When respondent voluntarily terminated his employment as an
account executive in petitioner securities broker's San Francisco
office for a similar position with a competitor, petitioner
determined, pursuant to a forfeiture clause of its employees'
profit-sharing plan, that respondent, by entering competitive
employment, had forfeited all rights to the plan's benefits.
Respondent sought a declaratory judgment in a California state
court that the forfeiture clause was unlawful under § 16600 of the
California Business and Professions Code, which invalidates every
contract restraining a person from engaging in a lawful business.
Petitioner answered,
inter alia, that a condition of
respondent's employment with petitioner was approval by the New
York Stock Exchange; that respondent, at the time of his
employment, applied on an Exchange form for such approval, as
required by Exchange Rule 345(a)(1), pledging to abide by Exchange
rules; and, as required by Rule 347(b), agreed to submit to
arbitration any controversy arising out of termination of his
employment. On petitioner's appeal from the denial of its petition
for an order directing arbitration, the California Court of Appeal
held that a written agreement to arbitrate did exist, but that the
forfeiture clause of the profit-sharing plan was invalid as in
restraint of trade under California law when applied to California
residents, and petitioner's contributions under the plan were wages
under provisions of the California Labor Code giving wage earners a
right of action for wages due and unpaid despite any private
agreement to arbitrate.
Held: Exchange Rules 345(a)(1) and 347(b), promulgated
as self-regulatory measures pursuant to § 6 of the Securities
Exchange Act of 1934 (the Act), and respondent's pledge to abide by
those rules do not preempt the avenues of wage relief otherwise
available to respondent under California law. Pp.
414 U. S.
125-140.
(a) Rule 347(b) does not fall under the Exchange's mandate to
protect the investing public and to insure just and equitable trade
practices set forth in §§ 6(d) and 19(b) of the Act, so as
Page 414 U. S. 118
to require preemption of contrary state law by such rule, there
being nothing in the Act or any SEC rule or regulation specifying
arbitration as a favored means of resolving employer employee
disputes, and it being clear that Rule 347(b) would not be subject
to the SEC's modification or review under § 19(b). Pp.
414 U. S.
134-136.
(b) Rule 347(b) cannot be categorized as part of a need for
uniform national regulation, there being no revelation in the Act
or in any SEC regulation that nationwide uniformity of an
exchange's housekeeping affairs is necessary, and it not being
shown that national uniformity in the area of wage claims is vital
to federal securities policy. Pp.
414 U. S.
136-137.
(c) The "applicable state laws" referred to in § 6(c) of the
Act, which subjects exchange rules to a requirement of consistency
with the Act, "and the applicable laws of the State in which it is
located," are not, in this instance, merely because the New York
Stock Exchange is in New York City, the laws of New York so as to
require the California court to apply New York law compelling
arbitration of this dispute and validating the forfeiture clause of
the profit-sharing plan, since § 6(c) has no independent existence
creating some sort of spurious uniformity of application for all
States, but merely requires that any exchange rule adopted outside
the Act's context comport with the laws of the State in which the
exchange is located. Pp.
414 U. S.
137-139.
(d) Where California has manifested a strong statutory policy of
protecting its wage earners from what it regards as undesirable
economic pressures affecting the employment relationship, that
policy should prevail absent any interference with the federal
regulatory scheme; in this case, there is not only no such
interference, but the Act's structure manifests a congressional
intent that state policies in this area should operate vigorously.
Pp.
414 U. S.
139-140.
(e) Even though petitioner's profit-sharing plan is open to all
eligible employees in the United States, and respondent's
employment and petitioner's business are interstate, the
application of the California law would not unduly burden
interstate commerce. P.
414 U. S.
140.
24 Cal. App. 3d
35, 100 Cal. Rptr. 791, affirmed.
BLACKMUN, J., delivered the opinion of the Court, in which all
Members joined, except STEWART, J., who took no part in the
decision of the case.
Page 414 U. S. 119
MR. JUSTICE BLACKMUN delivered the opinion of the Court.
This case presents the question whether certain rules of the New
York Stock Exchange, promulgated as self-regulating measures
pursuant to § 6 of the Securities Exchange Act of 1934, 48 Stat.
885, 15 U.S.C. § 78f, and a broker's employee's pledge to abide by
those rules, preempt avenues of wage relief otherwise available to
the employee under state law. The California Court of Appeal
answered this in the negative.
24 Cal. App. 3d
35, 100 Cal. Rptr. 791 (1972). Because of the significance of
the question in the area of federal-state relations, we granted
certiorari. 410 U.S. 908 (1973).
I
Respondent, David Ware, in July, 1958, entered the employ of
petitioner Merrill Lynch, Pierce, Fenner & Smith, Inc., a New
York corporation, as a registered representative or "account
executive" in the petitioner's San Francisco office. Ware worked
there continuously until March, 1969, when he voluntarily
terminated that relationship and accepted a similar position in San
Francisco with one of Merrill Lynch's competitors.
Merrill Lynch is a broker-dealer in securities and is a member
corporation of the New York Stock Exchange. Since prior to 1958,
the firm has had a noncontributory Profit-Sharing Plan for its
employees in the United States.
Page 414 U. S. 120
Under the Plan, an employee may have allocated to his account
both vested and unvested units, as therein described. Article 11 of
the Plan relates to"Forfeiture of Benefits" upon the happening of
specified events. One such event is competitive activity:
"11.1 A Participant who, in the determination of the Committee,
voluntarily terminates his employment with the Corporation or
provokes his termination and engages in an occupation which is, in
the determination of the Committee, competitive with the
Corporation, or any affiliate or subsidiary thereof, shall forfeit
all rights to any benefits otherwise due or to become due from the
Trust Fund with respect to units credited for fiscal years
subsequent to the fiscal year ended December 30, 1960."
The Committee referred to is provided for by the Plan's Art. 1.
It has not less than five nor more than nine persons (not
necessarily employees) appointed by Merrill Lynch and serving "at
the pleasure of the Corporation." Article 1.2 states that the
Committee "shall administer the Plan," and
"shall determine any questions arising in the administration,
interpretation and application of the Plan, which determination
shall be conclusive and binding on all persons."
At the time Ware terminated his employment with Merrill Lynch in
March, 1969, both vested and unvested units were allocated to his
account. Upon his departure, the Committee, pursuant to Art. 11.1,
determined that Ware, by entering competitive employment, had
forfeited all rights to benefits due or to become due him under the
Plan.
In January, 1970, Ware filed this class action in California
state court against Merrill Lynch and the members of the Committee.
The class purported to consist of Ware and all other similarly
situated former
Page 414 U. S. 121
Merrill Lynch employees in California. Declaratory relief was
sought to the effect that Art. 11.1 was "unlawful and void under
applicable California law," and that the defendants were obligated
to pay all vested units credited from December 30, 1960, to the
date of termination of employment.
Although the statute was not cited in the complaint, the parties
appear to agree that the suit rested principally on § 16600 of the
California Business and Professions Code. This reads:
"Except as provided in this chapter, every contract by which
anyone is restrained from engaging in a lawful profession, trade,
or business of any kind is to that extent void."
In its answer, Merrill Lynch alleged that the provisions of Art.
11.1 were a reasonable restraint on competition under the laws of
New York or of the United States; that, pursuant to Art. 22.1
[
Footnote 1] of the Plan, it
was to be construed according to the laws of New York; that, under
New York law, Art. 11.1 is lawful, valid, and enforceable; that a
condition of Ware's employment with Merrill Lynch was approval by
the New York Stock Exchange; that Ware, at the time of his
employment in 1958, executed a written application, on an Exchange
form, for approval of his employment as a registered
representative, as required by the Exchange's Rule 345(a)(1);
[
Footnote 2] that, by � 30(j)
of that form, Ware agreed that any controversy with a member
arising out of the
Page 414 U. S. 122
termination of his employment would be settled by arbitration at
the instance of any party; [
Footnote 3] that the Exchange approved the application;
that Ware's sole remedy was arbitration; and that a declaration
that Art. 11.1 was invalid under the laws of California would cause
Merrill Lynch to discriminate in the administration of the Plan and
would deprive it of due process of law.
Merrill Lynch, invoking § 1281.2 of the California Code of Civil
Procedure, [
Footnote 4]
petitioned the state court for an
Page 414 U. S. 123
order directing arbitration pursuant to the above-quoted � 30(j)
and Ware's pledge, contained in his application for approval of
employment, that he would "bide by the Constitution and Rules of
the Board of Governors of the New York Stock Exchange" and that he
submitted himself "to the jurisdiction of such Exchange."
Ware opposed arbitration on the grounds that no contract to
arbitrate existed between him and Merrill Lynch; that, if an
agreement to this effect existed, it was a contract of adhesion;
and that, since § 16600 made the forfeiture provision illegal under
California law, it was not arbitrable.
The state trial court, by minute order, denied the petition to
compel arbitration.
Merrill Lynch then appealed. The California Court of Appeal held
that a written agreement to arbitrate did exist; that the Exchange
form was "a contractual agreement"; and that the "approval and
registration by Merrill Lynch made the application a contract
between the parties." 24 Cal. App. 3d at 40-41, 100 Cal. Rptr. at
795-796. The court went on to hold, however, that the forfeiture
clause was invalid and unenforceable under California law, when
applied to California residents, as being in restraint of trade.
Id. at 42-43, 100 Cal. Rptr. at 796-797. Cited as
supporting authorities were
Frame v. Merrill Lynch, Pierce,
Fenner,& Smith, Inc., 20 Cal. App. 3d
668, 97 Cal. Rptr. 811 (1971), where the same forfeiture clause
was held ineffective under California law, but where the court also
held that an
Page 414 U. S. 124
enforceable agreement to arbitrate existed, [
Footnote 5] and
Muggill v. Reuben H. Donnelley
Corp., 62 Cal. 2d
239, 398 P.2d 147 (1965).
Finally, the Court of Appeal, while taking note of California's
"strong public policy" favoring arbitration, held that Merrill
Lynch's contributions under its Profit Sharing Plan were wages
within the meaning of §§ 200 [
Footnote 6]
Page 414 U. S. 125
and 229 [
Footnote 7] of the
California Labor Code, and that § 229 gave Ware "the right to bring
his claim in court in spite of any agreement to arbitrate." 24 Cal.
App. 3d at 43-44, 100 Cal. Rptr. at 797-798. Merrill Lynch's
petition for hearing by the Supreme Court of California was denied
without opinion.
See 24 Cal. App. 3d at 45.
II
The broad issue thus presented to us is the extent to which
authority delegated under a federal regulatory statute preempts
state law. Specifically, we are concerned with the questions (a)
whether, in the context of the present case, § 229 of the
California Labor Code, which would preclude compulsory arbitration
of wage disputes, is ineffective under the Supremacy Clause; (b)
whether § 16600 of the California Business and Professions Code
unduly interferes with federal regulation of the securities
industry; and (c) whether the California legislation
unconstitutionally burdens interstate commerce.
In order to resolve these questions, we think it necessary to
review the principles of stock exchange preemption delineated in
this Court's decision a decade ago in
Silver v. New York Stock
Exchange, 373 U. S. 341
(1963), and to examine the geneses of the federal Act and of the
California statute.
Page 414 U. S. 126
A. In
Silver, the Court considered whether, and to what
extent, the federal antitrust laws apply to securities exchanges
regulated by the 1934 Act. It held that the mere passage of the Act
did not effect,
pro tanto, a repeal of the federal
antitrust laws, but that particular instances of exchange
regulation that fall within the scope and purposes of the Act may
be justified, and will be upheld against antitrust challenge.
Id. at
373 U. S.
357-361. With respect to the specific question there
presented, it was clear that the New York Stock Exchange had
exercised its "tremendous economic power,"
id. at
373 U. S. 361,
against two nonmembers by discontinuing their direct-wire telephone
connections with members of the Exchange without notice, hearing,
or statement of reasons. It was the Court's view, under the
circumstances, that procedural guarantees were necessary in order
to protect against the possibility of proscribed antitrust
practices and to provide the "extremely beneficial effect in
keeping exchange action from straying into areas wholly foreign to
the purposes of the Securities Exchange Act."
Id. at
373 U. S. 362.
See also Ricci v. Chicago Mercantile Exchange,
409 U. S. 289,
409 U. S.
300-301 (1973).
In contrast with
Silver, we are not confronted here
with conflicting federal regulatory schemes. The present
controversy concerns the interrelationship between statutes
adopted, respectively, by the Federal Government and a State. The
analytical framework of
Silver is instructive nonetheless.
There, the Court reviewed carefully the securities exchange
regulatory scheme that Congress had adopted in order to identify
the character and purposes of the Act and the extent to which
instances of exchange self-regulation were necessary to the
furtherance of congressional aims and objectives. 373 U.S. at
373 U. S.
349-361. It was mindful also of the purposes behind the
conflicting statutes which, in that case, were the
Page 414 U. S. 127
antitrust laws. So here, we may not overlook the body of law
relating to the sensitive interrelationship between statutes
adopted by the separate, yet coordinate, federal and state
sovereignties. Our analysis is also to be tempered by the
conviction that the proper approach is to reconcile "the operation
of both statutory schemes with one another, rather than holding one
completely ousted."
Id. at
373 U. S. 357.
[
Footnote 8] The principle that
emerged from
Silver, and the premise upon which the Court
based its judgment, was that conflicting law, absent repealing or
exclusivity provisions, should be preempted by exchange
self-regulation "only to the extent necessary to protect the
achievement of the aims of the Securities Exchange Act."
Id. at
373 U. S.
361.
B. The Securities Exchange Act of 1934, as amended, 15 U.S.C. §§
78a to 78hh-1, "regulates securities markets and the business of
securities brokers and dealers." Report of Special Study of
Securities Markets of the Securities and Exchange Commission,
H.R.Doc. No. 95, pt. 1, 88th Cong., 1st Sess., 3 (1963). Two types
of regulation are reflected in the Act. Some provisions impose
direct requirements and prohibitions. Among these are mandatory
exchange registration, restrictions on broker and dealer borrowing,
and the prohibition of manipulative or deceptive practices. Other
provisions are flexible, and rely on the technique of
self-regulation to achieve their objectives.
Ibid.
Supervised self-regulation, although consonant with the traditional
private governance of exchanges, allows the Government to
Page 414 U. S. 128
monitor exchange business in the public interest. [
Footnote 9] MR. JUSTICE DOUGLAS, when he was
Chairman of the Securities and Exchange Commission, observed that
this permits the exchanges to
"take the leadership with Government playing a residual role.
Government would keep the shotgun, so to speak, behind the door,
loaded, well oiled, cleaned, ready for use, but with the hope it
would never have to be used."
W. Douglas, Democracy and Finance 82 (J. Allen ed.1940).
The Act provides for stock exchanges to be registered by the
Commission. § 6, 15 U.S.C. § 78f. It outlaws securities
transactions conducted on unregistered exchanges. § 5, 15 U.S.C. §
78e. It conditions registration on a showing that the exchange has
rules that are "just and adequate to insure fair dealing and to
protect investors." § 6(d), 15 U.S.C. § 78f(d). An exchange seeking
registration must also meet other requirements. It must agree "to
enforce, so far as is within its powers, compliance by its members"
with the
Page 414 U. S. 129
Act and the Commission's rules and regulations thereunder. §
6(a)(1), 15 U.S.C. § 78f(a)(1). It must include in its rules a
provision for the disciplining of a member "for conduct or
proceeding inconsistent with just and equitable principles of
trade." § 6(b), 15 U.S.C. § 78f(b). And it must supply to the
Commission copies of its constitution, articles of incorporation,
and bylaws, and such data or other information as the Commission
may require "as being necessary or appropriate in the public
interest or for the protection of investors." § 6(a)(3) and (2), 15
U.S.C. § 78f(a)(3) and (2).
The Commission's direct authority with respect to exchange
self-regulation is supervisory. Apart from its responsibilities in
registering exchanges, the Commission may "alter or supplement" the
rules of an exchange if such action is
"necessary or appropriate for the protection of investors or to
insure fair dealing in securities traded in upon such exchange or
to insure fair administration of such exchange."
§ 19(b), 15 U.S.C. § 78s (b). [
Footnote 10] This authority, however, relates to 12
designated subject areas and "similar matters."
Ibid. As a
consequence, some exchange rules are not subject to direct
Commission scrutiny,
In re Rules of the New York Stock
Exchange, 10 S.E.C. 270, 294 (1941), and, instead, if they do
not operate contrary to the interests of insuring fair dealing and
protecting investors, would kindle no federal curiosity, and would
serve no identifiable public purpose. It is to be noted, moreover,
that the Commission has exercised its direct supervisory power
Page 414 U. S. 130
sparingly. Securities Industry Study, Report of the Subcommittee
on Securities, Committee on Banking, Housing and Urban Affairs,
S.Doc. No. 93-13, p. 180 (1973).
Apart from registration and direct Commission supervision, the
only other qualification on exchange autonomy is the statutory
requirement that any rules promulgated and enforced by an exchange
not be "inconsistent with this [Act] and the rules and regulations
thereunder and the applicable laws of the State in which it is
located." § 6(c), 15 U.S.C. § 78f(c).
From this review of relevant portions of the Act, it is apparent
that Congress accorded maximum scope to self-regulation, and
reposed powers in the Commission "to be exercised as needed, but in
such manner as to allow maximum initiative and responsibility to
the self-regulators." Report of the Special Study,
supra,
pt. 4, p. 726. In the words of the Senate Report issued at the time
of enactment,
"Thus, the initiative and responsibility for promulgating
regulations pertaining to the administration of their ordinary
affairs remain with the exchanges themselves. It is only where they
fail adequately to provide protection to investors that the
Commission is authorized to step in and compel them to do so."
S.Rep. No. 792, 73d Cong., 2d Sess., 13 (1934).
It is thus clear that the congressional aim in supervised
self-regulation is to insure fair dealing and to protect investors
from harmful or unfair trading practices. To the extent that any
exchange rule or practice contravenes this policy, or any
authorized rule or regulation under the Act, the rule may be
subject to appropriate federal regulatory supervision or action.
Correspondingly, any rule or practice not germane to fair
dealing
Page 414 U. S. 131
or investor protection would not appear to fall under the shadow
of the federal umbrella; it is, instead, subject to applicable
state law.
C. On the other side are the California statutes. By the
addition of § 229 to its Labor Code in 1959, California codified
for the wage earner, with the solitary collective bargaining
agreement exception, a right of action to recover due and unpaid
wages from his employer, regardless of the existence of any private
agreement to arbitrate. Selected 1959 Code Legislation, 34
Cal.St.B.J. 581, 706-707. This was due, apparently, to the
legislature's desire to protect the worker from the exploitative
employer who would demand that a prospective employee sign away in
advance his right to resort to the judicial system for redress of
an employment grievance. The statute's legislative history is
sparse, but the exception carved out for collective bargaining
disputes provides the obvious conclusion that it was the
individual, nonunion, and otherwise unprotected wage earner who was
the intended beneficiary of the State's grace in providing this
remedy. This conclusion is fortified by the fact that § 200(a) of
the Code defines "wages" broadly to include
"all amounts for labor performed by employees of every
description, whether the amount is fixed or ascertained by the
standard of time, task, piece, commission basis, or other method of
calculation."
And the California court itself has noted "the established
policy . . . of protecting and promoting" the right, "
favored'
in the law," of the wage earner "to all wages lawfully accrued to
him." City of Ukiah v. Fones, 64 Cal. 2d
104, 108, 410 P.2d 369, 371 (1966). It may be, too, that the
legislature felt that arbitration was a less than adequate
protection against awarding the wage earner something short of what
was due compensation. In any event, there is the harder substance
of California case law. In Local 669 v. Color Corp. of
America, 47 Cal. 2d
189, 302 P.2d
Page 414 U. S. 132
294 (1956), decided prior to the addition of § 229 to the Labor
Code, the court held that the then § 1280 of the State's Code of
Civil Procedure, providing for the enforcement of an arbitration
clause in a contract and characterizing it as "irrevocable," was
subject to waiver or mutual rescission. The statute provided that
arbitration was required "save upon such grounds as exist at law or
in equity for the revocation of any contract." [
Footnote 11] California, thus does not
exclude a remedy available at law or in equity for the revocation
of any contract that happens to contain an arbitration clause.
This conclusion as to the broad and liberal intendment of § 229
is reinforced by the Court of Appeal's observation in the present
case, 24 Cal. App. 3d at 41 5, 100 Cal. Rptr. at 798, that the
State's Arbitration Act, revised in 1961, embraced no attempt to
change the right of action first accorded the wage earner only two
years earlier in 1959. The record is clear, moreover, that
legislative attention was drawn in 1961 to § 229. The California
Senate was asked to reconsider its unanimous vote in favor of the
Arbitration Act on the ground that there was legislative
uncertainty as to its effect upon § 229. 2 Journal of the Senate
2215-2218 (May 4, 1961). The motion to reconsider was later waived,
and the bill was transmitted to the Assembly.
Id. at 2287
(May 8, 1961). Thus, the Senate had in mind the rights accorded
wage earners by § 229, and those rights were placed in focus with
the "historical friendliness of California to the institution of
arbitration." Feldman, Arbitration Modernized -- The New California
Arbitration Act, 34 So.Calif.L.Rev. 413, 414 (1961). Section 229
thus survived subsequent legislative scrutiny and has now
manifested
Page 414 U. S. 133
itself as an important state policy through interpretation by
the California courts.
One might also consider, as the respondent suggests here, the
California antitrust policies embodied in § 16600 of the Business
and Professions Code, quoted
supra at
414 U. S. 121.
This statute has been in effect for many years, and is well
entrenched in case law and in commentary. [
Footnote 12] We need not pursue in depth the
policy considerations supporting this statute, because, in our
judgment, § 16600, standing alone and apart from § 229, under
existing case law, would not provide the necessary support to
uphold a challenge to arbitration. Our inclination in this respect
is buttressed by the different results reached by the California
Court of Appeal in this case and in
Frame, supra,
respectively. In
Frame, the court decided that the "strong
[California] public policy" against restraining one from engaging
in a lawful business foreclosed the application of the more
permissive New York law to the forfeiture provision of the
profit-sharing plan. Although California public policy thus served
to nullify the contract's forfeiture provision, arbitration,
nonetheless, was not precluded. By way of contrast, the present
case provoked a claim under § 229, in addition to Ware's reliance
on § 16600, in the face of Merrill Lynch's motion to compel
arbitration. The California court declared again that the
forfeiture clause was invalid but, in addition, held that the
arbitration clause was unenforceable, relying on § 16600 and § 229,
respectively. With this analysis of the state statutes made by the
California court, we rest on that court's interpretation of state
law and do not, and, in fact, cannot, disturb its determination
that, under those statutes, arbitration will lie in the one
instance but not in the other.
Page 414 U. S. 134
With this background, we turn to specific arguments advanced by
the petitioner here.
III
A. Merrill Lynch suggests that Rule 347(b) of the New York Stock
Exchange, set forth in
n 3,
supra, falls under the Exchange's mandate to protect the
investing public and to insure just and equitable trade practices.
[
Footnote 13] Its contention
is that confidence in the industry and in the integrity and ability
of its members has been jeopardized by failures of major brokerage
houses with consequent substantial losses to the public. Investor
confidence would be further undermined, it is said, by protracted
litigation between member firms and their employees over disputes
that arise out of employment relationships; public airing of every
claim of this kind will erode confidence in the market; and
arbitration, on the other hand, will internalize these disputes and
provide an expeditious and economical method of resolution by
arbitrators familiar with industry customs and practices.
As is seen by our discussion above, §§ 6(d) and 19(b) of the
Act, 15 U.S.C. §§ 78f(d) and 78s(b), establish the measure of
congressionally delegated authority for self-regulation in the
national interest. Section 6(d) requires that exchange rules be
"just and adequate to insure fair dealing and to protect
investors." Section 19(b) gives the Commission limited power over
certain types of exchange rules "for the protection of
investors
Page 414 U. S. 135
or to insure fair dealing in securities" or to "insure fair
administration" of the exchanges. [
Footnote 14] Measured by these standards, we conclude
that the policy arguments advanced by Merrill Lynch do not require
preemption of contrary state law by Rule 347(b).
To begin with the obvious, there is nothing in the Act, and
there is no Commission rule or regulation, that specifies
arbitration as the favored means of resolving employer employee
disputes. [
Footnote 15] It
is also clear that Rule 347(b) would not be subject to the
Commission's modification or review under § 19(b). The United
States, as
amicus, concedes as much, and we conclude, as
the Government suggests, that the relationship between compulsory
employer employee arbitration and fair dealing and investor
protection is "extremely attenuated and peripheral, if it exists at
all." Brief for the United States 9. Merrill Lynch has not alleged
that arbitration will effect fair dealing or result in investor
protection. It suggests only that investor confidence not be
shaken
Page 414 U. S. 136
further by public airing of employer employee disputes. There is
no explanation of why a judicial proceeding, even though public,
would undermine investor confidence. It is difficult to understand
why muffling a grievance in the cloakroom of arbitration would
prevent lessening of confidence in the market. To the contrary, for
the generally sophisticated investing public, market confidence may
tend to be restored in the light of impartial public court
adjudication. Furthermore, it should be apparent that, so far as
investor confidence is concerned, compulsory arbitration of an
employee employer grievance is no substitute for direct effective
disciplinary action against any abusive exchange practice. Other
rules of the Exchange serve this very function. Rule 345(b), for
example, permits the Exchange to disapprove, and thereby to
forestall, the employment of any person, and Rule 345(d) spells out
punitive measures for "conduct inconsistent with just and equitable
principles of trade," or "acts detrimental to the interest or
welfare of the Exchange," or "conduct contrary to an established
practice of the Exchange." These measures, designed to insure fair
dealing and to protect investors, are of the kind directly related
to the Act's purposes, and ordinarily would not be expected to
yield to provisions of state law.
B. Rule 347(b) cannot be categorized, as the petitioner
suggests, as part of a need for uniform national regulation. There
is no revelation in the Act or in any Commission rule or regulation
that nationwide uniformity of an exchange's housekeeping affairs is
necessary or desirable. And Merrill Lynch has not demonstrated that
national uniformity in the area of wage claims is vital, in some
way, to federal securities policy. Convenience in exchange
management may be desirable, but it does not support a plea for
uniform application when the rule to be applied is not necessary
for the achievement of the national policy objectives reflected
in
Page 414 U. S. 137
the Act. Indeed, Congress, in the securities field, has not
adopted a regulation system wholly apart from and exclusive of
state regulation.
Cf. Rice v. Santa Fe Elevator Corp.,
331 U. S. 218,
331 U. S.
234-236 (1947);
Campbell v. Hussey,
368 U. S. 297,
368 U. S. 302
(1961). Instead, Congress intended to subject the exchanges to
state regulation that is not inconsistent with the federal Act.
Section 6(c), 15 U.S.C. § 78f(c), explicitly subjects exchange
rules to a requirement of consistency with the Act "and the
applicable laws of the State in which [the exchange] is located."
"Where the Government has provided for collaboration, the courts
should not find conflict."
Union Brokerage Co. v. Jensen,
322 U. S. 202,
322 U. S. 209
(1944). And we observed in
Silver that the scheme of
self-regulation provides in some cases for no agency check on
exchange behavior, and, therefore,
"[s]ome form of review of exchange self-policing, whether by
administrative agency or by the courts, is . . . not at all
incompatible with the fulfillment of the aims of the Securities
Exchange Act."
373 U.S. at
373 U. S.
359.
C. It is also argued that the applicable state laws referred to
in § 6(c) are the laws of the State in which the exchange itself is
located. Thus, because the New York Stock Exchange is in the city
of New York, it is said that "the applicable laws" are those of New
York, and that the California court was in error in not applying
New York law that would have compelled arbitration of this dispute
and would have validated the forfeiture provision of the
Profit-Sharing Plan.
We are not persuaded that this is what Congress intended.
Section 6(c) has no independent existence creating some sort of
spurious uniformity of application for all States. It has meaning
only in the context of the assertion of a federal interest, and it
hinges on our determination that the particular rule be integrally
related to or substantially effect the aims and purposes of the
Page 414 U. S. 138
Act. It merely requires that any exchange rule adopted outside
the context of the Act be consistent with the laws of the State in
which the exchange is located. [
Footnote 16]
If the rule is sought to be enforced in another State, normal
conflict of laws principles come into play, and the rule's effect
depends on the resolution of that conflict. Were this not so, there
would be no purpose behind the choice of law clause in the
Profit-Sharing Plan itself. More importantly, the uniform
application Merrill Lynch's interpretation of the Act would
purportedly foster is seen to be ephemeral when one considers that
broker-dealers like petitioner are also members of exchanges
located outside New York, and are therefore subject, under the
"state of location" theory, to other States' laws. In effect, we
are asked to sacrifice the individual's expectation of uniform
treatment in the State of his residence for uniformity of
application of the effect of an exchange's rules. We decline to do
so, because we believe that Congress intended that those elements
of the old regime of complete self-regulation, that is, those
elements not related to the federal objectives, be subject to state
law and to established conflicts principles when their application
out of State comes into controversy. After all, a stock exchange is
organized as an association in
Page 414 U. S. 139
accordance with the laws of the State of its location. Any
assertion of extraterritorial jurisdiction contends, of course,
with the public policy of the State in which this jurisdiction is
sought. To ascribe more to § 6(c) would be contrary to the
congressional scheme and to what might be regarded as common
sense.
D. MR. JUSTICE BRENNAN has stated:
"The principle to be derived from our decisions is that federal
regulation of a field of commerce should not be deemed preemptive
of state regulatory power in the absence of persuasive reasons --
either that the nature of the regulated subject matter permits no
other conclusion or that the Congress has unmistakably so
ordained."
Florida Lime Avocado Growers, Inc. v. Paul,
373 U. S. 132,
373 U. S. 142
(1963).
In other contexts, preemption has been measured by whether the
state statute frustrates any part of the purpose of the federal
legislation.
Colorado Anti-Discrimination Comm'n v. Continental
Air Lines, Inc., 372 U. S. 714,
372 U. S. 724
(1963);
Perez v. Campbell, 402 U.
S. 637 (1971);
Rice v. Board of Trade,
331 U. S. 247,
331 U. S.
253-255 (1947). And only last term, MR. JUSTICE DOUGLAS,
in speaking for the Court, observed that, while prior cases on
preemption "are not precise guidelines," because "each case turns
on the peculiarities and special features of the federal regulatory
scheme in question," it is where there is in existence a pervasive
and comprehensive scheme of federal regulation that preemption
follows in order to fulfill the federal statutory purposes.
City of Burbank v. Lockheed Air Terminal, Inc.,
411 U. S. 624,
411 U. S.
638-639 (1973).
In the area of regulation that we are considering here,
California has manifested a strong policy of protecting its wage
earners from what it regards as undesirable economic pressures
affecting the employment relationship.
Page 414 U. S. 140
This policy prevails in the absence of interference with the
federal regulatory scheme. We find no such interference, and we
also find in the structure of the Act an intent on the part of
Congress that state policies in this area should operate
vigorously.
E. It is suggested, finally, that the petitioner's
Profit-Sharing Plan operates on a national level; that it is open
to all eligible Merrill Lynch employees in the United States; that
the employment of respondent and the class he represents is
interstate in nature, as is Merrill Lynch's business; and that the
application of the California statutes would unduly burden
interstate commerce.
What has been said above provides the answer to this argument.
It is in line with the principle, long established, that the
National Government's power, under the Commerce Clause, to regulate
commerce does not exclude all state power of regulation.
Southern Pacific Co. v. Arizona, 325 U.
S. 761,
325 U. S.
766-767 (1945);
Brotherhood of Locomotive Firemen
& Enginemen v. Chicago, R.I. & P. R. Co., 393 U.
S. 129 (1968);
Huron Portland Cement Co. v.
Detroit, 362 U. S. 440
(1960).
The judgment of the Court of Appeal is affirmed.
It is so ordered.
MR. JUSTICE STEWART took no part in the decision of this
case.
[
Footnote 1]
"22.1 The validity of the Plan or of any of the provisions
thereof shall be determined under and shall be construed according
to the laws of the State of New York."
[
Footnote 2]
"Rule 345.(a) No member or member organization shall"
"(1) permit any person to perform regularly the duties
customarily performed by a registered representative, unless such
person shall have been registered with and is acceptable to the
Exchange. . . ."
[
Footnote 3]
Paragraph 30(j) of the Exchange form reads:
"(j) I agree that any controversy between me and any member
organization arising out of my employment or the termination of my
employment by and with such . . . member organization shall be
settled by arbitration at the instance of any such party in
accordance with the Constitution and rules then obtaining of the
New York Stock Exchange."
Paragraph 30(d) of the same form reads in part:
"(d) I have read the Constitution and Rules of the Board of
Governors of the New York Stock Exchange and, if approved, I hereby
pledge myself to abide by the Constitution and Rules of the Board
of Governors of the New York Stock Exchange as the same have been
or shall be from time to time amended, and by all rules and
regulations adopted pursuant to the Constitution, and by all
practices of the Exchange."
Rule 347(b) of the New York Stock Exchange, adopted in April,
1958, prior to Ware's employment, provides:
"(b) Any controversy between a registered representative and any
. . . member organization arising out of the employment or
termination of employment of such registered representative by and
with such . . . member organization shall be settled by
arbitration, at the instance of any such party, in accordance with
the arbitration procedure prescribed elsewhere in these rules."
It is thus apparent that � 30(j) of the form follows the
language of the Exchange's Rule 347(b).
[
Footnote 4]
"§ 1281.2 Order to arbitrate controversy; petition;
determination of court"
"On petition of a party to an arbitration agreement alleging the
existence of a written agreement to arbitrate a controversy and
that a party thereto refuses to arbitrate such controversy, the
court shall order the petitioner and the respondent to arbitrate
the controversy if it determines that an agreement to arbitrate the
controversy exists, unless it determines that:"
"(a) The right to compel arbitration has been waived by the
petitioner; or"
"(b) Grounds exist for the revocation of the agreement. . .
."
[
Footnote 5]
In
Frame, decided only five months earlier, the same
California Court of Appeal
reversed a trial court's order
denying arbitration, and thus seemingly arrived at an
ultimate result opposite to that reached in the present case. The
court held,
20 Cal. App. 3d
668, 671-673, 97 Cal. Rptr. 811, 813-815, that Frame (like
Ware) had made an agreement to arbitrate; that there was no basis
for using the doctrine of adhesion to avoid arbitration; that the
forfeiture provision of Art. 11.1 was ineffective under § 16600;
that the agreement's provision that New York law was to apply "must
not be allowed to defeat" the policy of § 16600; that, however, the
entire contract was not necessarily unlawful; and that a
"latent question exists as to whether the agreements of the
parties may be construed as applying only to such permissible
subjects of restraint as breaches of confidence and
misappropriation of trade secrets. Other questions may be raised as
to the time and circumstances of respondent's employment and the
amount of any benefits earned and remaining unpaid. All of these
matters, whether they involve questions of law or questions of fact
are, in the first instance, properly subject to arbitration."
20 Cal. App. 3d at 673, 97 Cal. Rptr. at 815. But no mention was
made in
Frame of §§ 200 and 229 of the State's Labor Code,
see nn.
6-|
6-S. 117fn7|>7,
infra, and,
as the court later said in this case,
24 Cal. App. 3d
35, 43, 100 Cal. Rptr. 791, 797, "[t]he
Frame court
did not consider the effect of section 229 of the Labor Code on the
arbitration agreement." Apparently, neither side in
Frame
sought review by the California Supreme Court.
[
Footnote 6]
"§ 200. Definitions"
"As used in this article: (a) 'Wages' includes all amounts for
labor performed by employees of every description, whether the
amount is fixed or ascertained by the standard of time, task,
piece, commission basis, or other method of calculation."
[
Footnote 7]
"§ 229. Actions to enforce payment of wages; effect of
arbitration agreements"
"Actions to enforce the provisions of this article for the
collection of due and unpaid wages claimed by an individual may be
maintained without regard to the existence of any private agreement
to arbitrate. This section shall not apply to claims involving any
dispute concerning the interpretation or application of any
collective bargaining agreement containing such an arbitration
agreement."
Section 229 was added to the Code in 1959. Cal.Stats.1959,
c.1939, p. 4532.
[
Footnote 8]
This approach is supported by decisions extending back to the
turn of the century.
Florida Lime & Avocado Growers, Inc.
v. Paul, 373 U. S. 132,
373 U. S. 142
(1963);
Huron Portland Cement Co. v. City of Detroit,
362 U. S. 440
(1960);
International Assn. of Machinists v. Gonzales,
356 U. S. 617
(1958);
Union Brokerage Co. v. Jensen, 322 U.
S. 202 (1944);
Savage v. Jones, 225 U.
S. 501 (1912).
[
Footnote 9]
The first attempt at exchange regulation arose after the panic
of 1907, when, in response to public concern over speculation,
President Theodore Roosevelt urged Congress to take action. 42
Cong.Rec. 1347, 1349 (1908). Nothing of significance happened,
however, until after the 1929 stock market crash. It became
apparent that
"transactions in securities as commonly conducted upon
securities exchanges and over-the-counter markets are affected with
a national public interest which makes it necessary to provide for
regulation and control of such transactions and of practices and
matters related thereto."
Securities Exchange Act of 1934, § 2, 15 U.S.C. § 78b.
Self-regulation was adopted as a means of policing the exchanges.
The tradition, as has been noted, had been one of self-governance;
the financial community was strongly opposed to governmental
control of daily exchange business; and the task was deemed to be
of such magnitude that Government simply could not regulate
effectively every aspect of the industry. Comment, 48 Minn.L.Rev.
597-598 (1964); 2 L. Loss, Securities Regulation 1175-1176 (1961),
and 5
id. at 3138-3139 (1969).
[
Footnote 10]
The Commission also has broad rulemaking power under the Act.
See, for example, §§ 8, 9, and 11, 15 U.S.C. §§ 78h, 78i,
and 78k. No question is presented in this case as to the authority
of the Commission to promulgate rules affecting the operation of
stock exchanges.
[
Footnote 11]
Section 1280 was repealed and replaced in 1961 to make the
saving clause in § 1281 now read, "save upon such grounds as exist
for the revocation of any contract." Cal.Stats.1961, c. 461, pp.
1540-1541, §§ 1 and 2.
[
Footnote 12]
See citations following § 16600 in West's
Ann.Calif.Bus. & Prof.Code 41
et seq.
[
Footnote 13]
The phrase "just and equitable trade practices" would be
inappropriately used to justify Rule 347(b). This is because the
standard refers to rules adopted pursuant to § 6(b) of the Act, 15
U.S.C. § 78f(b), providing for the expulsion, suspension, or
disciplining of a member "for conduct or proceeding inconsistent
with just and equitable principles of trade." Arbitration is not
the type of disciplinary rule that § 6(b) contemplates.
[
Footnote 14]
As noted,
supra at
414 U. S. 129,
the Commission's review power over exchange rules is circumscribed
by certain subject matter limitations explicitly enumerated in §
19(b). None of the subject matter categories suggests that the
Commission has review authority with respect to a rule requiring
arbitration of employer employee disputes.
[
Footnote 15]
This Court and other federal courts, of course, have endorsed
the suitability of arbitration to resolve federally created rights.
Wilko v. Swan, 346 U. S. 427,
346 U. S. 431
(1953);
Coenen v. R. W. Pressprich & Co., 453 F.2d
1209 (CA2),
cert. denied, 406 U.S. 949 (1972).
See other cases cited by MR. JUSTICE WHITE in his
dissenting opinion in
U.S. Bulk Carriers, Inc. v.
Arguelles, 400 U. S. 351,
400 U. S.
374-375 (1971). These cases, however, concern situations
where a federal act itself has provided for arbitration. Yet, in
Wilko v. Swan, an investor customer's agreement to
arbitrate was held void under § 14 of the Securities Act of 1933,
15 U.S.C. § 7n, notwithstanding the provisions of § 3 of the United
States Arbitration Act, 9 U.S.C. § 3.
See Prima Paint Corp. v.
Flood & Conklin Mfg. Co., 388 U.
S. 395 (1967).
[
Footnote 16]
The Act contains other provisions indicating the intent of
Congress that state law continues to apply where the Act itself
does not. Thus, § 28(a), 15 U.S.C. § 78bb(a), states that the
rights and remedies provided by the Act "shall be in addition to
any and all other rights and remedies that may exist at law or in
equity." It further provides that nothing in the Act "shall affect
the jurisdiction of the securities commission . . . of any State .
. . insofar as it does not conflict with the provisions" of the Act
"or the rules and regulations thereunder." Section 28(b), 15 U.S.C.
§ 78bb(b), provides that nothing in the Act
"shall be construed to modify existing law . . . with regard to
the binding effect . . . of [exchange] action taken . . . to settle
disputes between its members . . . on any person who has agreed to
be bound thereby."