The HONORABLE BYRON R. WHITE, Associate Justice (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 RICHARD S. ARNOLD, Chief Judge, WHITE, Associate Justice (Ret.),

*

and LOKEN, Circuit Judge.

___________

LOKEN, Circuit Judge.

Park Nicollet Medical Foundation, an unwilling member of a settlement

class in this securities fraud class action, wishes to arbitrate its claim

against investment adviser Piper Capital
 Piper Capital Management is one of several affiliated

1

companies named as defendants in the class action. The parent

company is Piper Jaffray Companies Inc. Like the parties, we will

refer to the class action defendants as "Piper."

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Management Incorporated. Park Nicollet appeals district court orders

1

enjoining arbitration until the court permits Park Nicollet to opt out of

the class, and denying its motion to stay the class action pending

arbitration. Concluding that these orders deny Park Nicollet its

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 medical foundation based in Minnesota.

In 1991, Park Nicollet hired Piper to manage over $2,500,000 of Park

Nicollet's endowment fund. Park Nicollet signed Piper's standard

Investment Management Agreement, in which the parties agreed that "all

controversies . . . shall be determined by arbitration to the fullest

extent provided by law," in accordance with the rules then in effect of the

National Association of Securities Dealers ("NASD"). 

Piper invested a substantial portion of Park Nicollet's funds in

Piper's Institutional Government Income Portfolio mutual fund (the "Fund").

In early 1994, shares in the Fund lost over twenty 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 investors

who had purchased shares of the Fund between July 1, 1991, and May 9, 1994.

The class plaintiffs alleged numerous claims under federal and state

securities laws, plus common law claims of misrepresentation and breach of

fiduciary duty. The Judicial Panel on Multidistrict Litigation

consolidated these cases and transferred them to the District of Minnesota.
 The district court based its injunction on the All Writs Act, 2

28 U.S.C. § 1651, which has been invoked by federal class action

courts to enjoin persons not within the court's jurisdiction from

frustrating 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

conduct by absent class members that affects management or

disposition of the class action. However, exercise of this power

must be "agreeable to the usages and principles of law," § 1651(a),

which in this case include the FAA as well as Rule 23.

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In January 1995, Park Nicollet filed a fifty-page Statement of Claim

with the NASD, requesting an arbitration award of over $4,500,000. Because

this claim overlapped claims asserted by the class action plaintiffs, Park

Nicollet stated, in accordance with § 12(d)(2) of the NASD Code of

Arbitration Procedure ("NASD Code"), that "it is electing not to

participate in the as yet uncertified class actions." In early February,

Piper and attorneys for the plaintiff class tentatively settled the class

actions for approximately $70 million. On March 2, 1995, Park Nicollet

advised the district court by letter that it has "1) chosen to have its

dispute with Piper resolved in arbitration, 2) decided not to participate

in the putative class actions, and 3) irrevocably opted out of the putative

class actions." 

The next day, at the request of the class action parties, the

district court entered an order conditionally certifying a settlement

class, and enjoining arbitration by any class member until after the court

distributes a class notice and then rules on requests to opt out of the

class (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 the 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 Judicial Improvements and Access to Justice Act, Pub. L. 3

No. 100-702, § 1019, 102 Stat. 4642, 4670 (1988). The new section

was later renumbered as § 16 in the Judicial Improvements Act of

1990, Pub. L. No. 101-650, § 325(a), 104 Stat. 5089, 5120 (1990).

-4-

plaintiffs had "carefully negotiated a settlement in this case before any

forum had addressed the merits, and [an arbitration] ruling on an issue

such as whether or not Piper made fraudulent representations could

jeopardize that proposed agreement." Park Nicollet appeals these two

orders.

II. Two Threshold Issues.

Piper contends that we lack jurisdiction because Park Nicollet has

appealed non-final orders, and that Park Nicollet lacks standing to

challenge those orders. We disagree.

A. Appealability. 

In Gulfstream Aerospace Corp. v. Mayacamas Corp., 485 U.S. 271, 287-

88 (1988), the Supreme Court held that an order refusing to stay litigation

pending the outcome of another proceeding, such as an arbitration, is not

automatically appealable as a collateral order or an injunction. Congress

responded by enacting Section 16 of the FAA, which makes appealable "an

3

interlocutory order granting . . . an injunction against an arbitration,"

§ 16(a)(2), and also an order "refusing a stay of any action under section

3 of [the FAA]," § 16(a)(1)(A). 

The district court's March 3 Order enjoined Park Nicollet from

proceeding with its arbitration against Piper. The court's April 3 Order

denied Park Nicollet's motion to stay the class action pending arbitration.

Both orders are appealable 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
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and were not "anti-arbitration." The plain language of the statute is

controlling.

B. Standing. 

Piper argues that Park Nicollet lacks standing to challenge the

district court's orders because it did not seek leave to intervene in the

class action. Piper relies on Croyden Associates v. Alleco, Inc., 969 F.2d

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 class settlement in which it will participate. This case is very

different. Park Nicollet is not attacking the adequacy of the proposed

settlement. Rather, it appeals injunctive orders interfering with its

contractual right to reject the class action remedy and arbitrate. 

Section 3 of the FAA provides for a stay of litigation pending

arbitration "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 an

order refusing a § 3 stay. To give proper effect to § 16, the party denied

the § 3 stay, here Park Nicollet, must have standing to appeal. 

A nonparty normally has standing to appeal when it is adversely

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). Equitable

considerations clearly warrant giving standing to appeal to a nonparty that

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). For these reasons, we conclude Park Nicollet has standing to

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 Arbitration 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 securities

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

4

arbitration agreements enforceable in federal court. However, in Wilko v.

Swan, 346 U.S. 427 (1953), the Supreme Court held that investor-customers

could not be compelled to arbitrate claims under the Securities Act of

1933. Until 1987, most lower federal courts held that investors likewise

could not be compelled to arbitrate claims of securities fraud under the

Securities Exchange Act 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 Shearson/American Express, Inc. v. McMahon, 482 U.S. 220 (1987),

the Court held that pre-dispute agreements to arbitrate Exchange Act claims

are enforceable under the FAA, and in Rodriguez de Quijas v.

Shearson/American Express, Inc., 490 U.S. 477 (1989), the Court overruled

Wilko and held that agreements to arbitrate 1933 Act claims are enforceable

as well. These recent decisions mean that the Park Nicollet/Piper

agreement to arbitrate all claims, including securities law claims

encompassed by this class action, is enforceable under the FAA. That is

an important cornerstone for the issues raised in this appeal.

The class action remedy is frequently invoked by those with claims

under the federal securities laws, and it is a useful procedure for

remedying similar claims of numerous small investors. 
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McMahon created two significant uncertainties for class actions involving

members of the securities industry and their investor-customers. The first

question was whether an entire securities law class action could be

submitted to arbitration, an issue the Supreme Court did not reach in

Southland Corp. v. Keating, 465 U.S. 1 (1984). See Gammaro v. Thorp

Consumer Discount Co., 828 F. Supp. 673 (D. Minn. 1993), appeal dismissed,

15 F.3d 93 (8th Cir. 1994). The second was whether securities industry

defendants or their customer claimants could compel 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 and

Exchange Commission "expansive power to ensure the adequacy of the

arbitration procedures employed by" self-regulatory organizations like the

NASD, "including the power to mandate the adoption of any rules it deems

necessary to ensure that arbitration procedures adequately protect

statutory rights." McMahon, 482 U.S. at 233-34. In 1988, SEC Chairman

David Ruder urged these organizations to modify and clarify their

arbitration procedures relating to class actions. See S.E.C. Release No.

34-30882 (July 1, 1992), 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 claim filed by a member or members of a putative or

certified class action is also ineligible for arbitration at

the Association . . . . However, such claims shall be eligible

for arbitration . . . pursuant to the parties' contractual

agreement, if any, if a claimant demonstrates that it has

elected not to participate in the putative or certified class

action or,
 The other industry self-regulatory organizations adopted

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 agreed to be bound by the 6

arbitration rules in effect at the time Park Nicollet commenced

arbitration. See Nielsen v. Piper, Jaffray & Hopwood, Inc., 66

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 approval

5

authority under § 19(b)(1) of the Exchange Act, 15 U.S.C. § 78s(b)(1). See

S.E.C. Release 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 by reference. Park Nicollet included with its arbitration claim a

6

declaration "that it has elected not to participate" in the class action,

as § 12(d)(2) requires. Thus, the principal issue on this appeal is

whether the district court violated the FAA as construed in McMahon when

it enjoined Park Nicollet from proceeding with an arbitration to which it

is contractually entitled under § 12(d) of the NASD Code. 

B. The Order Enjoining Arbitration.

Many cases have enforced agreements to arbitrate by staying

contemporaneous litigation, 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) makes

immediately appealable "an interlocutory order granting . . . an injunction

against an arbitration that is subject to this title." Consistent with the
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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. Litig.,

38 F.3d 380, 383 (8th Cir. 1994), in which we affirmed an injunction

barring arbitration of a dispute settled in a prior class action. The

injunction in Y & A protected the res judicata effect of that prior

judgment. Because the claimant sought an arbitration award precluded by

the judgment, the injunction was like an order refusing to compel

arbitration because a dispute is not arbitrable. Here, on the other hand,

the district court agreed that Park Nicollet has a right to arbitrate but

enjoined it from pursuing that remedy. Neither the district court nor

appellees cite any case granting an injunction of this type.

The 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 "carefully

negotiated" class action settlement. For a number of reasons, we conclude

that this is an insufficient basis upon which to limit Park Nicollet's

rights under the FAA. 

First, McMahon confirmed that Park Nicollet has a contractual right

to immediate submission of its securities law claims to arbitration. Park

Nicollet submitted its claim under class action provisions of the NASD Code

that have been approved by the SEC under the federal securities laws. The

district court's injunction significantly frustrated Park Nicollet's

contractual rights, as protected by the FAA. "Belated enforcement of the

arbitration clause, though a less substantial interference than a refusal

to enforce it at all, nonetheless significantly disappoints the

expectations of the parties and frustrates the clear purpose of their

agreement." Dean Witter, 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
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selected by the parties to a contract, [must] be speedy and not subject to

delay and obstruction in the courts").

Second, prior cases make clear that Park Nicollet's contractual and

statutory right to arbitrate may not be sacrificed on the altar of

efficient class action management. As the Supreme Court said in Dean

Witter, 470 U.S. at 220, "[the FAA] 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." See

also 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' conclusory

assertion that immediate arbitration by Park Nicollet (and perhaps others)

will frustrate their class action settlement. For example, in In re First

Commodity Corp. Customer Accounts Litig., 119 F.R.D. 301, 305-06 (D. Mass.

1987), cited by the district court as the only reported decision

acknowledging the power to stay arbitration by objecting class members

pending approval of a settlement, the court declined to stay arbitration,

and the defendants promptly waived that condition of the settlement.

Moreover, even when the settling parties contemplate that class members

with a substantial dollar volume of claims may opt out in favor of

arbitration, their settlement agreement can conditionally take that into

account; indeed, it may even assist the settlement process to have

arbitration opt outs identified before the final hearing on settlement

approval. Finally, the class action court should not be concerned if the

settlement fund is ultimately reduced because many claimants elect to

arbitrate; plaintiffs' class attorneys should not share in amounts paid to

settle the claims of class members who choose arbitration. 
 The due process aspect of opting out was more explicitly

7

discussed in Phillips Petroleum Co. v. Shutts, 472 U.S. 797 (1985),

which we appear to have read more narrowly in White v. National

Football League, 41 F.3d 402, 407 (8th Cir. 1994), cert. denied,

115 S. Ct. 2569 (1995), than three Justices read it in Ticor Title

Ins. Co. v. Brown, 114 S. Ct. 1359, 1363 (1994) (O'Connor, J.,

dissenting). The Supreme Court has been asked again to clarify

this issue in Martin v. Drummond Co., Nos. 1930066-70, 1995 WL

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.

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For the foregoing reasons, we conclude that the district court

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 district court to exclude Park Nicollet

from the class or, alternatively, to stay the class action litigation.

Reflecting due process principles, Fed. R. Civ. P. 23(c)(2) requires that

a putative member of a Rule 23(b)(3) class action be given the opportunity

to opt out and not be bound by the judgment. Eisen v. Carlisle &

Jacquelin, 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 the

member from the class if the member so requests by a specified date." Rule

23(c)(2)(A). In this case, the class notice is part of the lengthy

settlement approval process, and the district court refused Park Nicollet's

request for early opt out. Thus, the unique question presented is whether

an unwilling class member's right to arbitrate may be held hostage in this

manner to the class action settlement process. 

We have no quarrel with the usual practice of not allowing class

members to opt out until after the formal Rule 23(c)(2) notice to the

class. That practice is administratively efficient, and it helps the court

ensure that class members make informed
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decisions whether to opt out. However, the usual practice is not

appropriate in this case. Although the court supervising a class action

has wide discretion to control a class action, including the opt-out

process, that discretion must be exercised consistent with the policies and

principles of the FAA when a class member with an immediate right to

arbitrate its claim seeks to opt out. 

In this case, by its March 2, 1995, letter to the district court,

Park Nicollet made an unrefuted showing that it (i) was represented by

separate counsel; (ii) had a contractual right to arbitrate any claim

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 FAA

required that the court promptly take one of three actions: it could stay

the class action while Park Nicollet's claim is arbitrated; it could deny

the request to opt out (for example, because Park Nicollet's arbitration

claim is not arbitrable or its request to opt out was too late); or it

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 the

class action, and it is conceded that Park Nicollet is entitled to opt out.

In these circumstances, the court abused its discretion in refusing to

enter an order excluding Park Nicollet from the class. 

IV. Conclusion.

For the foregoing reasons, we issue the following order: (1) The

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 arbitrate Park Nicollet's Statement of Claim to the NASD, without

further delay, in accordance with the
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Investment Management Agreement and applicable NASD rules. (3) Park

Nicollet's request for exclusion from the class is granted. (4) Park

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.