Amicus Curiae Brief — Howsam v. Dean Witter Reynolds, Inc.

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No. 01-800 ; P,

Jn the Supreme Court of the Anitey States

: — dl: CL

KAREN HOWSAM, ETC., PETITIONER

DEAN WITTER REYNOLDS, INC.

ON WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE TENTH CIRCUIT

BRIEF FOR THE SECURITIES AND

EXCHANGE COMMISSION AS AMICUS CURIAE

SUPPORTING PETITIONER

THEODORE B. OLSON

Solicitor General

MEYER EISENBERG Counsel of Record

Deputy General Counsei EDWIN S. KNEEDLER

JACOB H. STILLMAN Deputy Solicitor General

Solicitor MATTHEW D. ROBERTS

MARK PENNINGTON Assistant to the Solicitor

Assistant General Counsel General ;

Securities and Exchange Department of Justice

Commiesion Washington, D.C. 20530-0001

Washington, D.C. 20549 (202) 514-2217

QUESTION PRESENTED

Petitioner and respondent have agreed to arbitrate “all

controversies * * * concerning or arising from” petitioner’s

securities accounts with respondent, including “the con-

struction, performance or breach of this or any other agree-

ment between us.” The arbitration agreement makes appli-

cable the rules of the arbitral forum selected by petitioner,

the National Association of Securities Dealers, Inc. (NASD).

The NASD rules provide, among other things, that the

“arbitrators shall be empowered to interpret and determine

the applicability of all” the rules. The question presented is

whether the arbitrator, rather than a court, is to decide

whether petitioner’s claims are barred by the NASD rule

that no claim is “eligible for submission to arbitration” by the

NASD if more than six years “have elapsed from the

occurrence or event giving rise to the” claim.

(I)

TABLE OF CONTENTS

Interest of the Securities and Exchange Commission ...........

SEIIIIIIID csenctcsctatasnsesnnnnscnsvennsesssnensnsnsnsnssnssescescsesssesnsseenscssenesssnesesee

SII, ‘s1ssscsnspunshenesssnnnsunsensssasensnsnnsnssusesngsassscests

Argument:

Whether petitioner’s claims are barred by the time

limit in NASD Rule 10304 is for the NASD arbitrator

IIIT ialetated cei ecerdetarictatnesnapnsnnnestqneemmmnanesnescesenenemensnetnensiece

A. When parties have agreed to arbitration, they

are presumed to intend that the arbitrator will

resolve their disputes, unless the disputed issue

TET sn rescnccesnsemnanensesnnesvesnmmensnsnensesnssesssecees

B. Whether a party has complied with an applicable

time limit on claim submission is not a question

LTTE

1. Arbitrability includes only the questions

whether the parties are bound by a valid

agreement to arbitrate and whether the

subject matter of the underlying dispute is

within that agreement ...............c.cscscscssesessseresessenees

2. Whether a party to an arbitration agreement

has complied with applicable time limits is

presumptively an issue for the arbitrator ..........

C. The presumption that the arbitrator is to decide

whether claims were submitted within appli-

cable time limits advances the purposes of the

I I crenpenemmnnsnsnemnennsnsensnnsesensesessens

D. NASD Rule 10304’s use of the phrase “eligible

for submission to arbitration” does not make the

Rule’s application a question of arbitrability ............

(III)

10

13

13

16

19

IV

TABLE OF CONTENTS—Continued: Page

E. The parties to this case agreed that the arbitrator

would decide whether claims are barred by the

time limit in NASD Rule 10804 oc ccccccccccecceeeeee 27

TE me IS nT i RE AP ee 30

TABLE OF AUTHORITIES

Cases:

AT&T Technologies, Inc. v. Communications Workers,

Sa ED tecetnnnitnnicntcsininerennteenntaaaiines 5, 6, 7,

9, 12, 13, 15, 16

Armco Employees Indep. Fed. v. AK Steel Corp.,

252 F.3d 854 (Gth Cir. 2001) .........c-cccscvssvesesssscssessesesseseesessess 23

Atkinson v. Sinclair Refining Co., 370 U.S. 238

GRIT cxsnssnnserzusssssessesenstsnnssanensecnsssnenncatesmsesenennsestmusnssetenens 13-14, 15

Automotive Employees Union, Local No. 618 v.

Town & County Ford, Inc., 709 F.2d 509 (8th

ee 23

Beer, Local Union No. 744 v. Metropolitan Distrib.,

Inc., 763 F.2d 300 (7th Cir. 1985) _ 23

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

693 F.2d 1023 (11th Cir. 1982) 23

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

Inc., 78 F.3d 474 (10th Cir. 1996) 5, 24, 29

Denhardt v. Trailways, Inc., 767 F.2d 687 (10th

Cir. 1985) 23

Edward D. Jones & Co. v. Sorrells, 957 F.2d 509

(7th Cir. 1992) 24, 29

FSC Sec. Corp. v. Freel, 14 F.3d 1310 (8th Cir.

1994) 29

First Options of Chicago, Inc. v. Kaplan, 514 US.

938 (1995) passim

General Drvers, Local Union 89 v. Moog Louisville

Warehouse, 852 F.2d 871 (6th Cir. 1988) 23

Glass v. Kidder Peabody & Co., 114 F.3d 446 (4th

Cir. 1997) 23

V

Cases—Continued: Page

Hanes Corp. v. Millard, 531 F.2d 585 (D.C. Cir.

1976) 19

International Union of Operating Eng’rs v. Flair

Builders, Inc., 406 U.S. 487 (1972) ..oceccscssssssssseeee 7, 18, 19, 28

John Wiley & Sons v. Livingston, 376 U.S. 543

fen - 7, 8, 13, 14,

16, 17, 18, 20, 22, 25

Kennecott Utah Copper Corp. v. Becker, 186 F.3d

DOO 0 ) 23

Lampf, Pleva, Lipkind, Prupis & Petigrow v.

Gilbertson, 501 U.S. 350 (1991) ......cccccccccecseeeeeeseneneneennnnens 26

Local 285, Serv. Employees Int'l Union v. Nonotuck

Res. Assoc., 64 F.3d 735 (1st Cir. 1995) ....... : 23

Local Union No. 370 v. Morrison-Knudsen Co.,

786 F.2d 1356 (9th Cir. 1986) 23

Martens v. Thomann, 273 F.3d 159 (2d Cir. 2001) .......... 23

Mastrobuono v. Shearson Lehman Hutton, Inc.,

514 US. 52 (1995) 11, 27, 28

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

62 F.3d 381 (11th Cir. 1995) 21, 24, 29

Mitsubishi Motors Corp. v. Soler Chrysler-

Plymouth, Inc., 473 U.S. 614 (1985) 12

Moseley v. Electronic & Missile Facilities, Inc., 374

U.S. 167 (1963) 14

Moses H. Cone Mem'l Hosp. v. Mercury Constr.

Corp., 460 U.S. 1 (1983) 11, 12, 16, 17, 19, 21

Nursing Home & Hosp. Union No. 434 v. Sky Vue

Terrace, Inc., 759 F.2d 1094 (3d Cir. 1985) 23

Oil Workers’ Int’l Union, Local 4-447 v. Chevron Co.,

815 F.2d 338 (5th Cir. 1987) 23

Office of Supply, Gov't of the Republic of Korea v.

New York Navigation Co., 469 F.2d 377 (2d Cir.

1972) 19

Painewebber Inc. v. Bybyk, 81 F.3d 1193 (2d Cir.

1996) 27, 28, 29

VI

Cases—Continued: Page

Painewebber Inc. v. Elahi, 87 F.3d 589 (1st Cir.

TN 20, 24, 27

Painewebber Inc. v. Hartmann, 921 F.2d 507

ES GUID cxznctccnscepnmennasenensnensemansinasnpetnnenseenmntetseas 25-26

Painewebber Inc. v. Hofmann, 984 F 2d 1372 (3d

Sn SED ceerrneneeenscesnssnstenseecsnmenmunmmeemmemennnm 21, 24, 25

Prima Paint Corp. v. Flood & Conklin Mfg., 388

ie SND crrernsesssrmeeeemmenn 11, 14, 15, 16, 21

Reconstruction Fin. Corp. v. Harrisons & Cross-

field, Ltd., 204 F.2d 366 (2d Cir.), cert. denied, 346

ED cereterscstnnssesentininntinatettnrnmainatetimepentanennnamn 19

Roney & Co. v. Kassab, 981 F.2d 894 (6th Cir.

GIDUIED corsascessscsssnsnvenssensenensnsesensscnesssensensess w- 24,26

Shearson/American Express Inc. v. McMahon,

482 U.S. 220 (1987) sosmusonsssssenesensonsmmsnasnensenmensmnsensseste 1

Smith Barney Shearson, Inc. v. Sechaven, 91

N.Y.2d 39 (1997) 6, 28, 29

United Steelworkers v. American Manufacturing

Fag Ge IEEE serenmmennnnsesemeennsiiemmnnnen 16

United Steelworkers v. Warrior & Gulf Navigation

Co., 363 U.S. 574 (1960) 12, 15, 19

Volt Info. Sciences, Inc. v. Board of Tr. of

Leland Stanford Junior Univ., 489 U.S. 468

(1989) 11

Washington Hosp. Cir. v. Service Employees Int'l

Union, Local 722, 746 F.2d 1503 (D.C. Cir. 1984) ........... 23

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

grounds, Rodriquez de Quijas v. Shearson/American

Express, Inc., 490 U.S. 477 (1989) ..ccccccccccececessesesesesereeeees 10

Statutes and rules:

Federal Arbitration Act, 9 U.S.C. 1 et seq. 2,6, 11

9 U.S.C. 2 11

9 U.S.C. 4 15

9 U.S.C. 10(a)(4) 10

Vil

Statutes—Continued: Page

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

et seq.: ;

EN 26

Te 26

TQ ,

§ 15(b)(8), 15 U.S.C. 780(D)(8) ...sesssssssseeessessssnneeersnseeeen 2

eC 1

National Association of Securities Dealers, Inc. Code

of Arbitration Procedure:

Rule 15 (former) .....-.-.-.-s-ssecesesesesesesesnsesnensnnnnnnnnsnensnnnenenenes 4

Rule 35 (former) ........:.-:-:-cssssssscssesnesessensnensensnensnsnnsnsnsnnnnes 4

Rule 10B01(a) .....o.cccscececesesssecsssvsssnsnersenensessssssnensnsansnensnenees | 9

Rule 10804 ...........-cccccceseeeeeeeeesenesnnennnesennsenenennnnnnnanennnnnns passim

Rutle 10324 .......c.ccsscessesssssssesernsenessensnnsnenees 4, 9, 10, 28, 29, 30

National Association of Securities Dealers, Inc. Rule

BLLO(L MA) .nceecececececsersssesscssseserersenenenssnsnensnnsnsnsnsnensnnensnanennenaes 10,17

New York Stock Exchange Rule 608 ..............::::::s:sseseeereres 4

Pacific Exchange Rule 12.4 ............:s:sssssssssssnssneenseneennennnennnens 4

Miscellaneous:

59 Fed. Reg. (1994):

Pp. BD,BTB ...cseccerveecesneeseensnneversnnssssnesnsnnecssnusennnnssnnnsensnnessnnnnsssennes 24

Pp. BO,BT4 ....cccsrcrrerserenesensssssssrsnsenseesensnssnsnnsnenvanssnsensanansanenanasnness 24

63 Fed. Reg. (1998):

p. 588 21

P. SGD ..rrcsccvsessssesssessnsssnsnnnessnessnessnsessnecsnnennnnensnssnnnensnessnnsaqnnesssnss 24

Pp. SD .nasscsssccnssesnneersnneecnnsnnensnnssrnnessnnsssnnesssnnsennnsccnnnsnnsssnnnnsssnnsee 21

Pp. SGD .nesccsecssneeesnseeesnsesencnnnessnnsssnnsssnncssnussnnnecsnnssnnnnssnnsssnnessennse 24

Pp. FDA .crescctecsrneesneessnsescnenesssnssnnssnnecsnnessnscnnnecnnnecsnsssnnsssnsssenssesees 26

67 Fed. Reg. (2002):

P. 19,464 ..n.ecrvecssneecssneeeesennsssnnsesnnsssnsscsnnenssneensnnsnnnnssnerennnnssstees 4, 28

P. 19,466 ....ccseecsneeessnseesessneessnnecsnessnssssnesennnesnnnnensnnsssnnscnnnnssssees 4, 29

H.R. Rep. No. 96, 68th Cong., ist Sess. (1924) spesneceunueneientes 11

VIII

In the Supreme Court of the United States

“Miscellaneous—Continued:

Page

Black, Barbara, Securities Arbitration Is Not Su |

, | pposed

To Be So Complicated: Arbitrability, the Eligibility seecagsiont

Rule, And Whose Law Decides (to be published in KAREN Hows, ETC., PETITIONER

Securities Regulation Law Journal) (Summer U

RE ETD ES : )

National Association of Securities Dealers, Inc., What : BRAN WHER SETS, _

is NASD Dispute Resolution, Inc., available at

a <http//www.nasdadr.com/whatdr.asp#nasd_dispute> — 2 TO THE UN ITED STATES: COURT OF APPEALS

oser, Norman, Making Securities Arbitration Work, FOR THE TE N TH CIRCUIT

50 SMU L. Rev. 277 (1996) ...........ceccseserssseecsseees enens 4, 20, 22 ’,

—_— Industry Conference on Arbitration, _ BRIEF FOR THE SECURITIES AND

eventh Re July 2001) .......

eee 4 EXCHANGE COMMISSION AS AMICUS CURIAE

SUPPORTING PETITIONER

INTEREST OF THE SECURITIES AND

EXCHANGE COMMISSION

Under Section 19 of the Securities Exchange Act of 1934

(Exchange Act), 15 U.S.C. 78s, the Securities and Exchange

Commission (SEC) oversees and approves the rules of

the National Association of Securities Dealers, Inc. (NASD),

and other securities industry self-regulatory organizations

(SROs), such as the New York Stock Exchange (NYSE) and

the American Stock Exchange (AMEX), to ensure that the

rules adequately protect the rights of customers. See

Shearson/American Express Inc. v. McMahon, 482 U.S. 220,

233-234 (1987). The SEC has a substantial interest in ensur-

ing that SRO rules governing the arbitration of customer

disputes are interpreted correctly, so that arbitration is fair

and not unnecessarily complex, time consuming or expen-

sive.

1 The NASD is registered with the SEC as a national securities

association under Section 15A of the Exchange Act, 15 U.S.C. 780-3. It is

(1)

2

The question presented in this case is whether NASD

Rule 10304, which imposes a time limit for submission of

claims to arbitration by the NASD, is to be applied by the

arbitrator, subject to judicial review as provided in the

Federal Arbitration Act, 9 U.S.C. 1 et seq., or is instead to be

applied by a court in advance of arbitration. The holding of

the court of appeals that the rule is to be applied by a court

in advance of arbitration imposes a costly and time-con-

suming judicial proceeding antecedent to arbitration that is

not required by the SEC-approved NASD rules or by the

parties’ arbitration agreement. The SEC therefore has a

strong interest in the correct resolution of the question

presented.

STATEMENT

1. Petitioner Karen Howsam was a customer of respon-

dent Dean Witter Reynolds, Inc., a securities broker-dealer

from the spring of 1986, when she purchased interests in four

limited partnerships, until late 1994, when she closed her

accounts. Pet. App. 3. In March 1997, petitioner commenced

an arbitration proceeding against respondent pursuant to

the arbitration clause in her customer agreement. /d. at 4.

That agreement, which was drafted by respondent, provides

in relevant part:

The Client agrees that all controversies between the

Client and Dean Witter * * * concerning or arising

the only registered national securities association. Subject to comprehen-

sive oversight by the SEC, the NASD is responsible for regulation of

those who sell securities in the over-the-counter market. As a result of

Section 15(b)(8) of the Exchange Act, 15 U.S.C. 780(b)(8), broker-dealers

must belong to the NASD unless they execute transactions only on a

registered national exchange. In the summer of 2000, the component of

the NASD that administers alternative dispute resolution was incor-

porated as a separate subsidiary, NASD Dispute Resolution, Inc. See

<http://www.nasdadr.com/whatdr.asp#nasd_dispute>. For simplicity, this

brief refers to both entities as the NASD.

3

from (i) any account maintained with Dean Witter by the

Client; (ii) any transaction involving Dean Witter and the

Client, * * * or (iii) the construction, performance or

breach of this or any other agreement between us * * *

shall be determined by arbitration before any self-

regulatory organization or exchange of which Dean

Witter is a member. The Client may elect which of these

arbitration forums shall hear the matter.

Access Client Services Agreement Between Karen Howsam

and Dean Witter Reynolds, Inc. § 19 (Aug. 26, 1992) (1992

Agreement). The agreement also provides that it “shall be

construed and enforced in accordance with the laws of the

State of New York without reference to choice of law

doctrine.” Id. 4 18.

Petitioner alleges that respondent made material mis-

representations about her investments before she purchased

them and that the investments were unsuitable for someone

with her investment needs. Pet. App. 4. She further alleges

that respondent continued to inform her that the invest-

ments were sound, despite indications to the contrary, and

that the misinformation impeded her understanding of the

true nature of the investments until 1994. /bid.

Petitioner initiated arbitration before the NASD by

executing a Uniform Submission Agreement, as required by

the NASD. Pet. App. 4. The Submission Agreement incor-

porates the NASD Code of Arbitration Procedure (NASD

Code) by providing that the parties “hereby submit the

present matter in controversy, as set forth in the attached

statement of claim, * * * to arbitration in accordance with

the Constitution, By-Laws, Rules, Regulations, and/or Code

of Arbitration Procedure of the sponsoring organization.”

Uniform Submission Agreement { 1 (Apr. 16, 1997) (1997

Agreement). Although only petitioner signed the 1997

Agreement, respondent’s signature was unnecessary: the

1992 Agreement gave petitioner the power to select the

4

arbitral forum, and the 1997 Agreement was a necessary

consequence of petitioner’s selection of the NASD. See Pet.

App. 5.

The NASD Code contains a provision entitled “Time Limi-

tation Upon Submissions,” which provides that “[nJo dispute,

claim or controversy shall be eligible for submission to

arbitration under this Code where six (6) years have elapsed

from the occurrence or event giving rise to the act or

dispute, claim or controversy.” NASD Rule 10304. Another

provision of the NASD Code provides that the “arbitrators

shall be empowered to interpret and determine the appli-

cability of all provisions under [the NASD Code.]” NASD

Rule 10324.”

2. Respondent filed an action in the United States

District Court for the District of Colorado in which respon-

dent requested a declaratory judgment that petitioner’s

2 The NASD Code was renumbered in May 1996. See Norman Poser,

Making Securities Arbitration Work, 50 SMU L. Rev. 277, 291 n.88 (1996).

Current Rule 10304 was formerly Rule 15, and current Rule 10324 was

formerly Rule 35. Jd. at 291 & n.88, 334 & n.349. The SEC is considering a

proposal by the NASD to revise Rules 10304 and 10324 to provide, among

other things, that the NASD Director of Arbitration, rather than either a

court or an arbitrator, will determine whether a claim is barred by the six-

year time limit in Rule 10304. See 67 Fed. Reg. 19,464 (2002). The dead-

line for submission of comments on the proposed rule changes was May 10,

2002, and the SEC is currently reviewing the comments received. Al-

though adoption of the new rules would reduce the future importance of

this case, the proposed rule changes would not be retroactive, see id. at

19,466, and therefore they would not affect the outcome of this case.

Moreover, the case would still be of some continuing significance because

the proposed rules would apply only to arbitrations before the NASD and

would not change rules similar to the current NASD Rule 10304 that are

in effect at other SROs. See, e.g., NYSE Rule 603; Pacific Exchange Rule

12.4. Although the NASD conducts about 90% of SRO arbitrations, other

SROs also conduct a substantial number of arbitrations. See Securities

Industry Conference on Arbitration, Eleventh Report 111, 113, 117, 119,

121, 125 July 2001).

Ee ROOT ET

5

claims are untimely under NASD Rule 10304 and thus not

eligible for arbitration before the NASD. Pet. App. 5-6.

Respondent also sought to enjoin the arbitration pending

resolution of its court action. /d. at 6.

Petitioner moved to dismiss respondent’s district court

action. Petitioner contended that the parties had agreed

that the arbitrator would decide all controversies arising out

of her securities accounts with respondent and the agree-

ments concerning those accounts. Pet. App. 6. Respondent

argued that compliance with NASD Rule 10304 concerns the

arbitrability of the dispute, and, therefore, under this

Court’s precedents, the issue is for the courts to decide,

unless the parties have clearly and unmistakably manifested

an intent to submit the issue to the arbitrator. Furthermore,

respondent contended, its agreement with petitioner does

not contain a sufficiently clear and unmistakable expression

of intent on that issue, so Rule 10304 should be applied by

the courts. Jd. at 6-7.

The district court ruled that the broad language of the

arbitration provision, which, as noted above, provides for the

arbitration of “all controversies” between the parties, in-

cluding “construction” of the arbitration agreement, author-

izes the arbitrator to apply the six-year rule to the facts of

petitioner’s claims. Pet. App. 31-36. The court therefore

granted the motion to dismiss for lack of subject matter

jurisdiction and entered judgment for petitioner. Jd. at 37-

38.

3. The United States Court of Appeals for the Tenth Cir-

cuit reversed the judgment of the district court. Pet. App. 1-

30. Based on its analysis of this Court’s decisions in AT&T

Technologies, Inc. v. Communications Workers, 475 U.S.

643 (1986), and First Options of Chicago, Inc. v. Kaplan, 514

U.S. 938 (1995), as well as the Tenth Circuit’s prior decision

in Cogswell v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,

78 F.3d 474 (1996), the court of appeals concluded that the

6

question whether petitioner’s claims are barred by the time

limit in NASD Rule 10304 is an element of the arbitrability

of her claims. Pet. App. 16-17. The court therefore applied

the principle that the issue of arbitrability is to be decided by

the courts unless the parties have clearly and unmistakably

provided otherwise. Jd. at 17 (quoting First Options, 514

US. at 944 (citing AT&T, 475 U.S. at 649)).

The court of appeals rejected petitioner’s contention that,

because the agreement contains a choice-of-law clause pro-

viding that the agreement is subject to New York law, the

court was bound by the interpretation of the NASD rules

and a similar arbitration clause that the New York Court of

Appeals adopted in Smith Barney Shearson Inc. v. Sa-

charow, 91 N.Y.2d 39 (1997). Pet. App. 19-24. Instead,

relying on its own prior decision in Cogswell, the Tenth Cir-

cuit concluded that neither the broad arbitration provision in

the customer agreement nor the applicable provisions of the

NASD Code clearly and unmistakably provide that the

arbitrator will decide whether claims are barred by NASD

Rule 10304. Jd. at 18-19 & n.4, 24-28.

SUMMARY OF ARGUMENT

The parties’ arbitration agreement, the NASD rules that

it makes applicable, and the policies of the Federal Arbitra-

tion Act, 9 U.S.C. 1 et seq., all indicate that the arbitrator,

rather than the a court, is to decide whether petitioner’s

claims were filed within the time limit prescribed by NASD

Rule 10304. Because arbitration is generally a matter of

contract between the parties, whether the arbitrator or a

court decides a particular question is determined by the

parties’ agreement. In ascertaining what the parties have

agreed, courts generally apply ordinary principles of state

contract law. Federal law, based on the Federal Arbitration

Act, however, imposes some constraints.

The Federal Arbitration Act embodies a federal policy

favoring enforcement of arbitration contracts and ensuring

7

that arbitration, when it has been selected by parties to a

contract, is speedy and not subject to delay and obstruction

in the courts. When arbitration agreements are subject to

the Act, as the agreement in this case is, federal law

generally requires that any doubts concerning the scope of

arbitrable issues be resolved in favor of arbitration. There

is, however, an exception to the presumption in favor of

having the arbitrator resolve disputed issues when the issue

in dispute is arbitrability itself. In that circumstance, a con-

trary presumption applies, and a court may conclude that the

parties agreed to arbitrate arbitrability only if there is clear

and unmistakable evidence that they did so. See First

Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995).

Because of that contrary presumption, a broad view of the

questions encompassed within arbitrability could undermine

the Federal Arbitration Act’s fundamental goals of enforcing

arbitration agreements and preventing delay and obstruc-

tion of arbitraticn proceedings in the courts. This Court has

therefore been careful to construe arbitrability narrowly.

The Court’s decisions limit arbitrability to two questions

central to whether the parties have agreed to subject them-

selves to the power of an arbitrator: whether the parties are

bound by a valid arbitration agreement, and whether the

subject matter of their underlying dispute falls within that

agreement. E.g., First Options, supra, AT&T Tech. ine. v.

Communications Workers, 475 U.S. 643 (1986). Ar ~rabil-

ity does not include whether the parties have complied with

contractual and other time limits on the submission of claims.

Those issues are instead subject to the general presumption

in favor of resolution by the arbitrator. See John Wiley &

Sons v. Livingston, 376 U.S. 543, 555-559 (1964); Interna-

tional Union of Operating Eng’rs v. Flair Builders, Inc., 406

U.S. 487, 491-492 (1972).

The presumption that the arbitrator is to resolve ques-

tions of timeliness advances the purposés behind the Federal

8

Arbitration Act. When the parties enter into a valid arbitra-

tion agreement, and the agreement covers the subject

matter of their underlying dispute, then they most likely

intend that the arbitrator will resolve all issues that arise

concerning their dispute. If courts resolved timeliness ques-

tions in proceedings antecedent to arbitration, courts would

be required to delve into the facts of the underlying disputes,

because resolving timeliness questions frequently requires

interpretation and factual assessment of the underlying

claims. Requiring such extensive mini-trials in advance of

arbitration would frustrate the Federal Arbitration Act’s

goal that parties to arbitration not face lengthy and costly

delays in court. Indeed, the costs of antecedent judicial pro-

ceedings could lead some claimants to forgo their claims

entirely. .

NASD Rule 10304 imposes a time limit on submission of

claims, and it therefore presents not a question of arbitrabil-

ity but an ancillary procedural question that is presump-

tively to be decided by the arbitrator. That conclusion holds

true even though Rule 10304 is phrased in terms of whether

a claim is “eligible for submission -to arbitration.” This

Court’s precedents and the policies they reflect do not sup-

port treating a timeliness requirement as an issue of arbi-

trability merely because the timeliness requirement is

phrased in certain language. See John Wiley, 376 U.S. at

555-559.

Because NASD Rule 10304 does not present an arbitrabil-

ity issue, the court of appeals erred in presuming that a

court is to apply the rule in the first instance unless the

parties clearly and unmistakably provided otherwise. The

court of appeals should instead have applied ordinary princi-

ples of state contract law, supplemented by the general fed-

eral law presumption in favor of dispute resolution by the

arbitrator. Under those principles it is clear that the parties

9

agreed that the arbitrator would decide whether petitioner's

claims are timely under Rule 10304. .

The arbitration agreement contains a broad arbitration

clause that provides for arbitration of “all controversies”

between the parties, including controversies about construc-

tion or performance of the agreement. The agreement also

incorporates all the NASD arbitration rules, which include

both the time limit in NASD Rule 10304 and a rule stating

that the arbitrator is “empowered to interpret and deter-

mine the applicability of all” the rules. NASD Rule 10324.

Thus, if the agreement is interpreted using the presumption

favoring arbitration, there can be no doubt that it provides

for the arbitrator to interpret and apply Rule 10304 in the

first instance. Indeed, the agreement clearly and unmistaka-

bly provides for the arbitrator to apply Rule 10304 even if

the contrary presumption against the arbitration of arbitra-

bility were applicable.

ARGUMENT

WHETHER PETITIONER’S CLAIMS ARE BARRED BY

THE TIME LIMIT IN NASD RULE 10304 IS FOR THE

NASD ARBITRATOR TO DECIDE

Arbitration is generally “a matter of contract between the

parties.” First Options of Chicago, Inc. v. Kaplan, 514 U.S.

938, 943 (1995) (citing inter alia AT&T Tech., Inc. v. Com-

munications Workers, 475 U.S. 643, 649 (1986)).* Therefore,

3 Petitioner sought arbitration pursuant to an arbitration agreement

with respondent, and most arbitrations arise from arbitration agreements.

This brief therefore analyzes the question presented under the legal

framework governing arbitration by agreement of the parties. The rules

of the NASD, however, give customers the right to demand arbitration of

disputes with NASD member firms even absent an arbitration agreement

between the customer and the firm. See NASD Rule 10301(a). The

NASD rules further prohibit customer agreements from including pro-

visions that limit or contradict the rules of any SRO or that limit the

ability of customers to file claims in arbitration. See NASD Rule

10

whether a particular dispute between the parties to an

arbitration agreement is decided in the first instance by the

arbitrator or by a court depends on the parties’ agreement.

If the parties have agreed to submit the issue to arbitration,

then the arbitrator decides the issue. If the parties have not

agreed to submit the issue to arbitration, then the court

decides the issue. See First Options, 514 U.S. at 943. Here,

the parties’ agreement (including the NASD rules of arbitra-

tion that it makes applicable), interpreted with due regard

for the policies underlying the Federal Arbitration Act,

provides that the arbitrator, not a court, is to decide in the

first instance whether petitioner’s claims are barred by the

time limit in NASD Rule 10304.

A. When Parties Have Agreed To Arbitration, They Are

Presumed To Intend That The Arbitrator Will Resolve

Their Disputes, Unless The Disputed Issue Is Arbi-

trability Itself

_When deciding whether the parties have agreed to arbi-

trate a certain matter, courts generally apply ordinary

principles of state contract law. See First Options, 514 U.S.

3110(f)(4). As discussed below, one of the NASD rules also clearly pro-

vides that arbitrators are authorized to apply the other NASD rules,

including the time limit in NASD Rule 10304. See pp. 28-30, infra

(discussing NASD Rule 10324). Thus, even if this case were governed

solely by the NASD rules rather than by the terms of the parties’

arbitration agreement, the arbitrator, rather than a court, would decide

whether claims had been submitted in compliance with Rule 10304’s time

limit.

‘ Arbitrators’ decisions on the time-limit issue, like their decisions on

the merits of underlying disputes, are subject to judicial review upon con-

clusion of the arbitration to ensure, among other things, that the arbi-

trators did not “exceed[] their powers,” 9 U.S.C. 10(a)(4), or act in

“manifest disregard” of the law, see First Options, 514 U.S. at 942

(quoting Wilko v. Swan, 346 U.S. 427, 436-437 (1953), overruled on other

grounds, Rodriguez de Quijas v. Shearson/American Express, Inc., 490

U.S. 477 (1989)).

11

at 944; Mastrobuono v. Shearson Lehman Hutton, Inc., 514

U.S. 52, 62-63 & n.9 (1995); Volt Info. Sciences, Inc. v. Board

of Tr. of Leland Stanford Junior Univ., 489 U.S. 468, 475-476

(1989). Federal law, however, imposes some constraints on

the application of state law. See First Options, 514 U.S. at

944-945. The federal law principles flow from the Federal

Arbitration Act, 9 U.S.C. 1 et seqg., which “creates a body of

federal substantive law establishing and regulating the duty

to honor an agreement to arbitrate.” Moses H. Cone Mem'l

Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 25 n.32 (1983).

The Federal Arbitration Act “is a congressional declara--

tion of a liberal federal policy favoring arbitration agree-

ments.” Moses H. Cone Mem’ Hosp., 460 U.S. at 24. The

Act, which applies broadly to arbitration agreements con-

cerning “any maritime transaction or a contract evidencing a

transaction involving commerce,” provides that such agree-

ments “shall be valid, irrevocable, and enforceable, save

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

tion of any contract.” 9 U.S.C. 2. The Federal Arbitration

Act’s principal purposes are “to overrule the judiciary’s long-

standing refusal to enforce agreements to arbitrate” and to

“ensur{e] that private arbitration agreements are enforced

according to their terms.” Volt Info. Sciences, Inc., 489 U.S.

at 478. The Act also evinces an “unmistakably clear congres-

sional purpose that the arbitration procedure, when selected

by the parties to a contract, be speedy and not subject to

delay and obstruction in the courts.” Prima Paint Corp. v.

Flood & Conklin Mfg. Co., 388 U.S. 395, 404 (1967). See

H.R. Rep. No. 96, 68th Cong., Ist Sess. 2 (1924) (noting that

arbitration can eliminate “the costliness and delays of

litigation”).

For arbitration agreements covered by the Act, such as

the agreement in this case, the “Act establishes that, as a

matter of federal law, any doubts concerning the scope of

arbitrable issues should be resolved in favor of arbitration,

12

whether the problem at hand is the construction of the

contract language itself or an allegation of waiver, delay, or a

like defense to arbitrability.” Moses H. Cone Mem’! Hosp.,

460 U.S. at 24-25. See also First Options, 514 U.S. at 944-

945. Thus, “(a)n order to arbitrate the particular [dispute]

should not be denied unless it may be said with positive

assurance that the arbitration clause is not susceptible of an

interpretation that covers the asserted dispute.” AT&T, 475

U.S. at 650 (quoting United Steelworkers v. Warrior & Gulf

Navigation Co., 363 U.S. 574, 582-583 (1960)).

The presumption in favor of having the arbitrator resolve

disputed issues both advances the federal policy favoring

arbitration and reflects the likely intent of the parties. See

First Options, 514 U.S. at 945; Mitsubishi Motors Corp. v.

Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626 (1985).

“(WJhen the parties have a contract that provides for arbi-

tration of some issues,” they “likely gave at least some

thought to the scope of arbitration.” First Options, 514 U.S.

at 945. Therefore, “given the law’s permissive policies in

respect to arbitration, * * * thelaw * * * insist[s] upon

clarity before concluding that the parties did not want to

arbitrate a related matter.” Jbid.

There is, however, an exception to the general presump-

tion that the parties have agreed that any disputed issue will

be resolved by the arbitrator. When the issue to be resolved

is “arbitrability” itself—whether the parties “agreed to

arbitrate” one or more underlying disputes, the general pre-

sumption does not apply. First Options, 514 U.S. at 942, 944-

945. Instead, the parties are presumed to intend that the

courts, rather than the arbitrator, will decide the question of

arbitrability. “Courts should not assume that the parties

agreed to arbitrate arbitrability unless there is ‘clea{r] and

unmistakabl[e]’ evidence that they did so.” Jd. at 944 (quot-

ing AT&T, 475 US. at 649). See Warrior & Gulf, 363 U.S. at

583 n.7.

13

The Court has explained that the reason for the pre-

sumption against arbitration of arbitrability is that the

question who should decide arbitrability is “rather arcane.”

First Options, 514 U.S. at 945. “A party often might not

focus upon that question,” and, therefore, a presumption that

the arbitrator has the power to decide arbitrability “might

too often force unwilling parties to arbitrate a matter they

reasonably would have thought a judge, not an arbitrator,

would decide.” /bid.

B. Whether A Party Has Complied With An Applicable

Time Limit On Claim Submission Is Not A Question Of

Arbitrability

As explained above, classifying a dispute as one about

arbitrability not only exempts the dispute from the general

presumption in favor of arbitration, but also subjects it to a

contrary presumption against arbitration. As a result, a

broad view of the questions encompassed within the concept

of arbitrability could undermine the Federal Arbitration

Act’s fundamental goals of enforcing arbitration agreements

and protecting the arbitration procedure from delay and

obstruction in the courts. Mindful of that concern, this Court

has construed arbitrability narrowly.

1. Arbitrability includes only the questions whether

the parties are bound by a valid agreement to

arbitrate and whether the subject matter of the

underlying dispute is within that agreement

The Court has used a variety of different formulations to

describe arbitrability. See, e.g., First Options, 514 U.S. at

942 (“whether [the parties] agreed to arbitrate the merits” of

their dispute); AT&T, 475 U.S. at 649 (whether the “agree-

ment creates a duty for the parties to arbitrate the particu-

lar grievance”); John Wiley & Sons v. Livingston, 376 U.S.

543, 547 (1964) (whether the party “is bound at all by the

agreement’s arbitration provision” and whether the party

“agreed to arbitrate disputes of a particular kind”), Atkinson

14

v. Sinclair Refining Co., 370 U.S. 238, 241 (1962) (“whether

or not the [party] was bound to arbitrate, as well as what

issues it must arbitrate”). A review of the Court’s decisions

reveals that the Court has considered disputes to concern

arbitrability only when they have involved one of two funda-

mental questions: (1) whether the parties are bound by a

valid agreement to arbitrate; and (2) whether the subject

matter of the underlying dispute falls within that agreement.

Examples of cases that have involved the question

whether the parties are bound by a valid agreement to arbi-

trate include First Options, John Wiley, and Prima Paint.

The arbitrability issue in First Options was whether a couple

was bound to arbitrate a dispute with a securities clearing

firm when only the husband’s wholly-owned trading firm and

not the couple had signed an arbitration agreement. See 514

U.S. at 940-941. Similarly, the arbitrability issue in John

Wiley was whether John Wiley was bound by an arbitration

agreement to which another corporation, with which John

Wiley merged, had agreed before the merger. See 376 U.S.

at 546-547.

Prima Paint involved the question whether a consulting

agreement that included an arbitration clause had been

induced by fraud. 388 U.S. at 402. The Court held that that

question should not be decided by the courts, because the

fraud was not alleged to have induced the arbitration pro-

vision itself but rather the contract as a whole. Jd. at 403-

404. In so holding, however, the Court stated that, if the

claim were fraud in the inducement of the arbitration clause

itself, then that issue would be resolved by the courts. See

ibid. See also Moseley v. Electronic & Missile Facilities

Inc., 374 U.S. 167 (1963). ,

. Cases that have involved the question whether the sub-

ject matter of the underlying dispute is within the arbitra-

tion agreement include AT&T, Warrior & Gulf, and Atkin-

son. In AT&T, the arbitrability question was whether the

15

decision to lay off workers was subject to arbitration or was

instead an exercise of management functions that were ex-

pressly exempt from arbitration under the agreement. See

475 U.S. at 644-646. Similarly, the arbitrability issue in

Warrior & Gulf was whether the decision to contract out

certain work was subject to arbitration. See 363 U.S. at 583-

585. In Atkinson, the arbitrability issue was whether, under

an arbitration clause that provided for the arbitration of

“individual or local employee or local committee grievances,”

a company was bound to arbitrate its claim for damages

against the union for breach of its promise not to strike. See

370 U.S. at 241-243.

Defining arbitrability to include such questions—which

involve the fundamental issue whether the parties have

agreed to subject themselves to the power of an arbitrator—

preserves for the courts the important function of prevent-

ing parties who have not consented to arbitration from being

forced to submit to it. This Court has been careful, however,

not to extend the definition of arbitrability so far that it

interferes with the policies underlying the Federal Arbitra-

tion Act.

That caution explains why the Court concluded in Prima

Paint that the question whether there was fraud in the in-

ducement of a business contract that includes an arbitration

clause should be decided by the arbitrator even though the

question whether the arbitration clause itself was induced by

fraud should be decided by the courts. The Court explained

that, under the Federal Arbitration Act, a federal court is

instructed to order arbitration to proceed once it is satisfied

that “the making of the agreement for arbitration or the

failure to comply (with the arbitration agreement) is not in

issue.” 388 U.S. at 403 (quoting 9 U.S.C. 4). The Court also

noted that its holding advanced the Federal Arbitration

Act’s goal of ensuring that “the arbitration procedure, when

16

selected by the parties to a contract, be speedy and not

subject to delay and obstruction in the courts.” Jd. at 404.

In a similar vein, the Court has held that courts must

guard against ruling on the merits of the underlying claim

when deciding whether the parties have agreed to submit a

particular grievance to arbitration. AT&T, 475 U.S. at 649.

If questions of arbitrability required the courts to delve

deeply into the facts of the underlying dispute, then prelimi-

nary adjudication of arbitrability issues could interfere with

“Congress’ clear intent, in the Arbitration Act, to move the

parties to an arbitrable dispute out of court and into arbi-

tration as quickly and easily as possible.” Moses H. Cone

Mem’ Hosp., 460 U.S. at 22. In light of that concern, the

Court has held that even the question whether a claim is so

frivolous that it is not subject to arbitration is presumptively

for the arbitrator rather than the courts to decide. See

United Steelworkers v. American Mfg. Co., 363 U.S. 564

(1960).

2. Whether a party to an arbitration agreement has

complied with applicable time limits is presump-

tively an issue for the arbitrator

Similar considerations have led the Court to make clear

that, when the subject matter of the underlying dispute

between the partirs is arbitrable, “the question whether

‘procedural’ conditions to arbitration have been met” is

presumptively for the arbitrator to decide. See John Wiley,

376 U.S. at 556-558. The Court’s decisions thus establish

that questions concerning compliance with contractue] ex-

haustion requirements and time limits, as well as questions

about the applicability of extrinsic time limitations such as

laches, are not issues of arbitrability that the parties are

presumed to have intended that the courts would decide.

In John Wiley, after holding that whether the obligation

to arbitrate survived the merger was an arbitrability issue

to be decided by the courts, 376 U.S. at 546-551, the Court

<r cee me roe +

17

considered “the question of so-called ‘procedural arbitrabil-

ity,’” id. at 555. John Wiley contended that it was not re-

quired to arbitrate because the union had not invoked the

informal grievance procedures that the arbitration agree-

ment imposed as a prerequisite to arbitration. /d. at 555-556.

The company also contended that the union had not complied

with the agreement’s requirement that the union provide

notice of any grievance within four weeks after its occur-

rence or latest existence. Jd. at 556 n.11. The Court held

that, “[o]nce it is determined * * * that the parties are

obligated to submit the subject matter of a dispute to arbi-

tration, ‘procedural’ questions which grow out of the dispute

and bear on its final disposition should be left to the arbi-

trator.” Id. at 557.° .

The Court reasoned that whether procedural prerequi-

sites apply, whether they have been followed or excused, and

whether the unexcused failure to follow them bars arbitra-

tion “cannot ordinarily be answered without consideration of

the merits of the dispute which is presented for arbitration.”

376 U.S. at 557. The Court thought “{i]t would be a curious

rule which required that intertwined issues of ‘substance’

and ‘procedure’ growing out of a single dispute and raising

the same questions on the same facts had to be carved up

between two different forums, one deciding after the other.”

5 The Court did not address whether the parties to an arbitration

agreement could, in their agreement, override the rule that the arbitrator,

not the courts, decide whether time limits and other procedural precondi-

tions to arbitration have been satisfied. Because arbitration is fundamen-

tally “a matter of contract between the parties,” First Options, 514 US. at

943, there is no reason, as a general matter, to conclude that the parties

could not do so, although any doubts about the parties’ intent would be

resolved in favor of the arbitrator’s deciding the time limit issue. See

Moses H. Cone Mem’ Hosp., 460 U.S. at 24-25. As noted above, however,

the NASD rules prohibit customer agreements from restricting or con-

tradicting the rules of any SRO or limiting a customer's right to file a

claim in arbitration. See note 3, supra (discussing NASD Rule 3110(f)(4)).

18

Ibid. The Court also noted that “judicial proceedings pre-

liminary to arbitration” present “opportunities for deliberate

delay and the possibility of well-intentioned but no less

serious delay” occasioned by the separation of the “proce-

dural” and “substantive” elements of a dispute. Jd. at 558.

Indeed, antecedent judicial proceedings not only delay reso-

lution of the underlying dispute but impose increased costs

on the parties, a result that is contrary to the very reasons

that the parties agreed to arbitration in the first place—to

increase the speed and decrease the cost of resolving their

disputes. [bid.

Similarly, in International Union of Operating Engineers

v. Flair Builders, Inc., 406 U.S. 487 (1972), the Court held

that whether arbitration was barred by laches was a ques-

tion for the arbitrator to decide because the agreement

called for arbitration of “any difference” between the parties.

The Court noted that the court is responsible for deter-

mining “whether a union and employer have agreed to

arbitration” as well as “the scope of the arbitration clause.”

Id. at 491. Once it was determined, however, that the

parties had signed an agreement to arbitrate “any differ-

ence,” then “a claim that particular grievances are barred by

laches is an arbitrable question under the agreement.” Jd. at

491-492.

The Court based its holding in Flair Builders, Inc. on the

conclusion that the parties had agreed to arbitrate the issue

of laches rather than on the principle established in John

Wiley that, if the subject matter of the underlying dispute is

subject to arbitration, ancillary procedural questions should

also be decided by the arbitrator. See 406 U.S. at 490-491

(reserving question whether John Wiley principle applies

only to procedural prerequisites imposed by the arbitration

agreement and not to extrinsic limitations). Notably, how-

ever, in determining whether the parties had agreed to

arbitrate the issue of laches, the Court did not require a

+ peter t

19

“clear” indication that the parties had so agreed. See ibid.

The Court thus did not treat the issue of laches as presenting

a question of arbitrability that is presumptively for the

courts to decide. Cf. Warrior & Gulf, 363 U.S. at 583 n.7

(issue of arbitrability is decided by courts absent “clear

demonstration” that parties intended the contrary).

In Moses H. Cone Memorial Hospital, supra, the Court

once again confirmed that the presumption “in favor of arbi-

tration” applies “whether the problem at hand is the con-

struction of the contract language itself or an allegation of

waiver, delay, or a like defense to arbitrability.” 460 U.S. at

25 (emphasis added). Among the cases that the Court cited

in support of that proposition was a decision by the United

States Court of Appeals for the District of Columbia that

applied the presumption in favor of arbitration to the ques-

tion whether the court or the arbitrator should decide if a

claim was barred by the statute of limitations. See id. at 25

n.31 (citing Hanes Corp. v. Millard, 531 F.2d 585; 598

(1976)). The D.C. Circuit in Hanes had relied both on this

Court’s decision in Flair Builders, Inc., see 531 F.2d at 599-

600, and on two Second Circuit decisions, one that involved

the application of a statute of limitations and another that

involved the application of a contractual time bar, see id. at

598-599 (citing Reconstruction Fin. Corp. v. Harrisons &

Crosfield, Ltd., 204 F.2d 366, 367, 369, cert. denied, 346 U.S.

854 (1953), and Office of Supply, Gov't of the Republic of

Korea v. New York Navigation Co., 469 F.2d 377, 380

(1972)).

C. The Presumption That The Arbitrator Is To Decide

Whether Claims Were Submitted Within Applicable

Time Limits Advances The Purposes Of The Federal

Arbitration Act

The presumption that the arbitrator rather than a court is

to decide whether a party to an arbitration agreement has

satisfied contractual or other time limits not only is sup-

20

ported by this Court’s precedents but also advances the

purposes behind the Federal Arbitration Act. See Poser,

supra, 50 SMU L. Rev. at 279-280, 295, 329-336.

As noted above, the Act’s principal purpose is to ensure

that arbitration agreements are enforced in accordance with

the parties’ intent. See p. 11, supra. If the parties enter into

a valid arbitration agreement that covers the subject matter

of their underlying dispute, then the parties “most likely

intend and expect that the arbitrator should resolve all

issues that arise concerning that subject.” Painewebber Inc.

v. Elahi, 87 F.3d 589, 599 (1st Cir. 1996). At the very least,

the time limit question “arises when the parties have a

contract that provides for arbitration of some issues. In such

circumstances, the parties likely gave at least some thought

to the scope of arbitration. And given the law’s permissive

policies in respect to arbitration, * * * one can understand

why the law would insist upon clarity before concluding that

the parties did not want to arbitrate” the time limit question.

First Options, 514 U.S. at 945 (internal citation omitted).

The presumption that the arbitrator is to decide time-

liness issues also prevents the courts from becoming en-

meshed in the facts of the underlying dispute that the

parties have agreed te arbitrate. See p. 16, supra. As the

Court recognized in John Wiley, it is often difficult to

separate timeliness issues from the substance of the parties’

underlying dispute. 376 U.S. at 557. The timeliness require-

ment at issue in this case illustrates the point. To determine

whether a claim is timely under NASD Rule 10304, the

decision-maker must identify the “occurrence or event” that

gives rise to the underlying claim. For example, petitioner

purchased her investments in 1986 but did not file her

arbitration claim until March 1997. She alleges, however,

not only that respondent sold her unsuitable investments

and made misrepresentations at the time that she made the

investments, but also that respondent provided misinforma-

21

tion abou’. the investments on an ongoing basis until 1994.

To the extent petitioner claims that respondent made mis-

representations within six years prior to the date that she

requested arbitration and that those misrepresentations

caused her to retain the investments, then that claim would

be timely, even though the original sale occurred more than

six years before petitioner requested arbitration. See

Merrill Lynch, Pierce, Fenner & Smith v. Cohen, 62 F.3d

381, 385 (11th Cir. 1995); Painewebber Inc. v. Hofmann, 984

F.2d 1372, 1381 (3d Cir. 1993). Thus, a court could not re-

solve the question whether petitioner complied with NASD

Rule 10304 without conducting a detailed inquiry into the

nature and extent of petitioner’s underlying claims. E.g.,

Cohen, 62 F.3d at 384-385 (remanding for district court to

conduct such a factual inquiry); Hofmann, 984 F.2d at 1374

(same).

Requiring such an extensive mini-trial before petitioner

could proceed to arbitration would ill serve Congress’s intent

“to move the parties to an arbitrable dispute out of court and

into arbitration as quickly and easily as possible.” Moses H.

Cone Mem’! Hosp., 460 U.S. at 22. Instead, it would allow

the kind of “delay and obstruction in the courts” that the

Federal Arbitration Act was designed to avoid. See Prima

Paint Corp., 388 U.S. at 404. Indeed, the “costs and delays

involved in resolving eligibility disputes affect the ability of

customers (investors) to receive complete recovery on their

claims. Under some circumstances, customers (investors) are

discouraged or prevented from seeking recovery for their

claims because the costs and delays of litigating eligibility

* * * approach or exceed the value of their claims.” 63 Fed.

Reg. 588, 591 (1998) (views of the NASD, reprinted in SEC

notice of proposed rulemaking to approve amendment to

Rule 10304).

When parties who have signed an agreement to arbitrate

are forced to litigate collateral issues before they can pro-

22

ceed to arbitration, the advantages that arbitration offers

over judicial resolution are undermined. “If arbitration is to

enable parties to resolve their differences with speed,

economy, informality, privacy, and finality, then the ability

of arbitrating parties to also resort to the courts must be

reduced to a minimum.” Poser, supra, 50 SMU L. Rev. at

279.

There is no need to permit resort to the courts here.

Allowing the arbitrator to decide timeliness issues does not

pose a significant risk of “fore[ing] unwilling parties to arbi-

trate a matter they reasonably would have thought a judge,

not an arbitrator, would decide.” First Options, 514 U.S. at

945. The contention that an arbitration claim was not timely

filed is different in character from the contention that a

party never consented to arbitration at all or did not consent

to arbitration of certain subject matters. The contention is

not that the party did not intend an arbitrator to have the

power to resolve the underlying dispute but that the claim-

ant, because of the passage of time, can no longer arbitrate a

claim that would otherwise be within the scope of the

agreement. An arbitrator can appropriately decide that

issue without any risk that the arbitration forum is forcing

its process upon a non-consenting party. See John Wiley,

376 U.S. at 558-559 (“Refusal to order arbitration of subjects

which the parties have not agreed to arbitrate does not

entail the fractionating of disputes about subjects which the

parties do wish to have submitted.”); Barbara Black, Securi-

ties Arbitration Is Not Supposed To Be So Complicated:

Arbitrability, the Eligibility Rule, And Whose Law Decides

(to be published in Securities Regulation Law Journal

(Summer 2002)) (copy lodged with Court). Finally, the

arbitrator’s decision on the time-limit issue is subject to

judicial review upon completion of the arbitration to ensure,

among other things, that the arbitrator did not exceed his

powers or manifestly disregard the law. See note 4, supra.

— ee ie -. <e

23

D. NASD Rule 10304’s Use Of The Phrase “Eligible For

Submission To Arbitration” Does Not Make The Rule’s

Application A Question Of Arbitrability

Consistent with this Court’s decisions and the policies

underlying the Federal Arbitration Act, the courts of ap-

peals have almost uniformly held that the arbitrator, rather

than a court, is to decide whether claims have been sub-

mitted within contractual time limits, at least outside the

specific context of the question presented in this case. See

Washington Hosp. Ctr. v. Service Employees Int'l Union,

Local 722, 746 F.2d 1503, 1506 (D.C. Cir. 1984); Local 285,

Serv. Employees Int'l Union v. Nonotuck Resource Assoc.,

64 F.3d 735, 739-741 (1st Cir. 1995); Martens v. Thomann,

273 F.3d 159, 179 n.14 (2d Cir. 2001); Nursing Home & Hosp.

Union No. 434 v. Sky Vue Terrace, Inc., 759 F.2d 1094, 1097

(3d Cir. 1985); Glass v. Kidder Peabody & Co., 114 F.3d 446,

455-456 (4th Cir. 1997); Oil Workers’ Int’l Union, Local 4-447

v. Chevron Chem. Co., 815 F.2d 338, 341-343 (5th Cir. 1987);

Armco Employees Indep. Fed. v. AK Steel Corp., 252 F.3d

854, 858-861 (6th Cir. 2001); Beer, Local Union No. 744 v.

Metropolitan Distrib., Inc., 763 F.2d 300, 303 (7th Cir. 1985);

Automotive Employees Union, Local No. 618 v. Town &

Country Ford, Inc., 709 F.2d 509 (8th Cir. 1983); Local

Union No. 370 v. Morrison-Knudsen Co., 786 F.2d 1356 (9th

Cir. 1986) (per curiam); Denhardt v. Trailways, Inc., 767

F.2d 687 (10th Cir. 1985); Belke v. Merrill Lynch, Pierce,

Fenner & Smith, 693 F.2d 1023, 1027 (11th Cir. 1982).°

There is, however, substantial division among the courts

of appeals regarding the specific question of who decides

6 There have been some divergent decisions within some of the courts

of appeals. See Kennecott Utah Copper Corp. v. Becker, 186 F.3d 1261,

1267-1268 (10th Cir. 1999) (acknowledging the possible existence of a

divergent Tenth Circuit opinion); General Drivers, Local Union 89 v.

Moog Louisville Warehouse, 852 F.2d 871 (6th Cir. 1988) (“virtually

limited to its facts” by Armco Employees Indep. Fed., 252 F.3d at 860).

24

whether a party has complied with the time limit imposed by

NASD Rule 10304 and parallel arbitration rules of other

SROs. See Elahi, 87 F.3d at 592 (noting a nearly even

circuit split). Those courts that have held that NASD Rule

10304 and parallel rules of other SROs should be applied by

the courts at the outset have relied almost exclusively on the

rules’ use of the phrase “eligible for submission to arbitra-

tion.” The courts reason that, because failure to comply with

the time limit bars eligibility for arbitration, the rule is not

simply a contractual timeliness requirement, but is instead a

substantive or jurisdictional limitation and thus a component

of arbitrability.”

The fact that Rule 10304 is phrased in terms of whether a

claim is “eligible for submission to arbitration” does not

mean that it involves the question of arbitrability. The rule,

the NASD has explained, originally reflected a judgment

that claims that were more than six years old could be

unsuitable for arbitration, largely because brokerage firms

were not required to maintain records longer than that

period of time. See 63 Fed. Reg. at 590. That objective does

not support according the rule “arbitrability” status.*

7 See Cogswell v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 78

F.3d 474, 476-477, 479 (10th Cir. 1996); Cohen, 62 F.3d at 384; Painewebber

Inc. v. Hofmann, 984 F.2d 1372, 1379 (3d Cir. 1993); Roney & Co. v.

Kassab, 981 F.2d 894, 898-899 (6th Cir. 1992); Edward D. Jones & Co. v.

Sorrells, 957 F.2d 509, 512, 514 (7th Cir. 1992).

® The NASD has referred to the rule as a “substantive jurisdictional

time limitation on the dispute that could be arbitrated.” 63 Fed. Reg. at

592. It is unclear what the NASD meant by those terms and what conse-

quences the NASD thought might flow from that characterization. As

explained in the text above, however, this Court’s decisions indicate that

the arbitrator rather than the courts should apply the rule. Nor could the

NASD have meant to suggest differently, because it had expressly stated

that the rule “does not specify the party responsible for determining

whether 6 years have elapsed from the occurrence or event giving rise to

25

Nor is the language of the rule substantially different

from the language of the notification provision in John

Wiley, which this Court held was to be applied by the

arbitrator. That notification provision stated that “(t]he

failure of either party to file the grievance within this time

limitation shall be construed and be deemed to be an

abandonment of the grievance.” 376 U.S. at 556 n.11. NASD

Rule 10304 could easily have been phrased using similar

language, so that the failure to bring a claim within six years

would be “deemed to be an abandonment of” the right to

seek arbitration. That change in language would not alter

the operative effect of the rule, and it should likewise make

no difference regarding whether the arbitrator or a court

applies the rule in the first instance.

Similarly, the policy considerations that support the

Court’s decision in John Wiley still apply however Rule

10304 is phrased. Even though the rule uses the words

“eligible for submission to arbitration,” the parties likely

intended that the arbitrator would decide the timeliness of

claims that otherwise would be subject to arbitration,

particularly because the timeliness decision often requires a

detailed understanding and factual assessment of the under-

lying claims. Moreover, lengthy judicial proceedings prior to

arbitration would still deprive parties whose claims are

found to meet the timeliness requirement of the speedy, less

costly dispute resolution that they bargained for in the

arbitration agreement. See pp. 17-18, 20-22, supra.

Some courts that have held that Rule 10304 should be

applied by the courts have also suggested that the word

“eligible” differs in an important way from the language of

statutes of limitations, which the courts agree should be

applied by the arbitrator. See Painewebber Inc. v.

Hofmann, 984 F.2d 1372, 1378 (3d Cir. 1993) (quoting Paine-

the matter.” 59 Fed. Reg. 39,373, 39,374 (1994) (NASD description of the

rule reprinted in earlier SEC notice of proposed rulemaking).

26

webber Inc. v. Hartmann, 921 F.2d 507, 513-514 (3d Cir.

1990)); Roney, 981 F.2d at 899 (also agreeing with Hart-

mann); see also p. 19, supra. There is, however, no meaning-

ful difference, for purposes of deciding whether Rule 10304

presents an issue of arbitrability, between the language of

the rule and the language of statutes of limitations. For

example, the statute of limitations adopted by the Court for

private actions under Section 10(b) of the Exchange Act, 15

U.S.C. 78}(b), provides that “[nJo action shall be maintained

to enforce any liability * * * unless brought within one

year after the discovery of the facts constituting the viola-

tion and within three years after such violation.” 15 U.S.C.

78i(e); see Lampf, Pleva, Lipkind, Prupis & Petigrow v.

Gilbertson, 501 U.S. 350, 364 n.9 (1991). Given that Rule

10304 would be applied by the arbitrator if it provided that

no arbitration claims over six years old “shall be main-

tained,” then it should likewise be applied by the arbitrator

even though it provides instead that no such claims “shall be

eligible for submission to arbitration.” Whether the rule is

applied by the courts or by the arbitrator should not turn on

subtleties in the rule’s language that were never intended to

bear such weight.

There are distinctions between a statute of limitations and

Rule 10304. For example, a claim can be barred by a statute

of limitations and yet satisfy the time limit imposed by the

rule, or vice versa. See 63 Fed. Reg. at 594 (views of the

NASD). In addition, a statute of limitations affects a party’s

right to recover in any forum, but Rule 10304 provides only

that certain claims are not eligible for “arbitration under [the

NASD] Code.” NASD Rule 10304. Despite those differ-

ences, statutes of limitations and Rule 10304 both impose

timing requirements on claims, and there is no persuasive

reason why statutes of limitations should be applied by the

arbitrator but Rule 10304 should not. Indeed, because Rule

10304 is essentially a forum-specific limitations provision, it

27

is especially appropriate that it should be applied by the

forum created by the very rules that impose the limitation,

rather than by the courts.

E. The Parties To This Case Agreed That The Arbitrator

Would Decide Whether Claims Are Barred By The

Time Limit In NASD Rule 10304

For the reasons stated above, NASD Rule 10304, like

other time limitations, does not involve a question of arbi-

trability. Therefore, the court of appeals erred in presuming

that the parties intended the courts to decide whether

petitioner’s claims are barred by the rule. See Pet. App. 16-

19, 24-25. Instead, the court of appeals should have applied

ordinary state law contract principles, supplemented by the

general federal law presumption that parties to a valid

arbitration agreement intend the arbitrators to decide dis-

puted issues. See pp. 10-12, supra. When the parties’ agree-

ment is considered under that analytical framework, it is

clear that the arbitrator, not the courts, is to decide whether

petitioner’s claims are time barred under Rule 10304.

Because the agreement contains a choice-of-law clause

providing for application of New York law, see 1992 Agree-

ment 4 18, interpretation of the agreement begins with

application of the substantive rules of the New York state

law of contracts. See Elahi, 87 F.3d at 600; Painewebber

Inc. v. Bybyk, 81 F.3d 1193, 1198-1199 (2d Cir. 1996); see

generally Mastrobuono, 514 U.S. at 63-64 (interpreting simi-

lar choice-of-law clause to require application of the “sub-

stantive principles that New York courts would apply, but

not to include special rules limiting the authority of arbi-

trators”).

Under New York law, a court “enforce[s] the plain mean-

ing of th{e] agreement” between the parties. Bybyk, 81 F.3d

at 1199 (citing New York law); accord Elahi, 87 F.3d at 600

(same). The basic arbitration clause in the parties’ agree-

ment provides that the parties will arbitrate “all controver-

28

sies between [them] * * * concerning or arising from

(i) any account maintained with [respondent] by [petitioner];

(ii) any transaction involving [respondent and petitioner],

* * * or (iii) the construction, performance or breach of this

or any other agreement between [respondent and peti-

tioner].” 1992 Agreement 4 19. The plain meaning of that

provision is that the parties will arbitrate “all” disputes aris-

ing from petitioner’s securities accounts with respondent,

including whether petitioner’s request for arbitration by the

NASD of her claim that respondent breached its fiduciary

duty was timely filed. The word “all” encompasses disputes

over whether an underlying claim concerning the account is

timely. Cf. Flair Builders, Inc., 406 U.S. at 491-492. Any

doubt on that point is eliminated by the express provision

that disputes about the “construction” and “performance” of

the arbitration agreement or any other agreement between

the parties are themselves subject to arbitration. See

Bybyk, 81 F.3d at 1199; Smith Barney Shearson, Inc. v.

Sacharow, 91 N.Y.2d 39, 46 (1997). Moreover, any ambiguity

in the scope of the clause must be construed against respon-

dent, which drafted the agreement. See Mastrobuono, 514

U.S. at 63 (citing New York law).

Consideration of other terms of the agreement reinforces

that reading of the basic arbitration clause. See Mastro-

buono, 514 U.S. at 63 (under New York law, agreement is

“read to give effect to all its provisions and to render them

consistent with each other”). The 1992 Agreement author-

izes petitioner to select the arbitral forum, 1992 Agreement

q 19, and her selection of the NASD makes applicable the

NASD Code, 1997 Agreement 4 1. The NASD Code, in turn,

includes not only the time limit in NASD Rule 10304 but also

NASD Rule 10324, which provides that the “arbitrators shall

be empowered to interpret and determine the applicability

of all provisions under [the NASD Code.]” Because Rule

10304 is a provision of the NASD Code, the clear import of

Rule 10324 is that arbitrators are empowered to determine

whether a claim complies with Rule 10304. See 67 Fed. Reg.

at 19,466 n.11 (expressing SEC’s view to that effect); Bybyk,

81 F.3d at 1202; FSC Sec. Corp. v. Freel, 14 F.3d 1310, 1312-

1313 (8th Cir. 1994); Sacharow, 91 N.Y.2d at 46-47.

Thus, interpreted under ordinary principles of contract

law, the parties’ agreement provides that the arbitrator is to

decide whether petitioner’s claims were filed within the time

limit in NASD Rule 10304. The federal law presumption

that parties to a valid arbitration agreement intend for the

arbitrator to resolve their disputes only reinforces that con-

clusion. Indeed, even if the contrary presumption that gov-

erns arbitrability issues applied, Rule 10324 would provide

the necessary “clear and unmistakable” evidence that the

parties intended for the arbitrator to apply Rule 10304 in the

first instance. See Bybyk, 81 F.3d at 1202; Freel, 14 F.3d at

1312-1313; Sacharow, 91 N.Y.2d at 46-47.

Some courts that have rejected reliance on Rule 10324

have found it insufficiently clear because it does not ex-

pressly address arbitrability. Jones, 957 F.2d at 514 n.6.

Other courts have relied on the principle of contract inter-

pretation that a specific provision controls over a conflicting

more general provision, and have reasoned that the specific

provision in Rule 10304 trumps the general delegation of

authority to the arbitrator in Rule 10324. Cogswell, 78 F.3d

at 480; Cohen, 62 F.3d at 384. Those arguments are unper-

suasive. Rule 10324 gives the arbitrator authority to inter-

pret and apply all provisions of the NASD Code, one of

which is the time limit in Rule 10304. Because both Rule

10324 and Rule 10304 appear in the NASD Code, a party

reading the Code could have no doubt that arbitrators are

empowered to interpret and apply the time limit. Further-

more, the principle that a specific provision controls over a

conflicting more general provision is not applicable here,

because there is no conflict between Rule 10304 and Rule

30

10324. Rule 10304 only imposes a time limit; it does not

speak to the question which decision-maker—the arbitrator

or a court—is to apply the time limit to determine whether a

claim has been timely submitted. Rule 10324 addresses that

question, by providing that the arbitrator has the authority

to apply all provisions of the NASD Code, including the time

limit in Rule 10304.

CONCLUSION

The judgment of the court of appeals should be reversed.

Respectfully submitted.

THEODORE B. OLSON

Solicitor © eneral

MEYER EISENBERG EDWINS.K EDLER

Deputy General Counsel Deputy S itor General

JACOB H. STILLMAN MATTHEW tOBERTS

Solicitor Assistan: — the Solicitor

MARK PENNINGTON Gener«

Assistant General Counsel

Securities and Exchange

Commission

MAY 2002