In an action brought by a customer against a securities
brokerage firm to recover damages, under the civil liabilities
provisions of § 12(2) of the Securities Act of 1933, for alleged
misrepresentation in the sale of securities,
held that an
agreement for arbitration of any controversy arising in the future
between the parties was void under § 14, notwithstanding the
provisions of the United States Arbitration Act. Pp.
346 U. S.
428-438.
(a) The agreement to arbitrate future controversies was void
under § 14 of the Securities Act as a "stipulation" binding the
customer to "waive compliance" with a "provision" of the Act. Pp.
346 U. S.
432-435.
(b) The right of an aggrieved person under § 22(a) to select the
judicial forum is a "provision" of the Securities Act that cannot
be waived under § 14 thereof. Pp.
346 U. S.
434-438.
(c) As the protective provisions of the Securities Act require
the exercise of judicial direction to fairly assure their
effectiveness, Congress must have intended § 14 to apply to waiver
of judicial trial and review. P.
346 U. S.
437.
201 F.2d 439, reversed.
Petitioner sued respondents to recover damages under the
Securities Act of 1933. Respondents' motion to stay the action,
pursuant to § 3 of the United States Arbitration Act, was denied by
the District Court.
107 F. Supp.
75. The Court of Appeals reversed. 201 F.2d 439. This Court
granted certiorari. 345 U.S. 969.
Reversed, p.
346 U. S.
438.
Page 346 U. S. 428
MR. JUSTICE REED delivered the opinion of the Court.
This action by petitioner,
346 U. S. against
respondents, partners in a securities brokerage firm, was brought
in the United States District Court for the Southern District of
New York, to recover damages under § 12(2) of the Securities Act of
1933. [
Footnote 1] The
complaint alleged that, on or about January 17, 1951, through the
instrumentalities of interstate commerce, petitioner was induced by
Hayden, Stone and Company to purchase
Page 346 U. S. 429
1,600 shares of the common stock of Air Associates,
Incorporated, by false representations that pursuant to a merger
contract with the Borg Warner Corporation, Air Associates' stock
would be valued at $6.00 per share over the then current market
price, and that financial interests were buying up the stock for
the speculative profit. It was alleged that he was not told that
Haven B. Page (also named as a defendant, but not involved in this
review [
Footnote 2]), a
director of, and counsel for, Air Associates was then selling his
own Air Associates' stock, including some or all that petitioner
purchased. Two weeks after the purchase, petitioner disposed of the
stock at a loss. Claiming that the loss was due to the firm's
misrepresentations and omission of information concerning Mr. Page,
he sought damages.
Without answering the complaint, the respondent moved to stay
the trial of the action pursuant to § 3 of the United States
Arbitration Act [
Footnote 3]
until an arbitration in accordance with the terms of identical
margin agreements was had. An affidavit accompanied the motion
stating that the parties' relationship was controlled by the terms
of the agreements, and that, while the firm was willing to
arbitrate, petitioner had failed to seek or proceed with any
arbitration of the controversy.
Finding that the margin agreements provide that arbitration
should be the method of settling all future
Page 346 U. S. 430
controversies, the District Court held that the agreement to
arbitrate deprived petitioner of the advantageous court remedy
afforded by the Securities Act, and denied the stay. [
Footnote 4] A divided Court of Appeals
concluded that the Act did not prohibit the agreement to refer
future controversies to arbitration, and reversed. [
Footnote 5]
The question is whether an agreement to arbitrate a future
controversy is a "condition, stipulation, or provision binding any
person acquiring any security to waive compliance with any
provision" of the Securities Act which § 14 [
Footnote 6] declares "void." We granted
certiorari, 345 U.S. 969, to review this important and novel
federal question affecting both the Securities Act and the United
States Arbitration Act.
Cf. Frost & Co. v. Coeur D'Alene
Mines Corp., 312 U. S. 38,
312 U. S.
40.
As the margin agreement, in the light of the complaint,
evidenced a transaction in interstate commerce, no issue arises as
to the applicability of the provisions of the United States
Arbitration Act to this suit, based upon the Securities Act. 9
U.S.C. (Supp. V, 1952) § 2.
Cf. Tejas Development Co. v.
McGough Bros., 165 F.2d 276, 278,
with Agostini Bros.
Bldg. Corp. v. United States, 142 F.2d 854.
See
Sturges and Murphy, Some Confusing Matters Relating to Arbitration,
17 Law & Contemp.Prob. 580.
In response to a Presidential message urging that there be added
to the ancient rule of
caveat emptor the further doctrine
of "let the seller also beware," [
Footnote 7] Congress passed
Page 346 U. S. 431
the Securities Act of 1933. Designed to protect investors,
[
Footnote 8] the Act requires
issuers, underwriters, and dealers to make full and fair disclosure
of the character of securities sold in interstate and foreign
commerce, and to prevent fraud in their sale. [
Footnote 9] To effectuate this policy, § 12(2)
created a special right to recover for misrepresentation, which
differs substantially from the common law action in that the seller
is made to assume the burden of proving lack of
scienter.
[
Footnote 10] The Act's
special right is enforceable in any court of competent jurisdiction
-- federal or state -- and removal from a state court is
prohibited. If suit be brought in a federal court, the purchaser
has a wide choice of venue, the privilege of nationwide service of
process, and the jurisdictional $3,000 requirement of diversity
cases is inapplicable. [
Footnote
11]
The United States Arbitration Act establishes by statute the
desirability of arbitration as an alternative to the complications
of litigation. The reports of both Houses on that Act stress the
need for avoiding the delay and expense of litigation, [
Footnote 12] and practice under its
terms raises
Page 346 U. S. 432
hope for its usefulness both in controversies based on statutes
[
Footnote 13] or on
standards otherwise created. [
Footnote 14] This hospitable attitude of legislatures and
courts toward arbitration, however, does not solve our question as
to the validity of petitioner's stipulation by the margin
agreements, set out below, to submit to arbitration controversies
that might arise from the transactions. [
Footnote 15]
Petitioner argues that § 14,
note 6 supra, shows that the purpose of Congress
was to assure that sellers could not maneuver buyers into a
position that might weaken their ability to recover under the
Securities Act. He contends that arbitration lacks the certainty of
a suit at law under the Act to enforce his rights. He reasons that
the arbitration paragraph of the margin agreement is a stipulation
that waives "compliance with" the provision
Page 346 U. S. 433
of the Securities Act, set out in the margin, conferring
jurisdiction of suits and special powers. [
Footnote 16]
Respondent asserts that arbitration is merely a form of trial to
be used in lieu of a trial at law, [
Footnote 17] and therefore no conflict exists between the
Securities Act and the United States Arbitration Act, either in
their language or in the congressional purposes in their enactment.
Each may function within its own scope, the former to protect
investors, and the latter to simplify recovery for actionable
violations of law by issuers or dealers in securities.
Respondent is in agreement with the Court of Appeals that the
margin agreement arbitration paragraph,
note 15 supra, does not relieve the seller
from either liability or burden of proof,
note 1 supra, imposed by the Securities Act.
[
Footnote 18] We agree that,
insofar as the award in arbitration
Page 346 U. S. 434
may be affected by legal requirements, statutes or common law,
rather than by considerations of fairness, the provisions of the
Securities Act control. [
Footnote 19] This is true even though this proposed
agreement has no requirement that the arbitrators follow the law.
This agreement of the parties as to the effect of the Securities
Act includes also acceptance of the invalidity of the paragraph of
the margin agreement that relieves the respondent sellers of
liability for all "representation or advice by you or your
employees or agents regarding the purchase or sale by me of any
property. . . ."
The words of § 14,
note 6
supra, void ant "stipulation" waiving compliance with any
"provision" of the Securities Act. This arrangement to arbitrate is
a"stipulation,"
Page 346 U. S. 435
and we think the right to select the judicial forum is the kind
of "provision" that cannot be waived under § 14 of the Securities
Act. That conclusion is reached for the reasons set out above in
the statement of petitioner's contention on this review. While a
buyer and seller of securities, under some circumstances, may deal
at arm's length on equal terms, it is clear that the Securities Act
was drafted with an eye to the disadvantages under which buyers
labor. Issuers of and dealers in securities have better
opportunities to investigate and appraise the prospective earnings
and business plans affecting securities than buyers. It is
therefore reasonable for Congress to put buyers of securities
covered by that Act on a different basis from other purchasers.
When the security buyer, prior to any violation of the
Securities Act, waives his right to sue in courts, he gives up more
than would a participant in other business transactions. The
security buyer has a wider choice of courts and venue. He thus
surrenders one of 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.
Even though the provisions of the Securities Act, advantageous
to the buyer, apply, their effectiveness in application is lessened
in arbitration as compared to judicial proceedings. Determination
of the quality of a commodity [
Footnote 20] or the amount of money due under a contract
is not the type of issue here involved. [
Footnote 21] This case requires subjective findings on
the purpose and knowledge
Page 346 U. S. 436
of an alleged violator of the Act. They must be not only
determined, but applied, by the arbitrators without judicial
instruction on the law. As their award may be made without
explanation of their reasons and without a complete record of their
proceedings, the arbitrators' conception of the legal meaning of
such statutory requirements as "burden of proof," "reasonable
care," or "material fact,"
see note 1 supra, cannot be examined. Power to vacate
an award is limited. [
Footnote
22] While it may be true, as the Court of Appeals thought, that
a failure of the arbitrators to decide in accordance with the
provisions of the Securities Act would "constitute grounds for
vacating the award pursuant to section 10 of the Federal
Arbitration Act," [
Footnote
23] that failure would need to be made clearly to appear. In
unrestricted submission, such as the present margin agreements
envisage, the interpretations of the law by the arbitrators in
contrast to manifest disregard are not subject, in the federal
courts, to judicial review for error
Page 346 U. S. 437
in interpretation. [
Footnote
24] The United States Arbitration Act contains no provision for
judicial determination of legal issues such as is found in the
English law. [
Footnote 25]
As the protective provisions of the Securities Act require the
exercise of judicial direction to fairly assure their
effectiveness, it seems to us that Congress must have intended §
14,
note 6 supra, to
apply to waiver of judicial trial and review. [
Footnote 26]
This accords with
Boyd v. Grand Trunk Western R. Co.,
338 U. S. 263.
[
Footnote 27] We there held
invalid a stipulation restricting an employee's choice of venue in
an action under the Federal Employers' Liability Act. Section 6 of
that Act permitted suit in any one of several localities, and § 5
forbade a common carrier's exempting itself from any liability
under the Act. [
Footnote 28]
Section 5 had been adopted to avoid contracts waiving employers'
liability. [
Footnote 29] It
is
Page 346 U. S. 438
to be noted that, in words, it forbade exemption only from
"liability." We said the right to select the "forum" even after the
creation of a liability is a "substantial right," and that the
agreement restricting that choice would thwart the express purpose
of the statute. We need not and do not go so far in this present
case. By the terms of the agreement to arbitrate, petitioner is
restricted in his choice of forum prior to the existence of a
controversy. While the Securities Act does not require petitioner
to sue, [
Footnote 30] a
waiver in advance of a controversy stands upon a different footing.
[
Footnote 31]
Two policies, not easily reconcilable, are involved in this
case. Congress has afforded participants in transactions subject to
its legislative power an opportunity generally to secure prompt,
economical, and adequate solution of controversies through
arbitration if the parties are willing to accept less certainty of
legally correct adjustment. [
Footnote 32] On the other hand, it has enacted the
Securities Act to protect the rights of investors, and has
forbidden a waiver of any of those rights. Recognizing the
advantages that prior agreements for arbitration may provide for
the solution of commercial controversies, we decide that the
intention of Congress concerning the sale of securities is better
carried out by holding invalid such an agreement for arbitration of
issues arising under the Act.
Reversed.
|
346
U.S. 427|
* The Securities and Exchange Commission participated as
amicus curiae throughout this case, and has shared
petitioner's burden in presenting the case to the Court.
[
Footnote 1]
48 Stat. 74, 15 U.S.C. § 77a
et seq., § 12(2), 48 Stat.
84, 15 U.S.C. § 77
l(2), provides:
"Any person who --"
"
* * * *"
"(2) sells a security (whether or not exempted by the provisions
of section 77c of this title, other than paragraph (2) of
subsection (a) of section 77c of this title), by the use of any
means or instruments of transportation or communication in
interstate commerce or of the mails, by means of a prospectus or
oral communication, which includes an untrue statement of a
material fact or omits to state a material fact necessary in order
to make the statements, in the light of the circumstances under
which they were made, not misleading (the purchaser not knowing of
such untruth or omission), and who shall not sustain the burden of
proof that he did not know, and in the exercise of reasonable care
could not have known, of such untruth or omission, shall be liable
to the person purchasing such security from him, who may sue either
at law or in equity in any court of competent jurisdiction, to
recover the consideration paid for such security with interest
thereon, less the amount of any income received thereon, upon the
tender of such security, or for damages if he no longer owns the
security."
[
Footnote 2]
See Wilko v. Swan, 201 F.2d 439, 445.
[
Footnote 3]
9 U.S.C. § 1
et seq. (Supp. V, 1952). Section 3
provides:
"If any suit or proceeding be brought in any of the courts of
the United States upon any issue referable to arbitration under an
agreement in writing for such arbitration, the court in which such
suit is pending, upon being satisfied that the issue involved in
such suit or proceeding is referable to arbitration under such an
agreement, shall on application of one of the parties stay the
trial of the action until such arbitration has been had in
accordance with the terms of the agreement, providing the applicant
for the stay is not in default in proceeding with such
arbitration."
[
Footnote 4]
Wilko v. Swan, 107 F. Supp.
75.
[
Footnote 5]
Wilko v. Swan, 201 F.2d 439.
[
Footnote 6]
48 Stat. 84, 15 U.S.C. § 7m. Section 14 provides:
"Any condition, stipulation, or provision binding any person
acquiring any security to waive compliance with any provision of
this subchapter or of the rules and regulations of the Commission
shall be void."
[
Footnote 7]
H.R.Rep.No.85, 73d Cong., 1st Sess. 2.
[
Footnote 8]
S.Rep.No.47, 73d Cong., 1st Sess. 1.
See Oklahoma-Texas
Trust v. SEC, 100 F.2d 888, 891.
[
Footnote 9]
48 Stat. 74, Preamble; 48 Stat. 77, 15 U.S.C. § 77d.
See
Frost & Co. v. Coeur D'Alene Mines Corp., 312 U. S.
38,
312 U. S.
40.
[
Footnote 10]
See note 1
supra.
"Unless responsibility is to involve merely paper liability, it
is necessary to throw the burden of disproving responsibility for
reprehensible acts of omission or commission on those who purport
to issue statements for the public's reliance. . . . To impose a
lesser responsibility would nullify the purposes of this
legislation."
H.R.Rep.No.85, 73d Cong., 1st Sess. 9-10.
[
Footnote 11]
§ 22(a), 48 Stat. 86, as amended 49 Stat. 1921, 15 U.S.C. §
77v(a).
See Deckert v. Independence Shares Corp.,
311 U. S. 282,
311 U. S. 289.
Existing remedies at law and equity are retained. § 16, 48 Stat.
84, 15 U.S.C. § 77p.
[
Footnote 12]
H.R.Rep.No.96, 68th Cong., 1st Sess. 1-2; S.Rep.No.536, 68th
Cong., 1st Sess. 3.
See Marine Transit Corp. v. Dreyfus,
284 U. S. 263.
[
Footnote 13]
Agostini Bros. Bldg. Corp. v. United States, 142 F.2d
854;
Watkins v. Hudson Coal Co., 151 F.2d 311;
Donahue
v. Susquehanna Collieries Co., 138 F.2d 3;
Donahue v.
Susquehanna Collieries Co., 160 F.2d 661;
Evans v. Hudson
Coal Co., 165 F.2d 970.
[
Footnote 14]
Marine Transit Corp. v. Dreyfus, 284 U.
S. 263;
Kentucky River Mills v. Jackson, 206
F.2d 111;
Campbell v. American Fabrics Co., 168 F.2d 959;
Columbian Fuel Corp. v. United Fuel Gas
Co., 72 F. Supp.
843,
aff'd, 165 F.2d 746;
Matter of Springs Cotton
Mills v. Buster Boy Suit Co., 275 App.Div. 196, 88 N.Y.S.2d
295,
aff'd, 300 N.Y. 586, 89 N.E.2d 877;
White Star
Mining Co. v. Hultherg, 220 Ill. 578, 77 N.E. 327;
Oregon-Washington R. & N. Co. v. Spokane, P. & S. R.
Co., 83 Ore. 528, 163 P. 600; Sturges, Commercial Arbitrations
and Awards, pp. 502, 793-798.
[
Footnote 15]
"Any controversy arising between us under this contract shall be
determined by arbitration pursuant to the Arbitration Law of the
New York, and under the rules of either the Arbitration Committee
of the Chamber of Commerce of the New York, or of the American
Arbitration Association, or of the Arbitration Committee of the New
York Stock Exchange or such other Exchange as may have jurisdiction
over the matter in dispute, as I may elect. Any arbitration
hereunder shall be before at least three arbitrators."
[
Footnote 16]
48 Stat. 86, as amended, 49 Stat. 1921, 15 U.S.C. § 77v(a).
Section 22(a) provides:
"The district courts of the United States . . . shall have
jurisdiction . . . concurrent with State and Territorial courts, of
all suits in equity and actions at law brought to enforce any
liability or duty created by this subchapter. Any such suit or
action may be brought in the district wherein the defendant is
found or is an inhabitant or transacts business, or in the district
where the sale took place, if the defendant participated therein,
and process in such cases may be served in any other district of
which the defendant is an inhabitant or wherever the defendant may
be found. Judgments and decrees so rendered shall be subject to
review as provided in sections [1292-93] and [1254] of Title 28. No
case arising under this subchapter and brought in any State court
of competent jurisdiction shall be removed to any court of the
United States. . . ."
See note 11
supra.
[
Footnote 17]
See Murray Oil Products v. Mitsui & Co., 146 F.2d
381, 383;
American Locomotive Co. v. Chemical Research
Corp., 171 F.2d 115, 120.
[
Footnote 18]
"Paragraph 3 of the margin agreement provides that all
transactions 'shall be subject to the provisions of the Securities
Exchange Act of 1934 and present and future acts amendatory thereto
[15 U.S.C. § 78a
et seq.].' It contains no express mention
of the Securities Act of 1933. If reference to the 1934 Act were
construed as excluding the 1933 Act, it might be argued that the
agreement did not provide for arbitration of a controversy as to
the liability of Hayden, Stone & Co. under section 12(2) of the
1933 Act. But we do not think the principle of
expressio unius
est exclusio alterius is here applicable. It may well be that
the phrase 'present . . . acts . . . supplemental' to the 1934 Act
should be construed to include the 1933 Act. In any event, the sale
transaction would necessarily be subject to that Act. Therefore,
the
amicus does not regard it as material whether or not
the agreement purports to make that statute applicable. We agree,
and shall proceed to a consideration of the question decided below
-- namely, whether the 1933 Act evidences a public policy which
forbids referring the controversy to arbitration."
201 F.2d at 443.
The paragraph of the agreement referred to by the Court of
Appeals as "3" reads as follows:
"All transactions made by you or your agents for me are to be
subject to the constitutions, rules, customs and practices of the
exchanges or markets where executed and of their respective
clearing houses, and shall be subject to the provisions of the
Securities Exchange Act of 1934 and present and future acts
amendatory thereof or supplemental thereto, and to the rules and
regulations of the Federal Securities and Exchange Commission and
of the Federal Reserve Board insofar as they may be applicable. . .
."
[
Footnote 19]
See Sturges, Commercial Arbitrations and Awards,
500.
[
Footnote 20]
Campe Corp. v. Pacific Mills, 87 N.Y.S.2d 16,
reversed, 275 App.Div. 634, 92 N.Y.S.2d 347.
[
Footnote 21]
Evans v. Hudson Coal Co., 165 F.2d 970;
Donahue v.
Susquehanna Collieries Co., 160 F.2d 661;
Watkins v.
Hudson Coal Co., 151 F.2d 311;
Donahue v. Susquehanna
Collieries Co., 138 F.2d 3;
Agostini Bros. Bldg. Corp. v.
United States, 142 F.2d 854;
American Almond Prod. Co. v.
Consolidated Pecan S. Co., 144 F.2d 448.
[
Footnote 22]
9 U.S.C. (Supp. V, 1952) § 10:
"In either of the following cases, the United States court in
and for the district wherein the award was made may make an order
vacating the award upon the application of any party to the
arbitration --"
"(a) Where the award was procured by corruption, fraud, or undue
means."
"(b) Where there was evident partiality or corruption in the
arbitrators, or either of them."
"(c) Where the arbitrators were guilty of misconduct in refusing
to postpone the hearing, upon sufficient cause shown, or in
refusing to hear evidence pertinent and material to the
controversy; or of any other misbehavior by which the rights of any
party have been prejudiced."
"(d) Where the arbitrators exceeded their powers, or so
imperfectly executed them that a mutual, final, and definite award
upon the subject matter submitted was not made."
"(e) Where an award is vacated and the time within which the
agreement required the award to be made has not expired, the court
may, in its discretion, direct a rehearing by the arbitrators."
[
Footnote 23]
Wilko v. Swan, 201 F.2d 439, 445.
[
Footnote 24]
Burchell v.
Marsh, 17 How. 344,
58 U. S. 349;
United States v.
Farragut, 22 Wall. 406,
89 U. S. 413,
89 U. S.
419-421 (note the right of review);
Kleine v.
Catara, 14 Fed.Cas. 732, No. 7,869;
Texas & P. Ry. Co.
v. St. Louis Southwestern Ry. Co., 158 F.2d 251, 256;
The
Hartbridge, 62 F.2d 72, 73. In
Mutual Benefit Health &
Acc. Assn. v. United Cas. C., 142 F.2d 390, 393, the problem
was dealt with on the basis of the Massachusetts law.
See
Sturges,
note 19
supra; Note, Judicial Review of Arbitration Awards on the
Merits, 63 Harv.L.Rev. 681, 685, Award Based on Erroneous Rule;
Cox, The Place of Law in Labor Arbitration, XXXIV Chicago Bar Rec.
205.
[
Footnote 25]
Arbitration Act, 1950, 14 Geo VI, c. 27, § 21, 29 Halsbury's
Statutes of England (2d ed.) p. 106.
[
Footnote 26]
Cf. notes 66 Harv.L.Rev. 1326; 53 Col.L.Rev. 735; 41
Georgetown L.J. 565; 62 Yale L.J. 985.
[
Footnote 27]
See also Krenger v. Pennsylvania R. Co., 174 F.2d 556;
Akerly v. New York Cent. R. Co., 168 F.2d 812.
[
Footnote 28]
§ 5 of the Federal Employers' Liability Act, 35 Stat. 66, 45
U.S.C. § 55, provides:
"Any contract, rule, regulation, or device whatsoever the
purpose or intent of which shall be to enable any common carrier to
exempt itself from any liability created by this chapter shall, to
that extent, be void. . . ."
[
Footnote 29]
See H.R.Rep.No.1386, 60th Cong., 1st Sess. 6.
Compare Baltimore & O.S. R. Co. v. Voigt, 176 U.
S. 498.
[
Footnote 30]
Cf. Callen v. Pennsylvania R. Co., 332 U.
S. 625,
332 U. S. 631.
[
Footnote 31]
Brooklyn Savings Bank v. O'Neil, 324 U.
S. 697,
324 U. S. 707,
324 U. S.
714.
[
Footnote 32]
Cf. Wilko v. Swan, 201 F.2d at 444.
MR. JUSTICE JACKSON, concurring.
I agree with the Court's opinion insofar as it construes the
Securities Act to prohibit waiver of a judicial remedy in favor of
arbitration by agreement made before any controversy arose. I think
thereafter the parties could agree upon arbitration. However, I
find it unnecessary
Page 346 U. S. 439
in this case, where there has not been and could not be any
arbitration, to decide that the Arbitration Act precludes any
judicial remedy for the arbitrators' error of interpretation of a
relevant statute.
MR. JUSTICE FRANKFURTER, whom MR. JUSTICE MINTON joins,
dissenting.
If arbitration inherently precluded full protection of the
rights § 12(2) of the Securities Act affords to a purchaser of
securities, or if there were no effective means of ensuring
judicial review of the legal basis of the arbitration, then, of
course, an agreement to settle the controversy by arbitration would
be barred by § 14, the anti-waiver provision, of that Act.
There is nothing in the record before us, nor in the facts of
which we can take judicial notice, to indicate that the arbitral
system as practiced in the City of New York, and as enforceable
under the supervisory authority of the District Court for the
Southern District of New York, would not afford the plaintiff the
rights to which he is entitled.
*
The impelling considerations that led to the enactment of the
Federal Arbitration Act are the advantages of providing a speedier,
more economical and more effective
Page 346 U. S. 440
enforcement of rights by way of arbitration than can be had by
the tortuous course of litigation, especially in the City of New
York. These advantages should not be assumed to be denied in
controversies like that, before us arising under the Securities
Act, in the absence of any showing that settlement by arbitration
would jeopardize the rights of the plaintiff.
Arbitrators may not disregard the law. Specifically, they are,
as Chief Judge Swan pointed out, "bound to decide in accordance
with the provisions of section 12(2)." On this we are all agreed.
It is suggested, however, that there is no effective way of
assuring obedience by the arbitrators to the governing law. But,
since their failure to observe this law "would . . . constitute
grounds for vacating the award pursuant to section 10 of the
Federal Arbitration Act," 201 F.2d 439, 445, appropriate means for
judicial scrutiny must be implied, in the form of some record or
opinion, however informal, whereby such compliance will appear, or
want of it will upset the award.
We have not before us a case in which the record shows that the
plaintiff, in opening an account, had no choice but to accept the
arbitration stipulation, thereby making the stipulation an
unconscionable and unenforceable provision in a business
transaction. The Securities and Exchange Commission, as
amicus
curiae, does not contend that the stipulation which the Court
of Appeals respected, under the appropriate safeguards defined by
it, was a coercive practice by financial houses against customers
incapable of self-protection. It is one thing to make out a case of
overreaching as between parties bargaining not at arm's length. It
is quite a different thing to find in the anti-waiver provision of
the Securities Act a general limitation on the Federal Arbitration
Act.
On the state of the record before us, I would affirm the
decision of the Court of Appeals.
* Under the rules of the American Arbitration Association,
available to the plaintiff under his contract, the procedure for
selection of arbitrators is as follows:
The Association submits a list of potential arbitrators
qualified by experience to adjudicate the particular controversy.
In the City of New York, the list would be drawn from a panel of
4,400 persons, 1,275 of whom are lawyers. Each party may strike off
the names of any unacceptable persons and number the remaining in
order of preference. The Association then designates the
arbitrators on the basis of the preferences expressed by both
parties.
See "Questions and Answers," Pamphlet of American
Arbitration Association. In short, those who are charged to enforce
the rights are selected by the parties themselves from among those
qualified to decide.