Smith Barney Shearson, Inc. v. Boone

United States Court of Appeals,
Fifth Circuit.

Nos. 93-9174, 94-10031.

SMITH BARNEY SHEARSON, INC., Plaintiff-Appellant,

v.

Warren BOONE, Individually and as Trustee for Watercol Profit
Sharing Plan, dated 1/7/80, Defendant-Appellee.

SMITH BARNEY SHEARSON, INC., Plaintiff-Appellant,

v.

Scott G. SHERMAN, Defendant-Appellee.

March 20, 1995.

Appeal from the United States District Court for the Northern
District of Texas.

Before WISDOM, KING and DUHÉ, Circuit Judges.

WISDOM, Circuit Judge.

In this case, the plaintiff/appellant, Smith Barney Shearson,

Inc., a brokerage firm, sought to prevent two former customers, the

defendant/appellees, from arbitrating independent grievances before

the American Stock Exchange and the National Association of

Security Dealers, respectively. Smith Barney Shearson, Inc. filed

this action seeking a declaratory judgment stating that the

appellees' grievances are not subject to arbitration under the

existing customer agreements because they were filed late according

to the applicable arbitration rules of both associations. The

district court denied Smith Barney Shearson, Inc. the relief it

sought because it determined that the issue of timeliness was a

question for the arbitrator, 838 F.Supp. 1156. Because we agree

1
with the reasoning of the district court, we AFFIRM.

I.

A. Smith Barney Shearson, Inc. v. Boone

In August 1993, Boone, one of two defendant/appellees in this

action, filed a claim against Smith Barney Shearson (SBS), the

plaintiff/appellant, with the American Stock Exchange (AMEX)

seeking arbitration of several grievances pursuant to the Customer

Agreement entered between SBS and Boone.1 In his Statement of

Claims, Boone alleges causes of action for breach of contract,

negligence, breach of fiduciary duty, common law fraud, as well as

causes of action under the Texas Deceptive Trade Practices and

Consumer Protection Act and RICO. All of the claims relate to a

series of investments made by Boone between 1984 and 1986 on the

advice of his broker at SBS.

In response to Boone's request for arbitration, SBS filed this

action seeking a preliminary injunction and a declaratory judgment

to prevent Boone from pursuing his grievances before AMEX. SBS

alleged that Boone's claims are barred because they were filed more

than six years after the last investment in violation of AMEX rule

605. Rule 605 provides:

No dispute, claim or controversy shall be eligible for

1
The Customer Agreement provided that:

any controversy arising out of or relating to my
accounts, to transactions with you for me or to this
agreement or the breach thereof, shall be settled by
arbitration in accordance with the rules then in
effect, of the National Association of Security
Dealers, Inc. and/or the American Stock Exchange, Inc.
as I may elect.

2
 submission to arbitration in any instance where six (6) years
shall have elapsed from the occurrence or event giving rise to
the act or the dispute, claim or controversy.

SBS alleged in the district court, and continues to allege here,

that Rule 605 is a prerequisite to the arbitrator's jurisdiction.

According to SBS, since more than six years passed before Boone

filed his grievance, AMEX lacks jurisdiction to resolve the

controversy and SBS cannot be compelled to arbitrate.

The district court refused SBS any relief, holding that under

established Fifth Circuit Court precedent, the timeliness question

should be decided by the arbitrator and not by a federal court.

Once the district court determined that the parties had obligated

themselves to resolve disputes by arbitration " "procedural'

questions which grow out of the dispute and bear on its final

disposition should be left to the arbitrator."2 SBS currently

appeals the district court's decision.

B. Smith Barney Shearson v. Sherman

In November of 1993, Sherman, the second of two

defendant/appellees in this action, filed a complaint with the

National Association of Securities Dealers (NASD) seeking

arbitration of several claims against SBS. Like Boone, Sherman was

a former customer of SBS who had entered into the same Customer

Agreement which provided that all disputes would be resolved

through arbitration. Sherman asserted several causes of action

including breach of fiduciary duty, negligent misrepresentation,

2
Amended Memorandum Opinion and Order Denying Smith Barney
Shearson's Complaint for Declaratory Judgment and Motion for
Preliminary Injunction at 5 (citations omitted).

3
statutory fraud under the Texas Commercial Code, violation of NASD

Rules of Fair Practice, and a cause of action under the Texas

Deceptive Practices Act. The asserted causes of action center

around several purchases of limited partnerships in late 1986. SBS

filed a complaint similar to the complaint filed in Boone, seeking

a preliminary injunction and a declaratory judgment to prevent

Sherman from pursuing arbitration because his complaint was filed

more then six years after his last purchase. The relevant NASD

section, section 15, provides:

No dispute, claim or controversy shall be eligible for
arbitration where six (6) years have elapsed from the
occurrence or event giving rise to the act or dispute, claim
or controversy.

The district court, in reliance on its recent opinion in

Boone, refused SBS any relief and dismissed its complaint. SBS, as

in Boone, appeals that decision. These two cases have been

consolidated for appeal.

II.

The key issue in this appeal is whether a federal court or an

arbitrator should rule on the eligibility of the defendants'

arbitration claims under AMEX Rule 605 and NASD code section 15.

In AT & T Technologies v. Communication Workers3 the Supreme Court

reaffirmed the basic principle outlined in its earlier decisions

that "arbitration is a matter of contract and a party cannot be

required to submit to arbitration any dispute which he has not

3
475 U.S. 643 (1985).

4
agreed so to submit."4 Since a party may only be compelled to

arbitrate an issue he has previously agreed to arbitrate, a forum

in which to identify these issues is needed. The Supreme Court

decided that the appropriate forum is a court and not the

arbitrator. Thus, the "question of arbitrability" is a judicial

one.5 The arbitrator is not allowed to determine his or her own

jurisdiction. However, the reviewing power of a court is limited.

The court may only determine whether the parties intended the

particular issue to be resolved by arbitration, the court cannot

"rule on the potential merits of the underlying claim."6 Thus, in

this case, our role is to determine whether, on its face, the

agreement to arbitrate includes the asserted causes of action. If

there are any doubts, they are to be resolved in favor of

arbitration.7

SBS, however, asks more of us. It alleges that rule 605 and

section 15 are substantive "eligibility requirements" which must be

considered by the courts before SBS is required to submit to

arbitration. In reliance on its interpretation of AT & T

Technologies and caselaw from other circuit courts, SBS argues that

part of this Court's role in the initial review of arbitrability is

to determine whether Rule 605 and section 15 would bar the causes

4
Id. at 648, 106 S.Ct. at 1418 (quoting Steelworkers v.
Warrior & Gulf Navigation Co., 363 U.S. 574, 80 S.Ct. 1347, 4
L.Ed.2d 1409 (1960)).
5
Id. at 649, 106 S.Ct. at 1418.
6
Id. at 649, 106 S.Ct. at 1419.
7
Id. at 650, 106 S.Ct. at 1419.

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of action asserted by the defendants. If they do, SBS argues that

it is this Court's responsibility to enjoin defendants from

pursuing their arbitration claims because they are "ineligible for

arbitration." The crucial distinction, as identified by the

district court, is whether the time bars are considered issues of

"substantive arbitrability" relating to whether the parties agreed

to arbitrate these issues, or, whether the rules present issues of

"procedural arbitrability" relating to the procedures of

arbitration agreed upon.

As noted by the district court, SBS relies on several opinions

of the Third, Sixth, and Seventh Circuit Courts which analyze the

AMEX and NASD rules, as SBS does, as eligibility requirements or

prerequisites to arbitrability.8 This Court, however, must focus

its attention on the treatment it has given these types of

provisions.

In Local No. 406 v. The Austin Co., this Court reversed a

decision by the district court granting a motion for summary

judgment based on the untimeliness of grievances filed by the union

seeking arbitration.9 The district court found that the union's

grievances had not been filed within thirty days, as required by

the collective bargaining agreement.10 Rather than reviewing the

8
The best example is Edward D. Jones v. Sorrells, 957 F.2d
509 (7th Cir.1992); see also, Paine Webber v. Hartmann, 921 F.2d
507 (3rd Cir.1990); Paine Webber v. Hofman, 984 F.2d 1372 (3rd
Cir.1993); Roney v. Kassab, 981 F.2d 894 (6th Cir.1992).
9
784 F.2d 1262 (5th Cir.1986).
10
Id. at 1264.

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district court's decision, however, we questioned whether the

district court should have decided that issue or should have left

it to the arbitrator.

This Court, in reliance on the Supreme Court's decision in

John Wiley & Sons v. Livingston,11 reversed the district court's

decision and held that it was the arbitrator's role to determine

whether the proper arbitration procedures had been followed.12 We

held that "a question of timeliness is generally to be considered

one of procedural arbitrability".13 As a procedural issue, Supreme

Court precedent requires that it be decided by the arbitrator. The

district court's only role should have been to determine whether

the subject matter of the dispute was subject to arbitration under

the parties' agreement.14

Our decision in Local 4-447 v. Chevron Chemical Company is

also relevant.15 In Local 4-447, Chevron, in opposition to a motion

seeking to compel Chevron to arbitrate, contended that one of the

11
376 U.S. 543, 84 S.Ct. 909, 11 L.Ed.2d 898 (1964). This
case is a forerunner of the Supreme Court's more recent decision
in AT & T Technologies.
12
Id. at 1264-65.
13
Id. at 1264.
14
Id. at 1265.
15
815 F.2d 338 (5th Cir.1987); see also Alabama Power
Company v. Local Union No. 391, 612 F.2d 960 (5th Cir.1980);
Commerce Park v. Mardian Construction Co., 729 F.2d 334 (5th
Cir.1984). For an application of this Court's rule that
timeliness is a question of procedural arbitrability, see United
Food and Commercial Worker's Union v. Delta Catfish Processors,
Inc., 767 F.Supp. 798, 800 (N.D.Miss.1991); Sabine Independent
Seagoing Officers Assoc. v. Sabine Towing Transportation Co., 805
F.Supp. 430, 433 (E.D.Tex.1992).

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Union's grievances under the collective bargaining agreement had

not been submitted to arbitration in a timely fashion.16 The

relevant provision in the agreement provided that "[o]nly

grievances ... which are processed ... within the time limits

herein provided shall be subject to arbitration...."17 Chevron

argued that because of this express exclusion, the grievance which

was allegedly filed late was not subject to arbitration under the

agreement. In other words, the parties had agreed only to

arbitrate grievances filed in a timely fashion and, therefore, it

was within the court's reviewing power under AT & T Technologies to

determine that this grievance was not subject to arbitration.

We disagreed and held that the issue of timeliness was within

the arbitrator's jurisdiction.18 The only exception to this general

rule was "that a court "could deny arbitration only if it could

confidently be said not only that a claim was strictly procedural,

... but also that it should operate to bar arbitration altogether

...' "19 Chevron attempted to place itself in this rare category of

cases but failed. We held that since there was some dispute as to

the timing of the filing of the grievance at issue, the substantive

claims were arbitrable and the procedural issue of timeliness

16
Id. at 339.
17
Id. at 339.
18
Id. at 340.
19
Id. at 341 (quoting John Wiley & Sons, Inc. v. Livingston,
376 U.S. 543, 84 S.Ct. 909, 11 L.Ed.2d 898 (1964)).

8
should be decided by the arbitrator.20

Applying these concepts to the case before us, the question is

whether the parties originally intended their claims to be subject

to arbitration. If we answer positively, unless we find that the

time bars cited by SBS will absolutely bar arbitration, we must

deny SBS the declaratory judgment it seeks. From the broad

language of the Customer Agreements it is clear that both SBS and

the defendants intended to have "any controversy" arising between

them resolved through arbitration. And while SBS's view that the

time bars are prerequisites to the arbitrator's jurisdiction has

some support, similar provisions have not been so interpreted by

this Court. Rather, this Court has characterized them as part of

the procedural requirements to arbitration and, as such, they are

decision of the arbitrator. We hold, therefore, that the

timeliness issues raised in this case are issues of procedural

arbitrability and must be decided by the arbitrator.

This case does not fall into the narrow exception articulated

in Chevron because there is some dispute as to the effect of the

time bars. First, there is a some controversy as to when the last

act or occurrence giving rise to the claims of Boone and Sherman

took place. SBS contends that the last act was the last purchase

by each customer, both of which took place over six years before

filing. The defendants, however, allege that SBS continued to act

fraudulently after the last purchases were made and within six

years of the filing of the arbitration complaint. Furthermore, as

20
Id. at 342.

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to Sherman's alleged causes of action, the defendants contend that

SBS cannot now oppose arbitration under the doctrine of judicial

estoppel since SBS succeeded in staying an action by Sherman in

Texas state court based on the compelled arbitration in the

Customer Agreement.21 Finally, both Boone and Sherman argue that

the time bars should be tolled since SBS engaged in fraudulent

conduct which prevented the defendants from learning several

important facts until after the six year post-purchase date. Thus,

there is substantial controversy over whether the time bars will

act to bar the causes of action asserted by the defendants. This

Court cannot, under the narrow exception articulated in Chevron,

prevent arbitration.

III.

The district court appropriately decided that the grievances

raised by the defendants are subject to arbitration under the

Customer Agreements. Furthermore, the district court appropriately

declined to decide the procedural issue of timeliness which, under

Supreme Court and Fifth Circuit Court precedent, is a question for

the arbitrator. Accordingly, the decisions of the district court

in this consolidated appeal are AFFIRMED.

21
Sherman also contends that the abatement by the Texas
state court was actually an order to arbitrate the claims which
would allow Sherman to by-pass NASD code section 15. The
district court, however, correctly characterized the abatement as
a stay pending arbitration rather than a specific order to
arbitrate.

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