Pearce v. E.F. Hutton Group, Inc.

• Decision Date: 11 September 1987
• Docket Number: No. 86-5281,86-5281
• Citation: 264 U.S.App.D.C. 246,828 F.2d 826
• Parties: , 56 USLW 2186 John M. PEARCE v. E.F. HUTTON GROUP, INC., Appellant.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 826

828 F.2d 826

264 U.S.App.D.C. 246, 56 USLW 2186

John M. PEARCE v. E.F. HUTTON GROUP, INC., Appellant.

No. 86-5281.

United States Court of Appeals District of Columbia Circuit.

Argued Feb. 17, 1987.

Decided Sept. 11, 1987.

Appeal from the District Court for the District of Columbia (Civil Action No. 86-00008).

John J. Walsh, with whom Mark C. Ellenberg and Harvey M. Spear, New York City, were on brief, for appellant.

Stephen G. Milliken, with whom John P. Coale, Washington, D.C., was on brief, for appellee.

William J. Fitzpatrick, New York City, was on brief, for amicus curiae, The Securities Industry Ass'n urging the reversal of the District Court's decision.

Before BORK ^* and D.H. GINSBURG, Circuit Judges and OBERDORFER ^**, United States District Judge for the District of Columbia.

Opinion for the Court filed by Circuit Judge D.H. GINSBURG.

Concurring opinion filed by United States District Judge OBERDORFER.

D.H. GINSBURG, Circuit Judge:

The appellant in this diversity case, the E.F. Hutton Group, Inc. (Hutton Group) is a holding company of which E.F. Hutton and Company, Inc. (Hutton Company), a securities broker, is a wholly owned subsidiary. Appellee John M. Pearce has at all relevant times been a registered representative employed by the Hutton Company as a branch manager at its offices first in Bethesda, Maryland and then in St. Louis, Missouri. In those offices, Pearce was responsible for the branches' cash management practices, among other things.

In May 1985, Hutton Company pled guilty to 2,000 counts of mail and wire fraud in connection with its cash management practices. In the aftermath of the plea and the publicity surrounding it, Hutton Group engaged Griffin B. Bell to conduct an investigation of Hutton Company's cash management practices and to identify the individuals responsible for the acts leading up to Hutton Company's guilty plea. In September 1985, Bell publicly released his report at a press conference at which, in response to questions, he explained and elaborated upon the report.

In January 1986, Pearce sued Hutton Group and Bell, invoking the diversity jurisdiction of the District Court and alleging that various statements contained in the Bell report or that Bell made at the press conference defamed him and invaded his privacy by portraying him in a false light. We need not repeat here the particulars of the statements so charged; their gist, according to Pearce's complaint, was to portray him as one of a small number of Hutton Company employees who, by departing from established company policy, was responsible for Hutton Company's pleading guilty to the 2,000 counts of mail and wire fraud.

Hutton Group promptly moved to stay "all proceedings," including the action against Bell as well as itself, pending arbitration pursuant to the rules of the New York Stock Exchange. Hutton Group argued that it had a right to go to arbitration pursuant to the employment contract between Pearce and Hutton Company. It is undisputed that in order to obtain employment with Hutton Company, Pearce had submitted to the Exchange a so-called U-4 form, or "Uniform Application for Securities and Commodities Industry Representative and/or Agent." Pearce thereby agreed that:

[A]ny controversy between me and any member or member organization or affiliate or subsidiary thereof arising out of my employment or the termination of my employment shall be settled by arbitration at the instance of any such party in accordance with the arbitration procedure prescribed in the Constitution and Rules then obtaining of the New York Stock Exchange, Inc.

(Emphasis added).

Article XI, Sec. 1 of the Constitution of the Exchange provides that "any controversy between a member ... and any other person arising out of the business of such member ... shall at the instance of any such party be submitted for arbitration" according to the Constitution and rules of the Exchange. Rule 600(a) of the Exchange provides:

Any dispute, claim or controversy between a customer or non-member and a member, allied member, member organization and/or associated person arising in connection with the business of such member, allied member, member organization and/or associated person in connection with his activities as an associated person shall be arbitrated under the Constitution and Rules of the New York Stock Exchange, Inc. as provided by any duly executed and enforceable written agreement or upon the demand of the customer or non-member.

(Emphasis added).

On April 16, 1986, the District Court denied the Hutton Group's motion to stay the proceedings pending arbitration. Record Excerpts (R.E.) at 117. After a review of recent cases arising from the arbitration provisions of the U-4 form and of the Exchange rules, the District Court held that Rule 600 does not mandate arbitration in this case. Although it found that plaintiff is an "associated person" and Hutton Group is a "non-member" as those terms are used in the Exchange's rules, the Court held that because plaintiff's claim is "based on activities not involving customers and merely the Company's own accounts," it does not arise "in connection with his activities as an associated person" and is thus outside the scope of Rule 600. Id. at 123.

Turning to the "much more difficult issue" raised by the terms of the U-4 form that plaintiff signed, the District Court offered three reasons for doubting that plaintiff's claims are subject to arbitration. First, the District Court viewed the cause of action as running "primarily against defendant Bell." Id. Hutton is liable, if at all, because Bell was acting as its agent. Second, since Hutton Group is neither plaintiff's employer nor a member of the Exchange, "even were this action viewed as one primarily against the Group, the action would be subject to arbitration only if the Group was an 'affiliate' within the meaning of the U-4 provision quoted above." Id. at 124. Reading Exchange Rule 321 to define an affiliate as an entity in which an Exchange member holds at least a 40% interest, the Court determined that Hutton Group is not an affiliate of the member firm Hutton Company within the intendment of the U-4 arbitration agreement. Finally, the District Court expressed its concern that "allowing the Group to arbitrate and staying Bell's case pending arbitration would give Bell an unfair advantage in the eventual trial before the court between Bell and plaintiff." Id. Here the Court may have shared the concern, urged by the plaintiff, that Bell would be made privy to the trial tactics, framing of questions, and arguments he would later face if he could first observe "a mini-trial of the issues his counsel terms 'virtually identical' to those which Mr. Bell would thereafter litigate as a defendant." ¹

On June 10, the District Court granted Hutton Group's motion for a stay pending appeal and denied Bell's motion for a similar stay. R.E. at 129. The District Court found that Hutton Group's arguments that Pearce's claims were subject to arbitration raised "issues ... of first impression," and that Hutton Group would suffer substantial harm if Pearce's action were not stayed pending appeal and the District Court was later reversed. On the other hand, the District Court thought it "clear that there is no arbitration agreement between plaintiff and Bell," and thus, saw no reason that the case against Bell could not proceed to trial. Id. at 133.

The issues raised by Hutton Group's arguments are indeed ones of first impression in this Circuit. In resolving them, we are aided by the District Court's own effort to sort out the relevant precedents available from other Circuits, and by the brief of amicus Securities Industries Association, which did not participate before the District Court. Acknowledging that the dispositive issue is a close one, we nonetheless reverse the judgment below and hold that Pearce's claim against Hutton Group is subject to arbitration. Litigation of that claim must be stayed pending the outcome of arbitration.

I

Arbitration is fundamentally a creature of contract. See Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985). The Federal Arbitration Act makes written agreements to arbitrate "valid, irrevocable, and enforceable" on the same terms as other contracts. 9 U.S.C. Sec. 2. Whereas doubts about the meaning of a contract are generally to be resolved by reference to the intention of the parties, the federal policy favoring arbitration counsels that doubts about the intended scope of an agreement to arbitrate be resolved in favor of the arbitral process. Moses H. Cone Hospital v. Mercury Construction Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 941, 74 L.Ed.2d 765 (1983). The rationale for this policy is at its strongest where the arbitration will be governed by procedures specifically tailored to the context from which the agreement to arbitrate arises, and will be conducted by arbitrators who are expert in the norms and practices of the relevant industry. Labor arbitration is one such context. The arbitration system of the New York Stock Exchange is another.

Moreover, as the Supreme Court recently noted, the Securities and Exchange Commission (SEC) has "expansive power to ensure the adequacy of the arbitration procedures employed by [a self-regulating organization]" such as the Exchange. Shearson/American Express, Inc. v. McMahon, --- U.S. ----, ----, 107 S.Ct. 2332, 2341, 96 L.Ed.2d 185 (1987). Indeed, the New York and American Exchanges and the National Association of Securities Dealers have all adopted the Uniform Code of Arbitration, which was drafted at the urging of the Securities and Exchange Commission (SEC). Id., Brief of SEC as amicus curiae, at 17. We note also the affidavit of Edward Morris, Arbitration Director of the New York Stock Exchange, Inc., which states that "there is nothing unique about Mr. Pearce's claims of defamation and invasion of privacy that...