no explanation as to why they were not aware of an option which they now contend is clearly provided for by the Customer Agreement and the rules and constitution of the AMEX.
As we have just concluded, the Karols' election to arbitrate before the NASD precludes any proceedings before the AAA. However, even if the Karols' election were not binding, the Customer Agreement does not provide for arbitration before the AAA. The Karols contend that the reference in the Customer Agreement to the "rules" of the AMEX encompasses the AMEX constitution. According to the Karols, the AMEX constitution provides them with the right to elect the AAA to arbitrate the dispute.
Specifically, the Karols contend that AMEX constitution, Article VIII, para. 9063, § 2(c) gives them the right to arbitrate before the AAA. Section 2(c) provides that: "arbitration shall be conducted under the arbitration procedures of this Exchange, except as follows . . . if any of the parties to a controversy is a customer, the customer may elect to arbitrate before the American Arbitration Association in the City of New York, unless the customer has expressly agreed, in writing, to submit only to the arbitration procedure of the Exchange." 2 Am.Stock Ex.Guide (CCH) P 9063 (1984).
The Karols assume that the AMEX constitution is a "rule," as this term is used in the Bear Stearns customer agreement. However, this argument has been rejected by courts in identical factual contexts. In Hybert v. Shearson Lehman/American Express, Inc., (slip op.) 1989 U.S. Dist. LEXIS 6656 (N.D.Ill. 1989), the plaintiff customers entered into an agreement with an arbitration provision virtually identical to the Bear Stearns agreement involved in the present case. The customers attempted to arbitrate their claims before the AAA, citing § 2(c) of the AMEX constitution.
The Court flatly rejected this argument for two reasons. First, the Court held that the reference to "rules" in the arbitration provision was intended to embrace the arbitration provisions of the three exchanges; the AMEX constitution was not within the scope of the "rules" referenced in the provision. Second, the Court held that even if the drafters of the contract intended to embrace the AMEX constitution in their reference to the AMEX rules, the language of § 2(c) precluded its application. The Court explained that the words "unless the customer has expressly agreed in writing to submit only to the arbitration procedure of the exchange" meant "unless the customer has expressly agreed in writing to submit only to specified arbitration forums." In other words, § 2(c) is only applicable when customers enter into very general arbitration agreements with AMEX members. The agreement involved in Hybert, which is identical to the provision at issue here, was the type of specific contract which fell outside the scope of § 2(c).
In Painewebber, Inc. v. Pitchford, 721 F. Supp. 542 (S.D.N.Y. 1989), the parties were bound by an arbitration provision virtually identical to the provision at issue here. The customers argued that § 2(c) of the AMEX constitution afforded them the right to arbitrate before the AAA. As was the case in Hybert, the court rejected this interpretation of § 2(c) and the arbitration contract.
The court found that the agreement did not include a right to arbitrate before the AAA. "We . . . conclude that the references to the 'rules' means the arbitration procedures of the three electable organizations, and not their constitutions. It is certainly more logical to assume that the forums named in the arbitration clause are the only electable forums intended by the parties. The agreement was specifically limited to these forums. Accordingly, if we held that constitution of the AMEX is a 'rule,' we would be creating a fourth electable forum, a result we believe was not envisioned by either the drafters of the clause or the parties." Id. See also, Piltch v. Merrill Lynch, Pierce, Fenner & Smith, 714 F.Supp. 537, 538 (D.D.C. 1989).
We find the reasoning of these cases to be persuasive, and conclude that the Customer Agreement was not intended to encompass the AMEX constitution. Rather, the forum selection language in the contract was intended to specify three proper forums for arbitration. Furthermore, we find that the agreement signed by the Karols constitutes an express agreement to submit a dispute only to the arbitration procedures of the three exchanges. Therefore, the agreement is beyond the scope of § 2(c).
For the reasons stated above, we order the parties to immediately proceed to arbitration before the National Association of Securities Dealers. Because the AAA has indicated that it will abide by our order, injunctive relief is inappropriate at this time. (See Bear Stearns, Ex. G). Finally, because there are insufficient facts to suggest that the Karols' actions were not grounded in a good faith attempt to extend or modify existing law, we decline to award sanctions. It is so ordered.
DATED November 15, 1989
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