R.J. O'Brien & Associates, Inc. v. Pipkin

• Decision Date: 15 August 1995
• Docket Number: No. 94-1763,94-1763
• Citation: 64 F.3d 257
• Parties: , Comm. Fut. L. Rep. P. 26,477 R.J. O'BRIEN & ASSOC., INC., Plaintiff-Appellee, v. Thomas D. PIPKIN, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 257

64 F.3d 257

64 USLW 2127, Comm. Fut. L. Rep. P. 26,477

R.J. O'BRIEN & ASSOC., INC., Plaintiff-Appellee, v. Thomas D. PIPKIN, Defendant-Appellant.

No. 94-1763.

United States Court of Appeals, Seventh Circuit.

Argued June 6, 1995.

Decided Aug. 15, 1995.

Lloyd A. Kadish, Kadish & Associates, Chicago, IL, for R.J. O'Brien & Associates, Inc.

Leslie A. Blau (argued), Paul E. Eberhardt, Blau, Eberhardt & Kokoszka, Chicago, IL, Joseph P. Pfingst, Mission Viejo, CA, for Thomas P. Pipkin.

Kathryn Page Camp (argued), Thomas W. Sexton, III, Nat. Futures Ass'n, Chicago, IL, for Nat. Futures Ass'n.

Before ESCHBACH, KANNE, and ROVNER, Circuit Judges.

ESCHBACH, Circuit Judge.

Thomas Pipkin appeals from the district court's decision in a diversity action to confirm an arbitration award entered against him and in favor of R.J. O'Brien & Associates, Inc., ("O'Brien") by the National Futures Association ("NFA"). In Pipkin's motion to vacate the award, he contended that the NFA imposed mandatory arbitration without contractual or Congressional authority and it appointed a panel in a manner contrary to its own rules. For the reasons below, we affirm.

I.

The Commodity Exchange Act (the "Act"), 7 U.S.C. Secs. 1-25, regulates the conduct of participants in transactions involving commodity futures. Persons who actively participate in the industry, such as futures commission merchants, introducing brokers, and persons associated therewith, are obligated to register under the Act. 7 U.S.C. Secs. 6f(a) and 6k(1). To oversee the regulatory regime, Congress created the Commodity Futures Trading Commission ("CFTC"), an independent agency which is also vested with the authority to register persons under the Act. Under 7 U.S.C. Sec. 21(o), the CFTC is permitted to delegate this registration function to a registered futures association to be performed in accordance with the association's rules as approved by the CFTC pursuant to 7 U.S.C. Sec. 21(j). The NFA, a private corporation registered as a futures association under the Act, has been delegated the registration function by the CFTC.

In 1985, O'Brien, an Illinois corporation registered as a futures commission merchant, entered into a clearing agreement with the Sage Group, Inc., an independent introducing broker under the Act. Pipkin, a California resident, was the president and principal stockholder of Sage and registered as an associated person. According to the agreement, O'Brien cleared the trades for all customers introduced to it by Sage. That arrangement terminated in June 1990 and Sage declared bankruptcy in December 1990. O'Brien, however, claimed that after Sage's bankruptcy it paid approximately $172,000 to satisfy complaints against it by customers introduced by Sage. It asserted that Pipkin was personally responsible to indemnify O'Brien for this amount. Since O'Brien and Pipkin were both registered with the NFA and subject to its rules, O'Brien filed a demand for arbitration against Pipkin in June 1992 under the NFA's Member Arbitration Rules which require associated persons to arbitrate disputes with members. Pipkin filed an answer challenging the NFA's jurisdiction to conduct the arbitration, but the matter was allowed to proceed. The ensuing arbitration resulted in an award of $82,000 in O'Brien's favor.

On May 26, 1993, O'Brien filed a petition in the district court for an order confirming the arbitration award. Pipkin responded by moving to vacate the award, arguing that the NFA had no authority to impose arbitration upon him and its actions in doing so violated the due process clause of the Fifth Amendment. He also argued that one of the panelists was not selected in accordance with the NFA's rules. The district court confirmed the arbitration award, finding that the NFA performed the arbitration proceeding as authorized and in accordance with its rules, and that it was not a government actor and therefore could not have deprived Pipkin of his constitutional rights by requiring arbitration. Pipkin filed a timely notice of appeal. ¹ We have jurisdiction pursuant to 28 U.S.C. Sec. 1291.

II.

This appeal requires us to decide two legal questions: (1) whether Pipkin consented to submit his dispute with O'Brien to the NFA when he signed the registration form and, if so, whether that consent was obtained through a denial of due process; and (2) whether the NFA's arbitration panel was selected in accordance with its own rules. This decision involves an interpretation of the Act, CFTC regulations, and NFA requirements. Thus, our standard of review is the same as the district court. Moseley, Hallgarten, Estabrook & Weeden v. Ellis, 849 F.2d 264, 267 (7th Cir.1988); see Pritzker v. Merrill Lynch, Pierce, Fenner & Smith, 7 F.3d 1110, 1113 (3d Cir.1993). We will vacate the arbitration award if "the arbitrators exceeded their powers" in deciding this case. 9 U.S.C. Sec. 10(a)(4); Eljer Mfg., Inc. v. Kowin Dev. Corp., 14 F.3d 1250, 1253 (7th Cir.), cert. denied, --- U.S. ----, 114 S.Ct. 2675, 129 L.Ed.2d 810 (1994).

A. NFA's authority to impose arbitration

1. Pipkin's consent to submit to arbitration

Pipkin argues that he did not consent to arbitrate all member-associate disputes before the NFA when he registered to be an "associated person" under the Act. "[A]rbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." AT & T Technologies, Inc. v. Communications Workers, 475 U.S. 643, 648, 106 S.Ct. 1415, 1418, 89 L.Ed.2d 648 (1986); Miron Constr. Co., Inc. v. International Union of Operating Eng'rs, 44 F.3d 558, 562 (7th Cir.), cert. denied, --- U.S. ----, 115 S.Ct. 1824, 131 L.Ed.2d 746 (1995).

The Form 8-R application for registration as an associated person under the Act and as an Associate in the NFA, which Pipkin signed, states that "execution and delivery of this application shall constitute ... an express agreement by me that, if registered as an Associate, I shall become and remain bound by all NFA requirements as then and thereafter in effect." Under Article XVIII(u) of the NFA's Articles of Incorporation and Rule 1-1(q) of the NFA's Compliance Rules, "Requirements" is defined as "any duty, restriction, procedure, or standard imposed by a charter, bylaw, rule, regulation, resolution, or similar provision." One of these requirements, adopted on May 1, 1992, is the NFA's "Member Arbitration Rules." Under Sec. 2(a) of these rules, "disputes between and among Members and Associates shall be arbitrated under these Rules upon the filing of a Demand by a Member or Associate." Thus, in signing the Form 8-R, Pipkin consented to mandatory arbitration of his dispute with O'Brien before the NFA. ²

Pipkin protests that the language in the Form 8-R is too ambiguous to provide his consent. Unlike the registration forms in the securities field, see Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 23, 111 S.Ct. 1647, 1651, 114 L.Ed.2d 26 (1991), the NFA and CFTC forms do not specifically mention arbitration. A contract, however, need not contain an explicit arbitration clause if it validly incorporates by reference an arbitration clause in another document. See Geldermann, Inc. v. CFTC, 836 F.2d 310, 318 (7th Cir.1987), cert. denied, 488 U.S. 816, 109 S.Ct. 54, 102 L.Ed.2d 33 (1988); Progressive Casualty Ins. Co. v. C.A. Reaseguradora Nacional, 991 F.2d 42, 48 (2d Cir.1993); United States Fidelity & Guar. Co. v. West Point Constr. Co., Inc., 837 F.2d 1507, 1508 (11th Cir.1988); Maxum Foundations, Inc. v. Salus Corp., 779 F.2d 974, 978 (4th Cir.1985). In Geldermann, we held that "a written agreement to observe and be bound by the Charter, Rules and Regulations of the Association, and all amendments subsequently made thereto" constituted a consent to be bound by arbitration procedures later adopted by the Association. Id., 836 F.2d at 318.

Pipkin counters that the phrase "all NFA requirements" was too vague to incorporate the Member Arbitration Rules. He argues that, while it would subject members of the NFA to such requirements, associates could only expect to be bound by those requirements the NFA was specifically authorized to impose by the Act, such as proficiency and compliance requirements authorized by Sec. 21(p). Even if such a broad phrase as "all NFA requirements" could be so construed, Pipkin's argument ignores Secs. 12a(10) and 21(o )'s blanket delegation of authority to the NFA to perform the registration function in accordance with its rules as approved by the CFTC. Thus, an associated person could not assume that the NFA's requirements were limited in any way by those specified in the Act. ³ Nor can an associated person take refuge in Pipkin's suggestion that the word "requirements" in the Form 8-R is distinguished from the defined term "Requirements" in the Articles of Incorporation and Compliance Rules by the absence of a capital "R." This is a distinction without a difference. Nowhere in the text of the Articles of Incorporation, Bylaws or other rules does the NFA use the word "requirements" with a capital "R." The phrase "all NFA requirements" is sufficiently comprehensive to prevent Pipkin from complaining that he could not discern which NFA mandates actually applied to him.

Moreover, the Form 8-R clearly indicated that the application to obtain registration as an associated person also constituted an application for registration as an NFA Associate. According to the definition of "Associate" in the Member Arbitration Rules, "every person who is associated with a Member within the meaning of the term 'associated person' as used in Section 4k of the Commodity Exchange Act, and who is required to register as such with the Commission, must register with NFA as an Associate." Thus, the arbitration requirement applies to Pipkin independent of whether the Form 8-R was sufficient to incorporate the rules.

Finally, Pipkin argues that the Form 8-R could not have...