Appendix — Bird v. Shearson Lehman/American Express, Inc.

TILED

APR 16 1998

coe

In Che

Supreme Court Of Che United States

OCTOBER TERM, 1990

FRANK L. BIRD, Trustee of the FRANK L. BIRD

PROFIT SHARING TRUST, FRANK L. BIRD,

Individually, and J“AN SHEA,

Petitioners,

v.

SHEARSON LEHMAN/AMERICAN EXPRESS, INC.

and RAYMOND R. CLEMENTS,

Respondents.

SUPPLEMENTAL APPENDIX TO

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

DONALD R. HOLTMAN

KATZ & SELIGMAN

130 Washington Street

Hartford, CT 06106

(203) 547-1857

Counsel of Record for

Petitioners

Printed by

Brescia s Printing Services. |

66 Connecticut Boulevard

Fast Hartford, CT 06108

25-4254

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

>

No. 721—August Term 1990

(Argued December 13, 1990

Decided January 17, 1991)

Docket No. 90-7688

>

FRANK L. BIRD, Trustee of the Frank L. Bird Profit

Sharing Trust, FRANK L. BIRD, Individually, and

JOAN SHEA,

Appellees,

al ,

SHEARSON LEHMAN/AMERICAN EXPRESS, INC.,

and RAYMOND R. CLEMENTS,

Appellants.

Before:

TIMBERS, KEARSE and MINER,

Circuit Judges.

>

Appeal from an order entered July 16, 1990 in the

District of Connecticut, Jose A. Cabranes, District

Judge, denying appellants’ motion to compel arbitration

of appellees’ ERISA claim and to stay proceedings in

the district court pending arbitration.

1373

Reversed and remanded.

Judge Kearse filed a dissenting opinion.

>

JEFFREY L. FRIEDMAN, New York, N.Y.

(Theodore A. Krebsbach, New York,

N.Y., on the brief) for appellants Shear-

son Lehman/American Express, Inc.

and Raymond R. Clements.

DONALD R. HOLTMAN, Hartford, Conn.

(Katz & Seligman, Hartford, Conn., on

the brief) for appellees Frank L. Bird,

Trustee of the Frank L. Bird Profit

Sharing Trust, Frank L. Bird, Individu-

ally, and Joan Shea.

—

TIMBERS, Circuit Judge:

Appellants Shearson Lehman/American Express, Inc.

(Shearson) and Raymond R. Clements appeal from an

order entered July 16, 1990 in the District of Connecti-

cut, Jose A. Cabranes, District Judge, denying their

motion to compel arbitration of a claim brought by

appellees Frank L. Bird, Individually and as Trustee of

the Frank L. Bird Profit Sharing Trust, and Joan Shea

for breach of fiduciary duty pursuant to the Employee

Retirement Income Security Act (ERISA). 29 U.S.C.

§ 1001 et seg. (1988).

On appeal, appellants contend that the Federal Arbi-

tration Act (FAA), 9 U.S.C. § 1 et seg. (1988), requires

1374

———=—

that agreements to arbitrate statutory ERISA claims are

enforceable.

For the reasons that follow, we reverse the judgment

of the district court and remand for proceedings consis-

tent with this opinion, including arbitration forthwith.

We shall summarize only those facts and prior pro-

ceedings believed necessary to an understanding of the

issues raised on appeal.

Frank L. Bird is the Trustee and a participant and

beneficiary in the Frank L. Bird Profit Sharing Trust

(the Trust). Joan Shea is a participant and beneficiary in

the Trust. The Trust was established to provide for the

retirement of its participants and beneficiaries and is

governed by the terms of ERISA.

Raymond Clements, a broker and vice president of

Shearson, solicited Bird as a client. Bird was interested

in investing the assets of the Trust. At their first meet-

ing, Bird alleges that he explained to Clements that the

investment objectives for the Trust were long term

growth and safety of the Trust’s assets. In his capacity

as Trustee, Bird invested all the assets of the Trust in a

securities account with Shearson.

Bird signed Shearson’s standard ‘‘Customer’s Agree-

ment’’ prior to opening the account. That agreement

contained an arbitration clause which provided that

‘Unless unenforceable due to federal or state law,

any controversy arising out of or relating to my

accounts, to transactions with you for me or to this

agreement or the breach thereof, shall be settled by

1375

arbitration in accordance with the rules then in

effect, of the National Association of Securities

Dealers, Inc. or the Boards of Directors of the New

York Stock Exchange, Inc. and/or the American

Stock Exchange, Inc. as I may elect.’’

All of the Trust’s assets, a total of $62,205.56, were

deposited in the account. Fifty-five transactions were

made in the account between July 24, 1984 and May 28,

1986. At the end of that period, $13,427.53 remained in

the account. Appellees allege that the assets of the Trust

were diminished due to mishandling by appellants, who

allegedly made high risk investments on behalf of the

Trust in disregard of the stated investment objectives of

the Trust.

On July 21, 1987, appellees commenced this action

and filed the complaint in the District of Connecticut.

Count one of the complaint alleged a breach of fiduci-

ary duties under ERISA. 29 U.S.C. § 1104 (1988).

Count two alleged that the account had been churned in

violation of the Securities Exchange Act of 1934, 15

U.S.C. § 78(j)) (1988), and Rule 10b-5 promulgated

thereunder, 17 C.F.R. § 240.10b-5 (1990). The com-

plaint also set forth various state law claims; these sub-

sequently were dismissed.

On August 18, 1987, appellants filed a motion invok-

ing the arbitration clause in the Customer’s Agreement

and seeking a stay of proceedings in the district court.

The district court granted the motion as to the securities

law claim, but denied the motion as to the ERISA

claim. We affirmed the district court’s decision. Bird v.

Shearson Lehman/American Express, Inc., 871 F.2d 292

(2 Cir. 1989) (Bird I). We held that Congress intended

1376

ee

to preclude a waiver of judicial remedies for statutory

ERISA claims, but not for contractual claims involving

ERISA-covered plans. /d. at 298.

Appellants filed a petition for a writ of certiorari in

the Supreme Court. In the meantime, the Supreme

Court filed its opinion in Rodriguez de Quijas v.

Shearson/American Express, Inc., 109 S. Ct. 1917

(1989). In Rodriguez, the Court held that agreements to

arbitrate statutory claims arising under the Securities

Act of 1933 were enforceable. Subsequently, the Court

granted certiorari in Bird I, vacated our judgment, and

remanded the case for reconsideration in light of Rodri-

guez. Shearson Lehman/American Express, Inc. v. Bird,

110 S. Ct. 225 (1989).

On Jat.uary 19, 1990, we entered an order remanding

the case to the district court for reconsideration in light

of Rodriguez. On July 16, 1990, the district court, in a

thoughtful opinion, affirmed its original decision. The

district court reasoned that ‘‘Rodriguez [was] consistent

with the Supreme Court’s other recent rulings on arbi-

tration and therefore [did] not significantly change the

legal landscape in which this issue was originally consid-

ered.’’ The district court held that statutory ERISA

claims were not subject to compulsory arbitration. The

court denied appellants’ motion to compel arbitration

and for a stay of the district court proceedings pending

arbitration.

This appeal followed.

Initially, we set forth our standard of review. ‘‘[A]

court asked to stay proceedings pending arbitration in a

1377

case covered by the [FAA] has essentially four tasks:

first, it must determine whether the parties agreed to

arbitrate; second, it must determine the scope of that

agreement; third, if federal statutory claims are asserted,

it must consider whether Congress intended those claims

to be nonarbitrable; and fourth, if the court concludes

that some, but not all, of the claims in the case are arbi-

trable, it must then determine whether to stay the bal-

ance of the proceedings pending arbitration.’’ Genesco,

Inc. v. T. Kakiuchi & Co., Ltd., 815 F.2d 840, 844

(2 Cir. 1987) (citations omitted). We review the district

court’s determinations on those issues de novo. Id. at

846.

In Bird I, we affirmed the district court’s holding that

Bird and Shearson entered into a valid arbitration agree-

ment that encompassed the ERISA claim. Bird I, supra,

871 F.2d at 295. We see no reason to disturb that hold-

ing. Accordingly, the only issue before us on the instant

appeal concerns the third element, i.e., whether Con-

gress intended statutory claims created by ERISA to be

nonarbitrable.

IIT.

We turn first to appellants’ contention that the FAA

requires that their agreement to arbitrate be enforced

notwithstanding the fact that appellees’ claim is for a

breach of fiduciary duties under ERISA. We agree.

In Bird I, we held that the text of ERISA—

particularly the provisions for exclusive federal jurisdic-

tion of statutory claims, the remedial nature of the

Statute, and the underlying purposes of ERISA—

compelled the conclusion that ‘‘Congress intended the

1378

ee. 0

federal courts to be the exclusive forum for resolving

disputes of substantive rights.’’ Bird J, supra, 871 F.2d

at 295. We are told that Bird J was motivated, in part,

by an ‘‘outmoded presumption of disfavoring arbitra-

tion proceedings’’. Rodriguez, supra, 109 S. Ct. at 1920.

Rodriguez makes it clear that that is no longer tenable.

Accordingly, we now reach a contrary result.

The FAA, ‘‘reversing centuries of judicial hostility to

arbitration agreements, was designed to allow parties to

avoid ‘the costliness and delays of litigation,’ and to

place arbitration agreements ‘upon the same footing as

other contracts... .’’”’ Scherk v. Alberto-Culver Co.,

417 U.S. 506, 510-11 (1974) (footnote and citation omit-

ted). Section 2 of the FAA provides that ‘‘an agreement

in writing to submit to arbitration an existing contro-

versy . . . Shall be valid, irrevocable, and enforceable,

save upon such grounds as exist at law or in equity for

the revocation of any contract.’’ 9 U.S.C. § 2 (1988).

‘*Section 2 [of the FAA] is a congressional declaration

of a liberal federal policy favoring arbitration agree-

ments.’’ Moses H. Cone Memorial Hosp. v. Mercury

Constr. Corp., 460 U.S. 1, 24 (1983); see also Dean

Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 221 (1985)

(the FAA ‘‘requires that we rigorously enforce agree-

ments to arbitrate’’).

The ‘‘duty to enforce arbitration agreements is not

diminished when a party bound by an agreement raises a

claim founded on statutory rights.’’ Shearson/American

Express, Inc. v. McMahon, 482 U.S. 220, 226 (1987).

Congress, however, may override the presumption

favoring arbitration agreements by a contrary provision

in another statute. Jd. The burden of demonstrating

such congressional intent rests with the party opposing

1379

arbitration. Rodriguez, supra, 109 S. Ct. at 192);

McMahon, supra, 482 U.S. at 227. The party contend-

ing that an agreement to arbitrate a statutory claim is

not enforceable must show that ‘‘Congress intended in a

separate statute to preclude a waiver of judicial remedies

... Rodriguez, supra, 109 S. Ct. at 1921. ‘‘[S]uch

an intent ‘will be deducible from [the statute’s] text or

legislative history,’ or from an inherent conflict between

arbitration and the statute’s underlying purposes.’’

McMahon, supra, 482 U.S. at 227 (citations omitted).

Applying these standards in a series of recent cases,

the Supreme Court has upheld arbitration agreements

involving various statutory claims. E.g., McMahon,

supra, 482 U.S. at 227-38 (claim under § 10(b) of the

Securities Exchange Act of 1934); id. at 238-42 (claim

under civil provisions of Racketeer Influenced and Cor-

rupt Organizations Act); Mitsubishi Motors Corp. v.

Soler Chrysler-Plymouth, Inc.. 473 U.S. 614, 628-40

(1985) (claim under Sherman Antitrust Act). Most

recently, the Court held that agreements to arbitrate

claims brought pursuant to the Securities Act of 1933

are enforceable. Rodriguez, supra, 109 S. Ct. at 1919-

21. In so holding, the Court (unfortunately) overruled

its holding in Wilko v. Swan, 346 U.S. 427 (1953) (a

1933 Act decision), which it stated ‘‘rested on suspicion

of arbitration as a method of weakening the protections

afforded in the substantive law’’ and had ‘‘fallen far out

of step with our current strong endorsement of the fed-

eral statutes favoring this method of resolving dis-

putes.’’ Rodriguez, supra, 109 S. Ct. at 1920. In so

doing, the Court ignored the command of Congress that

waiver of any provisions of the 1933 Act would not be

countenanced. Wilko, supra, 346 U.S. at 434-35; 15

U.S.C. § 77n (1988).

1380

Prior to Rodriguez, courts of appeals that considered

the enforceability of agreements to arbitrate claims

derived from ERISA reached varying conclusions. Com-

pare Bird I, supra, 871 F.2d at 298 (agreement to arbi-

trate statutory ERISA claims is not enforceable) and

Barrowclough v. Kidder, Peabody & Co., Inc., 752 F.2d

923, 941 (3 Cir. 1985) (same) with Arnulfo P. Sulit, Inc.

v. Dean Witter Reynolds, Inc., 847 F.2d 475, 477-79

(8 Cir. 1988) (agreement to arbitrate statutory ERISA

claim is enforceable). No court of appeals has consid-

ered this issue since Rodriguez. This case is one of first

impression.

(A)

We consider next the text and legislative history of

ERISA. We find nothing in the text or legislative history

explicitly addressing the issue of whether Congress

intended to preclude a waiver of a judicial forum for

claims arising from the substantive guarantees of

ERISA. We also find nothing in the text or legislative

history that compels us to reach that conclusion by

implication.

We are aware that one of the means by which Con-

gress sought ‘“‘to protect . . . participants in employee

benefit plans and their beneficiaries’’ was ‘‘by providing

. ready access to the Federal courts.’’ 29 U.S.C.

§ 1001(b) (1988). This provision, however, does not

speak to whether Congress intended to require that par-

ties avail themselves of that forum. Sulit, supra, 847

F.2d at 478. It does not follow that ‘‘by permitting a

federal judicial forum Congress also intended to over-

ride the Arbitration Act’s aim of ensuring the enforce-

ment of privately made agreements in which parties . .

1381

have chosen to forego an available judicial forum in

favor of arbitration.’’ Jd. at 479.

Similarly, the fact that Congress provided for exclu-

sive federal jurisdiction of claims brought to enforce

ERISA’s substantive provisions, 29 U.S.C. § 1132(e)

(1988), speaks only to which judicial forum is available,

not to whether an arbitral forum is available. Moreover,

the Supreme Court has upheld an arbitration agreement

which was involved in a dispute grounded in a statute

that similarly provides for exclusive federal jurisdiction.

E.g., McMahon, supra, 482 U.S. at 227 (Securities

Exchange Act of 1934, 15 U.S.C. § 78aa (1988)). In

short, ‘‘any claim that the jurisdictional language of

ERISA evidences a congressional intent to tureclose

arbitrability would appear to be untenable in light of

McMahon and [Rodriguez)}.’’ Southside Internists Group

v. Janus Capital Corp., 741 F. Supp. 1536, 1541 (N.D.

Ala. 1990).

Liberal procedural provisions that facilitate bringing

ERISA claims in federal court pursuant to § 1132 also

do not compel a conclusion that Congress intended such

claims to be nonarbitrable. The Supreme Court rejected

that reasoning in Rodriguez. It declined to imply such

an intent based on similar provisions that govern claims

brought in the federal courts pursuant to the Securities

Act of 1933. Rodriguez, supra, 109 S. Ct. at 1920.

We hold that ERISA’s text and legislative history do

not support a conclusion that Congress intended to pre-

clude arbitration of claims brought pursuant to it.

1382 »°

(B)

We turn next to whether arbitration is inconsistent

with ERISA’s underlying purposes. We hold that it is

not.

In its statement of findings and declaration of policy,

Congress explained the circumstances leading to the pas-

sage of ERISA and the purpose of the legislation:

‘that despite the enormous growth in [pension]

plans many employees with long years of employ-

ment are losing anticipated retirement benefits

owing to the lack of vesting provisions in such

plans; that owing to the inadequacy of current min-

imum standards, the soundness and stability of

plans with respect to adequate funds to pay prom-

ised benefits may be endangered; that owing to the’

termination of plans before requisite funds have

been accumulated, employees and their beneficiaries

have been deprived of anticipated benefits; and that

it is therefore decirable . . . that minimum stan-

dards be provided assuring the equitable character

of such plans and their financial soundness.’’

29 U.S.C. § 1001(a) (1988). ‘‘A reading of the statute’s

legislative history compels the conclusion that ERISA’s

purpose is to secure guaranteed pension payments to

participants by insuring the honest administration of

financially sound plans.’’ Pompano v. Michael

Schiavone & Sons, Inc., 680 F.2d 911, 914 (2 Cir.), cert.

denied, 459 U.S. 1039 (1982); see also Firestone Tire &

Rubber Co. v. Bruch, 489 U.S. 101, 113 (1989)

(‘ERISA was enacted ‘to promote the interests of

employees and their beneficiaries in employee benefit

plans,’ and ‘to protect contractually defined benefits’ ”’

1383

(citations omitted)). Allowing parties to provide by

agreement that their disputes will be resolved in arbitra-

tion is not inconsistent with those purposes.

“‘By agreeing to arbitrate a statutory claim, a party

does not forgo the substantive rights afforded by the

statute; it only submits to their resolution in an arbitral,

rather than a judicial, forum.’’ Mitsubishi, supra, 473

U.S. at 628. Thus, arbitration is inconsistent with the

underlying purposes of a statute ‘‘where arbitration is

inadequate to protect the substantive rights at issue.’’

McMahon, supra, 482 U.S. at 229.

A presumption that arbitration is an inadequate

forum in which to resolve disputes based on complex

federal statutes is untenable in light of recent Supreme

Court decisions. McMahon, supra, 482 U.S. at 232;

Mitsubishi, supra, 473 U.S. at 633-34. Rodriguez put to

rest ‘* ‘the old judicial hostility to arbitration.’ ’’ Rod-

riguez, supra, 109 S. Ct. at 1920 (citation omitted).

Appellees suggest no reason why the substantive rights

guaranteed by ERISA will be jeopardized if the arbitra-

tion agreement is enforced. We are aware of no such

reasons. As in Rodriguez, ‘‘ ‘[t]here is nothing in the

record before us nor in the facts of which we can take

judicial notice, to indicate that the arbitral system. . .

would not afford the plaintiff{s] the rights to which

[they] are entitled.’ ’’ Jd. at 1921 (citation omitted).

Accordingly, we disagree with those courts that have

expressed the fear that substantive rights guaranteed by

ERISA may be foreclosed by an arbitration agreement.

E.g., Barrowclough, supra, 752 F.2d at 941; Amaro v.

Continental Can Co., 724 F.2d 747, 752 (9 Cir. 1984).

Similarly, ERISA’s remedial nature, Firestone, supra,

489 U.S. at 108, is not compromised ‘‘so long as the

1384

prospective litigant effectively may vindicate its statutory

cause of action in the arbitral forum, [since] the statute

will continue to serve. . . its remedial . . . function.’’

Mitsubishi, supra, 473 U.S. at 614. The Supreme Court

has upheld agreements to arbitrate claims arising under

other remedial statutes. E.g., McMahon, supra, 482

U.S. at 240 (considering remedial role of RICO); Mitsu-

bishi, supra, 473 U.S. at 636-37 (considering remedial

role of antitrust legislation).

Appellees contend that their view is supported by a

line of cases that held that arbitrations of claims under

Title VII of the Civil Rights Act of 1964, Alexander v.

Gardner-Denver Co., 415 U.S. 36 (1974), the Fair Labor

Standards Act, Barrentine v. Arkansas-Best Freight

Sys., Inc., 450 U.S. 728 (1981), and 42 U.S.C. § 1983

(1988), McDonald v. City of West Branch, 466 U.S. 284

(1984) were not preclusive in subsequent litigation to

vindicate rights under those statutes. We disagree.

In those three cases, the arbitrations were commenced

pursuant to a clause in a collective bargaining agreement

negotiated by the union, rather than the employee. They

rely partially on the reasoning that an employee should

not be bound by an arbitration clause he did not negoti-

ate ‘‘where the employee’s claim is based © rights aris-

ing out of a statute designed to provide minimum

substantive guarantees to individual workers.’’ Barren-

tine, supra, 450 U.S. at 737. The Court was concerned

with the fact that the union’s interest might not coincide

with the employee’s and, therefore, the union’s repre-

sentation at arbitration might not be adequate.

McDonald, supra, 466 U.S. at 291; Barrentine, supra,

450 U.S. at 742; Gardner-Denver, supra, 415 U.S. at 58

n.19.

1385

The instant case does not raise such concerns. Bird

signed the agreement that contained the arbitration

clause. He cannot complain that his rights were bar-

gained away by a third party. Although Shea did not

sign the agreement, her interests and claims are essen-

tially identical to Bird’s. Under such circumstances,

requiring Shea to arbitrate does not work an injustice.

Cf. Barrowclough, supra, 752 F.2d at 938-39 (beneficia-

ries are bound by principal’s agreement to arbitrate

when they ‘‘claim no present entitlement to the [bene-

fits} and press no claims separate from his’’).

We also do not find arbitration inconsistent with the

enforcement and oversight responsibilities granted to the

Secretary of Labor. The Secretary is involved in report-

ing requirements, 29 U.S.C. § 1021 (1988), is authorized

to commence an action for a plan fiduciary’s breach of

duty, 29 U.S.C. § 1132(a)(2) (1988), and is authorized to

participate in litigation commenced by plan participants,

29 U.S.C. § 1132(h) (1988). Moreover, the Secretary is

vested with broad investigatory powers to determine

compliance with ERISA’s provisions. 29 U.S.C. § 1134

(1988). ‘‘We are reluctant to conclude that the mere fact

of administrative involvement in a statutory scheme of

enforcement operates as an implicit exception to the pre-

sumption of arbitral availability under the FAA.’’

Gilmer v. Interstate/Johnson Lane Corp., 895 F.2d 195,

198 (4 Cir.), cert. granted, 111 S. Ct. 41 (1990). Arbitra-

tion of ERISA claims will not impede the Secretary’s

supervisory and enforcement responsibilities. ‘‘[I]mple-

mentation of the statutory purpose is [not] dependent

upon the [Secretary’s] involvement in each and every

allegation [under ERISA].”’ Jd.

1386

Finally, one of the purposes of ERISA is to ‘‘bring a

measure of uniformity in an area where decisions under

the same set of facts may differ from state to state.’’

H.R. Rep. No. 533, 93rd Cong. Ist Sess. 12 (1973),

reprinted in 1874 U.S. Code Cong. & Admin. News

4639, 4650. This desire has led the Supreme Court to

conclude that Congress intended that ‘‘courts

develop a ‘federal common law of rights and obligations

under ERISA-regulated plans.’ ’’ Firestone, supra, 489

U.S. at 110 (citation omitted). We are not persuaded

that the fact that federal common law is to be created

and applied to ERISA disputes alleging breaches of

fiduciary duties creates an inherent conflict with arbitra-

tion.

First, we do not believe that our holding will prevent

the development of federal common law in this area.

Our holding does not prohibit plaintiffs from bringing

ERISA claims alleging a breach of fiduciary duty in fed-

eral courts. We merely hold that parties may provide by

agreement that such claims will be arbitrated. If such

agreements are the result of unequal bargaining power

between the parties, general principles o£ contract law

will bar enforcement. Second, the import of recent

Supreme Court decisions is that artbitration is not to be

distrusted no matter what the source of law to be

applied is. Third, an arbitration determination is subject

to review by the federal courts through a motion to

enforce or to vacate the award.

Arbitration is not inconsistent with the underlying

purposes of ERISA. Appellees have not sustained their

burden of demonstrating that the text, legislative his-

tory, or underlying purposes of ERISA indicate that

Congress intended to preclude a waiver of a judicial

1387

forum for claims arising under it. Accordingly, we hold

that statutory claims arising under ERISA may be the

subject of compulsory arbitration.

IV.

To summarize:

We hold that Congress did not intend to preclude a

waiver of a judicial forum for statutory ERISA claims.

We further hold that the FAA requires courts to enforce

agreements to arbitrate such claims. The district court,

therefore, erred in denying appellants’ motion to compel

arbitration of appellees’ ERISA claim and for a stay of

the district court proceedings pending arbitration.

Reversed and remanded with instructions that arbitra-

tion proceed promptly. The mandate shall issue forth-

with.

-

KEARSE, Circuit Judge, dissenting:

I respectfully dissent from the majority’s conclusion

that an agreement to arbitrate future claims of breach of

fiduciary responsibility under ERISA, 29 U.S.C. § 1101

et seq. (1988), is enforceable. Despite the general federal

policy favoring arbitration, see, e.g., Moses H. Cone

Memorial Hospital v. Mercury Construction Corp., 460

U.S. 1 (1983), arbitration should not be ordered where

there is ‘‘an inherent conflict between arbitration and

the statute’s underlying purposes,’’ Shearson/American

Express, Inc. v. McMahon, 482 U.S. 220, 227 (1987). I

believe there is such a conflict between arbitration and

ERISA.

1388

The underlying purpose of ERISA is ‘‘to protect. . .

the interests of participants in employee benefit plans

and their beneficiaries’? by, inter alia, ‘‘establishing

standards of conduct, responsibility, and obligation for

fiduciaries of employee benefit plans, and by providing

for ... ready access to Federal courts.’’ 29 U.S.C.

§ 1001(b) (1988). In an effort to achieve this purpose,

Congress declined to adopt the traditional ‘‘reasonably

prudent man dealing with his own property’’ standard

for defining the scope of a fiduciary’s duties. Rather, it

intended that there be developed carefully tailored stan-

dards that (1) would vary depending on the capacity in

which the fiduciary was acting and the expertise nor-

mally associated with that capacity, see 29 U.S.C.

§ 1104(1)(B) (‘‘a fiduciary shall discharge his duties with

respect toa plan. . . with the care, skill, prudence, and

diligence under the circumstances then prevailing that a

prudent man acting in a like capacity . . . would use in

the conduct of an enterprise of a like character and with

like aims’’), and (2) would reflect a particular sensitivity

to the need to protect pension rights, see 29 U.S.C.

§ 1001(b) (goal of ERISA is ‘‘to protect . . . the inter-

ests Of participants in employee benefit plans and their

beneficiaries’’). Congress intended that the courts, in

fashioning the appropriate principles, would develop a

new body of federal common law.

The legislative history of ERISA makes plain that

Congress intended this new federal common law to be

uniform and predictable. The congressional reports, in

explaining why Congress chose to codify such a fiduci-

ary responsibility requirement rather than relying on tra-

ditional principles of trust law, repeatedly noted the

importance of creating a consistent source of law to help

fiduciaries, administrators, and plan participants predict

1389

the legality of the fiduciaries’ actions. Thus, the House

of Representatives report stated as follows:

[W]ithout . . . access to the courts, and without

standards by which a participant can measure the

fiduciary’s conduct he is not equipped to safeguard

either his own rights or the plan assets. Further-

more, a fiduciary standard embodied in Federal leg-

islation is considered desirable because it will bring

a measure of uniformity in an area where decisions

under the same set of facts may differ from state to

state. It is expected that courts will interpret the

prudent man rule and other fiduciary standards

bearing in mind the special nature and purposes of

employee benefit plans intended to be effectuated

by the Act.

. . . « The uniformity of decision which the Act

is designed to foster will help administrators, fiduci-

aries and participants to predict the legality of pro-

posed acitons....

H.R. Rep. No. 533, 93d Cong., Ist Sess. 12 (1973),

reprinted in 1974 U.S. Code Cong. & Admin. News

(“‘USCCAN’’) 4639, 4650. The Senate report was virtu-

ally identical. See S. Rep. No. 127, 93d Cong., Ist Sess.

29 (1973), reprinted in 1974 USCCAN 4838, 4865. The

conference report on ERISA also noted that ‘‘[t]he con-

ferees expect that the courts will interpret th{e] prudent

man rule (and the other fiduciary standards) bearing in

mind the special nature and purpose of employee benefit

plans.’’ H.R. Conf. Rep. No. 1280, 93d Cong., 2d Sess.

302 (1974), reprinted in 1974 USCCAN 5038, 5083.

Congress’s effort to promote the development of a

uniform federal common law is reflected principally in

1390

ERISA’s provision that only federal courts, and not

state courts, have jurisdiction over fiduciary-duty claims

under ERISA. See 29 U.S.C. § 1132(e)(1). In addition,

Congress included a provision (a) requiring that in every

ERISA action for breach of fiduciary responsibilities, a

copy of the complaint must be served on the Secretary

of Labor, and (b) allowing the Secretary to intervene in

any such action. See 29 U.S.C. § 1132(h). Both of these

provisions further the goal of developing a uniform,

consistent, and predictable body of ERISA fiduciary-

responsibility law. This goal may well be frustrated with

respect to fiduciary-duty claims against brokerage

houses, however, if such claims are decided in arbitra-

tion. There are at least two reasons why this is so. First,

a clear set of principles is unlikely to emerge since an

arbitrator need not state any reasons for his decision.

Second, judicial review of arbitration decisions is lim-

ited.

There is no general requirement that arbitrators of

commercial disputes explain the reasons for an arbitra-

tion decision. See American Arbitration Association

Commercial Arbitration Rule 42, reprinted in Alterna-

tive Dispute Resolution Techniques 2.042, 2.048 (1989)

(requiring only that award itself be in writing). Nor do

the American and New York Stock Exchanges require

that arbitrators in securities disputes involving member

firms give reasons for their decisions. See American

Stock Exchange Rule 618(e) (requiring only that the

award summarize the demands, the issues, and the

results); New York Stock Exchange Rule 627(e) (same).

Though public interest groups have urged that arbitra-

tion decisions resolving securities disputes be required to

include written statements of the arbitrators’ reasons for

their decisions, the SEC has refused to require any such

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statement of reasons. See 54 Fed. Reg. 21,144, 21,151

(May 16, 1989) (SEC Order approving other proposed

rule changes relating to securities arbitration). A deci-

sion without a stated rationale does little to develop the

law, or to provide guidance for plan beneficiaries and

fiduciaries, or to -provide predictability as to the out-

come of disputes. The SEC itself noted that in the

absence of such statements ‘‘awards rendered by arbitra-

tors in prior cases will not predict the vote or outcome

of future cases.’’ Jd. at 21,152.

Further, in the absence of such statements, there will

be no assurance that the arbitrators have followed what-

ever precedent there may be. And apparently, in the

securities industry, they often do not. In 1988 congres-

sional hearings on arbitration reform, a securities indus-

try spokesman noted that arbitrators in the industry are

regarded as being free to grant or deny awards without

complying with applicable legal standards. See, e.gz.,

Arbitration Reform: Hearings on H.R. 4960 Before the

Subcomm. on Telecommunications and Finance of the

Comm. on Energy and Finance, 100th Cong., 2d Sess.

85-86 (statement of Theodore Krebsbach, vice president

and associate general counsel of Shearson Lehman

Brothers). The spokesman stated that arbitrators fre-

quently made decisions that did not reflect legal stan-

dards but rather sought to do rough justice: ‘‘A lot of

times ... you don’t say one person is 100 percent

wrong or 100 percent right and you do what makes

sense under the circumstances.’’ Jd. at 138. A member

of the plaintiffs’ bar concurred. See id. (statement of

Theodore G. Eppenstein, Esq.) (‘‘many times arbitration

panels will split the baby[;] . . . the way they split it,

they will try to figure out how much the claimant has to

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pay his attorney and that will be the size of the award

aoe

Finally, though judicial review of arbitration decisions

is available, its scope is severely limited. The standard of

review is highly relaxed, for such decisions may be set

aside only for ‘‘manifest disregard’’ of ‘‘clearly govern-

ing iegal principle[s],’’ not merely because of ‘‘an argua-

ble difference regarding the meaning or applicability of

laws.’’ Merrill Lynch, Pierce, Fenner & Smith, Inc. v.

Bobker, 808 F.2d 930, 933-34 (2d Cir. 1986). And this

standard is made even more difficult for the disap-

pointed disputant to meet when the arbitrators have

stated no reasons for their decision. Indeed, the SEC, in

support of its decision not to require written opinions

explaining arbitration awards, stated that such opinions

would generally serve no purpose, since ‘‘[e]ven if

awards contained errors of law, . . . a mistake of law is

not currently grounds for vacating an arbitration

award.’’ See 54 Fed. Reg. 21,144, 21,151 n.45. Given

the widespread use of arbitration clauses in brokerage

firms’ standard customer contracts, together with the

lack of any requirement of a stated rationale in the arbi-

trators’ decision and the very limited scope of judiciai

review, there is no likelihood that enforcement of such

agreements will permit development of a carefully tai-

lored, or uniform, or predictable body of law as to the

fiduciary duties of brokers in dealing with ERISA pen-

sion plans.

In sum, I would conclude that broad-scale arbitration

of ERISA fiduciary-responsibility claims would conflict

with ERISA’s goal of providing carefully tailored fiduci-

ary duty principles and be antithetical to the goals of

uniformity and predictability. Our prior ruling in the

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present case, holding the arbitration agreement unen-

forceable, was vacated by the Supreme Court and

remanded for consideration in light of Rodriguez de

Quijas v. Shearson/American Express, Inc., 490 U.S.

477 (1989), see Shearson Lehman/American Express,

Inc. v. Bird, 110 S. Ct. 225 (1989), vacating and

remanding 871 F.2d 292 (2d Cir. 1989). Rodriguez did

not alter the principle that arbitration agreements should

not be enforced when there is an inherent conflict

between arbitration and the statute’s underlying pur-

poses. I would uphold the district court’s refusal to

enforce the arbitration agreement here on the ground

that there is an inherent conflict between arbitration and

Congress’s intention not to permit the resolution of

ERISA fiduciary-duty disputes by the application of

rough justice, ad hoc and sub silentio.

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