News
Securities
Feb. 26, 2002
Court Will Hear Arbitration Time-Limits Case
WASHINGTON - Taking on another arbitration dispute, the Supreme Court on Monday agreed to consider whether federal courts or arbitrators should interpret the time-limits provisions of arbitration agreements covering securities transactions.
The justices, who in recent years have shown a strong interest in defining the breadth of arbitration agreements, agreed to review in October a decision by the Denver-based 10th U.S. Circuit Court of Appeals that a federal judge should decide whether claims by a Colorado investor against Dean Witter were filed too late. Howsam v. Dean Witter Reynolds Inc., 01-800.
In unrelated actions Monday, the justices:
• Declined for the second time in a year to consider whether the Establishment Clause is violated when a local government places a monument bearing the Ten Commandments on government property. O'Bannon v. Indiana Civil Liberties Union, 01-966.
This time the high court let stand a 2-1 decision by the Chicago-based 7th Circuit that blocked including the commandments on a large limestone monument on the Indiana Statehouse grounds.
"The permanence, content, design and context of the monument amounts to the endorsement of religion by the state," the circuit ruled.
• Let stand a decision by the Atlanta-based 11th Circuit that a business that offers sexually oriented entertainment on the Internet from a residential location is not covered by local zoning ordinances regulating adult entertainment offered to the public. City of Tampa, Fla. v. Voyeur Dorm, 01-902.
The case concerned a company that offers on its Web site, for a fee of $35 a month, video-stream pictures of the activities of five young women from cameras placed in every room of a house in Tampa. The city contended that the company violated zoning ordinances covering adult businesses, but the circuit held that the zoning code "cannot be applied to a location that does not, itself, offer adult entertainment to the public."
The securities case that will be heard next term began in 1986. After her husband died, Karen Howsam of Denver was advised by local brokers from New York-based Dean Witter to invest $550,000 in four limited partnerships.
Howsam signed a standard agreement to arbitrate all disputes over her accounts before "any self-regulatory organization of which Dean Witter is a member." Howsam was entitled to choose the organization.
After Howsam suffered "serious losses" in her accounts, she closed them in 1994. Three years later, she began an arbitration proceeding before the National Association of Securities Dealers.
She alleged that the brokers had failed to recommend "investments that were suited to her and her investment objectives" and had failed to keep her apprised of the investments' value "so that she could make informed decisions with respect to their sale or retention."
The National Association of Securities Dealers code states that "no dispute, claim or controversy shall be eligible for submission to arbitration ... where six years have elapsed from the occurrence or event giving rise to the act or dispute, claim or controversy."
Citing that provision, Dean Witter filed a complaint in the federal court in Denver seeking a determination that Howsam's claims were untimely and thus that the National Association of Securities Dealers could not arbitrate them. The brokerage asserted that the arbitrability question was for the court, not the National Association of Securities Dealers, to decide.
Howsam filed a motion to dismiss, contending the court lacked jurisdiction over the matter because the parties had agreed to submit all disputes to arbitration.
In June 1999, U.S. District Judge Walker D. Miller of Denver granted Howsam's motion. Dean Witter appealed, and last August the 10th Circuit reversed.
In an opinion by Circuit Judge David M. Ebel, the court held that the arbitration agreement "is simply not a clear and unambiguous statement that courts should not be involved in the threshold arbitrability question in this case."
The panel noted that federal circuit courts of appeals are almost evenly divided on the issue. The San Francisco-based 9th Circuit held that arbitrators should decide the question, in O'Neel v. National Association of Securities Dealers Inc., 667 F.2d 804 (1982).
Ebel said it was "long overdue" for the National Association of Securities Dealers and other arbitration forums to amend their agreements to resolve this issue.
Howsam instead decided to ask the justices to do that.
In his high court petition, Howsam's lawyer, Alan C. Friedberg of Denver's Pendelton, Friedberg, Wilson & Hennessey, said that review was required not only because of the federal circuit split on who should decide the time question but also because the state courts are split, as well.
In California, he noted, the rule is that courts decide this issue, according to Citibank v. Crowell, Weedon & Co., 4 Cal.App.4th 844 (1992).
"To complicate matters further," Friedberg added, "the courts deciding these cases have reached their decisions using conflicting lines of reasoning."
As for the merits of Howsam's claim, he said the justices repeatedly have left arbitrability issues to the arbitrators when the agreement is clear, as it is here.
Mandating court determination of such issues "imposes a wasteful layer of litigation on the arbitration process," Friedberg added.
By asking the courts to determine when the time for filing a claim began, he said, "[Dean Witter] and other brokers force their customers into court as defendants in order to delay arbitration and to increase the cost of bringing claims."
Dean Witter's lawyer, Elliot H. Scherker of Miami-based Greenberg Traurig, responded that "there is no need for the Court to revisit" the basic principle of its arbitration precedents: Courts should decide arbitrability unless there is "clear and unmistakable evidence of an intent to allow the arbitrators to decide."
In this case, Scherker added, the 10th Circuit found no such intent "based on the particular language of the agreement between the parties."
He acknowledged a split among the circuit courts on interpreting the National Association of Securities Dealers code's language.
But, Scherker said, "there is no broad national rule that could emerge from this case, which is, after all, merely a case of contract interpretation."
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David Pike
Daily Journal Staff Writer
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