1. Appeal and Error--appealability--order granting application to co
mpel arbitration
Although there is no right of appeal from an order granting an application to compel
arbitration, the Court of Appeals exercised its discretionary authority under Rule 2 to grant the
writ of certiorari and address the appeal on the merits.
2. Arbitration and Mediation--federal statutes--transaction affectin
g interstate
commerce
Federal arbitration statutes apply to this case instead of state arbitration statutes because
the securities transactions involved affect interstate commerce.
3. Arbitration and Mediation--securities transactions--U-4 form agre
ement--third
party beneficiary--equitable estoppel
The trial court did not err in an action alleging that defendant violated the noncompete
clause contained in her employment contract with plaintiff by staying court proceedings pending
arbitration and by compelling plaintiff to submit to binding arbitration based on the fact that
plaintiff is bound by the U-4 form agreement between defendant and UVEST compelling the
arbitration of employment contract disputes even though plaintiff did not sign the agreement to
arbitrate, because: (1) plaintiff was a third party beneficiary receiving the direct benefit of the
contract between defendant and UVEST through commissions earned; (2) equitable estoppel
prevents plaintiff from asserting that the lack of its signature on a written contract precludes
enforcement of the contract's arbitration clause when it consistently maintained that other
provisions of the same contract should be enforced to benefit it; (3) plaintiff required defendant
to sign the U-4 form so that plaintiff would be in a lawful position to benefit from the business of
securities transactions and so that defendant would be eligible to serve as a securities broker for
plaintiff; and (4) the issue of the noncompete clause in the employment contract that gave rise to
the dispute does arise out of defendant's employment as a securities broker.
Brinkley Walser, P.L.L.C., by Charles H. McGirt, for
plaintiff-appellant.
Smith Helms Mulliss & Moore, L.L.P., by J. Donald Cowan, Jr.,
for defendants-appellees.
TIMMONS-GOODSON, Judge.
LSB Financial Services, Inc. (“plaintiff”) appeals the order
of the trial court staying court proceedings pending arbitration
and compelling plaintiff to submit to binding arbitration. We
affirm.
The present action stems from a suit instituted by plaintiff
against Brenda S. Harrison (“defendant”) and J.C. Bradford & Co.
(“Bradford” or, together, “defendants”), alleging that defendant
violated the noncompete clause contained in her employment contract
with plaintiff. Defendant was an employee of Lexington State Bank
from 1979 to 1998. She worked as a securities broker for
plaintiff, the bank's financial services subsidiary, for the last
two years of her employment. Until 1999, federal law prohibited
banks from being members of the National Association of Securities
Dealers, Inc. (“NASD”). Due to this prohibition, banks were not
allowed to engage in the business of securities transactions unless
they partnered with an NASD member. Plaintiff did partner with a
NASD member, Liberty Securities Corporation (“Liberty”) in 1996,
and as such, qualified employees of plaintiff were allowed to
engage in securities brokering. After about one year, plaintiff
chose to replace their Liberty partnership with a partnership with
Investment Services (“UVEST”), another NASD member.
As part of the arrangement, UVEST and plaintiff maintained
employees, such as defendant, called “dual employees,” as they
worked under the supervision and control of both plaintiff and
UVEST. The arrangement was such that plaintiff paid the employees,
while UVEST and plaintiff shared the profits garnered from the dual
employees' securities work. While plaintiff was not allowed to become a NASD member, the
dual employees were required to become NASD members in order to
qualify for employment as securities brokers. In order to become
a NASD member, applicants, including defendant, were required to
complete and sign a Uniform Application for Securities Industry
Registration Form (“U-4 Form”). The U-4 Form, which is a
standardized application form, includes a provision for submitting
disputes between applicable people and organizations to
arbitration.
The noncompete clause in the employment contract between
plaintiff and defendant reads as follows:
During Employee's employment hereunder and
continuing thereafter for a period of one
year, Employee shall not directly or
indirectly compete or attempt to compete with
the said Broker/Dealer or LSBFS Program within
a 50 mile radius of any Service Center
location or locations to which the Employee
has been assigned during the term hereof, by
(i) doing business with, interfering in the
contracts or relationships with or soliciting,
directing or taking away the business or
patronage of the then existing or prospective
clients, customers or accounts of the said
Program, The Broker/Dealer LSBFS or LSBFS's
affiliates or (ii) recruiting or inducing any
employee of LSBFS, the Broker/Dealer engaged
by LSBFS, or affiliates of LSBFS to terminate
or otherwise cease his employment relationship
with said Broker/Dealer or LSBFS or such
affiliates.
Defendant voluntarily terminated her employment with plaintiff
on 18 August 1998 and began working as a broker with Bradford,
another NASD member. Several customers left plaintiff and began
conducting business transactions with defendants. Plaintiff
thereafter initiated a complaint against defendants, alleging a
violation of the covenant not to compete and other provisions ofthe employment contract. In addition to seeking damages for breach
of contract, plaintiff alleged willful or malicious interference
with contract, libel and slander, unfair and deceptive trade
practices, punitive damages and sought injunctive relief. A
temporary restraining order was issued at the time of the
initiation of the action. Defendant filed an answer on 24
September 1999 along with a motion to compel arbitration and stay
judicial proceedings. On 10 December 1999, defendant filed an
amended motion to compel arbitration and stay proceedings pending
arbitration pursuant to sections 1-567.2 and 1-567.3 of the North
Carolina General Statutes. On 27 January 2000, defendant filed an
amended motion to compel arbitration and stay proceedings pending
arbitration pursuant to the Federal Arbitration Act (“FAA”) 9
U.S.C. § 2 and § 3.
On 16 February 2000, the trial court entered an order staying
proceedings pending arbitration and compelling plaintiff to
arbitrate all matters alleged in the complaint. The court found
that the disagreement between plaintiff and defendant should be
settled by binding arbitration because plaintiff was a third party
beneficiary of the contract between defendant and UVEST, and
because the contract between defendant and UVEST mandated binding
arbitration between certain parties in the event of a dispute.
From this order, plaintiff appeals. For the following reasons, we
affirm the trial court decision.
The essential distinction, for our purposes, between the
federal and state arbitration statutes, is that the FAA governs
contracts “evidencing a transaction involving commerce.” 9 U.S.C.
§ 2. For the FAA to apply, then, the contract must affect
interstate commerce. See e.g. Allied-Bruce Terminix Cos. v.
Dobson, 513 U.S. 265, 130 L. Ed. 2d 753 (1995). “'Commerce' in its
broadest sense comprehends intercourse for the purposes of trade in
any form.” Johnson v. Insurance Co., 300 N.C. 247, 261, 266 S.E.2d
610, 620 (1980). The FAA defines commerce broadly as "commerce
among the several States . . . , or in the District of Columbia,
. . . or between the District of Columbia and any state." 9 U.S.C.
§ 1.
Previous decisions strongly support the conclusion that this
dispute involves commerce in such a way that the FAA was properly
invoked by the trial court, as “[b]rokerage agreements . . . fall
within the broad construction of the term 'involving commerce'
under section 2 of the FAA.” Smith Barney, Inc. v. Bardolph, 131
N.C. App. 810, 813, 509 S.E.2d 255, 257 (1998). Even more
specifically, the U-4 Form has been held by the United States
Supreme Court to be a contract that involves commerce. Gilmer v.
Interstate/Johnson Lane Corp., 500 U.S. 20, 114 L. Ed. 2d 26(1991).
We conclude, therefore, that the securities transactions involved
here affect interstate commerce and the FAA is applicable.
[3]
We turn our attention, then, to the dispositive issue on
appeal of whether plaintiff is bound by the agreement between
defendant and UVEST compelling the arbitration of employment
contract disputes when plaintiff did not sign the agreement to
arbitrate. While neither party argues that an agreement to
arbitrate is contained in the employment contract between plaintiff
and defendant, defendant asserts that the fact that plaintiff and
defendant do not have a written and signed contract directly
requiring arbitration does not mean that there is not an
enforceable agreement to arbitrate between the two parties.
We
agree.
Arbitration of a claim is available only when the parties
involved agree to arbitration by contract. United Steelworkers of
America v. Warrior & Gulf Navigation Co., 363 U.S. 574, 4 L. Ed. 2d
1409 (1960). Whether parties must arbitrate a dispute is for the
courts to decide on the basis of the contract. Id.
While it is
true that 9 U.S.C. § 2 overtly and clearly mandates that
arbitration can only be compelled if there is a “written . . .
contract . . . to settle by arbitration,” and "a party cannot be
required to submit to arbitration any dispute which he has not
agreed so to submit," United Steelworkers of America, 363 U.S. at
582, 4 L. Ed. 2d at 1417
, "a variety of nonsignatories of
arbitration agreements have been held to be bound by suchagreements under ordinary common law contract and agency
principles." In re Prudential Ins. Co. of America Litigation, 133
F.3d 225, 229 (3rd Cir. 1998).
While In re Prudential is a decision by the Third Circuit, it
is instructive in our decision. In In re Prudential, Prudential
was sued by former agents and Prudential moved to compel
arbitration. Prudential was not a signatory to the U-4 Form which
was used in the case, but the plaintiffs had signed the form.
Rather, Prudential was a third party beneficiary to the U-4 Form
agreement, as found by the Court. In its opinion, the Court
articulated some broad principles regarding the U-4 Form, the NASD,
and third party beneficiaries:
[I]t is clear from the text and purpose of
Form U-4, that the parties to the agreement
intended to benefit such non-signatory, third
parties as Prudential. While Form U-4 is
only an agreement between the NASD and the
applicant, it was adopted as a broader effort
by self-regulatory organizations, including
the NASD, to regulate the securities industry
(Citations omitted). The intention, as Form
U-4 unambiguously indicates, was not limited
to arbitrating disputes between the NASD and
the applicant or member "firms" explicitly
recognized in the text. Rather, the
arbitration agreement and the NASD Code of
Arbitration establish certain classes of
individuals-- member firms of the NASD,
customers, and so on--who would benefit from
the applicant's agreement with the NASD. The
applicant, in return, would become a
registered broker with the NASD and could
properly conduct business under the federal
securities laws. Therefore, we have no
doubts that the parties to Form U-4
unequivocally intended that each applicant
would submit to arbitration against
non-signatory third parties such as
Prudential.
Id. at 230.
We accept the propositions set forth above. After all, in
both In re Prudential and the case at bar, the third party
beneficiary was a third party beneficiary because they were
receiving the direct benefit of the contract.
(See footnote 1)
Accepting the
propositions set forth above, however, still leaves us with another
question. The Court in In re Prudential held that a U-4 Form
signator and a third party beneficiary to the U-4 Form can be
compelled to arbitrate disputes under the authority of the NASD.
In In re Prudential, however, it was the third party beneficiary
that was trying to compel the actual signator to the U-4 Form to
arbitrate, whereas in the case sub judice, the facts are reversed
in that the U-4 Form signator wants to compel a third party
beneficiary to arbitrate under the conditions of the U-4 Form.
Defendant argues that through commissions earned, “LSB reaped the
benefits of the U-4 Form . . . [and] must not be permitted to avoidits burdens.” Defendant's position is supported by the fact that
our case law establishes that “[i]f the third party is an intended
beneficiary, the law implies privity of contract.” Coastal Leasing
Corp. v. O'Neal, 103 N.C. App. 230, 236, 405 S.E.2d 208, 212
(1991). Defendant's position is also supported by the doctrine of
equitable estoppel, a doctrine which prevents a party from
asserting a right that “he otherwise would have had against
another” when his conduct would make the assertion of those rights
contrary to equity. In re Varat Enterprises, Inc. 81 F.3d 1310,
1317 (4th Cir. 1996). In the context of arbitration, the doctrine
of equitable estoppel may be used to stop a party from asserting
that, for example, “the lack of his signature on a written contract
precludes enforcement of the contract's arbitration clause when he
has consistently maintained that other provisions of the same
contract should be enforced to benefit him.” Inter. Paper v.
Schwabedissen Maschinen & Anlagen, 206 F.3d 411, 418 (4th Cir.
2000).
In the case at bar, plaintiff has maintained that other
provisions of the U-4 Form should be enforced to benefit them.
Indeed, plaintiff required defendant to sign the U-4 Form so that
plaintiff would be in a lawful position to benefit from the
business of securities transactions. We agree, therefore, with
defendant's argument that “LSB reaped the benefits of the U-4 Form
in terms of commissions earned [so] it must not be permitted to
avoid its burdens.
”
Defendant's argument that plaintiff was
properly compelled to arbitrate is further bolstered by the factthat defendant was an agent of
plaintiff and
plaintiff instructed
defendant to submit the U-4 Form in order to be eligible to serve
as a securities broker for plaintiff. “It is well established in
the federal courts that an arbitration agreement may be enforced by
or against a nonsignatory party under traditional principles of
agency or contract law.” Stone v. Pennsylvania Merchant Group,
Ltd., 949 F. Supp. 316, 320 (E.D. Pa. 1996) (emphasis added).
Plaintiff partnered with Liberty and then UVEST, two NASD members,
for the sole purpose of allowing plaintiff's employees to sell
securities for the financial gain of plaintiff. As
a dual employee
of plaintiff and UVEST, defendant was required to become a member
of NASD and to submit a U-4 Form to NASD, and, as such, agreed to
abide by the NASD rules and regulations. Among these regulations
was the requirement that certain disputes be submitted to
arbitration. The NASD Code of Arbitration requires arbitration of
suits between “an NASD member against a person associated with an
NASD member.” A “person associated with an NASD member” is defined
by NASD By-laws, and includes “a . . . partner . . . of a member.”
Because plaintiff and UVEST were sharing profits on commissions
earned by their joint employees, the trial court properly concluded
that plaintiff is a “person associated with an NASD member.”
Sharing profits, after all, is prima facie evidence of the
existence of a partnership. Wilder v. Hobson, 101 N.C. App. 199,
398 S.E.2d 625 (1990).
The mere fact that plaintiff is associated with an NASD
member, however, does not mean that it should be bound by thearbitration agreement to arbitrate any given dispute that may
arise. Instead, the NASD Code of Arbitration states that issues
“arising out of or in connection with the business of any member”
and “arising out of the employment . . . of associated person(s)
with any member” are among the issues that are arbitrable. As
defendant points out in her brief, the issue of the noncompete
clause in the employment contract that gave rise to this dispute
does “arise out of” the defendant's employment as a securities
broker. The underlying dispute, after all, is about whether
defendant, a securities broker who works for plaintiff, is allowed
to transfer her skills and efforts to work as a securities broker
for a competing business. Similar disputes have previously been
subject to mandatory arbitration by federal courts. See e.g.
Merrill Lynch, Pierce, Fenner & Smith v. Schwartz, 991 F. Supp.
1480 (M.D. Ga. 1998) (in which the case is subject to mandatory
binding arbitration pursuant to the NASD when noncompete clause is
allegedly breached).
Finding no error in the trial court's decision to stay court
proceedings and to compel the plaintiff to submit to mandatory
arbitration, the decision of the trial court is affirmed.
Affirmed.
Judges MARTIN and TYSON concur.
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