Wolfe v. E.F. Hutton & Co., Inc.

• Decision Date: 29 September 1986
• Docket Number: 85-5419,Nos. 85-3352,s. 85-3352
• Citation: 800 F.2d 1032
• Parties: , Fed. Sec. L. Rep. P 92,933 Frederick J. WOLFE, and Heather B. Wolfe, his wife, Plaintiffs-Appellees, v. E.F. HUTTON & COMPANY, INC., and Peter Panos,Defendants-Appellants. Joseph GORMAN, Plaintiff-Appellee, v. MERRILL LYNCH, PIERCE FENNER AND SMITH, INC., a foreign corporation, Defendant- Appellant, Micah Hollander, Michael Strauss, Defendants.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1032

800 F.2d 1032

55 USLW 2264, Fed. Sec. L. Rep. P 92,933

Frederick J. WOLFE, and Heather B. Wolfe, his wife, Plaintiffs-Appellees, v. E.F. HUTTON & COMPANY, INC., and Peter Panos,Defendants-Appellants.

Joseph GORMAN, Plaintiff-Appellee, v. MERRILL LYNCH, PIERCE FENNER AND SMITH, INC., a foreign

corporation, Defendant- Appellant,

Micah Hollander, Michael Strauss, Defendants.

Nos. 85-3352, 85-5419.

United States Court of Appeals Eleventh Circuit.

Sept. 29, 1986.

As Amended Oct. 16, 1986.

Keith Olin, Bennett Falk, Miami, Fla., defendants-appellants.

Parker, Johnson, Owen & McGuire, Elmo R. Hoffman, Orlando, Fla., Greenfield & Chimicles, E. Stirling Lathrop, Haverford, Pa., Karen A. Gievers, Anderson Moss Russo Gievers & Cohen, P.A., Miami, Fla., plaintiffs-appellees.

Albert J. Beveridge, III, John S. Guttmann, Robert H. Singletary, Jr., for amicus curiae, Werner Heierli.

Beveridge & Diamond, Washington, D.C., for amicus curiae.

Appeals from the United States District Court for the Southern District of Florida.

Before RONEY, Chief Judge, GODBOLD, TJOFLAT, HILL, FAY, VANCE, KRAVITCH, JOHNSON, HATCHETT, CLARK and EDMONDSON, Circuit Judges, ^* and HENDERSON, ^** Senior Circuit Judge.

VANCE, Circuit Judge:

We granted rehearing en banc in these cases to determine whether claims brought under section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b), and corresponding Securities and Exchange Commission Rule 10b-5, 17 C.F.R. Sec. 240.10b-5, are subject to mandatory arbitration under an arbitration agreement entered into before the claim arose. Adhering to the established law of this circuit, we hold that a pre-claim agreement to arbitrate such claims is not enforceable.

I.

Appellees Frederick and Heather Wolfe and Joseph Gorman brought separate suits in their respective district courts in Florida claiming that their respective brokers, E.F. Hutton and Merrill Lynch, ¹ were liable under 10b-5 ² and state law for illegally "churning" their accounts--engaging in excessive trading to generate high commissions. In both cases, appellants had signed agreements upon setting up their accounts which included clauses providing that disputes over the accounts would be submitted to arbitration. The brokers, appellants here, sought to enforce the agreements with respect to both the 10b-5 claims and those arising under state law. The district court in Wolfe, No. 85-3352, denied appellant E.F. Hutton's motion to compel arbitration in its entirety. The district court in Gorman, No. 85-5419, granted appellant Merrill Lynch's similar motion with respect to the state claims, but denied arbitration of Gorman's 10b-5 claim.

On appeal, a panel of this court held that the district courts had properly denied arbitration of the 10b-5 claims but that the Wolfe court should have granted the motion to compel arbitration of the Wolfes' state claims. Wolfe v. E.F. Hutton & Co., 780 F.2d 1032 (11th Cir.1985); Gorman v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 780 F.2d 1032 (11th Cir.1985) (consolidated appeals). The panel noted that under the Supreme Court's decision in Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985), the arbitration agreement between E.F. Hutton and the Wolfes was enforceable with respect to claims arising under state law. ³ The court also noted, however, that under Belke v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 693 F.2d 1023, 1025-26 (11th Cir.1982), an agreement to submit a 10b-5 claim to arbitration cannot be enforced. Holding Belke to be binding precedent, the court rejected appellants' contention that Belke and an earlier case from the former fifth circuit, Sibley v. Tandy Corp., 543 F.2d 540, 543 & n. 3 (5th Cir.1976), cert. denied, 434 U.S. 824, 98 S.Ct. 71, 54 L.Ed.2d 82 (1977), had been undermined by dicta in the Supreme Court's Byrd decision and by Justice White's concurring opinion in that case.

Doubt cast by Byrd on the continuing validity of Sibley and Belke has led us to consider the issue of 10b-5 arbitration en banc.

II.

The holding of Belke and Sibley that 10b-5 claims are not arbitrable ⁴ stems from the Supreme Court's decision more than thirty years ago in Wilko v. Swan, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953). In that case the Court held that claims arising under section 12(2) of the Securities Act of 1933, 15 U.S.C. Sec. 77l(2), are not subject to arbitration under an agreement otherwise enforceable under the United States Arbitration Act, 9 U.S.C. Secs. 1-14.

The Supreme Court has not extended Wilko to 10b-5 actions. In fact, in Scherk v. Alberto-Culver Co., 417 U.S. 506, 94 S.Ct. 2449, 41 L.Ed.2d 270 (1974), the Court noted that

a colorable argument could be made that even the semantic reasoning of the Wilko opinion does not control [in a 10b-5 case]. Wilko concerned a suit brought under Sec. 12(2) of the Securities Act of 1933, which provides a defrauded purchaser with the "special right" of a private remedy for civil liability.... There is no statutory counterpart of Sec. 12(2) in the Securities Exchange Act of 1934, and neither Sec. 10(b) of that Act nor Rule 10b-5 speaks of a private remedy to redress violations.... While federal case law has established that Sec. 10(b) and Rule 10b-5 create an implied private cause of action ... the Act itself does not establish the "special right" that the Court in Wilko found significant. Furthermore, while both the [1933 and 1934 Acts] contain sections barring waiver of compliance with any "provision" of the respective Acts, certain of the "provisions" of the 1933 Act that the Court held could not be waived by Wilko's agreement to arbitrate find no counterpart in the 1934 Act. In particular, the Court in Wilko noted that the jurisdictional provision of the 1933 Act ... allowed a plaintiff to bring suit "in any court of competent jurisdiction--federal or state--and removal from a state court is prohibited." .... The analogous provision of the 1934 Act, by contrast, provides for suit only in the federal district courts ... thus significantly restricting the plaintiff's choice of forum.

Id. at 513-14, 94 S.Ct. at 2454-55. Despite this statement, however, the Court did not actually decide the issue of 10b-5 arbitration in Scherk; the case was instead decided on another, narrower ground.

It was after Scherk that the former fifth circuit decided Sibley. The court noted the "colorable argument" suggested in Scherk but nevertheless affirmed the rulings of several lower courts which had held 10b-5 claims non-arbitrable. The court reasoned that "the similarities between the [1933 and 1934 Acts] far outweigh any differences which might exist...." 543 F.2d at 543 n. 3. The Belke court merely cited and followed Sibley.

Then came Byrd. The Court in a footnote reiterated the "colorable argument" from Scherk, and added the following:

The Court [in Scherk ] did not ... hold that Wilko would not apply in the context of a Sec. 10(b) or Rule 10b-5 claim, and Wilko has retained considerable vitality in the lower federal courts. Indeed, numerous District Courts and Courts of Appeals have held that the Wilko analysis applies to claims arising under Sec. 10(b) ... and that agreements to arbitrate such claims are therefore unenforceable....

Dean Witter and amici representing the securities industry urge us to resolve the applicability of Wilko to claims under Sec. 10(b) and Rule 10b-5. We decline to do so.

470 U.S. at 215 n. 1, 105 S.Ct. at 1240 n. 1. In a concurring opinion, Justice White reemphasized that whether 10b-5 claims are arbitrable was "a matter of substantial doubt," and expanded on Scherk 's reasoning as to why the Wilko analysis might be inappropriate in the 10b-5 context. Id., 105 S.Ct. at 1244 (White, J., concurring).

III.

A.

The differences noted by the Supreme Court in Scherk and Byrd between the section 12(2) action held non-arbitrable in Wilko and the 10b-5 action at issue here are significant enough to merit discussion. Indeed, in light of Scherk and Byrd we are inclined to agree with appellants that Wilko is distinguishable from this case and hence is not "controlling" in the narrow sense of the term. That Wilko may be distinguished, however, does not necessarily mean that Wilko should not be followed. Our task is to determine whether, despite the differences, the similarities between the section 12(2) and 10b-5 causes of action are such that under the circumstances it makes sense to follow Wilko and thus to hold that 10b-5 claims, like those arising under section 12(2), are not subject to arbitration.

B.

Although not discussing the issue in detail, the panel in Sibley concluded that the holding of Wilko is applicable to 10b-5 cases because the similarities between section 12(2) and 10b-5 actions outweigh the differences. We too find the similarities more compelling.

The purpose of the 1933 and 1934 Acts is the same: "to protect investors" by requiring "full and fair disclosure" in connection with securities transactions. See Wilko, 346 U.S. at 431, 74 S.Ct. at 184; Rudolph v. Arthur Andersen & Co., 800 F.2d 1040, 1043 (11th Cir.1986). One act concerns itself with the issuance of securities and the other with post-issuance transactions, but that does not suggest that they should be treated differently with respect to arbitration.

Both section 12(2) and 10b-5 "create[ ] a special right to recover for misrepresentation which differs substantially from the common-law action." Wilko, 346 U.S. at 431, 74 S.Ct. at 184. In finding section 12(2) to create a "special right" the Wilko Court focused on the fact that under section 12(2) the defendant "is made to assume the burden of proving lack of scienter." Wilko, 346 U.S. at 431, 74 S.Ct. at 184. This is not so under 10b-5. See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193, 96 S.Ct. 1375, 1380, 47 L.Ed.2d 668 (1976) (under 10b-5 plaintiff must plead and prove defendant's scienter). Nevertheless, the 10b-5 action is...