(2) the dispute is covered by the scope of the agreement. See 9 U.S.C. sec. 3.
Federal law governs the current dispute as to the scope of the Customer Agreement. Cone Memorial Hosp., 460 U.S. at 24 (FAA creates a "body of substantive law of arbitrability applicable to any arbitration agreement within the coverage of the Act.") Where the dispute concerns an issue of contract, the application of federal law "simply 'comprises generally accepted principles of contract law.'" McPheeters v. McGinn, Smith and Co., Inc., 953 F.2d 771, 772 (2d Cir. 1992) (citations omitted).
In passing the FAA, Congress sought to "reverse centuries of judicial hostility to arbitration agreements . . . [and] place arbitration agreements 'upon the same footing as other contracts.'" Scherk v. Alberto Culver Co., 417 U.S. 506, 510-11, 41 L. Ed. 2d 270, 94 S. Ct. 2449 (1974) (quoting H. R. Rep. No. 96, 68th Cong., 1st Sess. 1, 2 (1924)); see also Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 225-26, 96 L. Ed. 2d 185, 107 S. Ct. 2332 (1987). There indisputedly exists a liberal federal policy favoring arbitration which has consistently been endorsed by the Supreme Court. See McMahon, 482 U.S. at 226; Mitsubishi v. Soler Chrysler-Plymouth, 473 U.S. 614, 626, 87 L. Ed. 2d 444, 105 S. Ct. 3346 (1985); Cone Memorial Hosp., 460 U.S. at 25. Consequently, when it comes to interpreting arbitration agreements, "as with any other contract, the parties' intentions control, but those intentions are generously construed as to issues of arbitrability." Mitsubishi, 473 U.S. at 626. Doubts concerning the scope of arbitrable issues are to be resolved in favor of arbitration. Cone Memorial Hosp., 460 U.S. at 24-25; Coudert v. Paine Webber, 705 F.2d 78, 81 (2d Cir. 1983).
Here, petitioners seek to compel arbitration of respondent's charges though they are not signatories to the Customer Agreement. As with any other contract, a contract containing an arbitration provision may be binding on non-signatories where that was the parties' intent. See McPheeters, 953 F.2d at 772. The relevant inquiry, then, is whether petitioners and respondent agreed to arbitrate, under general principles of contract construction; that is, did W.J. Nolan and Midway intend to submit their disputes to arbitration. Petitioners argue that they did and we agree.
The Customer Agreement outlines the functions, legal rights and liabilities of the introducing broker and the clearing broker and explicitly separates the two. This boiler-plate agreement is routinely used by Prudential when it acts as both the introducing and clearing broker for a client. However, in Midway's case, Prudential did not assume this dual role. Prudential acted only as respondent's clearing broker, while W.J. Nolan acted as its introducing broker; that is, petitioners (1) opened, approved and monitored respondent's account, (2) reviewed the account and orders, (3) supervised the investment advice given to respondent, (4) accepted respondent's orders, and (5) executed transactions on behalf of respondent.
The Customer Agreement's language clearly demonstrates that it was intended to apply to the introducing broker, independent of the clearing broker. Specifically, paragraphs 3, 5, 6 and 7 set forth responsibilities that fall exclusively to W.J. Nolan as introducing broker. And although W.J. Nolan's name does not appear on the letterhead because Prudential's agreement was used, W.J. Nolan's New York branch office and account number are explicitly referenced on the face of the Customer Agreement. It is obvious that respondent was well aware that W.J. Nolan was its introducing broker and intended the Customer Agreement to bind W.J. Nolan and govern its performance.
The arbitration clauses contained in the Agreement further illustrate the parties' intent to submit their disputes to arbitration. The first clause, contained in paragraph 11, provides in relevant part: "The undersigned agrees, and by carrying an account for the undersigned you agree, all controversies which may arise between us . . . shall be determined by arbitration." (Emphasis added). It is uncontroverted that W.J. Nolan was the only party involved in the transactions that "carried an account" for respondent, as that expression is used in the securities industry. Introducing brokers, rather than clearing brokers, are frequently referred to as carrying firms for this reason. Thus paragraph 11's arbitration clause is specifically directed at the introducing broker -- W.J. Nolan.
The second arbitration clause, also contained in paragraph 11, provides in relevant part: "Any controversy arising out of or relating to my account, to transactions with or for me or to this Agreement . . . shall be settled by arbitration . . . ." (Emphasis added). Again, it appears from the undisputed facts that W.J. Nolan was the sole party handling "transactions" for respondent. Like the clause cited above, the second arbitration clause contemplates arbitration of controversies with the introducing broker.
Respondent argues that McPheeters v. McGinn, Smith & Co., Inc., 953 F.2d 771 (2d Cir. 1992), not only controls, but "disposes of" petitioners' arguments in this case. We disagree. In McPheeters, the Second Circuit determined that a broker who was not a signatory to an agreement between a customer and a clearing broker could not avail itself of the agreement's arbitration clause. However, McPheeters did not create a per se rule that non-signatories in such situations could never receive arbitration, as respondent suggests. To the contrary, the Court held that "under general contract principles, we may deem non-signatories to fall within the scope of an arbitration agreement where that is the intent of the parties. " 953 F.2d at 772 (citations omitted) (emphasis added). The Court then concluded, "the Agreement, however, indicates no such intent." Id. at 773. This was because the agreement in McPheeters referred to the non-signatory broker "only where necessary to explain the relationship between [the clearing broker] and [the customer]." Id.
As explained above, the Customer Agreement in the instant case goes well beyond elaborating the relationship between the customer (Midway) and the clearing broker (Prudential). It directly and explicitly enumerates the obligations and liabilities of the introducing broker. Further, unlike in McPheeters, the arbitration clause in Prudential's Customer Agreement defines "you" as the firm "carrying an account for the undersigned." See McPheeters, 953 F.2d at 774. This can only mean petitioners.
Thus, in keeping with the Second Circuit's emphasis on the parties' intent, we hold that W.J. Nolan is party to the Customer Agreement and entitled to enforce it. The petition to compel arbitration is accordingly granted.
New York, New York
January 30, 1996
Constance Baker Motley