Chapter 14 - § 14.3 • ENFORCEABILITY OF PRE-DISPUTE ARBITRATION AGREEMENTS

• Jurisdiction: Colorado

§ 14.3 • ENFORCEABILITY OF PRE-DISPUTE ARBITRATION AGREEMENTS

The 1953 decision of Wilko v. Swan¹¹ held that pre-dispute arbitration agreements were unenforceable with respect to causes of action arising under the 1933 Act. The Wilko v. Swan reasoning was thought to apply to 1934 Act claims as well, although never expressly stated by the Court.

In 1987, the U.S. Supreme Court held that claims under the 1934 Act were arbitrable and that pre-dispute arbitration agreements with respect to such claims were enforceable.¹² Previously, the Circuit courts had been divided on this question.¹³

Courts have held that arbitration provisions that broker-dealers include in customer agreements are neither adhesion contracts nor otherwise unconscionable and are, therefore, enforceable.¹⁴

Registered representatives agree to arbitration with their employers in the Form U-4 that each registered representative submits to maintain his or her license. One court has held that the arbitration provisions of the Form U-4 are unenforceable with respect to claims made against a broker-dealer for sexual discrimination and harassment under the Civil Rights Act of 1991.¹⁵

In 1988, the Fifth Circuit concluded that Wilko "was reduced to obsolescence." The Fifth Circuit held that 1933 Act claims were now arbitrable, and that pre-dispute arbitration agreements relating to 1933 Act claims would be enforced in the same manner as for 1934 Act claims. A divided Supreme Court affirmed the Fifth Circuit, although not without chastising the Fifth Circuit for attempting to overrule the senior court, even when the Fifth Circuit was correct.¹⁶

There is a significant concern whether punitive damages can be awarded in arbitration. The Second Circuit has ruled that arbitrators in self-regulatory organizations do not have such authority in arbitration under New York law,¹⁷ and courts have held that, under New York law, arbitrators cannot award punitive damages.¹⁸ For that reason, customer agreements with broker-dealers contain pre-dispute arbitration agreements and generally contain a choice of law provision for New York law.¹⁹ However, in Mastrobuono v. Shearson Lehman Hutton, Inc.,²⁰ the Supreme Court concluded that neither the choice of law clause nor the agreement's arbitration provision expressed an intent to preclude the award of punitive damages. In Mastrobuono, the court read the New York choice of law provision in a brokerage agreement to encompass only substantive principles of New York law...