HIGGINS v. GREAT WESTERN FINANCIAL SECURITIES

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Court of Appeal, Second District, Division 4, California.

Cynthia HIGGINS, et al., Petitioners, v. The SUPERIOR COURT of Los Angeles County, Respondent, GREAT WESTERN FINANCIAL SECURITIES, Real Party in Interest.

No. B057028.

Decided: October 08, 1991

Allred, Maroko, Goldberg & Ribakoff and Carla D . Barboza, Los Angeles, for petitioners. No appearance, for respondent. Morgan, Lewis & Bockius, Michael L. Wolfram and Dawn Patrice Ross, Los Angeles, for real party in interest. Jon W. Davidson, Paul L. Hoffman, Los Angeles, Steven S. Zaleznick, Cathy Ventrell-Monsees, Washington, D.C., Bill Lann Lee, Constance L. Rice, Kevin S. Reed, Los Angeles, Joseph Posner, Encino, Leroy S. Walker and Peter F. Laura, Los Angeles, as amici curiae on behalf of petitioners.

Petitioners Cynthia Higgins, Lucia Smith and Lorraine Hartman seek damages for alleged sexual discrimination in violation of Government Code section 12900, et seq., against their former employer, real party in interest Great Western Financial Securities (real party).   In this writ proceeding they request relief from an order of the trial court granting real party's motion to compel binding arbitration of their claims.   We issued an alternative writ of mandate and ordered all arbitration proceedings stayed until further order of this court.

The issue presented is whether arbitration of petitioners' gender discrimination claim is compelled by the arbitration clause contained in their Form U–4 1 applications for registration with the National Association of Securities Dealers (NASD) which they were required to file as a condition of continued employment.   That clause is:  “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․”

NASD's Code of Arbitration Procedure provides that claims “arising out of or in connection with the business of any member” are eligible for arbitration if the dispute is “between or among members,” (section 1) and that such “industry and clearing controversies” must be arbitrated “at the instance” of “a member against another member․”  (Section 8.)

Real party argued in its motion to compel arbitration that since all parties were members of NASD, and therefore “subject to the NASD Code of Arbitration,” its demand for arbitration pursuant to that code should be enforced pursuant to Code of Civil Procedure section 1281 2 and the Federal Arbitration Act (FAA).3  (9 U.S.C., § 1 et seq.)

Petitioners' opposition to the motion asserted that discrimination claims brought under the California Fair Employment and Housing Act (Gov.Code, § 12900 et seq.) could not be waived by private arbitration agreements because Congress had demonstrated its intent that discrimination claims, whether based on a state statute or the parallel provisions of Title VII of the Civil Rights Act of 1964 (42 U.S.C. § 2000e et seq.), be exempt from the policy favoring arbitration embodied in the Federal Arbitration Act.

The trial court, after expressing its dissatisfaction with the confusing and contradictory federal case law on the issue and noting the absence of controlling California law, took the matter under submission and ultimately granted the motion to compel arbitration.

 The trial court's frustration with the state of the law on this issue was, in our opinion, justified.   The only California case on point had recently been ordered to be depublished.4  Existing case law was confusing at best.   Two California cases, Baker v. Aubry (1989) 216 Cal.App.3d 1259, 265 Cal.Rptr. 381 (cert. denied 498 U.S. 820, 111 S.Ct. 66, 112 L.Ed.2d 40 (1990)), and Hall v. Nomura Securities International (1990) 219 Cal.App.3d 43, 268 Cal.Rptr. 45, had held that Form U–4 arbitration clauses compelled the arbitration of an employee's state-based claims for violation of statutory rights against an employer.   They were distinguishable from this case, however, because Baker involved a statutory claim for overtime pay, and Hall concerned alleged age discrimination.   They were also distinguishable because each was based upon a U–4 agreement in combination with a New York Stock Exchange Rule which required arbitration of any controversy “ ‘arising out of the employment or termination of employment․’ ”  (Baker v. Aubry, supra, 216 Cal.App.3d at p. 1262, 265 Cal.Rptr. 381.   See also Hall v. Nomura Securities International, supra, 219 Cal.App.3d at p. 47, 268 Cal.Rptr. 45.)   The Hall case nonetheless provided fuel for petitioners' fire with the following dictum:  “Federal cases have upheld exemptions for state-based sex and race discrimination claims, but not for claims of age discrimination.”  (219 Cal.App.3d at p. 49, 268 Cal.Rptr. 45.)

Federal case law did not suffer from the same paucity of authority, but failed to reveal either clear guidance or controlling authority on the issue.   It was clear that the FAA's policy favoring arbitration generally preempted any conflicting state law requiring a judicial forum.  (See Southland Corp. v. Keating (1984) 465 U.S. 1, 11, 104 S.Ct. 852, 859, 79 L.Ed.2d 1 [“We see nothing in the Act indicating that the broad principle of enforceability is subject to any additional limitations under state law.”];  Perry v. Thomas (1987) 482 U.S. 483, 490, 107 S.Ct. 2520, 2525, 96 L.Ed.2d 426 [a claim for commissions must, pursuant to a U–4 agreement and a New York Stock Exchange (NYSE) rule, be arbitrated, notwithstanding a state statute which authorized an action for wages despite the existence of an agreement to arbitrate].)

It was also clear that arbitration was not required i every case involving an arbitration clause despite the FAA's strong policy favoring arbitration.   For example, in Alexander v. Gardner–Denver Co. (1974) 415 U.S. 36, 94 S.Ct. 1011, 39 L.Ed.2d 147, the United States Supreme Court held that a grievance/arbitration procedure established in a collective bargaining agreement did not preclude an individual employee's action for race discrimination in violation of Title VII.   The bases for this conclusion were the purpose and procedures of Title VII, which “strongly suggest[ed] that an individual does not forfeit his private cause of action if he first pursues his grievance to final arbitration under ․ a collective-bargaining agreement,” (Alexander v. Gardner–Denver Co., supra, 415 U.S. at p. 49, 94 S.Ct. at p. 1020), and the declaration that “an employee's rights under Title VII are not susceptible of prospective waiver.  [Citation.]”  (415 U.S. at pp. 51–52, 94 S.Ct. at p. 1021.)

Alexander was not decided under the FAA.   It did, however, discuss the tension between the “federal policy favoring arbitration of labor disputes” (415 U.S. at p. 46, 94 S.Ct. at p. 1018), and the “important congressional policy against discriminatory employment practices.  [Citations.]”  (415 U.S. at p. 45, 94 S.Ct. at p. 1018.)   The Alexander court concluded that these policies “can best be accommodated by permitting an employee to pursue fully both his remedy under the grievance-arbitration clause of a collective-bargaining agreement and his cause of action under Title VII.”  (415 U.S. at pp. 59–60, 94 S.Ct. at p. 1025.)

Apparently of some significance to this conclusion was the Alexander court's reservations about the adequacy of the arbitral process in claims of discrimination.   The court noted, inter alia, the “fact that the specialized competence of arbitrators pertains primarily to the law of the shop, not the law of the land.  [Citation.]”  (415 U.S. at p. 57, 94 S.Ct. at p. 1024.)

The Supreme Court subsequently declared that “we are well past the time when judicial suspicion of the desirability of arbitration and of the competence of arbitral tribunals inhibited the development of arbitration as an alternative means of dispute resolution.”  (Mitsubishi Motors v. Soler Chrysler–Plymouth (1985) 473 U.S. 614, 626–627, 105 S.Ct. 3346, 3354, 87 L.Ed.2d 444.)   The court has since enforced arbitration agreements in cases arising under the Securities Act of 1933 (Rodriguez de Quijas v. Shearson/Am. Exp. (1989) 490 U.S. 477, 109 S.Ct. 1917, 104 L.Ed.2d 526), Racketeer Influenced and Corrupt Organizations (RICO) (Shearson/American Express, Inc. v. McMahon (1987) 482 U.S. 220, 107 S.Ct. 2332, 96 L.Ed.2d 185) and antitrust statutes (Mitsubishi Motors v. Soler Chrysler–Plymouth, supra ).

Some courts nonetheless continued to demonstrate a reluctance to relinquish to arbitration the resolution of discrimination claims.   A classic example of this attitude appears in Wertheim & Co., Inc. v. Halpert (1979) 48 N.Y.2d 681, 421 N.Y.S.2d 876, 397 N.E.2d 386, in which an age discrimination action filed in state court was held nonarbitrable pursuant to an arbitration clause in a U–4 agreement.5  The reviewing court, without reference to the FAA or citation of any federal law, explained:  “Although arbitration is a favored method of dispute resolution, arbitration agreements are unenforceable where substantive rights, embodied by statute, express a strong public policy which must be judicially enforced [citations].   This is especially true in the area of discrimination where particular remedies are afforded by both State and Federal statutes [citations].”  (421 N.Y.S.2d at p. 877, 397 N.E.2d at p. 387.)

Other courts reasoned that Alexander's analysis of the congressional intent underlying Title VII survived Mitsubishi Motors v. Soler Chrysler–Plymouth, supra, 473 U.S. 614, 105 S.Ct. 3346, and provided a basis upon which to exempt state statutory sex and race discrimination claims from the FAA.   One leading case, Swenson v. Management Recruiters Intern., Inc. (8th Cir.1988) 858 F.2d 1304 (cert. denied 493 U.S. 848, 110 S.Ct. 143, 107 L.Ed.2d 102 (1989)), acknowledged that a New Jersey federal district court came to a contrary conclusion in a case involving a state age discrimination statute (Steck v. Smith Barney, Harris Upham & Co., Inc. (D.N.J.1987) 661 F.Supp. 543), but reconciled the two apparently conflicting results by distinguishing between the two underlying federal statutes.6

In Utley v. Goldman, Sachs & Co. (1st Cir.1989) 883 F.2d 184, certiorari denied Goldman, Sachs & Co. v. Utley (1990) 493 U.S. 1045, 110 S.Ct. 842, 107 L.Ed.2d 836, a similar conclusion was reached on facts closer to those of the instant case.   There, a plaintiff who had previously signed a U–4 agreement sued her employer in state and federal courts for sexual harassment and discrimination in violation of Title VII.   The First Circuit, relying on the authority of Alexander v. Gardner–Denver Co., supra, 415 U.S. 36, 94 S.Ct. 1011, and Swenson v. Management Recruiters Intern., Inc., supra, 858 F.2d 1304, concluded that “an employee cannot waive prospectively her right to [adjudicate an alleged violation of Title VII in] a judicial forum at any time, regardless of the type of employment agreement which she signs.”   (Utley v. Goldman, Sachs & Co., supra, 883 F.2d at p. 187.)

Real party argued in the trial court that Alexander, Swenson and their progeny were wrongly decided.   This interpretation, real party now asserts, has been vindicated by the Supreme Court's recent decision in Gilmer v. Interstate/Johnson Lane Corp., supra, 500 U.S. 20, 111 S.Ct. 1647, 114 L.Ed.2d 26.

The plaintiff in Gilmer, like the plaintiffs in Perry v. Thomas, supra, 482 U.S. at page 490, 107 S.Ct. at page 2525, Baker v. Aubry, supra, 216 Cal.App.3d 1259, 265 Cal.Rptr. 381, and Hall v. Nomura Securities International, supra, 219 Cal.App.3d 43, 268 Cal.Rptr. 45, signed a U–4 application containing an arbitration clause which subjected him to the NYSE rule requiring arbitration of “ ‘[a]ny controversy between a registered representative and any member or member organization arising out of the employment or termination of employment of such registered representative.’ ”   (Gilmer v. Interstate/Johnson Lane Corp., supra, 500 U.S. at p. ––––, 111 S.Ct. at p. 1651.)   After Gilmer was fired at the age of 62, he filed an action against his employer in federal court alleging that he had been discharged due to his age in violation of the ADEA.   The district court denied the employer's motion to compel arbitration pursuant to the FAA, citing Alexander v. Gardner–Denver Co., supra, 415 U.S. 36, 94 S.Ct. 1011, in support of its conclusion that “ ‘Congress intended to protect ADEA claimants from the waiver of a judicial forum.’ ”  (Gilmer v. Interstate/Johnson Lane Corp., supra, 500 U.S. at p. ––––, 111 S.Ct. at p. 1651.)   The Fourth Circuit Court of Appeals reversed.

The United States Supreme Court affirmed, noting that “[a]lthough all statutory claims may not be appropriate for arbitration, ‘[h]aving made the bargain to arbitrate, the party should be held to it unless Congress itself has evinced an intention to preclude a waiver of judicial remedies for the statutory rights at issue.’  [Citation.]”  (Gilmer v. Interstate/Johnson Lane Corp., supra, 500 U.S. at p. ––––, 111 S.Ct. at p. 1652.)   The court concluded that no such intent could be found in the language or legislative history of the ADEA.  (Ibid.)

The Gilmer court distinguished Alexander v. Gardner–Denver Co., supra, 415 U.S. 36, 94 S.Ct. 1011, and its progeny on the bases that “those cases did not involve the issue of the enforceability of an agreement to arbitrate statutory claims[,] ․ occurring in the context of a collective-bargaining agreement[,] ․ [and] were not decided under the FAA, which ․ reflects a ‘liberal federal policy favoring arbitration agreements.’  [Citation.]”  (Gilmer v. Interstate/Johnson Lane Corp., supra, 500 U.S. at p. ––––, 111 S.Ct. at p. 1657.)   Challenges to the adequacy of arbitration procedures were rejected as speculative, unlikely, and unfounded.   The court explained in a footnote that the “ ‘mistrust of the arbitral process,’ ” expressed in Alexander “has been undermined by our recent arbitration decisions.   [Citation.]”  (Gilmer v. Interstate/Johnson Lane Corp., supra, 500 U.S. at p. ––––, fn. 5, 111 S.Ct. at p. 1656, fn. 5.)

Before Gilmer was decided, the Fifth Circuit had held, in Alford v. Dean Witter Reynolds, Inc. (5th Cir.1990) 905 F.2d 104, that a stockbroker's action against her employer for violation of Title VII of the Civil Rights Act of 1964 was not required to be arbitrated under the FAA.   The Fifth Circuit noted that a contrary conclusion had been reached in Roe v. Kidder Peabody & Co., Inc. (S.D.N.Y.1990) 1990 WL 52200, 1990 U.S. Dist. Lexis 4536, 53 CCH EPD 39911, and observed that “[c]ircuit and district courts have divided over the arbitrability of employee claims under the Age Discrimination in Employment Act, which is very similar to Title VII.  [Citations.]”  (Alford v. Dean Witter Reynolds, Inc., supra, 905 F.2d at p. 106, fn. 3.)

On petition for certiorari, the United States Supreme Court vacated the Fifth Circuit's judgment in Alford and remanded the case for further consideration in light of its decision in Gilmer.  (Dean Witter Reynolds, Inc. v. Alford (1991) 500 U.S. 930, 111 S.Ct. 2050, 114 L.Ed.2d 456.)

Upon remand, the Fifth Circuit concluded that the holding of Gilmer compelled the arbitration of Alford's Title VII claim, explaining tersely:  “In Gilmer, the Supreme Court decided that a claim under the Age Discrimination in Employment Act of 1967 (ADEA) ‘can be subjected to compulsory arbitration pursuant to an arbitration agreement in a securities registration application.’  [Citation.]  Because both the ADEA and Title VII are similar civil rights statutes, and both are enforced by the EEOC, ․ we have little trouble concluding that Title VII claims can be subjected to compulsory arbitration.   Any broad public policy arguments against such a conclusion were necessarily rejected by Gilmer.”  (Alford v. Dean Witter Reynolds, Inc. (5th Cir.1991) 939 F.2d 229, 230.

The message of Gilmer and Alford is clear.   Disputes alleging a violation of a statutory prohibition against discrimination in employment may, despite the important public policies involved, be subject to arbitration if the arbitration agreement in question is governed by the FAA.   Although Gilmer allowed that “all statutory claims may not be appropriate for arbitration,” the vacation and remand of Alford strongly suggests that the court does not view the procedural distinctions between Title VII and ADEA as significant on this issue.

 This being the case, it is of no assistance to petitioners that they relied only upon the parallel state statute rather than upon Title VII.   If the agreement in question is subject to the FAA, any conflicting state law requiring a judicial forum for resolution of the issue is, as we have previously explained, preempted.  (Southland Corp. v. Keating, supra, 465 U.S. at p. 11, 104 S.Ct. at p. 858;  Perry v. Thomas, supra, 482 U.S. at p. 490, 107 S.Ct. at p. 2525.)

 We turn then, to the effect of the FAA on the facts of this case.   An arbitration clause is subject to the act if it is part of “[a] written provision in any maritime transaction or a contract evidencing a transaction involving commerce” (9 U.S.C., § 2) unless it is part of a contract of employment of a seaman, a railroad employee or “any other class of workers engaged in foreign or interstate commerce.”

We reject the contention of petitioners and amicus American Association of Retired Persons (AARP) that the arbitration agreements in this case were contracts of employment, and therefore exempt from the FAA.   Amicus AARP argues that petitioners' U–4 agreements “became part and parcel of the employment relationship,” and therefore, “the arbitration provision became a term of the employees' contracts of employment subject to section 1 of the FAA.”   We disagree.   The applications in which the clause appears merely identify real party as the applicant's “firm.”   They contain no terms and conditions of employment with that firm.   The fact that the applications were a condition of continued employment does not make them employment contracts.

In light of this conclusion, we need not address the issue of whether petitioners were engaged in interstate commerce within the meaning of section 1's exemption.

 Section 3 of the FAA provides that a lawsuit must be stayed until the dispute has been arbitrated if the court in which the action is pending is “satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement [.]”  (9 U.S.C., § 3;  italics added.)   This language demonstrates that neither the agreement nor the particular issue may be considered in the abstract.   Both must be weighed in the balance.

Real party concedes that any waiver of the right to a jury trial which would otherwise exist in a FEHA case (see Rojo v. Kliger (1990) 52 Cal.3d 65, 276 Cal.Rptr. 130, 801 P.2d 373) must be knowing, intelligent and voluntary.7  Obviously, a waiver of so important a right should not be lightly inferred.   This is especially true where, as in this case, the arbitration clause appears in a form application rather than a personal contract.

The agreement in this case is, as we have previously discussed, significantly different from the agreement in Gilmer, because it does not bring into play any securities exchange rule concerning employment disputes.   Rather, the rule involved in this case (NASD Code of Arbitration Procedure, section 8) concerns “Industry and Clearing Controversies.”

The proper interpretation of this section was the subject of A.G. Edwards & Sons, Inc. v. Clark (Ala.1990) 558 So.2d 358.   In that case a stockbroker sued a second stockbroker and his employer for defamation.   The plaintiff had signed a U–4 agreement, and the defendants moved to compel arbitration relying, as does the real party in this case, on section 8 of the NASD Code of Arbitration Procedure.   The trial court denied the motion, and the Supreme Court of Alabama affirmed, rejecting the defendants' contention that the NASD Code mandated arbitration of “ ‘any claim against a member.’ ”  (558 So.2d at p. 363;  italics in original.)   The court explained:  “Section 8 is intended to apply only to disputes related to the securities business.   The fact that [the defendant] was employed by a securities firm does not mean that every tort he commits creates an arbitrable ‘Industry’ or ‘Clearing’ controversy.  [¶]․  [¶] [W]hile arbitration clauses are to be interpreted broadly, they are not limitless and cannot be interpreted to include matters that clearly fall outside the scope of the contract agreement.”  (558 So.2d at pp. 362–363.   See also Transamerica Financial Res. v. Rondini (1989) 189 Ill.App.3d 853, 137 Ill.Dec. 136, 139, 545 N.E.2d 789, 792 [a company's action to collect on a loan agreement with a former employee did not fall within the scope of NASD, section 8 because it bore “no relationship to its business as a retail broker of securities”];  cf. Merrill Lynch, Pierce, Fenner & Smith v. Hovey (8th Cir.1984) 726 F.2d 1286 [a similar provision of the NYSE constitution required arbitration of a dispute concerning alleged misuse of records and solicitation of clients by former employees].)

We find this authority persuasive.   Petitioners, by virtue of their applications, agreed to arbitrate industry and clearing disputes arising out of or in connection with business transactions.   They did not agree to arbitrate any employment disputes, much less those arising from alleged violations of anti-discrimination statutes.   Further, no reasonable person would have any cause to suspect that an agreement to arbitrate business disputes would be interpreted to include disputes arising from the kind of acts of discrimination alleged in this case.   Given the language of the agreement and the importance of the right to select a judicial forum for resolution of this conflict (Rojo v. Kliger, supra, 52 Cal.3d at pp. 74–75, 276 Cal.Rptr. 130, 801 P.2d 373), we conclude as a matter of law that the arbitration clauses do not encompass such claims.

For this reason we conclude the trial court erred in granting real party's motion to compel arbitration.   The petition for writ of mandate is, therefore, granted.   The trial court is directed to vacate its order granting the motion to compel arbitration and enter a new and different order denying the motion in its entirety.

FOOTNOTES

1.   The “U–4” is a four-page pre-printed form entitled “Uniform Application for Securities Industry Registration or Transfer.”   It requires the applicant to provide personal data, employment history, residential history, and information concerning criminal conviction and disciplinary action.

2.   Code of Civil Procedure section 1281 provides:“A written agreement to submit to arbitration an existing controversy or a controversy thereafter arising is valid, enforceable and irrevocable, save upon such grounds as exist for the revocation of any contract.”Petitioners raise no issue regarding this code section in this proceeding.

3.   The FAA's “primary substantive provision states that ‘[a] written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction ․ shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.’  [Citation.]  The FAA also provides for stays of proceedings in federal district courts when an issue in the proceeding is referable to arbitration, [citation], and for orders compelling arbitration when one party has failed, neglected, or refused to comply with an arbitration agreement, [citation].   These provisions manifest a ‘liberal federal policy favoring arbitration agreements.’   [Citation.]”  (Fn. omitted.)  (Gilmer v. Interstate/Johnson Lane Corp. (1991) 500 U.S. 20, ––––, 111 S.Ct. 1647, 1651, 114 L.Ed.2d 26.)

4.   That case was Cook v. Barratt American, Inc. (1990) formerly reported at 219 Cal.App.3d 1004, 268 Cal.Rptr. 629.

5.   The facts of the case are found in the opinion of a lower court reported at (1978) 65 A.D.2d 724, 411 N.Y.S.2d 11.

6.   The Swenson court explained in a footnote that the Age Discrimination in Employment Act (ADEA) (29 U.S.C., § 633 et seq.) “is not part of Title VII, and although aimed at a form of discrimination, the ADEA does not contain the same recognition of state procedural remedies as does Title VII in dealing with race and gender discrimination claims․  Suffice it to say there are many substantive and procedural differences in the provisions of Title VII and the ADEA.   Title VII makes clear state procedures must be invoked as a prerequisite to a filing of a Title VII claim.   The ADEA does not have a similar requirement.   Under the ADEA, ․ it is provided that ‘upon commencement of action under this chapter such action shall supersede any State action’ whereas Title VII contains no such limitation.   Compelling arbitration in race and gender discrimination cases as a preemptive forum to state enforced claims runs contra to the intended scheme Congress has provided in Title VII.”   (Swenson v. Management Recruiters Intern., Inc., supra, 858 F.2d at p. 1309.)   The Swenson court did not mention Wertheim & Co., Inc. v. Halpert, supra, 421 N.Y.S.2d 876, 397 N.E.2d 386.

7.   Amicus California Employment Lawyers Association argues this point vigorously.   No issue of voluntariness was raised in the trial court or in the verified petition filed in this court.   Therefore we do not reach this factual issue in this proceeding.

ARLEIGH M. WOODS, Presiding Justice.

EPSTEIN and COOPER *, JJ., concur.

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