AL Williams & Associates, Inc. v. McMahon, Civ. A. No. 1:88-cv-669-RLV.

• Decision Date: 06 September 1988
• Docket Number: Civ. A. No. 1:88-cv-669-RLV.
• Parties: A.L. WILLIAMS & ASSOCIATES, INC.; Massachusetts Indemnity and Life Insurance Company; First American National Securities, Inc., Satellite Conference Network, Inc.; Arthur L. Williams, Jr.; Rob Victor; and Rusty Crossland, Petitioners, v. Todd W. McMAHON and Nancy McMahon, Respondents.
• Court: U.S. District Court — Northern District of Georgia

697 F. Supp. 488

A.L. WILLIAMS & ASSOCIATES, INC.; Massachusetts Indemnity and Life Insurance Company; First American National Securities, Inc., Satellite Conference Network, Inc.; Arthur L. Williams, Jr.; Rob Victor; and Rusty Crossland, Petitioners, v. Todd W. McMAHON and Nancy McMahon, Respondents.

Civ. A. No. 1:88-cv-669-RLV.

United States District Court, N.D. Georgia, Atlanta Division.

September 6, 1988.

Sidney O. Smith, Jr. and Anne S. Rampacek, Alston & Bird, Atlanta, Ga., for petitioners.

Terrence B. Adamson and Anthony E. DiResta, Dow, Lohnes & Albertson, Atlanta, Ga., for respondents.

ORDER

VINING, District Judge.

This is an action to compel arbitration pursuant to the Federal Arbitration Act, 9 U.S.C. § 4, and to stay a state court proceeding brought by the respondents against the petitioners in California.

On March 30, 1988, this court granted the petitioners' ex parte motion to stay the California action. Since the parties sought oral argument on both the merits of the petition to compel arbitration and upon the authority of this court to stay the state court proceedings, the parties agreed for this court's stay to remain in effect pending full briefing and oral arguments on the issues raised in the petition. On July 11, 1988, the court heard oral argument with respect to this court's authority to issue a stay order and requested additional briefing.¹ The issues before the court are now ripe for decision.

I. FACTUAL BACKGROUND

Massachusetts Indemnity and Life Insurance Company ("MILICO") is a life insurance company incorporated in Massachusetts with its principal place of business in Duluth, Georgia. Arthur L. Williams, Jr. ("Williams") and A.L. Williams & Associates, Inc. ("Williams, Inc.") are, collectively, a general agent of MILICO.

MILICO insurance policies are sold by independent contractor life insurance agents who are recruited, trained, and organized under guidelines established by Williams, Inc. These insurance agents make up the A.L. Williams sales force and are licensed to use Williams, Inc.'s federally registered trademark. A person who is recruited and accepted by Williams, Inc. enters into an independent contractor agreement with Williams, Inc. and, when he or she obtains a license to sell insurance, enters into a life insurance agent agreement with MILICO and sells exclusively life insurance products of MILICO.

First American National Securities, Inc. ("FANS") is a Georgia corporation, which markets mutual funds. Mutual funds approved by FANS are sold exclusively by qualified members of the A.L. Williams sales force.

Satellite Conference Network, Inc., is an Illinois corporation with its principal place of business in New York. It has sold equipment used for communication within the A.L. Williams sales force.

Williams is president of Williams, Inc. Rob Victor is a life insurance agent with MILICO and at all times material hereto was downline to Todd W. McMahon within the A.L. Williams sales force. Rusty Crossland is a life insurance agent with MILICO and at all times material hereto was a national sales director within the A.L. Williams sales force. At all times material hereto, Todd W. McMahon was a life insurance agent with MILICO, a registered representative of FANS, and, successively, regional vice president, senior vice president, and national sales director within the A.L. Williams sales force. Nancy McMahon is Todd McMahon's wife and, purportedly, his business partner.

Agents of the A.L. Williams sales force market financial products throughout the United States. The activities of the agents in selling MILICO insurance policies and/or mutual funds approved by FANS are monitored by Williams, Inc. and FANS. Agents' activities are reviewed for compliance with applicable governmental and other regulations, for compliance with the terms of the various independent contractor agreements with for compliance with the agents, and for compliance with guidelines for professional conduct issued by Williams, Inc. and FANS. This monitoring is conducted primarily through "upline agents" in the sales hierarchy.

Upline agents are individuals who support and oversee lower level agents in the A.L. Williams sales force hierarchy. These upline agents have titles of, in ascending order, regional vice president ("RVP"), senior vice president ("SVP"), national sales director ("NSD"), and senior national sales director ("SNSD"). These upline agents receive "override commissions," i.e., percentages of the commissions paid by MILICO on policies sold by lower level sales persons. Individuals who hold such lower level positions in the hierarchy are referred to as "downline agents."

RVP's, SVP's, and NSD's enter into additional independent contract agreements with Williams, Inc.; there is a separate independent contractor agreement for each of these positions, and each agreement incorporates the terms of other agreements signed by the upline agent to the extent that those terms are not specifically altered in his or her new agreement.

Members of the A.L. Williams sales force who obtain licenses to sell securities enter into registered representative agreements with FANS.

The RVP agreement executed by Todd McMahon contains the following language with respect to arbitration:

The Parties agree that, except as specifically provided to the contrary in this Agreement, any controversy, claim, dispute or other matter in question (whether the Parties' rights and remedies are governed or created by the law of contract, tort or otherwise, or by federal, state or local statute, legislation, rule of regulations), arising out of or relating to this Agreement (and/or any agreement superseded by this Agreement), or the breach thereof, between or among the RVP, on the one part, and Williams, Inc., and/or any of the officers, directors and employees of Williams, Inc., whether present or past, and whether in their individual or their corporate capacities, or any of them, on the other part, (hereinafter referred to as a "Dispute") shall be resolved exclusively by Negotiation and Arbitration in accordance with this section 15.

The MILICO and FANS agreements contain substantially the same language.²

Todd McMahon became a member of the A.L. Williams sales force in 1980, and in March 1981, he became regional vice-president. He became a senior vice president in November 1983 and a national sales director in June 1985.

Mr. McMahon signed his most recent A.L. Williams RVP agreement in November 1986, signed his most recent SVP agreement in September 1985, and signed his most recent NSD agreement in November 1987. In August 1986, he executed a new FANS agreement and in November 1986 executed a new MILICO agreement.

In late 1987 various allegations of unlawful conduct by Mr. McMahon came to the attention of Judy C. Cohn, vice president of and counsel to Williams, Inc. Among other things, Ms. Cohn was advised that Mr. McMahon had defrauded downline agents by selling them percentages of his royalty interest in an Arizona gold mining venture for a price which exceeded his costs and had made material misrepresentations in order to induce these sales. Mr. McMahon also reportedly pressured downline agents to purchase stock under an agreement providing that he would share in the profits and cover any losses; however, when the stock price dropped, he refused to cover the losses as promised. She further learned of allegations that Mr. McMahon had blocked the promotion of some agents and coerced others to give up their RVP status so that he would be able to obtain larger shares of certain bonus pools. She was also informed of allegations that Mr. McMahon had failed to perform his oversight and assistance responsibilities with regard to his downline agents.

Subsequently, on or about November 23, 1987, Mr. McMahon's NSD agreement was terminated. On December 21, 1987, Williams, Inc., notified Mr. McMahon that it was terminating his RVP and SVP agreements and further notified him that it was asking MILICO to terminate his agency agreement. Mr. McMahon's FANS agreement was terminated on December 23, 1987.

On or about November 24, 1987, Arthur L. Williams, Jr., in a closed circuit television broadcast to thousands of sales agents and other employees throughout the United States, commented on the allegations made against Mr. McMahon and stated, inter alia, that Mr. McMahon had been engaged in illegal conduct.

On February 9, 1988, the McMahons filed a complaint against the petitioners in the Superior Court of California in and for the city and county of San Francisco, in which they asserted claims for libel, interference with prospective business advantage, fraud, conspiracy to defraud, conversion, intentional infliction of emotional distress, and negligent infliction of emotional distress; the complaint also sought injunctive relief and an accounting. The petitioners then brought this suit to compel the respondents to arbitrate those claims raised in the California suit.

II. LEGAL DISCUSSION

Since the California action was filed approximately six weeks prior to the filing of this action, this court must decide, as an initial matter, whether principles of comity, federalism, and judicial economy require (or permit) this court to defer to the California court and let it decide all issues, including the issue of whether the McMahons' claims are subject to arbitration.

"Abstention from the exercise of federal jurisdiction is the exception, not the rule." Colorado River Water Conservation District v. United States, 424 U.S. 800, 813, 96 S.Ct. 1236, 1244, 47 L.Ed.2d 483. The doctrine of abstention is a narrow exception to the duty of a district court to adjudicate a controversy properly before it, and traditionally was exercised only in three circumstances: (1) when a federal constitutional issue might be mooted or presented in a different posture by a state court determination of pertinent state law, Railroad Commission...