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ZECHMAN v. MERRILL LYNCH

March 28, 1990

JAMES E. ZECHMAN, Plaintiff,
v.
MERRILL LYNCH, PIERCE, FENNER & SMITH, Inc., Defendant



The opinion of the court was delivered by: MORAN

 JAMES B. MORAN, UNITED STATES DISTRICT JUDGE

 Plaintiff James E. Zechman ("Zechman"), a former employee of defendant Merrill Lynch, Pierce, Fenner & Smith ("Merrill Lynch"), brings this action seeking relief on a variety of theories for injuries he allegedly suffered incident to his discharge from Merrill Lynch in August, 1988. Before this court are two motions of the defendant: the first seeking dismissal of five of Zechman's eight counts for failure to state a claim and the second requesting this court to compel arbitration of all claims that are not dismissed. For the reasons set forth below, the motion to dismiss is granted in part and denied in part, and the motion to compel arbitration is granted.

 FACTS

 Plaintiff Zechman was employed by Merrill Lynch, a corporation in the business of trading securities and offering investment advice, as a trader on the Chicago Board of Trade ("CBOT") *fn1" for twelve years until he was discharged on August 30, 1988. In his complaint, Zechman alleges that his discharge from employment with Merrill Lynch coincided with his objections to several Merrill Lynch practices. Shortly before his discharge, Zechman alleges, he was instructed to participate in a scheme that demoted some employees who had enjoyed membership interest to floor clerks while permitting them to continue trading as principals, brokering for others, and soliciting orders. Perceiving this practice to run afoul of four rules of the CBOT *fn2" as well as of two provisions of the United States Code regulating commodity exchanges, Zechman refused to follow these instructions. Around the same time, Zechman also became aware of a scheme by which transactions involving Merrill Lynch Government Securities -- a subsidiary of defendant Merrill Lynch and a non-member of the CBOT -- were channelled through Merrill Lynch, a member of the CBOT. For each of these transactions the CBOT received an Exchange Service Fee of $ .04, which corresponds to the transaction fee that member firms are charged, rather than $ 1.00, which is the fee assessed on non-members. *fn3" After learning of this scheme, Zechman alleges that he articulated his objections to his superiors at Merrill Lynch, demanded that it be stopped, and advised them that it had to be reported to the CBOT. Merrill Lynch did not discontinue its untoward conduct, Zechman alleges; rather, it fired him in retaliation for his "troublemaking."

 Out of these facts grow Zechman's eight counts. In Count I he alleges the tort of retaliatory discharge; Count II seeks relief on a quantum meruit theory for the 1988 bonus allegedly earned by Zechman before his discharge; Count III seeks relief for the same bonus but is based on a theory of implied contract; Count IV alleges that Merrill Lynch's refusal to pay this bonus violates a covenant of good faith and fair dealing implied in the bonus contract between Merrill Lynch and Zechman; Counts V and VI both seek damages corresponding to unpaid vacation and personal days -- the former based on a breach of contract theory and the latter on the Illinois Wage Payment and Collection Act; Count VII alleges that Zechman was defamed by a statement conveyed by a series of acts performed by Merrill Lynch in connection with the discharge; and Count VIII alleges that the same series of acts gives rise to the tort of false-light privacy. Merrill Lynch asks this court to dismiss Counts I, II, IV, VII, and VIII for failure to state a claim on which relief can be granted, Fed.R.Civ.P. 12(b)(6). Merrill Lynch also moves to compel arbitration, however, and because this latter motion may determine whether we have to decide the 12(b)(6) motion with respect to some or all of the claims, we turn to the arbitration motion first.

 DISCUSSION

 A. Arbitration

 As members of the Chicago Board of Trade, Zechman and Merrill Lynch are bound by CBOT Rule 600.00, which provides:

 
Any controversy between parties who are members and which arises out of the Exchange business of such parties shall, at the request of any such party, be submitted to arbitration in accordance with regulations prescribed by the Board. Every member, by becoming such, agrees to arbitrate all such disputes with other members in accordance with this Rule and the regulations prescribed by the Board pursuant to this Rule, and further agrees and obligates himself to abide by and perform any awards made thereunder.

 In compliance with this rule, which both parties concede to be a valid arbitration agreement, Zechman filed on March 27, 1989, a statement of claim before the CBOT, thereby submitting his dispute with Merrill Lynch to arbitration. In a memorandum filed over a month later, however, Zechman urged the CBOT to accept jurisdiction only with respect to his claim for unpaid bonus and to refrain from hearing all other claims on the ground that they do not arise out of the exchange business of the parties as required by Rule 600.00. For its part, Merrill Lynch submitted to the CBOT a letter suggesting that the Arbitration Committee of the CBOT refrain from hearing Zechman's claims to "avoid even the appearance of impropriety" in light of the CBOT's "direct financial interest in the resolution of these issues." On May 12, 1989, the CBOT announced, with no explanation, that it had determined to decline jurisdiction and to dismiss Zechman's demand for arbitration. Merrill Lynch now asks this court to compel the parties to arbitrate before a neutral arbitrator all claims that survive its motion to dismiss. A court asked to enforce an arbitration agreement, however, is not empowered to rule on the merits of an arbitrable claim, see Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 218, 84 L. Ed. 2d 158, 105 S. Ct. 1238 (1985), *fn4" and therefore we read Merrill Lynch's motion as a request to compel the arbitration of all arbitrable claims and to consider the 12(b)(6) motion only with respect to non-arbitrable claims. *fn5" Zechman argues in response that Rule 600.00 provides for arbitration before CBOT arbitrators and according to CBOT rules and regulations, and that this court lacks power to require arbitration except in conformity with these provisions. Moreover, Zechman asserts, Merrill Lynch's actions over the course of this litigation have served to waive its right to compel arbitration.

 1. Availability of Ultra-agreement Arbitration

 An arbitration provision, like any other binding agreement between parties, is a creature of contract, Snyder v. Smith, 736 F.2d 409, 419 (7th Cir.), cert. denied, 469 U.S. 1037, 83 L. Ed. 2d 403, 105 S. Ct. 513 (1984), and therefore a party can be compelled to arbitrate only to the extent he has so agreed. See National Iranian Oil Co. v. Ashland Oil, 817 F.2d 326, 335 (5th Cir.), cert. denied, 484 U.S. 943, 98 L. Ed. 2d 356, 108 S. Ct. 329 (1987); 9 U.S.C. § 4 (empowering the court to direct a recalcitrant arbitrator "to proceed to arbitration in accordance with the terms of the agreement"). Thus, one court refused to order arbitration in Illinois where the agreement explicitly named Houston as the forum city, Snyder, 736 F.2d 409 at 418-20, while another declined to consolidate two arbitration proceedings involving a common party where the individual arbitration agreements contemplated separate arbitrations. Weyerhaeuser Co. v. Western Seas Shipping Co., 743 F.2d 635 (9th Cir.), cert. denied, 469 U.S. 1061, 83 L. Ed. 2d 431, 105 S. Ct. 544 (1984).

 The unwillingness of the courts in Snyder and Weyerhaeuser to go beyond the letter of the arbitration agreement, however, did not prevent the parties in those cases from resolving their disputes through arbitration. By contrast, a refusal by this court to order arbitration before a neutral arbitrator would foreclose the possibility of arbitration altogether, for the arbitration mechanism prescribed by Rule 600.00 is unavailable due to the CBOT's decision to decline jurisdiction. This case, then, unlike Snyder and Weyerhaeuser, implicates the strong federal policy favoring arbitration, see Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25, 74 L. Ed. 2d 765, 103 S. Ct. 927 (1983); Societe Generale de Surveillance, S.A. v. Raytheon European Management and Systems Co., 643 F.2d 863, 867 (1st Cir. 1981), which compels a different analytical approach to the question of whether to direct the parties to arbitrate in accordance with an ultra-agreement term.

 Where one term of an arbitration agreement has failed, the decision between substituting a new term for the failed provision and refusing to enforce the agreement altogether turns on the intent of the parties "at the time the agreement was executed, as determined from the language of the contract and the surrounding circumstances." Iranian Oil, 817 F.2d at 333; see also Chattanooga Mailers Union, Local No. 92 v. Chattanooga News-Free Press, 524 F.2d 1305, 1315 (6th Cir. 1975), overruled on other grounds, Bacashihua v. U.S. Postal Service, 859 F.2d 402 (6th Cir. 1988). To determine this intent, courts look to the "essence" of the arbitration agreement; to the extent the court can infer that the essential term of the provision is the agreement to arbitrate, that agreement will be enforced despite the failure of one of the terms of the bargain. See Chattanooga Mailers Union, 524 F.2d 1305; Erving v. Virginia Squires Basketball Club, 349 F. Supp. 716 (E.D.N.Y.), aff'd, 468 F.2d 1064 (2d Cir. 1972). If, on the other hand, it is clear that the failed term is not an ancillary logistical concern but rather is as important a consideration as the agreement to arbitrate itself, a court will not sever the failed term from the rest of the agreement and the entire arbitration provision will fail. See Iranian Oil, 817 F.2d 326. In construing arbitration agreements, courts are aided by the principle

 
that "arbitration should not be denied 'unless it can be said with positive assurance that an arbitration clause is not susceptible to an interpretation which would cover the dispute at issue.'"

 In cases where the failed term establishes the identity of the arbitrator or arbitrators, the Federal Arbitration Act ...


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