In re Prudential Insurance Co. of America Sales Practice Litigation All Agent Actions

133 F.3d 225 (3rd Cir. 1998)
  • Opinion Date: January 7, 1998

EMPLOYER-EMPLOYEE; ARBITRATION—Where it is unclear if an arbitration provision applies or if an exemption from arbitration applies, public policy favors the arbitration provision.

Several former insurance company employees alleged that action was taken against them in retaliation for their refusal to participate in the company’s insurance sales fraud. The company moved to compel arbitration because the employees signed a securities registration form (Form) which incorporated by reference the National Association of Securities Dealers Code of Arbitration Procedure (NASD Code). The Form constitutes a consent to arbitration of any dispute for which the NASD Code requires arbitration. The employees argued that the company could not use the Form as a basis for arbitration because it was not a signatory to it. Alternatively, they argued that the NASD Code contains an exception to arbitration for disputes involving the “insurance business.” The issue was whether the “insurance business” exception in the NASD Code precludes arbitration of employment disputes involving insurance issues. The District Court ruled that the company could enforce the arbitration agreement even though it was not a signatory to the Form and that the scope of arbitration covered a legal claim of an employee. However, the District Court denied the company’s motion for arbitration, concluding that the insurance business exception applied because these claims were “intricately related” to the insurance business.

The 3rd Circuit Court of Appeals agreed that parties bound by the Form included not just those that signed it, and that numerous non-signatories have been bound by such agreements under common law contract and agency principles. Since the insurance company was bound by the provision of the NASD Code, the Court then had to determine the scope of the arbitration clause. The Appeals Court examined the Form, under which the employees agreed to arbitrate claims against “any other person,” and the NASD Code, which requires arbitration of disputes “between members and associated persons.” It concurred with the District Court that the claims were arbitrable, finding that the insurance company was an NASD member and its employees were “associated persons.” Since federal law promotes arbitration (through the Federal Arbitration Act) and encourages courts to uphold arbitration clauses, there is a presumption that arbitration applies unless the relevant clause is not susceptible of an interpretation that covers the particular dispute. In other words, any ambiguity is to be resolved in favor of arbitration so long as the claim itself can be within the purview of the applicable arbitration agreement. The NASD Code covers, “any dispute…in connection with the business of any NASD member…with the exception of disputes involving the insurance business of any member which is also an insurance company.” The Court found that the claims of the former employees necessarily involved the company’s insurance practices. However, the Court found that neither the NASD Code nor NASD by-laws defines “insurance business,” and that it is unclear whether such a term applies to employment related disputes. Unable to determine whether the NASD intent to arbitrate employment disputes was overridden when an employment dispute involved insurance claims, the Court decided the matter on the basis of the presumption in favor of arbitration. The Court of Appeals buttressed its decision by citing Supreme Court precedent requiring “piecemeal resolution when necessary to give effect to an arbitration agreement.” Moses H. Cone Memorial Hospital v. Mercury Construction Co., 460 U.S. 1, 20 (1982). In other words, the Court reversed the lower court’s decision and remanded the case, even though that result may have created duplicative litigation and inconsistent outcomes because the former employees were forced to litigate their claims in numerous forums.