Mayo v. Dean Witter Reynolds, Inc., C-01-20336JF (PVT).

• Citation: 258 F.Supp.2d 1097
• Decision Date: 22 April 2003
• Docket Number: No. C-01-20336JF (PVT).,C-01-20336JF (PVT).
• Court: United States District Courts. 9th Circuit. United States District Courts. 9th Circuit. Northern District of California
• Parties: Richard MAYO, on behalf of himself and the People of California, Plaintiff, v. DEAN WITTER REYNOLDS, INC., Morgan Stanley Dean Witter & Co. dba Morgan Stanley Dean Witter, and Does 1-50, Defendants.

Page 1097

258 F.Supp.2d 1097

Richard MAYO, on behalf of himself and the People of California, Plaintiff, v. DEAN WITTER REYNOLDS, INC., Morgan Stanley Dean Witter & Co. dba Morgan Stanley Dean Witter, and Does 1-50, Defendants.

No. C-01-20336JF (PVT).

United States District Court, N.D. California.

April 22, 2003.

William E. Kennedy, Santa Clara, CA, for Plaintiff.

Sarah A. Good, Palo Alto, CA, Gilbert R. Serota, San Francisco, CA, for Defendants.

Ethan D. Dettmer, F. Joseph Warin, Mark A. Perry, Gibson, Dunn & Crutcher LLP, Washington, DC, for Intervenor NASD Dispute Resolution, Inc.

M. Benjamin Valerio, Linda Dakin-Grimm, Milbank, Tweed, et al., Los Angeles, CA, for Intervenor New York Stock Exchange, Inc.

Mary Maloney Roberts, Judicial Council of California, Office of the General Counsel, San Francisco, CA, for Judicial Council of California.

Amy J. Winn, Sacramento, CA, for Attorney General of the State of California.

Meyer Eisenberg, Jacob H. Stillman, Eric Summergrad, Douglas W. Henkin, Milbank, Tweed, Securities and Exchange Commission, Washington, DC, for Securities and Exchange Commission.

ORDER DENYING PLAINTIFF'S MTION TO VACATE ORDER COPELLING ARBITRATION AND STAYING PROCEEDINGS

FOGEL, District Judge.

On February 4, 2002, the Court granted the motion of Defendant Morgan Stanley Dean Witter & Co. ("Morgan Stanley") to compel arbitration and to stay proceedings. After Plaintiff commenced arbitration proceedings before the New York Stock Exchange, Inc. ("NYSE"), the Judicial Council of California promulgated new ethics standards for arbitrators in California. Plaintiff moves to vacate the Court's February 4, 2002 Order on the ground that the NYSE's refusal to appoint an arbitration panel that is compliant with the new California ethics standards constitutes an intervening change in circumstances requiring denial of the motion to compel arbitration. Morgan Stanley and Intervenors the NYSE and the National Association of Securities Dealers Dispute Resolution, Inc. ("NASDDR") oppose the motion. The Court has read the briefing submitted by the parties and has considered the oral arguments of counsel presented on November 25, 2002 and February 10, 2003. For the reasons set forth below, the Court concludes that federal law preempts application of the new California ethics standards to the NYSE and other "self-regulatory organizations." Accordingly, the motion will be denied.

I. BACKGROUND

This suit arises out of allegedly unauthorized withdrawals from Plaintiff Richard Mayo's Morgan Stanley investment account. In June 2000, Plaintiff opened a Morgan Stanley "Active Assets Account" by completing and executing an account application, pursuant to which be agreed to abide by the terms and conditions of the Morgan Stanley Client Account Agreement. The Client Account Agreement includes a provision specifying that all disputes between the parties arising out of or concerning any Morgan Stanley account are subject to binding arbitration.

During October and November 2000, Plaintiff noticed a number of unauthorized withdrawals from his account, including thousands of dollars in point-of-sale transactions and automated teller machine ("ATM") withdrawals. After Plaintiff reported these unauthorized withdrawals, Morgan Stanley recredited to his account the approximate amount of the complained of point-of-sale transactions, but it refused to recredit the amount corresponding to the complained of ATM withdrawals.

On March 14, 2001, Plaintiff filed suit in the Santa Clara Superior Court alleging that Morgan Stanley's failure to reimburse him for the amount of the unauthorized ATM withdrawals violates the Electronic Funds Transfer Act, 15 U.S.C. §§ 1693, et seq., and the state Unfair Competition Law, Cal. Bus. & Prof.Code §§ 17200, et seq. Plaintiff seeks monetary damages, as well as injunctive and restitutionary relief on behalf of himself and the general public of California.

Morgan Stanley removed the action to this Court on the basis of both diversity jurisdiction and federal question jurisdiction, and thereafter moved to compel arbitration pursuant to the arbitration provision in its Client Account Agreement. On February 4, 2002, the Court granted Morgan Stanley's motion to compel arbitration under the Federal Arbitration Act, 9 U.S.C. §§ 1, et seq. ("FAA"), and stayed proceedings pending completion of the arbitration process. Order Granting Motion to Compel Arbitration and to Stay Proceedings, Feb. 4, 2002 ("Arbitration Order"). In reaching this decision, the Court determined that the parties' agreement to arbitrate was valid and enforceable under the FAA. Id.

The arbitration provision in the Client Account Agreement provides for arbitration "only before the New York Stock Exchange, Inc.; the National Association of Securities Dealers, Inc.; or the Municipal Securities Rulemaking Board, as [Plaintiff] may elect." Client Account Agreement at 14.¹ On February 22, 2002, Plaintiff commenced arbitration proceedings before the NYSE by filing a statement of claim and executing a Uniform Submission Agreement ("USA"). The USA provides that the arbitration "will be conducted in accordance with the Constitution, By-Laws, Rules, Regulations, and/or Code of Arbitration Procedure of the sponsoring organization."

In July 2002, the NYSE informed Plaintiff that it would not appoint an arbitrator in his case at that time because it temporarily was suspending the assignment of all arbitrators in California in response to new ethics standards for arbitrators promulgated by the Judicial Council of California ("the Judicial Council") that took effect on July 1, 2002. NASDDR also temporarily suspended the assignment of arbitrators in California.

A. The California Standards

The new California ethics standards for arbitrators are the result of legislation passed by the California Legislature and signed into law by the Governor in 2001. Senate Bill 475 requires that the Judicial Council "adopt ethical standards for all neutral arbitrators effective July 1, 2002." Cal.Code Civ. Proc. § 1281.85(a). SB 475 provides that the new standards, including arbitrator disclosure and disqualification requirements, apply to any person "serving as a neutral arbitrator pursuant to an arbitration agreement." Id. Pursuant to SB 475, in April 2002 the Judicial Council adopted new "Ethics Standards for Neutral Arbitrators in Contractual Arbitration" ("the California standards") that are codified at Division VI of the Appendix to the California Rules of Court. The California standards took effect on July 1, 2002. In December 2002, the Judicial Council approved various revisions to the California standards that took effect on January 1, 2003.

The California standards are intended "to promote public confidence in the arbitration process." Ethics Std. 1(a). Among other things, the California standards provide that: "[a] person who is nominated or appointed as an arbitrator must disclose all matters that could cause a person aware of the facts to reasonably entertain a doubt that the proposed arbitrator would be able to be impartial." Ethics Std. 7(d). Standard 7 expands on pre-existing statutory disclosure requirements by setting forth a non-exhaustive list of thirteen distinct categories of information that arbitrators must disclose. See Ethics Std. 7(d).² Standard 8 requires additional disclosures "in consumer arbitrations in which a dispute resolution provider organization is administering the arbitration." Comment to Ethics Std. 8. See Ethics Std. 8. The disclosures required by the California standards also are expressly mandated by statute. See Cal.Code Civ. Proc. § 1281.9(a)(2).

Standard 10 provides that a proposed arbitrator's failure to make the disclosures required by the California standards results in disqualification upon notice by any party entitled to receive the disclosure. See Ethics Std. 10(a). A proposed arbitrator also may be disqualified on the basis of a disclosure that is a ground for disqualification upon notice by any party entitled to receive the disclosure. See id. In addition, Standard 10 restates pre-existing disqualification requirements and procedures found in California Code of Civil Procedure § 1281.91. See id.

The grounds for vacatur of an arbitration award are established by statute, not the California standards. As amended by SB 475, California Code of Civil Procedure § 1286.2 provides that a court "shall vacate" an arbitration award if it determines that:

An arbitrator making the award either: (A) failed to disclose within the time required for disclosure a ground for disqualification of which the arbitrator was then aware; or (B) was subject to disqualification upon grounds specified in 1281.91 but failed upon receipt of timely demand to disqualify himself or herself as required by that provision.

Cal.Code Civ. Proc § 1286.2(a)(6). In other words, failure to comply with the disclosures required by the California standards results in mandatory vacatur of an arbitration award.

With the exception of Standard 8, the California standards apply to all neutral arbitrators appointed on or after July 1, 2002. See Ethics Std. 3. Standard 8 does not apply to neutral arbitrators appointed before January 1, 2003. Nothing in SB 475 purported to give the Judicial Council any authority to enforce the California standards. NASD Dispute Resolution, Inc. v. Judicial Council of California, 232 F.Supp.2d 1055, 1058 (N.D.Cal.2002). Rather, SB 475 depends upon private implementation. Id. at 1066.

B. Self-Regulatory Organizations

The NYSE, the second oldest national securities exchange in the United States, and the National Association of Securities Dealers ("NASD"), a national securities association, are "self-regulatory organizations" ("SROs") registered with the SEC pursuant to the Securities Exchange Act of 1934, 15 U.S.C. §§ 78a, et seq. ("the Exchange Act"). As part of the comprehensive system of federal regulation...