Conover v. Dean Witter Reynolds, Inc.

Citation794 F.2d 520
Decision Date17 July 1986
Docket NumberNo. 85-6082,85-6082
Parties, Fed. Sec. L. Rep. P 92,831 Harry R. CONOVER, Plaintiff-Appellee, v. DEAN WITTER REYNOLDS, INC., and Brenton Ogden, Defendants-Appellants, and Sears, Roebuck & Co., Defendant.
CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)

Gregory L. Dillion, Newport Beach, Cal., for plaintiff-appellee.

Eugene Bell, Kevin K. Fitzgerald, Craig R. Bockman, Jones & Bell, Los Angeles, Cal., for defendants-appellants.

Appeal from the United States District Court for the Central District of California.

Before SCHROEDER and NORRIS, Circuit Judges, and SOLOMON, * District Judge.

SCHROEDER, Circuit Judge.

I. INTRODUCTION

This is an action by a customer against his securities broker for damages resulting from alleged violations of section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities and Exchange Commission Rules. In this appeal by the broker, the issue is whether the claim should be submitted to arbitration under the arbitration provision of the parties' customer agreement. Relying upon the Supreme Court's decision in Wilko v. Swan, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953), and subsequent decisions of this circuit, the district court denied the defendants' motion to compel arbitration.

The genesis of this appeal is Justice White's special concurring opinion in Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985). Justice White there questioned whether Wilko's holding, i.e. the non-arbitrability of claims arising under the Securities Act of 1933, applies to claims arising under the Securities Exchange Act of 1934. This is the first of a number of similar cases, involving arbitrability of customer claims against a broker under section 10(b) of the 1934 Act and Rule 10b-5, to reach this court since the Supreme Court's decision in Byrd.

We affirm the district court's ruling that claims under section 10(b) of the 1934 Act should be litigated in federal court rather than submitted to arbitration. For the reasons discussed below, we conclude that the language and history of the securities statutes, considered against the background of controlling Supreme Court decisions and circuit court decisions stressing the importance of a federal judicial forum for Rule 10b-5 claims, require us to hold that the judicial forum for such claims cannot be waived by an arbitration agreement between a customer and broker.

II. BACKGROUND

Plaintiff-appellee, Harry Conover, opened a margin account with Dean Witter Reynolds, Inc., in 1960 and signed a form "customer agreement," which contained the following arbitration provision:

16. Any controversy between you and the undersigned arising out of or relating to this contract or the breach thereof, shall be settled by arbitration, in accordance with the rules ... of either the Arbitration Committee of the Chamber of Commerce of the State of New York, or the American Arbitration Association, or the Board of Arbitration of the New York Stock Exchange....

In July, 1983, Conover brought this suit against Dean Witter and the broker who handled Conover's account, Brenton Ogden. Conover alleged that the defendants "churned" and manipulated his account to generate sales commissions, in violation of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. Sec. 240.10b-5.

On May 10, 1985, shortly after the Supreme Court's decision in Byrd, Dean Witter filed a motion to compel arbitration of Conover's section 10(b) claim and to stay further proceedings pending completion of that arbitration. The motion stressed Justice White's concurrence in Byrd, and urged that arbitration provisions of a customer agreement should constitute a waiver by the customer of a judicial forum for section 10(b) claims.

In discussing the waiver issue, Justice White posed a question which the parties had not raised and which the Court did not need to decide in Byrd. Indeed, as Justice White observed, the very "premise of the controversy" in Byrd was that the plaintiff's claims in that case under the 1934 Act were not arbitrable, in spite of the arbitration agreement. Byrd, 105 S.Ct. at 1244 (White, J., concurring).

This assumption of non-arbitrability of section 10(b) claims is one that this court has shared. It is reflected in several Ninth Circuit Court decisions after the Supreme Court's decision in Wilko, and before its opinion last year in Byrd. See Kehr v. Smith Barney, Harris Upham & Co., 736 F.2d 1283, 1285 n.1 (9th Cir.1984); Kershaw v. Dean Witter Reynolds, Inc., 734 F.2d 1327, 1328 (9th Cir.1984); De Lancie v. Birr, Wilson & Co., 648 F.2d 1255, 1257 (9th Cir.1981). Commentators also had assumed that Wilko applied to claims arising under Section 10(b) of the 1934 Act. See, e.g., A. Jacobs, The Impact of Rule 10b-5, Sec. 237.02 (1980) ("An agreement to arbitrate future claims under the 1933 Act or the 1934 Act ... is voidable"); S. Jaffe, Broker-Dealers and Securities Markets Sec. 1702 (1977) (Noting, without discussion, that Wilko's holding applies to claims arising under the 1934 Act); A. Bromberg & L. Lowenfels, 2 Securities Fraud & Commodities Fraud Sec. 5.16 (410) (1985) (same).

Although this circuit did not directly decide the issue, at least five other circuits in the period before Byrd did decide it, and they held squarely that 1934 claims are not arbitrable. Mansbach v. Prescott, Ball & Turben, 598 F.2d 1017, 1030 (6th Cir.1979); Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Moore, 590 F.2d 823, 827-29 (10th Cir.1978); Weissbuch v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 558 F.2d 831, 833-36 (7th Cir.1977); Allegaert v. Perot, 548 F.2d 432, 437 (2d Cir.), cert. denied, 432 U.S. 910, 97 S.Ct. 2959, 53 L.Ed.2d 1084 (1977); Sawyer v. Raymond, James & Associates, Inc., 642 F.2d 791, 792 (5th Cir.1981). See also Surman v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 733 F.2d 59, 61 (8th Cir.1984); Belke v. Merrill Lynch, Pierce, Fenner & Smith, 693 F.2d 1023, 1025-26 (11th Cir.1982); Ayres v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 538 F.2d 532, 537 (3d Cir.), cert. denied, 429 U.S. 1010, 97 S.Ct. 542, 50 L.Ed.2d 619 (1976).

After the Supreme Court's opinions in Byrd, at least one circuit, the Second, has reaffirmed its pre-Byrd holding of non-arbitrability, reaching the same conclusion that we reach today. McMahon v. Shearson/American Express, Inc., 788 F.2d 94 (2d Cir.1986). The Second Circuit reasoned that clear circuit precedent, the similarity of '33 and '34 Act provisions, and "strong public policy concerns" precluded arbitration of claims under section 10(b).

Because our previous decisions have not addressed the issue squarely, we are free in this case to consider the issue appellants raise. We do so by examining, in light of the questions raised by Justice White, the statutes, their history, and their interpretation by the courts.

III. DISCUSSION

Dean Witter claims that the Arbitration Act, 9 U.S.C. Sec. 1, et seq., requires arbitration of Conover's claims against it. The Arbitration Act provides that an arbitration agreement in a contract evidencing a transaction involving commerce or in a maritime transaction "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. Sec. 2.

As Dean Witter points out, the Supreme Court repeatedly has enforced arbitration agreements in light of the strong federal policy evidenced in the Arbitration Act. Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., --- U.S. ----, 105 S.Ct. 3346, 3355, 87 L.Ed.2d 444 (1985) (because of the international nature of the contract, the arbitration clause was valid in regard to claims that might not be arbitrable under a domestic agreement); Southland Corp. v. Keating, 465 U.S. 1, 104 S.Ct. 852, 79 L.Ed.2d 1 (1984) (a California franchise law which invalidates arbitration agreements violates the supremacy clause); Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24-25, 103 S.Ct. 927, 941-42, 74 L.Ed.2d 765 (1983) ("[A]ny doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration").

The Arbitration Act, however, obviously does not automatically validate an arbitration agreement in the face of contrary congressional policy. See, e.g. Wilko v. Swan, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953). In Mitsubishi, the Supreme Court explained why not all controversies implicating statutory rights are suitable for arbitration.

Just as it is the congressional policy manifested in the federal Arbitration Act that requires courts liberally to construe the scope of arbitration agreements covered by the Act, it is the congressional intention expressed in some other statute on which the courts must rely to identify any category of claims as to which agreements to arbitrate will be held unenforceable.

Mitsubishi, 105 S.Ct. at 3355. Similarly, in Wilko, the Supreme Court recognized the tension between the respective policies of the Arbitration Act and the Securities Act of 1933. It considered the statutory language and purposes of the Acts, and concluded that "the intention of Congress concerning the sale of securities is better carried out by holding invalid such an agreement for arbitration...." 346 U.S. at 438, 74 S.Ct. at 188.

Thus, the question in this case is whether congressional policy prohibits arbitration of claims arising under section 10(b) of the Securities Exchange Act of 1934, despite the strong federal policy favoring arbitration. To determine Congress' intent, we study the text, and both the legislative and judicial history of the 1934 Act, with due regard for the purposes underlying the securities and arbitration statutes.

In determining congressional intent with respect to waiver of a judicial forum we look first to the...

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