Source: https://supreme.justia.com/cases/federal/us/346/427/
Timestamp: 2019-04-25 04:23:57+00:00

Document:
In an action brought by a customer against a securities brokerage firm to recover damages, under the civil liabilities provisions of § 12(2) of the Securities Act of 1933, for alleged misrepresentation in the sale of securities, held that an agreement for arbitration of any controversy arising in the future between the parties was void under § 14, notwithstanding the provisions of the United States Arbitration Act. Pp. 346 U. S. 428-438.
(a) The agreement to arbitrate future controversies was void under § 14 of the Securities Act as a "stipulation" binding the customer to "waive compliance" with a "provision" of the Act. Pp. 346 U. S. 432-435.
(b) The right of an aggrieved person under § 22(a) to select the judicial forum is a "provision" of the Securities Act that cannot be waived under § 14 thereof. Pp. 346 U. S. 434-438.
(c) As the protective provisions of the Securities Act require the exercise of judicial direction to fairly assure their effectiveness, Congress must have intended § 14 to apply to waiver of judicial trial and review. P. 346 U. S. 437.
Petitioner sued respondents to recover damages under the Securities Act of 1933. Respondents' motion to stay the action, pursuant to § 3 of the United States Arbitration Act, was denied by the District Court. 107 F.Supp. 75. The Court of Appeals reversed. 201 F.2d 439. This Court granted certiorari. 345 U.S. 969. Reversed, p. 346 U. S. 438.
1,600 shares of the common stock of Air Associates, Incorporated, by false representations that pursuant to a merger contract with the Borg Warner Corporation, Air Associates' stock would be valued at $6.00 per share over the then current market price, and that financial interests were buying up the stock for the speculative profit. It was alleged that he was not told that Haven B. Page (also named as a defendant, but not involved in this review [Footnote 2]), a director of, and counsel for, Air Associates was then selling his own Air Associates' stock, including some or all that petitioner purchased. Two weeks after the purchase, petitioner disposed of the stock at a loss. Claiming that the loss was due to the firm's misrepresentations and omission of information concerning Mr. Page, he sought damages.
Without answering the complaint, the respondent moved to stay the trial of the action pursuant to § 3 of the United States Arbitration Act [Footnote 3] until an arbitration in accordance with the terms of identical margin agreements was had. An affidavit accompanied the motion stating that the parties' relationship was controlled by the terms of the agreements, and that, while the firm was willing to arbitrate, petitioner had failed to seek or proceed with any arbitration of the controversy.
The question is whether an agreement to arbitrate a future controversy is a "condition, stipulation, or provision binding any person acquiring any security to waive compliance with any provision" of the Securities Act which § 14 [Footnote 6] declares "void." We granted certiorari, 345 U.S. 969, to review this important and novel federal question affecting both the Securities Act and the United States Arbitration Act. Cf. Frost & Co. v. Coeur D'Alene Mines Corp., 312 U. S. 38, 312 U. S. 40.
As the margin agreement, in the light of the complaint, evidenced a transaction in interstate commerce, no issue arises as to the applicability of the provisions of the United States Arbitration Act to this suit, based upon the Securities Act. 9 U.S.C. (Supp. V, 1952) § 2. Cf. Tejas Development Co. v. McGough Bros., 165 F.2d 276, 278, with Agostini Bros. Bldg. Corp. v. United States, 142 F.2d 854. See Sturges and Murphy, Some Confusing Matters Relating to Arbitration, 17 Law & Contemp.Prob. 580.
Respondent asserts that arbitration is merely a form of trial to be used in lieu of a trial at law, [Footnote 17] and therefore no conflict exists between the Securities Act and the United States Arbitration Act, either in their language or in the congressional purposes in their enactment. Each may function within its own scope, the former to protect investors, and the latter to simplify recovery for actionable violations of law by issuers or dealers in securities.
may be affected by legal requirements, statutes or common law, rather than by considerations of fairness, the provisions of the Securities Act control. [Footnote 19] This is true even though this proposed agreement has no requirement that the arbitrators follow the law. This agreement of the parties as to the effect of the Securities Act includes also acceptance of the invalidity of the paragraph of the margin agreement that relieves the respondent sellers of liability for all "representation or advice by you or your employees or agents regarding the purchase or sale by me of any property. . . ."
The words of § 14, note 6 supra, void ant "stipulation" waiving compliance with any "provision" of the Securities Act. This arrangement to arbitrate is a"stipulation,"
and we think the right to select the judicial forum is the kind of "provision" that cannot be waived under § 14 of the Securities Act. That conclusion is reached for the reasons set out above in the statement of petitioner's contention on this review. While a buyer and seller of securities, under some circumstances, may deal at arm's length on equal terms, it is clear that the Securities Act was drafted with an eye to the disadvantages under which buyers labor. Issuers of and dealers in securities have better opportunities to investigate and appraise the prospective earnings and business plans affecting securities than buyers. It is therefore reasonable for Congress to put buyers of securities covered by that Act on a different basis from other purchasers.
Two policies, not easily reconcilable, are involved in this case. Congress has afforded participants in transactions subject to its legislative power an opportunity generally to secure prompt, economical, and adequate solution of controversies through arbitration if the parties are willing to accept less certainty of legally correct adjustment. [Footnote 32] On the other hand, it has enacted the Securities Act to protect the rights of investors, and has forbidden a waiver of any of those rights. Recognizing the advantages that prior agreements for arbitration may provide for the solution of commercial controversies, we decide that the intention of Congress concerning the sale of securities is better carried out by holding invalid such an agreement for arbitration of issues arising under the Act.
* The Securities and Exchange Commission participated as amicus curiae throughout this case, and has shared petitioner's burden in presenting the case to the Court.
"(2) sells a security (whether or not exempted by the provisions of section 77c of this title, other than paragraph (2) of subsection (a) of section 77c of this title), by the use of any means or instruments of transportation or communication in interstate commerce or of the mails, by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading (the purchaser not knowing of such untruth or omission), and who shall not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of such untruth or omission, shall be liable to the person purchasing such security from him, who may sue either at law or in equity in any court of competent jurisdiction, to recover the consideration paid for such security with interest thereon, less the amount of any income received thereon, upon the tender of such security, or for damages if he no longer owns the security."
See Wilko v. Swan, 201 F.2d 439, 445.
Wilko v. Swan, 107 F.Supp. 75.
Wilko v. Swan, 201 F.2d 439.
S.Rep.No.47, 73d Cong., 1st Sess. 1. See Oklahoma-Texas Trust v. SEC, 100 F.2d 888, 891.
48 Stat. 74, Preamble; 48 Stat. 77, 15 U.S.C. § 77d. See Frost & Co. v. Coeur D'Alene Mines Corp., 312 U. S. 38, 312 U. S. 40.
"Unless responsibility is to involve merely paper liability, it is necessary to throw the burden of disproving responsibility for reprehensible acts of omission or commission on those who purport to issue statements for the public's reliance. . . . To impose a lesser responsibility would nullify the purposes of this legislation."
H.R.Rep.No.85, 73d Cong., 1st Sess. 9-10.
§ 22(a), 48 Stat. 86, as amended 49 Stat. 1921, 15 U.S.C. § 77v(a). See Deckert v. Independence Shares Corp., 311 U. S. 282, 311 U. S. 289. Existing remedies at law and equity are retained. § 16, 48 Stat. 84, 15 U.S.C. § 77p.
H.R.Rep.No.96, 68th Cong., 1st Sess. 1-2; S.Rep.No.536, 68th Cong., 1st Sess. 3. See Marine Transit Corp. v. Dreyfus, 284 U. S. 263.
Agostini Bros. Bldg. Corp. v. United States, 142 F.2d 854; Watkins v. Hudson Coal Co., 151 F.2d 311; Donahue v. Susquehanna Collieries Co., 138 F.2d 3; Donahue v. Susquehanna Collieries Co., 160 F.2d 661; Evans v. Hudson Coal Co., 165 F.2d 970.
Marine Transit Corp. v. Dreyfus, 284 U. S. 263; Kentucky River Mills v. Jackson, 206 F.2d 111; Campbell v. American Fabrics Co., 168 F.2d 959; Columbian Fuel Corp. v. United Fuel Gas Co., 72 F.Supp. 843, aff'd, 165 F.2d 746; Matter of Springs Cotton Mills v. Buster Boy Suit Co., 275 App.Div. 196, 88 N.Y.S.2d 295, aff'd, 300 N.Y. 586, 89 N.E.2d 877; White Star Mining Co. v. Hultherg, 220 Ill. 578, 77 N.E. 327; Oregon-Washington R. & N. Co. v. Spokane, P. & S. R. Co., 83 Ore. 528, 163 P. 600; Sturges, Commercial Arbitrations and Awards, pp. 502, 793-798.
"Any controversy arising between us under this contract shall be determined by arbitration pursuant to the Arbitration Law of the New York, and under the rules of either the Arbitration Committee of the Chamber of Commerce of the New York, or of the American Arbitration Association, or of the Arbitration Committee of the New York Stock Exchange or such other Exchange as may have jurisdiction over the matter in dispute, as I may elect. Any arbitration hereunder shall be before at least three arbitrators."
"The district courts of the United States . . . shall have jurisdiction . . . concurrent with State and Territorial courts, of all suits in equity and actions at law brought to enforce any liability or duty created by this subchapter. Any such suit or action may be brought in the district wherein the defendant is found or is an inhabitant or transacts business, or in the district where the sale took place, if the defendant participated therein, and process in such cases may be served in any other district of which the defendant is an inhabitant or wherever the defendant may be found. Judgments and decrees so rendered shall be subject to review as provided in sections [1292-93] and  of Title 28. No case arising under this subchapter and brought in any State court of competent jurisdiction shall be removed to any court of the United States. . . ."
See Murray Oil Products v. Mitsui & Co., 146 F.2d 381, 383; American Locomotive Co. v. Chemical Research Corp., 171 F.2d 115, 120.
"Paragraph 3 of the margin agreement provides that all transactions 'shall be subject to the provisions of the Securities Exchange Act of 1934 and present and future acts amendatory thereto [15 U.S.C. § 78a et seq.].' It contains no express mention of the Securities Act of 1933. If reference to the 1934 Act were construed as excluding the 1933 Act, it might be argued that the agreement did not provide for arbitration of a controversy as to the liability of Hayden, Stone & Co. under section 12(2) of the 1933 Act. But we do not think the principle of expressio unius est exclusio alterius is here applicable. It may well be that the phrase 'present . . . acts . . . supplemental' to the 1934 Act should be construed to include the 1933 Act. In any event, the sale transaction would necessarily be subject to that Act. Therefore, the amicus does not regard it as material whether or not the agreement purports to make that statute applicable. We agree, and shall proceed to a consideration of the question decided below -- namely, whether the 1933 Act evidences a public policy which forbids referring the controversy to arbitration."
"All transactions made by you or your agents for me are to be subject to the constitutions, rules, customs and practices of the exchanges or markets where executed and of their respective clearing houses, and shall be subject to the provisions of the Securities Exchange Act of 1934 and present and future acts amendatory thereof or supplemental thereto, and to the rules and regulations of the Federal Securities and Exchange Commission and of the Federal Reserve Board insofar as they may be applicable. . . ."
Campe Corp. v. Pacific Mills, 87 N.Y.S.2d 16, reversed, 275 App.Div. 634, 92 N.Y.S.2d 347.
Evans v. Hudson Coal Co., 165 F.2d 970; Donahue v. Susquehanna Collieries Co., 160 F.2d 661; Watkins v. Hudson Coal Co., 151 F.2d 311; Donahue v. Susquehanna Collieries Co., 138 F.2d 3; Agostini Bros. Bldg. Corp. v. United States, 142 F.2d 854; American Almond Prod. Co. v. Consolidated Pecan S. Co., 144 F.2d 448.
"In either of the following cases, the United States court in and for the district wherein the award was made may make an order vacating the award upon the application of any party to the arbitration --"
"(a) Where the award was procured by corruption, fraud, or undue means."
"(b) Where there was evident partiality or corruption in the arbitrators, or either of them."
"(c) Where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced."
"(d) Where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made."
"(e) Where an award is vacated and the time within which the agreement required the award to be made has not expired, the court may, in its discretion, direct a rehearing by the arbitrators."
Wilko v. Swan, 201 F.2d 439, 445.
Burchell v. Marsh, 17 How. 344, 58 U. S. 349; United States v. Farragut, 22 Wall. 406, 89 U. S. 413, 89 U. S. 419-421 (note the right of review); Kleine v. Catara, 14 Fed.Cas. 732, No. 7,869; Texas & P. Ry. Co. v. St. Louis Southwestern Ry. Co., 158 F.2d 251, 256; The Hartbridge, 62 F.2d 72, 73. In Mutual Benefit Health & Acc. Assn. v. United Cas. C., 142 F.2d 390, 393, the problem was dealt with on the basis of the Massachusetts law. See Sturges, note 19 supra; Note, Judicial Review of Arbitration Awards on the Merits, 63 Harv.L.Rev. 681, 685, Award Based on Erroneous Rule; Cox, The Place of Law in Labor Arbitration, XXXIV Chicago Bar Rec. 205.
Arbitration Act, 1950, 14 Geo VI, c. 27, § 21, 29 Halsbury's Statutes of England (2d ed.) p. 106.
See also Krenger v. Pennsylvania R. Co., 174 F.2d 556; Akerly v. New York Cent. R. Co., 168 F.2d 812.
"Any contract, rule, regulation, or device whatsoever the purpose or intent of which shall be to enable any common carrier to exempt itself from any liability created by this chapter shall, to that extent, be void. . . ."
See H.R.Rep.No.1386, 60th Cong., 1st Sess. 6. Compare Baltimore & O.S. R. Co. v. Voigt, 176 U. S. 498.
Cf. Callen v. Pennsylvania R. Co., 332 U. S. 625, 332 U. S. 631.
Brooklyn Savings Bank v. O'Neil, 324 U. S. 697, 324 U. S. 707, 324 U. S. 714.
Cf. Wilko v. Swan, 201 F.2d at 444.
in this case, where there has not been and could not be any arbitration, to decide that the Arbitration Act precludes any judicial remedy for the arbitrators' error of interpretation of a relevant statute.
enforcement of rights by way of arbitration than can be had by the tortuous course of litigation, especially in the City of New York. These advantages should not be assumed to be denied in controversies like that, before us arising under the Securities Act, in the absence of any showing that settlement by arbitration would jeopardize the rights of the plaintiff.
Arbitrators may not disregard the law. Specifically, they are, as Chief Judge Swan pointed out, "bound to decide in accordance with the provisions of section 12(2)." On this we are all agreed. It is suggested, however, that there is no effective way of assuring obedience by the arbitrators to the governing law. But, since their failure to observe this law "would . . . constitute grounds for vacating the award pursuant to section 10 of the Federal Arbitration Act," 201 F.2d 439, 445, appropriate means for judicial scrutiny must be implied, in the form of some record or opinion, however informal, whereby such compliance will appear, or want of it will upset the award.
We have not before us a case in which the record shows that the plaintiff, in opening an account, had no choice but to accept the arbitration stipulation, thereby making the stipulation an unconscionable and unenforceable provision in a business transaction. The Securities and Exchange Commission, as amicus curiae, does not contend that the stipulation which the Court of Appeals respected, under the appropriate safeguards defined by it, was a coercive practice by financial houses against customers incapable of self-protection. It is one thing to make out a case of overreaching as between parties bargaining not at arm's length. It is quite a different thing to find in the anti-waiver provision of the Securities Act a general limitation on the Federal Arbitration Act.
The Association submits a list of potential arbitrators qualified by experience to adjudicate the particular controversy. In the City of New York, the list would be drawn from a panel of 4,400 persons, 1,275 of whom are lawyers. Each party may strike off the names of any unacceptable persons and number the remaining in order of preference. The Association then designates the arbitrators on the basis of the preferences expressed by both parties. See "Questions and Answers," Pamphlet of American Arbitration Association. In short, those who are charged to enforce the rights are selected by the parties themselves from among those qualified to decide.

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