Relevant Facts: Customers of a securities brokerage firm sued under the Securities Act of 1933, a law designed to protect the rights of investors. The brokers who allegedly defrauded their customers tried to force arbitration under the terms of the consumer contract.
Question Before The Court: Whether a pre-dispute arbitration clause can legally require a person acquiring securities to waive compliance with certain provisions of the Securities Act.
The Opinion: After first establishing that the Federal Arbitration Act (FAA) applied to purchases of stocks and securities, the Court addressed whether the Securities Act carved out an exception to the FAA. To determine whether arbitration should be compelled, the Court looked to the primary purpose of both federal statutes, and found that the Securities Act was written to help equalize an inherently unequal bargaining position between buyers and sellers of securities by, inter alia, giving buyers a wider choice of courts and venues. The Court found that the pre-dispute arbitration clause at issue here required the buyer to “surrender on the advantages the Act gives him and surrenders it at a time when he is less able to judge the weight of the handicap the Securities Act places upon his adversary.”
The Court noticed three problems faced by plaintiffs if compelled to arbitrate. First, the matter at issue required not just the simple determination of the value of a commodity or the amount of money due under a contract, but a subjective finding by the arbitrator on the purpose and knowledge of an alleged violator of the law, without the benefit of judicial instruction on what the law requires. Second, the arbitrator’s decision could be rendered without explanation, without a complete record, and without any subsequent ability to review the legal standards applied. Finally, the power to vacate the award was severely limited under the Federal Arbitration Act (FAA), with no provision for judicial review for error in interpretation or determination of legal issues.
Although the Court recognized that, through the FAA, people have “an opportunity to generally secure prompt, economical and adequate solution of controversies through arbitration if the parties are willing to accept less certainty of legally correct adjustment,” they ultimately held that the intentions of Congress in passing the Securities Act could only be carried out by holding the arbitration agreement invalid with respect to issues arising out of that law.
Unfortunately, the holding of this case was later hollowed out in Shearson/ American Express, Inc v. McMahon, 482 U.S. 220 (1987), and then fully overturned in R. de Quijas v. Shearson/American Express, 490 U.S. 477 (1989).