This motion is part of a large group of cases against defendant Prudential Insurance Company of America ("Prudential") which have been transferred to this Court for coordinated pretrial proceedings under 28 U.S.C. SEC. 1407 pursuant to the order of the Judicial Panel on Multidistrict Litigation. The majority of these cases involve allegations by current and former Prudential policyholders that the company engaged in various illegal sales practices. The cases at issue on this motion are part of a smaller subset of cases in which certain former Prudential sales agents allege that prudential took adverse employment actions against them because they refused to participate in these illegal practices. Plaintiffs Michael R. Weaver ("Weaver"). Herbert Schulte ("Schulte") Rick A. Martin ("Martin") Kenneth R. Young ("Young") and Michael D. Gordon ("Gordon") (collectively for purposes of this motion the "agents") assert such claims.
At some point in the course of each of the agents' employment at Prudential they became eligible to sell insurance products which at least in Prudential's view constituted securities. Accordingly each signed a Uniform Application for Securities Industry Registration or Transfer ("U-4"). *fn1 Young signed two U-4s the first in 1988 and the second in 1993 when after his 1992 retirement Prudential allegedly retained his services as an "agent emeritus." (Young Opp. Br. p. 3) Although the agents' U-4s differed in minor respects for purposes of this motion they were essentially the same. For example Young's 1988 U-4 read in relevant part:
2. I hereby apply for registration with the organizations and states indicated in Item 10 as may be amended from time to time [i.e. the NASD] *fn2 and in consideration of such organizations and states receiving and considering my application I submit myself to the jurisdiction of such states and organizations and hereby certify that I agree to 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 states and organizations as they are and may be adopted changed or amended from time to time and I agree to comply with be subject to and abide by all such requirements and all rulings orders directives and decisions of and penalties prohibitions and limitations imposed by such states and organizations subject to right of appeal as provided by law; . . .
5. 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 with which I register as indicated in Item 10 as may be amended from time to time.
Insofar as is relevant to this motion Weaver's U-4 and Young's 1993 U-4 contained the same provisions. Martin and Schulte on the other hand signed an earlier version of the U-4 which differed slightly in two ways: (1) in paragraph 2 in addition to certifying that they agreed to abide by comply with and adhere to the provisions conditions and covenants of the statutes constitutions certificates of incorporation by-laws and rules and regulations of the NASD Martin and Schulte attested: "I . . . have read and understand" these provisions and rules; and (2) in paragraph 5 their U-4s do not contain the language "as may be amended from time to time" at the end of the sentence. *fn3
Interpretation of the NASD arbitration provisions -- and a determination of which provisions were in effect at various times -- are central issues on this motion. Effective October 1 1993 the NASD amended its Code in respects that are critical to this motion (the "1993 amendment"). Although each agent was terminated before the 1993 amendment took effect they all filed their actions after that date. *fn4
Two provisions of the NASD Code are chiefly relevant. Under its post-amendment formulation Part I Section 1 ("section 1") sets forth generally the matters 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 person(s) with any member *fn5 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; *fn6 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 ("Section 8") defines which disputes must be arbitrated:
(a) Any dispute claim or controversy eligible for submission under Part I of this Code between or among members and/or associated persons and/or certain others arising in connection with the business of such member(s) or in connection with the activities of such associated person(s) or arising out of the employment or termination of employment of such associated person(s) with such member *fn7 shall be arbitrated under this Code at the instance of:
(1) a member against another member;
(2) a member against a person associated with a member or a person associated with a member against a member; and
(3) a person associated with a member against a person associated with a member.
Even under its pre-amendment version section 8 contemplated arbitration between members and persons associated with a member.
In addition plaintiffs Gordon Weaver and Schulte were during their employment with Prudential members of the United Food & Commercial Workers International Union (the "union"). *fn8 Accordingly their employment was governed by the terms of a collective bargaining agreement between Prudential and the union (the "CBA"). *fn9 Pursuant to Labor Management Relations Act Sec. 301 certain state law causes of action which they might otherwise be entitled to bring against Prudential may be preempted by the CBA.
PRUDENTIAL'S A MOTION TO COMPEL ARBITRATION
The Federal Arbitration Act ("FAA") 9 U.S.C. SEC.(s) 1-9 (1988) governs enforcement of arbitration agreements contained in U-4s. See Gilmer v. Interstate/Johnson Lane Corp. 500 U.S. 20 111 S. Ct.1647 114 L. Ed. 2d 26 (1991). Under 9 U.S.C. SEC 2 a written agreement to arbitrate in a contract evidencing a transaction involving commerce is "valid irrevocable and enforceable save upon grounds as exist at law or in equity for the revocation of any contract." Congress enacted the FAA in 1925 "to 'reverse centuries of judicial hostility to arbitration agreements.'" Shearson/American Express Inc. v. McMahon 482 U.S. 220 225 107 S. Ct.2332 2337 96 L. Ed. 2d 185 (1987) quoting Scherk v. Alberto-Culver Co. 417 U.S. 506 510 94 S. Ct.2449 2453 41 L. Ed. 2d 270 (1974). The statute accordingly "establishes a federal policy favoring arbitration " requiring that Courts "rigorously enforce agreements to arbitrate." Id. (citations omitted). Court have taken this directive seriously holding that the intent of the FAA was to leave "no place for the exercise of discretion by the district court . . . ." where an agreement can be construed to require arbitration. Dean Witter Reynolds Inc. v. Byrd 470 U.S. 213 218 105 S. Ct.1238 1241 84 L. Ed. 2d 158 (1985).
On the other hand "arbitration 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 of America 475 U.S. 643 648 106 S. Ct.1415 1418 89 L. Ed. 2d 648 (1986) quoting United Steelworkers of America v. Warrior & Gulf Nav. Co. 363 U.S. 574 582 80 S. Ct.1347 1353 4 L. Ed. 2d 1409 (1960). In other words the FAA makes arbitration agreements "as enforceable as any contract not more so." Moore v. Interacciones Global Inc. 1995 WL 33650 *2 (S.D.N.Y.). See also Armijo v. Prudential Ins. Co. of America 72 F.3d 793 801 (10th Cir.1995) (Jenkins J. concurring) (citations omitted) (expressing concern that Courts have overcompensated for hostility of Courts to arbitration in decades past and commenting: "It seems to me that the rule that doubts about the scope of arbitrable issues should be resolved in favor of arbitration like other rules of construction should be applied only as a last resort after Court or trier of fact has considered extrinsic evidence of the parties' intent and found it inconclusive.").
To determine whether a party may compel arbitration a Court "must determine: (1) whether there is an agreement to arbitrate; (2) whether the claims fall within the scope of that agreement; and (3) whether there has been a waiver of the right to arbitrate." Wojcik 1995 WL 516591 at *2 citing Gilmer 500 U.S. at 24-34; Hall v. Metlife Resources/Div. of Metropolitan Life Ins. Co. 1995 WL 258061 *2 (S.D.N.Y.).
The agents first argue that they signed no valid agreement to arbitrate claims against Prudential. All four agents assert that Prudential is not a party to the U-4s they signed and Martin and Young argue that their U-4s did not bind them at the time of the events from which this litigation arises. Second the agents argue that the arbitration provisions do not apply to the claims at issue here because (a) the arbitration clauses did not apply to employment disputes before the 1993 amendment and cannot be retroactively applied; and (b) their claims are exempt from arbitration by virtue of the insurance business exception set forth in Section 1 of the NASD Code. Finally. Martin asserts that the U-4 he signed is unenforceable as a contract of adhesion. Court will address these arguments in turn *fn10
I. Applicability of the U-4s to the Parties
A. Prudential May Enforce the Arbitration Provisions Even Though it is Not Named as the "Firm" in the U-4s
The agents allege that Prudential is not a party to the U-4 arbitration provision and therefore cannot enforce it. That provision requires the agents "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]." The "firm" is identified in a separate section of each agent's U-4 as Pruco Securities Corp. ("Pruco") Prudential's wholly-owned subsidiary. The agents claim Prudential cannot compel enforcement of an arbitration provision contained in an agreement to which it was never a party.
This argument fails for several reasons. First Court notes that each agent agreed to arbitrate disputes not only with his firm but with "a customer or any other person " so long as the NASD rules require that dispute to be arbitrated. The agents have focused on the "my firm" language and failed to address the remainder of the provision. Clearly Prudential is an "other person" whose disputes with its agents are covered by the current NASD arbitration rules. Moreover each agent's U-4 contained a separate provision requesting names of broker-dealers other than Pruco with which he would maintain registration. With the exception of Young's 1993 U-4 each of the agents attested that they would maintain concurrent registration with Prudential.
Prudential Ins. Co. of America v. Shammas 865 F. Supp.429 (W.D. Mich. 1993) is exactly on point. There as here the plaintiff signed a U-4 naming Pruco as "my firm" but naming Prudential as a broker-dealer with which he would maintain concurrent registration. Id. at 430. Court noted that plaintiff's "act of registering with NASD was as part of his employment with Prudential" and held that "the context of his registration plus the language [providing for concurrent registration] make it clear that the representation concerning arbitration paragraph 5 [of the U-4] applied to . . . Prudential." Id. at 430. Within this circuit Foley v. Presbyterian Ministers' Fund 1992 WL 63269 *2 (E.D. Pa.) rejected the plaintiff's argument that his U-4 did not apply to his non-signatory employer because there was "no suggestion that plaintiff had any occasion to seek registration as a securities dealer except as an aspect of his employment with [defendant]." See also Pitter v. Prudential Life Ins. Co. of America 906 F. Supp.130 132 n.2 (E.D.N.Y. 1995) (without discussion requiring plaintiff to arbitrate with Prudential although Pruco was named "firm" on U-4).
Kresock v. Bankers Trust Co. 21 F.3d 176 178 (7th Cir.1994) is distinguishable. In that case the plaintiff worked for defendant Bankers Trust which was one of two subsidiaries of Bankers Trust New York Corporation. The other was BT Securities Corporation. BT Securities was a NASD member; Bankers Trust was not. In 1989 the plaintiff had plans to transfer from Bankers Trust to BT Securities; accordingly she signed a U-4 which identified BT Securities as her "firm." When Bankers Trust terminated her in 1991 she had never transferred to or performed any work for BT Securities. Court declined to enforce the U-4 arbitration provision against Bankers Trust because as a mere co-subsidiary sharing a corporate parent with BT Securities it was neither a NASD member a person associated with a NASD member a public customer or "other." Id. at 178. Here by contrast Prudential is a NASD member in its own right; its relationship to the "firm" named in the U-4s is that of parent-subsidiary; the agents' employment with Prudential was the sole reason for their signing the U-4s; and the agents specifically named Prudential as a broker-dealer with whom they would maintain concurrent registration.
B. Martin's Employment Agreement did not Supersede his Agreement to Arbitrate
Martin alleges that in 1988 some five years after he signed his U-4 in 1983 Prudential promoted him to District Agencies Manager and entered a standard employment agreement with him which explicitly stated: "This Agreement supersedes any previous agreement the Manager may have had with the Company." (Martin Opp. Br. pp. 6-7 10-11) Martin contends that the employment agreement supersedes his U-4 and that since the employment agreement did not contain an arbitration clause Prudential may not compel arbitration of his claims. (Id. At pp. 7 11)
O'Donnell v. First Investors Corp. 872 F. Supp.1274 (S.D.N.Y. 1995) squarely rejected a very similar argument. In that case the plaintiff had upon acceptance of employment with the defendant signed both a standard employment agreement and a U-4. Three years later he received a promotion and in connection therewith signed a new employment agreement that explicitly superseded the old. When the defendant terminated him he argued that since he signed the U-4 as a condition to his initial employment agreement the superseding employment agreement canceled the U-4. Court disagreed holding that the U-4 "is not a contract with defendants but rather an application to qualify with various security exchanges. The U-4 is a separate contract and as long as this contract is effective the terms of the agreement must be followed regardless of the fate of a separate though related agreement." Id. at 1277.
Here too even though Martin's employment agreement states that it "supersedes any previous agreement the Manager may have had with the Company" (emphasis added) the U-4 is not an agreement with Prudential and therefore remained in effect following Martin's promotion.
C. Prudential May Enforce Young's U-4
Young argues that Prudential cannot enforce the U-4 against him because (1) he never became subject to it because he never actually engaged in the sale of securities; and (2) he was no longer subject to the first U-4 he signed once Prudential terminated him and notified the NASD of this fact and he never became subject to the second U-4 he signed because Prudential denies that it rehired him as an agent emeritus. (Young Opp. Br. pp. 6-7)
Court in Foley 1992 WL 63269 at *1 rejected Young's first argument when it held that the "undertakings contained in Form U-4 were contingent on executing the form not on becoming a registered dealer." See also Cherry v. Wertheim Schroder and Co. 868 F. Supp.830 835 (D.S.C. 1994) (signatory of U-4 obligated to arbitrate even though she failed to pass NASD examination); Johnson v. Piper Jaffray Inc. 530 N.W.2d 790 798 (Minn. 1995) (declining to look "beyond [plaintiff]'s job title or job description" of bond trader and determining that plaintiff was a "person associated with a member" even though she never actually traded securities).
The Ninth Circuit rejected Young's second argument in O'Neel v. National Ass'n of Securities Dealers Inc. 667 F.2d 804 (9th Cir.1982) in which the plaintiff argued that the agreement to arbitrate contained in his U-4 did not apply to a claim his former employer asserted against him nearly four years after he resigned from the NASD. Court stated:
It would seem strange indeed that with such a significant integrated method of dispute settlement one party could frustrate the purpose of the Exchange rules and the federal policy favoring arbitration by the mere expediency of resignation from the Exchange.
Id. at 806-07 quoting Muh v. Newburger Loeb & Co. 540 F.2d 970 973 (9th Cir.1976). Accord 'Strappes Group Inc. v. Siedle 1993 WL 443926 *5 (D. Mass.); see also Le Roux v. Shearson Lehman Hutton Inc. 160 A.D.2d 1091 553 N.Y.S.2d 572 (3d Dept. 1990) (U-4 required financial consultant to arbitrate claim against former employer where plaintiff remained a person "associated with a member" by virtue of his subsequent employment in securities industry).
II. Applicability of Arbitration Clauses to Agents' Claims
A. Coverage of Employment Disputes
As set forth above the 1993 amendment added language to sections 1 and 8 of the NASD which makes it clear that the arbitration provisions currently cover employment disputes. In the legislative history to the proposal for the 1993 amendment the NASD stated: "The NASD has taken the position that employment disputes are arbitrable under Section 8 but in order to clear up any ambiguity it is proposing the changes . . . which parallel the NYSE rule language." Fed. Reg. Vol. 58 No. 138 pp. 39070 39071 (July 21 1993). Prudential argues that this legislative history proves that the provisions always applied to employment disputes and that in any event the 1993 amendment applies to the agents' claims because they filed them after its effective date. The agents argue that the 1993 amendment indicates that the provisions did not apply to employment disputes previously and that the amendment cannot be applied retroactively.
The agents urge Court to adopt precedent from the Seventh Circuit. In Farrand v. Lutheran Brotherhood 993 F.2d 1253 1255 (7th Cir.1993) decided before the amendment took effect Court Easterbrook held that "the NASD's Code does not authorize and section 8 therefore does not require the arbitration of an employment dispute between a member of the NASD and one of the member's registered representatives." Section 1 at that time read as follows:
any dispute claim or controversy arising out of or in connection with the business of any member of the [NASD] 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 public customers or others; . . .
Court focused on the language in section 1 following the colon which defines the parties whose claims are subject to arbitration and determined that members' representatives' claims are not subject to arbitration. Court rejected the defendant's argument that the phrase "or others" in subpart (2) covered such claims finding that "such a reading . . . would make all of the words after the colon surplus." Id. at 1255-56. Court acknowledged that "the NASD's rules could be stretched to cover such disputes " Id. at 1255 and that the NASD had suggested in its proposed amendment that it "believed that its Code already covers employment disputes " id. at 1256 but concluded that "[a] change in the Code rather than a strained interpretation of the current language is the right way to proceed." Id. at 1257.
Kresock 21 F.3d at 178 which the Seventh Circuit decided after the 1993 amendment's effective date reaffirmed Farrand and went on to hold that the amendment did not apply retroactively. Id. at 179. In Kresock as here the plaintiff had signed a U-4 that bound her to amendments of the NASD rules. But unlike here the plaintiff in Kresock had filed her claims nearly a year before the effective date of the amendment. Court pointed out that the SEC in its August 31 1993 order approving the amendment provided for the effective date of October 1 1993 and found that this was a strong indication against retroactivity. Id.
Court rejected the defendant's argument that the plaintiff's agreement to be bound by amendments to the NASD Code mandated arbitration on the ground that "the incentive created by such a result would be this: after commencement of litigation an organization such as the NASD could simply amend its rules to force one or both parties to do something (like arbitrate) that one or both never agreed to do." Id. Thus the fact that the agents filed their cases after the effective date distinguishes this case from Kresock in a meaningful way; for a holding that U-4 signatories are bound to amendments taking effect before they file their cases would not create this opportunity for strategic rule changes.
A recent district court opinion within the Seventh Circuit examined Kresock and stated that it "appeared to be primarily concerned with the application of amendments to a situation in which a claim has already been filed." Wojcik 1995 WL 516591 at *4. Accordingly the Wojcik Court held the 1993 amendment applies to plaintiffs whose U-4s require them to comply with NASD rules and regulations "as amended" and who file their claims after the effective date. Id. at *5. *fn11
This reasoning is persuasive and harmonizes Kresock with the holdings of numerous other courts which have applied the 1993 amendment to cases filed before the amendment's effective date. In Pitter 906 F. Supp. at 134 (citations omitted) the Eastern District of New York held that the 1993 amendment applied to a case filed in April 1994 stating:
The 1993 amendments to the NASD Code deal after all only with the forum where employment claims will be heard. They do not alter the substantive rights conferred by Congress on employees. . . . In Landgraf v. USI Film Prods. U.S. 114 S. Ct. 1483 1502 (1994) the Supreme Court stated that 'changes in procedural rules may often be applied in suits arising before their enactment without raising concerns about retroactivity.' Thus it is entirely appropriate to hold [plaintiff] to compliance with non-substantive rules that took effect almost six months before he filed his lawsuit.
The Pitter Court distinguished Kresock on the ground that the plaintiff there had not filed his claims until after the effective date of the amendment. Id. At 134 n.5.
In Moore 1995 WL 33650 the Southern District of New York rejected the plaintiff's argument that the 1993 amendment so substantively changed the NASD Code that it could not be incorporated through the U-4's "as amended" clause. Court distinguished contractual agreements to incorporate such amendments from "the very different issue of statutory retroactivity." Id. at *5. See also Hall 1995 WL 258061 at *4 citing Scher v. Equitable Life Assur. Soc. of the United States 866 F. Supp.776 777 (S.D.N.Y. 1994) ("it is the NASD Code in existence at the time an action is commenced that governs"); but see F.N. Wolf & Co. v. Brothers 161 Misc. 2d 98 102 613 N.Y.S.2d 319 322 (Sup. Ct.1994) (citations omitted) (without stating whether action commenced before or after effective date of amendment holding that retroactivity "would reduce the arbitration agreement to a mere forum selection clause overlooking the fact that by agreeing to arbitrate parties forfeit important substantive rights to resort to a judicial forum to resolve their disputes and to appeal unfavorable results").
This Court finds the Farrand and Kresock holdings to be in-apposite to this case in which the agents all signed written agreements to abide by the rules and regulations of the NASD Code as amended and brought their claims after the effective date of the 1993 amendment. Given the agents' explicit agreement to arbitrate under the NASD Code "as amended " Court must look to the rules as they existed at the time the agents filed suit and not before. On this ground alone it is clear that the agents may not avoid arbitration on the ground that their disputes are employment-related.
Moreover Farrand and Kresock have been widely criticized. Most notably Court in Kidd v. Equitable Life Assur. Soc. of the United States 32 F.3d 516 519 (11th Cir.1994) as well as courts in numerous cases that have followed Kidd held that the NASD Code always required arbitration of employment disputes and that the 1993 amendment was a mere clarification of that rule. The Eleventh Circuit pointed out that the Farrand holding creates a tension between sections 1 and 8 of the pre-amendment Code: whereas section 8 required the arbitration of disputes between members and "associated persons" such as employees section 1 did not specifically authorize arbitration of disputes between members and associated persons. Id. *fn12 Accord F.N. Wolf & Co. v. Bowles 160 Misc. 2d 752 757 610 N.Y.S.2d 757 759 (Sup. Ct.1994) ("Farrand's interpretation based on the principle that paragraph 3 of section 1 would be rendered surplusage if arbitration of the subject dispute were required was at the cost of making surplusage of the portion of section 8 which in paragraph 2 mandates arbitration when demanded by an associated person against a member").
The Kidd Court resolved this apparent conflict by reading the language following the colon in section 1 to modify only the insurance business exception clause that immediately preceded it rather than the entire paragraph. Under this reading parties were required to arbitrate "any dispute connected to an NASD member's business except for disputes involving the insurance business of an NASD member that are (1) between NASD members or (2) between NASD members and public customers or others." Kidd 32 F.3d at 519. Accord Moore 1995 WL 33650 at *4.
While this Court agrees that the Farrand reading creates an inconsistency between sections 1 and 8 of the NASD Code it also hesitates to adopt the Kidd reading of section 1. Like Court in Pitter 906 F. Supp. at 135 this Court "has difficulty understanding what interest the NASD would have in qualifying the insurance business exception clause with the enumerated categories that follow." Court in 'Strappes 1993 WL 443926 at *4 and Johnson 530 N.W.2d at 797 resolved the conflict by reading the phrase "or others" in section 1 to incorporate all the categories specifically identified in section 8 including "persons associated with members." This reading solves the problem with the "or others" language which the Farrand Court highlighted without requiring the somewhat strained interpretation of section 1 that Kidd advanced. While Court need not specifically adopt any interpretation of sections 1 and 8 in light of its holding that the 1993 amendment applies to the agents' claims it will note that the 'Strapps/Johnson reading appears to be the most logical.
Yet another approach courts have taken to this semantic conundrum is to label it an ambiguity and apply the presumption in favor of arbitration to resolve the issue. As noted in Kidd 32 F.3d at 519 n.6 the Farrand Court "acknowledged that it was not unreasonable to interpret the pre-amendment Code to require arbitration of employment disputes." Thus the Kidd Court found Farrand's adoption of an alternative construction contravened well-established federal precedent that doubts regarding the scope of arbitrable issues are to be resolved in favor of arbitration. Id. citing Moses H. Cone Memorial Hosp. v. Mercury Const. Corp. 460 U.S. 1 103 S. Ct.927 74 L. Ed. 2d 765 (1983) Wick v. Atlantic Marine Inc. 605 F.2d 166 (5th Cir.1979). See also Armijo 72 F.3d at 798 ("to acknowledge the ambiguity is to resolve the issue because all ambiguities must be resolved in favor of arbitrability"); O'Donnell 872 F. Supp. at 1278 (rejecting Farrand and finding that Kidd "makes more sense given the liberal federal policy toward arbitration"); Pitter 906 F. Supp. At 136; Bowles 160 Misc. 2d at 757 610 N.Y.S.2d at 759-60.
This Court is not convinced that the presumption in favor of arbitrability would be powerful enough on its own to compel arbitration where the language of the provisions is so unclear. However the Kidd opinion provided additional support for its holding that the pre-amendment Code contemplated arbitration of employment disputes 32 F.3d at 520 to wit (1) dicta from a District of Columbia Circuit case stating that "NASD rules mandate arbitration of employer-employee disputes and did so to the same extent as they do now before the development of [the U-4]." Association of Inv. Brokers v. Securities and Exchange Com'n 219 U.S. App. D.C.259 676 F.2d 857 861 (D.C. Cir.982) (Ginsburg J.); (2) a 1987 NASD statement that employment disputes between members and their registered agents were arbitrable 52 Fed. Reg. 9232 (1987); and (3) the NASD's statement that the purpose of its amendment was to clarify that employment disputes are arbitrable 58 Fed. Reg. 45 932 (1993). As pointed out in Pitter 906 F. Supp. at 137 (citing cases) agencies and exchanges have substantial authority to interpret their own rules and regulations. See also Bowles 160 Misc. 2d at 758 610 N.Y.S.2d at 760 (citations omitted) (applying principle that courts should defer to administrative agency's interpretation of its own regulations unless "irrational or unreasonable" to NASD).
This position finds further support in numerous opinions that predate the 1993 amendment in which courts applied the NASD arbitration clause to employment disputes of various kinds. See e.g. Association of Inv. Brokers 676 F.2d at 861; Bender v. Smith Barney Harris Upham & Co. 789 F. Supp.155 (D.N.J. 1992); Spellman v. Securities Annuities and Ins. Servs. Inc. 8 Cal. App. 4th 452 464 10 Cal. Rptr.2d 427 435 (Cal. App. 2 Dist.1992).
In sum Court finds ample indications that the pre-amendment NASD Code applied to employment disputes such as the agents' claims; however Court will simply hold that since all the agents filed their claims after the effective date of the amendment they are bound thereby and may not avoid the arbitration provisions simply because their disputes are employment-related. This does not end our analysis however. The fact that the agents have asserted claims that are arbitrable under the terms of their U-4 does not mean that they must arbitrate them against Prudential. As an insurance company Prudential is potentially subject to the "business of insurance" exception set forth in the NASD Code.
B. The Insurance Business Exception
Section 1 of the NASD Code excludes from its list of matters eligible for arbitration all "disputes involving the insurance business of any member which is also an insurance company." Although none of the parties were able to enlighten Court as to the drafting history or reasoning behind this exception presumably it has something to do with the lack of insurance industry expertise on the part of securities industry arbitrators. Certainly it would stand to reason that the drafters of the NASD might have recognized that a category of its signatories belong to an industry which although it sells some products with a securities component operates otherwise in a separate sphere from the rest of the securities industry. Especially given the complex regulatory framework which governs the insurance industry the exception makes a great deal of sense.
Numerous cases have found the insurance business exception inapplicable to personnel and various other employment related disputes. See e.g. Shammas 865 F. Supp. at 432 (plaintiff claimed national origin race religion and sex discrimination plus retaliation for complaining about alleged discrimination); Foley 1992 WL 63269 at *2 (plaintiff alleged his termination was unlawful under ADEA ERISA and unspecified state law); Wojcik 1995 WL 516591 (plaintiff claimed defendants took various unlawful actions against him in retaliation for refusal to accept job change). Requiring arbitration of garden-variety employment disputes involving U-4 signatories makes sense because as Prudential's Counsel pointed out at oral argument securities arbitrators have a wealth of experience resolving such disputes; accordingly these courts properly declined to apply the exception.
From this authority however Prudential asks Court to derive a rule that the insurance business exception can never apply where the plaintiff alleges an employment-related injury. A contrary rule asserts Prudential would allow any employee of an insurance company to avoid arbitration "simply by alleging the dispute involves consideration of the company's insurance business." (Prudential Reply Br. p. 16) Prudential's argument focuses too narrowly upon the injuries the agents allege disregarding the scope and nature of the issues the trier of fact will have to analyze in determining whether or not to grant relief for those injuries.
The agents concede that garden-variety employment disputes do not implicate the insurance business exception. They claim however that the instant case is distinguishable from ordinary employment disputes on the ground that their claims are more intricately connected with the allegedly fraudulent and illegal character of Prudential's insurance business practices than are claims in ordinary employment disputes. This Court agrees -- and would add that this case is also distinguishable from garden variety employment disputes in another important respect. The agents' claims are intertwined with dozens of putative class actions potentially involving hundreds of thousands of policyholders who have made allegations against Prudential that involve the same factual issues that the agents' claims raise. The resulting potential for inconsistent results and inefficiencies provided the impetus for the consolidation of all of these actions in this Court and the same circumstances -- while they obviously could not justify a reformation of a binding contract to arbitration claims -- have also weighed into Court's determination that these claims involve Prudential's insurance business and therefore belong in this Court and not in a separate arbitral forum. Court does not share Prudential's concern that future disgruntled insurance employees will avoid arbitration simply by including allegations involving their employers' insurance business; courts are perfectly capable of looking beyond the face of a complaint to determine whether or not the dispute really involves a defendant's insurance business.
Court is aware that the few courts which have addressed the application of the insurance business exception to claims arising out of employment relationships appear to have rejected the agents' position; however Court finds each of these cases distinguishable under the unique circumstances of the instant case. To the extent they are not Court declines to follow them here. In Young v. Prudential Ins. Docket No. SOM-L-907-95 at p. 4 (slip op.) (N.J. Super. Law Div. Oct. 19 1995) Court refused to apply the exception to a claim for discharge in retaliation for whistle blowing finding that "the exception relating to insurance and the business of insurance . . . must of necessity relate to disputes about the practices of an insurance company raised between insurance companies themselves and not to the alleged retaliation visited on an employee who calls attention to his insurance company employer's alleged unlawful insurance practice."
The opinion provides few specifics about the retaliatory discharge claim --only that it involved the plaintiff's "whistle blowing about unlawful conduct of other Prudential employees." Id. at 2. Thus it is not clear that the claim would have required Court to engage in the comprehensive evaluation of Prudential's insurance practices that the agents' claims might require. Moreover this Court finds no support in the text or history of the NASD Code for the Young Court's finding that the exception applies only to disputes between insurance companies themselves. Accordingly Court will decline to follow Young in this matter.
In Trumbetta v. Metropolitan Life Ins. Co. 1994 WL 481152 *3 n.3 (E.D. Pa.) Court refused to apply the exception where although the plaintiff made some general allegations in the complaint that [defendant] is engaging in unlawful insurance practices the basis of his claims stem from actions taken by the defendants against the plaintiff since he did not participate in their alleged scheme. Thus whether or not the defendants actually engaged in any unlawful insurance practice is irrelevant to this dispute.
The Trumbetta opinion does not set forth the factual details of the plaintiff's claims in that case; however the case appears to be distinguishable from the agents' claims here. In Trumbetta the plaintiff had made "some general allegations in the complaint" that the defendant insurance company had engaged in "certain unlawful insurance practices" and that the defendants had taken adverse actions against him "since he did not participate in their alleged scheme." Id. at *3. However the "thrust" of the Trumbetta complaint was "that the defendants harassed and persecuted [plaintiff] such that he lost business and thus ultimately was constructively discharged." Id.
Accordingly the Trumbetta Court found that "whether or not the defendants actually engaged in any unlawful insurance practices is irrelevant to this dispute." Id. Although it is not entirely clear from the opinion it would seem that the plaintiff in Trumbetta could prove that illegal acts of harassment and persecution led to his constructive discharge without proving that defendants actually engaged in unlawful insurance practices; thus the Trumbetta case implicated the business of insurance only indirectly having to do only with the defendants' motivation for what would be if proven independently unlawful acts.
Here by contrast Prudential discharged the agents in what would facially appear to be an entirely proper manner. Prudential's action becomes unlawful only if the agents can prove that it was taken in retaliation for the agents' refusal to cooperate with unlawful insurance practices and only if the practices the agents refused to participate in were actually fraudulent or unlawful does Prudential's allegedly retaliatory motive become improper or unlawful.
Armijo 72 F.3d 793 is also distinguishable from this case. In Armijo the plaintiffs framed their claim as an ordinary Title VII claim for discrimination based upon national origin. Id. at 800 (emphasis added) ("the dispute as framed by the Plaintiffs is predicated on the civil-rights laws not the insurance laws and they are predicated on [defendant]'s role as an employer rather than as an insurer"). The only basis for applicability of the insurance business exception was the defendant's defense of the adverse employment actions it had taken against plaintiffs on the ground that plaintiffs had violated the insurance laws. Here by contrast plaintiffs' allegations of insurance business misconduct form the very center of their claims. Indeed without the agents' allegations that Prudential engaged in improper insurance business practices there would be no lawsuit. Plainly such claims "involve the insurance business of [a] member which is also an insurance company " and the NASD will not require a securities industry arbitrator to resolve it.
III. Enforceability of Martin's U-4
Martin argues that "the alleged arbitration agreement is one of adhesion was entered into fraudulently and does not bind Martin in any manner." (Martin Br. p. 3) He asserts that his agreement to submit to the jurisdiction of the organizations for which he applied for registration was "buried" at the end of one of many purported "employment forms" which Prudential presented for his immediate signature as a condition of employment. Martin acknowledges his express agreement appearing in "fine print" (Martin Br. p. 6) at paragraph 5 of the U-4 "to arbitrate any dispute . . . that is required to be arbitrated" under NASD rules. However he claims that neither of these provisions should bind him to arbitrate this dispute because contrary to Prudential's own representation at the end of the U-4 that "the applicant will be familiar with the . . . rules and by-laws of the . . . self-regulatory organization with which this application is being filed and the rules governing registered persons " Martin was never provided with copies of any of the rules or regulations with which he purportedly agreed to comply. (Martin Br. p. 5)
A somewhat similar argument has prevailed in the Ninth Circuit. In Prudential Ins. Co. of America v. Lai 42 F.3d 1299 1301 (9th Cir.1994) cert. denied 133 L. Ed. 2d 24 __U.S. __ 116 S. Ct.61 (1995) as here the plaintiffs alleged that when they signed the U-4 form they were told only that they were applying to take a test which was required for their employment by Prudential and that they were simply directed to sign in the relevant place without being given an opportunity to read the forms. Arbitration was never mentioned and plaintiffs were never given a copy of the NASD Manual.
Court held that under these circumstances the plaintiffs had not knowingly agreed to waive their rights to sue in federal court under Title VII; it based its holding however on specific language from the federal statute requiring a knowing agreement to waive such rights before a plaintiff can be compelled to arbitrate. Id. at 1304-05. The agents have pointed to no such statutory requirement of a knowing waiver of their rights; accordingly Lai is distinguishable from this case.
Moreover Lai has been rather extensively criticized. See Beauchamp v. Great West Life Assur. Co. F. Supp.1996 WL 96686 *4 (E.D. Mich.) (holding that Lai misreads Title VII and "flies in the face of" Gilmer and basic contract law); Maye v. Smith Barney Inc. 897 F. Supp.100 107 (S.D.N.Y. 1995) (citing cases); Degaetano v. Smith Barney Inc. 1996 U.S. Dist.1140 1996 WL 44226 *7 (S.D.N.Y.) (citing cases). And numerous other courts have rejected similar arguments. In Bender 789 F. Supp. at 159 Court found that the plaintiff failed to allege that defendant Smith Barney made a false or misleading statement "either as to the Form U-4 itself or as to any inducement to sign the form . . . [and] failed to present any legal support establishing that [her employer] had a duty to disclose or to explain the existence or scope of the Form U-4 arbitration clause." The Bender Court found that since brokers have no legal duty to disclose or explain arbitration clauses to their customers their duty to employees such as the plaintiff is "even less." Id. Finally the Bender Court held 789 F. Supp. at 159
Even if Smith Barney had explained the scope of the arbitration clause to plaintiff the end result would have been the same; the execution of a Form U-4 is not unique to Smith Barney employees and it is not optional. It is an SEC industry-wide requirement a prerequisite to registration with any securities firm. Thus plaintiff could not have been fraudulently induced into signing this document or could not have detrimentally relied on any affirmative representations rendered by Smith Barney. . . . Smith Barney is bound by the terms of the Form U-4 to the same extent as plaintiff is bound.
See also Pitter 906 F. Supp. at 140 (rejecting Lai and noting: "the fact that a U-4 form does not specifically identify employment claims -- or any other types of claims -- as among those to be arbitrated does not mean that a registrant has failed knowingly to enter into an arbitration agreement. Indeed the lack of specificity only highlights the breadth of the agreement."); Cherry 868 F. Supp. at 836 (absent "any allegation of fraud coercion or unfairness" Court rejects plaintiff's argument that unequal bargaining power voided the agreement); Beauchamp 1996 WL 96686 at *6-*7.
This Court is sympathetic to the views of those who believe that the arbitration provisions to which employees in the securities industry are required to submit as a condition of their employment are unfair. However basic contract law and long standing judicial precedent clearly preclude a holding that Martin's U-4 is a contract of adhesion.
Court is intrigued however by Martin's argument that Prudential's failure to provide him with copies of the rules and regulations with which the U-4 obligated him to comply despite its explicit written attestation that it had done so precludes the company from demanding arbitration. This is a question which Court do not appear to have addressed yet. The parties have not fully briefed the issue and in light of Court's holding on the insurance business exception it is unnecessary for this Court to explore it further; however Court highlights this as a potential ground for exploration.
PRUDENTIAL'S MOTION TO DISMISS ON SECTION 301 PREEMPTION GROUNDS
As set forth above Gordon Weaver and Schulte were union members during their employment with Prudential and accordingly governed by the terms of the CBA. Under Labor Management Relations Act ("LMRA") SEC. 301 Suits for violation of contracts between an employer and a labor organization representing employees in an industry affecting commerce as defined in this Act or between any labor organizations may be brought in any district court of the United States having jurisdiction of the parties without respect to the amount in controversy or without regard to the citizenship of the parties.29 U.S.C. Sec. 185(a). While the statute on its face simply provides for federal jurisdiction over controversies involving collective bargaining agreements the preemptive force of section 301 has long been acknowledged. See Lingle v. Norge Div. of Magic Chef Inc. 486 U.S. 399 403-06 108 S. Ct.1877 1880-82 100 L. Ed. 2d 410 (1988); Berda v. CBS Inc. 881 F.2d 20 22 (3d Cir.1989) cert. denied CBS Inc. v. Berda 493 U.S. 1062 110 S. Ct.879 107 L. Ed. 2d 962 (1990). Essentially the preemption doctrine that has developed provides that:
if the resolution of a state-law claim depends upon the meaning of a collective-bargaining agreement the application of state law (which might lead to inconsistent results since there could be as many state-law principles as there are states) is preempted and federal labor-law principles -- necessarily uniform throughout the Nation -- must be employed to resolve the dispute.
Lingle 486 U.S. at 405-06 108 S. Ct. at 1881. The "limited purpose" of the doctrine is to ensure "that a uniform law is applied in interpreting collective bargaining agreements " Berda v. CBS Inc. 881 F.2d 20 27 (3d Cir.1989) and to enforce arbitration provisions in such agreements. Livadas v. Bradshaw 129 L. Ed. 2d 93 __ U.S. __ 114 S. Ct.2068 2077 (1994).
Thus the proper approach to a state law preemption question is to analyze each element of the state claim at issue and then to determine whether its resolution will require the Court to construe or interpret any terms or provisions of the applicable labor agreement. See Lingle 486 U.S. at 407 108 S. Ct. at 1992. *fn13 The fact that a labor agreement provides a remedy that the plaintiff could pursue as an alternative to state law claims does not mandate preemption. See Trans Penn Wax Corp. v. McCandless 50 F.3d 217 229 (3d Cir.1995) ("plaintiff may bring a state law tort action against an employer even where he could have brought a similar claim based on a provision in his collective bargaining agreement so long as the state claim does not require interpretation of the collective bargaining agreement"). At the same time however the fact that a particular provision of the [CBA] may not explicitly address the conduct underlying [the] complaint does not mean that resolution . . . does not require interpretation of the agreement. . . . The governmental nature of the collective-bargaining process demands a common law of the shop which implements and furnishes the context of the agreement although not expressed in it.
Douglas v. American Information Technologies Corp. 877 F.2d 565 572 (7th Cir.1989).
That resolution of a state law claim might require consultation of a collective bargaining agreement does not mandate preemption; a claim is preempted only if its resolution requires interpretation or construction of a collective bargaining agreement. See Hawaiian Airlines Inc. v. Norris 129 L. Ed. 2d 203 __ U.S. __ 114 S. Ct.2239 2248 n.8 (1994) (citations omitted); Livadas v. Bradshaw 129 L. Ed. 2d 93 __ U.S.__ 114 S. Ct.2068 2078 (1994) (citations omitted) ("when the meaning of contract terms is not the subject of dispute the bare fact that a collective-bargaining agreement will be consulted in the course of state-law litigation plainly does not require the claim to be extinguished"); Thomas v. LTV Corp. 39 F.3d 611 620 (5th Cir.1994); Pelech v. Klaff-Joss LP 828 F. Supp.525 531 (N.D. Ill. 1993) (citations omitted) (section 301 did not preempt claim where complaint frequently referred to but did not require interpretation of collective bargaining agreement terms).
The circuit courts have not yet reached a consensus on whether reliance upon terms of a collective bargaining agreement as a defense to plaintiff's claims creates grounds for preemption. See Livadas __ U.S. __ 114 S. Ct. at 2078 n.18 (noting disagreement among courts); Schacht v. Caterpillar Inc. 503 U.S. 926 112 S. Ct.1306 1306-07 117 L. Ed. 2d 527 (1992) (White J. dissenting) (same). Although a majority of federal circuit courts who have addressed the issue have held that a court should consider potential defenses in the section 301 preemption analysis this Court finds that the question remains unresolved in the Third Circuit.
In Capraro v. United Parcel Service Co. 993 F.2d 328 332 (3d Cir.1993) Court held that where either the plaintiff's claim or the defendant's defense relies on interpretation of a collective bargaining agreement the Railway Labor Act ("RLA") preempts the claim. As the preemption standard under the RLA is "virtually identical" to that under the LMRA Hawaiian Airlines U.S. at __ 114 S. Ct. at 2247 Capraro provides a strong indication that the Third Circuit would consider issues raised in defense of state claims to be relevant to the preemption analysis.
However in an earlier case arising directly under the LMRA the Third Circuit arrived at a different conclusion. Berda v. CBS Inc. 881 F.2d 20 (3d Cir.1989). Relying on Caterpillar Inc. v. Williams 482 U.S. 386 398-99 107 S. Ct.2425 2433 96 L. Ed. 2d 318 (1987) the Berda Court held that "the fact that as part of a defense to a state law contract claim an employer might raise 'a federal question even a Sec. 301 question ' does not mean that the claim is preempted. The preemption of state law engendered by section 301 is only occasioned when the claim raised 'on the face of the complaint' substantially depends on interpretation of a collective bargaining agreement for its resolution." Berda 881 F.2d at 23-24 quoting Caterpillar 482 U.S. at 398-99 107 S. Ct. at 2433.
Berda should be viewed through the prism of the Supreme Court authority upon which it relies. Caterpillar was not a true section 301 preemption case; rather the issue presented in that case was whether the doctrine of complete preemption applied to allow the defendants in the case to remove to federal court claims brought exclusively under state law. *fn14 Indeed the Caterpillar Court specifically noted: "We intimate no view on the merits of . . . any of the [section 301] pre-emption arguments discussed above." Caterpillar 482 U.S. at 398 n.13 107 S. Ct. at 2433. It also stated: "It is true that when a defense to a state claim is based on the terms of a collective-bargaining agreement the state court will have to interpret that agreement to decide whether the state claim survives." Id. See also Smith v. Colgate-Palmolive Co. 943 F.2d 764 770 (7th Cir.1991) (interpreting Caterpillar to hold that claims might ultimately be preempted based on issues raised by defense). In light of this dicta in the Supreme Court case upon which Berda relies as well as the Third Circuit's subsequent opinion in Capraro this Court finds that Third Circuit precedent does not preclude an examination of potential defenses in the determination of whether section 301 preemption applies.
The Seventh Eighth and Ninth Circuits have clearly stated that defenses are relevant in the preemption analysis. *fn15 As noted above the Seventh Circuit cited Caterpillar to support its determination that it was "free to resolve this [preemption] question by looking beyond the plaintiffs' complaint to the defenses [defendant] asserts." Smith 943 F.2d at 770. See also Loewen Group Int'l Inc. v. Haberichter 65 F.3d 1417 1423 (7th Cir.1995).
Both the Ninth Circuit and the Eighth Circuit have cited Lingle 486 U.S. at 407 108 S. Ct. at 1882 in determining that potential defenses are relevant to the preemption analysis. Jimeno v. Mobil Oil Corp. 66 F.3d 1514 1524 (9th Cir.1995); Hanks v. General Motors Corp. 859 F.2d 67 70 (8th Cir.1988). Each of these cases refers to the same passage from the Lingle opinion where in determining that the retaliatory discharge claims at issue did not require interpretation of the collective bargaining agreement the Lingle Court first noted that none of the elements of the tort required such an interpretation and then stated:
To defend against a retaliatory discharge claim an employer must show that it had a non-retaliatory reason for the discharge; this purely factual inquiry likewise does not turn on the meaning of any provision of a collective-bargaining agreement. Thus the state-law remedy in this case is 'independent' of the collective-bargaining agreement . . . : resolution of the state-law claim does not require construing the collective-bargaining agreement.
This clear indication that potential defenses are relevant to a section 301 preemption analysis coming one year after the Caterpillar decision provides a further indication that the Supreme Court did not intend that its Caterpillar holding should apply beyond the context of the complete preemption doctrine.
These decisions comport with the policies and purposes of section 301 preemption. As set forth above supra p. 34 the reason courts have ascribed such broad preemptive effect to section 301 is to enforce properly negotiated arbitration provisions and to ensure uniformity of interpretation regarding collective bargaining agreements. A court can frustrate this policy just as effectively by deciding an issue that arises in a defense as it can by deciding that same issue when it arises as an element of the plaintiff's proof. Accordingly this Court will consider not only the issues raised by the agents' claims but also the issues raised by Prudential's defenses in determining whether section 301 preemption applies.
Prudential moves to preempt two categories of claims: (1) those of Gordon Weaver and Schulte for retaliatory discharge; and (2) Weaver's claims for defamation and tortious interference with business expectancies. *fn16 Prudential contends these claims will require Court either to interpret specific provisions of the CBA or to examine relationships and practices governed by the CBA. For example the company claims it terminated Schulte and Weaver for low sales production under the terms of its low production probation policy ("LPP policy"). Prudential asserts that the CBA supplied the authority under which it adopted the LPP policy and that the CBA mandates grievance arbitration for disputes arising out of its application of the policy.
Similarly Prudential states that it terminated Gordon when he failed to return to work after his disability period expired. Under the company's Service Disability Allowance Plan (the "disability plan") expressly incorporated into the CBA in effect at the time agents with less than five years' service are entitled to six months of disability leave benefits but face termination if they do not return to work at the end of the six-month period. Finally Prudential defends Weaver's charges of defamation and tortuous interference with business relations on the grounds that it owed its policyholders an obligation to disclose the information it imparted and that Weaver had no reasonable expectation of maintaining an independent business relationship with Prudential policyholders. Prudential contends that these relationships between the company its agents and its policyholders are all governed by express and implied terms of the CBA.
I. Retaliatory Discharge
Under Illinois law which applies to the claims of Weaver and Schulte a retaliatory discharge complaint must allege (1) that the employer discharged the employee in retaliation for the employee's activities; and (2) that the discharge contravened a "clearly mandated public policy." Carter Coal Co. v. Human Rights Com'n 261 Ill. App. 3d 1 9 633 N.E.2d 202 208 198 Ill. Dec. 740 (App. Div. 1994) citing Palmateer v. International Harvester Co. 85 Ill. 2d 124 421 N.E.2d 876 52 Ill. Dec. 13 (1981). Under Kentucky law upon which Gordon's claim is based the tort of retaliatory discharge is similarly limited to "those situations where the evidence establishe[s] the employer was retaliating against the employee for exercising a right conferred by well-established legislative enactment or for refusing to violate the constitution or a statute." Nelson Steel Corp. v. McDaniel 898 S.W.2d 66 69 (Ky. 1995). According to Prudential "the central issue in a retaliatory discharge claim is whether the employer had an illicit motive in terminating the employee; an evaluation of the employer's stated reasons for termination is inseparable from this determination." (Prudential Br. p. 17)
In Lingle supra the Supreme Court determined that section 301 did not preempt an Illinois state law claim that alleged retaliatory discharge for filing a workers compensation claim. The defendant in that case claimed that the reason for the discharge was that the plaintiff's workers compensation claim contained false information and that this constituted "just cause" for termination under the parties' collective bargaining agreement. The Supreme Court found that the state law claim was independent of the collective bargaining agreement because it turned on questions pertaining to "the conduct of the employee and the conduct and motivation of the employer " the determination of which did not require Court to interpret any terms of the agreement. Id. 486 U.S. at 407 108 S. Ct. at 1882. See also T.J. Gendron v. Chicago and North Western Transp. Co. 139 Ill. 2d 422 435 564 N.E.2d 1207 1213 151 Ill. Dec. 545 (1990) (citation omitted).
Prudential attempts to distinguish Lingle. It points out that it took adverse employment actions against Weaver Schulte and Gordon under terms of the CBA that were much more specific than the "just cause" provision at issue in Lingle and contends that whereas the Lingle defendants simply referred to the "just cause" provision as a justification for terminating the plaintiff there this Court must actually examine and interpret CBA terms to resolve the agents' retaliatory discharge claims.
Specifically Prudential claims Court will have to "evaluate" Prudential's claim that it terminated Weaver and Schulte for low sales production pursuant to the LPP policy -- which in turn will require Court to examine the amount of commissions these agents earned during the relevant period and to compare their performance to that of similarly situated agents who were not terminated. To decide Gordon's retaliatory discharge claim Prudential argues Court will have to resolve a disagreement between Prudential and Gordon as to whether or not Prudential's disability plan authorized it to terminate Gordon. (Prudential Br. p. 20)
There are several potential problems with Prudential's arguments. First it is far from clear that resolution of the retaliatory discharge claims will ultimately turn on the application of any specific CBA terms. It does not appear that either Illinois or Kentucky requires a retaliatory discharge plaintiff to show that the employer's sole motivation for taking action against the plaintiff was retaliatory. See Szaflarski v. Lurie Co. 1991 U.S. Dist.11937 1991 WL 169356 *6 (N.D. Ill.); First Property Mgt. Corp. v. Zarebidaki 867 S.W.2d 185 188 (Ky. 1993); Willoughby v. GenCorp Inc. 809 S.W.2d 858 861 (Ky. App.1990). Accordingly if the agents can trace Prudential's actions against them even partially to improper retaliatory motives Court may be able to resolve the issue in their favor without even consulting the CBA. See Thomas 39 F.3d at 621.
Although Prudential contends that its defenses bring the CBA into play this is not so apparent either. A court in this district recently declined to preempt a retaliatory discharge claim holding: "Even if the employer's non-retaliatory explanation for the discharge depends on its interpretation of the collective bargaining agreement 'so long as this interpretation was made in good faith and actually motivated . . . the [employer's] actions ' it constitutes a valid defense 'without regard to the correctness of the interpretation.'" Kube v. New Penn Motor Express Inc. 865 F. Supp.221 231 (D.N.J. 1994). *fn17 And as an Illinois district court recently pointed out courts in the Seventh Circuit have "consistently held that Sec. 301 does not preempt retaliatory discharge cases" because "courts need not venture beyond a determination of whether an employer's termination decision was motivated by the employee's filing of a claim or other method of opposition." Pelech 828 F. Supp. at 531 n.7.
Prudential's position also assumes that the agents challenge its interpretation of the CBA. Clearly if the parties all agree on the meaning of the relevant CBA provisions the doctrine of preemption does not preclude Court from deciding whether or not they constitute valid defenses. Hawaiian Airlines Inc. __ U.S. at __ 114 S. Ct. at 2248 n.8; Livadas __ U.S. at __ 114 S. Ct. at 2078. The agents apparently do not challenge Prudential's authority under the CBA to adopt or implement the LPP policy nor do they assert that Prudential has violated the terms of the CBA the LPP policy or any other internal rule procedure or practice adopted thereunder. *fn18 (See Weaver/Schulte Opp. Br. p. 11)
Even to the extent that the agents attack the LPP policy directly for requiring production levels that can only be met through illegal sales practices their claims do not appear to present an interpretation question. See Gayres v. Lancaster Press Inc. 1994 WL 71277 (E.D. Pa.) (no preemption where plaintiff and defendant agreed on intent and meaning of provision in collective bargaining agreement but disagreed as to whether provision violated state law).
Douglas 877 F.2d at 565 is distinguishable. There plaintiff sued her employer for intentional infliction of emotional distress alleging that the defendant had harassed her by arbitrarily denying ordinary employees' rights such as vacation and sick time and by unduly scrutinizing her work. Id. At 567-68. Court found that "even though the complaint facially stated a state-law tort claim [plaintiff] was actually seeking relief for alleged breaches of the collective bargaining agreement." Id. at 568. Here by contrast Weaver and Schulte have asserted claims that Court will likely decide without substantial reference to much less interpretation of the CBA.
Arguments like Prudential's have fared poorly in other courts as well -- including the United States Supreme Court. In Hawaiian Airlines __ U.S. at __ 114 S. Ct. at 2251 *fn19 an employee claimed his employer discharged him after he refused to sign maintenance records because he believed the maintenance had not been performed properly. The employer argued that the claim should be preempted because it would require Court to interpret a collective bargaining agreement provision setting forth circumstances under which employees were required to sign maintenance records. Court found that "although such a determination would be required with regard to [the employee's] separate allegation of discharge in violation of the agreement . . .the state tort claims by contrast require only the purely factual inquiry into any retaliatory motive of the employer." *fn20
Prudential cites Doran v. Thermatex Corp. 1989 U.S. Dist.16312 1989 WL 163700 (N.D. Ohio) Thomas 39 F.3d 611 and Riccio 1992 WL 281159 cases in which courts have preempted retaliatory discharge claims. All are distinguishable. In Doran the plaintiff's claims were preempted only because he himself raised an issue requiring interpretation of the collective bargaining agreement. See Kube 865 F. Supp. at 230 (noting that Doran Court preempted claim "because it was based on the allegation that the employer had incorrectly interpreted the collective bargaining agreement.") Similarly Court in Thomas 39 F.3d at 620 explicitly based its preemption holding on the fact that the plaintiff himself had grounded his claim on an interpretation of the relevant labor agreement. And in Riccio 1992 WL 281159 at *3 Court simply held without detailed explication that it was "necessary to evaluate the terms of the CBA to determine whether [plaintiff] was wrongfully discharged." As set forth above it does not appear that the agents' claims will require construction of the CBA.
For all of these reasons Court determines that section 301 does not mandate preemption of the agents' retaliatory discharge claims. Court will also address Schulte's related claim for emotional distress arising out of his allegedly wrongful termination for which Prudential requested preemption for the first time in its reply brief. As Prudential appears to concede Schulte's claims for retaliatory discharge and emotional distress arise out of the same facts and implicate the CBA to the same degree. Accordingly Court will also deny Prudential's request for preemption of Weaver's emotional distress claim.
II. Defamation and Tortious Interference Claims
Weaver alleges that Prudential defamed him and interfered with his business relationships -- both during and after his employment with Prudential - by informing individuals that Weaver was being investigated for unethical conduct that he did not understand the insurance business that he was inexperienced and that he "did not know what he was saying" when he told policyholders that Prudential had engaged in improper churning practices. (Weaver Resp. pp. 5 13) Prudential argues that resolution of this claim requires interpretation of the CBA because the CBA establishes the contours of the relationships among Prudential its agents and its policyholders an understanding of which is necessary to evaluate Prudential's qualified privilege defense to the defamation action and to assess Weaver's reasonable expectations for purposes of the tortuous interference claims. Court will examine Weaver's defamation and tortuous interference claims in turn.
A. Tortuous Interference
To set forth a claim under Illinois law for tortuous interference with existing business relations Weaver would have to show:
(1) the existence of a valid and enforceable contract between the plaintiff and another; (2) the defendant's awareness of this contractual relation; (3) the defendant's intentional and unjustified inducement of a breach of the contract; (4) a subsequent breach by the other caused by the defendant's wrongful conduct; and (5) damages.
HPI Health Care Servs. Inc. v. Mt. Vernon Hosp. Inc. 131 Ill. 2d 145 154-55 545 N.E.2d 672 676 137 Ill. Dec. 19 (1989). To establish a cause of action for tortuous interference with prospective business relations he must show
(1) his reasonable expectation of entering into a valid business relationship; (2) the defendant's knowledge of the plaintiff's expectancy; (3) purposeful interference by the defendant that prevents the plaintiff's legitimate expectancy from ripening into a valid business relationship; and (4) damages to the plaintiff resulting from such interference.
Fellhauer v. City of Geneva 142 Ill. 2d 495 511 568 N.E.2d 870 878 154 Ill. Dec. 649 (1991).
Prudential claims Court cannot resolve the first element of either claim without referring to the CBA. Specifically it contends that express and implied provisions of the CBA set forth the terms of the three-way relationship among Prudential Prudential's agents and Prudential's policyholders. Prudential contends that the CBA prohibits the formation of contracts between its current agents and its policyholders by protecting all proprietary information regarding its policyholders and their insurance contracts and by making it clear that these contracts are between Prudential and its customers not between agents and customers. It also points to provisions in the CBA which prohibit Prudential agents from selling or servicing other companies' insurance products while employed at Prudential. Finally it notes that departed Prudential agents are (1) required to turn in all written information they have received or generated regarding policyholders and their contracts and (2) precluded from soliciting Prudential policyholders for two years.
Court agrees with Prudential that in light of these express terms of the CBA as well as the implied terms of the three-way relationship which may have developed thereunder it will be impossible to determine the scope of Weaver's legitimate independent business relationships or reasonable business expectancies without construing the CBA.
In Pelech 828 F. Supp.525 the plaintiff asserted claims against three individuals for among other things tortuous interference with her expectation of continued employment. The Court found that "regardless of defendants' motivation for interfering with [plaintiff's] business expectancy . . .litigation of this claim will necessarily involve Court in interpreting provisions of the collective bargaining agreement. At the very least as a threshold issue we will have to assess whether or not [plaintiff] had a valid business expectancy . . . ." Id. at 533. The existence and extent of Weaver's actual or potential contractual relationships with Prudential policyholders or other potential insurance customers are no less dependent on an interpretation of the CBA than was the case in Pelech. Accordingly Weaver's tortuous interference claims are preempted and Court will dismiss them.
Ordinarily dismissals on grounds of preemption are with prejudice. Here however Weaver has asserted that the CBA ceased to apply to him when he left Prudential's employ and that at least a portion of his claims arose after his termination. In response to this argument Prudential cites Merk v. Jewel Cos. Inc. 848 F.2d 761 765 (7th Cir.1987) for the proposition that persons "covered by a collective bargaining agreement -- even those no longer working --must exhaust their union remedies before filing suit." Although this response does not satisfactorily resolve the extent of the CBA's applicability to Weaver after his termination Weaver was unable to cite any authority to delineate the CBA's post-termination reach -- nor did he specify the extent to which his claims arose after his termination. Accordingly Court will dismiss his tortuous interference claims but without prejudice. *fn21
Prudential argues that Court will have to construe the CBA in order to evaluate Prudential's qualified privilege defense to Weaver's defamation claim. In Kuwik v. Starmaker Star Marketing and Admin. Inc. 156 Ill. 2d 16 27 619 N.E.2d 129 134 188 Ill. Dec. 765 (1993) the Illinois Supreme Court adopted the approach taken by the Restatement (Second) of Torts in determining whether a conditional privilege exists. To establish qualified privilege under this test Prudential must show the Court that it made its allegedly defamatory statements on one of three types of "privileged occasion " defined as
(1) situations in which some interest of the person who publishes the defamatory matter is involved
(2) situations in which some interest of the person to whom the matter is published or of some other third person is involved
(3) situations in which a recognized interest of the public is concerned.
Id. 156 Ill. 2d at 29 619 N.E.2d at 135 (citation omitted).
Prudential claims it disclosed the alleged defamatory information to protect its own interests in maintaining relationships between itself and its policyholders. Prudential cites the same CBA sections it cites in defense of Weaver's tortuous interference claim e.g. provisions allegedly making clear that Prudential's policyholders were to be regarded as Prudential's customers and not Weaver's prohibitions against Weaver's use of customer information for any purposes other than selling Prudential products and the provision barring solicitation of Prudential customers for two years following his termination.
To show that a statement is conditionally privileged because it protects the publisher's interest the defendant must show that the circumstances under which it was made would "induce a correct or reasonable belief that (a) there is information that affects a sufficiently important interest of the publisher and (b) the recipient's knowledge of the defamatory matter will be of service in the lawful protection of the interest." Id. (emphasis supplied) quoting Restatement (Second) of Torts SEC. 594 (1977). Even assuming that the information Prudential allegedly imparted to its policyholders about Weaver affected the interests it cites this Court fails to see how the policyholders' knowledge of the information could possibly have been of service to Prudential in protecting those interests. Accordingly Weaver's claims for defamation are not preempted. *fn22
In Pelech 828 F. Supp. at 531 the plaintiff sued for sex discrimination retaliatory discharge and related claims including a claim that defendants defamed her when "they accused her of theft and then published these accusations along with allegations that Pelech was involved in illegal drug trafficking and an illicit affair with a married coworker to her fellow employees and tenants of the building where she worked." Court found that evaluating the claim under Illinois law in light of plaintiff's allegations and defendants' defenses simply involves a determination of (1) whether Pelech did or did not steal a coworker's calculator (2) whether defendants did or did not publish statements that Pelech was engaged in drug trafficking (3) whether the latter statements are true and (4) whether defendants made the alleged statements with malice. Nothing in such an evaluation requires us to look to the [CBA] let alone interpret it.
Id. at 531. Although Court noted that interpretation of a labor agreement might become necessary "where a defendant-employer claims qualified privilege thus necessitating a review of the [CBA]'s terms to determine whether the disputed communications fell within the scope of defendant's duties " id. at 531 n.8 in this case Court has found that the alleged defamatory statements could not have fallen within the scope of Prudential's duties or the legitimate protection of its interests.
Moreover as the Pelech Court noted qualified privilege serves in large part to enhance the plaintiff's burden of proof under Illinois defamation law requiring a showing of malice rather than simple negligence; accordingly since the plaintiff in that case had alleged malice Court held that even if the defendants had asserted the qualified privilege as a defense it would have made no difference to Court's determination that the defamation claim was not preempted. Id. See also Evans v. Keystone Consol. Indus. 884 F. Supp.1209 1217 (C.D. Ill. 1995) (noting in preemption context that plaintiff had "conceded" the qualified privilege issue as well as "pled around it by claiming . . . actual malice"). Weaver too has alleged that Prudential acted with malice and not merely negligently. Accordingly even if Prudential's qualified privilege defense did require this Court to consult the CBA it would not provide grounds for preemption.
Other courts have declined to preempt claims for defamation. In Mulligan v. United Parcel Service Inc. 1995 WL 695097 (E.D. Pa.) in which a plaintiff sued for discharge in retaliation for filing a workers compensation claim as well as defamation and emotional distress arising out of the same event Court granted summary judgment for the defendant on the defamation claim on the ground of qualified privilege but did not preempt the claim on that ground.
The cases Prudential cites are distinguishable. In Kozlowsky v. K-Mart Corp. 1990 WL 90537 (D.N.J.) (Wolin J.) this Court preempted a plaintiff's claim that his supervisor and fellow employees had defamed him during grievance proceedings at an unemployment hearing and in other contexts. The statements at issue consisted of allegedly false allegations that the plaintiff had violated a certain company policy. According to the defendant the policy was set forth in the CBA; according to the plaintiff it did not exist. Id. at *3. Court therefore held that it could not "determine the falsity of the statements at issue without inquiring into the existence of a company policy" and that although this inquiry "might very well begin outside the CBA Court remains convinced that all avenues of inquiry would ultimately lead to the CBA." Id. at *3-*4. Here by contrast the truth or falsity of the allegedly defamatory statements has nothing to do with the CBA.
Similarly in Hurst v. Consolidated Freightways Corp. of Delaware 1990 WL 43934 (M.D. Pa.) the defendant employer had discharged the plaintiff for failing a drug test. Plaintiff alleged that the test had been improperly administered in his case and sued for among other things defamation. Court held that "the determination of whether the statements [the employer] made were defamatory requires an interpretation of the [CBA] and the Testing Procedure." Id. at *4. In other words whether the defendant's statements regarding the plaintiff's termination were or were not defamatory depended upon Court's determination of whether or not the testing procedure used complied with the procedures set forth in the relevant CBA. See also Stallard v. B-Line Sys. Inc. 799 F. Supp.924 926 (S.D. Ill. 1992) (defamation claim preempted where offending statements involved allegations that plaintiff had violated rules adopted pursuant to collective bargaining agreement).
Both DeCoe 32 F.3d 212 and Johnson v. Anheuser Busch Inc. 876 F.2d 620 (8th Cir.1989) involved allegations of defamatory statements made in the context of procedures or proceedings specifically authorized or mandated by collective bargaining agreements. In DeCoe the plaintiff alleged that coworkers defamed him by bringing unfounded sexual harassment charges against him with political motives. Court found that the plaintiff could not establish essential elements of his claim without substantial reference to provisions in the collective bargaining agreement regarding sexual harassment procedures because his claim essentially was that his coworkers had "exceeded the scope of CBA-imposed rights and duties in their attempts to prosecute sexual harassment allegations." Id. at 216.
Similarly in Johnson the plaintiff alleged that coworkers defamed him by falsely reporting that he had slashed the tires of a fellow employee during business hours in the workplace parking lot. Since the allegedly false report was made as part of the employer's investigation under collective bargaining agreement provisions Court preempted the plaintiff's claims insofar as they arose out of statements made within the company. Id. 876 F.2d at 624. It did not however preempt the plaintiff's claim against the victim of the tire-slashing episode for statements to his insurance company. Id. at 624-25.
In this case the alleged defamatory statements were not even arguably made as part of any procedure or proceeding carried out pursuant to the CBA. Prudential does not claim that any provision specifically authorized or required it to inform its policyholders that Weaver was being investigated for ethical violations or to share with its policyholders its views on Weaver's knowledge competence or job performance.
Furillo v. Dana Corp. Parish Div. 866 F. Supp.842 (E.D. Pa. 1994) has little relevance to this case because it involved allegedly defamatory statements uttered during a grievance hearing. Courts have been quick to preempt state defamation claims based upon statements made during such proceedings to avoid reexamining issues already addressed by the arbitrator. See id. at 852; Kozlowsky 1990 WL 90537 at *4.
Accordingly Court finds that Weaver's defamation claim is not preempted by section 301 and will allow the claim to proceed on the merits.
For the foregoing reasons Court will deny Prudential's motion to compel arbitration and stay these proceedings. It will grant Prudential's motion to dismiss without prejudice Weaver's claims for tortious interference with business relations on the ground that section 301 preempts them but will deny Prudential's motion to dismiss Weaver's defamation claim Schulte's claim for emotional distress and the retaliatory discharge claims of Weaver Schulte and Gordon.
An appropriate Order is attached.
ALFRED M. WOLIN U.S.D.J.
In accordance with Court's Opinion filed herewith
It is on this 19th day of April 1996
ORDERED that the motion of The Prudential Insurance Company of America ("Prudential") to compel arbitration and stay these proceedings is denied; and it is further
ORDERED that Prudential's motion to dismiss plaintiff Michael R. Weaver's ("Weaver") claims for tortious interference with business relations is granted without prejudice; and it is further
ORDERED that Prudential's motion to dismiss Weaver's defamation claim is denied; and it is further
ORDERED that Prudential's motion to dismiss plaintiff Herbert Schulte's ("Schulte") claim for emotional distress is denied; and it is further
ORDERED that Prudential's motion to dismiss the retaliatory discharge claims of plaintiffs Weaver Schulte and Michael D. Gordon is denied; and it is further
ORDERED that the age discrimination claim of Schulte is dismissed with prejudice.
ALFRED M. WOLIN U.S.D.J.