Zandford v. Prudential-Bache ( 1997 )

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
CHARLES ZANDFORD,
Plaintiff-Appellant,
v.
PRUDENTIAL-BACHE SECURITIES,
No. 94-1360
INCORPORATED; JOHN P. GRANER, in
his individual and representative
capacities,
Defendants-Appellees.
Appeal from the United States District Court
for the District of Maryland, at Baltimore.
John R. Hargrove, Senior District Judge.
(CA-90-2568-HAR)
Argued: December 4, 1996
Decided: April 30, 1997
Before WIDENER and HAMILTON, Circuit Judges, and
PHILLIPS, Senior Circuit Judge.
_________________________________________________________________
Affirmed by published opinion. Senior Judge Phillips wrote the opin-
ion, in which Judge Widener and Judge Hamilton joined.
_________________________________________________________________
COUNSEL
ARGUED: Neal Lawrence Walters, Supervising Attorney, Appellate
Litigation Clinic, UNIVERSITY OF VIRGINIA SCHOOL OF LAW,
Charlottesville, Virginia, for Appellant. Mahlon M. Frankhauser,
KIRKPATRICK & LOCKHART, L.L.P., Washington, D.C., for
Appellees. ON BRIEF: Tristan B.L. Siegel, Third Year Law Student,
Kevin M. Haley, Third Year Law Student, Appellate Litigation
Clinic, UNIVERSITY OF VIRGINIA SCHOOL OF LAW, Char-
lottesville, Virginia, for Appellant. Stephen G. Topetzes, KIRKPAT-
RICK & LOCKHART, L.L.P., Washington, D.C., for Appellees.
_________________________________________________________________
OPINION
PHILLIPS, Senior Circuit Judge:
Charles Zandford appeals an order of the district court confirming
an arbitration award against him on claims he made against his former
securities dealer employer, Prudential-Bache Securities, Inc. (Pru-
Bache). He claims that the court erroneously compelled arbitration of
disputes that he was not contractually bound to arbitrate. We affirm.
I
Zandford began work as an account executive for Pru-Bache in
May 1983. As a condition of his employment with Pru-Bache, Zand-
ford filed a "Form U-4, Uniform Application for Securities Industry
Registration," which both he and an agent for Pru-Bache signed. The
U-4 contract was between Zandford and the National Association of
Securities Dealers (NASD) and the securities exchanges, and not
between Zandford and Pru-Bache. The U-4 form required Zandford
to arbitrate "any dispute, claim or controversy" that might arise
between him and his employer under the various rules and bylaws of
the NASD and the New York Stock Exchange (NYSE). J.A. 31-34.
Among those rules covered in the U-4 form was NYSE Rule 347,
which provides, "Any controversy between a registered representative
and any member . . . arising out of the employment or termination of
employment of such registered representative by and with such . . .
member organization shall be settled by arbitration, at the instance of
either party . . . ." J.A. 87. Similarly, Zandford's separate employment
contract with Pru-Bache required him to arbitrate"[a]ny claim or con-
troversy arising out of or respecting any matter contained in this
Agreement . . . ." J.A. 110.
2
On March 15, 1984, Pru-Bache terminated Zandford because of
alleged irregularities in Zandford's customers' accounts and because
of Zandford's alleged failure to comply with Pru-Bache's internal
policies. At the heart of these allegations was Pru-Bache's claim that
Zandford had placed his personal funds into his clients' accounts to
cover margin calls, a practice Pru-Bache's rules did not permit. Pru-
Bache then initiated an arbitration proceeding against Zandford to
recover the proceeds of a loan it had made to him. Zandford
responded by filing counterclaims for wrongful termination, abusive
discharge and libel. In late 1986, the parties settled their dispute and
agreed to dismiss with prejudice all of their claims pursuant to a set-
tlement agreement. In this agreement, Pru-Bache promised to amend
its termination form to explain that Zandford had deposited the funds
into his clients' accounts at the clients' direction, and that Zandford
had acted with the "knowledge and assistance" of Pru-Bache's opera-
tions personnel. J.A. 39. Both parties also agreed not to "divulge or
discuss . . . the facts or circumstances underlying this settlement
except otherwise (sic) required by law." J.A. 40. Pru-Bache also
agreed to pay Zandford $20,000 and to "release, discharge and acquit
Zandford . . . from all claims, demands, sums of money, causes of
action, obligations and liabilities of any kind or nature whatsoever
which [Pru-Bache] may have had or hereafter[may] assert to have
which arise out of or are in any manner whatsoever, directly or indi-
rectly related to Zandford's employment . . . ." J.A. 39.
Pru-Bache amended the termination form that it filed with the
NASD as it had promised to do in the settlement agreement. Later,
however, the NASD commenced a disciplinary proceeding against
Zandford alleging that he made unsuitable recommendations to his
clients, engaged in excessive trading, and made improper deposits
into clients' accounts while he was employed by Pru-Bache. Appellee
John P. Graner, Pru-Bache's regional manager while Zandford was
employed there, testified against Zandford at the NASD proceeding
in October 1988.
Zandford then brought this action in the United States District
Court for the District of Maryland against Pru-Bache and Graner
alleging breach of the settlement agreement, intentional interference
with business relationships, and intentional infliction of emotional
3
distress.1 Pru-Bache moved the district court to stay the proceeding
and to compel arbitration before the NYSE based on the arbitration
clause contained in the U-4 form. The district court granted the
motion and denied Zandford's subsequent motion for reconsideration.
Zandford noticed an appeal to this court, but the appeal was dismissed
as interlocutory. Zandford then participated in the NYSE arbitration,
presenting the same three claims as in his complaint. The arbitration
panel dismissed Zandford's claims and required Zandford to pay one-
half of the forum fees. Zandford then filed a motion to vacate the arbi-
tration award in the district court, contending that the arbitration panel
erred in refusing to hear certain testimony and in being partial to Pru-
Bache. Instead, the district court granted Pru-Bache's motion to con-
firm the arbitration award. This appeal followed.
II
Zandford challenges the district court's order confirming the arbi-
tration award on the basis that arbitration should not have been com-
pelled. He seeks reversal of the order and a remand to the district
court for trial of his claims on the merits. We review the district
court's orders de novo. See First Options of Chicago, Inc. v. Kaplan,
115 S. Ct. 1920, 1926 (1995); Peoples Sec. Life Ins. Co. v. Monumen-
tal Life Ins. Co., 991 F.2d 141, 145 (4th Cir. 1993).
Zandford advances two basic reasons why the district court erred
in compelling arbitration of his claims: (1) the arbitration clauses in
the employment contract and the U-4 registration form did not survive
when the settlement agreement superseded the employment contract,
and (2) the disputes at issue did not arise out of Zandford's employ-
ment so are not arbitrable in any event. We take these contentions in
order.
A.
The settlement agreement released Zandford from"all . . . obliga-
tions and liabilities of any kind or nature whatsoever . . . which arise
out of or are in any manner whatsoever, directly or indirectly related
_________________________________________________________________
1 Graner died in January 1994. No person or other entity has since been
substituted for Graner.
4
to Zandford's employment and termination of employment with [Pru-
Bache]." Zandford says this released him from any obligation to arbi-
trate under either the U-4 form or the employment agreement; Pru-
Bache says the obligation under the U-4 filing survived and remained
binding. We agree with Pru-Bache.
We start with the federal policy strongly favoring arbitration, under
which "as a matter of federal law, any doubts concerning the scope
of arbitrable issues should be resolved in favor of arbitration, whether
the problem at hand is the construction of the contract language itself
or an allegation of waiver, delay, or a like defense to arbitrability."
Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1,
24-25 (1983). When a party seeking to avoid arbitration contends that
the clause providing for arbitration has been superseded by some
other agreement, "the presumptions favoring arbitrability must be
negated expressly or by clear implication." Nolde Bros., Inc. v. Local
No. 358, Bakery and Confectionery Workers Union, 430 U.S. 243,
255 (1977). Motions to compel arbitration under an arbitration clause
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. Doubts should be resolved in favor of
coverage.'" Peoples Sec. Life Ins. Co. v. Monumental Life Ins. Co.,
867 F.2d 809, 812 (4th Cir. 1989) (quoting United Steelworkers of
America v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582-83
(1960)).
There are, however, countervailing considerations to be taken into
account. Arbitration clauses are contractual terms, and ordinary
means of contract interpretation must be applied to determine their
applicability to particular disputes. Arbitration may only be judicially
compelled when the parties have agreed to it, and then only for those
kinds of disputes that the parties have agreed to submit to arbitration.
See General Drivers, Warehousemen and Helpers Local Union No.
509 v. Ethyl Corp., 68 F.3d 80, 83 (4th Cir. 1995). "[T]he basic objec-
tive . . . is not to resolve disputes in the quickest manner possible, no
matter what the parties' wishes, but to ensure that commercial arbitra-
tion agreements, like other contracts, `are enforced according to their
terms.'" First Options of Chicago, Inc. v. Kaplan, 115 S. Ct. 1920,
1925 (1995) (quoting Mastrobuono v. Shearson Lehman Hutton, Inc.,
115 S. Ct. 1212, 1214 (1995)) (internal citations omitted). And, when
5
an arbitration clause is invoked after the contractual relationship
between the parties has ended, the parties' intent governs whether the
clause's authority extends beyond the termination of the contract. See
Virginia Carolina Tools, Inc. v. International Tool Supply, Inc., 984
F.2d 113, 119 (4th Cir. 1993).
The settlement agreement between Pru-Bache and Zandford does
not purport to provide any exceptions to Zandford's general release
from all obligations that are directly or indirectly related to his
employment with Pru-Bache. "[T]he very nature of a general release
is that the parties desire to settle all matters forever. A general release
. . . not only settles enumerated specific differences, but claims `of
every kind or character, known and unknown.'" Virginia Impression
Prods. Co., Inc. v. SCM Corp., 448 F.2d 262, 265 (4th Cir. 1971).
It is, therefore, apparent from the wording of the release executed
in 1986 that Pru-Bache and Zandford intended their employment con-
tract to be no longer the source of any requirement or liability. Based
on the language of the release and the intent of the parties that it
evinces, it is clear and indeed not disputed that Zandford cannot be
called upon to arbitrate any matter on the authority of the arbitration
clause included in the employment agreement.
The obligation assumed by Zandford in the U-4 filing, however, is
a different matter. As indicated, the U-4 form that Zandford signed
and filed included an agreement "to arbitrate any dispute, claim or
controversy . . . that is required to be arbitrated under the rules . . .
of the organizations with which [he] register[ed] . . . ." J.A. 34. By
contemporaneously registering with the NYSE, he therefore submit-
ted to NYSE Rule 347, which provides for arbitration of "[a]ny con-
troversy . . . arising out of the employment or termination of
employment . . . at the instance of either party." J.A. 87. Though such
agreements are with securities exchanges rather than with individual
employers, they are enforceable by employer members of the
exchanges without regard to whether their employment agreements
also contain arbitration clauses. See Gilmer v. Interstate/Johnson
Lane Corp., 500 U.S. 20, 25 n.2 (1991) (so holding); Williams v.
Cigna Fin. Advisers, Inc., 56 F.3d 656, 660 (5th Cir. 1995) (same);
Willis v. Dean Witter Reynolds, Inc., 948 F.2d 305, 312 (6th Cir.
1991) (same). Zandford does not contest that proposition, but con-
6
tends that his obligations under the U-4 form expired with the execu-
tion of the general release along with his obligations under his
employment contract, because his application to become a registered
representative was related to his employment with Pru-Bache. We
disagree.
Critically, the settlement agreement did not purport to "negate[ ]
expressly or by clear implication" the arbitration obligations invoked
by the U-4 form, hence the presumptions favoring arbitration deriving
from those provisions. See Nolde Bros., 430 U.S. at 255. Furthermore,
Pru-Bache had no power by contract to release Zandford from the
arbitration obligations assumed in his U-4 form which ran to the
NYSE and the NASD. See Thomas James Assocs., Inc. v. Jameson,
102 F.3d 60, 66 (2d Cir. 1996) (voiding a clause in an employment
contract between an employer and employee, both members of the
NASD, purporting to waive the NASD's arbitration provisions
because "it would be inappropriate" for courts to enforce a waiver
when a self-regulatory association of securities firms ordains that
such waivers not be included in employment contracts). As Zandford
concedes, see Appellee's Br. Exh. 3 (ltr. concession), he remained a
member of the securities exchanges and subject to their requirements
when the events leading to this lawsuit occurred. Among those
requirements was compliance with the obligation he assumed in filing
the U-4 form to arbitrate those disputes enumerated in that form. See
O'Donnell v. First Investors Corp., 872 F. Supp. 1274, 1277
(S.D.N.Y. 1995) (enforcing arbitration clause contained in U-4 form
even though another employment agreement superseded contract that
related to the U-4 form).
B.
That leads to the question whether the disputes at issue did fall
within that set of disputes subject to arbitration under the U-4 filing.
As indicated, the U-4 form requires registered representatives to arbi-
trate disputes according to the rules established by the various
exchanges and organizations, and NYSE Rule 347 declares that dis-
putes "arising out of . . . employment or termination of employment"
are subject to arbitration. J.A. 87. Zandford contends that the disputes
at issue concern only Pru-Bache's alleged breach of the settlement
agreement and therefore do not "arise out of" his employment or his
7
termination in any but the most attenuated manner. Pru-Bache
responds that the disputes are directly related to his record as a securi-
ties dealer when he was employed by Pru-Bache and therefore the
disputes do arise out of his employment or the termination of his
employment. Again, we agree with Pru-Bache.
Though this court has not before addressed the specific interpretive
issue, see Dean Witter Reynolds, Inc. v. Ness , 677 F. Supp. 866, 868
(D.S.C. 1988), the courts of appeals that have done so in interpreting
Rule 347's "arising out of employment" language have followed the
Eighth Circuit in construing the phrase to include claims that "involve
significant aspects of the employment relationship, including but not
limited to explicit contractual terms." Morgan v. Smith Barney, Har-
ris Upham & Co., 729 F.2d 1163, 1167 (8th Cir. 1984); see Fleck v.
E.F. Hutton Group, Inc., 891 F.2d 1047, 1052 (2d Cir. 1989); Zolezzi
v. Dean Witter Reynolds, Inc., 789 F.2d 1447, 1450 (9th Cir. 1986);
Aspero v. Shearson American Express, Inc., 768 F.2d 106, 109 (6th
Cir. 1985); cf. Pearce v. E.F. Hutton Group, Inc., 828 F.2d 826, 832-
33 (D.C. Cir. 1987) (applying Morgan to define scope of phrase "aris-
ing out of" employment with regard to an arbitration clause in another
form contract).
As Morgan pointed out, the Rule 347 language, "reveals that the
specific source from which a controversy must arise is not the
employment (or termination of the employment) contract; it is simply
employment or termination of employment." Morgan, 729 F.2d at
1167 (emphasis in original). Neither party contends that this prevail-
ing formulation of the "arising out of employment" test as derived
from Morgan is inappropriate as an interpretive guide, and we take
this opportunity to adopt it.
In applying Morgan's "significant aspects" test, some courts have
elaborated that "the proper question is whether resolution of the claim
depends upon evaluation of a party's performance either as a broker
or as an employer of brokers during the time of the contractual rela-
tionship." Aspero, 768 F.2d at 109; Fleck, 891 F.2d at 1053 (citing
Aspero). On this basis, non-contractual tort claims for wrongful termi-
nation and post-termination defamation respecting an employee's job
performance have been held arbitrable under Rule 347 because they
necessarily involve an evaluation of the employer's or the employee's
8
performance during their employment relationship. See Fleck, supra;
Zolezzi, supra, Aspero, supra; Morgan, supra. On the other hand,
post-termination disputes whose resolution will require no such evalu-
ation of the former employer-employee relationship have been found
not arbitrable under Rule 347. See Dean Witter Reynolds, Inc. v. Ness,
677 F. Supp. 866, 870 (D.S.C. 1988) (holding disputes arising from
former employee's claims of false arrest and imprisonment following
his arrest for unauthorized entry into former employer's office not
arbitrable under Rule 347); see also Morgan , 729 F.2d at 1168 (hold-
ing that former employee's defamation claim against former employer
for latter's assertions of petty theft from other employees' work desks
was not arbitrable because "no significant issue of [the employee's]
job performance qua broker is implicated").
The disputes in issue here are those defined by the three claims
alleged in Zandford's complaint that were ordered to arbitration.
These were: (1) a claim seeking rescission of the settlement agree-
ment and release for failure of consideration and material breach;
(2) a claim seeking damages for intentional interference with business
relationships; and (3) a claim seeking damages for intentional inflic-
tion of emotional distress. J.A. 13-16.
Applying the Morgan "significant aspects" test, which identifies
the source from which arbitrable disputes arise under Rule 347 as "not
the employment (or termination of the employment) contract" but
"simply employment or termination of employment," Morgan 729
F.2d at 1167 (emphasis in original), we conclude that all three claims
meet the test, hence are arbitrable.
The two tort claims--for intentional interference with business
relationships and intentional infliction of emotional distress--easily
meet that test. Zandford argues that their common source is the settle-
ment agreement and hence not either his preexisting employment by
Pru-Bache or its termination. Specifically, the contention seems to be
that because both alleged torts would, if proven, also involve breaches
of the settlement agreement's obligations of non-disclosure, it is that
agreement out of which these two tort-based disputes arise. But, this
is completely belied by the factual basis of these tort claims as
pleaded, hence defined for arbitrability purposes, in Zandford's com-
plaint.
9
As pleaded, the gist of the intentional interference claim was that
by falsely and recklessly representing to persons in the securities busi-
ness that while employed by Pru-Bache, Zandford had engaged in
conduct violative of securities industry regulations, Pru-Bache had
"maliciously" interfered with his "business relationships." J.A. 13-14.
A critical issue in resolving that dispute is the truth of any such repre-
sentations made about Zandford's conduct as a broker while
employed by Pru-Bache. See Morgan, 729 F.2d at 1167 (pointing out
that "[a] primary issue" in resolving a comparable post-termination,
employment related slander claim would be "the truth of the state-
ments"). The fact that, even if true, the representations might never-
theless involve violation of the settlement agreement is completely
irrelevant to the tort-claim dispute, and certainly does not make that
agreement the true source of the dispute.
Similarly, the gist of the emotional distress claim as pleaded is Pru-
Bache's alleged post-termination conduct in "unjustly and wrongfully
accusing Zandford of engaging in criminal activity" involving his
employment as a broker by Pru-Bache. J.A. 15. Again, the truth of
any "accusations" made about Zandford's conduct as a broker is a
critical issue in resolving that tort-claim dispute. And, again, the con-
nection that the accusations might have to breach of the settlement
agreement could not make that agreement, rather than the employ-
ment relationship, the source of the dispute. Hence, that claim also
was clearly arbitrable under Rule 347.
Zandford's breach of contract claim seeking (for reasons not read-
ily apparent to us)2 rescission of the settlement agreement and mutual
release presents a closer issue, but we conclude that it too was prop-
erly found arbitrable by the district court. Zandford argues that the
gist of this claim is simply breach of the settlement agreement, and
_________________________________________________________________
2 The consequences of rescission would presumably include an obliga-
tion to make restitution of the $20,000 paid Zandford; re-opening of any
claims by Pru-Bache against Zandford that are not time-barred; and
removal of any obligations imposed upon Pru-Bache respecting disclo-
sure of Zandford's employment conduct. When asked at oral argument
if Zandford was aware of those apparent consequences, counsel for
Zandford professed awareness, but willingness--for reasons not
proffered--to accept them.
10
that its resolution does not require any inquiry into his performance
as a broker while employed by Pru-Bache. A closer look at the full
range of the claim, however, reveals a closer relationship to his earlier
Pru-Bache employment. A critical aspect of the claim involves
Graner's testimony at the NASD disciplinary proceeding against
Zandford, which is alleged to have constituted a material breach war-
ranting rescission. That testimony of course directly concerned Zand-
ford's performance as a broker while employed by Pru-Bache.
Inevitably, Pru-Bache's justification defense for the giving of this
testimony--that it was legally compelled, hence not a violation of the
agreement, see J.A. 40--must involve inquiry into the nature of the
testimony, hence of the details of Zandford's performance while with
Pru-Bache.
That this connection between the breach of contract claim and
Zandford's pre-termination job performance is attenuated suffices at
most to make Rule 347's coverage doubtful. It is not so palpable as
plainly to exclude coverage. Cf. Ness , 677 F. Supp. at 870 (unrelated
post-termination tort claim not attributable). We are, as indicated,
required to resolve doubts concerning the scope of arbitrability in
favor of arbitration, Moses H. Cone Mem'l Hosp. , 460 U.S. at 24-25,
and to deny a claimed right to arbitration only when we have "posi-
tive assurance" that the clause relied upon "is not susceptible of an
interpretation that covers the asserted dispute," United Steelworkers
of America v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582-83
(1960). Applying those mandates to what is at most a doubtful ques-
tion of coverage, we resolve it in favor of arbitration as to this claim
as well as the two tort-based claims.
AFFIRMED
11