Selected Topics in Securities Arbitration: Rule 15c2-2, Fraud, Duress, Unconscionability, Waiver, Class Arbitration, Punitive Damages, Rights of Review, and Attorneys' Fees and Costs

Article by Stephen H. Kupperman and George C. Freeman III

The Federal Arbitration Act provides in pertinent part:

A written provision in . . . a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract . . . shall be valid, irrevocable, and enforceable . . . .

The language of the Arbitration Act makes clear that “[a]rbitration is a matter of contract between the parties. . . .” The Act was intended to place arbitration agreements “‘upon the same footing as other contracts,”’ and therefore “requires courts to enforce privately negotiated agreements to arbitrate, like other contracts, in accordance with their terms.”

The Arbitration Act reflects a strong “federal policy favoring arbitration agreements,” and “requires courts liberally to construe the scope of arbitration agreements covered by that Act.” “As with any other contract, the parties' intentions control, but those intentions are generously construed as to issues of arbitrability.” Indeed, “ a n order to arbitrate the particular grievance should not be denied unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute.” The Arbitration Act “leaves no place for the exercise of discretion by a district court, but instead mandates that district courts shall direct the parties to proceed to arbitration on issues as to which an arbitration agreement has been signed.” “As a matter of federal law, any doubts concerning the scope of arbitrable issues 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.”

In determining whether arbitration is required, a court is to conduct a two-step inquiry. The court first must determine whether the agreement to arbitrate encompasses the issues in dispute. If the court determines that it does, the court then must consider whether legal constraints external to the agreement prohibit arbitration of the claims asserted. In this second step, an arbitration agreement should be held unenforceable only if congressional intent, expressed in a statute or legislative history, definitively precludes enforcement of the agreement.

In the context of the federal securities laws, the United States Supreme Court initially addressed this second step of the arbitration inquiry in Wilko v. Swan. In Wilko, the Court determined that predispute agreements to arbitrate claims under section 12(2) of the Securities Act of 1933 were not enforceable because the statutory text did not support enforcement and because arbitration did not provide an adequate forum for protecting substantive rights created by the statute. Lower courts adopted this skepticism regarding the adequacy of arbitration, and applied the Wilko holding of nonarbitrability to claims asserted under the Securities Exchange Act of 1934 as well.

In the mid-1970s, the Supreme Court implicitly expressed reservations about Wilko. By the 1980s, the Court began to chip away at its prior antiarbitration position, emphasizing congressional policy favoring arbitration and expressing confidence in the arbitration process. In a concurring opinion in Dean Witter Reynolds, Inc. v. Byrd, Justice White distinguished express private rights of action granted under the Securities Act (the issue in Wilko) from implied rights of action arising under the Exchange Act. He directly attacked the application of Wilko by lower courts to claims asserted under the Exchange Act. This concurrence sparked a series of assaults in the lower courts on the concept of nonarbitrability of claims arising under the Exchange Act.

In Shearson/American Express, Inc. v. McMahon, the Supreme Court expressly determined that predispute agreements to arbitrate Exchange Act claims are enforceable. McMahon stressed the federal policy favoring arbitration and rejected mistrust of the arbitral process. Unlike the Byrd concurrence, McMahon did not purport to distinguish claims arising under the Securities Act from those arising under the Exchange Act. Not long thereafter, the Court specifically overruled Wilko, holding in Rodriguez de Quijas v. Shearson/American Express, Inc., that predispute agreements to arbitrate claims under the Securities Act are enforceable.

Whether as a result of the recent Supreme Court rulings or as a reflection of a change in societal perspectives, there has been a virtual explosion of arbitration filings regarding securities matters. The National Association of Securities Dealers (NASD), for instance, reported that its arbitration filings increased an average of thirty-one percent per annum from 1980 through 1986, with 1987 filings up eighty-two percent over those in 1986. The increase in 1988 filings was thirty-two percent in excess of those in 1987, resulting in a staggering 151 percent increase from 1986 through 1988 alone. As overwhelming as these statistics may be, the NASD is but one of the various self-regulatory organizations offering arbitration fora. The New York Stock Exchange, Inc. (NYSE), another self-regulatory organization, reported an equally impressive sixty-seven percent increase in 1988 filings compared with filings in 1987. This rapid growth in securities arbitrations has focused attention on the rights of those participating in the arbitration process.

The issues arising in securities arbitration settings are myriad and diverse, and cannot all be addressed in the confines of a single law review article. Consequently, this Article addresses only a few narrow topics of current debate in the context of securities arbitrations.


About the Author

Stephen H. Kupperman. Partner, Stone, Pigman, Walther, Wittmann & Hutchinson; Professor of Law, Adjunct Faculty, Tulane University School of Law; Member, Securities Industry Association; Arbitrator, National Association of Securities Dealers.

George C. Freeman III. Partner, Stone, Pigman, Walther, Wittmann & Hutchinson; Professor of Law, Adjunct Faculty, Tulane University School of Law; Arbitrator, National Association of Securities Dealers.

Citation

65 Tul. L. Rev. 1547 (1991)