Opposition Brief — Bird v. Shearson Lehman/American Express, Inc.

No. 90-1701] / 19 69l

IN THE { THE CLERK

Supreme Court of the United States

Octroser Term, 1990

FRANK L. Birp. Trustee of the Frank L. Bian

- Prorit SHARING Trust, FRANK L. Birp, Individually.

and JOAN SHEA.

Petitioners

‘

SHEARSON LEHMAN/AMERICAN Express INC. and

RAYMOND R. CLEMENTS.

Respondents

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUII

RESPONDENTS’ BRIEF IN OPPOSITION

TO PETTTION FOR A WRIT OF CERTIORARI

THEeopore A. KREBSBACH

Counsel of Record for Respondents

Office of the General Counsel

Shearson Lehman Brothers Inc

388 Greenwich Street

New York, New York 10013

(212) 464-7206

Jerrrey L. FriepMAN

Office of the General Counsel

Shearson Lehman Brothers Inc

(212) 464-7293

Of Counsel

QUESTION PRESENTED

Whether the Federal Arbitration Act, 9 U.S.C. § 1 et seq.

(1990) (“FAA”), mandates arbitration of claims asserted under

the Employee Retirement Income Security Act of 1974, 29 U.S.C.

§ 1001 et seg. (1982) (“ERISA”), when parties have agreed to

resolve their ERISA disputes by arbitration?

TABLE OF CONTENTS

Question Presented .......... 00. .ccccccceccoee

Dee ee FD oiks nn cv oe ccc dnckenee ne

Opinions Below........... 250 © he Veen

NEES 6s oh onde 0dd9d ake ee

Statutory Provisions Involved

Statement of the Case ........................

Reasons for Denying the Writ..................

A. The Lower Courts are Uniformly Enforcing

Agreements to Arbitrate ERISA Disputes in

Accordance with the Modern Arbitration

Jurisprudence of This Court...............

B. The Court’s Recent Opinion in Gilmer

v. Interstate/Johnson Lane Corp. Refutes

Petitioners’ Arguments Supporting Their

Request for Certiorari..................

Conclusion ................ Re PSS x >

~

~l

———EE

TABLE OF AUTHORITIES

Cases Page

Alexander v. Gardner-Denver Co., 415 U.S. 36

ees ca csaccenrccccccecs . 6

Barrentine v. Arkansas-Best Freight Sys., Inc.,

Las Sten ccssccccecccce. 6

‘Barrowclough v. Kidder, Peabody & Co., 752

F.2d 923 (3d Cir. 1985)...............20005- 7

-

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

871 F.2d 292 (2d Cir.), vacated and remanded,

TU 5 oc ccc cess esccces | 4

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

926 F.2d 116 (2d Cir. 1991)............. ... passim

Cohen v. Cowen Securities, Inc., [Current] Fed.

Sec. L. Rep. (CCH) 4 94,925 (S.D. Fla. July

ee ti gic ee bcs a cdsccccce- 8

Gilmer v. Interstate/Johnson Lane Corp., 111

S. Ct. 1647, 59 U.S.L.W. 4407 (May 13, 1991) — passim

Glover v. Wolff, Webb, Burk & Campbell, 731

F. Supp. 292 (N.D. Ill. 1990)...... be 8

lacono v. Drexel Burnham Lambert, Inc., 715

F. Supp. 18 (D.R.1. 1989)............... 8

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

TCC Tis kaesseccacecsscececes | 6

Metz v. Merrill Lynch, Pierce, Fenner & Smith,

Inc., 19990 WESTLAW 68532 (W.D. Okla.

TL Geevsvescrevesscoes 8

Mitsubishi Motors Corp. v. Soler Chrysler-

Plymouth, Inc., 473 U.S. 614 (1985)........

Nicholson v. CPC Int, Inc., 877 F.2d 221 (3d

et as Se eee ere

Rodriguez de Quijas v. Shearson/American

Express, Inc., 490 U.S. 477, 109 S. Ct. 1917

RR resales ee ee

Rosenblum v. Drexel Burnham Lambert. 700

F. Supp. 874 (E.D. La. 1987) ............

Santamauro v. Shearson Lehman Hutton Inc..

No. B-89-321 (TFGD) (D. Conn. April 4, 1990)

Shearson/American Express, Inc. v. McMahon,

482 U.S. 220, reh’g denied, 483 U.S. 1056

Ry SON gaan ie ar eng any on ,

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

Se ee ee fee

Southside Internists Group v. Janus Capital

Corp., 741 F. Supp. 1536 (N.D. Ala. 1990)

Sulit v. Dean Witter Reynolds, Inc., 847 F.2d

475 (8th Cir. 1988)........... eer cree

Wilko v. Swan, 346 U.S. 427 (1953) ...

Statutes

Age Discrimination in Employment Act of 1967,

29 U.S.C. § 621 et seg. (1982)

Employee Retirement Income Security Act of

1974, 29 U.S.C. § 1001 et seg. (1982). .

29 U.S.C. § 1001

29 U.S.C. § 1004

Page

10

passim

passim

ur

9, 10

to

t©

OS ae Pee eee ey eer

rN ES oe ev ep eeear ees

Federal Arbitration Act, 9 U.S.C. § 1 et seq.

6 tS Serre eer err eee eee eee

Securities Exchange Act of 1934, 15 U.S.C. § 78a

| errr rr ree eee

§ 10%), 15 U.S.C. § TAD)... ....- 60 eee eee

yy | 6 ike Sr errs er

Rules

Securities and Exchange Commission Rule

Rule 10b-5, 17 C.F.R. § 240.10b-5.......

United States Supreme Court Rules

Appendices

A. Statutory Provisions Involved ................

B. Order of the United States Court of Appeals for

the Second Circuit, Dated January 17, 1991...

C. Order of the United States District Court for the

District of Connecticut, Dated July 16, 1990 ..

D. Judgment of the United States Court of Appeals

. for the Second Circuit, Dated January 17, 1991 .

Page

_

‘

a |

A-22

A-28

a

No. 90-1701

IN THE

Supreme Court of the United States

OcroBer TERM, 1990

FRANK L. Birp, Trustee of the FRANK L. Birp

PRoFIT SHARING TrusT, FRANK L. Birp, Individually,

and JOAN SHEA,

Petitioners,

Vv.

SHEARSON LEHMAN/AMERICAN Express INC. and

RAYMOND R. CLEMENTS,

Respondents.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

RESPONDENTS’ BRIEF IN OPPOSITION

TO PETITION FOR A WRIT OF CERTIORARI

OPINIONS BELOW

The opinion of the United States Court of Appeals for the

Second Circuit is reported at 926 F.2d 116, and is reproduced

at Appendix B hereto. The opinion of the United States District

Court for the District of Connecticut is unreported but is

reproduced at Appendix C hereto.

JURISDICTION

The judgment of the court of appeals was entered on January

17, 1991 and is reproduced at Appendix D hereto. The Court

has jurisdiction pursuant to 28 U.S.C. § 1254(1) (1982).

——————EEEEEeEeeeeere

STATUTORY PROVISIONS INVOLVED*

United States Arbitration Act

Section 2, 9 U.S.C. § 2

Section 3, 9 U.S.C. § 3

Employee Retirement Income Security Act

29 U.S.C. § 1001

29 U.S.C. § 1004

29 U.S.C. § 1132

29 U.S.C. § 1144

* The text of these provisions is reproduced in full at Appendix A hereto.

a

STATEMENT OF THE CASE

Petitioner Frank L. Bird, the trustee as well as a participant

and a beneficiary of the Frank L. Bird Profit Sharing Trust (the

“Trust”), opened a securities account on behalf of the Trust in

or around July 1984 with respondent Raymond R. Clements,

formerly employed by respondent Shearson Lehman/American

Express Inc. (“Shearson”)' as a registered representative in a

branch office located in Boston, Massachusetts. At or around

the time Mr. Bird opened the securities account for the Trust,

he executed a Customer’s Agreement with Shearson in his

capacity as trustee. The Customer’s Agreement defines the terms

and conditions of the parties’ business relationship and includes

their agreement to arbitrate any controversy relating to the

Trust’s securities account at one of three designated self-

regulatory organization (“SRO”) arbitration forums:’

Unless unenforceable due to federal or state law, any

controversy arising out of or relating to [the Trust’s]

accounts, to transactions with [Shearson] for [the

Trust] or to this agreement or the breach thereof, shall

be settled by 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 [the Trust] may elect.

Petitioners filed a complaint against Shearson and Mr.

Clements in the United States District Court for the District

' Pursuant to Rule 28.1 of the United States Supreme Court Rules, the parent

company of Shearson is Shearson Lehman Brothers Holdings Inc. (“SLBHI”)

and the parent company of SLBHI is the American Express Company. Non-

wholly owned affiliates of Shearson are Gulfmark Int'l, First Capital Holdings

Corp., Energy Ventures, Inc. and Illinois Central Corp.

? The SROs are overseen by the Securities and Exchange Commission. See § 19

of the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq. (1982) (“Ex-

change Act”). The Court examined the SRO arbitration forums in Shear-

son/American Express, Inc. v. McMahon, 482 U.S. 220, reh’g denied, 483 U.S.

1056 (1987), and found them to be fair, efficient and fully capable of resolv-

ing statutory disputes.

_—

of Connecticut on or around July 21, 1987. The complaint alleges

that from July 1984 through May 1986, respondents traded the

Trust account excessively and inappropriately in light of the

Trust's investment objectives. The complaint alleges that this

conduct constitutes: (a) a breach of fiduciary duties under

ERISA, 29 U.S.C. § 1004; (b) a violation of § 10(b) of the Ex-

change Act, 15 U.S.C. § 78j(b) and Securities and Exchange

Commission Rule 10b-5 promulgated thereunder, 17 C.F.R.

§ 240.10b-5; (c) a violation of various provisions of the Connect-

icut General Statutes; and (d) a violation of various provisions

of the Massachusetts Laws. Petitioners filed for a motion for leave

to file an amended complaint which the district court granted

on September 30, 1987. The district court subsequently dismissed

certain state law claims of petitioners, and petitioners volun-

tarily withdrew their remaining state law claims.

Shearson and Mr. Clements filed a motion in the district court

on or about August 17, 1987 for an order enforcing the arbitration

agreement entered into by the parties pursuant to § 3 of the FAA.

The district court issued a bench ruling on April 4, 1988, which

held that the parties’ arbitration agreement is valid and requires

petitioners to arbitrate their § 10(b) claim in accordance with

the Court's opinion in McMahon. The district court, however,

refused to enforce the parties’ arbitration agreement with respect

to petitioners’ ERISA claim, finding such claims to be

nonarbitrable.

Respondents filed an appeal with the court of appeals to

review the district court's refusal to enforce the parties’ agree-

ment to arbitrate their ERISA dispute. A divided court of ap-

peals affirmed this portion of the district court's opinion on

March 28, 1989 and ruled that Congress intended to prohibit

enforcement of an agreement to arbitrate an ERISA claim. See

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

295-98 (2d Cir.) (“Bird I”), vacated and remanded, 110 S. Ct.

225 (1989). Judge Cardamone dissented from this ruling. See

Bird 1, 871 F.2d at 298 (Cardamone, J., dissenting). The court

of appeals, in its de novo review of the district court's order,

also ruled that a valid arbitration agreement exists between the

parties and it affirmed the district court's order requiring

arbitration of the parties’ § 10(b) dispute. See Bird I, 871 F.2d

at 294-95. Respondents filed a petition with the court of ap-

peals for rehearing and suggestion for rehearing en banc. The

court of appeals denied rehearing by order dated May 9, 1989

from which Judge Cardamone dissented.

Respondents subsequently filed a Petition for a Writ of Cer-

tiorari with this Court on or about August 7, 1989 to review

the court of appeals’ opinion in Bird I rendering unenforceable

agreements to arbitrate ERISA disputes. On October 10, 1989,

this Court issued an order which: (1) granted respondents’ Peti-

tion for a Writ of Certiorari, (2) vacated the court of appeals’

judgment rendering unenforceable the parties’ agreement to ar-

bitrate their ERISA dispute, and (3) remanded the case to court

of appeals for further consideration in light of Rodriguez de Qui-

jas v. Shearson/American Express, Inc., 490 U.S. 477, 109 S. Ct.

1917 (1989). Justices Brennan, Marshall and Stevens dissented

from this order. See Shearson Lehman/American Express, Inc.

v. Bird, 110 S. Ct. 225 (1989).

The court of appeals issued an order vacating its March 28,

1989 judgment in accordance with this Court's order, on or about

December 11, 1989, and issued a subsequent order remanding

the case to the district court with instructions to reconsider its

opinion in light of Rodriguez, on or about January 19, 1990.

The district court once again ruled that agreements to ar-

bitrate ERISA disputes are unenforceable on or about July 16,

1990. See Appendix C. The district court relied on the reasons

expressed in the court of appeals’ vacated opinion in Bird | to

support its ruling and it concluded that Rodriguez did not re-

quire a different result. Respondents appealed to the court of

appeals from this order and the court of appeals reversed the

district court's order, ruling that petitioners are required to ar-

bitrate their ERISA claim. Judge Kearse dissented from this

order. See Bird v. Shearson Lehman/American Express, Inc., 926

F.2d 116 (2d Cir. 1991) (“Bird II”), Appendix B.’

’ Petitioners filed a Supplemental Appendix with the Court subsequent to their

filing of the Petition which contains the opinion of the court of appeals in

(footnote continued)

In its order, the court of appeals upheld its ruling in Bird /

that the parties entered into a valid arbitration agreement. See

Bird II, 926 F.2d at 118, Appendix B at A-9. The court of ap-

peals also held that there is no congressional intent to prohibit

arbitration of ERISA claims and it recognized that its opinion

in Bird I, refusing to enforce the parties’ agreement to arbitrate

their ERISA claim, “was motivated, in part, by an ‘outmoded

presumption of disfavoring arbitration proceedings.” See Bird

11, 926 F.2d at 118-19 (citing Rodriguez, 109 S. Ct. at 1920). The

court of appeals also rejected: (1) petitioners’ reliance on this

Court's labor arbitration precedent represented in Alexander v.

Gardner-Denver Co., 415 U.S. 36 (1974), Barrentine v. Arkansas-

Best Freight Sys., Inc., 450 U.S. 728 (1981), and McDonald v.

City of West Branch, 466 U.S. 284 (1984), and (2) petitioners’

arguments that arbitration of ERISA claims would infringe upon

the enforcement and oversight responsibilities of the Secretary

of Labor and the development of federal common law under

ERISA. See Bird II, 926 F.2d at 121-22, Appendix B at A-14-16.

Petitioners subsequently filed the Petition on or about April

12, 1991. Respondents contend that the Court should deny the

Petition since the lower courts are properly uniformly enforc-

ing agreements to arbitrate ERISA claims pursuant to the Court's

modern arbitration precedent represented in Mitsubishi Motors

Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985),

McMahon and Rodriguez, and arguments such as those relied

on by petitioners to support their request for certiorari were

refuted in the Court's recent opinion in Gilmer wv. In-

terstate/Johnson Lane Corp., 111 S. Ct. 1647, 59 U.S.L.W. 4407

(May 13, 1991).

(footnote continued)

Bird 11. This opinion, however, was subsequently corrected by the court of

appeals. The court of appeals’ corrected opinion in Bird I] is contained herein

at Appendix B.

REASONS FOR DENYING THE WRIT

Petitioners seek certiorari from the Court based on their con-

tention that the court of appeals’ ruling that agreements to ar-

bitrate ERISA disputes are enforceable is an important issue of

federal law which has not been, but should be, settled by this

Court and petitioners contend that a conflict exists among the

circuit courts of appeals on the issue presented by the Petition

which requires resolution by the Court. See Petition at 4-5 (citing

United States Supreme Court Rules 17.l(a) and (e)). These

arguments are baseless. The lower federal courts are presently

uniformly enforcing agreements to arbitrate ERISA disputes in

light of this Court’s modern arbitration jurisprudence

represented in Mitsubishi, McMahon and Rodriguez which

clearly requires enforcement of such agreements. Peti* »ners also

present arguments supporting the granting of certio: ri which

were rejected by the Court in Gilmer v. Interstate/Johnson Lane

Corp., U1 S. Ct. 1647, 59 U.S.L.W. 4407 (May 13, 1991), rendered

subsequent to the filing of the Petition. See Petition at 5-7.

A. The Lower Courts are Uniformly Enforcing Agree-

ments to Arbitrate ERISA Disputes in Accordance with

The Modern Arbitration Jurisprudence of This Court

Petitioners contend that the Court should grant certiorari in

this case because the circuit courts are in conflict regarding the

enforceability of agreements to arbitrate ERISA disputes. Peti-

tioners claim that such a conflict exists since the Second and

» Eighth Circuits have ruled that an agreement to arbitrate an

ERISA dispute is enforceable in Bird I] and Sulit v. Dean Wit-

ter Reynolds, Inc., 847 F.2d 475 (8th Cir. 1988), respectively, and

the Third Circuit reached a contrary conclusion in Barrowclough

v. Kidder, Peabody & Co., 752 F.2d 923 (3d Cir. 1985). See Peti-

tion at 4-5. However, as the Second Circuit recognized in Bird

II, and even petitioners recognize in the Petition, the Third Cir-

cuit’s ruling in Barrowclough was decided prior to this Court's

opinions in Rodriguez and McMahon. See Bird I1, 926 F.2d at

119, Appendix B at A-ll; Petition at 4-5. Barrowclough was also

decided prior to Mitsubishi, so it was decided prior to, and

without the benefit of, any pronouncement of this Court's

ail

modern arbitration precedent. In fact, the Third Circuit in Bar-

rowclough relied on Wilko v. Swan, 346 U.S. 427 (1953) to sup-

port its conclusion that statutory ERISA disputes are not sub-

ject to arbitration. See Barrowclough, 752 F.2d at 940 n.17. The

Court overruled Wilko in Rodriguez and described Wilko as per-

vaded by “the old judicial hostility to arbitration,” stating that

Wilko “has fallen far out of step with our current strong en-

dorsement of the federal statutes favoring this method of resolv-

ing disputes.” See Rodriguez, 490 U.S. at 480-81. Barrowclough

is thus premised on an outmoded presumption against arbitra-

tion of statutory disputes and it has been superseded by the

Court's modern arbitration precedent.

Moreover, apart from the Second Circuit's opinion in Bird |

which was vacated by this Court, every court that has analyzed

the enforceability of agreements to arbitrate ERISA disputes in

light of the Court’s modern arbitration precedent has rendered

such agreements enforceable and has not relied on Bar-

rowclough. See Bird I1; Sulit; Glover v. Wolff, Webb, Burk &

Campbell, 731 F. Supp. 292, 293 (N.D. Ill. 1990); Southside In-

ternists Group v. Janus Capital Corp., 741 F. Supp, 1536, 1541

(N.D. Ala. 1990); Rosenblum v. Drexel Burnham Lambert, 700

F. Supp. 874, 876-77 (E.D. La. 1987); Cohen v. Cowen

Securities, Inc., [Current] Fed. Sec. L. Rep. (CCH) 4 94,925

at p. 95,108 (S.D. Fla. July 24, 1989); Metz v. Merrill Lynch,

Pierce, Fenner & Smith, Inc., 1990 WESTLAW 68532 (W.D.

Okla. Mar. 8, 1990); lacono v. Drexel Burnham Lambert, Inc.,

715 F. Supp. 18 (D.R.1. 1989); Santamauro v. Shearson Lehman

Hutton Inc., No. B-89-321 (TFGD) (D. Conn. April 4, 1990).

There is thus unanimity among all courts, let alone the circuit

courts, on the issue presented by-the Petition and there is no

conflict which this Court needs to resolve through the granting

of certiorari in this case.

B. The Court’s Recent Opinion in Gilmer v. Inter-

state/Johnson Lane Corp. Refutes Petitioners’

Arguments Supporting Their Request for Certiorari

In its most recent pronouncement of its modern arbitration

jurisprudence, the Court, in Gilmer, rendered enforceable

agreements to arbitrate claims asserted under the Age

Discrimination in Employment Act of 1967, 29 U.S.C. § 621 et

seq. (1982) (“ADEA”). Gilmer was rendered subsequent to the

filing of the Petition and the Court rejected arguments in Gilmer

which are relied on in the Petition.

Initially, the Petition argues that the parties’ arbitration agree-

ment is governed by the Court’s labor arbitration precedent and

not by the Court’s commercial arbitration precedent relied on

by the court of appeals:

Neither McMahon nor Rodriguez de Quijas speaks

directly to the issue in this case. ... The closest

analogy to ERISA claims like those asserted here is

not the commercial disputes of which McMahon and

Rodriguez de Quijas are representative but the labor

cases where this Court has consistently allowed

claimants to vindicate their statutory rights in the

judicial forum provided. See Alexander v. Gardner-

Denver Co., 415 U.S. 36 (1974); McDonald v. City of

West Branch, Michigan, 466 U.S. 284 (1984).

See Petition at 5. The same argument was raised in Gilmer and

it was flatly rejected by the Court.‘

Like petitioners in the present case, the petitioner in Gilmer

had entered into a privately negotiated commercial arbitration

agreement governed by the FAA and he sought to avoid his con-

tract by relying on the Court's labor arbitration precedent. See

Gilmer, 59 U.S.L.W. at 4411. The Court in Gilmer refused to

apply its labor arbitration precedent to the kind of agreement

at issue in Gilmer and the present case since: (1) these cases did

not involve the enforceability of agreements to arbitrate statutory

claims, (2) the labor arbitrators who decided these cases pur-

suant to collective-bargaining agreements did not have the

authority to resolve statutory disputes, (3) the claimants in the

* This argument was also properly rejected by the court of appeals. See Bird

11, 926 F.2d at 121, Appendix B at A-14-15.

arbitration proceedings were represented by unions, and thus

the claimants’ individual rights might have been compromised

by collective representation, (4) these cases were not decided

under the FAA, and (5) these cases evidenced a mistrust of ar-

bitration which has been rejected in subsequent decisions of the

Court. See Gilmer, 59 U.S.L.W. at 441] & n.5. Likewise, the

Court’s labor arbitration cases cannot be relied on to prevent

enforcement of the parties’ agreement to arbitrate their ERISA

dispute.

Petitioners also relied on the Third Circuit’s opinion in

Nicholson v. CPC Int, Inc., 877 F.2d 221 (3d Cir. 1989) to sup-

port the granting of certiorari in this case. See Petition at 6-7.

The Third Circuit in Nicholson rendered unenforceable agree-

ments to arbitrate ADEA claims, relying primarily on the Court's

labor arbitration precedent. See Nicholson, 877 F.2d at 231.

Nicholson obviously can no longer be relied on in light of Gilmer.

Lastly, petitioners suggest that if agreements to arbitrate

ERISA disputes are enforced, this will diminish the Secretary

of Labor’s enforcement role under the statute and thwart the

development of federal common law under ERISA. See Peti-

tion at 7. These arguments were rejected by the Court in Gilmer

in the context of the ADEA.* The Court in Gilmer was “unper-

suaded by the argument that arbitration will undermine the

role of the Equal Employment Opportunity Commission in en-

forcing the ADEA” and rejected the argument that enforcing

agreements to arbitrate ADEA claims would infringe upon the

development of the law under ADEA, stating that “judicial deci-

sions addressing ADEA claims will continue to be issued because

it is unlikely that all or even most ADEA claimants will be sub-

ject to arbitration agreements.” Gilmer, 59 U.S.L.W. at 4439-40.

The same holds true for the enforcement powers of the Secretary

of Labor and the development of the law under ERISA. Thus,

these arguments of petitioners are also insufficient to warrant

the granting of certiorari in this case.

* These arguments were also properly rejected by the court of appeals. See

Bird I], 926 F.2d at 121-22, Appendix B at A-15-16.

10

CONCLUSION

For all of the foregoing reasons, respondents respectfully re-

quest the Court to deny the petition for a writ of certiorari in

this case.

DATED: New York, New York

June 10, 199]

THEODORE A. KREBSBACH

Counsel of Record for Respondents

Office of the General Counsel

Shearson Lehman Brothers Inc.

388 Greenwich Street

New York, New York 10013

(212) 464-7206

Jerrrey L. FRIEDMAN

Office of the General Counsel

Shearson Lehman Brothers Inc.

(212) 464-7293

Of Counsel

APPENDIX

APPENDIX A

i te ot Otte

STATUTORY PROVISIONS INVOLVED

United States Arbitration Act

9 U.S.C. § 2:

A written provision in any maritime transaction or

a contract evidencing a transaction involving com-

merce to settle by arbitration a controversy thereafter

arising out of such contract or transaction, or the

refusal to perform the whole or any part thereof, or

an agreement in writing to submit to arbitration an

existing controversy arising out of such a contract,

transaction, or refusal, 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. § 3:

If any suit or proceeding be brought in any of the

courts of the United States upon any issue referable

to arbitration under an agreement in writing for such

arbitration, the court in which such suit is pending,

upon being satisfied that the issue involved in such

suit or proceeding is referable to arbitration under

such an agreement, shall on application of one of the

parties stay the trial of the action until such arbitra-

tion has been had in accordance with the terms of the

agreement, providing the applicant for the stay is not

in default in proceeding with such arbitration.

Employee Retirement Income Security Act

29 U.S.C. § 1001. Congressional findings and declaration of policy

(b) Protection of interstate commerce and beneficiaries by

requiring disclosure and reporting, setting standards

of conduct, etc., for fiduciaries

It is hereby declared to be the policy of this chapter to pro-

tect interstate commerce and the interests of participants in

employee benefit plans and their beneficiaries, by requiring the

disclosure and reporting to participants and beneficiaries of

financial and other information with respect thereto, by

establishing standards of conduct, responsibility, and obligation

for fiduciaries of employee benefit plans, and by providing for

appropriate remedies, sanctions, and ready access to the Federal

courts.

29 U.S.C. § 1104. Fiduciary duties

(a) Prudent man standard of care

(1) Subject to sections 1103(c) and (d), 1342, and 1344 of this

title, a fiduciary shall discharge his duties with respect to a plan

solely in the interest of the participants and beneficiaries and —

(A) for the exclusive purpose of:

(i) providing benefits to participants and

their beneficiaries; and

(ii) defraying reasonable expenses of ad-

ministering the plan;

(B) with the care, skill, prudence, and diligence

under the circumstances then prevailing that a pru-

dent man acting in a like capacity and familiar with

such matters would use in the conduct of an enter-

prise of a like character and with like aims;

A-2

(C) by diversifying the investments of the plan so

as to minimize the risk of large losses, unless under

the circumstances it is clearly prudent not to do so; and

(D) in accordance with the documents and in-

struments governing the plan insofar as such

documents and instruments are consistent with the

provisions of this subchapter or subchapter III of this

chapter.

(2) In the case of an eligible individual account plan (as de-

fined in section 1107(d)(3) of this title), the diversification re-

quirement of paragraph (1)(C) and the prudence requirement

(only to the extent that it requires diversification) of paragraph

(1)(B) is not violated by acquisition or holding of qualifying

employer real property or qualifying employer securities (as

defined in section 1107(d)(4) and (5) of this title).

(b) Indicia of ownership of assets outside

jurisdiction of district courts

Except as authorized by the Secretary by regulation, no

fiduciary may maintain the indicia of ownership of any assets

of a plan outside the jurisdiction of the district courts of the

United States.

(c) Control over assets by participant or beneficiary

In the case of a pension plan which provides for individual

accounts and permits a participant or beneficiary to exercise

control over the assets in his account, if a participant or

beneficiary exercises control over the assets in his account (as

determined under regulations of the Secretary) —

(1) such participant or beneficiary shall not be

deemed to be a fiduciary by reason of such exercise,

and

(2) no person who is otherwise a fiduciary shall be

liable under this part for any loss, or by reason of any

ee

breach, which results from such participant’s or

beneficiary’s exercise of control.

29 U.S.C. § 1132. Civil enforcement

(e) Jurisdiction

(1) Except for actions under subsection (a)(1)(B) of this sec-

tion, the district courts of the United States shall have exclusive

jurisdiction of civil actions under this subchapter brought by

the Secretary or by a participant, beneficiary, or fiduciary. State

courts of competent jurisdiction and district courts of the United

States shall have concurrent jurisdiction of actions under subsec-

tion (a)(1)(B) of this section.

(2) Where an action under this subchapter is brought in a

district court of the United States, it may be brought in the

district where the plan is administered, where the breach took

place, or where a defendant resides or may be found, and pro-

cess may be served in any other district where a defendant resides

or may be found.

29 U.S.C. § 1144. Other laws

(d) Alteration, amendment, modification, invalidation,

impairment, or supersedure of any law

of United States prohibited

Nothing in this subchapter shall be construed to alter, amend,

modify, invalidate, impair, or supersede any law of the United

States (except as provided in sections 1031 and 1137(b) of this

title) or any rule or regulation issued under any such law.

A-4

APPENDIX B

[CORRECTED OPINION]

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. Bimp, Trustee of the Frank L. Bird Profit

Sharing Trust, FRANK L. Birp, Individually, and

JOAN SHEA,

Appellees,

— V. —

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 ap-

pellants’ motion to compel arbitration of appellees’ ERISA claim

and to stay proceedings in the district court pending arbitration.

Reversed and remanded.

Judge Kearse filed a dissenting opinion.

A-5

Jerrrey L. FRIEDMAN, New York, N.Y. (Theodore

— A. Krebsbach, New York, N. Y., on the brief)

for appellants Shearson Lehman/American

Express, Inc. and Raymond R. Clements.

DonaLpD R. HotrMan, 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,

Individually, and Joan Shea.

TIMBERS, Circuit Judge:

Appellants Shearson Lehman/American Express, Inc. (Shear-

son) and Raymond R. Clements appeal from an order entered

July 16, 1990 in the District of Connecticut, 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 seq. (1988).

On appeal, appellants contend that the Federal Arbitration

Act (FAA), 9 U.S.C. § I et seq. (1988), requires 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 consistent with this

opinion, including arbitration forthwith.

I.

We shall summarize only those facts and prior proceedings

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.

A-6

ne

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 meeting, 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 Agreement” prior

to opening the account. That agreement contained an arbitra-

tion clause which provided that

“Unless unenforceable due to federal or state law, any con-

troversy arising out of or relating to my accounts, to trans-

actions with you for me or to this agreement or the breach

thereof, shall be settled by 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 objec-

tives 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 fiduciary 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.E.R. § 240.10b-5 (1990). The complaint also set forth various

state law claims; these subsequently were dismissed.

On August 18, 1987, appellants filed a motion invoking the

arbitration clause in the Customer’s Agreement and seeking a

A-7

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 to preclude a waiver of judicial remedies for statutory

ERISA claims, but not for contractual claims involving ERISA-

covered plans. Id. at 298.

Appellants filed a petition for a writ of certiorari in the

Supreme Court. In the meantime, the Supreme Court filéd 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 re-

manded the case for reconsideration in light of Rodriguez. Shear-

son Lehman/American Express, Inc. v. Bird, 110 S. Ct. 225

(1989).

On January 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 re-

cent rulings on arbitration and therefore [did] not significantly

change the legal landscape in which this issue was originally

considered.” 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.

II.

Initially, we set forth our standard of review. “[A] court asked

to stay proceedings pending arbitration in a 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

A-8

claims to be nonarbitrable; and fourth, if the court concludes

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

it must then determine whether to stay the balance of the pro-

ceedings 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 agreement that

encompassed the ERISA claim. Bird I, supra, 871 F.2d at 295.

We see no reason to disturb that holding. Accordingly, the only

issue before us on the instant appeal concerns the third element,

i.e, whether Congress intended statutory claims created by

ERISA to be nonarbitrable.

ITl.

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 jurisdiction of statutory claims,

the remedial nature of the statute, and the underlying purposes

of ERISA — compelled the conclusion that “Congress intend-

ed the federal courts to be the exclusive forum for resolving

disputes of substantive rights.” Bird I, supra, 871 F.2d at 295.

We are told that Bird I was motivated, in part, by an “outmod-

ed presumption of disfavoring arbitration proceedings”.

Rodriguez, supra, 109 S. Ct. at 1920. Rodriguez makes it clear

that that is no longer tenable. Accordingly, we now reach a con-

trary result.

The FAA, “reversing centuries of judicial hostility to arbitra-

tion 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) (foot-

note and citation omitted). Section 2 of the FAA provides that

“an agreement in writing to submit to arbitration an existing

A-9

controversy. . .shall be valid, irrevocable, and enforceable, save

upon such grounds as exist at law or in equity for the revoca-

tion of any contract.” 9 U.S.C. § 2 (1988). “Section 2 [of the FAA]

is a congressional declaration of a liberal federal policy favor-

ing arbitration agreements.” 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 agreements 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. Id. The burden of

demonstrating such congressional intent rests with the party op-

posing arbitration. Rodriguez, supra, 109 S. Ct. at 1921;

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

flict 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 Corrupt 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 191921. In so holding, the Court overruled its

holding in Wilko v. Swan, 346 U.S. 427 (1953) (a 1933 Act deci-

sion), which it stated “rested on suspicion of arbitration as a

method of weakening the protections afforded in the substantive

A-10

law” and had “fallen far out of step with our current strong en-

dorsement of the federal statutes favoring this method of resolv-

ing disputes.” Rodriguez, supra, 109 S. Ct. at 1920.

Prior to Rodriguez, courts of appeals that considered the en-

forceability of agreements to arbitrate claims derived from

ERISA reached varying conclusions. Compare Bird I, supra, 871

F.2d at 298 (agreement to arbitrate 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 en-

forceable). No court of appeals has considered 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 ad-

dressing the issue of whether Congress intended to preclude a

waiver of a judicial forum for claims arising from the substan-

tive 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 Congress 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 parties

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 override the Arbitration Act’s aim of

ensuring the enforcement of privately made agreements in which

parties. . . have chosen to forego an available judicial forum in

favor of arbitration.” Id. at 479.

Similarly, the fact that Congress provided for exclusive 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

A-ll

a

law is to be created and applied to ERISA disputes alleging

breaches of fiduciary duties creates an inherent conflict with

arbitration.

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 alieg-

ing a breach of fiduciary duty in federal courts. We merely hold

that parties may provide by agreement that such claims will be

arbitrated. If such agreements are the result of unequal bargain-

ing power between the parties, general principles of contract

law will bar enforcement. Second, the import of recent Supreme

Court decisions is that arbitration is not to be distrusted no mat-

ter what the source of law to be applied is. Third, an arbitra-

tion 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 history, or underlying

purposes of ERISA indicate that Congress intended to preclude

a waiver of a judicial forum for claims arising under it. Accor-

dingly, 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 ap-

pellants’ 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 arbitration pro-

ceed promptly. The mandate shall issue forthwith.

A-16

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 arbitra-

tion, 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 arbitra-

tion 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.

The underlying purpose of ERISA is “to protect. . .the in-

terests 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 standards that (1) would vary

depending on the capacity in which the fiduciary was acting

and the expertise normally associated with that capacity, see

29 U.S.C. § 1104(1)(B) (“a fiduciary shall discharge his duties

with respect to a plan...with the care, skill, prudence, and

diligence under the circumstances then prevailing that a pru-

dent 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 pro-

tect. ..the interests 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 pre-

dictable. The congressional reports, in explaining why Congress

chose to codify such a fiduciary responsibility requirement rather

A-17

is available. Moreover, the Supreme Court has upheld an ar-

bitration agreement which was involved in a dispute grounded

in a statute that similarly provides for exclusive federal jurisdic-

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

change Act of 1934, 15 U.S.C. § 78aa (1988)). In short, “any claim

that the jurisdictional language of ERISA evidences a congres-

sional intent to foreclose arbitrability would appear to be

untenable in light of McMahon and [ Rodriguez].” Southside In-

ternists 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 nonar-

bitrable. 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 pur-

suant to the Securities Act of 1933. Rodriguez, supra, 109 S. Ct.

at 1920.

We hold that ERISA’s text and legislative history do not sup-

port a conclusion that Congress intended to preclude arbitra-

tion of claims brought pursuant to it.

(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, Con-

gress explained the circumstances leading to the passage of

ERISA and the purpose of the legislation:

“that despite the enormous growth in [pension] plans many

employees with long years of employment are losing an-

ticipated retirement benefits owing to the lack of vesting

provisions in such plans; that owing to the inadequacy of

current minimum standards, the soundness and stability

of plans with respect to adequate funds to pay promised

benefits may be endangered; that owing to the termina-

tion of plans before requisite funds have been accumulated,

A-12

employees and their beneficiaries have been deprived of

anticipated benefits; and that it is therefore desir-

able. ..that minimum standards be provided assuring the

equitable character of such plans and their financial sound-

ness.

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’ ”(citations omitted)). Allowing parties to provide by

agreement that their disputes will be resolved in arbitration 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 sub-

mits 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. ”

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

suggest no reason why the substantive rights guaranteed by

ERISA will be jeopardized if the arbitration agreement is en-

forced. 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,

A-13

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 prospective litigant

effectively may vindicate its statutory cause of action in the ar-

bitral 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 aris-

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

U.S. at 240 (considering remedial role of RICO); Mitsubishi,

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 pur-

suant 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 ar-

bitration clause he did not negotiate “where the employee's claim

is based on rights arising out of a statute designed to provide

minimum substantive guarantees to individual workers.” Bar-

rentine, 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 representation at arbitra-

tion might not be adequate. McDonald, supra, 466 U.S. at 291;

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

US. at 58 n.19.

A-14

The instant case does not raise such concerns. Bird signed the

agreement that contained the arbitration clause. He cannot com-

plain that his rights were bargained away by a third party.

Although Shea did not sign the agreement, her interests and

claims are essentially identical to Bird’s. Under such cir-

cumstances, requiring Shea to arbitrate does not work an in-

justice. Cf. Barrowclough, supra, 752 F.2d at 938-39 beneficiaries

are bound by principal’s agreement to arbitrate when they “claim

no present entitlement to the [benefits] and press no claims

separate from his”).

We also do not find arbitration inconsistent with the enforce-

ment and oversight responsibilities granted to the Secretary of

Labor. The Secretary is involved in reporting 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 com-

pliance 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 presumption of arbitral availabili-

ty under the FAA.” Gilmer v. Interstate/Johnson Lane Corp.,

895 F.2d 195, 198 (4 Cir.), cert. granted, 111 S. Ct. 41 (1990).

Arbitration of ERISA claims will not impede the Secretary’s

supervisory and enforcement responsibilities. “[I1]mplementa-

tion of the statutory purpose is [not] dependent upon the

[Secretary’s] involvement in each and every allegation [under

ERISA].” Id.

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 omit-

ted). We are not persuaded that the fact that federal common

A-15

than relying on traditional principles of trust law, repeatedly

noted the importance of creating a consistent source of law to

help fiduciaries, administrators, and plan participants predict

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 con-

duct he is not equipped to safeguard either his own rights

or the plan assets. Furthermore, a fiduciary standard em-

bodied in Federal legislation is considered desirable because

it will bring a measure of uniformity in an area where deci-

sions 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, fiduciaries and par-

ticipants to predict the legality of proposed actions. . ..

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 virtually identical. See S. Rep. No. 127,

93d Cong., lst Sess. 29 (1973), reprinted in 1974 USCCAN 4838,

4865. The conference report on ERISA also noted that “(t]he

conferees 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 “ sng., 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 ERISA’s provi-

sion that only federal courts, and not state courts, have jurisdic-

tion over fiduciary-duty claims under ERISA. See 29 U.S.C. §

1132(e)(1). In addition, Congress included a provision (a) requir-

ing that in every ERISA action for breach of fiduciary respon-

sibilities, a copy of the complaint must be served on the Secretary

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

A-18

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 limited.

There is no general requirement that arbitrators of commer-

cial disp .ces explain the reasons for an arbitration decision. See

American Arbitration Association Commercial Arbitration Rule

42, reprinted in Alternative 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 Ex-

change Rule 618(e) (requiring only that the award summarize

the demands, the issues, and the results); New York Stock Ex-

change Rule 627(e) (same). Though public interest groups have

urged that arbitration 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 state-

ment 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 decision 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 outcome of disputes. The SEC itself noted that in the absence

of such statements “awards rendered by arbitrators in prior cases

will not predict the vote or outcome of future cases.” Id. at 21,152.

Further, in the absence of such statements, there will be no

assurance that the arbitrators have followed whatever precedent

there may be. And apparently, in the securities industry, they

often do not. In 1988 congressional hearings on arbitration

reform, a securities industry 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.g.,

A-19

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

comm. 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 frequently made decisions that did not reflect

legal standards 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 cir-

cumstances.” Id. at 138. A member of the plaintiffs’ bar con-

curred. 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 claim-

ant has to pay his attorney and that will be the size of the

award. ..”).

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 governing legal principle[s},”

not merely because of “an arguable difference regarding the

meaning or applicability of laws.” Merrill Lynch, Pierce, Fen-

ner & 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 pur-

pose, 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’ stan-

dard customer contracts, together with the lack of any require-

ment of a stated rationale in the arbitrators’ decision and the

very limited scope of judicial review, there is no likelihood that

enforcement of such agreements will permit development of a

carefully tailored, or uniform, or predictable body of law as to

the fiduciary duties of brokers in dealing with ERISA pension

plans.

A-20

In sum, I would conclude that broad-scale arbitration of

ERISA fiduciary-responsibility claims would conflict with

ERISA’s goal of providing carefully tailored fiduciary duty prin-

ciples and be antithetical to the goals of uniformity and predic-

tability. Our prior ruling in the present case, holding the ar-

bitration agreement unenforceable, 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 be-

tween arbitration and the statute's underlying purposes. 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.

A-21

APPENDIX C

UNITED STATES DISTRICT COURT

DISTRICT OF CONNECTICUT

FRANK L. BIRD, Trustee of the

Frank L. Bird Profit Sharing

Trust, FRANK L. Bird,

Individually, and JOAN SHEA

: Civ. No.

V. H-87-530 (JAC)

SHEARSON LEHMAN/AMERICAN

EXPRESS INC., AND

RAYMOND R. CLEMENTS

APPEARANCES:

DONALD R. HOLTMAN

(Katz & Seligman)

Hartford, CT

For Plaintiffs

WILLIAM S. ROGERS

(Tyler Cooper & Alcorn)

Hartford, CT

THEODORE A. KREBSBACH

JEFFREY L. FRIEDMAN

(Office of the General Counsel,

Shearson Lehman Hutton, Inc.)

New York, NY

For Defendants

ROBERT J. HIGGINS

GEORGE KAUFMAN

MARCUS C. MIGLIORE

(Dickstein, Shapire & Morin)

Washington, DC

For Amici Curiae, New York State Teamsters Council

Health and Hospital Fund, Upstate New York Teamsters

Pension and Retirement Fund and New York Teamsters

Conference Pension and Retirement Fund

A-22

RULING ON REMAND

FROM THE COURT OF APPEALS

JOSE A. CABRANES, District Judge:

This case has been remanded by the Court of Appeals for the

limited purpose of reconsidering the issue of whether a fiduciary

responsibility claim under the Employee Retirement Income

Security Act (ERISA) is subject to compulsory arbitration in light

of the Supreme Court’s decision in Rodriguez de Quijas v. Shear-

son/American Express, Inc., 109 S.Ct. 1917 (1989) (“Rodriguez”).

Because Rodriguez is consistent with the Supreme Court’s other

recent rulings on arbitration and therefore does not significantly

change the legal landscape in which this issue was originally

considered, I continue to hold that fiduciary responsibility

claims' under ERISA are not subject to compulsory arbitration.

Procedural History

This case was originally filed on July 21, 1987. Plaintiffs Frank

L. Bird, a trustee and beneficiary of the Frank L. Bird Profit

Sharing Trust (“the Plan”), and Joan Shea, a beneficiary of the

Plan, allege, inter alia, that defendants’ handling of the Plan’s

funds constituted a breach of fiduciary duties under ERISA, 29

U.S.C. § 1104. Plaintiffs assert that defendants, an investment

firm and its vice president, solicited the management of the

Plan’s account and were aware of its conservative investment

objectives. After twenty-two months and fifty-five transactions,

the $62,205.56 from the Plan invested with defendants was

reduced to $18,427.53, and plaintiffs claim that many of the in-

vestments made on their behalf were improperly risky.

' The Court of Appeals’ decision recognized a distinction between “purely con-

tractual claims” and “fiduciary claims” — that is, “claims created as part of

a comprehensive federal scheme protecting the rights of individual participants

and beneficiaries.” The same distinction is drawn by the statute, which allows

contractual claims to be heard in state court, but give federal courts exclusive

jurisdiction over fiduciary claims. See 29 U.S.C. §1132(e). The Court of Ap-

peals stressed that its holding did not cover contractual claims. “We do not

suggest that arbitration of purely contractual claims asserted pursuant to

ERISA cannot be compelled.” 871 F.2d at 298.

A-23

On August 13, 1987, the defendants filed a motion to com-

pel arbitration and to stay the action pending arbitration. At

a hearing on April 4, 1988, I held that an enforceable arbitra-

tion agreement existed and that the motion should be granted

as to the securities claims, but that the ERISA claims were not

subject to compulsory arbitration. On August 23, 1988 the defen-

dants filed a notice of appeal as to the ruling on the ERISA

claims, and on March 28, 1989, the Court of Appeals for the

Second Circuit affirmed that ruling, having considered the issue

de novo, 871 F.2d 292, 294 n. 4 (“A denial of a motion to com-

pel arbitration is subject to de novo review. [citation omitted]”).

The Supreme Court, on October 10, 1989, vacated by summary

order the Court of Appeals’ judgment and remanded the cause

for reconsideration in light of Rodriguez. 110 S.Ct. 225 (1989).

On January 19, 1990, the Court of Appeals, in turn, remanded

the case to this court “with directions to proceed in accordance

with the mandate of the Supreme Court.”

Discussion

Rodriguez does not alter the basic framework, set out in Shear-

son/American Express, Inc. v. McMahon, 107 S.Ct. 2332 (1987),

within which issues of arbitrability are determined. “The Federal

Arbitration Act, 9 U.S.C. § 1 et seg., provides the starting point

. . and the burden is on the party opposing arbitration . . .

to show that Congress intended to preclude a waiver of judicial

remedies... .” Id. at 2337. Such congressional 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.” Id. (citations omitted; brackets in

original).

This court has been authorized and directed only to recon-

sider its decision in this case in light of Rodriguez. While

Rodriguez overruled Wilko v. Swan, 346 U.S. 427 (1953), it con-

firmed, rather than departed from, the Court's other recent deci-

sions about arbitrability. Wilko had found claims under the

Securities Act of 1933 not to be subject to compulsory arbitra-

tion. During the last decade, the Court has recognized arbitra-

tion as a legitimate alternative to formal litigation and has been

A-24

less willing to find federal statutory rights exempt from arbitra-

tion agreements. As the Court noted in Rodriguez,

[t]he shift in the Court’s views on arbitration away

from those adopted in Wilko is shown by the flat state-

ment in Mitsubishi [Motors Corp. v. Soler Chrysler-

Plymouth, Inc., 473 U.S. 614, 628 (1985) ]: “By agree-

ing 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.”

109 S.Ct. at 1920. Other cases besides Mitsubishi confirmed this

change in perspective. See Moses H. Cone Memorial Hospital

v. Mercury Construction Corp., 460 U.S. 1, 24 (1983); Dean Wit-

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

While Wilko was not normally overruled until Rodriguez, the

anti-arbitration perspective underlying Wilko had been

discredited by McMahon, supra. In McMahon, the Court ex-

plained that changing conditions cast doubt on the earlier

decision: .

[T]he mistrust of arbitration that formed the basis for

the Wilko opinion in 1953 is difficult to square with

the assessment of arbitration that has prevailed since

that time. . . . Even if Wilko’s assumptions regarding

arbitration were valid at the time Wilko was decided,

most certainly they do not hold true today for arbitra-

tion procedures subject to the SEC’s oversight

authority.

107 S.Ct. at 2341. In fact, the Court explicitly noted that it was

limiting Wilko and disapproved of that case’s holding, “While

stare decisis concerns may counsel against upsetting Wilko’s

(result] under the Securities Act, we refuse to extend Wilko’s

reasoning to the Exchange Act in light of these intervening

regulatory developments.” /d.

Given how strongly Wilko was already disfavored at the time

the instant case was first considered, I am not persuaded that

A-25

oC

a different result should be reached in light of Rodriguez. The

first prong of the analysis under McMahon, whether the text

and legislative history of ERISA preclude arbitration, is not

significantly affected by Rodriguez. In holding that ERISA

claims for breach of fiduciary duty are not arbitrable, the Court

of Appeals found ERISA’s generous provisions for access to the

federal courts “persuasive evidence that Congress intended

disputes under the statute to be resolved in a federal judicial

forum.” Bird, 871 F.2d at 297. Rodriguez arguably makes that

evidence somewhat less persuasive, because the 1933 Act —

which Rodriguez found arbitrable — contains similar provisions

to preserve access to federal courts.?, However, at least two other

statutes with provisions for increased access to the federal courts,

the Securities Exchange Act of 1934 and the antitrust laws,’ had

already been found arbitrable, so the impact of Rodriguez is

only marginal. That decision does not disturb the Court of Ap-

peals’ assessment that “Federal court access for pension claimants

and beneficiaries was explicitly included [by Congress] as a key

ingredient of [ERISA.]” 371 F.2d at 297.

Turning to the second prong of the McMahon test, the over-

ruling of Wilko does not alter the Court of Appeals’ basic assess-

ment that ERISA — when used to ensure fiduciary duties as

opposed to enforcing the provisions of a specific plan — is a

“remedial statute designed to ‘curb . . . abuses of employee pen-

sion and welfare benefit plans by establishing minimum federal

standards. ” 871 F.2d at 296-97 (relying on statutory language).

Rodriguez also does not alter the Court of Appeals’ proper

reliance on Alexander v. Gardner-Denver Co., 415 U.S. 36 (1974)

* See 15 U.S.C. § 77v(a) (1933 Act provisions) and 29 U.S.C. § 1132 (ERISA

provisions).

> See McMahon, supra, and Mitsubishi, supra; see generally Shell, “ERISA

and Other Federal Employment Statutes: When Is Commercial Arbitration

an ‘Adequate Substitute’ for the Courts?” 68 Texas Law Review 509, 557 (1990)

(“The special procedural protections ERISA provides claimants are not unique

to the statute and do not answer the question of arbitrability .. . .”).

A-26

and McDonald v. City of West Branch, 466 U.S. 284 (1984) for

the proposition that “[w]hen enacting remedial legislation, Con-

gress has limited or prohibited waiver of a judicial forum. Most

often these injunctions occur in statutes designed to provide

minimum substantive guarantees.” Id. at 295. Finally, because

Rodriguez does not alter the character of ERISA or the general

rule that such federal minimum substantive guarantees are not

suitable for arbitration, it does not alter the conclusion that

ERISA claims for breach of fiduciary duty (as opposed to ERISA

claims for benefits under the provisions of a particular plan)

are not subject to compulsory arbitration.

CONCLUSION

Accordingly, this court finds that the ERISA claims are not

subject to compulsory arbitration and the Motion for an Order

Staying Proceedings Pending Arbitration is DENIED.

It is so ordered.

Dated at New Haven, Connecticut this 16th day of July, 1990.

/s/ José A. Cabranes

José A. Cabranes

United States District Judge

A-27

APPENDIX D

United States Court of Appeals

for the

Second Circuit

At a stated Term of the United States Court of Appeals for

the Second Circuit, held at the United States Courthouse in the

City of New York, on the 17th day of January one thousand nine

hundred and ninety-one.

Present! HON. WILLIAM H. TIMBERS

HON. AMALYA L. KEARSE

HON. ROGER L. MINER

Circuit Judges,

FRANK L. BIRD, TRUSTEE OF

FRANK L. BIRD PROFIT SHARING

TRUST, FRANK L. BIRD,

INDIVIDUALLY, AND JOAN SHEA,

Appellees,

-\- Docket No. 90-7688

SHEARSON LEHMAN/AMERICAN

EXPRESS, INC., AND RAYMOND

R. CLEMENTS,

Appellants.

Appeal from the United States District Court for the District

of Connecticut.

This cause came on to be heard on the transcript of record

from the United States District Court for the District of Con-

necticut and was argued by counsel.

A-28

ON CONSIDERATION WHEREOF, it is now hereby

ordered, adjudged and decreed that the ORDER of said District

Court be and it hereby is Reversed and the action be and it

hereby is remanded to the said district court for further pro-

ceedings in accordance with the opinion of this court with costs

to be taxed against the appellee.

Elaine B. Goldsmith,

Clerk

/s/ Edward J. Guardaro

by: Edward J. Guardaro,

Deputy Clerk

A-29