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PaineWebber Inc. v. Faragalli

filed: August 4, 1995.


On Appeal from the United States District Court for the Eastern District of Pennsylvania. (D.C. Civil No. 94-mc-00147).

Before: Hutchinson, Roth and Garth, Circuit Judges.

Author: Garth


GARTH, Circuit Judge :

Henry J. Faragalli, Jr. ("Faragalli") appeals from an order of the district court which granted the petition of appellees PaineWebber Incorporated, Sheldon Chaiken, Lee H. Lovejoy, Anthony Presogna and Kevin Collins (collectively, "PaineWebber") to compel arbitration. The principal questions on appeal are two: first, whether PaineWebber's cause of action to compel arbitration under § 4 the Federal Arbitration Act accrued when Faragalli filed a "Writ of Summons" in the Pennsylvania Court of Common Pleas in 1988 and was thus time-barred when PaineWebber filed its 1994 petition? Second, whether PaineWebber waived its right to compel arbitration by engaging in protracted settlement negotiations with Faragalli and by moving to have Faragalli's state court action dismissed for non pros? The district court ruled against Faragalli on both issues and granted PaineWebber's petition to compel. We affirm.


In 1981, Faragalli, a stockbroker and registered representative of what was then Paine, Webber, Jackson & Curtis, signed a "Uniform Application for Securities and Commodities Industry Representative and/or Agent," thereby committing himself to abide by the rules of the New York Stock Exchange ("NYSE"). NYSE Rule 347 provides as follows:

Any controversy between a registered representative and any member or member organization arising out of the employment or termination of employment by such registered representative by and with such member or member organization shall be settled by arbitration....

App. 758a.

PaineWebber terminated Faragalli's employment sometime in December of 1987. On or about November 16, 1988, Faragalli filed a Writ of Summons in the Philadelphia Court of Common Pleas. The Writ of Summons named PaineWebber*fn1 and stated that "you are notified that the Plaintiff, Henry J. Faragalli, Jr., has commenced an action against you." App. 14a. The Writ gave no information regarding the nature of Faragalli's claims. Under Pennsylvania law PaineWebber was under no obligation to respond to the Writ, and Faragalli was under no obligation to file an initial pleading unless requested to do so by PaineWebber. Pa. R. Civ. P. 1037.

Shortly after filing the Writ of Summons Faragalli sent PaineWebber's lawyers an unfiled "draft complaint" alleging state law causes of action for breach of contract, defamation, conversion, interference with contractual relations, invasion of privacy, and unjust enrichment. Settlement negotiations ensued, and, as far as we can tell from the record, no complaint was filed by Faragalli in the next five years nor was any other substantive action taken in state court during that time. On November 23, 1993, Faragalli's state court action was automatically dismissed for lack of activity under Pennsylvania's "day backward" docket clearing program.

On April 14, 1994, the Court of Common Pleas granted Faragalli's motion to have his action reinstated but ordered Faragalli to file a complaint within 20 days.

On May 2, 1994, Faragalli filed a complaint claiming that PaineWebber had withheld commissions and other compensation and had committed assorted torts in the process of informing Faragalli's clients that he was no longer employed by PaineWebber. Three days later PaineWebber moved to have Faragalli's action dismissed for non pros. This motion was denied without explanation by order of June 17, 1994. App. 407.

On May 23, 1994, some six and one half years after Faragalli's discharge, five and one half years after Faragalli filed the Writ of Summons and 21 days after Faragalli finally filed his complaint, PaineWebber entered a preliminary objection in state court on the ground that the claims stated in Faragalli's complaint were subject to arbitration. In his June 10, 1994 reply to PaineWebber's objection Faragalli expressly denied for the first time that his claims were subject to arbitration. App. 433.

No discovery or briefing on the merits ever occurred in state court.

Within two months after asserting in state court that Faragalli's claims had to be arbitrated, on July 15, 1994, PaineWebber filed a petition in the Eastern District of Pennsylvania to compel arbitration. Faragalli objected based on timeliness and waiver. By memorandum and order dated August 15, 1994, the district court ruled that PaineWebber's petition was timely. The court reasoned that "the mere filing of the writ of summons, without the filing of a complaint, was insufficient as a matter of law to constitute a rejection of arbitration." Dist. Ct. Op. at 5. The court also concluded that PaineWebber had not waived its right to arbitrate; held that all of Faragalli's ...

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