1998 Decisions

Opinions of the United

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Precedential or Non-Precedential: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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Recommended Citation

"In Re: Prudential" (1998). 1998 Decisions. Paper 2.

http://digitalcommons.law.villanova.edu/thirdcircuit_1998/2
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 nonsignatories 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 selfregulatory 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 McCarranFerguson 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