Morgan v. Smith Barney, Harris Upham & Co.

• Decision Date: 24 April 1984
• Docket Number: No. 82-2475,82-2475
• Citation: 729 F.2d 1163
• Parties: James E. MORGAN, Appellee, v. SMITH BARNEY, HARRIS UPHAM & CO., Appellants.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 1163

729 F.2d 1163

James E. MORGAN, Appellee, v. SMITH BARNEY, HARRIS UPHAM & CO., Appellants.

No. 82-2475.

United States Court of Appeals,

Eighth Circuit.

Submitted Sept. 16, 1983.

Decided March 14, 1984.

Rehearing en banc Denied April 24, 1984.

Daniel M. Dibble, Kathryn H. Vratil, Kansas City, Mo., for Smith Barney, Harris Upham & Co.

Charles C. Shafer III, Charles C. Shafer, Jr., P.C., Kansas City, Mo., for James E. Morgan.

Before HEANEY, JOHN R. GIBSON, Circuit Judges, and FLOYD R. GIBSON, Senior Circuit Judge.

JOHN R. GIBSON, Circuit Judge.

James Morgan, a former account executive for Smith Barney, Harris Upham & Company, sued the brokerage firm for slander and prima facie tort. The district court ¹ granted Smith Barney's motion to stay the proceedings pending arbitration. The court reasoned that Morgan's claims were covered by a clause in his employment contract which required him to arbitrate "any controversy ... arising out of employment or termination of employment." Morgan appeals from that ruling. We affirm as to three of the counts in Morgan's complaint and reverse as to the fourth.

In 1978, Morgan accepted a position as account executive for Smith Barney, a Delaware corporation engaged in the buying, selling and trading of securities. Pursuant to his position, Morgan sought membership in the New York Stock Exchange (NYSE) and other organizations by executing Form U-4, the "Uniform Application For Securities and Commodities Industry Representative And/Or Agent." In so doing, Morgan consented to the following provision:

I agree to abide by the Statute[s], Constitution[s], Rules, and By-Laws as any of the foregoing are amended from time to time of the agency, jurisdiction or organization with or to which I am filing or submitting this application.

This clause thereby incorporated by reference the following two NYSE arbitration provisions. The first, Rule 347, provides that

[a]ny 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....

The second is Article VIII, section one of the NYSE Constitution:

[a]ny controversy between parties who are members, ... member firms ... and any controversy between a non-member and a member ... arising out of the business of such member, ... shall at the instance of any such party, be submitted for arbitration, in accordance with the provisions of the Constitution and the Rules of the Board of Directors.

In late 1980, Morgan voluntarily resigned from his position at Smith Barney. Almost two years after his departure, he filed this action against Smith Barney for prima facie tort and slander. In counts one and two of his complaint, Morgan alleged that one of his superiors, Mr. Brewster Ellis, had boasted to Morgan's former customers that he had "caused Jim Morgan's demise" and was "investigating his books." Morgan also alleged that Ellis attempted to "scrounge up" complaints from his former customers concerning his handling of their investments. He stated that these false complaints prompted investigations of him by the NYSE Division of Enforcement and the Missouri Securities Commission, resulting in the loss of professional opportunity. In count three, Morgan claimed that his superiors falsely informed persons that his Missouri broker's license was suspended. In count four, Morgan asserted that his supervisors told fellow office workers that he stole things from their desks at night.

Following removal to federal court, the district court granted Smith Barney's motion under section three of the Federal Arbitration Act, 9 U.S.C. Secs. 1-14 (1976), for a stay pending arbitration under Rule 347 and the NYSE constitution. This appeal followed.

The Federal Arbitration Act establishes a statutory scheme for effectuating the federal policy of encouraging arbitration as a less costly and less complicated alternative to litigation. Section two of the Act provides that arbitration agreements contained in contracts involving commerce or a maritime transaction are "valid, irrevocable, and enforceable." ² Section three grants federal courts the power to stay trial proceedings of issues referable to arbitration under such contracts. In determining the propriety of a section three stay, a federal court "may consider only issues relating to the making and performance of the agreement to arbitrate." Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 404, 87 S.Ct. 1801, 1806, 18 L.Ed.2d 1270 (1967). Consequently, the only issue before this court is whether the scope of arbitrable disputes under Rule 347 includes Morgan's slander and prima facie tort claims. ³

Two principles guide our determination. First, the duty to arbitrate is a contractual obligation: only those disputes which a party has agreed to submit to arbitration may be so resolved. Merrill Lynch, Pierce, Fenner & Smith v. Hovey, 726 F.2d 1286, 1289 (8th Cir.1984) (citing United Steelworkers of America v. Warrior & Gulf Navigation, 363 U.S. 574, 582, 80 S.Ct. 1347, 1352, 4 L.Ed.2d 1409 (1960)). Arbitrability is thus a matter of contract interpretation. We must ascertain whether the parties intended the particular dispute to be arbitrated as evidenced by the language contained in the agreement. The second principle commands that when contract language is ambiguous or unclear, a "healthy regard" for the federal policy favoring arbitration requires that "any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration." Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 103 S.Ct. 927, 941, 74 L.Ed.2d 765 (1983); Johnson Controls, Inc. v. City of Cedar Rapids, 713 F.2d 370, 373 (8th Cir.1983).

Earlier decisions construing the language of Rule 347 have almost exclusively involved disputes concerning the rights and obligations of the parties under the employment contract--breach of contract and commercial tort claims. ⁴ One recent decision, however, has considered the applicability of Rule 347 to non-commercial torts. ⁵ In Coudert v. Paine Webber Jackson & Curtis, 705 F.2d 78 (2d Cir.1983), an account executive sued her former brokerage firm for defamation, invasion of privacy and intentional infliction of emotional distress. The allegedly tortious acts were statements made by firm management to customers, co-workers and various securities agencies that her departure was involuntary and under "clouded circumstances." All of the acts complained of occurred after she left the firm. A divided panel of the Second Circuit reversed the district court and held the dispute nonarbitrable under Rule 347.

The Coudert majority began its analysis with the principle that the duty to arbitrate, as a contractual obligation, exists only as long as the agreement to do so remains in effect. The court then reasoned that the duty operates prospectively and survives termination of the arbitration agreement if the claim is "based on conditions arising 'during the term of the agreement....' " Coudert, 705 F.2d at 81 (citing Procter & Gamble Independent Union of Port Ivory v. Procter & Gamble Manufacturing Co., 312 F.2d 181, 186 (2d Cir.1962), cert. denied, 374 U.S. 830, 83 S.Ct. 1872, 10 L.Ed.2d 1053 (1963) (emphasis in original). From these principles, the court concluded that Coudert's dispute would be arbitrable if it "pertain[ed] either to employment or termination," but would not be if it "simply allege[d] tortious conduct arising after termination." Coudert, 705 F.2d at 82. Because Coudert resigned prior to the tortious conduct, the agreement had terminated and her claims were held to be nonarbitrable.

Coudert was discussed in detail in Hovey, supra, a recent decision of a panel of our court. Hovey involved the violation of an agreement prohibiting post-termination solicitation of clients. In distinguishing Coudert, Hovey stressed that the post-termination defamation in Coudert did not arise out of the broker's employment. We think there are significant differences between Coudert and this case which cause us to conclude that three of Morgan's claims arose out of his employment, and which satisfy the distinguishing considerations articulated in Hovey. We will discuss these differences presently.

We also feel there are serious weaknesses in the Second Circuit's approach. The Coudert majority inexplicably characterized the issue as a choice between whether the dispute pertains to employment or termination or simply alleges post-termination tortious conduct. This "either-or" test, however, is unfaithful to the principle, cited with approval by the Coudert majority, that post-termination disputes remain arbitrable if "based on conditions arising during the term of the agreement." Coudert, 705 F.2d at 81. If a claim is deemed an allegation of post-termination tortious conduct, the Coudert test forever excludes it from arbitration. A dispute's temporal posture thus becomes dispositive. As some clearly arbitrable controversies cannot by definition surface until after the agreement has terminated, i.e., violation of a post-employment non-solicitation clause, this approach is clearly inadequate. ⁶ Cf. Nolde Brothers, Inc. v. Local 358, Bakery and Confectionery Workers Union, 430 U.S. 243, 249, 97 S.Ct. 1067, 1070, 51 L.Ed.2d 300 (1977) ("(t)he dispute therefore, although arising after the expiration of the collective-bargaining contract, clearly arises under that contract") (emphasis in original). Hovey also rejected Coudert's analysis as a "rigid temporal approach" to Rule 347 arbitration. Hovey, 726 F.2d at 1290.

As contrasted to the Second Circuit's approach, we believe the issue of arbitrability under Rule 347 should be guided by the two principles previously stated. Recognizing the principle that arbitrability is a matter of contract interpretation, we...