Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Lauer

• Decision Date: 04 April 1995
• Docket Number: No. 94-2297,94-2297
• Citation: 49 F.3d 323
• Parties: , Fed. Sec. L. Rep. P 98,636 MERRILL LYNCH, PIERCE, FENNER & SMITH, INC. and Patrick Palella, Plaintiffs-Appellees, v. Peter H. LAUER and Therese A. Lauer, Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 323

49 F.3d 323

63 USLW 2545, Fed. Sec. L. Rep. P 98,636

MERRILL LYNCH, PIERCE, FENNER & SMITH, INC. and Patrick Palella, Plaintiffs-Appellees, v. Peter H. LAUER and Therese A. Lauer, Defendants-Appellants.

No. 94-2297.

United States Court of Appeals Seventh Circuit.

Argued Jan. 6, 1995.

Decided March 1, 1995.

Rehearing Denied April 4, 1995.

Peter A. Cantwell (argued), Stephen F. Boulton, Thomas A. Lidbury, John S. Burke, Cantwell & Cantwell, Chicago, IL, for Merrill Lynch, Pierce, Fenner & Smith, Inc.

Christopher J. Barber (argued), William T. McCartan, Christopher C. Kendall, Coffield, Ungaretti & Harris, Chicago, IL, for Patrick Palella.

David A. Shaneyfelt, Bruce J. Van Heukelem (argued), Hoogendoorn, Talbot, Davids & Godfrey, Chicago, IL, for Peter H. Lauer, Therese A. Lauer.

Before CUMMINGS and KANNE, Circuit Judges, and GRANT, District Judge. ^*

CUMMINGS, Circuit Judge.

This appeal concerns an arbitration currently pending in Florida and a court proceeding in the Northern District of Illinois that dramatically influenced the arbitration's potential course. Responding to a motion from plaintiffs Merrill Lynch, Pierce, Fenner & Smith ("Merrill Lynch") and account broker Patrick Palella ("Palella") (plaintiffs referred to collectively as "Merrill Lynch"), the district judge entered an order compelling the plaintiffs in the underlying Florida arbitration, Peter and Therese Lauer, to eliminate certain of their claims against Merrill Lynch and account broker Palella. Judge Shadur's conclusions regarding the effect of Seventh Circuit precedent on these claims were correct, and we have no quarrel with his reading of our case law in these areas. But because we conclude that his issuance of an order regarding a distant arbitration hearing contravenes the language and purpose of the Federal Arbitration Act ("FAA"), we vacate the order and remand for dismissal of this action.

BACKGROUND

I. Prior Proceedings

The Lauers first opened accounts with Merrill Lynch over 10 years ago, with Palella serving as their broker. Over the next decade they shifted their accounts among Merrill Lynch and other brokerage services, generally following Palella as he changed jobs, but returned exclusively to Merrill Lynch in September 1990. At that time, on opening a retirement account, they signed a new Customer Agreement delineating their rights and obligations with respect to their investments.

The Customer Agreement contained several clauses that are relevant to the present action. The first required the Lauers, along with Merrill Lynch, to submit any future claims to arbitration. ¹ The second, a rather obtuse choice-of-law provision, instructed the Lauers that New York law would govern certain of the claims they might bring, including those involving their retirement account. ²

By 1993, the Lauers had come to believe that their investment account was being handled improperly and that they had been duped about the health of their retirement funds. Accordingly, in March 1993 the Lauers initiated a demand for arbitration against Merrill Lynch, electing to proceed before the National Association of Securities Dealers ("NASD"). ³ The complaint alleged, inter alia, that certain of the investments made for the Lauers were unsuitable, that their assets were "churned"--excessively traded for the purpose of generating commissions--and that Palella misled them by providing inaccurate summaries of their holdings on which they detrimentally relied. The Lauers requested a hearing in Florida, where they had relocated. Merrill Lynch formally consented to arbitration in June 1993, but sought an Illinois arbitration site. By August 1993, however, the NASD had selected Tampa, Florida, as the arbitration site and had set March 14, 1994, as the date of hearing. Both sides commenced prehearing discovery.

On January 3, 1994, Merrill Lynch filed an action in the Northern District of Illinois, seeking to compel arbitration in that district and to force the Lauers to eliminate both their claims for punitive damages and all claims involving investments made more than six years before the complaint was filed. In support of the request regarding damages, Merrill Lynch relied on Garrity v. Lyle Stuart, Inc., 40 N.Y.2d 354, 386 N.Y.S.2d 831, 353 N.E.2d 793 (1976), which held that under New York state common law, arbitrators may not award punitive damages. More to the point, Merrill Lynch cited several recent Seventh Circuit cases which have upheld the Garrity rule when New York law is incorporated into arbitration agreements via a choice-of-law provision. These cases have rejected arguments that the federal common law of arbitration permits the award of punitive damages and preempts state law such as Garrity. ⁴

With respect to the "stale" claims argument, Merrill Lynch referred to an NASD provision barring arbitration of claims more than six years old. ⁵ Seventh Circuit precedent has interpreted this provision as a jurisdictional limitation subject to disposition by the courts, not an eligibility issue to be resolved by the arbitrator. ⁶

The Lauers opposed Merrill Lynch's motion, both arguing against its substantive merits and challenging resort to the Northern District of Illinois on venue or jurisdictional

grounds. Subsequently the Lauers filed their own motion in the Northern District of Florida to compel arbitration there, where the NASD had ruled that the arbitration was to proceed--and where, not coincidentally, the New York ban on punitive damages has been disallowed in FAA cases and the NASD six-year limitation has been deemed an issue for the arbitrator to resolve. See Bonar v. Dean Witter Reynolds, Inc., 835 F.2d 1378 (11th Cir.1988) (allowing for possibility of punitive damages despite New York choice-of-law clause); Belke v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 693 F.2d 1023 (11th Cir.1982) (holding that the arbitrator should determine whether claims are time-barred). The court below declined to compel arbitration here, but the judge granted Merrill Lynch what he deemed the "other relief" requested: he ordered the Lauers to eliminate their claim for punitive damages and any claim more than six years old. This appeal followed.

II. The Federal Arbitration Act

The "whys" of all this forum shopping are self-evident: If the Northern District of Illinois decides arbitrability, the Lauers lose a chunk of their claims; if the decision rests with the Northern District of Florida, both punitive damages and potentially stale claims may go to the arbitrator for resolution. The "hows," however, depend on provisions of the FAA, which facilitates the removal of some disputes from our federal court system while allowing for limited judicial supervision of these cases.

Generally, judicial intervention in potentially arbitrable disputes takes one of a few discrete forms: (1) Sec. 3 of the FAA requires a court confronted with a dispute that is referable to arbitration to stay its proceedings until arbitration is concluded; (2) Sec. 4 allows parties who feel that their case is not being arbitrated, or is being arbitrated improperly, to petition the court for an order compelling arbitration on the proper terms; (3) Sec. 9 permits a party to move a court to enforce an arbitration award; (4) Sec. 10 allows a party to move the court to vacate an award if in making it the arbitrator exceeded his powers; and (5) Sec. 11 provides for judicial modification or correction of awards under limited circumstances. Moreover, federal courts are charged with the initial task of interpreting the arbitration agreement to determine whether the parties agreed to arbitrate the particular dispute. See AT & T Technologies, Inc. v. Communications Workers of America, et al., 475 U.S. 643, 649, 106 S.Ct. 1415, 1418, 89 L.Ed.2d 648 (1986) ("the question of arbitrability ... is undeniably an issue for judicial determination"). Although they cannot reach the merits of a particular dispute, the federal courts may play an important role in affecting arbitration.

Both Merrill Lynch and the Lauers invoked Sec. 4 of the FAA before the respective district courts in which they sought relief. Merrill Lynch, which was quicker on the draw, got it, while the Lauers had to content themselves with a stay and this appeal. ⁷ The question is not whether the district judge correctly read our precedents in issuing the order; it is whether the Northern District of Illinois court was an appropriate candidate for a Sec. 4 motion in this dispute given the prearbitration proceedings that had already taken place in Florida. Because this issue presents a question of statutory construction--not, as Merrill Lynch suggests, the propriety of a refusal to order transfer from one acceptable venue to another--de novo review is appropriate. Resolution Trust Corp. v. Gallagher, 10 F.3d 416, 418 (7th Cir.1993).

ANALYSIS

Our analysis of the district court's power to order the relief requested in the instant case thus begins with Sec. 4 of the FAA, which both prescribes authority and assigns limitations to federal courts in adjudicating arbitrable disputes. Does Sec. 4 authorize a district court to compel a party to replead its arbitration complaint when the arbitration is already slated for another district? We look first to the text for an answer. We look Section 4 allots, in pertinent part, the following authority to federal district courts:

beyond the express language of a statute only where such language is ambiguous, or where a literal interpretation would lead to absurd results or thwart the goals of the statutory scheme. United States v. One Parcel of Real Estate Commonly Known as 916 Douglas Ave., Elgin, Ill., 903 F.2d 490, 492 (7th Cir.1990), certiorari denied, 498 U.S. 1126, 111 S.Ct. 1090, 112 L.Ed.2d 1194 (1991).

A party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court...