in Re Wachovia Securitites, LLC and Rodrick Chisholm

Opinion issued November 23, 2005

In The

Court of Appeals

For The

First District of Texas

NO. 01-05-00305-CV

WACHOVIA SECURITIES, LLC & RODERICK CHISHOLM, Appellants

V.

ROCKY EMERY, Appellee

On Appeal from the 165th District Court

Harris County, Texas

Trial Court Cause No. 2004-64094

* * *

__________

NO. 01–05–00448–CV

___________

IN RE WACHOVIA SECURITIES, LLC AND RODERICK CHISHOLM,

RELATORS

Original Proceeding on Petition for Writ of Mandamus

O P I N I O N

In dual proceedings, appellants/relators, Wachovia Securities, LLC and

Roderick Chisholm (“relators”), challenge the trial court’s order that denied their

motion to compel arbitration against appellee/real party in interest, Rocky Emery

(“Emery”).

In one issue, relators contend that the trial court erroneously denied their

motion to compel arbitration. We dismiss the interlocutory appeal for want of

jurisdiction and conditionally grant the petition for writ of mandamus.

Background

Rocky Emery began his career in the securities industry as a registered

representative of PaineWebber in 1993. Before starting his employment with

PaineWebber, Emery was required to execute a Uniform Application for Securities

Industry Registration or Transfer (“U-4”) which contained an arbitration provision.

On July 13, 2001, Emery resigned from PaineWebber and began working for First

Union, Wachovia’s predecessor.

Emery then signed a second U-4 which contained

essentially the same arbitration provision. Pursuant to the arbitration provisions,

Emery agreed “to arbitrate any dispute, claim or controversy that may arise between

me and my firm, or a customer, or any other person, that is required to be arbitrated

under the rules, constitutions or by-laws of the SROs

indicated in Item 11 [i.e., the

National Association of Securities Dealers (NASD) and the New York Stock

Exchange (NYSE)] as may be amended from time to time.”

After Wachovia terminated Emery’s employment on September 21, 2004,

Emery filed a breach-of-contract claim against Wachovia and a negligent

misrepresentation claim against Chisholm, his branch manager at Wachovia. A little

over a week later, relators filed a motion to compel arbitration. On January 10, 2005,

Emery amended his petition by dropping the breach-of-contract claim and adding a

fraud and negligent misrepresentation claim against Wachovia and Chisholm and a

statutory libel and business-disparagement claim against Chisholm.

In his amended petition, Emery alleged that the defendants had made “false,

material misrepresentations” to induce him to leave his prior employment at

PaineWebber and join Wachovia. Specifically, Emery claimed that he had been

promised a computer platform for a Stock Option Financing (SOF) business he had

developed while at PaineWebber in order to induce him to leave PaineWebber and

bring other employees in the SOF group with him to Wachovia, but that Wachovia

had not kept its promises to get the SOF Platform up and running. Emery further

alleged that Chisholm had misrepresented to the NYSE and NASD in 2003 that

Emery had engaged in unauthorized business activities while employed by Wachovia,

that Wachovia was investigating these activities, and that Emery had been terminated

by Wachovia. Emery also filed a response to the motion to compel arbitration in

which he argued that the agreement to arbitrate did not apply to his claims because

his claims were based on conduct that occurred before he signed the second U-4.

Following a hearing, the trial court denied relators’ motion to compel. Relators

now challenge the trial court’s order via an interlocutory appeal and a petition for writ

of mandamus.

Appeal

The Texas Arbitration Act (“TAA”) and the Federal Arbitration Act (“FAA”)

provide alternative procedural vehicles for relief. In re Educ. Mgmt. Corp., Inc ., 14

S.W.3d 418, 425 (Tex. App.—Houston [14th Dist.] 2000, orig. proceeding). If the

trial court denies arbitration based on the TAA, the order is subject to interlocutory

appeal. T ex. Civ. Prac. & Rem. Code Ann . § 171.098(a)(1) (Vernon 2005). Relief

from a denial of arbitration under the FAA, however, must be pursued by mandamus.

EZ Pawn Corp. v. Mancias , 934 S.W.2d 87, 91 (Tex. 1996).

The trial court did not expressly determine whether the FAA or the TAA

applies. See 9 U.S.C. §§ 1-16 (2000); T ex. Civ. Prac. & Rem. Code Ann . §§

171.001-.098 (Vernon 2005). In addition, the U-4 does not state whether arbitration

is governed by the FAA or the TAA. As a threshold matter, we first determine which

act applies.

The FAA governs a written arbitration clause in any contract “evidencing a

transaction involving commerce . . . .” See 9 U.S.C. § 2 . This provision extends to

all transactions affecting commerce and is coextensive with the reach of the

Commerce Clause of the United States Constitution. Allied-Bruce Terminix Co. v.

Dobson , 513 U.S. 265 , 271–81, 115 S. Ct. 834 , 838–43 (1995); see In re L & L

Kempwood Assocs ., 9 S.W.3d 125, 127 (Tex. 1999). A contract “evidenc[es] a

transaction involving commerce” if it in fact turns out to involve interstate commerce.

Allied-Bruce , 513 U.S. at 277–81, 115 S. Ct. at 841–43.

The FAA displaces state law only to the extent the state law conflicts with the

FAA’s purpose of enforcing the parties’ contractual obligation to arbitrate. Volt Info.

Sciences, Inc. v. Bd. of Trustees , 489 U.S. 468 , 477–78, 109 S. Ct. 1248, 1255 (1989);

In re H.E. Butt Grocery Co ., 17 S.W.3d 360, 378 (Tex. App.—Houston [14th Dist.]

2000, orig. proceeding). Thus, if the arbitration clause is enforceable under the FAA,

an analysis of enforceability under the TAA is unnecessary. See In re Anaheim

Angels Baseball Club, Inc ., 993 S.W.2d 875 , 877 n.1 (Tex. App.—El Paso 1999, orig.

proceeding [mand. denied]).

The sale of securities has been held to involve interstate commerce. See

Eurocapital Group, Ltd. v. Goldman Sachs & Co ., 17 S.W.3d 426, 430 (Tex.

App.—Houston [1st Dist.] 2000, no pet.) (recognizing that account agreement

concerning sale of securities involved interstate commerce); Thomas James Assocs.,

Inc. v. Owens , 1 S.W.3d 315, 319 (Tex. App.—Dallas 1999, no pet.) (same); see also

Williams v. Cigna Fin. Advisors, Inc. , 56 F.3d 656, 659 (5th Cir. 1995) (reasoning

that U-4 registration involved interstate commerce because it was contract involving

sale of securities).

The underlying proceedings in this case involve an employment dispute in the

securities industry which is partially governed by an arbitration agreement in a U-4.

Cases that involve U-4 arbitration agreements are consistently construed as affecting

interstate commerce. See In re Merrill Lynch, Pierce, Fenner & Smith Inc ., 131

S.W.3d 709, 712 (Tex. App.—Dallas 2004, orig. proceeding); In re Scott , 100 S.W.3d

575, 579 (Tex. App.—Fort Worth 2003, orig. proceeding); Williams , 56 F.3d at 659

(reasoning that U-4 registration involves interstate commerce because it is contract

involving sale of securities); see also BWI Cos. v. Beck , 910 S.W.2d 620 , 622–23

(Tex. App.—Austin 1995, orig. proceeding [leave denied]) (arbitration agreement

between employer and employee involved interstate commerce, even though

employee worked and made deliveries only in Texas, because employer had facilities

in Texas and other states). Thus, we conclude that the transaction between Emery and

the relators affected interstate commerce and that the FAA applies.

Because the FAA applies, mandamus, and not interlocutory appeal, is the

procedural vehicle for the relief that relators request. Accordingly, we dismiss the

relators’ interlocutory appeal and consider the merits of the petition for writ of

mandamus.

Mandamus

Standard of Review

Mandamus is an extraordinary remedy that will issue only to correct a clear

abuse of discretion or the violation of a legal duty when there is no adequate appellate

remedy at law. In re Masonite Corp ., 997 S.W.2d 194, 197 (Tex. 1999). When a trial

court erroneously grants a party’s motion to compel arbitration, the movant has no

adequate remedy at law and is entitled to a writ of mandamus. See In re Am.

Homestar, Inc ., 50 S.W.3d 480, 483 (Tex. 2001). We review the trial court’s order

for abuse of discretion. Jack B. Anglin Co. v. Tipps , 842 S.W.2d 266, 271 (Tex.

1992); Trico Marine Servs., Inc. v. Stewart & Stevenson Technical Servs ., Inc. , 73

S.W.3d 545, 548 (Tex. App.—Houston [1st Dist.] 2002, no pet.) (combined appeal

& orig. proceeding). A trial court abuses its discretion when it errs in determining

what the law is or in applying the law to the facts. In re Bruce Terminix Co ., 988

S.W.2d 702, 703 (Tex. 1998); Trico Marine Servs ., 73 S.W.3d at 548 . The trial

court’s order does not state its grounds for denying the relators’ motion to compel

arbitration. Thus, we review the grounds stated in the relators’ motion and reverse

the trial court’s order if any of the grounds are meritorious. See In re H.E. Butt

Grocery , 17 S.W.3d at 367.

Enforceability of 2001 Agreement to Arbitrate

In their mandamus petition, relators argue that the trial court erred in denying

their motion to compel arbitration because they submitted an agreement to arbitrate

and Emery’s claims were within the scope of the agreement.

Whether an enforceable agreement to arbitrate exists is a legal question subject

to de novo review. In re Kellogg Brown & Root , 80 S.W.3d 611, 615 (Tex.

App.—Houston [1st Dist.] 2002, orig. proceeding). Although an arbitration

agreement does not have to assume any particular form, the language of the

agreement must clearly indicate the intent to arbitrate. See Massey v. Galvan , 822

S.W.2d 309, 316 (Tex. App.—Houston [14th Dist.] 1992, writ denied). Without an

agreement to arbitrate, arbitration cannot be compelled. Freis v. Canales , 877 S.W.2d

283, 284 (Tex. 1994) (orig. proceeding). In deciding whether to compel arbitration,

the trial court is entitled to rely on affidavits, pleadings, discovery, and stipulations.

Jack B. Anglin , 842 S.W.2d at 269 .

Under both the TAA and the FAA, a party seeking to compel arbitration has

the initial burden to establish the arbitration agreement’s existence and to show that

the claims asserted fall within the agreement’s scope. See T ex. Civ. Prac. & Rem.

Code Ann . § 171.021(a) (Vernon 2005); In re Kellogg Brown & Root , 80 S.W.3d at

615 . If the party seeking arbitration carries its initial burden, the burden then shifts

to the party resisting arbitration to present evidence on its defenses to the arbitration

agreement. See In re Oakwood Mobile Homes, Inc ., 987 S.W.2d 571, 573 (Tex.

1999); Mohamed v. Auto Nation USA Corp. , 89 S.W.3d 830, 835 (Tex.

App.—Houston [1st Dist.] 2002, orig. proceeding) .

To support their motion to compel arbitration, relators relied on the arbitration

clause found within the 2001 U-4 that Emery signed. The U-4 provides,

5. I agree to arbitrate any dispute, claim or controversy that may

arise between me and my firm, or a customer, or any other person,

that is required to be arbitrated under the rules, constitutions, or

by-laws of the SROs indicated in Item 11 as may be amended

from time to time and that any arbitration award rendered against

me may be entered as a judgment in any court of competent

jurisdiction.

Emery neither disputes that this clause mandates arbitration, nor disputes that he is

a signatory to this clause. We conclude that relators presented a valid arbitration

agreement. Thus, we turn to whether Emery’s claims fall within the scope of the

arbitration agreement.

Scope of 2001 Arbitration Agreement

Both federal and state law strongly favor arbitration. Cantella & Co., Inc. v.

Goodwin , 924 S.W.2d 943, 944 (Tex. 1996) (orig. proceeding); Prudential Sec. Inc.

v. Marshall , 909 S.W.2d 896, 898 (Tex. 1995) (orig. proceeding). Under the FAA,

any doubts as to whether a plaintiff’s claims fall within the scope of the arbitration

agreement must be resolved in favor of arbitration. Cantella , 924 S.W.2d at 944 ;

Prudential Sec. , 909 S.W.2d at 899 . “[A] court should not deny arbitration ‘ unless

it can be said with positive assurance that an arbitration clause is not susceptible of

an interpretation which would cover the dispute at issue.’” Prudential Sec ., 909

S.W.2d at 899 (quoting Neal v. Hardee’s Food Sys., Inc ., 918 F.2d 34, 37 (5th Cir.

1990)). In determining whether a claim falls within the scope of an arbitration clause,

we must focus on the factual allegations of the complaint, rather than the legal causes

of action asserted. Id . at 900; AutoNation USA Corp. v. Leroy , 105 S.W.3d 190, 195

(Tex. App.—Houston [14th Dist.] 2003, orig. proceeding).

The arbitration clause in the 2001 U-4 requires that Emery 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” of the NYSE or NASD.

Emery argues (1) that his claims against Wachovia arose before he signed the July 13,

2001 arbitration agreement and are therefore outside its scope and (2) that claims by

a registered representative, like himself, against another registered representative, like

Chisholm, are not arbitrable under NASD or NYSE rules of arbitration.

Accrual of Emery’s Claims

Emery first argues that his pre-July 13, 2001 conduct is not arbitrable. To

support his contention, he relies on Hendrick v. Brown & Root, Inc . 50 F. Supp. 2d

527 (E.D. Va. 1999). Hendrick worked for Brown & Root at four different time

periods. Id . at 528. In his third period of employment, October 19, 1988 through

May 20, 1993, and before he was terminated on May 20, 1993, Brown & Root

notified Hendrick that a dispute resolution plan would take effect on June 15, 1993.

Id . at 529. After his fourth period of employment had ended, Hendrick discovered

that Brown & Root had used his name unlawfully during his third period of

employment, and he filed suit. Id . at 530. Brown & Root moved for arbitration,

claiming that Hendrick’s cause of action was subject to arbitration pursuant to his

employment contract during his fourth period of employment, which contained the

dispute resolution plan. Id. at 531 . The court of appeals stated that the threshold

issue was whether the fourth contract and the incorporated dispute resolution plan

evinced an intent to arbitrate an employee’s claims that had accrued before execution

of the fourth contract. Id . at 533. The court found that at the time of the accrual of

Hendrick’s cause of action the employment contract contained no agreement to

arbitrate. Id. at 533–34.

The facts of this case are entirely different. Unlike Hendrick , Emery had an

arbitration agreement with Wachovia throughout the time of his employment there.

The plain language of the agreement requires Emery 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” of the NYSE or NASD. (Emphasis

added.) Emery’s petition alleges claims arising out of a controversy between himself

as an employee of Wachovia and his employer and branch manager. There is no time

limit in the arbitration clause as to when the claims must have accrued. Thus,

Emery’s claims, by their terms, fall within the scope of his July 13, 2001 arbitration

agreement with Wachovia.

We also observe that none of Emery’s claims accrued until after he was

employed by Wachovia and had signed the arbitration agreement. Emery’s claims

arise out of Wachovia’s alleged failure to keep promises made to induce him to leave

PaineWebber and out of Chisholm’s and Wachovia’s alleged misrepresentations to

the NYSE, NASD, and SEC relative to Emery’s outside business activities during his

employment at Wachovia and his termination by Wachovia. Emery does not allege

any injury prior to Wachovia’s alleged failure to carry through on its promises to

provide him an SOF Platform while he was employed by Wachovia. Accordingly,

Hendrick does not apply to the case at bar.

We conclude that Emery’s claims fall squarely within the scope of the July 13,

2001 U-4s arbitration clause, assuming that those claims are indeed arbitrable under

the rules of the NASD or NYSE. See Prudential Sec ., 909 S.W.2d at 900 ;

AutoNation , 105 S.W.3d at 195 .

Arbitrability of Claims Among Associated Persons

Emery also argues that his claims against Chisholm are not subject to

arbitration under NASD or NYSE rules. The arbitration agreement in the U-4

incorporates by reference the rules of the SROs referred to in Item 11 of the U-4.

Item 11 of the U-4 indicates that Emery is registered with the NASD and the NYSE.

The rules of these two organizations govern which disputes must be resolved by

arbitration. See Metropolitan Life Ins. Co. v. Lindsay , 920 S.W.2d 720, 722 (Tex.

App.—Houston [1st Dist.] 1996, no writ); Smith Barney Shearson, Inc. v. Finstad ,

888 S.W.2d 111, 115 (Tex. App.—Houston [1st Dist.] 1994, no writ).

The NASD Code of Arbitration Procedure provides in relevant part:

10101 Matters Eligible for Submission

This Code of Arbitration Procedure is 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, or arising out of the employment or termination of

employment of associated person(s) with any member, with the

exception of disputes involving the insurance business of any

member which is also an insurance company;

(a) between or among members;

(b) between or among members and associated persons;

(c) between or among members or associated persons and

public customers, or others; and

(d) between or among members, registered clearing agencies

with which the Association has entered into an agreement

to utilize the Association’s arbitration facilities and

procedures, and participants, pledgees, or other persons

using the facilities of a registered clearing agency, as these

terms are defined under the rules of such a registered

clearing agency.

10201 Required Submission

(a) Except as provided in paragraph (b) or Rule 10216,

a dispute, claim, or controversy eligible for

submission under the Rule 10100 Series between or

among members and/or associated persons, and/or

certain others, arising in connection with the

business of such member(s) or in connection with

the activities of such associated persons(s), or

arising out of the employment or termination of

employment of such associated person(s) with such

member, shall be arbitrated under this Code, at the

instance of:

(1) a member against another member;

(2) a member against a person associated with a

member or a person associated with a member

against a member; and

(3) a person associated with a member against a

person associated with a member.

It is undisputed that Wachovia is a member of the NASD and that, as registered

representatives of a member firm, Emery and Chisholm are both persons “associated

with a member.”

Wachovia argues that the plain language of Rule 10101(b) provides for

arbitration between Emery, an associated person, and Chisholm, another associated

person. Emery argues that the arbitration agreement does not cover disputes solely

between associated persons. We agree with Wachovia.

Emery relies on Wojcik v. Aetna Life Ins. and Annuities Co ., 916 F. Supp. 729,

733 (N.D. Ill. 1996). In Wojcik , the federal district court held that a prior version of

the NASD rules did not encompass disputes solely between associated persons. 916

F. Supp. at 733 . The current version plainly does encompass such disputes. See

NASD Code of Arb. Proc. 10201(a)(3); see also In re Scott , 100 S.W.3d 575 ,

579–82 (Tex. App.—Fort Worth 2003, orig. proceeding) (compelling arbitration of

claims by one associated person against another pursuant to NASD rules 10101 and

10201); Williams v. Imhoff , 203 F.3d 758 , 764–65 (10th Cir. 2000) (holding that

plaintiffs’ claims were subject to arbitration because plaintiffs were associated

persons and that defendants, as trustees of member’s stock plan, were either

associated persons or “others” under rule 10101(c)); Singer v. Gaines , 896 So. 2d

851 , 853–54 (Fla. Dist. Ct. App. 2005) (holding that NASD rules contemplate

arbitration among associated persons).

Once a party seeking to compel arbitration establishes that an agreement exists

under the FAA and that the claims raised are within the agreement’s scope, the trial

court “has no discretion but to compel arbitration and stay its proceedings pending

arbitration.” Cantella , 924 S.W.2d at 944 . Accordingly, the trial court erred by

denying relators’ motion to compel arbitration pursuant to the FAA.

Conclusion

We conclude that the trial court improperly denied relators’ motion to compel

arbitration. A party who is erroneously denied the right to arbitrate under the FAA

has no adequate remedy at law, and mandamus relief is appropriate. Id . at 945. Thus,

we conditionally grant the writ of mandamus in cause no. 01–05–00448–CV and

direct the trial court to order that relators’ claims proceed to arbitration under the

FAA. We dismiss the appeal in cause no. 01–05–00305–CV for want of jurisdiction.

Evelyn V. Keyes

Justice

Panel consists of Justices Taft, Keyes, and Hanks.