United States Court of Appeals
Fifth Circuit
F I L E D
UNITED STATES COURT OF APPEALS
FIFTH CIRCUIT May 30, 2006
Charles R. Fulbruge III
Clerk
No. 05-10242
SIMON A. BULKO,
Plaintiff-Appellee,
versus
MORGAN STANLEY DW INC.; SHANE KHUBCHANDANI,
Defendants-Appellants.
Appeal from the United States District Court
for the Northern District of Texas
Before KING, BARKSDALE, and PRADO, Circuit Judges.
RHESA HAWKINS BARKSDALE, Circuit Judge:
Morgan Stanley DW Inc., and Shane Khubchandani, a Morgan
Stanley stockbroker (together, Morgan Stanley), appeal the summary
judgment awarded Simon A. Bulko, vacating an arbitration award to
Morgan Stanley. The district court held: one of the arbitrators
was not properly qualified; and, therefore, the arbitration panel
acted outside the scope of its authority. It ordered the dispute
to be considered by a new arbitration panel. REVERSED AND
RENDERED.
I.
In March 2002, pursuant to a customer agreement, Bulko
initiated a National Association of Securities Dealers (NASD)
arbitration against Morgan Stanley, stemming from Bulko’s
stock–market loss of approximately $16 million within a 14–month
period. As part of the NASD process, the arbitration was pursuant
to NASD rules.
For matters in which the amount in controversy exceeds
$50,000, those rules require a three–member panel consisting of two
public, and one non-public, arbitrators. A non-public arbitrator
“is an attorney, accountant, or other professional who has devoted
20 percent or more of his or her professional work, in the last two
years, to clients who are engaged” in the securities industry.
NASD Code of Arbitration Procedure § 10308(a)(4)(C)(amended 1984)
(NASD Code) (emphasis added).
By a 14 October 2003 letter, the NASD advised the parties:
the designated non–public arbitrator had withdrawn and was being
replaced by Mary Beth Marshall; and the parties had the option of
agreeing to proceed with only the two public arbitrators. No party
objected to Marshall.
In 1994, Marshall stated in her initial application to become
a NASD arbitrator: she was a shareholder with Munch Hardt Kopf
Harr Dinan, P.C. (Munch); and her practice was commercial
litigation, with an emphasis on securities law. The 1994
disclosure form stated half of her practice consisted of securities
work. That form imposed a duty on Marshall to inform the NASD of
any changes to her answers to the form’s questions. In 2000,
Marshall informed the NASD she was no longer practicing law full
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time; this was disclosed to the parties in the NASD’s 14 October
2003 letter.
Following the panel’s deciding in Morgan Stanley’s favor,
Bulko discovered Marshall had not practiced law since 1999, because
she took inactive status that year with the Texas State Bar. As a
result, this action contests the award, claiming the panel acted
outside the scope of its authority because it was not properly
constituted. Concluding Marshall was not qualified to serve as a
non-public arbitrator, the district court granted Bulko summary
judgment and directed the dispute to be heard by a new panel.
II.
The merits of the arbitration panel’s decision are not at
issue. Instead, the sole issue is whether the district court erred
in vacating the award by determining the panel acted outside the
scope of its authority. (Morgan Stanley claims that, even if the
award was properly vacated, the court abused its discretion by
requiring the dispute to be heard by a new panel, instead of by the
two non–challenged arbitrators and a new non-public one. Because
the court erred in vacating the award, we do not reach this
contention.)
A summary judgment is reviewed de novo, applying the same
standard as the district court. Wyatt v. Hunt Plywood Co., 297
F.3d 405, 408 (5th Cir. 2002), cert. denied, 537 U.S. 1188 (2003).
Such judgment is proper when “there is no genuine issue as to any
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material fact and ... the moving party is entitled to a judgment as
a matter of law”. FED. R. CIV. P. 56(c). Our de novo review is
conducted against the backdrop of the Federal Arbitration Act’s
(FAA) policy favoring the enforcement of arbitration agreements;
the scope of our review of an arbitration award is extremely
narrow. Brook v. Peak Int’l Ltd., 294 F.3d 668, 672 (5th Cir.
2002).
Bulko claims, and the district court held, that FAA § 10(a)(4)
permits vacating the award: “the arbitrators exceeded their
powers, or so imperfectly executed them that a mutual, final, and
definite award upon the subject matter was not made”. 9 U.S.C. §
10(a)(4). Bulko maintains the panel acted outside the scope of its
authority because Marshall was not qualified to serve as a non-
public arbitrator.
A.
After graduating from law school in 1988, Marshall started
working at Munch. She became a shareholder and remained there
until 31 December 1997, when she became of counsel, continuing in
that capacity until the end of 2003 (the record does not describe
any activities she undertook in that position). She was not
treated as a Munch employee after 31 December 1997 and performed no
work for Munch after mid–1999. That year, Marshall took inactive
status with the Texas State Bar.
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It is undisputed that Marshall’s practice with Munch
emphasized securities law. In June 2000, she notified the NASD she
was not practicing law full time but still had an office at Munch.
As noted, that updated disclosure was reflected in the 14 October
2003 NASD letter to the parties, which included a disclosure report
detailing Marshall’s qualifications: she stated she was of counsel
to Munch, “although [she was] not currently practicing full time”.
(Arguably: this suggests she was practicing law to some extent,
other than full time; and conflicts with the above–described
evidence in the summary–judgment record, including taking inactive
status in 1999 with the Texas State Bar.)
In May 2004, in connection with an unrelated arbitration for
which Marshall was serving as the non-public arbitrator, she
submitted an updated disclosure report stating: her Munch
of–counsel position ended 31 December 2003; and she had taken
inactive status with the Texas State Bar. Nevertheless, the NASD
continued classifying Marshall as a non-public arbitrator due to
her employment history.
1.
An arbitration agreement is a contract; accordingly,
arbitrators must be selected pursuant to the method provided in it.
Brook, 294 F.3d at 672. Courts do not hesitate to vacate an award
when an arbitrator is not selected according to the
contract–specified method. Id. at 673.
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For example, in Brook, the contract required the American
Arbitration Association (AAA) to submit a list of nine names as
potential arbitrators and instructed the parties “alternately to
strike names from the list until only one remained”. Id. Instead,
the AAA provided a list of 15 arbitrators and told the parties to
strike the unacceptable names and then rank by preference the
“remaining candidates”. Id. (but holding failure to object
constituted waiver); see Cargill Rice, Inc. v. Empresa Nicaraguense
Dealimentos Basicos, 25 F.3d 223 (4th Cir. 1994) (vacating award
where arbitration agreement called for appointment of arbitrators
by mutual agreement, but arbitral body appointed panel without
parties’ input, despite objections); Avis Rent A Car Sys., Inc. v.
Garage Employees Union, Local 272, 791 F.2d 22, 25 (2d Cir. 1986)
(vacating award when arbitrator appointed by city mediation board
instead of AAA, as contract required).
a.
The above cases, however, are distinguishable from the
situation at hand. They involve deviations from contract
provisions prescribing the method for selecting arbitrators. Here,
however, the customer agreement (contract) was not included by
Bulko in the record on appeal. Nevertheless, it is undisputed
that, in the customer agreement, the parties agreed to submit
disputes to arbitration. The parties’ subsequent Uniform
Submission Agreement (submitting the matter to arbitration),
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provides “the arbitration will be conducted in accordance with ...
[NASD] Rules ... and/or NASD Code of Arbitration Procedure ....”
Therefore, in the light of this record, we cannot say Marshall’s
selection violated a specific method of selection in the customer
agreement (contract). Restated, based on this record, we cannot
say the customer agreement incorporated NASD Rules. In any event,
the rules’ method for selection was followed. At issue is whether
Marshall qualified to serve pursuant to that method. As discussed
below, she did.
Concerning the NASD rules, when summary judgment was granted,
the NASD continued classifying Marshall as a non-public arbitrator
in the light of her employment history, although she had not
practiced law since 1999. Although it is unclear whether the NASD
had full disclosure from Marshall, this action was public
information when the NASD continued to classify Marshall as a non-
public arbitrator. Thus, it is reasonable to infer the NASD had
available to it all relevant information regarding her. In
addition, the NASD director of arbitration has discretion, when
appointing arbitrators, to “make any decision ... consistent with
the purposes of [the NASD arbitration code] to facilitate the
appointment of arbitration panels and the resolution of arbitration
disputes”. NASD Code § 10308(e).
Again, a non–public arbitrator is “an attorney, accountant, or
other professional who has devoted 20 percent or more of his or her
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professional work, in the last two years, to clients who are
engaged” in the securities industry. Id. § 10308(a)(4)(C)
(emphasis added). Contrary to Bulko’s contention, and as reflected
in the foregoing provision, the NASD Code does not limit non-public
arbitrator eligibility to practicing attorneys-at-law. Rather, §
10308(a)(4)(C) provides that attorneys, among others, who have
devoted a certain amount of their professional activity to
securities related matters qualify as non-public arbitrators.
“Attorney”, of course, encompasses more than practicing law. An
attorney is “one ... designated to transact business for another;
a legal agent”. BLACK’S LAW DICTIONARY 138 (8th ed. 2004). Thus, it
is not clear Marshall’s inactive–member–of–the–bar status precludes
her satisfying § 10308(a)(4)(C)’s plain language, even absent the
NASD arbitration director’s discretion to facilitate arbitration to
further the Code’s purposes. In fact, as discussed, Marshall’s
2004 updated disclosure was in connection with another arbitration
panel for which she was serving as a non-public arbitrator.
In the absence of a specific agreement to the contrary,
determining Marshall’s qualifications and eligibility is a matter
left to the NASD. See Howsam v. Dean Witter Reynolds, Inc., 537
U.S. 79, 85 (2002) (holding NASD, not court, determines the
application of NASD rules because NASD has more expertise).
Because the parties’ agreement (contract) did not have a specific
method–of–selection clause, appointing Marshall as the panel’s non-
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public arbitrator was arguably not a departure from their
agreement. It called for any dispute to be decided by NASD
arbitration. For disputes involving more than $50,000, NASD
arbitration rules call for an arbitration panel consisting of two
public arbitrators and one non-public arbitrator. That is what
Bulko and Morgan Stanley received, with the NASD classifying
Marshall as the non-public arbitrator.
b.
Assuming, arguendo, that Marshall’s selection contradicted the
parties’ agreement, it was, at most, a trivial departure not
warranting vacatur. See Brook, 294 F.3d at 673; R.J. O’Brien &
Assoc., Inc. v. Pipkin, 64 F.3d 257 (7th Cir. 1995). Based on her
work experience, Marshall fulfilled the purpose of a non-public
arbitrator, which is to serve as an industry insider on the
arbitration panel. And, as discussed, the NASD continues to
classify Marshall as a non-public arbitrator due to that
experience. Lacking a specific method–of–selection clause in the
relevant contract, and in the light of the strong federal policy
favoring arbitration contracts, any error in selecting Marshall was
trivial.
B.
Because the district court erred in vacating the award, we
need not decide whether, by failing to raise the issue pre–award,
Bulko waived objecting to Marshall’s serving as a non-public
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arbitrator. It is worth noting, however, that the parties were
aware, pre–arbitration, that Marshall was not practicing law full
time. Yet, no party asked for any further information; nor,
apparently, did any party independently investigate until
post–award. Marshall’s disclosure should have put the parties on
notice of any potential issue with her qualifications. Likewise,
the parties were aware her position with Munch was of counsel, a
loosely–defined term that describes a wide variety of arrangements.
BLACK’S LAW DICTIONARY 375 (8th ed. 2004). Marshall’s of–counsel title
did not guarantee she was performing any work. Despite Bulko’s
contention that Marshall could not have been practicing as an
attorney after 1999, nothing in the record disputes her serving as
of counsel until the end of 2003. In sum, pre–arbitration, the
parties were on notice of any potential claims regarding Marshall’s
qualifications as a non-public arbitrator.
III.
For the foregoing reasons, the arbitration award was
improperly vacated by the district court; accordingly, the summary
judgment is REVERSED and judgment reinstating the award is RENDERED
for Morgan Stanley DW Inc., and Shane Khubchandani.
REVERSED AND RENDERED
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