Rodriguez de Quijas v. Shearson/American Express
490 U.S. 477 (1989)
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Rule of Law:
A predispute agreement to arbitrate claims arising under the Securities Act of 1933 is enforceable and is not overridden by the anti-waiver provision in § 14 of the Act.
Facts:
- Petitioners, a group of individual investors, invested approximately $400,000 in securities through the respondent brokerage firm.
- As part of opening their accounts, the petitioners signed a standard customer agreement with the broker.
- The agreement contained a clause stating that the parties agreed to settle any controversies relating to the accounts through binding arbitration.
- The investments performed poorly, and the petitioners alleged their money was lost due to unauthorized and fraudulent transactions conducted by the respondent and its agent.
Procedural Posture:
- Petitioners sued respondent, Shearson/Lehman Bros., Inc., in the U.S. District Court for federal and state securities law violations.
- The District Court, relying on the precedent of Wilko v. Swan, compelled arbitration for all claims except those brought under § 12(2) of the Securities Act of 1933, which it retained for judicial resolution.
- Respondent (appellee) appealed the District Court's order refusing to compel arbitration of the 1933 Act claims to the U.S. Court of Appeals for the Fifth Circuit.
- The Court of Appeals reversed the District Court's decision, holding that the Supreme Court's subsequent decisions had rendered Wilko obsolete and that the 1933 Act claims were arbitrable.
- Petitioners (appellants) successfully petitioned the U.S. Supreme Court for a writ of certiorari.
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Issue:
Does a predispute agreement to arbitrate claims under the Securities Act of 1933 constitute an impermissible waiver of a substantive right under § 14 of the Act, therefore making the agreement unenforceable?
Opinions:
Majority - Justice Kennedy
No. A predispute agreement to arbitrate claims under the Securities Act of 1933 does not waive a substantive right and is enforceable under the Federal Arbitration Act. The Court explicitly overrules its prior decision in Wilko v. Swan, which held such agreements were unenforceable. The Court's reasoning is that the suspicion of arbitration that underpinned Wilko is an outdated judicial hostility that has been eroded by subsequent decisions strongly favoring arbitration as a method of dispute resolution. Citing cases like Shearson/American Express Inc. v. McMahon, which enforced arbitration for claims under the Securities Exchange Act of 1934, the Court reasons that by agreeing to arbitrate a statutory claim, a party does not forgo substantive rights but merely submits to their resolution in an arbitral, rather than a judicial, forum. Harmonizing the interpretation of the 1933 and 1934 Acts is essential, and allowing arbitration for both promotes this consistency. The Federal Arbitration Act establishes a strong federal policy favoring arbitration, and the party opposing it bears the burden of showing Congress intended to preclude a waiver of judicial remedies, a burden petitioners failed to meet.
Dissenting - Justice Stevens
Yes. The dissent argues that the Court should uphold the precedent set in Wilko v. Swan. For 35 years, Wilko provided a settled interpretation that Congress had elected not to amend, which gave that interpretation the force of law. Overturning such a long-standing statutory precedent is an act of judicial activism that oversteps the Court's role and usurps the legislative function of Congress. The dissent contends that a Justice's vote in such a case depends more on their philosophy regarding the respective lawmaking roles of the Court and Congress than on the specific policy arguments, which have been debated for years. Since Congress acquiesced to the Wilko interpretation for decades, the Court should respect that and leave any changes to the legislature.
Analysis:
This decision represents a landmark shift in securities law and arbitration jurisprudence, cementing the dominance of the Federal Arbitration Act over investor protection statutes. By overruling Wilko v. Swan, the Court aligned the treatment of claims under the 1933 Act with those under the 1934 Act, creating a uniform rule that predispute arbitration agreements are enforceable for virtually all federal securities claims. This ruling significantly limited investors' access to judicial forums, channeling most disputes with brokerage firms into arbitration. The decision solidifies the modern view that arbitration is merely a choice of forum, not a waiver of substantive statutory rights, a principle with broad implications for other federal statutory claims.
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