### The HONORABLE BYRON R. WHITE, Associate J ustice (Ret.) of the * 

### Supreme Court of the United States, sitting by designation. ___________ No. 95-1925

___________ In Re: Piper Funds, Inc., * Institutional Government * Income Portfolio Litigation. * *

-------------------------------- Richard J. Rodney, Jr., et al., * * Plaintiffs - Appellees, * * v. * * Piper Capital Management, Inc.; * Piper Funds, Inc. Institutional * Appeal from the United States Government Income Portfolio; * District Court for the Piper Jaffray, Inc.; Piper * District of Minnesota. Jaffray Companies Inc.; * William H. Ellis; Edward J. * Kohler, * * Defendants - Appellees, * * Park Nicollet Medical * Foundation, * * Objector - Appellant. *

___________ Submitted: October 19, 1995 Filed: December 4, 1995

___________ Before R ICHARD S. ARNOLD, Chief Judge, WHITE, Associate Justice (Ret.) , * and LOKEN, Circuit Judge.

___________ LOKEN, Circuit Judge.
Park Nicollet Medical Foundation, an unwilling member of a sett lement class in this securities fraud class action, wis hes to arbitrate its claim against investment adviser Piper Capital

### Piper Capital Management is one of several affiliate d 1 

### companies named as defendants in the class action. The paren t company is Piper Jaffray Compa nies Inc. Like the parties, we will refer to the class action defendants as "Piper."
-2- Managem ent Incorporated. Park Nicollet appeals district court order s 1 enjoining arbitration until the court permits Park Nicollet to opt out of the class, and denying its motion to stay the class action pendin g arbitr ation. Concluding that these orders deny Park Nicollet it s contractual right to arbitrate in violation of the Federal Arbitration Act , 9 U.S.C. §§ 1-16 ("FAA"), we reverse.

I. Factual Background.
Park Nicollet is a non-profit medica l foundation based in Minnesota. In 1 991, Park Nicollet hired Piper to manage over $2,500,000 of Par k Nic ollet's endowment fund. Park Nicollet signed Piper's standar d Invest ment Management Agreement, in which the parties agreed that "al l controvers ies . . . shall be determined by arbitration to the fulles t extent provided by law," in accordance with the rules then in effect of th e National Association of Securities Dealers ("NASD").
Piper invested a substantial portion of Park Nicollet's funds i n Piper's Institutional Government Income Portfolio mutual fund (the "Fund")

. In early 1994, shares in the Fund lost over twen ty percent of their value, largely because the Fund was heavily invested in "derivative" fixed income securities that were particularly hard-hit by rising interest rates. Ten class action lawsuits were promptly filed on behalf of some 7,000 investor s who had purchased shares of the Fund between July 1, 1991, and May 9, 1994

. The cl ass plaintiffs alleged numerous claims under federal and stat e securities laws, plus common law claims of misre presentation and breach of fiduciary duty. The Judicial Panel on Multidistrict Litigatio n consolidated these cases and transferred them to the District of Minnesota

.

### The district court based its injunction o n the All Writs Act, 2 

### 28 U.S.C . § 1651, which has been invoked by federal class actio n courts to enjoin persons not within the court's jurisdiction from frus trating a court order or court-supervised settlement. See , e.g. , In re Baldwin-United Corp. , 770 F.2d 328, 335-38 (2d Cir

. 1985). We agree with the district court that it has the power , under Fed. R. Civ. P. 23 augmented by the All Writs Act, to control co nduct by absent class members that affects management o r disposition of the class action. However, exercise of this power must be "agreeable to the usages and principles of law," § 1 651(a), which in this case include the FAA as well as Rule 23.
-3- In January 1995, Park Nicollet filed a fifty-page Statement of Claim with the NASD, requesting an arbitration award of over $4,500,000. Becaus e this claim overlapped claims asserted by the cla ss action plaintiffs, Park Nic ollet stated, in accordance with § 12(d)(2) of the NASD Code o f Arbitr ation Procedure ("NASD Code"), that "it is electing not t o participate in the as yet uncertified class actions." In early February, Piper and attorneys f or the plaintiff class tentatively settled the class actions for approximately $70 million. On March 2, 1995, Park Nicolle t advised the district court by letter that it has "1) chosen to have it s dispute with Piper re solved in arbitration, 2) decided not to participate in the putative class actions, and 3) irrevocably opted out of the putativ e class actions."

The next d ay, at the request of the class action parties, th e distric t court entered an order conditionally certifying a settlemen t class, and enjoining arbitration by any class me mber until after the court distrib utes a class notice and then rules on requests to opt out of th e clas s (the "March 3 Order"). Park Nicollet moved to vacate the March 3 2 Order, and to stay the class actions pending arbitration pursuant to § 3 of th e FAA. The district court denied that motion in an April 3, 1995 , Memorandum and Order (the "April 3 Order"). Concluding that the FAA does not bar an injunction where the party seeking arbitration is a member of
a conditionally certified class, the court denied Park Nicollet's motion to vacate on the ground that Piper and the class

### See Judicia l Improvements and Access to Justice Act, Pub. L. 3 

### No. 100-702, § 1019, 102 Stat. 4642, 4670 (1988). The new section was late r renumbered as § 16 in the Judicial Improvements Act o f 1990, Pub. L. No. 101-650, § 325(a), 104 Stat. 5089, 5120 (1990).
-4- plaintiffs had "caref ully negotiated a settlement in this case before any forumhad addressed the merits, and [an arbitration] ruling on an issu e such a s whether or not Piper made fraudulent representations coul d jeopar dize that proposed agreement." Park Nicollet appeals these tw o orders.

II. Two Threshold Issues.
Piper contends that we lack jurisdiction because Park Nicollet ha s appeal ed non-final orders, and that Park Nicollet lacks standing t o challenge those orders. We disagree.

A. Appealability.

In Gulfstream Aerospace Corp. v. May acamas Corp. , 485 U.S. 271, 287- 88 (1988), the Supreme Court held that an order refusing to stay litigatio n pending the outcome o f another proceeding, such as an arbitration, is not automatically appealable as a collateral order o r an injunction. Congress respon ded by enacting Section 16 of the FAA, which makes appealable "a n 3 interlocutory order g ranting . . . an injunction against an arbitration," § 16(a)(2), and also an order "refusing a stay o f any action under section 3 of [the FAA]," § 16(a)(1)(A).

The district court's March 3 Order enjoined Park Nicollet fro m proceeding with its a rbitration against Piper. The court's April 3 Order denied Park Nicollet's motion to stay the class action pending arbitration

. Both orders are appea lable under § 16(a)(2) and § 16(a)(1)(A). We reject Piper's contention that the orders should be non-appealable because they did not decide arbitrability

### -5-

and w ere not "anti-arbitration." The plain language of the statute i s controlling.

B. Standing.

Piper argues that Park Nicollet lacks standing to challenge th e district court's orde rs because it did not seek leave to intervene in the class action. Piper relies on Croyden Associates v. Alleco, Inc. , 969 F.2 d 675 (8th Cir. 1992), cert. denied , 113 S. Ct. 1251 (1993), where we held that an unnamed class member must intervene before appealing the approval of a cla ss settlement in which it will participate. This case is ver y different. Park Nicollet is not attacking the adequacy of the propose d settle ment. Rather, it appeals injunctive orders interfering with it s contractual right to reject the class action remedy and arbitrate.

Secti on 3 of the FAA provides for a stay of litigation pendin g arbitratio n "on application of one of the parties." The term "party " includes a party to the arbitration agreement. See Dickstein v. duPont , 443 F .2d 783, 785 (1st Cir. 1971). Section 16 allows an appeal from a n order refusing a § 3 stay. To give proper effect to § 16, the party denie d the § 3 stay, here Park Nicollet, must have standing to appeal.

A nonpart y normally has standing to appeal when it is adversel y affected by an injunction. See Thompson v. Freeman , 648 F.2d 1144, 1147 n.5 (8th Cir. 1981); Hazeltine Research, Inc. v. Zenith Radio Corp. , 388 F.2d 25, 28-30 (7th Cir. 1967), aff'd , 395 U.S. 100, 110 (1969). Equitabl e considerations clearly warrant giving standing to appeal to a nonparty tha t has been "haled . . . into district court despite [its] objections. " S.E.C. v. Wencke , 783 F.2d 829, 834 (9th Cir.), cert. denied , 479 U.S. 818 (1986). F or these reasons, we conclude Park Nicollet has standing t o appeal.

### For example, the New York Stock Exchange ("NYSE" ) 4 

### constitution has called for arbitration of disputes between members and their customers since 1872. See Constantine N. Katsoris , Foreword: New York Stock Exchange, Inc. Symposium on Arbitra tion in the Securities Industry , 63 Fordham L. Rev. 1501 (1995).
-6- III. The Merits.

A. The Legal Setting.

Arbitration has long been a preferred remedy in the securitie s industry

. The FAA, enacted in 1925, made the industry's pre-disput e

4 arbitration agreements enforceable in federal co urt. However, in Wilko v. Swan , 346 U.S. 427 (1 953), the Supreme Court held that investor-customers could not be compelled to arbitrate claims under the Securities Act o f 1933. Until 1987, mo st lower federal courts held that investors likewise could not be compelled to arbitrate claims of securities fraud under the Securities Exchange A ct of 1934, despite Supreme Court warnings that this
was an open issue. See Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 224 (1985) (White, J., concurring).

In Shears on/American Express, Inc. v. McMahon , 482 U.S. 220 (1987), the Court held that pre-dispute agreements to arbitrate Exchange Act claim s
are enforceable under the FAA, and in Rodriguez de Quijas v

. Shearson/American Exp ress, Inc. , 490 U.S. 477 (1989), the Court overruled Wilko and held that agreements to arbitrate 1933 Act claims are enforceabl e
as well. These recent decisions mean that the Park Nicollet/Pipe r agreement to arbitrate all claims, including securities law claim s encompassed by this class action, is enforceable under the FAA. That is an important cornerstone for the issues raised in this appeal.

The clas s action remedy is frequently invoked by those with claim s under the federal securities laws, and it is a useful procedure fo r remedying similar claims of numerous small investors.

### -7-

McMahon created two s ignificant uncertainties for class actions involving members of the securities industry and their investor-customers. The firs t question was whether an entire securities law class action could b e submitted to arbitration, an issue the Supreme Court did not reach i n Southl and Corp. v. Keating , 465 U.S. 1 (1984). See Gammaro v. Thor p Consumer Discount Co. , 828 F. Supp. 673 (D. Minn . 1993), appeal dismissed , 15 F.3d 9 3 (8th Cir. 1994). The second was whether securities industr y defendants or their customer claimants could com pel arbitration of pending class action claims, a tactic that class action plaintiffs have usually, but as this case illustrates, not always, opposed.

The 1975 amendments to the Exchange Act gave the Securities an d Exchan ge Commission "expansive power to ensure the adequacy of th e arbitration procedures employed by" self-regulat ory organizations like the NASD, "including the power to mandate the adoption of any rules it deems necessary to ensure that arbitration procedures adequately protec t statutory rights." McMahon , 482 U.S. at 233-34. In 1988, SEC Chairma n David Ruder urged these organizations to modify and clarify thei r arbitration procedure s relating to class actions. See S.E.C. Release No. 34-30882 (July 1, 199 2), 57 Fed. Reg. 30519, 30520 (July 9, 1992). After four years of work, the NASD promulgated § 12(d) of the NASD Code, which addressed the above two issues:

(d) Class Action Claims (1) A claim submitted as a class action shall not be eligible for arbitration under this Code at the Association. (2) Any c laim filed by a member or members of a putative o r certif ied class action is also ineligible for arbitration a t the Association . . . . However, such claims shall be eligible for arbitration . . . pursuant to the parties' contractua l agr eement, if any, if a claimant demonstrates that it ha s elected not to participate in the putative or certified class action or,

### The other industry self-regulatory organizations adopte d 5 

### identical amendments to their rules governing member-customer and other arbitrations. See , e.g. , NYSE Rule 600(d). Section 12(d) applies because Piper agree d to be bound by the 6 

### arbitr ation rules in effect at the time Park Nicollet commence d arbitration. See Nielsen v. Piper, Jaffray & Hopwood, Inc. , 6 6 F.3d 145, 148-49 (7th Cir. 1995).
-8- if applicable, has complied with any conditions for withdrawing from the class prescribed by the court.
(Emphasis added.) The SEC approved § 12(d) pursuant to its approva l 5 authority under § 19(b)(1) of the Exchange Act, 15 U.S.C. § 78s(b)(1). Se e S.E.C. Re lease No. 34-31371 (Oct 28, 1992), 57 Fed. Reg. 52659 (Nov. 4 , 1992).
Park Nicollet's contract with Piper incorporated § 12(d) of the NASD Code b y reference. Park Nicollet included with its arbitration claim a 6 declaration "that it has elected not to participate" in the class action,
as § 1 2(d)(2) requires. Thus, the principal issue on this appeal i s whether the district court violated the FAA as construed in McMahon when it enjoined Park Nico llet from proceeding with an arbitration to which it is contractually entitled under § 12(d) of the NASD Code.

B. The Order Enjoining Arbitration.

Many ca ses have enforced agreements to arbitrate by stayin g contemporaneous litig ation, a type of stay expressly authorized by § 3 of the FAA, 9 U.S.C. § 3

. See , e.g. , Morgan v. Smith Barney, Harris Upham & Co. , 729 F.2d 1163 (8th Cir. 1984). On the other hand, the FAA does not authorize a district court to enjoin arbitration; instead, § 16(a)(2) make s immediately appealable "an interlocutory order granting . . . an injunctio n against an arbitration that is subject to this title." Consistent with th e

### -9-

national policy favoring arbitration, there are very few reported cases in which a federal court has enjoined arbitration.
Piper and the class plaintiffs rely on In re Y & A Group Sec. L itig. , 38 F.3 d 380, 383 (8th Cir. 1994), in which we affirmed an injunctio n barring arbitration of a dispute settled in a prior class action. Th e injunctio n in Y & A protected the res judicata effect of that prio r judgment. Because the claimant sought an arbitration award precluded by the j udgment, the injunction was like an order refusing to compe l arbitration because a dispute is not arbitrable. Here, on the other hand, the district court ag reed that Park Nicollet has a right to arbitrate but enjoi ned it from pursuing that remedy. Neither the district court no r appellees cite any case granting an injunction of this type.

Th e district court gave one reason for issuing its injunction -

- because an arbitrator's "ruling on an issue such as whether or not Piper made fraudulent representations could jeopardize" the "carefull y negotiated" class action settlement. For a numb er of reasons, we conclude that this is an insufficient basis upon which to limit Park Nicollet' s rights under the FAA.

First, Mc Mahon confirmed that Park Nicollet has a contractual right to immediate submission of its securities law cl aims to arbitration. Park Nicollet submitted its claim under class action provisions of the NASD Cod e that have been approved by the SEC under the fed eral securities laws. The district court's injunction significantly frustrated Park Nicollet' s contractual rights, a s protected by the FAA. "Belated enforcement of the arbitration clause, t hough a less substantial interference than a refusal to enforce it at all, nonetheless significantly disappoints th e expecta tions of the parties and frustrates the clear purpose of thei r agreement." Dean Wit ter, 470 U.S. at 225 (1985) (White, J., concurring). See also Prima Paint Corp. v. Flood & Conklin Mfg. Co. , 388 U.S. 395, 404 (1967) ("arbitration procedure, when

### -10-

selected by the parties to a contract, [must] be speedy and not subject to delay and obstruction in the courts").

Second, p rior cases make clear that Park Nicollet's contractual and sta tutory right to arbitrate may not be sacrificed on the altar o f efficient class action management. As the Supreme Court said in Dea n Witter , 470 U.S. at 2 20, "[the FAA] was motivated, first and foremost, by
a cong ressional desire to enforce agreements into which parties ha d entered, and we must not . . . allow the fortuitous impact of the Act on efficient dispute resolution to overshadow the underlying motivation." Se e als o C. Itoh & Co. v. Jordan Int'l Co. , 552 F.2d 1228, 1231 (7th Cir

. 1977).

Third, we do not accept the class action parties' conclusor y assertion that immediate arbitration by Park Nic ollet (and perhaps others) will frustrate their class action settlement. F or example, in In re First Commodity Corp. Customer Accounts Litig. , 119 F. R.D. 301, 305-06 (D. Mass. 19 87), cited by the district court as the only reported decisio n acknow ledging the power to stay arbitration by objecting class member s pending approval of a settlement, the court declined to stay arbitration, and th e defendants promptly waived that condition of the settlement

. Moreov er, even when the settling parties contemplate that class member s with a substantial dollar volume of claims may opt out in favor o f arbitration, their settlement agreement can conditionally take that into account; indeed, it may even assist the settlement process to hav e arbitr ation opt outs identified before the final hearing on settlemen t approval. Finally, t he class action court should not be concerned if the settle ment fund is ultimately reduced because many claimants elect t o arbitrate; plaintiffs' class attorneys should no t share in amounts paid to settle the claims of class members who choose arbitration.

### The due process aspect of opting out was more explicitl y 7 

### discussed in Phillips Petroleum Co. v. Shutts , 472 U.S. 797 (1985), which we appear to have read more narrowly in White v. Nationa l Football League , 41 F.3d 402, 407 (8th Cir. 1994), cert. denied , 115 S. Ct. 2569 (1995), than t hree Justices read it in Ticor Title In s. Co. v. Brown , 114 S. Ct. 1359, 1363 (1994) (O'Connor, J. , dissenting). The Supreme Court has been asked again to clarif y this issue in Martin v. Drummond Co. , Nos. 1930066-70, 1995 W L 396879 (Ala. July 7, 1995), petition for cert. filed , 64 U.S.L.W. 3287 (Oct. 17, 1995) (No. 95-548). In any event, Rule 23(c)(2 ) clearly provides Park Nicollet a right to opt out in this case.
-11- For the foregoing reasons, we conclude that the district cour t violated the FAA and abused its discretion when it enjoined Park Nicollet from arbitrating its claim.

C. The Order Refusing Park Nicollet's Request To Opt Out.

Park Nicollet also asked the distric t court to exclude Park Nicollet fromthe class or, alternatively, to stay the class action litigation

. Reflecting due proces s principles, Fed. R. Civ. P. 23(c)(2) requires that a putative member of a Rule 23(b)(3) class actio n be given the opportunity to opt out an d not be bound by the judgment. Eisen v. Carlisle & Jacq uelin , 417 U.S. 156, 173-76 (1974). Therefore, a district court' s 7 class notice must advise each class member that "the court will exclude th e member from the class if the member so requests by a specified date." Rul e 23(c)(2)( A). In this case, the class notice is part of the length y settlement approval process, and the district court refused Park Nicollet' s request for early opt out. Thus, the unique que stion presented is whether an unwilling class member's right to arbitrate m ay be held hostage in this manner to the class action settlement process.

We hav e no quarrel with the usual practice of not allowing clas s
mem bers to opt out until after the formal Rule 23(c)(2) notice to th e class. That practice is administratively efficient, and it helps the cour t ensure that class members make informed

### -12-

decision s whether to opt out. However, the usual practice is no t appropriate in this case. Although the court supervising a class action has wide discretion to control a class action, including the opt-ou t process, that discretion must be exercised consistent with the policies an d princi ples of the FAA when a class member with an immediate right t o arbitrate its claim seeks to opt out.

In this c ase, by its March 2, 1995, letter to the district court , Park Nicollet made an unrefuted showing that it (i) was represented b y separat e counsel; (ii) had a contractual right to arbitrate any clai m encompassed by the class action; (iii) had submitted a claim to the NASD along with a declaration under § 12(d)(2) of the NASD Code that it elected not to participate in the class action; and (iv) now elected irrevocably to opt out of the class action. In our view, proper regard for the FA A required that the court promptly take one of thr ee actions: it could stay the class action whil e Park Nicollet's claim is arbitrated; it could deny the request to opt out (for example, because Park Nicollet's arbitration clai mis not arbitrable or its request to opt out was too late); or i t could grant the request to opt out, in which case Park Nicollet's motion to stay the class action becomes moot. The district court did not stay th e class action, and it is conceded that Park Nicollet is entitled to opt out

. In these circumstances, the court abused its discretion in refusing t o enter an order excluding Park Nicollet from the class.

IV. Conclusion.

For the foregoing reasons, we issue the following order: (1) Th e district court's March 3 Order and April 3 Order are reversed insofar as (and only insofar as) they affect Park Nicollet Medical Foundation. (2) Piper Capital Management Incorporated and Piper Jaffray Inc. are ordered to a rbitrate Park Nicollet's Statement of Claim to the NASD, withou t further delay, in accordance with the

### -13-

Invest ment Management Agreement and applicable NASD rules. (3) Par k Nicollet's request for exclusion from the class is granted. (4) Par k Nicollet's motion to stay the class action litigation is denied as moot. (5) Our mandate shall issue forthwith.

A true copy.

Attest:

CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.