Reply Brief — J. Aron & Co. v. Haviland

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| No. ak ki

Supreme Court, U |

IN THE APR 24 1992

Supreme Court of the United States o¢ pac cin |

OCTOBER TERM, 1991

tN a en ome ae

hai

J. ARON & COMPANY,

Petitioner,

Vv.

LEO HAVILAND,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

J. ARON & COMPANY’S REPLY

TO BRIEF IN OPPOSITION

GANDOLFO V. DIBLAS!

125 Broad Street

New York, New York 10004

(212) 558-4000

Counsel for Petitioner

Of Counsel

THEODORE QO. ROGERS, JR.

ROBERT J. GIUFFRA, JR.

SULLIVAN & CROMWELL

April 24, 1992

Rule 29.1 Statement

The parent company of petitioner J. Aron & Company is

The Goldman Sachs Group, L.P. The only subsidiary of J.

Aron & Company that is not wholly owned is J. Aron &

Company (Singapore) PTE.

Table of Authorities

Page(s)

Cases

AT&T Technologies, Inc. v. Communications

Workers of Am., 475 U.S. 643 (1986) ........ 3

Barrowclough v. Kidder, Peabody & Co.,

752 F.2d 923 (3d Cir. 1985) ............. 4

Basic Inc. v. Levinson,

485 U.S. 224 (1988) .................. 6

Fleck v. E.F. Hutton Group, Inc.,

891 F.2d 1047 (2d Cir. 1989) ............. 3, 4

Gilmer v. Interstate/Johnson Lane Corp.,

eS | 6

Haviland v. Goldman, Sachs & Co.,

947 F.2d 601 (2d Cir. 1991) ............ passim

Martin v. Occupational Safety and Health

Review Comm’n, 111 S. Ct. 1171 (1991) ...... 6

McGinnis v. E.F. Hutton & Co.,

812 F.2d 1011 (6th Cir.),

cert. denied, 484 U.S. 824 (1987) .......... 4

Mitsubishi Motors Corp. v. Soler

Chrysler-Plymouth, Inc. , 473 U.S. 614 (1985)... 3

Morgan v. Smith Barney, Harris Upham & Co.,

729 F.2d 1163 (8th Cir. 1984) ............ 4

‘i

Page(s)

Paine, Webber, Jackson & Curtis, Inc. v.

Chase Manhattan Bank, N.A., 728 F.2d

Se I eee oe be ek we 4 ee 2

Pavelic & LeFlore v. Marvel Entertainment

Group, 493 U.S. 120 (1989) ............. 6

Pearce v. E.F. Hutton Group, Inc.,

7 fw = Vi kee A, 7) ir 4,5

Scherk vy. Alberto-Culver Co..,

3 e 8 er ere ene ene 3

Shearson/American Express Inc. v.

McMahon, 482 U.S. 220 (1987) ........... 3, 5-6

United Steelworkers of Am. v. Warrior &

Gulf Navigation Co., 363 U.S. 574 (1960) ..... 3

Zolezzi v. Dean Witter Reynolds, Inc.,

789 F.2d 1447 (9th Cir. 1987) ............ 4

Statutes and Rules

Federal Arbitration Act,

ee ek a's eae ee ie ee passim

supreme Court Rule 16.1 . 0... ccc cnc eves 7

Rules of The New York Stock Exchange, Inc.

UE ge ge Be eon A Gea 2,4

eee Se 6 en a ee eee eS passim

mama

Supreme Court of the Anited States

OCTOBER TERM, 1991

NO. 91-1355

J. ARON & COMPANY,

Petitioner,

LEO HAVILAND,

Respondent.

J. ARON & COMPANY’S REPLY

TO BRIEF IN OPPOSITION

In its decision below, the Second Circuit — the circuit

whose decisions have the greatest impact on the U.S.

securities industry — directly contravened the Federal

Arbitration Act (“FAA”) by applying a judge-made

“exchange-relatedness” requirement to override the plain

language of the arbitration rules of the NYSE (and

agreements incorporating those rules). Respondent’s

protestations notwithstanding, this case is not a fact-bound

dispute over the application of the Second Circuit’s

“exchange-relatedness” limitation on the scope of NYSE

arbitration. Rather, it squarely raises the issue of whether the

FAA permits courts to create and impose such requirements,

thereby contradicting the express terms of arbitration

agreements.

The Second Circuit has limited NYSE Rule 600(a), the

NYSE arbitration provision governing member-non-member

disputes, in a manner contrary not only to the clear meaning

—

of the rule, but also to common sense. In the Second

Circuit’s view, an employee is free to litigate employment-

related claims against the non-member affiliate of his or her

employer, even when those very same claims against the

employer must be arbitrated. The Court should correct the

Second Circuit’s error before substantial public and private

resources are unnecessarily wasted on the litigation of

disputes that properly belong in NYSE arbitration.

1. The Second Circuit first announced the “exchange-

relatedness” requirement in Paine, Webber, Jackson &

Curtis, Inc. v. Chase Manhattan Bank, N.A., 728 F.2d 577,

580 (2d Cir. 1984), a case predating this Court’s recent

decisions under the FAA favoring arbitration. Paine Webber

did not involve, as here, employment-related claims by an

officer of an NYSE member firm against his member

employer and its non-member affiliate. Instead, in Paine

Webber, an NYSE member firm brought suit against a non-

member bank and one of the bank’s employees for making

fraudulent representations that led the member firm to extend

credit to a third party. In those circumstances, the Second

Circuit ignored the language of the NYSE Constitution and

Rule 600(a) and limited the rule to “controversies arising out

of the member’s exchange-related business.” Jd.

In this case, the Second Circuit erred when it expanded

the “exchange-relatedness” requirement to cover employment-

related claims. That requirement is not found in the text of

Rule 600(a), or anywhere else in the NYSE’s arbitration rules

for that matter, and its application here conflicts directly with

the FAA. Indeed, until the decision below, it had been

“widely understood in the securities industry” (Brief of the

Securities Industry Association as Amicus Curiae (“SIA Br.”)

at 4) that NYSE Rules 347 (governing claims against member

firms) and 600(a) (governing claims against non-members)

were coextensive in employment-related cases.’ By expressly

rejecting that consensus view, 947 F.2d at 605 (A20), the

Second Circuit created a situation that threatens to increase

markedly the burdens on federal and state courts by requiring

them to hear the numerous employment-related cases that

comprise a substantial portion of the claims before NYSE

arbitrators (SIA Br. at 4-5).

2. The FAA was intended to put an end to “centuries of

judicial hostility to arbitration agreements,” Scherk v.

Alberto-Culver Co., 417 U.S. 506, 510 (1974), of the sort

evinced by the Second Circuit here and in other recent cases

requiring action by this Court, ¢.g., Shearson/American

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

Second Circuit’s refusal to enforce NYSE arbitration agree-

ment). Courts may not, as the Second Circuit did by

imposing the “exchange-relatedness” requirement, “distort

the process of contract interpretation . . . in order to ferret

out [controversies thought] inappropriate” for arbitration.

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

473 U.S. 614, 627 (1985).

Contrary to respondent’s claims (Opp. at 11-13), the

Second Circuit’s decision cannot be reconciled with the

strong federal policy mandating enforcement of arbitration

agreements “‘unless it may be said with positive assurance

that the arbitration clause is not susceptible of an

interpretation that covers the asserted dispute.’” AT&T

Technologies, Inc. v. Communications Workers of Am., 475

U.S. 643, 650 (1986) (quoting United Steelworkers of Am. v.

Warrior & Gulf Navigation Co., 363 U.S. 574, 582-83

(1960)) (emphasis added). That is not the case here.

1 Ina prior case, Fleck v. E.F. Hutton Group, Inc., 891 F.2d

1047, 1054 (2d Cir. 1989), the Second Circuit had held —

correctly — that a registered representative’s employment-related

dispute with a non-member affiliate was arbitrable “to the same

extent” as his or her dispute with the NYSE member.

Rule 600(a), as Judge Walker wrote in his dissent below,

“plainly covers this dispute.” 947 F.2d at 608 (A17). It

expressly requires arbitration of “[aJny dispute, claim or

controversy” between a non-member, such as petitioner, and

an associated person, such as respondent, “arising in

connection with the business of such member” or “associated

person in connection with his activities as an associated

person.” (A41). It is not disputed that respondent is an

“associated person” or that his employment-related claims

against petitioner arose in connection with (a) the business of

Goldman, Sachs & Co. (“Goldman Sachs”), and (b) his

activities as an associated person, i.e., as a vice president of

Goldman Sachs.?

3. Respondent treats as irrelevant (Opp. at 14-16)

rulings by other courts of appeals that NYSE arbitration rules

must be interpreted literally, and that any doubt concerning

a tule’s scope is resolved in favor of arbitration. See, e.g.,

McGinnis v. E.F. Hutton & Co., 812 F.2d 1011, 1013 (6th

Cir.), cert. denied, 484 U.S. 824 (1987); Zolezzi v. Dean

Witter Reynolds, Inc., 789 F.2d 1447, 1449 (9th Cir. 1987);

Barrowclough v. Kidder, Peabody & Co., 752 F.2d 923,

937-38 (3d Cir. 1985); Morgan v. Smith Barney, Harris

Upham & Co., 729 F.2d 1163, 1165 (8th Cir. 1984). By

attempting to distinguish those cases as based on the

construction of NYSE Rule 347 instead of Rule 600(a),

respondent misses the significance of their holdings for this

case: the Second Circuit stands alone in its unwillingness to

give effect to the plain language of NYSE arbitration rules.

2 Respondent was an “associated person” because he was an

officer of Goldman Sachs, an NYSE member firm. See Fleck, 891

F.2d at 1054; Pearce v. E.F. Hutton Group, Inc. , 828 F.2d 826, 830

(D.C. Cir. 1987). Having voluntarily agreed to arbitrate before the

NYSE any dispute with a non-member arising in connection with his

activities as a Goldman Sachs officer, petitioner cannot now claim that

such an agreement is unfair because he never traded on the NYSE as

a registered representative (Opp. at 13).

Further, the Second Circuit’s interpretation of the

“exchange-relatedness” requirement is itself contrary to that

of the D.C. Circuit in Pearce v. E.F. Hutton Group, Inc.,

828 F.2d 826 (D.C. Cir. 1987). Whereas the Second

Circuit held that respondent’s employment-related dispute

with petitioner is not arbitrable under Rule 600(a) because

respondent did not trade on the NYSE, the D.C. Circuit

expressly refused to limit Rule 600(a) “to activities involving

customer accounts or broker-dealer functions.” Jd. at 831-32.

The D.C. Circuit instead held that the employment-related

claims of an employee of an NYSE member firm are by

definition sufficiently tied to the interests of the NYSE to

satisfy the “exchange-relatedness” test and be arbitrable

under Rule 600(a). Jd. at 830. As Judge Walker emphasized

below, Pearce “require[d the Second Circuit] to hold that

Haviland’s claims against J. Aron are connected to

Haviland’s activities as an associated person and thus

arbitrable.” 947 F.2d at 609 (A20).

4. Respondent minimizes the “substantial national

importance to the securities industry” of this petition (SIA

Br. at 1), by claiming that it merely involves the “inter-

pretation of a privately enacted rule” (Opp. at 16-17). Once

again, respondent is wrong. As rules approved by the

Securities and Exchange Commission (“SEC”), NYSE

arbitration rules are an integral part of federal regulation of

national securities markets.‘ In addition, they are

3 In Pearce, the D.C. Circuit did not consider the appropriate-

ness of the Second Circuit’s “exchange-relatedness” requirement

because the non-member affiliate there did not object to its

application. 828 F.2d at 831.

4 Since 1970, Congress has granted the SEC “expansive power

to ensure the adequacy of [NYSE] arbitration procedures.” McMahon,

482 U.S. at 233. Indeed, “[nJo proposed rule change may take effect

unless the SEC finds that the proposed rule is consistent with” the

Securities Exchange Act of 1934. Id. (citing 15 U.S.C. § 78s(b)(2)).

(continued...)

incorporated by reference into many thousands of arbitration

agreements throughout the securities industry.

Making much of the fact that Rule 600(a) can be

amended (Opp. at 16), respondent ignores that this Court has

repeatedly reviewed cases to resolve circuit splits over the

proper interpretation of statutes, rules (including SEC and

NYSE rules), and regulations, all of which are subject to

amendment.* More importantly, given the Second Circuit’s

“exchange-relatedness” requirement, it is hard to see how the

NYSE could amend Rule 600(a) to require arbitration of

employment-related claims against non-member affiliates,

when the present rule already requires arbitration of such

claims on its face.

Respondent urges the Court not to expend its resources

to hear this case. (Opp. at 3, 17). Yet, the Court’s failure to

- do so will substantially undermine its previous efforts,

including just last Term in Gilmer v. Interstate/Johnson Lane

Corp., 111 S. Ct. 1647 (1991), to enforce the FAA’s pro-

arbitration policy and strengthen NYSE arbitration. Because

more than fifty NYSE members, including all of the major

4 (...continued)

The SEC has “the power, on its own initiative, to ‘abrogate, add to,

and delete from’ any [NYSE] rule if it finds such changes necessary

or appropriate to further the objectives of the Act.” Jd. (quoting 15

U.S.C. § 78s(c)).

> See, e. g., Martin v. on as te ety and Health Review

Comm'n, 111 S. Ct. 1171 5 (1991) {resolving conflict over

degree of deference owed to conflicting interpretations of ambiguous

regulation under OSHA); Pavelic & LeFlore v. Marvel Entertainment

Group, 493 U.S. 120, 12? (1989) (resolving conflict between Second

and Fifth Circuits over whether Fed. R. Civ. P. 11 permits imposition

of sanctions against individual atto rney’s law firm); Basic

Inc. v. Levinson, 485 U.S. 224, 2 30 (1988) (ree (resolving conflict over

application of SEC Rule 10b-5 to preliminary corporate merger

discussions); McMahon, 482 U.S. at 225 (resolving conflict over

arbitrability of § 10(b) and RICO claims before NYS

firms, have non-member affiliates (see A42-A43), the Second

Circuit’s use of the “exchange-relatedness” test to override

the plain language of Rule 600(a) is likely to “result in a

substantial — and completely unnecessary — increase in the

caseload of federal and state courts as employees increasingly

engage in forum shopping” (SIA Br. at 5).

Conclusion

This Court’s decisions are clear: the FAA does not

permit courts to create additional requirements to circumvent

the express terms of arbitration agreements. The Court should

therefore grant certiorari and reverse summarily pursuant to

Rule 16.1, striking down the Second Circuit’s expansion of

its “exchange-relatedness” requirement, which sharply limits

the arbitration of employment-related claims before the

NYSE and thereby subverts one of the Nation’s oldest and

most respected systems of arbitration.

Respectfully submitted,

GANDOLFO V. DIBLASI