The opinion of the court was delivered by: WOLIN
This motion is part of a large group of cases against defendant Prudential Insurance Company of America ("Prudential") which have been transferred to this Court for coordinated pretrial proceedings under 28 U.S.C. § 1407 pursuant to the order of the Judicial Panel on Multidistrict Litigation. The majority of these cases involve allegations by current and former Prudential policyholders that the company engaged in various illegal sales practices. The cases at issue on this motion are part of a smaller subset of cases, in which certain former Prudential sales agents allege that prudential took adverse employment actions against them because they refused to participate in these illegal practices. Plaintiffs Michael R. Weaver ("Weaver"). Herbert Schulte ("Schulte"), Rick A. Martin ("Martin"), Kenneth R. Young ("Young") and Michael D. Gordon ("Gordon") (collectively, for purposes of this motion, the "agents") assert such claims.
At some point in the course of each of the agents' employment at Prudential, they became eligible to sell insurance products which, at least in Prudential's view, constituted securities. Accordingly, each signed a Uniform Application for Securities Industry Registration or Transfer ("U-4").
Young signed two U-4s, the first in 1988 and the second in 1993 when, after his 1992 retirement, Prudential allegedly retained his services as an "agent emeritus." (Young Opp. Br. p. 3) Although the agents' U-4s differed in minor respects, for purposes of this motion they were essentially the same. For example, Young's 1988 U-4 read, in relevant part:
2. I hereby apply for registration with the organizations and states indicated in Item 10 as may be amended from time to time [i.e., the NASD]
and, in consideration of such organizations and states receiving and considering my application, I submit myself to the jurisdiction of such states and organizations and hereby certify that I agree to abide by, comply with, and adhere to all the provisions, conditions and covenants of the statutes, constitutions, certificates of incorporation, by-laws and rules and regulations of the states and organizations as they are and may be adopted, changed or amended from time to time, and I agree to comply with, be subject to and abide by all such requirements and all rulings, orders, directives and decisions of, and penalties, prohibitions and limitations imposed by such states and organizations, subject to right of appeal as provided by law; . . .
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 organizations with which I register, as indicated in Item 10 as may be amended from time to time.
Insofar as is relevant to this motion, Weaver's U-4 and Young's 1993 U-4 contained the same provisions. Martin and Schulte, on the other hand, signed an earlier version of the U-4 which differed slightly in two ways: (1) in paragraph 2, in addition to certifying that they agreed to abide by, comply with and adhere to the provisions, conditions and covenants of the statutes, constitutions, certificates of incorporation, by-laws and rules and regulations of the NASD, Martin and Schulte attested: "I . . . have read and understand" these provisions and rules; and (2) in paragraph 5, their U-4s do not contain the language "as may be amended from time to time" at the end of the sentence.
Interpretation of the NASD arbitration provisions -- and a determination of which provisions were in effect at various times -- are central issues on this motion. Effective October 1, 1993, the NASD amended its Code in respects that are critical to this motion (the "1993 amendment"). Although each agent was terminated before the 1993 amendment took effect, they all filed their actions after that date.
Two provisions of the NASD Code are chiefly relevant. Under its postamendment formulation, Part I Section 1 ("section 1") sets forth generally the matters eligible for arbitration:
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 associated person(s) with any member,
with the exception of disputes involving the insurance business of any member which is also an insurance company:
(1) between or among members;
(2) between or among members and associated persons;
(3) between or among members or associated persons and public customers, or others;
Part II Section 8 ("Section 8") defines which disputes must be arbitrated:
(a) Any dispute, claim, or controversy eligible for submission under Part I of this Code 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 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.
Even under its preamendment version, section 8 contemplated arbitration between members and persons associated with a member.
In addition, plaintiffs Gordon, Weaver and Schulte were, during their employment with Prudential, members of the United Food & Commercial Workers International Union (the "union").
Accordingly, their employment was governed by the terms of a collective bargaining agreement between Prudential and the union (the "CBA").
Pursuant to Labor Management Relations Act § 301, certain state law causes of action which they might otherwise be entitled to bring against Prudential may be preempted by the CBA.
PRUDENTIAL'S A MOTION TO COMPEL ARBITRATION
The Federal Arbitration Act ("FAA"), 9 U.S.C. §§ 1-9 (1988), governs enforcement of arbitration agreements contained in U-4s. See Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 111 S. Ct. 1647, 114 L. Ed. 2d 26 (1991). Under 9 U.S.C. § 2, a written agreement to arbitrate in a contract evidencing a transaction involving commerce is "valid, irrevocable and enforceable, save upon grounds as exist at law or in equity for the revocation of any contract." Congress enacted the FAA in 1925 "to 'reverse centuries of judicial hostility to arbitration agreements.'" Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 225, 107 S. Ct. 2332, 2337, 96 L. Ed. 2d 185 (1987), quoting Scherk v. Alberto-Culver Co., 417 U.S. 506, 510, 94 S. Ct. 2449, 2453, 41 L. Ed. 2d 270 (1974). The statute accordingly "establishes a federal policy favoring arbitration," requiring that Courts "rigorously enforce agreements to arbitrate." Id. (citations omitted). The Courts have taken this directive seriously, holding that the intent of the FAA was to leave "no place for the exercise of discretion by the district court . . . ." where an agreement can be construed to require arbitration. Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 218, 105 S. Ct. 1238, 1241, 84 L. Ed. 2d 158 (1985).
On the other hand, "arbitration 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 of America, 475 U.S. 643, 648, 106 S. Ct. 1415, 1418, 89 L. Ed. 2d 648 (1986), quoting United Steelworkers of America v. Warrior & Gulf Nav. Co., 363 U.S. 574, 582, 80 S. Ct. 1347, 1353, 4 L. Ed. 2d 1409 (1960). In other words, the FAA makes arbitration agreements "as enforceable as any contract, not more so." Moore v. Interacciones Global, Inc., 1995 WL 33650, *2 (S.D.N.Y.). See also Armijo v. Prudential Ins. Co. of America, 72 F.3d 793, 801 (10th Cir. 1995) (Jenkins, J., concurring) (citations omitted) (expressing concern that Courts have overcompensated for hostility of Courts to arbitration in decades past and commenting: "It seems to me that the rule that doubts about the scope of arbitrable issues should be resolved in favor of arbitration, like other rules of construction, should be applied only as a last resort, after the court or trier of fact has considered extrinsic evidence of the parties' intent and found it inconclusive.").
To determine whether a party may compel arbitration, a Court "must determine: (1) whether there is an agreement to arbitrate; (2) whether the claims fall within the scope of that agreement; and (3) whether there has been a waiver of the right to arbitrate." Wojcik, 1995 WL 516591 at *2, citing Gilmer, 500 U.S. at 24-34; Hall v. Metlife Resources/Div. of Metropolitan Life Ins. Co., 1995 WL 258061, *2 (S.D.N.Y.).
The agents first argue that they signed no valid agreement to arbitrate claims against Prudential. All four agents assert that Prudential is not a party to the U-4s they signed, and Martin and Young argue that their U-4s did not bind them at the time of the events from which this litigation arises. Second, the agents argue that the arbitration provisions do not apply to the claims at issue here because (a) the arbitration clauses did not apply to employment disputes before the 1993 amendment and cannot be retroactively applied; and (b) their claims are exempt from arbitration by virtue of the insurance business exception set forth in Section 1 of the NASD Code. Finally. Martin asserts that the U-4 he signed is unenforceable as a contract of adhesion. The Court will address these arguments in turn.
I. Applicability of the U-4s to the Parties
A. Prudential May Enforce the Arbitration Provisions Even Though it is Not Named as the "Firm" in the U-4s
The agents allege that Prudential is not a party to the U-4 arbitration provision and therefore cannot enforce it. That provision requires the agents "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]." The "firm" is identified in a separate section of each agent's U-4 as Pruco Securities Corp. ("Pruco"), Prudential's wholly-owned subsidiary. The agents claim Prudential cannot compel enforcement of an arbitration provision contained in an agreement to which it was never a party.
This argument fails for several reasons. First, the Court notes that each agent agreed to arbitrate disputes not only with his firm but with "a customer, or any other person," so long as the NASD rules require that dispute to be arbitrated. The agents have focused on the "my firm" language and failed to address the remainder of the provision. Clearly, Prudential is an "other person" whose disputes with its agents are covered by the current NASD arbitration rules. Moreover, each agent's U-4 contained a separate provision requesting names of broker-dealers other than Pruco with which he would maintain registration. With the exception of Young's 1993 U-4, each of the agents attested that they would maintain concurrent registration with Prudential.
Prudential Ins. Co. of America v. Shammas, 865 F. Supp. 429 (W.D. Mich. 1993), is exactly on point. There, as here, the plaintiff signed a U-4 naming Pruco as "my firm" but naming Prudential as a broker-dealer with which he would maintain concurrent registration. Id. at 430. The Court noted that plaintiff's "act of registering with NASD was as part of his employment with Prudential" and held that "the context of his registration plus the language [providing for concurrent registration] make it clear that the representation concerning arbitration, paragraph 5 [of the U-4], applied to . . . Prudential." Id. at 430. Within this circuit, Foley v. Presbyterian Ministers' Fund, 1992 WL 63269, *2 (E.D. Pa.), rejected the plaintiff's argument that his U-4 did not apply to his non-signatory employer because there was "no suggestion that plaintiff had any occasion to seek registration as a securities dealer except as an aspect of his employment with [defendant]." See also Pitter v. Prudential Life Ins. Co. of America, 906 F. Supp. 130, 132 n.2 (E.D.N.Y. 1995) (without discussion, requiring plaintiff to arbitrate with Prudential although Pruco was named "firm" on U-4).
Kresock v. Bankers Trust Co., 21 F.3d 176, 178 (7th Cir. 1994), is distinguishable. In that case, the plaintiff worked for defendant Bankers Trust, which was one of two subsidiaries of Bankers Trust New York Corporation. The other was BT Securities Corporation. BT Securities was a NASD member; Bankers Trust was not. In 1989, the plaintiff had plans to transfer from Bankers Trust to BT Securities; accordingly, she signed a U-4 which identified BT Securities as her "firm." When Bankers Trust terminated her in 1991, she had never transferred to or performed any work for BT Securities. The Court declined to enforce the U-4 arbitration provision against Bankers Trust because, as a mere co-subsidiary sharing a corporate parent with BT Securities, it was neither a NASD member, a person associated with a NASD member, a public customer or "other." Id. at 178. Here, by contrast, Prudential is a NASD member in its own right; its relationship to the "firm" named in the U-4s is that of parent-subsidiary; the agents' employment with Prudential was the sole reason for their signing the U-4s; and the agents specifically named Prudential as a broker-dealer with whom they would maintain concurrent registration.
B. Martin's Employment Agreement did not Supersede his Agreement to Arbitrate
Martin alleges that in 1988, some five years after he signed his U-4 in 1983, Prudential promoted him to District Agencies Manager and entered a standard employment agreement with him which explicitly stated: "This Agreement supersedes any previous agreement the Manager may have had with the Company." (Martin Opp. Br. pp. 6-7, 10-11) Martin contends that the employment agreement supersedes his U-4 and that, since the employment agreement did not contain an arbitration clause, Prudential may not compel arbitration of his claims. (Id. at pp. 7, 11)
O'Donnell v. First Investors Corp., 872 F. Supp. 1274 (S.D.N.Y. 1995), squarely rejected a very similar argument. In that case the plaintiff had, upon acceptance of employment with the defendant, signed both a standard employment agreement and a U-4. Three years later he received a promotion and, in connection therewith, signed a new employment agreement that explicitly superseded the old. When the defendant terminated him he argued that, since he signed the U-4 as a condition to his initial employment agreement, the superseding employment agreement cancelled the U-4. The Court disagreed, holding that the U-4 "is not a contract with defendants but rather an application to qualify with various security exchanges. The U-4 is a separate contract, and as long as this contract is effective, the terms of the agreement must be followed, regardless of the fate of a separate, though related, agreement." Id. at 1277.
Here, too, even though Martin's employment agreement states that it "supersedes any previous agreement the Manager may have had with the Company" (emphasis added), the U-4 is not an agreement with Prudential and therefore remained in effect following Martin's promotion.
Young argues that Prudential cannot enforce the U-4 against him because (1) he never became subject to it because he never actually engaged in the sale of securities; and (2) he was no longer subject to the first U-4 he signed once Prudential terminated him and notified the NASD of this fact, and he never became subject to the second U-4 he signed because Prudential denies that it rehired him as an agent emeritus. (Young Opp. Br. pp. 6-7)
The Court in Foley, 1992 WL 63269 at *1, rejected Young's first argument when it held that the "undertakings contained in Form U-4 were contingent on executing the form, not on becoming a registered dealer." See also Cherry v. Wertheim Schroder and Co., 868 F. Supp. 830, 835 (D.S.C. 1994) (signatory of U-4 obligated to arbitrate even though she failed to pass NASD examination); Johnson v. Piper Jaffray, Inc., 530 N.W.2d 790, 798 (Minn. 1995) (declining to look "beyond [plaintiff]'s job title or job description" of bond trader and determining that plaintiff was a "person associated with a member" even though she never actually traded securities).
The Ninth Circuit rejected Young's second argument in O'Neel v. National Ass'n of Securities Dealers, Inc., 667 F.2d 804 (9th Cir. 1982), in which the plaintiff argued that the agreement to arbitrate contained in his U-4 did not apply to a claim his former employer asserted against him nearly four years after he resigned from the NASD. The Court stated:
It would seem strange indeed that with such a significant integrated method of dispute settlement one party could frustrate the purpose of the Exchange rules and the federal policy favoring arbitration by the mere expediency of resignation from the Exchange.
Id. at 806-07, quoting Muh v. Newburger, Loeb & Co., 540 F.2d 970, 973 (9th Cir. 1976). Accord, ' Strappes Group, Inc. v. Siedle, 1993 WL 443926, *5 (D. Mass.); see also Le Roux v. Shearson Lehman Hutton, Inc., 160 A.D.2d 1091, 553 N.Y.S.2d 572 (3d Dept. 1990) (U-4 required financial consultant to arbitrate claim against former employer where plaintiff remained a person "associated with a member" by virtue of his subsequent employment in securities industry).
II. Applicability of Arbitration Clauses to Agents' Claims
A. Coverage of Employment Disputes
As set forth above, the 1993 amendment added language to sections 1 and 8 of the NASD which makes it clear that the arbitration provisions currently cover employment disputes. In the legislative history to the proposal for the 1993 amendment, the NASD stated: "The NASD has taken the position that employment disputes are arbitrable under Section 8, but in order to clear up any ambiguity, it is proposing the changes . . . which parallel the NYSE rule language." Fed. Reg. Vol. 58, No. 138, pp. 39070, 39071 (July 21, 1993). Prudential argues that this legislative history proves that the provisions always applied to employment disputes and that, in any event, the 1993 amendment applies to the agents' claims because they filed them after its effective date. The agents argue that the 1993 amendment indicates that the provisions did not apply to employment disputes previously and that the amendment cannot be applied retroactively.
The agents urge the Court to adopt precedent from the Seventh Circuit. In Farrand v. Lutheran Brotherhood, 993 F.2d 1253, 1255 (7th Cir. 1993), decided before the amendment took effect, Judge Easterbrook held that "the NASD's Code does not authorize, and section 8 therefore does not require, the arbitration of an employment dispute between a member of the NASD and one of the member's registered representatives." Section 1 at that time read as follows:
any dispute, claim, or controversy arising out of or in connection with the business of any member of the [NASD], with the exception of disputes involving the insurance business of any member which is also an insurance company:
(1) between or among members;
(2) between or among members and public customers, or others; . . .