Source: https://law.justia.com/cases/federal/appellate-courts/F2/806/291/45592/
Timestamp: 2019-09-19 16:39:36
Document Index: 273191285

Matched Legal Cases: ['§ 78', '§ 1964', '§ 4', '§ 3', '§ 1292', '§ 2', '§ 1', '§ 771', '§ 1964', '§ 1962', '§ 1962', '§ 77', '§ 78', '§ 1983', '§ 1961', '§ 1961']

Frederick J. Page, Jr. and Kristin D. Page, Plaintiffs, Appellees, v. Moseley, Hallgarten, Estabrook & Weeden, Inc., and Josephmcdonald, Defendants, Appellants, 806 F.2d 291 (1st Cir. 1986) :: Justia
Justia › US Law › Case Law › Federal Courts › Courts of Appeals › First Circuit › 1986 › Frederick J. Page, Jr. and Kristin D. Page, Plaintiffs, Appellees, v. Moseley, Hallgarten, Estabrook...
Frederick J. Page, Jr. and Kristin D. Page, Plaintiffs, Appellees, v. Moseley, Hallgarten, Estabrook & Weeden, Inc., and Josephmcdonald, Defendants, Appellants, 806 F.2d 291 (1st Cir. 1986)
U.S. Court of Appeals for the First Circuit - 806 F.2d 291 (1st Cir. 1986)
Argued June 3, 1986. Decided Nov. 26, 1986
This action was brought below by plaintiffs-appellees, Frederick J. Page, Jr. and Kristin D. Page, against their former stockbroker Joseph McDonald, and his employer, a Cambridge, Massachusetts stockbrokerage firm known as Moseley, Hallgarten, Estabrook & Weedon, Inc. Plaintiffs' basic claim below was for alleged excessive trading or "churning" of their accounts by defendants. Plaintiffs sought to recover damages pursuant to Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1982), and Rule 10b-5 promulgated thereunder, 17 C.F.R. Sec. 240.10b-5 (1985). Plaintiffs also alleged that defendants' conduct violated the civil provisions of the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1964(c). Finally, plaintiffs alleged a violation of Massachusetts General Law Chapter 93A, pertaining to deceptive and unfair trade practices.
On March 29, 1985, approximately twelve months after plaintiffs filed their complaint and 3 1/2 weeks after the Supreme Court decision in Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 105 S. Ct. 1238, 84 L. Ed. 2d 158 (1985), defendants moved to compel arbitration. Again, this motion was not acted upon by the court at that time.
Plaintiffs-appellees do not dispute that their action is one for damages, and hence, is legal in nature. Appellees also acknowledge the "Enelow-Ettelson" doctrine.1 This doctrine establishes that if the underlying action is one at law, orders compelling arbitration, 9 U.S.C. § 4, or staying district court proceedings pending arbitration, 9 U.S.C. § 3, are appealable under 28 U.S.C. § 1292(a) (1). See Mowbray v. Moseley, 795 F.2d 1111, 1113 (1st Cir. 1986); Langley v. Colonial Leasing Co. of New England, 707 F.2d 1, 5 (1st Cir. 1983); Hartford Financial Systems v. Florida Software Services, Inc., 712 F.2d 724, 726-727 (1st Cir. 1983).
In considering the issue of waiver, it is paramount that we keep in mind the Supreme Court's admonition that, due to the strong federal policy favoring arbitration agreements, any doubt concerning arbitrability "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 Hospital v. Mercury Construction Corp., 460 U.S. 1, 24-25, 103 S. Ct. 927, 941, 74 L. Ed. 2d 765 (1983).
It is in deference to this policy favoring arbitration that courts have stated that "[w]aiver is not to be lightly inferred, and mere delay in seeking [arbitration] without some resultant prejudice to a party cannot carry the day." Rush v. Oppenheimer & Co., 779 F.2d 885 (2d Cir. 1985) (citing Carcich v. Rederi A/B Nordie, 389 F.2d 692, 696 (2d Cir. 1968)); see also Hilti, Inc. v. Oldach, 392 F.2d 368, 371 (1st Cir. 1968).
In order properly to understand plaintiffs' claim of prejudice, it is necessary to reiterate the events prior to and after defendants' motion to compel arbitration. Plaintiffs' complaint was filed on March 15, 1984. Discovery was completed on November 7, 1984. On January 4, 1985, plaintiffs filed a motion for partial summary judgment as to the 10b-5 claim. Approximately twelve months after plaintiffs had filed their complaint, and 3 1/2 weeks after the Supreme Court opinion in Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 105 S. Ct. 1238, 84 L. Ed. 2d 158 (1985), the defendants moved to compel arbitration on March 29, 1985. No immediate action was taken on this motion by the district court.
On appeal, plaintiffs claim prejudice from the fact that they were at the stage of complete readiness to try the case, and if made to arbitrate, will be forced to "restart the entire process before a new tribunal." This argument, while compelling if defendants had indeed filed their motion 72 hours before trial, obfuscates the fact that the defendants filed their motion nine months prior, at which point the only prejudice incurred by plaintiffs was having to engage in discovery.3 As to the alleged burden of discovery, plaintiffs have stipulated in their brief that it caused them no prejudice. Accordingly, we hold that, because plaintiffs have neither alleged nor shown any prejudice from the discovery prior to defendants' motion to compel arbitration, defendants cannot at that point be said to have waived their right to compel arbitration. See J & S Construction Co., Inc. v. Travelers Indemnity Co., 520 F.2d 809 (1st Cir. 1975) (no showing of prejudice by plaintiffs, and hence, no waiver by defendants, despite 13 month delay in seeking arbitration and participation in discovery).
The Supreme Court, in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 105 S. Ct. 3346, 87 L. Ed. 2d 444 (1985), set out the standard by which lower courts are to assess the arbitrability of federal statutory claims. First, it is imperative that the agreement to arbitrate be a valid one, and it is our role to "... remain attuned to well-supported claims that the agreement to arbitrate resulted from the sort of fraud or overwhelming economic power that would provide grounds 'for the revocation of any contract.' " Id. 105 S. Ct. at 3354 (citing 9 U.S.C. § 2; Southland Corp. v. Keating, 465 U.S. 1, 16, n. 11, 104 S. Ct. 852, 861, n. 11, 79 L. Ed. 2d 1 (1984); The Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 15, 92 S. Ct. 1907, 1916, 32 L. Ed. 2d 513 (1972)). We therefore conclude that, because there has been no challenge to the agreement qua agreement in this case, Mitsubishi requires us to give it credence, and forbids indulgent presumptions as to systemic overreaching in the investor-broker context. Id. 105 S. Ct. at 3357.6
In Wilko v. Swan, 346 U.S. 427, 74 S. Ct. 182, 98 L. Ed. 168 (1953), the Supreme Court ruled that, despite the United States Arbitration Act, 9 U.S.C. § 1 et seq., private parties cannot agree to arbitrate disputes arising under Sec. 12(2) of the Securities Act of 1933 ("1933 Act"), 15 U.S.C. § 771(2) (1982). The Court offered two central justifications for this holding. First, it noted that, in Sec. 22(a) of the 1933 Act, Congress provided individuals an express right of action in federal and state courts, and that therefore, such an express right of action amounted to a "provision" of the Act that, under Sec. 14,7 could not be waived. Id. at 434-435, 74 S. Ct. at 186. Second, the Court concluded that Congress regarded the determination of rights under the 1933 Act as an area of vital federal concern that could only be entrusted to the federal courts, the express assumption being that arbitration provides an ineffective forum for the vindication of federal statutory rights. Id. at 435-437, 74 S. Ct. at 186-188.
In determining whether the Wilko rule of nonarbitrability should be extended to claims under the 1934 Act, courts have focused on both prongs of the Wilko analysis. Examination of the first prong--i.e., whether the right to a judicial forum can be regarded as a nonwaivable "provision" of the 1934 Act subject to its similar anti-waiver clause8 --leads us to conclude that arbitration cannot be barred. As Justice White noted in Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 105 S. Ct. 1238, 1244, 84 L. Ed. 2d 158 (1985), and as five members of the court observed in Scherk v. Alberto-Culver Co., 417 U.S. 506, 513-514, 94 S. Ct. 2449, 2454, 41 L. Ed. 2d 270 (1974), the 1934 Act, unlike the 1933 Act, does not expressly provide individuals a right to a judicial forum.9 Because of the absence of any express "provision" for a judicial forum under the 1934 Act, we conclude that the 1934 Act's anti-waiver clause, by itself, does not suffice to indicate a Congressional intent to preclude arbitration.
As to the Congressional intent to preclude arbitration of 1934 Act claims, we cannot deny two central facts. First, Congress expressly provided in the 1934 Act that the jurisdiction of the federal courts is exclusive, thus arguably allowing for the inference that Congress regarded the federal court forum to be an important one. See Conover v. Dean Witter Reynolds, Inc., 794 F.2d 520, 527 (9th Cir. 1986). Second, and more importantly, we do not dispute that Congress, in enacting both the 1933 and 1934 Acts, regarded the legislation as establishing significant federal rights in an area of undisputed federal importance. See, e.g., Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194-196, 96 S. Ct. 1375, 1381-1382, 47 L. Ed. 2d 668 (1976).10
First, the Mitsubishi Court made clear that the presence of a federal statutory right cannot, without more, prevent private parties from agreeing to arbitrate. Id. 105 S. Ct. at 3354-3355. Thus, it is not enough to find that a federal statute covers an area of federal import. All federal statutes do this, and Mitsubishi teaches that the Arbitration Act, itself a federal statute, deserves at least equal deference. Id. at 3354.
Our reasons for not allowing arbitration of RICO claims are two. First, unlike 10b-5 actions under the 1934 Act, Congress provided civil RICO plaintiffs an express private right of action. 18 U.S.C. § 1964(c). Second, while many civil RICO claims can perhaps be characterized as "glorified" common law fraud allegations, we cannot overlook the clear legislative history of that statute to the effect that when Congress enacted the RICO provisions, it did so with a view toward the eradication of organized crime. See United States v. Turkette, 452 U.S. 576, 589, 101 S. Ct. 2524, 2531, 69 L. Ed. 2d 246 (1981). A civil RICO judgment against a defendant effectively amounts to an accusation that the defendant participated in a "pattern of racketeering activity." See 18 U.S.C. §§ 1962, 1961(1). A civil RICO suit is in effect quasi-criminal in nature.12 Thus, in light of the arguable parallels between criminal and civil RICO proceedings, and given the Congressional policy of eradicating organized crime through the express use of a private right of action, we believe the Congressional intent to have been one of precluding arbitration and limiting determinations of liability under this statute to the sole province of Article III courts.
We note that two circuit courts have addressed the issue of the arbitrability of civil RICO claims, and, in one case, wish to distinguish their reasoning from our own. The Third Circuit, in Jacobson, et al. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., et al., 797 F.2d 1197 (3d Cir. 1986), held that where a civil RICO claim is based on predicate act 10b-5 violations, the RICO claim is arbitrable if the underlying 10b-5 claims are arbitrable. Id. at 1202-1203. Because the Third Circuit found 10b-5 claims not arbitrable, it likewise found RICO not arbitrable. Id. If we were to apply the Third Circuit's reasoning to this case, we would be obliged to find the RICO claim arbitrable along with 10b-5. We have, of course, rejected that view.
We decline to adopt the Third Circuit's reasoning on the ground that a civil RICO violation is made up of more than the predicate act. Specifically, plaintiffs must show that the series of predicate acts amounted to a "pattern of racketeering activity." 18 U.S.C. §§ 1962 and 1964(c). The meaning of this additional element of a civil RICO claim has yet to be clearly established in the law. See Sedima, S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479, 105 S. Ct. 3275, 3285 n. 14, 87 L. Ed. 2d 346 (1985). We note, however, that the obligation of plaintiffs to establish the existence of a "pattern of racketeering activity" is not meaningless, id., and that it is precisely this element of a RICO claim that carries with it the compelling public policy considerations which were so important to Congress, and which, in our view, preclude arbitrability. Accordingly, while we can find no Congressional intent precluding arbitration of 10b-5 claims (either alone or where these are alleged as the predicate acts for a civil RICO violation), we must conclude that Congress intended the "pattern of racketeering activity" aspect of RICO to be the sole province of Article III courts. That the result under our rule is bifurcated litigation cannot affect our conclusion. See Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 105 S. Ct. 1238, 1241-1243, 84 L. Ed. 2d 158 (1985) (holding that considerations of efficiency cannot override the command of the Arbitration Act, even where bifurcated proceedings would result).
The Second Circuit, in McMahon v. Shearson/American Express, Inc., 788 F.2d 94 (2d Cir. 1986), cert. granted, --- U.S. ----, 107 S. Ct. 60, 93 L. Ed. 2d 20 (1986), held that civil RICO claims are not arbitrable. The court there stated, inter alia, that a civil RICO plaintiff can be analogized to the private antitrust plaintiff, whose claims are not arbitrable under the doctrine of American Safety Equipment v. J.P. Maguire, 391 F.2d 821 (2d Cir. 1968). The American Safety court stated as follows:
We agree with the Second Circuit that this element of the American Safety doctrine remains alive after Mitsubishi, which only criticized the private attorney general concept in the context of an international dispute.13 105 S. Ct. at 3355, 3358-3360. Thus, we note that, as in Wilko, Alexander, Barrentine and McDonald, the provision by Congress to individuals of an express right of action is not to be taken lightly by the courts, and when combined with compelling public policy considerations requiring Article III determination of rights under a statute, can serve to bar arbitration altogether, see Wilko, supra; American Safety, supra; or render it clearly secondary by allowing plaintiffs to litigate in federal court anew. See Alexander, supra; Barrentine, supra; and McDonald, supra.
See Enelow v. New York Life Insurance Co., 293 U.S. 379, 383, 55 S. Ct. 310, 311, 79 L. Ed. 440 (1935); Ettelson v. Metropolitan Life Insurance Co., 317 U.S. 188, 191, 63 S. Ct. 163, 164, 87 L. Ed. 176 (1942)
The parties in their briefs address the proper standard of review for an appellate tribunal when faced with a district court finding of waiver. The problem in this case, however, is that the district court never specifically found waiver. At one point, the court stated that "the fact that defendants' motion to compel arbitration comes after the completion of discovery and after being prepared for trial in and of itself, I think, constitutes sufficient prejudice...." However, after defendants' counsel mentioned that such a finding of waiver might be in conflict with this court's opinion in J & S Construction Co., Inc. v. Travelers Indemnity Co., 520 F.2d 809 (1st Cir. 1975), the district court stated that it was "not holding waiver as a matter of law" and would deny defendants' motion due to "the unusual factors that are present in this case and the stage at which it now stands...."
Even if we were to construe the district court's concern over the alleged lateness of defendants' motion as a finding of waiver, the court's conclusion was not based on predicate findings of fact. Compare Price v. Drexel Burnham Lambert, Inc., 791 F.2d 1156, 1159 (5th Cir. 1986). Accordingly, we opt to review the waiver claim de novo as a legal conclusion that follows from the undisputed facts of defendants' pretrial participation in the litigation. See Rush v. Oppenheimer, supra, at 887.
McMahon v. Shearson/American Express, Inc., 788 F.2d 94 (2d Cir. 1986), cert. granted, --- U.S. ----, 107 S. Ct. 60, 93 L. Ed. 2d 20 (1986); Jacobson, et al. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., et al., 797 F.2d 1197 (3d Cir. 1986); Bustamante v. Rotan Mosle, Inc., 802 F.2d 815 (5th Cir. 1986); Mansbach v. Prescott, Ball & Turben, 598 F.2d 1017 (6th Cir. 1979); Weissbuch v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 558 F.2d 831 (7th Cir. 1977); Conover v. Dean Witter Reynolds, Inc., et al., 794 F.2d 520 (9th Cir. 1986); Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Moore, 590 F.2d 823 (10th Cir. 1978); Wolfe v. E.F. Hutton & Co., Inc., 800 F.2d 1032 (11th Cir. 1986) (en banc)
Phillips v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 795 F.2d 1393 (8th Cir. 1986)
We note that the Supreme Court in Wilko v. Swan, 346 U.S. 427, 74 S. Ct. 182, 98 L. Ed. 168 (1953) stated that "[w]hile a buyer and seller of securities, under some circumstances, may deal at an 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." Id. at 435, 74 S. Ct. at 186. Despite this general statement by the Wilko Court that certain investors may operate at a disadvantage vis a vis their more sophisticated brokers, we do not believe that it requires the invalidation of all customer-broker arbitration agreements ab initio, especially given the Court's admonition in Mitsubishi that claims such as overreaching are to be addressed on a case-by-case basis. Id. 105 S. Ct. at 3357; see also Wilko, supra 346 U.S. at 440, 74 S. Ct. at 189 (Frankfurter, J. dissenting) ("We have not a case before us 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.")
Section 14 of the Securities Act of 1933, 15 U.S.C. § 77n (1982) provides:
Section 29(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78cc(a) (1982), provides:
Instead, this right has been judicially implied. See Herman & MacLean v. Huddleston, 459 U.S. 375, 380 & nn.9-10, 103 S. Ct. 683, 686 & nn. 9-10, 74 L. Ed. 2d 548 (1983)
A third argument noted by the circuits is that Congress, in a 1975 amendment to the 1934 Act, seemed to indicate an understanding that 10b-5 claims were nonarbitrable. See Conover, supra, 794 F.2d at 524. Putting aside the question of what weight to give the detail of a committee report like this, see, e.g., Hirschey v. FERC, 777 F.2d 1, 7-8 (D.C. Cir. 1985) (Scalia, J., concurring), we agree with the Eighth Circuit that this statement does not provide a compelling indication of Congressional intent, to endorse the rule and policies in Wilko, see Phillips, supra, 795 F.2d at 1398 n. 17. Congress might simply have been indicating that it would accept, and not seek to alter, whatever rule the courts chose. We add that the statement appears only reflective of the pre-Mitsubishi circuit court opinions extending, under what we regard as erroneous premises, the Wilko rule of nonarbitrability to claims arising under Rule 10b-5
We do not have before us the issue of the preclusive effect to be given a prior arbitration of a federal statutory right. We note, however, that the Supreme Court, in deciding the preclusive effect to be given such arbitration, has taken note of the arbitral forum's "effectiveness" in vindicating the federal statutory right at issue. See Alexander v. Gardner-Denver Co., 415 U.S. 36, 56-58, 94 S. Ct. 1011, 1023-1024, 39 L. Ed. 2d 147 (1974) (right to sue under Title VII of the Civil Rights Act of 1964 not precluded by prior arbitral decision); Barrentine v. Arkansas-Best Freight System, Inc., 450 U.S. 728, 743-745, 101 S. Ct. 1437, 1446-1447, 67 L. Ed. 2d 641 (1981) (right to sue under Fair Labor Standards Act not precluded by prior arbitration of employee's minimum wage claims); McDonald v. City of West Branch, 466 U.S. 284, 292, 104 S. Ct. 1799, 1804, 80 L. Ed. 2d 302 (1984) (city employee's cause of action under 42 U.S.C. § 1983 not precluded by prior arbitration based on same facts)
The Supreme Court in Sedima, S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479, 105 S. Ct. 3275, 87 L. Ed. 2d 346 (1985) stated that "... to the extent an action under Sec. 1964(c) might be considered quasi-criminal, requiring protections normally applicable only to criminal proceedings, [citation omitted], the solution is to provide those protections...." Id. 105 S. Ct. at 3283. While the Court did not by this statement decide whether RICO proceedings are quasi-criminal, we believe it acknowledged such a risk. More importantly, we note that, if the agreed-upon premise is one of a quasi-criminal proceeding necessitating certain implied procedural protections, the extent and nature of such protections would appear to be a constitutional question solely for the province of Article III courts, and not arbitrators, to decide
A panel of the Fifth Circuit has recently concluded that Mitsubishi overrules American Safety in the domestic context, and hence, ends the utility of analogies to the latter case in deciding the arbitrability of RICO claims. Mayaja, Inc. v. Bodkin, 803 F.2d 157 (5th Cir. 1986). While the proper interpretation of Mitsubishi's impact on the arbitrability of RICO claims will soon be decided by the Supreme Court, see McMahon, supra, we reject the Fifth Circuit's analysis on two grounds. First, we believe the Fifth Circuit ignored its own warning that parties who too eagerly set out to find an express Congressional intent barring arbitration will return with empty hands. Mitsubishi, in our estimation, allows for judicial inferences of an implied Congressional intent to bar arbitration, especially in light of express rights of action and in the context of a proceeding that involves adjudication of conduct subject to criminal as well as civil sanctions. See 18 U.S.C. §§ 1961(1), 1962, 1964(c). Second, we note that it is precisely our concern over the quasi-criminal nature of civil RICO proceedings (and hence, the need for exclusive Article III elaboration of standards of liability and procedural protections) that distinghishes our analysis from that of the Second Circuit in McMahon, supra. The Fifth Circuit's apparent solution to the problem--i.e., determining whether the particular action sub judice involves arguably criminal or organized crime activity--is in our view unsatisfactory. The makings of a "pattern of racketeering activity" are not yet clear, but the fact remains that a "pattern" for civil purposes is a "pattern" for criminal purposes. 18 U.S.C. §§ 1961(1), 1962, 1964(c). This overlap, in our view, compels the inference that Congress intended only the courts, and not arbitrators, to decide the myraid of issues that will arise in determining the bounds of liability under the civil RICO statute