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STONE v. PENNSYLVANIA MERCHANT GROUP

December 16, 1996

JAMES A. STONE, Plaintiff,
v.
PENNSYLVANIA MERCHANT GROUP, LTD., Defendant.



The opinion of the court was delivered by: BRODY

 Anita B. Brody, J.

 December 16, 1996

 BACKGROUND

 Merchant employed Stone as a securities analyst during a period beginning in June 1992 and ending in November 1994. Following the termination of Stone's employment relationship with Merchant, Stone filed this action in diversity against Merchant on June 23, 1995, seeking compensatory and punitive damages, statutory liquidated damages, and reasonable attorney's fees. In the complaint, Stone alleges that the parties entered into two employment contracts, in May 1992 and June 1994 respectively, in which Merchant promised Stone various minimum levels of compensation and bonuses. In Counts One and Two of the complaint, Stone alleges that Merchant breached the employment contracts by failing to pay the full amount of compensation and bonuses due under the contracts. In Count Three of the complaint, Stone sets forth a tort/defamation claim in which he alleges that Merchant intentionally gave him false information about a company it was promoting so that Stone would prepare a falsely positive report about the company's prospects. He alleges that Merchant profited by selling the company's stock at artificially high prices, and that when the company subsequently failed, Stone's reputation as a reliable analyst in the industry was damaged. Finally, in Count Four, Stone seeks to recover unpaid wages, liquidated damages, and reasonable attorney's fees under Pennsylvania's Wage Payment and Collection Law.

 Shortly after he commenced employment with Merchant, Stone executed a Uniform Application for Securities Industry Registration or Transfer, commonly referred to as a Form U-4. The Form U-4 is a generic application that is used to register with one or more self-regulatory organizations and state jurisdictions. In Item 10 of the U-4 application, Stone indicated that he desired registration with the National Association of Securities Dealers ("NASD") and with the jurisdictions of New York and Pennsylvania. The Form U-4 identifies Merchant as Stone's current firm with which he was employed. On the signature page of the U-4 application, ten paragraphs are located immediately above the applicant signature line and immediately below a bold heading stating that "THE APPLICANT MUST READ THE FOLLOWING VERY CAREFULLY." Paragraph 2 states in relevant part:

 
in consideration of the jurisdictions and organizations receiving and considering my application, I submit to the authority of the jurisdictions and organizations and agree to comply with all provisions, conditions and covenants of the statutes, constitutions, certificates of incorporation, by-laws and rules and regulations of the jurisdictions and organizations as they are or may be adopted, or amended from time to time.

 Furthermore, paragraph 5 of the U-4 states:

 
I agree to arbitrate any dispute, claim or controversy that may arise between me and my firm, or a customer, or any other person, that is required to be arbitrated under the rules, constitutions, or by-laws of the organizations indicated in Item 10 as may be amended from time to time . . . .

 Stone signed the Form U-4 on the applicant signature line immediately below these paragraphs and filled in the date as June 22, 1992. No signature line for the applicant's firm exists in this portion of the Form U-4.

 On July 18, 1995, Merchant moved for an order staying this action pending arbitration on the basis of the Form U-4 that Stone executed. On February 28, 1996, I denied this motion without prejudice because the materials the parties had submitted were insufficient to decide the motion. On March 13, 1996, Merchant renewed its motion for arbitration, the instant motion under consideration now, and submitted additional materials in support of its motion. On April 16, 1996, Stone filed a response opposing Merchant's motion and also submitted additional materials in opposition to the motion.

 Merchant contends that it is entitled to an order under the FAA staying this action pending arbitration because Stone agreed in the Form U-4 application to arbitrate any dispute with his firm that is required to be arbitrated under the rules of the organizations with which Stone sought to register. Merchant claims that because Stone sought registration with the NASD, and because the NASD rules require arbitration of the claims at issue in this action, Stone must resolve his claims against Merchant through arbitration rather than in federal court.

 Stone contends that Merchant is not entitled to a stay under the FAA because he claims that Stone never entered into an agreement with Merchant to arbitrate and because even if a valid agreement to arbitrate does exist between Stone and Merchant, the particular claims asserted in Stone's complaint are not within the scope of that arbitration agreement. Stone claims that Merchant has no contractual standing to enforce the Form U-4 application because Stone was not a party to the agreement, which was an agreement exclusively between Stone and the NASD, and because Merchant did not give Stone any independent consideration for signing the Form U-4, whether in the form of employment or in the assumption of a mutuality of obligation. Stone also argues that even if Merchant does have contractual standing to enforce the agreement, the NASD rules do not require arbitration of ...


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