SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
A-4229-96T2
MID-STATE SECURITIES CORP.,
Plaintiff-Respondent,
v.
WILLIAM B. EDWARDS,
Defendant-Appellant.
_________________________________________________________________
Argued: January 28, 1998 - Decided: March 3,
1998
Before Judges Baime, Brochin and Braithwaite.
On appeal from the Superior Court of New
Jersey, Chancery Division, Monmouth County.
Robert A. Vort argued the cause for
appellant.
Craig S. Hilliard argued the cause for
respondent (Stark & Stark, attorneys; Mr.
Hilliard, on the brief).
The opinion of the court was delivered by
BRAITHWAITE, J.A.D.
This is an appeal from a Chancery Division order enjoining
arbitration of a claim by defendant against plaintiff that
plaintiff's employee engaged in improper conduct with respect to
defendant's securities brokerage account. The parties have
agreed to arbitrate such claims pursuant to rules of the National
Association of Stock Dealers (NASD). The rules of the NASD
require arbitration claims to be submitted within six years from
the date of the occurrence which gives rise to the claim. An
issue arose as to whether a court or the arbitrator
was to decide the issue of arbitrability because more than six
years elapsed before defendant filed his claim. The trial judge
ruled that a court is to decide the issue and permanently
enjoined defendant from arbitrating his claim.
Defendant now appeals and contends:
POINT I
New Jersey case law, decided after judgment
was entered in this case, holds that
timeliness of a demand for arbitration is an
issue to be resolved by the arbitrators.
POINT II
If the Court analyzes the arbitrability issue
from the standpoint of federal case law, it
must make its own analysis as to which is the
better reasoned body of law.
A. Federal law requires a liberal
construction in favor of
arbitration.
B. In construing the parties'
contract, the court should try to
divine the parties' intentions on
the issue in dispute.
C. Issues of time limitations are
presumptively for the arbitrator.
D. The NASD can and should construe
its own rules.
POINT III
Mid-State is judicially estopped from seeking
to have this Court enjoin arbitration.
A. Mid-State's motion to the NASD to dismiss for untimeliness admitted the authority of the NASD to decide the issue and is inconsistent with
its position in this Court that the
Court must address the issue.
B. Mid-State's motion to dismiss was
more than it had to do in order to
avoid an award by default against
it.
C. Federal case law construing the
doctrine of judicial estoppel is
consistent with New Jersey case
law.
POINT IV
Edwards' claim is not barred by Rule 15.
The parties agree that federal law applies. We acknowledge
that the federal circuits are evenly divided on the issue of
whether a court or the arbitrator is to decide the issue of the
timeliness of the arbitration. Five circuits hold that the court
determines the issue, and five circuits hold that the arbitrator
determines the issue. We choose to follow those courts that hold
that it is an issue for the arbitrator and therefore reverse.
The facts necessary to resolve this appeal are not in
dispute. On November 4, 1986, defendant William B. Edwards
opened a securities brokerage account with plaintiff Mid-State
Securities Corp. ("Mid-State"). Robert L. Maggs, Jr., was the
broker at Mid-State from whom Edwards purchased the securities.
After receiving advice and information about the securities from
Maggs, Edwards purchased three securities that are the subject of
this dispute. Edwards claims that the information and advice he
received was fraudulent, negligent, in violation of NASD and New
York Stock Exchange rules, and a breach of contract and fiduciary
relationship.
Edwards filed a Uniform Submission Agreement to have his
claims against Mid-State arbitrated by the NASD. The Uniform
Submission Agreement is a form document to submit claims to
arbitration by the NASD. The form only has space for the names
of the claimant and respondent and for the signature of the
claimant. A separate Statement of Claim is submitted by the
claimant setting forth the factual basis of the claim. The
relevant provisions on the form are:
1. The undersigned parties hereby submit to the
present matter in controversy, as set forth in the
attached statement of claim, answers, and all related
counterclaims and/or third-party claims which may be
asserted, to arbitration in accordance with the
Constitution, By-Laws, Rules, Regulations, and/or Code
of Arbitration Procedure of the sponsoring
organization.
2. The undersigned parties hereby state that they
have read the procedures and rules of the sponsoring
organization relating to arbitration.
3. . . . . The undersigned parties further agree
and understand that the arbitration will be conducted
in accordance with the Constitution, By-Laws, Rules,
Regulations, and/or NASD Code of Arbitration Procedure
of the sponsoring organization.
At oral argument, both parties conceded that federal law applies. We agree, and therefore affirm the trial judge's reliance on federal law. We disagree, however, that we are bound by decisions of the Third Circuit because New Jersey is located in that circuit. A state court is not bound by the decisions of lower federal courts. Dewey v. R.J. Reynolds Tobacco Co., 121 N.J. 69, 79-80 (1990).
Defendant argues that because federal law favors arbitration, arbitrators should determine whether his claim is time barred. Plaintiff asserts that federal law requires courts to determine the scope of arbitration, including whether a claim submitted for arbitration by the NASD is non-arbitrable because it is outside the six-year limit of the NASD rules. The rule in question provides as follows:
No dispute, claim, or controversy shall be
eligible for submission to arbitration under
this Code where six (6) years have elapsed
from the occurrence or event giving rise to
the act or dispute, claim or controversy.
This Rule shall not extend applicable
statutes of limitations, nor shall it apply
to any case which is directed to arbitration
by a court of competent jurisdiction.
[NASD Code rule 10304 (former § 15).]
Federal law is not settled on the question of whether a
court or an arbitrator decides whether a claim submitted to the
NASD for arbitration is barred by NASD Code rule 10304 (former §
15). The United States Supreme Court has not yet decided the
issue and the circuit courts are split evenly. Circuits holding
that a court decides are: Cogswell v. Merrill Lynch, Pierce,
Fenner & Smith, Inc.,
78 F.3d 474, 478-81 (10th Cir. 1996);
Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Cohen,
62 F.3d 381, 383-84 (11th Cir. 1995); PaineWebber Inc. v. Hofmann,
984 F.2d 1372, 1378 (3d Cir. 1993);See footnote 1 Roney & Co. v. Kassab, 981 F.2d
894, 898-900 (6th Cir. 1992); Edward D. Jones & Co. v. Sorrells,
957 F.2d 509, 512-13 (7th Cir. 1992). Circuits holding that
arbitrators decide are: PaineWebber v. Elahi,
87 F.3d 589 (1st
Cir. 1996); PaineWebber Inc. v. Bybyk,
81 F.3d 1193 (2d Cir.
1996); Smith Barne Shearson, Inc. v. Boone,
47 F.3d 750 (5th Cir.
1995); FSC Secs. Corp. v. Freel,
14 F.3d 1310 (8th Cir. 1994);
O'Neel v. National Ass'n of Secs. Dealers, Inc.,
667 F.2d 804
(9th Cir. 1982).
We find particularly persuasive on this issue the first
circuit decision in Elahi, supra. There, where the issue of
arbitrability was unclear, the court created a presumption. The
court held that where "(1) [the parties] have entered into a
valid arbitration agreement . . ., and (2) the arbitration
agreement covers the subject matter of the underlying dispute
between them . . .," it would presume that the parties intended
that "the other issues relating to the substance of the dispute
or the procedures of arbitration are for the arbitrator" to
decide. Id. at 599.
Here, the Uniform Submission Agreement provides that the
parties are submitting to arbitration "the present matter in
controversy" and that the parties agree "that the arbitration
will be conducted in accordance with the Constitution, By-Laws,
Rules, Regulations, and/or Code of Arbitration Procedure of the
[NASD]." The agreement could reasonably be read to mean either
that the arbitrators would determine the time-bar issue under the
NASD Code or that the arbitrators determine only the underlying
matter of the arbitration. Thus, the agreement does not clearly
state the parties' intention with regard to whether the NASD's
time-bar is to be decided by the court or the arbitrator.
Where, as here, an agreement is ambiguous as to whether the
parties intended for an issue to be arbitrated, "federal
arbitration law must provide default rules and presumptions."
Elahi, supra, 87 F.
3d at 594. There is a broad presumption of
arbitrability requiring that "any doubts concerning the scope of
arbitrable issues . . . 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'l Hosp. v. Mercury
Constr. Corp.,
460 U.S. 1, 24-25,
103 S. Ct. 927, 941,
74 L.
Ed.2d 765, 785 (1983).
Thus, applying the presumption here, the time-bar issue
should be decided by the arbitrator. Moreover,
once it is decided that the subject of a
particular dispute is within the scope of an
agreement to arbitrate, any question as to
whether a party has satisfied the procedural
preconditions of arbitration, such as the
timeliness of a demand for arbitration, . . .
generally should be decided by arbitrators
rather than a court.
[Commerce Bank, N.A. v. DiMaria Constr.,
Inc.,
300 N.J. Super. 9, 14 (App. Div.),
certif. denied,
151 N.J. 73, petition for
cert. filed,
66 SLW 3439 (1997).]
Further, NASD Code Rule 10324 provides that the arbitrator
"shall be empowered to interpret and determine the applicability
of all provision under this code . . . ." We therefore conclude
that the trial judge erred in enjoining defendant from
arbitration.
We find no merit to defendant's assertion that plaintiff is judicially estopped from seeking relief in the court to enjoin the arbitration. R. 2:11-3(e)(1)(E). Plaintiff did not assert a different position from a prior proceeding. See Cummings v. Bahar, 295 N.J. Super. 374, 386-87 (App. Div. 1996).
Reversed.
Footnote: 1 This case actually determines the question of who decides the effect of the New York Stock Exchange rule that has the identical language of the NASD Code rule 10304 (former § 15).