Justia Federal District Court Opinions

Peter R. Sonderby, William E. Snyder, Chicago, Ill., for defendant-appellant.

Eugene L. Resnick, Stephen E. Smith, Chicago, Ill., for plaintiffs-appellees.

Before FAIRCHILD and TONE, Circuit Judges, and GRANT, Senior District Judge.*

GRANT, Senior District Judge.

We are faced in this case with the matter of deciding what affect an arbitration clause in an agreement has upon a claim for relief under S.E.C. Rule 10b-5. The litigation arises from the decision of Plaintiff Henry Weissbuch to open a trading account and participate in Merrill Lynch's Money Management Option Program. Paragraph 5 of the Standard Option Agreement signed by plaintiff specifically provides that:

After making their investment, the Weissbuchs not only failed to realize a return on their investment, but lost a substantial amount of their investment as well. Believing that the defendant had misled them with certain untrue and deceptive representations, warranties, and assurances, the plaintiffs filed this suit in the Northern District of Illinois.

The complaint consists of three counts: Action under Rule 10b-5 of the S.E.C. (Count I), Fraud and Deceit (Count II), and Breach of Contract (Count III). Plaintiff seeks both legal and equitable relief.

Defendant, relying on the arbitration clause in the written agreement, moved for a stay of proceedings in the district court. After plaintiffs resisted this motion to stay, the court entered an order holding that the action under Rule 10b-5 was not subject to arbitration, but that the fraud and contract claims were properly arbitrable. The district court denied defendant's motion but stayed arbitration of Counts II and III until the court's final determination of Count I. Defendant brought this appeal pursuant to 28 U.S.C. § 1292(a)(1). It argues that Count I is legally insufficient because it does not adequately allege scienter and, further, that an arbitration agreement is valid and enforcible with respect to a claim arising under Rule 10b-5. Subsequent to the filing of the appeal, plaintiff moved to dismiss the appeal on the grounds that there was no appealable interlocutory order present. Defendant responded and this court deferred ruling on this jurisdictional issue until the presentation of oral argument.JURISDICTION OF THE APPEAL

Plaintiffs seek to preclude this appeal by arguing that Judge Kirkland's stay order is not an appealable interlocutory order under 28 U.S.C. § 1292(a)(1). In essence the plaintiffs argue that their claim is essentially equitable in nature and that therefore the order of the district court was not an order appealable as an injunction. They point out that the Supreme Court has recognized that stay orders in proceedings at law are appealable while those in equitable proceedings are not. Baltimore Contractors v. Bodinger, 348 U.S. 176, 184-185, 75 S.Ct. 249, 99 L.Ed. 233 (1955).

The stay order issued by the district court enjoined the arbitration of the two counts seeking money damages. Accordingly, we cannot accept plaintiffs' characterization of this lawsuit as an equitable proceeding for purposes of appeal. This court has explicitly held that a stay order preliminarily enjoining a proceeding in arbitration and denying a stay of its own proceeding as to a Rule 10b-5 claim is an interlocutory injunction within the meaning of 28 U.S.C. § 1292(a)(1). Alberto-Culver v. Scherk, 484 F.2d 611, 614 (C.A. 7 1973), rev'd on other grounds, 417 U.S. 506, 94 S.Ct. 2449, 41 L.Ed.2d 270 (1974). The district court's ruling here is an appealable interlocutory injunction order and the plaintiffs' motion to dismiss the appeal is hereby denied.

Defendant maintains that Count I of the complaint fails to allege facts sufficient to state a claim for relief under Rule 10b-5 because it does not state the presence of "intentional wrongdoing" or "scienter" as recently required by the Supreme Court in Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976). The Court stated there that:

The district court, relying on the Supreme Court's decision in Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957), held that the complaint was not deficient as a matter of law. In Conley, supra, the Court enunciated the standard to be utilized in measuring a complaint for failure to state a claim:

After reviewing the complaint, we are convinced the district court reached the proper conclusion. In paragraph 5 of Count I the plaintiffs allude to "deceptive, fraudulent and manipulative schemes and misrepresentations . . .". These allegations, coupled with the language in paragraphs 7 and 9 make it clear that the plaintiffs' charges go beyond suggestions of mere negligence and contemplate a theory of liability resting upon intentional misconduct. Defendant postulates that the Conley formula should not be applied because the core issue here is whether the arbitration agreement is enforcible. We disagree. Conley was properly relied upon and the complaint states a claim under Section 10(b) and Rule 10b-5.

Defendant next argues that private claims arising under Section 10(b) and Rule 10b-5 should be submitted to arbitration where parties have so agreed. Defendant properly points out that there is a strong national policy favoring the recognition of arbitration agreements as a means of resolving private conflicts short of the more costly and disruptive avenue of litigation. The benefits that accrue from the utilization of such private remedial devices have been approvingly noted by this court. Butler Products Co. v. Unistruct Corp., 367 F.2d 733, 736 (C.A. 7 1966).

There is also, of course, a strong national policy rationale underpinning the Securities Acts of 1933 and 1934. It is clear that the Securities Acts were passed with an eye to the disadvantages confronting the small investor in this area. It was not unreasonable for Congress to provide particular statutory protections for the securities buyer.

The litigation of the validity of arbitration agreements with respect to actions brought pursuant to federal securities laws inevitably brings into collision these two well recognized public policies. The Supreme Court has addressed this vexing confrontation on two earlier occasions. In Wilko v. Swan, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953), the Court held that an arbitration agreement was void and unenforcible with respect to an action brought pursuant to § 12(2) of the Securities Act of 1933, 15 U.S.C. § 77l. The Court, held that Section 14 of the 1933 Act, 15 U.S.C. § 77n, operated as a bar to the waiver of a 12(2) action through an arbitration clause.

More recently that Court has addressed the issue of whether an arbitration clause in an international agreement, may be enforcible against an action founded upon § 10(b) and Rule 10b-5. In Scherk v. Alberto-Culver Co., 417 U.S. 506, 94 S.Ct. 2449, 41 L.Ed.2d 270 (1974), the Court held that an international agreement containing an arbitration clause was enforcible against a claim arising under Rule 10b-5.

In Scherk v. Alberto-Culver the Court noted the "crucial differences" between the international agreement and the agreement involved in Wilko. The Court weighed the possible harm to international trade against the policies embodied in the securities laws and concluded that the arbitration clause should have been given deference. Specifically, the court noted:

U.S. at 516, 94 S.Ct. at 2456.

The Court in Scherk left open the question of whether an arbitration clause would be enforced against a claim arising under Rule 10b-5 where there were no international dimensions involved. The Court did note, however, that only agreements with significant international contacts would be controlled by the holding in Scherk :

U.S. at 517 n. 11, 94 S.Ct. at 2456 (Emphasis added.)

Another consideration at play in both the Wilko and Scherk cases was the bargaining posture of the parties. The holding in Wilko was directed at protecting what Justice (then Judge) Stevens identified in his Court of Appeals Scherk dissent (484 F.2d 611, 617) as "the relatively uninformed individual investor". Lacking bargaining power and extensive information about his investment, this type of individual is most vulnerable to securities swindles and in most need of the special protections and remedies afforded by the Securities laws. It would be admittedly incongruous to attach this kind of disparity in leverage to the situation in Scherk where both parties possessed formidable financial interests and where their arbitration agreement emerged from a period of prolonged and extensive negotiations. Under such circumstances, the waiver of a statutory remedy in the courts could be realistically perceived as the product of a bargain. There are many factors that might lead international parties to resolve future controversies through a forum of their own choosing.

The position of the plaintiff in the instant suit, however, can hardly be analogized to the posture of Alberto-Culver Company. The contract signed was defendant's "Standard Option Agreement" and there are no international considerations at play as were present in Scherk. The plaintiffs here are clearly the type of individuals whom Justice Stevens, in his Scherk dissent, envisioned would be in need of protection.