First Liberty Inv v. Nicholsberg

Opinions of the United

1998 Decisions States Court of Appeals

for the Third Circuit

6-9-1998

First Liberty Inv v. Nicholsberg

Precedential or Non-Precedential:

Docket 97-1514

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Recommended Citation

"First Liberty Inv v. Nicholsberg" (1998). 1998 Decisions. Paper 137.

http://digitalcommons.law.villanova.edu/thirdcircuit_1998/137

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Filed June 9, 1998

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

NO. 97-1514

FIRST LIBERTY INVESTMENT GROUP

v.

ERIC SCOTT NICHOLSBERG,

Appellant

On Appeal From the United States District Court

For the Eastern District of Pennsylvania

(D.C. Civil Action No. 97-cv-00452)

Argued March 9, 1998

BEFORE: STAPLETON and ALITO, Circuit Judges, and

SHADUR, District Judge*

(Opinion Filed June 9, 1998)

Marvin Gersten

Kenneth Gatz (Argued)

Gersten, Savage, Kaplowitz,

Fredericks & Curtin

101 East 52nd Street

New York, NY 10022

Attorney for Appellant

_________________________________________________________________

*Honorable Milton I. Shadur, Senior United States District Judge for the

Northern District of Illinois, sitting by designation.

Margaret Sherry Lurio

(Argued)

Lurio & Associates

Suite 1300

1760 Market Street

Philadelphia, PA 19103-4132

Attorney for Appellee

OPINION OF THE COURT

SHADUR, Senior District Judge:

Eric Scott Nicholsberg ("Nicholsberg") appeals a district

court's denial of his motion, brought under the Federal

Arbitration Act (the "Act," 9 U.S.C. SS 3-4), to stay a breach

of contract action and to compel arbitration of the claim

brought against him in that action by First Liberty

Investment Group ("First Liberty"). First Liberty had

initiated its lawsuit to recover money damages stemming

from Nicholsberg's alleged breach of an employment

agreement. For the reasons stated below, we reverse the

district court's order and remand to that court so that it

may stay the action and order the parties to proceed to

arbitration.

Facts1

We briefly summarize the uncontroverted essential facts.

Other relevant facts that fit better into the substantive legal

discussion will be set out later in this opinion.

In February 1996 Nicholsberg began his association with

First Liberty, a broker-dealer registered with the National

Association of Securities Dealers, Inc. ("NASD"). As a

condition of his employment in the securities industry,

Nicholsberg executed a "Uniform Application for Securities

Industry Registration or Transfer" (universally referred to as

"Form U-4"), which both he and an agent for First Liberty

_________________________________________________________________

1. This statement is drawn from the parties' briefs and the district

court's unreported opinion, available at 1997 WL 312123 (E.D. Pa. June

3).

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signed. Among other things, Form U-4 required Nicholsberg

to "arbitrate any dispute, claim or controversy" that might

arise between him and First Liberty "that is required to be

arbitrated under the rules, constitutions or by-laws" of

NASD. Form U-4 thus incorporates by reference the NASD

Code of Arbitration Procedures (the "NASD Code").

On March 11, 1996 the parties entered into the OSJ

Principal Agreement (the "Agreement"), under which First

Liberty agreed to provide Nicholsberg with facilities to

execute various types of securities transactions. Two

aspects of the Agreement are at the core of the current

dispute:

1. It characterized Nicholsberg as an independent

contractor rather than as an employee of First Liberty.

2. Its provisions, looked at alone, were silent as to

the arbitrability of disputes between the parties.

As we have stated at the outset, on January 21, 1997

First Liberty filed a breach of contract action against

Nicholsberg to recover monies assertedly owed it under the

Agreement. Shortly thereafter Nicholsberg moved to stay

the proceeding and to compel arbitration of the claim. This

appeal stems from the district court's denial of

Nicholsberg's motion. We review that denial de novo (In re

Prudential Ins. Co. of Am. Sales Practice Litig. All Agent

Actions ["Prudential Agents"], 133 F.3d 225, 227 n.1 (3d Cir.

1998)).

Arbitrability of the Parties' Dispute

Arbitration is a creature of contract (see AT&T Techs., Inc.

v. Communications Workers of Am., 475 U.S. 643, 648

(1986)). "As a matter of contract, no party can be forced to

arbitrate unless that party has entered into an agreement

to do so" (PaineWebber Inc. v. Hartmann, 921 F.2d 507, 511

(3d Cir. 1990)). And as we recently observed in Prudential

Agents, 133 F.3d at 228:

A threshold inquiry under the Federal Arbitration Act

is to determine, under recognized principles of contract

law, the validity of, and the parties bound by, the

arbitration agreement.

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Here Nicholsberg's Form U-4 supplies such a potentially

applicable agreement (at least on his part):

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 [NASD] as may be amended from time to time....

For its part, although one of First Liberty's authorized

agents also signed Form U-4, it is not a direct party to that

document.2 Rather Form U-4 is more correctly understood

as a contract between Nicholsberg and NASD, not between

Nicholsberg and First Liberty (Prudential Agents, 133 F.3d

at 228 n.5, citing Gilmer v. Interstate/Johnson Lane Corp.,

500 U.S. 20, 25 n.2 (1991)).

That, however, does not prove fatal to Nicholsberg's

request for arbitration. As we went on to say in Prudential

Agents, 133 F.3d at 229, quoting Kaplan v. First Options of

Chicago, Inc., 19 F.3d 1503, 1512 (3d Cir. 1994), aff'd, 514

U.S. 938 (1995):

The identification of the parties bound by the

agreement to arbitrate need not be confined to the

limited inquiry of identifying the signatories to the

_________________________________________________________________

2. Here is what First Liberty represented, as Form U-4 required:

To the best of my knowledge and belief, the applicant is currently

bonded where required, and, at the time of approval, will be

familiar

with the statute(s), constitution(s), rules and by-laws of the

agency

jurisdiction or civil regulatory organization with which this

application is being filed, and the rules governing registered

persons, and will be fully qualified for the position for which

application is being made herein. I agree that, notwithstanding the

approval of such agency, jurisdiction or organization which hereby

is requested, I will not employ the applicant in the capacity

stated

herein without first receiving the approval of any authority which

may be required by law. This firm has communicated with all of the

applicant's previous employers for the past three years.

[Past employer information]

IN ADDITION I HAVE TAKEN APPROPRIATE STEPS TO VERIFY THE

ACCURACY AND COMPLETENESS OF THE INFORMATION

CONTAINED IN AND WITH THIS APPLICATION.

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arbitration agreement. Rather, the dispositive finding is

an " `express' and `unequivocal' " agreement between

parties to arbitrate their disputes.

In this instance the requisite intent on First Liberty's part

to resort to arbitration is provided by its post-Form U-4

entry into the Agreement with Nicholsberg. Despite its

labeling of Nicholsberg as an "independent contractor" (of

which more later), the Agreement goes on to say in terms

that are both express and unequivocal:

Nevertheless, for fulfillment of this contract and for the

mutual benefit of both parties it is necessary that both

parties at all times fully comply with applicable

regulations of the...NASD.

Thus, entirely without reference to Nicholsberg's

undertaking in the Form U-4, the terms of the Agreement

(committed to by both First Liberty and Nicholsberg) clearly

incorporate by reference all requirements applicable to their

relationship as imposed by NASD. And it is equally clear

that such incorporation by reference necessarily

encompasses the NASD Code, if and to the extent that it

covers their relationship. Indeed, even in the absence of

such a commitment in the Agreement, it has long been

established (see, e.g., Axelrod & Co. v. Kordich, Victor &

Neufeld, 451 F.2d 838 (2d Cir. 1971)) that, with NASD

being a self-regulating organization within the terms of the

Securities Exchange Act of 1934 ("1934 Act"), each of its

members such as First Liberty is contractually bound by its

regulations--including all of its arbitration provisions.

Before we turn to those NASD Code provisions, we pause

to dispatch First Liberty's contention that because the

later-signed Agreement contains an integration clause, it

somehow acts to supersede the earlier-dated Form U-4. If

Nicholsberg had to rely on First Liberty's limited

involvement in the Form U-4 (as he does not), he could

point to the principle expressed in Zandford v. Prudential-

Bache Sec., Inc., 112 F.3d 723, 727 (4th Cir. 1997), quoting

Nolde Bros., Inc. v. Local No. 358, Bakery & Confectionery

Workers Union, 430 U.S. 243, 255 (1977):

When a party seeking to avoid arbitration contends

that the clause providing for arbitration has been

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superseded by some other agreement, "the

presumptions favoring arbitrability must be negated

expressly or by clear implication."

But any potential issue involving the Form U-4 is really a

red herring. What controls instead is that, as we have

already explained, the document that contains the

integration clause--the Agreement itself--incorporates by

reference the NASD Code and thus contractually obligates

both First Liberty and Nicholsberg to arbitrate certain

disputes.

We return then to the coverage of the NASD Code's

arbitration mandate. Two of its Rules are particularly

relevant here.

First, "Section 1 [now Rule 10101 as the result of a

subsequent amendment] defines the general universe of

issues that may be arbitrated" (Armijo v. Prudential Ins. Co.

of Am., 72 F.3d 793, 798 (10th Cir. 1995)). Under Rule

10101 matters eligible for submission to arbitration

include:

any dispute, claim or controversy arising out of or in

connection with the business of any member of the

[NASD], or arising out of the employment or

termination of employment of the associated person(s)

with any member...:

* * *

(b) between or among members and associated

persons....

Next, "Section 8 [now Rule 10201(a) as the result of the

same amendment] describes a subset of that universe of

disputes that must be arbitrated under the Code" (Armijo,

72 F.3d at 798):

Any 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 person(s), or arising out of the

employment or termination of employment of such

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associated person(s) with such member, shall be

arbitrated under this Code, at the instance of:

* * *

(2) a member against a person associated with a

member or a person associated with a member

against a member....

Thus the NASD Code imposes two requirements for a

securities industry dispute to be arbitrable. First is a

restriction on the parties: In terms relevant to the present

situation, the dispute must be "between...members and

associated persons." Second is a restriction on the subject

matter: All of the substantive disputes must be ones

"arising in connection with the business" of members or

arising "in connection with the activities of such associated

person(s)" or "arising out of the employment or termination

of employment of such associated person(s) with such

member." We consider each requirement in turn.

Are the Parties Subject to Arbitration Vis-a-Vis

Each Other?

Whether the present litigants are parties whose disputes

with each other are arbitrable at all is a function of the

NASD Code's Rule 10101 mandate that extends to the

arbitration of disputes "between...members and associated

persons." It is undisputed that First Liberty is a member of

NASD. At issue instead is the other half of the necessary

arbitration twosome: whether Nicholsberg qualifies as an

"associated person" within the scope of that mandate.

NASD By-Law Art. I(q) defines the term "associated

person of a member" as:

every sole proprietor, partner, officer, director, or

branch manager of any member, or any natural person

occupying a similar status or performing similar

functions, or any natural person engaged in the

investment banking or securities business who is

directly or indirectly controlling or controlled by such

member....

That "associated person" concept did not originate with

NASD--relatedly the 1934 Act, which provides the authority

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for an individual exchange's self-regulating rules (Kaplan,

19 F.3d at 1517), defines "person associated with a

member" or "associated person of a member" to mean (15

U.S.C. S 78c(a)(21)):

any partner, officer, director, or branch manager of

such member (or any person occupying a similar

status or performing similar functions), any person

directly or indirectly controlling, controlled by, or under

common control with such member, or any employee of

such member.

Analysis of the parties' relationship discloses that

Nicholsberg plainly qualifies as an associated person within

the meaning of both the NASD Code and the 1934 Act. That

conclusion flows from the record's disclosure that when

First Liberty initiated this lawsuit, Nicholsberg was both

(1) a natural person engaged in the securities business who

was "directly or indirectly...controlled by" NASD member

First Liberty and (2) a natural person "performing similar

functions" to those of a "branch manager" of First Liberty.

Either of those satisfies the "associated person" definition.

To resist that conclusion, First Liberty urges that

Nicholsberg cannot be an "associated person" because the

Agreement specifically labels him as an independent

contractor. That characterization, however, is not

controlling in the face of the conflicting reality, as gleaned

both from First Liberty's own depiction of the parties' linked

relationship in various paragraphs of its Complaint and

from provisions of the Agreement itself.

Here are some relevant portions of First Liberty's

Complaint against Nicholsberg:

7. Pursuant to the Agreement, First Liberty and

Nicholsberg agreed that First Liberty would provide

facilities to Nicholsberg for execution of transactions....

8. First Liberty appointed Nicholsberg's office as an

entity allowed under the provisions of the Agreement to

offer and solicit the sales of securities.

9. Pursuant to the Agreement, First Liberty gave

Nicholsberg geographic exclusivity in the New York,

New York metropolitan area and agreed not to open

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competing offices without the prior written consent of

Nicholsberg....

And those undisputed allegations about the nature of the

parties' relationship conjoin with other provisions in the

Agreement in which:

1. Nicholsberg agreed to comply with and abide by all

of the policies and rules included in First Liberty's

Policy and Procedures Manuals.

2. Nicholsberg agreed that his office would not mail

any correspondence or cause any advertising pertaining

to securities solicitation without securing the prior

approval of a First Liberty compliance officer.

3. Nicholsberg promised not to engage in a securit y

transaction of any nature with any individual or

broker-dealer other than through First Liberty.

To be sure, other provisions in the Agreement might

perhaps successfully avert a finding that an agency

relationship exists for purposes of imposing respondeat

superior liability on First Liberty, but that is not the

relevant inquiry here (and is a matter on which we express

no view). What rather controls is that the parties' total

relationship, including the limitations placed by First

Liberty both on Nicholsberg's conduct of his business and

on its own conduct of business, amount to at least indirect

control and also to placing Nicholsberg in much the same

practical position that would be occupied by a branch

manager in charge of First Liberty's only New York

metropolitan area office. And that in turn means that

notwithstanding the Agreement's use of "independent

contractor" and its disclaimer of an "agent" relationship,

Nicholsberg was an "associated person" as to First Liberty.3

Indeed, if broker-dealers could escape the NASD

arbitration requirements simply by calling someone acting

_________________________________________________________________

3. This just-completed application of the substance-over-form principle is

reminiscent of the rejection of the tyranny of labels traditionally

attributed to Abraham Lincoln:

If you call a tail a leg, how many legs has a dog? Five? No,

calling

a tail a leg don't make it a leg.

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in Nicholsberg's capacity an independent contractor, they

could easily frustrate NASD's firm policy of submitting

industry disputes to binding arbitration. In sum, we

conclude that First Liberty and Nicholsberg fall within the

class of adversaries subject to mandatory arbitration under

their contractual relationship, the former by virtue of its

NASD membership and the latter as an associated person

of a member.

Scope of the Parties' Arbitrable Disputes

With that issue having been resolved, the final analytical

step is to ascertain whether the present dispute falls within

the scope of the relevant arbitration clause. In that regard

we are guided by settled principles of federal arbitration

law.

Congress' adoption of the Act was intended to "revers[e]

centuries of judicial hostility to arbitration agreements"

(Scherk v. Alberto-Culver Co., 417 U.S. 506, 510 (1974)) and

to replace that hostility with "a liberal federal policy

favoring arbitration agreements" (Moses H. Cone Mem'l

Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983)).

Hence any doubts concerning the scope of arbitrable issues

must be resolved in favor of arbitration (id. at 24-25;

Mitsubishi Motors Corp. v. Soler Chrsyler-Plymouth, Inc., 473

U.S. 614, 626 (1985)). As we stated two decades ago in

Bristol Farmers Mkt. & Auction Co. v. Arlen Realty & Dev.

Corp., 589 F.2d 1214, 1219 (3d Cir. 1978), quoting United

Steelworkers of Am. v. Warrior & Gulf Navigation Co. , 363

U.S. 574, 582-83 (1960):

An order to arbitrate...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.

In light of those principles (or even without our having to

invoke them), it takes only a brief look at the nature of First

Liberty's claim to confirm that it falls well within the scope

of the parties' commitment to arbitration.

First Liberty attempts to resist that result by positing

that its breach of contract claim arises solely from the

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Agreement and does not implicate Form U-4. From that

premise it seeks to conclude that even if the NASD Code

requires arbitration of pertinent disputes arising from the

latter document, there is no basis for requiring arbitration

in this case. But again the purported Form U-4 issue is a

nonissue: First Liberty's contention is scotched by our

earlier determinations (1) that the Agreement itse lf includes

an incorporation by reference of the NASD Code and

(2) that the Code requires the arbitration of busi ness

disputes between members (in this instance First Liberty)

and their associated persons (in this instance Nicholsberg).

Conclusion

As stated at the outset of this opinion, we REVERSE the

district court's order denying Nicholsberg's motion to stay

the proceedings and REMAND the matter to the district

court with directions to order the parties to proceed to

arbitration forthwith.

A True Copy:

Teste:

Clerk of the United States Court of Appeals

for the Third Circuit

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