Legg, Mason & Company, Inc. v. Mackall & Coe, Inc.

• Decision Date: 13 December 1972
• Docket Number: Civ. A. No. 2340-72.
• Citation: 351 F. Supp. 1367
• Court: U.S. District Court — District of Columbia
• Parties: LEGG, MASON & COMPANY, INC., Plaintiff, v. MACKALL & COE, INC., et al., Defendants.

351 F. Supp. 1367

LEGG, MASON & COMPANY, INC., Plaintiff, v. MACKALL & COE, INC., et al., Defendants.

Civ. A. No. 2340-72.

United States District Court, District of Columbia.

December 13, 1972.

Jeremiah C. Collins, Washington, D.C., John Connally, New York City, for plaintiff.

John A. Beck, Lee Ellis, Washington, D. C., for defendants.

MEMORANDUM OPINION

RICHEY, District Judge.

This case came before the Court for hearing on the Motion of plaintiff, Legg, Mason & Company, Inc., for a Temporary Restraining Order and the Motion of the defendants to Dismiss or in the Alternative to Stay the Present Action Pending Arbitration pursuant to the Constitution and Rules of the New York Stock Exchange. The Court denied the plaintiff's Motion for a Temporary Restraining Order, finding that the plaintiff had not made the requisite showing of irreparable injury necessary to justify the relief requested, and granted the defendants' Motion to Stay the Present Action Pending Arbitration provided that such arbitration could be had within sixty days from the date of the Court's Order.

The suit seeks injunctive relief and damages arising out of the alleged improper conduct of four former employees of Legg, Mason in concert with Mackall & Coe in establishing a service reporting and advising investment clients on Washington affairs in competition with a service previously offered by Legg, Mason. It is alleged that the former employees in concert with Mackall & Coe stole a unique business idea belonging to Legg, Mason and took certain documents belonging to Legg, Mason with them to set up the competing business. It is further alleged that the former employees in concert with Mackall & Coe are attempting to take clients away from Legg, Mason by improper use of the stolen materials and by disparaging and defaming the service provided by Legg, Mason.

The defendants deny plaintiff's allegations, but their main contention was that this controversy must be resolved by the arbitration procedures of the New York Stock Exchange to which both Legg, Mason and Mackall & Coe are members and signatories. Mackall & Coe and the individual defendants each requested arbitration by Affidavit.

I. Issues Presented

While this action sounds in tort, the issue presented by the defendants' Motion to Stay Pending Arbitration is basically one of contract law—that is, whether there is a binding agreement to arbitrate between the parties. The defendants contend that the arbitration provisions of the New York Stock Exchange Constitution and Rules constitute such a binding agreement.

Article VIII, Section 1 of the New York Stock Exchange Constitution provides in pertinent part:

"Any controversy between parties who are member firms or member corporations shall, at the instance of any such party, and any controversy between a non-member and a member or allied member or member firm or member corporation arising out of the business of such member, allied member, member firm or member corporation, . . . shall at the instance of such nonmember, be submitted for arbitration. . . ."

Rule 345, paragraph J, of the New York Stock Exchange provides that member firms and registered representatives sign the following agreement:

"I agree that any controversy between me and any member organization or affiliate or subsidiary thereof arising out of my employment or the termination of my employment shall be settled by arbitration at the instance of any such party in accordance with the arbitration procedure prescribed in the Constitution and the rules then obtaining of the New York Stock Exchange."

It is undisputed that the plaintiff, defendant Mackall & Coe, Inc. and the individual defendants are all members, signatories or beneficiaries of the arbitration procedures of the New York Stock Exchange Constitution.

A. Whether the Constitution and Rules of the New York Stock Exchange Constitute a Binding Contract Between Its Members

This Court is not aware of any District of Columbia decisions dealing with the question of whether the Constitution and Rules of the New York Stock Exchange constitute a binding contract.¹ However, the Court may appropriately look for guidance to the decisions of the Federal and state courts sitting in New York, a jurisdiction which has many, if not the most significant contacts with parties who are members, signatories or beneficiaries of the provisions of the New York Stock Exchange Constitution and Rules.² There are many such decisions holding that the constitution and rules of a stock exchange constitute a contract between all members of the exchange with each other and with the exchange itself. See Brown v. Gilligan, Will & Co., 287 F.Supp. 766 (S.D.N.Y. 1968); Franklin v. Dick, 262 App.Div. 299, 28 N.Y.S.2d 426, aff'd, 287 N.Y. 656, 39 N.E.2d 282 (1941); Cohen v. Thomas, 209 N.Y. 407, 103 N.E. 708 (1913). In Brown v. Gilligan & Will Co., supra 287 F.Supp. at 769, the court stated:

"Every member, by virtue of his admission, contracts to be governed by the conditions of membership which the exchange has imposed. These conditions are, therefore, binding on the members, and constitute virtually a body of law by which the members are governed in their dealings with the exchange and with each other."

In accordance with the policies and reasoning underlying the above-cited decisions, this Court finds that the Constitution and Rules of the New York Stock Exchange constitute a binding contract between its members.

B. Whether the Court May Refer This Matter to Arbitration Consistent with the Provisions of the United States Arbitration Act, 9 U.S.C. §§ 1-14.

Plaintiff contends that this Court is precluded from referring the controversy to arbitration by virtue of the provisions of the United States Arbitration Act, 9 U.S.C. §§ 1-14, which is the only arbitration act applicable in the District of Columbia. John W. Johnson, Inc. v. 2500 Wisconsin Avenue, 98 U.S.App.D.C. 8, 231 F.2d 761 (1956). The key statutory provisions for purposes of this action are sections 2 and 3 of Title 9. Section 2 provides that a written provision for arbitration of a controversy arising out of "any maritime transaction or a contract evidencing a transaction involving commerce . . . shall be valid, irrevocable and enforceable, save upon such grounds at law or in equity for the revocation of any contract."³ Section 3 requires a federal court in which suit has been brought "upon any issue referable to arbitration under an agreement in writing for such arbitration" to stay the court action pending arbitration once it is satisfied that the issue is arbitrable under the agreement.

In Bernhardt v. Polygraphic Co., 350 U.S. 198, 76 S.Ct. 273, 100 L.Ed. 199 (1956), the Supreme Court held that the stay provisions of section 3 apply only to the two kinds of contracts specified in sections 1 and 2 of the Act, namely those in admiralty or evidencing transactions in "commerce." The first question, therefore, is whether the transactions dealt with in this case are transactions "involving commerce." There is no doubt that the contract between the parties to arbitrate controversies under the Constitution and Rules of the New York Stock Exchange evidences a "transaction involving commerce" within the meaning of section 2 of the Act. See Brown v. Gilligan, Will & Co., supra. But the plaintiff contends that the transactions alleged in the complaint, being common law business torts, are not such transactions "involving commerce" within the meaning of section 2 of the Act because they bear no relation to the parties' membership in the Stock Exchange.

It has been held that a complaint sounding in tort will not in itself prevent arbitration if the underlying contract embraces the disputed matter. See Saucy Susan Products, Inc. v. Allied Old English, Inc., 200 F.Supp. 724 (S.D. N.Y.1951); Robinson v. Bache & Co., 227 F.Supp. 456 (S.D.N.Y.1964). The plaintiff's claims arise as a result of alleged breaches of employment contracts with four of the individual defendants. Their employment was pursuant to a contract evidencing a transaction "involving commerce" if their contracts involved work "`in' commerce, . . . producing goods for commerce, or . . . engaging in activity that affected commerce." Bernhardt v. Polygraphic Co., supra; Dickstein v. duPont, 320 F.Supp. 150 (D.Mass.1970). Clearly it cannot be said that the service offered by the plaintiffs and the duties of their employees in compiling data, compiling client lists, and contracting clients or potential clients outside the District of Columbia did not affect commerce and so involve commerce within the meaning of Section 2 of the Act. And by virtue of their employment, these employees and their employer, the plaintiff, as members, signatories, or beneficiaries of the New York Stock Exchange Constitution and Rules, were bound by its provisions regarding arbitration. This Court, therefore, is not precluded by the United States Arbitration Act from referring this matter to arbitration.⁴

C. Whether the New York Stock Exchange Constitution and Rules Encompass the Subject Matter of This Lawsuit

Plaintiff argues that the subject matter of this lawsuit is not encompassed by the arbitration provisions of the New York Stock Exchange and Rules because the suit alleges common law business torts not unique to the securities industry, and requires a determination of rights and liabilities more commonly within the province of a court than a stock exchange arbitration body.

In countering plaintiff's argument, the defendants again direct the attention of the Court to an opinion issued by a New York court. In Osborne & Thurlow v. Hirsch & Co., 10 Misc.2d 225, 172 N.Y.S.2d 522 (N.Y.Sup.Ct.1958), the Supreme Court of New York County held that a claim for libel was a...