Arbitrators should decide timeliness of dispute

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Hon. Stephen Breyer

Whether a securities dispute was timely submitted for arbitration to the National Association of Securities Dealers (NASD) is for the arbitrator to decide, rather than a court, the United States Supreme Court held on Dec. 10.

At some time between 1986 and 1994, Dean Witter Reynolds, Inc. (Dean Witter), recommended to its client, Karen Howsam, that she buy and hold interests in four limited partnerships. According to a dispute filed by Howsam in 1997, Dean Witter misrepresented the virtues of the partnerships.

The parties had a standard Client Service Agreement, with an arbitration clause providing: “all controversies … concerning or arising from … any account … , any transaction … , or … the construction, performance or breach of … any … agreement between us … shall be determined by arbitration before any self-regulatory organization or exchange of which Dean Witter is a member.”

The agreement also provides that Howsam can select the arbitration forum, and Howsam chose arbitration before the NASD.

NASD Code 10304 provides that no dispute, “shall be eligible for submission … where six (6) years have elapsed from the occurrence or event giving rise to the … dispute.”

Dean Witter filed a suit in federal district court in Colorado, asking the court to declare that the dispute was ineligible for arbitration because it was more than six years old.

The district court dismissed the action, holding that the NASD arbitrator, not the court, should interpret and apply the NASD rule. On appeal, however, the Court of Appeals for the Tenth Circuit, reversed, holding that the district court was the proper forum.

The U.S. Supreme Court granted certiorari, and reversed the Tenth Circuit in a decision by Justice Stephen Breyer that agreed with the district court that the issue is for the arbitrator to decide.

The Question of Arbitrability

The court acknowledged the general rule that an issue on whether parties have submitted a particular dispute to arbitration — the “question of arbitrability” — is an issue for judicial determination unless the parties clearly and unmistakably provide otherwise, citing AT&T Tech-nologies, Inc. v. Communications Workers, 475 U.S. 643, 649 (1986).

The court further acknowledged prior precedent holding various arbitrability issues to be the province of the courts: whether an arbitration contract bound parties who did not sign the agreement; whether an arbitration agreement survived a corporate merger and bound the resulting corporation; whether a labor-management layoff controversy falls within the arbitration clause of a collective-bargaining agreement; and whether a clause providing for arbitration of various grievances covers claims for damages for breach of a no-strike agreement.

Nevertheless, the court concluded that application of the NASD time limit does not fall into the scope of this general rule. Instead, the court concluded the timeliness of a dispute “closely resembles” other procedural questions which the court has held to be within the arbitrator’s realm to decide.

The court noted that in John Wiley & Sons, Inc. v. Livingston, 376 U.S. 543 (1964), the court held that an arbitrator should decide whether the first two steps of a grievance procedure were completed, where those steps were prerequisites to arbitration.

Likewise, in Moses H. Cone Memorial Hospital v. Mercury Constr. Corp., 460 U.S. 1 (1983), the court held that the arbitrator should decide allegations of waiver, delay, or a like defense to arbitrability.

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The court noted further that Section 6(c) and comment 2 of the Revised Uniform Arbitration Act of 2000 (RUAA) state that an, “arbitrator shall decide whether a condition precedent to arbitrability has been fulfilled,” and that issues of procedural arbitrability, including time limits, are for arbitrators to decide.

Finally, the court cited policy considerations that warrant having arbitrators decide issues of timeliness. The court stated, “NASD arbitrators, comparatively more expert about the meaning of their own rule, are comparatively better able to interpret and to apply it. … [F]or the law to assume an expectation that aligns (1) decisionmaker with (2) comparative expertise will help better to secure a fair and expeditious resolution of the underlying controversy.”

Considering the parties intent, the court added, “parties to an arbitration contract would normally expect a forum-based decisionmaker to decide forum-specific procedural gateway matters.” Accord-ingly, the court reversed.

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David Ziemer can be reached by email.