Massaro move to stay this action pending arbitration. Plaintiffs oppose the motion on two grounds.
Plaintiffs argue first that the arbitration clause is unenforceable because they were induced to sign the joint venture agreement by fraud and, indeed, never even knew that it contained an arbitration clause. The courts repeatedly have held, however, that one must distinguish between fraud in the inducement of the contract and fraud in respect of the arbitration clause itself. In the former case, the issue of fraud is for the arbitrators. Only in the latter is it for the Court. E.g., Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 18 L. Ed. 2d 1270, 87 S. Ct. 1801 (1967); Robert Lawrence Co. v. Devonshire Fabrics, Inc., 271 F.2d 402 (2d Cir. 1959), cert. dismissed, 364 U.S. 801 (1960). Here there is no colorable claim of fraud in the inducement of the arbitration clause itself, as distinct from the contract generally. While plaintiffs claim that they relied on the allegedly conflicted advisor with respect to the contract and that the advisor failed to explain the significance of the arbitration clause and discouraged them from consulting counsel, the fact remains that the plaintiffs both signed the agreement, paragraph 4 of which bore the caption "ARBITRATION" and contained the clause. See I E. ALLAN FARNSWORTH, FARNSWORTH ON CONTRACTS § 4.10, at 403 (1990). There is no evidence that plaintiffs were misled by misrepresentations specific to the arbitration clause rather than to the contract as a whole. Rosen v. Waldman, No. 93 Civ. 225 (PKL), 1993 U.S. Dist. LEXIS 14076, at *6-7 (S.D.N.Y. Oct. 7, 1993); Kyung In Lee v. Pacific Bullion (New York) Inc., 788 F. Supp. 155, 157 (E.D.N.Y. 1992). In consequence, the issue of fraud is for the arbitrators.
Second, plaintiffs contend that the action should not be stayed because the provision requiring arbitration of their federal securities law claims constitutes of waiver of substantive rights that runs afoul of Section 14 of the Securities Act of 1933, 15 U.S.C. § 77n. It is a vast understatement to suggest that this is a difficult argument in light of Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477, 104 L. Ed. 2d 526, 109 S. Ct. 1917 (1989), and Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 96 L. Ed. 2d 185, 107 S. Ct. 2332 (1987). Plaintiffs gamely argue that a stay would deprive them of substantive rights because Massaro, who did not sign the arbitration clause, cannot be compelled to arbitrate and because movants seek only a stay pending arbitration rather than an order compelling arbitration. Suffice it to say that the first argument is easily dealt with by preserving plaintiffs' rights against Massaro and that the second is frivolous in view of the fact that it is within plaintiffs' power to demand arbitration of their claims against Atlantic.
Accordingly, Atlantic's motion to stay this action as to itself pending arbitration is granted. Defendants' motion is denied in all other respects.
Dated: July 18, 1995
Lewis A. Kaplan
United States District Judge