First Options Chicago v. Kaplan

Decision Date22 May 1995
Docket Number94560
PartiesFIRST OPTIONS OF CHICAGO, INC., Petitioner, v. Manuel KAPLAN, et ux. and MK Investments, Inc
CourtU.S. Supreme Court
Syllabus *

This case arose out of disputes centered on a "workout" agreement, embodied in four documents, which governs the "working out" of debts owed by respondentsManuel Kaplan, his wife, and his wholly owned investment company, MK Investments, Inc. (MKI)—to petitioner First Options of Chicago, Inc., a firm that clears stock trades on the Philadelphia Stock Exchange. When First Options' demands for payment went unsatisfied, it sought arbitration by a stock exchange panel. MKI, which had signed the only workout document containing an arbitration agreement, submitted to arbitration, but the Kaplans, who had not signed that document, filed objections with the panel, denying that their disagreement with First Options was arbitrable. The arbitrators decided that they had the power to rule on the dispute's merits and ruled in First Options' favor. The District Court confirmed the award, but the Court of Appeals reversed. In finding that the dispute was not arbitrable, the Court of Appeals said that courts should independently decide whether an arbitration panel has jurisdiction over a dispute, and that it would apply ordinary standards of review when considering the District Court's denial of respondents' motion to vacate the arbitration award.

Held:

1. The arbitrability of the Kaplan/First Options dispute was subject to independent review by the courts. Pp. __.

(a) The answer to the narrow question whether the arbitrators or the courts have the primary power to decide whether the parties agreed to arbitrate a dispute's merits is fairly simple. Just as the arbitrability of the merits of a dispute depends upon whether the parties agreed to arbitrate that dispute, see, e.g., Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. ----, ----, 115 S.Ct. 1212, 1216, 131 L.Ed.2d 76, so the question "who has the primary power to decide arbitrability" turns upon whether the parties agreed to submit that question to arbitration. If so, then the court should defer to the arbitrator's arbitrability decision. If not, then the court should decide the question independently. These two answers flow inexorably from the fact that arbitration is simply a matter of contract between the parties. Pp. __.

(b) The Kaplans did not agree to arbitrate arbitrability. Courts generally should apply ordinary state-law principles governing contract formation in deciding whether such an agreement exists. However, courts should not assume that the parties agreed to arbitrate arbitrability unless there is "clea[r] and unmistakabl[e]" evidence that they did so. See, e.g., AT & T Technologies, Inc. v. Communications Workers, 475 U.S. 643, 649, 106 S.Ct. 1415, 1418, 89 L.Ed.2d 648. First Options cannot show a clear agreement on the part of the Kaplans. The Kaplans' objections to the arbitrators' jurisdiction indicate that they did not want the arbitrators to have binding authority over them. This conclusion is supported by (1) an obvious explanation for their presence before the arbitrators (i.e., Mr. Kaplan's wholly owned firm was arbitrating workout agreement matters); and (2) Third Circuit law, which suggested that they might argue arbitrability to the arbitrators without losing their right to independent court review. First Options' counterarguments are unpersuasive. Pp. __.

2. Courts of appeals should apply ordinary standards when reviewing district court decisions upholding arbitration awards, i.e., accepting findings of fact that are not "clearly erroneous" but deciding questions of law de novo; they should not, in those circumstances, apply a special "abuse of discretion" standard. It is undesirable to make the law more complicated by proliferating special review standards without good reason. More importantly, a court of appeals' reviewing attitude toward a district court decision should depend upon the respective institutional advantages of trial and appellate courts, not upon what standard of review will more likely produce a particular substantive result. Nothing in the Arbitration Act supports First Options' claim that a court of appeals should use a different standard when conducting review of certain district court decisions. Pp. __.

3. The factbound question whether the Court of Appeals erred in its ultimate conclusion that the dispute was not arbitrable is beyond the scope of the questions this Court agreed to review. P. ____.

19 F.3d 1503 (CA3 1994), affirmed.

BREYER, J., delivered the opinion for a unanimous Court.

James D. Holzhauer, Chicago, IL, for petitioner.

John D. Roberts, Jr., Hyannis, MA, for respondents.

Justice BREYER delivered the opinion of the Court.

In this case we consider two questions about how courts should review certain matters under the federal Arbitration Act, 9 U.S.C. § 1 et seq. (1988 Ed. and Supp. V): (1) how a district court should review an arbitrator's decision that the parties agreed to arbitrate a dispute, and (2) how a court of appeals should review a district court's decision confirming, or refusing to vacate, an arbitration award.

I

The case concerns several related disputes between, on one side, First Options of Chicago, Inc., a firm that clears stock trades on the Philadelphia Stock Exchange, and, on the other side, three parties: Manuel Kaplan; his wife, Carol Kaplan; and his wholly owned investment company, MK Investments, Inc. (MKI), whose trading account First Options cleared. The disputes center around a "workout" agreement, embodied in four separate documents, which governs the "working out" of debts to First Options that MKI and the Kaplans incurred as a result of the October 1987 stock market crash. In 1989, after entering into the agreement, MKI lost an additional $1.5 million. First Options then took control of, and liquidated, certain MKI assets; demanded immediate payment of the entire MKI debt; and insisted that the Kaplans personally pay any deficiency. When its demands went unsatisfied, First Options sought arbitration by a panel of the Philadelphia Stock Exchange.

MKI, having signed the only workout document (out of four) that contained an arbitration clause, accepted arbitration. The Kaplans, however, who had not personally signed that document, denied that their disagreement with First Options was arbitrable and filed written objections to that effect with the arbitration panel. The arbitrators decided that they had the power to rule on the merits of the parties' dispute, and did so in favor of First Options. The Kaplans then asked the Federal District Court to vacate the arbitration award, see 9 U.S.C. § 10 (1988 Ed., Supp. V), and First Options requested its confirmation, see § 9. The court confirmed the award. Nonetheless, on appeal the Court of Appeals for the Third Circuit agreed with the Kaplans that their dispute was not arbitrable; and it reversed the District Court's confirmation of the award against them. 19 F.3d 1503 (1994).

We granted certiorari to consider two questions regarding the standards that the Court of Appeals used to review the determination that the Kaplans' dispute with First Options was arbitrable. 513 U.S. ----, 115 S.Ct. 634, 130 L.Ed.2d 539 (1994). First, the Court of Appeals said that courts "should independently decide whether an arbitration panel has jurisdiction over the merits of any particular dispute." 19 F.3d, at 1509 (emphasis added). First Options asked us to decide whether this is so (i.e., whether courts, in "reviewing the arbitrators' decision on arbitrability," should "apply a de novo standard of review or the more deferential standard applied to arbitrators' decisions on the merits") when the objecting party "submitted the issue to the arbitrators for decision." Pet. for Cert. i. Second, the Court of Appeals stated that it would review a district court's denial of a motion to vacate a commercial arbitration award (and the correlative grant of a motion to confirm it) "de novo." 19 F.3d, at 1509. First Options argues that the Court of Appeals instead should have applied an "abuse of discretion" standard. See Robbins v. Day, 954 F.2d 679, 681-682 (CA11 1992).

II

The first question—the standard of review applied to an arbitrator's decision about arbitrability—is a narrow one. To understand just how narrow, consider three types of disagreement present in this case. First, the Kaplans and First Options disagree about whether the Kaplans are personally liable for MKI's debt to First Options. That disagreement makes up the merits of the dispute. Second, they disagree about whether they agreed to arbitrate the merits. That disagreement is about the arbitrability of the dispute. Third, they disagree about who should have the primary power to decide the second matter. Does that power belong primarily to the arbitrators (because the court reviews their arbitrability decision deferentially) or to the court (because the court makes up its mind about arbitrability independently)? We consider here only this third question.

Although the question is a narrow one, it has a certain practical importance. That is because a party who has not agreed to arbitrate will normally have a right to a court's decision about the merits of its dispute (say, as here, its obligation under a contract). But, where the party has agreed to arbitrate, he or she, in effect, has relinquished much of that right's practical value. The party still can ask a court to review the arbitrator's decision, but the court will set that decision aside only in very unusual circumstances. See, e.g., 9 U.S.C. § 10 (award procured by corruption, fraud, or undue means; arbitrator exceeded his powers); Wilko v. Swan, 346 U.S. 427, 436-437, 74 S.Ct. 182, 187-188, 98 L.Ed. 168 (1953) (parties bound by arbitrator's decision not in "manifest...

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