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In re Prudential Ins. Co. of America Sales Practice Litigation All Agent Actions

January 7, 1998

*IN RE: THE PRUDENTIAL INSURANCE COMPANY *(AMENDED AS PER THE CLERK'S 6/20/96 ORDER)

OF AMERICA SALES PRACTICE LITIGATION

ALL AGENT ACTIONS

HERBERT SCHULTE, MDL TRANSFER; S.D. ILLINOIS; DNJ CIV. 95-4740; MICHAEL D. GORDON, MDL TRANSFER; W.D. KENTUCKY (PADUCAH); DNJ CIVIL ACTION 95-4738; RICK A. MARTIN, MDL TRANSFER, W.D. KENTUCKY (PADUCAH), DNJ CIVIL ACTION 95-5013; KENNETH R. YOUNG, MDL TRANSFER, M.D. FLORIDA (TAMPA), DNJ CIVIL ACTION 95-5010; MICHAEL WEAVER, MDL TRANSFER, S.D. ILLINOIS (E. ST. LOUIS), DNJ CIVIL ACTION 95-5011

v.

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, APPELLANT



ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY

(D.C. Civil No. 95-cv-04704)

Before 1993, Section(s) 1 made the following claims eligible for arbitration: "any dispute, claim or controversy arising out of or in connection with the business of any member of the Association, with the exception of disputes involving the insurance business of any member which is also an insurance company...." 58 Fed. Reg. 39,070 (1993). At this point, it was clear that the insurance business exception only applied to disputes in connection with a member's business. The stated purpose of the exception was to:

SEITZ, Circuit Judge.

Filed January 7, 1998

Argued September 8, 1997

Opinion Filed: January 7, 1998

OPINION OF THE COURT

This appeal presents a novel question in this court of whether the "insurance business" exception found in the National Association of Securities Dealers ("NASD") Code of Arbitration Procedure precludes arbitration of employment disputes that implicate insurance issues. *fn1

I. Background

A. Facts and Procedural History

Certain questionable sales practices of the Prudential Insurance Company of America ("Prudential") gave rise to several lawsuits against it by former employees. *fn2 Plaintiffs are former Prudential sales agents who brought suit alleging that Prudential took adverse employment action against them in alleged retaliation for their refusal to participate in the company's insurance sales fraud. In response to the plaintiffs' action, Prudential moved, under section 3 of the Federal Arbitration Act, to compel arbitration of plaintiffs' claims. Prudential relied upon the fact that each plaintiff had signed a Uniform Application for Securities Industry Registration or Transfer ("Form U-4") which incorporated by reference the arbitration provisions of the NASD Code. The plaintiffs opposed the motion, arguing that Prudential could not invoke Form U-4 because it is not a party to that agreement, and, in the alternative, that the Code contains an exception for disputes involving the "insurance business" which would preclude arbitration in this case.

Upon considering the contested motion, the district court held that Prudential could seek to enforce the arbitration agreement even though it is not a signatory to Form U-4. Having ruled that Form U-4 applied to the appropriate parties, the court addressed whether the arbitration agreement covered the legal claims pressed by the plaintiffs. Interpreting the scope of the agreement embodied in Form U-4, the court found that the relevant language applied to the plaintiffs' causes of action.

Finally, the court examined the insurance business exception, which would potentially exempt arbitration in this case. While recognizing a liberal federal policy in favor of arbitration, the court nevertheless held that the exception applied on the ground that plaintiffs' claims are "intricately related" to Prudential's insurance business. It added that the looming class action suits against Prudential may raise the same issues as those subject to arbitration. This consideration, in the district court's view, compelled a finding favoring the application of the exception. Accordingly, the court denied Prudential's motion under the Arbitration Act. This appeal followed.

B. The Arbitration Provisions

The resolution of the issues in this appeal first calls for a parsing of the relevant documentation and, in particular, the language of Form U-4 itself. *fn3 This form provides that the applicant agreed 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 ...[NASD] as may be amended from time to time.

Form U-4 further states that each applicant will:

abide by, comply with, and adhere to all the provisions, conditions and covenants of the statutes, constitutions, certificates of incorporation, by-laws and rules and regulations of the ... [NASD] as they are and may be adopted, changed or amended from time to time....

Incorporated by reference through these two provisions is the NASD Code of Arbitration. Part I Section One of the Code articulates which matters are eligible for arbitration:

any dispute, claim, or controversy arising out of or in connection with the business of any member of the [NASD], or arising out of the employment or termination of employment of associated persons(s) with any member, with the exception of disputes involving the insurance business of any member which is also an insurance company:

(1) between or among members;

(2) between or among members and associated persons;

(3) between or among members or associated persons and public customers, or others; and

(4) between or among members, registered clearing agencies with which the [NASD] has entered into an agreement to utilize the [NASD] arbitration facilities and procedures, and participants, pledges, or other persons using the facilities of a registered clearing agency, as these terms are defined under the rules of such a registered clearing agency.

Part II Section 8 of the Code mandates arbitration for "[a]ny dispute, claim, or controversy eligible for submission under Part I of this Code between or among members and/or associated persons...."

All the plaintiffs signed Form U-4 as a condition precedent to their employment at Prudential. *fn4 Prudential, however, is not a signatory to the agreement. *fn5 Rather, the "firm" identified in Form U-4, is Pruco ...


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