# Petition for Writ of Certiorari — Leon C. Baker P. C. v. Lynch

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition for Writ of Certiorari
- **Published:** January 1, 2002
- **Citation:** 535 U.S. 987

## Text

r
oy,
011150 FEB - 4 2002

In the Supreme Court of the United States

October Term 2001

Leon C. Baker P.C. and Leon C. Baker, individually,
Petitioners

V.

Merrill Lynch, Pierce, Fenner & Smith Inc.,
Respondent

PETITION FOR A WRIT OF CERTIORARI
TO THE SUPREME COURT OF THE
STATE OF ALABAMA

Arthur R. Miller

Attorney for Petitioner

1545 Massachussetts Avenue
Cambridge, Massachussetts 02138

Telephone: (617) 495-4111

Date: February 4, 2002

QUESTION PRESENTED

If a contract governed by the Federal
Arbitration Act, 9 U.S.C. §2 ("FAA"), provides that all
disputes arising hereunder’ shall be submitted to
arbitration," should disputes about preclusion (res
judicata and collateral estoppel) nevertheless be ruled on
by judges, rather than by arbitrators?

TABLE OF CONTENTS

QUESTION PRESENTED PI¹PDPDDZi: n.. i
TABLE OF AUTHORITIES ..........----e sere eee ii
Opinions Below ....... ele OE AS ET EPP ETT EEL ee 1
„„ „„ „„ „„ „„ 2
Constitutional and Statutory Provisions Involved 2
Corporate Disclosure Statement .........----seeeeseeee 3
STATEMENT OF THE CASEERERʒiʒigſiůͥiůin eee e ee eeeee 3
A. Nature of the Cassnsse . 3
B. The Rush to Judgment 5
EIn p e 6
D. The Questions Presented for Review by This
Court Were Raised in the Alabama. Court᷑s 14
E. Reasons for Granting the Wrilt. 15

POINTI: BOTH FEDERAL AND STATE COURTS
ARE SHARPLY DIVIDED AS TO
WHETHER REQUIRING A JUDGE TO
DECIDE PRECLUSION ISSUES IN A
DISPUTE GOVERNED BY AN

il

POINT II:

ARBITRATION AGREEMENT
VIOLATES SECTION TWO OF THE
FEDERAL ARBITRATION ACPI. 16

WHETHER COURTS MAY CREATE
EXCEPTIONS UNDER THE FEDERAL
ARBITRATION ACT FOR PRECLUSION
ISSUES WHEN THE PARTIES HAVE
CONTRACTED TOSUBMIT “ALL”
DISPUTES TO ARBITRATION CALLS

INTO QUESTION IMPORTANT FEDERAL
POLICIES WORTHY OF THIS COURTS’

Fe cere her dee Aka ds eeeues 27

— ͤ]l]ll]sns.. ß

BLE OF AUTHORITIES

CASES

Allied Bruce Terminix Cos. v. Dobson, 513 U.S.
„„ „„ „„ „% % „ „ „ „„ „ „ „ „„ „ 27, 28

Board of Education v. Patchogue-Medford Congress
of Teachers, 48 N.Y.2d 812, 424 N.Y.S.2d 122, 399,

N.E.2d 1143 (1979) 2.0... cee cee cece cere „„%„õ 26

Chiron Corp. v. Ortho Diagnostic Systems, Inc.,

207 F.3d1126 (0 Cir. 20000 / ů ce eee eee renee 24

Clements v. Central Railroad Co. of New Jersey,

399 F.2d 825 (3d Cir. 1968) ) ꝰqu! Un... 17

John Hancock Mutual Life Ins. Co. v. Olick,

151 F.3d 132 (3d Cir. 1998)... :...... 17

Kelly v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,

985 F.2d 1067 (11 Cir. 1993). )))7)».. 19

Mastrobuono v. Shearson Lehman Hutton, Inc.,

SIA UG. M % K 29

Miller v. Runyon, 77 F.3d 189, 194 MW 22

Miller Brewing Co. v. Fort Worth Distributing, 781

F.2d 494 (5™ Cir. 1986) ·ͥ ́ : n eee eee eres 18, 19

National Fire Ins. Co. v. National Gypsum Co.,

101 F.3d 813 (2d Cir. 19960 .Uu U ... 24
iv

National Union Fire Ins. Co. of Pittsburgh, Pa. v.
Belco Petroleum Corp., 88 F.3d 129 (2™ Cir. 1996) 22, 23, 24

Prima Paint Corp. v. Flood & Conklin, Mfg. Co.,
, eee Ter re rs 28

Rembrandt Indus. Inc, v. Hodges International, Inc,

38 N.Y. 2d 502, 381 N.Y.S.451, 344 N. E. 2d
„ 25
Southland Corp. v Keating, 465 U.S. 1 (1984) 14, 16

State Farm Fire & Cas. Co. v. Owen, 729 So.2d 834
CAD, TOPO v6 6.0005 0000996502000646404000 ee 10

Telephone Workers of New Jersey v. New J.ersey Bell Tel.,
ee ccecvvuvicuaetenesseus 17

Waterfront Construction, Inc. v. North End 49ers,
51 Va. 417, 468 S.E. 2d 894 (1996) (en banc) .......... 26

& A Securities Litigation, 38 F.3d 380 (8" Cir. 1994) .. 20

Constitutional Provisions

United States Constitution, Fourteenth Amendment 2

United States Constitution, Article II, Section3 .......... 2

United States Constitution, Article IV, Section] ......... 2

Federal Arbitration Act, Section 22 3
v

In the Supreme Court of the United States

October Term 2001

Leon C. Baker P. C. and Leon C. Baker, individually,
Petitioners
v.
Merrill Lynch Pierce Fenner & Smith Inc.,
Respondent

PETITION FOR A WRIT OF CERTIORARI
TO THE SUPREME COURT OF THE
STATE OF ALABAMA

Petitioners, Leon C. Baker, P. C. (“P. C.“) and
Leon C. Baker ("Baker") pray that a Writ of Certiorari
be issued to review the opinion and judgment of the
Supreme Court of Alabama entered on August 31, 2001.

Opinions Below

The opinion of the Circuit Court of Jefferson
County, Alabama, is not reported. A copy is set forth at
page A-lof the Appendix.

The opinion of the Alabama Supreme Court is set
forth at page C-1 of the Appendix. It is not yet reported in
South 2d.

Jurisdiction

The opinion of the Alabama Supreme Court was
entered on August 31, 2001. An application for rehearing
was filed on September 13, 2001 and was denied on
November 16, 2001. This Petition for a Writ of Certiorari
was filed within ninety days of the denial. The Court’s
jurisdiction is invoked under 28 U.S.C. § 1257(a).

Constitutional and Statutory Provisions

Involved
Article II, Section 3 of the United States
Constitution provides in pertinent part:

The Congress shall have the Power * * *
To regulate Commerce with foreign Nations,
and among the several States, and with the
Indian Tribes * * *.

Article IV, Section I of the United States
Constitution provides in pertinent part:

Full faith and credit shall be given in each
state to the public acts, records, and judicial
proceedings of every other state.

The Fourteenth Amendment to the United States
Constitution provides in pertinent part:

[NJor shall any state deprive any person of life,
liberty, or property, without due process of law

* 4 *
*

The Federal Arbitration Act, Section 2, provides
in pertinent part:

A written provision in any maritime
transaction or a contact evidencing a
transaction involving commerce to settle by
arbitration a controversy thereafter arising out
of such contract or transaction, shall be valid,
irrevocable, and enforceable * * *.

Corporate Disclosure Statement

Petitioner, Leon C. Baker P.C., is a New York
professional corporation authorized to practice law in that
state. The P. C.’s sole shareholder is Leon C. Baker. It
has no subsidiaries.

STATEMENT OF THE CASE
A. Nature of the Case

The P.C. has a securities brokerage account with
Respondent, Merrill Lynch, Pierce, Fenner & Smith Inc.
(Merrill Lynch") and signed the form of agreement
Merrill Lynch requires its customers to execute. The

3

agreement provides that the parties will submit all“
disputes to arbitration. A dispute did arise, the details of
which are set forth later in this Petition. The parties were
unable to resolve the dispute by negotiation, and the P.C.
sued Merrill Lynch in Florida, the state in which Baker,
its sole shareholder, has been a resident and citizen since
1989. |

Merrill Lynch moved to require arbitration.
When reminded of the arbitration provision, the P.C. did
not oppose Merrill Lynch’s motion. The Florida court
entered an agreed order directing arbitration and retained
jurisdiction to enforce any award which might be entered.

The P.C. commenced an arbitration proceeding
before the National Association of Securities Dealers, Inc.
("NASD"), the tribunal selected by Merrill Lynch
pursuant to its arbitration agreement. Merrill Lynch filed
an answer alleging res judicata as its principal defense.
As is set forth more fully below, the P.C. maintains that res
judicata is not applicable based both on the facts and on
the law.

The NASD then submitted a list of prospective
Florida arbitrators, from which a panel of three were to
be appointed. The P.C. selected three lawyers from the
NASD list. Merrill Lynch did not object to any of the P.
C.’s nominees; nor did Merrill Lynch submit any
alternative nominees. Accordingly, the arbitration panel
would have consisted of three lawyers.

On the very eve of the hearing, without any notice
to the P.C. or to the Florida court that had ordered
arbitration, Merrill Lynch obtained from an Alabama trial
court an ex parte restraining order prohibiting the P. C.
and Baker from proceeding with the arbitration. '

B. The Kush to Judgment

The irreparable injury that Merrill Lynch alleged
as the ground for equitable relief against the arbitration
was that it asserted a defense of res judicata which,
Merrill Lynch argued, non lawyer arbitrators would not
understand (ignoring the fact that all the chosen
arbitrators were lawyers). Baker and the P. C. objected
that an Alabama court could not interfere with an
arbitration ordered by a Florida court, and that Merrill
Lynch had waived any right it might have had to object to
arbitration, first, by seeking arbitration, and, second, by
participating in it. Moreover, the P.C. showed that res
judicata was not applicable because, as is more fully set
forth below, the P.C. was not a party to the earlier
proceedings and could not have appealed. Both the
Alabama trial court and the Alabama Supreme Court

1. Merrill Lynch may have elected to sue in Alabama, rather
than in Florida, among other reasons, because Alabama is notoriously
hostile to arbitration. See Ala. Code 8-1-41, which invalidates agreements
to arbitrate entered into before a claim has arisen.

rejected these objections and entered final judgment in
favor of Merrill Lynch.

Although these were serious errors, the P.C. and
Baker are not seeking certiorari with respect to them,
paradoxically, because there is no conflict among the
circuits (or state courts) a) that demanding and
participating in arbitration waive any objections to
arbitration, and b) that a non-appealable order can
have no preclusion effect. Of course, if this Court grants
certiorari on the grounds set forth in this Petition, the
Court could reverse for those errors as well.

The Alabama trial court held that the P.C.’s claim
was barred by res judicata and granted a permanent
injunction. On appeal Merrill Lynch dropped its
misrepresentation that the Florida arbitrators would be
non-lawyers. Instead it argued that 1) despite the
arbitration provision in Merrill Lynch’s customers
agreement requiring that al disputes be arbitrated, and
2) despite the FAA, actions in which the defendant avers
a defense of preclusion (res judicata or collateral
estoppel) must be submitted to courts rather than
arbitrators. The Alabama Supreme Court affirmed a) the
ruling of the trial court that the P.C. was barred by res
judicata and b) the issuance of the permanent injunction.

C. The Facts

Neither the P.C. nor Merrill Lynch were parties to
the original dispute and the lawsuits that ultimately gave
rise to the arbitration and the present lawsuit. The prior
litigation on which Merrill Lynch bases its preclusion
defense was between Baker and J. R. Bennett and Laura
Bennett, all residents of Florida. There were a total of
four lawsuits in Alabama between Baker and the
Bennetts, denominated in the Alabama Supreme Court ‘s

opinion (Appendix C-2) as "Alabama-Baker I" through
" Alabama-Baker IV.“

Those four lawsuits arose out of a computer leasing
transaction more than twenty years ago between persons
completely unrelated either to the present litigation or to
the lawsuits by the Bennetts against Baker in Alabama.
Those persons were Gibbs and West, the owners of a coal
mine in Alabama, and Atlantic Computer Leasing Ltd.,
an English computer lessor ("Atlantic"). Baker, then
practicing law in New York, represented Atlantic.

In 1980 oil prices were very high as a result of the
production restrictions of OPEC. This created a strong
demand for coal, and Gibbs and West’s Alabama mine
became very profitable. They invested their profits and all
the money they could borrow in digging shafts and
tunnels and purchasing mining equipment. Near year

end, they realized they did not have, and could not
borrow, enough funds to pay their income taxes.

Their Alabama accountants, who had worked with
Baker on tax matters for other clients, telephoned him in
New York and asked him to find a computer leasing tax
shelter" for Gibbs and West. Such tax shelters" do not
produce tax saving. They only defer taxes. Taxes saved“
during an initial five year accelerated depreciation period
have to be paid during later years, when there are no
depreciation deductions. What the investor receives from
such a tax shelter" is, in effect, an interest free loan“
from the United States Treasury. For Gibbs and West,
though, this was exactly what they needed. They asked
Baker to find them a computer leasing transaction. He
did so with his client, Atlantic. Gibbs and West survived
their cash crisis.

Six months later the accountants for Gibbs and
West telephoned Baker to inform him that they had sold
their mine and no longer needed tax deferral. The
accountants added that they had another client, J. R.
Bennett, who had a similar problem. Bennett’s mobile
home business was very profitable, but it was also
expanding very rapidly, and he was short of cash. He
wished to solve his problem by acquiring from Gibbs and
West a half interest in their contracts with Atlantic. The
accountants requested that Baker ask his client to

consent, which Atlantic did. Baker received no fee for his
services.

Nine years later the Internal Revenue Service
challenged the deductions J. R. Bennett and his wife had
taken, and they paid approximately $850,000 of deferred
taxes and interest. The taxes, of course, would have been
payable later in any event. Moreover, the Bennetts
received a tax deduction for the interest they paid. Thus
their actual loss was small--particularly when compared
with the value of saving Bennett’s business. Nevertheless,
the Bennetts sued Baker for $850, 000 plus punitive
damages. The Alabama Supreme Court refers to that
case as Alabama-Baker I."

The Bennetts asserted two theories: First that
Baker had acted as Bennett’s attorney and had advised
Bennett erroneously of the tax consequences of the
transfer from Gibbs and West. The Huntsville, Alabama
trial court directed a verdict dismissing this count.
Second, the Bennetts alleged that Baker had committed
intentional fraud in representing that a computer leasing
transaction would provide a good tax shelter. Since the
correctness of Baker’s legal opinion was a matter of law
for the court, Baker urged, based on Federal tax
authorities, that the fraud count also should be dismissed.
The court, however, simply left the tax issue for the jury
to decide without any instructions on Federal tax law.

The jury returned a verdict, for compensatory
damages of $440,000 but no punitive damages. The
Alabama Supreme Court affirmed. It held that, although
there was no evidence of intentional misrepresentation or
failure to disclose facts, the jury could have found liability
for innocent misrepresentation or innocent non-disclosure.

This was an unprecedented ruling since, both under
prior Alabama law and general common law, there can be
no damages for innocent misrepresentation or non-
disclosure. The remedies are rescission or reformation, but
neither of those remedies could have been obtained against
Baker, because he was not a party to the original
transaction between Gibbs and West and Atlantic
Computer Leasing Ltd. or the subsequent assignment by
Gibbs and West of a half interest to Bennett. Six years
later, in State Farm Fire & Cas. Co. v. Owen, 729 So. 2d 834
(Ala. 1998), the Alabama Supreme Court overruled its
decision against Baker in Alabama-Baker I. By then it
was too late for Baker to reopen the case.

The action which the Alabama Supreme Court refers
to as Alabama-Baker II arose out of the Bennetts’ efforts to
collect their judgment in Alabama even though Baker is
not a resident of Alabama and has no assets there. The
Bennetts served garnishments on the Alabama offices of a
number of national securities firms. Baker never had an
account with any of those Alabama offices, but the Bennetts
contended that service on the Alabama offices required the

10

offices required the firms to deliver Baker’s assets they
held in offices outside Alabama.

The Huntsville court held that garnishment may
not be used to reach a non-resident’s assets by serving a
resident bailee who holds the assets outside the state. The
firms could be regarded as residents of Alabama, because
of their local offices, but the assets of out-of-state
customers held in other states could not be garnished in
Alabama. With regard to the use of equity power, the
court held that the Alabama Constitution, which prohibits
imprisonment for debt, bars enforcement of money
judgments by contempt proceedings.

In the lawsuit the Alabama Supreme Court refers
to as Alabama-Baker III," the Bennetts’ lawyers
successfully evaded the decision in Alabama-Baker II.
They did so through the initial negligence of Merrill
Lynch and its subsequent complicity.

The Bennetts’ lawyers brought a new action in a
different Alabama venue, in Birmingham. They served
discovery notices on the major national securities
brokerage firms, including Merrill Lynch, demanding
copies of statements of any accounts Baker might have
with them. Baker moved to dismiss on the ground of res
judicata, but the court never ruled on his motion.

It was at this point, through the gross neglect of
Merrill Lynch, that the P.C. was dragged into the

litigation. The P.C. had, and still has, a brokerage account
with Merrill Lynch. When Merrill Lynch sent out
monthly account statements, it abbreviated the name on
the P.C.’s statements to "Leon C. Baker," omitting the
corporate designation P. C.“

Over the years the P. C. had objected that its
account name should be stated correctly, including P. C.“
Merrill Lynch responded that the P.C. need not be
concerned because the name was shown correctly on its
internal account records. Nevertheless, the P. C. insisted
that the statements be issued with the correct name.
Merrill Lynch finally complied—but, unfortunately, not
until after the disastrous events of Alabama-Baker III.

Merrill Lynch responded to the Bennetts’
discovery request in the Birmingham action with a
monthly statement of the P. C. but with P. C.“ omitted!
Based on this statement, the court directed Merrill
Lynch to liquidate a Treasury bill in the P.C.’s account
and to pay $723,353 to the Bennetts’ attorneys.

Merri'l Lynch responded by submitting an affidavit
of its executive responsible for the P.C.’s account, who
stated that the actual name on Merrill Lynch’s records was
Leon C. Baker P.C." and that Merrill Lynch had made

an error. Even so, the Birmingham court refused to

12

withdraw its order.”

At this point, only Merrill Lynch could appeal from
the payment order. Baker could not, because his property
had not been seized. The P.C. could not, because, under
Alabama law, only parties can appeal. Merrill Lynch was
a bailee that had made a mistake with respect to its bailor’s
property, which it was obligated to take legal action to
protect. It could have intervened, appealed, and posted a
bond rather than pay over the funds. Merrill Lynch chose
not to do so.

Instead, Merrill Lynch sought to protect itself at
the expense of its customer. It proposed that it would waive
its objection and pay the $723,353 to the Bennetts if the

court entered an order releasing Merrill Lynch from
any liability to the P.C. for doing so. Counsel for the
Bennetts prepared that order. Baker’s assent was not
required, because he claimed no interest in the account.
The P.C. was not a party, and its consent was not
sought. Nevertheless, Merrill Lynch contends that the
order provides it with a preclusion defense on two
points: 1 ) that Merrrill Lynch has no liability to the P.
C. and 2) that the account belongs to Baker, not the

|

2. The Alabama Supreme Court, at page 3 of its opinion in the present
case, noted that the account had been opened in the name of Leon C.
Baker P.C., ostensibly a corporate account of the P.C., rather than as an

individual account of Baker" (emphasis by the court].

13

As an alternative basis for preclusion barring the
Florida arbitration Merrill Lynch relies on the fact“ that
Alabama-Baker III was affirmed in Alabama-Baker IV.
True there was an affirmance, but the appeal was solely by
Baker on an unrelated issue. Since the P.C. was not a
party to the action, under Alabama law it could not appeal
even though its property had been seized. Consequently the
order could not be, and was not, appealed or affirmed in
Alabama-Baker IV and could not give rise to preclusion.

D. The Question Presented for Review By This
Court Was Raised In The Alabama Courts

When Merrill Lynch sought an injunction in the
Alabama trial court against the arbitration which was about
to be tried in Florida, the P. C. and Baker filed a
memorandum of law in opposition. The caption of a major
point of the memorandum was the following:

THE INJUNCTION MERRILL IS SEEKING IN THIS ACTION
IS BARRED BY THE FEDERAL ARBITRATION STATUTE.

In support, the P.C. and Baker cited, among
other authorities, this Court’s holding in Southland
Corp. v. Keating, 465 U.S. 1 (1984). They argued that
Congress has declared a national policy favoring
arbitration and has withdrawn the power of the states
to require a judicial forum for the resolution of claims

14

which the contracting parties agreed to resolve by
arbitration. The trial court, nevertheless, permanently
enjoined the Florida arbitration.

In the Alabama Supreme Court, Baker and the
P. C. argued: The Federal Arbitration Act applies to
arbitration agreements involving interstate commerce
and preempts state law with respect to such agreements."
That court, however, affirmed and denied reargument.

E. Reasons For Granting The Writ

There is a growing division of authority among
the United States Courts of Appeals and among various
state courts of last resort as to whether there should be
a judicially created exception to Section 2 of the FAA
for cases in which one party to an arbitration agreement
asserts preclusion. The usual rationale advanced for
creating such an exception is that preclusion law is
recondite and beyond the ken of lay arbitrators.

Another, much narrower, rationale for reading in
an exception to the federal statute for preclusion defenses
was articulated by the Alabama Supreme Court (and by
some United States Courts of Appeals). It is that the
rendering court is better able to determine what was
decided than arbitrators. However, the rendering court
and the enforcing court are often entirely different
tribunals. This defect in the theory is illustrated by this

15

very case. The judge who decided Alabama-Baker III
was no longer on the court. The Alabama judge in the
present case was just as uninformed about the earlier
case as the Florida arbitrators would have been.

POINT I
BOTH FEDERAL AND STATE COURTS ARE
SHARPLY DIVIDED AS TO WHETHER REQUIRING
A JUDGE TO DECIDE PRECLUSION ISSUES IN A
DISPUTE GOVERNED BY AN ARBITRATION
AGREEMENT VIOLATES SECTION TWO OF THE
FEDERAL ARBITRATION ACT.

The contract between the P.C. and Merrill Lynch,
relates to interstate commerce because it covers sales and
purchases on stock exchanges, through NASDAQ and in
over-the-counter securities markets. In disputes under
contracts which arise out of interstate commerce, the FAA
requires federal and state courts to enforce arbitration
provisions. In Southland Corp. v. Keating, 465 U.S. 1
(1984), this Court said :

In enacting § 2 of the federal Act,
Congress declared a national policy favoring
arbitration and withdrew the power of states to
require a judicial forum for the resolution of
claims the contracting parties agreed to resolve
by arbitration.
Id. at 9.

The United States Courts of Appeals disagree as
to whether, when parties have agreed to arbitrate all
their disputes under a contract governed by the FAA, u
defense of preclusion nevertheless should be decided
by a judge. As shown below, early cases did not take
the FAA into account in holding that judges, rather
than arbitrators, should rule on a preclusion defense.
More recent cases, but by no means all, hold that if the
parties agreed to arbitrate a// their disputes under the
contract, the FAA requires that the arbitrators, not a
judge, should rule on a preclusion defense. It is
primarily because of this disagreement among the
circuits that this Petition should be granted.

An early reported federal case was Clements v.
Central Railroad Co. of New Jersey, 399 F.2d 825 (3d
Cir.1968). Both the trial court and the Third Circuit
assumed that the court was required to consider the
preclusive effect of a prior judgment before compelling
the parties to arbitrate. Another Third Circuit decision
sometimes cited for the same proposition is Telephone
Workers of New Jersey v. New Jersey Bell Tel. Co., 584
F.2d 31 (3d Cir. 1978). However, that was not the issue
on which the court decided that case. In fact, it did not
even consider that issue. In John Hancock Mutual Life
Ins. Co. v. Olick, 151 F.3d 132 (3d Cir. 1998), the Third
Circuit had it both ways. It held that judges should rule
on claims of preclusion based on prior judgments but
that arbitrators should rule on claims of preclusion
based upon prior awards.

17

In Miller Brewing Co. v. Fort Worth Distributing,
781 F.2d 494 (5" Cir. 1986), Miller and Fort Worth
Distributing (referred to as FWD C“ in the court’s
opinion) entered into an agreement under which
FWDC distributed Miller beer. The agreement
provided that if Miller terminated the agreement
without cause, an arbitration panel could order Miller
to pay compensatory damages.

Miller did terminate and FWDC sued in a Texas
state court. Miller removed to a federal district court
but the Fifth Circuit remanded. FWDC took no steps to
schedule arbitration until almost four years later, when
its state court action was about to be dismissed for
want of prosecution. Miller’s attempt in a federal
district court to enjoin the arbitration was denied. The
Fifth Circuit reversed, holding that FWDC waived its
right to arbitrate by taking depositions and by other
activities before the state lawsuit was dismissed. In
dictum, the Fifth Circuit added that the action also
could have been dismissed on the ground of res
judicata. Although FWDC had not sought damages in
its state lawsuit (only an injunction), it could have. The
court noted:

The doctrine of res judicata * * * and its
cousin collateral estoppel have probably done
more to prevent useless and wasteful litigation
than arbitration ever could.

Id. at 497 n.3.
18

That dictum and supposition are not much of a
precedent for the proposition that only judges, and not
arbitrators, should rule on res judicata and collateral
estoppel. Nevertheless, they were followed by some
Courts of Appeals. The first was Kelly v. Merrill Lynch,
Pierce, Fenner & Smith Inc., 985 F.2d 1067 (11 Cir.
1993). Kelly sued Merrill Lynch in a federal district
court alleging violations of SEC Rule 10b-5. After the
district court dismissed the complaint, Kelly began an
arbitration on related state law claims.

The Eleventh Circuit affirmed an injunction
against arbitration of the state law claims primarily on
the authority of the Miller Brewing case but there was
one important difference between the cases. In Miller
Brewing the ground for enjoining the arbitration was
that the defendant, FWDC, had waived arbitration by
pursuing its failed lawsuit. The Eleventh Circuit
ignored this holding and focused on the dictum that
Miller Brewing might have been dismissed on the
ground of res judicata. It declared:

Courts should not have to stand by while

parties re-assert claims that have already been
resolved.

Id. at 1069. It cited as authority the Fifth Circuit’s
speculation that res judicata has "probably done
more to prevent useless and wasteful litigation than
’ arbitration ever could." Id. at 269.

19

In Y & A Securities Litigation, 38 F.3d 380 (8"
Cir. 1994), the court considered the preclusion effect of
a settled elass action. In particular, the court explored
whether claim preclusion applies either for or against
class defendants who were not actual parties. The class
action was brought in a United States district court in
Missouri alleging fraud on the market,“ which
inflated the price of Y & A stock. The settlement was
incorporated into a district court consent judgment.

Dean Witter Reynolds Inc., a securities
brokerage firm, was not a defendant in the class action.
Volk, a customer, and a member of the plaintiff class,
commenced an arbitration against Dean Witter under
its customers agreement. Volk alleged that he had
incurred losses on Y & A stock because a Dean Witter
broker forged his signature on a margin account
agreement "well before the period covered by the class
settlement.“ Dean Witter then obtained, on the ground
of res judicata, a preliminary injunction from the
federal district judge who had entered the consent
judgment barring the arbitrators from proceeding. The
Eighth Circuit affirmed.

The court’s decision is cited as authority that a
court, rather than arbitrators, should decide a res
judicata issue. It is an authority, but it is not a strong
one. Only a preliminary injunction was appealed. The
Eighth Circuit did not have to, and did not, reach the
merits. It only had to determine that the district court’s

20

legal analysis was plausible and might be sustained on
an appeal from a final order. The opinion declared:

Here the district court * * * has
concluded that Dean Witter is likely to be able
to prove that the class plaintiffs intended to
release for free third party brokers like Dean
Witter for bad acts which 1) Y & A had no

responsibility for and could not possibly be
indemnified for; and 2) affected individuals
rather than the class. While at first blush this
may appear to be a surprising outcome, we are
not convinced the district clearly erred in so
holding."

Id. at 384. Chief Judge Arnold, concurring in the
judgment, declared:

In general, when parties agree to submit
a matter to arbitration, they contract for the
arbitrator’s decision on legal questions as well as
on issues of fact. Such legal questions would
include defenses, such as res judicata, and I do
not read this Court’s opinion today to hold
generally that courts may by injunction, control
the decision of arbitrators on questions of issue
or claim preclusion.

Id. at 384.

The Seventh Circuit, in a dictum, has speculated

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"if the party opposing arbitration on grounds of
collateral estoppel asks the court to enjoin arbitration
before there is any award, * * * the court will have to
decide whether to refuse or order arbitration * * *."
Miller v. Runyon, 77 F.3d 189, 194 (0 Cir. 1996).

There is no ambiguity in the contrary holding of
the Second Circuit in National Union Fire Ins. Co. of
Pittsburgh Pa. v. Belco Petroleum Corp., 88 F.3d 129
(2™Cir. 1996), that Section 2 means exactly what it
provides. In brief the statute does not permit issues to
be decided by courts which the parties have agreed to
submit to arbitration.

The case arose out of the seizure of Belco’s oil
fields and equipment by the Peruvian government. The
dispute was between Belco and a group of insurance
companies which had issued policies insuring Belco
against expropriation. The insurers sought to rescind
the policies alleging that Belco had made
misrepresentations. The policies provided that all
disputes arising under them should be arbitrated, and
the arbitrators awarded Belco approximately $145
million plus interest.

Belco later recovered $3 million from a different
insurer for vessels taken by the Peruvian government.
The insurers who had paid the earlier award demanded
a portion under a provision in their policies that
proceeds collected from other insurance should be
shared between them and Belco. When Belco disputed

22

this claim, the insurers initiated a second arbitration.
Belco sought a declaratory judgment that the claim was
barred by res judicata, and the insurers countered with
a petition to compel arbitration. The district court ruled
that under federal law the arbitrators had to decide the
preclusion issue. The Second Circuit affirmed,
reasoning:

Belco’s claim of preclusion is a legal
defense to National Union’s claim. As such it is
itself a component of the dispute on the merits.
Belco’s attempt to characterize the preclusion
issue as not related to the merits is unavailing. It
as much related to the merits as a time limit in
the arbitration agreement or laches. * * *

The [arbitration] provision covers all
disputes which may arise under or in connection
with this policy" {emphasis added by the court},
and is not limited, as Belco contends, to disputes
that require interpretation of the AIG policy. We
do not believe the arbitration provision is
ambiguous, but even if it were, the FAA would
require resolving any ambiguity in favor of
arbitration.

Id. at 135.

The Alabama Supreme Court (at Appendix
C-10) sought to limit Belco by declaring that it held
only “that the preclusive effect of a prior arbitration

23

proceeding on claims asserted in a subsequent arbitration
proceeding is arbitrable.“ Four months after Belco,
however, the Second Circuit elaborated its position on
the preclusive effect of a prior judgment in National Fire
Ins. Co. v. National Gypsum Co., 101 F. 3d 813 (2d Cir.
1996). The district judge granted an injunction against
arbitration of a claim he held was precluded by his

affirmed decision in a prior case. In reversing, the Second
Circuit said:

Our decision is consistent with our recent
holding that the issue-preclusion effect of a prior
arbitration is arbitrable and must be arbitrated.
Belco, 88 F.3d at 135-36. In Belco we rejected
the argument that issue preclusion is not related
to the merits of an agreement and nonarbitrable,
noting that "Belco’s claim of preclusion is a legal
defense to National Union’s claim. As such it is a
component of the dispute on the merits." Belco,
88 F.3d at 135. Although the present dispute
involves the preclusive effect of a prior
judgment, Wellington’s arbitration agreement
covers any disputed issues within [its] scope.
Thus a defense based on the issue preclusive

effect of a prior judgment is part of the dispute
on the merits

Id. at 817. The Alabama Supreme Court’s narrow
interpretation of Belco is obviously erroneous.

In Chiron Corp. v. Ortho Diagnostic Systems,
24

Inc., 207 F.3d 1126 (9 Cir. 2000), the district court
confirmed an arbitration award. The Ninth Circuit
aligned itself with the Second Circuit, declaring:

Like the agreement in Belco, Chiron and Ortho’s
arbitration agreement is undeniably broad.
Ortho’s res judicata defense to a subsequent
arbitration proceeding necessarily involves an
inquiry into Chiron’s underlying claims. As with
respect to other affirmative defenses, such as
laches and the statute of limitations, we agree
with the Second Circuit that a res judicata
defense is a "component" of the merits of the
dispute and is thus an arbitrable issue.

Id. at 1134.

The manifest split in the United States Courts of
Appeals demonstrated above exists as well among state
courts. The division is not only in cases in which the
state courts are applying their domestic laws, but also
when the FAA requires them to apply federal law.

The Alabama Supreme Court in this case, for
example, cited Rembrandt Indus. Inc. v. Hodges
international, Inc., 38 N.Y. 2d 502, 381 N. V. S. 2d 451, 344
N. E. 2d 383 (1976). (App. C.13 ) The arbitration
defendant brought suit on a counterclaim, alleging that
the arbitrators had refused to consider it. The plaintiff
responded that the arbitrators had rejected the
counterclaim and that it was barred by res judicata. A

25

divided New York Court of Appeals held that the lower
court had not abused its discretion in permitting res
judicata to be pleaded as a defense. Neither party
demanded arbitration so the issue was one for the court.
By contrast, when the parties have agreed to arbitrate all
their disputes, as in this case, the same court held that
arbitrators are to determine preclusion issues. Board of
Education v. Patchogue- Medford Congress of Teachers,
48 N.Y. 2d 812, 424 N.Y.S.2d 122, 399 N.E.2d 1143
(1979).

A Virginia case cited by the Alabama Supreme
Court, Waterfront Construction, Inc. v. North End 49ers,
51 Va. 417, 468 S.E.2d 894 (1996)(en banc), discusses the
role of courts and arbitrators with respect to preclusion
issues. It held that a court rather than arbitrators
should rule on the res judicata effect of an arbitration
when the parties had not agreed to arbitrate that issue.

Given the major conflict of authority amorg
the United States Courts of Appeals and the highest
courts of some states as to whether preclusion defenses
are to be ruled on by arbitrators or solely by courts, this
Petition for Certiorari should be granted. Only this
Court can provide a much needed uniform construction
of the FAA on this important and recurrent issue.

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POINT II
WHETHER COURTS MAY CREATE EXCEPTIONS
UNDER THE FEDERAL ARBITRATION ACT FOR
PRECLUSION ISSUES WHEN THE PARTIES HAVE
CONTRACTED TO SUBMIT "ALL" DISPUTES TO
ARBITRATION CALLS INTO QUESTION
IMPORTANT FEDERAL POLICIES AND THE
DIVISION AMONG THE FEDERAL AND STATE
COURTS ON THIS POINT IS WORTHY OF THIS
COURT’S ATTENTION.

The present case is a perfect vehicle for this Court
to resolve the manifest conflict among the federal Courts
of Appeals and state courts, because the question is
squarely presented without diversionary side issues. The
Merrill Lynch customers agreement provides that all“
disputes under it shall be submitted to arbitration. It
indisputably relates to interstate commerce. Nor are
there any factual disputes which detract from the clarity
of the legal issues.

The issue in this case is important and "ripe" for
determination. As this Court has noted, courts have not
suffered arbitration gladly. Bernhardt v. Polygraphic Co.
of America, 350 U.S. 198, 211 (1958). The history of
arbitration in this Court is the abrogation, step by step, of
the reluctance of lower courts to accept arbitration as a
substitute for litigation. In Allied-Bruce Terminix Cos. v.
Dobson, 513 U.S. 265 (1995), this Court summarized the
history as follows:

27

First, the basic purpose of the Federal
Arbitration Act is to overcome courts’ refusals
to enforce agreements to arbitrate.* * * The
origins of those refusals apparently lie in
“ancient times," when the English courts fought
for "extension of jurisdiction----all of them
being opposed to anything which would deprive
every one of them of jurisdiction * * *."
American courts initially followed the English
practice, perhaps just "stand[ing]... upon the
antiquity of the rule" prohibiting arbitration
clause enforcement rather than "upon its
excellence or reason"* * *, Regardless, when
Congress passed the Arbitration Act in 1925, it
was "motivated, first and foremost, bya* * *
desire" to change this antiarbitration rule* * *.
It intended courts to "enforce [arbitration]
agreements into which parties entered * * *
upon the same footing as other contracts * * *

"
*

Id. at 270.

This Court has rejected contentions 1) that the FAA
applies only in federal question cases, Prima Paint Corp. v.
Flood & Conklin, Mfg. Co., 388 U.S. 395 (1967), 2) that the
FAA does not preempt conflicting state (Alabama) anti-
arbitration law, Allied Bruce Terminix Co., supra, and 3)

28

that the FAA does not supersede state law prohibiting
arbitrators from awarding punitive damages. Mastrobuono
v. Shearson Lehman Hutton, Inc., 514 U.S. 52 (1995).

Although the P.C. argued in the Alabama courts that
the FAA requires them to give effect to the agreement of the
parties that "all "their disputes should be resolved through
arbitration, there is no mention of the FAA in either the
ruling of the Alabama trial court or the decision of the
Alabama Supreme Court.

Judges who have taken it upon themselves to rule on
preclusion issues, despite agreements of the parties that all
disputes be resolved by arbitration, in effect have viewed
themselves as quasi parties to the controversy. The judges
feel free to override the agreement of the parties on the
theory that a) the judges have an independent interest in
their prior rulings and b) they have not agreed to submit
their contentions to arbitration. That is a fundamental error
which this Court should correct.

Section 2 of the FAA and the decisions of this Court
establish the importance of arbitration, and seek to
overcome the reluctance of courts to enforce arbitration
contracts. Only this Court can determine the propriety, or
impropriety, of courts extracting issues--such as preclusion
but potentially other matters as well—from arbitration,
either because they are deemed too complex or for some
other reason.

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The issue presented by this Petition is critical to the
arbitration process and currently is the subject of highly
divergent judicial decisions both on the federal and state
levels. A uniform principle needs to be be established,
because the scope of arbitration under the FAA should not
depend on the fortuity of the Circuit or state court in which
the dispute arises or be subject to forum shopping of counsel
seeking to halt arbitration. Moreover, the declaration of a
uniform principle would eliminate the unseemly business of
a court in one state (Alabama) enjoining an arbitration
ordered by a court of another state (Florida) as occurred in
this case.

CONCLUSION

This petition for a writ of certiorari should be granted.

Respectfully submitted,

Arthur R. Miller

Attorney for the Petitioner

1545 Massachussetts Ave.
Cambridge, Massachussetts 02138
Telephone: (617) 495-4111

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386009_1158%3A1. Public record. Not legal advice.