Scherk v. Alberto-Culver Co.
417 U.S. 506 (1974)
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Rule of Law:
An agreement to arbitrate disputes is enforceable in a truly international commercial transaction, even when the dispute involves claims arising under the anti-waiver provisions of the U.S. Securities Exchange Act of 1934.
Facts:
- Alberto-Culver Co., an American corporation, sought to expand its overseas operations.
- Alberto-Culver entered into negotiations with Fritz Scherk, a German citizen, to purchase his three European-based business entities and their associated trademarks.
- The negotiations took place across the United States and Europe.
- In February 1969, the parties signed a contract in Vienna, Austria, for the sale of the businesses.
- The contract contained express warranties from Scherk guaranteeing he had sole and unencumbered ownership of the trademarks.
- The contract also stipulated that any controversy would be settled by arbitration before the International Chamber of Commerce in Paris, France, under Illinois law.
- Nearly one year after the transaction closed, Alberto-Culver discovered that the trademark rights were subject to substantial encumbrances.
- Alberto-Culver attempted to rescind the contract, but Scherk refused.
Procedural Posture:
- Alberto-Culver commenced an action for damages and other relief against Scherk in the U.S. District Court for the Northern District of Illinois, alleging violations of the Securities Exchange Act of 1934.
- Scherk filed a motion to dismiss the action or, alternatively, to stay the action pending arbitration in Paris pursuant to the contract.
- Alberto-Culver opposed the motion and sought a preliminary injunction to restrain Scherk from proceeding with arbitration.
- The District Court denied Scherk's motion and granted a preliminary injunction enjoining arbitration, relying on the precedent of Wilko v. Swan.
- Scherk (appellant) appealed the District Court's order to the U.S. Court of Appeals for the Seventh Circuit.
- A divided panel of the Court of Appeals affirmed the District Court's decision.
- The U.S. Supreme Court granted Scherk's petition for a writ of certiorari.
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Issue:
Does a mandatory arbitration clause in an international commercial agreement require arbitration of a dispute arising under the Securities Exchange Act of 1934, despite the Act's anti-waiver provisions?
Opinions:
Majority - Justice Stewart
Yes, a mandatory arbitration clause in an international commercial agreement is enforceable for such disputes. The holding in Wilko v. Swan, which invalidated arbitration agreements in purely domestic securities transactions, is inapplicable to an international agreement. For international commerce to be orderly and predictable, contractual provisions that specify a forum and applicable law are indispensable. A refusal by U.S. courts to enforce such an international arbitration agreement would be parochial, invite tactical legal maneuvering by parties, and damage the fabric of international trade. Therefore, the strong federal policy favoring arbitration, as expressed in the Federal Arbitration Act, must be upheld in this international context to avoid the uncertainty that would otherwise exist regarding the governing law and jurisdiction.
Dissenting - Justice Douglas
No, the arbitration clause should not be enforced. The precedent set in Wilko v. Swan is controlling, as the anti-waiver provision of the Securities Exchange Act of 1934 is functionally identical to the provision in the Securities Act of 1933 at issue in Wilko. That provision voids any stipulation, such as an arbitration agreement, that waives compliance with the Act, including the right to a judicial forum. The 'international' nature of the contract is a talisman that should not allow parties to evade the strict protections Congress established for American investors. The majority's decision creates a loophole that leaves American investors vulnerable when dealing with foreign corporations, depriving them of the substantial rights and procedural advantages of a federal court, such as discovery and judicial review.
Analysis:
This decision significantly limited the scope of the Wilko v. Swan precedent by carving out an exception for international commercial agreements. It prioritized the federal policy of promoting certainty and predictability in international trade by enforcing arbitration clauses over the domestic policy of ensuring a judicial forum for securities fraud claims. The case established that the need for a neutral, predictable forum in global transactions outweighs the concerns underlying the anti-waiver provisions of U.S. securities laws. This ruling strongly reinforced the enforceability of arbitration agreements in a global context and foreshadowed the Court's increasingly favorable view of arbitration in both domestic and international disputes.
