1 The defendants amended motion for preliminary injunction amended their

March 2 motion for preliminary injunction.

1

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF TEXAS

FORT WORTH DIVISION

JOSEPHINE TONG §

 §

VS. § CIVIL ACTION NO.4:03-CV-1234-Y

 §

DIRECT TRADING CORP., et al. §

ORDER DENYING PLAINTIFF’S MOTION TO COMPEL ARBITRATION AND

RENDERING MOOT DEFENDANTS’ MOTION FOR PRELIMINARY INJUNCTION

Pending before the Court is plaintiff Josephine Tong’s Motion

to Compel Arbitration and Stay Proceedings [doc. # 78], filed

November 5, 2004. Also pending before the Court is the defendants’

First Amended Motion for Preliminary Injunction [doc. # 164], filed

April 8, 2005.1 Having carefully reviewed the motion to compel

arbitration and its response, reply, supplemental response, surreply, sur-sur-reply, and additional court-directed briefs on

choice-of-law issues, the Court concludes that Tong’s motion to

compel arbitration should be DENIED. Moreover, having so

determined, the Court further concludes that the defendants’ motion

for preliminary injunction should be RENDERED MOOT. 

I. BACKGROUND

Tong contends that defendants Direct Trading Corporation

(“DTC”), Direct Trading Management (“DTM”), Direct Trading, GP,

Inc., and Direct Trading Institutional, Inc. (“DTI”) (hereinafter,

 

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2 Tong sought leave to file a third amended complaint adding Williams

Financial as a defendant in the above-styled and -numbered cause. The Court

denied Tong’s motion on December 8, 2004.

2

collectively “the DT entities”) employed Tong during 2000 and 2001

to sell and train clients in the use of computer software that

facilitates the internet trading of stock and other investments.

Tong asserts that defendants Allan Peterson and Mark Gulis are

principals and/or alter egos of the DT entities, which she asserts

sold securities through Williams Financial Group (“Williams

Financial”). Williams Financial is not a party to this action.2

Tong contends that the defendants began wrongfully withholding

compensation from her in November 2000. Tong also alleges that in

June 2001, she informed the defendants in writing that she believed

she was being discriminated against on the basis of her gender and

race; and that following this notice the defendants began to

retaliate against her. Tong was discharged in July 2001.

On November 15, 2002, Tong filed suit in the Northern District

of Illinois, Chicago Division, against the DT entities, Gulis, and

Peterson, alleging that the defendants wrongfully withheld

compensation from and discriminated against her. Tong filed a

second amended complaint on July 10, 2003, in which she asserted

the following claims: (1) breach of contract; (2) unjust

enrichment; (3) quantum meruit; (4) violation of the Illinois Sales

Representative Act; (5) violation of the Illinois Wage Payment and

Collection Act; and (6) violation of 42 U.S.C. § 1981. The case

 

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3

 The Court notes that Tong originally also moved to compel arbitration

pursuant to an Independent Contractor Agreement (“the ICA”), but has since

abandoned the ICA as a basis for compulsive arbitration. (See Pl.’s Additional

Br. at 5-6.)

4 Just above the signature line is the following statement:

Applicant or applicant’s agent has typed applicant’s name under this

section to attest to the completeness and accuracy of this record.

The applicant recognizes that this typed name constitutes, in every

way, use or aspect, his or her legally binding signature.

(App. to Pl.’s Mot. to Compel Arbitration at 10). Tong’s name is typed below the

statement, along with the date. 

3

was subsequently transferred to this Court on September 30, 2003.

On October 19, 2004, DTC filed a counterclaim against Tong for

fraud, breach of contract, and unjust enrichment.

 Tong moves to compel arbitration on the basis of her having

signed an Application for Security Industry Registration or

Transfer, also known as a “Form U-4" (“the U-4"), which registered

her with the National Association of Securities Dealers (“NASD”).3

The U-4 lists Williams Financial as Tong’s firm and contains Tong’s

electronic signature.4 (App. to Pl.’s Mot. to Compel Arbitration

at 1-11.) The U-4 provides: 

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 SROs

indicated in item 11 [NASD] as may be amended from time

to time and that any arbitration awarded entered against

me may be entered as a judgment in any court of competent

jurisdiction.

(Id. at 9, ¶ 5). The Federal Arbitration Act (“FAA”) recognizes

such arbitration agreements, and courts have routinely enforced

arbitration provisions contained in the Form U-4. See 9 U.S.C. §

 

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4

2; Rojas v. TK Communications, Inc., 87 F.3d 745, 748 (5th Cir.

1996); Hampton v. ITT Corp., 829 F. Supp. 202, 203 (S.D. Tex.

1993); Mouton v. Metropolitan Life Ins. Co., 147 F.3d 453, 456 (5th

Cir. 1998); Williams v. Cigna Fin. Advisors, Inc., 56 F.3d 656,

658-59 (5th Cir. 1995).

Tong argues that arbitration must be compelled because DTC and

DTM are agents of Williams Financial and because Tong, Gulis,

Peterson, and other DTC/DTM employees were registered with NASD as

employees of Williams Financial. Thus, Tong’s contention is that

the defendants’ relationships with Williams Financial, coupled with

the U-4, bind the defendants to arbitrate the present dispute. The

defendants contend that they were not parties to the arbitration

agreement contained in the U-4 and that, even if they were subject

to that agreement, Tong waived her right to arbitrate by initiating

litigation against the defendants and allowing it to continue for

over two years. 

II. ANALYSIS

A. Application of Basic Arbitration Principles

Courts must conduct a two-step inquiry to determine whether

parties should be compelled to arbitrate a dispute. See OPE Int’l

LP v. Chet Morrison Contractors, Inc., 258 F.3d 443, 445 (5th Cir.

2001); R.M. Perez & Assocs., Inc. v. Welch, 960 F.2d 534, 538 (5th

Cir. 1992). First, the court must decide whether the parties

 

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5 The Supreme Court has emphasized that the FAA “declared a national policy

favoring arbitration,” Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52,

56 (1995), and was enacted “to overrule the judiciary’s longstanding refusal to

enforce agreements to arbitrate.” Volt Info. Sciences, Inc. v. Brd. of Trustees

of Leland Standford Junior Univ., 489 U.S. 468, 474 (1989). Consequently, the

FAA, by its terms, “leaves no place for the exercise of discretion by a district

court, but instead mandates that district courts shall direct the parties to

proceed to arbitration on issues as to which an arbitration agreement has been

signed.” Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 218 (1985). “[A]ny

doubts concerning the scope of arbitrable issues should be resolved in favor of

arbitration, whether the problem at hand is the construction of the contract

language itself or an allegation of waiver, delay, or a like defense to

arbitrability.” Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1,

24-25 (1983). Furthermore, with respect to arbitration clauses in the area of

employment law, the Supreme Court has indicated that “arbitration agreements can

be enforced under the FAA without contravening the policies of congressional

enactments giving employees specific protection against discrimination prohibited

by federal law.” Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 123 (2001).

5

agreed to arbitrate. See OPE Int’l LP, 258 F.3d at 445. “This

determination involves two considerations: (1) whether there is a

valid agreement to arbitrate between the parties; and (2) whether

the dispute in question falls within the scope of that arbitration

agreement.” OPE Int’l LP, 258 F.3d at 445 (quoting Webb v.

Investacorp, Inc., 89 F.3d 252, 257-58 (5th Cir. 1996). Second,

once the court determines that the parties agreed to arbitrate, it

must consider whether any federal statute or policy renders the

claims nonarbitrable. R.M. Perez & Assocs., Inc., 960 F.2d at 538.

“[A]rbitration 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.” Steelworkers v. Warrior & Gulf Nav. Co., 363

U.S. 574, 582 (1960); Howsam v. Dean Witter Reynolds, 537 U.S. 79,

83 (2002). Although there exists a strong and long-recognized

national policy favoring arbitration evinced by the FAA,5 “there is

an exception to this policy: . . . whether the parties have

 

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6

submitted a particular dispute to arbitration, i.e., the ‘question

of arbitrability,’ is ‘an issue for judicial determination unless

the parties clearly and unmistakably provide otherwise.’” Howsam,

537 U.S. at 83 (quoting AT&T Techs., Inc. v. Communications

Workers, 475 U.S. 643, 649 (1986)) (emphasis deleted) (citing First

Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995)).

Thus, “[the] federal policy favoring arbitration does not apply to

the determination of whether there is a valid agreement to

arbitrate between the parties; instead ‘ordinary contract

principles determine who is bound.’” Fleetwood Enters. Inc. v.

Gaskamp, 280 F.3d 1069, 1073-74 (5th Cir. 2004) (quoting Daisy Mfg.

Co., Inc., v. NCR Corp., 29 F.3d 389, 392 (8th Cir. 1994)) (citation

omitted). This is because “the purpose of the [FAA] is ‘to make

arbitration agreements as enforceable as other contracts, but not

more so.’” Fleetwood, 280 F.3d at 1074 n.5 (quoting Prima Paint

Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 404 (1967))

(citing Mitsubishi Motors Corp v. Soler Chrysler Plymouth, 473 U.S.

614, 625-26 (1985) (citation omitted) (“The preeminent concern of

Congress in passing the Act was to enforce private agreements into

which parties had entered.”)). Accordingly, “in determining

whether the parties agreed to arbitrate a certain matter, courts

apply the contract law of the particular state that governs the

agreement.” Wash. Mut. Fin. Group, LLC v. Bailey, 364 F.3d 260,

264 (5th Cir. 2004) (citing First Options, 514 U.S. at 944). 

 

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7

The issue is more complicated in this instance, however,

because the document containing the arbitration clause at issue is

not a simple contract between the parties, but rather is the U-4,

a securities-industry-registration application. The U-4 is

governed by NASD rules: “I submit to the authority of [Illinois]

and [the NASD] and agree to comply with all provisions, conditions

and covenants of the statutes, constitutions, certificates of

incorporation, by-laws and rules and regulations of [Illinois] and

[the NASD].” (App. Pl.’s Mot. Compel Arbitration at 8, ¶ 2 (The U4.)) To the extent that state-law interpretation of the contract

is necessary, Illinois law would apply. Alberto v. Diversified

Group, 55 F.3d 201, 203 (5th Cir. 1995) (stating that, to determine

which state’s choice-of-law rules apply, federal court sitting in

diversity should apply the forum state’s choice-of-law provisions);

Castilleja v. Camero, 414 S.W.2d 424, 426 (Tex. 1967) (“A contract

which is made in one jurisdiction but which relates to and is to be

performed in another jurisdiction is governed by the law of the

place of performance”); Maxus Exploration Co. v. Moran Bros., Inc.,

817 S.W.2d 50, 53 (Tex. 1991) (same); Gramercy Mills v. Wolens, 63

F.3d 569, 573 (7th Cir. 1995) (finding that home state is place of

performance even where sales are solicited outside that state).

Moreover, the U-4 contractually obligates an applicant to abide by

NASD’s rules and NASD’s Code of Arbitration Procedure (“the Code”).

See Goldberg v. Donaldson, Lufkin and Jenrette Securities, 650 F.

 

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6

 The Court takes note of the defendants’ argument that the FAA governs the

interpretation of the U-4's arbitration clause. (Defs.’ Resp. to Additional Br.

at 4.) The Court does not disagree with the defendants’ argument. The

interpretation of the arbitration clause contained within the U-4 is entirely

guided by the FAA. See 9 U.S.C. §§ 1 & 2; Gilmer v. Interstate/Johnson Lane

Corp., 500 U.S. 20, 25 (1991). But interpreting the U-4's arbitration clause is

separate from deciding whether there is between the parties a valid agreement to

arbitrate. Such a decision is lodged with the courts, and must be arrived at by

applying ordinary contract principles. See Cal. Fina Group, Inc. v. Herrin, 379

F.3d 311, 315-16 & n.6 (5th Cir. 2004) (interpreting NASD rules and a Form U-4)

(citation omitted); see also Howsam, 537 U.S. at 83 (citation omitted);

Fleetwood, 280 F.3d at 1073-74 (citation omitted). 

8

Supp. 222, 225-26 (N.D. Ga. 1986); Basil, 1998 U.S. Dist. LEXIS

2220, at *7-8; Hickman, 1996 U.S. Dist. LEXIS 13196, at *7-8.

Whether the defendants agreed to submit this dispute to arbitration

is therefore a question primarily answered by NASD’s rules.6 See

Howsam, 537 U.S. at 83. 

B. Application of NASD Principles

NASD’s rules constitute a contract (“the membership

agreement”) between NASD members. See Muh v. Newburger Loeb Co.,

540 F.2d 970, 973 (9th Cir. 1976); Basil Inv. Corp. v. Chubb Secs.

Corp., CIVIL ACTION No. 97-1852, 1998 U.S. Dist. LEXIS 2220, at *7-

8 (E.D. Pa. March 2, 1998). The membership agreement includes the

Code. See Gilmer, 500 U.S. at 25; Willis v. Dean Witter Reynolds,

948 F.2d 305 (6th Cir. 1991); Cullen v. Paine, Webber, Jackson &

Curtis, Inc., 587 F. Supp. 1520 (N.D. Ga. 1984); Legg, Mason & Co.

v. Mackall & Coe, Inc., 351 F. Supp. 1367 (D.D.C. 1972); Hickman v.

Painewebber Inc., No. 1:96-CV-0273, 1996 U.S. Dist. LEXIS 13196, at

*7-8 (E.D. Tex. Sept. 3, 1996). Because the membership agreement

 

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9

evidences a transaction in interstate commerce, the membership

agreement and the parties to it are subject to the provisions of

the FAA. See 9 U.S.C. §§ 1 & 2; Gilmer, 500 U.S. at 25. 

When a person registers with the NASD under Form U-4 he

becomes a party to the membership agreement. Hickman, 1996 U.S.

Dist. LEXIS 13196, at *8. NASD members as well as applicants under

Form U-4 are therefore contractually obligated to abide by the Code

and are further bound by the FAA. See Goldberg v. Donaldson,

Lufkin and Jenrette Securities, 650 F. Supp. 222, 225-26 (N.D. Ga.

1986); Basil, 1998 U.S. Dist. LEXIS 2220, at *7-8; Hickman, 1996

U.S. Dist. LEXIS 13196, at *7-8. An obligation to arbitrate

pursuant to Form U-4 and the Code is not extinguished upon

resignation as an NASD member. Hickman, 1996 U.S. Dist. LEXIS

13196, at *8.

Forms U-4 are contracts between the applicant and the

securities exchanges; they are not contracts between the applicant

and the firm for whom the applicant will work (the member). See

Gilmer, 500 U.S. at 25. The U-4 is therefore not a contract

between Tong and Williams Financial or any of Williams Financial’s

agents. See id. It would be therefore impossible for either the

defendants or Williams Financial to be parties to Tong’s U-4.

The language of the arbitration clause in the U-4 bolsters

this construction. The clause provides: “I agree to arbitrate any

dispute, claim or controversy that may arise between me and my

 

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7 CRD reports are reports obtained from NASD BrokerCheck, a publicdisclosure program containing reports “derived from the Central Registration

Depository (CRD) as reported on the industry registration/licensing forms--Form

U-4 and Form BD.” (Pl.’s App. to Reply Br. at 23.) 

10

firm, or a customer, or any other person that is required to be

arbitrated . . .” (The U-4 at 9, ¶ 5 (App. to Pl.’s Mot. to Compel

Arbitration.)) The use of the pronoun “I” indicates that only

those executing the form are bound by the specific arbitration

clause contained therein. As previously stated, Tong is the only

signatory to the U-4 in question. Thus, the very language of the

U-4 supports the conclusion that only Tong can be forced to

arbitrate because of the specific language contained in the U-4.

Whether the defendants are subject to the arbitration requirements

of NASD is a separate question, governed by NASD rules rather than

by the terms of the U-4. The Court must therefore look to NASD

rules and the Code to determine whether the parties agreed to

arbitration. Before the Court can engage in such an analysis,

however, it must first examine the defendants’ relationships to

each other and their classifications under NASD.

(a) Agency Principles

Tong argues that the defendants are agents or alter egos of

Williams Financial. The evidence Tong relies upon for this

argument, however, is weak at best, consisting of CRD reports7

 for

 

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8

 Tong contends that “the salespersons of DTC and DTM were employees of

Williams Financial.” (Pl.’s Reply to Mot. to Compel at 2.) As support for this

argument, Tong offers the CRD reports of Gulis, Peterson, and other individuals

that are not defendants in this suit; all of these individuals are currently

employed by DTI. (Pl.’s App. to Reply Br. at 33-88.) These CRD reports reflect

that Gulis, Peterson, and other individuals worked for Williams Financial while

also working for DTI; they do not reflect any employment relationship with either

DTC or DTM. Therefore, the CRD reports fail to support Tong’s argument because

they fail to connect DTC and/or DTM with Williams Financial. Nor does Tong offer

supporting evidence connecting DTI with DTC and/or DTM. 

Tong also offers her own CRD report to bolster her claim that DTC and DTM

employees were actually employees of Williams Financial. Tong’s CRD report does

not list DTC, DTM, or DTI as a former employer--in fact, it fails to indicate any

association between Tong and any of the DT entities; only Williams Financial is

listed as a former employer of Tong. (Id. at 110-121.) Tong’s CRD report

therefore also fails to create a nexus between DTC, DTM, or DTI and Williams

Financial.

11

DTI employees formerly associated with Williams Financial,8 pay

stubs, and a facsimile cover sheet. (Pl.’s Reply to Mot. to Compel

at 2.) Moreover, Tong fails to direct the Court to the most

probative pieces of evidence adduced: corporate records and

business registrations for DTC and DTM the Court found by

happenstance when paging through the appendix to Tong’s reply

brief. (Pl.’s App. to Reply to Mot. to Compel at 99-103.) 

Furthermore, Tong wholly fails to adequately brief the legal

predicate for establishing that the DT entities, Gulis, and/or

Peterson are agents of Williams Financial. Nor does Tong supply

legal citations or arguments regarding whether the DT entities are

sufficiently related to one another in terms of corporate structure

to be treated as one corporate entity, i.e., whether piercing the

corporate veil of these entities would be appropriate. In fact,

despite the numerous opportunities afforded Tong to support her

motion to compel, Tong includes only two citations to legal

 

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9

 Tong’s reply brief states: “An agent of a signatory can be bound to the

terms of that contract. See Bridas S.A.P.I.C. v. Government of Turkmenistan, 345

F.3d 347, 356 5th Cir. 2003).” (Pl.’s Reply Br. to Mot. to Compel at 2.) It

also states: “a non-signatory to a contract can be compelled to arbitrate by some

accepted theory under agency or contract law. See Grigson v. Creative Artists

Agency, L.L.C., 210 F.3d 524, 536 (5th Cir. 2000). Tong never indicates what

those “accepted theories” are. 

10 Furthermore, the Court notes that agency relationships can be difficult

to establish when seeking to bind a defendant to an agreement to arbitrate

pursuant to NASD rules. See Cantor Fitzgerald, L.P. v. Prebon Sec. (USA) Inc.,

731 A.2d 823, 830 (Del. Ch. 1999) (finding that non-NASD-member plaintiff that

owned a 99.5% partnership in a NASD member through which it carried out its

business could not be compelled to arbitrate by a separate NASD-member defendant

with whom plaintiff had business relations) (noting that defendant cited no legal

authority for binding a principal to an agent’s arbitration agreement where the

principal was not also a party to the action). 

12

authority concerning agency principles.9 Tong does not indicate

how this authority applies to the circumstances of her case,

however. What remains, then, is a bare-bones presentation upon

which the Court may not rely. Moreover, while it appears that

Illinois law applies to the state-law issues in this case, (see

Additional Brs.), the DT entities may be Texas entities. (Pl.’s

App. to Reply to Mot. to Compel at 99-103 (Corporate Records.))

Despite this, Tong does not provide the Court with any authority or

legal arguments regarding agency principles under either Illinois

or Texas law. Tong therefore wholly fails to brief her agency

arguments, and instead simply expects the Court to assume that the

DT entities, Gulis, and Peterson are or were agents or alter egos

of Williams Financial. Having failed to provide the legal and

factual support therefor, however, Tong cannot reasonably expect

the Court to so find, conclude, or even assume.10

 

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11 The CRD reports adduced by Tong list a broker’s current and former

employers and provide a “CRD Number” only for current employers (or firms)

registered with NASD. (Pl.’s App. to Reply Br. at 32-33.) Gulis’s and

Peterson’s CRD reports both indicate that DTI is their current employer (as of

September 2004) and provide a CRD number for DTI. (Id. at 33, 45.) Since CRD

numbers are only provided for current employers who are NASD firms, the presence

of a CRD number for DTI indicates that DTI is (or, as of September 2004, was) an

NASD member.

13

(b) NASD Registration and Membership: Gulis, Peterson,

Williams Financial, and DTI

As of September 2004, DTI was an NASD member. (Pl.’s App. to

Reply Br. at 33, 45 (Gulis’s CRD Report.))11 There is no evidence

in the record, however, that DTI was an NASD member either during

Tong’s employment with the DT entities or while Williams Financial

acted as Tong’s firm for purposes of Tong’s NASD registration.

There is little evidence in the record concerning Williams

Financial’s status as an NASD member: only the U-4 itself, which

merely lists Williams Financial as Tong’s member firm.

Nevertheless, the Court will assume that Williams Financial was a

member of the NASD during the relevant time because none of the

parties have contested the point and, were Williams Financial not

a member, it would not have been necessary for Tong to complete a

Form U-4. See NASD Manual Rule 1031 (2005).

Regarding Gulis and Peterson, as of September 2004 they were

both registered with the NASD. (Pl.’s App. to Reply Br. at 32-48

(CRD Reports.)) It is not clear, however, whether Gulis and

Peterson were registered with the NASD during the time underlying

this dispute or, if they were, through which NASD member they were

 

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12 As previously stated, CRD reports list a broker’s current and former

employers and only provide a CRD number for current employers (or firms)

registered with the NASD. (Pl.’s App. to Reply Br. at 32-33 (Gulis’s CRD

Report.)) CRD numbers are not displayed for firms that are either not registered

with the NASD or that are registered with the NASD but no longer employ the

broker in question. (Id.)

14

registered. (Id.) Gulis’s and Peterson’s CRD reports do not

include CRD numbers for Williams Financial.12 (Id. at 35, 47.) The

absence of a CRD number from Williams Financial’s listings on these

reports could indicate that either: (1) Gulis and Peterson

registered with NASD and listed Williams Financial as their member

firm but that the CRD number for Williams Financial is inexplicably

missing from their CRD reports; or (2) Gulis and Peterson, whose

employment with Williams Financial did not consume the ten-year

period preceding September 2004, did not list Williams Financial as

their member firm when registering with NASD. See supra note 14.

The Court cannot determine which inference is correct. 

Tong argues that Gulis’s and Peterson’s employment by Williams

Financial required registration with NASD pursuant to NASD Manual

Rule 1031, which provides that “[a]ll persons engaged or to be

engaged in the investment banking or securities business of a

member who are to function as representatives shall be registered

as such with NASD in the category of registration appropriate to

the function to be performed.” Tong misses an important step,

however, because there is no evidence before the Court, or at least

no evidence to which the Court was directed, stating what positions

Gulis and Peterson held with Williams Financial. Without such

 

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15

evidence, the Court cannot conclude that Gulis and Peterson

“engage[d] in the investment banking or securities business of a

member” while employed by Williams Financial. While logic suggests

that Gulis and Peterson acted in such a capacity, without some

evidence indicating as much the Court cannot draw such an

inference. The Court therefore cannot assume that Rule 1031

applied to Gulis’s and Peterson’s association with Williams

Financial. 

Moreover, even were Rule 1031 applicable, the Court could not

further infer that Gulis, Peterson, and Williams Financial actually

complied with Rule 1031. It is an understood reality that

individuals and entities do not always fully comply with every rule

and law to which they are subject; the Court cannot ignore this

reality without some evidence indicating that compliance with Rule

1031 was required and did occur. Thus, whether Gulis and Peterson

registered with NASD and listed Williams Financial as their member

firm cannot be determined from the evidence. 

The record therefore demonstrates only that Tong was

registered with NASD through Williams Financial during the time

relevant to the present dispute, that Gulis and Peterson are

currently registered with NASD through DTI, that DTI is a current

NASD member, and that Williams Financial was a NASD member during

the relevant time. Since Tong, Gulis, Peterson, DTI, and Williams

Financial are or were all registered with NASD, they are all

 

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13 The Court notes that the interpretation of the scope of the Code’s

provisions, once it is established that an agreement to arbitrate exists, is

within the sound province of the FAA and its policy favoring arbitration. See

Howsam, 537 U.S. at 83; Armijo v. Prudential Ins. Co. of Am., 72 F.3d 793, 798

(10th Cir. 1995). That policy is not yet applicable. Although the Court has

determined that Gulis, Peterson, and DTI are parties to the membership agreement,

and thereby are subject to the Code’s arbitration provisions, the Court has still

not determined whether the defendants agreed to arbitrate the present dispute.

See Volt, 489 U.S. at 478 (“The FAA does not require parties to arbitrate when

they have not agreed to do so.”); EEOC v. Waffle House, 534 U.S. 279, 294 (2002)

(“It goes without saying that a contract cannot bind a nonparty.”); McCarthy v.

Azure, 22 F.3d 351, 355 (1st Cir. 1994) (“The federal policy [favoring

arbitration], however, does not extend to situations in which the identity of the

parties who have agreed to arbitrate is unclear.”) (cited in Fleetwood, 280 F.3d

at 1073-74); Mitsubishi Motors, 473 U.S. at 625-26 (citation omitted) (“The

preeminent concern of Congress in passing the Act was to enforce private

agreements into which parties had entered.”); BMA Fin. Servs. v. Guin, 164 F.

Supp. 2d 813, 817-822 (W.D. La. 2001). Only when the Court concludes that the

defendants entered into such an agreement is the instant matter subject to the

FAA’s policy favoring arbitration. Herrin, 379 F.3d at 316 n.6; see also supra

note 7; BMA, 164 F. Supp. 2d at 818.

16

parties to the membership agreement and are subject to the Code’s

provisions. See Gilmer, 500 U.S. at 25; Muh, 540 F.2d at 973;

Willis, 948 F.2d at 305; Goldberg, 650 F. Supp. at 225-26; Basil,

1998 U.S. Dist. LEXIS 2220, at *7-8; Hickman, 1996 U.S. Dist. LEXIS

13196, at *7-8. Gulis, Peterson, and DTI have therefore entered

into an agreement to arbitrate. Whether they entered into an

agreement to arbitrate the present matter is a separate question.

C. Application of the Code13

(a) Legal Standards

Section 1 of the Code, contained within Rule 10101, “defines

the general universe of issues that may be arbitrated,” Thomas

James Assocs. v. Jameson, 102 F.3d 60, 64 (2d Cir. 1986) (citing

Armijo, 72 F.3d at 798), and provides 

 

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14 At the time of this order’s issuance, NASD rules and the Code’s 

provisions were available at NASD’s website, located at <http://www.nasd.com>. 

The Code’s provisions were specifically available at

<http://www.nasd.com/web/groups/med_arb/documents/mediation_arbitration/nasdw_

013098.pdf>.

17

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 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:

(a) between or among members;

(b) between or among members and associated persons;

(c) between or among members or associated persons and

public customers, or others; and

(d) between or among members, registered clearing

agencies with which [NASD] has entered into an

agreement to utilize [NASD]’s 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.

NASD Manual Rule 10101 (2005).14 

Industry disputes such as the instant one are governed by

Section 8 of the Code, or Rule 10201, which addresses what disputes

are required to be arbitrated. Only a subset of the disputes

eligible for arbitration under Rule 10101 fall within the mandatory

arbitration provisions of Rule 10201. See Armijo, 72 F.3d at 798;

see also Thomas, 102 F.3d at 64. Rule 10201(a) provides:

Except as provided in paragraph (b) or Rule 10216, a

dispute, claim, or controversy eligible for submission

 

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15 Rule 10201(a) specifically provides that, save the applicability of

certain exceptions, “a dispute, claim, or controversy eligible for submission

under the Rule 10100 Series . . . shall be arbitrated under this Code.” Thus,

the rule’s language only requires mandatory arbitration where a dispute, claim,

or controversy is first eligible for submission to arbitration pursuant to Rule

10101. 

18

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 associated

person(s) with such member, shall be arbitrated under

this Code, at the instance of:

(1) a member against another member;

(2) a member against a person associated

with a member or a person associated

with a member against a member; and 

(3) a person associated with a member

against a person associated with a

member.

NASD Manual Rule 10201 (2005). 

Thus, under the Code, three conditions must be met for an

industry dispute to be subject to mandatory arbitration. First,

the dispute must qualify as arbitrable under Rule 10101. See NASD

Rule 10201(a);15 Williams v. Imhoff, 203 F.3d 758, 764 (10th Cir.

2000) (“In order to satisfy both Rules 10101 and 10201, and thus be

subject to mandatory arbitration, plaintiffs’ . . . claims must be

‘between’ persons specifically listed in Rule 10101") (citing First

Liberty Inv. Group v. Nicholsberg, 145 F.3d 647, 651 (3d Cir.

1998)). Second, the matter must fall within the party and subject-

 

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16 The Court notes that parties qualifying as “certain others” under Rule

10201 may not compel arbitration under the Code. See Westervelt, 2003 U.S. Dist.

LEXIS 20082, at *7; Burns v. New York Life Ins. Co., 202 F.3d 616, 621 (2d Cir.

2000) (holding that “certain others” may join in NASD arbitration but may not

compel such arbitration); World Group Secs v. Ko, No. C-03-5055 MJJ (EDL), 2004

U.S. Dist. LEXIS 15726, at *19 (N.D. Cal. Feb. 11, 2004) (same); Steele, 2002

U.S. Dist. LEXIS 17376, at *11. In some circumstances, however, “certain others”

may be compelled to arbitrate. See Westervelt, 2003 U.S. Dist. LEXIS 20082, at

*7-8; Cantor Fitzgerald, 731 A.2d at 827; McMahan, 35 F.3d at 88; Basil, 1998

U.S. Dist. LEXIS 2220, at *10-11.

19

matter restrictions contained within Rule 10201(a):

The first . . . restriction [is] on the parties: the

dispute must be between or among members and/or

associated persons, and/or certain others. The second .

. . restriction [is] on subject matter: the substantive

dispute must be one arising in connection with the

business of members or arising in connection with the

activities of such associated person(s).

Heller v. MC Fin. Servs., 97 Civ. 5317 (WK), 1998 U.S. Dist. LEXIS

5547, at *5-6 (S.D.N.Y. Apr. 21, 1998) (citing McMahan Securities

v. Forum Capital Markets, 35 F.3d 82, 86 (2d Cir. 1994)). See also

NASD Manual Rule 10201(a); First Liberty, 145 F.3d at 651;

Westervelt v. Bayou Mgmt., L.L.C., CIVIL ACTION NO. 03-0860, 2003

U.S. Dist. LEXIS 20082, at *6 (E.D. La. Nov. 4, 2003). Third, the

dispute must be instigated by either an NASD member or an

associated person. See NASD Manual Rule 10201(a); World Fin. Group

Inc., v. Steele, CAUSE NO. IP 02-248-C H/ K, 2002 U.S. Dist. LEXIS

17376, at *11 (S.D. Ind. Aug. 15, 2002). A party’s status as a

member or associated person “must be determined at the time of the

events giving rise to the dispute or claim.” Riccard v. Prudential

Ins. Co. of Am., 307 F.3d 1277, 1288 (11th Cir. 2002).16 

 

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20

(b) The Defendants and Rule 10101

Applying Rule 10101, it’s clear that, since Tong is an

associated person, the only provisions that arguably may apply here

are (b) and (c). The term “associated person,” found in Rule

10101, includes “a natural person registered under NASD rules.”

NASD Manual Rule 1011, at http://nasd.complinet.com/nasd/display/

display.html?rbid=1189&element_id=1159000411. Though the definition

itself does not indicate as much, it appears that the term “person

associated with a member,” as used in Rule 10201, encompasses the

same definition. See Gates, 2004 U.S. Dist. LEXIS 10104, at *14

(citing NASD By-Laws, Art. I., P (q)); Paul Revere Variable

Annuity, 226 F.3d at 19 (older NASD rules) (citing NASD By-Laws,

Art. I). “Associated persons” or “persons associated with a

member” must be natural persons; corporate entities cannot be so

classified. Tays v. Covenant Life Ins. Co., 964 F.2d 501, 503 (5th

Cir. 1992).

The U-4 establishes that Tong was an associated person of

Williams Financial at the time relevant to the present dispute:

Tong is a natural person who was registered with NASD through

Williams Financial at the time that her dispute with the defendants

arose. See Riccard, 307 F.3d at 1288. But Tong does not assert

claims against Williams Financial. Instead, her claims are against

 

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21

Gulis, Peterson, and the DT entities.

Gulis and Peterson are currently associated persons of DTI:

they are both natural persons and, as of September 2004, were both

registered with NASD. (Pl.’s App. to Reply Br. at 32, 33, 45, 47

(CRD Reports)). While Gulis’s and Peterson’s current firm is DTI,

they were previously employed by Williams Financial. As previously

discussed, the only proof that Gulis and Peterson may be or were

associated persons of Williams Financial is that they formerly

worked for Williams Financial. There is no evidence in the record

that Gulis and Peterson were associated persons of either DTI or

Williams Financial at the time relevant to the present dispute.

Nor is there any evidence that any of the DT entities were NASD

members at that time. The facts of this case therefore present a

complicated, and from what the Court can determine a previously

unexamined, scenario in which an associated-person plaintiff of one

member seeks to compel arbitration against a different member and

other registered defendants where the defendants’ statuses as NASD

members or registrants during the relevant period are unknown and

where the relationships between the defendants and the member for

whom the plaintiff registered is not entirely discernible. 

Rule 10101 provides “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.”

NASD Manual Rule 10101 (2005) (emphasis added). This language

 

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22

implies that, to be arbitrable, a dispute must (1) arise from an

associated person’s employment with or termination from the member

with whom they were associated; and (2) be between that person and

that member. See BMA, 164 F.Supp.2d at 819 (evaluating whether any

person buying goods or services should be given “customer” status

pursuant to Rule 10301 without being required to show that the

relevant purchase was from the member defendant or its associated

person). As already examined by at least one court within the

Fifth Circuit, a contrary reading would leave NASD members

vulnerable to rampant litigation premised upon claims those members

likely did not anticipate they were agreeing to arbitrate. See id.

It would be tantamount to a holding that any NASD member or

associated person could demand arbitration against another member

or associated person regardless of whether an actual NASD

relationship existed between the two. See id. In other words,

simply by becoming a NASD member or by registering with NASD, a

firm or individual would agree to arbitrate the claims of any

person with whom they dealt, regardless of whether that individual

was actually associated with the member defendant or its associated

persons. See id. Such a boundless definition is not only

unsupported by the language of Rule 10101 itself, but also would

surely upset the reasonable expectations of NASD members and their

associated persons in entering into the membership agreement. See

id. The Court cannot give credence to such a reading.

 

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23

The defendants’ requirements to arbitrate are contained in

Rule 10101. Since Tong’s claims are not against the member with

whom she was associated--Williams Financial--or that member’s

associated person(s), Tong’s claims are not within the bounds of

Rule 10101, the arbitration requirement consented to by the

defendants. The defendants have therefore not agreed to arbitrate

those claims and are not parties to an arbitration agreement with

Tong. See Volt, 489 U.S. at 478 (“The FAA does not require parties

to arbitrate when they have not agreed to do so.”). 

Moreover, there is no evidence in the record that any of the

defendants were registered with NASD at the time that the present

dispute arose. Such evidence is crucial for Tong’s motion to

compel arbitration because “the status of association with a member

must be determined at the time of the events giving rise to the

dispute or claim.” Riccard, 307 F.3d at 1288. Thus, for the

defendants to be parties to the membership agreement upon which

Tong moves to compel arbitration, they must have been parties to

that agreement at the time that Tong’s claims arose. There is no

such evidence before the Court. The only evidence before the Court

demonstrates that DTI, Gulis, and Peterson are presently registered

with NASD. Such a showing is insufficient, and the Court can only

conclude that DTI, Gulis, and Peterson were not parties to the Code

at the necessary time. Thus, even assuming that the Court’s

reading of Rule 10101 is too restrictive, Tong still would not be

 

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24

entitled to compel arbitration of the instant matter because there

is no evidence of a timely agreement to arbitrate by the

defendants. Id.; see also Wheat, First Sec., Inc. v. Green, 993

F.2d 814, 820-821 (11th Cir. 1993).

 The Court therefore concludes that the defendants did not

agree to arbitrate the present dispute. Tong’s claims are simply

too far outside the bounds of Rule 10101 for arbitration to be

considered within the scope of the defendants’ agreement to

arbitrate. Moreover, Tong has not adduced any evidence that the

defendants were subject to the Code’s provisions when the present

dispute arose.

Furthermore, the defendants specifically aver that they did

not sign any document containing an arbitration clause. (Defs.’

Resp. to Pl.’s Additional Br. at 5). In the face of such

statements, and without any proof to the contrary, the Court cannot

conclude that the defendants actually entered into an arbitration

agreement. Without an agreement to arbitrate, the Court cannot

compel arbitration. AT&T Technologies, 475 U.S. at 648

(“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.”) (citation omitted); Steelworkers, 363 U.S.at

582; Howsam, 537 U.S. at 83; Gross, 1998 U.S. Dist. LEXIS 20911, at

*6-7 (“The duty to arbitrate remains one of contract; a court will

not compel parties to arbitrate a dispute unless the parties agreed

 

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17 The Court need not examine the defendants’ waiver arguments because it

has already concluded that the defendants are not parties to the arbitration

agreement at issue.

18 Because the Court concludes that Tong’s motion to compel arbitration

must be denied, the defendants’ motion to enjoin the arbitration proceedings

before NASD is rendered moot.

25

to do so.”) (interpreting U-4 form) (citation omitted).17 Thus,

Tong’s motion to compel arbitration must be denied.18

III. CONCLUSION

Therefore, Tong’s Motion to Compel Arbitration [doc. # 78-1]

is DENIED. 

Further, Tong’s Motion to Stay Proceedings [doc. # 78-2] and

the defendants’ First Amended Motion for Preliminary Injunction

[doc. # 164] are RENDERED MOOT. 

SIGNED September 19, 2005.

TRM/kat

 

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