1998 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

6-9-1998

First Liberty Inv v. Nicholsberg

Precedential or Non-Precedential:

Docket 97-1514

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Recommended Citation

"First Liberty Inv v. Nicholsberg" (1998). 1998 Decisions. Paper 137.

http://digitalcommons.law.villanova.edu/thirdcircuit_1998/137
Filed 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 District Judge for the 

Northern District of Illinois, sitting by designation. 
 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 district 

court's denial of his motion, brought under the Federal 

Arbitration Act (the "Act," 9 U.S.C. SS 3-4), to stay 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 had 

initiated its lawsuit to recover money damages stemming 

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 proceed to 

arbitration. 

Facts1 

We briefly summarize the uncontroverted essential facts. 

Other relevant facts that fit better into the substantive 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"). As a 

condition of his employment in the securities industry, 

Nicholsberg executed a "Uniform Application for Securities 

Industry Registration or Transfer" (universally referred to as 

"Form U-4"), which both he and an agent for First Liberty 

_________________________________________________________________ 

1. This statement is drawn from the parties' briefs and the district 

court's unreported opinion, available at 1997 WL 312123 (E.D. Pa. June 

3). 

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

to "arbitrate any dispute, claim or controversy" that might 

arise between him and First Liberty "that is required to be 

arbitrated under the rules, constitutions or by-laws" of 

NASD. Form U-4 thus incorporates by reference the NASD 

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 facilities to 

execute various types of securities transactions. Two 

aspects of the Agreement are at the core of the current 

dispute: 

 1. It characterized Nicholsberg as an independent 

 contractor rather than as an employee of First Liberty. 

 2. Its provisions, looked at alone, were silent as to 

 the arbitrability of disputes between the parties. 

As we have stated at the outset, on January 21, 1997 

First Liberty filed a breach of contract action against 

Nicholsberg to recover monies assertedly owed it under the 

Agreement. Shortly thereafter Nicholsberg moved to stay 

the proceeding and to compel arbitration of the claim. 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. All 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 Techs., 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 agreement 

to do so" (PaineWebber Inc. v. Hartmann, 921 F.2d 507, 511 

(3d Cir. 1990)). And as we recently observed in Prudential 

Agents, 133 F.3d at 228: 

 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. 

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

applicable agreement (at least on his part): 

 I agree 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.... 

For its part, although one of First Liberty's authorized 

agents also signed Form U-4, it is not a direct party to that 

document.2 Rather Form U-4 is more correctly understood 

as a contract between Nicholsberg and NASD, not between 

Nicholsberg and First Liberty (Prudential Agents, 133 F.3d 

at 228 n.5, citing Gilmer v. Interstate/Johnson Lane 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 Prudential 

Agents, 133 F.3d at 229, quoting Kaplan v. First Options of 

Chicago, Inc., 19 F.3d 1503, 1512 (3d Cir. 1994), aff'd, 514 

U.S. 938 (1995): 

 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 

_________________________________________________________________ 

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 approval, will be 

familiar 

 with the statute(s), constitution(s), rules and by-laws of the 

agency 

 jurisdiction or civil regulatory organization with which this 

 application is being filed, and the rules governing registered 

 persons, and will be fully qualified for the position for which 

 application is being made herein. I agree that, notwithstanding the 

 approval of such agency, jurisdiction or organization which hereby 

 is requested, I will not employ the applicant in the capacity 

stated 

 herein without first receiving the approval of any authority which 

 may be required by law. This firm has communicated with all of the 

 applicant's previous employers for the past three years. 

[Past employer information] 

 IN ADDITION I HAVE TAKEN APPROPRIATE STEPS TO VERIFY THE 

 ACCURACY AND COMPLETENESS OF THE INFORMATION

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

 an " `express' and `unequivocal' " agreement between 

 parties to arbitrate their disputes. 

In this instance the requisite intent on First Liberty's part 

to resort to arbitration is provided by its post-Form U-4 

entry into the Agreement with Nicholsberg. Despite its 

labeling of Nicholsberg as an "independent contractor" (of 

which more later), the Agreement goes on to say in terms 

that are both express and unequivocal: 

 Nevertheless, for fulfillment of this contract and for the 

 mutual benefit of both parties it is necessary that both 

 parties at all times fully comply with applicable 

 regulations of the...NASD. 

Thus, entirely without reference to Nicholsberg's 

undertaking in the Form U-4, the terms of the Agreement 

(committed to by both First Liberty and Nicholsberg) clearly 

incorporate by reference all requirements applicable 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 that it 

covers their relationship. Indeed, even in the absence of 

such a commitment in the Agreement, it has long been 

established (see, e.g., Axelrod & Co. v. Kordich, Victor & 

Neufeld, 451 F.2d 838 (2d Cir. 1971)) that, with NASD 

being a self-regulating organization within the terms of the 

Securities Exchange Act of 1934 ("1934 Act"), each of its 

members such as First Liberty is contractually bound by its 

regulations--including all of its arbitration provisions. 

Before we turn to those NASD Code provisions, we pause 

to dispatch First Liberty's contention that because the 

later-signed Agreement contains an integration clause, 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 could 

point to the principle expressed in Zandford v. PrudentialBache Sec., Inc., 112 F.3d 723, 727 (4th Cir. 1997), quoting 

Nolde Bros., Inc. v. Local No. 358, Bakery & Confectionery 

Workers Union, 430 U.S. 243, 255 (1977): 

 When a party seeking to avoid arbitration contends 

 that the clause providing for arbitration has been 

 5 
 superseded 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 really a 

red herring. What controls instead is that, as we have 

already explained, the document that contains the 

integration clause--the Agreement itself--incorporates by 

reference the NASD Code and thus contractually obligates 

both First Liberty and Nicholsberg to arbitrate certain 

disputes. 

We return then to the coverage of the NASD Code's 

arbitration mandate. Two of its Rules are particularly 

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. Prudential Ins. Co. 

of Am., 72 F.3d 793, 798 (10th Cir. 1995)). Under Rule 

10101 matters eligible for submission to arbitration 

include: 

 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 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 of the 

same amendment] describes a subset of that universe of 

disputes that must be arbitrated under the Code" (Armijo, 

72 F.3d at 798): 

 Any dispute, claim, or controversy eligible for 

 submission under the Rule 10100 Series between or 

 among members and/or associated persons, and/or 

 certain others, arising in connection with the 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 such 

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

 arbitrated under this Code, at the instance of: 

* * * 

 (2) a member against a person associated with 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 the present 

situation, the dispute must be "between...members and 

associated persons." Second is a restriction on the subject 

matter: All of the substantive disputes must be ones 

"arising in connection with the business" of members or 

arising "in connection with the activities of such associated 

person(s)" or "arising out of the employment or termination 

of employment of such associated person(s) with such 

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 disputes 

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 associated 

persons." It is undisputed that First Liberty is a member of 

NASD. At issue instead is the other half of the necessary 

arbitration twosome: whether Nicholsberg qualifies as an 

"associated person" within the scope of that mandate. 

NASD By-Law Art. I(q) defines the term "associated 

person of a member" 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.... 

That "associated person" concept did not originate with 

NASD--relatedly the 1934 Act, which provides the authority 

 7 
for 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 manager of 

 such member (or any person occupying a similar 

 status or performing similar functions), any person 

 directly or indirectly controlling, controlled by, or under 

 common control with such member, or any employee of 

 such member. 

Analysis of the parties' relationship discloses that 

Nicholsberg plainly qualifies as an associated person 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 was both 

(1) a natural person engaged in the securities business who 

was "directly or indirectly...controlled by" NASD member 

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" definition. 

To resist that conclusion, First Liberty urges that

Nicholsberg cannot be an "associated person" because 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 parties' 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 transactions.... 

 8. First Liberty appointed Nicholsberg's office as an 

 entity allowed under the provisions of the Agreement to 

 offer and solicit the sales of securities. 

 9. Pursuant to the Agreement, First Liberty gave 

 Nicholsberg geographic exclusivity in the New York, 

 New York metropolitan area and agreed not to open 

 8 
 competing offices without the prior written consent of 

 Nicholsberg.... 

And those undisputed allegations about the nature of the 

parties' relationship conjoin with other provisions in the 

Agreement in which: 

 1. Nicholsberg agreed to comply with and abide 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 officer. 

 3. Nicholsberg promised not to engage in a securit y 

 transaction of any nature with any individual or 

 broker-dealer other than through First Liberty. 

To be sure, other provisions in the Agreement might

perhaps successfully avert a finding that an agency

relationship exists for purposes of imposing respondeat 

superior liability on First Liberty, but that is not 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 First 

Liberty both on Nicholsberg's conduct of his business 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 branch 

manager in charge of First Liberty's only New York 

metropolitan area office. And that in turn means that 

notwithstanding the Agreement's use of "independent

contractor" and its disclaimer of an "agent" relationship, 

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 labels 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. 

 9 
in Nicholsberg's capacity an independent contractor, they 

could easily frustrate NASD's firm policy of submitting 

industry disputes to binding arbitration. In sum, we 

conclude that First Liberty and Nicholsberg fall within the 

class of adversaries subject to mandatory arbitration under 

their contractual relationship, the former by virtue of its 

NASD membership and the latter as an associated person 

of a member. 

Scope of the Parties' Arbitrable Disputes 

With that issue having been resolved, the final analytical 

step is to ascertain whether the present dispute falls within 

the scope of the relevant arbitration clause. In that regard 

we are guided by settled principles of federal arbitration 

law. 

Congress' adoption of the Act was intended to "revers[e] 

centuries of judicial hostility to arbitration agreements" 

(Scherk v. Alberto-Culver Co., 417 U.S. 506, 510 (1974)) and 

to replace that hostility with "a liberal federal policy 

favoring arbitration agreements" (Moses H. Cone Mem'l 

Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983)). 

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 dispute. Doubts 

 should be resolved in favor of coverage. 

In light of those principles (or even without our having to 

invoke them), it takes only a brief look at the nature of First 

Liberty's claim to confirm that it falls well within the scope 

of the parties' commitment to arbitration. 

First Liberty attempts to resist that result by positing 

that its breach of contract claim arises solely from the 

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

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 arbitration 

in this case. But again the purported Form U-4 issue 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 Liberty) 

and their associated persons (in this instance Nicholsberg). 

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 district 

court with directions to order the parties to proceed to 

arbitration forthwith. 

A True Copy: 

Teste: 

 Clerk of the United States Court of Appeals 

 for the Third Circuit 

 11