The opinion of the court was delivered by: Wexler, District Judge.
AEFA also has pending before this court, under docket number 98-4408,
what the parties have referred to as a "companion" case. In that case,
AEFA named as the defendant, Douglas Flynn (the "Flynn Action"). Like
Zito, Flynn is alleged to have breached the "Financial Planner's
Agreement" and misappropriated confidential information belonging to
AEFA. Both Flynn and Zito are referred to in the two complaints before
this court as AEFA "Financial Planners." It appears, from the allegations
of the complaints, that Flynn had seniority over Zito. See generally
Complaint ¶ 7 (referring to both Flynn and Zito as former financial
planners working for AEFA). Nonetheless, it is clear that the two worked
together at AEFA and are alleged to be currently working together at a
company known as Linsco/Private Ledger. They are alleged to have
misappropriated the same confidential information and to have been using
that information to the detriment of AEFA.
Both the Flynn Action and this action were commenced by way of Order To
Show Cause, within one week of each other, in late June and early July
1998. The Flynn case seeks only injunctive relief while the Zito case, as
noted above, seeks injunctive relief and damages. Apparently, AEFA has
elected to press its damages case against Flynn in an arbitration now
pending before the National Association of Securities Dealers ("NASD").*fn1
AEFA has neither commenced a separate arbitration case against Zito
before the NASD nor joined any claim for money damages against Zito in
the NASD arbitration commenced against Flynn.
Presently before the court are the motions of Zito seeking a stay of
this action and an order that the damages portion of this case are
properly arbitrated before the NASD. If the claims are held not to be
arbitrable, Zito seeks a stay of this action pending the outcome of the
arbitration against Flynn. Zito also seeks summary judgment on the merits
of any claim remaining in this court. In the alternative, Zito seeks a
stay of discovery in this action pending the outcome of the Flynn
I. The Motion For Referral To Arbitration Or Stay Pending The Flynn
Zito argues that the damages claims brought by AEFA are arbitrable
before the NASD.*fn2 Accordingly, Zito seeks a stay of this action and a
referral to arbitration pursuant to the Federal Arbitration Act,
9 U.S.C. § 3. In the alternative, Zito seeks a stay of this action
pending the outcome of the NASD arbitration brought by AEFA against
Although AEFA has readily conceded that any claim for money damages in
the Flynn Action must be sought in an NASD arbitration, it argues that
its claim for money damages against Zito should be allowed to proceed.
Specifically, AEFA argues that its damages case against Zito is not
arbitrable. Even if the claims are arbitrable, AEFA states that Zito has
waived his right to arbitrate.
A. The Claim of Arbitrability
Zito's claim that this case should be arbitrated relies on a form,
referred to as a "Form U-4," executed by Zito when
employed by AEFA. The Form U-4 states, in pertinent part, that Zito
agrees to "arbitrate any dispute, claim or controversy that may arise
between me and [AEFA] that is . . . required to be arbitrated under the
rules, constitutions, or by-laws of the organization with which I
register." Through his form U-4, Zito officially registered with the
NASD, so that any rules of that organization became binding on Zito. See
Thomas James Assoc., Inc. v. Jameson, 102 F.3d 60, 62 (2d Cir. 1997).
Zito further relies on NASD Rule 10201 providing that:
[a]ny dispute, claim or controversy eligible for
submission under Rule 10100 Series between or among
members and/or associated persons, and/or certain
others, arising in connection with the business of
such member(s), or arising out of the employment or
termination of employment of such associated person(s)
with such member, shall be arbitrated.
Claims are eligible for submission under "Rule 10100 Series" if they
are: (1) between or among members and associated persons or others, and;
(2) arise out of the business of any member.
The Second Circuit has interpreted the precise NASD rules upon which
the parties rely and has clearly described the two conditions that must
be met when determining whether a securities industry dispute is
arbitrable. See McMahan Securities Co. L.P. v. Forum Capital Markets,
L.P., 35 F.3d 82 (2d Cir. 1994). The first condition to be met is whether
the parties are "members and/or associated persons, and/or certain
others" within the meaning of the NASD rules. Id. at 86. Second, the
court must determine whether the ...