Opinion ID: 3010878
Heading Depth: 2
Heading Rank: 1

Heading: Prudential's Standing

Text: 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. As explained by the Supreme Court,  `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.'  AT&T Technologies v. Communications Workers of America, et al., 475 U.S. 643, _________________________________________________________________ 4. We note that plaintiffs Martin and Schulte signed an earlier version of Form U-4, which differed slightly from the agreement signed by the remaining plaintiffs. The provisions at issue in this appeal, however, are materially identical. 5. The Form U-4 agreement is more correctly understood as between the plaintiffs and the NASD. See Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 25 n.2. (1985). 6 648 (1986) (quoting United Steelworkers of America v. Warrior and Gulf Navigation Co., 363 U.S. 574, 582 (1960)). 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 arbitration agreement. Rather, the dispositive finding is an  `express' and `unequivocal'  agreement between parties to arbitrate their disputes. Kaplan v. First Options of Chicago, Inc., 19 F.3d 1503, 1512 (3d Cir. 1994) (citations omitted), aff'd, 514 U.S. 938 (1995). As this court has previously recognized, a variety of nonsignatories of arbitration agreements have been held to be bound by such agreements under ordinary common law contract and agency principles. Barrowclough v. Kidder, Peabody & Co., Inc., 752 F.2d 923, 938 (1985) (citations omitted), overruled on other grounds by Pritzker v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 7 F.3d 1110, 1112 (3d Cir. 1993). Indeed, courts have been willing to apply third party beneficiary law in examining the contractual standing of a non-signatory party to a dispute, provided there is an expression of the requisite intent between the third party and the plaintiff to arbitrate their claims. See McPheeters v. McGinn, Smith & Co., 953 F.2d 771, 772-73 (2d Cir. 1992) (per curiam); Nesslage v. York Sec., Inc., 823 F.2d 231, 23334 (8th Cir. 1987); Letizia v. Prudential Bache Sec., Inc., 802 F.2d 1185, 1187 (9th Cir. 1986); Mowbray v. Moseley, Hallgarten, Estabrook & Weeden, Inc., 795 F.2d 1111, 1116-17 (1st Cir. 1986); Stone v. Pennsylvania Merchant Group, Ltd., 949 F.Supp. 316, 320-21 (E.D.Pa. 1996). The parties in this case do not contest the validity of the arbitration clause itself. Rather, they dispute the identity of the parties bound by Form U-4.6 At the outset, we do not find Prudential is without standing here simply because it is not a signatory to the arbitration argument; nor will we deny standing because Pruco is listed as the onlyfirm referenced in Form U-4. Instead, we turn to the text of the Form U-4 arbitration agreement to see if there is an express _________________________________________________________________ 6. The parties raise this issue in response to this court's direction to address the significance, if any, of Dayhoff Inc. v. H.J. Heinz Co., 86 F.3d 1287 (3d Cir.), cert. denied, 117 S.Ct. 583 (1996), to this case. 7 and unequivocal intent that the plaintiffs would arbitrate their claims against, inter alia, Prudential, and whether both parties to the contract express an intention to benefit the third party in the contract itself.... Scarpitti v. Weborg, 530 Pa. 366, 372-73, 609 A.2d 147, 150 (1992); see also Restatement (Second) of Contracts S 302(1)(b) (1981). As stated in Form U-4, the plaintiffs agreed to arbitrate any dispute not only with Pruco, but also with any other person where the claim itself would be subject to arbitration under the NASD Code. Pursuant to section 8 of the NASD Code, plaintiffs agreed to arbitrate certain disputes between or among members and/or associated persons.... There is no question that Prudential is a member of the NASD, and the plaintiffs are associated persons within the meaning of the Code.7 Thus, we conclude, as did the district court, there is a clear and unequivocal intent to arbitrate claims with third parties such as Prudential, and not just Pruco, to the extent they are eligible for arbitration under S 1. Cf. Armijo v. Prudential Insurance Co. of America, 72 F.3d 793, 799 n.7 (10th Cir. 1995) (finding an intent to arbitrate with Prudential as well _________________________________________________________________ 7. An associated person is defined 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.... NASD By-Laws P 1101(q). We find no merit to plaintiff Young's argument that he is not an associated person within the meaning of the NASD Code. Indeed, Young's entire theory of recovery is premised on the fact that he was a Prudential employee with authority to trade in securities. Young would certainly be an associated person for purposes of the Securities Exchange Act, which uses similar language as the NASD's definition and provides the statutory basis for the NASD. See 15 U.S.C. S 78c(a)(21); Kaplan, 19 F.3d at 1517; Cular v. Metropolitan Life Ins. Co., 961 F.Supp. 550, 556-57 (S.D.N.Y. 1997). Even if Young, as an employee, is not an associated person for purposes of the NASD definition, his degree of involvement in these disputes would, at the very least, place him as a certain other under Section 8 of the NASD Code. See Thomas James Associates, Inc. v. Jameson, 102 F.3d 60, 67-68 (2d Cir. 1996). 8 as Pruco through the maintenance of registration with Prudential). Moreover, it is clear from the text and purpose of Form U-4, that the parties to the agreement intended to benefit such non-signatory, third parties as Prudential. While Form U-4 is only an agreement between the NASD and the applicant, it was adopted as a broader effort by selfregulatory organizations, including the NASD, to regulate the securities industry.8 See 1 Ian R. MacNeil, et al., Federal Arbitration Law: Agreements, Awards, and Remedies under the Federal Arbitration Act S 13, at 3-8, 43-44 (1996); Stephen J. Ware, Employment Arbitration and Voluntary Consent, 25 Hofstra L.Rev. 83, 146 (1996). The intention, as Form U-4 unambiguously indicates, was not limited to arbitrating disputes between the NASD and the applicant or member firms explicitly recognized in the text. Rather, the arbitration agreement and the NASD Code of Arbitration establish certain classes of individuals -- member firms of the NASD, customers, and so on -- who would benefit from the applicant's agreement with the NASD. The applicant, in return, would become a registered broker with the NASD and could properly conduct business under the federal securities laws. Therefore, we have no doubts that the parties to Form U-4 unequivocally intended that each applicant would submit to arbitration against non-signatory third parties such as Prudential. A holding that would restrict the right of these third parties to invoke arbitration because they had not signed Form U-4 would essentially require the NASD and the applicants to seek explicit textual recognition of all intended beneficiaries, whether known or unknown. We think such a requirement would frustrate the purpose and text of Form U-4 and accordingly hold that Prudential may properly seek enforcement of the arbitration clause against the plaintiffs. This case is distinguishable from Dayhoff Inc. v. H.J. Heinz Co., 86 F.3d 1287 (3d Cir.), cert. denied, 117 S.Ct. 583 (1996), where we held that a non-signatory parent _________________________________________________________________ 8. In fact, the Securities Exchange Act of 1934 requires brokers and dealers to register with, and submit to the rules of, the NASD as a condition to trading in securities. 15 U.S.C. S 78o(b)(8). 9 corporation cannot by reason of their corporate relationship enforce an arbitration clause, signed by a wholly-owned subsidiary, absent an express agreement to that effect. Id. at 1297. In Dayhoff, unlike the scenario before us, there was no unambiguous expression of intent between the parties to the arbitration agreement to create a class of intended beneficiaries who might invoke arbitration. Id. at 1296-97. In addition, the Dayhoff panel was particularly concerned that the non-signatory parent corporation had essentially created an option to accept or reject the arbitration and forum selection clauses.... Id. at 1297. The panel found that the existence of such a choice belie[d] the existence of an agreement to arbitrate. Id. Such is not the case here.