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D ock e t 97-1514

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. e du/thir dc ir c uit_1998/137Filed June 9, 1998

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

NO. 97-1514

FIRST LIBERTY INVESTMENT GROUP

v.

ERIC SCOTT NICHOLSBERG, Appellant

On Appeal From the United States District Court For the Eastern District of Pennsylvania (D.C. Civil Action No. 97-cv-00452)

Argued March 9, 1998

BEFORE: STAPLETON and ALITO, Circuit Judges, and SHADUR, District Judge*

(Opinion Filed June 9, 1998)

Marvin Gersten Kenneth Gatz (Argued) Gersten, Savage, Kaplowitz,
Fredericks & Curtin

101 East 52nd Street New York, NY 10022 Attorney for Appellant

___________________________________________________ ______________

*Honorable Milton I. Shadur, Senior United States D istrict Judge for the Northern District of Illinois, sitting by designati on.Margaret Sherry Lurio

(Argued)
Lurio & Associates
Suite 1300

1760 Market Street Philadelphia, PA 19103-4132 Attorney for Appellee

OPINION OF THE COURT

SHADUR, Senior District Judge:

Eric Scott Nicholsberg ("Nicholsberg") appeals a di strict court's denial of his motion, brought under the Fed eral Arbitration Act (the "Act," 9 U.S.C. SS 3-4), to st ay a breach of contract action and to compel arbitration of the claim brought against him in that action by First Liberty Investment Group ("First Liberty"). First Liberty h ad initiated its lawsuit to recover money damages stem ming from Nicholsberg's alleged breach of an employment agreement. For the reasons stated below, we reverse the
district court's order and remand to that court so that it may stay the action and order the parties to procee d to
arbitration.

Facts1

We briefly summarize the uncontroverted essential f acts.
Other relevant facts that fit better into the subst antive legal discussion will be set out later in this opinion.

In February 1996 Nicholsberg began his association with First Liberty, a broker-dealer registered with the National Association of Securities Dealers, Inc. ("NASD"). A s a condition of his employment in the securities indus try, Nicholsberg executed a "Uniform Application for Sec urities Industry Registration or Transfer" (universally ref erred to as "Form U-4"), which both he and an agent for First L iberty

___________________________________________________ ______________

1. This statement is drawn from the parties' briefs and the district court's unreported opinion, available at 1997 WL 31 2123 (E.D. Pa. June 3).

2signed. Among other things, Form U-4 required Nicho lsberg

to "arbitrate any dispute, claim or controversy" th at might arise between him and First Liberty "that is requir ed to be arbitrated under the rules, constitutions or by-law s" of NASD. Form U-4 thus incorporates by reference the N ASD Code of Arbitration Procedures (the "NASD Code").

On March 11, 1996 the parties entered into the OSJ Principal Agreement (the "Agreement"), under which First Liberty agreed to provide Nicholsberg with faciliti es to execute various types of securities transactions. T wo aspects of the Agreement are at the core of the cur rent dispute:

1. It characterized Nicholsberg as an indepe ndent contractor rather than as an employee of Fir st Liberty.

2. Its provisions, looked at alone, were sil ent as to the arbitrability of disputes between the pa rties.

As we have stated at the outset, on January 21, 199 7 First Liberty filed a breach of contract action aga inst Nicholsberg to recover monies assertedly owed it un der the Agreement. Shortly thereafter Nicholsberg moved to stay the proceeding and to compel arbitration of the cla im. This appeal stems from the district court's denial of Nicholsberg's motion. We review that denial de novo (In re Prudential Ins. Co. of Am. Sales Practice Litig. Al l Agent Actions ["Prudential Agents"], 133 F.3d 225, 227 n. 1 (3d Cir. 1998)).

Arbitrability of the Parties' Dispute

Arbitration is a creature of contract (see AT&T Tec hs., Inc. v. Communications Workers of Am., 475 U.S. 643, 648 (1986)). "As a matter of contract, no party can be forced to arbitrate unless that party has entered into an agr eement to do so" (PaineWebber Inc. v. Hartmann, 921 F.2d 5 07, 511 (3d Cir. 1990)). And as we recently observed in Pru dential Agents, 133 F.3d at 228:

A threshold inquiry under the Federal Arbitr ation Act is to determine, under recognized principles of contract law, the validity of, and the parties bound by, the arbitration agreement.

3Here Nicholsberg's Form U-4 supplies such a potenti ally

applicable agreement (at least on his part):

I agree to arbitrate any dispute, claim or c ontroversy that may arise between me and my firm, or a customer, or any other person, that is requi red to be arbitrated under the rules, constitutions, o r by-laws of the [NASD] as may be amended from time to ti me....

For its part, although one of First Liberty's autho rized agents also signed Form U-4, it is not a direct par ty to that document.2 Rather Form U-4 is more correctly unders tood as a contract between Nicholsberg and NASD, not bet ween Nicholsberg and First Liberty (Prudential Agents, 1 33 F.3d at 228 n.5, citing Gilmer v. Interstate/Johnson Lan e Corp., 500 U.S. 20, 25 n.2 (1991)).

That, however, does not prove fatal to Nicholsberg' s request for arbitration. As we went on to say in Pr udential Agents, 133 F.3d at 229, quoting Kaplan v. First Op tions of Chicago, Inc., 19 F.3d 1503, 1512 (3d Cir. 1994), a ff'd, 514 U.S. 938 (1995):

The identification of the parties bound by t he agreement to arbitrate need not be confined to the limited inquiry of identifying the signatori es to the

___________________________________________________ ______________

2. Here is what First Liberty represented, as Form U-4 required:

To the best of my knowledge and belief, the applicant is currently bonded where required, and, at the time of a pproval, will be
familiar with the statute(s), constitution(s), rules and by-laws of the

agency jurisdiction or civil regulatory organizatio n with which this application is being filed, and the rules go verning registered persons, and will be fully qualified for the position for which application is being made herein. I agree th at, notwithstanding the approval of such agency, jurisdiction or org anization which hereby is requested, I will not employ the applican t in the capacity

stated herein without first receiving the approval of any authority which may be required by law. This firm has commun icated with all of the applicant's previous employers for the past three years.

[Past employer information]

IN ADDITION I HAVE TAKEN APPROPRIATE STEPS T O VERIFY THE

ACCURACY AND COMPLETENESS OF THE INFORMATION

CONTAINED IN AND WITH THIS APPLICATION.4arbitration agreement. Rather, the dispositi ve finding is

an " `express' and `unequivocal' " agreement between parties to arbitrate their disputes.

In this instance the requisite intent on First Libe rty's part to resort to arbitration is provided by its post-Fo rm U-4 entry into the Agreement with Nicholsberg. Despite its labeling of Nicholsberg as an "independent contract or" (of which more later), the Agreement goes on to say in terms that are both express and unequivocal:

Nevertheless, for fulfillment of this contra ct and for the mutual benefit of both parties it is necessa ry that both parties at all times fully comply with appli cable regulations of the...NASD.

Thus, entirely without reference to Nicholsberg's undertaking in the Form U-4, the terms of the Agree ment (committed to by both First Liberty and Nicholsberg ) clearly incorporate by reference all requirements applicabl e to their relationship as imposed by NASD. And it is equally clear that such incorporation by reference necessarily encompasses the NASD Code, if and to the extent tha t it covers their relationship. Indeed, even in the abse nce of such a commitment in the Agreement, it has long bee n established (see, e.g., Axelrod & Co. v. Kordich, V ictor & Neufeld, 451 F.2d 838 (2d Cir. 1971)) that, with NA SD being a self-regulating organization within the ter ms of the Securities Exchange Act of 1934 ("1934 Act"), each of its members such as First Liberty is contractually boun d by its regulations--including all of its arbitration provi sions.

Before we turn to those NASD Code provisions, we pa use to dispatch First Liberty's contention that because the later-signed Agreement contains an integration clau se, it somehow acts to supersede the earlier-dated Form U- 4. If Nicholsberg had to rely on First Liberty's limited involvement in the Form U-4 (as he does not), he co uld point to the principle expressed in Zandford v. Pru dentialBache Sec., Inc., 112 F.3d 723, 727 (4th Cir. 1997) , quoting Nolde Bros., Inc. v. Local No. 358, Bakery & Confec tionery Workers Union, 430 U.S. 243, 255 (1977):

When a party seeking to avoid arbitration co ntends that the clause providing for arbitration ha s been

5superseded by some other agreement, "the

presumptions favoring arbitrability must be negated expressly or by clear implication."

But any potential issue involving the Form U-4 is r eally a red herring. What controls instead is that, as we h ave already explained, the document that contains the integration clause--the Agreement itself--incorpora tes by reference the NASD Code and thus contractually obli gates both First Liberty and Nicholsberg to arbitrate cer tain disputes.

We return then to the coverage of the NASD Code's arbitration mandate. Two of its Rules are particula rly

relevant here.

First, "Section 1 [now Rule 10101 as the result of a subsequent amendment] defines the general universe of issues that may be arbitrated" (Armijo v. Prudentia l Ins. Co. of Am., 72 F.3d 793, 798 (10th Cir. 1995)). Under R ule 10101 matters eligible for submission to arbitratio n include:

any dispute, claim or controversy arising ou t of or in connection with the business of any member o f the [NASD], or arising out of the employment or termination of employment of the associated person(s) with any member...:

* * *

(b) between or among members and associated

persons....

Next, "Section 8 [now Rule 10201(a) as the result o f the same amendment] describes a subset of that universe of disputes that must be arbitrated under the Code" (A rmijo, 72 F.3d at 798):

Any dispute, claim, or controversy eligible for
submission under the Rule 10100 Series betwe en or among members and/or associated persons, and /or certain others, arising in connection with t he business of such member(s) or in connection with the activities of such associated person(s), or arising out of the employment or termination of employment of s uch

6associated person(s) with such member, shall be

arbitrated under this Code, at the instance of:

* * *

(2) a member against a person associated wit h a member or a person associated with a member against a member....

Thus the NASD Code imposes two requirements for a securities industry dispute to be arbitrable. First is a restriction on the parties: In terms relevant to th e present situation, the dispute must be "between...members a nd associated persons." Second is a restriction on the subject matter: All of the substantive disputes must be one s "arising in connection with the business" of member s or arising "in connection with the activities of such associated person(s)" or "arising out of the employment or ter mination of employment of such associated person(s) with suc h member." We consider each requirement in turn.

Are the Parties Subject to Arbitration Vis-a-Vis

Each Other?

Whether the present litigants are parties whose dis putes
with each other are arbitrable at all is a function of the
NASD Code's Rule 10101 mandate that extends to the arbitration of disputes "between...members and asso ciated persons." It is undisputed that First Liberty is a member of
NASD. At issue instead is the other half of the nec essary arbitration twosome: whether Nicholsberg qualifies as an "associated person" within the scope of that mandat e.

NASD By-Law Art. I(q) defines the term "associated person of a member" as:

every sole proprietor, partner, officer, dir ector, or branch manager of any member, or any natural person occupying a similar status or performing sim ilar functions, or any natural person engaged in the investment banking or securities business wh o is directly or indirectly controlling or contro lled by such

member....

That "associated person" concept did not originate with NASD--relatedly the 1934 Act, which provides the au thority

7for an individual exchange's self-regulating rules (Kaplan,

19 F.3d at 1517), defines "person associated with a member" or "associated person of a member" to mean (15 U.S.C. S 78c(a)(21)):

any partner, officer, director, or branch ma nager of such member (or any person occupying a simil ar status or performing similar functions), any person directly or indirectly controlling, controll ed by, or under common control with such member, or any empl oyee of

such member.

Analysis of the parties' relationship discloses tha t Nicholsberg plainly qualifies as an associated pers on within the meaning of both the NASD Code and the 1934 Act. That
conclusion flows from the record's disclosure that when First Liberty initiated this lawsuit, Nicholsberg w as both (1) a natural person engaged in the securities busi ness who was "directly or indirectly...controlled by" NASD m ember First Liberty and (2) a natural person "performing similar functions" to those of a "branch manager" of First Liberty. Either of those satisfies the "associated person" d efinition.

To resist that conclusion, First Liberty urges that Nicholsberg cannot be an "associated person" becaus e the Agreement specifically labels him as an independent contractor. That characterization, however, is not controlling in the face of the conflicting reality, as gleaned both from First Liberty's own depiction of the part ies' linked relationship in various paragraphs of its Complaint and from provisions of the Agreement itself.

Here are some relevant portions of First Liberty's Complaint against Nicholsberg:

7. Pursuant to the Agreement, First Liberty and Nicholsberg agreed that First Liberty would provide facilities to Nicholsberg for execution of t ransactions....

8. First Liberty appointed Nicholsberg's off ice as an entity allowed under the provisions of the A greement to
offer and solicit the sales of securities.

9. Pursuant to the Agreement, First Liberty gave Nicholsberg geographic exclusivity in the Ne w York, New York metropolitan area and agreed not to open

8competing offices without the prior written consent of

Nicholsberg....

And those undisputed allegations about the nature o f the parties' relationship conjoin with other provisions in the Agreement in which:

1. Nicholsberg agreed to comply with and abi de by all of the policies and rules included in First Liberty's Policy and Procedures Manuals.

2. Nicholsberg agreed that his office would not mail any correspondence or cause any advertising pertaining to securities solicitation without securing the prior approval of a First Liberty compliance offic er.

3. Nicholsberg promised not to engage in a s ecurit y transaction of any nature with any individua l or broker-dealer other than through First Liber ty.

To be sure, other provisions in the Agreement might perhaps successfully avert a finding that an agency relationship exists for purposes of imposing respon deat superior liability on First Liberty, but that is no t the relevant inquiry here (and is a matter on which we express no view). What rather controls is that the parties' total relationship, including the limitations placed by F irst Liberty both on Nicholsberg's conduct of his busine ss and on its own conduct of business, amount to at least indirect control and also to placing Nicholsberg in much the same practical position that would be occupied by a bran ch manager in charge of First Liberty's only New York metropolitan area office. And that in turn means th at notwithstanding the Agreement's use of "independent contractor" and its disclaimer of an "agent" relati onship, Nicholsberg was an "associated person" as to First Liberty.3

Indeed, if broker-dealers could escape the NASD arbitration requirements simply by calling someone acting

___________________________________________________ ______________

3. This just-completed application of the substance -over-form principle is reminiscent of the rejection of the tyranny of labe ls traditionally
attributed to Abraham Lincoln:

If you call a tail a leg, how many legs has a dog? Five? No, calling a tail a leg don't make it a leg.

9in Nicholsberg's capacity an independent contractor , they

could easily frustrate NASD's firm policy of submit ting industry disputes to binding arbitration. In sum, w e conclude that First Liberty and Nicholsberg fall wi thin the class of adversaries subject to mandatory arbitrati on under their contractual relationship, the former by virtu e of its NASD membership and the latter as an associated per son of a member.

Scope of the Parties' Arbitrable Disputes

With that issue having been resolved, the final ana lytical step is to ascertain whether the present dispute fa lls within the scope of the relevant arbitration clause. In th at regard we are guided by settled principles of federal arbi tration

law.

Congress' adoption of the Act was intended to "reve rs[e] centuries of judicial hostility to arbitration agre ements" (Scherk v. Alberto-Culver Co., 417 U.S. 506, 510 (1 974)) and to replace that hostility with "a liberal federal p olicy favoring arbitration agreements" (Moses H. Cone Mem 'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (198 3)). Hence any doubts concerning the scope of arbitrable issues must be resolved in favor of arbitration (id. at 24 -25; Mitsubishi Motors Corp. v. Soler Chrsyler-Plymouth, Inc., 473 U.S. 614, 626 (1985)). As we stated two decades ago in Bristol Farmers Mkt. & Auction Co. v. Arlen Realty & Dev. Corp., 589 F.2d 1214, 1219 (3d Cir. 1978), quoting United Steelworkers of Am. v. Warrior & Gulf Navigation Co . , 363 U.S. 574, 582-83 (1960):

An order to arbitrate...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 disp ute. Doubts should be resolved in favor of coverage.

In light of those principles (or even without our h aving to invoke them), it takes only a brief look at the nat ure of First Liberty's claim to confirm that it falls well withi n the scope of the parties' commitment to arbitration.

First Liberty attempts to resist that result by pos iting that its breach of contract claim arises solely fro m the

10Agreement and does not implicate Form U-4. From tha t

premise it seeks to conclude that even if the NASD Code requires arbitration of pertinent disputes arising from the latter document, there is no basis for requiring ar bitration in this case. But again the purported Form U-4 issu e is a nonissue: First Liberty's contention is scotched by our earlier determinations (1) that the Agreement itse lf includes an incorporation by reference of the NASD Code and (2) that the Code requires the arbitration of busi ness disputes between members (in this instance First Li berty) and their associated persons (in this instance Nich olsberg).

Conclusion

As stated at the outset of this opinion, we REVERSE the district court's order denying Nicholsberg's motion to stay the proceedings and REMAND the matter to the distri ct court with directions to order the parties to proce ed to
arbitration forthwith.

A True Copy:

Teste:

Clerk of the United States Court of Appeals
for the Third Circuit

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