United States District Court, Southern District of New York
October 31, 2000
STEVEN MARCUS, PLAINTIFF,
SAMUEL MASUCCI AND BEAR, STEARNS & CO., INC., DEFENDANTS.
The opinion of the court was delivered by: Robert W. Sweet, Judge.
Defendants Samuel Masucci ("Masucci") and Bear Stearns & Co., Inc.
("Bear Stearns") (collectively, the "Defendants") have moved to compel
plaintiff Steven Marcus ("Marcus") to arbitrate this dispute and
dismissing or, alternatively, staying this action pending arbitration
pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure and the
Federal Arbitration Act ("FAA"), 9 U.S.C. § 1 et seq., and the
By-laws of the National Association of Securities Dealers Inc. ("NASD").
For the reasons set forth below, the motion will be granted, arbitration
is compelled, and this action is dismissed with leave granted to reopen
if necessary upon completion of the arbitration.
Marcus is employed by Chase Securities, Inc. ("Chase Securities"). Bear
Stearns is a registered broker-dealer of securities.
Masucci is employed by Bear Stearns as a Managing Director.
This action was commenced on May 8, 2000 by Marcus by the filing of a
complaint alleging fifteen causes of action against the Defendants
arising out of their use of an investment product called Shared
Application Mortgage Securities ("SAMS"), including misappropriation of
trade secrets, unfair competition, and unjust enrichment. Marcus seeks
damages, the imposition of a construction trust and an accounting.
The instant motion was filed on July 10, 2000, and submissions were
received through August 12, 2000, at which time the matter was deemed
For the purposes of a motion to dismiss, the factual allegations of the
complaint are taken as true, though it is appropriate when considering
jurisdictional issues to consider matters outside the parameters of the
pleadings. See Cargill Intern. S.A. v. M/T Pavel Dybenko, 991 F.2d 1012,
1019 (2d Cir. 1993); Kamen v. A.T. & T. Co., 791 F.2d 1006, 1011 (2d
Cir. 1986); Exchange Nat. Bank of Chicago v. Touche Ross & Co.,
544 F.2d 1126, 1130-31 (2d Cir. 1976), modified on other grounds by
Chemical Bank v. Arthur Andersen & Co., 726 F.2d 930 (2d Cir. 1981).
According to the complaint, Marcus and Masucci were previously employed
at SBC Warburg Pincus Dillon Read ("Warbury Pincus") where they worked on
the development of SAMS. Warburg Pincus abandoned the project in October
1998, terminated Marcus and Masucci, and granted them a release
concerning the SAMS materials.
According to Marcus, he and Masucci then formed a joint venture
to develop and promote SAMS.
The complaint further alleges that from November 1998 until March
1999, Marcus and Masucci sought to interest investment firms in the
project. Bear Stearns was one of these firms. Bear Stearns negotiated
with both Masucci and Marcus. In April 1999, Bear Stearns hired Masucci
as a managing director. Marcus was not hired and remained unemployed
until April 10, 2000, when he was hired by Chase Securities.
The complaint further alleges that Masucci, in collaboration with Bear
Stearns, has inter alia misappropriated SAMS and is currently exploiting
this product, that Bear Stearns is on the verge of bringing
SAMS to the marketplace, that Masucci is currently assisting Bear Stearns
in the development and marketing of SAMS, that the Defendants are using
misappropriated trade secrets to develops SAMS products in violation of
fiduciary and contractual duties to Marcus, and that the Defendants have
engaged in unfair competition.
Chase Securities is a member of the NASD and Marcus is a
NASD-registered employee of Chase Securities. The Defendants allege
without contradiction by Marcus that in order to become a registered
employee of Chase Securities, Marcus would have been required to sign a
"Form U-4 Uniform Application For Securities Industry Registration or
Transfer" ("Form U-4"). Form U-4 provides that the registered employee
to arbitrate any dispute, claim or controversy that may
arise between [the employee and his] firm, or a customer,
or any other person, that is required to be arbitrated
under the rules, constitutions, or by-laws of the
organizations indicated in item 10.
Item 10 of Form U-4 lists the NASD among the covered organizations.
I. The Standard Governing A Motion To Compel Arbitration
A valid arbitration agreement is governed by the FAA, 9 U.S.C. § 1
et seq., which establishes a "federal policy favoring arbitration." Moses
H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24, PIN
(1983). This policy requires that courts "rigorously enforce agreements
to arbitrate." Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 221
(1985); see also Shearson/American Express, Inc. v. McMahon, 482 U.S. 220,
226 (1987); McDonnell Douglas Fin. Corp. v. Pennsylvania Power & Light
Co., 858 F.2d 825, 830 (2d Cir. 1988); Mitsubishi Motors Corp. v. Soler
Chrysler-Plymouth, Inc., 473 U.S. 614, 626 (1985). The question of
arbitrability is two-fold: (1) whether there is an enforceable agreement
to arbitrate and, if so, (2) whether the scope of that agreement
encompasses the claims. See David L. Threlkeld & Co. v.
Metallgesellschaft Ltd., 923 F.2d 245, 249 (2d Cir. 1992) (citations
In making such determinations, a court is to employ ordinary contract
principles, see Conway v. Icahn & Co., 787 F. Supp. 340, 344 (S.D.N Y
1990); Kyung Sup Ahn v. Rooney, Pace Inc., 624 F. Supp. 368, 369
(S.D.N.Y. 1985), and "as with any other contract, the parties' intentions
control, but those intentions are generously construed as to issues of
arbitrability," Mitsubishi Motors, 473 U.S. at 626. There is a strong
federal policy to construe arbitration clauses broadly. See Threlkeld,
923 F.2d at 250-51; S.A. Mineracao da Trindade-Samitri v. Utah
International, Inc., 745 F.2d 190, 194 (2d Cir. 1984); AT & T
Technologies, Inc. v. Communications Workers of America, 475 U.S. 643,
650 (1986) (citations omitted).
II. The Motion To Compel Arbitration Will Be Granted
A. There is an Enforceable Agreement to Arbitrate
The NASD By-laws provide the basis for an agreement binding Marcus to
arbitrate before an NASD tribunal. Article VII, Section 1(a)(iv) of the
By-laws states that "the Board shall have the authority to . . .
prescribe rules for the required or voluntary arbitration of controversies
between members and between members and customers or others as it shall
deem necessary or appropriate." Rule 10101 of the NASD Code of
Arbitration Procedure ("NASD Code"), adopted pursuant to the foregoing
By-laws provision, states:
Matters Eligible for Submission. This Code of
Arbitration Procedure is prescribed and adopted pursuant
VII, Section 1(a)(iv) of the By-Laws of the
Association for the arbitration of any dispute,
claim, or controversy arising out of or in connection
with the business of any member of the Association, or
arising out of the employment or termination of
employment of associated person(s) with any member,
with the exception of disputes involving the insurance
business of any member which is also an insurance
(a) between or among members;
(b) between or among members and associated persons;
(c) between or among members or associated persons
and public customers, or others; and
(d) between or among members, registered clearing
agencies with which the Association has entered in
an agreement. . . .
In addition, NASD Code Rule 10201(a) covering "Required Submissions"
provides in relevant part that:
a dispute, claim, or controversy eligible for submission
under the 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 in
connection with the activities of such associated
person(s), or arising out of the employment or
termination or employment of such associated person(s)
with such members, shall be arbitrated under this Code at
the instance of:
(1) a member against another members;
(2) a member against a person associated with a member
or a person associated with a member against a
member; and (3) a person associated with a member
against a person associated with a member. . . .
The NASD By-Laws define a "member" as "any broker or dealer admitted to
membership in the NASD." NASD By-Laws, Art I (q). The By-Laws define a
"person associated with a member" or an "associated person of a member"
(1) a natural person registered under the Rules of the
Association; or (2) a sole proprietor, partner, officer,
director, or branch manager of any member, or any natural
person occupying a similar status or performing similar
functions, or any natural person engaged in the
investment banking or securities business who is directly
or indirectly controlling or controlled by such member
whether or not any such person is registered or exempt
from registration with the NASD under these By-Laws or
the Rules of the Association.
NASD By-Laws, Art. I (ee).
Bear Stearns is a member of the NASD. Masucci, as a Managing Director
and securities professional employed by Bear Stearns, is an "associated
person." Cular v. Metropolitan Life Ins. Co., 961 F. Supp. 550, 556
(S.D.N.Y. 1997) (employees of NASD-member firms are "associated persons"
under NASD Rules); American Express Fin. Advisors, Inc. v. Zito,
45 F. Supp.2d 230, 233 (E.D.N.Y. 1999) (former employee of NASD-member
firm was associated person under NASD rules). Masucci also signed a Form
U-4 in connection with his employment at Bear Stearns.
Chase Securities is also a member of the NASD. Thus, like Masucci,
Marcus, as an employee of Chase Securities, is an "associated person." In
addition, in order to become a registered employee of Chase, Marcus was
required to sign a Form U-4. A signed Form U-4 constitutes an express
arbitration agreement enforceable under the FAA.*fn1 See Hart v.
Canadian Imperial Bank of Commerce, 43 F. Supp.2d 395, 399 (S.D.N Y
1999) (citing Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 22-25
There is therefore an agreement to arbitrate.
B. The Scope Of The Agreement to Arbitrate
Includes The Claims At Issue Marcus contends that the agreement to
arbitrate cannot be applied retroactively to claims which arose before he
became bound as an employee of Chase Securities to arbitrate disputes in
accordance with the NASD By-Laws. Marcus became employed by Chase
Securities on April 10, 2000, and therefore would have executed a Form
U-4 on or about that date. According to Marcus, the instant dispute arose
during the period November 1998 through March 1999, during which time he
First, Marcus's characterization of when the events underlying this
dispute occurred is inconsistent with the complaint. The complaint is not
limited to the period prior to March 1999, which is when Bear Stearns
hired Masucci. Instead, the complaint alleges ongoing misconduct by the
Defendants, including inter alia that they are currently exploiting SAMS
in violation of Marcus's rights, that Bear Stearns is on the verge of
bringing SAMS to the marketplace, that Masucci is currently assisting
Bear Stearns in the development and marketing of SAMS, that the
Defendants are using misappropriated trade secrets to develops SAMS
products in violation of fiduciary and contractual duties to Marcus, and
that the Defendants have engaged in unfair competition.
Thus, Marcus's contention that his claims are limited to events
occurring before he became bound to arbitrate disputes under the
NASD By-Laws is misplaced.
Second, even if retroactive application of the agreement to arbitrate
were involved, the Second Circuit has expressly rejected the argument
that securities industry arbitration agreements cannot be applied
retroactively. See Coenen v. R.W. Pressprich & Co., Inc., 453 F.2d 1209
(2d Cir. 1972). In Coenen, the court considered the applicability of the
arbitration clause contained in the New York Stock Exchange ("NYSE")
Constitution to a claim which arose before the plaintiff joined the
NYSE. See id. at 1211. The court held that the claim was arbitrable
because when the plaintiff joined the exchange he agreed to arbitrate
"`[a]ny controversy between . . . members . . .,' with full knowledge
that he had a claim against [defendant] and that [defendant] was a Stock
Exchange member." Id. at 1212. The Second Circuit rejected the
plaintiff's argument that the NYSE arbitration clause applied only to
"future" disputes that arise after both parties have become NYSE
members, stating that such argument "need not detain us long," stating:
As an implementation of the statutory policy of
self-regulation, we think the clause is clear on its
face. It reads "any controversy" between members. And
that is precisely what it must mean if controversies
between members are to be kept out of the courts. Had
those who drafted the clause intended otherwise they
doubtless would have used language plainly stating
that "any future controversy" or any controversy
between members "arising after both parties to the
dispute have become" members . . . this purpose would
be frustrated and in effect nullified if we were to
construe such clause as applicable only to "future"
Id. Marcus contends that under ordinary contract law principles governing
the interpretation of contracts an agreement to arbitrate cannot be
applied retroactively unless retroactive application is expressly set
forth in the agreement. However, the cases cited by Marcus for this
proposition are inapposite. One case, Viacom Int'l, Inc. v. Tandem
Prods., Inc., 368 F. Supp. 1264, 1270 (S.D.N.Y. 1974), does not concern
an arbitration clause. Rather, Viacom deals with the enforceability of an
assignment clause in a contract with a retroactive effective date and
the distribution of a television show. See id.
Another case cited by Marcus, Mehler v. The Terminex Int'l Co. L.P.,
205 F.3d 44, 48 (2d Cir. 2000), held that a broadly-worded arbitration
clause encompassed acts which took place prior to the execution of the
contract. In Mehler the arbitration clause provided for the arbitration
of "`any controversy or claim between [the parties] arising out of or
relating to' the Agreement." Id. at 49 (citations omitted). The court
held that where such a broad arbitration agreement exists, "the court
must compel arbitration `unless it may be said with positive assurance
that the arbitration clause is not susceptible of an interpretation that
covers the asserted dispute.'" Id. The fact that the events at issue
occurred before the execution of the contract was not determinative. Id.
In Mehler, the Second Circuit relied upon its earlier decision in
Collins & Aikman Prods. Co. v. Building Sys., 58 F.3d 16, 21 (2d Cir.
1995) where it held that where two separate contracts governed a
dispute, and only the first contained an arbitration clause, certain
claims were arbitrable even if they arose after the second contract was
entered into. See Mehler, 205 F.3d at 50. Instead, the claims were
subject to arbitration because they "[arose] out of or [were] related to
`the contract that did contain the arbitration clause.'" Id. The Court
reached its decision by noting that "it is clear that we have not limited
arbitration claims to those that constitute a breach of the terms of the
contract at issue." Id. (citations omitted).
Form U-4 contains a broad arbitration clause covering disputes not only
with a registered employee's current employer but also with any
NASD-member firm or any other "associated person."
The only further limitation on the scope of the matters required to be
arbitrated is that they "aris[e] in connection with the business of [the
NASD] member, or in connection with the activities of [the] associated
person, or . . . out of the employment or termination of employment of
[the] associated person(s) with [the] member." NASD Rule 10201(a). The
Second Circuit has recognized that a broad arbitration clause such as
this one justifies a presumption of arbitrability. See Oldroyd v. Elmira
Savings Bank, 134 F.3d 72, 76 (2d Cir. 1998); Collins & Aikman, 58 F.3d
at 19-20. Thus, under the reasoning of Mehler, 205 F.3d 44, and the
presumption of arbitrability, any claims of Marcus existing prior to
April 2000 are subsumed in his ongoing claims arising out of the same
Finally, Marcus has cited to cases concerning arbitration clauses in
collective bargaining agreements. See, e.g. Procter & Gamble Independent
Union of Port Ivory, N.Y. v. Procter & Gamble Manufacturing Co.,
312 F.2d 181 (2d Cir. 1962). In that situation, the requirement to
arbitrate is typically restricted to disputes arising under the
collective bargaining agreement itself, and therefore is inapplicable to
events taking place after the collective bargaining agreement expires.
See Procter & Gamble, 312 F.2d at 185 and fn. 4 (2d Cir. 1962)
(arbitration clause limited to grievances concerning interpretation or
application of collective bargaining] agreement was inapplicable to
activities occurring after expiration of the agreement). The reasoning of
those cases does not apply here. In sum, the agreement to arbitrate
entered into by Marcus covers the instant case.
Therefore, for the reasons set forth above, the Defendants' motion to
compel arbitration is granted and this action is dismissed with leave
granted to reopen without payment of filing fees necessary to enforce or
vacate the arbitration.
It is so ordered.