Brown v. Dean Witter Reynolds, Inc.

• Decision Date: 22 January 1985
• Docket Number: No. 84-6701-Civ-Gonzalez.,84-6701-Civ-Gonzalez.
• Citation: 601 F. Supp. 641
• Parties: Jack R. BROWN, Plaintiff, v. DEAN WITTER REYNOLDS, INC., Robert Steinlauf and Richard Ten Eyck, Defendants.
• Court: U.S. District Court — Southern District of Florida

601 F. Supp. 641

Jack R. BROWN, Plaintiff, v. DEAN WITTER REYNOLDS, INC., Robert Steinlauf and Richard Ten Eyck, Defendants.

No. 84-6701-Civ-Gonzalez.

United States District Court, S.D. Florida, N.D.

January 22, 1985.

Arthur Leibell, Fort Lauderdale, Fla., for plaintiff.

Edward Marko, Fort Lauderdale, Fla., for defendants.

ORDER

GONZALEZ, District Judge.

Plaintiff sues defendants for federal and state security laws violations, and for alleged state common-law wrongs. The parties have previously contracted to submit the state claims to arbitration.

Query: Does federal law require a stay of the arbitration of the state law claims pending disposition of the federal claims in United States District Court?

For the reasons set forth below, the court answers no.

I.

Plaintiff Jack R. Brown, a disgruntled investor, has brought this action to recoup the losses he sustained through the acquisition of stocks purchased on his behalf by defendants Dean Witter Reynolds, Inc. ("Dean Witter") and two of its employees, Vice-President and Branch Manager Robert Steinlauf, and broker Richard Ten Eyck. Plaintiff contends that after opening two accounts at Dean Witter, Messrs. Steinlauf and Eyck induced him to purchase and retain two securities based on misrepresentations or omissions of material facts. Consequently, plaintiff has brought a six count complaint charging defendants with violations of federal and state securities laws. Count 1 alleges a cause of action under section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78j(b) (West 1981) and Rule 10b-5, 17 C.F.R. § 240.10b-5 (1983); Count 2 alleges fraud in the offer or sale of securities in violation of section 12(2) of the Securities Act of 1933, 15 U.S.C.A. § 77l(2) (West 1981); and Counts 3, 4, 5 and 6 allege that defendants violated Fla.Stat. §§ 517.211, 517.301 (1983), breached their fiduciary duty, negligently supervised plaintiff's accounts and committed common-law fraud, respectively.¹

Defendants have moved to stay the non-federal proceedings pending arbitration to be conducted after judgment resolution of the federal claims. The court now proceeds to consider the merits of defendants' motion.

II.

In connection with his Dean Witter account, plaintiff executed an Active Assets Account Agreement² and an Options Trading Agreement,³ both containing arbitration provisions.

The statutory authorization for and enforcement of most arbitration clauses is provided by section 2 of the Federal Arbitration Act, 9 U.S.C.A. § 2 (West 1970):

A ... contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.

Upon application of a party who is not in default in proceeding with arbitration, the court shall stay the trial of the action until arbitration is had in accordance with the terms of the parties' agreement. Id. § 3 (West 1970). As section 3 explains,

If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.

Arbitration is generally preferred over litigation as a vehicle for the resolution of private disputes because it is speedier and less costly for the parties and because it relieves already congested court dockets.⁴ See Southland Corp. v. Keating, ___ U.S. ___, 104 S.Ct. 852, 858, 79 L.Ed.2d 1 (1984); Belke v. Merrill Lynch, Pierce, Fenner & Smith, 693 F.2d 1023, 1025 (11th Cir.1982).

Plaintiff's claims in this case are plainly within the scope of the arbitration clauses contained in the Agreements he executed with defendants. Those contracts governed purchases of securities for plaintiff's accounts, transactions borne of defendants alleged misrepresentations or omissions of material facts. That Richard Ten Eyck did not sign the Agreements does not alter this result, for the clauses are broad enough to include disputes arising out of business between plaintiff and other Dean Witter employees who are not signatories to the contract. See Vic Potamkin Chevrolet, Inc. v. Bloom, 386 So.2d 286, 288 (Fla. 3rd DCA 1980). Arbitration clauses are to be liberally construed with any doubts being resolved in favor of arbitration. See DeHart v. Moore, 424 F.Supp. 55 (S.D.Fla.1976). This case is no exception to that rule.

Disregarding for the moment the Wilko doctrine, which is discussed below, it is also clear that the arbitration provisions are valid under the Federal Arbitration Act. The allegations of misrepresentation and breach of fiduciary duty arise out of or relate to plaintiff's accounts within the meaning of the arbitration clauses. The purchases in question were to be executed through the facilities of national securities exchanges and thus are evidence of "transactions involving commerce" within the meaning of 9 U.S.C.A. § 2. See Parry v. Bache & Co., 125 F.2d 493, 495 (5th Cir. 1942). Additionally, defendants did not waive their right to seek arbitration, "for they filed their motion to stay proceedings and compel arbitration the very day they filed their answer to plaintiff's complaint, and took no actions which could be viewed as being inconsistent with their right of arbitration." Sibley v. Tandy Corp., 543 F.2d 540, 542 (5th Cir.), cert. denied, 434 U.S. 824, 98 S.Ct. 71, 54 L.Ed.2d 82 (1977). In short, the Active Assets Account Agreement and the Options Trading Agreement are within the scope of, and valid under, the Federal Arbitration Act.

III.

The validity of arbitration provisions that govern securities transactions is tempered by two exceptions to section 2 of the Federal Arbitration Act: the Wilko doctrine and the doctrine of intertwining.

-A-

In Wilko v. Swan, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953), the Supreme Court of the United States ripped the lid off the Pandora's Box of securities litigation and ruled that an agreement between a purchaser and a broker/dealer to arbitrate future controversies arising under the Securities Act of 1933 is void as contrary to the anti-waiver provisions of section 14 of the Act, 15 U.S.C.A. § 77n (West 1981).⁵ Sections 11(a),⁶ 12,⁷ 16,⁸ and 22(a)⁹ permit a person acquiring a security to sue in federal, state or territorial courts, in law or in equity, to enforce any liability or duty created by the 1933 Act. Compulsory arbitration clauses deprive an investor of his right to select a judicial forum to resolve his claim, and hence are a nullity under section 14, which proscribes "any condition, stipulation, or provision binding any person acquiring any security to waive compliance with any provision" of the Securities Act of 1933.

According to Justice Reed, writing for the Court, purchasers of securities require special protection because "issuers of and dealers in securities have better opportunities to investigate and appraise the prospective earnings and business plans effecting securities than buyers." 346 U.S. at 435, 74 S.Ct. at 187. This is especially true when purchasers and brokers first contract to do business, for at that time the former "is less able to judge the weight of the handicap the Securities Act places upon his adversary." Id. Thus, a buyer who signs an agreement to arbitrate actually is unknowingly waiving many of his own legal rights; on this basis alone the compulsory arbitration clause fails since one can validly waive only known rights.

Another reason why the Court considered persons acquiring securities to be in need of protection was its belief that arbitration lacked the certainty of suits at law or equity to enforce a purchaser's rights; the record might not be sufficiently developed nor the arbitrator's reasoning clear. 346 U.S. at 436-37, 74 S.Ct. at 187-88.

The Wilko doctrine has been judicially applied without regard for the investor's financial acumen. See Newman v. Shearson, Hammill & Co., 383 F.Supp. 265, 268 (W.D.Tex.1974). More troublesome to many courts is the standardized form signed by sophisticated and unsophisticated investor alike which compels arbitration of future controversies without any bargaining on the question of dispute resolution. Id. (citing Stier v. Smith, 473 F.2d 1205 (5th Cir.1973)). Distinguishable from this situation and hence excepted from the doctrine are agreements between individuals who Congress did not believe warranted special protection. For example, the Wilko doctrine does not apply to agreements to arbitrate future disputes between dealers¹⁰ because Congress assumed they could "fend for themselves...." Brown v. Gilligan, Will & Co., 287 F.Supp. 766, 772 & n. 10, 773-75 (S.D.N.Y.1968); see Wilko, 346 U.S. at 435, 74 S.Ct. at 186-87 ("While a buyer and seller of securities, under some circumstances, may deal at arm's length on equal terms, it is clear that the Securities Act was drafted with an eye to the disadvantages under which buyers labor.") (emphasis added).

In addition to protecting most "buyers" regardless of their financial sophistication, the Wilko doctrine only applies to agreements to arbitrate future controversies under the securities laws. Voluntary agreements to submit an existing controversy to arbitration are not covered by the doctrine. Wilko, 346 U.S. at 438, 74 S.Ct. at...