Pierson v. Dean, Witter, Reynolds, Inc.

• Citation: 742 F.2d 334
• Decision Date: 24 August 1984
• Docket Number: No. 83-1568,83-1568
• Parties: Fed. Sec. L. Rep. P 91,615 Wayne E. PIERSON and Ruth E. Pierson, Plaintiffs-Appellees, v. DEAN, WITTER, REYNOLDS, INC., Defendant-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

Page 334

742 F.2d 334

Fed. Sec. L. Rep. P 91,615

Wayne E. PIERSON and Ruth E. Pierson, Plaintiffs-Appellees, v. DEAN, WITTER, REYNOLDS, INC., Defendant-Appellant.

No. 83-1568.

United States Court of Appeals, Seventh Circuit.

Argued Jan. 12, 1984.

Decided Aug. 6, 1984.

As Amended Aug. 24, 1984.

Gregg N. Grimsley, Vonachen, Cation, Lawless, Trager & Slevin, Peoria, Ill., for plaintiffs-appellees.

Timothy L. Bertschy, Hely, Royster, Voelker & Allen, Peoria, Ill., for defendant-appellant.

Before BAUER, WOOD, and COFFEY, Circuit Judges.

HARLINGTON WOOD, JR., Circuit Judge.

This is an interlocutory appeal taken pursuant to 28 U.S.C. Sec. 1292(a)(1) by Dean, Witter, Reynolds, Inc., defendant-appellant, from a district court order denying Dean Witter's motion to stay four common law causes of action for arbitration. ¹ Plaintiffs-appellees Wayne E. Pierson and Ruth E. Pierson brought these common law claims pendant to another claim challenging an alleged violation of the Securities Exchange Act of 1934. We reverse.

I.

In 1977, the Piersons opened a non-discretionary margin account with Dean Witter for security trading. The Piersons signed a printed form contract entitled "Customers Agreement." In pertinent part, that agreement provides for arbitration of any controversy "arising out of or relating to this contract or breach thereof." In addition, the contract specifies that the laws of the State of New York govern the contract and its enforcement. ²

Count I of the Piersons' amended complaint alleges a violation of Rule 10b-5 of the Securities Exchange Act of 1934. Counts II through V charge common law violations sounding in breach of fiduciary duty, negligence, gross negligence, and fraud. ³ The Piersons requested a trial by jury on all counts, and, in addition to actual damages, the Piersons seek exemplary damages on the common law counts, except on the count alleging negligence. Dean Witter filed a motion to dismiss the common law counts or, in the alternative, to stay the common law actions for arbitration, as provided in the contract.

The court denied Dean Witter's motion on March 7, 1983. As the same issues had been raised by a similar motion directed to the original complaint, the parties and this court assume that the explanation the trial judge gave at the time he denied the original motion remained his basis for dismissal of the second motion. Judge Mihm had stated that he was not convinced that the arbitration agreement reached allegations of fraud and breach of fiduciary duty, and that he was not satisfied that the Piersons had knowingly waived their right to a possible award of punitive damages, which are not available under New York law through arbitration, since punitive damages are not specifically mentioned in the contract. ⁴

II.

A

Dean Witter argues that the Piersons' common law allegations are controversies that "arise out of or relate to" the contract and therefore are subject to the contract's arbitration provision. Dean Witter concludes that the district court was obligated to stay all counts except the alleged Rule 10b-5 violation and to compel their arbitration. We agree, although we appreciate Judge Mihm's desire to avoid the possibility of a result perceived to have some potential unfairness for the Piersons.

As we know, arbitration clauses are regarded with favor. Weissbuch v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 558 F.2d 831, 833 (7th Cir.1977). Where less than all the alleged claims are arbitrable, and here the Rule 10b-5 claims is concededly not arbitrable, the court may proceed with the non-arbitrable claims, but the court is obliged to honor the arbitration clause agreed to by the parties and to lay aside the arbitrable claims. See Dickinson v. Heinold Securities, Inc., 661 F.2d 638, 644 (7th Cir.1981).

The arbitration clause in this case is broadly worded and encompasses any controversy arising out of or relating to the contract or its breach. Claims of fraud under a contract, breach of fiduciary duty, negligence, and gross negligence are not immune from arbitration under a broadly-worded valid arbitration clause. See In re Oil Spill by Amoco Cadiz, 659 F.2d 789, 794 (7th Cir.1981) (tort claims arbitrable under contract arbitration clause); cf. Sauer-Getriebe KG v. White Hydraulics, Inc., 715 F.2d 348, 350 (7th Cir.1983) (under broadly-worded clause, even validity of contract itself is subject to arbitration). These common law causes of action obviously are controversies that arise out of and relate to nothing other than the Piersons' contract, which defines the business relationship between them and Dean Witter. The fraud alleged is fraud under the contract; the Piersons do not allege that the arbitration clause was induced by fraud. See Prima Paint Corp. v. Flood & Conklin Manufacturing Co., 388 U.S. 395, 403-04, 87 S.Ct. 1801, 1805-06, 18 L.Ed.2d 1270 (1967) (in passing on an application to stay for arbitration, "a federal court may consider only issues relating to the making and performance of the agreement to arbitrate"). The fraud claim in this case therefore is arbitrable, Blumberg v. Berland, 678 F.2d 1068, 1071 (11th Cir.1982), as are the other common law claims, Baselski v. Paine, Webber, Jackson & Curtis, Inc., 514 F.Supp. 535, 539, 543 (N.D.Ill.1981) (breach of fiduciary duty); see also In re Oil Spill by Amoco Cadiz, 659 F.2d at 794 (common law tort claims).

These types of actions could have been specifically excepted, but were not. To except from the arbitration clause what the Piersons now want excepted would leave the clause anemic. The Supreme Court has emphasized that when there is a broad arbitration clause, "[i]n the absence of any express provision excluding a particular grievance from arbitration, we think only the most forceful evidence of a purpose to exclude the claim from arbitration can prevail ...." United Steelworkers of America v. Warrior & Gulf Navigation Co., 363 U.S. 574, 584-85, 80 S.Ct. 1347, 1353-54, 4 L.Ed.2d 1409 (1960); see also Randall v. Lodge No. 1076, International Association of Machinists, 648 F.2d 462, 467 (7th Cir.1981). The Piersons have not presented any evidence of a purpose to exclude common law claims from arbitration under their contract. Perhaps the Piersons did not fully appreciate all the ramifications of the plain wording of the arbitration clause, which include losing the right to a jury trial on the arbitrable issues and losing the possibility of obtaining punitive damages, but we cannot reform the clause to the Piersons' satisfaction.

Citing Fuller v. Guthrie, 565 F.2d 259 (2d Cir.1977), the Piersons argue that the arbitration clause should not be binding unless they consciously agreed to arbitrate the common law claims. In Fuller, Arlo Guthrie, a well-known folksinger, had announced from the stage that he and others were not being paid and that the plaintiff had cheated the audience. The court held that the subsequent complaint arising from Guthrie's failure to complete the concert was covered by the arbitration clause contained in his performance contract, but that the resulting slander claim against Guthrie was not subject to arbitration. The court explained that the slander claim fell "far beyond" the intended scope of the performance contract's arbitration clause. Id. at 261. We cannot say that the Piersons' common law claims fall "far beyond" their investment contract. The Piersons complain about the way Dean Witter handled their account. The resulting common law claims, which relate directly to the performance expected of Dean Witter, do not arise from "wholly unexpected tortious behavior," id. at 261, as did the claim against Guthrie for making allegedly slanderous comments during a musical concert.

B

Next, the Piersons argue that if the terms of the contract require arbitration of common law claims, the contract is unconscionable and one-sided in favor of Dean Witter, the stronger party. The Piersons failed, however, to plead unconscionability to the district court. The court apparently raised the question on its own, refusing to enforce the arbitration clause because of its perception that forfeiture of the right to pursue punitive damages is a "harsh result." However, without any indication in the record that the Piersons even alleged, much less proved, that they were forced to unknowingly forfeit their rights in an unfair manner, we cannot uphold the district court's finding that the arbitration clause is unconscionable. ⁵ See Dow Corning Corp. v. Capitol Aviation, Inc., 411 F.2d 622, 627 (7th Cir.1969) (before finding contract clause unconscionable, court should have held hearing on that question). The Piersons have now briefed and argued unconscionability, but we still see no basis for application of that doctrine.

The purpose of the unconscionability doctrine is to prevent unfair surprise and oppression. FMC Finance Corp. v. Murphree, 632 F.2d 413, 420 (5th Cir.1980); Leasing Service Corp. v. Broetje, 545 F.Supp. 362, 366 (S.D.N.Y.1982). The Piersons claim to be the weaker party, without a choice but to execute the contract. Even if we accept that claim as true, that one party enjoys little bargaining power is not itself sufficient reason to declare a contract provision unconscionable. T.A. Moynahan Properties, Inc. v. Lancaster Village Cooperative, Inc., 496 F.2d 1114, 1119 (7th Cir.1974). The Piersons have submitted no evidence that the clause is commercially unreasonable or that the Piersons lacked a reasonable opportunity to understand it. See Williams v. Walker-Thomas Furniture Co., 350 F.2d 445, 449-50 (D.C.Cir.1965); Leasing Service Corp. v. Broetje, 545 F.Supp. at 366; Contract Buyers League v. F & F Investment, 300 F.Supp. 210, 227 (N.D.Ill.1969), aff'd, 420 F.2d 1191 (7th Cir.), cert. denied, 400 U.S. 821, 91 S.Ct. 42, 27 L.Ed.2d 49 (1970). We know nothing of the Piersons' sophistication or experience. The only thing we can safely conclude from the meager record before u...