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

—-_, oe wwe ae Wats

In Che

Supreme Court Of Che United States

OCTOBER TERM, 1989

SHEARSON LEHMAN/AMERICAN EXPRESS, INC.

and RAYMOND R. CLEMENTS,

Petitioners,

V.

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

PROFIT SHARING TRUST, FRANK L. BIRD,

Individually, and JOAN SHEA,

Respondents.

BRIEF IN OPPOSITION TO A WRIT OF

CERTIORARI TO THE UNITED STATES COURT

OF APPEALS FOR THE SECOND CIRCUIT

DONALD R. HOLTMAN

Counsel of Record

for Respondents

KATZ & SELIGMAN

130 Washington Street

Hartford, CT 06106

(203) 547-1857

+3

89-23) “

No.

or)

QUESTION PRESENTED

Whether participants in a qualified Employee Retirement

Income Security Act of 1974 (ERISA) plan may be compelled

to arbitrate claims of statutory violations asserted against

a plan fiduc.ary, where a provision in an agreement between

the employer and a plan fiduciary calls for compulsory

arbitration of all claims.

TABLE OF CONTENTS

QUESTION PRESEN rwe). .. . 5.6.5 555d eee i

TABLE OF AUTRES Bee ois os os cee Cee ii?

STATEMENT OF THE CASE ................ a 1

REASONS FOR DENYING THE WRIT............ 2

I. THE COURT SHOULD NOT GRANT

CERTIORARI BECAUSE THE ISSUES

SURROUNDING THE CONTROVERSY

AT ISSUE IN THE CASE BELOW HAVE

NOT BEEN FULLY DEVELOPED AT

THIS TIME. THUS, CONSIDERATION

OF THESE ISSUES WOULD BE AN

IMPRUDENT UTILIZATION OF THE

COURT’S VALUABLE RESOURCES.......... 3

II. PETITIONERS’ ARGUMENT THAT

GRANTING OF CERTIORARI IN THIS

CASE WILL ENABLE THE COURT TO

SETTLE ISSUES CONCERNING COM-

PULSORY ARBITRATION OF CLAIMS

UNDER OTHER STATUTORY PROVI-

SIONS AMOUNTS TO A REQUEST FOR

AN ADVISORY OPIN'ON IN VIOLATION

OF ESTABLISHED RULES .................. 6

III. PETITIONERS ARGUE THAT ALLOWING

PLAINTIFFS TO MAINTAIN SEPARATE

ACTIONS IN BOTH ARBITRATION AND

THE COURTS BELOW WOULD AMOUNT

TO AN IMPROPER WASTE OF JUDICIAL

TENE 6 ks es xR a ee ee 10

CPI 5k de so ae pe 11

li

oe

TABLE OF AUTHORITIES

Cases: Page(s)

Aetna Life Insurance v. Haworth, 300 U.S. 227

ETE 7

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

OS 7

Amaro v. Continental Can Co., 724 F.2d 747 (9th Cir.

el OS ee 7,10

American Safety Equipment Corp. v. J.P. Maguire &

I 7

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

sf cg aly wae c+ oo 6 eee 7

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

Si7 F.2G 202 (2G Cir. 1989) ............. .. passim

Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213

AN ER a 10

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

rr ey Pade ae bw ws 7

Pilot Life Insurance Co. v. Dedeaux, 481 U.S. 41

RIE et ee a 5

Rodriguez De Quijas v. Shearson/American

Express, Inc., 109 S.Ct. 1917 (1989) ......... passim

Shaw v. Delta Air Lines, Inc., 463 U.S. 85 ............ 5

Shearson/American Express, Inc. v. McMahon,

a passim

Sulit v. Dean Witter Reynolds, Inc., 847 F.2d 475

I es ar ee passim

U.S. v. Fruehauf, 365 U.S. 146 (1961) ................ 7

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

ili

TABLE OF AUTHORITIES (continued)

Statutes and Regulations: Page(s)

Employee Retirement Income Security Act of |

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

Se ee I ok osc esa en ene secs yah naan 4

29 USC. BOA i PSN ONE ses Ul ALAR eee ge 5

il EO oo" bat Pe SO pene eas ee 9

Books and Articles:

Shepherd, ‘‘Investor Protection and the Arbitrability

of Securities Disputes After Shearson/American

Express, Inc. v. McMahon: Legislative and

Judicial Reaction;’ 25 Willamette L. Rev. 599

I I nw oe a ei pane aes ots 9

Wright, Law of Federal Courts, Fourth Edition, West

PE oe ite oe eg a tet Goins Cree 7

iv

STATEMENT OF THE CASE

The plaintiffs accept the defendants’ statement of the

facts, except to the extent that it implies that plaintiff Joan

Shea had contractually agreed with the defendants to an

arbitral forum for the resolution of her ERISA or any other

claims, and that plaintiff Frank L. Bird had agreed to arbi-

trate all of the disputes between the parties. The plaintiffs

state that Joan Shea was not a signatory or party to the

agreement, but merely an employee participant in the plan,

and that plaintiff Frank L. Bird as Trustee signed a stan-

dard form customer agreement which contained the

arbitration language quoted by the petitioners.

REASONS FOR DENYING THE WRIT

The Court should deny the writ in this case because the

issues in this case have not been sufficiently developed at

this time. Petitioners in their brief cite only two appellate

level cases related to the issues currently before this Court.

Given this short and premature history it would be unwise

for the Court to consider the merits of this controversy at

this time. The premature nature of this petition is further

illustrated by the lack of any substantial published legal

scholarship addressing the specific issues giving rise to the

Petitioners’ request.

While the petitioners cite the recent decisions of this

Court in Rodriguez De Quijas v. Shearson/American Express,

Inc., 109 S. Ct. 1917 (1989) and Shearson/ American Express,

Inc. v. McMahon, 482 U.S. 220 (1987) as evidence of a fully-

developed controversy concerning compulsory arbitration of

claims based on violations of securities laws, it is respect-

fully submitted that these cases do not directly bear on the

issues before the courts below in this matter. While it is true

that the controversy surrounding compulsory arbitration of

claims based on violations of the Securities Acts of 1933 and

1934 had been well developed by the time the Court decided

the McMahon and Rodriguez cases, it is not true that the

controversy surrounding compulsory arbitration of claims

based on violations of ERISA has been fully developed.

The importance of allowing full development of issues

through a case-by-case approach is at: the very heart of the

American legal system. This traditional approach to legal

reasoning is well illustrated by the long line of cases inter-

pretins: the Federal Arbitration Act, and its application to

various circumstances. Beginning with Wilko v. Swan, 346

U.S. 427 (1953) the Court has consistently found that Con-

gress has the authority to explicitly or implicitly override

the Federal Arbitration Act. Consistently, this Court and the

lower courts following this Court’s decisions have held that

one could not be compelled to arbitrate claims where statu-

tury language specifically prohibited such compulsion, where

the legislative history of an act prohibited such compulsion,

or where the fundamental goals and purposes of an act were

inconsistent with compulsory arbitration.

In reviewing the decision of the United States District

Court for the District of Connecticut in the case below the

United States Court of Appeals for the Second Circuit applied

the appropriate legal standard. The court found that the legis-

lative history and specific provisions of ERISA indicated a

Congressional intent to exempt certain ERISA-based claims

from compulsory arbitration. Additionally, the court below

found the goals and objectives of ERISA inconsistent with

Petitioners’ request to compel arbitration of all ERISA-based

claims through a blanket, pre-dispute, standardized arbitra-

tion clause in a contract of adhesion. The court found that

ERISA’s goal of protection of employee rights and develop-

ment of a uniform Federal common law of employee benefits

were thus inconsistent with compulsory arbitration provi-

sions of agreements such as the one at issue in the case below.

Similarly, Judge Gibson's dissent in Sulit v. Dean Witter Rey-

noilds, Inc., 847 F.2d 475 (8th Cir. 1988), also points to the

incompatibility of the fiduciary responsibilities under ERISA

and compulsory arbitration clauses in contracts of adhesion.

I. THE COURT SHOULD NOT GRANT CERTIORARI

BECAUSE THE ISSUES SURROUNDING THE CON-

TROVERSY AT ISSUE IN THE CASE BELOW HAVE

NOT BEEN FULLY DEVELOPED AT THIS TIME.

THUS, CONSIDERATION OF THESE ISSUES

WOULD BE AN IMPRUDENT UTILIZATION OF

THE COURT’S VALUABLE RESOURCES.

At the present time very few courts have considered the

issue of compulsory arbitration of ERISA-based claims of

statutory violations. Petitioners in their brief requesting cer-

tiorari cite only two appellate court cases dealing directly

with the issues presented in the case below, Sulit v. Dean

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

v. Shearson Lehman/American Express, Inc., 817 F.2d 292

(2d Cir. 1989). While these two cases are important cases and

worthy of public debate and discussion, they do not repre-

sent a significant conflict between United States Circuit

Courts of Appeal.

The Respondents respectfully submit that Sulit and Bird

do not represent a significant conflict due to the differences

in both the factual circumstances of the cases, and the legal

theories argued in the cases. In Sulit the court was faced with

a set of facts where only plan fiduciaries and signatories to

the arbitration agreement were parties to the litigation. In

contrast to Sulit, Bird is a case in which all parties are not

signatories to the agreement between the plan's sponsoring

employer, and the plan fiduciary. Furthermore, Sulit was

argued on the basis of 29 U.S.C. § 1110(a), the waiver provi-

sions of ERISA, which are very similar to the waiver

provisions found in the Securities Act of 1933, and the Secu-

rities Exchange Act of 1934; Bird by contrast was not argued

on the basis of the waiver provision alone, but was argued

based on the legislative history, general text of the statute

and the fundamental purposes of the act.

In Sulit the United States Court of Appeals for the

Eighth Circuit reviewed an opinion of the District Court

which was based strictly on the argument that 29 U.S.C.

§ 1110(a) bars enforcement of agreements to require arbitra-

tion. Sulit, 847 F.2d 475, 477. The Eightn Circuit’s opinion

in Sulit also specifically recognized that the Plaintiff below,

Sulit, had not argued, nor had he relied wpon, ERISA’s legis-

lative history to support his claim of preemption of the

Federal Arbitration Act by ERISA. Sulit, 847 F.2d 475, 478

(8th Cir. 1988). The United States Court of Appeals for the

Second Circuit specifically recognized the limited nature of

the Sulit opinion in footnote eight # its opinion, and further

held that, based on its analysis of the entire text of ERISA,

the legislative history supporting ERISA legislation, and the

fundamental purposes of the act, Congress had intended to

preclude enforcement of agreements to require arbitration of

the fiduciary responsibility requirements of ERISA. Bird v.

Shearson Lehman/American Express, Inc., 817 F.2d 292 (2d

Cir. 1989).

Balancing the interests of all of the parties to a con-

troversy is something which United States courts are

uniquely qualified to do, and something which they are spe-

cifically charged with the responsibility for in our system of

government. In the two cases which Petitioners cite as con-

flicting, the courts below were simply faced with a different

mix of parties, facts, and legal theories; hence, it is not sur-

prising that different factors were given different weights and

a subtle balance between the interests was struck. Respon-

dents submit that this balancing process works best on a

case-by-case basis, in which all interested parties are fully

represented and all legal arguments are fully developed. In

this process a logical set of rules will evolve from the

balancing of these interests and a fully-developed record of

case law will be developed to assist the decision-making

process.

The development of this case-by-case approach to the

development of legal rules is at the heart of traditional

common law legal systems, and represents precisely what

Congress intended in ERISA, 29 U.S.C. § 1144, when Con-

gress established that a fundamental purpose of ERISA was

to develop a ‘‘Federal Common Law”’ of employee benefits.

Pilot Life Insurance Co. v. Dedeaux, 481 U.S. 41 (1987), Shaw

v. Delta Air Lines, Inc., 463 U.S. 85, 99 (1983). Currently, only

a small fraction of all factual patterns have been considered

and argued. Thus, a decision to grant certiorari in this matter,

coupled with the type of broad sweeping decision on the

merits sought by the Petitioners in the Question Presented

would prematurely arrest the development of the law in this

area.

Contrary to the Petitioners’ assertions, the conflict

between the circuits is not fully developed, and courts do not,

as the Petitioners argue, either apply the Court's rationale

in McMahon and Rodriguez to ERISA claims, or refuse to

apply the Court’s rulings in McMahon and Rodriguez to

ERISA claims. The Second Circuit’s opinion in Bird clearly

recognizes and applies the proper legal standard set forth in

McMahon. Bird v. Shearson Lehman/American Express,

Inc., 817 F.2d 292. In applying that standard the court found

|

that Congress had intended to preempt the Federal Arbitra-

tion Act and that the fundamental purposes of ERISA were

inconsistent with compulsory arbitration of statutory claims

based on violations cf ERISA fiduciary responsibility

provisions.

While it is true that in the Bird case below the Second

Circuit reached a conclusion that results in a different out-

come from the outcome of the Sulit case argued before the

Eighth Circuit, it is also true that the Second Circuit in Bird

applied the correct legal standard to a different factual situ-

ation that had produced different legal arguments. Thus, the

Second Circuit had a record before it that more clearly linked

the labor and employment law history of ERISA to the facts

before the court. Based on this record the Second Circuit cor-

rectly analyzed the legislative text, legislative history, and

the objectives of ERISA in the light of the Court’s recent

rulings concerning compulsory arbitration.

II. PETITIONERS’ ARGUMENT THAT GRANTING OF

CERTIORARI IN THIS CASE WILL ENABLE THE

COURT TO SETTLE ISSUES CONCERNING COM-

PULSORY ARBITRATION OF CLAIMS UNDER

OTHER STATUTORY PROVISIONS AMOUNTS TO

A REQUEST FOR AN ADVISORY OPINION IN VIO-

LATION OF ESTABLISHED RULES.

The distinctions discussed above emphasize the impor-

tance of having a complete record. A court is not a legislative

body, and thus courts should not provide advisory opinions

or opinions based on a record that is incomplete. The Peti-

tioners argue that if the Court takes this case it will have

the opportunity to guide the lower courts in their handling

of other statutes as these statutes relate to the Federal

Arbitration Act. Respondents respectfully submit that this

Court should not engage in this type of speculative advisory

process. Courts are uniquely established to resolve fully-

developed conflicts between adversary parties based on a full

and complete record; courts are not legislative bodies with

wholesale law-making authority.

Clearly, the case before the Court does not present an

adequate record to allow the Court to address the sweeping

question of compulsory arbitration of all types of statutory

ERISA claims in all contexts as requested by the Petitioners.

Therefore, Respondents respectfully submit that this request

amounts to a request for an advisory opinion in violation of

justiciability requirements for Article III courts. Wright has

written that: ‘Yet the oldest and most consistent thread in

the federal law of justiciability is that the federal courts will

not give advisory opinions .. ’’ Wright, Law of Federal

Courts; See also U.S. uv. Fruehauf, 365 U.S. 146 (1961), Aetna

Life Insurance v. Haworth, 300 U.S. 227 (1937).

Consistently, this Court has held that the enforcement

of agreements to arbitrate disputes arising under federal stat-

utory provisions is to be determined by discerning Congress’

intent to override the Federal Arbitration Act as evidenced

in the text of the statute giving rise to the action, the legis-

lative history of the statute, or from the statute’s underlying

purposes. Rodriguez De Quijas v. Shearson/American

Express, Inc., 109 S.Ct. 1917 (1989), Shearson/American

Express v. McMahon, 482 U.S. 220 (1987). Thus, the under-

lying principle of Rodriguez and McMahon is consistent with

the guidelines developed in Wilko, and the long history in

case-by-case, statute-by-statute determination of which stat-

utory claims are exempt from enforcement of arbitration

agreements. Illustrations of this Court’s rulings on such

matters are found in McDonald v. City of West Branch,

Michigan, 466 U.S. 284 (1984), and Alexander v. Gardner-

Denver Co., 415 U.S. 36 (1974). In each of these cases this

Court, applying the same legal principles outlined in

Rodriguez and McMahon, found that Congress had in fact

intended to override the applicability of the Federal Arbitra-

tion Act. Similarly, the Courts of Appeal have woven threads

into this continuous fabric of case law. Barrowclough v.

Kidder, Peabody & Co, Inc., 752 F.2d 923 (3rd Cir. 1985),

Amaro v. Continental Can Company, 724 F.2d 747 (9th Cir.

1984), American Safety Equipment Corp. v. J.P. Maguire &

Co., 391 F.2d 821 (2d Cir. 1968).

In order to support their request for a broad-ranging

review of the enforcement of arbitration agreements under

any provision of ERISA the Petitioners note that some 6,704

claims based on some aspect of ERISA were filed in Federal

District Courts during the reporting year ending in June of

1988. The filing of these suits illustrates that Congress’s

intention in ERISA to establish a ‘‘Federal Common Law’’

of employee benefits is being followed by the courts, employee

benefit plan fiduciaries, and plan participants. Hence, estab-

lishing a rule that participants and employees who are the

victims of ERISA statutory violations may be compelled to

arbitrate claims based on statutory violations will preclude

federal courts from developing a ‘‘Federal Common Law”’ of

employee benefits. Thus, Respondents respectfully submit

that 6,704 suits filed in Federal District Courts simply illus-

trate that the system is working precisely as Congress

intended.

Respondents do not dispute that 6,704 ERISA claims

were filed. However, Respondents do respectfully argue that

only some unknown fraction of these claims are directly rele-

vant to the issues developed in the record below. Petitioners’

implied claim that a decision in this case will significantly

impact caseloads is not supported by any credible data that

breaks out the distribution of filings by type of action. While

it appears to be true that in the post-McMahon era almost

100 percent of all brokerage contracts require compulsory

arbitration clauses, it is not clear that non-brokerage house-

managed employee benefit or employee welfare plans have

similar provisions. Thus, given that brokerage firms handle

only a small portion of some types of ERISA plans, only a

very small portion of the 6,704 filings may prove to be directly

related to the issues raised in this case.

Furthermore, the Court may find it imprudent to inter-

vene in the regulation of brokerage contracts at this time.

Recently, several states have established regulations that pro-

hibit compulsory arbitration clauses of the type at issue in

this case.' Additionally, legislation has been introduced in

Congress to modify securities arbitration, and to control the

power of brokerage firms to compel compulsory arbitration

clauses in contracts of adhesion with their clients.” The Secu-

rities Industry Association has also recently established new

guidelines concerning compulsory arbitration provisions, and

it has also published a new model customer agreement which

incorporates numerous changes to the standard arbitration

clause at issue before the courts below.’ Lastly, the Securi-

ties and Exchange Commission, the New York Stock

Exchange, the National Association of Securities Dealers, the

Securities Industry Conference on Arbitration, and the North

American Securities Administrators Association have worked

to establish significant changes to the regulations concerning

‘compulsory pre-dispute arbitration agreements of the type

before the courts below.* Therefore, Respondents respectfully

submit that regulatory changes have essentially mooted the

securities regulatory policy issues raised before the courts

below in this case. Hence, Respondents submit that the Court

should not grant certiorari in this case as it addresses issues

that have been resolved by other branches of government,

and thus it does not raise issues which merit attention by

this Court.

' Massachusetts, California, and New Mexico have established regulations

that prohibit such regulations. See: Shepherd, ‘‘Investor Protection and

the Arbitrability of Securities Disputes After Shearson/ American

Express, Inc. v. McMahon: Legislative and Judicial Reaction,’ 25 Wil-

lamette L. Rev. 599.

? Id. at 619-627.

3 Securities Week, McGraw-Hill, July 17, 1989.

4 54 Fed. Reg. 21,144 (May 16, 1989). See also: (Current Developments]

Fed. Sec. L. Rep. (CCH) 80,099.

III. PETITIONERS ARGUE THAT ALLOWING PLAIN-

TIFFS TO MAINTAIN SEPARATE ACTIONS IN

BOTH ARBITRATION AND THE COURTS BELOW

WOULD AMOUNT TO AN IMPROPER WASTE OF

JUDICIAL RESOURCES.

Respondents concede that prosecuting both the securi-

ties claims in arbitration and the ERISA claims in federal

court will entail some duplication. However, mere duplica-

tion is not adequate grounds for denying the Plaintiff access

to federal courts. Dean Witter Reynolds Inc. v. Byrd, 470- U.S.

213 (1985). This general rule has been followed by numerous

lower federal courts in dealing with similar issues such as

exhaustion of internal plan remedies in the context of

employee benefit plans under ERISA. Amaro u: Continental

Can Ca., 724 F.2d 747 (9th Cir. 1984). Consistently the courts

have held that mere duplication alone is inadequate to bar

the Plaintiff from her right to pursue her remedies in federal

court.

10

CONCLUSION

Respondents submit that Petitioners’ petition for a writ

of certiorari should be denied because: (1) The apparent con-

flict between the circuits is not a significant conflict, (2) The

broadly stated question presented by Petitioners requests an

advisory opinion because it raises issues not argued before

the trial court, or the United States Court of Appeals for the

Second Circuit, (3) The public policy issues in this case have

become moot due to the Securities and Exchange Commis-

sion’s revised regulations which substantially change

arbitration clauses allowed in brokerage contracts, and

-(4) There is no conflict alleged or reported between or among

any group of the Circuit Courts of Appeal regarding the ruling

below allowing Respondents, Plaintiffs below, to proceed

simultaneously with both the ERISA claims in federal court

and the securities claims in arbitration. For all of the fore-

going reasons, Respondents respectfully request the Court

to deny the Petitioners’ request for a writ of certiorari.

DATED: Hartford, Connecticut

September 6, 1989

DONALD R. HOLTMAN

Counsel of Record

for Respondents

KATZ & SELIGMAN

130 Washington Street

Hartford, CT 06106

(203) 547-1857

11