Originally from:

Journal of American Arbitration (JAA) - Vol. 4, No. 1

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ARTICLES

The Sixth Circuit Rules on the Severability of
Arbitration Provisions under Prima Paint and
the Application of the Parol Evidence Rule
under Ohio Law in Glazer v. Lehman
Brothers, Inc.
By Alfred Croce

I. OVERVIEW
Samuel Glazer filed suit against Appellants Lehman Brothers, Inc.
and its affiliated investment companies (Lehman Brothers), as well as
SG Cowen Securities Corp. and Société Générale (collectively, SG
Cowen) based on allegations of theft that were allegedly perpetrated by
Frank Gruttadauria, a former employee and broker. The suit involved the
enforceability of arbitration clauses contained in five various investment
agreements signed by Glazer: an account agreement with an option
agreement signed in 1996, another account agreement signed in 1998, a
margin agreement, and an option contract. When Glazer brought claims
under the Securities and Exchange Act and other federal and Ohio state
securities laws, claiming damages from Gruttadauria’s misconduct, the
appellants argued that the claims should be submitted to arbitration
pursuant to the five agreements. Glazer argued that he was not bound by
the arbitration provisions because the arbitration clauses “must be treated
as contracts separate and distinct from the broader account agreements.”
Furthermore, he argued that, because the agreements should be treated
“separate,” he could introduce parol evidence to prove he was
fraudulently induced into making the agreement by Gruttadauria’s
statements.
As the United States Court of Appeals for the Sixth Circuit noted,
Glazer’s claims were first presented with six other investors’ claims as
part of a consolidated appeal in Fazio v. Lehman Brothers, Inc., 340 F.3d
386 (6th Cir. 2003). In Fazio, the district court had refused to enforce the
arbitration agreements based upon the allegations of fraud in the
inducement. Id. at 392. The district court found that, because there was
evidence that “Gruttadauria had no intention of acting as a true broker,”
the account agreements were unenforceable as well as the arbitration
agreements contained therein. Id. at 394. The Sixth Circuit, however,
disagreed with the district court and remanded the case with instructions
to determine the validity of the arbitration clauses “standing apart from
the account agreements as a whole.” Id. at 392.
Upon remand in the present action, the United States District Court
for the Northern District of Ohio again refused to compel arbitration of
Glazer’s claims against Lehman Brothers and SG Cowen. It held that
“the parol evidence rule did not bar consideration of Gruttadauria’s
alleged oral promise that SG Cowen would not enforce the arbitration
provisions.” Furthermore, the district court held that “Glazer proved the
elements of fraud in the inducement by clear and convincing evidence”
and that “the 1996 account agreement was superceded by Gruttadauria’s