Court Opinion

ID: 3027239
Source: CourtListenerOpinion
Date Created: 2015-10-13 22:37:47.025966+00
Date Added: 2024-06-11T11:47:55.029632
License: Public Domain

United States Court of Appeals
                          FOR THE EIGHTH CIRCUIT
                                 ___________

                                 No. 00-3816
                                 ___________

Fleet Boston Robertson Stephens,       *
Inc., formerly known as BancBoston     *
Robertson Stephens, a Massachusetts    *
corporation,                           *
                                       *
            Appellee,                  *
                                       *    Appeal from the United States
      v.                               *    District Court for the District
                                       *    of Minnesota.
Innovex, Inc., a Minnesota             *
Corporation; AdFlex Solutions          *
Inc., a Delaware corporation,          *
                                       *
            Appellants.                *

                                 ___________

                           Submitted: June 15, 2001

                                Filed: August 30, 2001
                                 ___________

Before MURPHY, HEANEY, and BEAM, Circuit Judges.
                           ___________

BEAM, Circuit Judge.
       This case comes before us on appeal from the district court's1 denial of a motion
to stay proceedings and compel arbitration. We affirm.

I.    BACKGROUND

       Fleet Boston Robertson Stephens, Inc. (Robertson Stephens), a multi-service
brokerage firm and member of the National Association of Securities Dealers (NASD),
commenced the underlying breach of contract action against AdFlex in an attempt to
collect over $800,000 in fees and expenses it claimed it was owed for providing
financial advice and assistance to AdFlex in AdFlex's merger with Innovex. The
contract between the parties did not call for Robertson Stephenson to act as a broker
for AdFlex securities. AdFlex, which has since merged with Innovex, disputes that it
owes these monies for a variety of reasons and filed a motion to stay litigation and
compel arbitration under the Federal Arbitration Act, 9 U.S.C. §§ 1 - 14.

       The essence of the dispute before this court is whether AdFlex was a customer
of Robertson Stephens under the NASD Code. If the answer is yes, then, according
to the NASD Code, Robertson Stephens has agreed to submit any claim by a customer
to arbitration, thus, the motion to stay litigation and compel arbitration should be
granted. If the answer is no, then there has been no agreement to submit to arbitration,
and the litigation shall continue.

II.   ANALYSIS

      In deciding whether to stay litigation and compel arbitration under the Federal
Arbitration Act, a court must first consider whether the parties have agreed to arbitrate
the underlying dispute. Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473

      1
      The Honorable David S. Doty, United States District Judge for the District of
Minnesota.

                                          -2-
U.S. 614, 626 (1985). Here, the parties agree that the contract in dispute does not
contain any agreement to arbitrate. Rather, AdFlex points to provisions of the NASD
Code in support of its claim that the court should compel arbitration.

       As a member of the NASD, Robertson Stephens is bound to follow the rules and
regulations of the NASD, including the NASD Code. That Code, in pertinent part,
requires NASD members to arbitrate disputes if they "aris[e] out of or in connection
with the business of any member" and are "between or among members or associated
persons and public customers." NASD Code of Arbitration Proc., § 10101. The Code
further provides that the matter shall be submitted to arbitration upon the demand of the
customer. Id. § 10301(a).

      The district court summed up the issues thus:

      The parties here do not dispute that Robertson Stephens is an NASD
      member, that AdFlex is not an associate of Robertson Stephens, that the
      controversy arises in connection with the business of Robertson Stephens,
      that the contract does not contain an arbitration provision and that AdFlex
      has not waived any right to arbitration it may have had.

Fleet Boston Robertson Stephens, Inc. v. Innovex, Inc., No. 00-778, Order at 5 (D.
Minn. Oct. 31, 2000). Thus, the only question is whether AdFlex is a "customer" of
Robertson Stephens under the NASD Code. This question hinges upon whether the
term "customer" applies only to those who received investment or brokerage services,
or whether it also applies to those who received banking and financial advice, as
AdFlex did in this case.

      The NASD Arbitration Code does not define the term "customer." AdFlex
points to the definition section of the NASD Manual which specifies, "The term
'customer' shall not include a broker or dealer." NASD Manual General Provisions §
0120(g). AdFlex argues that by negative inference this definition means a "customer"

                                          -3-
is everyone who is not a broker or dealer. We agree with the district court that this
definition is too broad. We do not believe that the NASD Rules were meant to apply
to every sort of financial service an NASD member might provide, regardless of how
remote that service might be from the investing or brokerage activities, which the
NASD oversees.

       Although not entirely clear, or consistent, other NASD Rules support a general
definition of "customer" as one who receives investment and brokerage services or
otherwise deals more directly with securities than what occurred here. The district
court relied on a provision in the NASD Rules of Conduct–which outline the standards
of conduct expected of NASD members when dealing with customers– that defines a
"customer" as "any person who, in the regular course of such member's business, has
cash or securities in the possession of such member." NASD Rules of Conduct § 2270.
Although that particular provision defines customer in one specific context, there are
numerous other provisions in the NASD Rules of Conduct that support this definition
of customer. See id. § 2230 (governing broker transaction confirmations); § 2260
(forwarding securities related information); § 2280 (investor education); § 2310
(investment recommendations); § 2320 (executing orders); § 2330 (maintaining
customer's securities and accounts); §§ 2400-2460 (commissions on brokerage
accounts and securities transactions); §§ 2700-2780 (securities distributions).2

       Additionally, the NASD's Manual and Notices to Members states that the
arbitration forum exists "[t]o assist in the resolution of monetary and business disputes

      2
        Apparently ignoring these provisions, AdFlex directs us to an isolated NASD
Rule relating to membership and registration that defines a "customer" to include those
receiving investment banking services. NASD Membership and Registration Rule §
1120(b)(1). This rule, which does not specifically deal with customer protection or
relations, is insufficient to expand the definition of "customer" for purposes of the
arbitration provision.

                                          -4-
between investors and their securities firms (as well as between member firms)."
NASD Manual & Notices to Members–Administrative–Profile of the
NASD–Regulation of the Broker/Dealer Profession and Securities Markets–Arbitration
and Mediation, NASD Manual available at http://secure.nasdr.com. This further
supports the proposition that "customer" in the NASD Code refers to one involved in
a business relationship with an NASD member that is related directly to investment or
brokerage services.

      Although other cases interpreting the term "customer" have in some ways taken
a broad view of the term, in all of these cases there existed some brokerage or
investment relationship between the parties. See, e.g., Oppenheimer & Co. v.
Neidhardt, 56 F.3d 352, 358 (2d Cir. 1995) (holding that investors who had been
defrauded by a representative of an NASD firm were customers of that firm under the
NASD Code, despite the fact that they never opened formal accounts with the firm);
Vestax Sec. Corp. v. McWood, 116 F. Supp. 2d 865, 869 (E. D. Mich. 2000) (noting
that "in the securities context" courts have taken a broad view of "customer")
(emphasis added); First Montauk Sec. Corp. v. Four Mile Ranch Dev. Co., 65 F. Supp.
2d 1371, 1380-81 (S.D. Fla. 1999) (finding an investor was a customer of an NASD
firm, when his account was maintained at a different brokerage firm, but a
representative of the member firm managed the investor's account).3 We decline to
extend the definition where the business relationship did not include these activities.

      3
        AdFlex cites Patten Securities Corporation v. Diamond Greyhound & Genetics,
Inc., to support the proposition that a "customer" is not defined by an investor
relationship with the NASD member. 819 F.2d 400, 406 (3d Cir. 1987). That case
involved a claim by a securities issuer against an underwriter, who was an NASD
member. Although the relationship between the two was not a broker/investor
relationship, it still related directly to the issuance of securities, rather than banking
advice, and is thus unavailing here.

                                           -5-
       In sum, while this is a close call, we do not believe the NASD Rules require a
member to submit to arbitration in every dispute that involves its business activities
with a non-member–as AdFlex's proposed definition of "customer" would require. We
agree with the district court that "customer" does not include an entity such as AdFlex,
which only received financial advice, without receiving investment or brokerage related
services, from an NASD member. AdFlex correctly recognizes that, where the parties
have agreed to arbitrate, there is a strong federal policy in favor of arbitration. Moses
H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983) ("[t]he
Arbitration Act establishes that, as a matter of federal law, any doubts concerning the
scope of arbitrable issues should be resolved in favor of arbitration"). However, this
does not change the fact that one cannot be compelled to arbitrate her disputes unless
she has agreed to do so. Volt Info. Sciences, Inc. v. Board of Trustees of Leland
Stanford Junior Univ., 489 U.S. 468, 478 (1989) ("[The Arbitration Act] simply
requires courts to enforce privately negotiated agreements to arbitrate, like other
contracts, in accordance with their terms."). Robertson Stephens did not, by virtue of
its membership in the NASD, agree to arbitrate this type of dispute over fees for giving
financial advice apart from investment or brokerage services.

III.   CONCLUSION

       Accordingly, we affirm the denial of the motion to stay litigation and compel
arbitration.

       A true copy.

             Attest:

                 CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.

                                          -6-