Shearson/American Express Inc. et al. v. McMahon et al.
482 U.S. 220 (1987)
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Rule of Law:
Predispute agreements to arbitrate claims are enforceable under the Federal Arbitration Act for claims arising under both § 10(b) of the Securities Exchange Act of 1934 and the Racketeer Influenced and Corrupt Organizations Act (RICO). A party seeking to avoid arbitration bears the heavy burden of demonstrating a congressional intent to preclude a waiver of judicial remedies for the statutory rights at issue.
Facts:
- Between 1980 and 1982, Eugene and Julia McMahon were customers of the brokerage firm Shearson/American Express Inc.
- Julia McMahon signed two customer agreements to open and maintain their accounts with Shearson.
- The agreements contained a clause stating that any controversy arising out of the accounts would be settled by arbitration.
- The McMahons' accounts were handled by Mary Ann McNulty, a registered representative for Shearson.
- The McMahons alleged that McNulty engaged in fraudulent and excessive trading (churning) on their accounts.
- The McMahons also alleged that McNulty made false statements and omitted material facts in the investment advice she provided.
Procedural Posture:
- Eugene and Julia McMahon filed a complaint against Shearson/American Express Inc. and Mary Ann McNulty in the U.S. District Court for the Southern District of New York.
- Shearson filed a motion to compel arbitration for all claims based on the customer agreements.
- The District Court compelled arbitration for the state law and § 10(b) Exchange Act claims but denied the motion for the RICO claim, finding it non-arbitrable.
- Both parties appealed to the U.S. Court of Appeals for the Second Circuit.
- The Court of Appeals affirmed the District Court's denial of arbitration for the RICO claim and reversed the District Court regarding the § 10(b) claim, holding that it was also non-arbitrable.
- The U.S. Supreme Court granted Shearson's petition for certiorari to resolve a conflict among the circuit courts.
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Issue:
Are predispute agreements to arbitrate claims under Section 10(b) of the Securities Exchange Act of 1934 and the Racketeer Influenced and Corrupt Organizations Act (RICO) enforceable under the Federal Arbitration Act?
Opinions:
Majority - Justice O’Connor
Yes. Predispute agreements to arbitrate claims under § 10(b) of the Securities Exchange Act of 1934 and RICO are enforceable under the Federal Arbitration Act. The Federal Arbitration Act (FAA) establishes a strong federal policy favoring arbitration that extends to statutory claims unless Congress has explicitly commanded otherwise. The burden rests on the party opposing arbitration to show that Congress intended to preclude a waiver of judicial remedies. For the Exchange Act claim, the anti-waiver provision of § 29(a) only voids waivers of compliance with the Act's substantive obligations, not waivers of the jurisdictional provision (§ 27). The Court distinguished its prior holding in Wilko v. Swan, which found 1933 Securities Act claims non-arbitrable, by concluding that Wilko was based on an outdated mistrust of arbitration's adequacy to protect substantive rights. Given modern confidence in arbitration and, crucially, the SEC's extensive regulatory oversight over arbitration procedures since 1975, enforcing these agreements does not waive substantive rights under the Exchange Act. For the RICO claim, neither the statute's text nor its legislative history indicates any congressional intent to override the FAA. Arguments that RICO claims are too complex or serve a public interest are unpersuasive, as the Court rejected similar arguments regarding antitrust claims in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc. The primary purpose of RICO's civil remedy is compensation, which can be effectively vindicated in an arbitral forum.
Concurring-in-part-and-dissenting-in-part - Justice Blackmun
Yes as to the RICO claim, but No as to the § 10(b) claim. While the RICO claims are arbitrable, the Court's decision to compel arbitration for § 10(b) claims effectively overrules Wilko v. Swan. The holding in Wilko was based not merely on the inadequacy of arbitration in 1953, but on a recognition that the Securities Acts were designed to protect investors and guarantee them a judicial forum. For decades, lower courts uniformly extended this protection to Exchange Act claims, a position Congress implicitly approved in its 1975 amendments by stating it did not intend to change existing law as articulated in Wilko. The majority's reliance on SEC oversight is unconvincing, as the SEC itself, until this litigation, consistently maintained that predispute agreements were unenforceable for securities claims. Arbitration still contains structural disadvantages for investors, including limited review and potential industry bias, which contradicts the investor-protection policy of the securities laws.
Concurring-in-part-and-dissenting-in-part - Justice Stevens
Yes as to the RICO claim, but No as to the § 10(b) claim. The dissent from the majority's holding on the § 10(b) claim is based on principles of statutory construction and stare decisis. For 32 years following Wilko v. Swan, every circuit court that addressed the issue concluded that Wilko's holding applied to claims under the Securities Exchange Act of 1934. This long-standing and consistent judicial interpretation has acquired a meaning as clear as if Congress had drafted it itself. If this settled interpretation is to be changed, the change should come from the Legislative Branch, not the Judicial Branch. The legislative history of the 1975 amendments adds special force to this presumption of congressional acquiescence.
Analysis:
This decision significantly strengthened the enforceability of predispute arbitration agreements under the FAA, particularly in the securities industry. By narrowly interpreting Wilko v. Swan as a product of its time, the Court signaled a profound shift away from judicial suspicion of arbitration toward a strong presumption of its validity for resolving complex statutory claims. The ruling underscored the importance of federal agency oversight (like the SEC's) as a key justification for finding arbitration adequate to protect statutory rights. This case greatly diminished the ability of customers to sue brokerage firms in court and set the precedent that would lead to Wilko being formally overruled two years later, solidifying arbitration as the primary forum for customer-broker disputes.
