The Paul Revere Variable Annuity Insurance Company v. Maureen A. Kirschhofer, the Paul Revere Variable Annuity Insurance Company v. William E. Hudson, the Paul Revere Variable Annuity Insurance Company v. A. Bruce Kunkel, Jr., the Paul Revere Variable Annuity Insurance Company v. Dennis R. Lindholm, the Paul Revere Variable Annuity Insurance Company v. Christopher R. Herchold, the Paul Revere Variable Annuity Insurance Company v. Robert A. Hanson,respondent, the Paul Revere Variable Annuity Insurance Company v. Douglas W. Rodwell, Jr., the Paul Revere Variable Annuity Insurance Company v. David S. Nelson, the Paul Revere Variable Annuity Insurance Company v. Dominic W. Dinunzio, the Paul Revere Variable Annuity Insurance Company v. H.C. Tidwell, Jr., the Paul Revere Variable Annuity Insurance Company v. Douglas Thomas, the Paul Revere Variable Annuity Insurance Company v. W. Ronald Anderson, the Paul Revere Variable Annuity Insurance Company v. Kevin J. Carr, the Paul Revere Variable Annuity Insurance Company
Docket: 00-1030
Court: Court of Appeals for the First Circuit; September 13, 2000; Federal Appellate Court
The case involves The Paul Revere Variable Annuity Insurance Company and several other petitioners appealing the denial of their seventeen petitions to compel arbitration against various respondents. The petitioners argue that they are entitled to arbitration under the rules of the National Association of Securities Dealers (NASD) concerning claims raised in related state court litigation. The United States Court of Appeals for the First Circuit, presided over by Judges Selya, Lipez, and District Judge Casellas, found no error in the district court's ruling and upheld the denial of the petitions for arbitration. The decision was issued following a hearing on August 1, 2000, and was decided on September 13, 2000, by Judge Nathaniel M. Gorton in the District of Massachusetts.
The petitioners, defendants in state court and appellants, include a corporate hierarchy of four Massachusetts companies: The Paul Revere Variable Annuity Insurance Company, The Paul Revere Protective Life Insurance Company, The Paul Revere Life Insurance Company, and The Paul Revere Corporation. These entities were acquired by Provident Life & Accident Insurance Company (a subsidiary of Provident Companies, Inc., based in Tennessee) on March 27, 1997. Following the acquisition announcement, seventeen General Manager-Career employees, employed by the subsidiaries, filed breach-of-contract lawsuits in Worcester Superior Court, alleging they would be terminated post-acquisition.
Each manager's employment required compliance with NASD rules, which mandated arbitration for certain disputes. The petitioners sought to stay or dismiss the managers' complaints based on arbitration provisions, but the managers voluntarily dismissed their claims against Variable, the only NASD member among the petitioners. The petitioners then moved to federal court, leveraging diversity jurisdiction due to the respondents' non-citizenship in Massachusetts, Tennessee, or Delaware, and requested to compel arbitration. The district court denied this request, stating the petitioners lacked standing under NASD rules.
The analysis is structured into two parts: first examining the rights of the non-NASD member corporations, and then addressing Variable’s situation. The court applies a de novo review standard for legal questions regarding arbitrable disputes, noting a federal policy favoring arbitration. It emphasizes that NASD registrants must adhere to the rules in effect at the time of the lawsuit, referencing a particular NASD rule set from October 8, 1997, when most managers filed their suits.
NASD Rule 10201 outlines the matters eligible for arbitration under the NASD Code, specifically stating that arbitration is required for disputes among members, associated persons, or others related to their business or employment activities. Claims may be arbitrated by (1) a member against another member, (2) a member against an associated person, or (3) an associated person against a member. The respondents acknowledge that their claims would be subject to this rule if a petitioner could invoke it; however, since the other petitioners are not NASD members, subsections (a)(1) and (a)(2) do not apply. Non-members can only demand arbitration if they qualify as "persons associated with a member." The NASD by-laws define "person associated with a member" as a natural person in specific roles related to a member. This definition implies that only individuals can be considered "associated persons," as the roles listed are inherently suited to natural persons. Therefore, since the non-members are corporations, they cannot claim the right to arbitration under NASD by-laws.
The definition of "associated person" in the NASD by-laws is interpreted to refer exclusively to "natural persons," as every instance of "person" is either explicitly or implicitly modified by "natural." This interpretation aligns with a holistic reading of the text, which suggests that the NASD intentionally excluded corporate entities from this classification to prevent manipulative behavior. The document cites several cases supporting this interpretation, notably Tays v. Covenant Life Ins. Co. and others, which confirm that the NASD's definition is crafted to exclude corporations.
The petitioners argue for a broader interpretation, suggesting that the context of the NASD definition allows for the inclusion of other entities, referencing the Supreme Court's ruling in United Steelworkers v. Warrior & Gulf Navigation Co. They assert that using the Exchange Act's definition would facilitate arbitration, whereas the NASD definition might allow parties to evade arbitration obligations. However, this argument is rejected. The Exchange Act defines "person" broadly, including various entities, but contrasts this with the NASD's consistent use of "natural" in its definitions, reinforcing the conclusion that NASD intends to limit its classification to natural persons only.
The provision in question primarily focuses on internal NASD regulations rather than external factors such as federal arbitration policy or the Exchange Act. The drafters of the NASD Manual did not intend for external influences to inform the interpretation of the by-laws. The text, structure, and purpose of NASD regulations are emphasized as the relevant context. The argument that federal policy should lead to a different interpretation is dismissed; there is no indication from the Exchange Act that suggests a different conclusion regarding the definition of "associated persons" under Rule 10201, which pertains solely to natural persons. The SEC, which reviews NASD rules, would not approve definitions that exceed NASD's authority.
Consequently, the five petitioners who are not NASD members lack the right to compel arbitration of their claims against the respondents, leading to the district court’s denial of relief being deemed appropriate.
Regarding Variable, an NASD member, it claims a contractual right to enforce arbitration with the respondents, who are natural persons associated with Variable. However, the respondents have already dismissed their claims against Variable with prejudice. Variable argues it may still have liability as a co-obligor on the respondents' employment agreements, referencing contract law principles that allow parties to seek contribution from one another in such cases. Despite potential liability, Variable maintains that as a regulated company, it must report this liability, which it believes establishes its standing to compel arbitration.
The conclusion of Variable hinges on the premise that it, Protective, and Revere Life jointly promised a single performance. To ascertain whether these co-signatories committed to a unified or separate performance, the manifested intent of the parties in the general manager agreements is examined. This intent can be discerned through the contract's language, the subject matter, and surrounding circumstances, including the parties' practical construction of the contract and their respective interests at the time of formation.
For the current appeals, it is assumed, for the petitioners’ benefit, that each respondent was employed under a singular general manager agreement with all three companies, relying on one representative agreement due to the absence of material differences among the seventeen agreements. The contract of Douglas Thomas, effective May 1, 1993, identifies the Paul Revere companies and appoints him as a full-time General Manager for each, with most provisions using the term "Paul Revere" without differentiation. An exception is made in paragraph seven regarding compensation, which may be applied to debts owed to any Paul Revere entity.
Petitioners argue that the non-specific references to "Paul Revere" and a single signature indicate a collective obligation among the three companies. Conversely, the respondents contend that the appointment clause signifies the intention to create three separate agreements, with obligations limited to each company's issued products. The district court supported this interpretation, emphasizing the separate and distinct obligations of the parties despite the undifferentiated references in the agreement.
Key aspects of the general manager agreement indicate that Variable, Protective, and Revere Life are not bound together as a singular entity. The absence of a conjunctive term, such as "and," between the names suggests a disjunctive interpretation, allowing for the possibility of individual obligations. Paragraph seven introduces a withholding mechanism that implies a general manager may owe debts to one company while being owed by another, further supporting distinct contractual duties rather than a collective promise.
The varied product lines offered by the companies reinforce this interpretation, as each company is regulated to sell specific products—e.g., only Variable can underwrite certain annuities. It would be inappropriate, and potentially illegal, for one company to pay commissions on another’s products under federal and state insurance laws, which mandate that debts and liabilities are company-specific.
Additionally, the petitioners, who bore the burden of proving arbitrability, failed to demonstrate that the companies engaged in practices such as paying each other’s commissions or sharing profits. The references to 'Paul Revere' within the agreement do not negate the distinct nature of the companies' obligations. Legal precedents suggest that the structure of a transaction can indicate separate promises, emphasizing that differing interests among parties can signal an intent for independent performances rather than a joint obligation.
The standard general manager agreement establishes distinct obligations for the three corporate co-signatories, creating three separate contractual relationships for each respondent. Consequently, their claims against Protective and Revere Life, which are not NASD members, are independent of their relationship with Variable and fall outside NASD Rule 10201. Variable, having achieved a dismissal with prejudice, does not face significant harm and thus lacks standing to compel arbitration, as a party must have a personal stake in the outcome to invoke federal jurisdiction.
The district court noted that the petitioners drafted the general manager agreements and applied the contra proferentem rule, which dictates that ambiguities in contracts should be interpreted against the drafter. The petitioners' objections to this ruling were found unpersuasive. Their first objection, that the application of contra proferentem is irrelevant since separate obligations benefit the companies by limiting liability, was dismissed because their case relies on joint liability.
The second objection claimed that the court should resolve ambiguities in favor of arbitration rather than against the drafters. This was deemed a misunderstanding of the principle behind the Federal Arbitration Act (FAA), which aims to enforce arbitration agreements like other contracts, but not more favorably. Courts have consistently applied the contra proferentem rule to arbitration agreements, which the court affirmed as appropriate. The petitioners acknowledged that contra proferentem applies to determining whether an arbitration agreement exists or is enforceable but argued it should not apply to the scope of the agreement, a position the court rejected.
The presumption favoring arbitration applies to scope questions when a contract ambiguously defines which disputes are arbitrable. However, the petitioners mischaracterize the issue of Variable's standing to compel arbitration as a scope question. This misinterpretation is problematic because standing pertains to whether a party has the right to arbitrate, not merely the scope of arbitration under a contract. The federal policy favoring arbitration cannot compensate for a lack of Article III standing, which is essential for federal court jurisdiction. The Federal Arbitration Act (FAA) aims to enforce arbitration agreements as written; allowing a party without standing to force arbitration would contradict this purpose and established standing principles. A mere interest in a dispute does not fulfill the injury requirement necessary for standing. The court concludes that the petitioners, except for Variable, lack contractual rights to compel arbitration under NASD rules, and Variable does not possess the standing necessary to enforce its right in this context. Consequently, the district court's denial of the petitions to compel arbitration is upheld.
The court affirmed the lower court's decision regarding the employment agreements of respondents James Samuel, Robert Hanson, and William Hudson, noting a merger between Provident and Unum Corporation in 1999, but referring to them as Provident due to the timing of events. There is a noted dispute about whether Variable and Protective were parties to these agreements; however, it is assumed for argument's sake that they were. Some respondents retired proactively, while others were terminated, with all claims against Variable dismissed with prejudice. Two additional managers, Michael Kelley and Stanley Compton, filed suit on January 28, 1999. An amendment to NASD Rule 10201 exempting statutory employment discrimination claims from mandatory arbitration was noted but deemed irrelevant to this case. Furthermore, the deletion of references to 'any rules of the NASD' in January 1998 does not affect the interpretation of the rules, as clarified by NASD Rule 0121, which maintains the relevance of existing definitions. The definition of 'person associated with a member' was also amended to clarify that it includes registered natural persons, reinforcing that the definition pertains solely to natural persons.
NASD Rule 0120(n) defines "person" to encompass various entities, including individuals and corporations. However, this general definition does not override the more specific definition of "person associated with a member" found in the by-laws, following the principle that specific provisions take precedence over general ones, as highlighted in Edmond v. United States and United States v. Lara. Petitioners reference Cular v. Metropolitan Life Ins. Co., where the court deemed an employee of a member as an associated person for NASD arbitration purposes. However, the reasoning in Cular is deemed inconsistent with a later Second Circuit decision in Burns, and thus it will not be followed. The Cular decision also relied on later amendments to the NASD Code that explicitly addressed employment-related disputes, which do not support the petitioners' argument for including corporations as associated persons.
The appeals at hand do not require a choice of law determination, and Massachusetts case law is referenced solely for illustration. Although it is unnecessary to resolve, there are indications that Variable may not present a justiciable controversy under its interpretation of the general manager agreements. Any rights to contribution for co-signatories would depend on future events, such as a liability finding and overpayment, suggesting that Variable currently faces no direct harm. This aligns with the precedent set in Ernst Young v. Depositors Economic Protection Corp., which found a declaratory judgment action unripe due to the contingent nature of the asserted injury.
