French v. Merrill Lynch, Pierce, Fenner & Smith, Inc.

• Decision Date: 06 March 1986
• Docket Number: Nos. 85-1653,85-1702,s. 85-1653
• Citation: 784 F.2d 902
• Parties: James FRENCH, Plaintiff-Appellant, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., a corporation, Defendant-Appellee. R. James FRENCH, Plaintiff-Appellee, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., a corporation, Defendant- Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 902

784 F.2d 902

54 USLW 2536

James FRENCH, Plaintiff-Appellant, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., a corporation,

Defendant-Appellee.

R. James FRENCH, Plaintiff-Appellee, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., a corporation,

Defendant- Appellant.

Nos. 85-1653, 85-1702.

United States Court of Appeals,

Ninth Circuit.

Argued and Submitted Nov. 12, 1985.

Decided March 6, 1986.

Robert Charles Friese, Anthony B. Levin, Shartsis, Friese & Ginsburg, San Francisco, Cal., for plaintiff-appellant.

W. Reece Bader, William Riley, Anne Bookin, Orrick, Herrington & Sutcliffe, San Francisco, Cal., for defendant-appellee.

Appeal from the United States District Court for the Northern District of California.

Before GOODWIN, NELSON and CANBY, Circuit Judges.

NELSON, Circuit Judge:

This appeal stems from a decision rendered by a duly constituted Arbitration Panel ("Panel") of the Pacific Stock Exchange ("PSE"), holding Merrill Lynch, Pierce, Fenner & Smith, Inc. ("Merrill Lynch") liable to R. James French ("French"), for negligent misrepresentation in connection with French's sale of option contracts to a Merrill Lynch broker. The Panel awarded French compensatory damages of $52,925.00, interest on that award, and consequential damages of $275,000.00 resulting from lost profits. The district court confirmed the Panel's award of compensatory damages and interest but struck the award of consequential damages. Both parties now appeal to this court.

We affirm the district court's confirmation of the compensatory damages award and its assessment of interest, but reverse its vacation of the consequential damages award.

FACTUAL BACKGROUND

On July 28, 1982, as a "marketmaker" on the options floor of the PSE, French was engaged in the trading of Heublein call options. Heublein had been a rumored takeover candidate for several months, during which time there had been periodic bursts of activity in the stock and options. At approximately 9:30 a.m., William Grebitus Only minutes after the subject trades, the Exchange suspended all trading in Heublein securities. Merrill Lynch then disclosed that the Grebitus order had actually been an opening rather than a closing. Before trading resumed the following day, R.J. Reynolds Industries, Inc. announced an offer for the majority of Heublein's outstanding common stock, causing the price of the stock and options to increase. In satisfying Merrill Lynch's orders, French suffered an out-of-pocket loss of about $53,000, and thereafter, lost profits he could have made by trading the $53,000.

                a floor broker for Merrill Lynch, began to purchase a "size" or large order of Heublein call options.  French asked Grebitus at least twice whether the order was an "opening" or a "closing". 1   Grebitus wrongly informed French and other traders that the order was a closing when in fact it was an opening.  French subsequently sold short, in two separate trades, a large quantity of the options to Grebitus
                

On November 3, 1982, French filed a complaint in federal court, charging Merrill Lynch with misrepresenting the nature of its purchase order in violation of various federal and state laws. He sought rescission of the subject trades, punitive damages, attorney's fees and costs, and compensatory damages in the sum of $69,050.00, plus interest. Merrill Lynch moved to stay the proceedings and compel arbitration, relying on the PSE Constitution and Rules, which provide for arbitration of "[a]ny dispute, claim or controversy between members ... at the request of [either] party." PSE Rule XII, Sec. 1(a) Pac. Stock Exchg. Guide (CCH) p 5300 (emphasis added).

On January 14, 1983, before the motion was heard, the parties stipulated "that the claims set forth in the complaint on file [with the district court] shall be submitted to arbitration pursuant to the constitution and rules of the [PSE]." The parties then executed a Uniform Submission Agreement ("Submission Agreement") wherein they explicitly acknowledged their decision to submit to arbitration the "matter in controversy, as set forth in [an] attached statement of claim ... in accordance with the Constitution [and] ... Rules ... of the [PSE]." Merrill Lynch stated in writing that it had executed the Submission Agreement "with the understanding that the statement of claim to be attached ... would be the Complaint ... [then] on file with the District Court," and added that if that "understanding [were] erroneous, [it] reserve[d] the right to revoke the signing of the Submission Agreement until such time as [it] ... ha[d] an opportunity to review [the] claim and ... prepare[ ] a response thereto."

Two days before the scheduled hearing date, French gave notice that he intended to seek those consequential damages stemming from his loss of available trading capital during the months following the subject trades. Merrill Lynch urged the Panel to strike the consequential damages claim and to preclude French from submitting any evidence on the claim. Nevertheless, the Panel allowed French to amend his prayer pursuant to Section 27 of PSE Rule XII, and to present evidence on the consequential damages claim. It continued the hearing for thirty days and allowed Merrill Lynch further opportunity to depose witnesses and discover documents.

At the conclusion of the arbitration, on July 27, 1984, the Panel found Merrill Lynch liable for negligent misrepresentation. It awarded French compensatory damages of $52,925; interest on that amount, calculated at the broker-call rate, to accrue from August 1, 1982 through the date of payment; and consequential damages of $275,000.

On November 1, 1984, the district court heard argument on French's motion to confirm under 9 U.S.C. Sec. 9, and Merrill

Lynch's motion to vacate or modify under 9 U.S.C. Secs. 10 and 11. Merrill Lynch contested the arbitrability of French's consequential damages and interest claims, and while conceding the arbitrability of its compensatory damages claim, took issue with the Panel's conclusion of law with respect to that claim (i.e., its finding of liability). Judge Vukasin issued an order, January 14, 1985, confirming the award of compensatory damages and interest, and vacating the award of consequential damages as beyond the scope of the matter submitted to arbitration. French timely appealed the order to vacate, and Merrill Lynch timely cross-appealed the order to confirm. French asks this court to award attorney's fees pursuant to Fed.R.App.P. 38 for the costs he incurred in responding to the cross-appeal.

ISSUES

I. Is the district court's order a final judgment pursuant to 28 U.S.C. Sec. 1291, over which this court has appellate jurisdiction?

II. Was the district court correct in confirming the Panel's compensatory award, based as it was on a finding that Merrill Lynch's misrepresentation was a material fact upon which French could reasonably rely?

III. Was the district court correct in holding that the Panel did not exceed its powers by awarding French interest on his damage award at the broker call-rate, to accrue from August 1, 1982 through the first day of the month in which the damages are paid?

IV. Was the district court correct in vacating the award of consequential damages on the ground that it was beyond the scope of the matters the parties agreed to submit to arbitration?

V. Should French be awarded attorney's fees incurred in responding to Merrill Lynch's cross-appeal because that appeal is frivolous?

DISCUSSION

I. Jurisdiction

Both parties urge us to hold that 28 U.S.C. Sec. 1291 does not require dismissal of this case and that we can and should determine the validity of the district court's order. We agree. Pursuant to Sec. 1291, this court has jurisdiction over appeals from "final" decisions of the district court. We have just such a decision here. While the district court might have determined, in a trial of its own, whether French was deserving of consequential damages, see Sentry Life Ins. Co. v. Borad, 759 F.2d 695, 697 (9th Cir.1985), close examination of the record reveals that French never asserted the right to try the issue in the event that the district court held it non-arbitrable. Accordingly, we view Judge Vukasin's order as disposing of all the issues put before him by the parties. We consider the judgment "an attempt to dispose of all claims in the action," Squaxin Island Tribe v. State of Washington, 781 F.2d 715, 719 (9th Cir.1986), ² and proceed to consider its validity. ³

II. Compensatory Damages

Under California law, negligent misrepresentation is a form of "deceit," see Cal.Civ.Code Secs. 1709 and 1710 (West 1985) We review the Panel's award mindful that confirmation is required even in the face of "erroneous findings of fact or misinterpretations of law." ⁴ American Postal Workers Union, AFL-CIO v. United States Postal Service, 682 F.2d 1280, 1285 (9th Cir.1982), cert. denied, 459 U.S. 1200, 103 S.Ct. 1183, 75 L.Ed.2d 431 (1983); see Carpenters' Local Union No. 1478 v. Stevens, 743 F.2d 1271, 1275 (9th Cir.1984) (arbitrator's factual determinations and legal conclusions should receive deferential review), cert. denied, --- U.S. ----, 105 S.Ct. 2018, 85 L.Ed.2d 300 (1985); George Day Construction Co. v. United Brotherhood of Carpenters, 722 F.2d 1471, 1477 (9th Cir.1984) (award must be enforced "notwithstanding the erroneousness of any factual findings or legal conclusions ..."); Broadway Cab Cooperative v. Teamsters & Chauffeurs Local, 710 F.2d 1379, 1382 (9th Cir.1983) (arbitrator's factual determinations and legal conclusions accorded deference); Coast Trading Co. v. Pacific Molasses Co., 681 F.2d 1195, 1198 (9th Cir.1982) ("The rule is, though the 'arbitrators' view of the law might be open to serious question, ... [an award] which is within the terms of the submission, will not be set aside by a court for error either in law or fact'....") (quoting San Martine Compania De Navegacion, S.A. v. Saguenay Terminals Ltd....