Bauscher v. Brookstone Securities, Inc.

Filing 31

MEMORANDUM DECISION AND ORDER granting 16 Motion to Compel; granting 16 Motion to Stay. Signed by Judge B. Lynn Winmill. (caused to be mailed to non Registered Participants at the addresses listed on the Notice of Electronic Filing (NEF) by (cjm)(Case stayed)

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF IDAHO

RANDY A. BAUSCHER,
Case No. 4:12-cv-00028-BLW
Plaintiff,
MEMORANDUM DECISION AND
ORDER

v.
BROOKSTONE SECURITIES, INC., a
Florida corporation, JESSE KRAPF, an
individual, and DOES 1-10,
Defendants.

INTRODUCTION
The Court has before it a motion to compel arbitration filed by defendant
Brookstone Securities, Inc. The motion is fully briefed and at issue. For the reasons
explained below, the Court will grant the motion.
BACKGROUND
In this case, plaintiff Randy A. Bauscher has sued Brookstone, a stock-brokerage
firm, and Jesse Krapf, an individual broker employed by Brookstone. For ease of
reference, the Court will refer to the defendants collectively as Brookstone.

Memorandum Decision and Order - 1

Bauscher alleges that Brookstone’s misinformation and manipulation caused
Bauscher to invest large sums on margin in a penny stock, resulting in a loss of more than
$650,000. Bauscher initially filed suit in Idaho state court on December 6, 2011, alleging
violations of Idaho state law and common law. Brookstone removed the case here on the
basis of diversity. See 28 U.S.C. § 1332. The Court denied Bauscher’s motion to remand
on April 26, 2011.
Brookstone now moves to compel arbitration and stay proceedings. It relies on the
terms of the contract created when Bauscher applied for an account with First Southwest
Company, Brookstone’s clearing broker.1 The contract consists of two documents; an
“Account Application” bearing Bauscher’s signature, and a “Customer Agreement,”
which was not signed by the parties, but is referenced in the Account Application. See
Exhibit A (Dkt. No. 14-5). On Bauscher’s Account Application, the paragraph
immediately above Bauscher’s signature states:
BY SIGNING BELOW, YOU AGREE TO ALL TERMS OF THE CUSTOMER
AGREEMENT INCLUDED WITH THIS ACCOUNT APPLICATION. YOU
ACKNOWLEDGE RECEIPT OF A COPY OF THIS ACCOUNT APPLICATION
AND THE CUSTOMER AGREEMENT. YOU UNDERSTAND YOU CAN
REVIEW A COPY OF THE ENTIRE CUSTOMER AGREEMENT AT ANY TIME

1

A clearing broker is a brokerage firm which provides cashier and processing functions
such as “order entry, confirmation, clearance of trades, calculation of margin, or similar activities.”
VanCook v. S.E.C., 653 F.3d 130, 133 (2d Cir. 2011) (internal quotation marks and alteration omitted).
The clearing broker acts at the behest of the introducing broker, in this case Brookstone. The introducing
broker interacts directly with the investor-customers. Id.
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BY ACCESSING WWW.FIRSTSWCLEARING.COM. YOU CERTIFY THAT
YOU HAVE READ, UNDERSTAND AND AGREE WITH ALL PROVISIONS OF
THE CUSTOMER AGREEMENT. THE CUSTOMER AGREEMENT BENEFITS
FIRST SOUTHWEST COMPANY, INTRODUCING BROKERS FOR WHICH IT
CLEARS TRANSACTIONS AND PERSONS RELATED TO EACH OF THE
FOREGOING. WITHIN THE CUSTOMER AGREEMENT, PAGE 10,
PARAGRAPH 27 CONTAINS A PRE-DISPUTE ARBITRATION CLAUSE.2
Id. at 2 (block capitalization in original). The referenced Customer Agreement includes an
arbitration agreement which states, in part,
ALL PARTIES TO THIS AGREEMENT ARE GIVING UP THE RIGHT TO SUE
EACH OTHER IN COURT, INCLUDING THE RIGHT TO A TRIAL BY JURY,
EXCEPT AS PROVIDED BY THE RULES OF THE ARBITRATION FORUM IN
WHICH A CLAIM IS FILED.
Id. at 10 (block capitalization in original).
ANALYSIS
Under the Federal Arbitration Act, any “party aggrieved by the alleged failure . . .

2

The pertinent section of Bauscher’s Account Application is illegible in the copy of the
document submitted to the Court. However, Bauscher submitted as evidence a blank, but legible, copy of
the same account agreement, which was provided to them by Brookstone. See Exhibit C (Dkt. No. 18-4)
at p. 17. Bauscher does not contend that the blank application differs from the one that he signed. See
Johnson v. Long John Silver’s Restaurants, Inc., 320 F. Supp. 2d 656, 663 n.5 (M.D. Tenn. 2004)
(holding that blank copy of agreement to arbitrate containing same terms as version signed by party
constitutes sufficient evidence of existence of agreement). Brookstone also introduced an affidavit from
Paul R. Richardson, the President and CEO of Brookstone, averring that the quoted language “appears
directly above Plaintiff’s signature on page 2” of his account application. See Richardson Declaration
(Dkt. No. 16-4) at ¶ 6. Bauscher does not challenge the accuracy of the quotation in the affidavit or
Brookstone’s quotation of this language in their memorandum. The Court is satisfied that there is
adequate evidence to conclude that this was the language contained in the Account Application signed by
Bauscher.
Memorandum Decision and Order - 3

of another to arbitrate under a written agreement for arbitration may petition . . . for an
order directing that such arbitration proceed in the manner provided for in such
agreement.” 9 U.S.C. § 4. The Court must stay proceedings and order arbitration if (1)
there is a valid agreement to arbitrate between the parties, and (2) the agreement
encompasses the dispute at issue. Lifescan, Inc. v. Premier Diabetic Servs., Inc., 363 F.3d
1010, 1012 (9th Cir. 2004). In construing the arbitration agreement, the Court “must
apply ordinary state-law principles that govern the formation of contracts.” Wolsey, Ltd.
v. Foodmaker, Inc., 144 F.3d 1205, 1210 (9th Cir. 1998) (internal quotation marks
omitted).
Bauscher resided in Idaho when he purportedly signed the Account Application,
and the Court therefore evaluates the contract under Idaho law. See Ingle v. Circuit City
Stores, Inc., 328 F.3d 1165, 1170 (9th Cir. 2003). Under Idaho law, the party seeking to
enforce the terms of a written contract bears “[t]he burden of proving the existence of a
contract” by a preponderance of the evidence. Idaho Power Co. v. Cogeneration, Inc., 9
P.3d 1204, 1213 (Id.Sup.Ct. 2000). Once the existence of a contract is established,
doubts about its scope “are to be ‘resolved in favor of coverage.’” Int’l Ass’n of
Firefighters, Local No. 672 v. City of Boise, 30 P.3d 940, 946 (Id.Sup.Ct. 2001) (quoting
AT & T Tech., Inc. v. Commc’n Workers of America, 475 U.S. 643, 650 (1986)).
Bauscher argues that the documents submitted by Brookstone are inadequate to
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establish the existence of a valid arbitration agreement between the parties. He argues that
(1) Brookstone failed to present admissible evidence of the agreement, (2) the Customer
Agreement is a contract between Bauscher and First Southwest; therefore Brookstone
may not compel his performance, (3) performance of the agreement is impossible because
it requires arbitration under the rules of an organization that no longer exists, and (4)
Brookstone has waived its right to enforce the agreement through its three-and-a-halfmonth delay in filing the instant motion. The Court is not persuaded. It will address each
of Bauscher’s arguments in turn.
Admissibility of the Contract
Bauscher argues that Brookstone has inadequately authenticated the contract
containing the arbitration agreement. Brookstone submitted the contract as an attachment
to an affidavit from Paul R. Richardson, the President and CEO of Brookstone.
Richardson’s affidavit states that the Account Application bearing Bauscher’s signature is
authentic and contains the pertinent language referencing the Customer Agreement.
Bauscher’s argument is that Richardson’s affidavit does not establish that he had personal
knowledge of the facts that he avers are true. See Fed. R. of Evid. 602 (“A witness may
testify to a matter only if evidence is introduced to support a finding that the witness has
personal knowledge of the matter.”).
The Court disagrees that the affidavit is “too conclusory to be cognizable.” United
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States v. Shumway, 199 F.3d 1093, 1104 (9th Cir. 1999). The asserted basis for
Richardson’s knowledge is his position as CEO of Brookstone. Richardson claims
personal knowledge that the Account Application was provided to Bauscher by Krapf,
working as a “registered representative” of Brookstone, as is “required by Brookstone in
the course of opening such [new] accounts.” See Richardson Declaration at ¶¶ 4, 5.
Bauscher signed the Account Application on June 24, 2011, and Krapf signed it on June
28, 2011. Id. at ¶ 5. While Bauscher hypothesizes that Richardson may not have actually
spoken to Krapf or reviewed Bauscher’s file, “speculation as to an affiant’s alleged lack
of personal knowledge of the events in his affidavit does not render it inadmissible.” Nev.
Dep’t of Corrs. v. Greene, 648 F.3d 1014, 1019 (9th Cir. 2011), cert. denied, 132 S. Ct.
1823 (2012). The Court concludes that Richardson’s declaration is sufficient to support a
finding that the contract is what Brookstone claims it is. See Fed. R. Evid. 901(a).
Bauscher also asserts that the arbitration agreement is inadmissible hearsay.
However, a document “which . . . itself affects the legal rights of the parties” is not
introduced for the truth of the matter asserted because “the significance of [the] offered
statement lies solely in the fact that it was made.” Fed. R. Evid. 801(c) advisory
committee’s note. In other words, “[f]acts of independent legal significance constituting
a contract which is at issue are not hearsay.” United States v. Rubier, 651 F.2d 628, 630
(9th Cir. 1981) (per curiam).
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Having held that the contract is competent evidence, the Court also finds that
Brookstone has carried its burden of showing the existence of a valid contract. Bauscher
has not submitted any evidence contradicting Brookstone’s claim that the Account
Application was signed by Bauscher, and therefore the preponderance of the evidence
supports the existence of a valid contract.
Bauscher does allege that “the purported Customer Agreement . . . appears to be
two separate documents that were put together in an effort possibly to confuse the
underlying issue.” See Bauscher’s Response Brief (Dkt. No. 18) at p. 8. Bauscher is
correct that there are two separate documents comprising the contract: the Account
Agreement and the Customer Agreement. However, under Idaho law, “[a] signed
agreement may incorporate by reference to another agreement, which is not signed by the
parties, if the terms to be incorporated are adequately identified and readily available for
inspection by the parties.” Harris, Inc. v. Foxhollow Constr. & Trucking, Inc., 264 P.3d
400, 416 (Id.Sup.Ct. 2011).
The unsigned Customer Agreement meets this standard for incorporation by
reference. The Account Application, which Bauscher signed, is explicit:
By signing below, you agree to all terms of the Customer Agreement included with
this account application. You acknowledge receipt of a copy of . . . the Customer
Agreement. You understand you can review a copy of the entire Customer Agreement
at any time [online]. You certify that you have read, understand and agree with all
provisions of the Customer Agreement.
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See Exhibit A (Dkt. No. 16) at p. 2 (block capitalization removed). There is no contention
that the Customer Agreement was not, in fact, “readily available for inspection” by
Bauscher. Harris, Inc., 264 P.3d at 416. The Court therefore finds that the Customer
Agreement was validly incorporated by reference in the Account Application. Bauscher’s
argument does not constitute evidence refuting the existence of a valid contract.
Brookstone’s Right to Enforce the Arbitration Agreement
Bauscher argues that the Account Application is a contract between himself and
First Southwest Company, the clearing broker for Brookstone. Therefore, he contends
that Brookstone cannot enforce the contract against him. Brookstone does not contest
that argument, but argues that it was a third-party beneficiary, and the Court agrees.
Bauscher notes that the majority of courts have held that an introducing broker
may not enforce an arbitration agreement between one of their customers and a clearing
broker. See Arrants v. Buck, 130 F.3d 636, 640-41 (4th Cir. 1997) (collecting cases). An
exception to that general rule exists, however, when a “specific provision in the customerclearing broker agreement makes the arbitration clause applicable to the introducing
broker.” Id. at 641. Where the agreement expresses a “clear intent” to benefit the
introducing broker, the introducing broker may enforce the arbitration clause. Id.
(internal quotation marks omitted).
That is the case here. The contract expressly states in three separate places that the
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introducing broker, Brookstone, was intended to be a beneficiary of the arbitration
agreement between FSW and Bauscher. The Account Application states, “The Customer
Agreement benefits First Southwest, introducing brokers for which it clears transactions
and persons related to each of the foregoing.” Exhibit A, supra, at p. 2 (block
capitalization removed and emphasis added). This is confirmed by the Customer
Agreement. Immediately beneath the title, in an enlarged font it states, “For
FirstSouthwest and/or Broker/Dealers for which it clears transactions.” Id. at p. 4
(emphasis added). Finally, the arbitration clause of the Customer Agreement states,
Any and all controversies between you and FSC, or the introducing broker, agents,
representatives, employees, directors, officers or control persons of FSC or the
introducing broker, arising out of . . . FSC’s business, the introducing broker’s
business or your accounts, shall be conducted pursuant to the code of arbitration
procedure of the National Association of Securities Dealers, Inc.
Id. at 10-11 (emphasis added). This language is unambiguous and sufficient to establish
that the introducing broker may enforce the arbitration agreement as a beneficiary. See
Wagner v. Stratton Oakmont, Inc., 83 F.3d 1046, 1047 (9th Cir. 1996) (recognizing that
similar contractual language allowed introducing broker to enforce arbitration agreement
as beneficiary of contract).
Bauscher counters that the contract does not identify Kraupf or Brookstone as the
“introducing brokers” and therefore its terms are too indefinite to be enforceable.
However, under Idaho law,
Memorandum Decision and Order - 9

The general rule is that a contract is enforceable if it is complete, definite and certain
in all its material terms, or contains provisions which are capable in themselves of
being reduced to certainty. Courts will not hold the contracting parties to a standard
of absolute certainty relative to every detail of a contract. Rather only reasonable
certainty is necessary before a contract will be given legal effect.
General Auto Parts Co., Inc. v. Genuine Parts Co., 979 P.2d 1207, 1215 (Id.Sup.Ct.
1999) (internal quotation marks, alterations, and citations omitted).
The terms of the agreement here are sufficiently certain to render it enforceable.
The first paragraph of the Customer Agreement defines the meaning of “introducing
broker” as “your personal broker who utilizes the services and facilities of FSC to
perform certain execution and clearing functions (referred to herein as ‘Introducing
Broker’). As used herein, ‘Broker’ refers to the personal broker with whom you deal and
the brokerage firm . . . with whom he or she is associated . . . .” Exhibit A, supra, at p. 4.
This definition of terms is and was sufficient to render the contract’s references to the
introducing broker “capable of being reduced to certainty.” General Auto Parts Co., 979
P.2d at 1215. There is no dispute that Bauscher’s personal broker was Krapf, who
worked for Brookstone. As Bauscher’s complaint alleges, Bauscher’s interactions were
directly with Krapf. In fact, Krapf gave the Account Application to Bauscher, and after
Bauscher mailed it in, Krapf signed it as the “registered representative” for the account.
Exhibit A, supra, at p. 2. Reading the contract as a whole, it is clear that the arbitration
was intended to benefit Brookstone, acting in its capacity as Bauscher’s introducing
Memorandum Decision and Order - 10

broker.
Possibility of Performance
Next, Bauscher argues that the arbitration agreement is invalid because it requires
the arbitration to be conducted “pursuant to the code of arbitration procedure of the
National Association of Securities Dealers, Inc.” (“NASD”). As the NASD ceased to
exist in July 2007, Bauscher contends that it is impossible to enforce the agreement.
The Court disagrees. Though the NASD no longer exists in name, it was
“succeeded” by the Financial Industry Regulatory Authority (“FINRA”). Wachovia Sec.,
LLC v. Brand, 671 F.3d 472, 474 n.2 (4th Cir. 2012). FINRA came into existence when
NASD and the New York Stock Exchange’s member regulation body merged to become
“the self-regulatory organization for the securities industry.” Id.; see also Fiero v. Fin.
Indus. Regulatory Auth., Inc., 660 F.3d 569, 571 (2d Cir. 2011) (“FINRA is the successor
to the National Association of Securities Dealers . . . .”). FINRA adopted NASD’s bylaws, including those concerning arbitration, with changes made “solely to reflect the
proposed governance structure of the [new organization’s] Board.” SEC Release No. 3456145, 2007 WL 5185330, at *8 (July 26, 2007). Given that FINRA is the successor
entity to NASD and serves the same function, the fact that the arbitration agreement
refers to NASD does not render the contract illusory or performance impossible. See
Lewis v. UBS Fin. Servs. Inc., 818 F. Supp. 2d 1161, 1166 (N.D. Cal. 2011) (holding that
Memorandum Decision and Order - 11

court can compel arbitration “before FINRA where . . . the arbitration agreement specifies
that arbitration will occur under the rules of NASD” and collecting similar cases).
Waiver
Finally, Bauscher argues that Brookstone has waived its right to enforce the
arbitration clause because of the approximately three and a half month delay between
removal of the case and the filing the motion to compel arbitration. Waiver of a
contractual right to arbitration is disfavored, and “thus any party arguing waiver of
arbitration bears a heavy burden of proof.” United States v. Park Place Assoc., 563 F.3d
907, 921 (9th Cir. 2009) (internal quotation marks omitted). The party seeking to prove
waiver must show: “(1) knowledge of an existing right to compel arbitration; (2) acts
inconsistent with that existing right; and (3) prejudice to the party opposing arbitration
resulting from such inconsistent acts.” Fisher v. A.G. Becker Paribas Inc., 791 F.2d 691,
694 (9th Cir. 1986).
Bauscher has not met the “heavy burden” of proving waiver in this instance
because there is no evidence that Brookstone took actions inconsistent with its right to
arbitrate or that Brookstone’s delay in filing the motion prejudiced Bauscher. Park Place
Assoc., 563 F.3d at 921. Bauscher relies on Viking Packaging Technologies., Inc. v.
Prima Frutta Packing, Inc., 629 F. Supp. 2d 883 (E. D. Wis. 2009). There, the court
ruled that the defendants had waived their right to arbitrate because they “did not mention
Memorandum Decision and Order - 12

arbitration when they answered the complaint and thereby presumptively waived their
right to arbitrate.” Id. at 885. In contrast, Brookstone put Bauscher on notice by
identifying the right to arbitrate as a defense in their answer to the complaint. See
Brookstone’s Answer (Dkt. No. 5) at ¶ 76.
Further, the Viking Packaging court applied the law of the Seventh Circuit, which
does not require a court to find, as an element of waiver, that the opposing party suffered
prejudice. Viking Packaging Techs., Inc., 629 F. Supp. 2d at 884 (citing Cabinetree of
Wis., Inc. v. Kraftmaid Cabinetry, Inc., 50 F.3d 388, 390 (7th Cir. 1995)). In this Circuit,
however, the opposing party must demonstrate prejudice. Fisher, 791 F.2d at 694.
Bauscher has suggested no reason why Brookstone’s delay was prejudicial. During the
three-and-a-half month time period, the parties litigated a motion to remand to state court
and engaged in discovery. This is inadequate to establish prejudice. See id. at 697
(burden of participating in discovery inadequate to show prejudice).
ORDER
In accordance with the Memorandum Decision set forth above,
NOW THEREFORE IT IS HEREBY ORDERED, that the Motion to Compel
Arbitration and Stay Proceedings (docket no. 16) is GRANTED.

Memorandum Decision and Order - 13

DATED: July 30, 2012

Honorable B. Lynn Winmill
Chief U. S. District Judge

Memorandum Decision and Order - 14