Chan v. Drexel Burnham Lambert, Inc.

Decision Date10 March 1986
Citation223 Cal.Rptr. 838,178 Cal.App.3d 632
CourtCalifornia Court of Appeals Court of Appeals
PartiesAdora K. CHAN, Plaintiff and Respondent, v. DREXEL BURNHAM LAMBERT INCORPORATED, a New York Corporation, Robert B. Zusman, Defendants and Appellants. Civ. B012889.

Keesal, Young & Logan and Geraldine Darrow, Long Beach, for defendants and appellants.

Smith & Holland, Malcolm George Smith and Lesley M. Vaughn, Los Angeles, for plaintiff and respondent.

KLEIN, Presiding Justice.

Defendants and appellants Drexel Burnham Lambert Incorporated (DBL) and Robert B. Zusman (Zusman) appeal from the denial of their petition to compel arbitration and motion for an order staying proceedings pending arbitration of their controversy with plaintiff and respondent Adora K. Chan (Chan).

Because the arbitration clause was not incorporated by reference into Chan's application form, the order is affirmed.


Chan was employed as a stockbroker by DBL, a securities brokerage firm, of which Zusman is an executive. As a condition of her continued employment with DBL, Zusman's secretary asked Chan to sign a form concerning her registration as a securities broker. 2

On March 11, 1980, Chan executed a four-page document entitled Uniform Application for Securities and Commodities Industry Representative and/ Agent (U-4). The U-4 is the document relied on by DBL as the agreement between it and Chan providing for arbitration. Line 9 of page 1 of the U-4 indicated applicant Chan was to be registered with the National Association of Securities Dealers (NASD), the American Stock Exchange (AMEX) and the New York Stock Exchange (NYSE). Paragraph 2C of page 4 of the U-4 states: "I agree to abide by the Statute(s), Constitution(s), Rule(s) and By-Laws as any of the foregoing are amended from time to time of the agency jurisdiction or organization with or to which I am filing or submitting this application; ..."

One of the organizations to which Chan submitted the application was the NYSE. The NYSE has a Rule 347 (Rule 347) which provides: "Any controversy between a registered representative and any member or member organization arising out of the employment or termination of employment of such registered representative by and with such member or member organization shall be settled by arbitration, at the instance of any such party, in accordance with the arbitration procedure prescribed elsewhere in these rules."

Chan was terminated from her position with DBL, and on May 18, 1984, she filed a complaint alleging, inter alia, wrongful discharge from employment. On October 26, 1984, DBL and Zusman petitioned to compel arbitration and moved for an order staying proceedings pending arbitration, which actions were opposed by Chan.

In a November 29, 1984 minute order, the trial court ruled there was no evidence before it as to the "terms" of the alleged agreement relied on by DBL, and that paragraph 2C thereof referred to statutes, constitutions, rules and bylaws not before the court. It noted Chan's position was she never agreed to arbitrate and did not understand paragraph 2C to obligate her to do so. The trial court thereby ordered both sides to present evidentiary positions.

Pursuant to the minute order, both sides filed additional briefs with the trial court, including declarations by Chan and Zusman. Thereafter, the matter came on for hearing, was argued and submitted.

In a minute order dated February 20, 1985, the trial court denied DBL's petition and ruled, inter alia: "1. The agreement signed by [Chan] does not expressly provide for arbitration. [Therefore] there was no openly and fairly entered into agreement for arbitration. [Citations.] [p] 2. The provision relied upon by defendants as requiring arbitration may reasonably be construed as applying to brokerage disputes and not to employer--employee matters. [178 Cal.App.3d 637] [p] 3. The contract is one of adhesion and the ambiguities contained therein ... should be resolved against defendants. [Citation.]"


DBL and Zusman contend Chan entered into a valid agreement which requires this controversy to be arbitrated, and that federal law preempts contrary California law where parties agree to arbitrate.

Chan counters that the alleged agreement did not contain an arbitration provision, is reasonably construed to apply only to brokerage disputes, and is one of adhesion with ambiguities to be resolved in her favor. She further avers that her right to select a judicial forum is a substantial one and cannot be compromised, and that California law governs this dispute.


It is now well established that state adhesion contract principles are inapplicable to the enforcement of arbitration clauses in an agreement governed by the Federal Arbitration Act (Act). (9 U.S.C. § 1 et seq.)

Acceptance of this concept means scrutiny and analysis of any such agreement pursuant to principles of California law is disallowed.

However, the formation of a valid agreement to arbitrate requires the application of California general contract law. Therefore, our discussion covers all these issues, and we conclude no agreement to arbitrate was entered into by the parties.

1. Liberal federal policy favoring arbitration controls, if applicable.

Section 2 of the Act provides: "A written provision in any ... contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract ..., or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, ..., shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." (9 U.S.C. § 2.)

"Section 2 is a congressional declaration of a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary." (Moses H. Cone Hospital v. Mercury Constr. Corp. (1983) 460 U.S. 1, 24, 103 S.Ct. 927, 941, 74 L.Ed.2d 765.) "In enacting § 2 of the federal Act, Congress declared a national policy favoring arbitration and withdrew the power of the states to require a judicial forum for the resolution of claims which the contracting parties agreed to resolve by arbitration." (Southland Corp. v. Keating (1984) 465 U.S. 1, 10, 104 S.Ct. 852, 858, 79 L.Ed.2d 1.)

There are "only two limitations on the enforceability of arbitration provisions governed by the ... Act: they must be part of a ... contract 'evidencing a transaction involving commerce' [fn. omitted] and such clauses may be revoked upon 'grounds as exist at law or in equity for the revocation of any contract.' [There is] nothing in the Act indicating that the broad principle of enforceability is subject to any additional limitations under state law." (Id., at pp. 10-11, 104 S.Ct. at pp. 858.)

a. Application throughout the states.

"The majority of state courts considering the preemption issue have held the Act controls the enforceability of arbitration clauses in contracts involving commerce which are litigated in state courts. (See, e.g., Blanks v. Midstate Constructors, Inc. (Tex.Civ.App.1980) 610 S.W.2d 220, 223; Garmo v. Dean, Witter, Reynolds, Inc. (1984) 101 Wn.2d 585 ; Episcopal Housing Corp. v. Federal Ins. Co. (1977) 269 S.C. 631 .) In Ex parte Alabama Oxygen Co., Inc. (Ala.1983) 433 So.2d 1158, the Supreme Court of Alabama determined that the Act did not preempt state policies regarding arbitration. However, the opinion was vacated by the United States Supreme Court and the case remanded for reconsideration in light of Southland Corporation v. Keating, supra, 465 U.S. 1, 104 S.Ct. 852, 79 L.Ed.2d 1. (York International v. Alabama Oxygen Co., Inc. (1984) 465 U.S. 1016, [79 L.Ed.2d 668, 104 S.Ct. 1260].) On remand, the Alabama court held federal law controlled. (Ex parte Alabama Oxygen Co., Inc. (Ala.1984) 452 So.2d 860.)" (Tonetti v. Shirley (1985) 173 Cal.App.3d 1144, 1148, 219 Cal.Rptr. 616.)

b. California adhesion principles inapplicable.

In recognition of the above discussion, California adhesion contract principles may not be applied here. Chan's employment dealt with "commerce", and therefore a binding arbitration agreement would be controlled by the Act. Further, "disputes between a member of a national stock exchange and its employees are consistently held to be arbitrable, ..." (Tonetti v. Shirley, supra, 173 Cal.App.3d at p. 1148, 219 Cal.Rptr. 616; see e.g. Merrill Lynch, Pierce, Fenner & Smith v. Hovey (8th Cir.1984) 726 F.2d 1286, 1288; Dickstein v. duPont (1st Cir.1971) 443 F.2d 783, 784-785; Merrill Lynch, Pierce, Fenner & Smith v. Shubert (M.D.Fla.1983) 577 F.Supp. 406-407; Legg, Mason & Company, Inc. v. Mackall & Coe, Inc. (D.D.C.1972) 351 F.Supp. 1367, 1369.)

The case of Tonetti v. Shirley, supra, 173 Cal.App.3d at page 1144, 219 Cal.Rptr. 616, involved a fact situation similar to the case at bench. A securities brokerage firm appealed from the denial of its motion to stay proceedings and compel arbitration of a dispute arising out of the plaintiff stockbroker's employment. After reviewing decisions of state courts that have considered the preemption issue, the Tonetti court held "[t]he overwhelming weight of authority compels us to conclude California adhesion contract principles are inapplicable to the enforcement of an arbitration clause in a contract governed by the Act." (Id., at p. 1148, 219 Cal.Rptr. 616.)

It follows also then that ambiguities in an arbitration clause are to be resolved in favor of arbitration, notwithstanding the California rule that a contract is construed most strongly against the drafter (Marshall & Co. v. Weisel (1966) 242 Cal.App.2d 191, 196, 51 Cal.Rptr. 183). "The ... Act establishes that, as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the...

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