Amicus Curiae Brief — Mastrobuono v. Shearson Lehman Hutton, Inc.

nov 15 098 | 1)

No. 94-18

In the Supreme Court

OF THE

United States

OCTOBER TERM, 1994

ANTONIO MASTROBUONO, ET UX.,

Petitioners,

vs.

SHEARSON LEHMAN HUTTON, INC., ET AL.,

Respondents.

On Writ of Certiorari to the United States

Court of Appeals for the Seventh Circuit

MOTION AND BRIEF AMICUS CURIAE OF

AMERICAN ASSOCIATION OF LIMITED PARTNERS

IN SUPPORT OF PETITIONERS

AMERICAN ASSOCIATION OF LIMITED

PARTNERS

5223 Wisconsin Ave. N.W.

Suite 306

Washington DC 20015

Telephone: (202) 797-3763

Amicus Curiae

MICHAEL B. DASHJIAN

Law Offices of Michael B. Dashjian

3161 Bechelli Lane

Suite 202-B

Redding, CA 96002

Telephone: (916) 221-8900

Counsel for Amicus Curiae

MOTION FOR LEAVE TO FILE BRIEF

AMICUS CURIAE

Pursuant to Rule 37.4 of the Rules of this Court, the

AMERICAN ASSOCIATION OF LIMITED PARTNERS,

through its counsel, respectfully moves this Court for

permission to file a brief amicus curiae in this action. The

proposed brief is printed with and follows this motion.

In support of this motion, applicant states the

following:

l. This brief is proffered to the Court in order to

bring relevant matter to its attention that has not been

brought to its attention by the parties.

2. Applicant is an independent, not-for-profit

national organization based in Washington, D.C. It was

founded in 1990, and has approximately 3500 members. It

seeks to act as an advocate on behalf of limited partners and

other investors to ensure fairness in financial investments, and

to provide investors with educational knowledge and

materials. Applicant has testified before Congress, and has

been widely quoted in major national financial publications.

3. Applicant’s interest in this case stems from its

overall mission of investor protection and promotion of

principles of fairness in the investment marketplace.

4. Counsel for applicant has previously appeared

before this Court as amicus curiae, by motion, in Plaut v.

Spendthrift Farm, Inc., No. 93-1121.

5. In order to ensure this brief conforms with

Rule 37.1 of this Court, counsel has reviewed the opinion of

the Court of Appeals, and has spoken with petitioners’

counsel as to the matters raised below. Based thereon,

applicant believes this brief fully comports with Rule 37.1.

For the reasons set forth in the brief, applicant also believes

the legal issues discussed are properly before the Court, and

are necessary to resolve in order to decide the cause.

6. Applicant files this motion because not all

parties have consented to the filing of this brief. Petitioners

have consented, while respondents have declined to consent.

For the foregoing reasons, applicant respectfully asks

that its motion to file a brief amicus curiae be granted.

I declare under penalty of perjury of the laws of the

United States that the facts set forth herein are true and

accurate to the best of my personal knowledge.

Dated this 14th day of November, 1994.

Respectfully submitted,

American Association of Limited

Partners

5223 Wisconsin Ave. N.W.

Suite 306

Washington, D.C. 20015

Telephone: (202) 797-3763

By: Michael B. Dashjian

3161 Bechelli Lane Suite 202-B

Redding, California 96002

Telephone: (916) 221-8900

Counsel for Amicus Curiae

No. 94-18

In the Supreme Court

OF THE

United States

OCTOBER TERM, 1994

ANTONIO MASTROBUONO, ET UX.,

Petitioners,

vs.

SHEARSON LEHMAN HUTTON, INC., ET AL.,

Respondents.

On Writ of Certiorari to the United States

Court of Appeals for the Seventh Circuit

BRIEF AMICUS CURIAE OF

AMERICAN ASSOCIATION OF LIMITED PARTNERS

IN SUPPORT OF PETITIONERS

AMERICAN ASSOCIATION OF LIMITED

PARTNERS

5223 Wisconsin Ave. N.W.

Suite 306

Washington DC 20015

Telephone: (202) 797-3763

Amicus Curiae

MICHAEL B. DASHJIAN

Law Offices of Michael B. Dashjian

3161 Bechelli Lane

Suite 202-B

Redding, CA 96002

Telephone: (916) 221-8900

Counsel for Amicus Curiae

TABLE OF CONTENTS

INTEREST OF AMICUS CURIAE.............. I

SUMMARY OF ARGUMENT ................. I

ES ee ee 3

1. The Attempted Punitive Damages

Prohibition Is Rendered Void By

Exchange Act Sections 19(g) And

29(a), Since It Purports To Prevent

The NASD From Complying With

And Enforcing Its Own Rules ....._.. 3

A. Applicability Of Exchange

Act Sections 19(g) And 29%(a) .. 3

B. Further Considerations Under

The Federal Securities Laws ... 7

Il. Petitioners’ Arbitration Was

Governed By The NASD Rules, Not

The Customer’s Agreement, Even If

It Had Been Governed By The

Customer’s Agreement, No Purported

“Waiver” Of Substantive Rights

Should Be Enforced When There Is

No Waiver Language In The

ES ae 13

A. The Customer’s Agreement Is

Inapposite To This Case ...._.. 13

CONCLUSION

Federal Courts Should Not

Enforce Purported “Waivers”

Of Substantive Rights In

Arbitration Agreements That

Are Based On Inference, And

Not The Plain Language Of

The Arbitration Agreement ...

l. There Is Nothing To

Suggest Petitioners

Intended To Agree To

Waive The Right To

Punitive Damages, And

No Proper Basis For

Enforcing Such An

Unintended “Waiver”

2. Strong Policy Reasons

Militate Against

Respondents’ Proffered

“Waiver By Choice Of

Foreign Law

a SR

3. Conclusion To Part

ga

~ oexeaeoeoeoesvraevrereeeeoeoeue gee eeaeecre. 2.97

16

16

TABLE OF AUTHORITIES

CASES

Arcadia, Ohio v. Ohio Power Co., 498 U.S. 73

er 11, 21

Baravati v. Josephthal, Lyon & Ross, Inc. |

28 F.3d 704 (7th Cir. 1994)... 3, 12

Bennecke v. Insurance Co., 105 U.S. (15 Otto) 355

ME Ue oe ok eG dcccdccccen 20

Bonar v, Dean Witter Reynolds, Inc., 835 F.2d 1378

SS 18

Carnley vy. Cochran, 369 U.S. 506 (1962)... ...... 18

Chesapeake & Ohio Canal Co. v. Hill, 82 US. (15 Wall.)

a ant ma ape 16

Clark v. Paul Gray, Inc., 306 U.S. 583 (1939) .._... 11

D.H. Overmyer Co. v. Frick Co., 405 U.S. 174

ee ee 27

Dean Witter Reynolds, Inc, v. McCoy, 995 F.2d 649

ee 26

Dunton v. County of Suffolk, 729 F.2d 903 (2d Cir.),

modified on other grounds, 748 F.2d 69

ee 1]

Frankel v. Allied Mills, Inc., 369 Ill. 578,

anne... 15

Fuentes v. Shevin, | aa 19

Garrity v. Lyle Stuart, Inc., 40 N.Y.2d 354, 386

N.Y.S.2d 831, 353 N.E.2d 793 (1976)... 23, 24

Gateway Coal Co. v, United Mine Workers, 414 US. 368

, te egy Be aR ARSE LO ea, ela 17

Gilbert Frank Corp. v. Federal Ins. Co., 70 N.Y.2d 966,

525 N.Y.S.2d 793, $20 N.E.2d 512 (1988)... 18

183 A.D.2d 446, 584 N.Y.S.2d 483 (1992) . 23, 25

Litigation, 623 F.Supp. 1466 (W.D. Wash. 1985) 5

iti 17 Cal.App.4th

1083, 21 Cal.Rptr.2d 826 (1993), cert. denied,

__ US. __, 114 S.Ct. 2182 (U.S. June 6,

7 ee ee Pr eee 18, 25, 26

Johnson v. Zerbst, 304 U.S. 458 (1938) ........... 18

L.K. Comstock & Co. v. New York Convention Center

Dev’t Corp., 179 A.D.2d 322, 584 N.Y.S.2d

I ve ov nko CHE CA Ad NTs 8 oo os 27

Lank v, New York Stock Exchange, 548 F.2d 61

EDs nv nat tii coeiil's «6s 0: 7,8

Levering & Garrigues v. Morrin, 289 U.S. 103 (1933) 11

Litton Financial Printing Div. v. NLRB, 501 U.S. 190

Goa RP TES Pe TR St ae 17

Maloney v. Iroquois Brewing Co., 173 N.Y. 303,

es acne 6 0c sty. < 17

20 F.3d 713 (7th Cir. 1994) ........ 4, 6, 14, 15

pi YY | RAP ae 17

Construction Corp., 460 U.S. 1 (1983)....... 28

175 Ill.App.3d 1069, 530 N.E.2d 994 (1988) .. 15

Shearson/American Express, Inc. v. McMahon,

482 U.S. 220 (1987) ........... 2, 8-10, 24, 25

Silver v. New York Stock Exchange, 373 U.S. 341

ie fee oo Sh A Ae ~

Sorrell v. SEC, 679 F.2d 1323 (9th Cir. 1982) ....... 3

SOS Oil Corp. v. Norstar Bank of Long Island, 76 N.Y.2d

561, 561 N.Y.S.2d 887, 563 N.E.2d 258 (1990) 15

977 F.2d 255 (7th Cir. 1992) .............. 4

iV

_v. United States

PINAR RES mRe re : r 6

Tcherepnin v. Knight, 389 U.S. 332 re 12

Todd & Co. v. SEC, $57 F.2d 1008 (3d Cir. 1977)... 3

64 N.Y.2d 449, 489 N.Y.S.2d 31.

478 NE.2d 172 (1988)... 18

United States v. Seckinger, 397 U.S. 203 (1970)... 15

\tley_v. Donaldson, 94 US. (4 Otto) 29 (1877)... 20

Volt Information Sciences, Inc. v. Board of Trustees of

Stanford University, 489 U.S. 468 (1989) _... 28

STATUTES

9USC.§2.

s iran oss te) 10

ORES Ra aia arena Wy .

ER 5g. os be con) be ey ee 9

RT, ices 2) 4s Nea :

IS USC. § 78cc . 2,3, $-7.9,

PR ARO SEE 3, 5-7, 9,

ee ee ; 7

I rn Sc ene ee 2

ae...

RULES OF SELF-REGULATORY ORGANIZATIONS

American Stock Exchange Constitution, Art. VIII,

Pee Pye es oe ee Pe ek Oe 14, 26

NASD By-Laws, Art. VII, Sec. 1] ...........---. 13

NASD Certificate of Incorporation ............... 5

NASD Code of Arbitration Procedure, § 1 ......... 13

NASD Code of Arbitration Procedure, § 12 . 13-15, 26, 28

NASD Code of Arbitration Procedure, § 42 ........ 14

NASD Rules of Fair Practice, Rule 211 ........ 4-7, 10

New York Stock Exchange Constitution, Art. XI_ .. 14, 26

New York Stock Exchange Rule 600........... 14, 26

OTHER AUTHORITIES

Black’s Law Dictionary 281 (6th ed. 1990) ......... 5

ELR. Rep. 1383, 73d Cong., 2d Sess. .........----. 7

Note, Exchange Liability for Net Capital Enforcement,

_f ee rrrrrrirere eee 8

S. Rep. No. 792, 73d Cong., 2d Sess. ............-. 8

INTEREST OF AMICUS CURIAE

The American Association of Limited Partners

(AALP) is an independent, not-for-profit national organization

based in Washington, D.C. It was founded in 1990, and has

approximately 3500 members. It seeks to act as an advocate

on behalf of limited partners and other investors to ensure

fairness in financial investments, and to provide investors

with educational knowledge and materials.

AALP is committed to protecting investor rights where

such rights are being abused or threatened. AALP has

testified before Congress, and has been widely quoted in

major national financial publications.

AALP believes this case is one in which investor

rights are in fact being threatened, and which creates a great

potential for abuse of those rights. As a result, it seeks to

bring before this Court matters that relate directly to its

mission of fairness in the investment marketplace. In AALP’s

opinion, this case is much more than what the Court of

Appeal perceived it as, a mere choice-of-law dispute. It

instead involves far greater issues of investor protection that

need to be addressed, based on strong legal as well as policy

reasons. AALP appreciates the opportunity to present its

views to this Court.

SUMMARY OF ARGUMENT

First. The NASD is bound by section 19(g)(1) of the

Securities Exchange Act of 1934 to comply with and enforce

Rule 21(f)(4) of its Rules of Fair Practice. As a result, NASD

arbitrators are bound under section 19(g)(1) to refuse to give

effect to any private agreement purporting to limit their

ability to make any award. Any provision seeking to bind the

NASD to waive such compliance with section 19(g)(1), such

as the one in this case, is rendered void by Section 29 of the

Exchange Act. This result especially follows from the

premises of the federal securities laws and this Court's

decision in

482 U.S. 220 (1987), which include integrity of self-

regulatory organization (SRO) rules and nonwaiver of

substantive rights in arbitration. Those premises must be

maintained fully intact, lest the carefully balanced system of

laws which ensures the fairness of SRO arbitrations to the

public investor be seriously undermined.

Second. Petitioners had the right to demand arbitration

directly under the NASD Rules, without any reference to the

arbitration agreement; as a result, the arbitration agreement is

irrelevant and moot, and should not be the basis of any

enforced waiver of rights. Furthermore, there is no language

in the Customer’s Agreement specifically stating that

petitioners were waiving any rights or even mentioning those

rights, and no contractual waiver of rights should be enforced

unless it is clear a party knows it is making a waiver. That is

especially true here, as the purported waiver is in a preprinted

agreement between parties of unequal bargaining power, there

is no language indicating a waiver of any sort, and there was

no consideration for the waiver because petitioners had

exactly the same right to arbitration with or without the

arbitration agreement. Finally, enforcement of a waiver

implied solely from interpretation of caselaw in a jurisdiction

that is the subject of a choice-of-law clause would have

atrocious practical consequences for millions of people, and

especially investors, who must engage in commercial

transactions in which a choice-of-law clause is imposed on

them.

ARGUMENT

I. The Attempted Punitive Damages Prohibition Is

Rendered Void By Exchange Act Sections 19(g)

And 29a), Since It Purports To Prevent The

NASD From Complying With And Enforcing Its

Own Rules

This case is much more than a mere “difference over

the proper interpretation of the choice of law clause.”

oe LV. Josephth al, Lyon & Ross, Inc., 28 F.3d 704, 709

ir. 1994). It is governed firstly by the federal securities

laws. Section 29(a) of the Exchange Act operates to void any

provision seeking to prevent the NASD from enforcing and

complying with its own rules, such as the one at issue here.

Z a is | |

29(a) =

Section 19(g)(1) of the Exchange A

78s(8)( 1), requires that a registered << plana

shall comply with the provisions of this chapter, the rules

and regulations thereunder, and its own rules, and absent

reasonable justification or excuse enforce compliance

with ‘such provisions . . . by its members and persons

associated with its members... .” (Emphasis added.) The

NASD, the body that conducted the arbitration at issue in this

Case, isa agp securities association. 15 U.S.C. § 780-3:

Sorrell v. SEC, 679 F.2d 1323, 1325 (9th Cir. 1982): Todd &

Co. v. SEC, 557 F.2d 1008, eth a Cir. Mo

The provisions of section 19(

iS OF g)(1) are obligatory. A

self-regulatory organization shall comply with its pa Pt

and shall enforce compliance with its rules by its members

and associated persons. As the Seventh Circuit has

recognized, section 19(g)(1) “expressly requires an exchange

to comply with, and enforce compliance by its members with,

its own rules. . . . [I]t is clear that Congress intended . . . Sec.

19(g)(1) to impose an affirmative legal duty upon registered

exchanges.” Spi

Inc., 977 F.2d 255, 259 (7th Cir. 1992).

The Court of Appeal’s decision is explicitly based on

its interpretation of Art. III, Sec. 21(f)(4) of the NASD Rules

of Fair Practice (hereinafter “Rule 21(f)(4)”), and its opinion

that Rule 21(f)(4) did not prevail over New York law to the

contrary. Mastrobuono, 20 F.3d at 717-18. Rule 21(f)(4)

provides that “[n]o agreement shall include any condition

which . . . limits the ability of the arbitrators to make any

award” (emphasis added). Mastrobuono, 20 F.3d at 718.

This is a rule of a self-regulatory organization.

Accordingly, under section 19(g)(1), the NASD must comply

with it, and enforce compliance with it by members and

associated persons. The NASD has an “affirmative legal

duty” to do so. Therefore, the NASD is obligated to enforce

and comply with Rule 21(f)(4) and its prohibition against

arbitration agreements which purport to limit its arbitrators’

power to render any award.

Because Exchange Act section 19(g)(1) requires that

the NASD must enforce compliance with all of its rules,

including Rule 21(f)(4), the contrapositive is true as well.

Exchange Act section 19(g)(1) prohibits the NASD from not

enforcing compliance with Rule 21(f)(4), just as it prohibits

the NASD from not enforcing compliance with any of its

other rules. It also prohibits the NASD from failing to comply

with Rule 21(f)(4). Section 19(g)(1) thus prohibits the NASD

from treating an agreement purporting to limit arbitrators’

power to render any award—one in direct violation of R

: |

21(f)(4)—as fully valid, proper and enforceable. "

Put differently, under section 19(g)(1), the NASD

must always retain full power to take whatever action it

deems necessary, against a private agreement that contravenes

Rule 21(£)(4). Furthermore, because the NASD must also

comply with its own rules, it must ensure that no agreement

operates to limit arbitrators’ power in the prohibited

manner—exactly what Rule 21(f)(4) specifies. Its arbitrators

can, and are duty-bound to, refuse to give effect to such a

private agreement purporting to nullify their power.

Section 29(a) of the Securities Exchange Act of 1934

15 U.S.C. § 78cc(a), provides (emphasis added): “Any

condition, stipulation, or provision binding any person to

waive compliance with any provision of this chapter or of

any rule or regulation thereunder, or of any rule of an

exchange required thereby shall be void.” In turn, Exchange

Act section 3(a)(9), 15 U.S.C. § 78c(a)(9), defines “person”

broadly as including a natural person, company, government

or political subdivision, agency, or instrumentality of

government. See also w I

ion, 623 F.Supp. 1466 .

(W.D. Wash. 1985). ” siosahiatiea

The National Association of Securities Dealers, Inc. is

@ corporation, see NASD Certificate of Incorporation, NASD

Manual { 1003, and it is an entity Carrying on a commercial

enterprise. In other words, it is a “company.” See, eg.

Black's Law Dictionary 281 (6th ed. 1990). It is thus 2

person” under the Exchange Act.

Thus, under Exchange Act section 29%

* * M4 . » 7 rv

provision binding a person such as the NASD hptiend

iSk Act (Chapter

compliance with any provision of the Exchange ,

2B of Title 15 of the U.S. Code) is void. Section 19(g)(1),

the statute requiring the NASD to comply with and enforce

its own rules, is such a provision.

What section 29(a)(1) renders void is exactly what

respondents’ interpretation of the customer’s agreement does.

By entering into a private agreement that purports to prohibit

the NASD from complying with and enforcing Rule 21(f)(4),

respondents also seek to bind the NASD to waive compliance

with Exchange Act section 19(g)(1).

As a result, even if the “New York law” provision of

the customer’s agreement meant what respondents want it to,

it would still be void by virtue of section 29(a)(1), to the

extent it attempts to prohibit the NASD from complying with

and enforcing Rule 21(f)(4). It is therefore void to the extent

it purports to prohibit arbitrators from making any award

under that Rule. Respondents claim, and the Seventh Circuit

held, that the New York choice-of-law provision in the

customer agreement “trumps” Rule of Fair Practice 21(£)(4).

Mastrobuono, 20 F.3d at 717-18. But Exchange Act section

29(a)(1) “overtrumps” the choice-of-law provision on the

punitive damages issue.

' The one/three year statute of limitations in wis 29 Foam

vant to this case. First, it only applies to actions regarding vio

pre or regulations orescribed under 15 U.S.C. § 780(c)(1) or

780(c)(2), which are not at issue in this dispute over whether een

damages may be awarded. Second, it applies only to actions seem

in reliance on section 29, and is thus by its terms not applicable to solely

defensive measures to avoid another party's attempt to enforce a contract

in violation of the Exchange Act, which is what petitioners are engaging

in here.

Simply put, respondents cannot use a private

contractual provision as a means of prohibiting the NASD

from complying with and enforcing its own rules. Had

Shearson’s preprinted customer’s agreement been more direct

and explicitly said, “This agreement requires the NASD not

to comply with or enforce Rule 21(f)(4) and thereby prohibits

it from awarding punitive damages in any NASD arbitration,”

the applicability of sections 19(g)(1) and 29(a)(1) would be

obvious. It should be no less so when respondents have tried

to accomplish exactly the same thing through a more

roundabout method.

B. Further Considerations Under The Federal Securities

Laws

That section 29 applies to void the purported punitive

damages waiver is not merely fortuitous. It is, rather, part of

a central purpose of the federal securities laws, which is to

protect the investing public and to ensure that the self-

regulatory organizations actively effectuate that vital purpose.

The beneficiary of the 1934 legislation was intended

to be the public investor, and the Exchange Act was enacted

““for the purpose of bringing safety to the general public in

the field of investment and finance. . . . It is in the light of

the interests of the general public that the bill was drawn.’”

, 548 F.2d 61, 65 (2d Cir.

1977) (quoting H.R. Rep. 1383, 73d Cong., 2d Sess. 15

(1934)).

The federal securities laws leave the implementation

of that important purpose to the securities self-regulatory

organizations, subject always to the oversight of the SEC.

“The primary purpose of the Exchange Act was to protect

customers of the stock exchanges, that is, public investors.

' —

One method of effectuating this was to impose on |

per tee a statutory duty ‘to protect investors by regulating

the exchanges’] members... .” _Sto

aes 548 F.2d at 64 (quoting Note, Exchange Liability

for Net Capital Enforcement, 73 Colum. L. Rev. 1262, 1264).

As long as the SROs are able to fulfill this vital

obligation, the SEC’s oversight power need not come into

play. Conversely, if the power of an SRO to protect core

is impaired, the federal laws will operate to stoner e

impairment. “[T]he Senate Committee Report stressed at

‘the initiative and responsibility for promulgating regulations

pertaining to the administration of their ordinary affairs

remain within the exchanges themselves. It is only where ow

fail adequately to provide protection to renters se “

so” Siler w- New York Sock Exchange. 373 U.S. 341,352

(1963) (quoting S. Rep. No. 792, 73d Cong, 2d Sess. 13

(1934)).

The NASD, like the other major SROs, has set up an

elaborate system of rules to ensure that broker-customer

disputes can be settled simply and fairly through pe gp

without any sacrifice of the customer’s substantive rights. n

addition, the NASD is still an organization of securities firms,

and it is crucial that there be both fairness and a perception

of fairness in the conduct of arbitrations that involve a

member firm. The existence of SRO rules and procedures,

with the SEC’s statutory duty of approval to ensure their

adequacy, are precisely why this Court held in McMahon os

arbitration procedures amply ensure fairness to public

customers. Id., 482 U.S. at pp. 233-234.

itrati edures

Thus, the current system of arbitration proced

reflects a pest» balance between the desire for simplified

dispute resolution, and a need to ensure that the goals of

investor protection embodied in our federal securities laws are

fulfilled. That system is set in place by both the SEC’s

approval of the NASD’s rules of arbitration, under Exchange

Act section 19(b)(1) [15 U.S.C. § 78s(b)(1)], and the NASD’s

Statutory charge under Exchange Act section 19(g) to enforce

and comply with those rules.

Respondents seek to undo this carefully balanced

SEC-approved system. Were respondents’ arguments to

prevail, a member firm could override any SRO rule it

wanted to, as long as it could get the other party to “agree”

to it (even if the “agreement” were nothing more than a

boilerplate preprinted customer’s agreement, see infra Part

11(B)(1)). That defeats the entire Purpose and structure of the

self-regulatory mechanism, by which the SRO enforces its

rules against members who seek to act contrary thereto. It

also defeats the overall Congressional paradigm. The integrity

of the SRO rules is a central part of the whole structure of

the federal securities laws, and it neither can nor should be

changeable at the instance of a member firm, especially by

means of a preprinted customer’s agreement. —

It is also worth stepping back to see how different this

case is from re Vv

482 U.S. 220 (1987), a case in which similar issues arose in

a much different factual context. For example, in McMahon,

this Court held that section 29(a) did not forbid waiver of

section 27 of the Exchange Act [15 U.S.C. § 78aa] because

“Sec. 27 does not impose any Statutory duties.” McMahon,

482 U.S. at 228. By contrast here, section 19(g)(1) does

impose statutory duties, and any attempt to override it is

subject to the prohibitions of section 29(a).’

In addition, McMahon rested on the principle that

“[b]y agreeing to arbitrate a statutory claim, a party does not

forgo the substantive rights afforded by the statute [, and

thus] the streamlined procedures of arbitration do not entail

any consequential restriction on substantive rights.” Id., 482

U.S. at 229-230, 232. But that is exactly wrong in this case,

because under respondents’ view, petitioners are barred from

remedies in arbitration that they would have in a court of law.

Under respondents’ view petitioners by agreeing to arbitrate

their state-law claim have in fact foregone substantive rights.

If nothing else, this Court should be chary of

enforcing the purported waiver of substantive rights in the

manner sought by respondents, for the reason that the

fundamental premises of McMahon do not exist in this case.

While arguments based on Exchange Act sections 19

and 29 have apparently not been raised until now, that should

not matter. Since the choice-of-law provision is void to the

extent it purports to prohibit punitive damages, a federal court

has no jurisdiction to give it any effect; something that is

void is a nullity and does not exist in contemplation of the

law. See also 9 U.S.C. § 2. Absence of subject matter

? In addition, McMahon generally relied on the SEC’s “expansive

power to ensure the adequacy of the arbitration procedures employed by

the SROs, id., 482 U.S. at 233, a presumption which in tur rested on the

SEC’s statutory power to approve all SRO rules and rule changes.

Respondents, however, seek to effect a de facto nullification of this SEC

power, by what amounts to a private cancellation of Rule 21(f)(4) for

purposes of this case—and many more like it—without the approval of

the SEC that is statutorily required for an SRO rule change.

10

jurisdiction to enforce this void provision may be raised at

any time, even for the first time to this Court. Clark v. Paul

Gray, Inc,, 306 U.S. 583, 588 (1939); Dunton v. County of

Suffolk, 729 F.2d 903, 910 (2d Cir.), modified on other

grounds, 748 F.2d 69 (2d Cir. 1984). Subject matter

jurisdiction to enforce a void provision is also lacking

because of the absence of a substantial federal question.

Levering & Garrigues v. Morrin, 289 U.S. 103, 105 (1933);

Dunton v. County of Suffolk, 729 F.2d at 910.

Furthermore, the issue of whether the attempted

waiver of section 19(g) is void is a “question antecedent to

[those decided by the Court of Appeals and argued below]

and ultimately dispositive of the present dispute.” Arcadia,

Qhio v. Ohio Power Co., 498 U.S. 73, 77 (1990). Since it

goes to the very existence of the contractual provision in

question, it must be resolved first, and the resolution should

control the outcome of this case. That is especially so because

the Federal Arbitration Act does not provide for enforcement

of arbitration agreements where there are grounds at law or

equity for the revocation of the agreement.

The facts of this case are little different from a

hypothetical customer agreement such as, “X Firm shall not

be bound by any rule of a self-regulatory organization, except

at its election.” Such a hypothetical agreement would be

contrary to the system of self-regulation on which our

securities laws are based, and would be ineffective to the

extent it sought to prohibit an SRO from enforcing and

complying with its rules. The current case may entail a much

lesser invasion of the role of an SRO than such a hypothetical

customer agreement, but the relevant legal principles are the

same. Thus, at least in the context of the regulated securities

industry, the Seventh Circuit errs in its view that “short of

authorizing trial by battle or, more doubtfully, by a panel of

1]

three monkeys, parties can stipulate to whatever procedures

they want to govern the arbitration of their disputes... .”

Baravati v. Josephthal, Lyon & Ross, 28 F.3d at 709.

In AALP’s view, the federal securities laws play a

vital role in our economy, especially in today’s climate,

where investment is often a necessity and not merely a

luxury. See infra, Part II(B)(2). The securities laws should be

interpreted liberally to achieve their important purposes,

Tcherepnin v. Knight, 389 U.S. 332, 336 (1967), and as an

Act of Congress, they should prevail over contrary language

in a private agreement. Any ambiguity or uncertainty as to

whether a private agreement is governed by the federal

securities laws should be interpreted in favor of the remedial

policies of investor protection that underlie those laws, as

well as the policies of regulatory oversight and SRO

enforcement.

Consequently, the judgment should be reversed, with

directions to remand to the District Court to reinstate the

award of punitive damages.

12

Il. Petitioners’ Arbitration Was Governed By The

NASD Rules, Not The Customer’s Agreement;

Even If It Had Been Governed By The Customer’s

Agreement, No Purported “Waiver” Of

Substantive Rights Should Be Enforced When

There Is No Waiver Language In The Agreement

Two other threshold issues that have not yet been

addressed are: Does the arbitration agreement in the

preprinted customer’s agreement govern this case at all; and

if it does, what have the parties agreed to in that agreement?

Those issues are also central to and controlling ir. this case.

A. The Customer’s Agreement Is Inapposite To This

Case

This entire dispute presupposes that petitioners’

arbitration was governed by the customer’s asreement.

However, that is not necessarily so.

Petitioners were not required to invoke the customer’s

agreement in order to file their complaint in arbitration.

Section 12(a) of the NASD Code of Arbitration Procedure

requires disputes arising in connection with the business of a

member firm to be arbitrated either based on an arbitration

agreement, or “upon demand of the customer.” Section 12(a)

of the Code of Arbitration Procedure is very simple; if a

customer demands arbitration under the NASD Rules, (s)he

gets it. There is no requirement that a customer must invoke

a written arbitration agreement.’

> The Code of Arbitration Procedure is prescribed and adopted

pursuant to Article VII, Section 1(a)(3) of the NASD By-Laws. NASD

Code of Arbitration Procedure, § 1.

13

If petitioners elected arbitration under the “demand of

the customer” provision of section 12(a), there should be no

New York law clause to invoke, because the customer

agreement would be irrelevant to the arbitration. It is not true

that submission to New York law is a “general condition” on

the petitioners’ right to invoke arbitration, compare

Mastrobuono, 20 F.3d at 717. Rather, petitioners may invoke

arbitration entirely under the NASD Rules.‘

Based on this, no choice-of-law provision in a

customer's agreement can operate to limit a customer’s rights

that would otherwise be available under the rules of the

NASD. The customer can simply choose arbitration under the

“demand of the customer” provision in section 12(a), and

bypass the customer’s agreement.

As an alternative analysis, the customer’s agreement

itself says that the arbitration shall be conducted “in

accordance with the rules then in effect, of the National

Association of Securities Dealers, Inc.” Section 12(a) of the

Code of Arbitration Procedure is one such rule. Moreover,

section 42 of the Code of Arbitration Procedure states: “This

Code shall be deemed a part of and incorporated by reference

in every agreement to arbitrate under the rules of the National

Association of Securities Dealers, Inc. including a duly

executed Submission Agreement.”

As a result, the customer’s agreement itself—with the

Code of Arbitration Procedure incorporated by

reference—invokes an NASD rule that permits the customer

* Similar provisions permitting arbitration at the behest of a public

customer exist under the rules of major stock exchanges. See, ¢.g., New

York Stock Exchange, Constitution Art. XI and Rule 600; American

Stock Exchange, Constitution Art. VIII, Sec. 1.

14

to demand arbitration directly, without any reference to or

need for the New York choice-of-law provision in that

agreement. Using this analysis, the customer’s agreement

effectively bypasses its own choice-of-law provision by going

straight to the NASD Rules, including the “demand of the

customer” provision of Section 12(a).

The customer’s agreement says the agreement is to be

governed by New York law. It does not say the arbitration

must be. If the petitioners elected arbitration directly under

the “demand of the customer” provision and not the

customer’s agreement, there would be no cause for New York

law to apply. In that event, if state law applied, the remedy

would ordinarily be governed by either the law of the forum

state or the state having the most significant contacts with the

controversy, which in either case is Illinois. Frankel v. Allied

Mills, Inc., 369 Ill. 578, 582, 17 N.E.2d 570, 572 (1938) (/ex

fori), Purcell & Wardrope Chartered v. Hertz Corp., 175

Ill.App.3d 1069, 530 N.E.2d 994 (1988) (most significant

contacts); see Mastrobuono, 20 F.3d at 715. Nothing in

Illinois law prohibits punitive damages in arbitration.

This alone should be dispositive, since a federal court

has no jurisdiction to enforce a purported “waiver” under the

Federal Arbitration Act, when the parties’ arbitration

agreement is inapposite to their dispute. If there were any

doubt, it should be resolved against respondents, since it was

their preprinted customer’s agreement that petitioners signed,

and all doubts in interpreting a contract should be resolved

against the party who drafted it. United States v. Seckinger,

397 U.S. 203, 210 (1970); SOS Oil Corp. v. Norstar Bank of

Long Island, 76 N.Y.2d 561, 568, 561 N.Y.S.2d 887, 563

N.E.2d 258, 261 (1990). Since the customer’s agreement is

irrelevant to this arbitration, there should be no occasion to

15

impose a punitive damages waiver that can only be argued to

emanate from the customer’s agreement.

Therefore, the purported waiver of punitive damages

in the customer’s agreement should not be enforced, because

there is no appropriate legal basis on which to enforce it.

“Waivers” Of S t t tiv Ri I I ; t . .

B.

Punitive 1 No P Basis F

Enforcing Such An Unintended “Waiver”

Even if this Court were to hold that the Customer’s

Agreement governs here, the question still remains: What

have the parties agreed to?

It is noteworthy that the customer’s agreement does

not say in plain language, “Punitive damages shall not be

awarded in any arbitration proceeding.” Instead, respondents

seek to import this substantial limitation on petitioners’ rights

through the “back door” of a choice-of-law provision that is

claimed to refer to the entire body of New York caselaw,

including one case therein which respondents claim “waives”

contrary provisions of the rules of the arbitral tribunals

specified in the customer’s agreement.

A fundamental tenet of interpreting any contract is

that a court seeks to effectuate the intent of the parties.

rd Oil w v. Uni , 340 US.

54, 57 (1950); Chesapeake & Ohio Canal Co. v. Hill, 82 U.S.

16

(15 Wall.) 94, 99-100 (1873). The same is true for an

arbitration agreement enforced under federal law, Litton

Financial Printing Div. v. NLRB, 501 U.S. 190, 210 (1991):

414 US. 368,

382 (1974)—an obvious corollary of the fact that an

arbitration agreement is a form of contract. Mitsubishi

- 473 U.S. 614, 626

(1985). It is true that the parties’ intentions are construed in

favor of arbitrability, id, but that does not mean they are

construed in favor of the waiver of substantive rights.

That a contract is to be interpreted to effectuate the

intent of the parties is the law of New York as well. “In the

construction of written contracts it is the duty of the court, as

near as may be, to place itself in the situation of the parties,

and from a consideration of the surrounding circumstances,

the occasion and apparent object of the parties, to determine

the meaning and intent of the language employed. Indeed, the

great object, and practically the only foundation of rules for

the construction of contracts, is to arrive at the intention of

the parties.” Maloney v. Iroquois Brewing Co,, 173 N.Y. 303,

310, 66 N.E. 19, 20 (1903).

Here, respondents would have to argue that petitioners

intended through such obscure means as these to waive all

rights to punitive damages, at the time they signed the

customer’s agreement. That argument should flunk any test of

common sense. One would think that if anything, petitioners

intended what the agreement said they were doing—agreeing

to arbitration “in accordance with the rules then in effect, of

the National Association of Securities Dealers, Inc.” Nothing

therein would have precluded punitive damages.

Respondents apparently argue that petitioners are

charged with having looked past the language of the contract

17

and even past the language of New York statutes, researched

New York caselaw, determined what New York caselaw

actually stood for, and thereby made a determination that the

right to otherwise available punitive damages was really an

illusion. This is not how a contract is formed, and parties

cannot be held to waive substantive rights in this manner.

Rather, in order for there to be any waiver by contract,

the language of the contract must make it clear that the

contracting parties have intended a waiver. This follows

directly from the principle that a contract should be

interpreted to effectuate the intent of the parties. One need

not adopt a “knowing and intelligent” standard for

constitutional waiver, Carnley v. Cochran, 369 U.S. 506, 515-

516 (1962); but even in a civil contractual context, there must

be some element of intentionality to a waiver, and a waiver

is still an intentional relinquishment or abandonment of a

known right or privilege. Johnson v. Zerbst, 304 US. 458,

464 (1938); accord Bonar v. Dean Witter Reynolds, Inc., 835

F.2d 1378, 1387 (llth Cir. 1988), and cases cited: J.

I iti 17 Cal.App.4th 1083,

1093-1094, 21 Cal.Rptr.2d 826, 832 (1993), cert. denied, os

US. ___, 114 S.Ct. 2182 (U.S. June 6, 1994).

New York law is particularly strict in this area.

Waiver is not only an_ intentional relinquishment or

abandonment of a known right, but there can only be a

waiver when there is “both knowledge of [the right’s]

existence and an intentional to relinquish it.” United

ities-Gr v. Fidelity Int’l Bank, 64 N.Y.2d 449,

457, 489 N.Y.S.2d 31, 34, 478 N.E.2d 172, 175 (1985). Such

a waiver is not lightly presumed. Gilbert Frank Corp. v.

Federal Ins. Co., 70 N.Y.2d 966, 968, 525 N.Y.S.2d 793, 520

N.E.2d 512, 514 (1988).

These principles militate strongly against any waiver.

Since the contract did not say petitioners were waiving their

right to punitive damages, and there is nothing anywhere else

in the record to suggest they had any intention of

relinquishing that right, no waiver should be inferred.

The circumstances of this case, involving a preprinted

brokerage house agreement, particularly call out for refusing

to enforce a waiver of substantive rights not spelled out in the

agreement. In Fuentes v. Shevin, 407 U.S. 67 (1972), this

Court refused to give effect to a contractual waiver of the

right to a prior hearing for reasons fully applicable here. Most

notably, “the contractual language relied upon [did] not, on

its face, even amount to a waiver.” Id. at 95. And here as in

Fuentes, “There was no bargaining over contractual terms

between the parties who, in any event, were far from equal in

bargaining power. The purported waiver provision was a

printed part of a form [brokerage] contract and a necessary

condition of the [brokerage]. The [respondents have] made no

showing whatever that the [petitioners] were actually aware

or made aware of the significance of the [provision] now

relied upon as a waiver... .” Id. See also infra, p. 27.

The purported waiver of punitive damages here may

not involve rights as constitutionally profound as the basic

right to notice and a hearing in Fuentes. But the right to

punitive damages when provided for by law is a significant

and substantial state-law right, and the federal courts are

being called upon to deny petitioners any such state-law right.

Even if some aspects of Fuentes have been subsequently

narrowed by this Court, there is nothing to suggest the

analysis above is based on anything other than good law.

But under any _ circumstances, and Fuentes

notwithstanding, “A waiver of a stipulation in an agreement

19

must, to be effectual, not only be made intentionally, but with

knowledge of the circumstances.” Bennecke v. Insurance Co.,

105 U.S. (15 Otto) 355, 359 (1882); Utley v. Donaldson, 94

U.S. (4 Otto) 29, 49 (1877). There is no such thing as a

“stealth waiver.” None can be inferred from language which

on its face would not suggest to a reasonable contracting

party that it is waiving anything.

Furthermore, the mere fact that this issue has split the

Circuits (and at least one state court) and is now before this

Court is ample evidence that the language of the contract

does not clearly and obviously constitute a waiver of the right

to punitive damages. If it is not even clear to the courts that

this language constitutes a waiver of rights, how could the

Mastrobuonos be expected to know this? When they signed

their customer’s agreement, they were trying to make

investments, not argue a case before the United States

Supreme Court. They manifested no intent at all, let alone a

clear intent, to adopt such an uncertain “waiver.”

These are issues that should be reached by this Court.

If there is no legal basis for holding petitioners intended to

waive their right to punitive damages by signing Shearson’s

customer agreement, then there is no legal basis for holding

that the contractual agreement to arbitrate incorporates such

a waiver. A federal court has subject matter jurisdiction to

* Furthermore, a jurisdiction’s caselaw is not always completely

clear, sometimes, not even a jurisdiction’s courts can agree on what its

caselaw is. While courts can clarify their law in later decisions, the same

standard is not true for contracting parties. Rather, the obligations of a

contract are supposed to be definite and certain at the time of the

contract. A “contract” that requires the parties to interpret caselaw to

figure out what its provisions are can hardly be viewed as a contract,

since caselaw can generally be interpreted in more than one way.

20

enforce an arbitration agreement under 9 U.S.C. § 2—to the

extent there is an agreement, and only to that extent.

: The issue of whether there is a contract for the waiver

of punitive damages is not only jurisdictional, it is also purely

one of law, appropriate for this Court’s consideration. Indeed,

since this Court would have no jurisdiction to sustain

respondents’ position if there were no binding contract to

waive punitive damages the first place, this too is a “question

antecedent to [those decided by the Court of Appeals and

argued below] and ultimately dispositive of the present

dispute.” Arcadia, Ohio v. Ohio Power Co., 498 US. at 77.

a ag nis |

E sae Queedalant™

Beyond these legal considerations, the result sought by

respondents would have awful repercussions throughout our

illegal system, extending to the conduct of everyday affairs

by millions of people in this country.

| It is one thing for sophisticated Parties voluntarily to

hire attorneys to negotiate the best possible contract. It is

quite another to say that an ordinary citizen or small business

considering a proposed preprinted contract must hire an

attorney to do caselaw research to determine what the terms

of the proposed contract are. To give the contract the

meaning respondents seek would be to hold that th

Mastrobuonos had such an obligation. Pay

Indeed, to give the contract the meaning respondents

seek could potentially force any ordinary citizen, faced with

a preprinted contract such as this one, to hire an attorney if

(s)he wants to know the very terms of the contract (s)he is

21

signing. If a person sees a choice-of-law provision in any

contract—be it an auto loan, a mortgage, a tuition assistance

agreement, or the like—the person must obtain legal

assistance to scour another state’s caselaw to figure out what

is in the contract. (We are not talking about only selected

portions of caselaw; since one can never know where the

“hidden traps” are, apparently the only way to discover them

is to look everywhere.) In fact, a person contemplating such

an contract might be required not only to hire an attorney, but

to hire an attorney from another jurisdiction.

This is an absolutely atrocious result. It is a

potentially staggering burden on everyday commerce by

ordinary citizens and small businesses. Those who do not

wish to shoulder the burden are put at risk of “waivers” they

would never have reason to anticipate. The result could even

operate as a trap for the unwary by encouraging larger

businesses to put hidden “choice-of-law” waivers into

preprinted agreements, intentionally.

An enormous amount of modern commerce is handled

through preprinted agreements required by large businesses.

There is no way an average person or small business can hire

an attorney at every turn to try to figure out what the terms

of each one of those agreements are supposed to be. And as

a result, people will operate in complete uncertainty of what

they are agreeing to, every time they sign an agreement with

a choice-of-law provision.

AALP is especially disturbed by the possibility of

such a result because of its grave ramifications for investors.

Investment through a brokerage firm, or another entity

that might insist on a preprinted arbitration clause, is no

longer just a luxury for the rich. It is an absolute necessity for

22

millions of people of much lesser means, including people

who are just trying to save some money for retirement

through a mutual fund, or seeking other means for growth of

modest assets—perhaps merely to keep up with inflation.

Arbitration agreements are everywhere, and a person may

have absolutely no choice but to sign one if (s)he wants to

invest any amount of money anywhere, beyond putting it in

the bank at 2-3 percent. “The average investor would be hard

put to find a brokerage that would accept his/her business

without a prior arbitration agreement.” itrati

183 A.D.2d 446,

448, 584 N.Y.S.2d 483, 485 (1992) (Asch, J., concurring).°

. “e This was the very reason why one judge of the Appellate

Division, in a recent case, suggested that the rule of

Stuart, Ine., 40 N.Y.2d 354, 386 N.Y.S.2d 831, 353 N.E.2d 793 (1976)

might be ripe for reexamination in light of changing times and

circumstances:

The four person majority in Garrity (supra, at

359) wrote, in pertinent part:

“Parties to arbitration agree to the substitution

of a private tribunal for purposes of deciding their

disputes without the expense, delay and rigidities of

traditional courts. If arbitrators were allowed to impose

punitive damages, the usefulness of arbitration would be

destroyed. It would become a trap for the unwary given

the eminently desirable freedom from judicial overview

of law and facts. It would mean that the scope of

determination by arbitrators, by the license to award

punitive damages, would be both unpredictable and

uncontrollable. It would lead to a Shylock principle of

doing business without a Portia-like escape from the

vise of a logic foreign to arbitration law.

(continued...)

23

*(...continued)

“In imposing penal sanctions in private

arrangements, a tradition of the rule of law in organized

society is violated. One purpose of the rule of law is to

require that the use of coercion be controlled by the

State [citation]. In a highly developed commercial and

economic society the use of private force is not the

danger, but the uncontrolled use of coercive economic

sanctions in private arrangements.” . . .

Note, even in Garrity (supra, at 359), the Court

explicitly recognized that: “In a highly developed

commercial and economic society the use of private

force is not the danger, but the uncontrolled use of

coercive economic sanctions in private arrangements.”

That is my precise concern with the present

rule. It appears that the present state of affairs, at least

in the securities field, where consent to arbitration of

disputes is now a sine qua non before the average

citizen can open an account at any brokerage, has

reversed the application of these principles enunciated

by the Court of Appeals. Before the United States

Supreme Court decided that an arbitration agreement in

an investor-broker contract was binding on the investor

(see, Shearson/American Express v McMahon, 482 US

220), the investor could proceed in arbitration and

waive any claim to punitive damages or bring suit in a

judicial forum where such a claim would be cognizable.

Since McMahon, this option has Seen largely

foreclosed. The average investor would be hard put to

find a brokerage that would accept his/her business

without a prior arbitration agreement. Accordingly,

arbitration has now become “a trap for the unwary”

investor. Under the present state of affairs, the danger

represented in “the uncontrolled use of coercive

economic sanctions in private arrangements” (supra, at

359) no longer refers to the ability of an arbitrator to

(continued...)

24

Still, arbitration is not of itself perceived as unfair to

investors—so long as the premise of

that no substantive rights are sacrificed in arbitration is

satisfied, and so long as customers are not later surprised by

“waivers” that appear nowhere in the preprinted arbitration

agreements they are obligated to execute. But when those

pillars fall down, so does the system of arbitration and

investor protection they support. The proper solution is not to

require every prospective investor to have an expensive out-

of-state lawyer at hand, ready to scour out-of-state caselaw to

figure out what the investor is agreeing to—or, in the

alternative, expect that investors must suffer unstated “hidden

traps” as the price they must pay for trying to stash away a

few dollars for their retirement.

Permitting such a system of “hidden traps” also

encourages serious overreaching by brokerage houses. In a

case similar to this one, the brokerage house strenuously

argued that “the sole reason for incorporating a New York

law provision was to preclude punitive damages awards.” J.

iti 17 Cal.App.4th 1083,

1093 n.9, 21 Cal. Rptr.2d 826, 832 n.9 (1993) (emphasis

added), cert denied, US. ,114S.Ct. 2182 (US. June

6, 1994). Since the brokerage house knew it was trying to

effect a waiver, it could have just put plain language in its

preprinted agreement: “No punitive damage awards are

permitted in an arbitration arising out of the customer’s

*(...continued)

impose punitive damages, but the inability of the

investor to recover for real, and in some cases, glaring

abuses.

25

accounts.” Instead, the brokerage house chose the “hidden

trap” method, by burying the attempted waiver within a

choice-of-law provision. Id., 17 Cal.App.4th at 1093 n.9, 21

Cal.Rptr.2d at 832 n.9. Federal courts need not and should

not enforce the Federal Arbitration Act in a way that tolerates

and encourages such intentional Overreaching, especially

given the much broader consequences discussed herein.

There are further special concerns with preprinted

brokerage house arbitration agreements. Such agreements are

often valueless to customers, because even if there is no

written agreement, the NASD and major stock exchanges all

have provisions requiring member firms and associated

persons to arbitrate customer disputes if the customer so

elects. NASD Code of Arbitration, Sec. 12(a); New York

Stock Exchange, Const. Art. XI and Rule 600: American

Stock Exchange Const., Art. VIII, sec. 1.’ In other words,

without the arbitration agreement, the customer would still

have the same right to arbitrate with a choice of arbitral

tribunals.

Thus, often it is only the brokerage house that gains

from a preprinted arbitration agreement. That would have

been true in the Mastrobuonos’ case as well, since Shearson

is a member of all major exchanges and the NASD, and

petitioners could have demanded arbitration before any of

those bodies with or without an arbitration agreement.

Perhaps such a one-sided “agreement” is now thought

to be the price a person must pay for putting money

somewhere other than in a bank. But that does not mean a

The rules of the major exchanges are similar to the NASD rules

and serve the same functions in arbitration. Ww

v. McCoy, 995 F.2d 649, 651 (6th Cir. 1993).

26

federal court should go beyond the agreement to arbitrate, and

read into the customer’s agreement a waiver of substantial

rights that is not clearly and specifically spelled out therein.

In fact, quite the opposite is true, even without

reference to the fact that the purported “waiver” is not based

on any language in the contract. Under the principles of D.H.

Overmyer Co, v. Frick Co., 405 U.S. 174, 187 (1972), a

contractual waiver should not be enforced if it is a contract

of adhesion, there is great disparity in the parties’ respective

bargaining power, and there is no consideration for the

waiver. Accord L.K. Comstock & Co. v. New York

Convention Center Dev’t Corp., 179 A.D.2d 322, 329, 584

N.Y.S.2d 472, 478 (1992).

Those are exactly the facts of this case. While absence

of consideration for a contractual waiver may be unusual, it

is the situation here, because respondents’ arbitration

clause—the vehicle by which respondents are claiming a

waiver of the right to punitive damages—gained petitioners

nothing they did not have anyway under the NASD, New

York Stock Exchange, and American Stock Exchange rules.

As a result, the sought-after waiver of the right to punitive

damages stemming directly from the arbitration clause in the

Customer’s Agreement should be unenforceable under an

Overmyer analysis as well.

3. Conclusion To Part II(B)

All of these principles are especially applicable in a

federal court. When a federal court is asked to interpret the

Federal Arbitration Act, it must apply federal common law,

since 9 U.S.C. § 2 “create[s] a body of substantive law of

arbitrability, applicable to any arbitration agreement within

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

27

Vv 460 U.S. 1, 25 (1983). And

under federal law, a person is not held to have waived a

substantive right unless (s)he knows (s)he is doing so.

This law should govern any invocation of the Federal

Arbitration Act as well. The claimed “waiver” should be held

not to exist, and should not be enforced by the federal courts.

If any doubts remained, they should be resolved in

favor of the arbitrators’ award. Indeed, it is arguable that the

award should be respected now, and the District Court did not

have subject matter jurisdiction to vacate the punitive

damages portion. Once a dispute is held arbitrable, questions

of procedure and !aw are for the arbitrators, especially under

broad arbitration provisions such as section 12 of the NASD

Code of Arbitration. Any ambiguity is resolved in favor of

arbitration.

Trustees of Stanford University, 489 U.S. 468, 485-86 (1989).

Here, the arbitrators considered respondents’ claims, and ruled

that punitive damages were awardable. Even if that were

legally erroneous, legal error is not a ground in 9 U.S.C. § 10

for vacating an arbitration award.

In any event, based on the principles in this section,

petitioners should not be held to have waived their right to

punitive damages based on the choice-of-law provision in the

Customer’s Agreement.

28

CONCLUSION

For these reasons, as well as those set forth by the

petitioners, AALP joins the petitioners in asking that the

judgment of the Court of Appeals be reversed.

Dated this 14th day of November, 1994.

Respectfully submitted,

American Association of Limited

Partners

5223 Wisconsin Ave. N.W.

Suite 306

Washington, D.C. 20015

Telephone: (202) 797-3763

Amicus Curiae

Michael B. Dashjian

3161 Bechelli Lane

Suite 202-B

Redding, California 96002

Telephone: (916) 221-8900

Counsel for Amicus Curiae

29

Sa al sal