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R.J. O'Brien & Assoc., Inc. v. Pipkin

August 15, 1995




Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 93 C 3154--Wayne R. Andersen, Judge.

Before ESCHBACH, KANNE, and ROVNER, Circuit Judges.

ESCHBACH, Circuit Judge.



Thomas Pipkin appeals from the district court's decision in a diversity action to confirm an arbitration award entered against him and in favor of R.J. O'Brien & Associates, Inc., ("O'Brien") by the National Futures Association ("NFA"). In Pipkin's motion to vacate the award, he contended that the NFA imposed mandatory arbitration without contractual or Congressional authority and it appointed a panel in a manner contrary to its own rules. For the reasons below, we affirm.


The Commodity Exchange Act (the "Act"), 7 U.S.C. secs. 1-25, regulates the conduct of participants in transactions involving commodity futures. Persons who actively participate in the industry, such as futures commission merchants, introducing brokers, and persons associated therewith, are obligated to register under the Act. 7 U.S.C. secs. 6f(a) and 6k(1). To oversee the regulatory regime, Congress created the Commodity Futures Trading Commission ("CFTC"), an independent agency which is also vested with the authority to register persons under the Act. Under 7 U.S.C. sec. 21(o), the CFTC is permitted to delegate this registration function to a registered futures association to be performed in accordance with the association's rules as approved by the CFTC pursuant to 7 U.S.C. sec. 21(j). The NFA, a private corporation registered as a futures association under the Act, has been delegated the registration function by the CFTC.

In 1985, O'Brien, an Illinois corporation registered as a futures commission merchant, entered into a clearing agreement with the Sage Group, Inc., an independent introducing broker under the Act. Pipkin, a California resident, was the president and principal stockholder of Sage and registered as an associated person. According to the agreement, O'Brien cleared the trades for all customers introduced to it by Sage. That arrangement terminated in June 1990 and Sage declared bankruptcy in December 1990. O'Brien, however, claimed that after Sage's bankruptcy it paid approximately $172,000 to satisfy complaints against it by customers introduced by Sage. It asserted that Pipkin was personally responsible to indemnify O'Brien for this amount. Since O'Brien and Pipkin were both registered with the NFA and subject to its rules, O'Brien filed a demand for arbitration against Pipkin in June 1992 under the NFA's Member Arbitration Rules which require associated persons to arbitrate disputes with members. Pipkin filed an answer challenging the NFA's jurisdiction to conduct the arbitration, but the matter was allowed to proceed. The ensuing arbitration resulted in an award of $82,000 in O'Brien's favor.

On May 26, 1993, O'Brien filed a petition in the district court for an order confirming the arbitration award. Pipkin responded by moving to vacate the award, arguing that the NFA had no authority to impose arbitration upon him and its actions in doing so violated the due process clause of the Fifth Amendment. He also argued that one of the panelists was not selected in accordance with the NFA's rules. The district court confirmed the arbitration award, finding that the NFA performed the arbitration proceeding as authorized and in accordance with its rules, and that it was not a government actor and therefore could not have deprived Pipkin of his constitutional rights by requiring arbitration. Pipkin filed a timely notice of appeal. *fn1 We have jurisdiction pursuant to 28 U.S.C. sec. 1291.


This appeal requires us to decide two legal questions: (1) whether Pipkin consented to submit his dispute with O'Brien to the NFA when he signed the registration form and, if so, whether that consent was obtained through a denial of due process; and (2) whether the NFA's arbitration panel was selected in accordance with its own rules. This decision involves an interpretation of the Act, CFTC regulations, and NFA requirements. Thus, our standard of review is the same as the district court. Moseley, Hallgarten, Estabrook & Wedeen v. Ellis, 849 F.2d 264, 267 (7th Cir. 1988); see Pritzker v. Merrill Lynch, Pierce, Fenner & Smith, 7 F.3d 1110, 1113 (3d Cir. 1993). We will vacate the arbitration award if "the arbitrators exceeded their powers" in deciding this case. 9 U.S.C. sec. 10(a)(4); Eljer Mfg., Inc. v. Kowin Dev. Corp., 14 F.3d 1250, 1253 (7th Cir.), cert. denied, 114 S. Ct. 2675 (1994).

A. NFA's authority to impose arbitration

1. Pipkin's consent to submit to arbitration

Pipkin argues that he did not consent to arbitrate all member-associate disputes before the NFA when he registered to be an "associated person" under the Act. "[A]rbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." AT & T Technologies, Inc. v. Communications Workers, 475 U.S. 643, 648 (1986); Miron Constr. Co., Inc. v. ...

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