The Supreme Court pronounces that courts must order arbitration whenever a valid arbitration clause is present, even in cases involving related non-arbitrable claims, state law claims, or where doing so would lead to inefficiency in the proceedings.

Comments Off on The Supreme Court pronounces that courts must order arbitration whenever a valid arbitration clause is present, even in cases involving related non-arbitrable claims, state law claims, or where doing so would lead to inefficiency in the proceedings.

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

Relevant Facts: A retired dentist invested his life savings in the stock market, only to lose the majority of his money. He subsequently sued the investment company in federal court, alleging violations of the Securities Exchange Act (SEA) and various state statutes. The investment company responded by moving to compel arbitration of the state law claims based on an arbitration clause in the preprinted ‘Customer’s Agreement’, and to stay that arbitration pending the resolution of the non-arbitrable SEA allegations. The district court denied the motion, and the Court of Appeals affirmed.

 

Question Before The Court: Whether, when a complaint raises both federal and state claims, a federal district court may deny a motion to compel arbitration of the state law claims despite the parties’ agreement to arbitrate their disputes; and whether district courts should decide arbitrable pendant claims when a non-arbitrable federal claim is before them due to the possible collateral estoppel effect that may arise in a subsequent federal proceeding were an arbitration of the pendant claims to occur.

 

The Opinion: In deciding this case, the Court resolved a circuit split on the issue of how to apply the process of compelling arbitration described in Sections 3 and 4 of the Federal Arbitration Act (FAA). Prior to this case, when faced with this question, some circuits applied the doctrine of intertwining, which provided that where “arbitrable and non-arbitrable claims arise out of the same transaction, and are sufficiently intertwined factually and legally, the District [court] may deny arbitration.” Other circuits held that “the FAA divests the District courts of any discretion regarding arbitration in cases containing both arbitrable and non-arbitrable claims, and instead requires that the court compel arbitration of arbitrable claims when asked to do so.”

 

The Supreme Court in this case chose the latter interpretation when it held that “even where the result would be the possible inefficient maintenance of separate proceedings in different forums . . . [b]y its terms, the [FAA] leaves no place for the exercise of discretion by a District court, but instead mandates that District courts shall direct the parties to proceed to arbitrate on issues as to which an arbitration agreement has been signed.” The Court reiterated “the preeminent concern of Congress in passing the Act was to enforce private agreements unto which parties had entered, and that concern requires that we rigorously enforce agreements to arbitrate, even if the result is piecemeal litigation, at least absent a countervailing policy manifested in another federal statute. By compelling arbitration of state law claims, a district court successfully protects the contracts of the parties and their rights under the FAA.”

 

Prior to this case, the Supreme Court had never ruled that state law claims were arbitrable under the FAA. With this decision, federal district courts have no discretion to refuse to compel arbitration of state statutory claims if they are deemed to fall within the scope of actions covered within a broadly-written arbitration clause, even if it is presented in a consumer contract of adhesion between an individual and large corporation. By forcing arbitration “on issues as to which an arbitration agreement has been signed,” the Court opened the door for all types of statutory claims to be deemed de facto arbitrable – a move they fully committed to in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, 473 U.S. 614 (1985), a case they heard oral arguments for just two weeks after issuing the opinion in this case.

© 2016 Employees Rights Advocacy. All Rights Reserved.