Seventh Circuit held that: (1) the Commodity Exchange Act requires arbitration of customers claims; (2) Geldermann's membership in the exchange, with its concomitant obligation to be governed by its rules, was sufficient to constitute consent to arbitration, and thus waived the Article III guarantee of impartial and independent federal adjudication; (3) providing commodity customers with the option of electing arbitration did not threaten the structural integrity of the courts or separation of powers, so that Geldermann's waiver of personal rights under Article III was binding; and (4) since Geldermann was not entitled to an Article III forum, the Seventh Amendment right to a jury trial was not implicated.
In O'Brien, the defendant had signed a Form 8-R to register as an associated person under the CFTC with the National Futures Association ("NFA"). The Form 8-R contained no arbitration clause, but did contain a compliance clause substantially similar to the one signed by plaintiff in the instant case, pursuant to which the defendant had agreed to become and remain bound by all NFA requirements as then and thereafter in effect. The Seventh Circuit, following Geldermann, held that by signing the Form 8-R the defendant had agreed to be bound by all NFA rules, one of which was to arbitrate disputes between and among members and associates. "Thus, in signing Form 8-R [defendant] consented to mandatory arbitration of his dispute with [plaintiff] before the NFA." O'Brien v. Pipkin, 64 F.3d 257 at 260; Accordingly, consistent with Geldermann and O'Brien, the court concludes that the Form U-4 that plaintiff signed in 1979 incorporated by reference the arbitration provisions the NASD adopted in 1993.
Plaintiff argues that even if he agreed to arbitrate certain disputes, he did not agree to arbitrate his employment claims, because such claims were not covered by the NASD arbitration rules in existence when he signed the Form U-4. See Farrand, 993 F.2d 1253. As noted, however, the arbitration rules were amended in 1993 to include arbitration of all employment disputes. Plaintiff agreed to abide by all NASD rules as they may be amended. In Farrand, the Seventh Circuit held that the pre-1993 rules did not extend to employment disputes. In Kresock v. Bankers Trust Co., 21 F.3d 176 (7th Cir. 1994), the court held that the 1993 amendments did not apply to a termination occurring prior to the amendments' effective date. In the instant case, plaintiff was terminated in 1995, almost two years after the effective date of the amendment. Thus, his cause of action accrued after the effective date. Accordingly, the amendments are applicable to his claims. Rahalnik v. John Hancock Funds, Inc., 1996 WL 145842 (N.D. Ill. 1996).
Aside from his attack on the existence of an agreement to arbitrate, plaintiff also asserts that the securities industry's mandatory arbitration requirement imposes an unconstitutional condition on his employment. Specifically, plaintiff asserts that as a condition of his employment he is forced to waive three constitutionally protected rights: (1) the right to an Article III court on his federal and pendent state claims; (2) the right to a jury under the Seventh Amendment on his federal statutory and state common law claims; and (3) his Fourteenth Amendment due process and equal protection rights to have his statutory claims decided by a tribunal that is required to apply statutory standards. Although plaintiff has presented a different gloss on these claims, most if not all of them were rejected in Kahalnik and Geldermann.
As plaintiff recognizes, these claims are cognizable only if there is state action; i.e., if the government has forced plaintiff to waive his rights as a condition of his employment. Obviously, defendants are not state actors. Kahalnik holds that neither is the NASD. 1996 WL 145842 at *4. That ends the inquiry as far as the defendants are concerned. Plaintiff argues, however, that it is the SEC that is compelling arbitration. According to plaintiff, the Securities Exchange Act requires brokers and dealers to register with an exchange and abide by their rules, and that the SEC plays a substantial role in developing, reviewing and approving those rules. Because the exchange rules require mandatory arbitration, plaintiff argues that the federal government is compelling mandatory arbitration.
In O'Brien, the court held that the NFA was a government actor in performing the registration function. It did so, however, because the NFA had admitted that it had been delegated the registration function by the federal government. Plaintiff has not submitted any evidence to demonstrate that the NASD has also been delegated that function. Moreover, plaintiff is not required to sign the Form U-4 or to join the NASD; he can simply go into another business. Although this seems harsh, the Supreme Court has held, in similar circumstances, that despite such economic compulsion, "a follow-on registrant [under the Federal Insecticide, Fungicide and Rodenticide Act] explicitly consents to have its rights determined by arbitration." Thomas v. Union Carbide Agricultural Produce Co., 473 U.S. 568, 592, 87 L. Ed. 2d 409, 105 S. Ct. 3325 (1985). In Geldermann, the court determined, relying on Thomas, that although the Commodity Exchange Act required the CFTC to promulgate rules requiring commodity exchange members to submit to arbitration, the requirement did not negate the voluntary nature of the applicant's consent to arbitration. Geldermann, 836 F.2d at 317. O'Brien held the same: "thus the mandatory nature of Pipkin's registration with NFA does not obviate his consent to submit to its arbitration procedures." O'Brien, 64 F.3d at 261. The O'Brien court also rejected a claim that the consent to arbitrate was obtained in violation of the Fifth Amendment due process clause. Id. at 262-63.
Additionally, because plaintiff has voluntarily consented to arbitration, he has waived any right he may have had to a full trial before an Article III court.
Without a right to an Article III forum, he has no Seventh Amendment claim. "In a non-Article III forum the Seventh Amendment simply does not apply." Geldermann, 836 F.2d 310 at 323.
Finally, the court rejects plaintiff's due process and equal protection claims that he is somehow being denied the right to have his claim decided by a tribunal that is required to apply the statutory standards established by Congress and the courts. First, as noted above, it is the NASD that requires arbitration, and the NASD is not a state actor. Second, like the Supreme Court, this court "decline(s) to indulge the presumption that the parties and arbitral body conducting a proceeding will be unable or unwilling to retain competent, conscientious and impartial arbiters." Gilmer, 500 U.S. at 30. Additionally, contrary to plaintiff's assertions, the NASD arbitration manual does not instruct arbitrators that they do not have to follow the law; it merely states that they are not "strictly bound by case precedent or statutory law." The arbitrators are also told that if they manifestly disregard the law, the award may be vacated. Accordingly, the court concludes that plaintiff's employment discrimination and state law claims arising out of his employment are subject to mandatory arbitration. The court therefore grants defendant's motion to dismiss Counts IV through X without prejudice.
The ERISA claims are another matter. In the ERISA counts (I-III), plaintiff has sued The Nuveen Profit Sharing plan Committee and each of its members, none of whom are members of the NASD or signatories to any arbitration agreement. As noted in Kahalnik, "The NASD Code only provides for arbitration of agreements between associated persons and members. See NASD Code, Part I, Section 1." 1996 WL at *4. The fact that the Plan Committee and its members are not NASD members necessarily excludes them from the arbitration agreement. The Supreme Court has held that, in cases involving a number of parties where only some are privy to an arbitration agreement, "federal law requires piecemeal resolution when necessary to give effect to an arbitration agreement." Moses H. Cone Memorial Hospital v. Mercury Const. Corp., 460 U.S. 1, 20, 74 L. Ed. 2d 765, 103 S. Ct. 927 (1983). Because the Plan Committee and its members are not parties to the agreement, they cannot force plaintiff to arbitrate his claims against them. Accordingly, the motion to dismiss counts I through III is denied.
For the reasons set forth above, defendant Nuveen's motion to dismiss counts IV through X is granted without prejudice. The Plan Committee's motion to dismiss counts I through III is denied. The motion to strike or dismiss certain portions of the complaint or to stay this action and compel arbitration is denied without prejudice.
ENTER: November 19, 1996
Robert W. Gettleman
United States District Judge