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Jacobson v. Lynch

argued: April 17, 1986.

ESTELLE JACOBSON AND CYNTHIA CARSON, APPELLANTS IN NOS. 85-3311 AND 85-3343,
v.
MERRILL LYNCH, PIERCE, FENNER & SMITH, INC. AND ROBERT M. KOLACZYNSKI, APPELLANTS IN NO. 85-3282; MARILYN E. BURRIS V. PAINE, WEBBER, JACKSON AND CURTIS, INC., SMITH BARNEY, HARRIS UPHAM & CO., INC., AND DONALD J. PORTER, SMITH BARNEY, HARRIS UPHAM & CO., INC., APPELLANT; ELLIS GANT V. KIDDER, PEABODY & CO., INC. AND FRANK E. GATTA, JR., JOINTLY AND SEVERALLY, KIDDER, PEABODY & CO., INC., APPELLANT; HERBERT BLUMENTHAL V. DEAN WITTER REYNOLDS INC. AND DANIEL J. TUROV, DEAN WITTER REYNOLDS, INC., APPELLANT; MICHAEL ERLBAUM V. PRUDENTIAL-BACHE SECURITIES, INC. AND SAMUEL ALAN LIEBMAN, APPELLANTS



ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA -- PITTSBURGH, D.C. Civ. No. 84-1844. ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY -- NEWARK, D.C. Civ. No. 83-3087. ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY -- NEWARK, D.C. Civ. No. 84-5025. ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY -- NEWARK, D.C. Civ. No. 84-4799. ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA, D.C. Civ. No. 84-5541. Submitted Under Third Circuit Rule 12(6) April 14, 1986,

Author: Gibbons

Before: ADAMS, GIBBONS, and MANSMANN, Circuit Judges

GIBBONS, Circuit Judge:

This opinion deals with five interlocutory appeals presenting similar legal issues. All five appeals present the issue whether subsequent decisions of the United States Supreme Court have overruled this court's holding in Ayres v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 538 F.2d 532 (3d Cir.), cert. denied, 429 U.S. 1010, 97 S. Ct. 542, 50 L. Ed. 2d 619 (1976), that claims against brokerage firms for violation of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1982), are not arbitrable. Two of the five appeals present the additional issue whether claims arising under sections 1962(a) and 1962(c) of the Racketeer Influenced and Corrupt Organization Act (RICO), 18 U.S.C. § 1962(a), (c) (1982), are arbitrable. Both these appeals present the issue whether a RICO claim is arbitrable when the predicate offenses on which it is based are section 10(b) violations. One of the appeals also presents the issue whether RICO claims are arbitrable when the predicate offenses are mail and wire fraud.

All the appeals are properly before us.*fn1 We affirm the orders denying the brokerage firms' motions to compel arbitration of the section 10(b) claims. We reverse the portion of the order in Jacobson v. Merrill Lynch, Pierce, Fenner & Smith, Inc., Nos. 85-3282, 85-3311, and 85-3343, compelling arbitration of the RICO claim that was based on violations of section 10(b). We also reverse the portion of the order in Blumenthal v. Dean Witter Reynolds, Inc., No. 85-5552, denying the motion to compel arbitration of RICO claims that are based on predicate acts of mail and wire fraud but affirm the portion of the order denying arbitration of a RICO claim based on section 10(b) violations.*fn2

I.

All the plaintiffs were customers with trading accounts at brokerage firms, and all executed agreements in which they consented to arbitrate all controversies arising out of transaction affecting their accounts. Typical of these agreements is the standard Customer Agreement used by Merrill Lynch, Pierce, Fenner & Smith, Inc. which provides,

It is agreed that any controversy between us arising out of your business or this agreement shall be submitted to arbitration conducted under the provisions of the Constitution and Rules of the Board of Governors of the New York Stock Exchange, Inc. or pursuant to the Code of Arbitration of the National Association of Securities Dealers, Inc., as the undersigned may elect . . . . Arbitration must be commenced by service upon the other of a written demand for arbitration or a written notice of intention to arbitrate, therein electing the arbitration tribunal. In the event the undersigned [customer] does not make such a designation within five (5) days of such demand or notice, then the undersigned [customer] authorizes you to do so on behalf of the undersigned [customer].

Joint Appendix (Jacobson v. Merrill Lynch) at 292. All the plaintiffs incurred losses in investment accounts covered by similar arbitration agreements, and all the plaintiffs instituted suits claiming that those losses resulted from violations of federal securities laws, state statutory and common laws, and various securities-industry rules. In all five cases the district courts on the authority of Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 105 S. Ct. 1238, 84 L. Ed. 2d 158 (1985), granted motions to compel arbitration of the state-law claims. No appeal challenges those orders. In Blumenthal, No. 85-5552, the district court refused to order arbitration of the RICO claim, while in Jacobson, Nos. 85-3282, 85-3311, and 85-3343, the district court ordered arbitration of the RICO claim. Claims predicated upon securities-industry rules*fn3 have been dismissed and are not before us. Before considering the substantive legal issues presented by these appeals, a preliminary question concerning the coverage of the arbitration agreements must be dealt with. In one of the five cases, Gant, No. 85-5439, the plaintiff argues that the broker amended the arbitration agreement to exclude claims arising under federal securities laws. The plaintiff contends, therefore, that because the arbitration agreement does not cover federal securities claims she is free to bring her suit in federal court. The logic of plaintiff's argument, however, is flawed.

Effective December 28, 1983 the Securities and Exchange Commission (SEC) promulgated a regulation making it a "fraudulent, manipulative or deceptive act" for a broker "to enter into an agreement with any public customer which purports to bind the customer to the arbitration of future disputes between them arising under the Federal securities laws . . . ." 17 C.F.R. § 240.15c2-2(a) (1985). This regulation goes on to mandate that for agreements entered into prior to December 28, 1983, the broker is required to send a notice "no later than December 31, 1984" informing customers that the arbitration agreements they executed do not cover federal securities laws. Id. at § 240.15c2-2(c).

All the arbitration agreements involved in these five appeals were executed prior to December 28, 1983. Consequently, in at least one situation, the broker, Kidder, Peabody & Co. sent a notice informing the plaintiff that the arbitration agreement did not cover federal securities laws claims. In the case in which the plaintiff raises this issue, the notice was not received until after the complained of federal securities laws violations occurred. At best, therefore, the notice acted as an amendment at the time plaintiff's account was next traded following receipt of the notice. Hence, even if the notice constituted an amendment, it does not affect any of the claims before us.

II.

In Wilko v. Swan, 346 U.S. 427, 98 L. Ed. 168, 74 S. Ct. 182 (1953), the Supreme Court, relying on the anti-waiver provision in section 14 of the Securities Act of 1933, 15 U.S.C. § 77n, held that a claim for damages for violation of section 12(2) of that Act, 15 U.S.C. § 771(2) was not subject to contract arbitration. This court, in Ayres v. Merrill Lynch, Pierce, Fenner & Smith, 538 F.2d 532 (3d Cir. 1976), applied the Wilko rule to claims for damages for violation of section 10(b) of the Securities and Exchange Act of 1934. Relying on the similar anti-waiver provision in section 29(a) of the 1934 Act, 15 U.S.C. § 78cc(a), and on Congress' acceptance of the view that the Wilko rule applied to claims under the 1934 Act, this court expressly rejected the contention that Scherk v. Alberto Culver Co., 417 U.S. 506, 41 L. Ed. 2d 270, 94 S. Ct. 2449 (1974) should be read as confining Wilko to claims under the 1933 Act. Ayers, 538 F.2d at 536-37.

The Ayers opinion, which is consistent with this court's earlier discussion of the same issue in Moran v. Paine, Webber, Jackson & Curtis, 389 F.2d 242, 245-46 (3d Cir. 1968) (dicta),*fn4 binds this panel unless we can conclude that it has been overruled by subsequent Supreme Court cases. See Internal Operating Procedures of the United States Court of Appeals for the Third Circuit, chapter 8, section C. The brokerage firms rely on two Supreme Court cases that they contend accomplished that result. The first is Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 105 S. Ct. 1238, 84 L. Ed. 2d 158 (1985), which held that state law claims pleaded in a federal forum as pendent to claims under section 10(b) are arbitrable. The reasoning of that opinion, according to the brokerage firms, casts doubt upon Ayers. We disagree. In Byrd the Court took note of the line of cases in the lower federal courts applying the Wilko rule to section 10(b) claims and expressly declined to resolve the applicability of Wilko to section 10(b) claims. 105 S. Ct. at 1240 n.1. In the face of this express disclaimer the opinion cannot fairly be read as casting any doubt upon the continued authority of Ayers as precedent in this circuit.

The second case on which the brokerage firms rely is Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 105 S. Ct. 3346, 87 L. Ed. 2d 444 (1985). Mitsubishi held that an antitrust claim by an automobile dealer against a foreign automobile manufacturer was arbitrable. 105 S. Ct. at 3360-61. The Court in Mitsubishi rejected, as a rule of construction for arbitration agreements, the proposition that such clauses are inapplicable to federal statutory claims unless such claims are mentioned expressly. Id. at 3354-55. The issue presented in Mitsubishi was entirely different from that presented in Ayers and in Wilko. Ayers and Wilko did not involve interpretations of arbitration agreements; rather they involved interpretations of federal statutes that prohibit the application of forum-selection clauses. As Justice Blackmun carefully noted, "it is the congressional intention expressed in some other statute on which the courts must rely to identify any category of claims as to which agreements to arbitrate will be held unenforceable." Mitsubishi Motors, 105 S. Ct. at 3355. The Ayers court identified section 29(a) of the 1934 Act as such a statute, and Mitsubishi does not undercut that statutory interpretation.

Because no subsequent Supreme Court decision may fairly be construed to have overruled Ayers, that opinion binds this panel. An extended discussion of the reasons advanced by the brokerage firms concerning why Wilko should not apply to section 10(b) claims is therefore inappropriate. The district courts properly followed the Ayers precedent, and the orders denying motions to compel arbitration of section 10(b) claims will be affirmed in each appeal.

III.

The question whether RICO claims should be subject to arbitration is one of first impression in this court. The question is complicated by the unique structure of the RICO statute, which is aimed at "racketeering" activity, defined in terms of other federal and state statutes. Mitsubishi teaches that exceptions to the general enforceability of arbitration agreements pursuant to the Federal Arbitration Act must be found, if at all, in regulatory statutes. In the case of RICO claims this involves consideration both of the RICO statute and the predicate statutes that it cross-references.

Unlike the 1933 and 1934 securities acts, RICO contains no anti-waiver provision. Moreover, the civil remedy for RICO violations has "evolv[ed] into something quite different from the original conception of its enactors." Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 105 S. Ct. 3275, 3287, 87 L. Ed. 2d 346 (1985). Because the reach of the civil remedy has been achieved largely by the courts, it is not surprising that there is no legislative history suggesting that Congress ever considered whether RICO civil claims should be arbitrated. Despite the absence of a statutory provision that could be construed as a general prohibition against such arbitration, the Court of Appeals for the Second Circuit recently held that RICO claims, for reasons of public policy, are not arbitrable. See McMahon v. Shearson/American Express, Inc., 788 F.2d 94, 98-99 (2d Cir. 1986). Presumably the public policy reasons that the McMahon court had in mind included the complexity of most RICO claims, the provision in the statute for recovery of treble damages, and the need for developing the governing law on a case-by-case basis. We believe, however, that the McMahon court paid too little deference to the Supreme Court's decision in Mitsubishi. The Mitsubishi court concluded that "complexity should not suffice to ward off arbitration." 105 S. Ct. at 3357. The antitrust laws are every bit as complex and in need of judicial interpretation as is the RICO statute. The Clayton Act also provides for treble damages. 15 U.S.C. § 15 (1982), yet the Mitsubishi Court held that the availability of this remedy did not require that private antitrust claims be deemed nonarbitrable. 105 S. Ct. at 3359. It would appear therefore that determining statutory claims to be nonarbitrable on the basis of some judicially recognized public policy rather than as a matter of statutory interpretation is no longer permissible.

The absence of any RICO statutory provision that would bar arbitration does not, however, resolve both of the appeals presenting RICO claims. Because of the unique structure of the RICO statute, which cross-references other predicate statutes, we must, in making the statutory ...


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