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

• Citation: 313 F.Supp.2d 603
• Decision Date: 09 April 2004
• Docket Number: No. CIV.A. 1:03-0388.,CIV.A. 1:03-0388.
• Court: U.S. District Court — Southern District of West Virginia
• Parties: MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., a Delaware Corporation, Plaintiff, v. James W. COE, John D. Wade, Robert L. Harmon, Joann Harmon, and ORA Robertson, Jr., Defendants.

313 F.Supp.2d 603

MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., a Delaware Corporation, Plaintiff, v. James W. COE, John D. Wade, Robert L. Harmon, Joann Harmon, and ORA Robertson, Jr., Defendants.

No. CIV.A. 1:03-0388.

United States District Court, S.D. West Virginia.

April 9, 2004.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Terry R. Weiss, Brian C. Hale, Sutherland, Asbill & Brennan, Atlanta, GA, Richard L. Gottlieb, Webster J. Arceneaux, III, Lewis, Glasser, Casey & Rollins, Charleston, WV, for Plaintiff.

Stephen B. Farmer, Robert A. Campbell, James R. Fox, Christopher S. Arnold, Farmer, Cline & Arnold, Charleston, WV, Shawn P. George, George & Lorensen, Charleston, WV, for Defendants.

MEMORANDUM OPINION IN SUPPORT OF ORDER DIRECTING ARBITRATION OF STATE COURT CLAIMS

FABER, Chief Judge.

I. Introduction

Before the court is Merrill Lynch, Pierce, Fenner & Smith, Inc.'s ("Merrill Lynch") motion for an order directing arbitration, sought in accordance with § 4 of the Federal Arbitration Act. See 9 U.S.C. § 4. The defendants in this matter, James Coe, John Wade, Robert and Joann Harmon, and Ora Robertson, Jr. ("state court plaintiffs") are plaintiffs in various proceedings pending in the Circuit Court of McDowell County, West Virginia ("state court actions"). Pursuant to § 4 the court conducted a hearing on January 6, 2004, and determined that the making of an agreement to arbitrate was "in issue." The court accordingly conducted a bench trial on February 27, 2004, in Charleston, West Virginia. At this trial, the parties presented evidence concerning the alleged arbitration agreements and any defenses applicable to them. The court has concluded that it must order the state court plaintiffs to arbitrate the claims being litigated in the state court actions and has accordingly issued Findings of Fact and Conclusions of Law in support of its ruling. This memorandum opinion details the court's legal and factual findings and discusses the critical issue in this case, whether West Virginia public policy prohibits enforcement of the arbitration agreements at issue here.¹

II. Factual Background

Between 1994 and 2000, each state court plaintiff opened an account or accounts with Merrill Lynch. In the course of opening these accounts, each state court plaintiff executed preprinted, form agreements with Merrill Lynch that (among other things) provided that New York law would govern their interpretation and validity and that all claims would be submitted to binding arbitration. The portions of the agreements setting forth these terms were clearly and unambiguously written and labeled; however, neither the forms nor Merrill Lynch's agents specifically alerted the state court plaintiffs to the existence of the terms or required the state court plaintiffs to separately and specifically assent to them. At the time they signed the agreements, each state court plaintiff was able to read and understand the English language and was competent to contract on his or her own behalf.

After executing the relevant agreements, each state court plaintiff transferred sums to Merrill Lynch for investment pursuant thereto. Merrill Lynch accepted the sums and invested them. Subsequently, the accounts of each state court plaintiff suffered significant losses. As a result, the state court plaintiffs commenced the state court actions in West Virginia circuit court against Merrill Lynch and its agents and employees. Each state court action seeks relief from Merrill Lynch and/or Merrill Lynch's agents and employees on account of the actions of Merrill Lynch and its agents and employees. One suit (prosecuted by Ora Robertson, Jr.) seeks relief only from Merrill Lynch's agent, but the suit seeks this relief on account of the agent's conduct on behalf of Merrill Lynch. The court previously ruled that Merrill Lynch was an "aggrieved party" with standing to seek relief from Robertson. See Order Setting Hearing and Addressing Various Pretrial Matters (Doc. No. 44), at 9-10. The state court actions seek punitive and compensatory damages in an amount in excess of $75,000. The state court actions set forth causes of action for: (1) negligence; (2) breach of contract; (3) breach of fiduciary duty; and (4) common-law fraud and violation of W. Va.Code § 32-4-410.

The arbitration and choice-of-law clauses at issue all employ similar language. For example, the arbitration clause in the agreement executed by Robert and Joann Harmon on January 21, 1995, generally provides: "I agree that all controversies which may arise between us, including but not limited to those involving any transaction or the construction, performance, or breach of this or any other agreement between us, whether entered into prior, on or subsequent to the date hereof, shall be determined by arbitration." The clause designates several forums for arbitration, including the National Association of Securities Dealers (NASD). The same agreement provides that it is to be "governed and interpreted under the laws of the State of New York." While there are differences in the precise language employed in the various agreements executed by the state court plaintiffs, each agreement stipulates arbitral resolution through a forum such as the NASD and provides that New York law applies. Each agreement was executed within the geographic confines of the State of West Virginia and was intended to be performed for the benefit of West Virginia citizens.

At trial, the parties presented extensive evidence on the differences between arbitration before the NASD and litigation in a West Virginia state court. First and most obviously, NASD arbitration takes place before a panel of three arbitrators, rather than before a judge and a jury. Parties have the power to object to and strike particular arbitrators, but the decision of the final panel is binding. Second, the cost of filing an NASD arbitration is significantly greater than the cost of filing an action in a West Virginia circuit court. For example, the filing fee for a claim between $100,000 and $500,000 is $1,425, while the cost of filing an action in the circuit court is $125. At the same time, testimony established that NASD arbitration tends to be less expensive than litigation in state court, though this tendency is only a general one.

A third difference is that litigants have much more limited discovery rights in NASD arbitration than they do in litigation before a West Virginia trial court. Depositions are not available as a matter of right in NASD arbitration, and NASD arbitrators have only a limited power to compel the attendance of persons, particularly persons who are not registered with the NASD or employed by a registered person or entity. Although NASD discovery rules apply equally to consumers (like the state court plaintiffs) and industry participants (like Merrill Lynch), it is noteworthy that different, more liberal rules apply to disputes that are solely between industry persons.

Fourth, NASD arbitration generally entails less motion practice and is less likely to involve an appeal than is a jury trial before a West Virginia circuit court. Fifth and finally, parties to NASD arbitration have more flexibility as to the timing and scheduling of their proceedings than do state court litigants. However, participants to NASD arbitration may need to travel further than would litigants in state court. The state court plaintiffs would likely be required to travel to Ohio in order to prosecute their claims.

III. Discussion

The court finds jurisdiction proper pursuant to the diversity statute, 28 U.S.C. § 1332. The arbitration agreements at issue here concern "commerce" as that term is defined by the Federal Arbitration Act ("FAA" or "Act"), 9 U.S.C. § 1. Finally, the Act is itself a proper exercise of Congress's power to regulate commerce among the several states and with foreign nations.

a. Federal Arbitration Act

The Federal Arbitration Act allows a "party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration" to petition a federal district court for "an order directing that such arbitration proceed in the manner provided for in such agreement." 9 U.S.C. § 4. The court must enter such an order if it determines that a written agreement to arbitrate was "made" and that the defendant has refused to comply with it. See id.; see also Sydnor v. Conseco Fin. Servicing Corp., 252 F.3d 302, 305 (4th Cir.2001) ("if parties execute a valid agreement to arbitrate disputes, a federal court must compel arbitration"). The Act also provides that any agreement to arbitrate is "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. The federal courts have developed and applied a "severability doctrine" under which challenges to an arbitration clause itself are heard by the court considering the FAA claim, whereas challenges to the contract as a whole are referred to the arbitrator. See Snowden v. CheckPoint Check Cashing, 290 F.3d 631, 637 (4th Cir.2002). This court can only consider challenges that "specifically relate" to the arbitration clause, instead of to the agreement generally. See id. A challenge specifically relates to an arbitration clause if it would invalidate that clause while leaving the remainder of the contract intact. See Sydnor, 252 F.3d at 307.

The court must order a party to arbitrate if it finds that the party made at least one valid agreement to arbitrate that applies to the present dispute. For example, in Snowden v. CheckPoint Check Cashing, the Court of Appeals for the Fourth Circuit ordered a plaintiff to arbitrate her claims against a check-cashing company. Snowden, 290 F.3d at 639. The plaintiff had signed twelve separate agreements with the company during an eight-month period, and one of the agreements (from the middle of the period) contained an...