Clark v. First Union Securities, Inc.

• Decision Date: 10 August 2007
• Docket Number: No. B189589.,B189589.
• Citation: 153 Cal.App.4th 1595,64 Cal.Rptr.3d 313
• Court: California Court of Appeals Court of Appeals
• Parties: Jason CLARK et al., Plaintiffs and Respondents, v. FIRST UNION SECURITIES, INC. et al., Defendants and Appellants.

64 Cal.Rptr.3d 313

153 Cal.App.4th 1595

Jason CLARK et al., Plaintiffs and Respondents, v. FIRST UNION SECURITIES, INC. et al., Defendants and Appellants.

No. B189589.

Court of Appeal, Second District, Division 3.

August 10, 2007.

Reed Smith, Margaret M. Grignon, Alisa M. Chevalier, Michele J. Beilke and Zareh Jaltorossian, Los Angeles, for Defendants and Appellants.

Knapp, Petersen & Clarke and Stephen M. Harris, Glendale, for Plaintiffs and Respondents.

ALDRICH, J.

INTRODUCTION

Defendant and appellant Wachovia obtained a trial court ruling that the putative class and class action causes of action brought by plaintiffs and respondents Jason Clark and Robert A. Pool were to be resolved in arbitration. Then, Wachovia obtained a ruling from the arbitrators that these causes of action were not eligible for arbitration. Thereafter, the trial court, on its own motion, reconsidered its first ruling. The trial court issued an order holding that the putative class and class causes of action were to be heard in the trial court. We affirm the trial court's order.

FACTUAL AND PROCEDURAL BACKGROUND

1. The employment.

a. Clark's contract and the U-4.

Plaintiff and respondent Jason Clark was hired by defendant and appellant First Union Securities, Inc. (First Union) as an investment consultant candidate.

Clark's position required him to hold a license from the National Association of Securities Dealers, Inc. (NASD).¹ Thus, Clark was required to execute a Securities and Exchange Commission (SEC) approved Uniform Application for Securities Industry Registration or Transfer Form U4 (Form U-4).² Clark executed a Form U-4 on October 28, 1998, and became employed by First Union in November 1998.

The Form U-4 contained the following arbitration provision: "I agree to arbitrate any dispute, claim or controversy that may arise between me and my firm, or a customer, or any other person, that is required to be arbitrated under the rules, constitutions, or by-laws of the [NASD] as may be amended from time to time and that any arbitration award rendered against me may be entered as a judgment in any court of competent jurisdiction."

b. The pertinent rules in the NASD Code

The arbitration rules promulgated by the NASD are contained in the NASD Code of Arbitration Procedure (NASD Code).

Rule 10331 provides that the NASD Code "shall be deemed a part of and incorporated by reference in every agreement to arbitrate under the Rules of the [NASD]...."

The following are the other Rules relevant to the matter before us:

Rule 10101 states in part: "This Code of Arbitration is prescribed and adopted ... for the arbitration of any dispute, claim, or controversy ... arising out of the employment or termination of employment of associated person(s) with any member...."

Rule 10201 states in part: "[A] dispute, claim, or controversy eligible ... between or among members and/or associated persons, and/or certain others, ... arising out of the employment or termination of employment of such associated person(s) with such member, shall be arbitrated under this Code...."

Rule 10301 states in part: "Any dispute, claim, or controversy ... arising in connection with the business of such member or in connection with the activities of such associated persons shall be arbitrated under this Code, as provided by any duly executed and enforceable written agreement or upon the demand of the customer. ..."

Subdivision (d) of Rule 10301 is entitled "Class Action Claims." It makes ineligible for arbitration class actions claims submitted as a class action and claims filed by members of a putative or certified class action "if the claim is encompassed by a putative or certified class action filed in federal or state court, or is ordered by a court to an arbitral forum...." (Rule 10301(d)(1)(2).) A party or class member may be compelled to arbitrate if class certification is denied, the class is decertified, the party or class member is excluded from the class by the court or the party or class member elects "not to participate in the putative or certified class action, or, if applicable, has complied with any conditions for withdrawing from the class prescribed by the court." (Rule 10301(d)(2)(3).)

Pursuant to Rule 10301(d)(2) the arbitration panel may decide if a dispute is "encompassed by a putative or certified class action." However, "[e]ither party may elect instead to petition the court" to resolve such disputes. Any such petition to the court must be filed within ten business days of receipt of notice that the Director of Arbitration is referring the dispute to a panel of arbitrators." This rule also prohibits submission of class claims to "an arbitral forum sponsored by a self-regulatory organization for classwide arbitration."

Rule 10301(d)(4) states that "No member or associated person shall be deemed to have waived any of its rights under this Code or under any agreement to arbitrate to which it is party except to the extent stated in this paragraph."³

Rule 10305(a) states: "At any time during the course of an arbitration, the arbitrators may either upon their own initiative or at the request of a party, dismiss the proceeding and refer the parties to their judicial remedies, or to any dispute resolution forum agreed to by the parties, without prejudice to any claims or defenses available to any party."

Rule 10314(d) permits persons to be joined in a single arbitration if they assert any rights to relief when there are common factual or legal issues.⁴

Rule 10324 provides that "The arbitrators shall be empowered to interpret and determine the applicability of all provisions under this Code and to take appropriate action to obtain compliance with any ruling by the arbitrator(s). Such interpretations and actions to obtain compliance shall be final and binding upon the parties." Additionally, arbitrators are "empowered to award any relief ... available in court under the law" (Rule 10214) and all awards rendered by an arbitrator are "final and not subject to review or appeal" (Rule 10330(b)).

c. The purpose of Rule 10301 (d).

Rule 10301(d) was adopted by the SEC in 1992. The impetus for the rule was a suggestion that procedures be developed "that would give investors access to the courts in appropriate cases ____" (Sept. 21, 1999 NASD interpretative letter by Jean I. Feeney, Assistant General Counsel, http://www.nasd.com/Rules Regulation/PublicationsGuida nce/InterpretiveLetters/ProceduralRules/NASDW_002521.) "Although Rule 10301(d) was designed to address investor class actions filed under Rule 23 of the Federal Rules of Civil Procedure, the underlying rationale would also cover other types of class actions." (Ibid.)

The SEC issued a public notice in connection with the approval of Rule 10301(d). In this 1992 approval order, the SEC gave notice that under the new provision class actions were excluded from arbitration. The order stated that arbitration agreements cannot require arbitration of class action disputes and such contracts are outside the scope of arbitration contracts. In part, the approval order stated, that "paragraph (d)(3) [of Rule 10301] clearly prohibits NASD members from enforcing existing arbitration contracts to defeat class certification of participation.... [¶][T]he NASD believes, and the Commission agrees, that the judicial system has already developed the procedures to manage class action claims. Entertaining such claims through arbitration at the NASD would be difficult, duplicative and wasteful." (57 Fed.Reg. 52660-52661 (Nov. 4, 1992).)⁵

2. Procedure.

a. The complaint.

Clark filed his initial complaint on September 18, 2002. The complaint alleged eight causes of action arising from his employment. The lawsuit alleged the misconduct violated a number of California Labor Codes and employment laws. The allegations of wrongdoing ranged from misrepresentations regarding the sale of securities, to the failure to pay wages and to reimburse for business expenses. The first six causes of action were personal to Clark. The seventh cause of action was brought by Clark individually and on behalf of others similarly situated. It alleged unfair business practices (Bus. & Prof.Code, § 17200, UCL) and sought restoration of all sums wrongfully obtained by First Union as well as injunctive relief. The eighth cause of action was for declaratory relief.

First Union filed a motion to compel arbitration of all of Clark's causes of action, except for the injunctive and declaratory relief requests in the seventh and eighth causes of action.⁶ First Union argued that because all allegations arose out of Clark's employment or termination of employment, they must be resolved in arbitration pursuant to the arbitration provision in the Form U-4 and the NASD Code. First Union did not cite Rule 10301(d).

In opposition, Clark contended NASD arbitration procedures were procedurally and substantively unconscionable. (Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 99 Cal. Rptr.2d 745, 6 P.3d 669.) Additionally, citing NASD Rule 10301(d), Clark argued that the unfair practice cause of action was asserted on behalf of all Wachovia employees, and thus, was not subject to arbitration. Clark stated, "[t]he only forum for the unfair practice claims is a civil lawsuit. The NASD arbitration rules do not even permit putative or class claims to be arbitrated."

In its reply brief, First Union addressed unconscionability, but failed to directly address Clark's argument that the NASD Code did not permit arbitration of putative or class claims.⁷

On January 13, 2003, the trial court granted the motion for all claims "except the seventh and eighth causes of action, for the limited claims as stated on the record[.]"

A first amended complaint was filed on September 19, 2003, on behalf of Clark and Pool. The complaint was filed against First Union and its successor in interest, defendant and appellant Wachovia...