Source: http://openjurist.org/201/f2d/439
Timestamp: 2013-05-18 09:47:26
Document Index: 660382008

Matched Legal Cases: ['§ 1', '§ 77', '§ 14', '§ 771', '§ 3', '§ 77', '§ 77', '§ 51']

201 F2d 439 Wilko v. Swan | OpenJurist
201 F. 2d 439 - Wilko v. Swan	Home201 f2d 439 wilko v. swan
201 F2d 439 Wilko v. Swan 201 F.2d 439
Docket 22441.
Although the order is interlocutory, it is appealable, since it is in effect an order denying an interlocutory injunction. Shanferoke Coal & Supply Corp. of Del. v. Westchester Co., 293 U.S. 449, 55 S.Ct. 95, 79 L.Ed. 647. The appeal presents an interesting question of statutory construction said to be of first impression.3 That question is whether the policy evidenced by the Federal Arbitration Act, 9 U.S.C.A. § 1 et seq., to permit controversies to be settled by arbitration, when the parties have so agreed, is overridden by the policy evidenced by the Securities Act of 1933, 15 U.S.C.A. § 77a et seq., to protect purchasers of securities, if the purchase was induced by untrue or misleading statements of material facts. The appellee has filed no brief, relying apparently on the brief of the Securities and Exchange Commission, as amicus curiae, which makes a strong presentation of the argument in support of Judge Goddard's decision.
Other provisions deemed material to the question before us are printed in the margin.5 The paragraph numbered 9, which purports to exempt the brokerage firm from liability based on any representation or advice by it or its agents, is concededly made invalid by section 14 of the Securities Act, if construed as a waiver of the statutory liability imposed by section 12(2) of the Act. But the invalidity of this one provision does not vitiate the entire agreement; this contingency was expressly provided for by the severability provision of paragraph 10. Cf. Watkins v. Hudson Coal Co., 3 Cir., 151 F.2d 311, 320, certiorari denied 327 U.S. 777, 66 S.Ct. 522, 90 L.Ed. 1005, rehearing den. 327 U.S. 816, 66 S.Ct. 701, 90 L.Ed. 1039. And § 14 itself does not purport to strike down the entire agreement containing a forbidden term, but declares void only "Any condition, stipulation, or provision" binding the purchaser to waive compliance with the requirements of the statute.6 The stipulation to arbitrate is not one waiving compliance with the statute unless the statute be construed to forbid arbitration &#x2014; a construction believed to be untenable for reasons hereafter stated.
The 1933 Act itself contains no declaration of such policy. "The essential purpose of the statute", as stated in Frost & Co. v. Coeur D'Alene Mines Corp., 312 U. S. 38, 40, 61 S.Ct. 414, 415, 85 L.Ed. 500, "is to protect investors by requiring publication of certain information concerning securities before offered for sale." Pursuant to this purpose section 12(2) does three things: it gives the purchaser a statutory cause of action against the seller if the purchase was induced by the seller's false or misleading statements; it provides that he may sue in any court of competent jurisdiction; and it changes in part the burden of proof, i. e., if the buyer proves that he bought in reliance on a false statement by the seller or one that was misleading because of the omission to state a material fact, the seller must prove that he did not know, and in the exercise of reasonable care could not have known, that his statement was untrue or misleading.
1. Section 12(2), 15 U.S.C.A. § 771(2):
2. 9 U.S.C.A. § 3:
3. Loss, Securities Regulation, p. 1076.
4. The agreements, one dated May 2, 1950, the other dated January 18, 1951, are identical in form. As the brief of the amicus states, it is immaterial to the question presented by the appeal on which date the agreement was entered into, but we agreed that the 1951 agreement was the one signed in connection with the transaction here involved.
5. The agreement is in the form of a letter signed by the customer and accepted by the broker. For convenience of reference we have supplied numbers to the successive paragraphs. Those deemed relevant are the following:
"[1] Dear Sirs: In consideration of your opening now or in the future or continuing an account or accounts in my name or for me for the purchase or sale of property, I agree with you and your successors as follows, all my relations and dealings with you being subject to this agreement:
"[3] 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, * * *
"[9] I expressly agree that you shall not be bound by any representation or agreement heretofore or hereafter made by any of your employees or agents which in any way purports to affect or diminish your rights under this agreement and that no representation or advice by you or your employees or agents regarding the purchase or sale by me of any property bought or sold on my order or carried or held in any manner for my account shall be the basis of any liability on your part to me.
"[10] Whenever any statute shall be enacted, or any regulation made under any statute or by the New York Stock Exchange, which shall be applicable to and affect in any manner or be inconsistent with any of the provisions hereof, the provisions of this agreement so affected shall be deemed modified or superseded, as the case may be, by such statute or regulation and all other provisions of this agreement and the provisions as so modified shall in all respects continue and be in full force and effect."
6. See 15 U.S.C.A. § 77n, supra, note 1.
7. What are courts of "competent jurisdiction" is provided in section 22(a), 15 U. S.C.A. § 77v, supra, note 1.
8. It is far from clear that the words "waive compliance with" refer to anything more than the mandatory or prohibitive provisions of the Act. The means of enforcement provisions, on the other hand, seem clearly permissive, not requiring compliance.
9. In England, even without such an express provision in the arbitration agreement, the arbitrators must decide "according to the legal rights of the parties." Jager v. Tolme, [1916] 1 K.B. 939, 953; Czarnikow v. Roth, Schmidt & Co., [1922] 2 K.B. 478, 484; Stotesbury v. Turner, [1943] K.B. 370.
Judge Goddard's incisively reasoned opinion, D.C.S.D.N.Y., 107 F.Supp. 75, and the able supporting arguments of the Securities and Exchange Commission are to me very convincing. Commercial arbitration has been highly successful in bringing a businessman's adjudication to business questions. But it would be vastly unfortunate if it became usable as a device to blunt or break social legislation. Here the intent of the contracting party having the superior bargaining power is not concealed. The seventeen finely printed paragraphs of obligation and waiver, covering six pages of the printed record, imposed by this brokerage firm upon customers are designed to secure just as much exculpation as can be devised, contrary to the spirit and the letter of the Securities Act of 1933. The court's opinion herewith declares at least one of the paragraphs illegal. More extensive examination may well bring others into doubt. As the apex to this series of burdens placed upon the investor there appears the arbitration requirement in issue. This is rather naturally and obviously intended to secure an expert or business judgment. But here the persons to give such judgment would naturally come from the regulated business itself. Adjudication by such arbitrators may, indeed, provide a business solution of the problem if that is the real desire; but it is surely not a way of assuring the customer that objective and sympathetic consideration of his claim which is envisaged by the Securities Act.
To uphold the provision for arbitration, it must be held, as it is here, that the investor, at the initiation of his dealings with the broker, may relinquish certain important rights accorded him by the Securities Act. Of these, the most vital appears to be that of the burden of proof placed upon the broker to establish lack of knowledge and inability upon the exercise of reasonable care to know of an untruth or omission in statement in the sale of securities &#x2014; thus changing the rule of caveat emptor to that of caveat venditor, as the S. E. C. happily phrases it. The suggestion that perhaps the business arbitrators will be able or inclined to manipulate the burden of proof like lawyers and judges seems to me completely unreal. After all, the great purpose of arbitration is to get away from ordinary legal restrictions as to evidence and proof, and substitute the informed knowledge of the tribunal for the imperfect knowledge of technical matters acquired through ordinary court processes. But the role of the burden-of-proof concept is to canalize and control the evidence; it may often be the decisive factor in the case. Since the very purpose of arbitration is to be rid of fancy legalisms, the chief reason for arbitration is gone if the arbitrators are to act only like lawyers and judges. Actually the suggestion cannot be carried out in any real sense; the arbitrators will act according to their business background and there will be no way &#x2014; unless they volunteer foolish explanations in their decision &#x2014; of checking what they do. So what is most desirable in the ordinary arbitration becomes a clear loss of statutory right here.
While I do not think decision on the point now necessary, I do submit with all deference that there is the greatest difference between a binding agreement for compulsory arbitration at the beginning of any transaction and an arbitration mutually acceptable after a breach as a method of settlement of an already existing dispute. The analogy of releases under the Federal Employers' Liability Act, 45 U.S.C.A. § 51 et seq., invalid prior to any accident, but valid if fairly and reasonably made in settlement of an existing claim, seems persuasive. See Callen v. Pennsylvania R. Co., 332 U.S. 625, 68 S.Ct. 296, 92 L.Ed. 242; Krenger v. Pennsylvania R. Co., 2 Cir., 174 F.2d 556, certiorari denied Pennsylvania R. Co. v. Krenger, 338 U.S. 866, 70 S.Ct. 140, 94 L.Ed. 531; Boyd v. Grand Trunk Western R. Co., 338 U.S. 263, 70 S.Ct. 26, 94 L.Ed. 55.
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