Painewebber v. Faragalli ( 1995 )

Opinions of the United
1995 Decisions States Court of Appeals
for the Third Circuit
8-4-1995
Painewebber v Faragalli
Precedential or Non-Precedential:
Docket 94-1896
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Recommended Citation
"Painewebber v Faragalli" (1995). 1995 Decisions. Paper 206.
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1
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
----------
No. 94-1896
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PAINEWEBBER INCORPORATED;
SHELDON CHAIKEN; LEE H. LOVEJOY;
ANTHONY PRESOGNA; KEVIN COLLINS
v.
HENRY J. FARAGALLI, JR.,
Appellant
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On Appeal from the United States District Court
for the Eastern District of Pennsylvania
(D.C. Civil No. 94-mc-00147)
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Argued Tuesday, June 27, 1995
BEFORE: HUTCHINSON, ROTH and GARTH, Circuit Judges
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(Opinion filed August 4, l995)
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Thomas T. Loder (Argued)
Christopher P. Stief
Rubin & Associates
10 South Leopard Road
Suite 202
Paoli, Pennsylvania 19301
Attorneys for Appellant
John M. Linsenmeyer (Argued)
Morgan, Lewis & Bockius
101 Park Avenue
2
New York, New York 10178
3
Elizabeth H. Fay
Morgan, Lewis & Bockius
2000 One Logan Square
Philadelphia, Pennsylvania 19103
Attorneys for Appellees
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OPINION OF THE COURT
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GARTH, Circuit Judge:
Henry J. Faragalli, Jr. ("Faragalli") appeals from an order of the distri
court which granted the petition of appellees PaineWebber Incorporated, Sheldon Cha
Lee H. Lovejoy, Anthony Presogna and Kevin Collins (collectively, "PaineWebber") to
arbitration. The principal questions on appeal are two: first, whether PaineWebber
cause of action to compel arbitration under § 4 the Federal Arbitration Act accrued
Faragalli filed a "Writ of Summons" in the Pennsylvania Court of Common Pleas in 19
was thus time-barred when PaineWebber filed its 1994 petition? Second, whether
PaineWebber waived its right to compel arbitration by engaging in protracted settle
negotiations with Faragalli and by moving to have Faragalli's state court action di
for non pros? The district court ruled against Faragalli on both issues and grante
PaineWebber's petition to compel. We affirm.
I.
In 1981, Faragalli, a stockbroker and registered representative of what w
Paine, Webber, Jackson & Curtis, signed a "Uniform Application for Securities and
Commodities Industry Representative and/or Agent," thereby committing himself to ab
the rules of the New York Stock Exchange ("NYSE"). NYSE Rule 347 provides as follow
Any controversy between a registered representative and any member or
member organization arising out of the employment or termination of
employment by such registered representative by and with such member
or member organization shall be settled by arbitration....
4
App. 758a.
PaineWebber terminated Faragalli's employment sometime in December of 198
or about November 16, 1988, Faragalli filed a Writ of Summons in the Philadelphia C
Common Pleas. The Writ of Summons named PaineWebber1 and stated that "[y]ou are no
that the Plaintiff, Henry J. Faragalli, Jr., has commenced an action against you."
14a. The Writ gave no information regarding the nature of Faragalli's claims. Und
Pennsylvania law PaineWebber was under no obligation to respond to the Writ, and Fa
was under no obligation to file an initial pleading unless requested to do so by
PaineWebber. Pa. R. Civ. P. 1037.
Shortly after filing the Writ of Summons Faragalli sent PaineWebber's law
unfiled "draft complaint" alleging state law causes of action for breach of contrac
defamation, conversion, interference with contractual relations, invasion of privac
unjust enrichment. Settlement negotiations ensued, and, as far as we can tell from
record, no complaint was filed by Faragalli in the next five years nor was any othe
substantive action taken in state court during that time. On November 23, 1993,
Faragalli's state court action was automatically dismissed for lack of activity und
Pennsylvania's "day backward" docket clearing program.
On April 14, 1994, the Court of Common Pleas granted Faragalli's motion t
his action reinstated but ordered Faragalli to file a complaint within 20 days.
On May 2, 1994, Faragalli filed a complaint claiming that PaineWebber had
withheld commissions and other compensation and had committed assorted torts in the
process of informing Faragalli's clients that he was no longer employed by PaineWeb
Three days later PaineWebber moved to have Faragalli's action dismissed for non pro
This motion was denied without explanation by order of June 17, 1994. App. 407.
1
It appears from the state court docket that Faragalli failed to serve the writ on
petitioners Chaiken and Collins.
5
On May 23, 1994, some six and one half years after Faragalli's discharge,
and one half years after Faragalli filed the Writ of Summons and 21 days after Fara
finally filed his complaint, PaineWebber entered a preliminary objection in state c
the ground that the claims stated in Faragalli's complaint were subject to arbitrat
In his June 10, 1994 reply to PaineWebber's objection Faragalli expressly denied fo
first time that his claims were subject to arbitration. App. 433.
No discovery or briefing on the merits ever occurred in state court.
Within two months after asserting in state court that Faragalli's claims
be arbitrated, on July 15, 1994, PaineWebber filed a petition in the Eastern Distri
Pennsylvania to compel arbitration. Faragalli objected based on timeliness and wai
By memorandum and order dated August 15, 1994, the district court ruled that PaineW
petition was timely. The court reasoned that "the mere filing of the writ of summo
without the filing of a complaint, was insufficient as a matter of law to constitut
rejection of arbitration." Dist. Ct. Op. at 5. The court also concluded that Pain
had not waived its right to arbitrate; held that all of Faragalli's claims were wit
scope of the arbitration clause; directed the Court of Common Pleas to stay Faragal
state court action; and entered an order compelling arbitration.
II.
Faragalli's first argument is that the applicable four-year statute of
limitations on PaineWebber's action to compel arbitration began to run the week of
November 16, 1988, when Faragalli filed the Writ of Summons and delivered a draft
complaint to PaineWebber. Because PaineWebber did not petition the court to compel
arbitration until July 15, 1994, some five and a half years later, Faragalli mainta
that PaineWebber has been barred by the statute for roughly a year and a half. Pain
argues that the statute was triggered no earlier than May 2, 1994, when Faragalli a
filed his complaint in state court.
6
The relevant facts are not in dispute, and our review over this issue is
plenary. See Adams v. Trustees of the New Jersey Brewery Employees' Pension Trust
29 F.3d 863, 869 (3d Cir. 1994); Sheet Metal Workers, Local 19 v. 2300 Group, Inc.,
F.2d 1274, 1278 (3d Cir. 1991). As our discussion will reveal, we hold that an act
compel arbitration under the Federal Arbitration Act accrues only when the responde
unequivocally refuses to arbitrate, either by failing to comply with an arbitration
or by otherwise unambiguously manifesting an intention not to arbitrate the subject
of the dispute.
The district court held that the mere filing of the writ of summons, with
filing of a complaint, was insufficient as a matter of law to constitute a rejectio
arbitration. Dist. Ct. Op. 5. We agree. Filing a Pennsylvania Writ of Summons ca
constitute an unequivocal refusal to arbitrate because the Writ is silent as to the
subject matter of the dispute. Nor does providing an adversary with a draft compla
which has not been filed in court constitute an unequivocal refusal to arbitrate be
it does not rule out a willingness to arbitrate. Moreover, even if we were to cons
the two documents together, that combination cannot manifest a refusal to arbitrate
Our review of the record discloses that the only events which could have
constituted a rejection of arbitration occurred either on May 2, 1994, when Faragal
filed his complaint in state court, or on June 10, 1994, when Faragalli for the fir
expressly denied that his claims were subject to arbitration. In either event, as
discuss infra, PaineWebber was not barred by the Statute of Limitations.
III.
Section 4 of the Federal Arbitration Act, 9 U.S.C. §§ 1 et seq. (the "FAA
provides as follows:
A party aggrieved by the alleged failure, neglect, or refusal of
another to arbitrate under a written agreement for arbitration may
7
petition any United States district court . . . for an order directing
that such arbitration proceed in the manner provided for in such
agreement. . .. The court shall hear the parties, and upon being
satisfied that the making of the agreement for arbitration or the
failure to comply therewith is not in issue, the court shall make an
order directing the parties to proceed to arbitration in accordance
with the terms of the agreement. . .. If the making of the
arbitration agreement or the failure, neglect, or refusal to perform
the same be in issue, the court shall proceed summarily to the trial
thereof. . ..
9 U.S.C. § 4 (1988).
Because Faragalli claims that PaineWebber's petition was untimely, we mus
decide which statute of limitations applies under the FAA, and the date on which th
statute started running.
The FAA is "something of an anomaly in the field of federal court jurisdi
Moses H. Cone Memorial Hosp. v. Mercury Const. Corp., 460 U.S. 1, 25 n.32 (1983), i
it gives federal courts the authority to compel arbitration, but does not in itself
independent federal question jurisdiction. Id. Thus, the district court must have
independent jurisdictional basis before it can entertain a petition to compel arbit
under § 4. National Iranian Oil Co. v. Mapco Int'l, Inc., 983 F.2d 485, 493 (3d Ci
1992).
Here, jurisdiction is premised on diversity of citizenship. In diversity
actions to compel arbitration, timeliness of the petition is determined by referenc
the applicable state law statute of limitations. National Iranian, 983 F.2d at 492
The parties agree that Pennsylvania law applies to this case. Because this action
based on a contractual arbitration clause, Pennsylvania's four-year statute of limi
8
for contract actions applies. 42 Pa.C.S. § 5525 (1994).2 While a state statute of
limitations may be "borrowed" for a federal claim, federal, not state, law governs
when the cause of action accrues. Keystone Ins. Co. v. Houghton, 863 F.2d 1125, 11
Cir. 1988).
Other courts have held that the right to petition for arbitration under §
arises after the adverse party has refused arbitration. See, e.g. Reconstruction F
Corp. v. Harrisons & Crosfield, 204 F.2d 366, 369 (2d Cir.), cert. denied, 346 U.S.
(1953) ("The 'cause of action' for breach of the obligation to arbitrate did not 'a
until defendant recently asked Reconstruction Finance Corporation to arbitrate the
'controversy,' and Reconstruction Finance Corporation then refused to comply"); Han
Corp. v. Millard, 531 F.2d 585, 600 n.12 (D.C.Cir. 1976) ("[S]tatute [of limitatio
could not begin to run until the [arbitration] agreement was broken, that is to say
arbitration was sought by one party and refused by the other"). See also Moses H.
Memorial Hospital, 460 U.S. at 21 ("[a]n indispensable element of Mercury's cause o
action under § 4 for an arbitration order is the Hospital's refusal to arbitrate").
Although we do not appear to have passed on the precise issue of when a c
action accrues under the FAA, we have held in the context of a petition to compel
arbitration under § 301(a) of the Labor Management Relations Act, 29 U.S.C. § 185(a
such a cause of action "arises when [one of the parties] takes an unequivocal posit
that it will not arbitrate." Federation of Westinghouse Independent Salaried Union
Westinghouse Elec. Corp., 736 F.2d 896, 902 (3d Cir. 1984). Accord Local Joint Exe
Bd. of Las Vegas v. Exber, Inc., 994 F.2d 674, 676 (9th Cir. 1993) ("[T]o start the
statute of limitations running [under § 301(a)], an unequivocal, express rejection
union's request for arbitration must be communicated"); Aluminum Brick and Glass Wo
Int'l Union v. AAA Plumbing Pottery Corp., 991 F.2d 1545, 1548 (11th Cir. 1993) (th
2
The parties do not rely on any contractual provisions setting a time limit for sub
a demand for arbitration.
9
period under § 301(a) "begins to run when one party unequivocally refuses to arbitr
dispute").
We find this doctrine equally applicable to a petition to compel arbitrat
under the FAA, which provides relief only to those persons "aggrieved by the allege
failure, neglect, or refusal of another to arbitrate." 9 U.S.C. § 4 (emphasis adde
Clearly, unless the respondent has resisted arbitration, the petitioner has not bee
"aggrieved" by anything. The reason for this rule, though little discussed, is evi
unless and until an adverse party has refused to arbitrate a dispute putatively gov
by a contractual arbitration clause, no breach of contract has occurred, no dispute
whether to arbitrate has arisen, and no harm has befallen the petitioner -- hence,
petitioner cannot claim to be "aggrieved" under the FAA.
Moreover, it is doubtful that a petition to compel arbitration filed befo
"adverse" party has refused arbitration would present an Article III court with a
justiciable case or controversy in the first instance. See, e.g. Valley Forge Chri
College v. Americans United for Separation of Church and State, Inc., 454 U.S. 464,
(1982) ("The constitutional power of federal courts cannot be defined, and indeed h
substance, without reference to the necessity 'to adjudge the legal rights of litig
actual controversies'") (quoting Liverpool, N. Y. & P. S. S. Co. v. Commissioners o
Emigration, 113 U.S. 33, 39 (1885)).
IV.
It follows that an express refusal to arbitrate a dispute following a dem
arbitration would undeniably start the clock running. However, Faragalli at no tim
expressly rejected arbitration until June 10, 1994, when, in his response to PaineW
objection made in state court that Faragalli's claims had to be arbitrated, Faragal
10
denied that his state court claims against PaineWebber were subject to arbitration.
least one court has suggested, however, that the commencement of litigation by one
to a claimed arbitrable dispute can give rise to a cause of action under the FAA, S
Downing v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 725 F.2d 192, 195 (2d Cir.
and PaineWebber concedes that the statute of limitations may have started running o
2, 1994, when Faragalli finally filed his complaint in state court.
Faragalli however wishes to go a step further and would have us hold that
a Pennsylvania Writ of Summons constitutes an unequivocal refusal to arbitrate. We
agree. Two factors inform our decision in the present case. First, Faragalli parti
in protracted settlement discussions with PaineWebber for a number of years after h
the Writ, and it was not until after five years had passed that he finally filed a
complaint, and then only under court order. While Faragalli's failure to file a com
is not definitive evidence that he was open to arbitration, it more than supports a
conclusion that he had not foreclosed that possibility.
Second, and more importantly, as we have earlier noted, a Pennsylvania Wr
Summons is silent as to the claims asserted by a plaintiff. It neither requires th
defendant to take any responsive action, nor does it indicate to the defendant the
matter of the dispute. Indeed, Pennsylvania courts have emphasized that a Writ of
is not a "pleading." Fox v. Thompson, 546 A.2d 1146, 1147 (Pa. Super. 1988). Henc
defendant cannot file preliminary objections to the Writ, which is the Pennsylvania
procedure for asserting the defense of an agreement to arbitrate. See Pa. R. Civ. P
1028(a)(6); Fox, 546 A.2d at 1147; see also Keller v. LaBarre, 311 A.2d 683 (Pa. Su
1973). And, a fortiori, because the defendant cannot know the gravamen of the plai
complaint, the defendant is forestalled from claiming that the parties have agreed
arbitrate the disputed matter.
3
Faragalli no longer denies that his substantive claims are subject to arbitration.
11
Because the Writ of Summons here conveyed no information as to Faragalli'
causes of action, PaineWebber could not know whether Faragalli's threatened lawsuit
within the scope of the arbitration clause. Thus, the Writ could not provide evide
that Faragalli, by filing it, was refusing to arbitrate the present claims, which b
parties now agree are subject to mandatory arbitration. Hence, the Writ could not
not convey Faragalli's intent to litigate in court the allegedly arbitrable claims,
less constitute an unambiguous and unequivocal refusal to arbitrate.
While it might be argued that Faragalli's "draft complaint" suggested wha
Faragalli had in mind when he filed the Writ, Faragalli's contention that the deliv
a draft complaint is a clear refusal to arbitrate, ignores Faragalli's manifest pur
providing the draft to PaineWebber. Faragalli quite obviously, by not filing the co
but by simply informing PaineWebber of it, sought to present PaineWebber with his p
claims against PaineWebber in an effort to begin settlement negotiations. Faragall
failure to file a complaint, his subsequent failure to press forward with his actio
his decision to undertake prolonged settlement negotiations with PaineWebber, buttr
district court's and our conclusion that Faragalli had not unequivocally refused to
arbitrate.
PaineWebber was entitled to wait until Faragalli made his intentions clea
(either by filing a complaint or by clearly manifesting a refusal to arbitrate in s
other manner) before it moved to compel arbitration. Thus by Faragalli having fail
reject arbitration unequivocally, PaineWebber had four years from the time its acti
compel arbitration accrued in 1994 in which to petition the district court. We the
affirm the district court on this ground.
V.
12
Faragalli next argues that PaineWebber waived its right to arbitration.
Faragalli relies primarily on our decision in Hoxworth v. Blinder, Robinson & Co.,
980 F.2d 912 (3d Cir. 1992). We hold this argument to be without merit.
Consistent with the strong preference for arbitration in federal courts,
"is not to be lightly inferred," Gavlik Const. Co. v. H.F. Campbell Co., 526 F.2d 7(3d Cir. 1975) (quoting Carcich v. Rederi A/B Nordie, 389 F.2d 692, 696 (2d Cir. 19
accord Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25, an
waiver will normally be found only "where the demand for arbitration came long afte
suit commenced and when both parties had engaged in extensive discovery." Gavlik, 5
at 783.
"[P]rejudice is the touchstone for determining whether the right to arbit
has been waived." Hoxworth, 980 F.2d at 925.4 In Hoxworth we found prejudice where
the 11 months prior to seeking arbitration, the petitioners engaged in extensive mo
practice, opposed the respondents' motions to compel discovery and deposed all of t
named plaintiffs. In Hoxworth, the petitioners sought arbitration only after obtai
useful information through discovery and only after the respondents' own motion to
discovery had been granted.
Here, we have already concluded that PaineWebber's cause of action to com
arbitration did not arise with the filing of the Writ of Summons in 1988. At the v
earliest, the right to compel arbitration arose on May 2, 1994, when Faragalli file
complaint in state court. Within two months, and before any discovery or briefing
4
Also relevant to the waiver inquiry is "the degree to which the party seeking to c
arbitration has contested the merits of its opponent's claims; whether that party h
informed its adversary of the intention to seek arbitration even if it has not yet
motion to stay the district court proceedings; the extent of its non-merits motion
practice; its assent to the district court's pretrial orders; and the extent to whi
parties have engaged in discovery." Hoxworth, 980 F.2d at 926-27 (citations omitte
"Merely answering on the merits, asserting a counterclaim (or cross-claim) or
participating in discovery, without more, will not necessarily constitute a waiver.
at 925 (quoting Gavlik, 526 F.2d at 783).
13
merits, PaineWebber submitted its petition to compel arbitration.5 Faragalli has n
shown nor demonstrated prejudice due to this two month "delay." To the extent that
Faragalli relies on the five year interval between the filing of the Writ of Summon
the eventual litigation of the motion to compel arbitration in federal court, Farag
must accept equal responsibility, as he took no action during those five years to
prosecute his claims against PaineWebber and only engaged in the aforementioned set
discussions.
Faragalli also contends that he was prejudiced due to PaineWebber's May 5
motion in state court to have his action dismissed for non pros, claiming that Pain
"sat on their hands, apparently hoping to dispose of Faragalli's claims on the meri
the state court actions, with prejudice, through their non pros motions." Appellan
Brief 40. However, Faragalli does not indicate how PaineWebber gained any advantag
how Faragalli was harmed, by PaineWebber's actions. Faragalli has not suggested th
was "strung along" by PaineWebber during settlement negotiations, nor does he argue
PaineWebber's non pros motion was frivolous.
We agree with the district court that Faragalli has shown no prejudice, a
hence no waiver.
VI.
In the memorandum accompanying its order granting PaineWebber's petition
compel arbitration, the district court observed as follows:
Moreover, at the oral hearing on this matter, counsel were in
agreement that following the delivery of the draft complaint to
PaineWebber's counsel, for a long period of time, the parties engaged
in negotiations to attempt to resolve the matter. During the course
of negotiations, the parties exchanged proposed settlement agreements.
Some of the proposed settlement agreements included referrals to
5
The state court docket sheet reveals that, prior to 1994, PaineWebber did not part
at all in the state court proceeding.
14
arbitration, while others did not. Under these circumstances, I find
as a matter of fact that there was no rejection or refusal of
arbitration communicated to PaineWebber that triggered the running of
the statute of limitations.
Dist. Ct. Op. 5.
On appeal Faragalli argues that there is no evidence of record to suppo
district court's conclusion that arbitration was one possibility considered by the
during settlement negotiations. While the record before us does not include any pr
settlement agreements, we read the district court's opinion to the effect that coun
made these representations at oral argument. We need not resolve that issue, howev
need we decide whether the district court's determination was erroneous. We hold t
even in the absence of evidence that the option of arbitration was discussed, the f
found, and the conclusions reached, by the district court more than adequately supp
conclusion that Faragalli had neither unambiguously nor unequivocally refused to ar
simply by filing a Writ of Summons and providing a draft complaint to PaineWebber.
VII.
The order of the district court granting PaineWebber's petition to compel
arbitration will be affirmed.
_________________________
15