490 U.S. 477 (1989), 88-385, Rodriguez de Quijas v. Shearson/American Express, Inc.

Docket Nº:No. 88-385
Citation:490 U.S. 477, 109 S.Ct. 1917, 104 L.Ed.2d 526, 57 U.S.L.W. 4539
Party Name:Rodriguez de Quijas v. Shearson/American Express, Inc.
Case Date:May 15, 1989
Court:United States Supreme Court
 
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Page 477

490 U.S. 477 (1989)

109 S.Ct. 1917, 104 L.Ed.2d 526, 57 U.S.L.W. 4539

Rodriguez de Quijas

v.

Shearson/American Express, Inc.

No. 88-385

United States Supreme Court

May 15, 1989

Argued March 27, 1989

CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR

THE FIFTH CIRCUIT

Syllabus

Petitioners, securities investors, signed a standard customer agreement which included [109 S.Ct. 1918] an agreement to settle account disputes through binding arbitration unless the agreement was found unenforceable under federal or state law. When the investments turned sour, petitioners brought suit in the District Court against, inter alia, respondent brokerage firm, alleging that their money was lost in unauthorized and fraudulent transactions in violation of, among other things, the provisions of the Securities Act of 1933 and the Securities and Exchange Act of 1934. The District Court ordered all but the Securities Act claims to be submitted to arbitration, holding that those claims must proceed in the court action pursuant to the ruling in Wilko v. Swan, 346 U.S. 427, that an agreement to arbitrate Securities Act claims is void under § 14 of the Act, which prohibits a binding stipulation "to waive compliance with any provision" of the Act. The Court of Appeals reversed, concluding that the arbitration agreement is enforceable because this Court's subsequent decisions have reduced Wilko to "obsolescence."

Held: A predispute agreement to arbitrate claims under the Securities Act of 1933 is enforceable, and resolution of the claims only in a judicial forum is not required. Pp. 479-486.

(a) Wilko is overruled. It was incorrectly decided, and is inconsistent with the prevailing uniform construction of other federal statutes governing arbitration agreements in the setting of business transactions. See, particularly, Shearson/American Express Inc. v. McMahon, 482 U.S. 220, which declined to read § 29(a) of the 1934 Act, which is identical to § 14 of the 1933 Act, to prohibit enforcement of predispute agreements to arbitrate, and which stressed the strong language of the Arbitration Act declaring a federal policy favoring arbitration. It would be undesirable for Wilko and McMahon to exist side by side, because their inconsistency is at odds with the principle that the 1933 and 1934 Acts be construed harmoniously in order to discourage litigants from manipulating their allegations merely to cast their claims under one, rather than the other, securities law. Pp. 479-485.

(b) The customary rule of retroactive application -- that the law announced in the Court's decision controls the case at bar -- is appropriate

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here. Although the decision to overrule Wilko establishes a new principle of law, the ruling furthers the purpose and effect of the Arbitration Act without undermining those of the Securities Act; it does not produce substantial inequitable results; and resort to arbitration does not inherently undermine any of petitioners' substantive rights under the Securities Act. P. 485-486. Pp. 485-485.

845 F.2d 1296, affirmed.

KENNEDY, J., delivered the opinion of the Court, in which REHNQUIST, C.J., and WHITE, O'CONNOR, and SCALIA, JJ., joined. STEVENS, J., filed a dissenting opinion, in which BRENNAN, MARSHALL, and BLACKMUN, JJ., joined, post, p. 486.

KENNEDY, J., lead opinion

JUSTICE KENNEDY delivered the opinion of the Court.

The question here is whether a predispute agreement to arbitrate claims under the Securities Act of 1933 is unenforceable, requiring resolution of the claims only in a judicial forum.

I

Petitioners are individuals who invested about $400,000 in securities. They signed a standard customer agreement with the broker, which included a clause stating that the parties agreed to settle any controversies "relating to [the] accounts" through [109 S.Ct. 1919] binding arbitration that complies with specified procedures. The agreement to arbitrate these controversies is unqualified, unless it is found to be unenforceable under federal or state law. Customer's Agreement ¶ 13. The investments turned sour, and petitioners eventually sued respondent and its broker-agent in charge of the accounts, alleging that their money was lost in unauthorized and fraudulent transactions. In their complaint, they

Page 479

pleaded various violations of federal and state law, including claims under § 12(2) of the Securities Act of 1933, 15 U.S.C. § 771(2), and claims under three sections of the Securities Exchange Act of 1934.

The District Court ordered all the claims to be submitted to arbitration except for those raised under § 12(2) of the Securities Act. It held that the latter claims must proceed in the court action under our clear holding on the point in Wilko v. Swan, 346 U.S. 427 (1953). The District Court reaffirmed its ruling upon reconsideration, and also entered a default judgment against the broker, who is no longer in the case. The Court of Appeals reversed, concluding that the arbitration agreement is enforceable because this Court's subsequent decisions have reduced Wilko to "obsolescence." Rodriguez de Quijas v. Shearson/Lehman Bros., Inc., 845 F.2d 1296, 1299 (CA5 1988). We granted certiorari, 488 U.S. 954 (1988).

II

The Wilko case, decided in 1953, required the Court to determine whether an agreement to arbitrate future controversies constitutes a binding stipulation "to waive compliance with any provision" of the Securities Act, which is nullified by § 14 of the Act. 15 U.S.C. § 7m. The Court considered the language, purposes, and legislative history of the Securities Act and concluded that the agreement to arbitrate was void under § 14. * But the decision was a difficult one in view of the competing legislative policy embodied in the Arbitration Act, which the Court described as "not easily reconcilable," and which strongly favors the enforcement of agreements to arbitrate as a means of securing "prompt, economical

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and adequate solution of controversies." 346 U.S. at 438.

It has been recognized that Wilko was not obviously correct, for

the language prohibiting waiver of "compliance with any provision of this title" could easily have been read to relate to substantive provisions of the Act, without including the remedy provisions.

Alberto-Culver Co. v. Scherk, 484 F.2d 611, 618, n. 7 (CA7 1973) (Stevens, J., dissenting), rev'd, 417 U.S. 506 (1974). The Court did not read the language this way in Wilko, however, and gave two reasons. First, the Court rejected the argument that "arbitration is merely a form of trial to be used in lieu of a trial at law." 346 U.S. at 433. The Court found instead that § 14 does not permit waiver of "the right to select the judicial forum" in favor of arbitration, id. at 435, because "arbitration lacks the certainty of a suit at law under the Act to enforce [the buyer's] rights," id. at 432. Second, the Court concluded that the Securities Act was intended to protect buyers of securities, who often do not deal at arm's length and on equal terms with sellers, by offering them "a wider choice of courts and venue" than is enjoyed by participants in other business transactions, making "the right to select the judicial forum" a particularly [109 S.Ct. 1920] valuable feature of the Securities Act. Id. at 435.

We do not think these reasons justify an interpretation of § 14 that prohibits agreements to arbitrate future disputes relating to the purchase of securities. The Court's characterization of the arbitration process in Wilko is pervaded by what Judge Jerome Frank called "the old judicial hostility to arbitration." Kulukundis Shipping Co. v. Amtorg Trading Corp., 126 F.2d 978, 985 (CA2 1942). That view has been steadily eroded over the years, beginning in the lower courts. See Scherk, supra, at 616 (Stevens, J., dissenting) (citing cases). The erosion intensified in our most recent decisions upholding agreements to arbitrate federal claims raised under the Securities Exchange Act of 1934, see Shearson/American

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Express Inc. v. McMahon, 482 U.S. 220 (1987), under the Racketeer Influenced and Corrupt Organizations (RICO) statutes, see ibid., and under the antitrust laws, see Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985). See also Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 221 (1985) (federal arbitration statute "requires that we rigorously enforce agreements to arbitrate"); Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24 (1983) ("[Q]uestions of arbitrability must be addressed with a healthy regard for the federal policy favoring arbitration"). The shift in the Court's views on arbitration away from those adopted in Wilko is shown by the flat statement in Mitsubishi:

By agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by the statute; it only submits to their resolution in an arbitral, rather than a judicial, forum.

473 U.S. at 628. To the extent that Wilko rested on suspicion of arbitration as a method of weakening the protections afforded in the substantive law to would-be complainants, it has fallen far out of step with our current strong endorsement of the federal statutes favoring this method of resolving disputes.

Once the outmoded presumption of disfavoring arbitration proceedings is set to one side, it...

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