Paulson v. Dean Witter Reynolds, Inc.

• Decision Date: 06 June 1990
• Docket Number: No. 89-35213,89-35213
• Citation: 905 F.2d 1251
• Parties: Fed. Sec. L. Rep. P 95,296 Richard V. PAULSON; Glorialee Paulson, individually and as trustees of Richard V. Paulson Family Trust and Glorialee Paulson Family Trust, Plaintiffs-Appellees, v. DEAN WITTER REYNOLDS, INC., a Delaware corporation; American Insurance Company, a California corporation; Richard Allen; Robert H. Kehrli, Defendants-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1251

905 F.2d 1251

Fed. Sec. L. Rep. P 95,296

Richard V. PAULSON; Glorialee Paulson, individually and as trustees of Richard V. Paulson Family Trust and Glorialee Paulson Family Trust Plaintiffs-Appellees, v. DEAN WITTER REYNOLDS, INC., a Delaware corporation American Insurance Company, a California corporation; Richard Allen; Robert H Kehrli, Defendants-Appellants.

No. 89-35213.

United States Court of Appeals Ninth Circuit.

Argued and Submitted May 10, 1990.

Decided June 6, 1990.

Mildred J. Carmack, Thomas V. Dulchich, Schwabe, Williamson & Wyatt, Portland, Or., for defendants-appellants.

David J. Sweeney, Brownstein, Rask, Sweeney, Kerr, Grim & Desylvia, Portland, Or., for plaintiffs-appellees.

Appeal from the United States District Court for the District of Oregon.

Before BROWNING, ALARCON and KOZINSKI, Circuit Judges.

ALARCON, Circuit Judge:

Dean Witter Reynolds, Inc., American Insurance Company, Richard Allen, and Robert H. Kehrli (Dean Witter) appeal from the district court's denial of their motion to compel arbitration of the Richard V. Paulson Family Trust's and the Glorialee Paulson Family Trust's claims for violation of the federal securities laws.

PERTINENT FACTS

In the summer of 1985, Richard V. Paulson and Glorialee Paulson (the Paulsons) sought investment advice on behalf of themselves and as trustees of the Richard V. Paulson Family Trust and the Glorialee Paulson Family Trust (the Family Trusts) from Dean Witter.

On October 10, 1985 the Paulsons entered into an "Active Assets Account Agreement" with Dean Witter. This agreement allowed Dean Witter to trade on margin for the Paulsons on their individual account. That agreement contained the following arbitration clause:

Arbitration of Controversies. I agree and you agree by carrying my account that all controversies which may arise between us concerning any transactions or the construction, performance or breach of this or any other agreement between us, whether entered into prior, on or subsequent to the date below, shall be determined by arbitration in accordance with the rules of the National Association of Securities Dealers, Inc. or the New York Stock Exchange, Inc. or the American Arbitration Association or any other arbitration facility provided by any other exchange, as I may elect. If I do not make such an election by registered mail addressed to you at your office within five (5) days after receipt of notification from you requesting such election, then I authorize you to make such election for me. Any arbitration proceedings This agreement to arbitrate does not apply to any controversy between us for which a remedy exists pursuant to a right of action under the federal securities laws, unless you and I agree to arbitration after the date the controversy arises. Then, if we jointly agree to arbitrate, the terms of the agreement to arbitrate shall be applied.

between us shall be before at least three arbitrators. The award of the arbitrators or of a majority of them shall be final. Judgment upon the award rendered may be entered in any state or federal court having jurisdiction.

Also on October 10, 1985 the Paulsons, on behalf of the Family Trusts, entered into two "Options Trading Agreements" (the options agreements) with Dean Witter. Each of these options agreements contains the following arbitration clause:

Any controversy between us arising out of or relating to the agreement or the breach thereof, shall be settled by arbitration, in accordance with the rules, then obtaining, of either the American Arbitration Association, the Board of Arbitration of the New York Stock Exchange, the American Stock Exchange, the Chicago Board Options Exchange or the National Association of Securities Dealers, Inc., as I may elect. If I do not make such election by registered mail addressed to you at your main office within five (5) days after receipt of notification from you requesting such election, then I authorize you to make such election in my behalf.

In addition, each of the options agreements contains a clause stating that all conflicts between the Options Trading Agreements and other agreements shall be resolved in favor of the Options Trading Agreements:

All other agreements existing between us or hereafter made which, by their terms apply to all accounts of mine with you, shall be applicable to my options account or accounts where they are not in conflict with this agreement. Should a conflict exist it shall be resolved in favor of this agreement. Otherwise, the provisions of each agreement shall be applicable.

At the time the parties entered into the Options Trading Agreements, SEC Rule 15c2-2 was in effect. SEC Rule 15c2-2 provided:

It shall be a fraudulent, manipulative or deceptive act or practice for a broker or dealer 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, or to have in effect such an agreement, pursuant to which it effects transactions with or for a customer.

17 C.F.R. Sec. 240.15c2-2 (1987) (rescinded October 15, 1987, 52 Fed.Reg. 39.216 (1987)). SEC Rule 15c2-2 was premised on the validity of Wilko v. Swan, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953), which held that agreements to arbitrate claims under the Securities Act of 1933 are unenforceable. Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 234 n. 3, 107 S.Ct. 2332, 2341 n. 3, 96 L.Ed.2d 185 (1987).

Dean Witter invested the Family Trusts' funds in options and in limited partnership interests in an oil and gas limited partnership. Between January 1987 and October 1987, the Family Trusts suffered substantial losses on both types of investments. On July 29, 1988, the Paulsons, on behalf of themselves and the Family Trusts, filed a complaint for monetary damages, alleging claims under the federal securities laws, Oregon securities laws, and Oregon common law. All losses alleged in the complaint were sustained by the Family Trusts.

Dean Witter filed a motion to compel arbitration on September 1, 1988. On December 20, 1988, the district court granted Dean Witter's motion, ordered arbitration of all claims, and dismissed the action without prejudice. On January 6, 1989, the Paulsons filed a motion for reconsideration of the district court's order compelling arbitration of the Family Trusts' federal securities claims for losses from option trading, in light of recent Ninth Circuit authority. The Paulsons did not seek reconsideration

of the district court's order compelling arbitration of the Family Trusts' state securities and common law claims. On March 6, 1989, the district court granted the Paulsons' motion for reconsideration, concluding that the Family Trusts' federal securities claims for losses from options trading were not arbitrable. Paulson v. Dean Witter Reynolds, Inc., 708 F.Supp. 1163, 1167 (D.Or.1989). Dean Witter timely appealed.

DISCUSSION

The Paulsons contend that they did not agree to arbitrate the Family Trusts' federal securities claims. The Paulsons also assert that we must presume, as an implied-in-law condition of the agreement, that the parties incorporated SEC Rule 15c2-2 into the Family Trusts' options contracts. At the time of the formation of the contract, SEC Rule 15c2-2 prohibited the arbitration of federal securities claims. Therefore, the Paulsons argue, controversies regarding compliance with federal securities laws are excluded from arbitration. We review decisions regarding the validity and scope of arbitration clauses de novo. Gooding v. Shearson Lehman Bros., Inc., 878 F.2d 281, 283 (9th Cir.1989).

I. Arbitrability of the Paulsons' Federal Securities Claims

Parties may arbitrate claims under the Securities Act of 1933, Rodriguez de Quijas v. Shearson/American Express, Inc., --- U.S. ----, 109 S.Ct. 1917, 1921, 104 L.Ed.2d 526 (1989), and the Securities Exchange Act of 1934, Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 238, 107 S.Ct. 2332, 2343, 96 L.Ed.2d 185 (1987). The combined effect of these cases was to overrule Wilko v. Swan, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953), which held that predispute agreements to arbitrate claims under the Securities Act were unenforceable. Id. at 434-35, 74 S.Ct. at 186. As a result, a dispute regarding federal securities transactions is arbitrable unless the parties expressly excepted such controversies from the scope of the arbitration agreement. Gooding v. Shearson Lehman Bros., Inc., 878 F.2d at 283, 284 n. 1.

II. Enforceability of the Agreement to Arbitrate

Our threshold inquiry is to determine whether the written agreement shows that the parties agreed to arbitrate any dispute under the federal securities laws concerning Dean Witter's options trading on the Family Trusts' account. Van Ness Townhouses v. Mar Indus. Corp., 862 F.2d 754, 756 (9th Cir.1988). Under the Federal Arbitration Act "any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability." Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25, 103 S.Ct. 927, 941, 74 L.Ed.2d 765 (1983) (footnote omitted). The Federal Arbitration Act, however, does not require parties to arbitrate when they have not agreed to do so, "nor does it prevent parties who do agree to arbitrate from excluding certain claims from the scope of their arbitration agreement." Volt Information Sciences, Inc. v. Board of Trustees, 489 U.S. 468, 109 S.Ct. 1248, 1255, 103 L.Ed.2d 488 (1989) (citations omitted). Thus, "as with any other contract, the parties' intentions control, but those intentions are generously construed as to issues of arbitrability." Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626, 105 S.Ct. 3346, 3354, 87 L.Ed.2d 444 (1985...