Shearson/American Express Inc. v. McMahon

Summary

From 1980 to 1982 Eugene and Julia McMahon, for themselves and as trustees of pension and profit-sharing plans, held accounts with the brokerage firm Shearson/American Express Inc. Julia McMahon signed two customer agreements providing that any controversy over the accounts would be settled by arbitration. In 1984 the McMahons sued Shearson and their registered representative, Mary Ann McNulty, in federal court, alleging fraudulent, excessive trading and misleading advice in violation of Section 10(b) and Rule 10b-5, a civil claim under the Racketeer Influenced and Corrupt Organizations Act (RICO), and state-law claims. Shearson moved to compel arbitration under the Federal Arbitration Act. The District Court sent the securities and state claims to arbitration but kept the RICO claim; the Second Circuit agreed on the state and RICO claims but held the Exchange Act claims could not be arbitrated, following Wilko v. Swan (1953), which had refused to compel arbitration of claims under the Securities Act of 1933. The questions were whether predispute agreements to arbitrate Section 10(b) claims and civil RICO claims are enforceable. The McMahons argued that the Exchange Act's antiwaiver provision, Section 29(a), voids any agreement giving up the federal courts' exclusive jurisdiction; that Wilko rested on the inadequacy of arbitration to protect investors and the inequality of bargaining power between brokers and customers; and that RICO's public purposes and its overlap with criminal law require a judicial forum. Shearson, supported by the SEC, argued that the Arbitration Act reflects a strong federal policy favoring arbitration, that Section 29(a) forbids waiving compliance with substantive duties, not choosing a forum, and that the SEC's oversight of industry arbitration since 1975 answered Wilko's concerns. On 8 June 1987 the Court reversed. Justice O'Connor held that the party opposing arbitration must show Congress intended to preclude waiver of a judicial forum. Section 29(a) bars waiving substantive obligations, and Wilko barred arbitration only because the Court then judged it inadequate to enforce the statute. Since the 1975 amendments, the SEC had broad authority over self-regulatory organizations' arbitration procedures, so arbitration was adequate and the Section 10(b) claims were arbitrable, by a vote of five to four. On RICO, all nine justices agreed: neither the statute's text nor its history excludes arbitration,, and Mitsubishi (1985) had already held complex antitrust claims arbitrable. Justice Blackmun, joined by Justices Brennan and Marshall, dissented on the Exchange Act claims, arguing that the Court had in effect overruled Wilko on the SEC's newly adopted view and that Congress had approved Wilko's extension in 1975. Justice Stevens, also dissenting on that point, wrote that eight circuits' consistent reading for thirty-two years should be changed only by Congress. The library text includes O'Connor's and Stevens's opinions and part of Blackmun's; it omits notes in principle, though some of the source's notes appear at the end. In Rodriguez de Quijas v. Shearson/American Express (1989) the Court overruled Wilko, and arbitration became the usual forum for customer disputes with brokers.

Top Lessons

• Keeping a bargain

  The Court held the McMahons to the arbitration clause they had signed. The opinion rests on the Federal Arbitration Act's command that arbitration agreements be enforced like other contracts, unless Congress has clearly provided otherwise for a particular kind of claim.

• Reading an old precedent in a new setting

  O'Connor read Wilko as depending on its 1953 judgment that arbitration could not protect investors, and found that judgment outdated given SEC oversight. Blackmun saw this as overruling Wilko in substance while claiming to follow it. The disagreement shows how the reasons behind a precedent can decide its reach.

• Fairness of the forum

  The McMahons argued that brokerage customers sign standard agreements without real bargaining and that industry-sponsored arbitration may favor firms. The majority relied on the SEC's power to review and approve arbitration rules; the dissenters doubted that oversight was enough. The case raises enduring questions about where disputes between unequal parties should be heard.

• Settled interpretation and the role of Congress

  Stevens argued that a reading of a statute accepted by every circuit for decades becomes as clear as if Congress had written it, and that any error should be fixed by Congress. The majority treated the question as open because the Supreme Court itself had never decided it.

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Medical Lens

A dispute over arbitration of brokerage customers' securities and racketeering claims; the opinions raise no medical subject.