Shearson/American Express Inc. v. McMahon

PETITIONER: Shearson/American Express Inc.
LOCATION: United States Tax Court

DOCKET NO.: 86-44
DECIDED BY: Rehnquist Court (1986-1987)
LOWER COURT: United States Court of Appeals for the Second Circuit

CITATION: 482 US 220 (1987)
ARGUED: Mar 03, 1987
DECIDED: Jun 08, 1987

Richard G. Taranto - as amicus curiae, supporting the petitioners
Theodore Grant Eppenstein - on behalf of the respondents
Theodore A. Krebsbach - on behalf of the petitioners

Facts of the case


Media for Shearson/American Express Inc. v. McMahon

Audio Transcription for Oral Argument - March 03, 1987 in Shearson/American Express Inc. v. McMahon

William H. Rehnquist:

WE will hear arguments next in No. 86-44, Shearson/American Express, Inc., and Mary Ann McNulty versus Eugene McMahon, et al.--

Mr. Krebsbach, you may proceed whenever you are ready.

Theodore A. Krebsbach:

Mr. Chief Justice, and may it please the Court, the issue in this case is whether lower courts can refuse to enforce agreements to arbitrate claims under Section 10(b) of the Exchange Act and RICO, notwithstanding the clear Congressional directive in the Arbitration Act that agreements to arbitrate shall be valid, irrevocable, and enforceable.

The parties in this case contracted to arbitrate all of their disputes with respect to the handling of respondent's securities accounts.

The Court of Appeals enforced that contract with respect to the parties' common law claims but refused to enforce that contract with respect to the claims pertaining to Section 10(b) and RICO, notwithstanding the fact that these claims arose from the same set of factual allegations pertaining to the common law claims.

Petitioners are here today on appeal from the decision of the Second Circuit, and ask this Court to enforce the contract of the parties with respect to all of their disputes.

The parties' contracts should be enforced with respect to 10(b) claims because Congress did not intend to create an exception to the Federal Arbitration Act for claims under Section 10(b).

Congress enacted the Exchange Act in 1934, just nine years after it passed the Arbitration Act in 1925.

If Congress had intended to create an exception to the Arbitration Act, Section 10(b), it simply had to state within the statute itself that such an exception was to be created and it simply could have prohibited within the statute itself arbitration of 10(b) claims.

This it did not do, and for this reason alone it is clear that the Arbitration Act contains no exception for 10(b) claims.

Despite the Congressional silence in the Exchange Act, the Exchange Act does contain an antiwaiver provision of the type that this Court in Wilko v. Swann found in 1953 prohibited arbitration of Section 12-2 claims under the 1933 Securities Act.

Section 14 of that Act voided stipulations binding a person to waive compliance with a provision of the 1903 Securities Act.

The Wilko court held that because of the unique special [= 12-2] right created by Congress in the Securities Act, which was substantially different from common law fraud, and that it switched the burden of proof from the plaintiff buyer to the seller defendant in that case, as well as because of the Wilko court's concerns about the adequacy of the arbitral forum to enforce the special right and the adequacy of judicial review of the arbitrator's decision.

The Wilko court as a result of this analysis of Section 14 to prohibit waiver of judicial trial and review, notwithstanding the fact that nowhere in the statute or its legislative history did Congress indicate any evidence that it wanted to use that interpretation of an antiwaiver provision, which in fact was quite contrary to the interpretation of an antiwaiver provision at common law.

Petitioners believe that the Wilko court's interpretation of a antiwaiver provision must be limited to Section 12-2 of the Securities Act for two reasons.

First, Wilko's interpretation of an antiwaiver provision with respect to Congressional intent cannot be mechanically applied to Section 10(b) claims as Justice White pointed out in his concurring opinion in the Byrd case in 1985.

It simply cannot be said that for an implied, judicially implied cause of action such as 10(b) that Congress intended an antiwaiver provision to prohibit judicial trial and review of the cause of action that it itself did not create.

Second, to the extent that the Wilko courts--

John Paul Stevens:

May I interrupt you there?

Theodore A. Krebsbach:

--Yes, Your Honor.

John Paul Stevens:

Who did create the 10(b)(5) private cause of action?

Theodore A. Krebsbach:

The 10(b)(5) private cause of action was judicially implied by the courts, which held in effect that Congress impliedly intended to create an--

John Paul Stevens:

They held that Congress intended such a cause of action?

Theodore A. Krebsbach:

--That's true, Your Honor.

John Paul Stevens:

So that although it isn't expressed the source of the cause of action is nevertheless the statute.

Theodore A. Krebsbach:

That is true, Your Honor, but that source is created by judicial implication and was not expressly created.

John Paul Stevens:

I though you said the courts interpreted the legislation as indicating that Congress impliedly intended it.

Theodore A. Krebsbach:

The action itself is created by judicial implication but the reports by doing that were saying that Congress intended to create--

John Paul Stevens:

So what is the ultimate source of the cause of action?

Theodore A. Krebsbach:

--Congressional intent, Your Honor.