Securities Industry Ass'n v. Connolly, 89-1022

• Decision Date: 06 June 1989
• Docket Number: No. 89-1022,89-1022
• Parties: , Fed. Sec. L. Rep. P 94,561 SECURITIES INDUSTRY ASSOCIATION, et al., Plaintiffs, Appellees, v. Michael J. CONNOLLY, etc., et al., Defendants, Appellants. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 1114

883 F.2d 1114

58 USLW 2155, Fed. Sec. L. Rep. P 94,561

SECURITIES INDUSTRY ASSOCIATION, et al., Plaintiffs, Appellees, v. Michael J. CONNOLLY, etc., et al., Defendants, Appellants.

No. 89-1022.

United States Court of Appeals First Circuit.

Heard June 6, 1989.

Decided Aug. 31, 1989.

Thomas A. Barnico, Asst. Atty. Gen., with whom James M. Shannon, Atty. Gen., and Richard M. Brunell, Asst. Atty. Gen., Boston, Mass., were on brief, for defendants, appellants.

Cornish F. Hitchcock and Alan B. Morrison, Washington, D.C., Public Citizen Litigation Group, on brief, for Public Citizen, amicus curiae.

Joseph C. Long, Sp. Counsel, on brief, for North American Securities Administrators Ass'n, Inc., amicus curiae.

Steven W. Hansen with whom Gerald F. Rath, Victor H. Polk, Don E. Gorton III and Bingham, Dana & Gould, Boston, Mass., were on brief, for plaintiffs, appellees.

Marshall E. Hanbury, Gen. Counsel, Chicago, Ill., Kenneth M. Raisler, Gen. Counsel, New York City, and Jay Witkin, Deputy Gen. Counsel, Washington, D.C., on brief, for the Commodity Futures Trading Com'n, amicus curiae.

Before CAMPBELL, Chief Judge, SELYA, Circuit Judge, and CAFFREY, ^* Senior District Judge.

SELYA, Circuit Judge.

Hypertrophy is the pathologic "overgrowth ... of an organ or part ... resulting from unusually steady or severe use...." Webster's Third New International Dictionary 1114 (1981). Metaphorists seem to find the condition irresistible. Thus, hypertrophy has been used as a partial explanation for the collapse of entire intellectual systems, e.g., Kuhn, The Structure of Scientific Revolutions (2d ed. 1970), and detailed mechanical intellectual artifacts, e.g., Posner, Goodbye to the Bluebook, 54 U.Chi.L.Rev. 1343 (1986). We succumb today to the same temptation, for we find the metaphor especially apt in discussing the rampant growth of the civil docket in the United States.

We need not belabor the point. Increased resort to the courts, and the consequent tumefaction of already-swollen court calendars, have received considerable attention, see, e.g., Heydebrand & Seron, The Rising Demand For Court Services, 11 Just.Sys.J. 303 (1986); Galanter, The Day After the Litigation Explosion, 46 Md.L.Rev. 3 (1986); Lieberman, The Litigation Society (1981), so we merely note the phenomenon and do not comment further upon it. We focus instead on arbitration, a contractual device that relieves some of the organic pressure by operating as a shunt, allowing parties to resolve disputes outside of the legal system. Congress passed the Federal Arbitration Act (FAA or Act), 9 U.S.C. Secs. 1-14 (1982), to help legitimate arbitration and make it more readily useful to disputants. The hope has long been that the Act could serve as a therapy for the ailment of the crowded docket. As might be expected, there is a rub: the patient, and others in interest, often resist the treatment.

I

We are asked to decide today if certain regulations, Mass.Regs.Code tit. 950, Secs. 12.204(G)(1)(a)-(c) (Regulations), set forth in the appendix hereto, are preempted by the FAA. The Regulations are part of a set which governs the conduct of those who sell securities in the Commonwealth. The provisions at issue were promulgated at one time. Neither party suggested to the district court that any of the provisions might be severable, so we treat them as a unit for purposes of our preemption analysis. See Clauson v. Smith, 823 F.2d 660, 666 (1st Cir.1987) (court of appeals will ordinarily eschew consideration of theories not raised below).

The contracts to which the Regulations apply implicate interstate and international commerce, as well as the instrumentalities of that commerce, thus subjecting them to the reach of the FAA. See 9 U.S.C. Sec. 1; see generally Societe Generale de Surveillance, S.A. v. Raytheon European Management and Systems Co., 643 F.2d 863, 867 (1st Cir.1981) (the term "commerce" as used in the Act is to be broadly construed). Specifically, the Regulations are aimed at broker-dealers who require customers to sign pre-dispute arbitration agreements (PDAAs) as a concomitant of establishing account relationships. Not coincidentally, many of the major brokerage firms prefer to follow some such praxis. Cf. Drayer v. Krasner, 572 F.2d 348, 353-54 (2d Cir.), cert. denied, 436 U.S. 948, 98 S.Ct. 2855, 56 L.Ed.2d 791 (1978) (discussing industry-wide use of arbitration to resolve disputes between broker-dealers and registered representatives).

The Regulations not only regulate; they do so in a manner patently inhospitable to arbitration. They (i) bar firms from requiring individuals to enter PDAAs as a nonnegotiable condition precedent to account relationships, Sec. 12.204(G)(1)(a); (ii) order the prohibition brought "conspicuously" to the attention of prospective customers, Sec. 12.204(G)(1)(b); and (iii) demand full written disclosure of "the legal effect of the pre-dispute arbitration contract or clause," Sec. 12.204(G)(1)(c).

In Massachusetts, regulation of securities falls within the province of the Secretary of State, who superintends the Securities Division. Immediately upon adoption of the Regulations in September 1988, the Securities Industry Association and ten brokerage firms affiliated with it ¹ sued in federal district court seeking a declaration that the Regulations were unconstitutional because they conflicted with the provisions and policies of the FAA. SIA also sought a preliminary injunction barring enforcement of the Regulations. The suit named the Secretary of State and the director of the Securities Division (appellants before us) as defendants. Claiming that the Commonwealth had power to issue the Regulations as part of its concurrent authority to regulate securities transactions, see Mass.Gen.L. ch. 110A, Secs. 201, 204 (1984) (governing registration of broker-dealers), appellants stood their ground. Cross-motions for summary judgment were eventually filed. In due course, the district court granted declaratory and injunctive relief in appellees' favor. Securities Indus. Ass'n v. Connolly, 703 F.Supp. 146 (D.Mass.1988). This appeal followed.

II

A

The Supremacy Clause of Article VI of the federal Constitution prevents the states from impinging overmuch on federal law and policy. See Louisiana Pub. Serv. Comm'n v. FCC, 476 U.S. 355, 368, 106 S.Ct. 1890, 1898, 90 L.Ed.2d 369 (1986). Preemption--the vehicle by which the Supremacy Clause is generally enforced--always boils down to a matter of congressional intent. Schneidewind v. ANR Pipeline Co., 485 U.S. 293, 108 S.Ct. 1145, 1150, 99 L.Ed.2d 316 (1988); California Fed. Sav. & Loan Ass'n v. Guerra, 479 U.S. 272, 280, 107 S.Ct. 683, 689, 93 L.Ed.2d 613 (1987); Wardair Canada, Inc. v. Florida Dep't of Revenue, 477 U.S. 1, 6, 106 S.Ct. 2369, 2372, 91 L.Ed.2d 1 (1986); French v. Pan Am Express, Inc., 869 F.2d 1, 2 (1st Cir.1989); Wood v. General Motors Corp., 865 F.2d 395, 401 (1st Cir.1988). And, because Congress has not expressly delineated the preemptive reach of the FAA, our task is to determine the extent of any implied preemption vis-a-vis the state's Regulations.

We have acknowledged before that "[t]he concept of implied preemption has a certain protean quality," a circumstance which tends to defeat courts' efforts to establish tidy creedal subcategories. French, 869 F.2d at 2. Yet, although we continue to "abjure taxonomy for taxonomy's sake," id., it is sometimes helpful to sketch the borders of the doctrine by reference to commonly used descriptions. Thus, it has been said that implied preemption prospers when Congress intends its enactments "to occupy a given field to the exclusion of state law." Schneidewind, 108 S.Ct. at 1150. That is not the case here: Congress did not want the FAA to occupy the entire field of arbitration law. Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior Univ., --- U.S. ----, 109 S.Ct. 1248, 1254, 103 L.Ed.2d 488 (1989); New England Energy, Inc. v. Keystone Shipping Co., 855 F.2d 1, 4 (1st Cir.1988), cert. denied, --- U.S. ----, 109 S.Ct. 1527, 103 L.Ed.2d 832 (1989). State law may also be preempted "when it actually conflicts with federal law." Schneidewind, 108 S.Ct. at 1150; see also Perry v. Thomas, 482 U.S. 483, 491, 107 S.Ct. 2520, 2526, 96 L.Ed.2d 426 (1987). In this respect, substance takes precedence over form; a direct, facial contradiction between state and federal law is not necessary to catalyze an "actual[ ] conflict" within the doctrinal parameters of the Supremacy Clause.

Whatever labels may be affixed, the pivot upon which our inquiry turns remains constant: where Congress has failed explicitly to detail the dimensions of displacement, courts must decide if "the state law disturbs too much the congressionally declared scheme...." Palmer v. Liggett Group, Inc., 825 F.2d 620, 626 (1st Cir.1987); see also French, 869 F.2d at 2 (adopting a practical preemption analysis which focuses "on the effect which the challenged enactment will have on the federal plan"). Put another way, a state law or regulation cannot take root if it looms as an obstacle to achievement of the full purposes and ends which Congress has itself set out to accomplish. Schneidewind, 108 S.Ct. at 1151; California Coastal Comm'n v. Granite Rock Co., 480 U.S. 572, 107 S.Ct. 1419, 1425, 94 L.Ed.2d 577 (1987); Silkwood v. Kerr-McGee Corp., 464 U.S. 238, 248, 104 S.Ct. 615, 621, 78 L.Ed.2d 443 (1984); Hines v. Davidowitz, 312 U.S. 52, 67, 61 S.Ct. 399, 404, 85 L.Ed. 581 (1941).

B

Here, then, the critical inquiry is whether the FAA is an enactment which Congress meant to remain relatively unfettered; and if so, whether the Regulations intrude impermissibly. We approach our task mindful both that interpretation of a statute's meaning must start with the text itself, United States v. James, 478 U.S. 597, 604, 106 S.Ct. 3116, 3120, 92 L.Ed.2d 483 (1986), and that the language chosen by Congress must be accorded its ordinary meaning, ...