MERRILL LYNCH, PIERCE, FENNER & SMITH v. WARE
Legal provision: Securities Act of 1933, the Securities and Exchange Act of 1934, or the Williams Act
Argument of Joseph C. Barton
Chief Justice Warren E. Burger: Mr. Barton, you may continue, you have 15 minutes left.
Mr. Joseph C. Barton: Mr. Chief Justice, may it please the court.
I believe at the conclusion of yesterday's session, the Court had addressed itself to the 6 (c) argument concerning the application of state law.
In that connection, I would like to point out to the Court that the Securities and Exchange Commission in their amicus brief files in the osmosis of the Solicitor General considered that very argument made by the petitioner, and stated on Page 9 of its brief that there is no basis for suggesting that Rule 347 (b) was required to implement the literal language of the act or any commission rule.
It further concluded that the application of California law was proper in this case and urged affirmance of the California court decision.
I would like to point out regarding Section 6 (c) that it specifically provides that any rule enacted by any exchange must conform to the the rules and regulations of the Securities Exchange Act as well as the rules and regulations of the Securities and Exchange Commission and that this Court has held in Silver v. New York Stock Exchange that the rule of an exchange may be judicially invalidated as being beyond the great purposes of the Securities Exchange Act.
I submit that rule, that 28 (c) and Rule 347 (b) as adopted by the New York Stock Exchange is a stipulation, that's in the meaning of Section 78 CCA of the Act and is void by reason there of.
Moreover, it is inconsistent with the grant of judicial authority that Congress gave the courts in Section 27 of the Act which would be 15 U.S.C. 78aa and that provides that the District Courts of the United States shall have exclusive jurisdiction of violations of this chapter with the rules and regulations they are under.
In addition, Rule 347 (b) is inconsistent with the provisions of the Federal Arbitration Act, since admittedly, it is an agreement which concerns interstate commerce and which is a part of the employment contract.
As this Court noted in the Prima Paint decision, the Federal Arbitration Act was not meant to apply to contracts of employment between parties of an equal bargaining strength.
Justice Black in his dissenting opinion in that case spelled out the legislative intent behind the Federal Arbitration Act, and that was that it was not meant to apply to contracts of employment.
Now both this Court and Silver and the Senate Subcommittee, the Securities -- the Subcommittee on Securities in its extensive analysis of the functioning of the New York Stock Exchange concluded that judicial review was necessary regarding the self regulatory powers of the New York Stock Exchange.
I would like to observe at this point that it is not the New York Stock Exchange which is a party to this lawsuit but rather a private corporation that came into existence by virtue of state law and that Merrill Lynch, like being a member of the0 New York Stock Exchange is also a member of the Pacific Coast Stock Exchange which is physically located in California.
Now if Congress meant physical location in Section 6 c, it would lead to disunity in decision because there are many stock exchanges located throughout the country which are not in New York and that would give a stock exchange moreover, the opportunity to physically locate itself in a state whose laws are favorable to its policies and thereby effectively emasculate the laws of 49 other states.
Justice William H. Rehnquist: You are suggesting then that if Pacific Coast Exchange had a rule like the New York Stock Exchange does, it could not enforce it under Merrill Lynch's theory because it is physically located in California?
Mr. Joseph C. Barton: Yes, I submit that would be correct under one rationale.
I believe that Congress intended, by location to mean the application of those laws of a state which have significant interest in the case, such as California in this case.
Unknown Speaker: The Pacific Stock Exchange had any rules touching this area of relationship between a termination of employment of a registered customers plan or employer?
Mr. Joseph C. Barton: Your Honor, the Pacific Coast Stock Exchange does have rules concerning arbitration which are very similar to Article 8, Section 1 of the New York Stock Exchange Constitution which provides in essence that a member, Merrill Lynch in this case cannot compel beyond member to arbitrate.
That choice is given to the non-member, if he willingly wishes to invoke arbitration and the rationale behind that distinction is that obviously Merrill Lynch has voice in the exchange rules which an employee does not have, so they do not have equal bargaining strength.
So they give the non-number the option to request arbitration.
Unknown Speaker: Do you think the Federal Court should order arbitration in a case like is now before us if the employee demands it?
Mr. Joseph C. Barton: If the employee demands it?
Unknown Speaker: Under California law?
Mr. Joseph C. Barton: Excuse me, Your Honor.
Unknown Speaker: Under California law?
Mr. Joseph C. Barton: Yes, I think that if the employee demands it that would be an exception.
The application would be--
Unknown Speaker: It would be a waiver, I suppose, of the California law?
Mr. Joseph C. Barton: Section 229 of the California Labor Code.
Yes, Your Honor.
Chief Justice Warren E. Burger: You have no difficulty with this waving and provision that was made for his benefit in this context of employer-employee relationship?
Mr. Joseph C. Barton: Is Your Honor referring to the arbitration process?
Chief Justice Warren E. Burger: Yes.
Mr. Joseph C. Barton: Well, Your Honor, it is not my opinion that the arbitration clause of the rule was made for the benefit the employee but rather to benefit the members of the New York Stock Exchange because the employee would be compelled to arbitrate before what I consider a less than impartial panel.
Chief Justice Warren E. Burger: Are you speaking of the California law that you were engaged in the colloquy talk with Mr. Justice Stewart waiving the benefits of the California's statute?
You have no difficulty with this waiving that?
Mr. Joseph C. Barton: Yes, Well, Your Honor.
When there is a -- I was to say, a body of decision that indicates that an individual may not waive a law inactive for his benefit, that represents public policy.
I would say that the California courts would have to consider in a factual context whether or not --.
Chief Justice Warren E. Burger: Then I misunderstood you because I thought you told Justice Stewart in response to his question that he could waive it?
Mr. Joseph C. Barton: Well, the employee could waive it, Your Honor, but whether the California courts would recognize that waiver is a different question.
And I should also point out that Rule 347 (b) does conflict.
Unknown Speaker: Well, I don't follow that.
If I understand, if I read Section 29 correctly, what it says is that the individual may maintain an action without regard to the existence of any file being arbitrated.
However, the employee didn't bother bringing an action, but rather submitted the arbitration with probably the California courts have ever get to?
Mr. Joseph C. Barton: In that context, Your Honor, they would not, unless the employer moves the court to compel that the matter not be arbitrated but go to court.
Chief Justice Warren E. Burger: Each of the arbitration was completed, the employee might be then making collateral attack or other attack on the arbitration plan?
Mr. Joseph C. Barton: That is not permitted under California law, Your Honor.
It is the --.
Chief Justice Warren E. Burger: Well, we said we could not get there in any other way, it might get there if he brought section accurate in the court?
Mr. Joseph C. Barton: Correct Your Honor.
If the employees submitted to arbitration, and the employer rejected that request, the employer would then be in the position of going to court to avoid arbitration, the issue that would arise in that context, and I guess it could also rise in the context where both parties have submitted the arbitration and then after the arbitration, a word was made the employee being dissatisfied with it, would petition the courts.
But under that circumstance, Your Honor, the Californian courts would not consider that objection as I understand existing California law.
I should also --.
Unknown Speaker: Once, once he voluntarily goes to arbitrations, he can't take advantage of 229 rather?
Mr. Joseph C. Barton: That's correct, Your Honor.
He is bound, by since 229, as the states on this space is not compulsory.
It does not say must.
Unknown Speaker: It may be maintained.
Mr. Joseph C. Barton: Yes.
Unknown Speaker: Without regard to current requirement.
Justice William H. Rehnquist: Mr Barton, is this motion to arbitrate that the petitioner filed in response to your complaint in the superior court, is that an independent proceeding under California law or is it just a part of the defense raised to your claim for wages?
Mr. Joseph C. Barton: Your Honor, under California law it could be either an independent action or it could be part of a lawsuit.
There are situations arising under California law where you may go in the court on just a petition to arbitrate.
Justice William H. Rehnquist: But that wasn't what happened.
Mr. Joseph C. Barton: That is not what happened.
Justice William H. Rehnquist: And actually the decision of the Court of Appeal isn't a final disposition of this case, is it?
Mr. Joseph C. Barton: Well, Your Honor under California law it isn't.
It established the law of the cases for the legality of the forfeiture provision.
That is the Court of Appeals indicated there are other issues that remain to be decided by the Trial court.
Justice William H. Rehnquist: And if the California Court of Appeal disposition were followed here, the case would go back to the superior Court for Trial to the Court on your client's compliant.
Mr. Joseph C. Barton: That's correct, Your Honor.
However, in all fairness, I should note that if the court consider arbitration to be an outcome determinative, as was indicated in the Bernhard decision, then that part of the California decision would be final.
I should also like to know Your Honor that if I understood counsel's opening argument, he indicated that the profit-sharing plan by virtue of Article 18.1, which is noted at page 41 Appendix, specifically stated the profit-sharing plan was not to be construed as part of the employment contract, and I submit under that theory then Rule 347(b) would have no application in this case, because it specifically relates to employment disputes.
And by the functioning of Article 18.1, it would be excluded from the application of Rule 347(b).
Now concerning Counsel's statement that respondents -- some have been guilty of forum shopping, I submit that is not accurate.
Now each and every respondent is a citizen or resident of the state of California.
All they have done is petitioned their own state courts or decision regarding this dispute.
They have not sought to go outside their home state, for example Nevada or Wyoming to forum shop.
This is not a case of forum shopping.
Now the policy of California is spelled out in several cases.
California courts deemed in a matter of important strong public policy considering the right of the wager into to all lawfully approved wages.
In this context, I would like to note that although technically Merrill Lynch made all contributions to the profit-sharing plans, those contributions evolved because of the work and labor of the employees, who contributed to the profit of Merrill Lynch, and it is no different than Merrill Lynch writing out a check to Mr, Ware or any other respondent for their weekly wages because profit-sharing even as interpreted by Federal Court, results because of a man's labor and is not construed as a gift.
Now, the concern of the Courts to avoid forfeitures has manifested I think most recently by the action of the senate in adopting and passing HR4200, which is the private pension plan will, and that states no unequivocal terms that to qualify under the Internal Revenue Code, a pension may not contain a forfeiture provision.
It also provides that an individual works and is given retirement benefits can carry those benefits from employer to employee, excuse me to employer.
Now this is more or less a parallel to profit-sharing, it shows the great concern not only in the state courts but in Congress that may not be deprived of his lawfully approved benefits and that he be paid them.
Now I submit --
Unknown Speaker: You still would have a stronger case, if it were a contributory plan, wouldn't you?
Mr. Joseph C. Barton: Well, Your Honor that's really kind of theoretical question, because if David Ware and the rest of the respondents didn't work and contribute to Merrill Lynch's profit they wouldn't get paid anything.
Unknown Speaker: Well, Merrill Lynch probably views, this is a gratuity on their part, it's something that deals with loyalty or two sides to the issues.
Mr. Joseph C. Barton: That's correct, I would agree to that Your Honor.
I don't make that distinction though between --
Unknown Speaker: Well, in any event, that really goes to the merits of what would be tried in a court.
if you are correct or tried by an arbitrator, if your brother on the other side is correct.
There is no question, but isn't it conceded that these are wages and that's what the statute says --
Mr. Joseph C. Barton: That's correct.
Petitioner concedes that.
Unknown Speaker: I don't think there was any question.
Mr. Joseph C. Barton: There isn't.
Chief Justice Warren E. Burger: In the Trial on the merits, what is your idea of scope of the issues that will be covered, will they include for example, any claim that there was a breach of the fiduciary duty, is that open?
Mr. Joseph C. Barton: Your Honor, I believe that Merrill Lynch will make such a claim.
Chief Justice Warren E. Burger: That's open to be tried out there.
Mr. Joseph C. Barton: Yes, if there is a breach of a fiduciary duty.
Chief Justice Warren E. Burger: Taking customer's lists and that sort of thing.
If they can establish --.
Mr. Joseph C. Barton: That's correct, as against each individual employee or former employee.
That would be one of the issues that I believe the Court of Appeals in California left open.
So obviously Merrill Lynch's rights are not prejudiced by having trial.
One trial I should note Your Honor that would include everyone in the class and to decide at one time and for all time, what the respective rights of the parties are.
Now on the opposite side of the coin, we have Merrill Lynch suggesting that it would be more efficient and effective to have 90, 100 or more separate arbitration hearings to decide each case individually, and as the court knows there is no principle such as stare decisis that binds arbitrators; a group of arbitrators could decide one case one way, could decide the next case the other way.
It is not a necessary calvary of arbitration under the New York Stock Exchange Plan that one panel of arbitrators would hear each and every one of those cases.
Unknown Speaker: Is there any indication of why your state Court of Appeals finished its course by 183 --
Mr. Joseph C. Barton: Yes, there is Your Honor.
And the case was presented Frame versus Merrill Lynch, the Labor Code, Section 229 argument was not made, neither it was there an explication of the effectiveness of Rule 347(b) in relationship, for example, to the New York Stock Exchange constitutional, waived.
In the exhibits for this Court, after oral argument before the Court of Appeals; the issue of Frame v. Merrill Lynch came up.
Thereafter, the court send a letter to respective counsel which is exhibit D requesting --
Unknown Speaker: Is it the Appendix?
Mr. Joseph C. Barton: No it's not the Appendix Your Honor, it's only exhibits.
It's exhibit D requesting further written argument regarding five separate points.
One of those points was related to Labor Code Section 229.
The Court specifically held in Ware versus Merrill Lynch, that the Court didn't consider the application of Frame versus Merrill Lynch of Labor Code Section 229 and I think the court should be commended for having a judicial courage to reverse what I considered an incorrect decision at the outset and I should also know that under the class aspects of this case that Mr. Frame, I believe would be covered.
Unknown Speaker: Even though he lost?
Mr. Joseph C. Barton: Well he didn't lose against merits, Your Honor.
All it said was that, there should be arbitration and I believe --
Unknown Speaker: Well, that's on the merits of the issue, it's not before us.
Mr. Joseph C. Barton: Right.
Unknown Speaker: That is the issue as.
Mr. Joseph C. Barton: well I should note that that is the issue of arbitration.
I should note that there was an extensive discussion between myself and Mr. Frame's counsel regarding his position before the argument on appeal and there was an invitation at that time extended to him to join in the class and of course we considered in great detail, what decision he was going to take in his briefs which was different from the position that I took on behalf the quest in my brief.
I believe, Your Honor in conclusion that I would like to know that -- I just feel of it inconceivable what Congress could have meant that New York law which has no significant context with California residents in this case should apply to the exclusion of Law -- 49 other states many of which would have significant context as far as their own residents are concerned at least.
Unknown Speaker: Well, this is not correct.
It is merely the issue, is it.
It isn't the real issue whether this rule of the New York Stock Exchange declined which incorporates or refers to New York Law, but it's a rule of the New York Stock--
Mr. Joseph C. Barton: That's correct.
Pursuant to it's rule making authority granted under 6(c).
Unknown Speaker: Right.
Mr. Joseph C. Barton: If there are no further questions, I would like to thank the court this time.
Chief Justice Warren E. Burger: Thank you Mr. Barton.
Argument of William H. Orrick, Jr.
Mr. William H. Orrick, Jr.: Mr. Chief Justice.
Unknown Speaker: Mr. Orrick, at some point would you mind dealing with the Government's argument in 6 © -- the language of 6 (c) is very broad, any rule it says, any rule but I read the brief amicus of the Securities And Exchange commission is saying no, any rule should be limited to rules related to investor protection, fair dealing or fair exchange administration.
I gather based on, what they give us in the way of legislative history of 6 (c) and of the general purposes of the Act and as I read their conclusion, it is that any rule does not embrace 347 (b).
Mr. William H. Orrick, Jr.: Yes sir and with that I take exception, the legislative history or the Act is replete with discussions of the deficiencies in employees of the securities industry both as to their competence and to their integrity.
So even the 1964 special study mandated by Congress, I had similar references to these deficiencies and indeed if the court would look at the agreements made by Mr. Ware and his colleagues and I call attention to them, one at question here which is on Page 8 of the Appendix to our brief, it's the sub-section J, Rule 345 and it reads English is as plain as it can be written, I agree that any controversy between me and any member or member organization or affiliate or subsidy there, arising out of my employment or the termination of my employment shall be settled by arbitration at the instance of any such party in accordance with the arbitration procedure prescribed in the constitution and rule then obtained at the New York Stock Exchange and then if you read Mr. Ware's affidavit which appears in Volume 1 of the record at page 171 and he says, as far as I knew, this was nothing more than an application for registration at no time with provisions contained in that form discussed with me or explained to me, nor was I ever provided with any sort of study guide, referencing the provisions before I signed it.
I didn't understand it to be a contract or agreement of any type.
I suggest that this record itself is reason enough for the Securities and Exchange Commission to regulate the conduct of employees.
Here are these employees who are dealing with -- giving financial advice to widows and orphans who will say under oath if they don't understand what they read and back out on their agreements.
Chief Justice Warren E. Burger: Mr. Orrick, is there anything in the record indicating whether Ware was also a member of the Pacific Coast Exchange as a result of his employment with Merrill Lynch?
Mr. William H. Orrick, Jr.: I don't recall if there is anything in record on that.
Now, the position of Merill Lynch is first, we have an agreement to arbitrate under a rule of the New York Stock Exchange which is valid in the state of New York and under 6 (c) that rule should be adhered to, whatever veneer, the SEC can put on the rule by saying that this is within our oversight, the purview of our oversight simply enforces the status of this rule which we claim here has the--
Unknown Speaker: But am I right Mr. Orrick that your whole case depends on 6 (c), the language of 6 ©, rules and regulation including 347 (b), doesn't it.
Mr. William H. Orrick, Jr.: Now the whole case is – yesterday, I said first, we have a right to arbitration under the California Arbitration Act which is the same as the Federal Arbitration Act.
We have a right to arbitration under these--
Unknown Speaker: But that's not a federal question, that's not our problem.
So far as your case in this court turns on your persuading us, does it not that 6 (c) covers 347 (b)?
Mr. William H. Orrick, Jr.: Well the 347 (b) was enacted pursuant to--
Unknown Speaker: A rule and regulation within 6 ©.
Mr. William H. Orrick, Jr.: Well I think it's also a rule and regulation enacted pursuant to Article 3, Section 6 of the New York Stock Exchange and it is an equally valid binding agreement.
What we have here is an agreement to arbitrate.
Unknown Speaker: Where is that, what's Article 6, Section 3?
Where is that?
Mr. William H. Orrick, Jr.: Article 3, Section 6, I don't believe that we have it printed.
It's in the constitution of the New York Stock Exchange which authorizes the directors to make such rules and regulations as are necessary.
Unknown Speaker: Listening to part of your argument, it is certainly related to 6 (c) argument, the California rule sets it not an important objective of the Federal Law.
Mr. William H. Orrick, Jr.: Exactly sir.
Unknown Speaker: And wholly aside from 6 (c) you would argue that?
Mr. William H. Orrick, Jr.: That's right.
An important federal policy.
Unknown Speaker: You don't need to argue that expect in connection with 6, if you have read about it, 6 (c) automatically picks it--
Mr. William H. Orrick, Jr.: That's what I am trying to say, the rules such as--
Justice William H. Rehnquist: What is that important Federal policy?
Is it uniformity or is it preference for arbitration?
Unknown Speaker: The New York Stock Exchange and the securities industry has a federally mandated, self-regulation in order to accomplish this self-regulation as Judge Medina has indicated in the (Inaudible) case.
Necessary element of it is to be able to enforce arbitration and if you are unable to enforce the arbitration, which is guarded with respect to a rule governing the conduct of employees in one state or you can do it in another state, I think that defies the very purpose of this federally mandated self-regulation.
Justice William H. Rehnquist: Yeah if New York were to change its law tomorrow, so that its law were the same is California's.
Under your theory, that arbitration rule couldn't be enforced anywhere?
Mr. William H. Orrick, Jr.: I think to be fair with the board I think if New York had a rule 229, we would have a different case.
That is not our case here, however.
Justice William H. Rehnquist: Well so, so New York can set it not as important Federal preference for arbitration under your own theory.
Mr. William H. Orrick, Jr.: I would think that is so, yes.
Unknown Speaker: I suppose Mr. Orrick, if New York had a 229 then section -- Section c would rule out the arbitration provision of the New York Stock Exchange because the only rules that the Exchange may adopt are rules and regulations not inconsistent with the applicable laws of the state which is located.
So, if New York had a 229 that would nullify, would it not, the arbitration provisions of 347 (b)?
Mr. William H. Orrick, Jr.: That's correct.
Unknown Speaker: Unless, the commission is self required by regulation?
Mr. William H. Orrick, Jr.: One other point I want to make Justice Rehnquist, ask Mr. Barton as to whether or not that California court order is final, it is indeed final as to Merrill Lynch where the petition to arbitrate is denied.
Justice William H. Rehnquist: This was something you raised as a defense when you were brought into court by Mr. Barton' client, isn't it?
It wasn't a separate action that you brought to compel arbitration.
Mr. William H. Orrick, Jr.: We filed in effect that what we did, we filed an answer and we filed a petition to arbitrate and the court denied the petition to arbitrate and that's what was on appeal.
With respect to the question that Justice Stewart asked, Mr. Barton asked whether or not Section 229 was part of the Frame case, he asked if there is any explanation for these two diametrically opposite opinions.
Mr. Barton correctly said that it wasn't discussed in the Frame case but it was briefed in the Frame case.
It didn't take part in the opinion.
Chief Justice Warren E. Burger: Thank you Mr. Orrick, thank you Mr. Barton.
The case is submitted.