Olson v. Paine, Webber, Jackson & Curtis, Inc.

• Decision Date: 03 February 1986
• Docket Number: Civ. No. F 85-397.
• Citation: 627 F. Supp. 1317
• Parties: Martha OLSON, Plaintiff, v. PAINE, WEBBER, JACKSON & CURTIS, INC., Defendant.
• Court: U.S. District Court — Northern District of Indiana

627 F. Supp. 1317

Martha OLSON, Plaintiff, v. PAINE, WEBBER, JACKSON & CURTIS, INC., Defendant.

Civ. No. F 85-397.

United States District Court, N.D. Indiana, Fort Wayne Division.

February 3, 1986.

Martin T. Fletcher, Rothberg, Gallmeyer, Fruechtenicht & Logan, Fort Wayne, Ind., for plaintiff.

J. Timothy McCaulay, Helmke, Beams, Boyer & Wagner, Fort Wayne, Ind., for defendant.

ORDER

WILLIAM C. LEE, District Judge.

This matter is before the court on defendant's Motion to Stay Proceedings and to Compel Arbitration filed on November 8, 1985. The motion has been fully briefed and a hearing on this matter was held on December 10, 1985. In a telephone conference held on December 12, 1985, plaintiff's counsel contended that there existed further discrepancies in the form of agreement that plaintiff signed vis-a-vis the Commodity Futures Trading Commission's regulation, 17 C.F.R. § 180.3, as amended in 1983. Plaintiff's counsel was therefore given five days to bring those discrepancies to the court's attention. No such brief was filed. For the following reasons, defendant's motion to stay the proceedings and compel arbitration will be granted.

Statement of the Facts

The undisputed facts in this case are as follows. In 1984 plaintiff Martha Olson (Olson) established an account with the defendant Paine, Webber, Jackson & Curtis, Inc. (Paine Webber) for the trading of commodities. Paine Webber is a corporation engaged as a commodity broker and is a futures commission merchant as defined by the Commodity Futures Trading Commission (CFTC) Regulations and the Commodity Exchange Act (CEA). 17 C.F.R. § 1.1 (1985); 7 U.S.C. § 2 (1980 and Supp.1985).

On January 25, 1984, Olson signed both a Client Commodity Agreement and an agreement that required that any dispute between defendant and Olson be resolved by binding arbitration. The arbitration agreement contained the words "you need not sign this agreement to open an account ...".

During the morning of June 5, 1984, Olson placed an order for the purchase of two (2) silver contracts at a price of $932.00 with Stan Ford (Ford), an account executive for Paine Webber. This order was filled during the afternoon of June 5, 1984, the same day the order was placed.

It is disputed whether Olson, at the time she placed her order with Ford, told him that she wanted the silver contracts bought before noon on June 5, 1984, and if this was not done the order was to be cancelled.

Since Olson planned to be out of town for several days, she called Ford around noon on June 5, 1984, to see if he had purchased the silver contracts. At this time, Ford told Olson that her order had not yet been filled. It was not until June 9, 1984, that Olson learned from her brother that Ford had purchased the silver contracts on the afternoon of June 5, 1984.

Olson promptly called Ford to tell him that the contract had been filled against her instructions. Both Ford and the office manager of Paine Webber told Olson that they were unaware of any restriction that Olson had placed on her order of June 5, 1984. She was also told that she would have to "pay for" the filled order and suffer the consequences.

Since Olson failed to pay for the silver contracts and meet a margin call, Paine Webber proceeded to exercise its right of liquidation. As a result of this sale Olson lost approximately $17,000 to $18,000. During this time period the market price of the silver future contract declined from $932.00 to $870.00. Defendant's net loss on the transaction was offset against positive cash deposits Olson had with Paine Webber, and a debit balance of about $400.00 remained in Olson's account.

On September 24, 1984, Olson commenced this present action against Paine Webber. Olson alleges four causes of action. Count I alleges a violation of both the Commodity Exchange Act, 7 U.S.C. § 1, et seq., and the Commodity Futures Trading Commission's Regulations, 17 C.F.R. § 180.3. The second claim alleges a breach of fiduciary duty. Counts III and IV in effect allege that certain unauthorized trades in the plaintiff's commodities account constitute a breach of contract and constitute a failure to exercise reasonable care.

On November 8, 1985, Paine Webber moved the court to stay proceedings and compel arbitration under the predispute arbitration agreement.

Issue Before the Court

The issue before the court is whether the predispute arbitration agreement form that Paine Webber provided Olson with, and Olson voluntarily signed, sufficiently complies with the CFTC's Regulation § 180.3 to form a valid agreement to arbitrate disputes that arise between the parties.

In 1983 the CFTC added two entirely new sections to the existing § 180.3. New § (b)(4) requires that "the customer will have the opportunity to elect a qualified forum for conducting the arbitration proceeding." The second addition to § 180.3, new § (b)(5), directs that the "agreement must acknowledge that the futures commission merchant, ... will pay any incremental fees which may be assessed by a qualified forum for provision of a mixed panel ...".

The arbitration agreement form that Paine Webber provided to Olson did not contain the information required by §§ (b)(4) and (b)(5) of the 1983 amendment to § 180.3. Apparently Paine Webber failed to update the form of its arbitration agreement to conform to these new requirements.

Applicable Law

For an arbitration agreement to be valid it must comply with the regulations adopted by the CFTC under the authority of the federal statutes. Regulation § 180.3 provides in pertinent parts:

(a) The use by customers of the dispute settlement procedures established by contract markets pursuant to the Act or this part or the arbitration or other dispute settlement procedures specified in an agreement under paragraph (b)(3) of this section shall be voluntary. The procedures so established shall prohibit any agreement or understanding pursuant to which customers of members of the contract market agree to submit claims or grievances for settlement under said procedures prior to the time when the claim or grievance arose, except in accordance with paragraph (b) of this section.

(b) No futures commission merchant, introducing broker, floor broker, commodity pool operator, commodity trading advisor, or associated person shall enter into any agreement or understanding with a customer in which the customer agrees, prior to the time the claim or grievance arises, to submit such claim or grievance to any settlement procedure except as follows:

(1) Signing the agreement must not be made a condition for the customer to utilize the services offered by the futures commission merchant, inroducing broker, floor broker, commodity pool operator, commodity trading advisor or associated person.

(2) If the agreement is contained as a clause or clauses of a broader agreement, the customer must separately endorse the clause or clauses containing the cautionary language and other provisions specified in this section.

(3) The agreement may not require the customer to waive the right to seek reparations under section 14 of the Act and Part 12 of these regulations. Accordingly, the customer must be advised in writing that he or she may seek reparations under section 14 of the Act by an election made within 45 days ...

(4) The agreement must advise the customer that, at such time as he or she may notify the futures commission merchant, introducing broker, floor broker, commodity pool operator, commodity trading advisor or associated person that he or she intends to submit a claim to arbitration, or at such time as such person notifies the customer of its intent to submit a claim to arbitration, the customer will have the opportunity to elect a qualified forum for conducting the proceeding ...

(5) The agreement must acknowledge that the future commission merchant, introducing broker, floor broker, commodity pool operator, commodity trading advisor or associated person will pay any incremental fees which may be assessed by a qualified forum for provision of a mixed panel, unless the arbitrators in a particular proceeding determine that the customer has acted in bad faith in initiating or conducting that proceeding.

(6) The agreement must include the following language printed in large boldface type:

THREE FORUMS EXIST FOR THE RESOLUTION OF COMMODITY DISPUTES: CIVIL COURT LITIGATION, REPARATIONS AT THE COMMODITY FUTURES TRADING COMMISSION (CFTC) AND ARBITRATION CONDUCTED BY A SELF-REGULATORY OR OTHER PRIVATE ORGANIZATION. ...

BY SIGNING THIS AGREEMENT YOU: (1) MAY BE WAIVING YOUR RIGHT TO SUE IN A COURT OF LAW; AND (2) ARE AGREEING TO BE BOUND BY ARBITRATION OR ANY CLAIMS OR COUNTERCLAIMS WHICH YOU OR NAME MAY SUBMIT TO ARBITRATION UNDER THIS AGREEMENT....

YOU NEED NOT SIGN THIS AGREEMENT TO OPEN AN ACCOUNT WITH NAME.

Arguments of the Parties

Olson argues that the arbitration agreement does not conform to the Commodity Futures Trade Commission's Regulations, 17 C.F.R. § 180.3, as these regulations existed as of the date of the signing of the agreement, and therefore, the predispute arbitration agreement is void. Paine Webber, on the other hand, advances four arguments in support of its motion to stay the proceedings and to compel arbitration of all claims raised by Olson:

(1) the deficiencies in the agreement concern protection of customer's rights and not whether the agreement was entered into voluntarily, therefore, these deficiencies can be corrected without any disadvantage to Olson;

(2) the present arbitration agreement tracks CFTC guidelines (but for two insubstantial alterations) and therefore is valid and enforceable;¹ (3) a strong federal policy to enforce predispute arbitration agreements under the CEA favors enforcement of the present agreement;

(4) all claims raised by Olson are within the scope of the arbitration agreement and therefore are required to be arbitrated.

Discussion

1. Deficiencies in a Predispute Arbitration...