                                                                                                                           Opinions of the United
2000 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


4-4-2000

Smith v. Equitable
Precedential or Non-Precedential:

Docket 99-1031




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Recommended Citation
"Smith v. Equitable" (2000). 2000 Decisions. Paper 71.
http://digitalcommons.law.villanova.edu/thirdcircuit_2000/71


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Filed April 4, 2000

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 99-1031

C. LEON SMITH,
       Appellant

v.

THE EQUITABLE

       Appellee

APPEAL FROM THE
UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA

(D.C. No. 98-cv-01264)

District Judge: Honorable J. Curtis Joyner

ARGUED NOVEMBER 1, 1999

BEFORE: NYGAARD, McKEE, and ROSENN,
Circuit Judges.

(Filed: April 4, 2000)

       Joseph T. Wright, Jr., Esq.
       Danielle M. Mulcahey, Esq. (Argued)
       Wright & Associates
       148 Adams Avenue
       Scranton, PA 18503
        Attorneys for Appellant




       Larry Besnoff, Esq.
       Obermayer, Rebmann, Maxwell
        & Hippel
       1617 John F. Kennedy Boulevard
       One Penn Center, 19th Floor
       Philadelphia, PA 19103

       William L. Kandel, Esq. (Argued)
       John D. Giansello, III, Esq.
       Orrick, Herrington & Sutcliffe
       666 Fifth Avenue
       New York, NY 10103-0001
        Attorneys for Appellee
OPINION OF THE COURT

NYGAARD, Circuit Judge.

I.

This appeal arises from appellant C. Leon Smith's
attempt to secure employment with appellee, The Equitable.
He alleges that The Equitable refused to hire him because
of his race, in violation of Title VII of the Civil Rights Act of
1964, 42 U.S.C. S 2000e et seq.; 42 U.S.C. S 1981; and the
Pennsylvania Human Rights Act, 43 P.S. 955, et seq. The
District Court found that the parties had entered into an
arbitration agreement that covered Smith's claims. It
granted The Equitable's motion to compel arbitration, and
dismissed Smith's claims without prejudice. The District
Court reasoned that arbitration was the only relief Smith
was allowed under the Federal Arbitration Act ("FAA"), 9
U.S.C. SS 3-4. Smith now appeals, arguing that the District
Court should not have applied or enforced the arbitration
agreement. Because we lack appellate jurisdiction to hear
an appeal of this type of interlocutory order, we will
dismiss.

II.

In late 1996, Smith applied for a position selling"Series
6" annuities for The Equitable, a registered broker-dealer of

                                2


securities. Joseph McDonough, a District Manager for The
Equitable, interviewed Smith and forwarded his resume to
an Agency Manager named Joel Albert. Allegedly,
McDonough wanted to hire Smith but Albert stated he did
not want Smith to work for The Equitable because he is
African-American. However, in mid-January of 1997
McDonough offered Smith a pre-employment contract to
sell securities as a "prospective agent" of The Equitable.

As a prospective agent, Smith could attempt to qualify for
regular employment with The Equitable by selling securities
for the company during a trial period. The Equitable
considered prospective agents to be independent
contractors, and allowed them to solicit offers for the sale
of securities products on its behalf in order to evaluate
them. To become a prospective agent, however, Smith was
first required to register with the National Association of
Securities Dealers ("NASD"). The NASD in turn required
him to sign and submit an application called a U-4
"Uniform Application for Securities Industry Registration or
Transfer." This application stated that Smith agreed "to
arbitrate any dispute, claim or controversy that may arise
between [him] and [his] firm, or a customer, or any other
person, that is required to be arbitrated under the rules,
constitutions, or by-laws" listed on the form.

The NASD Code of Arbitration Procedure, incorporated
into the U-4 agreement, made the following matters eligible
for arbitration:

       [A]ny dispute, claim or controversy arising out of or in
       connection with the business of any members of the
       [NASD], or arising out of or in connection with the
       employment or termination of employment of
       associated person(s) with any member . . .:

       (a) between or among members;

       (b) between or among members and associated
       persons;

       (c) between or among members or associated persons
       and public customers, or others.

NASD Manual -- Code of Arbitration Procedure Rule 10101
(1997).

                                3


Of the disputes that are eligible for arbitration, the NASD
Code requires that several types always be submitted to
arbitration. These categories include disputes involving "a
person associated with a member against a member" and
vice-versa. NASD Code, Rule 10201(a). A person associated
with a member is defined as "a natural person registered
under the Rules of the [NASD] . . . or a natural person
engaged in the investment banking or securities business
who is directly or indirectly controlling or controlled by a
member." NASD By-Laws, Art. 1 (ee).

At the outset, the District Court correctly noted that the
strong federal policy favoring arbitration required it to
resolve all ambiguities in the U-4 agreement in favor of
arbitration. See Smith v. The Equitable, 27 F. Supp. 2d 565,
568 (E.D. Pa. 1998) (citing Seus v. John Nuveen & Co., Inc.,
146 F.3d 175, 178 (3d Cir. 1998), cert. denied , 119 S. Ct.
1028, 143 L. Ed. 2d 38, and Gilmer v. Interstate/Johnson
Lane Corp., 500 U.S. 20, 26, 111 S. Ct. 1647, 1652, 114 L.
Ed. 2d 26 (1991)). The District Court held that the scope of
the U-4 agreement did cover Smith's claims, because they
arose out of his pre-employment contract with The
Equitable:

       Accordingly, we find that Plaintiff 's current claims
       either arise out of or in connection with the business
       of a NASD member or arise out of the employment or
       termination of employment of an associated person
       with any member. Therefore, Plaintiff 's claims
       constitute the type of claims anticipated by the
       language of the U-4 Application and the NASD Code of
       Arbitration Procedure.

Smith v. The Equitable, 27 F. Supp. 2d at 568.

Smith argued that the U-4 agreement should not apply in
his case. He claimed that The Equitable fraudulently
induced him to sign the agreement, when it knew that it
would not hire him. Smith claims The Equitable thus
tricked him into waiving his rights under Title VII, and the
arbitration agreement should not be enforced as a result.
The District Court agreed that the arbitration agreement
would not be binding if Smith could demonstrate that it
was based on fraud, duress, mistake, "or some other

                               4


ground recognized by the law applicable to contracts
generally." Id. (citing Seus, 146 F.3d at 184 (quotation
marks omitted)). However, the District Court also correctly
noted that the Federal Rules of Civil Procedure require
allegations of fraud to be pleaded with particularity. See
Smith v. The Equitable, 27 F. Supp. 2d at 569; Fed. R. Civ.
P. 9(b). It concluded that Smith had failed to do so.

The District Court granted The Equitable's motion to
compel arbitration. It also granted The Equitable's
alternative motion to dismiss the litigation. The District
Court reasoned that because all of Smith's claims were
subject to arbitration, "retaining jurisdiction would serve no
purpose." Smith v. The Equitable, 27 F. Supp. 2d at 569. It
therefore dismissed Smith's claims without prejudice.
Smith appeals on the grounds that the District Court
misconstrued the applicability of the arbitration agreement,
that he should have been allowed to plead his allegations of
fraud with greater particularity, and that he did not make
a knowing and voluntary waiver of his civil rights when he
signed the arbitration agreement.

III.

Before we can consider Smith's arguments on the merits,
we must address The Equitable's assertion that we lack
appellate jurisdiction to hear this appeal. See Zosky v.
Boyer, 856 F.2d 554, 555 (3d Cir. 1988), cert. denied, 488
U.S. 1042, 109 S. Ct. 868, 102 L. Ed. 2d 992 (1989)
(examining appellate jurisdiction to review order compelling
arbitration sua sponte). Our jurisdiction depends on
whether or not the District Court's order compelling
arbitration was a final (and thus appealable) order, or
whether it was an interlocutory (and thus non-appealable)
order.

Generally, a federal Court of Appeals may not hear an
appeal from a non-final decision of a District Court. See 28
U.S.C. S 1291.1 Subject to a limited exception,2 Section
_________________________________________________________________

1. Very limited exceptions to the rule that interlocutory orders are not
immediately appealable may be found in 28 U.S.C.S 1292(a)(1) (for
interlocutory orders involving injunctions) and 28 U.S.C. S 1292(b) (for

                               5


16(b) of the F.A.A., 9 U.S.C. S 16(b), specifically prevents
appeal of a District Court's interlocutory order compelling
arbitration. This section provides that:

       [A]n appeal may not be taken from an interlocutory
       order granting a stay of any action under section 3 of
       this title; directing arbitration to proceed under section
       4 of this title; compelling arbitration under section 2063
       of this title; or refusing to enjoin an arbitration that is
       subject to this title.

9 U.S.C. S 16(b)(1)-(4) (format altered). Section 16(b) of the
F.A.A. reflects "the strong federal policy favoring
arbitration." Seus, 146 F.3d at 179. Because the District
Court did compel arbitration under Section 4 of the F.A.A.,
Section 16(b) prohibits us from hearing Smith's appeal if
that order was interlocutory. Whether the order was
interlocutory or not depends on whether it arose from an
independent or an embedded proceeding.

Independent proceedings are those which have been
brought initially for the sole purpose of compelling
arbitration pursuant to Section 4 of the FAA, 9 U.S.C. S 4.
These proceedings arise independently of any other lawsuit,
and the District Court's resulting order is immediately
appealable as the final relief sought. As the United States
Court of Appeals for the Second Circuit has explained,
_________________________________________________________________

certain certified questions). These grounds are generally not applicable
in

the arbitration context, because "no irreparable harm will be done to
either party by requiring arbitration without an interlocutory appeal."
Zosky, 856 F.2d at 561.

2. Section 16(b) does not trump 28 U.S.C. S 1292(b), which allows the
District Court to certify "controlling question of law as to which there
is

substantial ground for difference of opinion" such that immediate appeal
"may materially advance the ultimate termination of the litigation." This
exception does not apply here.

3. Section 206 provides that "[a] court having jurisdiction under this
chapter may direct that arbitration be held in accordance with the
agreement at any place therein provided for, whether that place is within
or without the United States. Such court may also appoint arbitrators in
accordance with the provisions of the agreement." 9 U.S.C. S 206.

                                6


       [i]f the suit is "independent," i.e., the plaintiff seeks an
       order compelling or prohibiting arbitration or a
       declaration that a dispute is arbitrable or not

       arbitrable, and no party seeks any other relief, afinal
       judgment ending such litigation is appealable at once
       . . . . If arbitration has been ordered, the objecting
       party need not await the outcome of the arbitration
       before challenging the order to arbitrate.

Filanto, S.P.A. v. Chilewich Int'l Corp., 984 F.2d 58, 60 (2d
Cir. 1993) (citations omitted and format altered); see also
Zosky, 856 F.2d at 557-59 (citing Rogers v. Schering Corp.,
262 F.2d 180, 182 (3d Cir. 1959) (in banc) (recognizing
distinction between independent proceedings to compel
arbitration and those arising as a defense to other claims)).

Embedded proceedings, on the other hand, are those in
which an agreement to arbitrate forms a defense to a claim
or claims brought before the court. Orders compelling
arbitration in an embedded proceeding are interlocutory,
and thus cannot be appealed according to Section 16(b) of
the F.A.A. and the final decision rule contained in 28
U.S.C. S 1291. As we have observed, "[i]t may appear
anomalous for the appealability of what amounts to the
same order to depend on the procedural posture of the case
in the district court." Zosky, 856 F.2d at 560. However,

       the underlying rationale . . . is that an order directing
       arbitration is interlocutory and, therefore, not
       appealable if it is made in a lawsuit, such as a suit for
       damages, in which in the normal course of judicial
       procedure there will be a later final order or judgment
       from which an appeal can be taken by a person
       aggrieved by the prior order to arbitrate.

Id., 856 F.2d at 558 (quoting Rogers, 262 F.2d at 182).
The question is which type of proceeding we have in this
case. Smith filed a lawsuit against The Equitable seeking
relief under various statutes. The Equitable responded by
seeking to compel arbitration as a defense to the lawsuit. It
is clear, therefore, that the motion to compel arbitration
began as an embedded proceeding because "[a]rbitration is
not the full relief sought by the plaintiff; indeed, the
plaintiff opposes arbitration." Zosky, 856 F.2d at 559. The

                               7


wrinkle here is that the District Court both compelled
arbitration and dismissed Smith's complaints.

Generally, when a District Court grants an order
compelling arbitration in an embedded proceeding, it will
also stay the proceedings pursuant to Section 3 of the
F.A.A., 9 U.S.C. S 3. Indeed, The Equitable argues that the
District Court only has power to stay the claims, according
to the mandatory language of Section 3. Although this may
be the better practice, it was not error to dismiss. We have
held in the context of an embedded proceeding that for
reasons of judicial efficiency, when "all the claims involved
in an action are arbitrable, a court may dismiss the action
instead of staying it." Seus, 146 F.3d at 179 (citing Dancu
v. Coopers & Lybrand, 778 F. Supp. 832, 835 (E.D. Pa.
1991), aff 'd, 972 F.2d 1330 (3d Cir. 1992)).

An argument can thus be made that we should treat the
present case more like an independent proceeding to
compel arbitration than as an embedded one, because in
the present case the District Court did not stay Smith's
claims. The end result, one could argue, is thus more like
that of an independent proceeding. We do not find this
distinction very compelling. Smith's claims were dismissed
without prejudice so that the arbitration could proceed in
an efficient manner. He argues the arbitration agreement
was invalid because he was never employed by The
Equitable, that The Equitable never intended to employ
him, and that his signature to the agreement was obtained
by artifice. However, he can test the validity of the
arbitration agreement before the arbitrator and still retain
his rights, if he deems it necessary, to challenge the
arbitration decision by re-filing his statement in the District
Court. Because Smith may re-file in this event,"[t]he
district court's order dismissing the action to the extent
that it concluded the . . . matter was arbitrable is
functionally analogous to the grant of a stay in an ongoing
proceeding pending the outcome of arbitration."
Communication Workers v. American Tel. & Tel., 932 F.2d
199, 207 (3d Cir. 1991).

We thus hold that because the dismissal was the
functional equivalent of a stay in this context, this is still
an embedded proceeding. The important point is that the

                               8


District Court did compel arbitration. Where, as here,
arbitration is a defense to litigation, arbitration provides
"an expeditious and inexpensive mode of alternative dispute
resolution." Communication Workers, 932 F.2d at 207. It
would be contrary to Section 16(b) of the F.A.A. to allow an
appeal of this order. Section 16(b) makes "clear that with
respect to an interlocutory order issued in an ongoing
proceeding, any order favoring litigation over arbitration is
immediately appealable and any order favoring arbitration
over litigation is not." Id. We are satisfied that we lack
appellate jurisdiction to hear this matter.

In an effort to circumvent this logic, Smith points out the
similarities between the complaint in Seus and his own. In
Seus, a former employee of a brokerage firm alleged that
the firm violated her rights under Title VII of the Civil
Rights Act of 1964, 42 U.S.C. SS 2000e et seq., and the Age
Discrimination in Employment Act of 1967, 29 U.S.C.
SS 621 et seq. The defendant raised as a defense the Form
U-4 arbitration agreement that plaintiff had signed. The
District Court compelled arbitration and dismissed the
complaint, and this Court affirmed. Smith argues that
because we reached the merits of an appeal of an order
compelling arbitration in an embedded proceeding in Seus,
this at least implicitly demonstrates that we have
jurisdiction to reach the merits of his appeal as well. We
disagree. In Zosky, we held that an order compelling
arbitration arising from an embedded proceeding is not
immediately appealable. See Zosky, 856 F.2d at 554. In
Seus, we did not address jurisdiction.4

We will dismiss for lack of appellate jurisdiction.
_________________________________________________________________

4. Because a later panel cannot overrule the holding of an earlier panel,
Seus could not alter our holding in Zosky, implicitly or otherwise, unless
it found the cases distinguishable. See Internal Operating Procedures
S 9.1 (3d Cir. 1994) ("no subsequent panel overrules the holding in a
published opinion of a previous panel. Court in banc consideration is
required to do so.").

                               9


A True Copy:
Teste:

       Clerk of the United States Court of Appeals
for the Third Circuit

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