KOST v. PNC BANK, NATIONAL ASSOCIATION

Filing 17

ENTRY ON DEFENDANT'S MOTION TO COMPEL AND DISMISS, AND FOR COSTS - 5 Motion to Compel and Dismiss, and for Costs is GRANTED in part and DENIED in part. Plaintiff is COMPELLED to arbitrate this matter, Plaintiff's action before this court is STAYED pending completion of such arbitration, and the parties shall bear their own costs regarding this motion. See Entry for details. Signed by Judge Richard L. Young on 9/17/2015. (LBT)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF INDIANA
NEW ALBANY DIVISION
SHAWN KOST,

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Plaintiff,
vs.
PNC BANK, NATIONAL
ASSOCIATION,

4:15-cv-00056-RLY-WGH

Defendant.
ENTRY ON DEFENDANT’S MOTION TO
COMPEL AND DISMISS, AND FOR COSTS
I. Introduction
Plaintiff, Shawn Kost, filed this defamation and negligence suit against Defendant,
PNC Bank, National Association, for damages arising out of allegedly false statements
made by Defendant regarding Plaintiff’s termination of employment. This matter comes
before the court on Defendant’s Motion to Compel and Dismiss, and for Costs.
Defendant seeks to dismiss the suit under Federal Rule of Civil Procedure 12(b)(3) for
improper venue and compel Plaintiff to arbitrate this matter. For the reasons set forth
below, the court GRANTS IN PART and DENIES IN PART Plaintiff’s motion.
II. Background
In his Complaint, Plaintiff contends that he was employed by Defendant as an
investment advisor and, upon his termination, Defendant reported inaccurate information
about the reason for his discharge to the Financial Industry Regulatory Authority
(“FINRA”). FINRA is a non-governmental, regulatory agency that oversees brokerage
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investment firms and their licensed employees. According to Plaintiff, this incorrect
information is accessible to the general public via FINRA’s Broker Check service. As a
result, Defendant’s statements have damaged his reputation in the industry and prevented
him from securing employment.
While Defendant disagrees that it was Plaintiff’s employer, Defendant explains
that every firm and broker that markets securities to the public in the United States must
be licensed and registered by FINRA. Those associated with FINRA must then adhere to
the rules and regulations promulgated by the agency. Specifically, FINRA requires
licensed employees, such as Plaintiff, to complete a Form U4 Application for Securities
Industry Registration or Transfer (“Form U4”) at the beginning of their employment with
brokerage investment firms. It is undisputed that Plaintiff completed a Form U4 on or
about August 8, 2011. The Form U4 signed by Plaintiff provides (emphasis original),
I agree to arbitrate any dispute, claim or controversy that may arise between
me and my firm, or a customer, or any other person, that is required to be
arbitrated under the rules, constitutions, or by-laws of the SROS indicated in
Section 4 (SRO REGISTRATION) as may be amended from time to time
and that any arbitration award rendered against me may be entered as a
judgment in any court of competent jurisdiction.
FINRA is one of the self-regulatory organizations (“SROs”) listed in Section 4
with which Plaintiff registered. FINRA Rule 13200(a) provides, “Except as otherwise
provided in the Code, a dispute must be arbitrated under the Code if the dispute arises out
of the business activities of a member or an associated person and is between or among:
Members; Members and Associated Persons; or Associated Persons.” FINRA defines a
“member” as “any broker or dealer admitted to membership in FINRA.” FINRA Rule

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13100. It defines an “associated person” as “a person associated with a member, as that
term is defined in paragraph (r).” Id. A “person associated with a member” includes “[a]
natural person who is registered or has applied for registration under the Rules of
FINRA.” Id.
In addition to the Form U4, Plaintiff also signed “Disclosure to Associated
Persons when Signing Form U-4” (“Disclosure”), which states,
You are agreeing to arbitrate any dispute, claim or controversy that may arise
between you and your firm, or a customer, or any other person, that is
required to be arbitrated under the roles of the self-regulatory organizations
with which you are registering. This means you are giving up the right to
sue a member, customer, or another associated person in court, including the
right to a trail [sic] by jury, except as provided by the rules of the arbitration
forum in which a claim is filed.
Defendant asserts that in order to remain in good standing with FINRA, members
are required to report the reason for any employee’s discharge to the agency via the Form
U5 Uniform Termination Notice For Securities Industry Registration (“Form U5”). In
this case, a Form U5 was filed shortly after Plaintiff’s discharge. Plaintiff’s Form U5
contains the allegedly defamatory remarks that are the focus of this lawsuit. FINRA
copied the information from the Form U5 and made it available online via its Broker
Check service.
III. Discussion
A. Agreements to Arbitrate
In considering whether the parties agreed to arbitrate this matter, the court applies
“ordinary state-law principles that govern the formation of contracts.” Druco Rests., Inc.
v. Steak N Shake Enters., 765 F.3d 776, 781 (7th Cir. 2014). Indiana and federal courts
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alike recognize that arbitration provisions are valid and enforceable. Tender Loving Care
Mgmt., Inc. v. Sherls, 14 N.E.3d 67, 71 (Ind. Ct. App. 2014) (“Both Indiana and federal
law recognize a strong public policy favoring enforcement of arbitration agreements.”).
When an Indiana court construes an arbitration agreement, “every doubt is to be resolved
in favor of arbitration.” Nightingale Home Healthcare, Inc. v. Helmuth, 15 N.E.3d 1080,
1085 (Ind. Ct. App. 2014). See Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp.,
460 U.S. 1, 24-25 (1983) (“[A]ny doubts concerning the scope of arbitrable issues should
be resolved in favor of arbitration.”).
B. Compelling Arbitration
Section 4 of the Federal Arbitration Act (“FAA”) 1, 9 U.S.C. § 1 et seq., authorizes a
federal court to “make an order directing the parties to proceed to arbitration” upon a
showing that “the making of the agreement for arbitration or the failure to comply
therewith is not in issue.” 9 U.S.C. 4. The Seventh Circuit has interpreted this statute to
mean that in order to compel arbitration, “a party need only show: (1) an agreement to
arbitrate, (2) a dispute within the scope of the arbitration agreement, and (3) a refusal by
the opposing party to proceed to arbitration.” Zurich American Ins. Co. v. Watts Indus.,
Inc., 466 F.3d 577, 580 (7th Cir. 2006). This court is required to order arbitration “unless
it may be said with positive assurance that the arbitration clause is not susceptible of an

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Defendant argues that the Form U4 is governed by the FAA, but Plaintiff does not respond to
this point. As Defendant notes, several courts, including the U.S. Supreme Court, have
implicitly held that the FAA does govern the Form U4. See e.g., Gilmer v. Interstate/Johnson
Lane Corp., 500 U.S. 20, 24 (1991); Koveleskie v. SBC Capital Mkts., Inc., 167 F.3d 361, 367
(7th Cir. 1999); Estabrook v. Piper Jaffray Cos., 492 F. Supp. 2d 922, 925 (N.D. Ill. 2007).
Therefore, this court need not revisit that issue.

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interpretation that covers the asserted dispute.” United Steelworkers of America v.
Warrior & Gulf Navigation Co., 363 U.S. 574, 582-83 (1960).
The three elements outlined by Zurich American Insurance Company are mostly
undisputed. First, the court finds that there is a valid agreement to arbitrate. The Form
U4 unambiguously provides that Plaintiff agreed to “arbitrate any dispute, claim or
controversy that may arise between [him] and [his] firm . . . .” Plaintiff fully
acknowledges that he signed this form and that it contains an arbitration provision.
Furthermore, the parties do not dispute that this is a valid contract under Indiana
principles of contract law. See McIntire v. Franklin Twp. Cmty. Sch. Corp., 15 N.E.3d
131, 134 (Ind. Ct. App. 2014) (stating that the “basic elements of a contract” are “an
offer, acceptance, a manifestation of mutual assent, and consideration”). Importantly
though, the Form U4 only mandates arbitration when it is required under the rules of a
specific SRO. To be sure, FINRA Rule 13200(a) requires arbitration in this instance.
First, Plaintiff’s claim “arises out of the business activities” of a member because this
case concerns the official procedure followed by Plaintiff’s firm after Plaintiff was
discharged. Second, this dispute is between an associated person (Plaintiff) and a
member (Plaintiff’s firm).
Rather than contest the validity of these arbitration provisions, Plaintiff argues that
he entered into an agreement to arbitrate with PNC Investments LLC (“PNCI”), not
Defendant. Plaintiff then reminds the court that this suit is against Defendant (allegedly
his former employer), not PNCI. Consequently, Defendant, a non-signatory party to the
Form U4, cannot seek to enforce PNCI’s arbitration agreement in this action. This
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argument is a non-starter. As Defendant demonstrates, PNCI, a subsidiary of Defendant,
was actually Plaintiff’s employer. Sean Stamper (a Compliance Senior Associate with
PNCI) and David Snow (an Assistant Vice President and Senior Employee Relations
Investigator with Defendant) both state, through their declarations, that Plaintiff was
employed by PNCI. (Filing No. 6-1, Declaration of Sean Stamper at ¶ 6; Filing No. 6-2,
Declaration of David Snow at ¶ 6). Plaintiff’s offer letter from PNCI reinforces this
conclusion. The letter, dated July 27, 2011, states, “[W]e are pleased to confirm your
verbal acceptance of the terms of employment extended to you to join PNC Investments
as a Full Time Financial Advisor starting on August 8, 2011.” (Filing No. 6-2, Offer
Letter). The Form U4 and Form U5 both list PNCI as Plaintiff’s firm. Moreover, the
Broker Check report-the principal piece of evidence relied upon by Plaintiff in his
Complaint-lists PNCI as Plaintiff’s employer. Plaintiff’s subjective beliefs that
Defendant was his employer based upon the entity listed on his compensation checks and
his reliance on Defendant’s website for employment policies are not enough to refute the
overwhelming evidence to the contrary.
Furthermore, this court cannot ignore that Plaintiff’s Complaint is based entirely
upon PNCI’s communication to FINRA regarding Plaintiff’s termination via the Form
U5. Plaintiff seemingly sought to avoid arbitration by naming Defendant, rather than
PNCI, in his lawsuit. Accepting Plaintiff’s arguments and permitting his lawsuit to move
forward would strike directly against the express intent of the parties, as reflected by the
unambiguous language in the Form U4. This is impermissible under Indiana law. See
Singleton v. Fifth Third Bank, 977 N.E.2d 958, 968 (Ind. Ct. App. 2012) (“When
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interpreting a contract, our paramount goal is to ascertain and effectuate the intent of the
parties.”); Ballew v. Town of Clarksville, 683 N.E.2d 636, 640 (Ind. Ct. App. 1997) (“A
court, even in equity, cannot make a new contract for the parties, or add new terms
thereto.”). As the Sixth Circuit Court of Appeals rightly concluded, if a litigant “can
avoid the practical consequences of an agreement to arbitrate by naming nonsignatory
parties as [defendants] in his complaint . . . the effect of the rule requiring arbitration
would, in effect, be nullified.” Arnold v. Arnold Corp., 920 F.2d 1269, 1281 (6th Cir.
1990). See Hilti, Inc. v. Oldach, 392 F.2d 368, 369 n.2 (1st Cir. 1968) (“If arbitration
defenses could be foreclosed simply by adding as a defendant a person not a party to an
arbitration agreement, the utility of such agreements would be seriously compromised.”).
The second requirement that must be met before this court can compel arbitration
is that the dispute must fall “within the scope of the arbitration agreement.” Zurich
American Ins. Co., 466 F.3d at 580. The plain language of the Form U4 is very broad in
that it covers “any dispute, claim or controversy that may arise . . . .” In other words, the
clause does not contain any limitations that might indicate it only applies in the context of
a specific type of dispute (e.g., a tort action). Rather, this language is so broad that it
likely encompasses any action an employee might attempt to file in court. Plaintiff does
not argue otherwise. As the Seventh Circuit noted, “Arbitration clauses containing
language such as ‘arising out of’ are ‘extremely broad’ and ‘necessarily create a
presumption of arbitrability.’” Faulkenberg v. CB Tax Franchise Sys., LP, 637 F.3d 801,
810-11 (7th Cir. 2011) (quoting Kiefer Specialty Flooring, Inc. v. Tarkett, Inc., 174 F.3d
907, 909-10 (7th Cir. 1999)). See IBEW Local 2150 v. NextEra Energy Point Beach,
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LLC, 762 F.3d 592, 594 (7th Cir. 2014) (“Where the arbitration clause is broad, we
presume arbitrability of disputes.”). Whereas this is unquestionably a dispute between
Plaintiff and his firm, this action is within the scope of the arbitration provision contained
within the Form U4. See Anonymous v. Hendricks, 994 N.E.2d 324, 329 (Ind. Ct. App.
2013) (“Parties are bound to arbitrate all matters not explicitly excluded that reasonably
fit within the language used.”).
Lastly, a party seeking to compel arbitration must demonstrate “a refusal by the
opposing party to proceed to arbitration.” Zurich American Ins. Co., 466 F.3d at 580.
This refusal is evident by the mere fact that Plaintiff filed this action, and then reinforced
by Plaintiff’s briefing on this motion.
Whereas the three elements outlined in Zurich American Insurance Company have
been satisfied, this court hereby COMPELS Plaintiff to arbitrate this matter pursuant to 9
U.S.C. § 4. 466 F.3d at 580.
C. Proper Disposition of Plaintiff’s Action
Defendant argues that the proper course of action in this case is an order
compelling arbitration and a dismissal pursuant to Rule 12(b)(3) for improper venue. In
support, Defendant cites to the Seventh Circuit’s decision in Faulkenberg. 637 F.3d at
808. However, the Faulkenberg court stated, “[A] Rule 12(b)(3) motion to dismiss for
improper venue, rather than a motion to stay or to compel arbitration, is the proper
procedure to use when the arbitration clause requires arbitration outside the confines of
the district court’s district.” Id. (emphasis added). Neither party contends that
arbitration must occur outside of the Southern District of Indiana. Accordingly, this rule
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is inapplicable to the instant case. Under the facts of this case, the FAA requires that the
court stay, not dismiss, the action:
If any suit or proceeding be brought in any of the courts of the United States
upon any issue referable to arbitration under an agreement in writing for such
arbitration, the court in which such suit is pending, upon being satisfied that
the issue involved in such suit or proceeding is referable to arbitration under
such an agreement, shall on application of one of the parties stay the trial of
the action until such arbitration has been had in accordance with the terms of
the agreement, providing the applicant for the stay is not in default in
proceeding with such arbitration.
9 U.S.C. § 3. See Shearson/American Express v. McMahon, 482 U.S. 220, 226 (1987)
(“[A] court must stay its proceedings if it is satisfied that an issue before it is arbitrable
under the agreement.”) (citation omitted) (emphasis added); Volkswagen of Am., Inc. v.
Sud’s of Peoria, Inc., 474 F.3d 966, 971 (7th Cir. 2007) (“For arbitrable issues, a § 3 stay
is mandatory.”) (emphasis added).
The Seventh Circuit explained that a stay “is the normal procedure when an
arbitrable issue arises in the course of a federal suit” because, in addition to being
required under § 3 of the FAA, it “spare[s] the parties the burden of a second litigation
should the arbitrators fail to resolve the entire controversy.” Tice v. Am. Airlines, Inc.,
288 F.3d 313, 318 (7th Cir. 2002). See Kawasaki Heavy Indus. v. Bombardier Rec.
Prods., 660 F.3d 988, 997 (7th Cir. 2011) (noting that a district court “retains
jurisdiction” under a § 3 stay in order to “effectuate the decision of an arbitrator”).
Therefore, Plaintiff’s action is hereby STAYED pending completion of the
arbitration.

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D. Costs
As a part of its motion to dismiss and compel arbitration, Defendant seeks the
costs associated with filing the motion and briefs. Defendant emphasizes that the
prevailing party is generally entitled to recover its costs as a matter of course. Harney v.
City of Chicago, 702 F.3d 916, 927 (7th Cir. 2012). Indeed, Rule 54(d) creates a
presumption that the prevailing party’s costs, other than attorney’s fees, shall be
reimbursed by the non-prevailing party. Fed. R. Civ. P. 54(d). See 28 U.S.C. § 1920.
Therefore, Defendant urges, the court should require Plaintiff to compensate Defendant
for its reasonable expenses.
Not so fast.
Under Rule 54(d) and 28 U.S.C. § 1920, “prevailing party” is a legal term of art.
Buckhannon Bd. & Care Home v. W. Va. Dep’t of Health & Human Res., 532 U.S. 598,
603 (2001). It does not simply refer to a party who wins a motion. In Buckhannon, the
Supreme Court defined “prevailing party” as “a party in whose favor a judgment is
rendered, regardless of the amount of damages awarded.” Id. (citing Black’s Law
Dictionary 1145 (7th ed. 1999)). The Court went on to specifically note, “We have only
awarded attorney’s fees where the plaintiff has received a judgment on the merits or
obtained a court-ordered consent decree.” Id. at 605 (citation omitted). See Zessar v.
Keith, 536 F.3d 788, 796 (7th Cir. 2008) (“[T]he Supreme Court has repeatedly held that,
other than a settlement made enforceable under a consent decree, a final judgment on the
merits is the normative judicial act that creates a prevailing party.”).

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As the Seventh Circuit explained, “victory on a jurisdictional point [that] merely
prolongs litigation” does not render the moving party a “prevailing party”: “A defendant
may persuade the court that the plaintiff has sued too soon, or in the wrong court, or
failed to jump through a procedural hoop. Then the dispute will continue later, or
elsewhere, and it remains to be seen who will prevail.” Citizens for a Better Env’t v.
Steel Co., 230 F.3d 923, 929-30 (7th Cir. 2000). Put another way, a defendant cannot be
deemed the “prevailing party” for simply “put[ting] off the evil day” when it will have to
address the plaintiff’s claim. Id. at 930. See Linda W. v. Indiana Dep’t of Educ., 200
F.3d 504, 507 (7th Cir. 1999) (“[T]o prevail in litigation one must win on the merits, and
not just score tactical victories in interlocutory skirmishes.”).
In this case, Defendant does not qualify as a “prevailing party” for purposes of
Rule 54(d). The court herein grants Defendant’s motion to compel arbitration, but this
victory is in no way an adjudication on the merits of Plaintiff’s claims. Moreover,
Plaintiff’s action shall be stayed, not dismissed. Thus, the court has not foreclosed all
relief for Plaintiff. To the contrary, Plaintiff is free to refile his action with the proper
arbitration body. This is precisely the type of resolution that the Citizens for a Better
Environment court warned does not produce a “prevailing party.” Whereas this “dispute
will continue” in another forum, Defendant’s victory today “merely prolongs litigation.”
230 F.3d at 929-30. In the words of the Seventh Circuit, Defendant has only succeeded
“in a battle,” when it needed to “triumph in the war” in order to recover its costs under
Rule 54(d). Id. at 930. See Draper, Inc. v. MechoShade Sys., No. 1:10-cv-1443, 2013
U.S. Dist. LEXIS 140040, at *2 (S.D. Ind. Sept. 30, 2013) (holding that the defendant
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was not a “prevailing party” under 28 U.S.C. § 1920 despite winning a motion to dismiss
for lack of personal jurisdiction).
Therefore, the parties must bear their own costs in this action.
IV. Conclusion
For the foregoing reasons, the court GRANTS IN PART and DENIES IN PART
Defendant’s Motion to Compel and Dismiss, and For Costs. (Filing No. 5). Therefore,
Plaintiff is COMPELLED to arbitrate this matter, Plaintiff’s action before this court is
STAYED pending completion of such arbitration, and the parties shall bear their own
costs regarding this motion.

SO ORDERED this 17th day of September 2015.

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RICHARD L. YOUNG, CHIEF JUDGE
RICHARD L. YOUNG, CHIEF JUDGE
United States District Court
United States District Court
Southern District of Indiana
Southern District of Indiana

Distributed Electronically to Registered Counsel of Record.

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