Fox v. Merrill Lynch & Co., Inc.

• Decision Date: 28 June 1978
• Docket Number: No. 77 Civ. 5769 (MP).,77 Civ. 5769 (MP).
• Citation: 453 F. Supp. 561
• Parties: James E. FOX, Plaintiff, v. MERRILL LYNCH & CO., INC. and Merrill Lynch, Pierce, Fenner & Smith, Incorporated, Defendants.
• Court: U.S. District Court — Southern District of New York

453 F. Supp. 561

James E. FOX, Plaintiff, v. MERRILL LYNCH & CO., INC. and Merrill Lynch, Pierce, Fenner & Smith, Incorporated, Defendants.

No. 77 Civ. 5769 (MP).

United States District Court, S. D. New York.

June 28, 1978.

Avrom S. Fischer, Brooklyn, N.Y., for plaintiff.

Brown, Wood, Ivey, Mitchell & Petty, New York City, by Roger J. Hawke, Thomas J. Mullaney, New York City, for defendants.

DECISION

POLLACK, District Judge.

This is a motion by defendants for a stay of this lawsuit pending an arbitration which has been demanded by defendants.

In this action, plaintiff James E. Fox seeks damages on account of the determination by defendant Merrill Lynch, Pierce, Fenner & Smith, Inc. (Merrill Lynch) that Fox has forfeited his right to a pension from Merrill Lynch. Defendants' application for a stay is made pursuant to 9 U.S.C. § 3. Arbitration of the dispute is sought under an agreement that disputes of the parties should be settled in accordance with Rule 347 of the New York Stock Exchange (NYSE). Plaintiff opposes the motion on the grounds, inter alia, that he is not bound by any agreement to arbitrate and that law and public policy forbid compelling him to arbitrate certain of the claims asserted herein.

For the reasons hereafter set forth, the aspects of this controversy which are appropriate for arbitration are severable from and predominate over the non-arbitrable claims. Accordingly, in the interests of economy and justice, a stay will be granted to permit arbitration of the arbitrable claims before consideration of the remainder.

Defendant Merrill Lynch is a broker-dealer and a member of the NYSE.¹ It employed Fox for 18 years approximately from 1955 until 1973, primarily as an institutional salesman. The company instituted an employee pension plan in 1959. As amended through 1973, this provided that employees who remained with Merrill Lynch until after the age of forty and had participated in the plan for at least ten years were entitled to a pension upon reaching the age of forty-five. Fox participated in the plan from 1959 onward and when he reached forty years of age in 1972 he had met the minimum ten year employment requirement and would have been entitled upon his forty-fifth birthday in 1977 to a pension under the plan.

The plan also provided, however:

A participant who enters employment or engages directly or indirectly in any business deemed by the Administrative Committee to be competitive with the business of any Employer or any Subsidiary shall forfeit all rights to any benefits due or to become due from the Trust Fund, other than those attributable to Voluntary Contributions.

Fox left Merrill Lynch voluntarily in 1973 to take employment as a branch manager with two other stockbrokerage firms, first Clark Dodge & Co. and then Dean Witter & Co. In 1975, the Administrative Committee advised him that his prospective benefits under the Pension Plan had been forfeited on account of his employment with competing firms.

Fox instituted this suit on November 29, 1977. His complaint alleges that the forfeiture of his pension benefits was inconsistent with the terms of the plan. He complains further that Merrill Lynch failed to warn him of the possibility of such a forfeiture when, before leaving the company in 1973, he discussed the possibility of accepting employment with Clark Dodge & Co., or in 1974 when he inquired concerning his pension shortly before accepting the position at Dean Witter & Co.

The first two counts of Fox's amended complaint allege that defendants breached their contractual obligations under the pension plan. In Count One the claimed contractual breach is posited on the Employee Retirement Income Security Act, 29 U.S.C. § 1001 et seq. (ERISA). In counts three and four, by way of anticipation Fox alleges that defendants have waived and are estopped from relying on the plan's forfeiture provision. The several remaining counts of the complaint set forth noncontractual theories opposing arbitration, primarily that the forfeiture constitutes a restraint of trade in violation of state and federal antitrust laws.

The Court's jurisdiction is alleged to rest on the grounds that the action arises under ERISA, as well as diversity of citizenship and requisite amount in controversy.

Fox's alleged agreement to arbitrate disputes arises from his employment agreement with Merrill Lynch which incorporates therein the Rules of the NYSE. That constitutes a provision in "a contract evidencing a transaction involving commerce," 9 U.S.C. § 2. Dickstein v. DuPont, 443 F.2d 783, 784-85 (1st Cir. 1971). Accordingly, federal law governs all questions regarding the interpretation, validity and enforceability of the arbitration agreement. Coenen v. R. W. Pressprich & Co., 453 F.2d 1209, 1211 (2d Cir.), cert. denied, 406 U.S. 949, 92 S.Ct. 2045, 32 L.Ed.2d 337 (1972). Issues concerning the validity and enforceability of an asserted arbitration agreement properly are determined upon a motion to stay pursuant to 9 U.S.C. § 3. See American Safety Equipment Corp. v. J. P. Maguire & Co., 391 F.2d 821, 826 (2d Cir. 1968).

Fox agreed to arbitrate the contractual dispute he asserts. In 1957, Fox and Merrill Lynch applied for and obtained the NYSE's approval for the company to employ Fox as a registered representative. In the application, Fox agreed

to abide by the Constitution and Rules of the Board of Governors of the New York Stock Exchange as the same have been or shall be from time to time amended, and by all the rules and regulations adopted pursuant to the Constitution, and by all the practices of the Exchange. (Emphasis added).

In 1958, (prior to adoption of the pension plan here involved) the NYSE adopted Rule 347(b), providing:

Any controversy between a registered representative and any member or member organization arising out of the employment or termination of employment of 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 the rules.

The provision is still in effect, presently as Rule 347.

Whether a party has agreed to arbitration is determined on the basis of ordinary contract principles. A valid arbitration provision must be in writing, but a party may be bound by that provision without having signed an exemplar. A/S Custodia v. Lessin International, Inc., 503 F.2d 318, 320 (2d Cir. 1974); Fisser v. International Bank, 282 F.2d 231, 233 (2d Cir. 1960).

Fox is bound by Rule 347 for two reasons. First, he agreed in 1957 to abide by the NYSE Rules as thereafter amended. A party who agrees to abide by the rules of an organization is bound by its subsequently adopted rule calling for arbitration. See M. Domke, The Law and Practice of Commercial Arbitration § 7.02 (1968). The Minnesota Supreme Court reached the same conclusion on an indistinguishable set of facts in Moritz v. Francis I. DuPont & Co., 291 Minn. 523, 180 N.W.2d 487 (1971) (per curiam).

Second, even if Rule 347 as such was not binding on Fox upon adoption, it was tacitly adopted by Fox as a modification of his employment agreement with Merrill Lynch. Parties may modify their contractual obligations by an agreement reasonably to be understood from their conduct. See Dow Chemical Co. v. S.S. Giovannella D'Amico, 297 F.Supp. 699, 707 (S.D.N.Y. 1969); 3 A. Corbin, Contracts § 564, at 297 (2d ed. 1960). Fox represented that he would abide by the NYSE Rules in 1957. After Rule 347 was adopted in 1958, he remained in the employ of Merrill Lynch, apparently without protest, for a year before the pension plan was instituted, twelve years before he acquired a right to benefits, and fifteen years in all.

The arbitration agreement applies to the instant controversy. Rule 347 provides for arbitration of "any controversy . . arising out of . . . employment or termination of employment." This action arises out of an alleged forfeiture of pension benefits which were offered as compensation for services. Thus, it relates directly to Fox's employment. See Stokes v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 523 F.2d 433, 437 (6th Cir. 1975) (dictum).

Plaintiff contends that Rule 347 is unenforceable on antitrust grounds. Drayer v. Krasner, 572 F.2d 348, 353-60 (2d Cir. 1978), rejected a similar contention. The Court of Appeals held, first, that Rule 347 is to be tested under the rule of reason because it does not constitute a "classic" boycott and because it is within the self-regulatory authority of the NYSE and subject to SEC oversight. Id. at 355-59. Second, the Court held that, taking into account the composition of NYSE arbitration panels, Rule 347 was permissible under the rule of reason in the absence of evidence of actual unfairness in the operation of such panels. Id. at 359. Fox makes conclusory allegations, self-confessedly based in part on hearsay, that NYSE arbitration tribunals are unfair to registered representatives. However, upon competent evidence of partiality, Fox would have the opportunity to move to have the arbitration award set aside pursuant to 9 U.S.C. § 10. Accordingly, this motion furnishes no occasion to depart from the Court of Appeals' holding, sustaining Rule 347 from attack on antitrust grounds.

Law and public policy offer no obstacle to compelling Fox to arbitrate his claim under ERISA. Fox relies on Lewis v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 431 F.Supp. 271 (E.D.Pa.1977), which held that Rule 347 was unenforceable as applied to the claims asserted pursuant to ERISA in that action. It proves unnecessary to consider whether Lewis was properly decided, because it is distinguishable from the instant action, and may not properly be extended to this case.

Lewis arose from facts similar to those presented here. The plaintiff asserted a number of claims pursuant to ERISA, including claims against the pension plan fiduciaries in their individual capacities, for breach of...