# Petition — Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385007_1892%3A01 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition - **Published:** January 1, 1982 - **Citation:** 456 U.S. 353 ## Text 80-203 AUG 91980 HAEL RODAK, JR., CLERK IN THE Supreme Court of the United States OCTOBER TERM, 1980 —_ e——_ MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., Petitioner, Vv. J. J. CURRAN and JACQUELYN L. CURRAN Respondents. PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT —e—— Douglas G. Graham, counsel of record Richard P. Saslow Seymour M. Nayer Butzel, Keidan, Simon, Myers & Graham 1990 First National Building Detroit, Michigan 48226 (313) 961-7900 Attorneys for Petitioner Merrill Lynch, Pierce, Fenner, & Smith, Inc. Interstate Brief & Record Co. Wurlitzer Bidg . 1509 Broadway. Detroit, Mi 48226 962-8745 962-8746 TABLE OF CONTENTS POE iv anc cesieendscuierceerae hese DIE kkg die we aN kiko «ear ee ree ee SN osc wcwaceen tee Ses OF Ee Gee Ss ko ke cece dee Reasons for Granting the Writ ................... il. Il. Ill. The Court of Appeals’ implication of a pri- vate right of action for fraud under the Commodity Exchange Act raises an impor- tant question of federal law that should be i A, a ee tee A. Congress has enacted a comprehensive scheme of commodities regulation which should not be altered by the ad- dition of judicially inferred remedies .. B. Implication of a private judicial right of action under the Commodity Exchange Act is an issue that has divided the Mower GOUGGE COMME 2... cos cc ceciesass The Court of Appeals’ implication of a pri- vate right of action for fraud under the Commodity Exchange Act conflicts in prin- ciple with the decisions of this Court in Transamerica and Touche Ross ...........+. The Court of Appeals’ retroactive applica- tion of Commodity Futures Trading Com- mission Reg. § 180.3 conflicts in principle with controlling decisions of this Court .... 13 15 26 Eas ees s ee ee v.05 5600-0 5.6865 0000600 27 Appendix Opinion of the Court of Appeals ............ A-l Memorandum Opinion of the District Court .. A-39 Order of the District Court .................. A-50 Judgment of the Court of Appeals ........... A-51 Commodity Exchange Act ee Se > ene A-52 oT eek oe | err er eee A-54 Beeman 26, 7 U.B.C. O18... cccccccceess A-55 Commodities Futures Trading Commission Reg. SE AE MUG EU. cece ccccccccosecens A-58 TABLE OF AUTHORITIES Page Cases Alkan v. Rosenthal & Co., [1977-80] Comm. Fut. L. Rep. (CCH) { 20,797 (S.D. Ohio 1979) ..... 14 Ames v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 567 F.2d 1174 (2d Cir. 1977) ........ 15,26,27 Ashwander v. T.V.A., 297 U.S. 288 (1936) ...... 27 Bartels v. International Commodities Corp., 435 F. Supp. 865 (D. Conn. 1979) ............0.5- 14 ili Page Berenson v. Madda Trading Co., [1977-80] Comm. Fut. L. Rep. (CCH) { 20,689 (D.D.C. WOMEN 0s 4 dad NS50 os 600 b40ns mee ta Rass eseexe ks 14 Berman v. Bache, Halsey, Stuart, Shields, Inc., 467 F. Supp. 311 (S.D. Ohio 1979) ........... 14 Blue Chip Stamps v. Manor Drug Stores, 421 SA CU UE EE ecu sekcsvchapvarineeseres 12,13,18 Bowles v. Seminole Rock & Sand Co., 325 U.S. GPUNPEEE Canashecdsnscee tubers eueasahaneues 26 Bradley v. Richmond School Board, 416 U.S. 696 GUUMNT +0eGo0a bance vase eeawsipeobeeenstae ees 27 Cannon v. University of Chicago, 441 U.S. 677 GOONER ct ca wd esa wad cased eCens aa snarans 13,16,18,24 Chrysler Corp. v. Brown, 441 U.S. 281 (1979) .. 13,21 Comstock Investors, Inc. v. Rosenthal & Co., [1977-80] Comm. Fut. L. Rep. (CCH) {| 20,934 See MN UN 0:0 5 oo. 0's'a.0%s balsa cuedoonen cee 14 Consolo v. Hornblower & Weeks-Hemphill, Noyes, Inc., 436 F. Supp 447 (N.D. Ohio 1976) Consumer Product Safety Commission v. GTE Sylvania, Inc.,.U.S.__, 48 U.S.L.W. 4658 OE Ss ar a Ly oe a ale wtlste aiaéea oe 17,21 Cort v. Ash, 422 U.S. 66 (1975)... cece cccncces 13,15 16,23,24 Croll v. Maduff & Sons, Inc., (slip opinion) No CV79-466 RMT (C.D. Cal., April 3, 1980) ..... 14 iv Page Deaktor v. L. D. Schreiber & Co., 479 F.2d 529 (7th Cir.), rev’d on other grounds sub nom. Chicago Mercantile Exchange v. Deaktor, 414 Se SESE sieiee sche ri cesuskavuasiess) 13 Fischer v. Rosenthal & Co., 481 F. Supp. 53 et PENN “Jct yaveeics concn cuerenees exe 14 Goodman v. H. Hentz & Co., 265 F. Supp. 440 NCEE MUUED cnc pebkesessescdsueavweeseess 13 Greene v. United States, 376 U.S. 149 (1964) .... 27 Hensley v. Maduff & Sons, Inc., 2 Comm. Fut. L. Rep. (CCH) % 21,017 (C.D. Cal. 1980) ........ 14 Hofmayer v. Dean Witter & Co., Inc., 459 F. Supp. Fae CER Cal. IO7E) on cccccccccccvsces 14 Jones v. B. C. Christopher & Co., 466 F. Supp. Pe OPEN se dekkoetevecvensvhuannnss 14 Leist v. Simplot, Nos. 79-7402, 7464, 7482 (2d OO Ee eer re 5,11,14,21 Liang v. Hunt, [1977-80] Comm. Fut. L. Rep. (CCH ) 4] 20,880 (N.D. Ill. 1979) ............. 14 Mullis v. Merrill Lynch, Pierce, Fenner & Smith, Inc., No. 79-172BRT (D. Nev., July 1, 1980) ... 14 National Railroad Passenger Corp. v. National Assn. of Railroad Passengers, 414 U.S. 453 EE A Pre r rrr rrr Ter ore rer ye 13 National Super Spuds, Inc. v. New York Mercan- tile Exchange, 470 F. Supp. 1256 (S.D.N.Y. 1979), rev'd sub nom. Leist v. Simplot, Nos. 79-7402, 7464, 7482 (2d Cir., July 8, 1980) ..... 14 Page Navigator Group Funds v. Shearson Hayden Stone, Inc., No. 77 Civ. 5350 (S.D.N.Y., March Lida tanca ds cscs ¢oe'beessees sees 14 Piper v. Chris-Craft Industries, 430 U.S. 1 DE seOLSS WeeR Loe seee nes aOreeasceresss 13,18,21 Poplar Grove Planting & Refining Co. v. Bache Halsey Stuart, Inc., 465 F. Supp. 585 (M.D. La. TPA CE CaS ys ceCCbeSheveesessvecsseses 14 R. J. Herely & Son Co. v. Statler & Co., 466 F. Supp. 345 (N.D. Ill. 1979) 22... eee 14 Securities Investor Protection Corp. v Barbour, SR 13 Shearson Hayden Stone, Inc. v. Lumber Mer- chants, Inc., 423 F. Supp. 559 (S.D. Fla. 1976) . 14 Smith v. Groover, 468 F. Supp. 105 (N.D. Ill. SEE ea ee rere Ter rer rere 14 Stone v. Saxon & Windsor Group, Ltd., [1977-80] Comm. Fut. L. Rep. (CCH) { 21,000 (N.D. Ill. ET iKae Ses ty abe sexs ehessseneceverseenes 14 Touche Ross & Co. v. Redington, 442 U.S. 560 PET Selanne hbesbeetheesee es ys 13,15-18,22-26 Transamerica Mortgage Advisors, Inc. v. Lewis, Sy ee 13,15-19,23,24,26 Wilko v. Swan, 346 U.S. 427 (1953) ............. 4 Witzel v. Chartered Service Corp. of New York, Ltd., Civ. No. 4-79-610 (D. Minn., May 27, PS NATRA MIN CACU Ged Oreeesteceeseesessaes 14 vi Page Constitutional Provisions gcc tux da vneb'a bas: 22,24 SP I ES a ia onc oben cncdeasevdveees 27 Statutes Commodity Exchange Act, 7 U.S.C. §§ 1, et seq. PERCE ees SURE e int chbebesaers ess passim Decent 2 (000, 7 U.S.C. 62 ow wc cc ccaces 8,21,22 Section 2 (a)(2)-(11), 7 U.S.C. § 4(a)(a)-(j) ..... 8 wecenen SO, 7 U.S.C. OGD nnn cvcvcccene 2,3,6,9,13,18 pecten TAAt), 7 UG... § 7A(RT) nc cccccseees 12 NDF OPM ac ce ciecanccceceneaas 8,12 re GF We BOO occ occccccccccise 11 UN Ey F CPi BME acc iccceccceses 8,11 ES F Ba EOE - i wescccccsvesess 10,11 I OF GPs OO sic ccessaness 8,9,12,13 18,20,21 Section 14(b), 7 U.S.C. § 18(b) ............... 9 Section 1416), 7 U.S.C. S$ 1Gle) ... nc cvcsscccees y Section Bale), 7 U.S.C. GIRO) 2... ccccccccces 9 oe eg Red 5!) eee ee 9,12 Section 14(QG(, 7% U.C. § Ye—(g) ............ 9,12 Federal Arbitration Act, 9 U.S.C. §3 ........... 4 Judicial Code (28 U.S.C.) rr ke sah ede da aeak ee 2 vii Page De ety TO CAeTy eR PeTeT ET TTT e TTT eee 3 PE MOE eden sk ccrexes coeesveutes ss 3 Rea biti bit rdrdeckiccusessy ede. 3 Michigan Uniform Securities Act (Mich. Comp. Laws Ann. §§ 451.501, et seq.) ..........005. 3 Packers and Stockyards Act, 7 U.S.C. §§ 308, 309, 7 Ee es Ns OO ake ccenccuwscsccneses ae Securities Act of 1933 (15 U.S.C. §§ 77a, et seq.) . 3,4 A ae Py, rere errr yr errr 3 Section 2212), 15-U.S.C. § 77) 2... ccc ussccees 3 Section 17(a), 15 U.S.C. § 77ala) .......c06ees 3 Section 22(a), 15 U.S.C. § 77v(a) ............. 3 Securities Exchange Act of 1934 (15 U.S.C. 2. yt ENO ePeTEr EL ore ee Tye eer eee 3,4 Section 15(c)(1), 15 U.S.C. § 780(c)(1) ......... 3 GN 27, BO UG GE TORE occ cc cicsccccans 3 Rules and Regulations Commodity Futures Trading Commission Rules CFTC Reg. § 180.3, 17 C.F.R. § 180.3 ..... 2,4,26,27 Securities and Exchange Commission Rules Rule 10b-5, 17 C.F.R. § 240.10b-5 ............ 3,25 Chicago Mercantile Exchange Rules ............ 3 National Association of Securities Dealers Rules . 3 2 New York Stock Exchange Rules ............... viii Page Miscellaneous S. Rep. No. 93-1131, 93d Cong., 2d Sess., re- printed in [1974] U.S. Code Cong. & Ad. f ROEEPEURT TAS PCr reer ay te Peter 5-7 S. Rep. No. 95-850, 95th Cong., 2d Sess., re- printed in [1978] U.S. Code Cong. & Ad. PORE, 5k.0b-os cuccpenedsabeckinetesr anes 8,11 H.R. 11195 (Smith Bill), 93d Cong., Ist Sess. § 17 GP ED sccescackss cer arvesnelenaerceeenee 10 S. 2578 (McGovern Bill), 93d Cong. 1st Sess., Part Re fk Ey Reem reer rg ei 10 S. 2837 (Hart Bill), 93d Cong., Ist Sess. § 505, 119 Came, Ree. GaGee CNT vc ekcicciscceevasis 10,20 Remarks of Rep. Poage, 119 Cong. Rec. 41333 CRUE cacaritnvsedeuswotcssieeeas eee 19,20 Hearings on S. 2485, S. 2578, S. 2837 and H.R. 13113 Before the Senate Comm. on Agriculture and Forestry, 93d Cong., 2d Sess. (1974) .... 20,21 Remarks of Philip F. Johnson, Chairman, ABA Committee on Commodities Regulation, 35 Bus. Law. 691 (Special Issue) (March, 1980) ... 7 Remarks of Hon. James M. Stone, Chairman, Commodity Futures Trading Commission, 35 Bus. Law. 691,692 (Special Issue) (March, 1980) IN THE Supreme Court of the United States OCTOBER TERM, 1980 —e——_ MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., Petitioner, Vv. J. J. CURRAN and JACQUELYN L. CURRAN Respondents. —_e——_ PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT Petitioner, Merrill Lynch, Pierce, Fenner & Smith, Inc. (“Merrill Lynch”) requests that a Writ of Certiorari issue to review the judgment and opinion of the United States Court of Appeals for the Sixth Circuit entered on May 12, 1980. OPINIONS BELOW The opinion of the Court of Appeals (A1-A38)' is not yet officially reported and is unofficially reported at [Current Binder] Fed. Sec. L. Rep. (CCH) % 97,390. The opinion of the District Court (A39-A49) is not officially reported. ’ JURISDICTION The judgment of the Court of Appeals was entered on May 12, 1980. This Court's jurisdiction is invoked under 28 U.S.C. § 1254 (1). STATUTES INVOLVED Section 4b of the Commodity Exchange Act, as amended, 88 Stat. 1413, 7 U.S.C. § 6b (1974); Commodity Futures Trading Commission (‘CFTC’) Reg. § 180.3, 17 C.F.R. § 180.3. Section 4b and other pertinent sections of the Commodity Exchange Act (“CEA”) are appended hereto (A52-A57). CFTC Reg. § 180.3 is appended at pages A58-A60. STATEMENT OF THE CASE In 1973, respondents J. J. Curran and Jacquelyn L. Curran (the “Currans”) opened several commodity trading accounts with Merrill Lynch, a_ broker of securities and commodities. Upon opening the accounts, the Currans signed agreements to submit to ' “A___" page references are to the Appendix of this Petition 3 arbitration disputes that might arise with Merrill Lynch. The commodity trading in the Currans’ accounts resulted in losses and the accounts were closed in April, 1974. In April, 1976, the Currans brought suit for damages in the United States District Court for the Eastern District of Michigan. The Currans alleged violations of sections 5 (failure to register), 12(2) (misleading statements) and 17(a) (fraud) of the Securities Act of 1933 (1933 Act’), 15 U.S.C. §§ 77e, 771(2), 77q(a); section 15(c)(1) (fraud and rulemaking powers) of the “ecurities Exchange Act of 1934 (‘1934 Act’), 15 U.S.C. § 780(c)(1), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5; and section 4b (fraud) of the CEA, 7 U.S.C. § 6b. The Currans also alleged breaches of duties owed under the Michigan Uniform Securities Act, Rules and Regulations of the National Association of Securities Dealers, the New York Stock Exchange and the Chicago Mercantile Exchange and common law principles of fraud, negligence and contract. Jurisdiction was alleged pursuant to section 22(a) of the 1933 Act, 15 U.S.C. § 77v(a); section 27 of the 1934 Act, 15 U.S.C. § 78aa; sections 1331, 1332 and 1337 of Title 28 of the United States Code; and by virtue of pendent jurisdiction. Upon Merrill Lynch’s motion, the District Court dismissed the Currans’ claims under the 1933 and 1934 Acts, and directed the remaining claims to arbitration in accordance with the parties’ agreement. In so ruling, the District Court held that the Currans’ commodity ? The Complaint alleges activities (fraud) such as are made unlawful by section 4b of the CEA, 7 U.S.C. § 6b. The Complaint actually specifies violation of “Section 6 of the Commodity Exchange Act.”’ Petitioner assumes, however, as did the Court of Appeals (A37) that respondent seeks recovery under CEA section 4b 4 trading accounts did not constitute ‘securities’ within the meaning of the 1933 and 1934 Acts and that, upon dismissal of the federal securities claims, there was no impediment to enforcement of the arbitration agreement in accordance with the Federal Arbitration Act, 9 U.S.C. § 3.3 The Currans appealed from the District Court's ruling that no cause of action had been stated under the federal securities laws and also argued that the District Court had erred in submitting the dispute to arbitration because the arbitration agreement did not conform to requirements set forth in CFTC Reg. § 180.3. That regulation (A58), effective November 29, 1976, provides that, to be enforceable, arbitration clauses must, inter alia, be signed separately and must apprise the customer, in bold-face type, that he may be waiving a right to sue in court. The arbitration agreements signed by the Currans in 1973 do not meet these requirements. The Court of Appeals unanimously affirmed the District Court’s ruling that the Currans’ federal securities claims should be dismissed for the reason that no security was involved, The Court also adopted the Currans’ argument that CFTC Reg. § 180.3 should be applied retroactively to invalidate the arbitration agreement between the parties. The Court of Appeals then raised, sua sponie, the issue of whether a private cause of action exists under the anti-fraud provisions of the CEA. Without benefit of briefing or argument by the parties, a majority of the panel concluded that the CEA provides an implied private right of action for » Merrill Lynch conceded that Wilko v. Swan, 346 U.S. 427 (1953), precluded enforcement of the arbitration agreement so long as the federal securities claims remained at issue. 5 fraud. The Court accordingly reversed the District Court's order staying the CEA claims pending arbitration, remanding those claims for trial on the merits. Judge Phillips dissented, reasoning that Congress’ failure expressly to provide a private judicial remedy under the CEA precludes implication of such a right. Judge Phillips relied upon the restrictive approach to implication of private remedies manifest in this Court's recent decisions, REASONS FOR GRANTING THE WRIT 1, The Court of Appeals’ implication of a private right of action for fraud under the Commodity Exchange Act raises an important question of federal law that should be settled by this Court. The commodities futures market is a risk-shifting mechanism that provides a stabilizing influence on the national economy. An orderly futures market is of paramount importance to producers and commercial users of commodities, to the exchanges, brokers and speculators involved in the market itself, and to the general population which profits by the stabilized availability and price of goods that an orderly futures market promotes,* * §, Rep, No, 93-1131, 93d Cong. 2d Sess, 11-19, reprinted in [1974] U.S. Code Cong. & Ad News 5843, 5852-60, See also, Leist v Simplot, Nos. 79-7402, 7464, 7482 (2d Cir., July 8, 1980) (Slip op. at 4022-28). 6 The issue presented by this petition involves the balance achieved by Congress in its regulation of the market and the threat posed to that balance by the interjection of judicially created remedies. Moreover, the issue presented by this petition has left the lower federal courts hopelessly divided and it would be consistent with the role of this Court to provide guidance on this question, thereby promoting conservation of judicial resources and sparing those associated with the commodities industry the costs and delay of duplicative litigation. A. Congress has enacted a comprehensive scheme of commodities regulation which should not be altered by the addition of judicially inferred remedies. The federal government has been involved in commodities regulation since passage of the Grain Futures Act of 1922. The 1922 Act required grain exchanges to be federally licensed and to assume responsibility for price manipulation by their members. The degree of regulation provided by the 1922 Act proved inadequate and in 1936 Congress enacted the CEA, broadening federal regulatory and enforcement powers. The scope of coverage was extended to commodities other than grains, to traders and brokers as well as exchanges, and powers were granted to curb excessive speculation by large operators and to prosecute price manipulation as a criminal offense. Section 4b was added to suppress cheating, fraud and fictitious transactions which were impairing the services of the market.* * See, S. Rep. No, 93-1131, 93d Cong, 2d Sess. 14, reprinted in [1974] U.S. Code Cong, & Ad. News 5843, 5855. 7 The commodities market has grown dramatically since 1936. A recent report shows the regulated industry now includes 12 existing or proposed exchanges, 329 brokerage firms, 555 money managers, 914 trading advisors and over 31,000 salesmen,.* In ten years the volume of commodity futures contracts traded has expanded seven-fold and what was previously a business primarily of interest to floor traders and commercial hedgers nov involves hundreds of thousands of individual investors’ and the trading of futures contracts for commodities valued at an estimated $1.5 trillion annually.* Federal regulatory powers have also grown, In 1968 Congress added new commodities to those regulated, increased penalties for certain violations, authorized issuance of cease and desist orders, imposed minimum financial standards on commission merchants and required enforcement by contract markets of their trading rules and contract terms.” Still dissatisfied with the performance of the commodities futures markets and the adequacy of regulatory protection,’ Congress responded in 1974 * Remarks of Philip F. Johnson, Chairman, ABA Committee on Commodities Regulation, 35 Bus. Law. 691 (Special Issue) (March, 1980). * Remarks of Hon, James M. Stone, Chairman, Commodity Futures Trading Commission, /d. at 692 * Wall St. J., Jan, 9, 1979, at 38, col, 5 (estimate for 1978) * §. Rep, No, 93-1131, 93d cong. 2d Sess, 14, reprinted im [1974] U.S, Code Cong. & Ad. News 5843, 5855 Id., [1974] U.S. Code Cong. & Ad. News at 5856 8 with sweeping revisions of the CEA. These amendments, entitled the Commodity Futures Trading Commission Act of 1974 (1974 Amendments’) created the CFTC'! and explicitly vested this new agency with “exclusive jurisdiction’ over regulation of commodity futures trading. '? The CFTC was created to assure that a single expert agency would have responsibility for developing a coherent regulatory program encompassing futures trading and related activities.'> Fulfillment of the CFTC's mandate was facilitated by other provisions of the 1974 Amendments which further strengthened regulatory control over the commodities markets. For example, the CFTC was given authority to seek injunctive relief restraining any person from violating the CEA,'* and to impose against registered persons, after hearing, a civil penalty of up to $100,000 for each violation of the Act. "5 A prominent feature of the 1974 Amendments was provis'on for reparation proceedings before the CFTC to adjudicate customer complaints against registered persons, including brokers such as Merrill Lynch.'® A '' Section 2(aX2)-(11), 7 U.S.C. § 4a(a)-(j). "2 Section 2(a)(1), 7 U.S.C. § 2 (emphasis added). ' S, Rep. No. 95-850, 95th Cong., 2d Sess. 13, reprinted in [1978] U.S, Code Cong. & Ad. News 2087, 2101. ' Section 6c, 7 U.S.C. § 13a-1. '§ Section 6(b), 7 U.S.C. § 9. © Section 14,7 U.S.C. § 18. 9 detailed procedure was established, providing for the filing of customer complaints with the CFTC, and investigation of such claims by that body.’ If the investigation supports further action, an administrative law judge is appointed to hear the claim. If a violation of the CEA is found, the CFTC, by statute, ‘shall’ impose a damage award in favor of the aggrieved customer,'* and such awards are enforceable in the federal district courts,'? and reviewable in the courts of appeals. 7° During the 44 years that section 4b has been in effect, and notwithstanding the extensive reconsideration and revision that Congress has afforded the CEA during that period (most notably in 1974), Congress has not seen fit expressly to authorize a private judicial right of action for violation of that section. Several bills that would have expressly provided private judicial remedies for violations of the CEA were introduced in the 93d Congress but not enacted. One proposed amendment would have provided a right of action for restitution in the federal district courts for a 17 Id. ‘6 Section 14(b), (c) and (e), 7 U.S.C. § 18(b), (c) and (e). '% Section 14(f), 7 U.S.C. § 18(f). 20 Section 14(g), 7 U.S.C. § 18(g). 10 non-willful violation of ‘any provision of this Act or regulation or order issued thereunder,” with a treble damage remedy for willful violations.2! This proposal and several others like it were rejected by Congress. ?? Further amendment to the CEA occurred in 1978, including the addition of a cause of action in favor of the States, acting as parens patriae, to enjoin violations of the Act, and original jurisdiction over such actions is expressly granted to the federal district courts.?3 It is apparent that during consideration of the 1978 Amendments Congress was weil aware that no private right of action was included within the regulatory scheme. A comprehensive list of public and private remedies provided customers under the CEA was set forth in the authoritative Senate Report. Mention of a private judicial remedy is conspicuous by its absence: The Commodity Exchange Act provides many customer protections and remedies. The Act directs the Commission to promulgate and administer a regulatory program that includes registration of commodity professionals, segregation of customers’ funds by futures commission merchants, establishment of dual trading guidelines, creation of a procedure for the adjudication of reparation claims, monitoring 21S. 2837 (Hart Bill), 93d Cong., Ist Sess., § W5(a)-(b), 119 Cong. Rec. 42688 (1973). 22 E.g., H.R. 11195 (Smith Bill), 93d Cong., Ist Sess. § 17 (1973) (treble damages); S. 2578 (McGovern Bill), 93d Cong., Ist Sess., Part I, § 20, 119 Cong. Rec. 33947-48 (1973) (treble damages). 23 Section 6d, 7 U.S.C. § 13a-2. 11 exchange arbitration procedures and disciplinary actions, and licensing of industry self-regulatory futures associations. Moreover, customers are afforded protection through the Commission’s power to sue directly for injunctive relief and to invoke a full range of administrative remedies where appropriate to curb unlawful behavior. *4 Aware that a private judicial damage remedy was not afforded customers under the CEA, Congress, as before, declined to authorize such a remedy. The foregoing?> reveals the methodical development over a 58 year period of a comprehensive scheme to regulate the commodities industry. Congress carefully identified the problems to be dealt with, balanced the interests of those involved in the market and enacted regulations and means of enforcement tailored to achieve its goals. In so doing, Congress defined the role to be played in the regulatory scheme by the federal courts. The district courts are given original jurisdiction in enforcement and injunctive actions by the CFTC,?° and in injunctive actions by the States;?’ and are given 24S. Rep. No. 95-850, 95th Cong., 2d Sess. 12-13, reprinted in [1978] U.S. Code Cong. & Ad. News 2087, 2100-01. 25 The discussion of legislative history in this petition is necessarily abbreviated. A more complete analysis of that history, as it specifically relates to legislative intent concerning private remedies, is provided by the majority and dissenting opinions of Judges Friendly and Mansfield in Leist v. Simplot, Nos. 79-7402, 7464, 7482 (2d Cir., July 8, 1980). See also, pp. 19-23, infra. 26 Sections 6b, 6c, 7 U.S.C. §§ 13a, 13a-1. 27 Section 6d, 7 U.S.C. § 13a-2. 12 enforcement jurisdiction in reparation awards.7* The courts of appeals are given statutory jurisdiction to review reparation awards and suspensions of trading privileges. 9 The limited jurisdiction granted the federal courts is an essential element of the balance achieved by Congress in its regulatory scheme. By enactment of the provisions for resolution of disputes, sections 5a(11) and 14, 7 U.S.C. §§ 7a(11), 18, Congress chose not to impose upon registered persons such as Merrill Lynch the substantial expense and disruptive impact of federal litigation of private damage claims, see Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 740-43 (1975), the burden of which would of necessity be passed on to the overall market in the form of higher commissions and diminished efficiency. Creation of a judicially inferred right of action would alter the balance inherent in the legislative scheme. Implication of a private right of action would also impose an unnecessary burden upon the federal judicial system. The already massive and ever-increasing volume of commodities trading, often based upon verbal orders, gives rise to a significant number of customer-broker disputes. Congress expressly enacted the means by which such disputes are to be resolved, and specified only a limited role for the federal judiciary.*° The majority below would scuttle this legislative plan, granting access to the federal courts for 28 Section 14(f), 7 U.S.C. § 18(f). 2% Sections 6(b), 14(g), 7 U.S.C. §§ 9, 18(g). % Section 14(f), 7 U.S.C. § 18(f) (enforcement of awards); section 14(g), 7 U.S.C. § 18(g) (appellate review). 13 adjudication of all cases alleging breaches of duties claimed to exist under section 4b. Such a burden on the federal courts is unnecessary since actions such as this one, alleging breach of fiduciary duty and fraud, rot only are cognizable under section 14 reparation proceedings, but are a mainstay of state court litigation. B. Implication of a private judicial right of action for fraud under the Commodity Exchange Act is an issue that has divided the lower federal courts. Whereas prior to the CEA’s substantial amendment in 1974, the few lower courts to treat the issue had generally recognized an implied private remedy under section 4b,3! such harmony no longer exists. Creation in 1974 of the CFTC and the express provision for reparation proceedings to adjudicate customer complaints against registered persons, together with development of the restrictive approach to implication of private remedies manifest in this Court’s recent decisions,3? has left the lower federal courts sharply divided on the issue of whether an additional judicial remedy may be implied under section 4b. 3! See, e.g., Goodman v. H. Hentz & Co., 265 F. Supp. 440 (N.D. Ill. 1967). Cf. Deaktor v. L.D. Schreiber & Co., 479 F. 2d 529 (7th Cir.), rev'd on other grounds sub nom. Chicago Mercantile Exchange v. Deaktor, 414 U.S. 113 (1973). 32 National Railroad Passenger Corp. v. National Assn. of Railroad Passengers, 414 U.S. 453 (1974); Cort v. Ash, 422 U.S. 66 (1975); Securities Investor Protection Corp. v. Barbour, 421 U.S. 412 (1975); Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975); Piper v. Chris-Craft Industries, 430 U.S. 1 (1977); Chrysler Corp. v. Brown, 441 U.S. 281 (1979); Cannon v. University of Chicago, 441 U.S. 677 (1979); Touche Ross & Co. v. Redington, 442 U.S. 560 (1979); Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11 (1979). 14 Several district court cases have reached the same result as the majority opinion below, implying a private right of action*’, while others support Judge Phillip’s dissenting view that no implied private remedy exists.*4 The divided panel below is the first court of appeals to address this issue. The Court of Appeals for the Second Circuit, in Leist v. Simplot, Nos. 79-7402, 7464, 7482 (July 8, 1980), also by a divided panel, recently reached a similar result, although Leist did not involve a section 4b claim by a customer against his own broker. 33° Witzel v. Chartered Service Corp. of New York, Ltd., Civ. No. 4-79-610 (D. Minn, May 27, 1980); Navigator Group Funds v. Shearsen Hayden Stone, Inc., No. 77 Civ. 5350 (S.D.N.Y., March 20, 1980); Smith v. Groover, 468 F. Supp. 105 (N.D. Ill. 1979); R. J. Herely & Son Co. v. Statler & Co., 466 F. Supp. 345 (N.D. Ill. 1979); Jones v. B. C. Christopher & Co., 466 F. Supp. 213 (D. Kan. 1979); Poplar Grove Planting & Refining Co. v. Bache Halsey Stuart Inc., 465 F. Supp. 585 (M.D. La. 1979); Hofmayer v. Dean Witter & Co., Inc., 459 F. Supp. 733 (N.D. Cal. 1978); Berenson v. Madda Trading Co., [1977-80] Comm. Fut. L. Rep. (CCH) paragraph, 20,689 (D.D.C. 1978); Cf. Croll v. Maduff & Sons, Inc., No. CV 79-466-RMT (C.D. Cal., April 3, 1980); Shearson Hayden Stone, Inc. v. Lumber Merchants, Inc., 423 F. Supp. 559 (S.D. Fla. 1976). 34 Mullis v. Merrill Lynch, Pierce, Fenner & Smith, Inc., No. 79-172 BRT (D. Nev., July 1, 1980); Hensley v. Maduff & Sons, Inc., 2 Comm. Fut. L. Rep. (CCH) paragraph 21,017 (C.D. Cal. 1980); Fischer v. Rosenthal & Co., 481 F. Supp. 53 (N.D. Tex. 1979); National Super Spuds, Inc. v. New York Mercantile Exchange, 470 F. Supp. 1256 (S.D.N.Y. 1979), rev'd sub nom. Leist v. Simplot, Nos. 79-7402, 7464, 7482 (2d Cir., July 8, 1980); Berman v. Bache, Halsey, Stuart, Shields, Inc., 467 F. Supp. 311 (S.D. Ohio 1979) (overruled sub silentio by Curran); Comstock Investors, Inc. v. Rosenthal & Co., [1977-80] Comm. Fut. L. Rep. (CCH) paragraph 20,934 (C.D. Cal. 1979); Alkan v. Kosenthal & Co., [1977-80] Comm. Fut. L. Rep. (CCH) paragraph 20,797 (S.D. Ohio 1979) (overruled sub silentio by Curran); Bartels v. International Commodities Corp., 435 F. Supp. 865 (D. Conn. 1979); Consolo v. Hornblower & Weeks-Hemphil], Noyes, Inc., 436 F. Supp. 447 (N.D. Ohio 1976) (overruled sub silentic by Curran). Cf. Stone v. Saxon & Windsor Group, Ltd., [1977-80] Comm. Fut. L. Rep. (CCH) paragraph 21,000 (N.D. Ill. 1980); Liang v. Hunt, [1977-80] Comm. Fut. L. Rep. (CCH) paragraph 20,880 (N.D. Ill. 1979). 15 In addition to the foregoing, there are undoubtedly many other federal court cases wherein the issue has not yet been decided or the decisions are not reported. Merrill Lynch is itself a party to several such pending cases, *5 II. The Court of Appeals’ implication of a private right of action for fraud under the Commodity Exchange Act conflicts in principle with the decisions of this Court in Transamerica and Touche Ross. The majority opinion below implied a private judicial: right of action under the CEA notwithstanding the absence of any persuasive evidence that Congress intended that such a right exist, and despite substantial evidence to the contrary. The majority's holding and the analysis by which it was reached are both in sharp conflict with guiding principles of statutory construction set forth by this Court in Transamerica Mortgage Advisors, Inc v. Lewis, 444 U.S. 11 (1979) and Touche Ross & Co. v. Redington, 442 U.S. 560 (1979). Rather than the sharp critical focus upon the narrow question of legislative intent, and the incisive search for “persuasive evidence” of intent that a private remedy exists, as required by Touche Ross and Transamerica, the majority below purported to follow the more diffuse analysis of Cort v. Ash, 422 U.S. 66 (1975), and in so doing, was drawn to render policy judgments beyond the scope of its proper judicial function. 38 E.g., Dart Partnership v. Merrill Lynch, Pierce, Fenner & Smith Inc., No. H80-1205 (D. Md.); Para v. Merrill Lynch, Pierce, Fenner & Smith, Inc., No. 80-667 (W.D. Wash.); Ames v. Merrill Lynch, Prerce, Fenner & Smith, Inc., No. 76 Civ. 3085 (S.D.N.Y.); Wanty v. Merrill Lynch, Pierce, Fenner & Smith, No. 77 Civ. 869 (RLC) (S.D.N.Y.); Zeltser v. Merrill Lynch, Pierce, Fenner & Smith, Inc., No. 80 Civ. 4009 (S.D.N.Y.). 16 Cort set forth four criteria to guide the courts in deciding whether to imply a private cause of action”. The majority below applied these four factors and found that each supports implication of a private right of action for fraud under the CEA (A30-A34). The breadth of the four part Cort analysis has, however been sharply criticized, Cannon v. University of Chicago, 441 U.S. 677, 730-49 (1979) (Powell, J., dissenting) and its focus has since been sharpened by this Court: It is true that in Cort v. Ash ... the Court set forth four factors that it considered ‘relevant’ in determining whether a private remedy is implicit in a statute not expressly providing one. But the Court did not decide that each of these factors is entitled to equal weight. The central inquiry remains whether Congress intended to create, either expressly or by implication, a private cause of action. Touche Ross, supra, at 575 (emphasis added). The holdings of this Court subsequent to Cort also demonstrate the proper methodology of the ‘‘central inquiry” into Congressional intent. The question whether a statute creates a cause of action, either expressly or by implication, is basically a matter of statutory construction, Transamerica, supra, at 15, and analysis must begin with the language of the statute itself. Touche Ross, supra, at 568. Further, “[a]bsent a clearly expressed legislative intention to the 36 6“First, is the plaintiff ‘one of the class for whose especial benefit the statute was enacted’ . . . that is, does the statute create a federal right in favor of the plaintiff? Second, is there any indication of legislative intent, explicit or implicit, either to create such a remedy or to deny one? ... Third, is it consistent with the underlying purposes of the legislative scheme to imply such a remedy for the plaintiff? ... And finally, is the cause of action one traditionally relegated to state law, in an area basically the concern of the States, so that it would be inappropriate to infer a cause of action based solely on federal law?’ 422 U.S. at 78. 17 contrary’’ the language of a statute ‘must ordinarily be regarded as conclusive.”” Consumer Product Safety Commission v. GTE Sylvania, Inc., — US. —, 48 U.S.L.W. 4658, 4659 (June 9, 1980) (emphasis added). The language of the CEA contains no reference whatever to a private judicial right of action for violation of its anti-fraud provisions. Its language is, nonetheless, instructive: most significantly, the CEA provides a full panoply of criminal, civil and administrative remedies to enforce its regulatory function. The majority below found this broad range of express enforcement measures to be evidence of Congressional intent to provide strong regulation of the commodities markets and then leapt, impermissibly, to the further conclusion that an additional remedy, a private right of action, is compatible with this goal and should therefore be judicially imp'ied. This conclusion is at odds not only with the teachings of Transamerica and Touche Ross, but with the doctrine of the separation of powers. The fact that a federal statute has been violated and some person harmed does not automatically give rise to a private cause of action in favor of that person. Touche Ross, supra, at 568. Instead, the judicial task is “limited solely to determining whether Congress intended to create the private right of action asserted.’’ I/d. Moreover, “it is an elemental canon of statutory construction that where a statute expressly provides a particular remedy or remedies, a court must be chary of reading others into it. ‘When a statute limits a thing to be done in a particular mode, it includes the negative of any other mode.’ "’ Transamerica, supra, at 19-20. 18 The CEA provides an express remedy for the type of violations asserted by the Currans. Section 14 provides for hearing before an administrative law judge and for damage awards enforceable and reviewable in the federal courts. These express provisions compel “the negative of any other mode,” including an implied judicial remedy. They also render an implied remedy unnecessary and, as this Court held in Piper v. Chris-Craft Industries, Inc., 430 U.S. 1, 25-26 (1977), creation by judicial implication of a private damage remedy is proper only if it is necessary to effectuate Congress’ goals. See also, Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 734, 736 (1975). The CEA’s express provision for private damage awards arising out of statutory reparation proceedings further compels the conclusion that ‘‘[o]bviously .. . when Congress wished to provide a private damages remedy, it knew how to do so and did so expressly.’’*’ Touche Ross, supra, at 572. In addition, the full panoply of express provisions for enforcing duties imposed by the CEA and section 4b in particular make it “highly improbable that ‘Congress absentmindedly forgot to mention an intended private action.’ ” Transamerica, supra, at 20 (quoting Cannon, supra, at 742 (Powell, J., dissenting)). Transamerica contains the clear admonition that when a statute fails expressly to provide a private judicial right of action while providing for other express remedies, an additional right of action cannot be implied by the courts absent “persuasive evidence of a 37 See also, sections 308, 309, Packers and Stockyards Act, 7 U.S.C. §§ 209, 210 (providing agency reparation proceedings analogous to CEA section 14, while expressly providing an alternative judicial right of action). 19 contrary legislative intent.” 444 U.S, at 20, The majority below failed to heed this admonition, No persuasive evidence of a congressional intent to provide a private judicial right of action for fraud exists, Indeed, the only support offered by the majority below for its holding that Congress intended an implied private remedy to exist is the fact that a few lower federal courts, using the discredited “tort theory” for implying a private right, had, previous to the 1974 Amendments, recognized such a right and that in the hundreds of pages of legislative history underlying the 1974 Amendments, one legislator had alluded to these decisions, This is not the “persuasive evidence’ required by Transamerica, especially in light of the considerable evidence in the legislative history that no private judicial remedy was intended. Moreover, the excerpts of legislative history offered by the majority in support of its holding are misconstrued, For example, the majority opinion states that “Congress recognized that the ‘courts [had] implied a private remedy for individual litigants in the Commodity Exchange Act’ " (A31, n, 27), citing the remarks of Representative Poage.* Representative Poage was, in fact, citing such private litigation as a threat to the self-regulatory activities of exchanges. Representative Poage expressed the view that private suits against exchanges for failure to enforce their rules offered exchanges ‘solid reason for shrinking the protection given the customer and the public through self-regulation’”’.*’ In context, Representative Poage was citing private litigation as a discordant note in the 119 Cong. Rec, 41333 (1973) Id. 20 regulatory scheme and as further reason for “Congress to act, and act expeditiously through meaningful, thoughtful change that is well reasoned and sure’’” to provide the comprehensive, coherent and balanced regulatory scheme embodied in the 1974 Amendments. Similarly misplaced is the majority's reliance (A31,n. 27) upon comments made during Senate hearings on the 1974 Amendments.*' The testimony cited includes that of Professor Schotland, who argued emphatically for enactment of the private civil damage remedy contained in the Hart bill.*? Professor Schotland also argued against the broad private reparation proceedings ultimately enacted as CEA section 14, The thrust of Professor Schotland’s remarks was that adjudication of private damage claims should be in the courts and not in the CFTC, The Professor also argued that “[i]f you do choose to retain such virtually unprecedented responsibility and burden [section 14 reparation proceedings] in this regulatory body, there should be explicit language in the statute that Federal and State courts are still open if a complainant prefers to go to trial there.”’*? As the 1974 Amendments make clear, Congress opted in favor of granting jurisdiction over © id. *' Hearings on S, 2485, S, 2578, S, 2837 and H.R, 13113 Before the Senate Comm, on Agriculture and Forestry, 93d Cong., 2d Sess, pt. 1 at 205, pt, 3 at 737 (1974), “2 §, 2837, 93d Cong., Ist Sess, § 905 (a), 119 Cong, Rec, 42688 (1973). * Hearings on S, 2485, S, 2578, S. 2837 and H.R. 13113 Before the Senate Comm, on Agriculture and Forestry, 93d Cong,, 2d Sess,, pt. 3 at 737 (1974), 21 private damage claims to the CFTC under section 14 and against an alternative private remedy in the federal courts, The majority below also places reliance (A3\, n. 27) on the remark of Senator Clark that “section 201 of (H.R, 13113) may prohibit all court actions’’** as evidence that the proviso to section 2(a)(1),"7 U.S.C. § 2, was added to preserve a private right of action for damages in the federal courts, The proviso states that “[nJothing in this section shall supersede or limit the jurisdiction conferred on courts of the United States or any State.” The majority below, however, ignores the statements of Representative Rodino, Chairman of the House Committee on the Judiciary, who recommended that the proviso be added to avoid an interpretation that the jurisdictional provision eliminates the jurisdiction of state courts over contract claims and the jurisdiction of federal courts over anti-trust claims and suits seeking review of administrative hearings. ** The remark of Senator Clark, a passing reference by a single legislator, is a slim reed upon which to base a finding that Congress approved a private right of action, Consumer Product Safety Commission v. GTE Sylvania, Inc., supra, 48 U.S.L.W. at 4662; Piper v. Chris-Craft Industries, Inc., 430 U.S. 1, 31-32 (1977); Chrysler Corp. v. Brown, 441 U.S, 281, 311 (1979); Leist v. Simplot, supra, (Slip Op, at 4173) (Mansfield, J., dissenting). In view of the lengthy and authoritative Hearings on S, 2485, S 2578, S, 2837 and H.R. 13113 Before the Senate Comm, on Agriculture and Forestry, 93d Cong., 2d Sess, pt. 1 at 205 (1974). 48 Id, at 259-260, See also, Leist v. Simplot, supra (Slip Op. at 4170-4174) (Mansfield, J., dissenting). 22 House and Senate Reports on the 1974 Amendments, both of which are silent as to the existence of any private judicial right of action, the remarks of Senator Clark and their bearing on the construction of section 2(a)(1) as the basis for a private judicial right of action are entitled to little weight. The language of section 2(a)(1) itself contradicts the conclusion of the majority below. The proviso states only that the 1974 legislation was not passed in derogation of jurisdiction already “conferred” upon the courts, Prior to 1974, Congress had enacted no provision ‘conferring’ jurisdiction on the courts to entertain private actions under the CEA. While a few federal courts had found an implied right of action under pre-1974 law, reliance on that factor is a bootstrap argument. The courts cannot “confer” jurisdiction upon themselves.4° Thus, only if the pre-1974 federal commodity legislation had expressly conferred jurisdiction on the courts to entertain actions thereunder would section 2(a)(1) be of any value in explaining away Congress’ conspicuous silence on that point when it completely overhauled the CEA in 1974. Since no pre-1974 provision existed, the implications of section 2(a)(1) (if any) are far outweighed by the straightforward legislative history discussed above, which is inconsistent with any intent to legislate a private right of action. Further, in Touche Ross, supra, at 577, this Court declared that reliance upon the general jurisdictional provision of a statute in attempting to imply a private right of action is misplaced and that the source of a - plaintiff's rights ‘must be found, if at all, in the # U.S. Const. art. IIL. 23 substantive provisions’ of the act sought to be enforced. There is no substantive provision in the CEA for a private judicial right of action. Finally, reliance by the majority below upon the remarks of Senator Talmadge (A28) is also misplaced The Senator’s statement that under the statutory reparation proceedings “the entire appeal process and the right of final determination by the courts are expressly preserved” (emphasis added) plainly does not support the inference that original jurisdiction over private damage claims also exists. It is apparent that the majurtty below, in implying a private judicial remedy, gave little weight to the plain language of the statute itself or to the great volume of legislative history, neither of which supports implication of such a right. The court below neither sought nor found ‘persuasive evidence’ of Congressional intent that a private judicial remedy be implied. The majority below thus acted in direct contravention of the teachings of Transamerica and Touche Ross. Perhaps the gravest error of the majority opinion, however, is its willingness to substitute its own judgment for that of Congress. The majority's inquiry under the third prong of the Cort analysis, and its finding that implication of a private right of action is “compatible” with the underlying purposes of the legislative scheme, do not justify reading the CEA more broadly than its language and the statutory scheme reasonably permit. Touche Ross, supra, at 578. ‘‘The ultimate question is one of Congressional intent, not one of whether [the Court] thinks that it can improve upon the statutory scheme that Congress enacted into law.” Id. 24 In Cannon, supra at 718, Mr. Justice Rehnquist wrote that “[nJot only is it ‘far better’ for Congress to so specify when it intends private litigants to have a cause of action, but for this very reason this Court in the future should be extremely reluctant to imply a cause of action absent such specificity on the part of the Legislative Branch.’’ Sound justification for this “extreme reluctance,” as set forth by the strong dissent of Mr. Justice Powell in Cannon, is based upon Article Ill of the United States Constitution and the doctrine of the separation of powers. As presaged by the opinions of Justices Rehnquist and Powell in Cannon, this Court, in Touche Ross and Transamerica, has held that a private right of action will be implied only when it is clear that Congress so intended. The effect of Touche Ross and Transamerica on the four part Cort analysis is to give primacy to legislative intent and subordinate the question of whether an implied remedy is ‘consistent with the underlying purposes of the legislative scheme’ for the reason that, the Cort analysis too easily may be used to deflect inquiry away from the intent of Congress, and to permit a court instead to substitute its own views as to the desirability of private enforcement .. . . .. Determining whether a private action would be consistent with the ‘underlying purposes’ of a legislative scheme permits a court to decide for itself what the goals of a scheme should be, and how those goals should be advanced. Cannon, supra at 740 (Powell, J. dissenting). The inquiry of the majority below was thus “deflected” from its proper purpose, the determination 25 of Congressional intent. Its deflection, and its error, are apparent from its conclusion: What we have done here, in our view, is to preserve the general concept of a private right of action and to provide for its continuing development, not under the securities laws generally, but under those laws of Congress which are more particularly related to the commodities market. This approach provides greater sensitivity to the specialized concerns of that area of commercial life, appears consistent with congressional intent and also allows for the development of a private right of action similar to the valuable body of law that has grown under Section 10 of the Securities Exchange Act and Rule 10b-5. (A36). The right to “preserve ... a private right of action and to provide for its continuing development” is that of Congress alone. Had Congress preferred a private right of action and a “valuable body of law” analogous to that which has grown under the federal securities laws, Congress certainly knew how to so provide and would have done so expressly. Touche Ross, supra, at 572. Congress chose, however, not to do so and it is beyond the province of the Judicial Branch to amend the legislative scheme and thereby alter its balance 26 Implication by the majority below of a private right of action for fraud under the CEA manifests an arrogation of the constitutional powers of the Legislative Branch and violates principles so recently emphasized by this Court in Touche Ross and Transamerica. Ill. The Court of Appeals’ retroactive application of Commodity Futures Trading Commission Reg. § 180.3 conflicts in principle with controlling decisions of this Court. The Court of Appeals retroactively applied a 1976 regulation to void a 1973 agreement that provided for arbitration of a claim that had ripened in 1974. The Court of Appeals so acted despite the fact that *he CFTC itself has interpreted the regulation as not voiding pre-existing agreements to arbitrate disputes that had arisen prior to the effective date of the regulation. Ames v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 567 F.2d 1174, 1182 n.2 (2d Cir. 1977) (Meskill, J., dissenting) (quoting brief of CFTC, amicus curiae). As pointed out by the cogent dissent of Judge Meskill in Ames, such a ruling violates no less than three canons of construction announced by this Court: First, the CFTC’s interpretation of its own regulation must be given “controlling weight unless it is plainly erroneous or inconsistent with the regulation.’’ Bowles v. Seminole Rock & Sand Co., 325 U.S. 410, 414 (1945). The Court below, relying on the Ames majority, gave no weight to the CFTC’s interpretation. Second, a new regulation should be interpreted in such a way as to avoid interference with matured 27 antecedent rights. Greene v. United States, 376 U.S. 149, 160 (1964); Bradley v. Richmond School Board, 416 U.S. 696, 720 (1974). Prior to the effective date of the regulation, Merrill Lynch had an accrued right to arbitrate this dispute. The interpretation of the regulation submitted by the CFTC as amicus in Ames avoided interference with this antecedent right. Third, a regulation should be construed, whenever possible, so as to avoid constitutional issues. See, Ashwander v. T.V.A., 297 U.S. 288, 348 (1936) (Brandeis, J., concurring). The interpretation of the Court below raises the substantial due process issue of whether the right to arbitration thus abrogated is substantive or procedural, and whether such abrogation results in “manifest unfairness.” Ames, supra, at 1177, 1179. CFTC Reg. § 180.3 should have been construed, as recommended by the CFTC in Ames, so as not to void arbitration agreements that pertained to disputes that existed as of the effective date of the regulation. CONCLUSION For the foregoing reasons this petition for a writ of certiorari should be granted. Respectfully submitted, Douglas G. Graham, counsel of record Richard P. Saslow Seymour M. Nayer Butzel, Keidan, Simon, Myers & Graham 1990 First National Building Detroit, Michigan 48226 Counsel for Petitioner, Merrill Lynch, Pierce, Fenner & Smith, Inc. Dated: August 5, 1980 QUESTIONS PRESENTED FOR REVIEW Does the Commodity Exchange Act create an implied private right of action for fraud in favor of a customer against his broker? Il. Should Commodity Futures Trading Commission Reg. §180.3 be given retroactive application to void arbitration agreements entered into prior to the effective date of that regulation in abrogation of the parties’ right to arbitration of a dispute that arose prior to that effective date? APPENDIX A-1 No. 77-1300 UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT J. J. Curran and Jacguetyn L. Curran, individually and as trus- tees of the John J. Curran Living Trust and Jacquelyn L. Curran Living Trust, Plaintiffs-Appellants, APPEAL from. the United States District Court for the Eastern v. District of Michigan. Merritt Lyncu, Pierce, FENNER AND Smitn, INc., Defendant-Appellee. Decided and Filed May 12, 1980. Before: Livery and Encer, Circuit Judges and Pius, Senior Circuit Judge. Encet, Circuit Judge, delivered the opinion of the Court, in which Livecy, Circuit Judge, joined. Pinus, Senior Cir- cuit Judge, (pp. 37-38) filed a separate opinion, concurring in part and dissenting in part. Encex, Circuit Judge. Plaintiffs appeal trom the district court’s order granting partial summary judgment in favor of the defendant Merrill Lynch, Pierce, Fenner & Smith (here- inafter Merrill Lynch), and further granting Merrill Lynch's motion for stay of the remaining claims pending arbitration." ‘An order staying a pending action until the case is submitted to arbitration is appealable under 28 U.S.C. £1292(a) (1) if the under- A-2 2 Curran, et al. v. Merrill Lynch, Inc. No. 77-1300 In their complaint, plaintiffs John J. Curran and Jacquelyn L. Curran sought damages from Merrill Lynch for false repre- sentations made by its agents which induced plaintiffs to open discretionary commodity trading accounts with Merrill Lynch and for the broker's subsequent mismanagement of those accounts. Specifically, plaintiffs allege that the accounts constitute investment contracts under federal law, and that Merrill Lynch violated Section 5 and Section 12(2) of the Securities Act by failing to file a registration statement before making an offer and sale of a security. Plaintiffs also assert that defendant made untrue statements of material fact, omitted to state material facts necessary to make the statements not mislead- ing, and employed a device, scheme, or artifice which operated as a fraud upon plaintiffs, all in violation of Rule 10b-5, § 17 (a) of the Securities Act, §6 of the Commodities Exchange Act, § 410(a)(2) of the Michigan Uniform Securities Act, and principles of common law. Plaintiffs further allege that de- fendant breached the commodity account agreement by: (1) failure to manage the accounts in a skillful and prudent man- ner; (2) failure to observe certain safeguards and stop-loss limits; and (3) failure to employ a scientific and comprehen- sive investment plan and instead, engaging in reckless and haphazard trading with the sole intention of generating large commissions. The district court ruling presents several issues of first impression in this circuit. Initially, we must determine whether a discretionary trading account in commodity futures constitutes a “security” subject to the registration requirements and enforcement provisions of the federal securities laws. The court below determined the account was not a security and entered partial summary judgment against plaintiffs’ se- lying action, as here, is legal in nature. Sce Mansbach v. Prescott, Ball & Turben, 598 F.2d 1017, 1022 (6th Cir. 1979); 9 Moore’s Federal Practice § 110.20[3). A-3 No. 77-1300 Curran, et al. v. Merrill Lynch, Inc. 3 curities claims, relying primarily on Milnarik v. M-S Com- modities, Inc., 457 F.2d 274 (7th Cir.), cert. denied, 409 U.S. 887 (1972). In Milinarik the Seventh Circuit, speaking through Mr. Justice Stevens (then Judge Stevens), held that a discretionary trading account in commodity futures is not a security because such accounts lack the “common enterprise” element required for an investment contract under Securities Exchange Commission v. Howey, 328 U.S. 293 (1946). We agree. Further, we reject plaintiffs’ contention that the account involved here, though not a security, should be treated as such because it was fraudulently misrepresented to include the essential elements of a common enterprise. This appeal also presents substantial questions whether the district court should have stayed plaintiffs’ other claims pend- ing arbitration, and whethez in all events the lawsuit is barred by a one-year limitation period provided for in the contract in question. Finally, for reasons set forth later, we have been obliged to consider, sua sponte, and have determined that an implied private right of action exists under the Commodity Exchange Act.? I. FACTS Plaintiffs, as customers of the broker-dealer defendant, Mer- rill Lynch, lost a substantial sum of money in the highly volatile and speculative futures market. These losses were allegedly sustained due to Merrill Lynch's mismanagement of plaintiffs’ discretionary commodity accounts in a manner con- trary to representations made when the contracts were made. 2In Kelley v. Carr, —— F.2d —— (6th Cir. 1980) (decided March ——, 1980 File No. 78-1091/2), our court noted that the federal courts are in conflict over the continuing validity of a private implied right of action under the Commodity Exchange Act, following the 1974 amendments to the Act. The Kelley court, however, found it unneces- sary “ F ig a the issue under the circumstances presented in that case. .at—, A-4 4 Curran, et al. v. Merrill Lynch, Inc. No. 77-1300 In 1973, plaintiffs opened several accounts for trading com- modity futures in defendant's “Guided Commodities Account Program.” In the written Customer Account Agreement, the parties agreed to submit any dispute under the contract to arbitration within one year after the accrual of such claim. As Merrill Lynch interprets the program, a customer deposits an amount he is prepared to risk in his own commodity trading account. Merrill Lynch further claims that although specific recommendations for purchase and sale are made by commodi- ties specialists, the ultimate decision to act or not is made only upon the customer's direct order. However, plaintiffs have raised a question of fact with respect to that issue in the pleadings and Merrill Lynch has acknowledged that, for the purposes of this appeal only, the plaintiffs’ commodity trading accounts must be deemed discretionary, with trading control in the hands of Merrill Lynch. Plaintiffs allege that Merrill Lynch fradulently misrepre- sented how the account would be handled with respect to other accounts in the same program. They insist that the discretionary account was represented to involve several unique elements in that: (1) the program involved a speci- fied number of investors who could not withdraw their capital for a minimum of 18 months; (2) the accounts were to he controlled by an individual trader who could direct buy/sell decisions on a broad basis and thereby control fluctuations in the market; (3) the capital availability and buying power generated by control over the group of accounts would create a multibuyer effect allowing the trader to buy as though he were buying five times greater the amount than if dealing with a separate account. To support these contentions, plaintiffs state that after they opened the first account of $100,000 Merrill Lynch made all trading decisions and exercised complete control over plain- tiffs’ accounts. Initially, plaintiffs realized profits on the trad- ing activity and at one point withdrew $101,007.80. Later, the A-5 No. 77-1300 Curran, et al. v. Merrill Lynch, Inc. 5 accounts declined in value and plaintiffs suffered excessive trading losses which they blame upon improper and excessive trading activities and a failure to observe the “stop loss” pro- cedures represented to exist as part of the program. On sev- eral occasions, plaintiff John J. Curran requested that the ac- counts be closed and that plaintiffs be “cashed-out.” On each occasion, except the final one (at which time plaintiffs’ capi- tal had been reduced to approximately $6,000), defendant either refused to follow his advice or convinced Curran that he was required to stay in the program for 18 months. In April, 1974, the defendants assented to plaintiffs’ demands to “cash-out” the accounts. At that time plaintiffs assert that the accounts had declined in value approximately $175,000. Sig- nificantly, Merrill Lynch had in the meanwhile been paid $44,500 in commissions. A commodity future is a standardized contract for the pur- chase and sale of a fixed quantity of a commodity to be delivered in a specified future month at a price agreed upon when the contract is entered into. See generally Bromberg, Securities Laws § 4.6, at 82.181 (1975). Futures contracts are traded by futures commission merchants and floor brokers on national exchanges, or “contract markets,” which are regu- lated by the Commodity Futures Trading Coimmission (CFTC). Generally, a futures contract seller is characterized as being in a “short” position since he must deliver the commodity in accordance with the contract in order to receive the purchase price. The purchaser of a futures contract is labeled as holding a “long” position in that he must pay the contract price before receiving the commodity. Ordinarily, the number of trades far excceds the number of actual deliveries since futures contracts are the subject of speculation by traders sccking to profit from their trading acumen, rather than from actually A-6 6 Curran, et al. v. Merrill Lynch, Inc. No. 77-1300 delivering or receiving the commodity involved. As Judge Kinneary stated in Berman v. Bache, Halsey, Stuart, Shields, Inc., 467 F. Supp. 311, 315-16 (S$.D. Ohio 1979), “a commodi- ties future contract is little more than a wager that the mar- ket price of a given commodity will change in a given direction by a specified future date.” Normally, the trader's expectation of profit arises solely from speculative hope based upon his expertise in the market. Although bare commodities are generally not considered securities, some courts have determined that an investment contract is formed when commodity accounts are managed by the seller or affiliate? Typically, a customer tradjng in a discretionary commodity account gives the broker authority to buy and sell at the broker's discretion, without prior con- sultation with the customer. Discretionary accounts are more common for commodities where fast trading is required due to sharp movement in prices, a factor further magnified by the high leverage that results from generally low margin requirements. While the underlying commodities themselves do not con- stitute securities, whether a discretionary commodity account constitutes an investment contract, and thus a security under the federal securities laws, is a current topic of dispute in the federal courts. The question is particularly difficult where there is no actual pooling of the customer's funds with those of other investors. Whether a particular financial arrangement is considered an “investment contract,”? and therefore subject to the filing requirements of Section 5, Securities Act of 1933, and the 3 See, o.9.. Securities & Exchange Commission v. Continental Com- modities Corp, 497 F.2d 516, 520 nO (Sth Cir, 1971); Glen-Arden Commodities, lve, v. Constantino, 493 F.2d 1027 (2d Cir, 1974); Sinva, lac, v. Merrill Lynch, Pierce, Fenner & Smith, Inc,, 253 F. Supp. 359 (S.D.N.Y. 1966). 4Section 2(1) of the Securities Act of 1933, 15 U.S.C. §77(b) (1), and Section 3(a) (10) of the Securities Exchange Act of 1934, 15 U.S.C. A-7 No. 77-1300 Curran, et al. v. Merrill Lynch, Inc. 7 antifraud provisions of Section 10 and Rule 10b-5 of the Securities Exchange Act of 1934, is usually determined by measuring the arrangement against the requirements set forth in Securities & Exchange Commission v. Howey, supra. In Howey, the Supreme Court defined an investment contract as “. . . a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or third party... .” Id. at 298-99. It is universally recognized that the Howey test is comprised of three basic elements: (1) an investment of money, (2) in a common enterprise, with (3) profits to come solely from the efforts of others. Further, although the Supreme Court offered little guidance in defining these elements, it did note that the definition of a security, [E]mbodies a flexible rather than static principle, one that is capable of adaptation to mect the countless and variable schemes devised by those who seck the use of money by others on the promise of profits. Id. at 351. See also United Housing Foundation, Inc. v. Forman, 412 U.S. 837, 852 (1975). The current debate usually focuses on whether a horizontal or a vertical relationship satisfies the “common enterprise” language of Howey. Plaintiffs assert that the common enter- prise requirement is met by a vertical relationship, which 78c (10) include the term “investment contract” in the definition of a security: The term “security” means any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transfer- able share, investment contract, voting-trust certificate, certifi- cate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, or, in general, any interest or instrument commonly known as a “security,” or any certificate of interest or participation in, temporary or interim certificates for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. (Emphasis added.) 15 U.S.C. §77b(1). A-8 8 Curran, et al. v. Merrill Lynch, Inc. No. 77-1300 essentially is a one-on-one arrangement between the customer and broker. Horizontal relationships are those between an individual investor and the pool of other investors. In rend- ering summary judgment against plaintiffs’ securities claims the district court applied the horizontal approach adopted in Milnarik v. M-S Commodities, Inc., supra. In Milnarik, Justice Stevens began his inquiry by observing that, in searching for the meaning and scope of the word “security,” courts should disregard form in favor of substance and place the emphasis on economic reality. Tcherepnin v. Knight, 389 U.S. 332 (1967). He observed that not “every conceivable arrangement that would fit a dictionary definition of an investment contract was intended to be included within the statutory definition of a security.” Id. at 375-76. Justice Stevens interpreted Securities & Exchange Commission v. Howey, supra, as stressing the significance of the common enterprise element in determining whether particular invest- ment contracts are securities. The original complaint in Milnarik alleged a discretionary arrangement remarkably similar to the relationship here. The court noted, however, that “the success or failure of those other [customer's] con- tracts had no direct impact on the profitability of plaintiffs’ contract. [The broker's] various customers were represented by a common agent, but they were not joint participants in the same investment enterprise.” Id. at 276. The significance of this finding is found in Milnarik’s adoption of the district court's further determination that: In essence, this contract creates an agency-for-hire rather than constituting the sale of a unit of a larger en- $ For cases adopting the horizontal commonality approach, see also, Hirk v. Agri-Research Council, Inc., 561 F.2d 96 (7th Cir. 1977) (reaffirms Milnarik); Wasnowic v. Chicago Board of Trade, 352 F. Supp. 1066 (M.D. Pa. 1972), 7 without opinion, 491 F.2d 752 (3rd Cir.), cert. denied, 416 U.S. 949 (1974); Berman v. Bache, Halsey, Stuart, Shields Co., 467 F. 1% 311 (S.D. Ohio 1979); Arnold v. Bache & Co., 377 F. Supp. 61 (M.D. Pa. 1973); Stuckey v. du Pont Glore Forgan, Inc., 59 F.R.D. 129, 131 (N.D. Cal. 1973). A-9 No. 77-1300 Curran, et al. v. Merrill Lynch, Inc. 9 terprise. No matter how many different persons Nelson became an agent for under similar or even identical dis- cretionary contracts, his relationship with each would remain as that of agent and principal. Each contract creating this relationship is unitary in nature and each will be a success or failure without regard to the others. Some may show a profit, some a loss, but they are inde- pendent of each other. No matter how many discretion- ary trading accounts Nelson may have had with other principals, the “security” “issued” to the plaintiffs, their discretionary trading account, could not be offered to anyone else. Although this Court recognizes that the registration requirements of Section 5 are for the pro- tection of the public and that any exemption therefrom must be strictly construed against one claiming it, Se- curities and Exchange Commission v. Ralston Purine Co., [346 U.S. 119, 73 S.Ct. 981, 97 L.Ed. 1494]; Securities and Exchange Commission v. Culpepper, 270 F.2d 241 (2d Cir. 1959), the unitary nature of the contract here involved is not overcome even when the transaction is viewed most strongly against the defendants. Id. at 277. We reject plaintiffs’ assertion that a pooling of investors’ interests is not essential to a finding of common enterprise and hold that Justice Stevens’ reasoning in Milnarik best com- ports with the language of J/owey since the agreement entercd into here was solely between plaintiffs as investors, and Merrill Lynch as broker, and it did not include a “common enterprise” clement. Therefore, we conclude the district court had no jurisdiction under the federal securitics laws and properly dismissed those claims for failure to state a cause of action. By adopting Milnarik, we necessarily reject the vertical commonality approach primarily championed by the Fifth Circuit’s decision in Securitics & Exchange Commission vy. Continental Commodities Corp., 497 F.2d 516 (5th Cir. 1974). A-10 10 Curran, et al. v. Merrill Lynch, Inc. No. 77-1300 In Continental Commodities, the district court followed the Seventh Circuit's reasoning in Milnarik, supra, primarily be- cause each individual invested in different accounts and the investors had no expectation that they would share in a com- mon fund comprised of the return on their investments.® The Fifth Circuit, however, refused to adopt the Milnarik approach and emphasized its view that a pro rata sharing of profits is not critical to a finding of commonality. Rather, the court preferred a resilient standard which would comport with the remedial purposes of the Securities Act of 1933 and the Securities Exchange Act of 1934. The court applied a test which the Ninth Circuit formulated to deal with the various pyramid-type investment schemes challenged in the courts as securities: a “common enterprise is one in which the fortunes of the investor are interwoven with and depen- dent upon the efforts and success of those secking the invest- ment or of third parties.” Securities & Exchange Commission v. Koscot Interplanetary, Inc., 497 ¥.2d 473 (5th Cir. 1974), quoting Securities & Exchange Commission v. Glen W. Turner Enterprises, 474 F.2d 476, 482 n. 7 (9th Cir.), cert. denied, 414 U.S. 821 (1973).?_ Further, the court expressed the notion 6 it is interesting to note that the SEC had argued unsuccessfully before the district court in Continental Commodities, supra, that “trading in discretionary commodities accounts engaged in by Con- tinental Commodities fell within the ambit of the term security, as defined by the Sccurities Act of 1933 and the Securities Exchange Act of 1934." 497 F.2d at 520. 71In Brodt v. Bache & Co., Inc., 595 F.2d 459 (9th Cir. 1979), the Ninth Circuit recocnized its prevailing definition of “common enter- prise” as one in which the fortunes of the investor are interwoven with and dependent upon the efforts and success of those secking the investment or of third persons. However, the court noted its incon- sistency with Milnarik’s strict pooling requirement for discretionary commodity accounts. The Brodt court then distinguished a discretion- ary commodity account from its general test by stating: ["]In the instant case, the investor's return, while specifically determined by the commodities market. is also clearly affected by the expertise of the person doing the trading. .. . the success or failure of Bache as a brokerage house docs not correlate with individual investor profit or loss. On the contrary, Bache could reap large commissions for itself and be characterized as suc- A-11 No. 77-1300 Curran, et al. v. Merrill Lynch, Inc. ll that “the critical factor is not the similitude or coincidence of investor input, but rather the uniformity of impact of the promoter’s efforts.” 497 F.2d at 478. In Continental Commodities the Fifth Circuit vigorously criticized Milnarik’s elevation of the pooling ingredient to exalted status and held that “the critical inquiry is confined to whether the fortuity of the investments collectively is essentially dependent upon promoter expertise. . . . That it may bear more productive fruits in the case of some options than it does in others should not vitiate the essential fact that the success of the trading enterprise as a whole and customer investments individually is contingent upon the sagacious investment counselling of Continental Commodities.” Id. at 522.8 Although this approach has attracted some si:port.? we believe that no horizontal common enterprise can exist wn- less there also exists between discretionary account customers cessful, while the individual accounts could be wiped out. Here. strong efforts by Bache will not guarantee a return nor will Bache'’s success necessarily mean a corresponding success for Brodt. Weak efforts or failure by Bache will deprive Brodt_of potential gains but will not necessarily mean that he will suffer serious losses. Thus, since there is no direct correlation on cither the success or failure side, we ho!d that there is no common enterprise between Bache and Brodt. Id. at 461. Specifically, Brodt concluded that “merely furnishing in- vestment counsel to another for a commission, even when done by wa of a discretionary commodities account, does not amount to a common enterprise.” Id. at 8 See also Merrill Lynch, Pierce, Fenner & Smith v. Goldman, A F.%d 129 (Bth Cir.). cert. denied. Ss. —, 100 S.Ct. 76 (1979); Moody v. Bache & Co., 570 F.2d 523 (5th Cir. 1978); Booth v. Peavey Co. Commodities Services, 430 F.2d 132 (8th Cir. 1970) (without explanation the court found a cause of action lies for churning a commodities account under the securities laws). 9See Commercial Iron & Metal Co. v. Bache & Co., 478 F.2d 29 (10th Cir. 1973), cert. denied, —— U.S. —, 99 S.Ct. 1229 (1979) (dictum); Booth v. Peaven Co. Commorities Services, 430 F.%d 19°, 133 (8th Cir. 1970) (prior to Milnarik); Marshall v. Lamson Rrot. & Co., 368 F.Supp. 486 (S.D. Iowa 1974) (emphasis on “pooling” of funds in Milnarik-sense is too strict or literal limitation on definition of “investment contract”); Johnson v. Arthur Esprey, Shearson, Hammell & Co., 341 F. Supp. 764 (S.D.N.Y. 1972): Berman v. Orimer Trading, Inc. 201 F. Supp. 701 (S.D.N.Y. 1968): Mahen v. Rewnolds & Co., 282 F. Supp. 423 (S.D.N.Y. 1968). See also Consolo v. Hornblower & A-12 12 Curran, et al. v. Merrill Lynch, Inc. No. 77-1300 themselves some relationship which ties the fortunes of each investor to the success of the overall venture. Thus in our view the finding of a vertical common enterprise based solely on the relationship between promoter and investor is incon- sistent with Howey. Further support for Milnarik’s rationale is found in ?erman v. Bache, Halsey, Stuart, Shields, Inc., 467 V. Supp. 311, 315- 16 (S.D. Ohio 1979), where Judge Kinneary observed that: a finding of a common enterprise based solely upon the fact of entrustment by a single principal of money to an agent effectively excises the common enterprise re- quirement of Iowey. The test would simply require (1) the investment of capital (2) with the expectation of profit through the efforts of others, for nothing more is involved in a single discretionary trading account. Al- though the precise meaning of the phrase “common en- terprise” is far from clear, nowhere in Jlowey or later Supreme Court decisions is it intimated that that phrase is somehow redundant of other elements of the definition of a security. Id. at 319. Even though we conclude that a discretionary commodity account is not a security, plaintiffs still claim the district court erred in dismissing the securitics claims because while a “common enterprise” was not shown to exist, it was none- theless fraudulently promised. In short, plaintiffs make the Wecks-Hemphill, Noves, Inc, 436 F. Supp. 447 (N.D. Ohio 1976), where the court determined that a non-discretionary trading account in a commodities future was not an investment contract under the securities laws. However, in defining what is required to find an investment contract the Consolo court stated that a contract situation involving only two persons. ic., the investor and his stock broker, docs not admit of the common cnterprise which is essential to the existence of an investment contract. Id. at 452. A-13 No. 77-1300 Curran, et al. v. Merrill Lynch, Inc. 13 interesting argument that the unfulfilled and fraudulent prom- ise of a “common enterprise” with other Merrill Lynch custo- mers itself brings the actual agreement made within the definition of a “security” and hence confers jurisdiction under the federal securities laws. Under such a circumstance, they urge it was improper for the district court to have entered summary judgment under Rule 56 because the deposition and affidavits submitted by the parties in connection with the motion for summary judgment raise a fact question of whether a “common enterprise” existed.'® We have earlier noted that the facts here are virtually identical to those in Milnarik, supra. One significant excep- tion, however, is that the Milnarik court did not deal with the situation where the account is claimed to involve a pooling of funds, whereas in this case the plaintiffs allege that such misrepresentation occurred. The Milnarik court stated: This characteristic of common enterprise is completely lacking in the present case. Even assuming that Nelson in fact solicited and collected money from numerous parties, no allegations are made that a common enterprise existed comprised of all people possessing discretionary account contracts with him. No claim is made that Nelson traded in a uniform manner for cach of these accounts. Even if he had so uniformly traded, no pooling of funds for a common purpose is alleged. Nel- son was apparently simply an agent for a number of separate and distinct principals, the plaintiffs being one such principal. The plaintiffs in no way can be viewed as having invested in a common enterprise with other suppliers of venture capital. Id. at 278. (emphasis added). 10 Upon summary judgment the inferences to be drawn from the underlying facts contained in supplemental materic!s must be viewed in a light most favorable to the party opposing the motion, United States v. Diebold, 369 U.S. 654, 655 (1962), and facts which are A-14 l4 Curran, et al. v. Merrill Lynch, Inc. No. 77-1300 The evidentiary matter before the district court included a deposition of Lawrence McMann, a Merrill Lynch customer account executive, and a counter affidavit of James Olin, Manager of a Detroit-area Merrill Lynch office. Olin stated that regardless of what plaintifis may have been told, their account was handled independently of others involved in the program, and was never used in a manner that would suggest a common enterprise with the companion accounts. McMann testified, however, that although the account may have been handled as suggested by Olin, the Currans were given a dif- ferent description of the account. Essentially, McMann stated that the account offered to the Currans was unique: the trader acted as controller of a group of accounts thus allowing him to make buy/sell decisions on a broader basis and thereby control fluctuations in the market. This control was represented as a trading capability five times greater than for a separate account. We do not view this tempting expectancy as elevating the trading account to the full dignity of a security. Essentially it remained an agency for hire. It is true that plaintiffs may have hoped that defendant's control over a number of ac- counts would increase the agent's clout in the market. The fact remains, however, that the plaintiffs always understood that their return would be based on a one-to-one vertical relationship with the trader. They knew there was no con- tractual tic to other accounts. IV. Merrill Lynch asserted in the district court that plaintiffs’ action was time-barred because the one year limitation per- iod agreed upon in writing by the parties expired before the complaint was filed. The “Commodity Account Agreement” asserted, if supported by evidentiary material, must be accepted as true. Day v. United Auto Aerospace Agric. Workers, 466 F.2d 83 (6th Cir, 1972). A-15 No. 77-1300 Curran, et al. v. Merrill Lynch, Inc. 15 provided for submission of all disputes to arbitration within one year after the cause of action accrued."' The accounts were opened April 5, 1973, and August 20, 1973. Plaintiffs claimed that they could not reasonably have known that defendant's representations were false until April, 1974. Judge Thornton, however, declined to rule on Merrill Lynch’s claim that the action accrued more than one year prior to the April 5, 1976 filing of the complaint. Merrill Lynch argues that absent a controlling statute to the contrary, a provision in a contract may validly limit the time for bringing an action for breach of contract to a period less than that prescribed in the general siatute of limitations, at least if the shorter period is reasonable. See, ¢.g., Order of United Commercial Travelers of America v. Wolfe, 331 U.S. 586, 608 (1947). Plaintiffs, however, assert that the one year limitation pro- vision is tied to the arbitration clause in their diserctionary trading account agreement, and that if arbitration is imper- missible, the one year limitation also dies with it.'2, We agree. Vv. Plaintiffs assert that arbitration is not a favored remedy with respect to commodity futures brokerage transactions, citing statutory and administrative limitations upon the en- forcement of an agreement to arbitrate. Specifically, Section 1? “Arbitration must be commenced within one year after the cause of action accrued by service upon the other of a written demand for arbitration or a written notice of intention to arbitrate, naming therein the arbitration tribunal.” 12 Plaintiffs’ also assert that the Supreme Court in Will:o v. Swan, 346 U.S. 427 (1953), determined that an agreement to arbitrate cannot preclude an aggrieved purchaser of a “security” from secking a — remedy under section 14 of the Securities Act of 1933. ‘urther, the Wilko principle has been held equally applicable to claims under the Securitics Exchange Act of 1931. However. due to our finding that the discretionary cornmodity account involved in this case is not a security, this argument is inapplicable. A-16 16 Curran, et al. v. Merrill Lynch, Inc. No. 77-1300 5a of the Commodity Exchange Act, 7 U.S.C. §7a(11), as amended by the Commodity Futures Trading Commission Act of 1974, P.L. 93463, 88 Stat. 1389, effective April 21, 1975, provides that each contract market is required to: (11) provide a fair and equitable procedure through arbitration or otherwise (such as by delegation to a registered futures association having rules providing for such procedures) for the settlement of customers’ claims and grievances against any member or employee thereof; Provided, That (i) the use of such procedure by a cus- tomer shall be voluntary, (ii) the procedure shall not be applicable to any claim in excess of $15,000, (iii) the procedure shall not result in any compulsory payment except as agreed upon between the parties. (Emphasis added). In 1976, the CFTC adopted regulations under Section 7a (11) providing that no pre-dispute arbitration agreement may be enforced unless the agreement is contained in a separate document executed by the customer and contains adequate warnings in large print.'? 17 C.F.R. § 180.1 et seq. (1976). 1317 C.F.R. § 180.3 states: Voluntary procedure and compulsory payments. (a) The use by customers of the dispute settlement procedures established by contract markcts pursuant to the Act or this Part or of the arbitration or other dispute settlement procedures specified in an agreement under paragraph (b) (3) of this sec- tion shall be voluntary. The procedures so established shall prohibit any agreement or understanding pursuant to which customers of members of the contract market agree to submit claims or grievances for settlement under said procedures prior to the time when the claim or grievance arose, except in ac- cordance with paragraph (b) of this section. (b) No futures commission merchant, floor broker or arso- ciated person shall enter into any agreement or understanding with a customer in which the customer agrees, prior to the time the claim or grievance arises, to submit such claim or grievance to any settlement procedure except as follows: (1) Signing the agreement must not be made a condition for the customer to utilize the services offered by the future com- mission merchant, floor broker or associated person; A-17 No. 77-1300 Curran, et al. v. Merrill Lynch, Inc. 17 Although the cause of action here arose before the effective date of the CFTC Act, plaintiffs argue that the Act's limita- tion upon arbitration should be retroactively applied. Plain- tiffs urge that retroactive application is justified because the agreement here is an adhesion contract, forced upon plaintiffs and other like customers through unequal bargaining power and does not comply with the requirements of Section 180.3. For its part, Merrill Lynch argues that the clause including the agreed limitation period is enforceable and that therefore the entire case should have been dismissed in the district (2) If the agreement is contained as a clause or clauses of a broader agreement, the customer must separately endorse the clause or clauses containing the cautionary language and other provisions specified in this section; (3) The agreement may not require the customer to waive the right to seek reparations under section 14 of the Act and Part 12 of these regulations. Accordingly, the customer must be advised in writing that he or she may seek reparations under section 14 of the Act by an election made within 45 days after the futures commission merchant, floor broker or associated per- son notifies the customer that arbitration will be demanded under the agreement. This notice must be given at the time when the futures commission merchant, floor broker or asso- ciated person notifies the customer of an intention to arbitrate. The customer must also be advised that if he or she seeks reparations under section 14 of the Act and the Commission declines to institute reparation proceedings, the claim or griev- ance will be subject to the preexisting arbitration agreement and must also be advised that aspects of the claims or grievances that are not subject to the reparations procedure (i.e. do not constitute a violation of the Act or rules thereunder) may be required to be submitted to the arbitration or other dispute settlement procedure set forth in the preexisting arbitration agreement. (4) The customer agreement must contain cautionary lan- guage, printed in large boldface type, to the following effect: WHILE THE COMMODITY FUTURES TRADING COMMIS- SION (CFTC) RECOGNIZES THE BENEFITS OF SETTLING DISPUTES BY ARBITRATION. IT REQUIRES THAT YOUR CONSENT TO SUCH AN AGREEMENT BE VOLUNTARY. YOU NEED NOT SIGN THIS AGREEMENT TO OPEN AN ACCOUNT WITH [name]. See 17 CFR 180.1-180.6. BY SIGNING THIS AGREEMENT. YOU MAY BE WAIVING YOUR RIGHT TO SUE IN A COURT OF LAW, BUT YOU ARE NOT WAIVING YOUR RIGHT TO ELECT AT A LATER DATE TO PROCEED PURSUANT TO SECTION 14 OF THE COM- A-18 18 Curran, et al. v. Merrill Lynch, Inc. No. 77-1300 court. Merrill Lynch contends that neither in their briefs nor in their argument to the district court did plaintiffs argue that CFTC Regulation § 180.3, 17 C.F.R. § 180.3, could or should be applied retroactively. That regulation did not become effective until November 29, 1976, months after the case had been briefed and argued to the district court. Therefore, we are urged to disregard this argument because it is raised for the first time on appeal. See Bannert v. American Can Co., 525 F.2d 104 (6th Cir.), cert. denied, 426 U.S. 942 (1975); Schneider v. Electric Auto-Lite Co., 456 F.2d 366, 375 (6th Cir. 1972); Cashner v. United States Steel Corp., 327 F.2d 533 (6th Cir, 1964) (court refused to consider issue not raised until a supplemental appellate brief was filed). The Supreme MODITY EXCHANGE ACT TO SEEK DAMAGES SUSTAINED AS_A_ RESULT OF A VIOLATION OF THE ACT, IN THE EVENT A_ DISPUTE ARISES, YOU WILL BE NOTIFIED IF [name] INTENDS TO SUBMIT THE DISPUTE TO ARBITRA- TION, IF YOU BELIEVE A VIOLATION OF THE COMMOD- ITY EXCHANGE ACT IS INVOLVED AND IF YOU PREFER TO REQUEST A SECTION 14 “REPARATIONS” PROCEEDING BEFORE THE CFTC, YOU WILL STILL HAVE 45 DAYS IN WHICH TO MAKE THAT ELECTION. (5) If the agreement specifies a forum for settlement other than a procedure established pursuant to section Sa(11) of the Act or this Part, the procedures of such forum must comply with the requirements of § 180.5. (c) The procedure established 4 a contract market pursuant to section Sa(11) of the Act or this Part may require partics utilizing such procedure to agree, under applicable state law, submission agreement or otherwise, to be bound by an award rendered in the procedure, provided that the agreement to submit the claim or grievance to the procedure was made in accordance with paragraph (b) of this section or that the agree- ment to submit the claim or grievance was made after the claim or grievance arose. Any award so rendered shall be en- forceabie in accordance with applicable law. (d) The procedure established by a contract market pursuant to the Act or this Part shall not establish any unreasonably short limitation period foreclosing submission of customers’ claim or grievances or counterclaims (permitted by § 180.4 or this Part) by contract markct members or employees thereof. (7 U.S.C. 7a(11), 12a (Supp. V, 1975)) {41 FR 42946, Sept. 29, 1976, as amended at 42 FR 3433, Jan. 18, 1977] A-19 No, 77-1300 Curran, et al. v. Merrill Lynch, Inc. 19 Court, however, in Hormel vy. Helvering, 312 U.S. 552, 556 (1941), stated: There may always be exceptional cases or particular circumstances which will prompt a reviewing or appellate court, where injustice might otherwise result, to consider questions of law which were neither pressed nor passed upon by the court or administrative agency below. In their supplemental brief, plaintiffs assert that Ames v. Merrill Lynch, Pierce, Fenner & Smith, 567 F.2d 1174 (2d Cir. 1977), supports the retroactive application of CFTC Reg. § 180.3 to bar arbitration here, and in so doing, also negates the one year limitation period written into it. In Ames, plaintiff signed the same standard form Merrill Lynch agreement as involved in this case. The plaintiff opposed a stay of arbitration on the ground that 17 C.F.R. § 180.3, which became effective on November 29, 1976, after the agreement was entered into, should be applied retroactively to render the arbitration agreement null and void. The Second Circuit agreed that the CFTC intended section 180.3 to be given retroactive effect and further observed that: A court must apply the law as it exists at the time of its decision, even where the law has changed during the pendency of the action, unless the statute or legislative history reveals an intention of prospective application only, or retroactive application would lead to “manifest injustice.” Bradley v. Richmond School Board, AVG U.S. 696, 711, 94. S.Ct. 2006, 40 L.Ed.2d 476 (1974). In apply- ing this principle to the instant case, we are called upon to determine: (1) whether the Commission had the an- thority to apply the provisions of $180.3 to all arbitra- tion agreements; (2) whether the Commission intended the application of the regulation to arbitration agree- ments antedating the reaulation; and (3) whether, given the authority and intention to make the regulation effec- tive as to antedated agreements, the particular circum- A-20 20 Curran, et al. v. Merrill Lynch, Inc. No. 77-1300 stance that the dispute arose before the effective date of the regulation nevertheless precludes its application. Id. at 1177. Before making its determination, the Ames court traced the evolution of Section 180.3. The Commodity Exchange Act, 7 U.S.C. §7a(11), required only that each contract market provide a “fair and equitable procedure through arbitration or otherwise” for settlement of claims up to $15,000, and that the use of such procedure be voluntary on the part of the customer. Neither arbitration of claims over $15,000 nor arbi- tration outside the contract market were mentioned in the Act. The Commission, however, determined that arbitration outside the literal scope of the Act should be regulated, and under provisions in the Act giving the Commission authority “to make and promulgate such rules and regulations as are necessary to effectuate any of the provisions or to accomplish any of the purposes of the act,” 7 U.S.C. § 12a(5), the Com- mission promulgated section 180.3. Initial proposals submitted by the Commission sought to bar any agreement to arbitrate future disputes, but provided that grievances arising out of agrecments actually entered into prior to the adoption of the regulations should be exempted. Later, the Commission decided that pre-dispute agreements would be tolerated, but only under conditions designed to insure that arbitration was truly voluntary. Also, the ex- emption for agreements antedating the regulation was with- drawn. As stated by the Ames court, “[i]nstead, the thrust was to include even pre-existing arbitration agreements in the new order of things.” Id. at 1178. Therefore, in making the final regulation effective on November 29, 1976, the Commission announced that “on the effective date of proposed § 180.3(b), all pre-dispute arbitration agreements that do not satisfy the conditions set forth in the proposed rule will be null and void, including those heretofore signed by customers.” 41 Fed. Reg. 42,944 (Sept. 29, 1976). The announcement made no mention A-21 No. 77-1300 Curran, et al. v. Merrill Lynch, Inc. 21 of the treatment to be accorded disputes already in existence. On this basis, the Ames court held that “§ 180.3 fairly read should apply to all arbitration agreements existing at the effec- tive date of the regulation.” Id. at 1179."* See also Tamari v. Bache & Co. (Lebanon) S.A.L., 565 F.2d 1194 (7th Cir. 1977), cert. denied, 435 U.S. 905 (1978) (Swygert, J. dissent- ing); Rothberg v. Loeb, Rhoades & Co., 445 F. Supp. 1336 (S.D.N.Y. 1978); Milani v. Conticommodity Services, Inc., 462 F. Supp. 405, 406-07 (N.D. Cal. 1976). The retroactive effect of an alteration in a regulatory scheme generally depends upon whether it affects litigation at a point which causes a result so unfair and inequitable that it is un- constitutional. Plaintiffs here sought equitable relief from the arbitration clause in their customer commodity account agrec- ment at an early stage of the litigation, and no surprise or other unfairness is apparent upon the record. Under these circumstances we do not find that retroactive application of Regulation § 180.3 would result in manifest injustice. Further, we note that the plaintiff in Ames appealed from a district court order compelling arbitration and staying trial of his action, and therefore, sought equitable relief from the effect of a similar arbitration agreement at the same stage of the proceedings as the plaintiffs in the instant case."3 In support of its result, the Ames court stated: Shortly after its creation, in 1975, the Commission un- dertook an examination of the use of arbitration in the 14 Judge Meskill issued a vigorous dissent to the Amcs majority, noting in part that the Commodity Futures Troding Commission, as amici, explained “that its intent to reach pre-cxisting agreements did not extend to cases where a dispute had already arisen at the time the regulation was adopted.” 567 F.2d at 1181. Apparently Judge Meskill agreed with the basic portent of the regulation but thought that application to disputes already in existence was ex- tremely unfair, He perceived no problems in allowing retroactive effect “to the extent necessary to bring about an immediate change a ett | — without unnecessarily cutting off accrued rights.” . at -83. 18 We note that in Arkoosh v. Dean Witter & Co. 571 F.2d 437 (8th Cir. 1978), plaintiff contended that section 180.3 rendered invalid A-22 22 Curran, et al. v. Merrill Lynch, Inc. No. 77-1300 futures industry. It learned that arbitration was frequent- ly conducted not under the auspices of the contract markets regulated by the Commission but through arbi- tration sponsored by the New York Stock Exchange or other securities-oriented organizations. It also became apparent that in many cases arbitration was not under- taken voluntarily by customers, but that customers were compelled to agree to pre-dispute arbitration clauses as a precondition to doing business. Indeed, this practice was found to be so prevalent that a customer might effec- tively be frozen out of the futures market if he refused to execute a predispute agreement. 41 Fed.Reg. 27,526 (July 2, 1976); 41 Fed.Reg. 42,945 (Sept. 29, 1976). The Commission received written comments and took oral testimony on March 5, 1976. At this hearing con- dlucted by the Commission, representatives both of Mer- rill Lynch and Shearson Hayden Stone conceded that a customer could not do futures business with the firm if he refused to sign a predispute arbitration agreement. Com- modity Futures Trading Comm'n, Oral Hearing on Arbi- tration and Other Dispute Settlement Procedures 32-34, 37, 82-98. (March 5, 1976); see generally 41 Fed.Reg. 42,945 (Sept. 29, 1976). the arbitration clause in his customer agreement. The claim. how- ever, was not made until after the district court had issued a stay of arbitration, and an arbitration award in defendant's favor had been granted. The Arkoosh court recognized the holding in Ames v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 567 F.2d 1174, 1179 (2d Cir. 1977), and in fact concurred by stating: “[tlhe regulation voided all existing pre-dispute arbitration agreements in contracts for the purchase of commodities unless certain conditions ore met.” Id, at 438. Further, the Arkoosh court recognized that generally “a court is to apply the law in effect at the time it renders its decision, unless doing so would result in manifest injustice... ." 571 F.2d at 438. (citations deleted). Within this context, the Eighth Circuit noted the district court's ruling that the chronological sequence demonstrated that plaintiff had ample time after the effective date of Section 180.3, and before the submission to arbitration, to urge the Court to recon- sider its interpretation of the Customer Agreement. The defendant, having obtained the arbitration award, would suffer substantial injustice if the case was reopencd, since plaintiffs assertion of his rights under the new regulation was untimely. Otherwise, the plain- tiff could play it both ways, and seck relief to have arbitration sct aside only if an unfavorable award is ordered. A-23 No. 77-1300 Curran, et al. v. Merrill Lynch, Inc. 23 Id. at 1178. In response to its fact-finding, the Commission, in announcing the effective date of the regulation, reiterated the nullity of all pre-dispute arbitration agreements not com- plying with the conditions of Section 180.3 but did not men- tion any exemption for existing disputes. 41 Fed. Reg. 42,942- 44 (Sept. 29, 1976). As further noted in Ames, “any such exemption would hardly conform to the notion, stated by the Commission itself, that customers who had entered into agree- ments before adoption of the regulation needed and were entitled to the protections of the rule no less than those cus- tomers who signed agreements after November 29, 1976.” Id. at 1177. Our determination that Section 180.3 should be retro- actively applied to invalidate the arbitration agreement in this case compels the further conclusion that the one year limitation period provided for therein is also inapplicable. The one year limitation was expressly contingent wpon the institu- tion of arbitration proceedings and the language of the agree- ment nowhere extends to any residual and underlying court action which may otherwise exist. Accordingly, the order compelling arbitration and staying this action with respect to plaintiffs’ commodity claims must be reversed and remanded to the district court. VI. Merrill Lynch has acknowledged that it did not consider the partial summary judgment in its favor, from which this appeal is taken, to have extended to or to have affected in any way the plaintiffs’ claims under the Commodity Exchange Act (CEA)."® Nevertheless, affirmance of the partial sum- 16 We construe the order of dismissal entered by the district court to grant only the relief requested by defendant's motion to dismiss, which related only to those allegations of the complaint purporting to state claims under the Sccurities Act of 193% and the Securities Ex- change Act of 1934. However, we view the pleadings and allegations in plaintiffs’ complaint purporting to state a claim under the Com- A-24 24 Curran, et al. v. Merrill Lynch, Inc. No. 77-1300 mary judgment and consequent remand to the district court for proceedings on the balance of the case necessarily raises the further question whether the federal district court has jurisdiction to entertain the remaining claims arising under the Commodity Exchange Act.'” Although the CEA does not expressly provide for a private right of action to recover damages, an implied right of action was generally thought to exist prior to the 1974 amendment of the Act.'® Consistent with this view, no issue concerning the continuing validity of the implied right of action was raised it, the court below, nor in this appeal.’* Nevertheless, modities Exchange Act, 7 U.S.C. §1, et seq., as unimpaired by the — court’s order of dismissal as, indeed, are the pendent state claims. 17 In Alexander v. Aero Lodge No. 735, 565 F.2d 1364 (6th Cir. 1977), cert. denied, ——— U.S. ——, 98 S.Ct. 2849 (1978), we recognized that a court of appeals should ordinarily limit its review of an interlocu- tory order to the narrow question of whether the district court abused its discretion and refrain from intruding into the merits of the case only to the extent necessary to decide that issue. We determined, however, that the rule is one of orderly judicial administration and not a limit on jurisdictional power. Therefore, it is generally recog- nized that a court possesses the jurisdictional power on the appeal of an interlocutory order under 28 11.S.C. §1292(a)(1) to reach and decide other aspects of the order which would not be independently reviewable by interlocutory appeal. Id. at 1370. See also Mansbach v. Prescott, Ball & Turben, 598 F.2d 1017, 1022 (6th Cir. 1979) (inter- locutory order staying a pending action submitted to arbitration is oe, under section 1292(a) (1) if the underlying action is legal n nature). 18 See, e.g., Deaktor v. L. D. Schreiber & Co.. 479 F.2d 529 (7th Cir.), rev'd on other grounds sub nom Chicago Mercantile Exchange v. Deaktor, 414 U.S. 113. 94 S.Ct. 466, 38 L.Ed. 2d 344 (1973) (anti- manipulation provision ef 7 U.S.C. $13b); Booth v. Pearey Co. Commoditn Servicers, 430 F.2d 132 (8th Cir. 1970) (7 U.S.C. %6b anti-fraud provision): Goodman v. WH. Ientz & Co., 265 F. Supp. 440 (N.D. I). 1967) (86b); United Egg Producers v. Baner International Corp., 311 F. Supp. 1275 (S.D.N.Y. 1970) ($13b); MeCurnin v. Kohl- meyer & Co., 340 F. Supp. 1338 (E.D. La. 1972) (86b); Johnson v. Arthur Espey, Shearson, Hammill & Co.. 341 F. Supp. 764 (S.D.N.Y. 1972) ($6b); Arnold v. Bache & Co., Inc., 377 F. Supp. 61 (M.D. Penn. 1973) (& Gb). 19 Plaintiffs allege that this cause of action arose in 1974, prior to the amendment of the Commodity Exchange Act. At that time it was generally held that a private cause of action existed under the A-25 No. 77-1300 Curran, et al. v. Merrill Lynch, Inc. 25 to provide direction to the district court upon remand and to avoid further delay in this already protracted litigation, we review this issue and specifically agree that an implie:! private right of action survived the 1974 amendments to the Act.?¢ The original Commodity Exchange Act of 1936 established a scheme for regulating trading in agricultural commodities futures based primarily on the concept of self-regulation. The chief means of enforcement of the Act emanated from the Commission’s regulations and the rules of each Exchange, to which the courts added an implied private right of action. The increasing effect of commodities trading on the nation’s economy, and significant escalations in annual trading volume, also gave rise to increased instances of fraud and manipula- tion. By 1974, Congress became aware that the system of Act. See note 18, supra. In 1974 Congress amended the Commodity Exchange Act, 7 U.S.C. 41, et scq., effective in 1975, to create a comprehensive regulatory procedure for the processing of complaints within the newly-established Commodity Futures Trading Commission (CFTC). This action was filed on April 5, 1976. Since the amend- ment of the CEA the courts have adopted contrary views with regard to the continuing validity of the pre-1974 implied right of action. Although the parties have not raised this issue on appeal, it is well established that “a court is to apply the law in effect at the time it renders its decision, unless doing so would result in manifest iniustice or there is statutory direction or a history to the contrary.” Bradley v. Richmond School Board, 416 U.S. 696, 711 (1974). See also Cort v. Ash, 422 U.S. 66, 74 (1975); Thorpe v. Housing Authority of the City of Durham, 393 U.S. 268 (1969); Bush v. State Industries Co., 599 F.2d 780 (6th Cir. 1979); Weisenberger v. Huecker, 593 F.2d 49 (6th Cir.), cert. denied, ———- U.S. ——, 100 S.Ct. 170 (1979). 20 In determining to proceed to the merits of this issue we recognize that in Burks v. Lasker, —— U.S. ——, 99 S.Ct. 1831, 1826 n. 5 (1979). the Supreme Court stated that “the question of whether a cause of action exists is not a question of jurisdiction. and thereiore may be assumed without being decided.” Under circumstances where peti- tioners never disputed the existence of a private right of action and the question had not been put to a test, the decision in Burks offers a tempting invitation to bypass the issuc. That course. in fact, was taken by the court in Chipser v. Kohlmener & Co., 690 F.2d 1061, 1067 & n. 14 (Sth Cir. 1979) when faced with the precise issue in this case. In Chipser, however, plaintif? had filed his complaint prior to the amendment of the Act and the court determined that the implied right of action issue should be addressed in the first instance by the district court. For purposes of this appeal, however, we find the more expedient route is to apply the law in effect at the time of our decision and to reach the implied right of action issue. A-26 26 Curran, et al. v. Merrill Lynch, Inc. No. 77-1300 self-regulation had decreased in effectiveness and sought to buttress the enforcement of the CEA safeguards?" In 1974 Congress amended the Commodity Exchange Act to create the Commodity Futures Trading Commission and established an administrative procedure under which viola- tions of any rule, provision, or regulation of the Act could be redressed by the commencement of an administrative proceed- ing before the CFTC to recover reparations.?? 7 U.S.C. § 18 (e). Reparations procedures may be initiated against futures commission merchants, floor brokers, commodity trading ad- visers and commodity pool operators, but not against the con- tract markets (exchanges). A judgment rendered in a repara- tions proceeding remains subject to appeal in the courts of appeal and is enforceable in the district courts. Additionally, the 1974 amendments grant the CFTC plenary power over futures commission merchants and contract markets.27 The 21 In Smith v. Groover, 468 F.Supp. 105 (N.D. Ill. 1979), the court noted that Congress traced the inadequacies of the self-regulatory scheme to a number of factors: First, the enforcement staffs of commodities exchanges were unable to handle the vastly increased trading volume. HLR. Rep. No. 975, 93d Cong., 2d Sess. 46 (1974). Also, exchanges faced “growing difficulties ... as a result of private plaintiffs seeking damages against self-regulatory activities of the mar- kets.” Id. at 48. ause an implied right of action could be brought against an exchange for failure to enforce its own rules, “attorneys to several boards of trade had been advising the boards to reduce—not expand exchange regulations designed to insure fair dealing.” Id. at 46. Finally, an exchange simply lacked the necessary motivation and vigilance to effectively police its own members. Id. at 109-10. 22 Commodity Futures Trading Commission Act of 1974, Pub. L. No. 93-463, 88 Stat. 1389 (codificd at 7 U.S.C. $1 et seq.). The Act was further amended in 1978. Futures Trading Act of 1978, Pub. L. No. 95-405, 92 Stat. 865 (codified at 7 U.S.C. $1 et seq.). 23 The CFTC may suspend or revoke the registration of a futures commission merchant or the designation of a contract market. 7 U.S.C. §7b. 9. The CFTC is authorized to issue cease and desist orders against contract markets, 7 U.S.C. § 13a, and may assess civil penalties of up to $100,000 against futures commission merchants and contract markets. 7 U.S.C. §9, 13a. Perhaps most significantly, the CFTC or the Attorney General at the CFTC'’s request, may bring an action in federal district court against futures commission mer- A-27 No. 77-1300 Curran, et al. v. Merrill Lynch, Inc. 27 creation of the CFTC was to provide a “strong Federal regula- tory umbrella” to support the regulatory cflorts of the ex- changes in curbing unfair trading practices by providing pub- lic enforcement measures at both the exchange and individual level. H.R. Rep. No. 975, 93d Cong., 2d Sess. 48 (1974). Although the 1974 amendments represented a thorough re- vision of congressional regulation over the commodities futures trading industry, the Act did not speak to the continuing validity of the pre-existing private right of action. We believe the legislative history of the CFTC Act, however, indicates that Congress intended to extend further protection to the ex- change customer, rather than to extinguish existing forms of protection. This observation is bolstered by the fact that Congress recognized self-regulation as a “commendable and noble concept and useful in such a complex atmosphere as that which surrounds futures trading.” H.R. Rep. No. 975, 93d Cong., 2d Sess. 48 (1974). In addition to providing a more comprehensive regulatory scheme, it appears that Congress was motivated by a desire to clarify the jurisdictional dispute developing between the Commodity Exchange Commission and the Securities Exchange Commission with regard to commodities regulation under sec- tion 2 of the 1974 Act. Congress, therefore, vested exclusive jurisdiction over commodities futures trading with the CFTC. 7 U.S.C. § 4a. See Smith v. Groover, 468 F. Supp. 105 (N.D. Ill. 1979); R. J. Merely & Son Co. v. Stotler & Co., 466 F. Supp. 345 (N.D. Ill. 1979); Hofmayer v. Dean Witter & Co., 459 F. Supp. 733 (N.D. Cal. 1978). The exclusive jurisdiction provision, however, should not be construed as extinguishing the pre-existing private right of action by implication since the thrust of the provision was to ensure that regulatory bodies chants and contract markets for a restraining order, an injunction or a writ of mandamus to compel compliance with the Act or its regulations devised by the CFTC. 7 U.S.C. $13a-1. Further, the 1978 amendments to the CEA added a provision whereby a state ay me an action under the CEA on behalf of its citizens. 7 U.S.C. a- A-28 28 Curran, et al. v. Merrill Lynch, Inc. No. 77-1300 other than the CFTC would not interfere with the orderly development and enforcement of commodities regulation. H.R. Rep. No. 93-975, 93 Cong., 2d Sess. 28 (1974). This result is further shown by additional language in the Act in which Congress provided that “nothing in this section shall supersede or limit the jurisdiction conferred on the courts of the United States or any State”. 7 U.S.C. §2. Further, it is apparent from the following statement that Congress intended to supplement existing remedies, rather than create a substi- tute for them: The vesting in the Commissicn of the authority to have administrative law judges and apply a broad spectrum of civil and criminal penalties is likewise not intended to interfere with the courts in any way. It is hoped that giving the Commission this authority will somewhat lighten the burden upon the courts, but the entire appeal process and the right of final determination by the courts wre expressly preserved. (emphasis added). Remarks of Senator Talmadge, 120 Cong. Rec. 30459 (1974).4 ' The CFTC has interpreted the Act as implicitly authorizing private actions, and asserts that the right must be presumed to have survived the 1974 amendments unless Congress ex- plicitly abolished the private remedy in enacting the amend- ments. Statement of CFTC Concerning Referral of Private Litigation Under the Doctrine of Primary Jurisdiction. 41 Fed. Reg. 18171 (May 5, 1976). See also Smith v. Groover, 468 F. Supp. 105 (N.D. Ill. 1979) (amicus brief submitted by CFTC). 24In 1978. Congress further amended the CEA, P.L. 95-405 (Oct. 1, 1978), 7 USC. §1, et seq., to expressly allow the states, through Attorneys General or security regulations, to initiate actions in federal district court for CEA violations. This section docs not indicate that Congress intended to extinguish private rights of action but rather, was meant to buttress the regulatory power of the CFTC, which is unable to regulate all aspects of commodities lag | effectively. Sce also Jones v. B.C. Christopher & Co., 466 F. Supp. 213 (D. Kan. 1979). A-29 No. 77-1300 Curran, et al. v. Merrill Lynch, Inc. 29 The judicial canon of construction which allows the court to grant considerable deference to the interpretation of a stat- ute by an agency charged with its administration also supports the conclusion that the 1974 act did not preclude a private right of action. See United States v. Consumer Life Ins. Co., 430 U.S. 725, 752 (1977); NLRB v. Boeing Co., 412 U.S. 67, 75 (1973). However, the Supreme Court indicated in Piper v. Chris-Craft Industries, Inc., 430 U.S. 1, 41, n. 27 (1976), that the administrative deference rule is not applicable where the narrow legal issue is whether a cause of action should be implied in favor of a particular class of litigants by judicial interpretation. See also National Super Spuds, Inc. v. New York Mercantile Exchange, 470 F. Supp. 1256 (S.D.N.Y. 1979). We admit that a recognized private right of action need not be re-examined every time the statutory scheme from which it is implied is altered. Nevertheless case law since the 1974 amendments has raised at least some uncertainty as to the continued vitality of the implicd right, especially when analyzed in light of Cort v. Ash, 422 U.S. 66 (1975).?5 See also Smith v. Groover, 468 F. Supp. 105, 112 (N.D. TIL 1979). The Supreme Court established a four-part test in Cort to determine whether Congress intended a private remedy to he implicd from legislation which created enforceable rights but remained silent as to the form of remedy. Since the 1974 23 In response to these devclopments the courts have cither: (1) presumed the continuing validity of the private remedy without takingg into account Cort v. Ash, 422 U.S. 66 (1975), or the 1974 amendments. Sce Ames v. Merrill Lynch, Pierce, Fenner & Smith, 567 F.2d 1174, 1176 (2d Cir. 1977); Case & Co. v. Board of Trade of Citu of Chicago, 523 F.2d 355 (7th Cir. 1975); Kelley v. Carr, 442 F. Supp. 346 (W.D. Mi. 1977) rev'd on other grounds, —- F.2d —— (Gth Cir. 1980); E. F. Hutton & Co. v. Lewis, 410 F. Supp. 416 (E.D. Mi. 1976); (2) determined that the 1974 amendments were intended to serve as a supplemental rather than a substitutionary remedy, and? therefore permit plaintiffs to bring a direct cause of action in federal court without attempting to exhaust the administrative reparations remedy provided by Congress. Sce, e.9., Smith v. Groover, 468 F. Supp. 105 (N.D. Ul. 1979): Jones v. B.C. Christopher & Co., 466 F. Supp. 213 (D. Kan. 1979); R. J. Hercely & Son Co. v. Stotler & Co., 466 F. Suse. 345 (N.D. Ill. 1979); (3) held that while the 1974 amend- A-30 30 Curran, et al. y. Merrill Lynch, Inc. No. 77-1300 amendments, the implied right of action inquiry has centered primarily on the issues of Congress’ legislative intent in enact- ing the 1974 amendments and the consistency of the statutory scheme with the Commodity Exchange Act. In Cort v. Ash, supra, the Court delineated four relevant factors to determine whether a private right of action may be implied under a federal statute: First, is the plaintiff “one of the class for whose especial benefit the statute was enacted,” . . . that is, does the statute create a federal right in favor of the plaintiff? Second, is there any indication of legislative intent, ex- plicit or implicit, either to create such a remody or to deny one? .. . Third, is it consistent with the under- lying, purposes of the legislative scheme to imply such a remedy for the plaintiff? ... And finally, is the cause of action one traditionally relegated to state law, in an area basically the concern of the States, so that it would be inappropriate to infer a cause of action based solely on federal law? Id. at 78. See also Transamerica Mortgage Advisors, Inc. v. Lewis, —— U.S. ——, 48 U.S.L:W. 4001, 4002 (November 15, 1979); Touche Ross & Co. vy. Redington, —— U.S. ——, 99 S. Ct. 2479 (1979); Cannon v. University of Chicago, 441 U.S. 677 (1979): Piper v. Chr [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385007_1892%3A01. Public record. Not legal advice.