Opposition Brief — McCowan v. Sears

FILED

SEP 12 1990

No. 90-279

JOSEPH F. SPANIOL, JR.

IN THE

Supreme Court of the United States

OCTOBER TERM, 1990

HORACE D. McCowan, JR. and

SARAH E. McCowan,

‘ Petitioners

SEARS, ROEBUCK & Co., and

DEAN WITTER REYNOLDS INC.,

Respondents

On Petition for Writ of Certiorari to the

United States Court of Appeals

for the Second Circuit

' BRIEF OF RESPONDENTS

SEARS, ROEBUCK & CO. AND

DEAN WITTER REYNOLDS INC.

IN OPPOSITION

JOHN LINSENMEYER *

JOHN F.X. PELOSO

ELIZABETH Hoop Fay

MORGAN, LEWIS & BOCKIUS

101 Park Avenue

New York, NY 10178

(212) 309-6000

Attorneys for Respondents

Sears, Roebuck & Co. and

Dean Witter Reynolds Inc.

September 12, 1990 * Counsel of Record

Wusen - oxebtomome aneaaaars 789-0096 - WasnineToN, D.C. 20001

| BEST AVAILABLE copy |

COUNTERSTATEMENT OF

THE QUESTIONS PRESENTED

1. Where customers of a securities brokerage firm, in

order to evade a valid and enforceable arbitration con-

tract which they had signed, commenced different Fed-

eral Court lawsuits in two judicial districts, including

one against the brokerage firm and another against the

corporate grand-parent of the brokerage firm solely on a

respondeat superior theory of vicarious liability for the

alleged misdeeds of the brokerage firm, and where the

Court of Appeals had undisputed jurisdiction over an

appeal from the denial of a stay pending arbitration in

the customers’ lawsuit against the corporate grand-parent,

but appellate jurisdiction over a closely-related appeal by

the securities brokerage firm was disputed, was the Court

of Appeals precluded from deciding identical issues raised

in both appeals, particularly where (i) the decision of

the issues in the corporate grand-parent’s appeal (the

action where alleged liability was entirely vicarious) re-

quired the Court of Appeals to determine the merits of

all the issues raised by the other appeal, (ii) the two ac-

tions against the brokerage firm and its corporate grand-

parent had been consolidated prior to the appeal(s), and

(iii) the District Court’s denial of arbitration in the first

appeal was clearly erroneous and inevitably would have

required eventual reversal after protracted and totally

pointless litigation?

2. Where those customers’ efforts to evade their arbi-

tration contract included multiple lawsuits arising out of

identical transactions and facts, which thereby created a

complex (and likely unique) procedural situation, and

where the Court of Appeals acted to clarify that situa-

tion on the grounds that all the litigation arose from a

single set of facts involving a single securities brokerage

account and should be brought on for adjudication on the

merits by the appropriate arbitral forum, and where no

conflicts among the judicial circuits, no constitutional is-

(i)

ii

sues and no questions of general public importance are

alleged by the customers (who merely claim that the

Court of Appeals acted unwisely or incorrectly), has any

basis been shown upon which to grant a writ of certiorari

for further appellate review by this Court?

iii

PARTIES TO THE PROCEEDING

A list of the parties below is contained in the Petition.

The following is a statement of the parent companies and

subsidiaries (except wholly owned subsidiaries) of each

corporation that is a party, provided pursuant to Rule

29.1 of this Court’s Rules:

Sears, Roebuck & Co.; Dean Witter Financial Serv-

ices Inc.; Dean Witter Reynolds Inc.; 184245 Canada

Limited; Allstate Automobile & Fire Insurance Com-

pany Limited; Arden Fair Associates; Bay City Mall

Associates; Carrefour Richelieu Realties Limited;

Chandler Mall Associates; Chatham Centre Mall

Limited; Citrus Park Venture; East Mesa Land

Partnership; Hamden Mall Associates; H. Co. May

Centers; H-D Lakeland Mall J.V.; H-D Pembroke

J.V.; H-L Land Improvement Venture; H-L Mall

Venture; H-L Office Venture; Hot Springs Mall As-

sociates; Kelfor Holdings Limited; The Mali at

Buckland Hills Partnership; New Park Associates;

North 400 Venture; Prodigy Services; Regional Shop-

ping Centres Limited; Saison Life Insurance Com-

pany, Ltd.; Samshin Allstate Life Insurance Com-

pany, Ltd.; Simon Homart San Antonio Mall Part-

nership; Simon Homart Shavano Partnership; Spring

Creek Mall Associates; St. Laurent Centre (Part-

nership); Tires Plus Co.; Vista Ridge Joint Ven-

ture; Westgate Associates; The Woodlands Mall

Assoc.

TABLE OF CONTENTS

Page

COUNTERSTATEMENT OF THE QUESTIONS

PRESENTED i

PARTIES TO THE PROCEEDING iii

TABLE OF AUTHORITIES vi

STATEMENT OF THE CASE 2

REASONS FOR DENYING THE WRIT 7

I. THE COURT OF APPEALS HAD JURISDIC-

TION OVER THE SEARS APPEAL AND IN

HEARING THAT APPEAL WAS REQUIRED

TO DETERMINE WHETHER THE ARBI-

TRATION CLAUSE IN THE DEAN WITTER

CUSTOMER AGREEMENT WAS VALID

AND WHETHER THE CLAIMS BROUGHT

UNDER THE VIRGINIA SECURITIES ACT

FALL WITHIN THE SCOPE OF THAT ARBI-

TERRE CHM se necinaicectctinsnssssitineminsonignampesnnes 8

II, APPELLATE JURISDICTION WAS PROP-

ERLY EXERCISED 10

III. THE COURT OF APPEALS REACHED THE

CORRECT RESULT IN STAYING YEARS OF

LITIGATION DESIGNED SOLELY TO DENY

BOTH DEAN WITTER AND SEARS THEIR

STATUTORY AND CONTRACTUAL RIGHTS

TO ARBITRATION 13

Oe iiilaiiticinicicndmgichainn 15

(v)

vi

TABLE OF AUTHORITIES

CASES Page

Abney v. United States, 431 U.S. 651 (1977) ........ 12

Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 218

(1985) . 2,7, 18

Decker Coal Co. v. Commonwealth Edison Co., 805

F.2d 884 (9th Cir. 1986) —........... 11

Deckert v. Independence Shares Corp., 311 U.S.

282 (1940) lon 11

Farkar Co. v. R. A. Hanson DISC, Ltd., 588 F.2d

GB. GRE GO, BOE enthctcnentinshedeeetetclictseentnatiadesin 9

Fisser v. International Bank, 282 F.2d 281 (2d

Cir. 1960) ... 9,10

Genesco, Inc. v. T. Kakiuchi & Co., 815 F.2d 840

(2d Cir. 1987) .... 8

In re Oil Spill by the Amoco Cadiz, 659 F.2d 789

to | eee 9

Interbras Cayman Co. v. Orient Victory Shipping

Co., 668 F.2d 4 (2d Cir. 1981) ..............................- 9

Intermedics Infusaid, Inc. v. Regents of University

of Minnesota, 804 F.2d 129 (Fed. Cir. 1986) -..... 11

J.J. Ryan & Sons, Inc. v. Rhone Poulene Textile,

S.A., 868 F.2d 315 (4th Cir. 1988) 9

Lee v. Ply*Gem Industries, Inc., 598 F.2d 1266

(D.C. Cir.), cert. denied, 441 U.S. 967 (1979) .... 11

Mansbach v. Prescott, Ball & Turben, 598 F.2d

1017 (6th Cir. 1979) 11

McBro Planning & Development Co. v. Triangle

Electrical Construction Co., 741 F.2d 342 (lith

| a ee 9

McCreary Tire & Rubber Co. v. Ceat S.p.A., 501

GO _yy————— EE 11

McCowan v. Dean Witter Reynolds Inc., 682 F.

Supp. 741 (S.D.N.Y. 1987) 3

McCowan v. Dean Witter Reynolds Inc., 889 F.2d

GBA GRR GD, Fe tctthceinittacntitticinnninis 4

McCowan v. Dean Witter Reynolds Inc., 1989 Fed.

Sec. L. Rep. (CCH) {94,423 (S.D.N.Y. April

12, 1989) ........ . - ™ 4

Mitsubishi Motors Corp. v. Soler Chrysler-

Plymouth, Inc., 473 U.S. 614 (1985) .................. 8

vii

TABLE OF AUTHORITIES—Continued

Moses H. Cone Memorial Hospital v. Mercury Con-

struction Corp., 460 U.S. 1 (1983) —....................

‘Newcome v. Esrey, 659 F. Supp. 100 (W.D.Va.

1987), aff'd, 862 F.2d 1099 (4th Cir. 1988) _......

Shearson/American Express, Inc. v. McMahon, 482

es ee MIE centectintasithicsisnceisienttaduninbenninemeeinnns

Thornburgh v. American College of Obstetricians

& Gynecologists, 476 U.S. 747 (1986) -...............

Torres v. Oakland Scavenger Co., 487 U.S. 312

SURI Sa tet Se al A A

Volt Information Sciences, Inc. v. Board of Trust-

ce fF Fe fen

STATUTES

Federal Arbitration Act § 8, 9 U.S.C. § 3 —..............

Federal Arbitration Act § 15, 9 U.S.C. § 15 —....

Racketeer Influenced and Corrupt Organizations

PR ace A a A SI SO

Securities Act of 1933, 15 U.S.C. § 77a _........----...

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

Securities Act of Virginia, Va. Code Ann. § 13.1-

ERT RPA AREAS OE Ae oe

MISCELLANEOUS

16 C. Wright & A. Miller, Federal Practice and

Procedure §§ 3921, 39387 (1977) .........................-

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4

IN THE

Supreme Court of the United States

OCTOBER TERM, 1990

No. 90-279

HoRACE D. McCowan, JR. and

SARAH E. MCCOWAN,

Petitioners

V.

SEARS, RoEBUCK & Co., and

DEAN WITTER REYNOLDS INC.,

Respondents

On Petition for Writ of Certiorari to the

United States Court of Appeals

for the Second Circuit

BRIEF OF RESPONDENTS

SEARS, ROEBUCK & CO. AND

DEAN WITTER REYNOLDS INC.

IN OPPOSITION

Respondents Sears, Roebuck & Co. (“Sears”) and Dean

Witter Reynolds Inc. (“Dean Witter”) respectfully sub-

mit this Brief in opposition to the Petition of Horace D.

McCowan, Jr. and Sarah E. McCowan (collectively “the

McCowans”) for a writ of certiorari to review the deci-

sion of the United States Court of Appeals for the

Second Circuit in this case. The opinion of the Court of

Appeals is not yet reported, but is provided in the Ap-

pendix to the Petition (“P. App.’’).

STATEMENT OF THE CASE

The McCowans claim that they lost money in a securi-

ties trading account by reason of non-disclosure and other

misconduct by Dean Witter (P. App. at 62-66). Dean

Witter and the McCowans had agreed in writing that

“any controversy” between them would “be settled by

arbitration” (P. App. at 75-76). All the lawsuits, ap-

peals, orders, and various reported and unreported deci-

sions of two District Courts and the Second Circuit, and

the entire unique procedural tangle now presented to

this Court, are the results of four years of increasingly

frenzied effort by the McCowans to avoid arbitration not-

withstanding this Court’s decisions in Shearson/American

Express, Inc. v. McMahon, 482 U.S. 220 (1987), and

Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 218 (1985).

The McCowans filed two District Court actions in

1986. The first (“McCowan I’, to use the Court of Ap-

peals’ terminology, see P. App. at 3) was commenced

against Dean Witter only in the Southern District of

New York and made claims under RICO, 18 U.S.C.

§ 1961, et seg., and the Federal securities laws? that the

transactions in their brokerage account with Dean Witter

were unauthorized and that misrepresentations had been

made by Dean Witter regarding their account. The sec-

ond (“McCowan II’), a diversity case from which this

Petition arises, was commenced in the Eastern District

of Virginia, named both Dean Witter and Sears as de-

fendants, and alleged that Dean Witter violated the anti-

fraud provisions of the Securities Act of Virginia, Va.

Code Ann. § 13.1-501, et seg. (“the Virginia Act”), in

connection with transactions made in the McCowans’

Dean Witter account in 1985 (P. App. at 61-67, 87-89).

The complaint requested no relief against Dean Witter,

but rather demanded “judgment against the defendant

1Claims were asserted under both the Securities Act of 1933

(“the Securities Act”), 15 U.S.C. § 77a, and the Securities Exchange

Act of 1934 (“the Exchange Act’), 15 U.S.C. § 78a.

Sears, only,” for damages for Dean Witter’s alleged con-

duct (P. App. at 67) on the theory that Sears is a con-

trolling person of Dean Witter under the Virginia Act

and vicariously liable for Dean Witter’s alleged violations

of the statute.

The District Court in Virginia transferred McCowan

II to the Southern District of New York, where it was

consolidated with McCowan I already filed in that Dis-

trict in October 1986; McCowan I was based on the

exact same transactions in the same brokerage account

at issue in MeCowan II.

In June 1987, Dean Witter and Sears filed a motion

to dismiss McCowan II on the grounds that no relief was

sought against Dean Witter, that the claims against

Sears failed to state a claim for controlling person lia-

bility, and that the entire complaint failed to plead fraud

with the required particularity. Alternatively, Dean

Witter sought a stay pending arbitration under the Fed-

eral Arbitration Act, 9 U.S.C. §3 (P. App. at 86).2 At

the time the motion was filed to dismiss or stay McCowan

II, Dean Witter’s motion to dismiss or stay McCowan I

was already pending in the Southern District.

The District Court ruled on the motions to dismiss

McCowan I and McCowan IT in a decision issued in De-

cember 1987 and held that the arbitration provision in

the customer’s agreement between Dean Witter and the

McCowans was valid, stayed the RICO and Exchange Act

claims pending arbitration as required by this Court’s

decision in Shearson/American Express, Inc. v. McMahon,

482 U.S. 220 (1987), and dismissed the Securities Act

claims with leave to replead. McCowan v. Dean Witter

Reynolds Inc., 682 F. Supp. 741 (S.D.N.Y. 1987). The

District Court deferred ruling on the motion to dismiss

the Virginia state law claim against Sears in McCowan

2 The arbitration clause in the McCowans’ customer’s agreement

with Dean Witter is reproduced in P. App. at 75-76.

4

II pending the repleading of the Securities Act claims,

and did not reach Dean Witter’s alternative motion for

a stay pending arbitration of McCowan II. Id. at 745.

The McCowans subsequently filed an amended com-

plaint in McCowan I repleading their Securities Act

claims, which was dismissed on Dean Witter’s motion in

April 1989 for failure to state a claim. McCowan v.

Dean Witter Reynolds Inc., 1989 Fed. Sec. L. Rep. (CCH)

794,423 (S.D.N.Y. April 12, 1989). The only other

claims asserted in McCowan I had been stayed pending

arbitration by the District Court’s decision of December

1987. The McCowans appealed the orders dismissing the

Securities Act claims and staying McCowan I pending

arbitration of the RICO and Exchange Act claims; the

Court of Appeals dismissed that appeal for lack of ap-

pellate jurisdiction since orders staying litigation pend-

ing arbitration are not immediately appealable. McCowan

v. Dean Witter Reynolds Inc., 889 F.2d 451 (2d Cir.

1989).

As of June 1989, ali the McCowan I claims (i.e., all

the claims for relief against Dean Witter) that had not

been dismissed had been stayed by the District Court

pending arbitration, but the District Court had not ruled

on the motion of Dean Witter and Sears to dismiss or

stay McCowan Il. As a consequence, Dean Witter and

Sears filed a renewed motion to dismiss or, in the alterna-

tive, to stay McCowan II. Dean Witter requested a stay

under § 3 of the Federal Arbitration Act, pending arbi-

tration of the allegations that Dean Witter violated the

Virginia Act. Sears moved for a discretionary stay of

the state law claims asserted against it, pending arbitra-

tion of the matter as to Dean Witter. In that motion,

Sears argued that the claim of controlling person lia-

bility should be dismissed for failure to state a claim, so

Sears did not at that time seek to have the claim against

it—the only claim for relief in McCowan I]—referred to

arbitration based upon the customer’s agreement with

Dean Witter. —

5

On October 5, 1989, the District Court denied the mo-

tion to dismiss or stay McCowan II (P. App. at 39-53) .*

Dean Witter filed a motion for reconsideration under

Local Rule 3(j) of the Southern District of New York,

which was denied, and filed a Notice of Appeal on No-

vember 6, 1989.

Sears filed in November 1989 a motion under §3 of

the Federal Arbitration Act seeking a stay and referral

of the Virginia Act claims against Sears to arbitration.

Because the District Court had held in its October 1989

opinion that Sears is a controlling person of Dean Witter

under the Virginia Act (P. App. at 46), Sears asserted

its right to enforce the arbitration agreement because

the McCowans’ claims against Sears alleged only deriva-

tive and vicarious liability for the acts of Dean Witter.

On January 17, 1990, the District Court denied Sears’

motion for a stay under § 3 of the Federal Arbitration

Act based solely on a finding that Sears was an inciden-

tal, rather than an intended, beneficiary of the customer’s

agreement between Dean Witter and the McCowans (P.

App. at 56-60).

Sears filed a notice of appeal from the January 17,

1990 order on January 24, 1990, since interlocutory or-

ders denying stays pending arbitration are immediately

appealable under the Federal Arbitration Act, 9 U.S.C.

$15(a)(1)(A) (P. App. at 86). The appeal from the

January 1990 decision denying Sears a stay pending ar-

bitration was consolidated in the Court of Appeals with

the appeal from the October 1989 decision denying Dean

Witter a stay.

It is undisputed that the Court of Appeals had juris-

diction over the appeal from the January 1990 order

denying Sears a stay under §3 of the Federal Arbitra-

* The District Court’s opinion was filed October 5, 1989, although

it is “dated” October 12, 1989, apparently a typographical error

(P. App. at 53).

6

tion Act. With respect to the appeal from the October

1989 decision denying Dean Witter a stay, however, the

Court of Appeals treated Dean Witter’s motion for recon-

sideration as a motion under Rule 59(e) of the Federal

Rules of Civil Procedure and regarded Dean Witter’s

Notice of Appeal as two days premature (P. App. at

10-11), conclusions with which Dean Witter disagrees

but which have no direct bearing on the instant Petition.

The Court of Appeals recognized nonetheless that the

appeal from the January 1990 order as to Sears “re-

quires analysis of the arbitration agreement entered into

by the plaintiffs and Dean Witter” and an “examination

of the relationship between the defendants and the basis

upon which the plaintiffs assert liability against them”

(P. App. at 13).

Emphasizing that no recovery against Sears as a con-

trolling person is possible unless the McCowans first

prove their contention that Dean Witter violated the Vir-

ginia Act (P. App. at 15), the Court of Appeals con-

cluded that under § 3 of the Federal Arbitration Act the

issue of whether Dean Witter violated the Virginia Act

must be arbitrated in accordance with the arbitration

clause in the customer’s agreement (P. App. at 17). As

a result, the Court of Appeals concluded that the claim

for relief against Sears in McCowan II, which is wholly

dependent on the allegations against Dean Witter, also

could not proceed. The Court of Appeals stayed the entire

McCowan II action pending arbitration (P. App. at 20).*

4In December 1989, two years after the District Court stayed

McCowan I pending arbitration of the RICO and Exchange Act

claims, the McCowans filed a Demand for Arbitration with the

American Arbitration Association asserting claims against Dean

Witter under those statutes and for common law conversion and

breach of contract. The case is scheduled to be heard by a panel of

arbitrators in Richmond, Virginia on September 24, 1990 through

September 28, 1990. A copy of the Notice of Hearing is provided

in the Appendix to this Brief (“R. App.’’).

7

As this unduly convoluted matter now stands, all claims

for relief against Dean Witter arising from the facts

alleged in both McCowan I and McCowan II are to be

arbitrated in several weeks. All claims for relief against

Sears arising from the same facts—the McCowan II

claims for relief—have been stayed at the direction of

the Court of Appeals. In advance of the results of that

arbitration (see R. App.}, the MeCowans ask this Court

to review the Court of Appeals’ interlocutory determina-

tion, apparently in an effort to litigate in the District

Court their state law claims against Sears for the alleged

misdeeds of Dean Witter, a litigation which can only

reach a result after the McCowans’ claims against Dean

Witter have been decided on the merits by the arbitra-

tors. In short, the MceCowans seek relief which is simul-

taneously lacking in general importance (since the proce-

dural snarl of McCowan I and I! is hard to replicate),

interlocutory, inefficient, and in all likelihood moot.

REASONS FOR DENYING THE WRIT

This case does not raise issues appropriate for the ex-

ercise of this Court’s discretionary review by certiorari.

It does not present any conflict between a decision of this

Court and the decision of the Court of Appeals, or any

conflict between decisions of several courts of appeals.

Nor does it raise any important question of constitu-

tional or federal law. The sole significant issue, viz.,

whether the McCowans are bound by their arbitration

contract no matter how much they object or how many

times they sue or appeal, has already been decided in

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

220 (1987), and Dean Witter Reynolds Inc. v. Byrd, 470

U.S. 213 (1985).

In reviewing the interlocutory order denying Sears a

stay pending arbitration, where Sears’ right to arbitra-

tion is dependent on Dean Witter’s right to arbitration, the

Court of Appeals was required to determine whether the

8

underlying claim against Dean Witter is subject to arbi-

tration and correctly did so. The unique procedural

posture of the case and the unusual position of Sears

and Dean Witter as defendants and respondents—cir-

cumstances created by the McCowans’ litigation strate-

gies to evade their arbitration contract—suggest no rea-

son for review by this Court and indeed weigh against -

the granting of interlocutory review of this exceptionally

fact-bound matter.

I. THE COURT OF APPEALS HAD JURISDICTION

OVER THE SEARS APPEAL AND IN HEARING

THAT APPEAL WAS REQUIRED TO DETERMINE

WHETHER THE ARBITRATION CLAUSE IN THE

DEAN WITTER CUSTOMER AGREEMENT WAS

VALID AND WHETHER THE CLAIMS BROUGHT

UNDER THE VIRGINIA SECURITIES ACT FALL

WITHIN THE SCOPE OF THAT ARBITRATION

CLAUSE

The Petition focuses almost exclusively on the appeal

from the October 1989 decision denying Dean Witter

a stay under the Federal Arbitration Act, and ignores

the fact that in the Sears appeal, as to which no juris-

dictional issue exists, it was necessary for the Court of

Appeals to determine whether the underlying dispute be-

tween the McCowans and Dean Witter is arbitrable. In

other words, review of the order denying Sears a stay

under § 3 of the Arbitration Act required a determina-

tion as to whether the arbitration clause in the cus-

tomer’s agreement with Dean Witter is enforceable and

whether the Virginia state law claims asserted in this

action fall within the scope of that arbitration clause.

See Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth,

Inc., 473 U.S. 614, 626, 630 (1985). See also Genesco,

Inc. v. T. Kakiuchi & Co., 815 F.2d 840, 844 (2d Cir.

1987) (citing Mitsubishi).

The McCowans assert that the issues of whether Dean

Witter and Sears are each entitled to stays are “totally

9

independent if not exclusive of each other” (Pet. at 8).

This simply ignores the long line of cases holding that

a non-signatory who is alleged to be vicariously or de-

rivatively liable for the actions of a signatory to an

arbitration agreement may be bound by, and may en-

force, the arbitration proviso. Thus, for example, where

there is an agency relationship between the signatory

and the non-signatory, the non-signatory may enforce or

be bound by the arbitration agreement. See, e.g., Inter-

bras Cayman Co. v. Orient Victory Shipping Co., 663

F.2d 4, 6 (2d Cir. 1981); In re Oil Spill by the Amoco

Cadiz, 659 F.2d 789, 796 (7th Cir. 1981). Similarly,

where a parent company or shareholder exercises con-

trol over the signatory so as to be an “alter-ego” or to

justify piercing the corporate veil, the non-signatory

parent or shareholder can both enforce and be bound by

the arbitration agreement. See, e.g., Farkar Co. v. R. A.

Hanson DISC, Ltd., 583 F.2d 68, 70-71 (2d Cir. 1978) ;

Fisser v. Int’l Bank, 282 F.2d 281, 234-35 (2d Cir.

1960). Whatever legal theory is relied upon to give the

non-signatory the benefit or obligation of the arbitration

agreement, the reasoning is the same: having sought to

hold the non-signatory vicariously liable for damages for

the actions of the signatory, the plaintiff cannot deny

tue non-signatory the benefit of the arbitration agree-

ment. See J.J. Ryan & Sons, Inc. v. Rhone Poulenc Tex-

tile, S.A., 863 F.2d 315, 320-21 (4th Cir. 1988). See

also McBro Planning & Dev. Co. v. Triangle Elec.

Constr. Co., 741 F.2d 342, 344 (11th Cir. 1984); In re

Oil Spill by the Amoco Cadiz, 659 F.2d at 796.

This line of authority is not, as suggested by the

McCowans (Pet. at 10-11), inconsistent with the prin-

ciple that parties cannot be required to arbitrate absent

an agreement to do so, but rather relies on basic common

law notions to determine when principals, parent cor-

porations, and others alleged to be vicariously liable for

the conduct of their agents and subsidiaries can be bound

by, and enforce, arbitration agreements entered into by

10

the entities for whose conduct they are being held re-

sponsible: the ‘variety of ways in which a [non-signa-

tory] . .. may become bound ... is limited only by

generally operative principles of contract law.” Fisser v.

Intl Bank, 282 F.2d at 233.

For the McCowans to urge this Court (Pet. at 10) to

grant the Petition on grounds that the decision of the

Court of Appeals “directly conflicts with this Court’s

reasoning and comments in Volt, 109 S. Ct. at 1254 n.5”

is captious. That footnote 5 in Volt Information Sci-

ences, Inc. v. Board of Trustees, 109 S. Ct. 1248 (1989),

merely observes that the Federal Arbitration Act “itself

contains no provision designed to deal with the special

practical problems that arise in multiparty contractual

disputes when some or all of the contracts at issue in-

clude agreements to arbitrate.” Similarly, that portion

of the decision in Moses H. Cone Memorial Hospital v.

Mercury Construction Corp., 460 U.S. 1 (1983), alleged

(Pet. at 10) to be contradicted by the Court of Appeals’

decision, holds only that an independent architectural

firm hired to oversee a construction project cannot be

required to arbitrate without its consent where the only

arbitration clause is in a contract between the project

owner and the general contractor. 460 U.S. at 4, 19-20.

Neither point is significant in this case where a parent

corporation, which is alleged only to be vicariously

liable for the conduct of its subsidiary, seeks to enforce

for its own benefit an arbitration clause in its subsid-

iary’s contract with the plaintiff.

Il. APPELLATE JURISDICTION WAS PROPERLY

EXERCISED

The rubries of pendent appellate jurisdiction and the

scope of interlocutory appellate review are frequently

treated as interchangeable and described in imprecise

language; Professors Charles Alan Wright and Arthur

Miller begin their commentary on “pendent and retained

jurisdiction” with the observation that:

dee ate Retr

il

A court of appeals may occasionally decide questions

going beyond the obvious limits authorized by the

appeal or petition before it. Many of the illustra-

tions that might be offered involve nothing more

than intelligent definition of the scope of interlocu-

tory appeals, in light of the fact that the immediate

occasion for appeal may warrant or even require

consideration of closely related issues. .. .

16 C. Wright & A. Miller, Federal Practice and Pro-

cedure § 3937 (1977). They also observe that “juris-

diction of the interlocutory appeal is in large measure

jurisdiction to deal with all aspects of the case that have

been sufficiently illuminated to enable decision by the

court of appeals without further trial court develop-

ment.” Id. at § 3921. See Thornburgh v. American Col-

lege of Obstetricians & Gynecologists, 476 U.S. 747,

756-57 (1986); Deckert v. Independence Shares Corp.,

311 U.S. 282, 287 (1940); Decker Coal Co. v. Common-

wealth Edison Co., 805 F.2d 834, 837 n.1 (9th Cir.

1986); Intermedics Infusaid, Inc. v. Regents of Univ.

of Minnesota, 804 F.2d 129, 184 (Fed. Cir. 1986) ; Mans-

bach v. Prescott, Ball & Turben, 598 F.2d 1017, 1023

(6th Cir. 1979); Lee v. Ply*Gem Indus., Inc., 593 F.2d

1266, 1270 (D.C. Cir.), cert. denied, 441 U.S. 967

(1979); McCreary Tire & Rubber Co. v. Ceat S.p.A.,

501 F.2d 1032, 1037-38 (3d Cir. 1974).

In this case,” disposition of the Sears appeal, as to

which there is no jurisdictional issue, required a deter-

mination of whether the arbitration agreement between

the McCowans and Dean Witter is enforceable and

whether the Virginia Act claims fall within the scope of

that agreement.* Sears’ right to a stay depends on the

5It should be noted, although the McCowans pretend to forget,

that “this case” includes both McCowan I and McCowan II, which

were consolidated (P. App. at 3).

6 Contrary to the arguments advanced in the Petition, there is no

conflict or inconsistency between the Court of Appeals’ necessary

12

enforceability and scope of Dean Witter’s arbitration

clause, and the Court of Appeals could not grant Sears

full relief without determining whether Dean Witter

was entitled to arbitration of the Virginia state law

allegations. Had only Sears, and not Dean Witter, moved

for a stay pending arbitration, or had Sears been the

only defendant named in the case, an appeal from a de-

nial of a stay as to Sears would have involved the same

examination of the underlying issues as to Dean Witter.

It hardly rises to the level appropriate for certiorari re-

view to ask this Court to entertain this interlocutory

matter simply to determine (i) whether as a matter of

language or labelling the Court of Appeals exercised pen-

dent appellate jurisdiction, or (ii) whether the Court

of Appeals merely recognized that the scope of review as

to Sears necessarily included consideration of all those

fully briefed issues on which Sears’ rights depend, and

having performed that review, decided to correct a plain

and closely-related error and to remand Dean Witter to

arbitration before, rather than after, a long lawsuit and

trial.

determination of the issue regarding Dean Witter’s arbitration

agreement with the McCowans, and the decisions in Abney v. United

States, 431 U.S. 651 (1977), that where a district court’s rejection

of a criminal defendant’s double jeopardy claim is immediately

reviewable under the narrow “collateral order’ exception to the

final judgment rule, other grounds for dismissal of the case rejected

by the district court are reviewable at that time only if they satisfy

the requirements of the “collateral order” exception, or in Torres

v. Oakland Scavenger Co., 487 U.S. 312 (1988), where the appeal of

one of sixteen appellants was barred because due to a clerical error

his name did not appear on the notice of appeal.

a

13

Ill. THE COURT OF APPEALS REACHED THE COR-

RECT RESULT IN STAYING YEARS OF LITIGA-

TION DESIGNED SOLELY TO DENY BOTH DEAN

WITTER AND SEARS THEIR STATUTORY AND

CONTRACTUAL RIGHTS TO ARBITRATION

The Court of Appeals reached the correct result in

staying this entire action pending arbitration of the Mc-

Cowan’s claims under the Virginia Act. The Petition

does not purport to challenge the validity of the arbitra-

tion clause, or to contend that the Virginia Act claims

are otherwise not subject to arbitration.’

Rather, the McCowans insist in the Petition that be-

cause they request no damages from named defendant

Dean Witter in McCowan II, they have no “claim”

against named defendant Dean Witter under the Vir-

ginia Act and therefore no “claim” to refer to arbitra-

tion. (Pet. at 8-9). The Court of Appeals cut through

these semantics, observing:

Although fashioned as two separate lawsuits, there

is in reality a single “controversy” at issue—as that

term would have been understood by the contracting

parties—giving rise to claims under three separate

laws: the 1934 Act, RICO and the Virginia Securi-

ties Act. The first two demand a money judgment

from Dean Witter; the third requires a showing of

liability against Dean Witter as a predicate to re-

covery against Sears, but demands no monetary

judgment from Dean Witter (P. App. at 17).

The arbitration clause requires arbitration of “any con-

troversy” (P. App. at 75), and §3 of the Federal Arbi-

tration Act speaks of arbitrable issues, not claims for

relief, and requires that courts stay litigation pending

arbitration “if any suit ... be brought ... upon any

7 The state law claims are not in any respect exempt from arbitra-

tion. Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213 (1985);

Newcome v. Esrey, 659 F. Supp. 100, 104 (W.D.Va. 1987), aff’d,

862 F.2d 1099 (4th Cir. 1988).

14

issue referable to arbitration under an agreement in

writing for such arbitration.” 9 U.S.C. §3 (emphasis

added) (P. App. at 86).

This Court has recognized that the congressional intent

underlying the Federal Arbitration Act includes an intent

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

and into arbitration as quickly and easily as possible.”

Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp.,

460 U.S. 1, 22 (1983). In directing that this entire case

be stayed pending arbitration, the Court of Appeals

sought to conclude an effort of nearly four years by

the McCowans to avoid arbitration. Indeed, counsel for

the McCowans acknowledged at oral argument in the

Court of Appeals that the reason for the multiple actions

was to attempt to avoid arbitration of the Virginia state

law claim.

No final judgment has been entered in either McCowan

I or McCowan II; both cases are stayed pending arbitra-

tion. Following the issuance of an award in the McCowan

I arbitration scheduled to be tried in this month, there

will doubtless be further court proceedings when the par-

ties attempt to confirm or vacate the award, leading to

an appealable final judgment. All the issues raised and

preserved by the McCowans, by Sears and by Dean Witter

in the litigation can then be heard on appeal. There is

no reason for this Court to grant review of this matter

at what is, notwithstanding that the case was filed in

1986, an interlocutory and preliminary stage in the litiga-

tion.

15

CONCLUSION

For these reasons, respondents urge that the Petition

for Writ of Certiorari be denied.

Respectfully submitted,

JOHN LINSENMEYER *

JOHN F.X. PELOSO

ELIZABETH Hoop Fay

MORGAN, LEWIs & BOCKIUS

101 Park Avenue

New York, NY 10178

(212) 309-6000

Attorneys for Respondents

Sears, Roebuck & Co. and

Dean Witter Reynolds Inc.

* Counsel of Record

APPENDIX

la

APPENDIX

Notice of Hearing Before

American Arbitration Association

AMERICAN ARBITRATION ASSOCIATION

Case Number: 16 136 00674 89G

IN THE

MATTER OF THE ARBITRATION BETWEEN

Horace D. McCowAn, JR., & SARAH E. MCCOWAN

AND

DEAN WITTER REYNOLDS INC.

NOTICE OF HEARING

Charles W. Laughlin, Esq. Robert E. Payne

Thompson & McMullan McGuire, Woods, Battle,

100 Shockoe Slip & Boothe

3rd Floor One James Center

Richmond, VA 23219 Richmond, VA 23219

Please Take Notice that a Hearing in the above-

entitled Arbitration will be held at the Arbitration Tri-

bunal of the American Arbitration Association.

AT:

DATE:

TIME:

BEFORE:

Richmond, Virginia—To Be Determined

September 24-28, 1990

10:00 am

Morris G. Sahr

William H. Malloy, Jr., Esq.

John P. Connolly, Esq.

2a

Please attend promptly with your witnesses and be

prepared to present your proofs.

Jay Gordon

Case Administrator

Dated: May 30, 1990

NOTICE: The Arbitrator(s) have arranged their sched-

ule and reserved the above date to meet the convenience

of the Parties. Therefore, every effort should be made to

appear on the date scheduled. In the event that unfore-

seen circumstances make it impossible to attend the hear-

ing as scheduled, the Parties are to request a postpone-

ment, no less than 48 hours before the time and date set

for hearing. All requests for postponements must be

comraunicated to the Case Administrator (not the Arbi-

trator). There should be no communication between

Parties and the Arbitrator other than at oral hearings.

ec: Arbitrator (s)

Form 8-AAA-C-1/82