In Re Next Financial Group, Inc., No. 08-0192 (Tex. Nov. 14, 2008)(arbitration mandamus,
employment, whistleblower claim - private employer, securities broker)
We hold that Clements’s Sabine Pilot claim is subject to arbitration under the NASD
rules. Because the trial court abused its discretion in refusing to compel arbitration,
we conditionally grant the writ of mandamus without hearing oral argument, see Tex.
R. App. P. 52.8(c). The trial court is directed to vacate its order denying NEXT’s
motion to compel arbitration and enter an order compelling arbitration of Clements’s
claims. We are confident that the trial court will comply, and this writ will issue only if
it does not.
IN RE NEXT FINANCIAL GROUP, INC.; from Harris County; 14th district
(14-08-00005-CV, ___ SW3d ___, 03-06-08) stay order issued March 28, 2008, lifted
Pursuant to Texas Rule of Appellate Procedure 52.8(c), without hearing oral argument, the Court
conditionally grants the petition for writ of mandamus.
Per Curiam Opinion
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In Re Next Financial Group, Inc. (Tex. 2008)(per curiam)(arbitration mandamus)
═══════════════════════════════════════════════════════════════════
PER CURIAM
The issue in this mandamus proceeding is whether a former securities broker must arbitrate a
claim that his employer wrongfully discharged him for refusing to commit an illegal act. See
Sabine Pilot Serv., Inc. v. Hauck, 687 S.W.2d 733, 734-35 (Tex. 1985). We hold that the
employee’s Sabine Pilot claim falls within the scope of his arbitration agreement and is not
subject to an exception limited to statutory employment discrimination claims. Because the trial
court erroneously denied the employer’s motion to compel arbitration, we conditionally grant
mandamus relief.
In September 2006, NEXT Financial Group, Inc., a securities brokerage firm, hired the
respondent, Michael Clements, as a regional supervisor. Clements did not have a written
employment agreement with NEXT, but registered representatives of broker-dealers must
register with one or more of the self-regulatory organizations that regulate the securities industry.
See 15 U.S.C. § 78o-3 (2006) (discussing self-regulatory organizations); 17 C.F.R. § 240.15b7-1
(registration requirement). As a condition of his employment, Clements was required to register
with the National Association of Securities Dealers (NASD)[1] by executing a Uniform Application
for Securities Industry Registration or Transfer form (U-4). See 15 U.S.C. § 78o. The U-4 includes
an agreement to “arbitrate any dispute, claim or controversy that may arise between me and my
firm . . . that is required to be arbitrated under the rules, constitutions, or bylaws of [the NASD] . . .
as may be amended from time to time . . . .”
NEXT fired Clements on August 31, 2007, claiming that he failed to perform required duties in
connection with an NASD audit. Shortly thereafter, Clements sued NEXT, alleging that he was
actually fired for refusing to conceal a trader’s fraudulent “churning” transactions.[2] See Sabine
Pilot, 687 S.W.2d at 734-35 (holding that an at-will employee can recover damages from an
employer who terminated his employment solely for refusing to perform an illegal act). NEXT
moved to compel arbitration under the Federal Arbitration Act (FAA) based on the arbitration
agreement in the U-4. At the time the dispute arose and Clements filed suit, the NASD Code of
Arbitration Procedure mandated arbitration of all disputes “aris[ing] out of the business activities
of a member or an associated person,” with the exception of claims “alleging employment
discrimination, including sexual harassment, in violation of a statute.” NASD Code of Arbitration
Procedure §§ 13200(a), 13201 (2007) (NASD Code).
The trial court refused the arbitration request, and the court of appeals summarily denied
mandamus relief. On petition for writ of mandamus to this Court, the disputed issues are (1)
whether the FAA governs, (2) whether Clements’s Sabine Pilot claim, which implicates alleged
illegal activity, “arises out of [NEXT’s] business activities,” and (3) whether a Sabine Pilot claim is
a statutory employment discrimination claim that triggers an exception to required arbitration.
Neither the validity of the arbitration agreement nor the applicability of the 2007 NASD rules is in
dispute. Although Clements signed the U-4 before the NASD arbitration rules were amended to
their current form in 2007, Clements agreed to be bound by the NASD rules as they “may be
amended from time to time.”[3]
Mandamus relief is appropriate when a trial court erroneously denies a motion to compel
arbitration pursuant to an agreement governed by the FAA. In re Weekley Homes, L.P., 180 S.W.
3d 127, 130 (Tex. 2005). The FAA applies to “[a] written provision in . . . a contract evidencing a
transaction involving commerce to settle by arbitration a controversy thereafter arising out of such
contract or transaction . . . .” 9 U.S.C. § 2 (2006). Courts have consistently held that the FAA
applies to U-4 arbitration agreements because they regulate the securities industry and thus affect
commerce, a point Clements does not contest. See, e.g., Seus, 146 F.3d at 178-79; Williams v.
Cigna Fin. Advisors, Inc., 56 F.3d 656, 659-60 (5th Cir. 1995). Clements contends, however, that
his at-will employment relationship with NEXT precludes applicability of the FAA because his non-
contractual wrongful termination claim does not arise out of a contract evidencing a commercial
transaction.
Under the FAA’s plain language, an arbitrable dispute can arise out of either the contract
containing the arbitration clause or a transaction evidenced by the contract. See 9 U.S.C. § 2.
While Clements’s wrongful termination claim may not arise out of a written employment contract,
“the creation of an employment relationship . . . is a sufficient ‘transaction’ to fall within section 2 of
the [Federal Arbitration] Act.” Dickstein v. du Pont, 443 F.2d 783, 785 (1st Cir. 1971); see also
White-Weld & Co. v. Mosser, 587 S.W.2d 485, 487 (Tex. Civ. App.—Dallas 1979, writ ref’d n.r.e.)
(holding that the FAA governed an employee’s suit for commissions owed by his employer
because an employment relationship constitutes a transaction involving commerce). Moreover,
this Court has held that tort claims and other extra-contractual claims can arise from a commercial
transaction and thus may be subject to arbitration agreements made under the FAA. See In re
Dillard Dep’t Stores, Inc., 186 S.W.3d 514, 516 (Tex. 2006). We therefore hold that the FAA
applies to this dispute.
In addition, NEXT is a clearly intended third-party beneficiary of the U-4 and may compel
arbitration in accordance with the terms of that agreement, even though NEXT is not a signatory to
the U-4. See In re Prudential Ins. Co. of Am. Sales Practice Litig., 133 F.3d 225, 230 (3rd Cir.
1998) (holding that an employer was an intended third-party beneficiary of a U-4 and could
compel arbitration); cf. In re Palm Harbor Homes, Inc., 195 S.W.3d 672, 677 (Tex. 2006) (holding
that an intended third-party beneficiary of an arbitration agreement could compel arbitration).
We turn now to the principal dispute in this case, which is whether Clements’s Sabine Pilot claim
falls within the scope of the arbitration agreement and, if so, whether an exception removes his
claims from mandatory arbitration. In resolving these issues, we are mindful that the scope of an
arbitration agreement must be broadly interpreted in light of the federal policy favoring arbitration.
In re FirstMerit Bank, N.A., 52 S.W.3d 749, 753 (Tex. 2001); see 9 U.S.C. §§ 1–307 (the Federal
Arbitration Act). Conversely, when exceptions to an arbitration agreement are at issue, we
construe the exceptions narrowly in light of the federal policies favoring arbitration and disfavoring
broad interpretations of exceptions, “lest they overwhelm the rule.” Choice Hotels Int’l, Inc. v. BSR
Tropicana Resort, Inc., 252 F.3d 707, 711 (4th Cir. 2001); see 9 U.S.C. §§ 1–307.
We first consider whether Clements’s claim falls within the general class of “business activities”
claims that are compelled to arbitration under the NASD Code. Clements argues that his claim
does not arise from NEXT’s business activities because the claim is based on NEXT’s alleged
illegal actions. The current version of the arbitration provision in the NASD Code was adopted in
2007 and states that arbitration is required if a claim “arises out of the business activities of [an
NASD] member . . . .” NASD Code § 13200(a). NASD members are securities firms. See 17 C.F.
R. § 240.15b7-1. Between 1993 and 2007 (and at the time Clements executed the arbitration
agreement in 2006), the NASD Code explicitly provided for arbitration of claims “arising out of or
in connection with the business of any member . . . or arising out of the employment or termination
of employment.” 58 Fed. Reg. 39070 (July 21, 1993) (emphasis omitted) (text of proposed rule);
see also 58 Fed. Reg. 45932-33 (Aug. 31, 1993) (SEC order adopting the proposed rule change
effective October 1, 1993). Clements argues that the 2007 change in the NASD Code’s language
evinces an intent to narrow the scope of arbitrable claims to exclude employment-related
disputes. We disagree.
In 2007, the NASD and the enforcement arm of the New York Stock Exchange (NYSE), which had
maintained its own arbitration rules, were preparing to merge to form the Financial Industry
Regulation Authority (FINRA). See supra note 1. At that time, NYSE’s arbitration rules required
arbitration of any claim “arising out of the employment or termination of employment of a
registered representative . . . .” 72 Fed. Reg. 45078 (Aug. 10, 2007) (quoting NYSE R. 347(a)
(2007)). NASD’s rule was similar. However, shortly before the merger, NASD amended the
NASD Code’s language to its present form. Despite the modification in the NASD Code, the
SEC’s commentary on the merger explicitly indicated that, following the merger, employment and
employment termination claims would “continue to be covered by NASD DR Rule 13200(a).” 72
Fed. Reg. 45078. Thus, the “business activities” language in the current version of NASD rule
13200(a) is inclusive of employment and employment termination claims, which is confirmed by
the SEC’s commentary.
In addition, effective January 1, 1999 and continuing to date, statutory employment discrimination
and sexual harassment claims have been excluded from compelled arbitration under NASD rules.
See NASD Code § 13201; 63 Fed. Reg. 35303 (June 29, 1998) (SEC order approving rule
change). There would be no reason to have such an exception if employment-related disputes
were excluded from mandatory arbitration.
Furthermore, cases interpreting similar language in the pre-1993 NASD Code, which required
arbitration for “a[ny] dispute, claim, or controversy arising out of or in connection with the business
of any member . . .,” held that claims arising from employment-related disputes were subject to
arbitration under the NASD Code. See, e.g., Armijo v. Prudential Ins. Co. of Am., 72 F.3d 793,
799 (10th Cir. 1995) (following most other federal circuits in holding that employment disputes
were compelled to arbitration by the pre-1993 NASD Code, largely due to “the requirement to
construe arbitration clauses broadly where possible” (citing cases from other federal courts));
Singer v. Jefferies & Co., 575 N.E.2d 98, 99, 101-04 (N.Y. 1991) (holding that the employee’s
claim for injury to reputation resulting from the employer’s alleged use of him as “an unwitting
pawn” in securities fraud was subject to arbitration because the employer’s wrongful conduct
involved “significant aspects” of the employer’s business activities); Skewes v. Shearson Lehman
Bros., 829 P.2d 874, 882 (Kan. 1992) (holding that an employee’s retaliatory discharge claim
“arose out of or in connection with [the employer’s] business” even though the employee claimed
he was terminated in retaliation for filing a wage claim).
Although the language in the pre-1993 NASD Code differs from the language in the current
version of the Code, the language in the current Code–“arising out of”–is not appreciably narrower
than the language of the former Code–“arising out of or in connection with.” The Fifth Circuit has
stated that arbitration agreements that require arbitration for claims “arising out of the contract”
are narrower than those that require arbitration for claims that are “connected with the contract.”
Pennzoil Exploration & Prod. Co. v. Ramco Energy Ltd., 139 F.3d 1061, 1067 (5th Cir. 1998). But
in construing contracts generally, this Court has stated that “‘arising out of’ are words of . . . broad
[] significance . . . .” Utica Nat’l Ins. Co. of Tex. v. Am. Indem. Co., 141 S.W.3d 198, 203 (Tex.
2004) (quoting Red Ball Motor Freight, Inc. v. Employers Mut. Liab. Ins. Co., 189 F.2d 374, 378
(5th Cir. 1951)). We do not perceive such a significant difference in the breadth of these terms
that one version would include employment-related disputes and the other would not.
At least one other court has concluded that a tort claim arising from a securities broker’s illegal
conduct “arose out of” the brokerage firm’s business and was subject to arbitration based on the
arbitration provision in the U-4 and the pre-1993 NASD rules. In Singer v. Jefferies, a securities-
industry employee claimed that his employer’s conduct made him appear complicit in the
employer’s securities-fraud crime. 575 N.E.2d at 100. The court opined, “To hold that such a
dispute does not arise out of the firm’s business is unrealistic and inconsistent with the Federal
policy requiring liberal, indeed generous, interpretation of arbitration agreements.” Id. at 102. In so
holding, the court relied on the federal policy favoring arbitration and “the arising out of” language
rather than the broad “in connection with” language in the NASD Code. Id. at 101-02. Similarly,
although Clements’s retaliatory discharge claim is premised on NEXT’s allegedly illegal activities,
the alleged conduct involves “significant aspects” of NEXT’s legitimate business activities,
bringing the dispute within the scope of the NASD arbitration clause.
Our inquiry does not end there, however, because Clements contends that his Sabine Pilot
wrongful termination claim is excepted from compelled arbitration as a “claim alleging
employment discrimination . . . in violation of a statute.” NASD Code § 13201. Although Clements
concedes that Rule 13201 generally does not except common law claims, he argues that his
Sabine Pilot claim is inherently different because NEXT’s act of terminating him for refusing to
commit a criminal act constitutes a violation of the Texas Penal Code, which criminalizes threats
made against a witness or prospective witness. Tex. Pen. Code § 36.06(a). Relying on the
doctrine of last antecedent, Clements severs the “statutory discrimination exception” into two
separate elements and offers the following analytical construct: To satisfy the “employment
discrimination . . . in violation of a statute” exception, (1) the claim must allege employment
discrimination, and (2) the conduct constituting discrimination must violate some statute, but not
necessarily a statute intended to address employment discrimination in particular. Based on his
construction of the exception, Clements concludes that a Sabine Pilot wrongful termination action
is a “claim alleging employment discrimination” and such discrimination was “in violation of a
statute,” section 36.06 of the Texas Penal Code.
Clements’s strained interpretation is contrary to the plain meaning and intent of the NASD Code,
to which this Court must give effect. See J.M. Davidson v. Webster, 128 S.W.3d 223, 229 (Tex.
2003) (“In construing a written contract, the primary concern of the court is to ascertain the true
intentions of the parties as expressed in the instrument.”); see also First Options of Chicago, Inc.
v. Kaplan, 514 U.S. 938, 944 (1995) (holding that states generally “should apply ordinary state-law
principles” to determine whether the parties agreed to arbitrate a particular issue). The plain
language of the NASD Code confirms that Rule 13201 does not except common law
discrimination claims, which is substantiated by the SEC’s commentary and conceded by
Clements. 62 Fed. Reg. 66166-67 (Dec. 17, 1997) (stating that the statutory discrimination
exception in the NASD Code “does not apply to causes of action created solely by judicial
precedents”). The most natural reading of this rule is that it applies only to violations of statutes
proscribing employment discrimination. Indeed, the rule is entitled “Statutory Employment
Discrimination Claims.” NASD Code § 13201. We do not view a Sabine Pilot claim as a
“discrimination claim,” but even if it were, it is not a statutory discrimination claim, nor is it
converted into one merely because the underlying conduct might actually constitute a violation of
some other type of statute. See 62 Fed. Reg. 66167 n.28 (“Such judicially created causes of
action might include, for example, claims alleging ‘wrongful discharge’ without any accompanying
claim of discrimination on account of age, sex, race, or other status protected by a specific law.”).
We therefore hold that Clements’s Sabine Pilot claim is subject to arbitration under the NASD
rules. Because the trial court abused its discretion in refusing to compel arbitration, we
conditionally grant the writ of mandamus without hearing oral argument, see Tex. R. App. P. 52.8
(c). The trial court is directed to vacate its order denying NEXT’s motion to compel arbitration and
enter an order compelling arbitration of Clements’s claims. We are confident that the trial court will
comply, and this writ will issue only if it does not.
OPINION DELIVERED: November 14, 2008
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[1] The NASD, a self-regulatory organization overseeing securities transactions, absorbed the
enforcement arm of the New York Stock Exchange (NYSE) and became the Financial Industry Regulation
Authority (FINRA) on July 30, 2007. For purposes of this appeal, we will continue to refer to the agency as
the NASD.
[2] “Churning” refers to the excessive buying and selling of securities without authorization, usually to
increase a broker’s commissions. See, e.g., Commodity Futures Trading Comm’n v. R.J. Fitzgerald & Co.,
Inc., 310 F.3d 1321, 1324 (11th Cir. 2002) (referencing 17 C.F.R. 33.10(a)). Churning violates anti-fraud
provisions of the federal securities laws and SEC regulations. See, e.g., 15 U.S.C. § 78j(b); 17 C.F.R. §
240.10b-1, .10b-3, .10b-5).
[3] See also Gardner v. Benefits Commc’ns Corp., 175 F.3d 155, 158 (D.C. Cir. 1999) (“[W]e must look to
NASD’s rules and by-laws in effect when [suit was filed] to determine whether [the] discrimination claims
were subject to the arbitration clause.”); Seus v. John Nuveen & Co., 146 F.3d 175, 187 (3d Cir. 1998)
(“Most courts have found that the Form U-4 compliance clause obligates a registrant to comply with the
NASD Arbitration Code as it existed at the time she filed suit.”); Kuehner v. Dickinson & Co., 84 F.3d 316,
320–21 (9th Cir. 1996) (same).
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In Re Next Financial Group, Inc. (Tex. App.- Houston [14th Dist.] Mar. 6, 2008)(per curiam denial)
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Memorandum Opinion of January 10, 2008, Withdrawn; Petition for Writ of Mandamus Denied and
Memorandum Opinion filed March 6, 2008.
IN RE NEXT FINANCIAL GROUP, INC., Relator
ORIGINAL PROCEEDING
WRIT OF MANDAMUS
M E M O R A N D U M O P I N I O N
On January 9, 2008, relator, NEXT Financial Group, Inc., filed a petition for writ of mandamus and a motion
for emergency relief.[1] See Tex. Gov't Code Ann. ' 22.221 (Vernon 2004); see also Tex. R. App. P. 52.
In the petition, relator ask this court to compel the Honorable Ken Wise, presiding judge of the 152nd
District Court of Harris County, to vacate his order of November 19, 2007, denying relator's motion to
compel arbitration and to enter an order granting the motion to compel. On February 14, 2008, real party
in interest, Michael Clements, filed a response to the petition. On February 25, 2008, relator filed a reply
to the response.
Relator has not established its entitlement to the extraordinary relief of a writ of mandamus. Accordingly,
we lift the stay of trial court proceedings and deny relator's petition for writ of mandamus.
PER CURIAM
Petition Denied and Memorandum Opinion filed March 6, 2008.
Panel consists of Chief Justice Hedges and Justices Anderson and Boyce.
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[1] The petition filed on January 9, 2008, failed to contain a proper verification of factual statements in the petition. On
January 10, 2008, the court issued an opinion, denying relief based on the procedural defect. On January 14, 2008, relator
filed a motion to reconsider and presented a proper verification of the petition. On January 18, 2008, the court granted the
motion to reconsider and entered an order, granting relator's motion for temporary relief. This order stayed all proceedings
in the trial court.