Court: Court of Appeals for the First Circuit; September 13, 2000; Federal Appellate Court
The appeals arise from a district court's denial of seventeen petitions to compel arbitration related to claims asserted by respondents in ongoing state court litigation. The petitioners, consisting of an intricate corporate structure including Paul Revere Variable Annuity Insurance Company and its parent companies, argue that they have a right to arbitration under the rules of the National Association of Securities Dealers (NASD). They assert that the NASD Code mandates arbitration for certain disputes involving NASD members.
The petitioners, who were defendants in state court, sought to stay the proceedings or dismiss the managers' complaints based on the NASD’s arbitration rules and the Federal Arbitration Act (FAA). However, the managers voluntarily dismissed their claims against Variable, the sole NASD member among the petitioners. The petitioners then attempted to shift the case to federal court, citing diversity jurisdiction, as none of the respondents resided in Massachusetts, Tennessee, or Delaware.
In federal court, the district court denied the petitioners' request to compel arbitration, determining that the petitioners lacked standing under NASD's arbitration protocol. The appeal reviews this ruling, with the analysis divided into two parts: examining the rights of non-NASD member petitioners and then addressing the situation of Variable. The court applies a de novo standard of review for these legal questions regarding arbitration provisions.
Federal policy favors resolving any doubts regarding arbitrable issues in favor of arbitration. An NASD registrant must comply with the organization’s rules as they were at the time of filing suit. The relevant NASD rules define matters eligible for arbitration, particularly under Rule 10201(a), which mandates arbitration for disputes between members and associated persons. However, since most petitioners in the case are not NASD members, they can only insist on arbitration if any qualify as "persons associated with a member."
The NASD bylaws specify that "person associated with a member" refers to natural persons in various roles (e.g., sole proprietors, officers, directors) and those controlling or controlled by a member, regardless of registration status. The interpretation of the definition suggests it applies only to natural persons, as the roles listed are inherently suited for individuals. Thus, since the non-member petitioners are corporations, they do not qualify for arbitration under NASD bylaws, as all references to "person" are implicitly or explicitly limited to natural individuals.
An organization should consistently apply its classification standards across different entities, avoiding a rigid interpretation that could lead to manipulative behavior. The phrase 'every' should be interpreted to mean 'every natural person,' thereby excluding all corporate entities from the definition of associated person in the NASD by-laws. This interpretation aligns with the Fifth Circuit's view that the NASD by-laws intentionally exclude corporations. The petitioners argue that the NASD definition is applicable unless the context dictates otherwise, referencing a Supreme Court case that supports broad interpretations of arbitration clauses. They suggest the Exchange Act's definition of associated person should be applied to ensure arbitration occurs, asserting this context necessitates such a definition. However, this argument is rejected. The Exchange Act defines 'person' broadly, but the NASD by-laws specifically repeat the term 'natural' in their definition, indicating an intent to limit the definition to natural persons. Furthermore, the focus of the NASD provisions appears to be internal, with no indication that external factors, such as federal arbitration policy or the Exchange Act, were considered relevant by the drafters. Therefore, the interpretation should be guided by the NASD's own regulations rather than external influences.
The Supreme Court's decision in Rowland v. California Men’s Colony clarifies that 'context' refers to the surrounding text of a statute rather than external sources. The federal policy favoring arbitration does not apply here because the Exchange Act clearly indicates that only natural persons qualify as associated persons under Rule 10201. The Second Circuit affirmed that the NASD's definition of 'associated person' aligns with statutory requirements and SEC regulations, as the SEC reviews and approves NASD rules before they take effect. Consequently, the five petitioners who are not NASD members lack any contractual right to compel arbitration against the respondents, leading to the district court's appropriate denial of their request.
Regarding Variable, an NASD member, it claims a right to enforce arbitration based on its association with the respondents. However, the respondents have dismissed all claims against Variable with prejudice. Variable argues it remains potentially liable as a co-obligor in the respondents’ employment agreements, suggesting that it and the other parties (Protective and Revere Life) jointly promised a single performance, which would necessitate arbitration. The determination of whether these parties intended to make a unified or separate promise depends on the intent revealed in their agreements and surrounding circumstances. The analysis draws on established contract law principles, including the Restatement of Contracts and relevant case law.
Assuming, for the sake of the appeals, that all respondents were employed under a unified general manager agreement with three companies—Paul Revere Life Insurance Company, Paul Revere Protective Life Insurance Company, and Paul Revere Variable Annuity Insurance Company—one exemplar of this contract, Douglas Thomas’s, is examined. The contract, dated May 1, 1993, appoints Thomas as General Manager-Career for each company upon proper licensing. The agreement predominantly uses the term "Paul Revere" to define the parties' obligations, except in paragraph seven, which discusses compensation that may be applied to debts owed to any of the Paul Revere entities.
Petitioners argue that the uniform references to "Paul Revere" and the single vice-president's signature imply collective obligations for the companies. Conversely, respondents highlight the appointment clause as evidence of distinct obligations for each company. The district court concluded that the agreement reflected an intention for three separate contracts, with each company responsible only for its own insurance products.
The analysis reveals that the absence of a conjunctive term between the companies’ names allows for a disjunctive interpretation. Furthermore, the withholding provision in paragraph seven suggests that a manager could owe one company while being owed by another, indicating that each company has a specific contractual duty. The interpretation aligns with established contract construction principles, reinforcing that the obligations of the parties are separate and distinct despite the general references in the agreement.
Confidence in the interpretation of the general manager agreement is supported by the distinct product offerings of Variable, Protective, and Revere Life. Each company's contractual obligations are linked to specific product sales, with Variable uniquely authorized to underwrite certain annuities. The heavily regulated nature of their business raises legal concerns about one company paying commissions on another’s products, which it cannot sell itself. The petitioners failed to demonstrate any evidence of co-signatories sharing commissions or profits, which undermines their claims for arbitrability. The general manager agreement's references to 'Paul Revere' do not alter the fundamental structure of the transactions among the companies. Legal precedents indicate that differing interests among parties can imply separate contractual obligations. Consequently, each respondent's claims against Protective and Revere Life are independent from their relationships with Variable, making them outside the jurisdiction of NASD Rule 10201. Variable, having achieved a dismissal with prejudice, does not face any significant risk of harm and thus lacks standing to compel arbitration, as it has no concrete interest in the state court proceedings. The district court's application of the contra proferentem rule, holding that ambiguities in the agreements should be construed against the petitioners, is upheld despite their objections, which are deemed unpersuasive.
Contra proferentem applies based on the parties' positions in the current litigation, indicating that while joint liability might disadvantage the petitioners, their case relies on it, undermining their first objection. The second objection misinterprets the Federal Arbitration Act (FAA), which aims to enforce arbitration agreements as regular contracts, not more favorably. The principle of resolving doubts in favor of arbitration is limited by standard contract interpretation rules, allowing courts to apply contra proferentem to ambiguities against the drafters of arbitration agreements.
The petitioners argue contra proferentem should not apply to questions about the scope of arbitration agreements, despite acknowledging its applicability to whether an arbitration agreement exists or is enforceable. However, scope questions arise when determining if a specific dispute falls within an arbitration contract, and the petitioners mischaracterize the issue of Variable's standing to compel arbitration as a scope question. This standing question pertains to Variable's right to arbitrate with the managers and is not covered by the federal policy favoring arbitration, which cannot compensate for a lack of Article III standing.
Standing is a constitutional requirement for federal court jurisdiction, and the Supreme Court emphasizes that the FAA's purpose is to enforce private arbitration agreements as per their terms. Allowing a dismissed party to compel arbitration would contradict this purpose.
A ruling has been made that the petitioners, except for Variable, lack the contractual right to demand arbitration under NASD rules. Variable, while having a theoretical right to arbitration, does not have standing to enforce it in the current circumstances. Consequently, the district court's denial of all seventeen petitions to compel arbitration is upheld. The case references a merger between Provident and Unum Corporation in 1999, with the events in question occurring before the merger, thus referring to the company as Provident. There is a dispute regarding whether Variable and Protective were parties to certain employment agreements, but this does not affect the outcome, and it is assumed for argument that the agreements include these entities. Some respondents retired in anticipation of events, while others were dismissed, with all claims against Variable dismissed with prejudice. The case also notes that NASD Rule 10201 was amended in 1998 to exempt statutory employment discrimination claims from mandatory arbitration, but this amendment does not apply here. The text explains that recent amendments to definitions within NASD rules do not imply a constriction of their scope, specifically reinforcing that the definition of "person associated with a member" includes only natural persons. The petitioners reference a previous case, Cular v. Metropolitan Life Ins. Co., which held that a member's employee qualifies as an associated person for NASD arbitration, but this does not alter the current ruling.
Cular's reliance on the presumption in favor of arbitration and the Exchange Act definition is inconsistent with the Second Circuit’s decision in Bums, which is more analogous, leading to the decision not to follow Cular. The Cular court's consideration of employment-related disputes, added to the NASD Code, does not support the petitioners' argument to classify corporations as associated persons, as there is no similar reference applicable here. The appeals do not involve choice of law, and Massachusetts case law is referenced solely for illustration. Although not necessary to address, there are indications that Variable may not present a justiciable controversy, as the rights of co-signatories for contribution depend on contingent events, including liability findings and excess payment beyond pro rata shares. Unless these events occur, Variable arguably suffers no direct and immediate harm, aligning with the precedent set in Ernst Young v. Depositors Economic Protection Corp., which deemed the declaratory judgment action unripe due to the contingent nature of the asserted injury.
