Jope v. Bear Stearns & Co.

• Decision Date: 15 November 1985
• Docket Number: No. C-85-4863 SC.,C-85-4863 SC.
• Court: U.S. District Court — Northern District of California
• Parties: Rene JOPE and Mary Jope, Plaintiffs, v. BEAR STEARNS & CO., a partnership; Painewebber Incorporated, a corporation; and Gilbert Johnson (also known as Jerome Muzinich), Defendants.

632 F. Supp. 140

Rene JOPE and Mary Jope, Plaintiffs, v. BEAR STEARNS & CO., a partnership; Painewebber Incorporated, a corporation; and Gilbert Johnson (also known as Jerome Muzinich), Defendants.

No. C-85-4863 SC.

United States District Court, N.D. California.

November 15, 1985.

Arthur Levy, San Francisco, Cal., for plaintiffs.

Orrick, Herrington & Sutcliffe, San Francisco, Cal., for Bear Stearns & Co. and Gilbert Johnson.

Steefel, Levitt & Weiss, San Francisco, Cal., for Painewebber.

ORDER RE MOTIONS TO COMPEL ARBITRATION, SEVER ARBITRABLE CLAIM, AND STAY PROCEEDINGS

CONTI, District Judge.

Plaintiff filed a First Amended Complaint in this action on August 22, 1985, seeking compensatory and punitive damages for violations of Rule 10b-5 of the Securities Exchange Act of 1934, breach of fiduciary duty, negligent securities account management, negligent employment and supervision, and negligence.

The matter is presently before the court on defendants PaineWebber Incorporated ("PaineWebber") and Gilbert Johnson's motion to compel arbitration of plaintiff's Fifth Cause of Action, and on defendants Bear Stearns & Co. ("Bear Stearns") and Gilbert Johnson's motion to stay proceedings pending arbitration of various causes of action in this case.

In May, 1982, plaintiffs opened an investment account at PaineWebber. Defendant Johnson served as plaintiffs' account executive at PaineWebber. In November, 1982, PaineWebber terminated Johnson's employment, apparently for reasons unrelated to plaintiffs' account. Bear Stearns then hired Johnson as an account executive "sometime around the end of 1982." Plaintiffs' Memorandum, of Points and Authorities in Opposition to Bear Stearns' Motion to Stay, p. 3. Plaintiffs accordingly transferred their account to Bear Stearns in order to facilitate Johnson's continued management of their investment funds. In May, 1984, Bear Stearns terminated Johnson's employment. In July, 1984, plaintiffs filed the instant action, stating various federal and state securities claims relating to the manner in which Johnson handled their account while employed by PaineWebber and Bear Stearns.

On September 9, 1985, Bear Stearns and plaintiffs entered into a stipulation for arbitration of plaintiffs' Second through Fourth Causes of Action. The parties entered into the stipulation pursuant to ¶ 9 of the customer agreement between plaintiffs and Bear Stearns whereby plaintiffs agreed to arbitrate "any controversy arising out of or relating to plaintiffs' cash and/or margin accounts," except for "claims arising under the federal securities laws." Bear Stearns' Memorandum of Points and Authorities in Support of Motion to Stay, p. 2. On September 17, 1985, PaineWebber and plaintiffs entered into a stipulation for arbitration of plaintiffs' Sixth through Eighth Causes of Action. The parties entered into the stipulation pursuant to ¶ 10 of the customer agreement between plaintiffs and PaineWebber whereby plaintiffs agreed to arbitrate any dispute arising out of their PaineWebber securities account.

PaineWebber and Johnson now move to compel plaintiffs to arbitrate their Fifth Cause of Action charging movants with violation of Rule 10b-5. Section 2 of the United States Arbitration Act, 9 U.S.C. § 2, provides that,

"a written provision in any ... contract evidencing a transaction involving commerce to settle by arbitration a controversy arising out of such contract or transaction ... shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract."

It is well established that "arbitration clauses are regarded with favor." Pierson v. Dean, Whitter, Reynolds, Inc., 742 F.2d 334, 338 (7th Cir.1984). Accordingly, agreements to arbitrate are to be "liberally construed, and any doubts about the scope of an arbitration clause are to be resolved in favor of arbitration." Atsa of California, Inc. v. Continental Insurance Co., 702 F.2d 172, 175 (9th Cir.1983); see also, Moses H. Cone Hospital v. Mercury Construction, 460 U.S. 1, 24-25, 103 S.Ct. 927, 941-42, 74 L.Ed.2d 765 (1983). Upon review of the record, the court finds that defendants' motion to compel has merit.

As plaintiffs note, the Ninth Circuit has generally held that "claims arising out of alleged violations of federal securities laws ... are not arbitrable." Kershaw v. Dean Whitter Reynolds, Inc., 734 F.2d 1327, 1328 (9th Cir.1984), cert. denied, ___ U.S. ___, 105 S.Ct. 1750, (1985); see also, Pierson, 742 F.2d at 338. The Ninth Circuit has based its rulings upon Wilko v. Swan, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953), in which the United States Supreme Court held that predispute agreements to arbitrate claims that arise under § 12(2) of the Securities Act of 1933, 15 U.S.C. § 77l (2), are not enforceable. The Wilko Court,

"pointed to language in § 14 of the 1933 Act ... which declares `void' any `stipulation' waiving compliance with any `provision' of the ... Act, and held that an agreement to arbitrate amounted to a stipulation waiving the § 12(2) private right to seek a judicial remedy and was therefore void."

Dean Whitter Reynolds Inc. v. Byrd, 470 U.S. 213, ___ n. 1, 105 S.Ct. 1238, 1240 n. 1, 84 L.Ed.2d 158, 162 n. 1 (1985). Although, by its terms, Wilko applies only to 1933 Act claims, numerous federal courts have extended its analysis to causes arising under § 10(b) of the Securities Exchange Act of 1934. See Pierson; Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Moore, 590 F.2d 823, 827-29 (10th Cir.1978); Weissbuch v. Merrill Lynch, Pierce, Fenner & Smith, 558 F.2d 831, 833-35 (7th Cir. 1977).

Recently, however, the Supreme Court has questioned the applicability of Wilko to 1934 Act claims. In Scherk v. Alberto-Culver Co., 417 U.S. 506, 513, 94 S.Ct. 2449, 2454, 41 L.Ed.2d 270 (1974), the Court wrote that "a colorable argument could be made that ... the semantic reasoning of the Wilko opinion does not control claims arising under the 1934 Act." The Court noted that the provisions of the 1933 and 1934 Acts differ and that, "unlike § 12(2) of the 1933 Act, § 10b of the 1934 Act does not expressly give rise to a private cause of action." Byrd, 470 U.S. at ___, n. 1, 105 S.Ct. at 1240, n. 1, 84 L.Ed.2d at 162, n. 1. In Byrd, the Court referred to its dicta in Scherk, but refrained from deciding "the applicability of Wilko to claims under § 10(b) and Rule 10b-5 as the question was not properly before the Court." Id. In a separate concurrence, however, Justice White elaborated upon the arbitrability of 1934 Act claims, noting,

"Wilko's reasoning cannot be mechanically transferred to the 1934 Act ... Jurisdiction under the 1934 Act is narrower, being restricted to the federal courts ... More important, the private cause of action under § 10(b) and Rule 10b-5 ... is implied rather than express ... Thus, unlike the non-waiver provision in the 1933 Act, the phrase in the 1934 Act which prohibits parties from `waiving compliance with any provision of this chapter,' 15 U.S.C. § 78cc(a) ... (emphasis added), is ... literally inapplicable to the arbitrability of 1934 Act claims. Moreover, Wilko's solicitude for the federal cause of action—the `special right' established by Congress ...—is not necessarily appropriate where the cause of action is judicially implied and not so different from the common law action ... I reiterate these reservations ... to emphasize that the question remains open and the contrary holdings of the lower courts must be viewed with some doubt."

Id. 470 U.S. at ___ - ___, 105 S.Ct. at 1244, 84 L.Ed.2d at 167-68.

Several lower courts have "accepted Byrd's invitation to compel parties' compliance with express contractual obligations" to arbitrate 1934 Act claims. Finn v. Davis, 610 F.Supp. 1079, 1082 (D.Fla.1985) see also, Marx v. Dean Whitter Reynolds, Inc., CCH Fed.Sec.L.Rep. ¶ 92,311 (C.D. Cal., Aug. 23, 1985); West v. Drexel Burnham Lambert, Inc., CCH Fed.Sec.L.Rep. ¶ 92,327 (W.D.Wash., Aug. 15, 1985); McMahon v. Shearson/American Express, Inc., CCH Fed.Sec.L.Rep. ¶ 92,319 (S.D. N.Y., Sept. 25, 1985); Raiford v. Merrill Lynch, Pierce Fenner & Smith, Inc., CCH Fed.Sec.L.Rep. ¶ 92,269 (N.D.Ga., May 16, 1985); Byrd v. Dean Whitter Reynolds, Inc., (on remand), CCH Fed.Sec.L.Rep. ¶ 92,225 (S.D.Cal., July 8, 1985); Niven v. Dean Whitter Reynolds, Inc., CCH Fed. Sec.L.Rep. ¶ 92,059 (M.D.Fla., March 28, 1985); Walch v. Dean Whitter Reynolds, Inc., CCH Fed.Sec.L.Rep. ¶ 92,060 (M.D. Fla., April 25, 1985); Jarvis v. Dean Whitter Reynolds, Inc., 614 F.Supp. 1146, 1148-50. At (D.Vt. Aug. 6, 1985); contra: Geller v. Nasser, CCH Fed.Sec.L.Rep. ¶ 92,227 (C.D.Cal., June 27, 1985).

In light of Byrd, the federal policy favoring arbitration, and the lower court trend towards permitting arbitration of 1934 Act claims, then, the court finds that plaintiffs' Fifth Cause of Action for violation of Rule 10b-5 is subject to the broad arbitration clause entered into between plaintiffs and movants. Plaintiffs argue in response that PaineWebber's customer agreement form violated SEC Release No. 15984, July 2, 1979, 17 SEC Dkt. 1167, 1169, which provides,

"Customers should be made aware prior to signing an agreement containing an arbitration clause that such a prior agreement does not bar a cause of action arising under the federal securities laws."

As defendants note, however,

"SEC Release No. 15984 is premised on the assumption that claims under the 1934 Act are in fact non-arbitrable ... Moreover, the Release is merely an interpretive statement by SEC staff, and ... does not have the force of law ..."

Defendants' Memorandum, p. 6; see also, Washington Federal Savings & Loan Association v. Federal Home Loan Bank Board, 526 F.Supp. 343, 383-84 (N.D.Ohio 1981). Moreover, even though PaineWebber's arbitration clause did not specifically characterize statutory claims as arbitrable, the court finds "no warrant in the Arbitration Act for implying in every contract within...