Salomon Inc. Shareholders' Derivative Litigation 91 Civ. 5500 (RRP):, In re

Decision Date22 September 1989
Citation68 F.3d 554
Parties, Fed. Sec. L. Rep. P 98,920 IN re SALOMON INC. SHAREHOLDERS' DERIVATIVE LITIGATION 91 CIV. 5500 (RRP): all actions. Morton WEINER, Dr. Henry Housman, Laurence Housman, The Hallisey and Johnson Money Purchase Pension Trust, Norman Salsits, David Shaev, Chaim Mandelbaum, Three Bridges Investment Group, Leatrice Seinfeld, Dorothy L. Kas, Alfred Cardani, Ruby Resnik, Gregg Copenhagen, IRA DTD
CourtU.S. Court of Appeals — Second Circuit

Greg A. Danilow, Weil, Gotshal & Manges, New York City (Curt P. Beck, of counsel), for defendant-appellant Thomas W. Strauss.

Philip K. Howard, Howard, Darby & Levin, New York City (Linda C. Goldstein, of counsel), for defendant-appellant John H. Gutfreund.

Charles E. Davidow, Wilmer, Cutler & Pickering, Washington, DC (Jeffrey E. McFadden, of counsel), for defendant-appellant John W. Meriwether.

Patricia M. Hynes, Milberg Weiss Bershad Hynes & Lerach, New York City (Melvyn I. Weiss, Steven G. Schulman, Joshua H. Vinik, of counsel), for derivative plaintiffs-appellees.

Scott W. Fisher, Garwin, Bronzaft, Gerstein & Fisher, New York City (Bertram Bronzaft, Jerald Stein, of counsel), for derivative plaintiffs-appellees.

Before: WINTER, ALTIMARI, and McLAUGHLIN, Circuit Judges.

McLAUGHLIN, Circuit Judge:

Shareholders in Salomon Inc. ("Salomon"), the corporate parent of Salomon Brothers Inc. ("Salomon Brothers"), brought a derivative suit in the United States District Court for the Southern District of New York (Robert P. Patterson, Jr., Judge ). They alleged securities and common law claims on behalf of Salomon and Salomon Brothers, all stemming from the Treasury Bill auction scandal that rocked Wall Street a few years ago.

The defendants, ex-Salomon Brothers officials, had signed agreements with Salomon Brothers providing for arbitration of any disputes arising out of their employment. They therefore moved to compel arbitration under the Federal Arbitration Act (the "FAA"), 9 U.S.C. Sec. 1 et seq. Judge Patterson granted the motion and referred the matter to the New York Stock Exchange ("NYSE"), the arbitral forum designated in the arbitration agreements. The NYSE declined to arbitrate the dispute, and the defendants went back to the district court, seeking the appointment of substitute arbitrators under Sec. 5 of the FAA. Judge Patterson denied the motion, and set the controversy down for trial in October, 1995.

The defendants now appeal, arguing that under First Options, Inc. v. Kaplan, --- U.S. ----, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995), the question of arbitrability is to be decided by the court, not the arbitrator, unless the arbitration clause clearly and unmistakably relegates that question to the arbitrator. They maintain that the arbitration clauses at issue here do not measure up to the clear and unmistakable test of First Options and, thus, Judge Patterson had the final say on the arbitrability question. Under the parties' arbitration agreements, however, this dispute could be arbitrated, if at all, only by the NYSE. Accordingly, we affirm the decision below to proceed to trial.

I.

In 1991, certain brokers at Salomon Brothers made unauthorized bids during a Treasury Bill auction. This enabled Salomon Brothers to obtain a near monopoly on the T-Bills sold in that auction. Afterwards, Salomon Brothers' General Counsel learned of the chicanery and notified John Gutfreund, at that time the CEO and Chairman of the Board of Salomon Brothers, as well as the President, CEO, and Chairman of the Board of Salomon. He also notified Thomas Strauss, who was both the President of Salomon Brothers and the Vice Chairman of the Board of Salomon, and John Meriwether, who was a Managing Director and the Vice Chairman of the Board of Salomon Brothers and was also the supervisor of the broker who orchestrated the bidding scheme.

Gutfreund, Strauss, and Meriwether did nothing. Federal authorities, however, discovered the bid-rigging, and Salomon Brothers and others have subsequently paid millions of dollars in penalties imposed by the SEC and the Justice Department.

In 1991, several shareholders in Salomon Brothers' corporate parent, Salomon, brought a derivative suit against Gutfreund, Strauss, Meriwether (collectively, the "defendants"), and others, alleging several securities and common law claims. The suit was just one of many federal suits stemming from the auction scandal, all of which were assigned to Judge Patterson.

The derivative suit crawled along. In 1994, the defendants belatedly remembered that each of them had signed an agreement to arbitrate (under the Constitution and rules of the NYSE) any dispute arising out of their employment by Salomon Brothers. Accordingly, they moved to stay the three-year old derivative suit and to compel arbitration before the NYSE. Judge Patterson granted the motion.

Before the NYSE, the plaintiffs vigorously contended that the matter was not arbitrable and that the NYSE should decline to arbitrate it. Invoking the NYSE's discretion to "decline in any case to permit the use of [its] arbitration facilities," NYSE Const. Art. XI, Sec. 3, the Secretary of the NYSE declined to arbitrate the dispute.

The defendants appealed the Secretary's decision to the NYSE Board. The Board affirmed in a thorough opinion. It advanced several reasons justifying its decision not to arbitrate the matter, including that:

. under its decision in Diana v. Merrill Lynch, shareholder controversies were " 'not appropriately within the mandatory provisions' " of its Constitution;

. "jurisdiction must be based on the consent of the parties to arbitrate," and "neither the shareholders who initiated th[e] derivative action nor Salomon ... have consented to arbitration";

. shareholders' derivative litigation, which is governed by Fed.R.Civ.P. 23.1, is foreign to the procedures and mechanisms employed in NYSE arbitration.

The matter returned to Judge Patterson. The defendants moved for an order compelling arbitration, staying trial pending arbitration, and appointing substitute arbitrators under Sec. 5 of the FAA. Judge Patterson denied the motion from the bench:

The [NYSE] has determined not to take this matter and, accordingly, the agreement [to arbitrate] has been carried out by the members, in terms of what they had to do pursuant to their agreement. Since the [NYSE] has determined not to accept jurisdiction, this Court is going to proceed to trial....

The defendants then requested that the trial be delayed. Judge Patterson rejected their request:

I am not going to put this case off. This case has been pending over three years now. You [the defendants] are just putting off the awful day.

.... I can see what is going on. And I don't believe that plaintiffs are entitled, members of the class are entitled to have the matter put off. They are entitled to have prompt justice.

He set a trial date of October 10, 1995. Thereafter, he issued an order formally denying both the defendants' motion to compel arbitration, and a motion to stay the trial pending appeal.

Pursuant to Sec. 16 of the FAA, the defendants appealed, and promptly moved for a stay pending appeal and for an expedited appeal. This Court denied the stay without prejudice, and ordered the appeal expedited. The defendants then asked Judge Patterson once again to stay the trial. He denied the motion. Finally, at oral argument in this Court, the defendants renewed their motion for a stay of the trial pending our decision. We denied that motion from the bench.

II.

On appeal, the parties focus almost exclusively on the Supreme Court's recent decision in First Options. The defendants contend that Judge Patterson, and not the NYSE, had to determine whether this dispute was arbitrable. See --- U.S. at ---- - ----, 115 S.Ct. at 1924-26. They construe his initial decision to refer the matter to the NYSE as a finding that the dispute was indeed arbitrable. Having once so found, they argue, Judge Patterson had no choice but to name substitute arbitrators under Sec. 5 of the FAA when the NYSE proved unwilling or unable to perform.

The plaintiffs, on the other hand, argue that Judge Patterson complied with First Options because the arbitration agreements at issue clearly and unmistakably assigned to the NYSE the power to determine arbitrability. See First Options, --- U.S. at ----, 115 S.Ct. at 1924. Alternatively, they argue that the defendants waived any right to have Judge Patterson decide the arbitrability question by convincing him to refer the matter to the NYSE in the first place, and by not renewing the arbitrability issue when the matter returned to him. Underlying their arguments is a belief that shareholder derivative suits are not fit for arbitration.

We need not reach these issues, however, because, under the arbitration agreements, all disputes were to be arbitrated by the NYSE and only the NYSE, "in accordance with the [NYSE] Constitution and rules." The NYSE Constitution clearly permits the NYSE to refuse the use of its facilities for the arbitration of any particular dispute. NYSE Const. Art. XI, Sec. 3. When the NYSE so refuses, there is no further promise to arbitrate in another forum.

We review de novo a district court's denial of a motion to stay an action pending arbitration. See Haviland v. Goldman, Sachs & Co., 947 F.2d 601, 604 (2d Cir.1991), cert. denied, 504 U.S. 930, 112 S.Ct. 1995, 118 L.Ed.2d 591 (1992). By now, it is axiomatic that "federal policy strongly favors arbitration as an alternative dispute resolution process." David L. Threlkeld & Co. v. Metallgesellschaft Ltd., 923 F.2d 245, 248 (2d Cir.), cert. dismissed, 501 U.S. 1267, 112 S.Ct. 17, 115 L.Ed.2d 1094 (1991). Thu...

To continue reading

Request your trial
121 cases
  • Topf v. Warnaco, Inc.
    • United States
    • U.S. District Court — District of Connecticut
    • August 22, 1996
    ...Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 25, 111 S.Ct. 1647, 1651, 114 L.Ed.2d 26 (1991); In re Salomon, Inc. Shareholders Derivative Litig., 68 F.3d 554, 557 (2d Cir.1995). This policy is reflected in the provision that any agreement to arbitrate in contracts affecting commerc......
  • Republic of Ecuador v. Chevrontexaco Corp., 04 Civ. 8378(LBS).
    • United States
    • U.S. District Court — Southern District of New York
    • June 27, 2005
    ...all questions of interpretation, construction, validity, revocability, and enforceability.'" Gutfreund v. Weiner (In re Salomon Inc. Shareholders Derivative Litig.), 68 F.3d 554, 559 (2d Cir.1995) (quoting Coenen v. R.W. Pressprich & Co., 453 F.2d 1209, 1211 (2d Cir.1972)) (alteration in or......
  • Singh v. Uber Techs., Inc.
    • United States
    • U.S. District Court — District of New Jersey
    • November 23, 2021
    ...interpretation, construction, validity, revocability, and enforceability.") (alteration in original); In re Salomon Inc. S'holders’ Derivative Litig. , 68 F.3d 554, 559 (2d Cir. 1995) (same). In any case, state law would furnish an alternative basis to arbitrate. Plaintiffs begin by reading......
  • Clerk v. First Bank of Del.
    • United States
    • U.S. District Court — Eastern District of Pennsylvania
    • March 22, 2010
  • Request a trial to view additional results
2 books & journal articles
  • 'THE PECULIAR GENIUS OF PRIVATE-LAW SYSTEMS': MAKING ROOM FOR RELIGIOUS COMMERCE.
    • United States
    • Washington University Law Review Vol. 97 No. 6, August 2020
    • August 1, 2020
    ...v. ITT Consumer Fin. Corp., 211 F.3d 1217,1222 (11th Cir. 2000); Gutfreund v. Weiner (In re Salomon Inc. S'holders' Derivative Litig.), 68 F.3d 554, 561 (2d Cir. 1995). But see Green v. U.S. Cash Advance Ill., LLC, 724 F.3d 787, 793 (7th Cir. 2013) (rejecting the "integral-part" test and co......
  • The Arbitration Clause in Context: How Contract Terms Do (and Do Not) Define the Process
    • United States
    • University of Nebraska - Lincoln Nebraska Law Review No. 40, 2022
    • Invalid date
    ...which procedures and remedies to make available in arbitration). 33. E.g., In re Salomon Inc. S'holders' Derivative Litig. 91 Civ. 5500, 68 F.3d 554, 557-61 (2d Cir. 1995) (recognizing that choice of arbitral forum may be integral to the arbitration agreement). 34. See supra notes 5, 15, & ......

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT