Jacobson v. Merrill Lynch, Pierce, Fenner & Smith, Inc.
| Decision Date | 14 April 1986 |
| Docket Number | 85-5517,85-5439,85-3311,85-,PRUDENTIAL-BACHE,85-5552,Nos. 85-3282,85-5542,85-1541,Nos. 85-5517,No. 85-3282,Nos. 85-3311 and 85-3343,85-3343,s. 85-3311 and 85-3343,85-3282,s. 85-3282,s. 85-5517 |
| Citation | 797 F.2d 1197 |
| Parties | , Fed. Sec. L. Rep. P 92,892, RICO Bus.Disp.Guide 6337 Estelle JACOBSON and Cynthia Carson, Appellants in, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC. and Robert M. Kolaczynski, Appellants inMarilyn E. BURRIS, v. PAINE, WEBBER, JACKSON AND CURTIS, INC., Smith Barney, Harris Upham & Co., Inc., and Donald J. Porter, Appeal of SMITH BARNEY, HARRIS UPHAM & CO., INC. Ellis GANT, v. KIDDER, PEABODY & CO., INC. and Frank E. Gatta, Jr., Jointly and Severally. Appeal of KIDDER, PEABODY & CO., INC. Herbert BLUMENTHAL, v. DEAN WITTER REYNOLDS INC. and Daniel J. Turov. Appeal of DEAN WITTER REYNOLDS INC. Michael ERLBAUM, v.SECURITIES, INC. and Samuel Alan Liebman, Appellants. . Submitted Under Third Circuit Rule 12(6) in5552 and 85-1541 |
| Court | U.S. Court of Appeals — Third Circuit |
Stirling Lathrop (argued), Greenfield & Chimicles, Haverford, Pa., John R. McGinley, Jr., Jeffrey Reed, Grogan, Graffam, McGinley, Solomon & Lucchino, Pittsburgh, Pa., for Estelle Jacobson and Cynthia Carson.
Richard C. Lane, Marten R. Jenkins (argued), Campbell, Sherrard & Burke, P.C., Pittsburgh, Pa., for Merrill Lynch, Pierce, Fenner & Smith, Inc.
Foster S. Goldman, Jr., Berkman, Ruslander, Pohl, Lieber & Engel, Pittsburgh, Pa., for Robert M. Kolaczynski.
William J. Fitzpatrick, New York City, for amicus curiae Securities Industry Ass'n, Inc.
Dennis A. Durkin, Thomas E. Durkin, Jr., Newark, N.J., for Marilyn Burris.
Sheldon M. Finkelstein, Joseph J. Fleischman, Hannoch Weisman, Roseland, N.J., for Paine Webber, Jackson & Curtis, Inc., and Donald J. Porter.
Janvey & Berglas, New York City, Matthew Farley, Shanley & Fisher, P.C., Morristown, N.J., Edward Turan, Linda R. Feinstein, New York City, for Smith Barney, Harris Upham & Co., Inc.
Kenneth K. Lehn, Perry Feinberg, Ellenport & Holsinger, P.A., Roseland, N.J., for Ellis Gant.
Matthew Farley, Florence M. Peterson, Shanley & Fisher, P.C., Morristown, N.J., for Kidder, Peabody & Co. Inc.
Alan Mansfield, Phillips, Nizer, Benjamin, Krim & Ballon, New York City, for Herbert Blumenthal.
John V. McCambley, Wyckoff, N.J., for Dean Witter Reynolds Inc.
Allan D. Windt, Spector, Cohen, Gadon & Rosen, Philadelphia, Pa., for Michael Erlbaum.
Harold E. Kohn, Joseph C. Kohn, Kohn, Savett, Marion & Graf, P.C., Philadelphia, Pa., for Prudential-Bache Securities, Inc. and Samuel Alan Liebman.
Before ADAMS, GIBBONS, and MANSMANN, Circuit Judges.
This opinion deals with five interlocutory appeals presenting similar legal issues. All five appeals present the issue whether subsequent decisions of the United States Supreme Court have overruled this court's holding in Ayers v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 538 F.2d 532 (3d Cir.), cert. denied, 429 U.S. 1010, 97 S.Ct. 542, 50 L.Ed.2d 619 (1976), that claims against brokerage firms for violation of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b) (1982), are not arbitrable. Two of the five appeals present the additional issue whether claims arising under sections 1962(a) and 1962(c) of the Racketeer Influenced and Corrupt Organization Act (RICO), 18 U.S.C. Sec. 1962(a), (c) (1982), are arbitrable. Both these appeals present the issue whether a RICO claim is arbitrable when the predicate offenses on which it is based are section 10(b) violations. One of the appeals also presents the issue whether RICO claims are arbitrable when the predicate offenses are mail and wire fraud.
All the appeals are properly before us. 1 We affirm the orders denying the brokerage firms' motions to compel arbitration of the section 10(b) claims. We reverse the portion of the order in Jacobson v. Merrill Lynch, Pierce, Fenner & Smith, Inc., Nos. 85-3282, 85-3311, and 85-3343, compelling arbitration of the RICO claim that was based on violations of section 10(b). We also reverse the portion of the order in Blumenthal v. Dean Witter Reynolds, Inc., No. 85-5552, denying the motion to compel arbitration of RICO claims that are based on predicate acts of mail and wire fraud but affirm the portion of the order denying arbitration of a RICO claim based on section 10(b) violations. 2
All the plaintiffs were customers with trading accounts at brokerage firms, and all executed agreements in which they consented to arbitrate all controversies arising out of transaction affecting their accounts. Typical of these agreements is the standard Customer Agreement used by Merrill Lynch, Pierce, Fenner & Smith, Inc. which provides,
It is agreed that any controversy between us arising out of your business or this agreement shall be submitted to arbitration conducted under the provisions of the Constitution and Rules of the Board of Governors of the New York Stock Exchange, Inc. or pursuant to the Code of Arbitration of the National Association of Securities Dealers, Inc., as the undersigned may elect.... Arbitration must be commenced by service upon the other of a written demand for arbitration or a written notice of intention to arbitrate, therein electing the arbitration tribunal. In the event the undersigned [customer] does not make such a designation within five (5) days of such demand or notice, then the undersigned [customer] authorizes you to do so on behalf of the undersigned [customer].
Joint Appendix (Jacobson v. Merrill Lynch ) at 292. All the plaintiffs incurred losses in investment accounts covered by similar arbitration agreements, and all the plaintiffs instituted suits claiming that those losses resulted from violations of federal securities laws, state statutory and common laws, and various securities-industry rules. In all five cases the district courts on the authority of Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985), granted motions to compel arbitration of the state-law claims. No appeal challenges those orders. In Blumenthal, No. 85-5552, the district court refused to order arbitration of the RICO claim, while in Jacobson, Nos. 85-3282, 85-3311, and 85-3343, the district court ordered arbitration of the RICO claim. Claims predicated upon securities-industry rules 3 have been dismissed and are not before us. Before considering the substantive legal issues presented by these appeals, a preliminary question concerning the coverage of the arbitration agreements must be dealt with. In one of the five cases, Gant, No. 85-5439, the plaintiff argues that the broker amended the arbitration agreement to exclude claims arising under federal securities laws. The plaintiff contends, therefore, that because the arbitration agreement does not cover federal securities claims she is free to bring her suit in federal court. The logic of plaintiff's argument, however, is flawed.
Effective December 28, 1983 the Securities and Exchange Commission (SEC) promulgated a regulation making it a "fraudulent, manipulative or deceptive act" for a broker "to enter into an agreement with any public customer which purports to bind the customer to the arbitration of future disputes between them arising under the Federal securities laws...." 17 C.F.R. Sec. 240.15c2-2(a) (1985). This regulation goes on to mandate that for agreements entered into prior to December 28, 1983, the broker is required to send a notice "no later than December 31, 1984" informing customers that the arbitration agreements they executed do not cover federal securities laws. Id. at Sec. 240.15c2-2(c).
All the arbitration agreements involved in these five appeals were executed prior to December 28, 1983. Consequently, in at least one situation, the broker, Kidder, Peabody & Co., sent a notice informing the plaintiff that the arbitration agreement did not cover federal securities laws claims. In the case in which the plaintiff raises this issue, the notice was not received until after the complained of federal securities laws violations occurred. At best, therefore, the notice acted as an amendment at the time plaintiff's account was next traded following receipt of the notice. Hence, even if the notice constituted an amendment, it does not affect any of the claims before us.
In Wilko v. Swan, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953), the Supreme Court, relying on the anti-waiver provision in section 14 of the Securities Act of 1933, 15 U.S.C. Sec. 77n, held that a claim for damages for violation of section 12(2) of that act, 15 U.S.C. Sec. 77l (2), was not subject to contract arbitration. This court, in Ayers v. Merrill Lynch, Pierce, Fenner & Smith, 538 F.2d 532 (3d Cir.1976), applied the Wilko rule to claims for damages for violation of section 10(b) of the Securities and Exchange Act of 1934. Relying on the similar anti-waiver provision in section 29(a) of the 1934 Act, 15 U.S.C. Sec. 78cc(a), and on Congress' acceptance of the view that the Wilko rule applied to claims under the 1934 Act, this court expressly rejected the contention that Scherk v. Alberto Culver Co., 417 U.S. 506, 94 S.Ct. 2449, 41 L.Ed.2d 270 (1974) should be read as confining Wilko to claims under the 1933 Act. Ayers, 538 F.2d at 536-37.
The Ayers opinion, which is consistent with this court's earlier discussion of the same issue in Moran v. Paine, Webber, Jackson & Curtis, 389 F.2d 242, 245-46 (3d Cir.1968) (dicta), 4 binds this panel unless we can conclude that it has been overruled by subsequent Supreme Court cases. See Internal Operating Procedures of the United States Court of Appeals for the Third Circuit, chapter 8, section C. The brokerage firms rely on two Supreme Court cases that they contend accomplished that result. The first...
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