Opinion
CAUSE NO. IP 02-248-C H/K
August 15, 2002
ENTRY ON MOTIONS TO DISMISS AND TO COMPEL ARBITRATION
Plaintiff World Financial Group, Inc. has brought this diversity action against a competitor and several individuals. World Financial Group markets financial products, including insurance products and annuities. World Financial Group alleges in general that defendant United Securities Alliance, Inc. and its officers have tortiously induced World Financial Group salespeople to breach non-competition and non-disclosure terms of their contracts with World Financial Group.
Defendants Ronald K. Bloomingkemper, Ronald J. Petrinovich, and Lester B. Schlais have moved to dismiss the claims against them for lack of personal jurisdiction. All defendants have moved for an order under the Federal Arbitration Act, 9 U.S.C. § 3, compelling World Financial Group to arbitrate its claims. As explained below, the court denies the motion to dismiss for lack of personal jurisdiction and, with one narrow exception, denies the motion to dismiss or stay pending arbitration.
I. Personal Jurisdiction
World Financial Group alleges that defendants Bloomingkemper, Petrinovich, and Schlais induced Indiana residents Jerry Steele and Bruce Carpenter, who are also defendants, as well as many other World Financial Group agents in Indiana and elsewhere, to breach their agreements with World Financial Group and to join United Securities Alliance.
The initial briefing on this motion was based on a limited factual record. After plaintiff had taken several depositions, however, plaintiff supplemented the record with the results on June 28, 2002. That submission provides evidence that all three of the moving defendants had purposeful contacts with Indiana sufficient to support specific jurisdiction in this case, which has arisen from those contacts. Specific jurisdiction may be based on relatively modest contacts with the forum if they have a substantial connection to the plaintiff's action. See Burger King Corp. v. Rudzewicz, 471 U.S. 462, 474-76 (1985); RAR, Inc. v. Turner Diesel, Ltd., 107 F.3d 1272, 1277 (7th Cir. 1997); Anthem Ins. Cos. v. Tenet Healthcare Corp., 730 N.E.2d 1227, 1235 (Ind. 2000).
A federal district court exercising diversity jurisdiction has personal jurisdiction over a nonresident defendant "only if a court of the state in which it sits would have such jurisdiction." RAR, Inc. v. Turner Diesel, Ltd., 107 F.3d at 1275. The same standard applies to claims arising under federal statutes that do not authorize nationwide service of process. Search Force, Inc. v. Dataforce Int'l, Inc., 112 F. Supp.2d 771, 774 (S.D.Ind. 2000). Indiana Trial Rule 4.4(A) serves as Indiana's long-arm statute. In Indiana, personal jurisdiction depends on both whether requirements of the state long-arm statute are met and whether federal due process is satisfied. Anthem Ins. Cos. v. Tenet Healthcare Corp., 730 N.E.2d at 1232.
Prior to the Indiana Supreme Court's decision in Anthem, deciding personal jurisdiction in Indiana required consideration only of federal due process standards. Wilson v. Humphreys (Cayman) Ltd., 916 F.2d 1239, 1243 (7th Cir. 1990), is one of many cases in which the Seventh Circuit applied Indiana Trial Rule 4.4(A) to extend personal jurisdiction to the limits of federal due process, and so collapsed the application of the state rule and federal due process into a single inquiry. In Anthem, however, the Indiana Supreme Court reinvigorated Indiana Trial Rule 4.4(A) by requiring courts to determine separately and initially whether its provisions have been satisfied. 730 N.E.2d at 1232.
Petrinovich and Bloomingkemper and defendants Steele and Carpenter talked by telephone to discuss having Steele and Carpenter leave World Financial Group in Indiana to join United Securities Alliance. The result of the call was that Steele and Carpenter visited Petrinovich and Bloomingkemper in Colorado to talk about leaving World Financial Group. Petrinovich then had continuing telephone and other contacts with Steele and Carpenter in Indiana to induce them to leave and to encourage them to bring others with them. Petrinovich also supplied to Steele and Carpenter some draft affidavits for use in documenting that other World Financial Group agents had initiated contact with Steele and Carpenter about leaving, and not vice versa.
It remains to be seen whether defendants were correct as to whether those affidavits make a difference on the merits. The theory is that, under the relevant contracts, a departing defendant may not solicit other colleagues to leave with him but may respond if a colleague has initiated the communications. The court expresses no view on the question at this time.
Defendant Schlais has also used the telephone in efforts to recruit World Financial Group agents in Indiana to join United Securities Alliance, allegedly in violation of their contracts with World Financial Group.
Plaintiff's claims arise at least in substantial part from these defendants' contacts with Indiana. The contacts with Indiana satisfy Indiana Trial Rule 4.4(A)(1) because they were "in furtherance" of defendants' business in Indiana, and they satisfy the "arising under" element of Rule 4.4(A) because those contacts were allegedly the means by which defendants carried out the alleged wrongs. See Anthem, 730 N.E.2d at 1241 (upholding jurisdiction over defendant based on telephone calls and letters to Indiana where fraud claim was based on those communications).
It remains to be seen, of course, whether the defendants took any actions that violated the plaintiff's rights, but the asserted claims arise from defendants' purposeful contacts with the State of Indiana. Under these circumstances, specific jurisdiction is applicable to all three of the moving defendants. Their motion to dismiss for lack of personal jurisdiction is hereby denied.
II. Arbitration
Defendants moved to dismiss or stay the case pending arbitration. The Federal Arbitration Act applies to enforce "an agreement in writing" for arbitration. 9 U.S.C. § 3. Defendants Steele and Carpenter have written agreements with World Financial Group for arbitration of disputes, but those agreements allow World Financial Group to sue in court for temporary injunctive relief and other "extraordinary relief." World Financial Group agrees that any claim for damages against Steele and Carpenter must be stayed pending arbitration, but World Financial Group has requested injunctive relief from the court. World Financial Group has no written agreements for arbitration with defendants United Securities Alliance, Inc., Bloomingkemper, Petrinovich, or Schlais.
To overcome the lack of written agreements, defendants initially relied on the theory that World Financial Group, Inc. is a member of the National Association of Securities Dealers (NASD), which has written rules requiring members to arbitrate most of their disputes with one another. When World Financial Group showed that it is not a member of NASD, defendants shifted gears. In their reply brief, they argued that World Financial Group nevertheless qualifies as a "certain other" within the meaning of NASD Rule 10201, such that arbitration should be required. The court disagrees, finding that this case falls outside the plain language of Rule 10201 regarding when a dispute must be arbitrated.
World Financial Group's motion to strike defendants' reply brief is hereby denied. Rather than requiring the parties to start again from scratch in briefing the issue of arbitrability, the court allowed plaintiff to file a surreply brief that addressed the new theory first offered in defendants' reply brief.
Under the heading "Required Submission," NASD Rule 10201(a) provides:
(a) Except as provided in paragraph (b) or Rule 10216 [which concern employment discrimination claims and are not relevant here], 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 of employment of such associated person(s) with such member, shall be arbitrated under this Code, at the instance of:
(1) a member against another member;
(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.
For the sake of argument, the court assumes, as defendants argue, that World Financial Group may be a "certain other," so that its claims against defendants are at least eligible for NASD arbitration. But World Financial Group opposes arbitration, so the issue here is whether plaintiffs' claims are subject to mandatory arbitration. And the problem is that defendants have ignored (and have omitted from the quotation in their reply brief, where defendants first raised the issue) the critical portions of Rule 10201(a), the numbered subsections.
Defendants' omission of the critical portions of Rule 10201 is a troubling example of advocacy, to say the least. The omission is even more troubling than usual because the omission was from a reply brief that was defendants' first statement of their "certain others" theory of arbitrability under Rule 10201. Thus, defendants' accusations against plaintiff, such as that it has "established its willingness to mislead this Court," Def. Supp. at 4 (filed July 11, 2002), are not made from the moral high ground. In the extensive motions practice thus far in this case, both sides seem to treat the role of the advocate as requiring them to remain silent about any uncomfortable fact or law until the opponent brings it out, even when it is inevitable that the opponent will do so. By this approach, both sides undermine their credibility with the court.
Defendants do not argue, and apparently concede, that World Financial Group does not qualify as an "associated person" of an NASD member. As that term is now defined in the rules, it is limited to natural persons. Under Rule 10201, arbitration is mandatory only if both sides of the arbitration include either members of the NASD or "associated persons." There is no express provision requiring a "certain other" to submit its claims to arbitration, or to submit to arbitration of NASD members' or associated persons' claims against it. See Burns v. New York Life Ins. Co., 202 F.3d 616, 621 (2d Cir. 2000) (affirming denial of defendant's motion to compel arbitration; defendant was affiliate of NASD member and was only "certain other" who was not entitled to compel arbitration under Rule 10201); Ladd v. Scudder Kemper Investments, Inc., 741 N.E.2d 47, 51 (Mass. 2001) (affirming denial of arbitration demanded by party claiming to be "certain other" against an "associated person"); Cantor Fitzgerald, L.P. v. Prebon Securities (USA), Inc., 731 A.2d 823, 827 (Del.Ch. 1999) (rejecting argument that plaintiff was required to arbitrate under NASD Rule 10201 as a "certain other"; plaintiff was not member of NASD but owned 99.5% of NASD member; plaintiff was not "associated person" of member and was asserting its own rights).
Defendants rely on McMahan Securities Co. v. Forum Capital Markets L.P., 35 F.3d 82, 88 (2d Cir. 1994), which stated that a "certain other" may be joined as a party in NASD arbitration if three conditions are met: (1) the party plays an active role in the securities industry; (2) the party is a signatory to a securities-industry arbitration agreement or is an "instrument" of another party to the arbitration; and (3) the party has voluntarily participated in the events giving rise to the controversy underlying the arbitration. That statement seems to remain correct with respect to permissive joinder in NASD arbitrations.
The McMahan court went further, however, in holding that a plaintiff was required to arbitrate its claim with a "certain other." That portion of McMahan is no longer viable because the McMahan court was applying an earlier version of the NASD's arbitration rules, which included claims involving "certain others" among the claims subject to mandatory arbitration. See 35 F.3d at 86 (quoting earlier version of Section 8 of NASD Code of Arbitration). The current version, set forth in Rule 10201, plainly excludes "certain others" from those who may insist on or must submit to mandatory arbitration. On this issue, therefore, McMahan offers no help for defendants.
Accordingly, defendants' motion to dismiss or to stay pending arbitration is hereby denied, with one exception. In response to defendants' motion, World Financial Group has stated it is not currently seeking monetary damages from defendants Steele and Carpenter. World Financial Group's contracts with Steele and Carpenter require arbitration but also allow World Financial Group to go to court to seek temporary injunctive relief and other "extraordinary relief." This distinction is not apparent from plaintiff's complaint, which is written broadly enough to seek monetary damages against all defendants. Accordingly, any claims for monetary relief that World Financial Group might be deemed to be asserting against defendants Steele and Carpenter are hereby stayed pending arbitration.
Finally, the court acknowledges defendants' submission of "Defendants' First Supplement to Their Motion to Dismiss and Compel Arbitration." The principal portion of the supplement has little to do with the issue of arbitration. Instead, it asserts that defendants have found evidence that in an earlier lawsuit with Primerica, World Financial Group or its predecessors asserted substantive positions inconsistent with the positions that World Financial Group is taking in this case. That is an argument that may or may not be relevant for a finder of fact on the ultimate merits of these claims, but it has nothing to do with arbitrability, nor could it support a judicial estoppel argument (because there is no indication that World Financial Group or its predecessors prevailed in the prior litigation). See Cooper v. Eagle River Memorial Hosp., Inc., 270 F.3d 456, 462-63 (7th Cir. 2001) (one element of judicial estoppel is that the party to be estopped must have convinced the first court to adopt its position); DeVito v. Chicago Park Dist., 270 F.3d 532, 535 (7th Cir. 2001) (judicial estoppel "forbids a party who has won a case on one ground to turn around in a subsequent case and repudiate that ground in an effort to win a second victory."). At the end of the supplement, defendants report that they have initiated an arbitration proceeding. That point is at least relevant to arbitrability, but it does not affect the decision on their motion to dismiss or stay.
To sum up, the motion to dismiss for lack of personal jurisdiction filed by defendants Bloomingkemper, Petrinovich, and Schlais is hereby denied, and all defendants' motion to dismiss or stay pending arbitration is denied, except that any claims for damages against defendants Steele and Carpenter are stayed pending arbitration.
So ordered.