Roubik v. Merrill Lynch, Pierce, Fenner & Smith, Inc.

JUSTICE HEIPLE, dissenting:

It is a fundamental rule of contract construction that a judge deciding a commercial dispute should first read the contract establishing the relationship between the parties and then — and only then — think great thoughts. In its misguided disposition of this case, the majority has put the proverbial cart before the horse: the majority opinion fails to recognize that parties to a contract may themselves provide that an arbitrator, and not a judge, shall decide whether an issue is arbitrable. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943 , 131 L. Ed. 2d 985, 993 , 115 S. Ct. 1920, 1923-24 (1995). Instead, in some ill-conceived attempt to do justice, the majority has decided to review de novo whether a given issue is arbitrable without first considering whether the parties agreed to submit the question to arbitration.

Did the parties agree to arbitrate questions of arbitrability, including the issue of whether the arbitrators had the power to award punitive damages? There are in fact two written agreements between the parties, a “Customer Agreement” and a “Cash Management Agreement,” each of which contains the identical “Agreement to Arbitrate Controversies” clause:

“Except to the extent that controversies involving claims arising under the Federal securities law may be litigated, 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 Directors of the New York Stock Exchange, Inc. or pursuant to the Code of Arbitration Procedure of the National Association of Securities Dealers, Inc., as the undersigned may elect.” (Emphasis added.)

These provisions evidence the parties’ intent to arbitrate all issues, including arbitrability. With the stated exception of federal securities claims, the language is all-inclusive, categorical, and unconditional. The word “any” is broad enough to encompass disputes over whether a particular claim is within the scope of arbitration. See 1 Oxford English Dictionary 539 (“In affirmative sentences [‘any’] asserts concerning a being or thing of the sort named, without limitation as to which, and thus constructively of every one of them”). Thus, an objective reading of the parties’ agreements leads inexorably to the conclusion that the parties intended to arbitrate issues of arbitrability.

Moreover, the plaintiff elected to submit the dispute for arbitration with the National Association of Securities Dealers (NASD). The submission agreement provided that the parties “hereby submit the present matter in controversy *** to arbitration in accordance with the Constitution, By-Laws, Rules, Regulations and/or Code of Arbitration Procedure of the [NASD]. 1 Section 1 of the NASD Code provides that the Code “is prescribed *** for the arbitration of any dispute, claim, or controversy’ between members and their customers.

The NASD Code itself grants the arbitrators the power to decide issues of arbitrability:

“The arbitrators shall be empowered to interpret and determine the applicability of all provisions under this Code and to take appropriate action to obtain compliance with any ruling by the arbitrator(s).”

NASD Code of Arbitration Procedure, NASD Manual 3735. By adopting the NASD Code to govern their dispute, the parties further agreed to commit all issues, including issues of arbitrability, to the arbitrators. See PaineWebber Inc. v. Bybyk, 81 F.3d 1193, 1202 (2d Cir. 1996); FSC Securities Corp. v. Freel, 14 F.3d 1310, 1312-13 (8th Cir. 1994) (“The parties’ adoption of this provision is a ‘clear and unmistakable’ expression of their intent to leave the question of arbitrability to the arbitrators”). 2

The emphatic, all-inclusive language of the arbitration clauses in the instant agreement and the parties’ adoption of the NASD Code are not sufficient to persuade the majority of the parties’ intent and commitment to arbitrate issues of arbitrability. The majority wants more. Here is more. When deciding whether the parties agreed to arbitrate a certain matter including arbitrability, courts should apply ordinary state-law principles that govern the formation of contracts. First Options, 514 U.S. at 944 , 131 L. Ed. 2d at 993 , 115 S. Ct. at 1924 . Here the parties’ agreement and its enforcement is to “be governed by the law of the State of New York.” The highest court in the State of New York has held that parties “clearly and unmistakably” agree to arbitrate arbitrability when the parties have agreed to resolve “any controversy” by arbitration in accordance with the rules of the NASD:

“Coupled with the plain and sweeping language of the arbitration clause in the instant agreements and the analysis of the persuasive authorities, Section 35 of the NASD Code (now Rule 10324) buttresses our conclusion concerning the parties’ intent and commitment to arbitrate the issue of arbitrability.”

Smith Barney Shear son, Inc. v. Sacharow, Nos. 234, 235 cons. (N.Y. December 4, 1997). Thus, under the relevant state law, the language of the arbitration agreement and the provision of the NASD manifest the parties’ intent to submit the arbitrability issue to arbitration.

Thus, the parties agreed to relinquish their right to have a court decide the merits of their dispute, and instead expressly agreed to submit all questions— including arbitrability — to arbitration. A party may still ask a court to review an arbitrator’s decision, but the court will set that decision aside only where the decision is tainted by corruption, fraud or misconduct, or amounts to a manifest disregard of the law. See First Options, 514 U.S. at 942 , 131 L. Ed. 2d at 992 , 115 S. Ct. at 1923 ; 9 U.S.C. § 10 (1994); 710 ILCS 5/12 (West 1996). The only issue left is whether the arbitrators interpreted the law in good faith; if they did, their interpretation — even if mistaken — is conclusive. Rauh v. Rockford Products Corp., 143 Ill. 2d 377, 391 (1991); Garver v. Ferguson, 76 Ill. 2d 1, 7-8 (1979); Merritt v. Merritt, 11 Ill. 565, 567-68 (1850). Here the arbitrators concluded in good faith that New York law precluded an arbitration panel from awarding punitive damages, and this conclusion was legally correct at the time of the arbitration award. Accordingly, the appellate court’s judgment purporting to “remand” the cause for further arbitration should be reversed.

In affirming the appellate court, the majority has dramatically expanded the scope of appellate review of arbitration awards and, in so doing, has grossly misstated the law in at least three respects. (1) The majority writes that “the issue of whether the arbitrators had the authority to award punitive damages in this case was a question of arbitrability and, as such, is subject to de novo review.” 181 Ill. 2d at 383. This is erroneous: if the parties agree to arbitrate issues of arbitrability, “then the court’s standard for reviewing the arbitrator’s decision about that matter should not differ from the standard courts apply when they review any other matter that parties have agreed to arbitrate.” First Options, 514 U.S. at 943 , 131 L. Ed. 2d at 993 , 115 S. Ct. at 1923 . (2) The majority states that “[h]ere, in resolving the punitive damages issue, the arbitrators were called upon to determine the scope of their own authority. Federal law and policy therefore requires that the arbitrators’ decision on this issue be subject to independent review by the courts.” 181 Ill. 2d at 385. Again, this is incorrect: the Federal Arbitration Act establishes an emphatic national policy favoring arbitration which, is binding on all courts, state and federal. See Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24-25 , 74 L. Ed. 2d 765, 785 , 103 S. Ct. 927, 941 (1983) (“questions of arbitrability must be addressed with a healthy regard for the federal policy *** [and] any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration”). (3) The majority holds that “[t]his issue [of punitive damages] addresses the scope of the arbitrators’ authority and is therefore a matter independently reviewable by the courts.” 181 Ill. 2d at 389. Wrong again: when, as here, there is “clear and unmistakable” evidence from the arbitration agreement that the parties intended that the question of arbitrability be decided by the arbitrators, the court must defer to the arbitrators’ decision. First Options, 514 U.S. at 944 , 131 L. Ed. 2d at 994 , 115 S. Ct. at 1924 .

In sum, the majority has misstated the law, misconstrued the facts and has undermined freedom of contract and the public policy favoring arbitration. Arbitration is a matter of consent, not coercion, and parties are free to write their arbitration agreements as they wish. The goal of arbitration is to avoid protracted litigation in the courts, and the parties to an arbitration agreement bargain for this efficiency. By adopting a de novo standard of review, the majority has rendered private arbitration nothing more than an expensive precursor to traditional litigation, rather than an alternative means for resolving commercial disputes. I dissent.

1 Based on a superficial reading of First Options, the majority cavalierly declares that “[t]he arbitration agreement in this case is, at best, silent on the question of who should decide questions of arbitrability and that the use of the word “any in the agreement is not “clear and unmistakable” evidence of the parties’ intent to arbitrate arbitrability. 181 Ill. 2d at 386. First Options indeed holds that courts may not assume that parties agreed to arbitrate arbitrability unless there is “clea[r] and unmistakabl [e] ” evidence that the parties so agreed. First Options, 514 U.S. at 944 , 131 L. Ed. 2d at 994 , 115 S. Ct. at 1924 , quoting AT&T, 475 U.S. at 649, 89 L. Ed. 2d at 656, 106 S. Ct. at 1418. But the precise issue decided by the Court in that case was whether a party (Kaplan) could be compelled to arbitrate personal claims when only his wholly owned investment company (MK Investments, Inc.), and not the party personally, signed the agreement to arbitrate. First Options, 514 U.S. at 941 , 131 L. Ed. 2d at 991 , 115 S. Ct. at 1922 . Because Kaplan never signed an agreement to arbitrate, the Court held that Kaplan “did not clearly agree to submit the question of arbitrability to arbitration.” First Options, 514 U.S. at 947 , 131 L. Ed. 2d at 995 , 115 S. Ct. at 1925 .

2 The majority feebly seeks to limit the holdings of Bybyk and Freel to instances where arbitrators are called on to interpret provisions of the NASD Code. However, the NASD Code by its own terms was promulgated to govern the arbitration of “any” dispute between the parties, including disputes over arbitrability, and thus section 35 clearly grants the arbitrators the power to decide arbitrability issues.