Spellman v. Securities, Annuities & Ins. Services, Inc.

• Decision Date: 28 July 1992
• Docket Number: No. B057549,B057549
• Citation: 8 Cal.App.4th 452,10 Cal.Rptr.2d 427
• Court: California Court of Appeals Court of Appeals
• Parties: Calvin SPELLMAN, Plaintiff and Respondent, v. SECURITIES, ANNUITIES AND INSURANCE SERVICES, INC., et al., Defendants and Appellants.

Page 427

10 Cal.Rptr.2d 427

8 Cal.App.4th 452

Calvin SPELLMAN, Plaintiff and Respondent, v. SECURITIES, ANNUITIES AND INSURANCE SERVICES, INC., et al., Defendants and Appellants.

No. B057549.

Court of Appeal, Second District, Division 6, California.

July 28, 1992.

Rehearing Denied Aug. 24, 1992.

As Modified Aug. 26, 1992.

Review Denied Oct. 16, 1992.

LeBoeuf, Lamb, Leiby & MacRae, and Sanford Kingsley and Cheryl D. Orr, San Francisco, for defendants and appellants.

Robert M. Sanger, Santa Barbara, and Tomas Morales, San Diego, for plaintiff and respondent.

GILBERT, Associate Justice.

An employee who sells securities is terminated by his employer. The employee claims he was wrongfully terminated because of racial discrimination. His employment contract provides that he abide by the Rules of Fair Practice of the National Association of Securities Dealers, Inc. (NASD). These rules provide, among other things, that disputes between employee and employer be arbitrated. Here we hold that a claim for racial discrimination is subject to arbitration.

FACTS

In March 1989, plaintiff Calvin Spellman signed a written employment agreement with Securities, Annuities and Insurance Services, Inc. (SAIS) and its corporate affiliate, GNA Securities, Inc. ¹ Spellman was hired as an account executive to solicit and sell life insurance and securities. In that contract he agreed, inter alia, "to affiliate [himself] as a registered representative to sell securities for GNA Securities, Inc., an SAIS affiliate; and to meet all state law and NASD requirements pertaining to [his] license."

In particular, Spellman agreed to "strictly adhere to the Rules of Fair Practice of the National Association of Securities Dealers, Inc. [the Rules], as set forth in the NASD Manual, a copy of which GNA shall make available to you."

The rules state, in pertinent part, that "[a] member, in the conduct of his business, shall observe high standards of commercial honor and just and equitable principles of trade." (Art. III, par. 2151, § 1.) This rule cross-references paragraph 3744 of the NASD Code of Arbitration Procedure concerning failure to act under those arbitration provisions.

Paragraph 3744 of the NASD Code of Arbitration Procedure states, in pertinent part: "It may be deemed conduct inconsistent with just and equitable principles of trade and a violation of Article III, Section I of the Rules ... for a ... person associated with a member to fail to submit a dispute for arbitration under the Code of Arbitration Procedure as required by that Code...."

Part II, section 8(a) of the NASD Code of Arbitration Procedure also requires arbitration of "[a]ny dispute, claim or controversy eligible for submission under Part I of this Code between or among members and/or associated persons ... arising in connection with the business of such member(s) or in connection with the activities of such associated person(s)...."

Part I of the NASD Code of Arbitration Procedure states that it has been "prescribed and adopted" "for the arbitration of any dispute, claim, or controversy arising out of or in connection with the business of any member of the Association...."

In addition, Spellman executed a Uniform Application for Securities Industry Registration or Transfer Form U-4, known as the U-4 form. At the top of the signature page the U-4 form states in bold type, "THE APPLICANT MUST READ THE FOLLOWING VERY CAREFULLY." Paragraph 5 reads: "I agree to arbitrate any dispute, claim or controversy that may arise between me and my firm ... or any other person, that is required to be arbitrated under the rules, constitutions, or by-laws of the organizations with which I register...." Spellman registered with the NASD.

On August 31, 1990, Spellman filed this suit in superior court against SAIS, GNA and others alleging wrongful termination due to racial discrimination in violation of California Government Code section 12900 et seq., the California Fair Employment and Housing Act. His complaint also alleged causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, intentional and negligent infliction of emotional distress and slander.

On November 9, 1990, SAIS filed a petition to compel arbitration and requested a stay of the action. At the hearing on the petition, the trial court stated that it believed that arbitration could not be required in lieu of a statutory civil rights action, and it questioned whether the employment agreement validly required arbitration. On March 27, 1991, the court denied the petition.

On March 28, 1991, SAIS filed a notice of appeal from the order denying its petition to compel arbitration. (Code Civ.Proc., § 1294, subd. (a).)

On May 13, 1991, the United States Supreme Court decided Gilmer v. Interstate/Johnson Lane (1991) 500 U.S. 20, 111 S.Ct. 1647, 114 L.Ed.2d 26. In Gilmer, the high court held that a statutory cause of action for wrongful termination due to age discrimination is subject to compulsory arbitration under the terms of a U-4 form.

DISCUSSION

The interpretation of statutes and contracts is a matter of law subject to independent review by this court. (Stratton v. First Nat. Life Ins. Co. (1989) 210 Cal.App.3d 1071, 1079, 1084, 258 Cal.Rptr. 721.)

We must first decide whether the employment contract and the U-4 form contain enforceable compulsory arbitration provisions.

A contract may validly incorporate by reference the terms of another document if the reference is clear and unequivocal. (Chan v. Drexel Burnham Lambert, Inc. (1986) 178 Cal.App.3d 632, 641, 223 Cal.Rptr. 838.) The terms of the incorporated document must be known or easily available to the contracting parties. (Ibid.)

In Chan, plaintiff Chan was employed as a broker for a securities brokerage firm. Chan, at the request of her employer, signed a U-4 Uniform Application for Securities and Commodities Industry Representative. The U-4 application set forth only that Chan agree to abide " 'by the Statute(s), Constitution(s), Rules and By-Laws' " and any amendments of the three organizations to which Chan's application was submitted. Arbitration was not mentioned in the application, nor was Chan specifically directed to any documents which contained arbitration requirements. The Court of Appeal held there was no enforceable arbitration clause because the U-4 form did not clearly and unequivocally refer to any incorporated document. (Chan v. Drexel Burnham Lambert, Inc., supra, 178 Cal.App.3d at p. 643, 223 Cal.Rptr. 838.)

Unlike Chan, Spellman signed a U-4 form which expressly requires arbitration. It states, in pertinent part: "I agree to arbitrate any dispute, claim or controversy that may arise between me and my firm ... that is required to be arbitrated under the rules, constitutions, or by-laws of the organizations with which I register, as indicated...." This is the statement, quoted supra, which appears on the signature page of his U-4 form under the bold face heading warning applicants that they must read the paragraphs on that page "VERY CAREFULLY." Also, Spellman, unlike Chan, registered only with the NASD, not with three separate securities organizations.

The employment contract here also "clearly referred to and identified the incorporated document wherein the arbitration clause appeared." (Chan v. Drexel Burnham Lambert, Inc., supra, 178 Cal.App.3d at p. 642, 223 Cal.Rptr. 838; Baker v. Aubry (1989) 216 Cal.App.3d 1259, 1265, 265 Cal.Rptr. 381.) It states, in pertinent part: "You will strictly adhere to the Rules of Fair Practice of the National Association of Securities Dealers, Inc., as set forth in the NASD Manual, a copy of which GNA shall make available to you." Thus, both the U-4 agreement and the contract require arbitration.

The Federal Arbitration Act

Whether Spellman must arbitrate his particular claim depends on the applicability of the Federal Arbitration Act (FAA). (9 U.S.C. § 1 et seq.)

Congress enacted the FAA "to reverse the longstanding judicial hostility to arbitration agreements...." (Gilmer v. Interstate/Johnson Lane, supra, 500 U.S. at p. ----, 111 S.Ct. at p. 1651, 114 L.Ed.2d at p. 36.) "Its primary substantive provision states that '[a] written provision in any ... contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract ... shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.' " (Ibid., quoting 9 U.S.C. § 2.)

"Section 2 is a congressional declaration of a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary." (Moses H. Cone Hospital v. Mercury Constr. Corp. (1983) 460 U.S. 1, 24, 103 S.Ct. 927, 941, 74 L.Ed.2d 765; Gilmer v. Interstate/Johnson Lane, supra, 500 U.S. at p. ----, 111 S.Ct. at p. 1651, 114 L.Ed.2d at p. 36.)

" 'In enacting § 2 of the federal Act, Congress declared a national policy favoring arbitration and withdrew the power of the states to require a judicial forum for the resolution of claims which the contracting parties agreed to resolve by arbitration.' (Southland Corp. v. Keating (1984) 465 U.S. 1, 10 [104 S.Ct. 852, 858, 79 L.Ed.2d 1].)" (Chan v. Drexel Burnham Lambert, Inc., supra, 178 Cal.App.3d at pp. 637-638, 223 Cal.Rptr. 838.)

Spellman argues that the FAA does not apply to the instant employment contract because section 1 of the FAA states, in pertinent part, "nothing herein contained shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce." (9 U.S.C. § 1.) Spellman asserts that securities representatives engage in interstate commerce within the meaning of the FAA.

The Gilmer court did not consider the scope of section 1 of the FAA because only a U-4 application was before the high court, not an employment...