Petition — Kroog v. Mait

F ~

$8.17) [Sree

NO. DEC 1 1983

IN THE ALEXANDER L. STEVAS,

SUPREME COURT OF THE UNITED STATES CLERK

October Term, 1983

NATALIE KROOG,

Petitioner,

Vv.

STEVEN MAIT and PAINE, WEBBER,

JACKSON & CURTIS,

Respondents.

On Writ of Certiorari

To the United States Court of Appeals

For the Seventh Circuit

PETITION FOR WRIT OF CERTIORARI

Bruce C. O'Neill

Fox, Carpenter, O'Neill

& Shannon, S.C.

622 North Water Street

Milwaukee, WI 53202

y (414) 273-3939

Attorneys for

Petitioner

Natalie Kroog

QUESTION PRESENTED

Whether Section 551.59(8) of the

Wisconsin Statutes, the anti-waiver

provision of the Wisconsin Uniform

Securities Law, is preempted by the federal

law consisting of the Federal Arbitration

Act, the Securities Act of 1933, and the

Securities Exchange Act of 1934?

i

INDEX

Page

Gpinions Below... cccsccoses rs 2

PREIS i bo oe 6 csenttceaeson 2

ee Pee ere 3

Statement of the Case....... ra a 7

Reasons for Granting the Writ... 13

Whether the Anti-Waiver

Provision of State Securi-

ties Laws is Preempted by

the Federal Law is an

Important Question of

Federal Law which has

not been and should be

Reviewed by this Court..... 13

RINNE. Socks 0 cc cwwae heaves 26

ii

Appendix

Decision and Order of the

Court of Appeals........

Judgment of the Court of

Eee ie er

Order Denying Petition

for Rehearing...........

Decision and Order of the

1 eee CE es 6 6 06 0'4,0% 5

CITATIONS

Cases

A. & E. Plastik Pak Co. v.

Wges28sg FO (Sth Cir. 1968).

Aimcee Wholesale Corp. v. Tomar

Froqucts. Inc.

d 621, 237 N.E.2d 223

Allegaert v. Perot

548 F.2d 432 (2d Cir.), cert.

den., 432 U.S. 910 al > 2 pa

j American Safety Equipment Corp.

< v. J.P. Maguire & Co.

. 391 F.2d d Cir. 1968). .

Page

C-1

D-1

26

; a ee A> ae, ——— -- |

iii

Applied Digital Technology,

Inc. v. Continental Casualty

O°.

576 F.2d 116 (7th Cir. 1978).

Ayres v. Merrill Lynch, Pierce,

Fenner & Smith

.2d 532 (3rd Cir. 1976).

Bache Halsey Stuart Shields,

Inc. v. Moebius

531 F. Supp. 75 (E.D. Wis.

EE Bsr Earl's Vibe’. 81e.n0 0 0 00 48

Barron v. Tastee Freez

International, Inc.

482 F. Supp. 1213 (E.D. Wis.

DDG chia seb eesqe nc ovesedese

Durst v. Abrash

22 A.D. 39, 253 N.Y.S.2d 351

CROCS) ce victeeccccccccecsswens

Florida Avocodo Growers, Inc.

v. Paul

ST wa) SAE C1968) «0 occ css

Keating v. Superior Court,

Alameda Count

31 Cal, 34 584, 183 Cal. Rptr.

360, 645 P.2d 1192 (1982),

cert. granted sub nom. South-

land Corportion v. Keating,

No. 82- a Ga. ks

Cre Dice. « Lutebe'e b's e.0 6 466-00

Page

25

23

9, .0

9, i0

26

18, 20,

21

13, 14,

16, 28

iv

Kiehne v. Purd

309 N.W.2 (Minn. 1981)...

Kroo . Mait

712 Fad 1148 (7th Cir. 1983).

Lee v. Ply Gem Industries, Inc.

“553 F. 1266 (D.C. Cir.),

cert. den., 441 U.S. 967 (1979)

Merrill Lynch, Pierce, Fenner

& Smith v. Ware

We ie Sy Ge gp ) re

Moses H. Cone Memorial Hospital

v. Mercury Construction Corp.

- U.S. -, 103 S. Ct. 927 3)

New York State Department of

Social Services Vv. Dublino

0 & RE . gel)» ) Ree

Prima Paint Corp. v. Flood and

soars Mf

a a SSE:

Sandefer v. Reynolds Securities,

Inc.

618 P.2d 690 (Colo. App. 1980).

Page

25

16

21, 22

19

21, 22

25

Silver v. New York Stock

Exchange

ae ee | CEO) 6 0 aes wé 6 0 16: i

United Nuclear Corp. v. General

Atomic Co.

93 N.M. 105, 597 P.2d 290, cert.

den., 444 U.S. 911 (1979)...... 25

. Weissbuch v. Merrill Lynch,

Pierce, Fenner & Smith

558 F.2d 831 (7th Cir. 1977)... 23

Wilko v. Swan

PCMeMs MAT CISDS)s icsonccouse

22,

NH wo

Cr

Statutes

Securities Act of 1933

Section 14, 15 U.S.C. Sec. 77n. ae

Section 18, 15 U.S.C. Sec. 77r. ee £°

14

Securities Exchange Act of

1934

Section 28(a), 15 U.S.C.

ee er ee &, $, 16

Section 29(a), 15 U.S.C.

es ND bo b:a's on be ,6.0 00.0-6.0 Pe

Federal Arbitration Act

pentane 2s @.0,8.C. B66. .2.<. 5 ;

Section 3, 9 U.8.C.,8ecs 3... 6, 9,

10, 12

vi

Page

Wisconsin Statutes

EEN BOL SHE occvodescoes 10

a Se ES) 9 ree 10, 12

DS. BOE CONC) 6 6 aceccveses 3. 8,

12

PUCERO DOR Ole cribs tescueres AS

Miscellaneous

Uniform Securities Act

SEA CUPID Ga bain 6 O48 O0-0w as 0 8

NE Ce 6k Ae et Midna elie aie is 8

Vol. 1, CCH Blue Sky Law Reporter,

Bp A Re | 3 Da

III Loss, Securities Regulation

C1902), OP. O88, BGO3L cesses 9, 27

Comment, Arbitration of Investor-

Broker Disputes

65 Cal. L.Rev. 120, 129-31

EE WAGE aoe Ske HRS win eine he 22

Federal Trade Commission Franchise

Disclosure Rules

ey es TS i a oe ee 14

‘

NO.

IN THE

SUPREME COURT OF THE UNITED STATES

October Term, 1983

NATALIE KROOG,

Petitioner,

Vv.

STEVEN MAIT and PAINE, WEBBER,

JACKSON & CURTIS,

Respondents.

On Writ of Certiorari

To the United States Court of Appeals

For the Seventh Circuit

PETITION FOR WRIT OF CERTIORARI

The petitioner, Natalie Kroog

("Kroog"), prays that a Writ of Certiorari

issued to review the judgment and opinion

of the United States Court of Appeals for

the Seventh Circuit, entered in this action

on July 15, 1983.

=2-

OPINIONS BELOW

The decision and order of the Court of

Appeals, dated July 15, 1983, is reported

at 712 F.2d 1148, and CCH Federal

Securities Law Reporter 999,418, and

reproduced in the Appendix to this

pet.tion, infra, at A-l et seq.

The decision and order of the United

States District Court for the Eastern

District of Wisconsin, dated January 7,

1983, is reproduced in the Appendix to this

petition, infra, at D-1 et seq.

JURISDICTION

The judgment of the Court of Appeals

for the Seventh Circuit was entered on July

15, 1983. A timely petition for rehearing

was denied on September 2, 1983, and this

petition for certiorari was filed within 90

~3-

i

pel

~

7.

2 days of that date. This Court's

jurisdiction is invoked under 28 U.S.C.

§1254(1).

STATUTES INVOLVED

Sec. 551.59(8), Wisconsin Statutes:

Any condition, stipulation or pro-

vision binding any person acquiring any

security to waive compliance with any

provision of this Chapter or any rule or

order hereunder is void.

Section 551.67, Wisconsin Statutes:

This chapter shall be so construed as

to effectuate its general purpose to make

uniform the law of those states which enact

the "Uniform Securities Act" and coordin-

ate the interpretation and administration

of this chapter with related federal

. regulation.

4

|

siie

Section 18, Securities Act of 1933 (15

U.S.C. §77r):

Nothing in this subchapter. shall

affect the jurisdiction of the securities

commission (or any agency or office per-

forming like functions) of any State or

Territory of the United States, or the

District of Columbia, over any security or

any person.

Section 28(a), Securities Exchange

Act of 1934 (15 U.S.C. §78bb(a)):

*** Nothing in this title shall affect the

jurisdiction of the securities commission

(or any agency or office performing like

functions) of any State over any security

or any person insofar as that it does not

conflict with the provisions of this title

or the rules and regulations thereunder.

kkk

Section 14, Securities Act of 1933 (15

U.S.C. §77n):

~ -

Any condition, stipulation, or pro-

vision binding any person acquiring any

security to waive compliance with any

provision of this title or of the rules and

regulations of the Commission shall be

void.

Section 29(a), Securities Exchange

Act of 1934 (15 U.S.C. §78cc(a)):

; Any condition, stipulation, or pro-

vision binding any person to waive com-

pliance with any provision of this title or

of any rule or regulation thereunder, or of

any rule of an exchange required thereby

shall be void.

Section 2, Federal Arbitration Act (9

U.S.C. §2):

A written provision in any maritime

transaction or a c itract evidencing a

transaction involving commerce to settle

by arbitration a controversy thereafter

arising out of such contract or trans-

-6~

action, 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.

Section 3, Federal Arbitration Act (9

U.8.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

Ki,

until such arbitration 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.

STATEMENT OF THE CASE

The Federal Arbitration Act was

enacted by Congress in 1925. In 1933 and

1934 Congress enacted the Securities Act

and the Securities Exchange Act. In the

securities laws, Congress provided that

pre-dispute arbitration clauses are not

enforceable as to disputes over violations

of the securities laws. Section 14 of the

Securities Act of 1933 and Section 29(a) of

the Securities Exchange Act of 1934. In

the securities laws, Congress’ further

provided for concurrent State regulation

of securities. Section 18 of the Secur-

nals

=.

ities Act of 1933 and Section 28(a) of the

Securities Exchange Act of 1934.

Wisconsin and 36 other states have

adopted or substantially adopted the

Uniform Securities Act which was drafted by

Professor Louis Loss of the Harvard Law

School and the National Conference of

Commissioners on Uniform State Laws in

1956. Vol. 1, CCH Blue Sky Law Reporter,

p. 1503 (Jan. 1982). The uniform law has

to be construed to coordinate its

interpretation with the Federal Securities

ews. ($415, U.S.A. end ‘$33.07, a

Stats.). The uniform law provides, like

the Federal Securities Laws, that pre-

dispute arbitration clauses are not

enforceable in disputes over violations of

the securities laws [§410, U.S.A. and

§551.59(8), Wis. Stats.}]. This uniform

anti-waiver provision was modeled on the

same provision in the Federal Securities

’

|

Ye

Laws. III Loss, Securities Regulation

(1961) at p. 1648. |

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

this Court held that the anti-waiver

Statute in the Securities Act of 1933

superseded Section 3 of the Federal

Arbitration Act. In Wilko, this Court

noted the underlying policy of the

securities law anti-waiver provision as

being that courts are better equipped to

protect investors and implement’ the

securities laws. Prior to this

petitioner's case, no court ever held that

the Federal Arbitration Act preempted the

anti-waiver provision of a state

securities lew.

1

At footnote 3 of the majority opinion in

this case, the Court states that the District Court

for the Eastern District of Wisconsin twice has

held that Section 3 of the Federal Arbitration

Act preempted the anti-waiver provision in the

Wisconsin Uniform Securities Law. It cites Bache

Halsey Stuart Shields, Inc. v. Moebius, 531 F.

Supp. 75 (E.D. Wis. 1982) and Barron v. Tastee

Freez International, Inc., 482 F. Supp. 1213 (E.D.

-10-

In this case the plaintiff sued the

defendants in state court alleging claims

under the Wisconsin Uniform Securities Law

and the common law. The statutory claims

pertained te the individual defendant's

failing to register as an agent under the

Wisconsin Uniform Securities Law, Section

551.31(1), with resulting civil liability

under Section 551.59(1). The defendants

removed the action to Federal District

Court upon the basis of diversity. They

then moved under Section 3 of the Federal

Arbitration Act to stay proceedings and

compel arbitration pursuant to paragraph

Wis. 1980). Neither case involved that principle

of law. Moebius was an employment-termination

dispute, wherein the employment contract had an

arbitration clause. There was no anti-waiver

statute involved, much less the Wisconsin

Uniform Securities Law. Barron involved the

Wisconsin Franchise Investment Law and not the

Wisconsin Uniform Securities Law.

rR

-1l-

15 of the form Paine, Webber brokerage

contract. That paragraph provided for

arbitration under the rules of various

securities bodies.

The Federal District Court deniec the

Stay as to the plaintiff's statutory c_aims

under the Wisconsin Uniform Securities Law

upon the basis that the state law ha- an

anti-waiver provision which was not

preempted by federal law. The Fecéral

District Court deemed the relevant federal

law to be considered on the questio- of

preemption to be the Federal Arbitration

Act and the Federal Securities laws w-ich

encouraged concurrent state regulatio- of

securities.

The defendants then appealed to the

United States Court of Appeals for the

Seventh Circuit. A panel of that Court. in

a two-one decision, reversed the District

Court's order denying the stay. The Court

’

a5 Pu

of Appeals held that the issue was not

whether federal law consisting of the

securities laws and the Federal

Arbitration Act preempted _ the _ State

securities law but rather was whether the

Federal Arbitration Act alone preempted

the state securities law. Within that

Marrow scope of inquiry, the Court of

Appeals held that Section 3 of the Federal

Arbitration Act preempted Section

551.59(8) of the Wisconsin Statutes. The

dissent agreed with the District Court that

the proper scope of inquiry was whether the

federal law consisting of the securities

laws and the Federal Arbitration Act

preempted the Wisconsin Securities Law.

The dissent argued that there was no

preemption under such an analysis.

*

*

a1 3s

REASONS FOR GRANTING THE WRIT

Whether the Anti-Waiver Provision of

State Securities Laws is Preempted by the

Federal Law is an Important Question of

Federal Law which has not been and should

be Reviewed by This Court.

This Court currently has under advise-

ment Keating v. Superior Court, Alameda

County, 31 Cal. 3d 584, 183 Cal. Rptr. 360,

645 P.2d 1192 (1982), cert. granted sub

nom. Southland Corporation v. Keating, No.

82-500 (U.S. Sup. Ct., 1-10-83). The case

was argued to the Court on October 4, 1983.

Therein, this Court is reviewing the

decision of the California Supreme Court

that the Federal Arbitration Act does not

preempt the anti-waiver provision of the

California Franchise Investment Law.

The petitioner's case is far more

compeling for a determination of no

o14-

preemption, because Keating did not

involve a related federal statute, i.e.,

there are no generalized federal franchise

statutes encouraging concurrent’ state

regulation in the franchise area as there

2

are in the securities area. In this case,

of course, there are the federal enactments

in §18 of the 1933 Act and §28(a) of the

1934 Act providing that the Federal

Securities Laws are not to be construed to

preempt state regulation. Here, the Court

of Appeals, without even considering the

Federal Securities Laws, struck down the

crucial anti-waiver provision of the state

securities laws. The decision effectively

bars all investors from bringing civil

claims against brokers based on violation

2

The Federal Trade Commission has promul-

gated franchise disclosure rules at 16 C.F.R.

§§436. 1-.3.

«2S~

of the state securities laws, since it

would take the lantern of Diogenes to

locate an investor who would not have

signed one of the form brokerage house

contracts with a standard arbitration

clause.

The Wisconsin Uniform Securities Law

was enacted by the Wisconsin legislature

pursuant to its inherent police power.

Needless to say, Congress has not preempted

the area of securities regulation and has

encouraged concurrent state regulation.

The State of Wisconsin, like 36 other

states, has adopted an anti-waiver policy

as a part of its securities regulation. In

so doing Wisconsin and the other 36 states

have adopted the same policy which Congress

has deemed to be appropriate in the Federal

Securities Laws.

In determining whether Wisconsin ran

afoul of federal law by enacting a

| 2

duplicate of a federal statute as a part of

its concurrent regulation in the area of

securities, one should start by reviewing

the general principles of preemption.

Judge Eschbach of the Seventh Circuit, in

his dissent in this case, and_ the

California Supreme Court, in its decision

in Rnatini, looked to this Court's

unanimous decision in Merrill Lynch,

Pierce, Fenner & Smith v. Ware, 414 U.S.

117 (1973). Therein, this Court heid that

California's statutory policy excluding

wage claims from arbitration was not

preempted by New York Stock Exchange

arbitration rules promulgated pursuant to

federal law. This Court granted certiorari

"because of the significance of the

question in the area of federal-state

relations ...." (414 U.S. at p. 119)

This Court discussed Silver v. New

York Stock Exchange, 373 U.S. 341 (1963),

i

iZ

e

x pat oe. >.

-17-

which considered the interrelationship

between the federal anti-trust laws and

Securities Exchange Act of 1934. This

Court then stated:

: "In contrast with Silver, we are

not confronted here with

conflicting federal regulatory

. schemes. The present contro-

versy concerns the inter-

relationship between statutes

adopted, respectively, by the

Federal Government and a State.

*k* So here, we may not overlook

the body of law relating to the

sensitive interrelationship be-

tween statutes adopted by the

seperate, yet coordinate,

federal and state sovereignties.

Our analysis is also to be

tempered by the conviction that

the proper approach is to

reconcile 'the operation of both

statutory schemes with one

another rather than holding one

completely ousted.' ia. » at

357." (414 U.S. at p. 126)

After reviewing the geneses of the

federal law and the state law, this Court

stated:

"Indeed, Congress, in the

securities field, has not

adopted a regulation scheme

wholly apart from and exclusive

a

-18-

of state regulation. *** ‘Where

the Government has provided for

collaboration the courts should

not find conflict.'" (414 U.S.

at p. 137)

This Court then concluded

recitation of general principles

preemption by stating as follows:

"'The principle to be derived

from our decisions is’ that

federal regulation of a field of

commerce should not be deemed

preemptive of state regulatory

power in the absence of

persuasive reasons - either that

the nature of the _ regulated

subject matter permits no other

conclusion, or that the Congress

has unmistakably so ordained.’

Florida Lime & Avocado Growers,

Inc. v. Paul, 373 U.S. 132, 142

(1963).

"In other contexts, pre-emption

has been meas»red by whether the

state statute frustrates any

part of the purpose of the

federal legislation. [Citations

omitted] ... It is where there is

in existence a pervasive and

comprehensive scheme of federal

regulation that pre-emption

follows in order to fulfill the

federal statutory purposes."

(414 U.S. at p. 139)

its

Judge Eschbach also relied on New York

State Department of Social] Services v.

Dublino, 413 U.S. 405 (1973). Therein,

this Court, after a review of legislative

history, arrived at a determination of no

preemption because of the inter-

relationship between the federal and state

laws. The case involved the federal Social

Security Act and the WIN rules on the one

hand and the State of New York Work Rules

as to welfare payments on the other hand.

With regard to general principles of

preemption, this Court stated as follows:

"'If Congress is authorized to

act in the field, it should

manifest its intention clearly.

It will not be presumed that a

federal statute was intended to

Supersede the exercise of the

power of the state unless there

is a clear manifestation of

intention to do so. The exercise

of federal supremacy is not

lightly to be presumed.'" (413

U.S. at p. 413)

oI

and

"Where coordinated state and

federal efforts exist within a

complementary administrative

frame work, and in the pursuit of

common purposes, the case for

federal pre-emption becomes a

less pursuasive one." (413 U.S.

at p. 421)

Contrary to the above well-reasoned

passages, the Court of Appeals relied in

main part on a portion of Florida Avocado

Growers, Inc. v. Paul, 373 U.S. 141 (1963),

which had nothing to do with arbitration

and wherein this Court stated that the

federal law would preempt the state law, if

compliance with both would be a physical

impossibility. That statement flowed from

the following hypothetical by the Court,

"That would be the situation here if, for

example, the federal orders forbade the

picking and marketing of any avocado

testing more than 7% oil, while the

California test excluded from the State any

*

a

avocado measuring less than 8 of oil

content." (373 U.S. at p. 143)

It is submitted that the Court of

Appeals should have not looked to a

decision involving avocado laws but rather

should have looked to a unanimous decision

involving the federal securities laws and

their interrelationship with state laws.

It is submitted that federal arbitration

will always preempt state anti-waiver

statutes, if the Florida Avocado Growers

"physical impossibility” test is to be the

standard.

Similarly, because this case involves

the coordinated federal-state regulation

of securities, the cases of Moses H. Cone

Memorial Hospital v. Mercury Construction

Corp., U.S. - 205 Sea See

(1983) and Prima Paint v. Flood & Conklin

Mfg. Co., 388 U.S. 395 (1967), which

involved run-of-the-mill commercial

032

disputes, are of nu help in determining the

question of preemption. There can be no

question that Congress favors arbitration

in cases such as those in Moses Cone and

Prima Paint

There also should be no question that

Congress does not favor arbitration in the

field of securities regulation for all of

the reasons articulated in Wilko v. Swan,

supra.> Indeed, the Seventh Circuit itself

agreed with Wilko, when it adopted the

position of the Third Circuit that claims

under the Securities Exchange Act of 1934

3

E.g., "... it is clear that the Securities

Act was drafted with an eye on the disadvantages

under which buyers labor." (346 U.S. at p. 435)

"As the protective provisions of the Securities

Act require the exercise of judicial discretion

to fairly assure their effectiveness, it seems to

us that Congress must have intended §14, note 6,

supra, to apply to waiver of judicial trial and

review." (346 U.S. at p. 437) See also, Comment,

Arbitration of Investor-Broker Disputes, 65 Cal.

L. Rev. 120 (1977) at pps. 129-31 for a discus-

sion of the reasons why judicial trial rather

than arbitration is crucial to the securities

laws.

ot§~

are not arbitrable and quoted with approval

from the Third Circuit as follows:

"'We need not review here the

fundamental and important

differences between litigation

in a court and arbitration. It

is enough to say that the Supreme

Court found prospective waivers

of the right to judicial trial

and review to be inconsistent

with Congress' overriding

concern for the protection of in-

vestors.'" Weissbuch v. Merrill

“Lynch, Pierce, Fenner & Smith,

Inc., 558 F.2d 831, 836 (1977),

quoting with approval from Ayres

v. Merrill Lynn 3 Pierce: Fenner

& Smith, Inc., F.2d 532, r

(3rd Cir. 1976), cert. den., 429

U.S. 1010, 97 S. Ct. 542, 50

L.Ed. 2d 619 (1976).

In this case, however, the Seventh

Circuit treated this securities matter as

if it were a routine commercial dispute and

mechanically applied the Federal

Arbitration Act to it.

It is submitted that the Court of

Appeals' unstudied application of the

Federal Arbitration Act, without any con-

sideration of the policies underlying the

rv

z

-24-

Uniform Securities Law of Wisconsin not to

mention the other 36 states adopting that

law, was in error. It is submitted that a

court must always consider the policy

underlying the state statute enacted

pursuant to the police power, where that

statute is part of a complementary federal-

state regulation of a field.

It is more particularly submitted

that a Court considering federal

preemption must look at the _ policy

underlying a state securities law enacted

as a part of the Congressionally encouraged

state portion of the comprehensive

federal-state regulation of the securities -

field.

Arbitration is and always will be a

vehicle of less than universal use.

Federal Courts have agreed, for example,

that federal antitrust and bankruptcy laws

are not arbitrable, because the nature of

-25-

the statutory schemes necessitates

judicial scrutiny. Allegaert v. Perot, 548

F.2d 432 (2d Cir.), cert. denied, 432 U.S.

910 (1977); American Safety Equipment

Corp. v. J.P. Maguire & Co., 391 F.2d 821

(2d Cir. 1968); accord, A. & E. Plastik Pak

Co. v. Monsanto Company 396 F.2d 710 (9th

Cir. 1968); Lee v. Ply Gem Industries,

ee, §6§6365. F.286 1266 (D.C. Cix.), Genk.

denied, 441 U.S. 967 (1979); Applied

Digital Technology, Inc. v. Continental

Casualty Co., 576 F.2d 116 (7th Cir. 1978).

State courts, for futher example, have held

that certain claims are not arbitrable due

to the nature of the statutory schemes.

Kiehne v. Purdy, 309 N.W.2d 60 Minn. (1981)

(state securities law claims not arbitr-

able), Sandefer v. Reynolds Securities

Inc., 618 P.2d 690 (Colo. App. 1980)

(same); United Nuclear Corp. v. General

Atomic Co., 93 N.M. 105, 597 P.2d 290,

96s

cert. denied, 444 U.S. 911 (1979) (state

antitrust law claim not arbitrable),

Aimcee Wholesale Corp. v. Tomar Products

Inc., 21 N.¥.2d 621, 237 N.E.2d 223 (1968)

(same); Durst v. Abrash, 22 A.D.2d 39, 253

N.Y.S.2d 351 (1964) (issue of whether

transaction was disguised usurious loan

not arbitrable).

The securities laws are a golden

example of a statutory scheme, where

arbitration frustrates rather than pro-

motes the law.

CONCLUSION

Certiorari should be~ granted to

review the decision herein, wherein the

Seventh Circuit without any consideration

of policies struck é deena blow to the

enforceability of the securities laws of at

least 37 states. As stated by the

97 «

draftsman of the Uniform Securities Act,

"The inadequate budgets and uneven

enforcement of the blue sky laws make civil

liability the only really effective

sanction in many states - perhaps most

states." III Loss, Securities Regulation

(1961) at p. 1631.

The decision is wholly at odds with

the Congressional intent of a comple-

mentary federal-state regulation of the

securities field and is wholly at odds with

the Congressional intent that there be no

pre-dispute waivers of the judicial forum

in the area of securities regulation. To

have a comprehensive federal-state

regulation of securities where the state

claims are arbitrable and the _ federal

claims are not arbitrable, and where there

are all the salutary reasons for not having

arbitration in security cases as

articulated in Wilko v. Swan, supra, the

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,, *

effect of the Court of Appeals' decision

herein will be to stultify the development

of the state portion of the federal-state

regulation of securities. All claims will

be pleaded under the federal laws. The

federal courts will be further encumbered

with matters which the state courts are

well-equipped to handle. This Court

granted certiorari in Keating, supra. With

much more reason, it should grant

certiorari in this case.

Dated at Milwaukee, Wisconsin, this

lst day of December, 1983.

Respectfully submitted,

BRUCE C. O'NEILL

Fox, Carpenter, O'Neill

& Shannon, S.C.

622 North Water Street

Milwaukee, WI 53202

(414) 273-3939

Attorneys for Petitioner

Natalie Kroog

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United States Court of Appeals

Sor the Seventh Cirrntt

No. 83-1094

NATALIE KROOG,

Plaintiff-A ppellee,

v.

STEVEN MAIT and PAINE, WEBBER, JACKSON & CURTIS,

INC., a foreign corporation,

Defendants-A ppellants.

Appeal! from the United States District Court for the

Eastern District of Wisconsin.

No. 82 C 363—Robert W. Warren, Judge.

ARGUED May 13, 1983—DecIDED JULY 15, 1983*

Before Woop and ESCHBACH, Circuit Judges, and

CAMPBELL, Senior District Judge.**

Woop, Circuit Judge. In this appeal, we are called

on to decide whether a provision of the Wisconsin Uni-

form Securities Law which has the effect of negating

an otherwise valid arbitration clause in a securities

brokerage contract is Spr by Section 3 of the

Federal Arbitration Act, 9 U.S.C. § 3, which requires

* An opinion in this case was originally issued as a unani-

to permit Judge Eachbach to file s dasenting inion, The

permit Ju a

original o pe Baad, Fe wy» comme, © ex-

ae for & addition of footnotes. Judge

's dissent has

°* ‘The Honorable William J. Campbell, Senior District Judge

for the Northern District of illinois, ts sitting by destanatien

2 No. 83-1094

that “{i}f any suit or proceeding be brought in any of the

courts of the United States upon any issue referable to ar-

bitration under an agreement in writing for such arbitra-

tion, the court ... shall .. . stay the trial of the action un-

til such arbitration has been had .. . .” Because this is a

clear case of “actual conflict” between federal and state

law as a result of which compliance with both is a

“physical impossibility,” Florida Lime and Avocado

Growers, Inc. v. Paul, 373 U.S. 132, 141-43 (1963), we

hold, contrary to the district court, that the Arbitration

Act must prevail under the Supremacy Clause.

I.

Plaintiff-appellee originally commenced this action in

the County Court for Milwaukee County, Wisconsin, seek-

ing to recover losses in her securities brokerage account

allegedly caused by defendants-appellees’ conduct in vio-

lation of the Wisconsin Uniform Securities Law and in

violation of the common law. The first cause of action

alleged that defendant Mait, as an “agent,” bought and

sold securities in Wisconsin in violation of the registra-

tion requirements contained in the Wisconsin Uniform

Securities Law, Wisc. Stat. §§ 551.31(1) and (2), 551.59(1).

The second claim alleged that, because Mait was not

properly registered, the brokerage contract between the

parties was void and subject to rescission. The remaining

three causes of action alleged defendants’ liability under

the common law theories of mismanagement, unsuitable

ee. excessive trading, and breach of fiduciary

uty.

Defendants removed the action to federal district court

on the basis of diversity. After answering the complaint,

defendants moved ‘to stay the proceedings and compel ar-

bitration pursuant to paragraph 15 of the brokerage con-

tract which provided,

No. 83-1094 3

of the New York Stock Exchange, American Stock

Exchange, National Association of Securities

Dealers or where appropriate, Chicago Board Option

Exchange or Commodities Futures Trading Com-

mission, as I may elect. 1 authorize you if I do not

make such election, by registered mail addressed to

you at your main office within fifteen (15) days after

receipt of notification from you requesting such elec-

tion, to make such election in my behalf. Any ar-

bitration hereunder shall! be before at least three ar-

bitrators and the award of the arbitrators, or of a ma-

jority of them, shall be final, and judgment upon the

award rendered may be entered in any court, state or

federal, having jurisdiction. (emphasis added).

In further support of their motion to stay, defendants

noted the requirements of the Federal Arbitration Act

which provide,

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 pend-

ing, 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

arbitration 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 ar-

bitration.

9 U.S.C. § 3. Defendants argued that since the controver-

sy at hand arose out of or related to the brokerage con-

tract which was in interstate commerce, and was exactly

the kind of dispute the arbitration clause was meant to

deal with, the court was required to stay the action and

compel arbitration.

Plaintiff the motion to stay, arguing that sub-

mission of dispute to arbitration was forbidden by

the Wisconsin Uniform Securities Law, Wisc. Stat.

§ 561.59(8), which provided, “Any condition, stipulation

4 No. 83-1094

or provision binding any person acquiring any security to

waive compliance with any provision of this chapter or

any rule or order hereunder is void.” Submitting the dis-

pute to arbitration, plaintiff argued (and defendants ap-

parently conceded) would effectively deny plaintiff the

protection of this non-waiver provision. And Congress,

plaintiff argued, could not have intended the commands

of the Arbitration Act to overcome such a provision for-

bidding arbitral waiver of state securities laws. In sup-

port of her argument, plaintiff noted that Section 15 of

the Federal Securities Act of 1933 specifically forbade

waiver of the protection of the Act’s provisions, and that

this section was subsequently held by the Supreme Court

in Wilko v. Swan, 346 U.S. 427 (1953), to applica-

tion of Section 3 of the Arbitration Act to stay actions

arising under the Federal Securities Act in which the un-

aie | contract contained an arbitration agreement.

Plaintiff further argued that since Congress has spe-

cifically mandated dual federal-state regulation in the

field of securities regulation through Section 18 of the

1933 Securities Act and Section 28(a) of the 1934 Ex-

change Act and Wisconsin has, pursuant to this authori-

ty, enacted an anti-waiver provision nearly identical to

the federal provision which was held to eclipse the Ar-

bitration Act in Wilko, surely under the pattern of

legislative intent discerned in Wilko, Congress did not

mean the federal Arbitration Act to overcome a state

non-waiver provision promulgated pursuant to residual

state securities regulation power.'

1 Plaintiff also apparently argued before the district court

that a stay ding arbitration was unwarranted in light of

Wisc. Stat. poege which — that any contract made

in violation of the Wisconsin Uniform Securities Law is unen-

forceable; since the entire broke contract at issue was

alleged to be unlawful, she argued, the arbitration clause con-

tained therein is also void. Plaintiff appears to have abandoned

this alternative argument on appeal, ———— recognizi

that it would be unavailing in light of the doctrine an

in Prima Paint Corp. v. and Conklin Mfg. Co., 388 U.S.

(Footnote continued on following page)

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No. 83-1094 5

The district court agreed with the plaintiff that the

Federal Arbitration Act did not require that her first

two claims alleging violation of the Wisconsin Securities

Law be arbitrated in light of the anti-waiver provision

contained in Wisc. Stat. § 551.598). The district court

began its analysis with the premise that

(flederal regulation of a field must not be deemed

reemptive of state regulatory authority in the same

ield in the absence of good reason. The exercise by a

state of its inherent police power, which would be

perfectly valid in the absence of federal action, is not

preempted unless the intention of Congress to do so

is clearly manifested in the federal legislation.

! continued

395 (1967), that arbitration clauses are severable, as matter of

federal law, from the contracts in which they are embedded

and hence allegations as to the unlawful inducement of the con-

tract generally are not sufficient to prevent application of Sec-

tion 3 of the Arbitration Act. Belatedly on appeal, plaintiff has

for the first time sought to exploit the door left open in Prima

Paint—that contractually prescribed arbitration will not be en-

forced where there is an allegation of fraud in connection with

the making of the agreement to arbitrate, 388 U.S. at 403-04.

Although plaintiff on ye argues that the arbitration clause

here, and indeed, any form arbitration clause, is a “fraudulent

device,” or, alternatively, a contract of adhesion, she cites no

record evidence in support of this claim, and the only case she

cites in ners of this argument is Wilko v. Swan, supra, which

held not that an arbitration clause was per se fraudulent, but

merely that such a clause conflicted with the policy of the

Federal Securities Act. Accordingly, we consider it inap-

epee to analyze this belated and unsupported claim on

appea

2 The district court did not address whether plaintiff's com-

mon law claims could withstand the ~ peer of the Federal

Arbitration Act, and on appeal, plaintiff has offered no reason

why they should not. In light of our holding below with respect

to the statutory claims, we wil! not address this issue but in-

stead instruct the district court on remand to consider whether

the common law claims are arbitrable under the contractual

arbitration clause here at issue.

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6 No. 83-1094

The court then posed the issue as a conflict between the

mandate of the Arbitration Act and the entire Wisconsin

securities regulation scheme, rather than as a conflict

between the procedural requirements of the Arbitration

Act and the contrary state procedural provision:

The case at bar presents a state remedial! statute

which adopts a uniform scheme of economic regula-

tion, enacted pursuant to the state’s inherent police

power, containing an ‘anti-waiver provision.’ This

state enactment conflicts with a strong federal policy

favoring arbitration expressed in the generalized

Federa! Arbitration Act.

Thus, the district court identified the preemption bat-

tlefield involved in this case as that of securities law

rather than that of policies concerning informal dispute

resolution:

. . . the conflict occurs in a subject matter area

(securities law) in which the federal enactments con-

tain clear and unequivocal language that they are

not to be construed so as to preempt state regulation.

See § 28a 1934 Act, and § 18, 1933 Act.

Having. posed this conflict and noting that its own con-

clusion had been rejected by other district courts,’ the

court here stated its position that

3 The conflict presented here has been presented in only three

reported federal cases of which we are aware; in ol shou

cases, Section 3 of the Arbitration Act was held to require ar-

bitration despite the presence of a statutory non-waiver provi-

sion. See Bache Ha Stuart Shields, Inc. v. Moebius, 531 F.

a | 75 (E.D. Wis. 1982) (non-waiver provision under Wiscon-

sin Uniform Securities Law); Barron v. Tastee Freez Inter-

national, Inc., 482 F. Supe. 1213 (E.D. Wis. 1980) camels Klein

Sleep Products, Inc. v. Hillside Bedding Co. Bus. Franch.

Guide (CCH) 7886 (S.D.N.Y. Oct. 13, 1982) (non-waiver Pa

sion in New York Franchise Sales Act). However, only in the

latter two cases did the court directly discuss the impact of the

non-waiver provision.

wy ie

No. 83-1094 7

because this is a case where the state law involves in-

herent police power; is remedial in nature; presents

a legislatively created cause of action; contains an

anti-waiver clause; and deals with an area of the law

in which Congress has expressly indicated it has not

preempted state regulation, this Court is of the opi-

nion that the statute can withstand the generalized

provisions of the Federal Arbitration Act.

Accordingly, the district court denied the defendants’

motion to stay proceedings and compe! arbitration. From

this determination, defendants appeal.

Il.

The Supreme Court has mandated that federal

preemption questions be addressed through a two-tier in-

quiry. The reviewing court must first ask whether there

is “such actual conflict between the two schemes of

regulation that both cannot stand in the same area.”

Florida Avocado Growers, Inc. v. Paul, 373 U.S. 141

(1963). If such “actual conflict” is found, the inquiry is at

an end. Or, as the Supreme Court has stated, “A holding

of federal exclusion of state law is inescapable and re-

quires no inquiry into congressional design where com-

pliance with both federal and state regulation is a physical

impossibility for one engaged in interstate commerce.

Id. at 142-43. (emphasis added). In short, the assess-

ment of “actual” or “facial” conflict is a threshold inquiry

we cannot escape; only if this inquiry is answered nega-

tively can we entertain arguments as to the intent of

Congress to occupy the field or preclude the kind of state

regulation at issue. Pacific Gas and Electric Co. v. State

Energy Resource Conservation and Development Commis-

sion, ..... U.S. ....., 103 S. Ct. 1713, 1722(1983) (“Even where

Congress has not entirely displaced state regulation ina

specific area, state law is preempted to the extent that it

actually conflicts with federal law.”); Ray v. Atlantic

Richfield Co., 485 U.S. 151, 158, 165 (1978); DeCanas v.

Baca, 424 U.S. 351, 363 (1976); McDermott v. Wisconsin,

228 U.S. 115 (1913). See also L. Tribe, American Con-

8 No. 83-1094

stitutional Law, § 6-24 at 377-78 (1978); C. Antieu, 2

Modern Constitutional Law, § 10:22 at 41-42 (1969)

(“Where state rules clash with an act of Congress in the

field of interstate commerce, there is no weighing by the

courts of supposed state interests versus national in-

terests. This the court presumes has been done by Con-

gress in enacting the legislation within its constitutional

power.”).

The instant case, we think, presents an “actual conflict”

which may not be avoided, as the district court en-

deavored to do, through a balancing of state and fed-

eral interests. The Federal Arbitration Act, 9 U.S.C.

§3, declares unambiguously that in “any suit or pro-

ceeding . . . 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 proceeding 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.” (emphasis added). Wisc. Stat. § 551.598)

purports to prohibit such a procedure. Plainly, here

“compliance with both federal and state [laws] is a

physical impossibility,” Florida Avocado Growers, Inc. v.

Paul, 373 U.S. 141 (1963).*In such circumstances, the

Federal Arbitration Act must prevail.

The matter might well stand differently if the Federal

Arbitration Act declared only a general, non-binding

policy in favor of arbitration, through the use of such

qualifying words as “where feasible.” But the language of

the Act is not precatory. Instead, as the Supreme Court

has recently noted, the Act “is a congressional declara-

tion of a liberal federal policy favoring arbitration

agreements, notwithstanding any state substantive or

procedural policies to the contrary. The effect of [Section

2 of the Act, generally holding such agreements en-

pactvanee is to create a body of federal substantive law of

arbitrability, applicable to any arbitration agreements

within the coverage of the Act.” Moses H. Cone Memorial

Hospital v. Mercury Construction Corp., ...... WD AB cisieets

103 S. Ct. 927, 941 (1983) (emphasis added). The Act, then,

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No. 83-1094 9

clearly mandates a specific procedure “notwithstand-

ing any state substantive or procedural policies to the

contrary” upon the meeting of certain prerequisites,‘ the

existence of which is not challenged here; the state act

blocks the effectuation of that procedure. Thus, the case

at bar falls squarely within the line of cases such as

Free v. Bland, 369 U.S. 663 (1962) (Federal treasury

regulations providing that Savings Bonds held in co-

ownership pass to a surviving co-owner preempts con-

trary Texas community property law.); Castle v. Hayes

Freight Lines, Inc., 348 U.S. 61 (1954) (Federal certifica-

tion of motor carrier under Motor Carriers Act preempts

state attempt to suspend carriers for violating state

highway regulations.); and McDermott v. Wisconsin, 228

* Plaintiff appears to argue on — that the language of

Section 2 of the Arbitration Act making arbitration clauses en-

forceable “save upon such grounds as exist in law or in equity

for the revocation of any contract” suggests that Me

countenanced that the Arbitration Act could be voided ab in-

itio by state enactments like Wisconsin's purporting to prohibit

arbitration. However, this argument, which was not considered

by the district court, ignores the language and purpose of the

Act. Section 2 by its very terms permits voiding an arbitration

clause = on —_ er ga applicable to “any contract”; state

law aimed specifically at preventing arbitration (unlike, say,

the statute of frauds) is obviously not such a universal

applicable legal principle. Moreover, such an expansive inter-

pretation of Section 2 is contrary to the entire thrust of the Act

which creates a “body of federal substantive law” mandating

arbitration “notwithstanding any state substantive or pro-

cedural policies to the contrary,” Moses H. Cone Memorial

Hospital, supra, 103 S. Ct. at 941. Although the Supreme Court

has not directly addressed this issue, we have povewey held

that the escape clause of Section 2 makes available only legal

and equitable defenses not grounded in state law seeking to

directly contravene the federal Act’s policies. Commonwealth

Edison Co. v. Gulf Oil Corp., 541 F.2d 1263, 1269-70 (7th Cir.

1976). Other circuits have aarees. See, e.g., Medical Develop-

ment Corp. v. Industrial Molding Corp., 479 F.2d 345, 348

— Cir. 1973); Collins Radio Co. v. Ex-Cell-O Corp., 467 F.2d

5, 996-97 (8th Cir. 1972).

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10 No. 83-1094

U.S. 115 (1913) (Federal act permitting certain labelling

reempts contrary state provision preventing use of

ederally approved labelling.)—all of which held preemp-

tion exists where such “actual conflict” between federal

and state regulation exists. As surely as Texas communi-

ty property law prevented federally mandated passage of

bond ownership in Bland or Illinois law forbade the

passage of federally certified carriers in Castle or

Wisconsin law prohibited the application of federally

mandated labels in McDermott, the Wisconsin anti-

waiver provision as sought to be applied here conflicts

with the procedure required under the Federal Arbitra-

tion Act. The Wisconsin law may not prevail.

The district court appeared to avoid this result through

two-step reasoning. First, it downplayed the existence

of direct, irreconcilable conflict (although it did ac-

knowledge that the Wisconsin provision “conflicts” with

the Arbitration Act) by maintaining that the real ques-

tion before it concerned the clash between the Fed-

eral Arbitration Act and the scheme of substantive Wis-

consin securities regulation. Having determined that

the Federal Arbitration Act and state securities policy

were the contenders for dominance, the district court

concluded that the state anti-waiver provision must

prevail because Congress declared its intent to leave state

securities regulation intact and Wilko v. Swan expressly

approved the confinement of the Arbitration Act where

the Federal Securities Act of 1933 was involved (due to

the existence of the latter’s anti-waiver provision) and

thus by analogy would have countenanced the same

result where state securities acts were at issue (due to a

similar anti-waiver provision). We think the district

court’s reasoning is vulnerable at either step.

First, the conflict we face is plainly not one of fed-

eral arbitration procedures versus Wisconsin substantive

securities regulation. The conflict is rather between two

procedural mandates—one that commands, and the other

that prohibits, the arbitration of brokerage contract

claims. If the Arbitration Act prevails, Wisconsin sub-

stantive securities law remains intact, and would indeed

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No. 83-1094 ; 1]

have to be considered by the arbitrator of the dispute

here. In short, the real field of analysis here is the set of

competing federal and state policies with respect to non-

legal dispute resolution, not with respect to securities

regulation. Accordingly, the district court’s citation to the

dual federal-state regulatory scheme in the securities

field and the Supreme Court’s interpretation of the

“intention of Congress concerning the sale of securities”

in Wilko v. Swan, 346 U.S. at 427, 438, is essentially

irrelevant to the required analysis.

But even if securities regulation were somehow the

field in which the required preemption analysis were to

take place, it would still be inappropriate to apply the

policy of Wilko to constrict the application of the Arbitra-

tion Act to claims based on breaches of state securities

law. This is so because the Supreme Court in Wilko

was concerned solely and expressly with the proper

reconciliation of two “not easily reconcilable” federal

mandates—the Securities Act and the Arbitration Act,

see 346 U.S. at 438. It is a non sequitur to assume, as does

plaintiff, that this lateral balance of diametrically op-

posed federal policies, and consequent delimitation of

the Arbitration Act, would be applied vertically to re-

strict the Arbitration Act’s impact on conflicting state

procedures. To the contrary, to the extent that the

Supreme Court held that a Wisconsin-style federal non-

waiver provision and the Arbitration Act were in direct

conflict, 346 U.S. at 433, 438, its Wilko opinion suggests

that the Wisconsin procedural provision would have to

yield under the “actual conflict” and “physical im-

possibility” standards enunciated in Flonda Avocado

Growers, Inc. v. Paul, 373 U.S. 141 (1963), and its

predecessors and progeny. To hold that Wilko’s delimita-

tion of the Arbitration Act’s application to another

federal law is vertically transferable to protect state

anti-waiver clauses is to deny that Congress may choose

not to apply interstate commerce-based policies to ex-

clusively Federal subject matter. Such a view cannot be

correct, for it is unquestioned that Congress has the

power to, and regularly does, exempt exclusively federal

A-12

12 No. 83-1094

subject matter from the reach of substantive interstate

commerce regulation (e.g., in the nuclear power and en-

vironmental! fields) without thereby automatically sanc-

tioning state attempts to remove private and state actors

from such regulation.‘

In sum, we think that the district court’s search for

congressional intent with respect to the Arbitration Act

via the 1933 and 1934 Securities Acts and Wilko could

not be productive. Here we face a naked and irrecon-

cilable conflict between a precise federal mandate to ar-

bitrate and a state provision which prevents arbitration.

Once that conflict has been described, we need go no

further, for federal preemption in such cases is auto-

matic. Pacific Gas and Electric Co., ..... U.S. ...., 108

S. Ct. 1713 (1983); Ray v. Atlantic Richfield Co., 435

U.S. 151, 158, 165 (1978).

For the foregoing reasons, the district court’s denial of

defendants-appellants’ motion to stay proceedings and

compel arbitration is reversed and the case is rernanded

with directions that proceedings be stayed and plaintiff-

appellee’s statutory claims, and, if otherwise warranted,

her common law claims, be submitted to arbitration.

REVERSED AND REMANDED.

’ It is true, as the dissent notes, that the case for federal pre-

q emption may be less persuasive where coordinated state and

federal efforts exist within a meee Serene

framework. New York State Sg ee of Social Services v.

Dublino, 413 U.S. 405, 421 (1973). But here there is no indica-

tion that Co has chosen to temper the imperatives of

the Federal Arbitration Act with respect for state policies

ing informal dispute resolution in the securities, or

any other, field. Compare Dublino, supra, at 418-21 (no pre-

emption found where federal statute contains express state-

ment of its suited ‘sppunettiy inst states and where

there exists long-s ing federal administrative practice of

deferring to state activity),

‘

No. 83-1094 13

ESCHBACH, Circuit Judge, dissenting. While I agree

with many of the gee principles discussed in my

brother Wood’s well written opinion, I part company

with the majority on an issue of critical importance—

the content of the federal law which is to be compared

with the Wisconsin anti-waiver provision in order to

determine whether federal law has preempted state

law. The majority compares the provisions of the Fed-

eral Arbitration Act with the provisions of the Wiscon-

sin Uniform Securities Law and concludes that there is

an actual or facial conflict. With this I agree. However,

in assessing whether “federal law” has preempted the

Wisconsin anti-waiver provision, we must look not only

at the Federal Arbitration Act, but also at other federal

laws and court decisions that have interpreted, applied,

and possibly modified the Arbitration Act. See Jones v.

Rath Packing Co., 430 U.S. 519, 526 (1977) (court must

consider relationship between state and federal laws as

they are interpreted and applied, not just as they are

written). The relevant federal law in this case consists

of the Federal Arbitration Act, the federal securities

acts of 1933 and 1934, and case law interpreting these

statutes.

Section 18 of the Securities Act of 1933, 15 U.S.C.

§ 77n, and § 28(a) of the Securities Exchange Act of

1934, 15 U.S.C. § 78bb(a), specifically provide for con-

current state regulation of securities. tion 14 of the

1933 Act, 15 U.S.C. § 77n, bars waiver of a judicial

forum by an arbitration agreement, in spite of the pro-

visions of the Federal Arbitration Act favoring such

ments. Wilko v. Swan, 346 U.S. 427, 438 (1953).

ile Wilko dealt only with actions under the federal

securities laws, much of the court’s analysis applies with

equal force to a state’s attempt to preserve a judicial

forum for buyers of securities. The Court enumerated

possible shortcomings of arbitration in this field and

recognized that the advan s the securities laws pro-

vi a buyer may be less effective in arbitration than

in judicial p ings. Jd. at 434-37. The Court found it

reasonable for Congress to put buyers of securities

covered by the 1933 Act on a different basis from other

A-14

14 No. 83-1094

purchasers. Jd. at 435. From the provisions of the fed-

eral securities ects specifically sanctioning state regu-

lation and from the Supreme Court’s interpretation of

the acts in Wilko, I conclude that re in enacting

the securities acts, impliedly modified the ae

general provisions of the Arbitration Act as they woul

apply in the areas of both federal and state securities

regulation. Thus, while the bare words of the Arbitra-

tion Act are in facial conflict with the Wisconsin Uni-

form Securities Law, “federal law” is not.

Having answered the threshold question of actual or

facial conflict in the negative, I find that the district

court was correct in its analysis of the competing fed-

eral and state interests and in its conclusion that the

Wisconsin anti-waiver provision has not been preempted

by federal law. Contrary to the majority’s assertion, the

“preemption battlefield” in the instant case is not merely

at of policies concerning informal dispute resolution,

but rather that of procedural advantages necessary to

fully effectuate the substantive provisions of the Wiscon-

sin securities laws. Cf. id. at 434-37 (discussing the

advantages of a judicial forum over arbitration in the

context of federal securities laws). Wisconsin has chosen

to regulate securities in a framework that is comple-

mentary to federal law and which furthers a common

purpose, i.e., the protection of the investor. In this situa-

tion, the case for preemption is not persuasive. See New

York State Department of Social Services v. Dublino, 413

U.S. 405, 421 (1973); of. Merrill Lynch, Pierce, Fenner &

Smith v. Ware, 414 U.S. 117, 187 (1973) (where the fed-

eral + gertige oy provides for collaboration, the courts

should not find conflict). In support of my conclusion

that federal law has not preempted the Wisconsin anti-

waiver provision, I concur in the following analysis of

the district court:

Proper adherence to the principles of Federalism

en 9 that, where there is a conflict between state

and federal policies, preemption of the subject area

by the federal enactment should take place only

when Congress clearly intends it to occur. The case

at bar presents a state remedial statute which

No. 83-1094 15

adopts a uniform scheme of economic regulation,

enacted pursuant to the state’s inherent police

power, containing an “anti-waiver” provision. This

state enactment conflicts with a strong federal pol-

icy favoring arbitration expressed in the general-

ized Federal Arbitration Act. However, the conflict

occurs in a subject matter area (securities law) in

which the federal enactments contain clear and

unequivocal language that they are not to be con-

strued so as to preempt state securities regulation.

See § 28a, 1934 Act, and § 18, 1933 Act. In this con-

text, it would seem that the Arbitration Act ought

not to preempt the Wisconsin Securities law with

its anti-waiver provision.

In summary, because this is a case where the

state law involves inherent police power; ‘is reme-

dial in nature; presents a legislatively created cause

of action; contains an anti-waiver clause; and deals

with an area of the law in which Congress has

expressly indicated it has not preempted state regu-

lation, this Court is of the opinion that the statute

can withstand the generalized provisions of the

Federal Arbitration Act.

Decision and Order at 8, 11. Kroog should not be com-

; — to arbitrate the two claims she brought under the

isconsin Uniform Securities Law. Accordingly, I re-

targa dissent from the majority’s decision directing

a proceedings be stayed pending arbitration of these

claims.

A true Copy:

Teste:

Clerk of the United States Court of

Appeals for the Seventh Circuit

USCA 30224—Midwest Law Printing Co., Inc., Chicago—7-15-83—400

B-1

Opinion by Judge Wood

Judge Eschbach dissenting

JUDGMENT - ORAL ARGUMENT

UNITED STATES COURT OF APPEALS

For the Seventh Circuit

Chicago, Illinois 60604

July 15, 1983

Before

Hon. HARLINGTON WOOD, JR., Circuit Judge

Hon. JESSE E. ESCHBACH, Circuit Judge

Hon. WILLIAM J. CAMPBELL, Senior

District Judge*

NATALIE KROOG, Appeal from the United

Plaintiff-Appellee, States District Court

for the Eastern

No. 83-1094 vs. District of Wisconsin

No. 82 C 0363

STEVEN MAIT & PAINE, Judge Robert W. Warren

WEBBER, JACKSON &

CURTIS, INC., a

foreign corporation,

Defendants-Appellants.

This cause was heard on the record

from the United States District Court for

the Eastern District of Wisconsin,

Division, and was argued by counsel.

On consideration whereof, IT IS

ORDERED AND ADJUDGED by this Court that the

B-2

judgment of the said District Court in this

cause appealed from be, and the _ same

hereby, REVERSED, with costs, and the case

is REMANDED, with directions, in

accordance with the opinion of this Court

filed this date.

* The Honorable William J. Campbell,

Senior District Judge for the Northern

District of Illinois, is sitting by

designation.

C-1

UNITED STATES COURT OF APPEALS

For the Seventh Circuit

Chicago, Illinois 60604

September 2, 1983

Before

Hon. HARLINGTON WOOD, JR., Circuit Judge

Hon. JESSE ESCHBACH, Circuit Judge

Hon. WILLIAM J. CAMPBELL, Senior

District Judge*

7

NATALIE KROOG, Appeal from the United

Plaintiff-Appellee, States District Court

for the Eastern

No. 83-1094 vs. District of Wisconsin

No. 82 C 0363

STEVEN MAIT & PAINE, Judge Robert W. Warren

WEBBER, JACKSON &

CURTIS, INC., a

foreign corporation,

Defendants-Appellants.

ORDER

On consideration of the petition for

rehearing and suggestion for rehearing in

banc filed in the above-entitled cause by

cousnel for plaintiff-appellee, no judge

in active service has requested a vote

thereon, and all of the judges on the

Original panel have voted to deny a

rehearing. Accordingly,

¥ we

C-2

IT IS ORDERED that the aforesaid

petition for rehearing be, and the same is

hereby, DENIED.

* The Honorable William J. Campbell,

Senior District Judge for the Northern

District of Illinois, is sitting by

designation.

D-1

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF WISCONSIN

NATALIE KROOG,

Plaintiff,

vs. Case No. 82-C-0363

STEVEN MAIT and PAINE,

WEBBER, JACKSON &

CURTIS, INC., a foreign

corporation,

Defendants.

DECISION AND ORDER

This action was commenced in February

1982 in Milwaukee County Circuit Court. The

complaint sets forth five separate causes

of action in which plaintiff alleges that

the defendants are liable for losses in her

brokerage account amounting to $82,006.69

plus commission and interest charges. The

first cause of action alleges that defendant ;

Mait, as “agent,” bought and sold securities in

Wisconsin in violation of registration .

requirements contained in sections 551.31(1)

and (2) as well as section 551.59(1) of the

P|

D-2

Wisconsin Uniform Securities Law. The

second claim alleges that, because Mait was

not properly registered, the investment

contract between the parties is void and

subject to recission. The other three

claims allege liability based on mis-

Management, unsuitable purchases, excessive

trading, and breach of fiduciary duty.

Defendants removed the case to this

Court based on diversity. Defendants

sought arbitration under paragraph 15 of the

brokerage contract (Exhibit A attached to

Affidavit of Robert L. Salzberg) and

thereafter filed their answer. They have

now moved this Court to stay proceedings

and compel arbitration.

The Wisconsin Commissioner of

Securities sought and obtained leave to file

’

a brief amicus curiae.

Defendants argue that arbitration should

be compelled because paragraph 15 of the

Client Agreement provides:

i

D-3

Any controversy between us

arising out of or relating to this

contract or the breach thereof, shall

be settled by arbitration in accordance

with tne rules, then obtaining, of either

the Arbitration Committee of the New

York Stock Exchange, American Stock

r Exchange, National Association of

Securities Dealers or where appropriate,

Chicago Board Option Exchange or

Commodities Futures Trading Commission,

as I may elect. I authorize you if

I do not make such election, by

registered mail addressed to you at

your main office within fifteen (15)

days after receipt of notification

from you requesting such election, to

make such election in my behalf. Any

arbitration hereunder shall be before

at least three arbitrators and the

award of the arbitrators, or of a

majority of them, shall be final, and

judgment upon the award rendered may

be entered in any court, state or

federal, having jurisdiction. (Emphasis

added).

The Federal Arbitration Act, 9 U.S.C.

§ 1 et. Seq, establishing a strong federal

policy favoring arbitration as a dispute-

: settling mechanism, provides:

If any suit or proceeding be brought ’

tn any of the courts of the Unite

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 pase or proceeding

D-4

is referable to arbitration under

such an agreement, shall on application

of one of the parties stay the trial

of the action until such arbitration

has been had in accordance with the

terms of the agreement, providing the ik

applicant for the stay is not in default

in proceeding with such arbitration.

: 9 U.S.C. § 3.

Defendants contend that under the

arbitration agreement, the present controversy

arises out of or relates to the contract

or breach thereof; that the transaction

involved a contract in interstate commerce

such that the Arbitration Act applies; and

that, given the fact that the dispute arises

directly out of the management of plaintiff's

brokerage account and is exactly the kind of

dispute the arbitration clause is meant to

deal with, the Court should stay this action

and compel arbitration. 9 U.S.C. §§ 2 and 3.

; Plaintiff contends that an exception ,

to the policy considerations favoring

arbitration exists where the claims are

based on a "statutory enactment promulgated

for the protection of the public welfare" |

D-5

and cites cases inyolving specific remedial

acts dealing with such subjects as labor

standards, patent validity, usury, and pension

protection. Wilko v. Swan, 346 U.S. 427 a

(1953), wherein a private action based on

4 the Federal Securities Act of 1933 was held

not arbitrable despite the inclusion of an

arbitration clause in the brokerage

agreement, the plaintiff points to the

Supreme Court's statement in the case that:

§ 14, note 6 of the 1933 Act

voids any stipulation waiving

compliance with the provisions of

the Securities Act. This

arrangement to arbitrate is a

“stipulation” and we think the right

to select a judicial forum is the

kind of "provision" that cannot be

waived under § 14 of the Securities

Act.

Id. at 434-435.

. Plaintiff further argues that such

reasoning was adopted by the Seventh

Circuit in Weissbuch v. Merrill Lynch,

Pierce, Fenner & Smith, 558 F.2d 831

(7th Cir. 1977), and that a similar line

-5-

r|

|

D-6

of reasoning should apply to the Wisconsin

Uniform Securities Act, which contains a

non-waiver provision comparable to that

. in Section 14 of the federal act.

As an ancillary argument, plaintiffs

contend that defendant Mait's activities

caused the contract containing the

arbitration agreement to be void. Section

551.59(7) Wis. Statutes recites that:

No person who has made or engaged

in the performance of any contract in

violation of this chapter or any rule

or order hereunder, or who has acquired

any purported ae under any contract

with knowledge of the facts by reason

of its making or performance was in

violation, may base any suit on the

contract.

Hence, it is argued, any effort by defendants

to enforce the arbitration clause is to no

avail since the contract itself is, under

Wisconsin law, void pursuant to section

551.59(7).

The Commissioner's amicus brief notes

that Chapter 551, Wis. Stats., is almost a

verbatim adoption of the uniform act adopted

-6-

¥

ee uel

D-7

by the National Conference of Commissioners

on Uniform State Laws. It further notes

that section 14 was drafted and adopted to

: encompass the holding of Wilko v. Swan,

supra, and to make § 551.39(8), Wis.

Stats., bar pre-dispute waiver of state

securities laws in a fashion parallel to

the Wilko doctrine at the federal level.

Plaintiff and the Commissioner argue that

the public policy factors are the same in

each arena -- the federal and the state --

and that the enforcement scheme is the same

with anti-waiver provisions in each law so

as to equalize the knowledge position of the

contracting parties. The theory here is that

the typical contracting investor would not

be aware that in signing a brokerage contract

7 he was agreeing to arbitration and waiving

the protection of the remedial securities

law involved -- either federal or state.

Plaintiffs contend that preemption of

§§ 551.59(7) and (8), Wis. Stats., by the

D-8

Federal Arbitration Act will force investors

into arbitration and deny them many rights

solely because the claims arise under state

securities law and not under comparable

provisions of the federal securities laws

where the Wilko doctrine would prevent such

injustice.

For analytical purposes, one must start

with the basic premise that, under the Tenth

Amendment, those powers not granted to the

federal government are reserved to the

states or to the people. To be sure, the

"powers" of the Congress under the commerce

and welfare clauses have been rather limit-

lessly construed by the courts such that

preemption is possible in a wide range of areas.

Under the Supremacy Clause such enactments

become the law of the land. Nonetheless,

there is discernible reluctance to interfere

with the police power of the sovereign states,

and properly so. Federal regulation of a

field must not be deemed preemptive of state

i es 4s“. , ¢ ae a. Wie Sa al

D-9

regulatory authority in the same field in

the absence of good reason. The exercise by

a state of its inherent police power,

which would be perfectly valid in the absence

of federal action, is not preempted unless

the intention of Congress to do so is clearly

manifested in the\ federal hegislation.

International Union United Auto Workers,

A.F. of L., Local 232 v. Wisconsin

Employment Relations Board, 336 U.S. 245

(1949). In its legislative enactments,

Congress is prone to make clear whether

or not a given act is intended to exist

in tandem with state pronouncements in the area,

or whether the federal action is to preempt

the area entirely.

There is no such clear mandate with

reference to the Federal Arbitration Act,

and when the application of the Act

becomes intertwined with various federal

remedial programs, the waters become

murky indeed. The amicus brief traces the

att.

D-10

history of the Federal Arbitration Act

from its enactment in 1925. Its purpose was

to make agreements for arbitration as

effective and enforceable as any other *s

contracts. American Airlines, Inc. v.

Louisville & Jefferson County Air Board,

269 F.2d 811, 815 (6th Cir. 1959).

In 1959, the Second Circuit, in

Lawrence Company v. Devonshire Fabrics,

Inc., 271 F.2d 402 (2nd Cir. 1959), held

that the Act created a new body of federal

"substantive law'' resting on Congress'

power to regulate interstate commerce.

This led a number of courts to the

conclusion that the Federal Arbitration

Act could require arbitration despite the

doctrine of Erie Railway Co. v.

Tompkins, 304 U.S. 64 (1938). See

Metro Industrial Plating Corp. v. Terminal

Construction Co., 287 F.2d 382 (2nd Cir.

1962); Prima Paint Corp. v. Flood and

Conklin Mfg. Co., 388 U.S. 395 (1967).

y -10-

D-11

The Court has considerable doubt as

to the efficacy of such reasoning. It would

seem a rather superficial solution to the

problem to simply call the Federal

Arbitration Act "substantive law" and

apply it to diversity cases without further

analysis. It is more appropriate to consider

the nature of the contending powers and

policies--and decide accordingly.

Proper adherence to the principles

of Federalism require that, where there is

a conflict between state and federal policies,

preemption of the subject area by the federal

enactment should take place only when

Congress clearly intends it to occur.

The case at bar presents a state remedial statute

which adopts a uniform scheme of econoric

regulation, enacted pursuant to the staze's

inherent police power, containing an "anti-

waiver" provision. This state enactment

conflicts with a strong federal policy

favoring arbitration expressed in the

nh a

D-12

generalized Federal Arbitration Act. However,

the conflict occurs in a subject matter area

(securities law) in which the federal

enactments contain clear and unequivocal

language that they are not to be construed

sO as to preempt state securities regulation.

See § 28a 1934 Act, and § 18, 1933 Act.

In this context, it would seem that the

Arbitration Act ought not to preempt the

Wisconsin Securities law with its anti-

waiver provision.

In making this decision, the Court is

very much aware that it is in apparent conflict

with a number of district court decisions by

its colleagues here in the Eastern District

of Wisconsin.

Judge Reynolds, in Romnes y. Bache &

Co., 439 F.Supp. 833 (E.D. Wis. 1977), dealt

with a similar problem. There, plaintiffs

sued the broker for alleged violations of

the Commodities Exchange Act, the Wisconsin

Uniform Securities Act, and the commo

-12-

*)

4

7

A,

ee, |

a. = p—): i oe AN Janes * »

D-13

law regarding brokerage accounts. Defendants

sought a stay and arbitration. Judge Reynolds

held that, under federal law, a trading

: account in commodities futures is not a

"security." Thus, the case turned upon the

application of the Commodities Exchange Act.

Since that Act had no "anti-waiver" provisions,

and the Arbitration Act was deemed substantive

law, the controversy was determined to be

arbitrable. The Court stated:

The Federal Arbitration Act, 9 U.S.C.

§ 1 et seq., creates federal substantive

4 law under the authority of the Inter-

State Commerce Clause. It is not merely \

procedural. Therefore it requires a

federal court to adjudicate the issue

of the enforceability of an arbitration

clause even in a diversity action

according to federal law. Federal court

is not bound under the doctrine of

Erie Railroad Co. v. Thompkins, supra.

. 493 F.Supp. at 838. The absence of any anti-

waiver provision in the Commodities Exchange

Act leads to the conclusion that case

presented a different proposition than the

case at bar. -13-

D-14

Judge Reynolds looked to his earlier

Romnes decision when faced with a similar

dilemma in Barron v. Tastee Freez

International, Inc., 482 F.Supp. 1213

(E.D. Wis. 1980). There the question was

whether arbitration should occur when some

of the claims were for various violations

of the Wisconsin and Illinois Franchise

Investment Acts, which each contained anti-

waiver provisions. Judge Reynolds apparently

felt that the effect of the Federal

Arbitration Act upon the anti-waiver clause

of remedial legislation had been settled by

Romnes -- perhaps on the basis of Lawrence

Company v. Devonshire Fabrics, supra, which

he quoted in the Rommes opinion.

Plaintiffs contend that the Barron

case was inadequately briefed and argued to

the court; that the impact of the Federal

Arbitration Act upon state police-power

statutes was never discussed, but only the

effect on state common law and state

-14-

D-15

arbitration statutes per se; and that

during the proceedings, Judge Reynolds had

been under the mistaken impression that

Romnes dealt with "the Uniform Securities

r Act" (Barron transcript, p. 19.)

In Bache Halsey Stuart Shields, Inc.

v. Moebius, 531 F.Supp. 75 (E.D. Wis. 1982).

Judge Gordon had occasion to consider the

Federal Arbitration Act and cited Barron

for the Act's supremacy over state law. But

in Moebius, the factors of an anti-waiver

provision and the absence or presence of a

statement of Congressional intent as to

preemption were not before the court.

In summary, because this is a case

where the state law involves inherent police

power; is remedial in nature; presents a

‘ legislatively created cause of action; contains

an anti-waiver clause; and deals with an

area of the law in which Congress has

expressly indicated it has not preempted

state regulation, this Court is of the

-15- :

- 4 wa

awe we ae! ee

D-16

opinion that the statute can withstand

the generalized provisions of the Federal

Arbitration Act.

Therefore, the motion of defendants

to stay proceedings and compel arbitration

is herewith DENIED.

SO ORDERED this 7th day of January 1983,

at Milwaukee, Wisconsin.

ROBERT W. WARREN ~~

UNITED STATES DISTRICT

JUDGE

lit is to be noted in passing that the

Commodities Exchange Act had no legislatively

created right of action for damages such as

the federal securities laws and the Wisconsin

act have.

2ohe cases of Allison v. Medicab

International Inc. , 92 Wash.2d 199, 597

‘ and Keating y. Superior

Court, Alameda County, a. ptr. 481

Cal. App. 1980), which defendants cite in

their reply brief are state cases and are

not persuasive in light of the policy ’

considerations set forth herein.