Dickinson v. Heinold Securities, Inc.

• Decision Date: 06 October 1981
• Docket Number: No. 80-2202,80-2202
• Citation: 661 F.2d 638
• Parties: Fed. Sec. L. Rep. P 98,309 Clarance B. DICKINSON, a Plaintiff-Appellee, v. HEINOLD SECURITIES, INC., Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 638

661 F.2d 638

Fed. Sec. L. Rep. P 98,309

Clarance B. DICKINSON, ^a Plaintiff-Appellee, v. HEINOLD SECURITIES, INC., Defendant-Appellant.

No. 80-2202.

United States Court of Appeals Seventh Circuit.

Argued April 3, 1981.

Decided Oct. 6, 1981. ^b

William J. Nissen, Chicago, Ill., for defendant-appellant.

Walter E. Trittipo, Jr., Speckman & Trittipo, Ltd., Chicago, Ill., for plaintiff-appellee.

Before FAIRCHILD, Circuit Judge, GIBSON, Senior Circuit Judge, ^c and CUDAHY, Circuit Judge.

CUDAHY, Circuit Judge.

Defendant Heinold Securities, Inc. ("Heinold") appeals from the order of the district court denying defendant's motion for a stay of these proceedings pending arbitration and its motion to compel arbitration on selected counts of the complaint. ¹ We reverse and remand for further proceedings.

Plaintiff is a former client of the defendant's stock options brokerage service. Plaintiff opened his account with Heinold in September of 1975. The agreement between the parties gave Heinold a limited discretionary power to trade plaintiff's account on the Chicago Board Options Exchange ("CBOE") in accordance with certain pre-selected strategies. The original agreement between the parties, as well as the subsequent "Options Agreement," contained a clause providing for the arbitration of any future disputes that might arise over the handling of the account. ²

Plaintiff's account remained open for approximately one year. Plaintiff then withdrew the bulk of his funds in September of 1976 and notified Heinold that he felt that Heinold had failed to trade his account in accordance with the investment strategies set out in the agreement between the parties. On September 24, 1976, plaintiff wrote the CBOE complaining of Heinold's handling of his account.

Considerable time passed while that body investigated the charges. ³ On February 14, 1978, plaintiff wrote Heinold threatening a lawsuit unless a satisfactory settlement was reached before February 26, 1978. Heinold replied by electing to arbitrate the dispute pursuant to the terms of the agreement between the parties. Plaintiff failed to respond and on or about April 10, 1978, Heinold commenced an arbitration proceeding before the Arbitration Committee of the CBOE.

Plaintiff filed the present action three days later and denied that it could be compelled to arbitrate the dispute. Plaintiff's complaint contained two counts. The first count stated in paragraph one that the matters alleged in this count

give rise to a cause of action under Section 10(b) of the Securities Exchange Act of 1934, as amended, 15 U.S.C. Section 78J, and Rule 10b-5 of the Regulations of the Securities and Exchange Commission.

Additional paragraphs of Count I alleged that Heinold made certain misrepresentations in soliciting the account and traded the account to maximize Heinold's profits from commissions. Under this court's decision in Weissbuch v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 558 F.2d 831 (7th Cir. 1977) (relying upon Wilko v. Swan, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953)), Count I was not arbitrable regardless of the agreement between the parties because of certain provisions and policies of federal securities law.

The first paragraph of Count II stated that "(a)s for its paragraphs 1 through 11 of this Count II, plaintiff realleges, and incorporates herein by reference, paragraphs 1 through 10 of Count I, above." Count II thus incorporated the above-quoted allegation that the Count stated a cause of action under the federal securities laws. If Count II is construed as stating a claim under the securities laws, Weissbuch would bar arbitration of its allegations. Additional paragraphs of Count II alleged that Heinold's conduct violated the agreement between the parties.

Heinold filed an answer to the complaint which denied the pertinent allegations. In particular, Heinold stated as an affirmative defense to both Counts that

(t)he complaint fails to state a claim under Section 10(b) of the Securities Exchange Set (sic) of 1934 or Rule 10b-5 promulgated by the Securities and Exchange Commission. Pursuant to an agreement between the parties, the complaint should be referred to arbitration. ⁴

Discovery proceeded rapidly with both parties filing, inter alia, interrogatories, requests for admissions and requests for the production of certain documents.

Plaintiff filed an amended four-count complaint on March 29, 1979, which expanded and clarified his earlier allegations. All references to federal securities law claims were consolidated in Count I and clearly labelled as such. Counts II, III and IV alleged various state law tort and contract claims based upon essentially the same facts relevant to the federal claim. Both parties continued with their discovery efforts after the filing of the amended complaint.

On April 24, 1979, Heinold moved to stay proceedings on Counts II, III and IV pending arbitration, to stay arbitration pending a judicial resolution of the non-arbitrable securities law claim in Count I and for an order compelling plaintiff to arbitrate Counts II, III and IV. The district court referred these motions to a magistrate. An additional motion, retained by the district court, sought summary judgment on Count I, the non-arbitrable claim. In his Revised Report of December 14, 1979, the magistrate recommended that Counts II, III and IV proceed to arbitration only if Count I was resolved adversely to the plaintiff on Heinold's pending motion for summary judgment. The district court adopted this recommendation. Subsequently, the district court denied the pending motion for summary judgment on Count I and, in accordance with the magistrate's recommendation, retained Counts II, III and IV for a judicial resolution together with Count I. It is from this order denying arbitration on Counts II, III and IV that Heinold appeals.

Three issues are presented by this appeal: 1) Did Heinold waive its right to seek arbitration on Counts II, III and IV?; 2) Does the agreement between the parties provide for arbitration of Counts II, III and IV given their joinder in this action with the non-arbitrable claim in Count I?; and 3) even if contractually required, does the Federal Arbitration Act, 9 U.S.C. § 1 et seq. (1976), allow the district court to compel a judicial resolution of otherwise contractually arbitrable claims?

I. Waiver

Plaintiff identifies several aspects of Heinold's conduct which it argues waived Heinold's right to arbitration of the three state law counts. While arbitration is a waivable contract right, Howard Hill, Inc. v. George A. Fuller Co., 473 F.2d 217, 218 (5th Cir. 1973), a "waiver of arbitration is not lightly to be inferred." Midwest Window Systems, Inc. v. Amcor Industries, Inc., 630 F.2d 535, 536 (7th Cir. 1980). The essential question is whether, under the totality of the circumstances, ⁵ the defaulting party acted " 'inconsistently' with the arbitration right." Midwest Window, 630 F.2d at 537 (quoting Shinto Shipping Co. v. Fibrex & Shipping Co., 572 F.2d 1328, 1330 (9th Cir. 1978)).

Plaintiff complains that Heinold waited 18 months after the controversy arose to seek arbitration. ⁶ This period of delay encompasses some attempts by the parties to settle the dispute; it also encompasses the investigation by the CBOE. When plaintiff indicated that an informal resolution would no longer be possible, Heinold promptly moved for arbitration. Preliminary negotiations concerning a settlement are not sufficient to waive arbitration. Southwest Industrial Import & Export Inc. v. Wilmod Co., 524 F.2d 468, 470 (5th Cir. 1975). Significant periods of delay prior to the onset of litigation are often necessary to allow the parties to engage in good faith efforts to resolve the controversy without reference to an adjudicatory body. Neither the length of the delay nor the interim actions of Heinold were inconsistent with Heinold's arbitration right.

We also find no waiver by Heinold's conduct after plaintiff filed this suit. Plaintiff's original complaint alleged two counts. Plaintiff cites as waiver Heinold's failure to seek a stay pending arbitration of the contract claim in Count II. We agree with the district court, however, that it was reasonable for Heinold to act on the assumption that Count II stated a non-arbitrable claim under the federal securities laws. Count II expressly incorporated paragraph 1 of Count I which stated a federal law basis for the cause of action. ⁷ Plaintiff may have intended to allege a contract claim but that is not determinative where plaintiff's original complaint, drafted by counsel, was ambiguous. Given the ambiguity, it is irrelevant that the complaint might eventually have been construed, within the loose strictures of notice pleading, as stating a claim for breach of contract. ⁸

Plaintiff's final waiver argument focuses on Heinold's conducting discovery in the district court both before and after plaintiff filed his amended complaint alleging state law claims capable of being arbitrated. Given our view of the original complaint, Heinold's discovery prior to the filing of the amended complaint does not constitute waiver. At that time, Heinold faced only allegations that were reasonably perceived as non-arbitrable, and no waiver of the right to arbitrate can occur from conducting discovery on non-arbitrable claims.

After the amended complaint was filed, Heinold was clearly on notice that claims capable of being arbitrated were alleged by three of the four counts. Discovery continued nonetheless, however, and with good reason. Plaintiff still alleged a non-arbitrable securities law claim in Count I of the amended complaint. Plaintiff has not argued that the discovery in question was irrelevant to Count I. While this court has noted that discovery efforts on arbitrable claims may constitute a waiver of the right to arbitration, Midwest Window, 630 F.2d at 537, it is Heinold's right to conduct discovery on...