Court Opinion

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Opinions of the United
1998 Decisions                                                                                                             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Precedential or Non-Precedential: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

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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).

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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. Prudential-
Bache 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

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