On appeal from the Superior Court of New Jersey, Law Division, Somerset County.
Approved for Publication February 20, 1997.
Before Judges Pressler, Humphreys and Wecker. The opinion of the court was delivered by Wecker, J.s.c. (temporarily assigned).
The opinion of the court was delivered by: Wecker
The opinion of the court was delivered by
WECKER, J.S.C. (temporarily assigned).
Plaintiff Robert Young appeals from an order dismissing his complaint against his former employer, defendant Prudential Insurance Company of America, Inc., and two supervisory employees, defendants Fred Fabozzi and Aven Kerr, without prejudice on the ground that Young was contractually bound to arbitrate his claims. Young's complaint alleges violations of the Conscientious Employee's Protection Act, N.J.S.A. 34:19-1 ("CEPA"), and the New Jersey Law Against Discrimination, N.J.S.A. 10:5-1 et seq. ("LAD"), arising out of his employment and termination by Prudential.
This appeal involves the enforceability of the arbitration provision contained in a securities registration application and the scope of the incorporated arbitration rules of the National Association of Securities Dealers ("NASD"), particularly the so-called "insurance exception" of the NASD Code of Arbitration Procedure ("Code").
We have carefully reviewed the arguments of counsel in light of the applicable law and conclude that although the arbitration provision is a valid and binding agreement, Young's claim under CEPA involves precisely the sort of "insurance business" that the NASD Code excepts from arbitration. We therefore reverse the dismissal as to plaintiff's CEPA claim. We affirm the dismissal without prejudice as to plaintiff's LAD claim.
These facts are undisputed. Young began working for Prudential in 1973. In 1982, while employed as a life insurance sales representative for Prudential, and because of Prudential's expansion into the securities market, plaintiff was required to take an examination and to register with the NASD as a condition of his continued employment. The NASD is a self-regulatory organization of securities brokers and dealers, as defined by 15 U.S.C.A. § 78c(a)(26), subject to regulation by the Securities and Exchange Commission ("SEC"). See generally, 15 U.S.C. § 78b. et seq. Registration required individuals such as Young to sign and submit a Uniform Application for Securities Industry Registration known as the "Form U-4" and to pass an examination. The development and use of the Form U-4 is explained in an opinion of Judge (now Justice) Ginsburg in Ass'n. of Inv. Brokers v. Securities & Exchange Comm'n., 219 U.S. App. D.C. 259, 676 F.2d 857, 859 (D.C. Cir. 1982) ("Form U-4 is in general use throughout the securities industry.") The U-4 calls for the applicant to supply personal and professional data and to undertake several promises, including a promise to arbitrate certain disputes. Young twice completed and signed the U-4, once in February 1982 and again in April 1983. Prudential is a member of the NASD and is named as Young's employer on each U-4 signed by him.
In or about June 1982 Young became the manager of a Prudential field office in Metuchen. In 1991 defendant Fred Fabozzi, Young's direct supervisor, requested him to transfer to the Warren Hills office. It was after his transfer to Warren Hills that Young alleges he discovered a widespread, illegal insurance sales practice he calls "churning." He contends that his attempts to stop the practice were rebuffed by Fabozzi and Prudential. Young further contends that he was similarly rebuffed when he complained about a compensation policy that charged all refunds issued to customers for past transactions against the earnings of all current sales representatives in the office. This policy, according to Young, was designed to cover up past churning activities by creating a financial disincentive for sales representatives to report past instances of churning that would require them to refund losses or otherwise reimburse customers.
Young claims in this action that as a result of pressures imposed upon him by Prudential in direct response to his open criticism of the churning problems and the cover-up policy, he suffered disabling depression and in October 1994 took a medical leave and began receiving disability benefits from Prudential. With respect to the individual defendants, plaintiff claims that in early December 1994 Fabozzi notified him in writing that he was being placed on probation as a result of three separate incidents claimed to have occurred in 1991, 1992 and 1994. According to plaintiff, in February 1995 defendant Aven Kerr signed the letter of termination on behalf of Prudential and referred to an "investigation into claims and complaints from employees of the Warren Hills office concerning your behavior towards the staff." Plaintiff's disability benefits were terminated as well.
Plaintiff filed this action in May 1995 alleging that defendants violated CEPA first by placing him on probation and then by firing him and cutting off his disability benefits, all in retaliation for his internal company efforts to report and stop what he reasonably believed to be illegal insurance sales practices. *fn1
Young's complaint describes in some detail the allegedly unlawful insurance practices he claims to have observed and opposed:
13. FABOZZI's representations of "fine opportunities for favorable progress" at the Warren Hills office were misleading because of liabilities and problems which existed within that office. Defendant knew of the liabilities and problems (involving certain illegal sales practices commonly referred to in the insurance industry as "churning") which existed at the Warren Hills office prior to the Plaintiff's transfer, yet they intentionally failed and refused to inform Plaintiff of these matters in order to induce him to accept the transfer.
14. Plaintiff was unaware that certain agents and employees of the Warren Hills office were engaged in "churning" activity. Churning activity involves a sales tactic, usually directed at older policyholders, who are encouraged to purchase new insurance policies based on the misrepresentation of a sales agent that premiums due on the new insurance policies would be satisfied from dividends paid by PRUDENTIAL to the policyholder on older insurance policies already owned by the policyholders. The sales agent, in making these false representations to the policyholder, would know that the representations were false; but would make the representation anyway, for the sole purpose of inducing the policyholder to purchase a new insurance policy. Although premiums due on the new policy would initially be satisfied from the dividends on the old policies, eventually the dividends would no longer be sufficient to pay the premiums. Thereafter, loans against the cash surrender value of the insurance policies would be arranged by PRUDENTIAL'S sales agent without the knowledge of the policyholder; and these loans would then be used to satisfy the premiums which became due. Eventually the original insurance policies would become virtually worthless.
16. The churning activity which was taking place in the Warren Hills office at the time Plaintiff was transferred to that office was, on information and belief, in fact encouraged by PRUDENTIAL, and its high level employees (including the former manager of the Warren Hills office and FABOZZI), as a means by which to increase sales.
17. The churning activity described above without specific notice to the policyholders is prohibited by law as well as being a totally dishonest and illegal sales practice perpetrated as against innocent and unsuspecting policyholders.
18. Shortly after his transfer to the Warren Hills office, Plaintiff discovered the rampant churning activity which was taking place within the office. Recognizing the churning activity to be an illegal sales practice, Plaintiff, as general manager of the Warren Hills office:
(i) reported incidents of churning to the attention of FABOZZI, as his immediate supervisor, with a recommendation that all such activities cease;
(ii) reprimanded individual sales agents for engaging in churning activities and vigilantly guarded against sales agents engaging in such activities in the future;
(iii) insisted that all policyholders affected by the churning activities (whether the policyholders in question had registered complaints with PRUDENTIAL or not) be reimbursed for all premiums which had wrongfully been charged and collected for the new policies; and
(iv) protested against PRUDENTIAL'S policy (the "Churning Policy") of charging the Warren Hills office with return premiums, earned through churning activity, rather than charging such return premiums against the guilty sales agents and/or prior sales managers who had encouraged, and participated in, the churning, especially since many were no longer employed at the Warren Hills office.
19. Defendants refused to accept Plaintiff's recommendations, and elected, instead, to deal with the churning problem on an ad hoc basis, returning premiums only to those policyholders who were sufficiently informed of the problem, and astute enough, to file a formal complaint with PRUDENTIAL.
20. The adoption of the Churning Policy by the Defendants and the intended purpose and result was calculated to discourage honest employees from reporting churning activities of dishonest employees working for Plaintiff presently, and previously, since the result of such honesty and forthrightness would be a decrease in their income.
21. Additionally, the Churning Policy was calculated to contain, and cover up, the churning practices of PRUDENTIAL for the purpose of:
(i) maintaining a high level of sales;
(ii) avoiding the loss of good will and public confidence which could flow from negative publicity;
(iii) avoiding civil and/or criminal charges which could result from widespread disclosure; and,
(iv) avoiding catastrophic consequences which could result from any large scale return of premiums to previously unsuspecting policyholders.
22. When Plaintiff, as the general manager of the Warren Hills office, protested the Churning policy to his immediate supervisor, FABOZZI (whose title was Vice President of Regional Marketing), he was told by FABOZZI that the Churning Policy would not be altered by PRUDENTIAL and that Plaintiff should stop complaining.
23. Because Plaintiff was outspoken about the churning activities; and, because of his attempts to convince the Defendants to discontinue the Churning Policy as an inherently unfair employment practice; Plaintiff, despite his twenty years of service to PRUDENTIAL, came to be held in disfavor by the Defendants.
24. Additionally, because of Plaintiff's insistence that all churning activities within the Warren Hills office cease immediately, he also came to be held in disfavor by several of the agents working under him in the Warren Hills office who frequently met sales goals and ...