Lewis v. Merrill Lynch, Pierce, Fenner & Smith, Inc.

• Decision Date: 21 April 1977
• Docket Number: Civ. A. No. 76-2882.
• Citation: 431 F. Supp. 271
• Parties: Thomas C. LEWIS v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., et al.
• Court: U.S. District Court — Eastern District of Pennsylvania

431 F. Supp. 271

Thomas C. LEWIS v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., et al.

Civ. A. No. 76-2882.

United States District Court, E. D. Pennsylvania.

April 21, 1977.

Robert S. Ryan, Amy F. Davis, Drinker, Biddle & Reath, Philadelphia, Pa., for plaintiff.

C. Clark Hodgson, Jr., Stradley, Ronon, Stevens & Young, Philadelphia, Pa., for defendants.

MEMORANDUM AND ORDER

HANNUM, District Judge.

Presently before the Court is defendants' motion to stay proceedings pending arbitration pursuant to 9 U.S.C. § 3¹ in this action under the Employees Retirement Income Security Act of 1974 (ERISA). The issue for determination is whether a prospective agreement to arbitrate disputes arising out of termination of employment compels a former employee to submit his ERISA claims to arbitration rather than adjudication in the federal courts.

From February 1955 until March 1975, the plaintiff Thomas C. Lewis was employed by defendant Merrill Lynch, Pierce, Fenner & Smith, Inc. (Merrill Lynch), serving in the capacity of account representative during most of his tenure. On December 1, 1957, Lewis became a participant in the Merrill Lynch Pension Plan and so remained until he resigned in May of 1975 to join the Philadelphia office of Kidder, Peabody & Co., a competing securities firm. In April of 1975, prior to his leaving Merrill Lynch, Lewis was informed that his pension rights were 100% vested based on his age and number of years as a plan participant. However, the Merrill Lynch Pension Plan provides that:

A Participant who enters employment or engages directly or indirectly in any business deemed by the 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.

Accordingly, in October of 1975 after Lewis had joined a competitor, he was informed that his pension rights were forfeited. In September 1976, Lewis instituted this suit against Merrill Lynch, the Merrill Lynch Pension Plan and individual plan administrators claiming violations of ERISA in connection with the forfeiture of his pension rights.

Defendants seek a stay of proceedings in this Court pending arbitration on the basis of what they construe to be an agreement to arbitrate stemming from forms signed by plaintiff in 1955. In order to become a registered representative, Lewis was required to file with the New York Stock Exchange (NYSE), of which Merrill Lynch is a member, a signed copy of form RE-1 which states in paragraph 31:

. . . in consideration of the New York Stock Exchange's approving my application, I submit myself to the jurisdiction of such Exchange, and I agree as follows:

. . . . .

(g) I am familiar with the rules and regulations of the New York Stock Exchange pertaining to the employment of so-called registered employees, and I agree to abide by the existing rules and all amendments thereto.

One such amendment to the NYSE rules, originally passed in 1958, is 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.

It is defendants' contention that form RE-1 and the subsequently instituted Rule 347, construed together, constitute Lewis' agreement to arbitrate the present dispute over forfeiture of his pension rights. Lewis resists arbitration, preferring instead to have his rights determined in the federal courts. He contends first, that there was no agreement to arbitrate and second, that a prospective agreement to arbitrate disputes arising out of termination of employment is void as to ERISA claims.

We express no opinion here on whether the constructive agreement to arbitrate urged by defendants is binding in these circumstances, but assume the existence of an arbitration agreement arguendo in order to address the paramount issue of whether an agreement to arbitrate executed before the fact is valid to force arbitration of ERISA claims. For the reasons which follow, we conclude that it is not.

The present posture of this case finds the policies of the Federal Arbitration Act and ERISA at loggerheads. Decision of this case requires the Court to balance the strong competing interests supporting these Acts and select the more ponderous. The United States Arbitration Act is the statutory expression of the federal policy favoring arbitration as an alternate means of dispute resolution. Particularly in the commercial sphere, it is a pervasive policy not to be lightly overridden. ERISA represents Congress's equally strong statement of its desire to give pension plan participants maximum protection. Section 2(b) of ERISA declares the legislature's intention

to protect . . . the interests of participants in employee benefit plans and their beneficiaries, by requiring the disclosure and reporting to participants and beneficiaries of financial and other information with respect thereto, by establishing standards of conduct, responsibility, and obligation for fiduciaries of employee benefit plans, and by providing for appropriate remedies, sanctions, and ready access to the Federal courts.

The Act contains numerous provisions directed to each of these areas. Responsive to the policy of ready access to Federal courts is Section 502, pursuant to which plaintiff brings this suit which provides special rights of action to recover for violation of duties and responsibilities under the Act. A potential plaintiff is granted a wide choice of Federal court venue, liberal service of process rules, and relief from the requirement of $10,000.00 in controversy. In addition, Section 502(d)(1) specifically makes an employee benefit plan a suable entity. A carefully particularized federal cause of action such as this, contained in important federal remedial legislation competes substantially with the Federal Arbitration Act policy.

For assistance in reconciling the digladiating legislative policies here involved, it is appropriate to inquire how courts have resolved this dilemma with respect to other relevant federal laws. Frequently, rights granted under other important federal protective legislation have been found to be inappropriate for arbitration and prior waivers of federal remedies under these laws have been invalidated. Prime examples are the securities laws, Wilko v. Swan, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953); Ayres v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 538 F.2d 532 (3d Cir.), cert. denied, 429 U.S. 1010, 97 S.Ct. 542, 50 L.Ed.2d 619 (1976), the antitrust laws, Cobb v. Lewis, 488 F.2d 41 (5th Cir. 1974); American Safety Equipment Corp. v. J. P. Maguire & Co., 391 F.2d 821 (2d Cir. 1968), and Title VII of the Civil Rights Act of 1964, Alexander v. Gardner-Denver Co., 415 U.S. 36, 94 S.Ct. 1011, 39 L.Ed.2d 147 (1974). In the leading case of Wilko v. Swan, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953), the Supreme Court held that an agreement to arbitrate disputes arising out of securities transactions between a customer and a broker could not force an action under Section 12(2) of the Securities Act of 1933, 15 U.S.C. § 77l(2) to arbitration. The agreement was found void under Section 14 of the Act which provides:

Any condition, stipulation, or provision binding any person acquiring any security to waive compliance with any provision of this subchapter or of the rules and regulations of the Commission shall be void.

The arbitration agreement was termed "stipulation" and the right to select the judicial forum was characterized as "the kind of `provision' that cannot be waived under § 14 of the Securities Act." 346 U.S. at 435, 74 S.Ct. at 186. The Court stressed the unequal bargaining power of securities purchasers and sellers noting Congress's strong intention to protect buyers. The seller's argument also made by defendants in the present case, that arbitration is merely an alternate form of dispute resolution fully compatible with federal protective legislation was rejected. The Court reasoned:

When the security buyer, prior to any violation of the Securities Act, waives his right to sue in courts, he gives up more than would a participant in other business transactions. The security buyer has a wider choice of courts and venue. He thus surrenders one of the advantages the Act gives him and surrenders it at a time when he is less able to judge the weight of the handicap the Securities Act places upon his adversary . . .

Even though the provisions of the Securities Act, advantageous to the buyer, apply, their effectiveness in application is lessened in arbitration as compared to judicial proceedings . . . This case requires subjective findings on the purpose and knowledge of an alleged violator of the Act. They must be not only determined but applied by the arbitrators without judicial instruction on the law. As their awards may be made without explanation of their reasons and without a complete record of their proceedings, the arbitrators' conception of the legal meaning of such statutory requirements as "burden of proof," "reasonable care" or "material fact," . . . cannot be examined. Power to vacate an award is limited . . . As the protective provisions of the Securities Act require the exercise of judicial direction to fairly assure their effectiveness, it seems to us that Congress must have intended § 14, to apply to waiver of judicial trial and review. 346 U.S. at 435-37, 74 S.Ct. at 187.

Following the rationale of Wilko, the Third Circuit in Ayres v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 538 F.2d 532 (3d Cir.), cert. denied, 429 U.S. 1010, 97 S.Ct. 542, 50 L.Ed.2d 619 (1976), held that agreements to...