Amicus Curiae Brief — Liberty Mutual Insurance v. Drew

Supreme Court brief1974

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The interest of the United States. -----------------"-"" 2

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CITATIONS

Cases:

City of Burbank v. Lockheed Air Terminal, Inc., 411

TIM: O0Ocu2 ssUa da scat eeaee obser e oe 4

Colorado Anti-Discrimination Comm’n v. Continental

Air Lines, Inc., 372 US. 714---------------7"7-- 4

Florida Lime & Avocado Growers, Inc. v. Paul, 373

TS WOR 2S a ls0d sie “ee Ses~~ sessweorno<™ ¢ 3

Parker v. Brown, 317 U.S. 341..-----------------"- 12

Penn Dairies, Inc. v. Milk Control Comm'n, 318 US.

mee. £0 dindassancs owenen> owensownn enone’ 12

Rice v. Chicago Board of Trade, 331 * aa 4

Rules of the New York Stock Exchange, In the

Matter of, 10 S.E.C. 270-..------------<-277--" "0 7

Silver v. New York Stock Exchange, 373 US. 341--- 9, 11,12

Statutes and rules:

Securities Exchange Act of 1934, 48 Stat. 881, as

amended, 15 U.S.C. 78a et seg.:

Section 2, 15 U.S.C. te | cncacccessesee parse

Section 6(a), 15 U.S.C. 78f(a) - ----------------

Section 6(b), 15 U.S.C. 781 (b) -----------------

Section 6(c), 15 U.S.C. 78f(c) ----------------"

Section 6(d), 15 U.S.C. 78f(d) -----------------

Section 8, 15 U.S.C. qWh...-------------------

Section 9(b) 15 U.S.C. 78i(b)------------------

Section 11(a), 15 U.S.C. 78k(a)----------------

Section 19(b), 15 U.S.C. 78s(b)------------- 6, 7,9, 10

Section 28(a), 15 US.C. 78bb(a) ---------------

523-090—73-——1

Statutes and rules—Continued

Securities Exchange Act of 1934—Continued

Section 28(b), 15 U.S.C. 78bb(b)

Section 29(a), 15, U.S.C. 78ec(a)

Section $2(a), 15 U.S.C. 78ff(a) :

and Professions Code, Section

nthe Supreme Court of the Winted States

Ocroper TERM, 1973.

No. 72-312

MERRILL LYNCH, Pxerce, PENNER & Smarts, INo.,

PETITIONER

Davin WARE, ET AL.

————$—$——

ON WRIT OF CERTIORARI TO THE COURT OF APPEAL OF

THE STATE OF CALIFORNIA FOR THE FIRST APPELLATE

DISTRICT

——$—$—$—

QUESTION PRESENTED

The United States will discuss the following ques-

, tion:

Whether, where an employee of a member firm of

the New York Stock Exchange has entered into an

agreement to arbitrate any dispu' relating to his em-

ployment, as required by a rule of the Exchange, the

Securities Exchange Act of 1934 preempts the appli-

eation to sueh an employment dispute of a California

statute providing that actions for wages can be main-

tained without regard to arbitration agreements.

(a)

THE INTEREST OF THE UNITED STATES

At the Court’s invitation, the United States filed a

government has an interest in the issues raised by the

parties, which concern the effect of the Securities Ex-

change Act of 1934 on the applicability of state law A)

rules of a stock exchange registered with and regulated

by the Securities and Exchange Commission.

. | P

Petitioner (“Merrill Lynch’’), a securities broker-

dealer registered with the Securities and Exchange

Commission, is a member of several stock exchanges

located in different states, including the New York

Stock Exchange, located in New York. It has a profit-

sharing plan for its employees containing a provision

ployment with Merrill Lynch forfeits his vested in-

terest in the plan if he subsequently is employed by a

competitor of Merrill Lynch or establishes a competi-

tive business (A. 38)."

Respondent David Ware, a California resident and

a former registered representative of Merrill Lynch

employed at one of its California offices, has been de-

nied distribution of his earned profit-sharing credits

under this forfeiture provision. Mr. Ware brought a

class action in a state court in California, alleging that

the forfeiture provision was invalid under California

Business and Professions Code Seetion 16600 (Pet.

Br. 4), which voids any contract to the extent that an

individual is restrained from engaging in a lawful

occupation.

Merrill Lynch petitioned for an order compelling

arbitration of the dispute on the basis of a written

agreement between it and Mr. Ware in which he

agreed that any dispute arising out of his employ-

ment. would be. settled by arbitration in accordance

with the rules of the Exchange (A. 53, 55-56; ef. Pet.

A8). Rule 347(b) of the Exchange provides that any

controversy between a registered representative and a

member of the Exchange arising out of the representa-

tive’s employment by a member thereof shall be settled

by arbitration (Pet. A9).

The trial court denied the petition to compel arbitra-

tion, and the California Court of Appeal affirmed on

the basis of Section 229 of the California Ann. Labor

Code (Pet. Br. 5), which provides that actions for wages

can be maintained without regard to arbitration

agreements.

DISCUSSION

1. A federal law will not ordinarily be found to.

supersede or preempt application of a state law unless

there is “‘such actual conflict between the two schemes

of regulation that both cannot, stand in the same

area,’’ or there is ‘‘evidence of a eongressional de-

sign to preempt the field.’”” Florida Lime & Avocado

Growers, Inc. v. Paul, 373 U.S. 132, 141. A finding

of preemption may be dictated by the nature of

the regulated subject, id. at 142, by the existence of

a pervasive and comprehensive scheme of federal

regulation that “requires a uniform and exclusive

system of federal regulation” to fulfill the’ federal

statutory purposes, City of Burbank v. Lockheed Air

Terminal, Inc., 411 U.S. 624, 639, or by the presence

of such’a conflict with the federal statute or the federal

regulatory scheme that application of the state law

would frustrate the purpose of the federal law. Colo-

yado Anti-Discrimination Comm’n V. Continental Atr

Lines, Inc., 312 U.S. 714, 724; Rice v. Chicago Board of

Trade, 331 U.S. 247, 253-255. |

Under these principles, we submit that in the cir-

cumstances of this case, Section 229 of the California

Ann. Labor Code has not been preempted by the Secu-

rities Exchange Act of 1934. |

2. Prior to enactment ‘of the Securities Exchange

Act of 1934, the power of regulation of the nation’s

securities exchanges rested primarily with the ex-

changes themselves, subject to such limited and largely

ineffectual state or local laws as might have borne

upon their operations. The legislative history of that

Act, engendered by the stock market crash of 1929,

reveals that Congress concluded that the prevailing

degree of reliance on self-regulation of the activities

of exchanges and their members was inadequate, that

their autonomy should be limited, and that a measure

of federal regulation was required.” But Congress

did not give the newly-created Securities and Ex-

change Commission total and exclusive power over

al 7

_? See generally Stock Exehange Practices, Report of the Senate

Committee on Banking and Currency, S. Rep. No. 1455, 73d Cong.,

3a Seas; S. Rep. No. 792, 78d Cong., 94 Sess.; H. Rep. No. 1883,

73d Cong., 2d Sess.

all exchange functions. Rather, the Act provided for

substantial federal regulation of exchange activities

relating to investor protection, fair dealing in secu-

rities, and fair administration of exchanges; in other

respects it continued the application of state law to

the exchanges and, subject to the constraints of federal

and state law, permitted exchanges to ‘eontinue to

regulate themselves to a substantial extent.

In particular, the Act drew a significant distinction

between the scope of authority left to the exchanges

f-ee of federal regulation with respect to “administra-

tion of their ordinary affairs,” and the restricted au-

thority permitted to the exchanges with respect to mat-

ers subject to Commission supervision that more di-

rectly affect the investing public. Thus, the Senate Com-

mittee’s report stressed that, under the. Act “the ini-

tiative and responsibility: for promulgating regula-

tions pertaining to the administration of their ordinary

affairs remain with the exchanges themselves.” But

“where * * * [exchanges] fail adequately to provide

protection to investors * * * the Commission is au-

thorized to step in and compel them to do so.” &. Rep.

No. 792, 73d Cong., 2d Sess. 13.*

The Act contains a general standard that, to ob-

tain registration, an exchange must have rules that are

“just and adequate to insure fair dealing and to pro-

3 The intention was therefore one of “letting the exchanges take

the leadership with Government playing a-residual role. Govern-

iment would keep the shotgun, so to speak, behind the deor, loaded,

well oiled, cleaned, ready for use but with the hope it would never

have to-be used.” Douglas, Democracy and Finance, 82 (Allen

ed., 1940). ;

tect investors * * *.”? 15 USC. 78f(d). In particular,

a registered exchange is, obliged to have rules that

provide for disciplining its members for “conduct or

proceeding inconsistent with just and equitable princi-

ples of trade” and that declare any violation of the Act

or the Commission’s rules or regulations thereunder to

be such conduct. 15 U.S.C. 78f(b).

Otherwise, the Act left exchanges a zone of freedom

and discretion as to their rules. Thus, exchanges are

generally authorized under. Section..6(c), 15 U.S.C.

78£(¢), to promulgate and enforce rules “not inconsist-

ent with * * * [the Act] and the applicable laws of the

State in which * * * [the exchange]; ‘is located.” *

Moreover, Section 19(b) of the Act, 15 US.C. 78s(b),

which authorizes the Commission “to alter or supple-

ment” exchange rules on twelve specified subjects and

“similar -matters” by rule or regulation: or by order,

may be regarded as implicitly authorizing exchanges to

adopt rules on the enumerated matters, none of which

is involved here.*

‘ Before an exchange may be registered, it must agree to fur-

nish “copies of any amendments to the rules of the exchange forth-

with upon their adoption,” Section 6(a) (4), 15.U.S.C. 78f(a) (4).

Commission Rule 17a-8, 17 C.F.R. 240.17a-8, requires that each

exchange submit to the Commission the text of “any proposed

ainendmient or repeal of, or any addition to, its rules,” including

its constitution, articles of incorporation, ' by-laws, and stated

policies, at least three weeks before any action is taken on. the

“Such amatters’ as. (1) safeguards in respect of the financial

evasion of financial responsibility: through the use of corporate

The Commission is authorized to act under Section

19(b) when it finds'a change in an exchange’s rules

to be »

necessary or appropriate for the protection

of investors or to insure fair dealing in secu-

_ yities traded in upon such exchange or to insure

fair administration of such exchange * * *.

Under Section 19(b), therefore, as the House Com-

mittee Report on the bill stated, |

[t]he Commission is empowered, if the rules

of the exchange in any important matter are

not appropriate for the protection of investors

forms or special partnerships; (2) the limitation or prohibi-

tion of the registration or trading in, any security within a

specified period after the issuance or primary distribution there-

of; (3) the listing or striking from listing of any security ;

(4) hours of trading; (5) the manner, method, and. place of

soliciting business; (6). fictitious .or numbered accounts; (7)

the time and method of making settlements, payments, and de-

liveries’ and of Closing accounts; (8) the reporting of transac-

tions on the exchange and upon tickers maintained by or with

the consent of the exchanges, including the method of reporting

short sales, stopped sales, sales of securities of issuers in default,

bankruptcy or receivership, and sales involving other special cir-

cumstances; (9) the fixing of reasonable rates of commission, in-

terest, listing, and other charges; (10) minimum units of trading ;

(11) odd-lot purchases and sales; (12) minimum deposits on mar-

gin accounts; and (13) similar matters.” _ eee

The Commission has recognized : .

“It is clear from this language [of Section 19(b)] that Con-

gress did not intend to empower this Commission to alter or

supplement all rules of a national secyrities exchange. At the

same time it is plain that the language ‘such matters a9 and

‘similar matters’ calls for a broad construction of the section.” /n

the Matter of the Rules of the New York Stock Ewchange, 10

S.E.C. 270, 294. orate | ; Feng?

.or appropriate to insure fair dealing, to order

such changes in the rules after due notice and

hearings as it may deem necessary. [H. Rep.

No. 1383, 73d Cong., 2d Sess. 15. (emphasis

supplied).]

In addition, the Commission has broad rulemaking au-

thority under the Act to deal directly with certain

other matters.’ Accordingly, with respect to “any im-

portant matter,” as the Subcommittee on Securities of

the Senate Committee on Banking, Housing and Ur-

ban Affairs has recently observed, * *

" [t]he Commission’s powers of direct rule mak-

ing * * * and its “reserved’’ authority in sec-

tion 19 are complementary. Taken together they

provide the Commission with pervasive regula-

tory authority over and responsibility for the

- operations of exchange markets and the conduct

_.of persons who use those markets.

‘Finally, although criminal sanctions were provided

for violations of the Act or Commission rules or regu-

lations, 15 U.S.C. 78ff(a), there are no such federal

sanctions for violation of rules of an exchange.”

¢ See, e.g., the Commission’s authority to regulate exchange

transactions concerning options wider $9(b) of the Act, 15

1J.S.C. 78i(b) ; members trading for their own accounts, § 11(),

15 U.S.C. 78k(a) ; hypothecating of customers’ securities, §8, 15

U.S.C. 78h. : | ca

‘Security Industry Study, Report of the Subcommittee on

Securities of the Senate Committee on Banking, Hoysing and

Urban Affairs,'S. Doc. No. 93-13, 93d Cong., Ist Sess. 143.

“®To the ‘contrary, the Act merely provides that, to, obtain

registration, an exchange must file with the Commission an

xenent “to enforce so far as is within its powers compliance

by its members” with the Act and the Commission’s rules and

regulations thereunder. 15 U.S.C. 78f(a) (1).

3. Petitioner contends that application of Section

9229 of the California Ann. Labor Code would lead to

“disparate” results and would conflict with an

exchange rule—Rule 347(b)—adopted under Section

6 of the Act, thus creating a conflict with the Con-

gressional objective of self-regulation under the Act

(Pet. Br. 8, 13). As the petitioner recognizes (Pet.

Br. 22), however, neither the Securities Exchange

Act nor any rule or regulation adopted thereunder

by the Commission purports to establish arbitration

as the generally-favored procedure for resolving all

disputes between exchange members and their em-

ployees.’ In other words, there is no basis for suggest-

ing that Rule 347 (b) was required to implement the

literal language of the Act or any Commission rule.

Moreover, an exchange rule like Rule 347(b), which,

if applicable, would merely require the respondent

to arbitrate his dispute with his employer, deals with

one of the “ordinary affairs” of the exchange that,

as we have shown (supra, Pp. 5), Congress did not

intend were to concern the Commission; the rela-

tionship of such a rule to investor protection, fair

dealing or fair exchange administration——which are

the standards under Section 19(b)—is extremely

attenuated and peripheral, if it exists at all. Accord-

ingly, the Commission ' would have no jurisdiction

? Petitioner's reliance (Pet. Br, 17) upon & passing reference

to arbitration in Silver v. New York Stock Evohange, 313 US.

341, 354, n. 9, ia misplaced, for there the Court wee dealing; in

another context, with exchange rulgs concerning relationships be-

tween exchange members and nonmember firms dealing in over-

the-counter securities, See infra, PP: 11-12 n. 13, yd “hes

under Section 19(b) to modify or review the operation

of Rule 347(b).” _ | 7

Neither the Act nor any Commission rule or regu-

lation purports to displace state law or to require na-

tion-wide uniformity as to an exchange’s ordinary af-

fairs. To the contrary, in the Act Congress several

times indicated its intention that state law should con-

tinue to apply where the Act does no “t As we have

noted; under Section 6(¢) an exchange is authorized

to adopt’ and enforce: rules not inconsistent with the

Act “‘and the applicable laws \of the State in which it

1° In view of the Commission’s lack of jurisdiction concern-

ing ‘suehi’ niatters, ‘its silence when Rule 347 ‘was submitted in

1958 did: not: constitute “authoritative approval” of Rule 547

(b), a8 petitioner contends (Pet. Br. 18).

4 For example, Section 28(a) provides that the rights and

remedies: provided by the Act'are “in addition to any and all

other rights and remedies that may exist at law or in equity,”

and further provides that nothing in. the Act “shall affect the

jurisdiction of the securities commission * * * of any state

* * * insofar as it does not conflict with” the Act or the Com-

mission’s rules and regulations thereunder. 15 U.S.C. T8bb(a).

In addition, Section 28(b) provides, in pertinent, part:

“Nothing in this chapter shall be construed to modify existing

jaw *.* * (2) with regard to the binding effect of * * * [ex-

change] action [to‘ settle disputes between its members] on any

person. who has agreed to be bound. thereby.” sie Sikhs oh

The parties (Pet. Br. 15, Res. Br. 16-20) disagree about the

proper applicability to the instant case of ‘the “nonwaiver”

provision of Section 29(a) of the Act, 15 U.S.C. 78ce(a), which

provides: ——

“Any condition, stipulation, or provision binding any per-

gon to waive compliance with any provision of this chapter or of

any ‘ville or regulation thereunder, or of any rule ‘of an exchange

requited: thereby shall be void.” jdiw

If; ss we believe, the exchange rule in issue here is not “re-

quired” by the Act nor by “any rule or regulation thereunder,”

Section 29(a) is inapplicable.

ilnesemaeeemeamnil

is located.” * There is nothing in the federal regula-

tory scheme to indicate that the activities of exchanges

and their members should not continue generally to

conform to applicable state and local law as they

were required to do before the Act, where such Iceal

standards are not contrary to the express requirements

of federal law, the rules or regulations of the Com-

mission, or the regulatory scheme that the Act estab-

lishes.

The legislative history and express language of the

Act show that a basic intent of the statute was pro-

tection of the investing public through the “main-

tenance of fair and honest markets.” See Section 2 of

the Act, 15 U.S.C. 78b. Exchange rules that are not

substantially related to the statutory objectives.should

not be considered paramount to otherwise conflicting

statutes. Compare Silver v. New York Stock Exchange,

973 U.S. 341." Rule 347(b), as applied here, cannot

be said to be related to the regulatory objectives of the

statute in any but the most indirect manner, and there-

12 Thus, if the law of New York, where the Exchange is lo-

cated, contained a provision like Section 229 of the California

Ann. Labor Code, there would be even less basis for a claim of

preemption.

18The parties have made frequent reference to Silver v.

New York Stock Exchange, 373 U.S. 341, where this Court

considered the question whether the federal Securities Exchange

Act of 1934 had impliedly repealed the federal antitrust laws.

The preemption issue presented here, however, is governed,

not by the principles concerning implied repeal and conflict

between different laws adopted by Congress at different: times,

but by this Court’s separate, if analogous, body of authority

concerning the sensitive interrelationship between laws adopted

by separate, coordinate so ignties, federal and state. More

fore it is net the type of exchange self-regulation

within the scope and purposes of the Securities Ex-

change Act that might oust conflicting provisions of

state law. If the exchange rule in issue before this

Court did involve a matter sufficiently important to

the Act’s objectives to be within the ambit of the Com-

mission’s pervasive regulatory oversight as delineated

by the Act, state law in conflict with the rule would

be preempted. However, the method for resolving dis-

putes about the eligibility of former employees of a

member firm to participate in a profit-sharing plan is

not such a matter. |

so than with the case of implied repeal, “an unexpressed

purpose to nullify” state law “is not lightly to be attributed

to Congress,” Parker v. Brown, 317 U.S. 341, 351, and a claim

of conflict must be, if anything, even more persuasive where

state law is concerned than where a claim of implied repeal

of another federal law is made. Penn Dairies, Inc. v. Milk

Control Comm'n, 318 U.S. 261, 275. As noted in the Memoran-

dum for the United States as amicus curiae, p. 8, n. 6, filed

in opposition to the petition in this case, the Commission and

the Antitrust Division of the Department of Justice have

different positions concerning the applicability of this Court's

decision in Silver to matters subject to Commission oversight.

apres, however, that Silver generally recognizes the con-

tinued applicability of the antitrust and other laws to exchange

activities that are not subject to Commission oversight, and

both agree that this case does not require the Court to con-

sider further the issues raised in Silver.

CONCLUSION

For the foregoing reasons the judgment of the court

of appeal should be affirmed.

Respectfully submitted. |

Rosert H. Bork, §

Solicitor General.

GERALD P. NorTON,

Assistant to the Solicitor General.

LAWRENCE E, NERHEIM,

General Counsel,

Davin FERBER,

Solicitor,

RicHarp E. NATHAN,

Assistant General Counsel,

Martin S. BERGLAS,

Attorney, ah

Securities and Exchange Commission.

OcToBER 1973.

LIBRARY

SUPREME COURT, U. S.

IN THE

Supreme Court of the Anited States

OcTOBER TERM, 1972

No. 73-312

LIBERTY MUTUAL INSURANCE COMPANY,

Petitioner,

vs.

SANDRA J. DREW,

Respondent.

SUPPLEMENTAL STATEMENT OF THE PETITIONER

KALVIN M. GROVE

SHAYLE P. Fox

Lederer, Fox and Grove

111 West Washington Street

Chicago, Illinois 60602

(312) 641-0200

RoserT A. PENNEY

175 Berkeley Street

Boston, Massachusetts 02117

Attorneys for Liberty Mutual

Insurance Company,

Petitioner.

Gunthorp-Warren Printing Company, Chicago @ 346-1717

IN THE

Supreme Court of the Anited States

OCTOBER TERM, 1972

No. 73-312.

LIBERTY MUTUAL INSURANCE COMPANY,

Petitioner,

vs.

SANDRA J. DREW,

Respondent.

SUPPLEMENTAL STATEMENT OF THE PETITIONER

On January 10, 1974 the United States Court of Appeals

for the Sixth Circuit decided a case which has just come to our

attention and which we would like to draw to the Court’s

attention. The case is Jerome v. Viviano Food Company, Inc.,

489 F. 2d 965 (6th Cir. 1974), which in our opinion is in

direct conflict with the holding in the instant case and which,

in our opinion, now creates a conflict between circuits. While

the Sixth Circuit attempts to distinguish the Viviano case from

the Drew case, we do not think they are distinguishable.

Respectfully submitted,