PaineWebber Inc. v. Hartmann

• Citation: 921 F.2d 507
• Decision Date: 16 March 1990
• Docket Number: No. 89-3663,89-3663
• Parties: Fed. Sec. L. Rep. P 95,738 PAINEWEBBER INCORPORATED v. Willard S. HARTMANN, Leona R. Hartmann, Appellants. . Submitted Under Third Circuit Rule 12(6)
• Court: United States Courts of Appeals. United States Court of Appeals (3rd Circuit)

Page 507

921 F.2d 507

Fed. Sec. L. Rep. P 95,738

PAINEWEBBER INCORPORATED v. Willard S. HARTMANN, Leona R. Hartmann, Appellants.

No. 89-3663.

United States Court of Appeals, Third Circuit.

Submitted Under Third Circuit Rule 12(6)

March 16, 1990.

Decided Dec. 31, 1990.

Michael J. Boyle, Meyer, Unkovic & Scott, Pittsburgh, Pa., for appellants.

Robert B. Sommer, Steven S. Santoro, Kirkpatrick & Lockhart, Pittsburgh, Pa., for appellee.

Before SLOVITER, BECKER and STAPLETON, Circuit Judges.

OPINION OF THE COURT

BECKER, Circuit Judge.

This is an appeal by Willard and Leona Hartmann from an order of the district court for the Western District of Pennsylvania granting the motion of plaintiff PaineWebber Inc., a brokerage house, for a preliminary injunction to prevent the scheduled arbitration of a securities dispute between PaineWebber and the Hartmanns. The Hartmanns contend that the district court erred in making, rather than referring to an arbitrator, the determination whether a clause in an agreement between the parties, which stated that claims filed more than six years after the events in dispute were not "eligible for submission" to arbitration, barred their arbitration demand. The district court's jurisdiction was predicated on diversity of citizenship, 28 U.S.C. Sec. 1331. Our jurisdiction is based on 9 U.S.C. Sec. 15(a)(2), which allows an appeal from an interlocutory order granting an injunction against arbitration. We will affirm the district court's order.

I. FACTUAL AND PROCEDURAL HISTORY

The relevant facts are essentially undisputed. From January through December of 1979, the Hartmanns maintained one or more brokerage accounts with Blyth, Eastman, Dillon & Company (Blyth), a predecessor of PaineWebber. Account executive Dennis Cowden managed these accounts. From January of 1980, through early April of 1982, the Hartmanns maintained one or more accounts with PaineWebber, also managed by Cowden. The last transaction involving any of the Hartmanns' accounts at PaineWebber occurred on March 22, 1982. Cowden then went to work for Shearson Lehman Brothers (Shearson), taking the Hartmanns' accounts with him. From April of 1982, through August of 1985, the Hartmanns maintained one or more accounts with Cowden at Shearson.

In opening their accounts at PaineWebber, the Hartmanns entered into a client agreement in which both parties agreed to submit certain disputes to arbitration. The agreement reads, in relevant part:

Any controversy between us arising out of or pertaining to this contract or the breach thereof, shall be [submitted] ... for arbitration, in accordance with the [rules] ... of either the ... Committee of the New York Stock Exchange, American Stock Exchange, National Association of Securities Dealers, or where appropriate, Chicago ... Exchange or Commodities Futures Trading Commission.

At some point, the Hartmanns came to believe that Cowden had fraudulently mishandled their accounts, causing them considerable loss. On April 18, 1988, the Hartmanns filed a demand for arbitration with the New York Stock Exchange (NYSE) Department of Arbitration against Blyth, PaineWebber, Shearson, and Cowden.

At all relevant times, Rule 603 of the NYSE Department of Arbitration Rules provided:

Time Limitation Upon Submission

No dispute, claim or controversy shall be eligible for submission to arbitration under this Code where six (6) years shall have elapsed from the occurrence or event giving rise to the act or dispute, claim or controversy. This section shall not extend applicable statutes of limitations, nor shall it apply to any case which is directed to arbitration by a court of competent jurisdiction.

The parties agree that Rule 603 is incorporated by reference into their agreement. They also agree that the last account transaction involving PaineWebber, which could give rise to arbitration, occurred on March 22, 1982, and that the demand for arbitration was filed more than six years later. However, the parties dispute the legal effect of this provision.

Arguing that Rule 603 bars submission of the Hartmanns' claim to an arbitrator, PaineWebber filed suit on August 25, 1989, seeking a permanent injunction against the arbitration, then scheduled for September 7, 1989. Pending resolution of the suit, PaineWebber moved for a temporary restraining order (TRO) against the arbitration. The district court denied the TRO application but, after a hearing, granted PaineWebber's motion for a preliminary injunction to stay the arbitration. In so doing, the district court specifically found that, under its interpretation of Rule 603, "[t]he clear intention of [Rule 603] is that a dispute which is more than six years old is not eligible for arbitration." Because the Hartmanns' demand for arbitration undisputedly was filed more than six years after the last event involving PaineWebber, the district court determined that the Hartmanns' claim was not arbitrable. This appeal followed. ¹

The Hartmanns make only one argument of substance on appeal--that the district court erred in interpreting Rule 603 as a substantive bar to arbitration instead of as a procedural limitation subject to the arbitrator's jurisdiction. ² As a consequence of this misinterpretation, they submit, the district court erroneously granted PaineWebber a preliminary injunction staying the scheduled arbitration.

Because the interpretation of contractual language to discern contractual intent is a question of fact, our review is limited to a determination whether the district court's findings are clearly erroneous. See Harkins Co. v. Waldinger Corp., 796 F.2d 657, 660 (3d Cir 1986), cert. denied, 479 U.S. 1059, 107 S.Ct. 939, 93 L.Ed.2d 989 (1987). Moreover, because this action involves an arbitration agreement connected to a transaction involving interstate commerce, we must look to the federal Arbitration Act, 9 U.S.C. Sec. 1, et seq., and the case law that has evolved thereunder, in reviewing the propriety of the district court's order. 9 U.S.C. Sec. 2; see also Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 941, 74 L.Ed.2d 765 (1983) ("The effect of [9 U.S.C. Sec. 2] is to create a body of federal substantive law of arbitrability, applicable to any arbitration agreement within the coverage of the Act."); 13B C. Wright, A. Miller & E. Cooper, Federal Practice and Procedure Sec. 3569 (2d ed. 1984) ("[E]ven in a diversity suit or an action in state court if a ... transaction ... in interstate or foreign commerce is involved, the substantive rules contained in the [Arbitration] Act, based as it is on the commerce ... power[ ], are to be applied regardless of state law."). ³

II. WHO DECIDES ARBITRABILITY?

In general, Sec. 4 of the Arbitration Act enables a litigant to invoke the authority of a federal district court in order to force a reluctant party to arbitrate a dispute. See 9 U.S.C. Sec. 4. Specifically, Sec. 4 requires a federal district court to hear an action brought by "[a] party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration." It further directs the district court to order a reluctant party to arbitrate if, after hearing the parties, it is "satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue." Section 4 continues, however, that "[i]f the making of the arbitration agreement or the failure, neglect, or refusal to perform the same be in issue, the court shall proceed summarily to the trial thereof."

Unfortunately, the general language of Sec. 4 fails to delineate with precision the scope of the district court's jurisdiction in an action to compel arbitration. In particular, it provides no guidance as to what renders a "refusal to perform" sufficiently "in issue" to warrant a trial in the district court. (Emphasis added). Fortunately, however, case law has clarified the limits of the court's jurisdiction considerably. An "issue" requiring resolution by the district court arises under Sec. 4 only when the party refusing to arbitrate contends that the dispute is not one that the parties agreed to arbitrate. As a matter of contract, no party can be forced to arbitrate unless that party has entered into an agreement to do so. See AT & T Technologies v. Communications Workers of America, 475 U.S. 643, 648, 106 S.Ct. 1415, 1418, 89 L.Ed.2d 648 (1986); Steelworkers v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582, 80 S.Ct. 1347, 1352, 4 L.Ed.2d 1409 (1960); Morristown Daily Record v. Graphic Communications Union, Local 8N, 832 F.2d 31, 33 (3d Cir.1987). Before compelling an unwilling party to arbitrate, Sec. 4 therefore requires the court to engage in a limited review to ensure that the dispute is arbitrable--i.e., that a valid agreement to arbitrate exists between the parties and that the specific dispute falls within the substantive scope of that agreement. See AT & T Technologies, 475 U.S. at 649, 106 S.Ct. at 1418; John Wiley & Sons, Inc. v. Livingston, 376 U.S. 543, 546-47, 84 S.Ct. 909, 912-13, 11 L.Ed.2d 898 (1964); Laborers' International Union v. Foster Wheeler Corp., 868 F.2d 573, 576 (3d Cir.1989).

If a court determines that a valid arbitration agreement does not exist or that the matter at issue clearly falls outside of the substantive scope of the agreement, it is obliged to enjoin arbitration. If, on the other hand, the court determines that an agreement exists and that the dispute falls within the scope of the agreement, it then must refer the matter to arbitration without considering the merits of the dispute. See AT & T Technologies, 475 U.S. at 649-50, 106 S.Ct. at 1418-19; Beck v. Reliance Steel Products Co., 860 F.2d 576, 579 (3d Cir.1988). In making this determination, the court must operate under a "presumption of arbitrability in the sense that '[a]n order to arbitrate the particular grievance should not be denied unless it may be...