San Jose office. In connection with this appointment, O'Donnell forwarded to FIC a Memorandum of Understanding ("MOU"), which outlined what he understood to be the terms of his promotion and which purported to supersede the earlier RRA with FIC. O'Donnell conducted his negotiations regarding the new job with Froman. A few months later, on March 29, 1993, FIC fired O'Donnell. The underlying action, for (i) fraudulent misrepresentation, (ii) interference with contract, (iii) breach of employment and (iv) breach of good faith, resulted.
In October 1993, NASD amended its Code to include explicitly employment contracts within the scope of mandatory arbitration. Defendants argue that NASD has always maintained that employment contracts are subject to arbitration, and the amendment was only a clarification. Reply Memorandum on Defendants' Motion to Compel Arbitration ("Defendant reply") at 14. O'Donnell, on the other hand, takes the position that the pre-amendment Code did not include employment contracts. Memorandum of Law in Opposition to Defendants' Motion to Compel Arbitration and for a Stay ("Plaintiff opp.") at 8. Alternatively, O'Donnell argues that the MOU, not the RRA, should govern this case. Since O'Donnell executed the U-4 in connection with the RRA, he argues that the U-4, and with it the NASD Code, does not apply to the underlying action.
Defendants contend that the dispute surrounding O'Donnell's discharge is subject to mandatory arbitration because the U-4, which O'Donnell signed, provided that he "agreed to arbitrate any dispute, claim or controversy that may arise between me and my firm. that is required to be arbitrated under the rules, constitutions, or by-laws of [NASD]." Given the U-4's and the Federal Arbitration Act's ("FAA") "liberal federal policy favoring arbitration agreements," Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 25, 114 L. Ed. 2d 26, 111 S. Ct. 1647 (1991) (quoting Moses H. Cone Memorial Hosp. v. Mercury Construction Corp., 460 U.S. 1, 24, 74 L. Ed. 2d 765, 103 S. Ct. 927 (1983)), defendants move for an order compelling arbitration and a stay of the pending action under FAA §§ 3 and 4. O'Donnell responds with a two-fold reply. First, he states that the MOU, not the U-4, governs the pending action.
Second, he contends that even if the U-4 were applicable, the rules of NASD, at the time O'Donnell was fired, did not include employment disputes within its scope.
An arbitration agreement is to receive the same treatment as any contract, and the FAA was designed "to reverse the longstanding judicial hostility to arbitration agreements that had existed at English common law and had been adopted by American courts, and to place arbitration agreements upon the same footing as other contracts." Gilmer, supra, 500 U.S. at 24. This impetus towards liberally enforcing arbitration agreements "reflect[s] Congress' recognition that arbitration is to be encouraged as a means of reducing the costs and delays associated with litigation." Deloitte Noraudit A/S v. Deloitte Haskins & Sells, 9 F.3d 1060, 1063 (2d Cir. 1993) (citations omitted).
FAA § 3 mandates that courts "upon being satisfied that the issue involved in [a] suit or proceeding is referable to arbitration under  an agreement, shall.. . . stay the trial of the action. . . ." 9 U.S.C. § 3 (1988) (emphasis added). "'"The Act leaves no place for the exercise of discretion by a district court, but instead mandates that district courts shall direct the parties to proceed to arbitration on issues as to which an arbitration agreement has been signed."'" McDonnell Douglas Fin. Corp. v. Pennsylvania Power & Light Co., 858 F.2d 825, 830 (2d Cir. 1988) (emphasis in original) (quoting Genesco, Inc. v. T. Kakiuchi & Co., 815 F.2d 840, 844 (2d Cir. 1987) (quoting Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 218, 84 L. Ed. 2d 158, 105 S. Ct. 1238 (1985))).
The Court, though, must first determine if the scope of the agreement includes the dispute at hand, and courts will not force parties into arbitration when such was clearly not the intent of the parties. See Chevron U.S.A., Inc. v. Consolidated Edison Co., 872 F.2d 534, 537 (2d Cir. 1989). The parties' intentions are important "but those intentions are generously construed as to issues of arbitrability." Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626, 87 L. Ed. 2d 444, 105 S. Ct. 3346 (1985). Whenever an arbitration agreement exists, "any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration," Moses H. Cone Memorial Hosp., 460 U.S. at 24-25, and "doubts should be resolved in favor of coverage," AT&T Technologies Inc. v. Communications Workers of America, 475 U.S. 643, 650, 89 L. Ed. 2d 648, 106 S. Ct. 1415 (1986) (quotation omitted).
1. U-4 Governs the Pending Action
O'Donnell argues that the MOU specifically superseded the RRA and all its riders. Since the U-4 was signed as a condition to the RRA, O'Donnell argues, the U-4 ceased to be effective when O'Donnell was promoted. The U-4, however, 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. In addition, this Court finds that there was no clear and unambiguous agreement to waive or supersede the U-4 agreement.
Many courts have upheld the validity of U-4 arbitration agreements with securities exchanges, even in cases where the employee never held the position of registered representative. See, e.g., Gilmer, 500 U.S. at 25 n.2. The Supreme Court, in fact, compelled arbitration in the case of a wage claim against a former employer in accordance with a registration statement with a securities exchange. See Perry v. Thomas, 482 U.S. 483, 96 L. Ed. 2d 426, 107 S. Ct. 2520 (1987).
Since O'Donnell indicated on his U-4 that he was applying to qualify as a NASD registered representative, the Court must look to the NASD Code in order to determine the scope of the agreement.
2. NASD Rules Encompassed Employment Disputes Prior to October 1993
The crux of this dispute is the question of whether the October 1993 amendment to NASD rules was a change or a clarification in the then-existing Code. This is important because O'Donnell was fired before the amendment went into effect. The October 1993 amendment adds a specific clause, which includes employment disputes in the NASD Code, to "cure an existing ambiguity between the language of Section 8 . . . and Part I, Section 1." NASD Notice to Members 93-64. The Second Circuit has not ruled on this issue, and the two circuits which have done so disagree. The Seventh Circuit interprets the Code in a manner similar to the one O'Donnell's urges, while the Eleventh Circuit's interpretation resembles defendants' position.
The Seventh Circuit, which first decided this issue before the October 1993 amendment went into effect, rejected NASD's interpretation of its own Code and ruled that NASD's old Code did not cover employment disputes. See Farrand v. Lutheran Bhd., 993 F.2d 1253 (7th Cir. 1993) (Easterbrook, J.). The reason for the decision was the interaction of the two relevant sections of the Code. Section 8 formerly read:
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), shall be arbitrated under this Code. . . .