MORELLO v. CHARLES SCHWAB CO. INC., (D.Neb. 1999)

KATHLEEN A. JAUDZEMIS, Magistrate Judge.

This matter is before me pursuant to 28 U.S.C. § 636 and the general order of referral on defendant's motion to compel arbitration and stay further proceedings in this court (#6). Having considered the briefs and evidence filed by the parties, I find that defendant's motion should be granted.

FACTUAL BACKGROUND AND ISSUES PRESENTED

On April 24, 1992, plaintiff established a brokerage account with Charles Schwab Co., Inc. (Schwab). The agreement was captioned "BROKERAGE ACCOUNT AGREEMENT Effective November 1, 1990." At that time, plaintiff also executed a Schwab Brokerage Account Application (Brokerage Application).

The immediate dispute involves an amendment to the arbitration clause of plaintiff's Brokerage Account Agreement. Plaintiff contends that the amendment does not apply to his account because he did not receive notice of the amendment.

Paragraph 6 of plaintiff's Brokerage Application provides, " Please note that the Account Agreement contains a pre-dispute arbitration agreement which is set forth at page 7, section 16 of the Account Agreement dated November 1, 1990." (#7, Ex. 3A, 6; emphasis in original).

The 1990 Brokerage Account Agreement signed by the plaintiff provides:

You [plaintiff] agree to settle by arbitration any controversy between you and us [Schwab] and/or any of our officers, directors, employees, or agents relating to the Account Agreement, your Brokerage Account or account transactions, or in any way arising from your relationship with us. Such arbitration will be conducted according to the securities arbitration rules then in effect of the American Arbitration Association, the National Association of Securities Dealers, or any registered national securities exchange. Either of us may initiate arbitration by serving or mailing a written notice. The notice must specify which rules will apply to the arbitration. This specification will be binding on both of us. Any award the arbitrator makes will be final, and judgment on it may be entered in any court having jurisdiction.

This arbitration provision shall be enforced and interpreted exclusively in accordance with applicable federal law, including the Federal Arbitration Act.

(#7, Ex. 3B, 16). The Brokerage Account Agreement further provides:

Prior to signing below, I have received, read, and understood the Account Agreement dated November 1, 1990 (which includes the Cash Account Agreement, and, if applicable, the Schwab Money Fund Agreement, the Margin and Short Account Agreement and Disclosures of Credit Terms and Policies, and other written agreements between me and Schwab), and I agree to be bound by the terms of the Account Agreement that applies to my Brokerage Account as currently in effect and as amended from time to time.

(#7, Ex. 3A, 6) (emphasis added). Similarly, paragraph 7 of the Brokerage Account Agreement provides:

I have received, read and understood the Account Agreement dated November 1, 1990 (which includes the Cash Account Agreement, the Margin and Short Account Agreement and Disclosure of Credit Terms and Policies and other written agreements between me and Schwab). In consideration of Schwab accepting and carrying on for me a Margin and Short Account, I hereby agree to be bound by such Account Agreement, as currently in effect and as amended from time to time.

(#7, Ex. 3A, 7) (emphasis added).

The 1990 Brokerage Account Agreement also contains a provision about communications to plaintiff concerning his account:

Notification. We'll send communications to you at the mailing address shown on your Account Application, or to another address you specify. Any communication we send to such an address, whether by mail, telegraph, messenger, or otherwise, is considered delivered to you personally, whether or not you actually receive it.

(#7, Ex. 3B, 20) (emphasis added). Finally, the Brokerage Account Agreement provides:

Entire Agreement, Amendment, and Waiver. The Account Agreement, as amended from time to time, is the complete statement of your agreement with us.

The Account Agreement may be amended only in the following manner: On prior written notice to you, we may modify or rescind existing provisions or add new provisions. Amendments won't affects rights or obligations either of us incur before the effective date of the amendment. . . .

(#7, Ex. 3B, 23).

Plaintiff's Brokerage Account Agreement was amended several times by notice to Schwab's clients. At issue in this case is an amendment dated July 1, 1997 (the 1997 Amendment) which eliminated the American Arbitration Association (AAA) as one of the entities pursuant to whose rules arbitration may be conducted. The 1997 Amendment was sent to plaintiff with plaintiff's June 1997 account statement. The 1997 Amendment provided that arbitration will be conducted by, and according to the securities arbitration rules and regulations in effect of, the National Association of Securities Dealers ("NASD"), the New York Stock Exchange, the Pacific Exchange or the Chicago Board Options Exchange. Either of us may initiate arbitration by filing a written claim with the NASD or one of the other organizations specified above.

(#7, Ex. 3C, 16).

Plaintiff's June 1997 account statement and the 1997 Amendment were sent to the address provided by plaintiff. Schwab received no indication that plaintiff did not receive copies of his June 1997 statement or the 1997 Amendment. Plaintiff's records show no indication that he objected to the 1997 Amendment. (#7, Ex. 5, 3).

Plaintiff subsequently became dissatisfied with Schwab's performance and filed a Notice of Arbitration/Statement of Claim with the AAA on or about February 27, 1999. (Complaint Ex. 1). Citing the 1997 Amendment, Schwab reminded plaintiff that the AAA could no longer be used as the forum for resolution of disputes and declined to consent to the jurisdiction of the AAA in this matter.

Although he agrees that the underlying dispute was originally subject to arbitration, plaintiff seeks a declaration that his Brokerage Account Agreement was not properly amended and that Schwab is estopped to assert the arbitration clause of any agreement because it initially declined to arbitrate this dispute before the AAA. Plaintiff also seeks an award of monetary damages for sums due him by reason of Schwab's alleged breaches of the Brokerage Account Agreement.

LEGAL ANALYSIS

"Before a party may be compelled to arbitrate under the Federal Arbitration Act, the district court must engage in a limited inquiry to determine whether a valid agreement to arbitrate exists between the parties and whether the specific dispute falls within the scope of that agreement." Houlihan v. Offerman Co., Inc., 31 F.3d 692, 695-96 (8th Cir. 1994) (citing Daisy Mfg. Co. v. NCR Corp., 29 F.3d 389, 392 (8th Cir. 1994)). "[Q]uestions of arbitrability must be addressed with a healthy regard for the federal policy favoring arbitration." Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983).

This court must stay the proceeding and compel arbitration if the court determines that the dispute falls within the scope of a valid arbitration agreement. Id. at 696; 9 U.S.C. § 3 4. An agreement to arbitrate is "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. The parties may determine by contract the method under which arbitrators for their disputes will be appointed. 9 U.S.C. § 5.

Based on the evidentiary materials discussed above, the court finds that the parties' dispute falls within the scope of a valid arbitration agreement. By signing the 1990 Brokerage Account Agreement, plaintiff agreed to settle by arbitration "any controversy . . . relating to the Account Agreement, [plaintiff's] Brokerage Account or account transactions, or in any way arising from [plaintiff's] relationship with [Schwab]." Plaintiff also agreed "to be bound by the terms of the Account Agreement that applies to my Brokerage Account as currently in effect and as amended from time to time." In consideration of Schwab accepting and maintaining plaintiff's Margin and Short Account, plaintiff agreed "to be bound by such Account Agreement, as currently in effect and as amended from time to time."

The 1990 Brokerage Account Agreement provided that it could be amended only on prior written notice to the plaintiff. Written notice and other communications would be sent to plaintiff at the mailing address shown on his Account Application, or to another address specified by plaintiff; however, "[a]ny communication we send to such an address, whether by mail, telegraph, messenger, or otherwise, is considered delivered to you personally, whether or not you actually receive it."

I find that the 1997 Amendment was sent to plaintiff by Schwab in accordance with the terms of the Brokerage Account Agreement. The parties agreed that such written notices would be considered "delivered" to plaintiff personally, whether or not he actually received them. Plaintiff agreed to do business with Schwab on those terms. I therefore find that plaintiff is bound by the terms of the 1997 Amendment modifying the parties' original arbitration clause.

"In the Eighth Circuit, a party waives its right to demand arbitration when 1) it has knowledge of an existing right to arbitration, 2) it undertakes conduct inconsistent with that right, and 3) the party opposing arbitration suffers prejudice."Hunt v. Up North Plastics, Inc., 980 F. Supp. 1046, 1048 (D.Minn. 1997). "In light of the strong federal policy in favor of arbitration, any doubts concerning waiver of arbitrability should be resolved in favor of arbitration. Ritzel Comm. Inc. v. Mid-American Cellular Telephone Co., 989 F.2d 966, 968-69 (8th Cir. 1993).

Since plaintiff is bound by the 1997 Amendment to the arbitration clause, the AAA was not a proper forum for arbitration of this matter. Schwab did not undertake conduct inconsistent with its right to arbitration when it declined to consent to the jurisdiction of the AAA in this matter. Schwab has not, therefore, waived its right to demand arbitration.

For these reasons,

IT IS ORDERED that defendant's motion to compel arbitration and stay further proceedings in this court (#6) is granted, as follows:

1. Plaintiff's claims are directed to arbitration pursuant to 9 U.S.C. § 1 et seq. before the National Association of Securities Dealers or the New York Stock Exchange at the choice of plaintiff.

2. Plaintiff shall commence said arbitration on or before September 30, 1999.

3. Plaintiff's claims are hereby stayed pursuant to 9 U.S.C. § 3 pending a final determination of plaintiff's claims by the arbitrators.

4. The parties shall file written status reports with the Clerk of the Court concerning the progress of the arbitration proceeding. The first status report shall be filed by February 4, 2000. Subsequent status reports are due quarterly thereafter.

Pursuant to NELR 72.3 any appeal of this order shall be filed with the Clerk of the Court within ten (10) days after being served with a copy of this order. Failure to timely appeal may constitute a waiver of any such objection. The brief in support of any appeal shall be delivered to the Hon. Joseph F. Bataillon at the time of filing such appeal. Failure to submit a brief in support of any appeal may be deemed an abandonment of the appeal.