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February 15, 1991


The opinion of the court was delivered by: William C. Conner, District Judge.


This action involves a challenge by plaintiffs William and Norma Hough to an arbitration award resolving a dispute between the parties arising from plaintiffs' securities account with the defendant Merrill Lynch, Pierce, Fenner & Smith ("Merrill Lynch"). The action is presently before the Court on defendant's motion to dismiss plaintiffs' complaint pursuant to Rule 12(b)(1) of the Federal Rules of Civil Procedure for lack of federal subject matter jurisdiction or, alternatively, pursuant to Rule 12(b)(6) Fed.R.Civ.P. for failure to state a claim upon which relief can be granted. In addition, Merrill Lynch has moved this Court for an order pursuant to Rule 11 Fed.R.Civ.P. for sanctions on the ground that the complaint is not well grounded in fact and warranted by existing law or a good faith argument for the extension, modification or reversal of existing law.


The underlying dispute arose in 1987 from the execution of plaintiffs' order to sell certain bonds held in their account with Merrill Lynch. Plaintiff William T. Hough apparently had solicited quotes from brokers both at Merrill Lynch and at the firm of Donaldson, Lufkin & Jenrette ("DLJ") to buy from him (or to sell on his behalf) $400,000 face value Missouri State Housing Development Bonds which were held by Merrill Lynch on plaintiffs' behalf. The same bonds were subsequently sold twice, by both Merrill Lynch and DLJ.

On May 23, 1987, DLJ brought an action in New Jersey Superior Court against Hough to recover the loss of approximately $37,948 incurred as a result of the failure to receive delivery of the bonds from Hough. Donaldson, Lufkin & Jenrette v. William and Norma Hough, Superior Court of New Jersey, Law Division, Somerset County, Docket No. L-050498-87 (Mahon, J.). Trial of the action took place in July 1989. After trial, the New Jersey court found in favor of plaintiff DLJ and awarded it $37,428 plus costs. Id. The Houghs settled DLJ's claim against them by paying $35,000. Complaint ¶ 12(b).

On or about February 18, 1989, the Houghs filed a Statement of Claim with the National Association of Securities Dealers ("NASD") naming Merrill Lynch as respondent. Shortly after the Statement of Claim was filed, the NASD referred the matter to the arbitration program of the Municipal Securities Rulemaking Board ("MSRB") for resolution. See Exh. B to the Complaint. In the arbitration, the Houghs sought to recover from Merrill Lynch the amount of their post-judgment settlement with DLJ, litigation costs and attorneys fees, punitive and other damages. Id. The arbitration was conducted on November 2 and 3, 1989, and the five member panel issued its arbitration award on December 11, 1989, awarding the Houghs $17,500. See Exh. E to the Complaint.

On December 29, 1989, Mr. Hough wrote to the panel requesting "reconsideration and modification" of the arbitration award. See Exh. A to the Complaint. On January 11, 1990, the panel denied Hough's request. Complaint ¶ 2. On April 11, 1990, this action was commenced seeking an order either modifying the arbitral award or vacating the award and remanding the matter for rehearing.


The complaint alleges that the jurisdiction of this Court is based on diversity, 28 U.S.C. § 1332, and also on the Sherman Act, 15 U.S.C. § 1-7, the Federal Trade Commission Act, 15 U.S.C. § 45-58, the Clayton Act, 15 U.S.C. § 12-27, and the Lanham Act, 15 U.S.C. § 1051 et seq. Complaint ¶ 3.

Defendants allege that the complaint fails to meet the requirements of diversity jurisdiction because it fails to meet the amount in controversy requirement of 28 U.S.C. § 1332.*fn1 In determining whether the amount in controversy requirement has been met, courts apply the "legal certainty" test which requires dismissal of an action when it appears to a legal certainty that the plaintiff's claim is for less than the jurisdictional minimum. St. Paul Mercury Indemnity Co. v. Red Cab Co., 303 U.S. 283, 58 S.Ct. 586, 82 L.Ed. 845 (1938). In applying the legal certainty test, resort to matters outside the pleadings may be used to amplify the meaning of the complaint's allegations. Zacharia v. Harbor Island spa, Inc., 684 F.2d 199, 202 (2d Cir. 1982), citing Givens v. W.T. Grant Co., 457 F.2d 612 (2d Cir.), vacated, 409 U.S. 56, 93 S.Ct. 451, 34 L.Ed.2d 266, on remand, 472 F.2d 1039 (2d Cir. 1972).

Plaintiffs' seventh cause of action (Complaint ¶¶ 63-68) requests that this Court, in the event that it refuses to modify the award, "refuse to affirm the award, and remit/remand the award to the MSRB with an order that the MSRB retry the case before new arbitrators." As this motion is, in part, a motion to vacate the arbitration award and to remand for rehearing, the Court will look to the possible award that might result from the desired rehearing. In actions seeking declaratory or injunctive relief, the amount in controversy is measured by the pecuniary value of the rights being litigated. Hunt v. Washington State Apple Advertising Commission, 432 U.S. 333, 347, 97 S.Ct. 2434, 2443, 53 L.Ed.2d 383 (1977). The relief sought on the present motion may be measured similarly.

In this action to vacate the arbitration award the amount in controversy may be regarded as either the value to plaintiff of the relief sought or the loss to defendant if the relief is granted. Plaintiffs contend that the amount in controversy in this action is the full amount of the original claim which was resolved by the arbitration award.

In their Statement of Claim before the MSRB plaintiffs requested a total judgment of at least $3 million for violations of the Sherman Act and of the Clayton Act. Exh. A to the Complaint ¶¶ 74-76. Nearly twenty years ago, the Court of Appeals for the Second Circuit ruled that "the pervasive public interest in enforcement of the antitrust laws, and the nature of the claims that arise in such cases, combine to make . . . antitrust claims . . . inappropriate for arbitration." American Safety Equipment Corp. v. J.P. Maguire & Co., 391 F.2d 821, 827-28 (2d Cir. 1968). Since that time the foundations of the American Safety doctrine have been significantly eroded. Gemco Latinoamerica, Inc. v. Seiko Time Corp., 671 F. Supp. 972 (S.D.N.Y. 1987), adhered to, in part, dismissed, in part, on reconsideration, 685 F. Supp. 400 (S.D.N.Y. 1988).

The Supreme Court has held that nothing in the federal antitrust laws prohibits parties from agreeing to arbitrate antitrust claims arising out of international commercial transactions. Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 105 S.Ct. 3346, 87 L.Ed.2d 444 (1985). Finding it "unnecessary to assess the legitimacy of the American Safety doctrine as applied to agreements to arbitrate arising from domestic transactions" it "confess[ed] to some skepticism of certain aspects of the American Safety doctrine." 473 U.S. at 629, 632, 105 S.Ct. at 3355, 3356. Although the holding of Mitsubishi was limited to international transactions, the Supreme Court nonetheless rejected the concerns that had been used to justify the non-arbitrability of antitrust claims. Id. at 632-40, 105 S.Ct. at 3356-60. The principles and reasoning set forth in Mitsubishi have been used by the Court in later cases to find that RICO and securities claims are arbitrable in the domestic context. See Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477, 109 S.Ct. 1917, 104 L.Ed.2d 526 (1989) (holding that claims under the Securities Act of 1933 are arbitrable); Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987) (holding that claims under the Securities Act of 1934 and the RICO statutes are arbitrable). The federal policy in favor of arbitration agreements has provided the foundation for the Court's recent expansion of the types of claims that they may encompass. Most recently, the Court of Appeals for the Second Circuit held that agreements to arbitrate statutory claims arising under ERISA are enforceable. Bird v. Shearson Lehman/American Express, Inc., 926 F.2d 116 (2d Cir. 1991). In the aftermath of such decisions it seems unlikely that the principle of Mitsubishi will be limited to international transactions. In fact, in Gemco, Judge Knapp of this Court found that "none of ...

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