Smith Barney Shearson, Inc. v. Boone

United States Court of Appeals,
Fifth Circuit.
Nos. 93-9174, 94-10031.
SMITH BARNEY SHEARSON, INC., Plaintiff-Appellant,
v.
Warren BOONE, Individually and as Trustee for Watercol Profit
Sharing Plan, dated 1/7/80, Defendant-Appellee.
SMITH BARNEY SHEARSON, INC., Plaintiff-Appellant,
v.
Scott G. SHERMAN, Defendant-Appellee.
March 20, 1995.
Appeal from the United States District Court for the Northern
District of Texas.
Before WISDOM, KING and DUHÉ, Circuit Judges.
WISDOM, Circuit Judge.
In this case, the plaintiff/appellant, Smith Barney Shearson,
Inc., a brokerage firm, sought to prevent two former customers, the
defendant/appellees, from arbitrating independent grievances before
the American Stock Exchange and the National Association of
Security Dealers, respectively. Smith Barney Shearson, Inc. filed
this action seeking a declaratory judgment stating that the
appellees' grievances are not subject to arbitration under the
existing customer agreements because they were filed late according
to the applicable arbitration rules of both associations. The
district court denied Smith Barney Shearson, Inc. the relief it
sought because it determined that the issue of timeliness was a
question for the arbitrator, 838 F. Supp. 1156. Because we agree
1
with the reasoning of the district court, we AFFIRM.
I.
A. Smith Barney Shearson, Inc. v. Boone
In August 1993, Boone, one of two defendant/appellees in this
action, filed a claim against Smith Barney Shearson (SBS), the
plaintiff/appellant, with the American Stock Exchange (AMEX)
seeking arbitration of several grievances pursuant to the Customer
Agreement entered between SBS and Boone.1 In his Statement of
Claims, Boone alleges causes of action for breach of contract,
negligence, breach of fiduciary duty, common law fraud, as well as
causes of action under the Texas Deceptive Trade Practices and
Consumer Protection Act and RICO. All of the claims relate to a
series of investments made by Boone between 1984 and 1986 on the
advice of his broker at SBS.
In response to Boone's request for arbitration, SBS filed this
action seeking a preliminary injunction and a declaratory judgment
to prevent Boone from pursuing his grievances before AMEX. SBS
alleged that Boone's claims are barred because they were filed more
than six years after the last investment in violation of AMEX rule
605. Rule 605 provides:
No dispute, claim or controversy shall be eligible for
1
The Customer Agreement provided that:
any controversy arising out of or relating to my
accounts, to transactions with you for me or to this
agreement or the breach thereof, shall be settled by
arbitration in accordance with the rules then in
effect, of the National Association of Security
Dealers, Inc. and/or the American Stock Exchange, Inc.
as I may elect.
2
submission to arbitration in any instance where six (6) years
shall have elapsed from the occurrence or event giving rise to
the act or the dispute, claim or controversy.
SBS alleged in the district court, and continues to allege here,
that Rule 605 is a prerequisite to the arbitrator's jurisdiction.
According to SBS, since more than six years passed before Boone
filed his grievance, AMEX lacks jurisdiction to resolve the
controversy and SBS cannot be compelled to arbitrate.
The district court refused SBS any relief, holding that under
established Fifth Circuit Court precedent, the timeliness question
should be decided by the arbitrator and not by a federal court.
Once the district court determined that the parties had obligated
themselves to resolve disputes by arbitration " "procedural'
questions which grow out of the dispute and bear on its final
disposition should be left to the arbitrator."2 SBS currently
appeals the district court's decision.
B. Smith Barney Shearson v. Sherman
In November of 1993, Sherman, the second of two
defendant/appellees in this action, filed a complaint with the
National Association of Securities Dealers (NASD) seeking
arbitration of several claims against SBS. Like Boone, Sherman was
a former customer of SBS who had entered into the same Customer
Agreement which provided that all disputes would be resolved
through arbitration. Sherman asserted several causes of action
including breach of fiduciary duty, negligent misrepresentation,
2
Amended Memorandum Opinion and Order Denying Smith Barney
Shearson's Complaint for Declaratory Judgment and Motion for
Preliminary Injunction at 5 (citations omitted).
3
statutory fraud under the Texas Commercial Code, violation of NASD
Rules of Fair Practice, and a cause of action under the Texas
Deceptive Practices Act. The asserted causes of action center
around several purchases of limited partnerships in late 1986. SBS
filed a complaint similar to the complaint filed in Boone, seeking
a preliminary injunction and a declaratory judgment to prevent
Sherman from pursuing arbitration because his complaint was filed
more then six years after his last purchase. The relevant NASD
section, section 15, provides:
No dispute, claim or controversy shall be eligible for
arbitration where six (6) years have elapsed from the
occurrence or event giving rise to the act or dispute, claim
or controversy.
The district court, in reliance on its recent opinion in
Boone, refused SBS any relief and dismissed its complaint. SBS, as
in Boone, appeals that decision. These two cases have been
consolidated for appeal.
II.
The key issue in this appeal is whether a federal court or an
arbitrator should rule on the eligibility of the defendants'
arbitration claims under AMEX Rule 605 and NASD code section 15.
In AT & T Technologies v. Communication Workers3 the Supreme Court
reaffirmed the basic principle outlined in its earlier decisions
that "arbitration is a matter of contract and a party cannot be
required to submit to arbitration any dispute which he has not
3
475 U.S. 643 (1985).
4
agreed so to submit."4 Since a party may only be compelled to
arbitrate an issue he has previously agreed to arbitrate, a forum
in which to identify these issues is needed. The Supreme Court
decided that the appropriate forum is a court and not the
arbitrator. Thus, the "question of arbitrability" is a judicial
one.5 The arbitrator is not allowed to determine his or her own
jurisdiction. However, the reviewing power of a court is limited.
The court may only determine whether the parties intended the
particular issue to be resolved by arbitration, the court cannot
"rule on the potential merits of the underlying claim."6 Thus, in
this case, our role is to determine whether, on its face, the
agreement to arbitrate includes the asserted causes of action. If
there are any doubts, they are to be resolved in favor of
arbitration.7
SBS, however, asks more of us. It alleges that rule 605 and
section 15 are substantive "eligibility requirements" which must be
considered by the courts before SBS is required to submit to
arbitration. In reliance on its interpretation of AT & T
Technologies and caselaw from other circuit courts, SBS argues that
part of this Court's role in the initial review of arbitrability is
to determine whether Rule 605 and section 15 would bar the causes
4
Id. at 648, 106 S.Ct. at 1418 (quoting Steelworkers v.
Warrior & Gulf Navigation Co., 363 U.S. 574, 80 S. Ct. 1347, 4
L. Ed. 2d 1409 (1960)).
5
Id. at 649, 106 S.Ct. at 1418.
6
Id. at 649, 106 S.Ct. at 1419.
7
Id. at 650, 106 S.Ct. at 1419.
5
of action asserted by the defendants. If they do, SBS argues that
it is this Court's responsibility to enjoin defendants from
pursuing their arbitration claims because they are "ineligible for
arbitration." The crucial distinction, as identified by the
district court, is whether the time bars are considered issues of
"substantive arbitrability" relating to whether the parties agreed
to arbitrate these issues, or, whether the rules present issues of
"procedural arbitrability" relating to the procedures of
arbitration agreed upon.
As noted by the district court, SBS relies on several opinions
of the Third, Sixth, and Seventh Circuit Courts which analyze the
AMEX and NASD rules, as SBS does, as eligibility requirements or
prerequisites to arbitrability.8 This Court, however, must focus
its attention on the treatment it has given these types of
provisions.
In Local No. 406 v. The Austin Co., this Court reversed a
decision by the district court granting a motion for summary
judgment based on the untimeliness of grievances filed by the union
seeking arbitration.9 The district court found that the union's
grievances had not been filed within thirty days, as required by
the collective bargaining agreement.10 Rather than reviewing the
8
The best example is Edward D. Jones v. Sorrells, 957 F.2d
509 (7th Cir.1992); see also, Paine Webber v. Hartmann, 921 F.2d
507 (3rd Cir.1990); Paine Webber v. Hofman, 984 F.2d 1372 (3rd
Cir.1993); Roney v. Kassab, 981 F.2d 894 (6th Cir.1992).
9
784 F.2d 1262 (5th Cir.1986).
10
Id. at 1264.
6
district court's decision, however, we questioned whether the
district court should have decided that issue or should have left
it to the arbitrator.
This Court, in reliance on the Supreme Court's decision in
John Wiley & Sons v. Livingston,11 reversed the district court's
decision and held that it was the arbitrator's role to determine
whether the proper arbitration procedures had been followed.12 We
held that "a question of timeliness is generally to be considered
one of procedural arbitrability".13 As a procedural issue, Supreme
Court precedent requires that it be decided by the arbitrator. The
district court's only role should have been to determine whether
the subject matter of the dispute was subject to arbitration under
the parties' agreement.14
Our decision in Local 4-447 v. Chevron Chemical Company is
also relevant.15 In Local 4-447, Chevron, in opposition to a motion
seeking to compel Chevron to arbitrate, contended that one of the
11
376 U.S. 543, 84 S. Ct. 909, 11 L. Ed. 2d 898 (1964). This
case is a forerunner of the Supreme Court's more recent decision
in AT & T Technologies.
12
Id. at 1264-65.
13
Id. at 1264.
14
Id. at 1265.
15
815 F.2d 338 (5th Cir.1987); see also Alabama Power
Company v. Local Union No. 391, 612 F.2d 960 (5th Cir.1980);
Commerce Park v. Mardian Construction Co., 729 F.2d 334 (5th
Cir.1984). For an application of this Court's rule that
timeliness is a question of procedural arbitrability, see United
Food and Commercial Worker's Union v. Delta Catfish Processors,
Inc., 767 F. Supp. 798, 800 (N.D.Miss.1991); Sabine Independent
Seagoing Officers Assoc. v. Sabine Towing Transportation Co., 805
F. Supp. 430, 433 (E.D.Tex.1992).
7
Union's grievances under the collective bargaining agreement had
not been submitted to arbitration in a timely fashion.16 The
relevant provision in the agreement provided that "[o]nly
grievances ... which are processed ... within the time limits
herein provided shall be subject to arbitration...."17 Chevron
argued that because of this express exclusion, the grievance which
was allegedly filed late was not subject to arbitration under the
agreement. In other words, the parties had agreed only to
arbitrate grievances filed in a timely fashion and, therefore, it
was within the court's reviewing power under AT & T Technologies to
determine that this grievance was not subject to arbitration.
We disagreed and held that the issue of timeliness was within
the arbitrator's jurisdiction.18 The only exception to this general
rule was "that a court "could deny arbitration only if it could
confidently be said not only that a claim was strictly procedural,
... but also that it should operate to bar arbitration altogether
...' "19 Chevron attempted to place itself in this rare category of
cases but failed. We held that since there was some dispute as to
the timing of the filing of the grievance at issue, the substantive
claims were arbitrable and the procedural issue of timeliness
16
Id. at 339.
17
Id. at 339.
18
Id. at 340.
19
Id. at 341 (quoting John Wiley & Sons, Inc. v. Livingston,
376 U.S. 543, 84 S. Ct. 909, 11 L. Ed. 2d 898 (1964)).
8
should be decided by the arbitrator.20
Applying these concepts to the case before us, the question is
whether the parties originally intended their claims to be subject
to arbitration. If we answer positively, unless we find that the
time bars cited by SBS will absolutely bar arbitration, we must
deny SBS the declaratory judgment it seeks. From the broad
language of the Customer Agreements it is clear that both SBS and
the defendants intended to have "any controversy" arising between
them resolved through arbitration. And while SBS's view that the
time bars are prerequisites to the arbitrator's jurisdiction has
some support, similar provisions have not been so interpreted by
this Court. Rather, this Court has characterized them as part of
the procedural requirements to arbitration and, as such, they are
decision of the arbitrator. We hold, therefore, that the
timeliness issues raised in this case are issues of procedural
arbitrability and must be decided by the arbitrator.
This case does not fall into the narrow exception articulated
in Chevron because there is some dispute as to the effect of the
time bars. First, there is a some controversy as to when the last
act or occurrence giving rise to the claims of Boone and Sherman
took place. SBS contends that the last act was the last purchase
by each customer, both of which took place over six years before
filing. The defendants, however, allege that SBS continued to act
fraudulently after the last purchases were made and within six
years of the filing of the arbitration complaint. Furthermore, as
20
Id. at 342.
9
to Sherman's alleged causes of action, the defendants contend that
SBS cannot now oppose arbitration under the doctrine of judicial
estoppel since SBS succeeded in staying an action by Sherman in
Texas state court based on the compelled arbitration in the
Customer Agreement.21 Finally, both Boone and Sherman argue that
the time bars should be tolled since SBS engaged in fraudulent
conduct which prevented the defendants from learning several
important facts until after the six year post-purchase date. Thus,
there is substantial controversy over whether the time bars will
act to bar the causes of action asserted by the defendants. This
Court cannot, under the narrow exception articulated in Chevron,
prevent arbitration.
III.
The district court appropriately decided that the grievances
raised by the defendants are subject to arbitration under the
Customer Agreements. Furthermore, the district court appropriately
declined to decide the procedural issue of timeliness which, under
Supreme Court and Fifth Circuit Court precedent, is a question for
the arbitrator. Accordingly, the decisions of the district court
in this consolidated appeal are AFFIRMED.
21
Sherman also contends that the abatement by the Texas
state court was actually an order to arbitrate the claims which
would allow Sherman to by-pass NASD code section 15. The
district court, however, correctly characterized the abatement as
a stay pending arbitration rather than a specific order to
arbitrate.
10