First Options of Chicago, Inc. v. Kaplan

PETITIONER: First Options of Chicago, Inc.
LOCATION: Spendthrift Farm

DOCKET NO.: 94-560
DECIDED BY: Rehnquist Court (1986-2005)
LOWER COURT: United States Court of Appeals for the Third Circuit

CITATION: 514 US 938 (1995)
ARGUED: Mar 22, 1995
DECIDED: May 22, 1995

James D. Holzhauer - Argued the cause for the petitioner
John D. Roberts, Jr. - for respondents

Facts of the case

After the October 1987 stock market crash, First Options of Chicago, Inc., a firm that clears stock trades on the Philadelphia Stock Exchange, demanded that Manuel Kaplan, his wife, and his wholly owned investment company, MK Investments, Inc. (MKI) immediately pay the entire MKI debt. When First Options' demands for payment went unsatisfied, it sought arbitration by a panel of the Philadelphia Stock Exchange based on workout agreements, which governed the working out of debts owned by Kaplan, his wife, and MKI. MKI, which had signed the only workout document containing an arbitration agreement, submitted to arbitration, but the Kaplans, who had not signed that document, filed objections with the panel. The Kaplans argued that their disagreement with First Options not was arbitrable. After deciding that they had the power to rule on the dispute's merits, the arbitrators ruled in First Options' favor. Ultimately, the Court of Appeals reversed the award, finding that the dispute was not arbitrable. The appellate court concluded that courts should independently decide whether an arbitration panel has jurisdiction over a dispute, and that it would apply ordinary standards of review when considering the District Court's denial of a motion to vacate the arbitration award.


Is the arbitrability of disputes subject to independent review by the courts? Should courts of appeals apply an "abuse of discretion" standard when reviewing district court upholding arbitration awards?

Media for First Options of Chicago, Inc. v. Kaplan

Audio Transcription for Oral Argument - March 22, 1995 in First Options of Chicago, Inc. v. Kaplan

Audio Transcription for Opinion Announcement - May 22, 1995 in First Options of Chicago, Inc. v. Kaplan

William H. Rehnquist:

The opinion of the court in number 94-560 First Options of Chicago v. Kaplan will be announced by Justice Breyer.

Stephen G. Breyer:

First Options, a securities company said that MKI, an investment company owed it some money and that MKI’s owners; the Kaplan should make up any deficiency.

There was no agreement on this.

The whole thing went to arbitration.

The Kaplans protested; they said, “We never agreed to arbitrate.”

The arbitrators bet, “Oh yes, you did” and then they went to court and the court said “No, the Kaplans didn’t ever agree to arbitrate” and we agree to review two questions growing out of this.

The first question is should a court review an arbitrator’s decision like this one saying, “You all agreed to arbitrate”? Should a court review that independently or should it defer to the arbitrator?

Now, this question is not about the merits, it’s not even about whether the merits are arbitral, it’s about who should basically decide whether the merits are arbitral, the court or the arbitrators?

The answer to the question is easy.

It depends upon what the parties agree, what do the parties agree who should decide the matter?

That's because arbitration is a matter of contract and the courts normally look to the party’s intentions as with any other contract.

It isn’t quite like any other matter.

As the law does assume if there is silence, if there is ambiguity, the court assumes that the parties want the judges to decide the matter independently unless they clearly indicate it to the contrary that's because this matter is rather arcane, the parties probably didn’t think about it and this presumption more or less in the general rule accords with their likely intent.

The Kaplans here did not clearly say they wanted the arbitrators to decide arbitrability so they win.

The second question is what standards did Courts of Appeals use when they review a District Court decision confirming in arbitration award?

One circuit says especially lenient standard.

The other circuit say normal standards.

We decide that that single circuit a voice crying in the wilderness is wrong.

We agree with the other circuits.

A court should use normal standards not some special lenient standard, that's because the way Courts of Appeals review District Courts is really a function of their comparative expertise and function not a question of the desirability of some substantive outcome.

The judgment of the Third Circuit is affirmed.

The opinion is unanimous.