SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
A-1806-95T3
ROBERT L. YOUNG,
Plaintiff-Appellant,
v.
THE PRUDENTIAL INSURANCE COMPANY OF
AMERICA, INC., a corporation of the
State of New Jersey; FRED FABOZZI,
individually and as an officer, agent
representative and/or employee of The
Prudential Insurance Company of America,
Inc.; and AVEN A. KERR, individually and
as an officer, agent, representative
and/or employee of The Prudential
Insurance Company of America, Inc.,
Defendants-Respondents.
________________________________________
Argued October 1, 1996 - Decided February 14, 1997
Before Judges Pressler, Humphreys and Wecker.
On appeal from the Superior Court of New Jersey,
Law Division, Somerset County.
Lawrence P. Cohen and Kevin M. Hahn argued the cause
for appellant (Courter, Kobert, Laufer & Cohen,
attorneys; Mr. Hahn on the brief).
Alan E. Kraus argued the cause for respondent
The Prudential Insurance Company of America (Riker,
Danzig, Scherer, Hyland & Perretti, attorneys; Mr.
Kraus on the joint brief filed by respondents).
Cynthia J. Borrelli argued the cause for respondents
Fred Fabozzi and Aven A. Kerr (Bressler, Amery & Ross,
attorneys; J. Michael Riordan on the joint brief filed
by respondents).
The opinion of the court was delivered by
WECKER, J.S.C. (temporarily assigned).
Plaintiff Robert Young appeals from an order dismissing his
complaint against his former employer, defendant Prudential
Insurance Company of America, Inc., and two supervisory
employees, defendants Fred Fabozzi and Aven Kerr, without
prejudice on the ground that Young was contractually bound to
arbitrate his claims. Young's complaint alleges violations of
the Conscientious Employee's Protection Act, N.J.S.A. 34:19-1
(“CEPA”), and the New Jersey Law Against Discrimination, N.J.S.A.
10:5-1 et seq. (“LAD”), arising out of his employment and
termination by Prudential.
This appeal involves the enforceability of the arbitration
provision contained in a securities registration application and
the scope of the incorporated arbitration rules of the National
Association of Securities Dealers (“NASD”), particularly the so-called “insurance exception” of the NASD Code of Arbitration
Procedure ("Code").
We have carefully reviewed the arguments of counsel in light
of the applicable law and conclude that although the arbitration
provision is a valid and binding agreement, Young's claim under
CEPA involves precisely the sort of "insurance business" that the
NASD Code excepts from arbitration. We therefore reverse the
dismissal as to plaintiff's CEPA claim. We affirm the dismissal
without prejudice as to plaintiff's LAD claim.
These facts are undisputed. Young began working for Prudential in 1973. In 1982, while employed as a life insurance
sales representative for Prudential, and because of Prudential's
expansion into the securities market, plaintiff was required to
take an examination and to register with the NASD as a condition
of his continued employment. The NASD is a self-regulatory
organization of securities brokers and dealers, as defined by
15 U.S.C.A.
§78c(a)(26), subject to regulation by the Securities
and Exchange Commission ("SEC"). See generally,
15 U.S.C. §78b.
et seq. Registration required individuals such as Young to sign
and submit a Uniform Application for Securities Industry
Registration known as the “Form U-4" and to pass an examination.
The development and use of the Form U-4 is explained in an
opinion of Judge (now Justice) Ginsburg in Ass'n. of Inv. Brokers
v. Securities & Exchange Comm'n.,
676 F.2d 857, 859 (D.C. Cir.
1982) ("Form U-4 is in general use throughout the securities
industry.") The U-4 calls for the applicant to supply personal
and professional data and to undertake several promises,
including a promise to arbitrate certain disputes. Young twice
completed and signed the U-4, once in February 1982 and again in
April 1983. Prudential is a member of the NASD and is named as
Young's employer on each U-4 signed by him.
In or about June 1982 Young became the manager of a
Prudential field office in Metuchen. In 1991 defendant Fred
Fabozzi, Young's direct supervisor, requested him to transfer to
the Warren Hills office. It was after his transfer to Warren
Hills that Young alleges he discovered a widespread, illegal
insurance sales practice he calls “churning.” He contends that
his attempts to stop the practice were rebuffed by Fabozzi and
Prudential. Young further contends that he was similarly
rebuffed when he complained about a compensation policy that
charged all refunds issued to customers for past transactions
against the earnings of all current sales representatives in the
office. This policy, according to Young, was designed to cover
up past churning activities by creating a financial disincentive
for sales representatives to report past instances of churning
that would require them to refund losses or otherwise reimburse
customers.
Young claims in this action that as a result of pressures
imposed upon him by Prudential in direct response to his open
criticism of the churning problems and the cover-up policy, he
suffered disabling depression and in October 1994 took a medical
leave and began receiving disability benefits from Prudential.
With respect to the individual defendants, plaintiff claims that
in early December 1994 Fabozzi notified him in writing that he
was being placed on probation as a result of three separate
incidents claimed to have occurred in 1991, 1992 and 1994.
According to plaintiff, in February 1995 defendant Aven Kerr
signed the letter of termination on behalf of Prudential and
referred to an “investigation into claims and complaints from
employees of the Warren Hills office concerning your behavior
towards the staff.” Plaintiff's disability benefits were
terminated as well.
Plaintiff filed this action in May 1995 alleging that
defendants violated CEPA first by placing him on probation and
then by firing him and cutting off his disability benefits, all
in retaliation for his internal company efforts to report and
stop what he reasonably believed to be illegal insurance sales
practices.See footnote 1
Young's complaint describes in some detail the allegedly
unlawful insurance practices he claims to have observed and
opposed:
13. FABOZZI's representations of "fine
opportunities for favorable progress" at the
Warren Hills office were misleading because
of liabilities and problems which existed
within that office. Defendant knew of the
liabilities and problems (involving certain
illegal sales practices commonly referred to
in the insurance industry as "churning")
which existed at the Warren Hills office
prior to the Plaintiff's transfer, yet they
intentionally failed and refused to inform
Plaintiff of these matters in order to induce
him to accept the transfer.
14. Plaintiff was unaware that certain agents and employees of the Warren Hills office were engaged in "churning" activity. Churning activity involves a sales tactic, usually directed at older policyholders, who are encouraged to purchase new insurance policies based on the misrepresentation of a sales agent that premiums due on the new insurance policies would be satisfied from dividends paid by PRUDENTIAL to the policyholder on older insurance policies already owned by the policyholders. The sales agent, in making these false representations to the policyholder, would
know that the representations were false; but
would make the representation anyway, for the
sole purpose of inducing the policyholder to
purchase a new insurance policy. Although
premiums due on the new policy would
initially be satisfied from the dividends on
the old policies, eventually the dividends
would no longer be sufficient to pay the
premiums. Thereafter, loans against the cash
surrender value of the insurance policies
would be arranged by PRUDENTIAL'S sales agent
without the knowledge of the policyholder;
and these loans would then be used to satisfy
the premiums which became due. Eventually
the original insurance policies would become
virtually worthless.
16. The churning activity which was taking
place in the Warren Hills office at the time
Plaintiff was transferred to that office was,
on information and belief, in fact encouraged
by PRUDENTIAL, and its high level employees
(including the former manager of the Warren
Hills office and FABOZZI), as a means by
which to increase sales.
17. The churning activity described above
without specific notice to the policyholders
is prohibited by law as well as being a
totally dishonest and illegal sales practice
perpetrated as against innocent and
unsuspecting policyholders.
18. Shortly after his transfer to the Warren
Hills office, Plaintiff discovered the
rampant churning activity which was taking
place within the office. Recognizing the
churning activity to be an illegal sales
practice, Plaintiff, as general manager of
the Warren Hills office:
(i) reported incidents of churning to
the attention of FABOZZI, as his
immediate supervisor, with a
recommendation that all such activities
cease;
(ii) reprimanded individual sales agents for engaging in churning activities and vigilantly guarded
against sales agents engaging in such
activities in the future;
(iii) insisted that all policyholders
affected by the churning activities
(whether the policyholders in question
had registered complaints with
PRUDENTIAL or not) be reimbursed for all
premiums which had wrongfully been
charged and collected for the new
policies; and
(iv) protested against PRUDENTIAL'S
policy (the "Churning Policy") of
charging the Warren Hills office with
return premiums, earned through churning
activity, rather than charging such
return premiums against the guilty sales
agents and/or prior sales managers who
had encouraged, and participated in, the
churning, especially since many were no
longer employed at the Warren Hills
office.
19. Defendants refused to accept Plaintiff's
recommendations, and elected, instead, to
deal with the churning problem on an ad hoc
basis, returning premiums only to those
policyholders who were sufficiently informed
of the problem, and astute enough, to file a
formal complaint with PRUDENTIAL.
20. The adoption of the Churning Policy by
the Defendants and the intended purpose and
result was calculated to discourage honest
employees from reporting churning activities
of dishonest employees working for Plaintiff
presently, and previously, since the result
of such honesty and forthrightness would be a
decrease in their income.
21. Additionally, the Churning Policy was
calculated to contain, and cover up, the
churning practices of PRUDENTIAL for the
purpose of:
(i) maintaining a high level of sales;
(ii) avoiding the loss of good will and
public confidence which could flow from
negative publicity;
(iii) avoiding civil and/or criminal
charges which could result from
widespread disclosure; and,
(iv) avoiding catastrophic consequences
which could result from any large scale
return of premiums to previously
unsuspecting policyholders.
22. When Plaintiff, as the general manager
of the Warren Hills office, protested the
Churning policy to his immediate supervisor,
FABOZZI (whose title was Vice President of
Regional Marketing), he was told by FABOZZI
that the Churning Policy would not be altered
by PRUDENTIAL and that Plaintiff should stop
complaining.
23. Because Plaintiff was outspoken about
the churning activities; and, because of his
attempts to convince the Defendants to
discontinue the Churning Policy as an
inherently unfair employment practice;
Plaintiff, despite his twenty years of
service to PRUDENTIAL, came to be held in
disfavor by the Defendants.
24. Additionally, because of Plaintiff's
insistence that all churning activities
within the Warren Hills office cease
immediately, he also came to be held in
disfavor by several of the agents working
under him in the Warren Hills office who
frequently met sales goals and increased
their own compensation by engaging in
churning activities.
New Jersey insurance law and regulations prohibit the
practice that Young alleges. See N.J.S.A. 17B:30-6:
No person shall make any misleading
representations or incomplete or fraudulent
comparison of any insurance policies or
annuity contracts or insurers for the purpose
of inducing, or tending to induce, any person
to lapse, forfeit, surrender, terminate,
retain, or convert any insurance policy or
annuity contract, or to take out a policy of
insurance or annuity contract in another
insurer.
See also N.J.A.C. 11:17A-2.8. The prohibited practice is
apparently known as "churning" or "twisting."See footnote 2 See 16
Appleman, Insurance Law and Practice § 8644. See also State ex
rel. Metropolitan Life Ins. Co. v. Starcher,
474 S.E.2d 186, 188
(W.Va. 1996):
Plaintiffs aver that MetLife engaged in a
form of "churning" or "twisting" by
improperly utilizing accumulated cash values,
dividends, and interest in existing life
insurance policies to finance the purchase of
additional policies.
In lieu of an answer, defendant filed a motion to dismiss or
stay plaintiff's lawsuit, invoking the arbitration provision of
the U-4. Plaintiff opposed the motion on the ground that the U-4
was not a contract, and that even if it was, his claim fell under
an express exception as a dispute involving the defendant's
insurance business.
The four-page U-4 forms signed by Young both in 1982 and
1983 required his signature on each page. Page four begins with
a heading printed in capital letters, white on a black
background: “THE FOLLOWING SHOULD BE READ VERY CAREFULLY BY THE
APPLICANT.” The fifth numbered paragraph following that
cautionary language reads as follows:
I agree to arbitrate any dispute, claim or
controversy that may arise between me and my
firm, or a customer, or any other person,
that is required to be arbitrated under the
rules, constitutions, or by-laws of the
organizations with which I register, as
indicated in Question 8.
The U-4 is used by several securities-related organizations, and
Question 8 (on page one) requires the applicant to specify the
organization to which application is made. Young specified
“NASD” and signed his name on each page. Young's notarized
signature appears on page four, just below the “read-very-carefully” section that includes the arbitration provision. The
second numbered paragraph of that section includes the following
certification:
I have read, understand and agree to abide
by, comply with, and adhere to all the
provisions, conditions and covenants of the
statutes, constitutions, certifications of
incorporation, by-laws and rules and
regulations of the states and organizations
as they are and may be adopted, changed or
amended from time to time . . . .
(emphasis added).
Sections 1 and 8 of the NASD Code as they existed in 1982
and 1983 were amended in 1993. See
58 FR 45932. Those sections,
with the 1993 deletions in brackets and additions underlined,
read as follows:
Sec. 1 This Code of Arbitration Procedure is
prescribed and adopted pursuant to Article
VII, Section 1(a)(3) of the By-Laws of the
National Association of Securities Dealers,
Inc., (the Association) for the arbitration
of any dispute, claim or controversy arising
out of or in connection with the business of
any member of the Association, or arising out
of the employment or termination of
employment of associated persons (s) with any
member, with the exception of disputes
involving the insurance business of any
member which is also an insurance company:
(1) between or among members;
(2) between or among members and associated persons;
[2] (3) between or among members or
associated persons and public customers, or
others; and
[3] (4) between or among members, registered
clearing agencies with which the Association
has entered into an agreement to utilize the
Association's arbitration facilities and
procedures, and participants, pledgees or
other persons using the facilities of a
registered clearing agency, as these terms
are defined under the rules of such a
registered clearing agency.
Sec. 8 (a) Any dispute, claim or controversy
eligible for submission under Part I of this
Code 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) by
and 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.
Young challenges the enforceability of the arbitration provision on several grounds.See footnote 3 He contends that he has a
statutory right to a jury trial of his CEPA and LAD claims and
that he did not knowingly waive the right to jury trial. With
respect to these arguments, the motion judge correctly concluded
that plaintiff's arguments could not prevail.
A written agreement to arbitrate a dispute involving
interstate commerce is “valid, irrevocable and enforceable” under
the Federal Arbitration Act,
9 U.S.C.A.
§1 et seq. (“FAA”),
“save upon such grounds as exist at law or in equity for the
revocation of any contract.” Id. § 2. The United States Supreme
Court has addressed the apparent conflict between the statutory
right to jury trial under a civil rights statute, the Age
Discrimination in Employment Act,
29 U.S.C.A.
§621 et seq.
("ADEA"), and the arbitration provision of a securities
registration application with the New York Stock Exchange
(“NYSE”), holding the discrimination claim subject to compulsory
arbitration. Gilmer v. Interstate/Johnson Lane Corp.,
500 U.S. 20, 26,
111 S. Ct. 1647, 1652,
114 L. Ed.2d 26, 37 (1991) ("It
is by now clear that statutory claims may be the subject of an
arbitration agreement, enforceable pursuant to the FAA.") The
Supreme Court found nothing in the text or legislative history of
the ADEA to suggest that Congress intended to bar a waiver of the
right to a judicial forum. Id., 500 U.S. at 28, 111 S. Ct. at
1653-54, 114 L. Ed.
2d at 38, citing Mitsubishi Motors Corp. v.
Soler Chrysler-Plymouth, Inc.
473 U.S. 614, 628,
105 S. Ct. 3346,
3354,
87 L. Ed.2d 444, 456 (1985).
We do not find plaintiff's reliance on the reasoning of
Prudential Ins. Co. of America v. Lai,
42 F.3d 1299 (9th Cir.
1994), cert. denied, U.S. ,
116 S. Ct. 61,
133 L. Ed.2d 24 (1995) to be persuasive. The 9th Circuit held that Prudential
sales representatives did not knowingly waive their Title VII
remedies for sexual harassment when they were required, as a
condition of their hiring, to sign U-4 forms similar to Young's.
Those plaintiffs
allege[d] that when they signed the U-4 form,
they were told only that they were applying
to take a test which was required for their
employment by Prudential, and that they were
simply directed to sign in the relevant place
without being given an opportunity to read
the forms. Arbitration was never mentioned,
and plaintiffs were never given a copy of the
NASD Manual, which contains the actual terms
of the arbitration agreement.
[Id. at 1301].
Addressing Gilmer, the 9th Circuit noted:
The issue before us, however, is not whether
employees may ever agree to arbitrate
statutory employment claims; they can. The
issue here is whether these particular
employees entered into such a binding
arbitration agreement, thereby waiving
statutory court remedies otherwise available.
[Id. at 1303].
Gilmer, however, tells us that only if the statute or legislative history evidence an intention to preclude alternate forms of dispute resolution will arbitration agreements be unenforceable with respect to a statutory claim. 500 U.S. at 29, 111 S. Ct. at 1653-54, 114 L. Ed. 2d at 39. Two years after Lai,
the 9th Circuit in Kuehner v. Dickinson & Co.,
84 F.3d 316 (9th
Cir. 1996), without overruling Lai, held that the U-4 arbitration
provision bound an employee asserting claims under the Fair Labor
Standards Act.
The FAA preempts any state law purporting to invalidate an
arbitration agreement involving interstate commerce. See Allied-Bruce Terminix Companies, Inc. v. Dobson,
513 U.S. 265,
115 S.
Ct. 834,
130 L. Ed.2d 753 (1995); Yale Materials Handling Corp.
v. White Storage and Retrieval Systems, Inc.,
240 N.J. Super. 370, 376 (App. Div. 1990). In any event, there is no evidence in
the text or legislative history of CEPA or LAD that members of
the classes protected by those statutes cannot waive the right to
jury trial by agreeing to arbitrate disputes with their
employers. Indeed the New Jersey Arbitration Act, N.J.S.A.
2A:24-1, mirrors the FAA and provides that any provision to
arbitrate an existing or future controversy "shall be valid,
enforceable and irrevocable, except upon such grounds as exist at
law or in equity for the revocation of a contract."
Both the federal and state arbitration statutes have been
held to express a strong policy favoring arbitration as a means
of dispute resolution and to require liberal construction of
contracts in favor of arbitration. E.g., Moses H. Cone Memorial
Hospital v. Mercury Construction Corp.,
460 U.S. 1, 24-25,
103 S.
Ct. 927, 941,
74 L. Ed.2d 765, 785 (1983); Marchak v. Claridge
Commons, Inc.,
134 N.J. 275, 281 (1993). Nevertheless, the scope
of the arbitration, no less than the duty to arbitrate, is
governed by the agreement of the parties. See, e.g., First
Options of Chicago, Inc. v. Kaplan, 514 U.S. ,
115 S. Ct. 1920, 1924,
131 L. Ed.2d 985, 993 (1995) (“[A]rbitration is
simply a matter of contract between the parties; it is a way to
resolve those disputes -- but only those disputes -- that the
parties have agreed to submit to arbitration."); Mastrobuono v.
Shearson Lehman Hutton Inc., 514 U.S. ,
115 S. Ct. 1212,
1217 n. 4,
131 L. Ed.2d 76, 86 n.4 (1995); Singer v.
Commodities Corp. (U.S.A.),
292 N.J. Super. 391, 402 (App. Div.
1996). We have recently considered an employee's claim that his
CEPA claim is not subject to the U-4's arbitration provision and
concluded that the provision is valid, enforceable and requires
the employee to arbitrate. Singer v. Commodities Corp. (U.S.A.),
supra,
292 N.J. Super. 391 (reversing the denial of defendant's
motion to compel arbitration). See also Bleumer v. Parkway Ins.
Co.,
277 N.J. Super. 378 (Law Div. 1994).
Whether a contract exists is to be determined in accordance
with state contract law. See, e.g., First Options of Chicago,
Inc. v. Kaplan, supra, 514 U.S. at , 115 S. Ct. at 1924, 131
L. Ed. 2d at 993; Volt Info. Sciences, Inc. v. Leland Stanford
Junior Univ.,
489 U.S. 468, 474,
109 S. Ct. 1248, 1253,
103 L.
Ed.2d 488, 497 (1989). Young's reliance upon New Jersey
contract law to avoid the arbitration agreement is unavailing.
In opposition to Prudential's motion, Young contended that he was
presented with the U-4 without sufficient time to read it
carefully; that he neither noticed the arbitration provision nor
contemplated that the document was anything more than an
application to take the registration exam; that no one at
Prudential called his attention to the arbitration provision;
that he was never given a copy of the U-4 that he signed; and
that he was never provided with the NASD rules and regulations
referred to by the arbitration clause.
Young contends on appeal that Prudential committed "fraud in
the factum and deceit," that he never agreed to arbitrate future
statutory claims or to waive the right to jury trial of such
claims, and that he was entitled to a plenary hearing to
determine whether his signatures on the U-4's constituted such an
agreement. There was, however, sufficient undisputed evidence
from which the motion judge determined, under the summary
judgment model plaintiff suggests, Brill v. Guardian Life Ins.
Co. of America,
142 N.J. 520 (1995), that no reasonable
factfinder could conclude that Young did not knowingly sign the
registration application and its arbitration agreement. The
judge concluded:
[I]t is undisputed that plaintiff signed the
U4, agreed to be bound by its terms,
including the arbitration term, and agreed to
be bound by any amendments to the terms,
including the added language clarifying the
inclusion of employment disputes within the
clause.
It is indeed undisputed that plaintiff himself entered
information and his signature on each page of the four-page U-4
forms, in 1982 and again in 1983. The caution “READ CAREFULLY”
appears in larger, white on black type, only a few inches above
six numbered paragraphs that include, as paragraph five, the
arbitration clause. These undisputed facts do not permit the
conclusion that Young was prevented from reading what he signed.
Young does not dispute that he signed documents acknowledging, as
office manager, that the NASD Manual was to be maintained in his
field office. Although plaintiff contends on this appeal that he
believed he was merely completing an application to take a test
and not entering into a contract to arbitrate future disputes,
the U-4 on its face is more than a test application.
Plaintiff complains that defendant never advised him or
alerted him to the arbitration provision in the U-4. No such
obligation exists where the provision is not hidden. Compare
Correa v. Maggiore,
196 N.J. Super. 273, 281 (App. Div. 1984)
("To support a claim [for concealment of material defects in real
property], however, the defective condition must be latent and
not reasonably observable to the purchaser.") Failing to read a
contract does not excuse performance unless fraud or misconduct
by the other party prevented one from reading. Berman v.
Gurwicz,
178 N.J. Super. 611, 617-18 (Ch. Div. 1981).
Plaintiff's claims of fraud and deceit in obtaining his
signature, in light of the undisputed facts, cannot establish
"fraud in the factum" as plaintiff claims. See Amsterdam v.
DePaul,
70 N.J. Super. 196 (App. Div. 1961). Neither do the
facts permit a finding of legal or equitable fraud as defined in
Baldasarre v. Butler,
254 N.J. Super. 502, 520-21 (App. Div.
1992) aff'd in part and rev'd in part on other grounds, 132 N.J.
278 (1993).
Plaintiff also contends that the 1993 amendments do not
apply to him because he signed the U-4 forms in 1982 and 1983.
Young argues that because his CEPA claim had not arisen when he
signed the U-4, he could not have knowingly waived the right to a
jury trial for such a claim. We find no merit to that contention
in light of the express promise in paragraph two of the "READ
CAREFULLY" section of the U-4, quoted in full above, to "abide
by, comply with, and adhere to all the provisions . . ., by-laws
and rules and regulations of the . . . [NASD] as they are and may
be adopted, changed or amended from time to time . . . ."
(emphasis added).
New Jersey law does not support plaintiff's argument that
because the U-4 is a form document, and he had no choice about
signing it or negotiating its terms, it is unenforceable as a
contraction of adhesion. See Rudbart v. North Jersey Dist. Water
Supply Comm'n,
127 N.J. 344, 353-56, cert. denied, 506 U.S. 871,
113 S. Ct. 203,
121 L. Ed.2d 145 (1992):
The project notes involved here
unquestionably fit our definition of
contracts of adhesion. That is, they were
presented to the public on standardized
printed forms, on a take-it-or-leave-it basis
without opportunity for purchasers to
negotiate any of the terms. But the
observations that the notes fit the
definition of contracts of adhesion is the
beginning, not the end, of the inquiry: we
must now determine as a matter of policy
whether to enforce the unilaterally-fixed
terms of the notes.
[Id. at 354 (emphasis added).]
Thus, in determining whether to enforce the
terms of a contract of adhesion, courts have
looked not only to the take-it-or-leave-it
nature or the standardized form of the
document but also to the subject matter of
the contract, the parties' relative
bargaining position, the degree of economic
compulsion motivating the “adhering” party,
and the public interest affected by the
contract.
[Id. at 356.]
In Rudbart, the majority cited three policy considerations
favoring enforcement of the contract of adhesion. First,
investors had the choice of “a vast selection of alternative
equity and debt instruments . . . . [and] were not driven to
accept the Commission's notes because of a monopolistic market or
any other economic constraint.” Id. at 356. Second, enforcement
“advances rather than contravenes well-established and important
public policies.” Id. at 357. Third, “judicial review of the
fairness of negotiable securities would be inconsistent with
federal and state securities law.” Id. at 358.
Analysis of the U-4 in light of the circumstances of Young's
signing and the factors suggested by Rudbart supports enforcement
of its arbitration provisions even if it is literally a contract
of adhesion. First, while employees of NASD members apparently
have no bargaining power and no choice with respect to signing
the U-4, the United States Supreme Court has determined that
unequal bargaining power does not preclude enforcement of the
arbitration provision. Gilmer, supra, 500 U.S. at 33, 111 S. Ct.
at 1655-56, 114 L. Ed.
2d at 41. The Court in Gilmer left open
the possibility that fraud or coercion in obtaining the
employee's agreement might avoid its terms based on contract law
in individual cases pursuant to section 2 of the FAA. Id., 500
U.S. at 33, 111 S. Ct. at 1655-56, 114 L. Ed.
2d at 41. However,
in light of the fact that Gilmer, like Young, was required to
sign the registration application as a condition of his
employment, the Supreme Court obviously contemplated avoidance of
the arbitration clause only upon circumstances substantially more
egregious than the ordinary economic pressure faced by every
employee who needs the job.
Second, there is a strong public policy expressed in the
substantial federal and state authority for enforcement of
arbitration agreements. See, e.g., Dean Witter Reynolds, Inc. v.
Byrd,
470 U.S. 213, 221,
105 S. Ct. 1238, 1242,
84 L. Ed.2d 158,
165 (1985); Bender v. A.G. Edwards & Sons, Inc.,
971 F.2d 698,
699 (11th Cir. 1992); Mago v. Shearson Lehman Hutton Inc.,
956 F.2d 932, 935 (9th Cir. 1992); Alford v. Dean Witter Reynolds,
Inc.,
939 F.2d 229 (5th Cir. 1991); Singer v. Commodities Corp.
(U.S.A.), supra,
292 N.J. Super. 391. See also
Shearson/American Express, Inc. v. McMahon,
482 U.S. 220, 226,
107 S. Ct. 2332, 2337,
96 L. Ed.2d 185, 193 (1987).
Third, the overall subject matter--registration and
regulation of persons selling securities to the public--is
already subject to review and oversight by the Securities and
Exchange Commission (“SEC”). See
15 U.S.C.A.
§78o-3 (g), (h).
The widespread use of the U-4 makes its uniform interpretation
and enforcement a matter of substantial public interest.
Accordingly, Young is bound by his agreement to arbitrate in
accordance with NASD rules.
Because we hold Young bound by his agreement to arbitrate disputes with Prudential in accordance with NASD rules, we look to the explicit exception provided by Section 1 of those rules for "disputes involving the insurance business of any member which is also an insurance company." Interpretation and construction of a contract is a matter of law for the court subject to de novo review. See Bradford v. Kupper, 283 N.J. Super. 556, 583 (App. Div. 1995), certif. denied, 144 N.J. 586 (1996). Our analysis of the NASD rules incorporated by reference in the U-4 persuades us that the insurance exception applies to Young's CEPA claim.See footnote 4
Defendant has brought to our attention the decisions of numerous federal circuit courts of appeals and district courts, many unreported, rejecting arguments on behalf of insurance-company employees that the "insurance exception" permits them to choose a judicial forum and precludes mandatory arbitration. The interpretation of federal law by federal courts may be persuasive in a given case, and "should be accorded due respect";
nevertheless, such rulings, other than by the United States
Supreme Court, are not binding upon a state appellate court.
Dewey v. R.J. Reynolds Tobacco Co.,
121 N.J. 69, 79-80 (1990).
Of the many decisions cited to us, few involve facts truly
similar to those before us.
The case factually closest to Young's is also the most
compelling. In re the Prudential Ins. Co. of America Sales
Practices Litigation,
924 F.Supp. 627 (D.N.J. 1996) (motion to
compel arbitration denied). There Judge Wolin concluded, as do
we, that the insurance exception--that provision of the Code that
excludes from arbitration those disputes "involving the insurance
business of any member which is also an insurance company"--precludes mandatory arbitration of employee claims against an
insurance company employer where the core of the claim is an
allegation that defendant's conduct of its insurance business
violates law or public policy. Id. at 640-42. The motion in In
re Prudential was:
part of a large group of cases against
defendant Prudential Insurance Company of
America ("Prudential") which have been
transferred to this Court for coordinated
pretrial proceedings under
28 U.S.C. §1407
pursuant to the order of the Judicial Panel
on Multidistrict Litigation. The majority of
these cases involve allegations by current
and former Prudential policyholders that the
company engaged in various illegal sales
practices. The cases at issue on this motion
are part of a smaller subset of cases, in
which certain former Prudential sales agents
allege that Prudential took adverse
employment actions against them because they
refused to participate in these illegal
practices.
[924 F.Supp. at 631.]
The defense relies upon a number of cases, both published
and unpublished, that hold the insurance exception inapplicable.
The great majority of those cases address what we deem a non-issue. E.g., Kidd v. Equitable Life Assur. Soc'y. of the United
States,
32 F.3d 516 (11th Cir. 1994) (Title VII race
discrimination claim); Wojcik v. Aetna Life Ins. & Annuity Co.,
901 F.Supp. 1282 (N.D. Ill. 1995) (broker's wrongful discharge
claim alleges harassment); O'Donnell v. First Investors Corp.,
872 F.Supp. 1274 (S.D.N.Y. 1995) (fraud and contract claims);
Prudential Ins. Co. of America v. Shammas,
865 F.Supp. 429 (W.D.
Mich. 1993) (state law discrimination claims). That is, they
tell us what is not debatable--that the mere fact that the
employer is an insurance company does not make the dispute one
"involving the insurance business."
There are, however, a handful of cases that decline to apply
the insurance exception to disputes not unlike the case before
us. In Armijo v. Prudential Ins. Co. of America,
72 F.3d 793
(10th Cir. 1995) (insurance exception not applicable),
Prudential's defense to plaintiff's Title VII claim was that
plaintiff's own violation of insurance law caused the company to
take adverse employment actions against him. Armijo has been
distinguished because insurance law violations were raised only
in defense of plaintiff's affirmative claim, In re Prudential,
supra, 924 F.Supp. at 641-42.
In Vitone v. Metropolitan Life Ins. Co.,
943 F.Supp. 192
(1996) reconsid. denied, F.Supp. , 1
997 WL 24850
(D.R.I. 1997), the plaintiff's suit alleged, among a number of
common law and statutory tort claims, that he had been terminated
for complaining and threatening to report alleged "compliance
irregularities in the company's operations . . . . [in violation
of] the Rhode Island's Whistleblowers' Protection Act" Id. at
194. Addressing the insurance business exception, the district
court in Rhode Island distinguished In re Prudential on the
ground that the claims there required "a comprehensive review of
the defendant's insurance business in order the resolve the
employment claims." Id. at 198. We fail to see how Young's
claim, or Vitone's, requires a less "comprehensive review,"
unless the Vitone court intended that the number of claimants
should determine the applicability of the insurance exception.
In Metropolitan Life Ins. Co. v. Lindsay,
920 S.W.2d 720
(Tex. Ct. App. 1996), several former salesmen who had either been
fired or accused of improper marketing actions, allegedly in
retaliation for questioning and threatening to "blow the whistle"
on the company's marketing practices, id. at 721, sued the
insurance company on a variety of tort and contract theories.
The Texas intermediate appellate court rejected the employees'
contention that their claims were not subject to mandatory
arbitration because of the insurance exception. In so holding,
the court noted that "most of the cases that address this issue
are unreported opinions from the federal district courts," id. at
723 n.2, and reasoned that
This case is essentially an employment
dispute, not a case about MetLife's insurance
business. At a trial on the merits, the
trial court will not necessarily be required
to determine whether the marketing practices
were in fact illegal; rather, the court must
decide whether MetLife required the
plaintiffs to follow the marketing practices
or whether the plaintiffs followed these
practices without authority from MetLife.
Thus, the primary issue is how MetLife
treated its employees. MetLife's marketing
practices are only a secondary issue.
[Id. at 724.]
We decline to follow the reasoning of the courts in Vitone
and Lindsay, which fail to distinguish claims like Young's from
termination cases that do not implicate the defendant's insurance
business. Vitone and Lindsay focus only on the defendant
insurance company's wrongful conduct toward plaintiff, ignoring
the fact that defendant's conduct toward its insurance clients
was squarely in issue.
In Trumbetta v. Metropolitan Life Ins. Co., 1
994 WL 481152,
129 Lab. Cas. (CCH) ¶ 57, 786, 2 Wage & Hour Cas. 2d (BNA) ¶ 542
(E.D. Pa. 1994), plaintiff brought suit against his insurance
company employer alleging RICO and defamation claims, intentional
interference with contractual relations and violations of state
labor laws. The court's opinion denying application of the
insurance exception is frequently cited in insurance exception
cases. However, discussion of the issue is so attenuated in that
opinion as to preclude useful comparison:
Although the plaintiff in this case made some
general allegations concerning the
defendant's insurance practices, . . . the
actual basis for each of his claims is the
conduct of his supervisors that led to his
constructive discharge.
[Id. at 2.]
Unlike Trumbetta, Young makes very specific allegations of
defendant's improper insurance practices. If the plaintiff in
Trumbetta made no specific allegations which, if proven, would
have established violations of insurance law, then the decision
is consistent with our decision today.
The critical distinction between the several no-insurance-exception cases on the one hand, and In re Prudential and the
instant case on the other, is that we deal here with more than a
statutory civil rights claim against an employer that happens to
be an insurance company. Indeed this is no "ordinary" or "garden
variety" employment dispute. See In re Prudential, supra, 924
F.Supp. at 640. Although the existence of multi-district
litigation and the risk of "inconsistent results" was cited by
Judge Wolin as an additional ground for applying the insurance
exception, 924 F.Supp. at 640, the involvement of Prudential's
insurance business is no less a factor in this individual suit.
Young's complaint sets forth the elements of a
"whistleblower" claim: that he reasonably believed Prudential was
engaging in an unlawful insurance practice, along with an
additional policy designed to cover-up the original practice;
that he complained to his superiors about both practices,
attempted to put a stop to those practices within his office, and
refused to participate in the cover-up; and that as a result of
such protected activity he was subjected to undue pressure and
adverse employment decisions, including termination. See
N.J.S.A. 34:19-3 a., c(1) and (3); Abbamont v. Piscataway Twp.
Bd. of Ed.,
138 N.J. 405, 423-24 (1994); Young v. Schering Corp.,
275 N.J. Super. 221, 233 (App. Div. 1994), aff'd,
141 N.J. 16
(1995).
The motion judge erred in concluding that the insurance
business exception applies only to disputes between insurance
companies. The express language of Section 1 of the NASD Code
leads us to a different conclusion. Section 1 was amended in
1993 to "clarify an existing ambiguity" and put to rest arguments
that employment related cases, including those arising out of
employment termination, were not covered by the arbitration
clause in the U-4. See
58 FR 45932. As quoted in full above,
Section 1 provides:
This Code . . . is prescribed . . . for the
arbitration of any dispute, claim or
controversy arising out of or in connection
with the business of any member of the
Association, or arising out of the employment
or termination of employment of associated
persons (s) with any member, with the
exception of disputes involving the insurance
business of any member which is also an
insurance company . . . .
[1993 amendment underlined.]
The 1993 amendment to NASD Code Section 1 added the words
describing employment disputes in a parallel construction to the
words describing arbitrable disputes generally. The insurance
exception language follows, and clearly modifies both of the
preceding parallel phrases. There is no other logical
interpretation of amended section 1, notwithstanding the cases
holding to the contrary. If employment disputes were not
intended to be subject to the "exception of disputes involving
the insurance business . . . ." and if that exception was
intended to apply solely to "any dispute, claim or controversy"
other than one involving employment, the phrase added in 1993
would have followed rather than preceded the "exception" phrase.
Section 1 would then likely have read:
This Code is prescribed . . . for the
arbitration of any dispute, claim or
controversy (a) arising out of or in
connection with the business of any member of
the Association, with the exception of
disputes involving the insurance business of
any member which is also an insurance company
or (b) arising out of the employment or
termination of employment of associated
persons (s) with any member,
Dictum in a recent Second Circuit opinion supports our conclusion
that the insurance exception is not limited to disputes involving
"certain parties." See Thomas James Assocs., Inc. v. Jameson,
102 F.3d 60, 64 (2d Cir. 1996) (provision in employment agreement
between NASD securities broker and employee registered with NASD,
purporting to waive employee's right to arbitrate under NASD
rules, is void as against public policy), citing In re
Prudential, supra, with approval.
To hold the insurance exception inapplicable on these facts
is to conclude that no individual employee's dispute with an
insurance company employer can ever meet the definition of a
dispute "involving the insurance business" of the employer. We
cannot imagine a claim that more clearly involves the insurance
business of the defendant than plaintiff's.
It is true that CEPA does not require proof that the
practices Young alleges are actually unlawful or against public
policy. Mehlman v. Mobil Oil Corp.,
291 N.J. Super. 98, 123
(App. Div.), certif. granted,
147 N.J. 264 (1996). Nevertheless,
those practices are at the heart of this case. If the evidence
proves that Prudential's behavior was unlawful, the
reasonableness of Young's perception will have been established.
Even if the evidence does not establish conduct that is unlawful
or in violation of public policy, Young's perception may be found
to have been reasonable. See Delran Educ. Ass'n. v. Delran Bd.
of Educ.,
277 N.J. Super. 538, 543-44 (App. Div. 1994). Of
course, if Young's belief, however sincere, was objectively
unreasonable, his actions are not protected activity and his CEPA
claim must fail. Whether Young acted upon "reasonable belief"
cannot be determined without "involving the insurance business"
of Prudential. Thus although the lawsuit is not an enforcement
proceeding, and although the lawfulness of the company's practice
is not the ultimate issue, it is a critical issue that is truly
at the core of this whistleblower case.
Young's claim falls outside the insurance exception only if
we conclude that no employee's claim can ever be subject to that
exception. Indeed, that is what the motion judge concluded:
Nor are we persuaded that the so-called
insurance exception on which plaintiff relies
applies to this case. The dispute here is at
its heart an employment dispute in which
plaintiff claims that he was wrongfully
discharged and discriminated against in
retaliation for what he describes as whistle
blowing. The exception relating to insurance
and the business of insurance, however, must
of necessity relate to disputes about the
practices of an insurance company raised
between insurance companies themselves and
not to the alleged retaliation visited on an
employee who calls attention to his insurance
company employer's allegedly unlawful
insurance practice. It is clear that the
essence of plaintiff's claim is wrongful
discharge and discrimination, not a dispute
relating in any meaningful way to insurance.
(emphasis added).
The judge relied upon Trumbetta v. Metropolitan Life Ins. Co.,
supra, whose facts are similar to those before us, and Prudential
Ins. Co. of America v. Shammas, supra, whose facts are readily
distinguishable. We agree with Judge Wolin in In re Prudential
that there is "no support in the text or history of the NASD Code
for the . . . finding that the exception applies only to disputes
between insurance companies themselves." 924 F.Supp. at 641. As
stated in Wojcik, supra, 901 F.Supp. at 1292, upon which
defendant relies, "[T]o successfully trigger the exception, a
plaintiff must allege unlawful insurance practices and not simply
wrongful conduct directed toward the plaintiff." Plaintiff has
done so.
We reverse the order of dismissal as to plaintiff's CEPA
claim and remand for trial and any appropriate pretrial
proceedings. The order dismissing plaintiff's LAD claim, without
prejudice, is affirmed.
Footnote: 1 Young's LAD claim alleges that his psychological injury qualifies him as "handicapped" and that the termination of his disability benefits as well as the termination of his employment constitute discrimination in violation of LAD. Footnote: 2 The headings of both N.J.S.A. 17B:30-6 and N.J.A.C. 11:17A-2.8 refer to the prohibited practice as "twisting." Footnote: 3 Defendant informs us that the United States District Court for the District of New Jersey rejected the very same arguments with respect to the enforceability of the U-4 arbitration requirement in plaintiff's suit against Prudential alleging a violation of the Employee Retirement Income Security Act, 29 U.S.C.A. §1001 ("ERISA"). Defendant cites Judge Clarkson Fisher's unreported opinion in that case, Civil No. 95-5883 (slip opinion) (D.N.J., April 2, 1996) solely for its
precedential value. The Law Division judge's letter opinion of October 19, 1995 predates Judge Fisher's opinion. Footnote: 4 Young does not argue that his LAD claim falls under this exception and we therefore do not address that question. Where some causes of action are arbitrable and others are not, they can be heard in different forums. See Dean Witter Reynolds, Inc. v. Byrd, supra, 470 U.S. at 217, 105 S. Ct. at 1240, 84 L. Ed. 2d at 163.