The Supreme Court divests federal district courts of discretion in ordering certain claims into arbitration, yet concedes that “arbitration cannot provide an adequate substitute for a judicial proceeding in protecting the federal statutory and constitutional rights that §1983 [of the Civil Rights Act] is designed to safeguard.”

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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. Although state law claims had never before been forced into arbitration, the company argued that since the federal claims were arbitrable under the terms of the contract, then the pendant state claims were too. However, the company also sought to stay 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 the 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.”

 

Despite ruling that courts must order arbitration of pendant state claims bound to non-arbitrable federal actions, Justice Thurgood Marshall, writing for the majority, made a point of observing that “arbitration cannot provide an adequate substitute for a judicial proceeding in protecting the federal statutory and constitutional rights that §1983 [of the Civil Rights Act] is designed to safeguard.” Justice Marshall rooted his finding on the belief that the FAA was a product of Congress’ Article III power to restrain the jurisdiction of the courts, and was not an exercise of its Commerce Clause power (a belief no longer held by the majority of the Court).

 

Federal district courts must now compel arbitration of state statutory claims if they are deemed to fall within the scope of a broadly-written arbitration clause, even if it is presented in a consumer contract of adhesion between an individual and a 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.

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