Washington Square Securities, Inc. v. Aune

• Decision Date: 23 September 2004
• Docket Number: No. 03-1937.,03-1937.
• Citation: 385 F.3d 432
• Parties: WASHINGTON SQUARE SECURITIES, INCORPORATED, Plaintiff-Appellant, v. James K. AUNE; Virginia M. Norman, individually and as the executrix of the Estate of Howard W. Norman and trustee of the Howard and Virginia Norman Charitable Trust; Patricia J. Walker; Fred W. Miltz, Trust Manager of the SAM Trust, Defendants-Appellees.
• Court: U.S. Court of Appeals — Fourth Circuit

385 F.3d 432

WASHINGTON SQUARE SECURITIES, INCORPORATED, Plaintiff-Appellant, v. James K. AUNE; Virginia M. Norman, individually and as the executrix of the Estate of Howard W. Norman and trustee of the Howard and Virginia Norman Charitable Trust; Patricia J. Walker; Fred W. Miltz, Trust Manager of the SAM Trust, Defendants-Appellees.

No. 03-1937.

United States Court of Appeals, Fourth Circuit.

Argued: June 2, 2004.

Decided: September 23, 2004.

Appeal from the United States District Court for the Western District of North Carolina, Richard L. Voorhees, J ARGUED: Burton W. Wiand, Fowler White Boggs Banker P.A., Tampa, Florida, for Appellant. Joel Arnold Goodman, Goodman & Nekvasil, P.A., Clearwater, Florida, for Appellees. ON BRIEF: Hala A. Sandridge, Elaine M. Rice, Fowler White Boggs Banker P.A., Tampa, Florida, for Appellant.

Before WILKINS, Chief Judge, LUTTIG, Circuit Judge, and Louise W. FLANAGAN, United States District Judge for the Eastern District of North Carolina, sitting by designation.

Affirmed by published opinion. Judge FLANAGAN wrote the opinion, in which Chief Judge WILKINS and Judge LUTTIG joined.

OPINION

FLANAGAN, District Judge:

This appeal arises from the commencement of arbitration proceedings by appellees James K. Aune and other investors (collectively "the Investors") against appellant brokerage firm Washington Square Securities, Inc. ("Washington Square"). Washington Square sought a declaratory judgment in district court halting the arbitration. Applying North Carolina contract and agency principles, the district court determined that Washington Square was bound to arbitrate by virtue of its membership in the National Association of Securities Dealers, Inc., ("NASD"), and dismissed the action. Albeit on different reasoning, we affirm.

I.

Appellees invested in ETS Payphone Equipment, Inc., and Worldwide Growth Partners, Inc. Series B/Evergreen Security Ltd. ("ETS and Evergreen") at various times from late 1997 through 1998. During that time, Richard White, the investment broker for each of these transactions, was acting as an associated person of NASD member Washington Square. As such, White was employed and authorized by Washington Square to sell securities on its behalf, but White was free to participate in other business opportunities unrelated to Washington Square. Washington Square did not authorize or have knowledge of the ETS and Evergreen investment transactions. As a result of their investments in ETS and Evergreen, the Investors collectively sustained losses in excess of $1,000,000.00.

On March 13, 2002, the Investors filed an arbitration claim before the NASD, seeking to hold Washington Square responsible for White's sale of allegedly fraudulent ETS and Evergreen investments, on grounds that Washington Square acted through White as his employer and otherwise failed to take adequate steps to supervise White. The Investors sought damages against Washington Square based upon North Carolina securities laws, breach of contract, common law fraud, breach of fiduciary duty, negligence, and gross negligence.

Washington Square filed two separate actions¹ in the Western District of North Carolina on July 26, 2002, seeking a declaratory judgment that there was no valid agreement to arbitrate between Washington Square and the Investors, and seeking injunctive relief staying the arbitration before the NASD. Upon the Investors' motion to compel arbitration, the court dismissed Washington Square's complaint seeking declaratory judgment and denied Washington Square's motion for preliminary injunction.

In reaching its decision, the court first determined that there was no presumption in favor of arbitration, given that Washington Square and the Investors never entered into an agreement to arbitrate. Nonetheless, based on the plain language of Rule 10301 of the NASD Code, White's representative agreement with Washington Square ("Form U-4"), and the circumstances surrounding the ETS investment transaction, the court concluded that the Investors were entitled to arbitrate under North Carolina law as third-party beneficiaries of the NASD Code.

The district court declined to consider Washington Square's extrinsic evidence bearing upon the meaning of the term "customer" in the NASD arbitration provision, reasoning that consideration of such evidence was unnecessary because "the language of the NASD Arbitration Code provisions is not ambiguous." J.A. 515. Moreover, the court reasoned that the extrinsic evidence offered by Washington Square was not dispositive of the meaning of the language in the NASD Code.

As an alternative basis for its decision, the district court determined that North Carolina's agency principles were sufficient to compel arbitration. Without allowing discovery, and based on allegations by the Investors as to representations made by Mr. White at the time of the ETS transactions, the court found "ample evidence" that Mr. White acted with apparent authority from Washington Square. J.A. II. 514. Accordingly, the district court held that the Investors were entitled to compel arbitration in their dispute with Washington Square.

II.

Washington Square raises several issues on appeal. In particular, it contends that the district court erred by applying Rule 10301 of the NASD Code without looking to additional language in Rule 10101, which states the eligibility requirements for arbitrable disputes. Washington Square also argues that there exists a latent ambiguity in the language of the NASD arbitration rules, and that the district court should have resolved this ambiguity by resort to its extrinsic evidence of the parties' intent. Finally, Washington Square challenges the district court's denial of discovery on the issue of whether White was acting as an agent of Washington Square. These are issues of first impression in this Circuit, and, as the district court noted, federal courts are divided over arbitrability of disputes between a NASD member and investors who conduct transactions through an associated person of the member. Compare John Hancock Life Ins. Co. v. Wilson, 254 F.3d 48, 59 (2nd Cir.2001) (finding that the NASD Code unambiguously requires arbitration in such circumstances), and Vestax Secs. Corp. v. McWood, 280 F.3d 1078, 1082 (6th Cir.2002) (same), and California Fina Group, Inc. v. Herrin, 379 F.3d 311, 318 (5th Cir.2004) (same), with Investors Capital Corp. v. Brown, 145 F.Supp.2d 1302, 1308 (M.D.Fla.2001) (holding that investors' status as "customer" under the NASD Code turns on the factual issue of whether the investors attempted to have an "informal business relationship" with the member).

III.

A.

The court reviews de novo a district court's determination that a dispute is arbitrable. Cara's Notions v. Hallmark Cards, 140 F.3d 566, 569 (4th Cir.1998).

We address first the district court's finding that no presumption in favor of arbitration applied in this case because the Investors and Washington Square never entered into an agreement to arbitrate. Washington Square urges the court to follow the reasoning of the district court on this point. We find Washington Square's argument and the reasoning of the district court unpersuasive.²

The obligation and entitlement to arbitrate "does not attach only to one who has personally signed the written arbitration provision." Int'l Paper Co. v. Schwabedissen Maschinen & Anlagen GMBH, 206 F.3d 411, 416 (4th Cir.2000). Rather, "[w]ell-established common law principles dictate that in an appropriate case a nonsignatory can enforce, or be bound by, an arbitration provision within a contract executed by other parties." Id. at 416-417.

The NASD Code of Arbitration Procedure, Rule 10301(a), provides:

Any dispute, claim or controversy eligible for submission... between a customer and a member and/or associated person arising in connection with the business of such member or in connection with the activities of such associated persons shall be arbitrated under this Code, as provided by any duly executed and enforceable written agreement or upon the demand of the customer.

J.A. II. 449. The NASD Code constitutes an "agreement in writing" under the Federal Arbitration Act, 9 U.S.C. § 2, which binds Washington Square, as an NASD member, to submit an eligible dispute to arbitration upon a customer's demand. See Kidder, Peabody & Co., Inc. v. Zinsmeyer Trusts P'ship, 41 F.3d 861, 863-64 (2nd Cir.1994). Because this arbitration agreement binds Washington Square, the remaining issue is whether the Investors are "customers" whose dispute falls within its scope.

"[T]he examination of the scope of an arbitration agreement is primarily a task of contract interpretation." Cara's Notions, 140 F.3d at 569. "[A]s with any other contract, the parties' intentions control." Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, 473 U.S. 614, 626, 105 S.Ct. 3346, 87 L.Ed.2d 444 (1985). Nevertheless, "in applying general state law principles of contract interpretation to the interpretation of an arbitration agreement within the scope of the [Federal Arbitration] Act, due regard must be given to the federal policy favoring arbitration." Volt Info. Sciences, Inc. v. Bd. of Trs. of Leland Stanford Jr. Univ., 489 U.S. 468, 475-76, 109 S.Ct. 1248, 103 L.Ed.2d 488 (1989) (citing 9 U.S.C. § 2).

Pursuant to this policy, the parties' intentions "are generously construed as to issues of arbitrability," Mitsubishi, 473 U.S. at 626, 105 S.Ct. 3346, and any "ambiguities as to the scope of the arbitration clause itself" must be "resolved in favor of arbitration." Volt, 489 U.S. at 476, 109 S.Ct. 1248. "[T]here is a presumption of arbitrability in the sense that `an order to arbitrate the particular grievance should not be denied unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute. Doubts should be resolved in favor of coverage.'" AT & T Techs., Inc....