enforced
even if other parties were not subject to arbitration);
Dayhoff, 86 F.3d at 1298 (enforcing an arbitration clause
even if a party may have to "litigate its claims in three
different fora with three different sets of rules").
The Eighth Circuit Court of Appeals, for example,
specifically rejected the view that arbitration was improper
when multi-district litigation may create duplicative
litigation and a potential for inconsistency. In re Piper
Funds, Inc., Institutional Government Income Portfolio Litig.,
71 F.3d 298, 303 (8th Cir. 1995). As the Supreme Court
broadly stated, the Federal Arbitration Act was "motivated,
first and foremost, by a congressional desire to enforce
agreements into which parties had entered, and we must
not ... allow the fortuitous impact of the Act on efficient
dispute resolution to overshadow the underlying
motivation." Dean Witter Reynolds Inc. v. Byrd, 470 U.S.
213, 220 (1985) (footnote omitted). Accordingly, we will also
reverse the district court's ruling based on judicial
efficiency and consistency.
IV. Conclusion
For the foregoing reasons, the order of the district court
will be reversed, to the extent it denied Prudential's motion
18
compelling arbitration, and the matter will be remanded for
further appropriate proceedings.
19
GREENBERG, Circuit Judge, dissenting in part.
While I agree with the majority that Prudential may seek
enforcement of the arbitration clause, I respectfully dissent
from its conclusion that the plaintiffs' claims are subject to
arbitration. I will set forth my reasons briefly. The NASD
Code, following its 1993 amendment, reads as follows:
This Code . . . is prescribed . . . for the arbitration of
any dispute, claim or controversy arising out of or in
connection with the business of any member of the
Association, or [dispute, claim or controversy] 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
. . .
The underscored words were added in 1993 and I have
inserted "dispute, claim or controversy" within them for
clarity because obviously arbitration is of a dispute, claim
or controversy.
Prudential, which contends that the insurance exception
is inapplicable in an employment dispute, see br. at 18,
effectively would rewrite the Code so that it reads as
follows:
This Code . . . is prescribed . . . for the arbitration of
any dispute, claim or controversy arising out of or in
connection with the business of any member of the
Association, with the exception of disputes involving
the insurance business of any member which is also
an insurance company, or [for the arbitration of any
dispute, claim or controversy] arising out of the
employment or termination of employment of
associated person(s) with any member.
I say that Prudential would rewrite the Code to read as I
have indicated because the rewritten version renders the
exception for "disputes involving the insurance business"
inapplicable in disputes arising out of employment or its
termination. Relying on its rewritten version of the Code,
Prudential explains that "[o]nly disputes predicated directly
on Prudential's contractual or other insurance-related
20
obligations to policyholders, rather than its role and
obligations as an employer, properly fall within the scope of
the business of insurance exception." Br. at 3.
Prudential's position is untenable. I am well aware that
the courts look generously at the scope of arbitration
clauses. Nevertheless, except in certain situations in which
statutes require arbitration, a party only need arbitrate
disputes which he or she agrees to arbitrate. Dayhoff Inc. v.
H.J. Heinz Co., 86 F.3d 1287, 1294 (3d Cir.), cert. denied,
117 S. Ct. 583 (1996). In my view, it is perfectly clear that
the exception from arbitration for disputes involving the
insurance business must apply to employment disputes
because the exception directly follows the provision for their
arbitration. While it could be argued that the exception
does not apply to disputes "arising out of or in connection
with the business of any member of the Association," as
that phrase is more remote than the employment disputes
provision from the exception, it cannot be argued tenably
that the exception jumps over the immediately preceding
employment disputes provision to modify only the more
remote phrase. It is one thing to construe a contract to
require the arbitration of a dispute. But it is quite another
to rewrite a contract to require arbitration. A court simply
cannot do that.
The majority indicates that "[t]he plaintiffs cannot recover
under their various theories of liability without necessarily
implicating the illegal nature of Prudential's insurance
practices." Majority Opinion at 12. The majority thus sets
forth that "the grievances cited by the plaintiffs are
accurately described as arising out of the employment or
termination of employment, but they nevertheless implicate
the legality of certain insurance practices." Id. at 12. I agree
with these points and thus I would affirm because the
obligation to arbitrate employment disputes excludes
"disputes involving the insurance business of any member
which is also an insurance company." (Emphasis added.)
Indeed, I regard this case as fairly straightforward. After all,
a dispute implicating the legality of insurance practices
surely is a dispute involving an employer's insurance
business.
21
The majority concludes that there must be arbitration
here in part because of ambiguities in the Code. It indicates
that "it is not clear whether the business of insurance
exception applies to employment related disputes, to
disputes in connection with a member's business, or to
both," id. at 13, and that is uncertain "whether employment
disputes that implicate a member's insurance business fall
under the insurance business exception." Id. at 14-15. I
respectfully disagree because as I have indicated the
provision for arbitration of employment disputes directly
precedes the insurance business exception.
The majority expresses concern about the scope of the
insurance business exception. I certainly agree that the
scope could be a problem if the insurance business aspects
of the dispute are tangential to the main controversy. But
in this case insurance disputes are at the heart of the
controversies for, as the majority points out, the plaintiffs
"cannot recover . . . without necessarily implicating the
illegal nature of Prudential's insurance practices" and the
plaintiffs' grievances, though arising out of the employment
or its termination, "nevertheless implicate the legality of
certain insurance practices." Id. at 12. Indeed, if the
exception to the obligation to arbitrate employment
controversies for disputes involving the insurance business
is inapplicable here, it is difficult to understand when it
ever would be applicable.
I respect the majority's point concerning the presumption
in favor of arbitration and, as I have indicated, I am aware
that in cases of doubt it is appropriate to order arbitration.
But to me this case is fairly clear and the generalized policy
in favor of arbitration cannot overcome the plain meaning
of the Code.
I also point out that the New Jersey state courts would
resolve this case differently. In Young v. Prudential Ins. Co.,
688 A.2d 1069 (N.J. Super. Ct. App. Div.), certif. denied,
694 A.2d 193 (N.J. 1997), the Superior Court of New
Jersey, Appellate Division, construed the same Code
provision involved here to permit an action in court in a
similar case. In fact, Young found the district court opinion
in this very case to be "compelling" and followed it. Id. at
1079. Accordingly, I have no doubt that the New Jersey
22
state courts will follow Young and not this case. See Dewey
v. R.J. Reynolds Tobacco Co., 577 A.2d 1239, 1244 (N.J.
1990) (holding that "decisions of a lower federal court are
no more binding on a state court than they are on a federal
court not beneath it in the judicial hierarchy") (citation
omitted). It thus appears that in New Jersey the
determination of whether there will be arbitration in
controversies of the nature involved here, even against the
same employer, now will depend on whether a state or
federal court makes the determination.
In sum, I conclude that the district court opinion at In re:
Prudential Ins. Co. of Am. Sales Practices Litig., 924 F.
Supp. 627, 640-42 (D.N.J. 1996), is right on the mark as is
the opinion of the state court in Young, 688 A.2d 1069.
Thus, I would affirm.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
23