Opinion ID: 2054609
Heading Depth: 1
Heading Rank: 8

Heading: Intent as to Time Bar

Text: The pivotal issue therefore becomes whether the arbitration code clearly and unmistakably assigns to arbitrators the power to determine what occurrence or event gave rise to the claim. Five federal circuit courts of appeal have ruled that a court must decide the applicability of the § 15 time bar: Smith Barney, Inc. v. Sarver, 108 F.3d 92 (6th Cir.1997); Cogswell v. Merrill Lynch, Pierce, Fenner & Smith, 78 F.3d 474 (10th Cir.1996); Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Cohen, 62 F.3d 381 (11th Cir.1995); Painewebber Inc. v. Hofmann, 984 F.2d 1372 (3d Cir.1993); Edward D. Jones & Co. v. Sorrells, 957 F.2d 509 (7th Cir.1992). Based upon PaineWebber Inc. v. Allen, 888 F.Supp. 53 (E.D.Va.1993), aff'd mem. 45 F.3d 427 (4th Cir.1995), Smith Barney would also place the Fourth Circuit in this camp. Therein, a district court within that circuit held that the 6-year time bar was a substantive eligibility question for the courts to decide and that it ran from the date of purchase of the investment. However, another district court within the circuit held in Humphrey v. Prudential Ins. Co. of America, No. Civ. A. 2:92CV178, 1993 WL 275213 (E.D.Va. Jan. 8, 1993), appeal dismissed, Humphrey v. Prudential Securities Inc., 4 F.3d 313 (4th Cir.), that timeliness under the 6-year time bar was a procedural question falling under the purview of the contract and must be decided by the arbitrators. As the Fourth Circuit has not yet issued a fully reasoned opinion on the question, the issue is unresolved in that circuit. Five other federal circuit courts have held that the arbitrator should decide the time-bar question: PaineWebber Inc. v. Elahi, 87 F.3d 589 (1st Cir.1996); PaineWebber Inc. v. Bybyk, 81 F.3d 1193 (2d Cir.1996); Smith Barney Shearson, Inc. v. Boone, 47 F.3d 750 (5th Cir.1995); FSC Securities Corp. v. Freel, 14 F.3d 1310 (8th Cir.1994); O'Neel v. National Ass'n of Securities Dealers, 667 F.2d 804 (9th Cir.1982). In the first of this latter series of cases, the Ninth Circuit in O'Neel, supra, found a clear expression of intent in § 35 that the issue of timeliness be submitted to arbitration. In the next case in point of time, the Eighth Circuit in Freel, supra, also focused on the language of § 35 empowering the arbitrators `to interpret and determine the applicability of all provisions of this Code....' Freel at 1312. The Freel court viewed this as a `clear and unmistakable expression' of an intent to commit the interpretation of all provisions under the arbitration code, including § 15 time-bar issues, to arbitration. Id. The Freel court also observed that if the parties wanted to limit the scope of arbitration more than is provided in § 35, they could have easily contracted around its broad scope. The Freel holding has been followed by a number of state courts, including Mid-State Securities v. Edwards, 309 N.J.Super. 73, 706 A.2d 773 (1998); Smith Barney, Inc. v. Keeney, 570 N.W.2d 75 (Iowa 1997); Matter of Noel R. Shahan Trust, 188 Ariz. 74, 932 P.2d 1345 (Ariz.App.1996); Nettleton v. Edward D. Jones & Co., 904 S.W.2d 409 (Mo.App.1995); and Gaines v. Financial Planning Consultants, 857 S.W.2d 430 (Mo.App.1993). Matter of Noel R. Shahan Trust concluded: Because we find nothing in the Code that removes § 15 from the scope of § 35, we agree with the following statement in FSC Securities Corp. v. Freel, 14 F.3d 1310, 1313 (8th Cir.1994): In no uncertain terms, section 35 commits interpretation of all provisions of the NASD Code to the arbitrators.... [W]e see no reason not to apply section 35 to the arbitrators' decision regarding the application of section 15. Id. at 77, 932 P.2d at 1348. In Boone, supra, the Fifth Circuit characterized time bars as part of the procedural requirements to arbitration and, as such, to be decided by arbitration. In accordance with the teachings of AT & T Technologies v. Communications Workers, 475 U.S. 643, 106 S.Ct. 1415, 89 L.Ed.2d 648 (1986), and First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995), the First Circuit in Elahi, supra, employed a two-step process to determine whether parties intended time bars to be settled by an arbitrator or the courts. It asked first whether the parties entered into a valid arbitration agreement and whether the arbitration agreement covered the subject matter of the underlying dispute. The Elahi court concluded that where the parties have clearly agreed to arbitrate the subject of the underlying dispute between them, as the parties [had done], it is unlikely that they intended other issues related to the dispute, such as the timeliness of the submission of the claim, to affect the arbitrability of the dispute. Elahi at 600. The contract in PaineWebber Inc. v. Bybyk, 81 F.3d 1193 (2d Cir.1996), did not incorporate the arbitration code. However, the Second Circuit held that the contract clause assigning to arbitration ` [a]ny and all controversies ... concerning any account' was clear evidence of the parties' intent to have the arbitrator determine arbitrability. (Emphasis in original.) Id. at 1199. It determined that the broad any and all controversies language was inclusive, categorical, unconditional and unlimited and that [t]he words `any and all' are elastic enough to encompass disputes over whether a claim is timely and whether a claim is within the scope of arbitration. Id. It also noted that had the contract incorporated the arbitration code, § 35 would have committed all issues, including arbitrability and timeliness, to arbitration. It pointed out in addition that as PaineWebber had drafted the agreement, any ambiguities should be construed against it. The Second Circuit observed as well that its decision did not harm the party seeking the protection of the § 15 time bar. That party's appropriate remedy would be to defend the arbitration action on timeliness grounds under § 15, not attempt to get arbitration enjoined. We find the cases holding time-bar issues to be arbitrable the more persuasive. For example, in the earliest decision holding otherwise, Edward D. Jones & Co. v. Sorrells, 957 F.2d 509 (7th Cir.1992), the court based its conclusion that courts must decide the time-bar issue upon three bases: First, it read the words `eligible for submission to arbitration' (emphasis omitted) in § 15 as meaning cognizable or within the jurisdiction of the arbitrator and concluded that claims over 6 years old were not substantively eligible for submission to the arbitrator. 957 F.2d at 513. Second, it read a 1988 letter from an association staff attorney, stating that the association `will not process a claim that falls wholly outside the six year period,' as evidence that the association itself considered § 15 to be a jurisdictional bar. 957 F.2d at 512. Lastly, it concluded that § 35 of the arbitration code was not a clear and unmistakable expression of the parties' intent to give arbitrators the power to decide time-bar issues. The problem with the Sorrells court's interpretation of the eligible for submission language is that the interpretation results in the court's predetermining the outcome of the controversy in order to decide what the forum should be. The Sorrells decision concluded that the occurrence in question was the security purchase rather than any later fraud or deception. By defining the occurrence, the court thereby arrived at the conclusion that the arbitrator had no jurisdiction when the crucial legal question which was to be decided by the court or arbitrator was: What constituted the occurrence, the purchase or subsequent actions? The Sorrells court assumed, without analysis, that the occurrence or event was the stock purchase. However, even if that were correct, if all controversies under the contract are directed to arbitration, then the occurrence controversy should have gone to arbitration for determination. Leaving aside the question of how much weight should be given the letter from an association staff attorney (the letter had been entered into evidence in an earlier Seventh Circuit case, PaineWebber Inc. v. Farnam, 870 F.2d 1286 (7th Cir.1989)), the statement that the association will not process a claim that falls wholly outside the six year period is not helpful. After all, the fund's argument is that its claim falls within the 6-year period because the acts of fraud and violations of fiduciary duty that were allegedly committed occurred after the purchases and within the 6-year period prior to the bringing of the claim. Barring claims that fall wholly outside the 6-year period would not bar the fund's claims if an arbitrator were to agree with the fund's definition of when the critical events occurred. The Seventh Circuit reiterated its Sorrells decision this year in Miller v. Flume, 139 F.3d 1130 (7th Cir.1998), reasoning that both interpretations and determinations about applicability of the arbitration code are steps that take place after the threshold determination of arbitrability has occurred. It repeated its Sorrells conclusion that § 35 is not the kind of clear and unmistakable language needed to show parties intended arbitrators to determine arbitrability. Similarly, the courts in Smith Barney, Inc. v. Sarver, 108 F.3d 92 (6th Cir.1997), and Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Cohen, 62 F.3d 381 (11th Cir.1995), concluded that § 35 of the code did not establish a clear and unmistakable intent that the timeliness of an arbitration clause should be determined by the arbitrators rather than by the courts. In PaineWebber Inc. v. Hartmann, 921 F.2d 507, 513 (3d Cir.1990), the Third Circuit relied, in part, upon an analysis of the eligible for submission sentence contained in rule 603 of the New York Stock Exchange Department of Arbitration, which is almost identical to § 15 of the arbitration code: Eligible is defined as fitted or qualified to be chosen or used or worthy to be chosen or selected. Webster's Third New International Dictionary 736 (1966). Submission is defined as the act of commit[ting something] for consideration, study, or decision. Id. at 2277. Interpolating these definitions into the text of Rule 603, the relevant portion of the rule would state that, after six years, a dispute shall [not] be worthy to be chosen or selected for [the] consideration, study, or decision [of] arbitration. Therefore, the Third Circuit concluded that this expanded reading of Rule 603 unambiguously supports [the] conclusion that the parties intended to bar from arbitration disputes raised more than six years after the events giving rise to them. Hartmann, 921 F.2d at 513. The Third Circuit went further in Paine-webber Inc. v. Hofmann, 984 F.2d 1372, 1379 (3d Cir.1993), noting that § 15 can reasonably be read in only one wayas a substantive limit on the claims that the parties have contracted to submit to arbitration. However, Hofmann did not stop with the assumption made by some courts that the occurrences in question were the purchases. It acknowledged that there are a number of events which may trigger the commencement of the 6-year time-bar period and laid out a method for determining timeliness: [T]here will inevitably be claims that can fairly be characterized as either independent causes of action or as tolling/discovery arguments. In view of the general presumption of arbitrability, see id., the court should, as a benchmark, generally accept a party's statement as to what constitutes a cause of action and permit the arbitration of that claim as long as the asserted cause of action is not clearly a mere tolling or discovery argument. However, when the stated cause of action is patently nothing more than an attempt to toll the six year period, the court must enjoin the arbitration of that claim. (Emphasis in original.) Id. at 1381. While the Hofmann court noted that some of the claims in that case obviously had occurred prior to the time bar, it remanded other claims to the district court for a determination of whether they were arbitrable, i.e., whether the events occurred after the time bar and warned the trial court `not to rule on the potential merits of the underlying claims. Whether arguable or not, indeed even if it appears to the court to be frivolous,'  the merits of the claims were to be left to the arbitrator. Id. at 1381, quoting AT & T Technologies, 475 U.S. 643, 106 S.Ct. 1415, 89 L.Ed.2d 648 (1986). Other courts which have, like Hofmann, remanded to have the trial court determine when the claims arose include Cogswell v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 78 F.3d 474 (10th Cir.1996), and Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Cohen, supra . In Cogswell, supra, the 10th Circuit criticized the Eighth Circuit's decision in FSC Securities Corp. v. Freel, 14 F.3d 1310 (8th Cir.1994), focusing on the fact that § 35 says nothing specific about whether the arbitrator or the court should decide whether a claim is arbitrable under § 15. That analysis is not particularly persuasive. Section 35 provided that the arbitrator `shall be empowered to interpret and determine the applicability of all provisions under this Code.' Cogswell at 480. The plain reading of that language is that the arbitrator is empowered to interpret all of the provisions of the code, including the § 15 provision concerning what claims are eligible for arbitration. The Cogswell court also reasoned that under statutory interpretation principles, specific provisions take precedence over general provisions, and that § 15 is a specific provision. However, the Tenth Circuit does not explain how §§ 15 and 35 conflict. Section 15 lays out the time bar for claims, but does not indicate whether a court or an arbitrator should interpret and apply this time bar. Section 35 does not specifically mention § 15, but declares that all provisions of the code will be determined by an arbitrator. There is no conflict; the two sections address different issues.