United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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Nos. 09-3173/3393/3449/10-1041
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Bank of America, N.A., *
*
Plaintiff – Appellee, *
* Appeals from the United States
v. * District Court for the Western
* District of Missouri.
UMB Financial Services, Inc.; Sheryl, *
Bosilevac; Elizabeth C. Brown; Aaron *
Israelite; Amy Pieper; Molly Kerr, *
*
*
Defendants – Appellants. *
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Submitted: May 11, 2010
Filed: August 26, 2010
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Before BYE, MELLOY, and SHEPHERD, Circuit Judges.
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BYE, Circuit Judge.
UMB Financial Services and individual defendants appeal a series of orders in
which the district court1 declined to compel Bank of America (BOA) to submit to
arbitration and declined to stay litigation pending the outcome of such arbitration. We
affirm.
1
The Honorable David Gregory Kays, United States District Judge for the
Western District of Missouri.
I
Sheryl Bolsilevac, Elizabeth Brown, Aaron Israelite, Amy Pieper, and Molly
Kerr all worked for BOA as financial advisors for high-net-worth clients of the bank.
Bosilevac, Brown, Pieper, and Israelite, were licensed to broker securities; Kerr was
not. All five were paid salary by BOA. They also periodically received commissions
from Banc of America Investment Services (BOAIS), a subsidiary of BOA which
dealt with investments in securities, when such commissions came from a
securities-related sale.
All five employees worked under employment agreements that included
non-solicitation clauses which prohibited them from soliciting BOA customers for a
period of time if they left BOA's employment. The non-solicitation clauses for three
of the employees – Bosilevac, Brown, and Pieper – referred to both BOA and BOAIS2
and provided as follows:
Registered Representative agrees to solicit the sale of, market, and/or sell
securities only for Firm pursuant to this Agreement, except as otherwise
approved in writing by Firm. Should the Registered Representative
separate from the Firm, Bank or the Affiliate, whether voluntarily or
involuntarily, the former Registered Representative agrees that, for a
period of one year, the Registered Representative may not and will not
solicit or attempt to solicit any securities related business, directly or
indirectly, any Firm, Bank or Affiliate customers who were served by or
whose names became known to the Registered Representative while in
the employ of the Firm, Bank, Affiliate, or any of their predecessors.
The non-solicitation agreements for the other two employees – Israelite and
Kerr – referred only to BOA and contained the statement:
2
These three non-solicitation agreements were entitled "Dual Employment and
Non-Solicitation Agreement by a Registered Representative of Banc of America
Investment Services, Inc. and as an Employee of Bank of America, N.A."
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If I am hired as an employee of the Bank, I agree that for the period of
my employment by the Bank and for six months after the date of the
termination of my employment with the Bank, I will not (i) solicit or
induce any associates of the Bank to leave the employ of the Bank or (ii)
solicit the business of any customer of the Bank (other than on behalf of
the Bank) of whom I became aware or was introduced in the course of
my duties for the Bank.
Thus, the non-solicitation period was one year for Bosilevac, Brown, and
Pieper, and six months for Israelite and Kerr.
All five employees left BOA in the spring of 2009 and started work for UMB,
where their duties did not include the sale of securities. BOA believed the five
employees began courting their previous customers from BOA in violation of the
non-solicitation agreements. On May 15, 2009, counsel for BOA and BOAIS sent a
letter to UMB demanding that UMB cease "any efforts to contribute or cause current
or former Bank of America employees to violate their obligations regarding
nonsolicitation[.]"
BOA filed this suit on July 27, 2009, to enforce all five agreements and sought
damages. BOAIS never brought claims against the employees. BOA requested a
temporary restraining order to prevent irreparable loss of its client base during the
litigation. Three days later, UMB responded by moving to dismiss the complaint for
failure to join BOAIS as a necessary party and for lack of subject matter jurisdiction.
The district court immediately granted BOA's request for a temporary restraining
order (TRO) pending a hearing on BOA's request for a preliminary injunction set for
August 19. On August 3, UMB moved again to dismiss the case, this time for failure
to state a claim upon which relief could be granted, and moved in the alternative for
judgment on the pleadings.
On August 6, UMB also filed a statement of claim with the Financial Services
Regulatory Authority (FINRA) to commence arbitration proceedings against BOA and
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BOAIS. FINRA is the organization that issued licenses to Bosilevac, Brown, Pieper,
and Israelite to broker securities. FINRA was formed by consolidation of NYSE
Regulation, Inc. (the enforcement arm of the New York Stock Exchange) and the
National Association of Securities Dealers, Inc. (the regulating organization for
securities brokers). Organized under 15 U.S.C. § 78s, part of the Securities and
Exchange Act (SEA), FINRA regulates the securities industry pursuant to an
agreement between its member entities and approval by the Securities and Exchange
Commission. FINRA is a private entity, part of the system of self-regulation set up
under SEA.
FINRA has its own Code of Arbitration for disputes between members and
between members and their employees. Each member of FINRA agrees, by
membership, to submit to arbitration if a "dispute arises out of the business activities
of a member or an associated person and is between or among: Members: Members
and Associated Persons; or Associated Persons." "Associated persons" are defined
under the FINRA code as individuals who are registered with FINRA, whereas
"members" refers to the organizations regulated by FINRA. UMB Financial Services
is a member of FINRA. BOA is not a member of FINRA. BOA claims none of the
individual defendants, except for Pieper, work for UMB Financial and requested leave
of the district court to substitute UMB Bank (a non-FINRA entity) as defendant. That
motion is stayed along with the rest of the district court proceedings pending the
outcome of these appeals.
On August 7, UMB moved to stay proceedings in district court pending
outcome of the arbitration and asked the district court to compel BOA to participate
in the FINRA proceedings. On August 28, the district court denied the motion to
compel arbitration "without prejudice" and expressed its intent to preserve the status
quo until it could hear argument and adequately consider the issues before it. FINRA
sent the district court a letter stating that it intended to conduct the arbitration because
the district court had not specifically enjoined UMB and the five former BOA
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employees from arbitration with BOAIS, but indicating FINRA would comply with
any subsequent order directly enjoining such arbitration. The district court entered an
order sua sponte on September 10 enjoining the parties from arbitrating their dispute
until the court ruled otherwise, and reiterating its intent to preserve the status quo
while it considered the issues.
On September 11, 2009, UMB appealed both the district court's August 28
order denying the motion to compel arbitration without prejudice, and the district
court's September 10 order enjoining the arbitration. UMB also filed a request to stay
the district court proceedings pending resolution of the appeal. The same day, the
district court heard argument on the motion to stay proceedings, granted the stay, and
extended the TRO to October 14, finding UMB did not oppose such extension in light
of the stay. UMB subsequently appealed that order. On October 9, BOA moved to
extend the TRO or, in the alternative, for a hearing on the preliminary injunction. The
court granted the extension of the TRO and UMB subsequently appealed that order.
On October 15, BOA moved this court to dismiss the appeals or stay them
pending the district court's decision on the preliminary injunction. We denied the
motion to dismiss but stayed the appeals so the district court could rule on the
preliminary injunction.
The district court lifted its earlier stay and denied both of UMB's pending
dispositive motions but joined BOAIS as a necessary party on December 14, 2009.
UMB moved the next day to compel arbitration with BOAIS, renewed its motion to
compel arbitration with BOA, and requested another stay of the district court
proceedings. BOAIS had joined BOA's resistance to its inclusion as a necessary party,
stating that it had no claims in the litigation and waiving any claims that could arise
out of the subject matter of the litigation. BOAIS has never filed a claim in this
litigation and has not filed anything since it was joined as an involuntary plaintiff. On
December 23, the district court denied UMB's new motions to compel and requests
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for a stay of proceedings. The district court also denied BOA's request to equitably
extend the term of Israelite's and Kerr's non-solicitation agreements, which had
expired during the litigation.
On December 24, the district court granted BOA's request for a preliminary
injunction, restraining the three individuals with active non-solicitation agreements
from violating them further and restraining UMB from doing business with customers
acquired in violation of any of the agreements. UMB appealed.
The four appeals were consolidated and expedited and the district court stayed
the litigation pending resolution in this court. Although the orders appealed from
address a number of issues, UMB only addresses on appeal the question of whether
the district court should have compelled BOA and BOAIS to arbitrate in the FINRA
proceedings, and whether the district court consequently erred when it enjoined the
parties from proceeding with the FINRA arbitration.
II
Section 2 - the FAA's substantive mandate - makes written
arbitration agreements valid, irrevocable, and enforceable, save upon
such grounds as exist at law or in equity for the revocation of a contract.
That provision creates substantive federal law regarding the
enforceability of arbitration agreements, requiring courts to place such
agreements upon the same footing as other contracts. Section 3, in turn,
allows litigants already in federal court to invoke agreements made
enforceable by § 2. That provision requires the court, on application of
one of the parties, to stay the action if it involves an issue referable to
arbitration under an agreement in writing.
Arthur Andersen LLP v. Carlisle, 129 S.Ct. 1896, 1901-02 (2009) (citations and
internal quotation marks omitted).
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Ordinarily, courts of appeals have jurisdiction only over "final decisions"
of district courts. 28 U.S.C. § 1291. The FAA [Federal Arbitration Act],
however, makes an exception to that finality requirement, providing that
"an appeal may be taken from . . . an order . . . refusing a stay of any
action under section 3 of this title." 9 U.S.C. § 16(a)(1)(A).
Id. at 1900.
The question of whether a dispute should be arbitrated3 under a contract is one
of contract interpretation, which we review de novo. Nitro Distrib., Inc. v. Alticor,
Inc., 453 F.3d 995, 998 (8th Cir. 2006). We review the district court's underlying
factual findings for clear error. Id. Because this is a diversity action, we apply the
substantive law of the forum state.4 Cicle v. Chase Bank USA, 583 F.3d 549, 553 (8th
Cir. 2009).
III
"A dispute must be submitted to arbitration if there is a valid agreement to
arbitrate and the dispute falls within the scope of that agreement." Berkley v. Dillard's
3
Appellants argued for the first time in their reply brief that the question of
whether a particular dispute should be arbitrated in a FINRA proceeding is one for the
arbitrator. See FSC Sec. Corp. v. Freel, 14 F.3d 1310, 1312-13 (8th Cir. 1994). Since
we find the parties did not agree to be bound by the FINRA arbitration code, we do
not reach the issue of whether any particular dispute is appropriate for arbitration
under FINRA rules. We would not consider the question in any case, as it was argued
for the first time in a reply brief. Turnage v. Fabian, 606 F.3d 933, 942 n.9 (8th Cir.
2010).
4
Appellants also argued for the first time on reply that the laws of various states
other than Missouri apply to govern the non-solicitation agreements. Although we do
not believe our result would be different under any of the state laws cited by
appellants, we decline to consider this argument because it was also raised for the first
time in a reply brief. See Turnage, 606 F.3d at 942 n.9.
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Inc., 450 F.3d 775, 777 (8th Cir. 2006). A party who has not agreed to arbitrate a
dispute cannot be forced to do so. PCS Nitrogen Fertilizer, L.P. v. Christy
Refractories, L.L.C., 225 F.3d 974, 977 (8th Cir. 2000). "The Arbitration Act
establishes that, as a matter of federal law, any doubts concerning the scope of
arbitrable issues should be resolved in favor of arbitration, whether the problem at
hand is the construction of the contract language itself or an allegation of waiver,
delay, or a like defense to arbitrability" Moses H. Cone Mem. Hosp. v. Mercury
Const. Corp., 460 U.S. 1, 24-25 (1983).
The non-solicitation agreements at issue in this case do not contain arbitration
clauses. The only possible arbitration agreement at issue here is FINRA form U-4,
which is executed by all members and contains an agreement to arbitrate if a "dispute
arises out of the business activities of a member or an associated person and is
between or among: Members: Members and Associated Persons; or Associated
Persons." UMB Financial Services is a FINRA member and subject to the provisions
of that document. All the individual appellants except for Kerr are FINRA associated
persons who are also subject to the requirements of form U-4. BOA is not a FINRA
member.
BANK OF AMERICA
BOA is not a FINRA member and did not directly agree to subject itself to
arbitration under FINRA's terms. Appellants must provide an alternate reason for
finding the arbitration agreements are enforceable against BOA. "[S]tate contract law
governs the threshold question of whether an enforceable arbitration agreement exists
between litigants. . . . The Supreme Court has ruled that state contract law governs
the ability of nonsignatories to enforce arbitration provisions." Donaldson Co., Inc.
v. Burroughs Diesel, Inc., 581 F.3d 726, 731-32 (8th Cir. 2009) (internal quotes
omitted). "[T]raditional principles of state law allow a contract to be enforced by or
against nonparties to the contract through assumption, piercing the corporate veil, alter
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ego, incorporation by reference, thirty-party beneficiary theories, waiver and
estoppel[.]" Arthur Anderson, 129 S.Ct. at 1902.
The Supreme Court of Missouri in Dunn Industrial Group, Inc. v. Lafarge
Corp., 112 S.W.3d 421 (Mo. 2003), found a third party guarantor could not be bound
by an agreement to arbitrate in a construction contract to which it was not a signatory,
where the contract to which it was a signatory did not incorporate the arbitration
provision of the construction contract. Id. at 435. The court noted,
[a]rbitration is a matter of contract, and a party cannot be required to
arbitrate a dispute that it has not agreed to arbitrate. As such, a guarantor
who is not a signatory to a contract containing an arbitration clause is
generally not bound by the arbitration clause. However, in a majority of
state courts, including Missouri, due to the strong federal policy in favor
of arbitration, arbitration agreements are enforced against guarantors or
sureties where the arbitration agreement is incorporated by reference into
the guaranty or performance bond.
Id. The parties do not argue the employment contracts signed by BOA in any way
incorporated the FINRA membership contract arbitration clauses.
Estoppel
UMB argues BOA should be estopped from disclaiming the obligation to
arbitrate because its claims are inextricably intertwined with any claims BOAIS might
bring against the appellants and because BOA seeks to benefit from its association
with BOAIS. The Dunn court considered a similar argument and rejected outright the
idea that a nonsignatory could be bound to an arbitration agreement under an estoppel
theory. In distinguishing cases in which arbitration agreements were enforced on a
theory of estoppel, the court stated,
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[t]hese cases, which held that arbitration between a signatory and
nonsignatory was required based on an estoppel theory, are, however,
distinguishable from the instant case. In those cases, signatories to
contracts containing an arbitration agreement were estopped from
avoiding arbitration with nonsignatories when the issues the
nonsignatories were seeking to resolve in arbitration were intertwined
with the agreement signed by the signatory. Conversely, in this case,
LaFarge, a signatory to the construction contract seeks to compel Dunn,
a nonsignatory, to arbitrate its claims . . . under the guaranty. A party
cannot be required to arbitrate a dispute that it has not agreed to arbitrate.
Dunn is not a signatory to a contract containing an arbitration clause. At
no point did Dunn indicate a willingness to arbitrate any disputes with
Lafarge.
Id. at 436. The court also found the estoppel cases were based on actions inextricably
intertwined with the contract containing the arbitration agreement, not the collateral
contract sought to be enforced. Id. at 436-37. Finally, the court found the
nonsignatory, while it had benefitted from the contract it sought to enforce, it had not
accepted a benefit from the contract which contained the arbitration agreement, or
committed any action which would have been inconsistent with the nonsignatory's
position that the arbitration clause did not apply to it. Id. at 437.
This case is similar in most relevant respects to Dunn. BOA never signed an
agreement containing an arbitration clause. The document BOA did sign, the
employment agreement, did not incorporate the arbitration clause of the FINRA
contracts by reference or otherwise. The Missouri court rejected the idea that
inextricability of facts permitted the court to compel arbitration where the nonsigning
party had not agreed to arbitration in some way in its own right. Even were that
theory permissible under Missouri law, here, as in Dunn, BOA's claims are
inextricably entwined with BOAIS's under the employment contract, not inextricably
intertwined with the FINRA arbitration agreements. UMB has not shown that BOA
sought the benefit of the FINRA membership agreements in any way related to this
dispute.
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Third Party Beneficiary
The Supreme Court of Missouri visited the issue of third party nonsignatories
and arbitration again in Nitro Distributing, Inc. v. Dunn, 194 S.W.3d 339 (Mo. 2006).
The case involved claims against the Amway family of companies and related
individuals. The Amway entities attempted to compel arbitration with Nitro and West
Palm, companies owned by an Amway distributor which were not party to any of the
Amway agreements signed by the distributor. The court set forth the law with regard
to third party beneficiaries as follows:
To be bound as a third-party beneficiary, the terms of the contract must
clearly express intent to benefit that party or an identifiable class of
which the party is a member. In cases where the contract lacks an
express declaration of that intent, there is a strong presumption that the
third party is not a beneficiary and that the parties contracted to benefit
only themselves. Furthermore, a mere incidental benefit to the third
party is insufficient to bind that party. Here, the Amway distributorship
agreement expresses no intent whatsoever to benefit Nitro and West
Palm, and any benefit obtained from the agreement, if at all, was
incidental. Accordingly, Nitro and West Palm are not third-party
beneficiaries.
Id. at 345.
There is no evidence that form U-4, the FINRA membership agreement, in any
way referenced BOA as a third party beneficiary or that it contained any language
benefitting a third party in BOA's position. BOA did not derive any benefit from the
FINRA memberships at issue here. It could not even hire FINRA members in their
FINRA capacities, because it was not a member of FINRA. BOAIS derived that
benefit from the contract, not BOA. In Nitro, the nonsignatory's entire purpose for
existing was to provide support for an Amway distributorship (the distributor owned
all three companies) and the Missouri Supreme Court found the benefit those
companies derived from the Amway operating agreements was incidental if it existed
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at all. BOA is not a third party beneficiary to any of the FINRA membership contracts
such that it could be compelled to arbitrate based on the arbitration provisions
contained therein.
The district court did not err when it denied the motion to compel BOA to
arbitrate its claims against UMB and the individual appellants. BOA did not agree in
writing or otherwise to arbitrate claims with any of them and cannot be compelled to
do so.
Waiver
"We review de novo the legal determination of waiver but examine the factual
findings underlying that ruling for clear error." Hooper v. Advance Am., Cash
Advance Ctrs. of Mo., Inc., 589 F.3d 917, 920 (8th Cir. 2009).
In light of the strong federal policy in favor of arbitration, any
doubts concerning waiver of arbitrability should be resolved in favor of
arbitration. Nevertheless, we will find waiver where the party claiming
the right to arbitrate: (1)knew of an existing right to arbitration; (2) acted
inconsistently with that right; and (3) prejudiced the other party by these
inconsistent acts.
Ritzel Commc'ns., Inc. v. Mid-Am. Cellular Tel. Co., 989 F.2d 966, 968-69 (8th Cir.
1993). We need not reach the question of waiver since the district court properly
determined there was no existing right to arbitration in this case. It would also be
inappropriate for us to examine the issue of waiver, which requires factual findings,
when the district court did not make such findings because it did not reach the
question, having disposed of the case on other grounds.
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BANC OF AMERICA INVESTMENT SERVICES, INC.
BOAIS was joined as an involuntary plaintiff and has waived all claims related
to the litigation or arising out of the employment agreements and non-solicitation
clauses. UMB and the individual appellants have not asserted any claims against
BOAIS. The district court did not err in denying the request to compel arbitration
with respect to BOAIS because there are no claims pending in this suit between
BOAIS and UMB or the individual defendants which the district court could have
compelled the parties to arbitrate.
IV
Motion for a stay pending arbitration
The district court did not err in denying the motion to stay its proceedings
pending arbitration because, for the reasons set forth above, there was no "issue
referable to arbitration under an agreement in writing" that would have triggered the
court's obligation to stay proceedings.
V
Order enjoining arbitration
UMB asserts the district court's order enjoining arbitration was a violation of
the due process clause because it was issued without notice and because UMB did not
have the opportunity to be heard on the matter. However, the district court has the
inherent ability to protect its own jurisdiction over the dispute pending before it. In
re Y&A Group Sec. Litig., 38 F.3d 380, 382-83 (8th Cir. 1884) ("The All Writs Act
makes plain that each federal court is the sole arbiter of how to protect its own
judgments: federal courts "may issue all writs necessary ... in aid of their respective
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jurisdictions...." 28 U.S.C. § 1651(a)."). UMB sought to join BOAIS as a necessary
party in the lawsuit, and eventually succeeded in doing so. UMB was aware of the
pending district court litigation when it filed the FINRA arbitration without waiting
for the district court's decision on the motion to compel arbitration. The district court
issued the order enjoining arbitration sua sponte to clarify its intention that the parties
not arbitrate while the court considered the issue, after FINRA informed the court that
it would allow the arbitration to proceed unless specifically enjoined from doing so.
The district court did not err in temporarily enjoining the parties from participating in
binding arbitration on a matter which UMB was attempting simultaneously to litigate
in district court.
VI
For the above-stated reasons, we affirm.
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