SHOULD MANDATORY WRITTEN OPINIONS BE REQUIRED IN ALL SECURITIES ARBITRATIONS?:
THE PRATICAL AND LEGAL IMPLICATIONS TO THE SECURITIES INDUSTRY
LYNN KATZLER
J.D. Candidate, Washington College of Law , The American University , May
1996; B.A., University of Florida , 1993. I wish to thank Professor Egon Guttman
of the Washington College of Law for his helpful insight and guidance
throughout the writing process.
- Enforceability of Agreements to Arbitrate Disputes: From Wilko to McMahon and Rodriguez
- Arbitrators Are Not Required to State the Reasons Behind Their Decision
- Written Opinions Accompanying Arbitration Awards Would Allow for "Meaningful Review"
- Lack of Development of Federal Common Law Has Implications for the Securities Industry
- Policy Reasons for Requiring Written Opinions
- Recommendations for the NASD Task Force
Each year, millions of transactions involving the purchase and sale of
securities take place. Occasionally, disagreements develop over these
transactions. Many of these disputes are then resolved by arbitration, the
voluntary submission of a dispute to an impartial party for final and binding
determination. 1
INTRODUCTION
A controversy exists over the arbitrability of securities claims due to the conflicting policies 2 of the Federal Arbitration Act (Arbitration Act) .3 passed in 1925, and the federal securities laws, passed in 1933 and 1934. 4 Congress enacted the Securities Act of 1933 (Securities Act) 5 and the Securities Exchange Act of 1934 (Exchange Act),6 in response to the rampant speculation, fraud, and deception in the securities industry that had culminated in the stock market crash of 1929. 7 Although the Securities Act and the Exchange Act differ,8 they share common goals. The federal securities laws were created with two main purposes: (1) to protect investors by elevating their level of sophistication through the requirement of full disclosure regarding investments; and (2) to restore investor confidence in the securities markets by instilling trust in their efficient and honest operation. 9
The Arbitration Act, alternatively, created a method by which securities disputes could be settled quickly, fairly, and inexpensively. 10 The Arbitration Act provides for the enforcement of agreements to arbitrate not just existing, but also future, disputes relating to transactions involving interstate commerce. 11 In this manner, arbitration agreements reached by parties, before and after a dispute arises, are enforceable. The Arbitration Act was intended to reverse centuries of judicial hostility toward arbitration agreements by providing for their enforcement to the same extent as other contracts. 12 Additionally, the Arbitration Act was created to reduce congestion in the courts by offering parties an equivalent substitute to the court system. 13. The federal courts interpretation of the Arbitration Act created a federal policy favoring arbitration of securities disputes. 14
If the Arbitration Acts policy favoring arbitration fails to advance the protection of investors, the Act will conflict with the goals of the federal securities laws, which seek to protect investors. 15 The delicate balance between the Arbitration Act and the federal securities laws must be preserved. Arbitral procedures must be modified to further the goals identified by Congress in enacting the federal securities laws. Arbitration should not be converted to a full court hearing comprised of lengthy discovery, complex evidentiary rules, and legal opinions. Arbitration, however, should be modified to incorporate the needs of current investors.16 Otherwise, both the policy behind the federal securities laws and the Arbitration Act will become empty promises. This Comment argues that section 41 of the Rules of the National Association of Securities Dealers (NASD), which focuses on the content of the award statement, fails to adequately protect investors as Congress intended. The NASD is one of a number of Self-Regulatory Organizations (SROs) to which the Securities and Exchange Commission (SEC) delegated authority to sponsor arbitral forums.17 The other SROs have comparable rules that also need reform. 18 NASD section 41(e) states:
The award shall contain the names of the parties, the name of counsel, if any, a summary of the issues, including the type(s) of any security or product, in controversy, the damages and other relief requested, the damages and other relief awarded, a statement of any other issues resolved, the names of the arbitrators, the dates the claim was filed and the award rendered, the number and dates of hearing sessions, the location of the hearings, and the signatures of the arbitrators concurring in the award. 19
Conspicuously absent from this list is a requirement that arbitrators write a statement of reasons in support of their decision. Arbitrators generally fill out a standard award form that merely identifies the prevailing party and the costs incurred.20 Commentators who oppose a requirement that arbitrators include a statement of reasons argue that there is no evidence to suggest that arbitration will not afford parties their substantive rights.21 They contend that requiring a written opinion would compromise the efficiency of arbitration, 22 discourage qualified arbitrators from serving, 23 reduce the confidentiality generally associated with arbitration, 24 and result in few benefits because disputes typically involve simple issues.25 Such critics fail to realize, however, that a statement of reasons will more effectively promote the policies behind the federal securities laws by reducing bias, 26 restoring the credibility of the securities markets,27 promoting"meaningful review" of arbitration awards, 28 stimulating the develop ment of consistent federal common law, 29 and enabling investors to make informed decisions that would promote the further economic development of the securities industry.30 Consequently, NASD section 41 should be amended to require a statement of the underlying reasons for the award because, as currently written, the rule fails to protect investors as intended by Congress.
Parts I and II of this Comment note the historical background of arbitration and the current status of the law. Specifically, Part I traces the development of a federal policy favoring arbitration through court interpretation and notes the pertinent arbitration reform movements. Part II reviews the current case law and regulatory rules regarding whether a statement of reasons should accompany an arbitration award.
Parts III and IV analyze the possible effects and implications that failure to include a reasoned decision may have on investors and the securities industry. Specifically, Part III discusses the limited right to appeal arbitration awards and notes the impact that a lack of "meaningful review" has on the industry and its participants. Part IV discusses the implications and the effect of decisions that are made without the development of a predictable source of federal common law that can promote uniformity in future decisions.
Part V analyzes the arguments opposing a reasoned opinion requirement and suggests that failing to require a written opinion will sustain bias and reduce the credibility of the entire securities industry. In conclusion, this Comment provides recommendations for a possible construction and application of NASD Rule 41(e).
I. Enforceability of Agreements to Arbitrate Disputes: From Wilko to McMahon and Rodriguez
The debate over the arbitrability of securities claims was confronted by the Supreme Court in 1953 when it decided Wilko v. Swan. 31 In Wilko, the Supreme Court held that parties whose claims arose under section 12(2) of the Securities Act could not be compelled to go to arbitration through a predispute arbitration agreement. 32 In this manner, the Court enforced the policy of investor protection in the Securities Act to allow parties recourse to the courts.33 The Court held that certain disputes were exempt from the Arbitration Acts policy, which demanded enforcement of agreements to arbitrate, because parties could not be forced in advance to waive their right to proceed in court.34 The Supreme Court found that courts provided investors with procedural rights that could not be substituted with abbreviated arbitration procedures.35 Of significance to the Court was the fact that an award could be granted: (1) without an explanation of reasons; (2) absent a complete record; and (3) with an extremely limited ability to review and vacate.36 Accordingly, the Court found that the plaintiff-investor could not be bound in advance to submit a federal securities law fraud claim to arbitration.37
In addition to holding that predispute arbitration agreements were unenforceable, the Wilko decision also stands for the proposition that private contractual agreements should be respected. Although the contract in dispute in Wilko was held unenforceable, the Court clearly stated that the contract was merely overridden by a stronger congressional command of investor protection.38 In his concurring opinion, Justice Jackson added that private arbitration contracts were invalid only if they were made before the dispute arose.39 According to Justice Jackson, if the agreement to arbitrate is reached after the dispute arises, the investor has made an informed waiver and, therefore, does not need protection from the Securities Act.40 Hence, the private contract would be upheld. 41
The Wilko doctrine, which encompasses the view that the Securities Acts goal of investor protection should override the clear policy for enforcement of arbitration agreements in the Arbitration Act, was extended in 1961 to domestic claims arising out of the Exchange Act in Reader v. Hirsch & Co.42 In 1977, the Wilko doctrine was further extended to disputes arising out of section 10(b) of the Exchange Act in Allegaert v. Perot.43 The viability of the Wilko doctrine, however, slowly eroded. In 1974, twenty-one years after Wilko, the Supreme Court, in Scherk v. Alberto-Culver Co.,44 held that an international dispute was subject to arbitration based on a preexisting arbitration agreement.45 The Court was careful to distinguish the facts and law in Scherk from those applicable in Wilko.46 The Court illustrated what it referred to as "crucial differences" between the disputed contract in Wilko and the contract at issue in Scherk.47 First, the international character of the dispute in Scherk lessened the need for investor protection enunciated in Wilko.48 Additionally, the Court stated that appearance before a specialized arbitral forum is necessary to promote predictability of international disputes and eliminate the dangers of disputes appear ing before a judicial forum that is unfamiliar with the laws and issues of the dispute involved.49 The case is also important, however, for its emphasis on enforcing the private contract reached by the parties.50 The Scherk decision eroded the attitude underlying the Wilko doctrine because it recognized that certain predispute arbitra tion agreements are valid and must be enforced pursuant to the Arbitration Act.51
The Supreme Court continued with its endorsement of preexisting arbitration agreements in the cases of Moses H. Cone Memorial Hospital v. Mercury Construction Corp. 53 and Southland Corp. v. Keating.53 The slow destruction of the Wilko doctrine continued in Dean Witter Reynolds, Inc. v. Byrd,54 decided in 1985. In Dean Witter Reynolds, the Supreme Court held that pendent state law claims joined with nonarbitrable federal securities law claims mustbe arbitrated pursuant to predispute arbitration agreements.55 The Court declined a request by the parties, however, to resolve a dispute among the courts about whether or not Wilko applies to claims under section 10(b) of the Exchange Act or SEC Rule 10b-5.56
A landmark decision came in 1987 when the Supreme Court, in Shearson/American Express Inc. v. McMahon,57 challenged the existing body of case law that had begun with Wilko.58 In McMahon, the Court held that securities fraud claims based on section 10(b) of the Exchange Act59 and Racketeer Influenced and Corrupt Organiza tions Act (RICO)60 were arbitrable.61The Court did not expressly overrule Wilko, but asserted that the Wilko decision was based on presumptions that were no longer valid.62 Specifically, the Court stated that Wilko was based on the presumption that arbitration would not adequately protect investors substantive rights.63 According to the McMahon decision, the Court in Wilko was justified in not enforcing the predispute arbitration agreement because, at the time, the Court had concluded that investors would not be protected in arbitration in the manner intended by the securities statutes.64 The Court in McMahon noted that no evidence was presented to the Court in 1953, nor could be presented to it today, suggesting that the arbitral forums could not afford plaintiff-investors their substantive rights.65 In McMahon, therefore, the Court held that the private contract was valid and enforceable.66 A strong dissent by Justice Blackmun attacked the majoritys interpretation of Wilko, arguing that Wilko was based on providing investor protection.67 Justice Blackmun argued that the same problems that existed in 1953 exist today, notably, lack of a reasoned decision, lack of a complete and final record, and the limited right to appeal.68
Despite the debate provoked by the McMahon decision concerning the vitality of the Wilko doctrine, in 1989 the Supreme Court expressly overruled Wilko in Rodriguez de Quijas v. Shearson/American Express, Inc. 69 The Court essentially held that predispute arbitration agreements are binding on investors in Securities Act claims,70 as such agreements had been held applicable in McMahon to Exchange Act claims. The McMahon and Rodriguez decisions made virtually all claims arising out of investor/broker disputes subject to arbitration pursuant to a predispute arbitration agreement.71 Thus, the Supreme Court sanctioned the trend toward recognizing the Arbitration Acts policy of enforcing all private contractual agreements to arbitrate.72
Accordingly, in the years following McMahon and Rodriguez tremendous efforts were exerted toward reforming arbitration procedures.73 Questions about the adequacy of arbitration led to the formation of task forces to amend the arbitration rules.74
The courts and "commentary of the time" brought attention to the potential problems the arbitration process might pose for the investing publicand the legal community.75 The problems posed by arbitration included: (1) limited ability to appeal;76 (2) limited discovery procedures allowed in arbitration as compared to litigation77 (3) absence of a record;78 (4) lack of explanation accompanying the decision;79 and (5) absence of a rule of precedent or stare decisis.80 As a result, the Securities Industry Conference on Arbitration (SICA) was created to represent all the arbitral forums in their evaluation of these and other concerns expressed about the effectiveness of arbitration.81
In a recent press release,82 the NASD announced the formation of its own Arbitration Policy Task force led by David S. Ruder, former SEC Chairman. 83 The NASD Task Forces authority, however, is limited to the NASD forum. SICA, however, represents all the SROs.84 The Task Force is composed of nine members, including individuals with a lifelong commitment to public interest, SEC alumni, NASD Senior Executives, academicians, and arbitration practitioners.85
The mission of the NASD Task Force is to ascertain "whether the arbitration process is meeting its goal of being an inexpensive, fast, and fair way to settle disputes."86 The Task Force will study the evolution of the arbitration rules in terms of the stated goals of arbitration.87 The Task Force will concentrate on the factors affecting the arbitration process that many contend have reduced its effectiveness and efficiency while increasing parties costs.88 The Task Force will submit a final report with recommendations to the NASD in December of 1995.89
Among the rules to be evaluated by the Task Force is NASD Rule 41, which describes the content of an award.90 This Comment is designed to affect the Task Forces decision on whether to require arbitrators to state the reasons behind their awards or, in the alternative, to guide future evaluative teams.
II. Arbitrators Are Not Required to State the Reasons Behind Their Decision
A. Judicial Interpretation
Case law undeniably establishes that arbitrators do not need to state the
reasons behind their awards.91 Courts and commentators
argue that requiring written opinions
would undermine the policy behind arbitration, which is to provide a quick,
efficient, and informal means of alternative dispute resolution.92 Courts generally feel it is not their role to interfere
with the proper functioning of arbitration, especially given the express
contractual agreement reached by the parties.93 In Sobel v. Hertz, Warner & Co.,94 the
Second Circuit noted that public interest demands that
arbitration remain an efficient and economical alternative.95 The court
held that requiring written opinions would bedestructive to the system and would
"diminish whatever efficiency the process now achieves."96 Recently, in
Antwine v. Prudential-Bache Securities, Inc.,97 the Fifth Circuit acknowledged that
arbitrators, pursuant to the arbitration rules, need not write a reasoned
opinion.98 The court held that American Arbitration
Association
(AAA) Rule 42, which requires an award to include a "statement"
regarding the disposition of statutory claims, does not require the arbitration
panel to provide a statement of reasons underlying the award.99 The court in Antwine explicitly rejected the argument
that the AAA had placed the need for comprehensive development of theory over
notions of expediency and economy.100 The SEC has agreed that written opinions would diminish the efficiency of
arbitration.101 In a SEC report evaluating proposed rules
submitted to the SEC by the New York Stock Exchange (NYSE), the American Stock
Exchange (AMEX), and the NASD,102 the SEC
stated that it did not believe it was in the public interest to require written
opinions. 103
Courts continue to support the view that arbitrators need not provide a
statement of reasons.104 The justification is based
primarily on
a notion that private contracts between parties should be enforced under the
terms specified in the contract.105 Courts seem to be
unwilling to interpret
an additional provision for which the parties neither contemplated nor
contracted. The development of a written opinion in arbitration decisions,
therefore, ultimately must come from a different source.
A party appears before an SRO-sponsored arbitral forum through
either a predispute arbitration agreement or an agreement reached after a
dispute arises. In either case, parties contract to appear before the arbitral
forum that they feel best represents their interests.106 The
rules and standards adopted by the SRO forum create the terms and give meaning
to the contract between the parties. The SROs, therefore, periodically evaluate
and reform their procedures to accommodate the needs expressed by parties.107
Recent reforms to arbitration procedures indicate that the SROs are
affirmatively responding to participants' desire to receive written opinions in
certain circumstances.109 The SROs are adding this to
the contractual
agreement reached by the parties. The first recent reform initiated by the SROs
concerns "large and complex" dis putes.110
Before
1990, a party to an arbitration hearing had difficulty obtaining a written
opinion. Under the arbitration rules, a party could obtain a written decision
only if both parties and the arbitrator consented.110 The
rules
for large and complex cases, however, were amended in June 1990 to make it
easier for parties to obtain written findings of fact and conclusions of law.111
These amendments wereapproved by the NASD, NYSE, AMEX,
and the AAA.112 Under the new rules, only one party to
a
large and complex dispute needs to request a written decision.113
Also, if the arbitrators do not comply with the request, they will be
replaced.114 The types of cases qualifying for large and complex treatment will be
determined by arbitrators on a case-by-case basis. Cases likely to qualify are
class actions, cases involving multiple parties, cases dealing with a novel
legal theory, and disputes involving potentially large sums of money.115 Commentators suggest that
routine disputes, on the other hand, involve the simple application of
commercial judgment for which a written opinion is unnecessary.116 In Part V, this Comment argues that
the value of a written opinion extends much further than these commentators
recognize.117 The second recent reform to the arbitration rules involves the printing of
a one page summary award statement highlighting the results of arbitration
proceedings.118 In May 1989, the SEC announced
that the SROs will begin disseminating summary arbitration data outlining
arbitrations conducted.119
The summary information will enable the investing public to review how
arbitration cases are decided. The summary statements, however, cannot be used
as precedent.120
Although the summaries will not be published, they will be readily available to
the public at individual SRO's public reference rooms.121
The summary
award statement will include: (1) the name of the case; (2) a one paragraph
summary of the dispute; (3) damages or other relief requested; (4) damages or
other relief awarded; and (5) a summary of other issues resolved, such as
jurisdictional questions.122 The proposal for summary
award statements was
part of a package of proposals aimed at countering the public opinion that
mandatory arbitration agreements were unfair to investors and that current
disclosure was insufficient.123 Here again, the
SROs incorpo rated participants' concerns by adding new procedures that will be
incorporated into the contractual agreement between the parties. These recent developments suggest that the SROs are beginning to realize
that a written decision, or at least a summary of factual issues, is desirable
and necessary in certain situations. The SROs have taken an affirmative step by
recognizing that the arbitration rules must adapt to incorporate current needs
of parties. In this manner, the SROs are enabling parties to receive more
freely written opinions by altering the rules that will ultimately create the
terms of the pre-dispute arbitration contract. Written opinions should be
required in all situations, however, because they enable all investors, not just
those engaged in a large and complex dispute, to review past decisions and
become better equipped to make sound investment decisions. Summary data,
although a commendable step by the SROs, is limited in scope because the data
only enables parties to evaluate sparse factual summaries. Routine opinions
develop a coherent body of principles for arbitrators to follow whenmaking
decisions and, therefore, also enhance the ability to predict outcomes.
Additionally, written opinions would enable parties to avoid wasting resources
by allowing them to uncover potential predispositions of arbitrators.124 Collectively, routine opinions would allow investors to
be more informed, and to have confidence in the efficient operation of the
securities markets.125
A. Vacatur of Arbitration Awards Is Limited
A "meaningful review" of arbitration awards is essential
in determining whether arbitration truly affords parties their substantive
rights. Meaningful review entails an actual analysis by the court of the
arbitrator's decision, instead of summary approval.126
Without a written
opinion, however, a court is unable to review meaningfully an arbitration
decision, because it is difficult to uncover potential problems such as bias or
mistake.127 When investors decide to submit their claim to arbitration, they forgo the
right to appeal because arbitration is a final decision that is binding on the
parties.128 If the party prevailing in arbitration has
difficulty enforcing the arbitration decision, however, the Arbitration Act
allows the party to ask the appropriate district court129 to
confirm the award.130
Generally, the award must be summarily confirmed and "can
only be denied if an award has been corrected, vacated, or modified in
accordance with the Federal Arbitration Act."131
The losing party may also petition the court to
vacate132 or modify133 the arbitration decision, in which case the
aforementioned standard must also be applied by the reviewing court. The grounds upon which a court can vacate an arbitration award are,
however, extremely limited.134 Courts do not re-hear
claims of legal error
committed by an arbitrator in the same manner as appellate courts review
decisions of lower courts.135 Instead, courts are
bound to defer to the arbitration decision,136, except
under the statutory exceptions outlined in section 10 of the Arbitration Act.137 The limited grounds on which a reviewing district court
may vacate an arbitration award and direct a rehearing138
occur when (1) the arbitration award was procured by corruption, fraud, or undue means;
(2) there was evident partiality or corruption in the arbitrators . . . ;(3) the
arbitrators were guilty of misconduct in refusing to postpone the hearing . . .
, or in refusing to hear evidence pertinent and material to the controversy; or
any other misbehavior by which the rights of any party have been prejudiced; (4)
the arbitrators exceeded their powers or so imperfectly executed them that a
mutual, final, and definite award upon the subject matter was not made.139 In addition, some appellate courts have adopted the narrow "manifestdisregard"
of the law standard.140
Manifest disregard of the law cannot be implemented without "meaningful
review" because manifest disregard "means more than error or
misunderstanding with respect to the law."141
" Manifest disregard must be made clearly to
appear," and may be found "when arbitrators understand and correctly
state the law, but proceed to disregard the same."142 Therefore, an inherent problem exists in applying the manifest
disregard standard when arbitrators do not include a statement of reasons with
the award. Without a written opinion, courts can neither analyze nor
investigate the underlying rationale of the arbitration decision. Consequently,
courts cannot engage in meaningful review. As a result the manifest disregard
standard becomes hollow because courts are unable to ascertain whether or not
arbitrators followed the law.143 The court is left
to assume that the arbitrator's decision was rational.144
Consequently, arbitration awards are insulated from any reasonable judicial
scrutiny.145 Some courts have recognized
this inherent conflict and have been unwilling to apply the manifest disregard
standard.146 Additionally, the useless application of the manifest disregard standard
led some courts to recognize that, in particular situations, remand of the award
to the arbitrator for clarification is proper.147 For
example, in Sobel v. Hertz,
Warner & Co.,148 the dispute involved an
investor who
appealed to the district court to vacate an unfavorable arbitration award. The
district court remanded the proceeding to the arbitration panel to state the
reasons for its decision.149
The court noted that if arbitrators do not state the reasons behind an award, a
court is unable to decide whether or not the arbitrators correctly applied the
law.150 On interlocutory appeal,151however, the appellate court reversed.152 The
appellate court agreed both that the loss of legal precision is apparent and
that consequently, a reviewing court is confronted with a dilemma absent a
statement of reasons.152 The court held,
however, that remanding arbitration awards for clarifica tion "would
undermine the very purpose of arbitration which is to provide a relatively
quick, efficient, and informal means of private dispute settlement."154 Justifying the
sacrifice of legal precision and the resulting loss of meaningful judicial
review with only an "efficien cy" argument155 may no longer be sufficient because the costs and efficiency
of arbitration are directly under attack.156
In the 1989 SEC Order of Proposed Rule Changes to the NYSE, the
NASD, and the AMEX, the SEC concluded that arbitrators need not provide reasons
for their awards.157
The SEC concluded that the benefits of requiring a written opinion do not
outweigh the concerns. First, the SEC suggested that the data to be included in
the awards under the new proposals, together with the pleadings and record,
should be sufficient for a court to apply the manifest disregard standard.158
Second, the SEC commented that arbitrators may reach
agreement on the dollar amount of an award without reaching a consensus
regarding the reasons for the award.159 Third, the SEC
advanced an efficiency argument by suggesting
that requiring written opinions would slow down the process and discourage
arbitrators from participating.160 Finally, the SEC felt
that the proposals had already
changed the procedures significantly and it wanted to give both the SROs and
potential parties time to adjust before implement ing additional changes.161The SEC suggested
that this adjustment period would enable arbitrators to begin writing opinions
indepen dently if they saw the need.162 The SEC's last proposition is overly optimistic and places too much faith
in the honest initiative of arbitrators.163 In reality,
arbitrators are unlikely to
expose themselves to judicial review by independently writing opinions.164 For the sake of
fairness and investor protection, the SEC should have required written opinions.
It should not have delegated the responsibility to the good sense of
arbitrators.165 Written opinions and meaningful judicial review are needed because they
reduce the likelihood that arbitrators will grant excessive awards that often
are the result of arbitrators' propensity to become emotionally involved in the
dispute.166 Such a
requirement would also reveal the legal standard on which the arbitrators based
their decisions.167 Without
written opinions, the reviewing court is unable either to apply the limited
grounds enumerated by Congress for vacatur of an arbitration award or to use the
judicially created manifest disregard standard effectively.168 As a result, arbitration awards are virtually
insulated from judicial scrutiny. This Comment does not suggest that arbitration should not be final and
binding, nor does it advocate increasing avenues of judicial review. It does
argue, however, that the limited basis for review that Congress outlined in
Section 10 of the Arbitration Act should be applied effectively. Requiring
written opinions would allow for such meaningful review of arbitration awards.
A. Unpredictability in Future Cases
Arbitration does not create a uniform, consistent, and
predictable body of federal common law because arbitrators need not state the
reasons for their decision.169
The limited right to appeal arbitration awards contributes to the lack of
uniformity170 because appellate courts rarely have the
opportunity to verify an arbitrator's legal interpretation to facilitate the
formation of appropriate decisionmaking standards.171
Such a process is incapable of meeting the basic
objectives of the legal system because it fails to provide guidance for future
decisions, produce jurisprudentialcohesiveness, or provide grounds for judicial
challenges.172 Moreover,
written opinions enable litigators to prepare arguments properly and allow
arbitrators to decide cases correctly and uniformly.173
Although arbitration awards would not guarantee the outcome of a future
dispute because they do not have precedential value,174
collectively they would foster greater expectation and certainty by enabling
investors to (1) become familiar with previous disputes involving similar
issues, (2) learn the prevailing standards used for decisionmaking, and (3)
acquire knowledge about the experience of and findings reached by particular
arbitrators. Greater expectation and certainty would lead to better informed
investors. Ultimately, better informed investors and greater predictability in
decisionmaking would lead to more confidence in the arbitration system.175
Since the landmark decision of Shearson/American
Express Inc. v. McMahon, which held that predispute arbitration
agreements arising under the Securities Act are enforceable, arbitrators have
increasingly assumed the primary role in interpreting federal securities laws.176
Their determinations, however, are not bound by any legal
precedent.177 Arbitrators' decisions are
based on what makes sense under the circumstances, thereby rendering a sort of
rough justice.178
Requiring written opinions would not only promote greater accountability, but
also would ensure that arbitrators properly interpret and apply federal
securities statutes.179 Furthermore, forcing arbitrators to justify their conclusions would
promote accountability and accuracy in decisionmaking which, in turn, would
allow courts to review arbitrators' legal interpretations, thereby resulting in
more effective judicial review of arbitration decisions.180
As the Supreme Court in Wilko warned, arbitrators
under the federal securities statutes are incapable of determining the legal
meaning of such statutory terms as "burden of proof," "reason
able care," or "material fact."181 The
Court feared that the district
court was incapable of reviewing determinations made by the arbitrators without
a statement of reasons and a record.182
Today, interpretations of the legal meaning and effect of the securities laws
are just as complex as such statutory terms. Thus, without a statement of
reasons, courts may experience the same concerns in arbitrators' abilities.
Requiring a written opinion would ensure that the federal securities laws are
interpreted properly, thereby protecting investors and industry participants by
allowing them to pursue claims and assert defenses adequately.
C. Federal Laws Will Remain Static and Cause Uncertainty
Among Investors
Federal securities laws are constantly evolving to
accommodate the expanding industry. Whereas a judicial opinion permits public
understanding of new developments and their place among the securities laws, new
issues that arise in arbitration cannot be handled in a consistent and
predictable manner without a statement of reasons. Because arbitrators must
resolve disputes involving new areas like derivatives, a statement of reasons
accompanying an arbitration award would foster common understanding, uniformity,
and the development of new theory.183
Likewise, as innovative lawyers introduce new claims that fit within the
parameters of the Exchange Act, such developments do not spread throughout the
industry because each arbitration is decided individually, without a statement
of reasons to guide future decisions.184 The lack of
guidance from prior arbitral proceedings has a severe
impact on the ability to deter future fraudulent conduct. In practice, if
arbitrators fail to articulate reasons for their conclusions, the securities
laws will not consistently handle new strains of criminality that do not fit
neatly within the causes of action created by Congress in the securities laws.
Such inconsistency in application may reduce the securities laws' deterrent
effect.185 If the lack of guidance provided by arbitration decisions continues, the
credibility of the arbitration system will be jeopardized.186 Complainants may begin to
believe that an arbitrator's failure to give reasons for a decision indicates an
unresolved decision or confusion about the application of the law.187 Denying the arbitration system the means to
develop standards with which to guide future decisions while giving it the
important task of enforcing the federal securities laws, thwarts the very
purpose for which arbitration was created.188 Thus,
arbitrators should be required to
provide a statement of reasons with an arbitration award.
D. No Assurance That a Subsequent Suit Will Be
Precluded
Without the development of common law via written
decisions, there is no guarantee that doctrines such as res judicata (claim
preclusion)189 and collateral estoppel (issue
preclusion)190 will
be applicable to subsequent arbitration suits.191 If an
arbitration hearing is truly considered equal in its binding effect to a court's
final decision, when an arbitration dispute is resolved between two parties, a
subsequent court proceeding between the same parties concerning the same issues
and facts should be barred through res judicata. A similar principle would seem to apply when a private party, not involved
in prior litigation between two other parties, later sues oneof the parties to
the initial action on an issue already resolved by the arbitrators. The
question then is whether the party to the initial arbitration proceeding may use
the arbitrator's findings to collaterally estop the subsequent party from
relitigating the same issue in court. Until recently, courts generally afforded
arbitration awards both res judicata and collateral estoppel effect.192 Although it remains established that a prior
arbitration hearing may have res judicata effect on a subsequent dispute arising
out of the same facts and same parties,193
this is not always the case for collateral estoppel.194 The
already uncertain
preclusive effect of issues decided by arbitrators is exaggerated by the
arbitrators' practice of granting only one-line awards.195
The absence of collateral estoppel in arbitration may have several
repercussions. First, arbitration findings may be duplicated thereby wasting
both arbitration and court participants' time.196
Second, the party being sued for the second time will be forced to waste
resources by repeatedly defending its position.197
Last, the finality of arbitration would be compromised.198 Nevertheless, a court is unable to
hold that arbitration awards are legally binding without a statement of reasons.
For example, in O'Neil v. Merrill Lynch, Pierce, Fenner &
Smith,199 the court
refused to invoke collateral estoppel of an arbitration award because, without a
written opinion, the court could not determine whether the arbitrator had
applied a preponderance of the evidence standard or a clear and convincing
evidence standard.200 Other courts have
used similar reasoning.201 Requiring written opinions
would reduce the
inefficient, duplicative expenditure of resources by affording all arbitration
awards final and binding effect. As one author stated, "The preclusive
effect of arbitration will increase as better records of arbitration proceedings
are kept and more detailed awards opinions are written."202 Many courts simply refuse to infer
which issues were and which were not decided by the arbitrators; requiring a
statement of reasons to accompany an arbitration award would allow arbitration
to be the binding tool it was created to be.203
V. Policy Reasons for Requiring Written Opinions
A. Requiring Written Opinions Would Not Cause the Problems
Predicted
Commentators who oppose a requirement that arbitrators
include a written reasoned decision with arbitration awards have advanced
numerous arguments in support of their position. Opponents contend that
requiring a written opinion would compromise the efficiency of arbitration,204
discourage qualified individuals from serving as
arbitrators,205 reduce the confidentiality
associated with arbitration,206
and create unnecessary work because most disputes involve simple factual and
legal issues.207 To the contrary, however, a statement of
reasons would
more effectively promote the policyunderlying the federal securities laws both
by reducing bias in the system and restoring the credibility of the securities
markets.208 Commentators argue that requiring arbitrators to write opinions would
compromise the efficiency of the arbitration process.209
This argument stems from
arbitration's original purpose—to exist as an inexpensive and expeditious
alternative to the courts.210
The logic of the argument has two main parts. First, opponents suggest that
written opinions would unnecessarily waste time, money, and effort.211 Second, opponents argue that
written opinions would provide opportunities for the losing party to attack the
outcome of the arbitration, thereby converting arbitration into "the
commencement, not the end, of litigation."212
a. Waste of time, effort, and money Commentators argue that, while arbitration lacks procedural safeguards
present in court proceedings,213 participants agree to
arbitrate,
fully appreciating the implications of their decision.214
Commentators argue that parties resort to arbitration to receive a
quick, efficient, and less costly, though less legally precise, settlement of
their dispute.215 They conclude that a written opinion as
a
procedural safeguard is neither desirable nor necessary because investors
voluntarily choose to sacrifice more specific procedures for greater efficiency.216
According to
this logic, requiring a written opinion would waste both time and resources,
resulting in inefficient proceedings. b. Revealing areas for attack by losing parties Another efficiency argument that opponents raise posits that
written opinions would enable losing parties to attack the decision and thereby
convert arbitration into the first step in a long process of dispute resolution.217 Commentators suggest that many
arbitrators are neither lawyers nor trained legal experts.218 Instead,
they are arbitrators because of their sound business judgment.219 If such non-lawyer arbitrators are
required to write decisions, opponents argue, then the losing party, in its
appeal to a court, could target less legally precise aspects of the opinion as
proof of injustice.220 They contend that this would
equate arbitration with the
court process in terms of duration and ultimately reduce the advantages of
arbitral forums.221
2. Written opinions would not compromise the efficiency of
arbitration The efficiency arguments advanced by opponents fail to explain how a
written opinion would significantly add to the time or cost of arbitration
hearings. Their argument assumes the fact to be proven. The reality is that
parties need written opinions and such opinions would neither waste time and
money222 nor convert arbitration into the first step in
complex dispute
resolution.223 a. Written opinions would not waste time, money, and
resources A written opinion would not compromise the efficiency of arbitration by
wasting time, money, or resources. Instead, such opinions would increase public
confidence in the arbitration process and improve the overall integrity of the
system. Many participants in arbitration do not knowingly forgo the procedural
safeguards inherent in the court system for greater efficiency in arbitration.224 In fact, evidence suggests that some parties
are dissatisfied with the arbitration process and believe that it does not
adequately protect their rights.225
Such discontent with the arbitral process recently sparked the formation of
the NASD Task Force to reevaluate arbitration procedures.226
Requiring arbitrators to provide a summary of reasons for their decisions is
precisely the procedural safeguard needed to reform public opinion about the
perceived fairness and costs of the failing arbitration system.227 Furthermore, a brief or informal statement of reasons accompanying an
arbitration award would not significantly add to the costs or the time required
for hearings. Neither costs nor time would increase because, during
deliberations, arbitrators already openly discuss their opinions regarding
issues and arguments raised by the parties.228 Given that
deliberations typically involve a broad exchange of ideas and conclusions,229
it is unlikely that a one to three paragraph written summary of reasons
would add significantly to the costs and time needed for the hearing. While a
complex legal opinion is not necessary, some written indication of why one party
prevailed over the other would be a step toward procedural and substantive
fairness without unnecessarily wasting time, money, or resources. b. Written opinions would not reveal areas for attack by
losing parties Opponents of written opinions suggest that written opinions will convert
arbitration into a series of legal proceedings by unveiling avenues for appeal.230
It can also be persuasively argued, however, that routine written opinions would
not create new tactics for appeal. For example, requiring a written opinion
would not change the finality of arbitration.231
Specifically, arbitration will
remain binding,232 subject to
being vacated only through the limited processes permitted by section 10 of the
Arbitration Act.233 In all
situations in which arbitration decisions can not be vacated, courts will still
be forced to defer to arbitrators' judgment.234
Requiring written opinions, therefore, would not create new avenues for
appeal. Written opinions instead would enable courts to properly apply the
limited judicial review that Congress intended for arbitration.235
3. The services of qualified arbitrators a. Qualified arbitrators would be discouraged from
serving Opponents of written opinions argue that if courts target areas for appeal
in arbitration decisions, many qualified arbitrators would be discouraged from
serving.236
Commentators are concerned that arbitrators would fear becoming involved in
lengthy legal disputes that may ultimately place blame on an arbitrator for bias
or mistake.237 Such
unfavorable attention, they assert, would irreparably taint the arbitrator's
reputation in the business community.238 Thus,
opponents contend that qualified individuals would be
discouraged from serving as arbitrators. b. Qualified arbitrators would not be discouraged from
serving The argument that qualified arbitrators would be deterred from service
assumes that arbitrators' opinions can easily be attacked.239 The arbitral forum confers
immense authority on arbitrators and courts struggle to uphold this authority.240
Moreover, arbitrators enjoy
substantial immunity from liability. Therefore, fear of liability is not likely
to deter individuals from serving as arbitrators.241
Arbitrators are exempt, for
example, from liability for failure to use care or skill.242
They are not exempt, however,
when their conduct constitutes fraud or other misconduct for which the law
provides a penalty.243 Given
arbitrators' broad immunity from liability, it is not arbitrators that may be
deterred. Instead, private parties may be deterred from suing arbitrators as
they must meet a difficult burden: proving that the arbitrator's conduct was
fraudulent. Moreover, the arbitration process may actually benefit if some arbitrators
are discouraged from serving. As one author suggests, bias is often sustained
in a system that does not require a statement of reasons to accompany an award.244
The author further
contends that arbitrators may have bias because they are "judges"
specifically chosen by and paid by the parties themselves to
resolve their disputes.245
Instead of deciding between right and wrong, it is argued, arbitrators often
render compromise awards to satisfy the parties with the hope they will be
chosen to arbitrate subsequent suits.246 Economic reward is not the only plausible explanation for compromise
awards.247
Other benefits, such as preserving a business relationship, may help explain the
phenomenon.248
Additionally, compromise awards can be attributed to the failure of arbitrators
to reach a unanimous conclusion regarding the reasons for allowing a particular
party to prevail.249 In any event, requiring written
opinions would decrease compromise awards because arbitrators would fear vacatur
for bias or partiality.250 As a result, parties may retain
arbitrators who are more
honest, qualified, and less influenced by selfish temptations.251 This result
would not be destructive to the process, but instead wouldpreserve the integrity
of arbitration as an efficient alternative to the court process. Other opponents of requiring written opinions252
insist that
the confidential nature of arbitration, which has historically been a private
forum,253 would be
sacrificed if arbitrators are forced to issue published, written opinions.254
The loss of privacy, opponents argue,
may deter parties from suing due to a fear of being labeled by the investing
community as a fickle, litigious investor.255 Commentators fail to address why confidentiality is a favored aspect of
arbitration. The fact that arbitration proceedings have always been conducted
privately is not dispositive. Even if confidentiality is a desired goal, there
is no evidence that mandating written opinions would eliminate that end. First,
each individual SRO would likely have its own practice; some may require the
release of the parties' and arbitrators' names while others may not. In fact, a
typical predispute arbitration clause enables the parties to choose among
numerous arbitral forums.256
Individual parties could, therefore, contract for the right to arbitrate in a
forum that protects their unique interests. Moreover, recent changes to
arbitration rules have already reduced arbitration's confidential nature.257
For example, recent amendments make it easier for parties in
large and complex disputes to receive written findings and conclusions, and
summary arbitration data is now required.258
These changes sacrifice some confidentiality for the greater
goals of clarity and fairness.259 Evidence suggests that
releasing the names of arbitrators would not only promote greater accountability
in decisionmaking,260 but it would also
decrease arbitrators' tendency to deliver excessive awards261 by instilling fear that
courts will vacate awards.262
Additionally, it would enable parties to discover arbitrators' potential
predispositions.263 Lastly,
releasing claimants' names, in addition to those of arbitrators, may allow
opposing parties and presiding arbitrators to expose frivolous suits by noticing
trends of investor harassment.
a. Typical disputes involve simple issues Finally, opponents argue that written opinions are unnecessary because
typical disputes involve simple factual issues, not complex legal
interpretations.264 This argument assumes that written
opinions serve only to
clarify decisions. Infact, clarification is only one benefit to be derived from
written opinions.265
Opponents argue further that arbitrators do not make law, but only solve
typical disputes between parties, which generally involve money or property
rights.266 Thus, arbitrators are
effective because they apply their sound commercial judgment.267 In fact, opponents offer
evidence that under the circumstances involved in a typical dispute,
arbitrators' failure to write opinions may actually benefit the complaining
investor by reducing the formality of the proceeding.268
Requiring written
opinions in simple disputes, commentators conclude, is unnecessary and would
merely waste valuable time and money.269 b. Written opinions are needed and would promote the
intent behind the securities laws The logic that written opinions are unnecessary because arbitrated disputes
ordinarily involve clear factual issues is flawed for two reasons. First,
arbitrators are often called upon to render complex damage awards that
incorporate punitive damages.270 Punitive
damages punish the offender while concurrently deterring others who might
subsequently engage in the harmful activity.271 These
damages supplement compensatory
damages by redressing the reckless and oppressive nature of the act.272 Written opinions are
essential because if present and future offenders do not know why punitive
damages have been awarded, they will be unable to correct their conduct. Arbitrators' ability to award punitive damages, however, has historically
been debated.273
In fact, until the 1995 decision of Mastrobuono v. Shearson Lehman Hutton,
Inc.,274 the Supreme Court had not
expressly authorized arbitrators to assign such awards.275
In
Mastrobuono, the Court held that arbitrators may grant punitive damages,
under New York law, when consistent with the terms of a contractual agreement,
even though New York state law affords only courts this power.276 The Mastrobuono decision accentuates the need for
written arbitration opinions because arbitrators consistently deliver
substantial punitive damage awards. Accordingly, the arbitral forum's proper
functioning demands mandatory written opinions. Second, the argument that written opinions are unnecessary because most
disputes involve simple issues fails to consider Congress' intent in formulating
the federal securities laws.277 This argument seems to
be based on the assumption that written opinions only serve to explain complex
legal and factual issues, an assumption that is incorrect. Small investors,
like large corporations involved in large and complex disputes,278 deserve an explanation of why arbitrators
granted judgment for or against them. Congress' goal behind the securities laws
of promoting investor protection and increasing confidence in the markets
demands such an accounting.279 Congress passed the Securities Act and the Exchange Act to protect
investors from securities industry abuse. These Acts sought to promote full and
fair disclosure and restore confidence in the securities industry.280 Furthermore, via the Federal Arbitration Act,
Congress sought to provide a fair tribunal for complainants to redress their
rights.281 An arbitration award that does not
require a statement of reasons may fail to advance the policy of either the
Securities Act or the Exchange Act. The securities laws may be thwarted because
investor confidence may not be fostered. Similarly, the Federal Arbitration Act
may be defeated because the arbitral forum may not be a fair and efficient
alternative to the courts.
B. Written Opinions Would Provide Better Protection for
Investors
1. Present investors
A present investor who seeks to redress his or her rights through
arbitration often feels "psychologically unsatisfied" without a
statement of reasons accompanying the award.282The
current rule destroys investors'
perceptions of having had their fair day in court or, alternatively, their fair
day in arbitration.283 For example, on a typical
new account form,284
potential investors must identify their investment objectives. Investment
objectives are ranked on a continuum from income to investment grade to growth
to speculation, with income representing the lowest risk and speculation, the
highest.285
Suppose that A, a typical investor, opens an account wanting a moderately risky
investment. Accordingly, A chooses investment grade as the investment
objective. Later, following a sudden increase in income, A changes the
investment objective to speculation. Throughout the entire investment period, A's investment declines and A
suffers a total loss of $10,000. A then alleges that security X was unsuitable
for A and that broker B is liable for giving inappropriate advice which caused A
ultimately to purchase a speculation security.286 A seeks
$10,000 in compensation for
this unsuitable and inappropriately high risk investment. The suit proceeds to
an arbitration hearing at which A is awarded only $5,000 because the arbitrator
discovered that A changed his investment objective to speculation during a
period of the security's decline. During the period that A had an objective of
investment grade, A lost only $5,000 and, therefore, the arbitration award
reflects only this amount. Once A changed the objective to speculation, the initial investment advice
rendered by the broker corresponded to A's desire for a moderately risky
investment. Without a written explanation from the arbitrators who awarded A
the money, A is left feeling cheated and psychologically unsatisfied.287 Investor A may not recall changing objectives or,
alternatively, may fail to see the reasoning that the arbitrators used to reach
theirdecision. As a result, A fails to understand why the award did not cover
the full $10,000 loss. A leaves the arbitration hearing feeling cheated.
Ultimately, A may lose confidence in the "proper and fair" functioning
of the securities market.288 Such a result directly
contradicts
Congress' and the Supreme Court's mandate. The protections afforded to future investors, as required by the securities
laws, also are inadequate absent a statement of reasons accompanying arbitration
awards. Recall that the original objective of the Securities Act was to remedy
abuses that occurred during the 1929 market crash.289This Act was specifically created to
protect investors by promoting full and fair disclosure. Accordingly, in order
to make informed decisions regarding whether to invest with a certain broker,
brokerage firm, or in a certain bond fund, future buyers need full and fair
disclosure of how arbitrators previously resolved certain issues. Investors are
simply unable to make informed decisions without reviewing written opinions of
prior arbitration hearings which affect the area they wish to pursue.
Furthermore, investors may question the securities industry's credibility if
they attribute the arbitrators' failure to provide reasons for their awards to
confusion and an inability to arrive at a valid decision.290
Ultimately, investors may conclude that the
securities market is not a safe place to invest their money. 3. Implications for the entire securities industry Over time, the fears of present and future investors may culminate in an
overall decline in investments in the securities industry. Investor confidence
is essential to the successful operation of the securities markets and "if
we destroy the breadth of the marketplace by alienating individual participants,
we may endanger the capital formation process so basic to our financial way of
life."291 Investors already have the overall impression that their claims are being
heard in a forum composed of individuals sympathetic to the securities industry.292
This belief, combined with the
stereotype that the securities industry is composed of wealthy, greedy, and
devious businesspersons, will likely cause investor confidence, which Congress
sought to revive with the federal securities laws, to become obsolete.
Eventually, current and potential securities buyers may invest in other
financial markets that they believe to be more credible and dependable. An
industry that neither inspires the confidence of investors nor offers guarantees
of protection will lose a vital source of capital.293 To the
extent that arbitration does not support the goals of the federal securities
laws, the rules need to be reformed.
VI. Recommendations for the NASD Task Force
Arbitration is a valuable tool to facilitate the handling of securities
disputes. Written opinions would not alter the unique and favored aspects of
the forum. Instead, written opinions would enable arbitration to continue to be
the efficient and economically conservative alternative that it was created to
be. NASD Rules § 41, NYSE Rule 627, AMEX Rule 618, and AAA Rules §
42, which focus on the content of the award statement, all should be amended to
include the following: I. Arbitrators shall be required, in all situations, to write a statement
of reasons which will accompany their award except as provided in section I(a); (a)When both parties to the arbitration shall consent, the arbitrator shall
not be required to write a statement of reasons. (b)Arbitrators shall use their sound business judgment to decide
arbitration decisions and be required to include this business judgment in
writing the opinion. If, in reaching their decisions, arbitrators relied on
legal precedent, statute, or another legal authority, arbitrators shall be
required to include the authority relied upon and how it served as precedent. The proposed amendment to the aforementioned rules would establish a per se
rule whereby arbitrators would be required to provide a written opinion with
their decisions. Such an opinion, however, could be waived with the consent of
both parties. By amending the rules in this manner, securities regulators could
ade quately protect both sophisticated and unsophisticated investors. Ordinary
investors will be protected because they will know why they were victorious or
why they were not. They will better understand the implications of investing
and hopefully, via written decisions, become more knowledgeable about the
markets. This result is entirely consistent with Congress' intent in enacting
the securities laws. Additionally, institutional investors and securities
industry personnel, who are typically more sophisticated, will realize that
arbitration disputes frequently involve few complex legal issues. These
sophisticated investors will get the result they desire from arbitration without
excess time or money expended by arbitrators. This result is also consistent
with the protection that Congress intended the federal securities laws to
provide. Together, both unsophisticated and sophisticated investors would
retain confidence in the securities industry by sensing that the arbitral forums
have their unique interests in mind.294 While arbitrators should be required to write opinions, they should not be
required to write complex legal opinions. Such a requirement would contradict
the Arbitration Act's goals by equalizing the procedural aspects of arbitration
and those of the courts.295 Arbitrators should be
required, however, to write reasoned factual determinations which include any
precedent relied on to reach the decision. Requiring factual determinations would facilitate courts' meaningful review
of awards to check for arbitrator bias or error,296
especially when a court is reviewing punitive damage awards.297 Factual
opinions would also generate customs and practices in decisionmaking which would
result in more uniformity and predict ability among arbitration awards.298 Although arbitration awards
would not have precedential value, the creation of a consistent body of factual
and occasionally legal determinations would incorporate changing norms,
standards, and practices for future generations to follow.299 For all of the aforementioned reasons,
the SROs should incorporate written opinions into the rules governing their
forums.
Conclusion
A written opinion requirement could be achieved in a number of ways.
First, this Comment introduced a method that would allow individual SROs to
reform the arbitration rules governing their forum. In fact, the innovations for
large and complex disputes and the summary arbitration data suggest that the
SROs are already moving in that direction by facilitating the exchange of
information between arbitrators and parties.300 Second,
reform could come from the judiciary. Courts could essentially read in a
requirement for written opinions when interpreting arbitration rules in the
context of cases adjudicated in the judicial forum. This is unlikely, however,
given the emphasis that courts generally place on the sanctity of the contract
negotiated between the parties.301 Third, using its broad
oversight
authority, the SEC could promulgate a requirement that arbitrators write a
statement of reasons. The SEC essentially has the power of approval over any
proposed rules, as well as the authority to mandate the adoption of any
arbitration rules it deems necessary for the protection of parties' statutory
rights.302 Finally, Congress could enact legislation
requiring
arbitrators to include written opinions. Irrespective of which entity ultimately mandates written opinions, the
first step is to acknowledge the benefits that such a requirement would
generate. Written opinions accompanying arbitration awards would offer many
advantages for investors. Opponents of written opinions believe that the need
to preserve efficiency, maintain qualified arbitrators, quickly resolve simple
issues, and promote confidentiality, outweigh any benefits that investors and
the securities markets would receive. But the benefits do outweigh the costs.
Most importantly, a statement of reasons would effectuate Congress' intent
behind the Securities Act and the Exchange Act, while recognizing the Federal
Arbitration Act's special policy favoring arbitration. Moreover, a written
opinion would promote meaningful review of arbitration awards; stimulate the
development of federal common law that is uniform, consistent, and predictable;
reduce bias among arbitrators; and contribute to the securities industry's
future economic development. 1. See generally International Ctr. for Dispute
Resolution, Am. Arbitration Assn, Securities Arbitration Rules (1993) (defining
arbitration agreements). 2. See Michael Durrer, Enforcing Arbitration of
Federal Securities Law Claims: The Effect of Dean Witter Reynolds v. Byrd, 28
Wm. & Mary L. Rev. 335, 340 (1987) (explaining competing policies of
efficient dispute resolution through arbitration and investor protection of
securities laws); see also George Friedman, Arbitrating Your Case under the
Securities Arbitration Rules of the American Arbitration Association 4 (1993)
(discussing conflict between Securities Acts promise of private right of action
in courts and predispute arbitration agreements in which participants waive
right to proceed in court). 3. Arbitration Act of 1925, ch. 392, § 1, 61 Stat. 669
(codified as amended at 9 U.S.C. § § 1-14 (1994)). 4.Securities Act of 1933, ch. 38, § 1, 48 Stat. 74
(codified as amended at 15 U.S.C. §
77a-77bbbb (1994)); Securities Exchange Act of 1934, ch. 404, § 1, 48
Stat. 881 (codified as amended at 15 U.S.C. § 78a-78 ll (1994)). 5. Ch.
38, § 1, 48 Stat. 74 (codified as amended at 15 U.S.C. §
77a-77bbbb (1994)). 6. Ch. 404, § 1, 48 Stat. 881 (codified as amended at
15 U.S.C. § 78a-78 ll (1994)). The Exchange Act was created primarily to protect
investors from manipulation of stock prices on the exchanges and the over-the-counter markets.
See Michael D. Hool, Whos Protecting Investors?
Shearson/American Express v. McMahon, 107 S. Ct. 2332 (1987), Compels Private
Claims Under Section 10(b) of the Securities Exchange Act into Arbitration , 19
Ariz. St. L.J. 793, 795 (1987). Congress provided for both civil and criminal
remedies under the Exchange Act. Id. 7. See Shearson/American Express
Inc. v. McMahon, 482 U.S. 220, 251 (1987) (Blackmun, J., dissenting) (explaining
historical development of securities laws). 8. See Durrer, supra note 2, at 336
n.6. The Exchange Act primarily regulates post-issuance securities trading that
encompasses the majority of investor disputes. Id. The Securities Act, on the
other hand, regulates the initial issuance of securities. Id. The majority of
investors sue under the Exchange Act, although when a dispute arises during an
initial public offering, the affected investors have a cause of action under the
Securities Act. Id. Investors will also sue under § 10(b) of the
Exchange Act, and Rule 10b-5 promulgated thereun der, because it covers many
fraudulent acts connected with invest ments. Id. Frequently, both Acts
provide alternative remedies. See Herman & MacLean v. Huddleston, 459 U.S.
375, 387 (1983) (allowing parties to maintain § 10(b) action under
Exchange Act even though they had express remedy under § 11 of the
Securities Act). 9. See Herman & MacLean, 459 U.S. at 387
(articulating twin aims of federal
securities laws). 10. 9 U.S.C. § § 1-14 (1994). A typical
arbitration suit arises after
parties have been unable to resolve a dispute and one party files a Demand for
Arbitration. American Arbitration Assn, A Guide for Securities Arbitrators 9
(1993). A Demand for Arbitration functions like a court complaint by notifying
the other party of the desire to arbitrate the dispute pursuant to a contractual
agreement reached by the parties. Id. This agreement gives the arbitral forum
authority over the suit. The responding party then has 20 days to assert an
answer or counterclaim. NASD Rules § 13(d). An assigned case
administrator will send a letter to the parties acknowledging receipt of the
Demand and enclose a list of potential arbitrators from which the parties are to
choose. Friedman , supra note 2, at 18. The arbitrators, once selected, will
administer a limited discovery process prior to the presentation of any
testimony or evidence. Friedman , supra note 2, at 16-17. At the hearing,
arbitrators have control over the order and direction of the informal
proceedings and are not bound by the Federal Rules of Evidence. NASD Rules §
34. The arbitration rules grant the arbitrators broad authority to deny the
admission of evidence while allowing them immense subpoena power. Friedman ,
supra note 2, at 18. Arbitration procedures resemble court proceedings in
several ways. Friedman , supra note 2, at 18. First, each side makes an
opening statement, testimony is taken, witnesses are cross-examined, and the
evidence is introduced. Friedman , supra note 2, at 18. Second, the rules
give parties an absolute right to be represented by counsel, and require that a
record be kept for all hearings. NASD Rules § § 27, 37. The
cost of transcription, however, is borne by the requesting party. Id. After
the hearing, the arbitrators move to deliberations. During this stage, they
discuss their opinions on the issues while considering the legal and factual
arguments made by the parties. Friedman , supra note 2, at 19. Arbitrators
must render a decision within 30 days of the close of the hearings, unless the
parties have agreed otherwise. NASD Rules § 41(d). The award granted is
often merely a one-line award indicating the prevailing party and the costs
incurred. Arbitrators have authority to grant any relief they deem " just
and equitable under the circumstances " and are not required, nor
encouraged, to include a written opinion justifying the award. Seegenerally
Friedman , supra note 2. The award ultimately granted is, nevertheless, final
and binding on the parties. NASD Rules § 41(b). If, however, the losing
party can prove some error or bias on the part of the arbitrators, a reviewing
court has the power to vacate the award. See infra notes 126-56 and
accompanying text (discussing grounds on which court can vacate arbitration
awards). The courts ability to vacate arbitra tion awards is severely limited
and often entirely restrained with out a written opinion. 11. 9 U.S.C. § 2 (1994). 12. Id. This
section of the Arbitration Act states that an arbitra tion agreement "
shall be valid, irrevocable, and enforceable, save upon such grounds as exist at
law or in equity for revocation of any contract. " Id. ; see also
Arbitration Reform: Hearings Before the Subcomm. on Telecomm. and Finance of the
House Comm. on Energy and Commerce , 100th Cong., 2d Sess. 75 (1988)
[hereinafter Arbitration Reform Hearings ] (statement of Theodore Krebsbach)
(suggesting that in passing Arbitration Act Congress intended to allow parties
to contract for quick resolution of disputes and to reduce congestion of
courts); Ranlet Sheldon Willingham, Securities Arbitration: Issues After
McMahon, 24 Wake Forest L. Rev. 409, 423-24 (1989) (arguing that Congress
intended to enforce arbitration provisions in private contracts). 13. 9 U.S.C. § 1 (1994). 14. Scherk v. Alberto-Culver Co., 417 U.S. 506, 510
(1974)
(arguing that Arbitration Act intended to place arbitration contracts " on
the same footing as other contracts " and thereby eliminate judicial
hostility towards them). The Act created a federal policy favoring arbitration
that courts battled to maintain. See Moses H. Cone Memorial Hosp. v. Mercury
Constr. Corp., 460 U.S. 1, 24 (1983) (explaining that result of Arbitration Act
is to create federal body of substantive law of arbitration, applicable to any
arbitration agreement falling within Acts coverage). 15. Securities
Exchange Act of 1934, ch. 404, § 1, 48 Stat. 891 (codified as amended at
15 U.S.C. § 78aa (1994)) (stating that goal of Exchange Act is investor
protection). 16. Since industry developments may change over time
and expand in ways
not contemplated by the original drafters of an act, interpreta tion of a
congressional act should adapt to incorporate the changing needs of protected
parties. This is not to suggest the policy of the Arbitration Act needs review.
The basic policy favoring arbitration and the enforcement of contractual
agreements remains clear. See Scherk , 417 U.S. at 510-11. The arbitration
process rules and procedures, however, must adapt to incorporate current
concerns while still recognizing the original intent of the Arbitration Act,
which was to create a fair and efficient alternative to the courts. Id. 17. See generally
National Assn of Securities Dealers, Securities Regulation in the United States
30-31 (1992) (addressing basic aspects and issues confronted in securities
arbitrations today). One of the most significant features of the Exchange Act
was the formation of the SEC. The SEC delegates significant regulatory
authority to a number of private, member-owned and operated organizations known
as SROs. Id. at 9. These SROs include the NASD, the New York Stock Exchange
(NYSE), the American Stock Exchange (AMEX), a number of regional exchanges, and
five option exchanges. Id. In addition to SROs, there are independent forums
provided by other associations, such as the American Arbitration Association
(AAA), which allow for dispute resolution. Id. The responsibilities of the
SROs include compliance with legal and ethical standards and the administration
of arbitration forums for investors and industry members to redress disputes.
Id. All SRO rules and regulations must be approved by the SEC before they can
take effect. Id. at 15. Together, the NASD and the NYSE process more than 90%
of all arbitration claims received. Id. at 31. 18. See AAA Rules § 42;
AMEX Rule 618; NYSE Rule 627. For simplicity this Comment only refers to NASD
Rules. 19. NASD Rules §
41(e).
20. Interview with Egon Guttman,
Professor, the American Universi ty, Washington College of Law and Arbitrator,
the NYSE and NASD (October 20, 1994) [hereinafter Interview with Egon Guttman];
See also Arbitration Reform Hearings , supra note 12, at 99 (statement of
Theodore A. Krebsbach) (discussing practice of delivering one-line awards).
Contrast this with arbitration in the labor setting. In labor arbitration
forums, written opinions, although not required, have become the norm. Some
commentators justify this phenomenon by suggesting that labor arbitration,
unlike commercial arbitration, is a mechanism through which content and meaning
are given to the collective bargaining agreement. These commentators suggests
that commercial arbitration, on the other hand, is transac tional. By issuing
opinions, labor arbitrators have developed an area of law to assist both unions
and employers in administering labor agreements. Id. ; see William B. Gould
IV, Judicial Review of Labor Arbitration Awards — Thirty Years of the
Steelworker Trilogy: The Aftermath of AT&T and Misco, 64 Notre Dame L.
Rev. 464, 491-95 (1989) (arguing that written opinions are needed in labor
disputes because of unique aspects of labor arbitration); G. Richard Shell,
ERISA and Other Federal Employment Statutes: When is Commercial Arbitration an
" Adequate Substitute " for the Courts? , 68 Tex. L. Rev. 509, 509
(1990) (comparing ability of labor arbitration and commercial arbitration to
adequately resolve statutory disputes). The issue of written opinions has also
arisen in the court system. For a discussion of the implications of the
practice of federal courts declining to issue written opinions, seeMartha J.
Dragich, Will the Federal Courts of Appeals Perish if They Publish? Or Does the
Declining Use of Opinions to Explain and Justify Judicial Decisions Pose a
Greater Threat? , 44 Am. U. L. Rev. 757, 757-802 (1995). This Comment,
however, focuses only on how the issue of written opinions impacts securities
arbitration. 21. The
Supreme Court has stated that arbitra tion is not an adequate forum to address
parties rights. See Shearson/American Express Inc. v. McMahon, 482 U.S. 220,
231 (1987) (citing Wilko v. Swan, 346 U.S. 427, 439 (1953) (Frankfurter J.,
dissenting)). 22. See infra notes 209-21
and accompanying text (discussing assertion that requiring written opinion would
compromise arbitrations primary benefit of efficiency). 23. See infra notes 237-39 and
accompanying text (outlining argument that risk of lengthy disputes tarnishing
arbitrators reputations will deter arbitra tors from serving). 24. See
infra notes 253-56 and accompanying text (explaining contention that published
written opinions would reduce confidentiality of process, thus deterring parties
from suing for fear of being blacklisted). 25. See infra notes
265-70 and accompanying text (noting allegation that arbitration disputes
involve simple factual issues). 26. See infra notes
245-52 and accompanying text (discussing bias in arbitration). 27. See infra
notes 283-94 and accompanying text (reiterating securities laws goal of investor
protection). 28. See infra notes 126-56 and
accompanying text (discussing
benefits of statement of reasons on appeal). 29. See infra notes 169-75 and
accompanying text (arguing that statement of reasons promotes judicial
uniformity). 30. See infra notes 283-94 and
accompanying text (discussing benefit of increased investor protection through written
opinions). 31. 346
U.S. 427 (1953), overruled by Rodriguez de Quijas v. Shearson/American Express,
Inc., 490 U.S. 477 (1989). 32. Wilko v. Swan, 346 U.S. 427, 438-39 (1953),
overruled by
Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477 (1989). 33. Section
12(2) of the Securities Act creates a special right of action for
misrepresentation that is enforceable in any federal or state court of competent
jurisdiction. 15 U.S.C. § 77 l (1994). Section 14 of the Act holds
any provision waiving compliance with the Act void. Id. § 77n. 34. Wilko , 346 U.S. at 437. 35. Id. at 435; see also
Shearson/American Express Inc. v. McMahon, 482 U.S. 220, 228-29 (1987)
(suggesting that Court in Wilko did not enforce predispute agreement because
arbitration was inadequate to protect substantive rights of investors). 36. Wilko , 346 U.S. at
436. 37. Id. at 431. 38. Id. at 437. 39. Id. at 438-39
(Jackson, J., concurring). Jackson theorized that predispute agreements could
not be enforced because " when the buyer, prior to any violation of the
Securities Act, waives his right to sue in Courts, . . . he surrenders one of
the advantages the Act gives him . . . at a time when he is less able to judge
the weight of the handicap the Securities Act places upon his adversary. "
Id. at 435. 40. Id. at 438-39 (Jackson, J., concurring). 41. Id. ; see also Shearson/American
Express
Inc. v. McMahon, 482 U.S. 220, 252-53 & n.9 (1987) (Blackmun, J.,
dissenting) (accepting distinction between private contracts reached before and
after dispute arises). 42. 197 F. Supp. 111 (S.D.N.Y. 1961) (holding that
investor
protection overrides goal of enforcing arbitration rulings in domestic claims
cases). 43. 548 F.2d 432 (2d Cir.) (extending overriding
importance
of investor protection in § 10(b) cases), cert. denied , 432 U.S. 910
(1977). 44. 417 U.S. 506 (1974). 45. Scherk v. Alberto-Culver Co., 417
U.S. 506, 520-21 (1974). The Court questioned the applicability of Wilko to a
claim arising out of § 10(b) of the Exchange Act, because the Exchange
Act does not expressly create a private cause of action. Id. at 513-14. The
decision in Wilko , however, was not yet overruled and continued to retain
vitality among some of the federal circuits in 1989 by Rodriguez de Quijas v.
Shearson/American Express, Inc., 490 U.S. 477 (1989). See, e.g. , Merrill
Lynch, Pierce, Fenner & Smith, Inc. v. Moore, 590 F.2d 823, 827-29 (10th
Cir. 1978) (holding that investor remedies under federal securities laws were
not waived as result of arbitration agreements); Weissbuch v. Merrill Lynch,
Pierce, Fenner & Smith, Inc., 558 F.2d 831, 833-35 (7th Cir. 1977) (holding
that, absent international concerns, arbitration agreements are unenforceable in
Rule 10b-5 claims). 46. Scherk , 417
U.S. at 515; see also Shearson/American Express Inc. v. McMahon, 482 U.S. 220,
229 (1987) (discussing holding in Wilko as based on inadequacy of arbitration
and noting that Courts decision in Scherk is consistent with this view). 47. Scherk , 417 U.S. at 515-16. 48. Id. at 515. 49. Id. at
516. 50. Id. at 516,
519 & n.15. 51. Compare id. at 519-20 (holding
parties must
arbitrate their international commercial dispute pursuant to Arbitration Act)
with Wilko , 346 U.S. at 437 (holding parties could not be forced in advance to
waive their right to proceed in court). 52. 460 U.S. 1, 29 (1983) (holding that
Court of Appeals acted properly by enforcing prompt arbitration as intended by
Congress). 53.
465 U.S. 1, 10 (1984) (recognizing Congress policy of favoring arbitration by
enacting Arbitration Act). 54.
470 U.S. 213, 225 (1985) (holding that district court erred in refusing motion
to compel arbitration of state claims). 55. Dean Witter Reynolds,
Inc. v. Byrd, 470 U.S. 213, 221-24 (1985). 56. Id. at 216 n.1. 57. 482 U.S. 220 (1987). 58. See David A. Lipton, Mandatory Securities
Industry Arbitration:
The Problems and the Solution , 48 Md. L. Rev. 881, 881 (1989) (explaining that
for over 30 years prior to McMahon , federal courts had followed Wilko and
allowed investors to disregard predispute arbitration agreements where claims
arose out of federal securities laws). 59. Shearson/American Express Inc. v. McMahon, 482
U.S. 220, 238
(1987). 60. 18 U.S.C. § 1961 (1994). 61.
. McMahon , 482 U.S. at 242. 62. Id. at 231-34 (discussing
that no evidence suggests that plaintiffs substantive rights are jeopardized by
arbitration). 63. Id. 64. Id. 65. Id. at 231. The
Court suggested that the Wilko holding reflected a mistrust of the arbitral
process — a mistrust virtually eliminated today in an age where the SEC has
superb regulatory authority over the Self Regulatory Organizations (SROs) and
supervisory power of approval over any proposed rules. Id. at 231-34;
Seealso
Lipton, supra note 58, at 882 (discussing history of investor ability to
disregard arbitration when claims arose under federal securities laws). 66. McMahon , 482 U.S. at 242. 67.
. Id. at 243 (Blackmun, J., dissenting). 68. Id. at 249-57 (Blackmun, J., dissenting). 69. 490 U.S. 477 (1989). 70. Rodriguez de Quijas v. Shearson/American
Express, Inc., 490 U.S. 477, 485-86 (1989). 71. Lipton, supra note 58, at 882; see also
Arbitration Reform Hearings , supra note 12, at 1 (statement of Hon. Edward J.
Markey) (suggesting that two factors have increased number of cases being drawn
to arbitration: (1) McMahon decision and (2) October 1987 market crash, in
which individual investors suffered substantial losses). 72.
The recent case of Mastrobuono v. Shearson Lehman Hutton, Inc., 115 S. Ct. 1212,
1219 (1995), decided by the Supreme Court in January, reiterates this notion.
See also supra notes 11-14 and accompa nying text (discussing policy of
Arbitration Act). 73. SEC Approves Arbitration Summaries, Other
Revisions to Industry Programs, 21 Sec. Reg. & L. Rep. (BNA) No. 19, at 683, 683 (May
12, 1989) [hereinafter SEC Approves Arbitration Summaries ]. 74. The SROs have worked together since 1977 to
develop the uniform
arbitration rules under the auspices of the Securities Industry Conference on
Arbitration (SICA). Securities Arbitration: How Investors Fare , in
Securities Arbitration 1992 , 19, 34 (PLI Corp. Law & Practice Course
Handbook Series No. B4-7006, 1992) [hereinafter How Investors Fare ]. SICA was
formed in 1977 by the SEC to review the existing arbitration procedures. Id.
at 34. SICA is composed of a representative from each SRO and the Securities
Industry Association, and four individuals from the public. Id. In 1985,
following Dean Witter Reynolds, Inc. v. Byrd , 470 U.S. 213 (1985), the SEC
began an 18-month review of the fairness and efficiency of SRO arbitration
programs, recognizing that it signalled the likely increase of arbitration of
securities claims. How Investors Fare , supra , at 39. In 1987, after the
McMahon decision, the SEC recommended changes to SICAs Uniform Code of
Arbitration. After lengthy negotiations, the SEC approved proposed rules to
govern the arbitration process. Id. The AAA also responded to the pressure of
reforming the arbitration procedures. Id. In October 1991, the AAA created
the Securities Arbitration Task Force (SATF) made up of investors attorneys,
representatives from various brokerage firms, and other knowledgeable persons.
George H. Friedman, The New Security Arbitration Rules of the American
Arbitration Association , in Securities Arbitration 1993: Product, Procedures,
and Causes of Actions 23, 39 (PLI Corp. Law. & Practice Course Handbook
Series No. B-819, 1993). The mission of the SATF was to improve the rules to
make procedures more attractive to arbitration participants. Id. The Task
Force met 11 times from November 1991, to February 1993, and the AAA rules were
amended effective May 1, 1993. Id. 75. See Joseph L. Hood, Jr., Arbitration and
Litigation of Public Customers Claims
Against Broker-Dealers After McMahon, 19 St. Marys L.J. 541, 579-85 (1988)
(arguing that as investors securities claims are referred massively to
arbitration, many securities industry personnel may find " perceived
advantages [of arbitration] are largely illusory " ). Id. at 579. 76. Lipton, supra note 52, at 882; see also
Shearson/American Express
Inc. v. McMahon, 482 U.S. 220, 257-58 (1987) (Blackmun, J., dissenting).
77. Lipton, supra note 58, at 882. 78. Lipton, supra note 58, at 882; see
alsoMcMahon , 482
U.S. at 257-58 (Blackmun, J., dissenting). 79. Lipton, supra note 58, at 882;
Seealso
McMahon , 482 U.S. at 257-58 (Blackmun, J., dissenting) (arguing written
opinions are needed for investor protection). 80. Lipton, supra note 58, at
882. 81. How Investors Fare , supra note 74, at
19. 82. Former SEC Head to Chair NASD Task
Force on Arbitration , National Assn of Securities Dealers Press Release (NASD,
Washington, D.C.) Sept. 9, 1994 [hereinafter SEC Head to Chair Task Force ]. 83. Id. 84. See How Investors Fare ,
supra note 74, at 34. SICAs duty is to
evaluate arbitration procedures. See Lynnette Khalfani, Two
Securities-Industry Committees Vie for Right to Handle Arbitration Issues , Wall
St. J. , Sept. 2, 1994, at A5A. SICA members criticized the NASD Task Force for
usurping SICAs historical role. Id. Members of the NASD defended the new Task
Force by suggesting that SICAs role is limited and that the NASD, as the largest
SRO forum, has unique and broader interests that the new Task Force will
accommodate. Id. 85.
The members are: David S. Ruder, Professor of Law, Northwestern University
School of Law, and former Chairman of the SEC (1987-1989); J. Boyd Page, Partner
at Page & Bacek and current President of Public Investors Arbitration Bar
Association, member of the NASD National Arbitration Committee, member of the
AAA Securities Advisory Committee, and member of the Board of Advisors of the
Securities Arbitration Commentator ; Francis O. Spalding, Adjunct Professor of
Law at Golden Gate University School of Law, current Chairman of the NASD
National Arbitration Committee, member of the AAA Securities Advisory Committee;
Richard Speidel, the Beatrice Kuhn Professor of Law at Northwestern University
School of Law and co-author of a five volume treatise entitled Federal
Arbitration Law: Agreements, Awards and Remedies Under the Federal Arbitration
Act ; John Bachmann, Managing Partner of Edward D. Jones & Co.; John A.
Wing, Chairman and Chief Executive Officer of The Chicago Corporation; Stephen
L. Hammerman, Vice Chairman and General Counsel of Merrill Lynch & Co.,
Inc.; Stephen J. Friedman, former SEC Commissioner (1980-1981), former Executive
Vice President and General Counsel for the Equitable Companies Incorporation and
currently Senior Partner of Debevoise & Plimpton; and Linda D. Fienberg, Of
Counsel with Covington & Burling and former Associate General Counsel and
Executive Assistant to the Chairman of the SEC. SEC Head to Chair NASD Task
Force , supra note 82. 86. Khalfani, supra note 84, at A5A
(statement of Debora Masucci). 87.
Khalfani, supra note 84, at A5A. 88.
Khalfani, supra note 84, at A5A. 89.
Khalfani, supra note 84, at A5A. 90. For similar rules promulgated by
other arbitral forums regarding the content of arbitration awards, See supra
note 18. 91. E.g. , Wilko v. Swan, 346 U.S. 427
(1953), overruled on other grounds by Rodriguez de Quijas v. Shearson/American
Express, Inc., 490 U.S. 477 (1989); O.R. Sec., Inc. v. Professional Planning
Assocs., 857 F.2d 742, 747 (11th Cir. 1988); Kaiser Cement Corp. v. Fischbach &
Moore, Inc., 793 F.2d 1100, 1102 (9th Cir.), cert. denied , 479 U.S. 949
(1986). 92. See
Raiford v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 903 F.2d 1410, 1413
(11th Cir. 1990) (arguing that requiring arbitrators to explain their reasons
would defeat policy in favor of expedited procedures); Stroh Container Co. v.
Delphi Indus., 783 F.2d 743, 750 (8th Cir.) (commenting that forcing arbitrators
to explain awards would " subvert the proper functioning of the arbitral
process " ) (citing Sobel v. Hertz, Warner & Co., 469 F.2d 1211, 1215
(2d Cir. 1972)), cert. denied , 476 U.S. 1141 (1986); Sobel v. Hertz, Warner &
Co., 469 F.2d 1211, 1214 (2d Cir. 1972) (noting that sacrifice in legal
precision is necessary in order to preserve proper functioning of arbitration
process); Securities Arbitration Group Opposes Mandatory Written Opinions in All
Cases , 19 Sec. Reg. & L. Rep. (BNA) No. 51, at 1952, 1953 (Dec. 25, 1987)
(arguing that requiring written opinion " could very well hinder, rather
than enhance, the administration of arbitration proceedings in that it would be
time consuming and burdensome and thus may discourage many qualified individuals
from serving as an arbitrator " ). See generally Stephen P. Doyle &
Roger S. Haydock, Without the Punches, Resolving Disputes Without Litigation
21-22 (1991). 93. See Mastrobuono v.
Shearson Lehman Hutton, Inc., 115 S. Ct. 1212, 1218-19 (1995) (enforcing
arbitration award of compensatory and punitive damages in securities dispute
because parties ' contract provided for both possibilities). 94. 469 F.2d 1211 (2d
Cir. 1972). 95. Sobel v.
Hertz, Warner & Co., 469 F.2d 1211, 1215 (2d Cir. 1972). 96.
Id. 97. 899
F.2d 410 (5th Cir. 1990). 98. Antwine v. Prudential-Bache Sec., Inc., 899 F.2d 410,
413
(5th Cir. 1990). 99. Id.
For other interpretations of the Antwine decision, seeFrank E. Massengale &
Marie Breaux Stroud, Federal Securities Law, 5th Circuit Symposium , 36 Loy. L.
Rev. 821, 823-25 (1990) (describing approval of unwritten decision as counter
to concerns of investigating public); Jane E. Zangleir, Securities Law, Fifth
Circuit Survey , 22 Tex. Tech. L. Rev. 685, 693-95 (1991) (arguing that court '
s ruling is inconsistent with AAA's position on written opinions for statutory
issues). 100. Antwine , 899 F.2d at 412 &
n.2. 101. Self-Regulatory Organizations; Order Approving
Proposed
Rule Changes by the New York Stock Exchange, Inc., National Association of
Securities Dealers, Inc., and the American Stock Exchange, Inc. Relating to the
Arbitration Process and the Use of Pre-dispute Arbitration Clauses, 54 Fed. Reg.
21,144, 21,151-52 (1989) [hereinaf ter SEC Order] (warning that it would be
inappropriate to require written opinions because it " could slow the
arbitration process and discourage many persons from participating as
arbitrators " ). 102. Id. at 21,151. 103. Id. ; see alsoinfra notes
157-64 and accompanying text
(discussing SEC ' s reasons for concluding that written arbitration would cause
more harm than good). But See infra notes 224-36 and accompanying text
(responding that written opinions are needed and would not be inefficient). 104. See generally Antwine v. Prudential-Bache
Securities Inc., 899 F.2d 410 (5th Cir. 1990); Sobal v. Hertz, Warner & Co.,
469 F. 2d 211 (2d Cir. 1972). 105. See Mastrobuono v. Shearson Lehman
Hutton, Inc., 115 S. Ct. 1212, 1218-19 (1995) (enforcing arbitration award of
compensatory and punitive damages in securities dispute because contract
provided for both options). 106. See infra
note 257 and accompanying text (discussing ability of parties to choose among
various arbitral forums pursuant to their arbitration clause). 107. See generally Rules Changed to Make
Written Findings Easier to
Obtain in Larger Arbitrations , 22 Sec. Reg. & L. Rep. (BNA) No. 22, at 816,
816 (June 1, 1990) [hereinafter Rules Changed ]. 108. See id. (discussing implementa tion of new
rule requiring arbitrators to provide written findings of fact and conclusions
of law in complex cases). 109. Id. 110. Id. 111. Id. 112. Id. 113. Id. 114. Id. 115.
See Ruder Urges Rules to Allow Arbitrators to Refer Complex Cases to Court
System , 20 Sec. Reg. & L. Rep. (BNA) No. 28, at 1087, 1087 (July 15, 1988).
In this report, Ruder commented that he expected the SROs to consider
procedures to permit investor access to courts in certain situations. Id. He
suggested these types of cases should be referred to the courts to permit the
adherence of precedent to guide arbitrators and others on the interpretation of
statutory provisions of the federal securities laws. Id. These types of
complicated suits arguably would qualify for large and complex treatment as
well. See also Perry E. Wallace, Jr., Securities Arbitration After McMahon,
Rodri guez and the New Rules: Can Investors Really be Protected? , 43 Vand. L.
Rev. 1199, 1250 (1990) (arguing that arbitrators should consider referring
class actions, cases challenging industry practices, and disputes involving
extensive discovery to courts). The application of this rule is expected to be
rare, but officials suggest its applicability " will be self- evident. "
Rules Changed , supra note 107, at 816. 116. See
Arbitration Reform Hearings , supra note 12, at 99-100 (statement of Theodore
Krebsbach) (arguing that vast majority of arbitrations involve only factual
determinations of whether broker defrauded client through misrepresentation,
churning or purchasing an unsuitable investment); see also Wallace, supra note
115, at 1249-50 & 1249 n.257 (suggesting that existing arbitration
procedures are adequate for typical customer or broker complaints, but complex
cases should be referred to courts); infra notes 265-70 and accompanying text
(discussing this point in detail). 117. See infra notes 271-82 and
accompanying text
(suggesting that requirement of written opinions would promote policy behind
securities laws). 118. See SEC Staff Suggests Arbitration Group
Adopt Use of
One-Page Award Statement , 20 Sec. Reg. & L. Rep. (BNA) No. 15, at 559, 560
(Apr. 15, 1988) [hereinafter One-Page Award Statement ] (providing example of
simplified public award statement). 119. . See SEC Approves Arbitration
Summaries ,
supra note 73, at 683 (noting that this change resulted from SEC meeting on
rule changes proposed by NASD and others); NASD Rules § 41(f). 120. . One-Page Award Statement , supra note
118, at 559. 121. See SEC
Approves Arbitration Summaries , supra note 73, at 683. 122. SEC Approves Arbitration Summaries ,
supra note 73, at 683. 123. NYSE Proposes Highlighting Rights,
Providing Summary Data on Arbitrations , 20 Sec. Reg. & L. Rep. (BNA) No.
46, at 1783, 1783 (Nov. 25, 1988) (detailing how changes are result of
protracted discussion among several members of SICA). 124.
Some commentators have warned that requiring arbitrators to submit written
opinions would have detrimental effects. See Arbitration Reform Hearings ,
supra note 12, at 102 (statement of Theodore Krebsbach) (arguing that judging
arbitrator ' s track record based on percentage of disputes decided for one side
or another encourages " arbitrator shopping " ); see also William C.
Hermann, Arbitration of Securities Disputes: Rodriguez and New Arbitration
Rules Leave Investors Holding a Mixed Bag , 65 Ind. L.J. 697, 714 (1990)
(suggesting that arbitrator shopping favors securities industry because it has
best access to results of prior arbitration hearings generally not publicly
avail able). 125. See supra notes 1-9 and
accompanying text
(discussing policy of Securities Act).
126. See infra notes
143-46 and accompanying text (explaining impossibility of judicial scrutiny of
awards without written explanations by arbitrators). 127. See infra notes 134-56 and
accompanying text (discussing
grounds in which court can vacate arbitration awards). 129. 9 U.S.C. §
9 (1994). The appropriate district court is in the jurisdiction where the
arbitration award was made. Id. Note that the parties have just one year from
the date of the award to seek confirmation. Id. 130. Id. 131. Ketchum v.
Prudential-Bache Sec., Inc., 710 F. Supp. 300, 301 (D. Kan. 1989) (citing Taylor
v. Nelson, 788 F.2d 220, 225 (4th Cir. 1986)); see also American Postal Workers
Union v. United States Postal Serv., 682 F.2d 1280, 1285 (9th Cir. 1982)
(stating that confirmation of arbitration award is required even in face of "
erroneous findings of fact or misinterpretations of law " ), cert. denied ,
459 U.S. 1200 (1983). 132. 9 U.S.C. § 10 (1994). 133.
Id. § 11. 134. See Wilko v. Swan, 346 U.S. 427, 436-37
(1953) (stating that judicial review of arbitration award is even narrower than
judicial review of trial proceedings), overruled on other grounds by Rodriguez
de Quijas v. Shearson/American Express, Inc., 490 U.S. 477 (1989); Antwine v.
Prudential-Bache Sec., Inc., 899 F.2d 410, 412 (5th Cir. 1990) (alluding to
narrow scope of judicial review of arbitration awards). But see Jeffrey A.
Winikoff & Maxine Streeter Bradford, Blue Sky Law: 1993 Survey of Florida
Law , 18 Nova L. Rev. 45, 66-68 (1993) (suggesting that review may not be so
limited because in Kelly v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 985
F.2d 1067 (11th Cir.), cert. denied , 114 S. Ct. 600 (1993), court held that
issue of res judicata should be left for court to decide). For discussion of
res judicata as it applies to arbitration decisions, See infra notes 189- 203
and accompanying text. 135. See United Paperworks Int ' l Union v.
Misco Inc., 484 U.S. 29 (1987); see also Forsythe Int ' l v. Gibbs Oil Co.,
915 F.2d 1017, 1020-22 (5th Cir. 1990) (stating that arbitration always contains
legal and evidentiary shortcuts as compared to formal trials and reviewing court
should resist correcting them without valid statutory basis for doing so); Hood,
supra note 75, at 586 (discussing limited standard of review for arbitration
award when compared to courts). Courts are bound by Rule 52(a) of Federal Rules
of Civil Procedure to review trial courts findings of fact with " clearly
erroneous " standard and conclusions of law " de novo , "
whereas courts may only vacate an arbitration award in narrow situations,
pursuant to § 10 of Arbitration Act. Id. 136. See McIlroy v. Paine
Webber Inc., 989 F.2d 817, 820 (5th Cir. 1993) (noting that courts owe great
degree of deference to ruling of arbitral bodies); see also Anderson/Smith
Operating Co. v. TennesseeGas Pipeline Co., 918 F.2d 1215, 1218 (5th Cir. 1990)
(commenting that congressional policy in promoting arbitration and efficiency
requires that courts refrain from intruding into questions settled by
arbitrators), cert. denied , 501 U.S. 1206 (1991). except under the statutory
exceptions outlined in section 10 of the Arbitration Act. [ . 9 U.S.C. §
10 (1994). 137. Id. For an
example of a court vacating an arbitration award, seeTinaway v. Merrill Lynch &
Co., 658 F. Supp. 576, 579 (S.D.N.Y. 1987) (holding that because arbitrator ' s
reduction of award was so substan tial it manifested " evident partiality "
and thus fell within Code provision regarding vacation of arbitration awards). 139.
. 9 U.S.C. § 10 (1994). Case law applying 9 U.S.C. § 10 is
plentiful. See, e.g. , McIlroy , 989 F.2d at 820 (denying movant ' s attempt
to vacate award on grounds that award was product of " gross mistake "
); Raiford v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 903 F.2d 1410,
1412-13 (11th Cir. 1990) (finding that judicial review of arbitration awards
should be limited to statutory provision and not expanded to include "
manifest disregard of law " standard); O.R. Sec. v. Professional Planning
Assocs., 857 F.2d 742, 747 (11th Cir. 1988) (stating that in order to vacate
award on basis of arbitrator ' s manifest disregard of law, movants must show
that arbitrators knew law and expressly disregarded it); Jenkins v.
Prudential-Bache Sec., Inc., 847 F.2d 631, 633-34 (10th Cir. 1988) (discussing
view that courts should go beyond narrow scope of 9 U.S.C. § 10 to
encompass " abuse of discretion " type standard when reviewing
arbitral awards); Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Bobker, 808
F.2d 930, 933 (2d Cir. 1986) (noting possibility that judicially created "
manifest disregard of law " standard expands on reasons for vacating award
enunciated in 9 U.S.C. § 10); Stroh Container Co. v. Delphi Indus., 783
F.2d 743, 749 (8th Cir.) (denying request to vacate award because no elements
for judicial action under 9 U.S.C. § 10 were met), cert. denied , 476
U.S. 1141 (1986); Ketchum v. Prudential-Bache Sec., Inc., 710 F. Supp. 300, 301
(D. Kan. 1989) (finding that arbitrator did not so imperfectly execute his
powers so as to require vacating award). 140. See, e.g. , Jenkins , 847 F.2d at 634
(defining
manifest disregard standard as arbitral award that is contrary to essence of
parties ' contract); Bobker , 808 F.2d at 933 (holding that manifest disregard
of law by arbitrators " clearly means more than error of misunderstanding
with respect to the law " ); Stroh Container Co. , 783 F.2d at 750 (caution
ing that it is arbitrator ' s disregard of law, not interpretation of law, which
is open to judicial review and must be overwhelmingly shown by appellant). 141. . Raiford , 903 F.2d
at 1412 (citing Bobker , 808 F.2d at 933). The Raiford court suggested that to
prove that an arbitrator manifestly disregarded the law, a party must
demonstrate that: (1) the error is so obvious that it would instantly be
noticed by the arbitrator; (2) the arbitrator knew the law but proceeded to
disregard it; and (3) the disregard must be apparent on the face of the record.
Id. at 1412-13. 142. Ketchum
, 710 F. Supp. at 303 (citing Stroh Container Co. , 783 F.2d at 750) (emphasis
added). 143. SEC Order , supra note 101, at
21,151. In the SEC hearings, Public Citizen Litigation Group and Plaintiff
Employment Lawyers Associa tion advocated for written opinions by arguing that
records of hearings were inadequate for a court to apply the " manifest
disregard " standard. SEC Order , supra note 88, at 21,151; see also
John L. Latham & Lynn Scott Magruder, Securities Regulation, Annual Eleventh
Circuit Survey , 42 Mercer L. Rev. 1519, 1540 (1991) (discussing Raiford , 903
F.2d at 1410, where court expressed doubt that manifest disregard standard could
ever be met when arbitrators do not give their reasons); Massengale &
Stroud, supra note 99, at 825 n.34 (arguing that without an opinion, there is
nothing for courts to review). But see Arbitration Reform Hearings , supra
note 12, at 100 (statement of Theodore Krebsbach) (arguing that there is no
reason to suggest party cannot vacate award without written factual and legal
conclu sions because party can attach portion of arbitration transcript or
relevant exhibits to support motion made to court). 144. Valentine
Sugars Inc. v. Donau Corp., 981 F.2d 210, 214 (5th Cir.) (stating that district
court must affirm arbitration award, even without arbitrator ' s written
statement of reasons, if award is " rationally inferable " from
facts), cert. denied , 113 S. Ct. 3039 (1993); Sobel v. Hertz, Warner & Co.,
338 F. Supp. 287, 297 (S.D.N.Y. 1971), rev ' d , 469 F.2d 1211, 1216 (2d Cir.
1972). Although the Second Circuit eventually reversed the district court ' s
holding in Sobel , the district court, remanding the arbitration decision to the
arbitrators for a statement of reasons, argued quite persuasively that without
written opinions, courts would be left with a bare record and would have to
assume that the arbitrators had correctly decided the dispute. Id. 145. Arbitration Reform Hearings , supra note
12, at 53
(statement of Theodore G. Eppenstein) (suggesting that already limited right to
appeal arbitration award, which is further diminished when arbitrators do not
state reasons underlying award, eliminates any effective means of testing award
' s legal adequacy or remedial sufficiency). As one author noted, "
[b]lanket approval of arbitration decisions rendered without an opinion . . .
is currently chilling judicial review of arbitration decisions. "
Massengale, supra note 99, at 825 n.34 (commenting that, without written
opinion, there is nothing for court to review and court becomes " rubber
stamp " for arbitration decision). 146. Raiford v. Merrill Lynch, Pierce, Fenner &
Smith,
Inc., 903 F.2d 1410, 1413 (11th Cir. 1990) ( " This court has never adopted
the manifest-disregard-of-the-law standard; indeed, we have expressed some doubt
as to whether it should be adopted since the standard would likely never be met
when the arbitrator provides no reasons for its award . . . . " ); see
also O.R. Secs., Inc. v. Professional Planning Assocs., Inc., 857 F.2d 742, 747
& n.4 (noting difficulty of showing that arbitrators expressly disregarded
law supports argument against applying manifest disregard standard when vacating
arbitration awards). But see Stroh Container Co. v. Delphi Indus., Inc., 783
F.2d 743, 750 (8th Cir.) (refusing to vacate award by applying " manifest
disregard " standard even though arbitrators failed to identify law
applied or reasons used in reaching decision), cert. denied , 476 U.S. 1141
(1986). 147. See, e.g. , Siegel
v. Titan Indus. Corp, 779 F.2d 891, 894 (2d Cir. 1985) (stating that "
remand for clarification . . . would not improperly require arbitrators to
reveal their reasons, but would instead simply require them to fulfill their
obligation " to justify award so that court can effectively review
decision) (citing Sobel v. Hertz, Warner & Co., 469 F.2d 1211, 1214 (2d Cir.
1972)); Olympia & York Fla. Equity Corp. v. Gould, 776 F.2d 42, 45-46 (2d
Cir. 1985) (recognizing that it is occasionally proper for courts to remand
awards to arbitrators for better description of meaning or effect of award);
United Steel Workers of Am., Local 8249 v. Adbill Management Corp., 754 F.2d
138, 141 (3d Cir. 1985) (stating that " [a] remand for further arbitration
is appropriate in only certain limited circumstances such as when an award is
incomplete or ambiguous " ). 148. 338 F. Supp. 287 (S.D.N.Y. 1971), rev ' d ,
469 F.2d 1211 (2d Cir. 1972). 149. Sobel v. Hertz, Warner & Co., 338 F.
Supp. 287, 299 (S.D.N.Y. 1971), rev ' d , 469 F.2d 1211 (2d Cir. 1972). 150. Id. at 293. In support of its position, the
district court
cited Justice Frankfurter ' s dissent in Wilko v. Swan, 346 U.S. 427, 440
(1953), overruled on other grounds by Rodriguez de Quijas v. Shearson/American
Express, Inc., 490 U.S. 477 (1989), stating: 151. See Sobel , 338 F.
Supp. at 300 (noting that courts of appeal will tend to accept interlocutory
appeal if question of law deals with unsettled issue) (citing Goldlawr Inc. v.
Heiman, 273 F.2d 729, 731 (2d Cir. 1959)). however, the appellate court
reversed. [ . Sobel , 469 F.2d 1211, 1216 (2d Cir. 1972). 152. Sobel, 469 F.2d 1211, 1216 (2d Cir. 1972)
153. Id. at 1215. 154. Id. Other courts and commentators have
agreed with this result. See San Martine Compania de Navegacion, S.A. v. Saguenay
Terminals Ltd., 293 F.2d 796,
800 (9th Cir. 1961) ( " [A]n award . . . which is one within the terms of
the submission[] will not be set aside by a court for error in either law or
fact . . . . `Arbitrators are judges chosen by the parties to decide the
matters submitted to them, finally and without appeal. . . . A contrary
course would be a substitution of the chancellor in place of the judges chosen
by the parties, and would make an award the commencement, not the end, of
litigation ' " (quoting Burchell v. Marsh, 58 U.S. (17 How.) 344, 349
(1854))); see also Lipton, supra note 58, at 883 ( " [I]t is reasonable
to believe that if arbitration awards were appealable for the full range of
reasons for which judicial decisions may be appealed, the efficiency of the
arbitration mecha nism would be reduced. " ). 155. See infra
notes 209-36 and accompanying text (developing and responding to efficiency
argument). 156. See infra notes 225-27
and accompanying text (discussing recent questions raised regarding costs and
efficiency of arbitration). 157. SEC Order, supra note 101, at 21,151. 158. SEC Order, supra note 101, at 21,151 n.45.
The SEC ' s leap is
very optimistic and incorporates many assumptions without recognizing the
strictness of the manifest disregard standard and the complexity a court faces
when applying it. For a discussion of the standard, See supra notes 140-56 and
accompanying text. 159. SEC Order, supra note 101, at
21,151. 161. SEC Order, supra note 101, at 21,151. 162. SEC Order, supra note 101, at
21,151. The SEC pointed to the developments in the labor area, where
arbitrators voluntarily began writing opinions to better understand changes in
the law. Id. For a brief discussion of labor arbitration, See supra note
20. 163. See Hermann, supra note
124, at 715 (stating that SEC ' s position puts great deal of faith in
initiative of arbitrators). 164.
. Hermann, supra note 124, at 715; Arbitration Reform Hearings , supra note
12, at 53-59 (statement of Theodore G. Eppenstein). 165. See Hermann, supra note 124, at
715 (stating that
arbitrators can use their complete discretion in choosing whether to write opin
ions). 166. Hermann, supra note 124, at 715. If
arbitrators must
justify the merits of a particular award through a written opinion, they would
be less prone to emotional biases. Arbitrators would be careful to deliver an
award that is warranted from the facts or applicable law. 167. Hermann, supra note 124, at 715. 168. Hermann,
supra note 124, at 715. 169. Bird v. Shearson Lehman/American
Express, Inc., 926 F.2d 116, 123 (2d Cir. 1991) (Kearse, J., dissenting). 170. Id. at 124; Lipton, supra note 58,
at 888; Wallace,
supra note 115, at 1247-48. 171. Wallace, supra
note 115, at 1248. 172. Wallace, supra note 115, at 1248. 173. See Lipton,
supra note 58, at 888 (arguing that written decision accompanying prior
arbitration is critical to assist arbitrators in decisionmaking process and to
aid parties in preparation of future arbitration hearings); Wallace, supra note
115, at 1248 (suggest ing that written opinions would develop body of federal
common law that could help litigators prepare cases and arbitrators "
render fair and consistent awards " ). 174. See infra note
177 (recognizing that arbitrators often are not constrained by law). Given this
practice, an outcome can rarely be predicted on the basis of stare decisis . 175.
. SEC Order, supra note 101, at 21,152 (mentioning statement made by Shearson
Lehman that investor confidence would grow if arbitra tion awards were made
public). 176. See Lipton, supra note 58, at 899
(concluding that securities
customers have had little choice but to submit all claims to arbitration in wake
of McMahon and Rodriguez ). After McMahon and Rodriguez , predispute
agreements, which tend to favor arbitration as the primary forum for these
disputes, were routinely enforced. The likelihood of a court deciding a case
arising under the federal securities laws subsequently decreased. Seeid. at
888 (arguing that wholesale movement toward arbitration impairs ability of court
system to provide precedential guidance because there are fewer cases
litigated). 177. See Prima Paint Corp. v. Flood &
Conklin Mfg. Co.,
388 U.S. 395, 407 (1967) (Black, J., dissenting) (arguing that because
arbitrators do not need to be lawyers, they are often unqualified to decide
legal issues, and even if they happen to be qualified, they are never bound by
precedent); see also Arbitration Reform Hearings , supra note 9, at 85-86
(statement of Theodore A. Krebsbach) (noting that arbitrators are not
constrained by statutory elements, and may issue awards as equity requires);
Wallace, supra note 115, at 1248 (stating that " arbitrators are most
likely not to perform in-depth legal research: their basis for awards generally
rest on what is `fair, ' `just, ' or `sensible ' under the circumstances "
); G. Richard Shell, Res Judicata and Collateral Estoppel Effects of Commercial
Arbitration , 35 UCLA L. Rev. 623, 633 (1988) (concluding that arbitrators are
not bound by law but instead are free to grant any award that they deem "
just and equitable " under circumstances). For an interesting article
discussing the standard that arbitrators use to reach their decisions seeDavid
A. Lipton, The Standard on Which Arbitrators Base Their Decisions: The SRO ' s
Must Decide , 16 Sec. Reg. L.J. 3 (1988). 178. Arbitration Reform Hearings , supra note
12, at 138
(statement of Theodore A. Krebsbach) (stating that arbitrators do not
necessarily know who is being truthful after hearing all evidence, and as result
they " do what makes sense under the circumstances " ). 179. See Massengale, supra note 99, at
825
(arguing that because arbitrators have assumed federal courts ' role of
interpreting federal securities laws, they must be accountable for their
decisions so that courts can determine whether principles developed over 50
years of jurisprudence have been observed). 180. See
Massengale, supra note 99, at 823-25 (discussing Antwine v. Prudential-Bache
Sec., 899 F.2d 410 (5th Cir. 1990), and suggesting that, contrary to court ' s
decision, active judicial review is essential for development of accurate legal
principles); see also supra notes 127-56 and accompanying text (analyzing
need for written decision to promote meaningful review of arbitration
decisions). 181. Wilko v. Swan, 346
U.S. 427, 436 (1953), overruled by Rodriguez de Quijas v. Shearson/American
Express, Inc., 490 U.S. 477 (1989). 182. Id. at 436-37. 183. See Hool, supra note 4, at
815-16 (arguing that causes of action under Rule 10(b) are constantly evolving
to include, for example, insider trading and other new issues of fraud, and
without written opinions common law in this area would not continue to evolve);
See also Lipton, supra note 52, at 889 (discussing arbitration ' s inability
to resolve new legal questions because of loss of consistency and precedent
resulting from universal use of predispute arbitration clauses). 184. See Hool, supra note 4, at
815-16 (arguing that written opinions, like those developed in judicial forum,
establish valuable precedent necessary for § 10(b) ' s evolution).
185. See Hool, supra note 4, at 816-17
(maintaining that
published opinions are essential for § 10(b) to accomplish its
deterrence function). 186. See
Lipton, supra note 52, at 889 (suggesting that credibility problems develop in
system without precedential guidance). 187.
See Sobel v. Hertz Warner & Co, 338 F. Supp. 287, 296-97 (S.D.N.Y 1971)
(stating that parties may interpret arbitrators ' failure to give reasons as
indecision), rev ' d , 469 F.2d 1211 (2d Cir. 1972). Judge Pollack, the
district court judge had argued " that parties who choose arbitration do
not expect a `legally perfect result ' " but do expect a rational and
judicious result. A dismissal without a stated rationale may undercut the
legitimacy of the process. Sobel , 338 F. Supp. at 296-97. Although the Second
Circuit reversed the district court ' s holding, the appellate court
acknowledged the judge ' s opinion regarding the implications of a lack of
written reasons. Sobel , 469 F.2d at 1214. The appellate court reversed, in
part, based on efficiency and deference to the arbitration process. Id. ; see
also Hool, supra note 4, at 817 (stating that without dissemination that comes
with fairness of having published opinions, market professionals hear investor
claims may be questioned); infra notes 232-47 and accompanying text (discussing
what long-term impact lack of confidence in arbitration process may have on
securities industry). 188. The policy behind the
federal securities laws cannot be fulfilled because parties are not protected
and confidence is not created. 189. Seagoing Uniform Corp. v. Texaco, Inc., 705 F.
Supp.
918, 920-24 (S.D.N.Y. 1989). The test for the application of res judicata is:
(1) whether rights established in prior action would be destroyed or impaired by
prosecution of second action, (2) whether substantially the same evidence is
presented in the second action, (3) whether the two suits involved infringement
of the same right, and (4) whether the two suits arose out of the same facts.
Id. 190. Greenblatt
v. Drexel Burnham Lambert, Inc., 763 F.2d 1352, 1360 (11th Cir. 1985) (citing
Deweese v. Town of Palm Beach, 688 F.2d 731, 733 (11th Cir. 1982)). Collateral
estoppel is invoked when the (1) issue at stake is identical to one in
preceding litigation; (2) issue was actually litigated in preceding litigation;
and (3) issue was critical and necessary to prior judgment. Id. 191. For discussions of
the applicability of res judicata and collateral estoppel to prior securities
arbitration awards, seeSecurities Arbitration 1989, A Practitioners Guide to
Securities Arbitra tion 241-46 (1989); Durrer, supra note 2, at 353-54 n.101;
C. Edward Fletcher III, Learning to Live With the Federal Arbitration Act,
Securities Litigation in a Post-McMahon World , 37 Emory L.J. 99, 116-22 (1988);
C. Edward Fletcher III, Privatizing Securities Disputes Through the Enforcement
of Arbitration Agreements , 71 Minn. L. Rev. 393, 431-35 (1987); Shell, supra
note 177, at 639-75; Willingham, supra note 12, at 427-32. 192.
See Maidman v. O ' Brien, 473 F. Supp. 25, 30-34 (S.D.N.Y. 1979) (holding that
arbitrator ' s decision collaterally estopped court from hearing investor ' s
allegations of violations of federal securities laws and libel); James L.
Saphier Agency v. Green, 190 F. Supp. 713, 718-21 (S.D.N.Y.) (concluding that
arbitrator ' s decision was res judicata and plaintiff was collaterally estopped
from relitigating issues), aff ' d , 293 F.2d 769, 774 (2d Cir. 1961). For a
discussion of these and other issues, seePrivatizing Securities Disputes ,
supra note 191, at 432. 193. See Greenblatt v. Drexel
Burnham Lambert, Inc., 763 F.2d 1352, 1360 (11th Cir. 1985) (stating that res
judicata can apply to arbitra tion awards); Shell, supra note 177, at 641 &
n.93 (stating that courts have long understood that arbitration decisions can
have res judicata effect) (citing New York Lumber & Wood-Working v.
Schneider, 24 N.E. 4 (1890) and Brazil v. Isham, 12 N.Y. 9 (1854)); see also
Restatement (Second) of Judgments § 84 (1982) providing that 194. Restatement
(Second) of Judgments § 84 (1982). 195. See Tamari
v. Bache & Co., 637 F. Supp. 1333, 1336-37 (N.D. Ill. 1986) (refusing to
invoke collateral estoppel because one-line award did not reveal whether
defendant or affiliated company, who was not party, had committed alleged
wrongs); Ufheil Constr. Co. v. Town of New Windsor, 478 F. Supp. 766, 768-69
(S.D.N.Y 1979) (refusing to apply collateral estoppel to any of alleged breaches
of construction contract because court could not determine which provisions had
formed basis for arbitration award because arbitrators did not state which
provisions had been breached), aff ' d , 636 F.2d 1204 (1980); see also Dean
Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 222 (1985) (stating that " it
is far from certain that arbitration proceedings will have any preclusive effect
on the litigation of nonarbitrable federal claims " ). The doubt regarding
the preclusive effect of arbitration may require some reformulating in light of
more recent Supreme Court cases. See Rodriguez de Quijas v. Shearson/American
Express, Inc., 490 U.S. 477, 481-82 (1989) (holding that because Arbitration Act
favors arbitration, courts are required to " rigorously enforce "
pre-dispute agreements); Shearson/American Express Inc. v. McMahon, 482 U.S.
220, 227-38 (1987) (enforcing arbitration agreement under Securities Act and
stating that courts are not required to resolve such claims). Collectively,
these cases not only signaled the end of most judicial due process litigation of
securities disputes but they also negated the arguments raised against res
judicata and collateral estoppel in arbitration. Much of the debate about res
judicata and collateral estoppel in arbitration dealt with a bigger underlying
issue — the denial of parties ' right to redress their grievances in the
court system. See Wilko v. Swann, 346 U.S. 427, 436 (1953) (holding parties
could not be forced to waive their right to judicial proceeding prior to
dispute), overruled by Rodriguez de Quijas v. Shearson/American Express, Inc.,
490 U.S. 477 (1989). The due process question was raised in Wilko because
arbitration lacked many judicial safe guards. But now that the Supreme Court
has held that arbitration is an adequate method of resolving securities disputes
and demanded that all predispute arbitration agreements be enforced, see
Rodriguez de Quijas , 490 U.S. at 485-86, almost every broker/dealer dispute
will be handled in arbitration. See supra note 71 (arguing that the
combination of McMahon and Rodriguez decisions will direct all claims arising
out of predispute arbitration agreements to arbitration). Thus, the underlying
arguments raised against applying res judicata and collateral estoppel to
arbitration decisions seem to have lost weight. As a result, this change in
attitude may cause arbitration awards to have greater preclusive effect. 196. It is wasteful for
participants to adjudicate the same issue twice simply because it is in a
different forum. For a discussion of collateral estoppel, See supra note 191. 197. Resources wasted
include the litigants ' and the taxpayers ' money used to operate the courts.
Seegenerally National Ass ' n of Securities Dealers, Securities Regulation in
the United States (1992) (addressing costs included in arbitration). 198. One of the
attractive features of arbitration is that time is saved without sacrificing
finality. See NASD Rules § 41(b) (stating that " all awards
ordered pursuant to this code shall be deemed final and not subject to review or
appeal " ). If arbitration is merely duplicated, the result would be an
increase in time and money. Inevitably, arbitration without finality offers
less advantages for participants. 199. 654 F. Supp. 347 (N.D. Ill. 1987). 200. O ' Neil v. Merrill Lynch, Pierce, Fenner &
Smith, 654 F. Supp. 347, 352-53 (N.D. Ill. 1987). 201. See supra note 195 (discussing
cases where
courts refused to apply collateral estoppel when arbitrators had not issued
written deci sions). 202.
Willingham, supra note 12, at 432. 203. See NASD Rules §
41(b) (stating that " all awards rendered pursuant to this code shall be
deemed final and not subject to review or appeal " ). 204. See supra note 92 (arguing that
efficiency will be reduced with
statement of reasons). 205. See infra note 237 (discussing idea
that written
opinions will discourage arbitrators). 206. See infra note 255 (stating that
confidentiality of arbitration may be compromised with written opinion). 207. See supra note 116 (suggesting that
typical broker
disputes involve simple factual issues for which written opinion is
unnecessary). 208. See supra notes 2-9 and
accompanying text (discussing
policy behind federal securities laws). 209. See supra
note 92 (discussing proposition that efficiency of arbitration will suffer if
statement of reasons is required). 210. See supra notes 11-13 and
accompanying
text (stating intent that arbitration be efficient alternative to courts). 211.
See supra note 92 (discussing notion that money and time will be wasted if
statement of reasons is required). 212. San Martine Compania
de Navegacion, S.A. v. Saguenay Termi nals Ltd., 293 F.2d 796, 800 (9th Cir.
1961) (citing Burchell v. Marsh, 58 U.S. (17 How.) 344, 349 (1854)); see also
Arbitration Reform Hearings , supra note 12, at 100 (statement of Theodore A.
Krebsbach) (arguing that unlimited appeals would allow parties to unilaterally
extend proceed ings). 213. See In re Sobel, 469 F.2d 1211, 1214
(2d Cir. 1972) (commenting on lack of legal precision inherent in arbitration);
Arbitration Reform Hearings , supra note 12, at 53 (statement of Theodore G.
Eppenstein) (arguing that arbitration benefits must be balanced against loss of
constitutional rights to due process; trial by jury; finding of facts and
conclusions of law; federal pleading, discovery, and evidentiary rules; risk of
collateral estoppel; and appeal). 214. See Deborah
B. Oliver, Arbitration of Securities Claims: Policy Considerations for Keeping
Investor-Broker Disputes Out of Court , 1987 Colum. Bus. L. Rev. 527, 541-46
(1987) (discussing investors ' vulnerability to brokers ' overreaching). There
is some evidence demonstrating that investors do not voluntarily choose to
arbitrate but instead are compelled to arbitrate by predispute agreements, a
reflection of the securities industry personnel ' s bargaining power. Id.
215. See Arbitration Reform Hearings,
supra note 12, at
83-84 (statement of Theodore A. Krebsbach) (noting that arbitration ' s
advantages over litigation include lower costs, speed, and efficient management
of litigation ' s elements). 216. This assumes that written opinions serve only as a
procedural
safeguard. See infra text accompanying notes 278- 94 (discussing idea that
written opinions promote policy behind securities laws). 218. Prima
Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 407 (1967) (Black,
J., dissenting); Arbitration Reform Hearings , supra note 12, at 99 (statement
of Theodore A. Krebsbach); Shell, supra note 177, at 631. 219.
Wallace, supra note 115, at 1248. 220. Hermann, supra note 124, at 715;
Arbitration
Reform Hearings , supra note 12, at 53-54 (statement of Theodore G.
Eppenstein). 221. See Stewart E. Sterk, Enforceability of
Agreements
to Arbitrate: An Examination of the Public Policy Defense , 2 Cardozo L. Rev.
481, 484-85 (1981) (arguing that requiring written opinions would result in loss
of arbitration ' s advantages). 222. See infra notes 224-30 and
accompanying text (arguing that
written opinions would improve investor confidence without increasing time or
money). 223. See infra notes 232-36 and
accompanying text (arguing
that finality of arbitration will not be altered with written opinion). 225. In Stroh Container Co. v. Delphi
Indus., Inc., 783 F.2d 743 (8th Cir.), cert. denied , 476 U.S. 1141 (1986),
Chief Judge Lay argued that despite the historical reputation of arbitration as
a simple, inexpen sive, and expeditious means of dispute resolution, parties
resorting to arbitration are discovering not only that the process is complex,
expensive, and time consuming, but that the results are much different than the
" fairer " results achieved in court. Id. at 751 n.12. These "
private and untrained `judges, ' " he argued, are unable to apply the law
appropriately. Id. Justice Blackmun also recently questioned the efficiency
of arbitration in his dissent in McMahon , arguing that arbitration ' s
effectiveness has not improved since the days of Wilko v. Swan .
Shearson/American Express Inc. v. McMahon, 482 U.S. 220, 259 (1987) (Blackmun,
J., dissenting) (noticing that as in the days of Wilko , written opinions and
records are not required, arbitrators are not bound by precedent, and judicial
review remains severely limited); see also Note, Arbitrability of Claims
Arising under the Securities Exchange Act of 1934 , 1986 Duke L.J. 548, 552-54
(comparing arbitration ' s reduced evidentiary rules, substantive differences,
lack of discovery rules, and limited judicial review with those of courts). 226. SEC Head
to Chair Task Force , supra note 82; Khalfani, supra note 84, at A5A. 227. For
a comparison of costs and time efficiency of arbitration and litigation, see
Hermann, supra note 124, at 707 (discussing Delloitte, Haskins & Sells
survey performed per NYSE ' s request). Although arbitration remains less
costly than a full court hearing, it is hardly inexpensive. Essentially, the
Delloitte survey revealed that the average arbitration costs $8,000 as compared
to $20,000 for a court proceed ing. Id. Additionally, the average arbitration
takes 434 days as compared to 599 days for a court hearing. " While this
data does show a pronounced difference, one would expect arbitration, for all
its supposed `speed, ' to be even faster. " Id. 228. See supra note 10
(discussing typical arbitration as it proceeds to award). 229. See Robert S. Clemente, Securities
Arbitrator Training: Managing
the Arbitration Process 17-20 (New York Stock Exchange, 1992-94). Clemente
describes the deliberation procedure in his manual outlining the basic
principles of the arbitrator training process. Deliberations begin immediately
after the hearing is concluded. Id. at 18. Arbitrators are advised to speak
openly about their opinions of the issues and to consistently consider the
factual and legal arguments raised by the parties. Id. Once a decision is
reached by a majority of arbitrators, the award is prepared. Id. at 19.
230. See supra note 212 and
accompanying text (criticizing appellate
procedures because of likelihood that proceeding would be extend ed). 231. See supra notes
134-37 and accompanying text (discussing courts ' limited ability to review and
vacate arbitrators ' decisions). 232. NASD Rules § 41(b). 233. 9 U.S.C. § 10 (1994). 234. See supra note 136 and
accompanying text (noting courts ' deference to arbitration decisions). 235. See
supra notes 127-56 and accompanying text (discussing need for meaningful review
of arbitration decisions). Written opinions would enable courts to determine
effectively whether arbitrators were biased or committed fraud, mistake, or
other errors by having the relevant facts before them. Id. 236. See Zanglier, supra note 99, at 696
(noting SEC ' s
concern that requiring publication of reasons would " `discourage potential
arbitrators from serving ' " (quoting Securities Arbitration: McMahon,
Rodriquez, and Beyond , 22 Rev. Sec. & Comm. Reg. (S&P) No. 20, at 218
(Nov. 22, 1989))); see also SEC Order, supra note 101, at 21,151-52 (arguing
that benefits of requiring written opinions do not outweigh concerns about
slowing down arbitration process and discouraging arbitrators from serving). 237. SEC Order, supra note 101, at
21,151-52. 238. SEC Order, supra note 101, at
21,151. 239. See supra
notes 134-46 and accompanying text (discussing insulation of arbitration
decisions from judicial scrutiny due to limited availability of vacatur and
widespread deference by appellate courts). 240. See supra note 136 (citing cases
that note high degree of judicial
deference given to arbitration decisions). 241. Securities
Industry Conference on Arbitration (SICA), Arbitrator ' s Manual 32 (May 1992)
[hereinafter SICA Arbitrator ' s Manual ]. 242. SICA
Arbitrator ' s Manual , supra note 242. 243. SICA Arbitrator ' s Manual , supra note 242.
Bribery is an example of the type of misconduct for which arbitrators are held
responsible. See SICA Arbitrators Manual , supra note 242. 244. Shell, supra note 177, at 634. 245. Shell, supra note 177, at 634. 246. Shell, supra note 177, at
634. An example of a compromise award is one in which neither party wins.
Instead, the award appeases both parties by affording each some sort of
victory. 247. An arbitrator typically earns around $150 per day,
which is
often only $20 per hour. Interview with Egon Guttman, supra note 20. 248.See Shell, supra note 177, at 634 (suggesting that
some arbitrators may render compromise awards in order to preserve outside
business relationships). Since many arbitrators are themselves business people,
they may not want to find against a party that they do business with. In such a
situation, a compromise award may save the business relationship. 249. See SEC Order, supra note 101, at
21,151
(describing phenome non of arbitrators reaching consensus regarding damage award
before agreeing on grounds for award). 250. See supra notes 138-42 and
accompanying
text (discussing both grounds for which district court can vacate arbitration
award under Arbitration Act and judicially created manifest disregard
standard). 251. See
Shell, supra note 177, at 634 (suggesting that arbitrators who render
compromise awards may do so out of pecuniary interest). 252. SEC Staff
Suggests Arbitration Group Adopt Use of One-Page Award Statement , 20 Sec. Reg.
& L. Rep. (BNA) No. 15, at 559, 559 (Apr. 15, 1988). 253. See SICA Arbitrator ' s Manual ,
supra note 242, at 32-33
(detailing confidentiality of all aspects of arbitration). 254. SEC Staff Suggests Arbitration Group Adopt
Use of One-Page Award
Statement, supra note 252, at 559; see also Arbitration Reform Hearings ,
supra note 12, at 102 (statement of Theodore A. Krebsbach) (suggesting that
both claimants and respondents may object to public disclosure); SEC Order,
supra note 101, at 21,152 (reporting SEC ' s decision to preserve confidential
nature of arbitration hearings). 255. Such investors may be
blacklisted from the investment community because brokers may not want to open a
new account for a client with a reputation for being a complaining, fickle
investor. 256. See Wallace, supra note 115, at
1203
n.12. The following is an example of a typical predispute arbitration
agreement: 257. See supra Part II.B (discussing
recent amendments to arbitration
rules). 258. See supra Part II.B (discussing
recent amendments to arbitration
rules). 259. Rules Changed , supra note 107. For
large and complex disputes, the documents and award statement would be made
public. Id. Summary award statements will not be published but will be
readily available in individual SRO reference rooms. NYSE Proposes Highlight
ing Rights, Providing Summary Data on Arbitrations , 20 Sec. Reg. & L. Rep.
(BNA) No. 46, at 1783 (Nov. 25, 1988). 260. See Massengale, supra note 99, at
825 n.33 and
accompanying text (asserting that greater accountability is needed for
arbitrators and citing supporting journal articles). 261. See
Hermann, supra note 124, at 715 (arguing that written opinions would deter "
emotionally-driven equitable awards " ). 262. See 9 U.S.C. § 10 (1994); see
also supra notes 138-42 and accompanying text (examining court ' s ability to
vacate arbitration awards under manifest disregard standard). 263. See supra notes 140-42 and
accompanying text
(discussing manifest disregard standard and vacating awards). 264. See Arbitration Reform Hearings,
supra note 12,
at 99-100 (statement of Theodore A. Kresbach) (arguing that vast majority of
arbitrations involve factual determinations of whether broker defrauded
client). 265. See infra notes 283-94 and
accompanying text
(discussing additional benefits derived from requiring written opinions). 266. See supra note 116 and
accompanying text (discussing
simple, factual nature of most arbitrations). 267. Wallace, supra note 115, at 1248-49. 268. See Wallace,
supra note 115, at 1248-49 (noting effects of fewer technical pleading
requirements and more responsive approach to alleged broker misconduct); see
also Hermann, supra note 124, at 707 (arguing that investors benefit from less
formal nature of arbitration proceedings) (citing Hood, supra note 75, at 584).
But See infra note 288 (suggesting that investors may prevail but not to
extent they feel they are entitled to recover). 269. See supra note 116 and
accompanying text (noting that most arbitrations involve simple factual
situations); SEC Order, supra note 101, at 21,151-52 (arguing that requiring
written opinions would slow down arbitration process). 270. Interview with Egon Guttman, supra
note 20. See generally Margaret Pedrick Sullivan, Comment, The Scope of
Modern Arbitral Awards , 62 Tul. L. Rev. 1113 (1988). 271. Restatement (Second) of
Torts § 908(1) (1965). 272.
22 Am. Jur. 2d Damages § 731 (1988). 273. See Sullivan, supra note 270, at
1130 (noting lack
of uniformity among states regarding availability of punitive damages in
arbitral forum). Compare Garrity v. Lyle Stuart, Inc., 353 N.E.2d 793 (N.Y.
1976) (holding that arbitrator lacks authority to award punitive damages even
where agreed upon by parties) with Lee v. Chica, 983 F.2d 883 (8th Cir. 1993)
(maintaining that arbitrators may award punitive damages under federal law). 274. 115 S. Ct. 1212 (1995). 275. Mastrobuono
v. Shearson Lehman Hutton, Inc., 115 S. Ct. 1212, 1218 n.7 (1995). 276. Id.
at 1219. For a discussion of the ability of arbitrators to award punitive
damages under New York law prior to Mastrobuono , seeHood, supra note 75, at
579-81. 277. See supra notes 2-9 and
accompanying
text (discussing policy behind securities laws). 278. See
supra notes 110-16 and accompanying text (discussing in detail innovation for
large and complex disputes). 279. See supra notes 2-9 and
accompanying
text (discussing policy behind Securities Act and Exchange Act). 280.
See supra notes 2-9 and accompanying text (discussing policy behind Securities
Act and Exchange Act). 281. See supra notes 11-13 and
accompanying text (discussing
policy behind Arbitration Act). 282. Interview with Egon
Guttman, supra note 20. 283. The hypothetical was derived from a combination
of conversations with Egon Guttman and case law involving claims of
unsuitability. Interview with Egon Guttman, supra note 20; see, e.g. , Brown
v. E.F. Hutton Group, Inc., 991 F.2d 1020, 131-33 (2d Cir. 1993) (holding that
evidence could not support finding that limited partners have relied on Hutton '
s assurances of suitability); O ' Connor v. R.F. Lafferty & Co., 965 F.2d
893, 900 (10th Cir. 1992) (holding unsuitability claim not proven because no
basis to conclude broken intentionally or recklessly defrauded client); Franks
v. Cavanaugh, 711 F. Supp. 1186 (S.D.N.Y. 1989) (holding investor failed to show
that securities purchased were unsuitable). 284. See PaineWebber Incorporated Business
Trust/New
Account Form [hereinafter Business Trust/New Account Form] (on file with
The American University Law Review ). An investor must provide a broker with a
variety of information upon opening a new account at a brokerage firm. Such
information includes: general personal information, fiduciary information,
trading history, power of attorney, investment objectives, and net worth. Id. 285. Business Trust/New Account Form, supra note 284. 286. See Clark v. John
Lamula Investors, Inc., 583 F.2d 594, 600-01 (2d Cir. 1978). An investor has
three ways to pursue a claim of unsuitabil ity. Id. First, investors can
allege a violation of § 10(b) of the Exchange Act and Rule 10b-5
promulgated thereunder. Second, investors can claim a breach of fiduciary duty.
Third, investors can allege a violation of NYSE Rule 425, the " know your
customer " rule. Id. Under any of these options, the plaintiff must
prove: (1) that the security purchased was not suited to the buyer ' s
investment objectives, (2) that the defendant knew or reasonably should have
known that the security was unsuitable for the buyer, (3) that the defendant
nevertheless recommended or purchased the unsuited security, (4) that the
defendant acted with scienter, and (5) that the buyer reasonably relied on
defendant to its detriment. Id. 287.
For another illustration of the results of this phenomenon, see
Shearson/American Express Inc. v. McMahon, 482 U.S. 220, 261 n.20 (1987)
(Blackmun, J., dissenting) (suggesting that statistics showing that investors
are favored in arbitration are misleading because of failure to account for
damages received in relation to amount to which investors felt they were
entitled). 288. See Arbitration Reform Hearings ,
supra
note 12, at 64 (statement of Theodore G. Eppenstein) (suggesting that proposals
to enhance arbitration ' s fairness should be seriously considered because
public confidence in marketplace, along with American ideal that disputes should
be fairly handled, are at stake). 290. See supra
notes 186-87 and accompanying text (discussing potential loss of credibility in
securities industry). 291. Arbitration Reform Hearings , supra note
12, at 1
(statement of Hon. Edward J. Markey). This remark referred primarily to the
issuing of securities, not trading, which normally results in arbitration. Id.
In the context of this article, however, the overall message seems to apply to
trading securities as well. 292. Shearson/American Express Inc. v. McMahon, 482
U.S. 220, 260-61
(1987) (Blackmun, J., dissenting). 293. See Arbitration
Reform Hearings , supra note 12, at 1 (statement of Hon. Edward J. Markey)
(voicing concern that alienating individual investors will result in loss of
basic capital formation process necessary to U.S. economy). 294. See supra notes 287-94 and
accompanying text (discussing need for confidence in order to maintain integrity
of markets). 295. For a discussion of this issue, see
generally Lipton, supra note 177 (arguing that SROs must decide whether
arbitrators should use their legal or commercial judgment); Hermann, supra note
124, at 715-16 (discussing possibility of different standards employed by
different arbitrators, including business judgment and legal standards).
Whether arbitrators should follow a legal or commercial judgment standard,
however, is beyond the scope of this article. 296. See supra notes
127-56 and accompanying text (discussing concept of meaningful review). 297. See supra notes 275-76 and accompanying
text (discussing Mastrobuono v. Shearson
Lehman Hutton, Inc., 115 S. Ct. 1212 (1995), where Court held that arbitrators
may grant punitive damages even when state law says otherwise). 298. See supra notes 169-75 and
accompanying text (discussing need for uniformity
and predictability in decisionmaking). 299. See supra notes 183-88 and
accompanying text (arguing that published decisions are
necessary for common, uniform understand ing of securities laws). This would
enable arbitrators to incorporate changes into the federal securities laws for
the industry ' s benefit. Id. 300. See supra notes 110-23
and accompanying text (discussing various reforms to arbitration rules,
including some which facilitate exchange of information). 301. See supra notes 31-72 and
accompanying text (discussing courts' treatment of parties' contracts
relating to arbitration agreements). 302. See 15 U.S.C. § 78s(c) (1994)
(authorizing SEC to "
abrogate, add to, and delete from " SROs ' rules); Shearson/American
Express Inc. v. McMahon, 482 U.S. 220, 233-34 (1987) (noting broad authority of
SEC to oversee and regulate arbitration rules); Securities Regulation in the
United States, NASD 8-9 (1992) (detailing statutory source of SEC ' s rulemaking
power).
Arbitrators may not disregard the
law . . . . But since their failure to observe the law " would . . .
constitute grounds for vacating the award pursuant to . . . [the] Federal
Arbitration Act " . . . appropriate means for judicial scrutiny must be
implied, in the form of some record or opinion, however informal, whereby such
compliance will appear, or want of it will upset the award.
Sobel , 338 F. Supp.
at 293 n.18.(1)
Except as stated in Subsections (2), (3), and (4), a valid and final award by
arbitration has the same effects under the rules of res judicata, subject to the
same exceptions and qualifications, as a judgment of a court. (2) An award by
arbitration with respect to a claim does not preclude relitigation of the same
or a related claim based on the same transaction if a scheme of remedies permits
assertion of the second claim notwithstanding the award regarding the first
claim. (3) A determination of an issue in arbitration does not preclude
relitigation of that issue if: (a) According preclusive effect to
determination of the issue would be incompatible with a legal policy or
contractual provision that the tribunal in which the issue subsequently arises
be free to make an independent determination of the issue in question, or with a
purpose of the arbitration agreement that the arbitration be specially
expeditious; or (b) The procedure leading to the award lacked the elements of
adjudicatory procedure prescribed in § 83(2). (4) If the terms of an
agreement to arbitrate limit the binding effect of the award in another
adjudication or arbitration proceeding, the extent to which the award has
conclusive effect is determined in accordance with that limitation.
The undersigned agrees, and by carrying an account for the under
signed you agree, that except as inconsistent with the foregoing sentence, all
controversies which may arise between us concerning any transaction or the
construction, performance or breach of this or any other agreement between us,
whether entered into prior, on, or subsequent to the date hereof, shall be
determined by arbitration in accordance with the rules, then in effect, of the
National Association of Securities Dealers, Inc., the Board of Governors of the
New York Stock Exchange, Inc., or the Board of Governors of the American Stock
Exchange, Inc., as you may elect. If you do not make such election by
registered mail addressed to [the brokerage firm ' s legal and compliance
department in New York City], within five days after demand by [the brokerage
firm] that you make such election, then [the brokerage firm] may make such
election. Judgment upon any award rendered by the arbitrators may be entered in
any court having jurisdiction thereof.
Id. (emphasis in original).
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