417 U.S. 506 (1974), 73-781, Scherk v. Alberto-Culver Co.

Docket Nº:No. 73-781
Citation:417 U.S. 506, 94 S.Ct. 2449, 41 L.Ed.2d 270
Party Name:Scherk v. Alberto-Culver Co.
Case Date:June 17, 1974
Court:United States Supreme Court
 
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Page 506

417 U.S. 506 (1974)

94 S.Ct. 2449, 41 L.Ed.2d 270

Scherk

v.

Alberto-Culver Co.

No. 73-781

United States Supreme Court

June 17, 1974

Argued April 29, 1974

CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

Syllabus

Respondent, an American manufacturer based in Illinois, in order to expand its overseas operations, purchased from petitioner a German citizen, three enterprises owned by him and organized under the laws of Germany and Liechtenstein, together with all trademark rights of these enterprises. The sales contract, which was negotiated in the United States, England, and Germany, signed in Austria, and closed in Switzerland, contained express warranties by petitioner that the trademarks were unencumbered and a clause providing that "any controversy or claim [that] shall arise out of this agreement or the breach thereof" would be referred to arbitration before the International Chamber of Commerce in Paris, France, and that Illinois laws would govern the agreement and its interpretation and performance. Subsequently, after allegedly discovering that the trademarks were subject to substantial encumbrances, [94 S.Ct. 2451] respondent offered to rescind the contract, but when petitioner refused, respondent brought suit in District Court for damages and other relief, contending that petitioner's fraudulent representations concerning the trademark rights violated § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Petitioner moved to dismiss the action or alternatively to stay the action pending arbitration, but the District Court denied the motion to dismiss and, as sought by respondent, preliminarily enjoined petitioner from proceeding with arbitration, holding, in reliance on Wilko v. Swan, 346 U.S. 427, that the arbitration clause was unenforceable. The Court of Appeals affirmed.

Held: The arbitration clause is to be respected and enforced by federal courts in accord with the explicit provisions of the United States Arbitration Act that an arbitration agreement, such as is here involved, "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. §§ 1, 2. Wilko v. Swan, supra, distinguished. Pp. 510-520.

(a) Since uncertainty will almost inevitably exist with respect to any contract, such as the one in question here, with substantial

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contacts in two or more countries, each with its own substantive laws and conflict of laws rules, a contractual provision specifying in advance the forum for litigating disputes and the law to be applied is an almost indispensable precondition to achieving the orderliness and predictability essential to any international business transaction. Such a provision obviates the danger that a contract dispute might be submitted to a forum hostile to the interests of one of the parties or unfamiliar with the problem area involved. Pp. 515-517.

(b) In the context of an international contract, the advantages that a security buyer might possess in having a wide choice of American courts and venue in which to litigate his claims of violations of the securities laws, become chimerical, since an opposing party may by speedy resort to foreign court block or hinder access to the American court of the buyer's choice. Pp. 517-518.

(c) An agreement to arbitrate before a specified tribunal is, in effect, a specialized kind of forum selection clause that posits not only the situs of suit, but also the procedure to be used in resolving the dispute, and the invalidation of the arbitration clause in this case would not only allow respondent to repudiate its solemn promise but would, as well, reflect a "parochial concept that all disputes must be resolved under our laws and in our courts." The Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 9. P. 519.

484 F.2d 611, reversed and remanded.

STEWART, J., delivered the opinion of the Court, in which BURGER, C.J., and BLACKMUN, POWELL, and REHNQUIST, JJ., joined. DOUGLAS, J., filed a dissenting opinion, in which BRENNAN, WHITE, and MARSHALL, JJ., joined, post, p. 521.

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STEWART, J., lead opinion

MR. JUSTICE STEWART delivered the opinion of the Court.

Alberto-Culver Co., the respondent, is an American company incorporated in Delaware with its principal office in Illinois. It manufactures and distributes toiletries and hair products in this country and abroad. During the 1960's, Alberto-Culver decided to expand its overseas operations, and as part of this program it approached the petitioner Fritz Scherk, a German citizen residing at the time of trial in Switzerland. Scherk was the owner of three interrelated business entities, organized under the laws of Germany and Liechtenstein, that were engaged in the manufacture of toiletries and the licensing of trademarks for such toiletries. An initial contact with Scherk was made by a representative of Alberto-Culver in Germany in June, [94 S.Ct. 2452] 1967, and negotiations followed at further meetings in both Europe and the United States during 1967 and 1968. In February, 1969, a contract was signed in Vienna, Austria, which provided for the transfer of the ownership of Scherk's enterprises to Alberto-Culver, along with all rights held by these enterprises to trademarks in cosmetic goods. The contract contained a number of express warranties whereby Scherk guaranteed the sole and unencumbered ownership of these trademarks. In addition, the contract contained an arbitration clause providing that "any controversy or claim [that] shall arise out of this agreement or the breach thereof" would be referred to arbitration before the International Chamber of Commerce in Paris, France, and that "[t]he laws of the State of Illinois, U.S.A. shall apply to and govern this agreement, its interpretation and performance."1

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The closing of the transaction took place in Geneva, Switzerland, in June, 1969. Nearly one year later, Alberto-Culver allegedly discovered that the trademark rights purchased under the contract were subject to substantial encumbrances that threatened to give others superior rights to the trademarks and to restrict or preclude Alberto-Culver's use of them. Alberto-Culver thereupon tendered back to Scherk the property that had been transferred to it and offered to rescind the contract. Upon Scherk's refusal, Alberto-Culver commenced this action for damages and other relief in a Federal District Court in Illinois, contending that Scherk's fraudulent representations concerning the status of the trademark rights constituted violations of § 10(b) of the Securities Exchange Act of 1934, 48 Stat. 891, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 CFR § 240.10b-5.

In response, Scherk filed a motion to dismiss the action for want of personal and subject matter jurisdiction as well as on the basis of forum non conveniens, or, alternatively, to stay the action pending arbitration in Paris pursuant to the agreement of the parties. Alberto

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Culver, in turn, opposed this motion and sought a preliminary injunction restraining the prosecution of arbitration proceedings.2 On December 2, 1971, the District Court denied Scherk's motion to dismiss, and, on January 14, 1972, it granted a preliminary order enjoining Scherk from proceeding with arbitration. In taking these actions, the court relied entirely on this Court's decision in Wilko v. Swan, 346 U.S. 427, which held that an agreement to arbitrate could not preclude a buyer of a security from seeking a judicial remedy under the securities Act of 1933, in view of the language of § 14 of that Act, barring

[a]ny condition, stipulation, or provision binding any person acquiring any security to waive compliance with any provision of this subchapter. . . .

48 Stat. 84, 15 U.S.C. § 7n.3 The Court of Appeals for the Seventh Circuit, with one judge dissenting, affirmed upon what it considered the controlling authority of the Wilko decision. 484 F.2d 611. Because of the importance of the question presented, we granted Scherk's petition for a writ of certiorari. 414 U.S. 1156.

I

The United States Arbitration Act, now 9 U.S.C. § 1 et seq., reversing centuries of judicial hostility to arbitration agreements,4 was designed to allow parties to avoid

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"the costliness and delays of litigation," and to place arbitration agreements "upon the same footing as other contracts. . . ." H.R.Rep. No. 96, 68th Cong., 1st Sess., 1, 2 (1924); see also S.Rep. No. 536, 68th Cong., 1st Sess. (1924). Accordingly, the Act provides that an arbitration agreement such as is here involved "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2.5 The Act also provides in § 3 for a stay of proceedings in a case where a court is satisfied that the issue before it is arbitrable under the agreement, and § 4 of the Act directs a federal court to order parties to proceed to arbitration if there has been a "failure, neglect, or refusal" of any party to honor an agreement to arbitrate.

In Wilko v. Swan, supra, this Court acknowledged that the Act reflects a legislative recognition of the "desirability of arbitration as an alternative to the complications of litigation," 346 U.S. at 431, but nonetheless declined to apply the Act's provisions. That case involved an agreement between Anthony Wilko and Hayden, Stone & Co., a large brokerage firm, under which Wilko agreed to purchase on margin a number of shares of a corporation's common stock. Wilko alleged that his purchase of the stock was induced by false representations

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on the part of the defendant concerning the value of the shares, and he brought...

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