Smith Barney, Inc. v. Critical Health Systems of North Carolina, Inc.

Filed: May 15, 2000

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

No. 99-1220
(CA-98-592-F)

Smith Barney, etc., et al,

Plaintiffs - Appellants,

versus

Critical Health Systems, etc., et al,

Defendants - Appellees.

O R D E R

The court amends its opinion filed May 11, 2000, as follows:

On the cover sheet, section 4 -- the word “Argued” is inserted

before the February 29, 2000, date.

For the Court - By Direction

/s/ Patricia S. Connor
Clerk
PUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

SMITH BARNEY, INCORPORATED,
formerly known as E. F. Hutton &
Company, Inc., a Securities Broker
Dealer Incorporated in DE; LEHMAN
BROTHERS, INCORPORATED, a
Securities Broker Dealer
Incorporated in DE,
Plaintiffs-Appellants,

v.

CRITICAL HEALTH SYSTEMS OF NORTH
CAROLINA, INCORPORATED OF RALEIGH,
No. 99-1220
North Carolina, formerly known as
Wake Anesthesiology Associates,
Incorporated; WAKE
ANESTHESIOLOGY, INCORPORATED
MONEY PURCHASE PENSION PLAN, of
Raleigh, North Carolina; WAKE
ANESTHESIOLOGY PROFIT SHARING
PLAN, of Raleigh, North Carolina;
PETER MODROW, of Raleigh, North
Carolina,
Defendants-Appellees.

Appeal from the United States District Court

for the Eastern District of North Carolina, at Raleigh.
James C. Fox, District Judge.

(CA-98-592-F)

Argued: February 29, 2000

Decided: May 11, 2000
Before WILKINSON, Chief Judge, MOTZ, Circuit Judge, and
James R. SPENCER, United States District Judge
for the Eastern District of Virginia, sitting by designation.

_________________________________________________________________

Reversed and remanded by published opinion. Chief Judge Wilkinson
wrote the opinion, in which Judge Motz and Judge Spencer joined.

_________________________________________________________________

COUNSEL

ARGUED: David G. Russell, PARKER, HUDSON, RAINER &
DOBBS, Atlanta, Georgia, for Appellants. Teri Louise DiGiulian,
BEDZOW, KORN, BROWN, MILLER & ZEMEL, P.A., Aventura,
Florida, for Appellees. ON BRIEF: Nancy H. Baughan, PARKER,
HUDSON, RAINER & DOBBS, Atlanta, Georgia; Eugene Boyce,
Philip R. Isley, BOYCE & ISLEY, P.A., Raleigh, North Carolina, for
Appellants. Robert B. Miller, BEDZOW, KORN, BROWN, MILLER
& ZEMEL, P.A., Aventura, Florida; Peter J. Sarda, WALLACE,
CREECH & SARDA, L.L.P., Raleigh, North Carolina, for Appellees.

_________________________________________________________________

OPINION

WILKINSON, Chief Judge:

Critical Health initiated arbitration proceedings against Smith Bar-
ney before the American Arbitration Association (AAA). Smith Bar-
ney seeks to enjoin the AAA proceedings because a customer
agreement between the parties provides that controversies shall be
"settled by arbitration, in accordance with the rules then in effect of
the [NASD, NYSE, or AMEX]." Because the parties have nowhere
mentioned the AAA in their agreement, we hold that arbitration may
proceed only before one of the specified fora. We therefore reverse
and remand.

I.

This case concerns the interpretation of a choice of forum clause
in an agreement between Critical Health and Shearson Lehman Hut-

2
ton (Smith Barney is the successor to these accounts). In the early
1980s, Critical Health signed a client agreement that provided:

This agreement shall be governed by the laws of the State
of New York without giving effect to the choice of law or
conflict of laws provision thereof. Any controversy arising
out of or relating to any of my accounts . . . shall be settled
by arbitration, in accordance with the rules then in effect of
the NASD, or the Boards of Directors of the NYSE or the
American Stock Exchange, Inc., as I may elect.

The agreement mentions arbitration in accordance with the rules of
three self-regulatory organizations (SROs), the National Association
of Securities Dealers (NASD), the New York Stock Exchange
(NYSE), and the American Stock Exchange (AMEX). The American
Arbitration Association (AAA) is not mentioned in the arbitration
agreement.

In April 1998, Critical Health instituted an arbitration proceeding
against Smith Barney before the AAA alleging, inter alia, violations
of industry rules, fraud, breach of fiduciary duty, negligence, and fail-
ure to supervise. These claims were based on transactions as far back
as the early 1980s. The AAA assumed jurisdiction under the "AMEX
Window." The AMEX Window is created by a provision in the
AMEX Constitution that states "the customer may elect to arbitrate
before the American Arbitration Association in the City of New York,
unless the customer has expressly agreed, in writing, to submit only
to the arbitration procedure of the [AMEX]." AMEX Const. art. VIII,
§ 2(c) (1995). The AAA refused to stay the arbitration proceeding
without a court order.

Smith Barney then sued for injunctive and declaratory relief in the
United States District Court for the Eastern District of North Carolina.
Smith Barney alleges that it may be irreparably injured if the dispute
proceeds before the AAA, because the AAA rules contain no limita-
tions period for Critical Health's claims. By contrast, the NASD,
NYSE, and AMEX arbitration rules all provide that claims based
upon transactions that occurred more than six years before the arbitra-
tion was filed are not eligible for arbitration. Critical Health's claims
arise from transactions and occurrences from the early 1980s and

3
likely would not be eligible for arbitration under the rules of the three
SROs. The district court nonetheless denied Smith Barney's motion
for a preliminary injunction, finding that the "AMEX Window"
allows arbitration before the AAA in North Carolina. Smith Barney
now appeals.

II.

We review de novo the district court's conclusions regarding the
arbitrability of the dispute between Smith Barney and Critical Health.
See American Recovery Corp. v. Computerized Thermal Imaging,
Inc., 96 F.3d 88, 91 (4th Cir. 1996).

Federal law governs the construction of contract language concern-
ing arbitrability. See 9 U.S.C. § 2 (1994) (Federal Arbitration Act
(FAA) regulates contracts "evidencing a transaction involving com-
merce to settle by arbitration a controversy thereafter arising out of
such contract."); Porter Hayden Co. v. Century Indem. Co., 136 F.3d
380, 382 (4th Cir. 1998); American Recovery, 96 F.3d at 92; see also
Weiner v. Gutfreund (In re Salomon Inc. Shareholders' Derivative
Litigation), 68 F.3d 554, 559 (2d Cir. 1995) ("Once a dispute is cov-
ered by the [FAA], federal law applies to all questions of interpreta-
tion, construction, validity, revocability, and enforceability." (internal
quotation marks omitted)).1 The strong federal policy in favor of arbi-
tration is by now well-established. See, e.g., Shearson/American
Express, Inc. v. McMahon, 482 U.S. 220, 226 (1987). The FAA
makes clear that arbitration agreements "shall be valid, irrevocable,
_________________________________________________________________

1 Critical Health makes much of the fact that the agreement states it
"shall be governed by the laws of the State of New York." Under New
York law the AMEX Window remains open. See Cowen & Co. v. Ander-
son, 558 N.E.2d 27, 29-30 (N.Y. 1990). But while New York decisional
law governs the substantive principles of any dispute, federal law still
governs the interpretation of the arbitration agreement. See Mastrobuono
v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 64 (1995) (considering
a similar choice of law provision in an arbitration contract and finding
that "the choice-of-law provision covers the rights and duties of the par-
ties, while the arbitration clause covers arbitration"). Because arbitration
contracts must be construed in accordance with federal law, we are not
bound by New York state decisions.

4
and enforceable, save upon such grounds as exist at law or in equity
for the revocation of any contract." 9 U.S.C. § 2.

Critical Health maintains that the agreement does not specify the
exclusive fora for arbitration but only requires that the "rules" of the
NASD, NYSE, or AMEX be followed in any arbitration. Critical
Health's argument centers on the AMEX Window, which allows cus-
tomers of the AMEX to arbitrate before the AAA, unless they have
agreed in writing to submit only to the arbitration procedures of the
AMEX. See AMEX Const. art. VIII, § 2(c). Critical Health maintains
that because the AMEX Window is a provision in the AMEX Consti-
tution, it is a "rule" of the AMEX and should be followed here. The
AMEX Window would allow Critical Health to arbitrate before the
AAA because the parties have not agreed to submit disputes only to
the AMEX. Critical Health argues that the AMEX Window is incor-
porated into its agreement and therefore that arbitration should be
allowed to proceed before the AAA.

This argument, however, contravenes the plain language of the
contract. The agreement provides that "[a]ny controversy arising out
of or relating to any of my accounts . . . shall be settled by arbitration,
in accordance with the rules then in effect of the NASD, or the Boards
of Directors of the NYSE or the American Stock Exchange, Inc." The
agreement specifies that arbitration may take place according to the
rules of three SROs. It does not mention any other organization and
does not specifically provide for arbitration before the AAA. Under
the principle of expressio unius est exclusio alterius, arbitration is
limited to the three prescribed fora.

Critical Health's argument has also been rejected by all circuit
courts that have considered the issue.2 Courts have interpreted similar
_________________________________________________________________

2 Most district courts have likewise found the AMEX Window closed.
See, e.g., Conroy v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 899 F.
Supp. 1471, 1474 (W.D.N.C. 1995); Merrill Lynch, Pierce, Fenner &
Smith, Inc. v. King, 804 F. Supp. 1512, 1514 (M.D. Fla. 1992); Bear
Stearns & Co. v. N.H. Karol & Assocs., 728 F. Supp. 499, 502-03 (N.D.
Ill. 1989) (finding AMEX Window closed by agreement and explaining
that the "rules" of the AMEX do not encompass the AMEX Constitu-
tion). But see Shearson Lehman Bros., Inc. v. Brady, 783 F. Supp. 1490,

5
agreements as specifying the exclusive arbitral fora. See Luckie v.
Smith Barney, Harris Upham & Co., 999 F.2d 509, 514 (11th Cir.
1993); PaineWebber, Inc. v. Rutherford, 903 F.2d 106, 108 (2d Cir.
1990). In Rutherford, the Second Circuit considered a very similar
agreement and held that the AMEX Window may be superseded by
a more specific customer agreement between the parties. 903 F.2d at
108. The agreement in Rutherford provided that disputes would be
"settled by arbitration, in accordance with the rules, then obtaining,
of either the . . . [NYSE, AMEX, NASD], or where appropriate, Chi-
cago Board Options Exchange or Commodity Futures Trading Com-
mission." Id. at 107-08 (emphasis added). The court compared this
agreement with one where the customer agreed to arbitrate "only
before" several SROs. See id. at 108 (discussing Merrill Lynch,
Pierce, Fenner & Smith, Inc. v. Georgiadis, 903 F.2d 109, 111-12 (2d
Cir. 1990)). The Second Circuit concluded that there was no real dif-
ference between an agreement that provided for arbitration "only
before" specified SROs, and an agreement that provided for arbitra-
tion "in accordance with the rules" of several SROs. The court found
that in both situations the language should be construed as an agree-
ment to arbitrate only before one of the SROs, thus precluding arbitra-
tion before the AAA. See id. A contrary holding simply "would allow
customers to circumvent their agreements with ease." Id.; see also
Weiner, 68 F.3d at 558 (following Rutherford and holding that the
court "cannot compel a party to arbitrate before someone other than
the NYSE when that party had agreed to arbitrate disputes only before
the NYSE").

Similarly, in considering an agreement with language virtually
identical to the language in the instant case, the Eleventh Circuit
found that the parties had "closed the AMEX Window by agreement."
Luckie, 999 F.2d at 514. There were two agreements at issue in
Luckie -- one provided for arbitration "before" the three SROs and
the other for arbitration "in accordance with the rules" of the three
SROs. Id. at 511. The court held that through these agreements the
_________________________________________________________________

1495-96 (D. Mass. 1991) (finding that the AMEX Window remains
open, but without analysis of contrary authority); Wade v. Prudential
Securities, Inc., 1994 WL 124428, at *4 (N.D. Cal. 1994) (finding that
New York law controls, and therefore the AMEX Window remains
open).

6
parties had "agreed to submit disputes to arbitration before the three
SROs . . . . They have not agreed to submit disputes to arbitration
before the AAA; they have closed the AMEX Window by agree-
ment." Id. at 514.

We join the Second and Eleventh Circuits in holding that the
AMEX Window can be superseded by a more specific agreement.
Here the agreement provides that arbitration will proceed in accor-
dance with the rules of the three SROs. Notably, the agreement makes
no mention whatsoever of the AAA. Where the parties have agreed
explicitly to settle their disputes before particular arbitration fora, that
agreement must control. See Georgiadis, 903 F.2d at 113. To hold
otherwise would require us to impose a strained construction on a
straightforward agreement. It is far better to interpret the agreement
based on what is specified, rather than attempt to incorporate other
remote rules by reference. Here Critical Health has the choice of three
fora. We can see no reason to pass over the three specified fora and
allow arbitration to proceed in a fourth unspecified arena.

The choice of forum is of consequence here because the claims
asserted by Critical Health are based on transactions commencing in
the early 1980s. The AAA rules would allow such claims to proceed.
By contrast, the NASD, NYSE, and AMEX arbitration rules provide
that claims based on transactions that occurred more than six years
before arbitration was filed are not eligible for arbitration. Smith Bar-
ney was entitled to rely upon the fact that its exposure to stale claims
was limited by the rules of the NYSE, NASD, and AMEX. Although
Critical Health may now rue the bargain it struck, this is not a suffi-
cient reason for this court to rewrite the agreement against Smith Bar-
ney.

III.

Critical Health cannot arbitrate its claims before the AAA where
it has already agreed to submit disputes to arbitration before the
NYSE, NASD, or AMEX. We thus reverse the judgment of the dis-
trict court and remand with directions that the district court enforce
the choice of forum clause in the arbitration agreement.

REVERSED AND REMANDED

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