SCHERK v. ALBERTO-CULVER CO.
Legal provision: 9 U.S.C. 1
Argument of Robert F. Hanley
Chief Justice Warren E. Burger: We’ll hear arguments next in 73-781, Scherk against Alberto-Culver Company.
Mr. Hanley, you may proceed whenever you’re ready.
Mr. Robert F. Hanley: Mr. Chief Justice, and may it please the Court.
I represent the petitioner Fritz Scherk and this case involves the acquisition of petitioner’s three related European cosmetic businesses by respondent Alberto-Culver, an American Corporation.
The issue that’s presented is the enforceability of arbitration clauses entered into as part of international agreements in the face of charges of violations of the Securities Exchange Act Section 10 (b) and Rule 10b-5.
The facts as reflected in the complaint and in the un-contradicted portions of the affidavits which were filed in the trial court and the district court are as follows.
Alberto-Culver became interested in petitioner’s businesses back in June or July of 1967 and apparently became interested because they were having some problems getting their products, their hair products and so forth into the German market, accepted on the German market and Scherk apparently had a good name, established name in that market.
So in June or July steps were taken, contacts were made in Berlin, in West Berlin by Alberto-Culver.
Your Honors, there’s some disagreement between the parties as to whether a meeting which was held in Melrose Park, Illinois in May of 1968 or meeting in West Berlin in March of 1968 was the most significant with respect to putting this transaction together.
But there is no contradiction about the fact that these negotiations commenced in Europe.
They were then negotiated and conducted in both Europe and the United States for a period of two years and they -- and finally came to conclusion at a closing in Geneva, Switzerland in June of 1969.
Now, a battery of attorneys took months to put together these acquisition agreements which are spread over some 100 and 125 pages.
And they contained clear clauses by which the parties agreed to negotiate, to arbitrate all future disputes before the International Chamber of Commerce in Paris, France.
The parties used both American and German attorneys in investigating and in negotiating and putting together this sale of these three foreign businesses.
They also used trademark experts, business consultants, and Alberto-Culver used its outside auditors Peat, Marwick, Mitchell & Company.
Part of the purchase price for the companies was paid in the form of promissory, four promissory notes which were delivered to the petitioner Mr. Scherk at the time of the closing in Geneva.
Now, in 1970 Alberto-Culver concluded that Petitioner Mr. Scherk had breached trademark warranties, having to do with trademarks that had been owned by the Scherk Enterprises.
And he charged -- they charged a violation -- they brought suit notwithstanding the arbitration clause, brought suit in the United States District Court for the Northern District of Illinois charging in June of 1971, charging violations of Section 10 (b), Rule 10b-5 charged common law, deceit, fraud, and charged a breach of warranty -- breach of trademark warranty.
And Mr. Scherk had taken steps to arbitrate the controversy in Paris back in January of 1971. But he had not filed the necessary papers take on to formal steps.
Those steps were not taken until after the suit in this case was filed.
Those steps were taken.
Arbitration was commenced officially or formally in November of 1971.
We filed motions to dismiss the complaint based upon contentions that the court was without jurisdiction over the person of the petitioner.
The court was without jurisdiction of the subject matter and on the basis of forum non conveniens.
In the alternative, we also applied for a stay pending arbitration, stay of the proceedings in the District Court.
Our motions were all denied and the District Court granted an injunction enjoining the Petitioner Mr. Scherk from proceeding with arbitration in Paris.
The Seventh Circuit affirmed, analyzing and applying the court’s 1953 decision in Wilko versus Swan as invalidating arbitration clauses and of course on the Wilko against Swan, the invalidation was with respect to charges -- was in the face of charges under the Securities Act of 1933.
Here, we are talking about the -- and here is the Seventh Circuit applied Wilko v. Swan in the phase of charges of violations, the Exchange Act in 10b-5.
Our position --
Justice Harry A. Blackmun: Mr. Robert F. Hanley --
Mr. Robert F. Hanley: Yes, Your Honor.
Justice Harry A. Blackmun: -- to what extent are you pursuing the suggestion of the Federal District Court in Illinois did not have jurisdiction of this?
Mr. Robert F. Hanley: Your Honor, we believe that the Federal District Court has now ruled and in the face of our motion to dismiss on jurisdictional grounds we believe and the Court of Appeals has -- if you are asking me as far as the preliminary injunction is concerned, the Court of Appeals has ruled that it had jurisdiction under 1292 (a) (1).
We certainly agree with that contention.
This was the granting of an injunction, a preliminary injunction.
We have, as far as our motion to dismiss was not certified here and that issue I believe is just not the issue of whether or not this is a security of whether or not Mr. Scherk was properly before the Court, I don’t think is any longer subject to debate in these proceedings.
We have proceeded on the assumption that the court has jurisdiction over the parties -- over the subject matter and that this appeal was properly before this Court as a preliminary injunction under 1292.
Our position here is that this Court upon a re-analysis of Wilko versus Swan in the light of the international context here and a strong federal policy favoring arbitration need not and should not apply Wilko versus Swan mechanically -- mechanistically and invalidate arbitration agreements where security violations are alleged in this international context.
There is no compelling reason to extend Wilko versus Swan.
And some very great good reasons we assert of why Wilko should not be applied in these circumstances.
Circuit Judge Stevens said in his dissenting opinion below, “The enforcement of these arbitration agreements in this case would not frustrate the policies of the Exchange Act whereas refusal to enforce them would certainly frustrate important policies which this Court is articulated as recently as 1972 in the Zapata case.”
It’s clear, I believe, it’s absolutely clear that without Wilko versus Swan, the arbitration provisions in these – in this acquisition – on these acquisition agreements would be enforced.
They be enforced under either Chapter one or Chapter 2 of the Federal Arbitration Act and we look in vain and have read the briefs in vain for any reason to support the mechanical application of Wilko versus Swan to the situation here.
The respondent is not going to lose his right to be heard on these trademark -- these breaches of trademark, the arbitration, the arbitral courts have and can arbitrate matters going to allegations of fraud and breaches of warranty.
The respondent says in effect, “I agree to arbitrate.
Now, I do not want to arbitrate anymore.
And I look around and I found this Supreme Court cases.
1953 cases says I don’t have to and it gives me an excuse so I am not going to live up to my bargain.”
And the respondent points to the language of Section 27 of the Exchange Act which says that District Courts shall have explosive jurisdiction of violations to the title or the rules and regulations there under and that all suits an equity in actions in law to enforce any liability or duly created under the title and so forth will be in the District Court.
Now, he points to that – the respondent points the language and says that, “As I understand his argument that all securities disputes must be resolved in the United States District Courts.”
That does not comport with reality.
The Securities Exchange Commission is resolving securities disputes everyday in arbitration proceedings where the matters are involved, existing disputes are being arbitrated everyday.
We are having resolution of securities problems and arbitration proceedings between members of exchanges where they have rules requiring arbitration.
We are having arbitration in securities matters and proceedings between non-members and members of exchanges.
And we’re having arbitration proceedings where the broker opposes arbitration and the customer fixes it, and it just doesn’t follow.
Justice Potter Stewart: It’s your admission I guess that that language means that if an action under the Exchange Act 34 comes to a Court it’s the Federal District Courts that have exclusive jurisdiction, exclusive of the state courts, is that your point?
Mr. Robert F. Hanley: That’s correct, Your Honor.
Justice Potter Stewart: That language is not on the 33 Act, is it?
Mr. Robert F. Hanley: No, Your Honor.
Justice Potter Stewart: And it was the 33 Act which is Wilko against Swan?
Mr. Robert F. Hanley: That’s correct.
Justice Lewis F. Powell: Mr. Hanley?
Mr. Robert F. Hanley: Yes, Your Honor.
Justice Lewis F. Powell: Before you proceed, let me come back to something you said a little earlier.
Do you concede that this transaction here is within the scope of the Securities Acts and if so why?
Mr. Robert F. Hanley: Technically, Your Honor, I believe we would have to concede under the cases that for the purpose, at least to this argument, we concede that there are promissory notes involved.
Justice Lewis F. Powell: This was a purchase of assets and nothing more, wasn’t it?
Mr. Robert F. Hanley: No, well.
Justice Lewis F. Powell: In substance?
Mr. Robert F. Hanley: There was a purchase of assets.
There was a purchase of a going business concern.
Justice Lewis F. Powell: Right and the purchase embraced a 100% of the ownership of your client?
Mr. Robert F. Hanley: There were some -- Your Honor that’s 90% accurate.
There were some trademark rights and some rights in Israel and in other parts of the world that were reserved by Mr. Scherk, but basically they acquired, the respondent required his business enterprise.
Justice Lewis F. Powell: The purchaser acquired stock in the German company that was organized as a part of the transaction as I understood it?
Mr. Robert F. Hanley: He acquired stock in a company or business --
Justice Potter Stewart: It was Liechtenstein.
Mr. Robert F. Hanley: It was Liechtenstein Anstalt, Your Honor, and at the time of the transaction, at the time of the re-entering into it, it was not a stock company.
It was specifically not a stock company.
Justice Potter Stewart: It was converted as part of this --
Mr. Robert F. Hanley: It was converted as part of the transaction and stock was issued and was delivered and at the time of the closing it was held in escrow.
I think the point on this is that if we permit these four promissory notes and this transformed German -- Liechtenstein Anstalt to establish the rule for the court and automatically -- the court would automatically apply Wilko versus Swan in that situation with those connecting factors.
It’s our position that you are certainly permitting form to rule substance and that there is no reason -- there is no countervailing, in these – in this circumstance, there is no countervailing policy with respect to the enforcement of the securities laws in this situation that would justify that.
Justice Lewis F. Powell: Well, neither the Act of 33 nor 34 was addressed to negotiate it mergers and acquisitions of assets.
Now, I do not understand why you give up that point.
We haven’t said so up here, have we?
Mr. Robert F. Hanley: Your Honor I have read the cases and have seen the extension of this definition of securities to include and I do not like to state and argue by myself but I --
Justice Lewis F. Powell: Have we said so?
Perhaps I have missed it, but have we said so?
Mr. Robert F. Hanley: No, Your Honor.
Not to my satisfaction but nevertheless I think that the -- our point here is that if really is not, it’s not necessary for us to fight any longer on that point because there is just really no requirement here to apply Wilko versus Swan if we -- arguendo if we are within the Securities Exchange ambit in this case and we argue that and we lost that in the District Court and we have considered for the sake of this argument.
Justice Lewis F. Powell: Didn’t lose it in entirely with Judge Stevens as I read his opinion?
Mr. Robert F. Hanley: Well --
Justice Lewis F. Powell: Go ahead.
I won’t interrupt you on this point any further, but I would have given enough up arguable point based on what I understand of this case?
Mr. Robert F. Hanley: Alright, Your Honor.
Chief Justice Warren E. Burger: Do I correctly understand the main thrust of your argument is that given the long standing judicial and legislative policy to encourage arbitration, that that should be followed absent compelling reasons of public policy not to do so and that there are no compelling reasons of public policy presented here as there were in Wilko?
Mr. Robert F. Hanley: That’s right, Your Honor.
We say -- Mr. Chief Justice we say that Wilko just doesn’t fit here.
It was a garden variety domestic case involving a customer of a brokerage house who would sign the 17-page form agreement provided by the brokerage house, contained an arbitration clause along with other provisions which waived the protection of Federal Securities Law.
There was a great disparity in bargaining positions, great disparity in the relative degrees of sophistication, just a very clear disparity in bargaining power.
There was no compelling reason not to relieve the customer of his agreement to arbitrate under circumstances and some fairly compelling reasons to show that it would have been unfair to require him to arbitrate under the circumstances.
Our situation is entirely different.
Alberto-Culver went to Europe.
They purchased these short businesses.
They used an array of European-American lawyers, trademark experts, business consultants.
The sophisticated businessman here agreed to arbitrate their disputes.
After a two-year, arm’s length transaction, there was no over-winning bargaining power on the part of the petitioner.
It’s clear also that Alberto-Culver considered the possibility that they’re going to have trademark problems.
Mr. Silver, their general counsel’s affidavit here shows -- evidences great concern about trademarks as shown also by the fact that the trademark warranties took up some 25 pages in the acquisition agreement.
They clearly anticipated trademark as area of possible future dispute.
And to permit the respondent to refuse to honor its promise to arbitrate in an agreed forum where the agreement was reached in good faith after free and fair bargaining between the parties with equal bargaining power just plain isn’t fair.
Wilko should be extended to permit an American businessman, that dishonored his agreement with a foreigner and certainly the foreign aspects that are compelling enough.
The international aspects to this case are compelling enough not to extend the Wilko rule in this case.
We know that uncertainty --
Justice Harry A. Blackmun: Mr. Hanley?
Mr. Robert F. Hanley: Yes, Your Honor.
Justice Harry A. Blackmun: Let me see if I follow you on this.
I take it it’s your position of course that the parties should go to arbitration.
Do you concede that once the arbitral award has arrived at, that nevertheless the Federal District Court may then pass upon the issue of whether our public policy prevents its enforcement?
Mr. Robert F. Hanley: We believe, Your Honor, that the arbitral court should resolve all of the questions, all of the factual questions here.
Yes, we do.
We don’t think we are in a situation where it’s necessary to remand the case here to make a determination whether there are these policy matters present in this case.
The -- it’s very clear -- that it's very clear here that there is no, at least, it’s clear to me that there is no countervailing policy present.
There is no shown and the matter has been argued, there is no showing here that under the facts in this case with arbitration that there would be a concomitant detriment to security law enforcement.
So, I would say that this matter should be resolved by the court, by the arbitral court in Paris in accordance with the solemn agreement of the parties.
Justice William O. Douglas: But you see you have a federal statue and it would be amazing I think that anybody who has worked in the field to assume that if I bought out a company, lock, stock and barrel with a stock and the ventures and everything else that wasn’t a security?
Mr. Robert F. Hanley: Your Honor, I can see areas that --
Justice William O. Douglas: Read the definition in Section 3810 of the Exchange Act 34. It would be driving at a hole in the Act that big enough to send the caravan through?
Mr. Robert F. Hanley: Your Honor, we can certainly hypothecate factual situations in which it would be unreasonable to not to apply Wilko versus Swan in this particular case.
Assume a British company coming over and making a tender offer on a widely held corporation and that kind of a situation.
Justice William O. Douglas: In this field you don’t talk about equity, you talk about the law, whether or not you have a security or you don’t have a security?
Mr. Robert F. Hanley: Well, what we’ve tried to show Your Honor is that under Section 27, the courts have not been requiring that all securities disputes be resolved in the District Courts.
Justice William O. Douglas: Well, you haven’t cited anything in the brief.
It is contrary what the Court of Appeals has said here?
Mr. Robert F. Hanley: Well, we hope we’ve shown Your Honor that it would be -- that because of the policies that were established by this Court or articulated in this Court in Zapata that it would be unfair and it would be unnecessary to extend Zapata into this international situation.
I am sorry, I mean in Wilko versus Swan.
Chief Justice Warren E. Burger: Zapata was a common law case, was it not, at -- an admiralty claim?
Mr. Robert F. Hanley: And we believe that as in Zapata, Your Honor that the issues in this case are ripe for determination by the arbitral court.
The thing we didn’t and have a chance, we really haven’t mention was the uncertainty in this international transactions which are the real bugaboo of these international transactions and it’s essential for the foreign businessmen to know in advance where and how they’re going to resolve their conflicts.
The parties bring to the bargaining table different legal theories and they pay for, they arbitrate and they negotiate and they pay for these arbitration clauses.
In fact, they may be the sine qua non of an international transaction.
In the Wilko garden variety, securities matter where you’re are buying securities from a broker.
There is no compelling reason that the parties have such certainly, but they certainly need that certainty in international transaction.
And one of the things that’s happened of course since Wilko is that we have articulated a strong national policy in favor of arbitration of international transactions both in Chapter 2 of the Federal Arbitration Act and also in the accession in the United Nations Treaty for the enforcement of arbitral awards and we think --
Justice Harry A. Blackmun: But that convention preserves consistently the issue of whether the arbitration award is against public policy in this country or any country, does it not?
Mr. Robert F. Hanley: Yes.
Justice Harry A. Blackmun: So, I get back to my question do you -- whether, if you prevail on the primary availability of arbitration here under the agreement, you still aren’t subject possibly to an American Court's passing on the public policy issue?
Mr. Robert F. Hanley: If there are facts I would certainly agree, Mr. Justice Blackmun.
I would certainly agree if there are facts to be resolved that they may have to be resolved as the Court indicated in Zapata.
I don’t see them.
Frankly, I don’t see any facts for resolution with respect to public policy in the matter – in the case that's before Your Honors.
Justice Harry A. Blackmun: That may will be and -- but certainly the arbitrator is not the one to pass on that?
Mr. Robert F. Hanley: I would concede it.
Justice Harry A. Blackmun: I guess, that’s what I am asking.
Justice William J. Brennan: Mr. Hanley is your problem this Wilko was arm’s length bargaining, was there?
It is now what we’re reaching there and that also was the situation, thereby arbitration clause arrived at by arm’s length bargaining?
Mr. Robert F. Hanley: I think not.
It was a garden variety, customer of a brokerage house, Hayden Stone.
Hayden Stone sends almost 17-page form contract, adhesion contract, signs an arbitration clause, tremendous disparity and bargaining of power, tremendous disparity and relative bargaining strengths, business acumen, sophistication.
It’s just exactly the antithesis of your situation with their battery of lawyers and experts who looked at this as a sophisticated businessmen and got together after two years and agreed that we are going to arbitrate the very kinds of disputes that have arisen here in Paris and what a shocking surprise that must be to wake up and find that your -- you negotiate, your going to be required to resolve your conflicts in the United States District Court.
Justice William O. Douglas: As you see this definition of security doesn’t -- in 34, it doesn’t turn upon how strong one party is and how weak the other party is.
This is the generalized wide category?
Mr. Robert F. Hanley: Well, I understood --
Justice William O. Douglas: A very unusual situation to acquire all this lock -- company lock, stock, and barrel securities and to match up saying that’s not a security, that is much more than a person who is working a deal who can swallow at least more quickly?
Mr. Robert F. Hanley: Well, it may -- it may be a security Your Honor and in this particular situation assuming as a security we are saying that it is not necessary for this Court to effectuate the rule, to apply the rule, to extend the rule in Wilko versus Swan and to prevent arbitration here.
The amicus [Voice overlap] five minutes in this --
Chief Justice Warren E. Burger: Very well, Mr. Hanley.
Argument of Gerald Aksen
Mr. Gerald Aksen: Mr. Chief Justice, and may it please the Court.
The American Arbitration Association as amicus in this matter is terribly concerned not with the merits of this particular case, but the impact of international business contract drafting.
We have at issue here, not the public policy attached to the issuance of an arbitration award because that has not yet occurred.
We have a standard type of business transaction where two parties from different countries who cannot agree to the choice of law of a different foreign country or foreign court, who typically provide for a dispute settlement mechanism, usually arbitration.
In this instance, the tribunal is a worldwide well-known tribunal, the International Chamber of Commerce sitting at Paris.
The arbitration clause provides for a neutral country between this American and this German.
Both of these countries have ratified a treaty, United Nations Convention on the Recognition and Enforcement of Foreign Awards, but that convention contains within it a specific provision of the enforcement of arbitration agreements.
The convention also states the specific grounds upon which a court may refuse to honor that agreement.
I would call to your attention that public policy is not one of those listed grounds.
I think it is very important to know that four major developments occurred in this country within the past few years, dealing with this convention.
The first is the fact that Congress amended Chapter 2 of the Federal Arbitration Act.
This Court was only ruling upon Chapter 1 of the Federal Arbitration Act in 1953 in the Wilko case. Congress not only added a new chapter to that Act, but the Senate advised and consented on this International Treaty.
Only two years ago, the Government of the United States in a series of joint agreements with the Russians, the Polish and more agreements are forthcoming have provided for this mechanism, the use of voluntary arbitration in a neutral country to resolve all commercial, business disputes.
Finally, only this year the American Bar Association and its House of Delegates wrote a letter to all of the other countries of the world through their BAR associations, advising and recommending that they pass this convention which has now been passed in 42 countries of the world.
There is no other practical way to settle international business disputes and though the arbitration mechanism.
Justice Harry A. Blackmun: Mr. Aksen let me be straight.
Did you say public policy was not a factor in the UN Convention?
Mr. Gerald Aksen: The UN convention, Your Honor, provides in a section on enforcement of awards that the host country may of course refuse to honor the arbitration award if it would offend its public policy.
It does not so provide on the section dealing with enforcement of arbitration agreements which is Article II of the Convention.
We feel that --
Justice Harry A. Blackmun: Well, that doesn’t invalidate the validity of my inquiry to --
Mr. Gerald Aksen: Well, Your Honor it does not.
It does not and in fact amicus does not argue that this Court should make a distinction between agreements and an award because I don’t think it would be appropriate to have two separate forums trying the same thing over again.
Chief Justice Warren E. Burger: Well is that presented in this case at this stage?
Mr. Gerald Aksen: Amicus has not so argued in this case.
I was just pointing out the exact language of the convention, should the Court wish to narrow its issue to the scope of the arbitration agreement itself.
Chief Justice Warren E. Burger: The jurisdiction of a United States Court to deal with what Mr. Justice Blackmun has raised to you, that is the award when as and if one was made, is a question not now before the Court?
Mr. Gerald Aksen: That is correct, Your Honor.
It is not now before the Court.
Justice William H. Rehnquist: Mr. Aksen, is there some workable line that could be drawn assuming that the Court wish to follow your suggestion between the Wilko versus Swan type of case and this type of case?
It seems to me it is not entirely satisfactory to say this was a wealthy man and he had three lawyers and the guy Wilko against Swan did not have any lawyer?
Mr. Gerald Aksen: The only workable line to accommodate the Federal Arbitration Act and the old Wilko v. Swan argument is to take a very hard look at recent times.
Now, all of the developments that we have listed for you in the brief have occurred since 1953.
Two administrations, Democratic and Republican in this country have recognized the need for this mechanism to resolve disputes.
If you find that with the wording of this convention, you can let one party, an American party refuse to honor this arbitration agreement and in the words of Mr. Justice Douglas, you will drive a caravan though this convention.
Now this convention was passed in this country --
Justice William O. Douglas: There are a lot of financial refugees around the world who do not dare to return to their own country.
They would welcome arbitration queries in Paris.
Mr. Gerald Aksen: I think Mr. Justice Douglas that all of the businessmen in the world would welcome the free use of arbitration.
Justice William O. Douglas: I am talking about the refugees.
Mr. Gerald Aksen: If they are businessmen, Your Honor, I think they would welcome arbitration.
Justice William O. Douglas: I am sure they would to avoid the rigors of their regime at home.
Mr. Gerald Aksen: I am perhaps missing something, but I am not sure if a political type --
Justice William O. Douglas: It's not political I am talking about.
Mr. Gerald Aksen: -- problem with refugees is relevant to the definition of commerce as defined by the convention.
Justice William O. Douglas: I'm thinking in terms of the problems of security, regulation of securities in Switzerland, here, England and elsewhere.
Mr. Gerald Aksen: Well, I think it is clear if this Court finds that the securities matters in this case which we consider peripheral, but if the Court finds that these securities matters are controlling, then it has a very difficult time accommodating these two statutes.
But in this case we do have a statutory problem and the most recent statute is one of both of convention and an enactment or reenactment getting a full chapter to the Federal Arbitration Act and with language, may I point out that was not required.
The convention does not require any court of any country to force a native to go abroad to arbitrate.
Justice Byron R. White: What do you think the end result would be under the amendments to the act under the convention if the Securities Act said itself expressly, that arbitration clauses will not be permitted?
Mr. Gerald Aksen: Then there would be no doubt in of my mind and the Wilko attitude should prevail but this is --
Justice Byron R. White: And that the convention would concededly accept that sort of provision.
Mr. Gerald Aksen: Yes.
Justice Byron R. White: Doesn’t that what Wilko really said?
Mr. Gerald Aksen: We think not.
Justice Byron R. White: Just as though, that kind of a provision was written into the Act?
Mr. Gerald Aksen: No, because I think when you talk of public policy, Wilko would have had to have said that you cannot only, not agree to arbitrate future disputes, but you could not agree to arbitrate an existing dispute.
Wilko did not say that.
But the sense clearly pointed out that they were not deciding whether or not two American parties could agree to arbitrate an existing securities question.
Justice William J. Brennan: Well, Mr. -- what have Mr. Justice Jackson’s concurring language, simple sentence?
“I agree with the Court’s opinion insofar as it construes the Securities Act to prohibit waiver of the judicial remedy in favor of arbitration by agreement made before any controversy arose.”
Mr. Gerald Aksen: That is correct, but I don’t think that is sufficient public policy of the kind required.
Justice William J. Brennan: But that was, at least Mr. Justice Jackson read Mr. Justice Reid’s opinion as a construction of the Securities Act to prohibit as Mr. Justice White suggested.
Mr. Gerald Aksen: It clearly did, Your Honor in a domestic transaction between two Americans who were fully aware of the local statutory provisions.
Chief Justice Warren E. Burger: Did we not have something to say in the Zapata case of the impact on international trade and commerce if arm’s length transactions by American companies and foreign companies could not freely commit themselves to arbitration.
Wasn’t there some discussions of that?
Mr. Gerald Aksen: You certainly did Mr. Justice Burger and we hardly endorse the language from the Zapata public opinion.
If you would have inserted arbitration rather than that choice of forum.
We think that all you’re doing is moving very slightly from the Zapata case to this one.
We’re not really asking the Court here for a very drastic change in American Law.
In fact, in Domestic law this Court has already ruled, that if you have a problem of fraud and the inducement or misrepresentation in Prima Paint then that is a matter for the arbitrator between Prima Paint and Zapata and moving very slightly to another rule in this case which would encourage the use of international commercial arbitration.
Chief Justice Warren E. Burger: Thank you Mr. Gerald Aksen.
Argument of Francis J. Higgins
Mr. Francis J. Higgins: Mr. Chief Justice, and may it please the Court.
Before turning to what I consider to be some inaccuracies in the statement of facts made by my brethren.
I would like to make this observation after having heard the arguments.
The two concessions which have been made here by counsel which I thought were impliedly conceded in the briefs as well, namely that (1) personal jurisdiction exists and (2) subject matter jurisdiction exists that is the coverage of the Act, leaves the petitioner in logic to ask this Court to overrule Wilko versus Swan.
That, I think is the necessary impact of their position.
Now, why were these concessions made?
Two reasons, one factual the other legal.
First of all, the petitioner has consistently overlooked the fact that securities fraud was committed in this country within the territorial boundaries of United States to the injury of an American citizen.
Recent decisions including the Leasco case in the Second Circuit and the Travis Case in the Eighth Circuit have applied the Act to this type of situation, whether negotiated or not.
So, if the Act applies, Section 29 (a) must apply as well.
Now, a suggestion has been made, the 29 (a) should not be the same as 14.
Since the language of the two statutes is the same we fail to see how that can occur.
Justice William O. Douglas: 29 (a) of the 34 Act?
Mr. Francis J. Higgins: Of the 34 Act is identical to 14 of the 33 Act.
What is the ultimate logic of the petitioner’s position here?
It is that my client, an American company is not a person within the meaning of 29 (a) which bars any stipulation by any person to waive compliance with the Act.
That we submit is a matter of statutory logic, construction and policy and should not be followed by this Court.
The convention makes no change in this law.
In fact it expressly accommodates Wilko and 29 (a) in international transactions.
Consider the effect, if the Court will, if you were to recognize an exception to this Act wherever the defendant is a foreigner, even though he has come into this country to fraud an American citizen he is concededly subject to the jurisdiction of the courts.
He can escape it because he is a foreigner.
Chief Justice Warren E. Burger: Well, not just because he is a foreigner but because he made an agreement and he is also a foreigner, isn’t that --
Mr. Francis J. Higgins: He made an agreement, but the plaintiff in the case is a person.
The agreement is a stipulation Chief Justice Burger and Section 27 of the Act creating exclusive jurisdiction is a provision.
Now, if you can see as the petitioner has done here, that the Act applies, it must necessarily follow we submit that Section 29 (a) applies and Section 27 also applies.
Chief Justice Warren E. Burger: Well, I could understand that.
I could follow that much more readily if you have a Swiss or German or French Corporation coming into this country selling securities in the traditional way, issuing them here.
Mr. Francis J. Higgins: I would like to address myself to that because I think this is the heart of Chief Judge Friendly's position in Leasco.
There you had securities which were totally foreign.
You had a negotiated transaction.
You had foreign defendants.
And nevertheless, the Court there held on traditional principles of international law, Foreign Relations Law of the United States that what was key was not whether if the securities were those of a foreign corporation, but whether or not that company through its representatives in the concededly negotiated transaction came to this country and here on our soil defrauded an American citizen.
Justice Potter Stewart: Yes, but that case didn’t involve this question of arbitration?
Mr. Francis J. Higgins: No.
Justice Potter Stewart: And that’s the only question here.
If you look at the petition for certiorari that it’s considered rightly or wrongly that at least arguendo this is a security and that there has been an alleged violation of the Securities Exchange Act of 34.
There is only one question presented in petition for certiorari.
Leasco didn't involve arbitration.
It simply involved the applicability of the 34 Act.
Mr. Francis J. Higgins: Correct.
And that brings as I suppose to an analysis or proper analysis of both 29 (a) and Wilko because we concededly have power over this man, albeit he is a foreigner.
Our courts have jurisdiction over him just as they had jurisdiction over the defendant in Wilko.
Now, we submit that the petitioner here has mis-characterized this Court’s holding in Wilko or misunderstood it.
It is true that that case involved a suit by a customer against the brokerage house, but what the Court had before it Section 14 of the 33 Act was again like 29 (a) of the 34 Act, a statute of general applicability.
It purported to benefit or protect any person signing any stipulation agreement or a provision waiving compliance with any portion of the act.
The majority opinion stated on its face, the opinion of Justice Reid, “that we recognize under the certain circumstances, buyers and sellers of securities may bargain at arm’s length, but we nevertheless hold that the intention of Congress is better carried out by finding void any agreement to arbitrate a future dispute.”
It was a statement of general applicability.
In his dissenting opinion, Justice Frankfurter recognized this.
He said, “We do not have before us here a case of overreaching, a case of coercion” and he nevertheless concluded in the last sentence, “I read the majority’s opinion to be a general limitation, a general limitation on the Federal Arbitration Act.”
Now that was the law as it stood in 1970.
Petitioner would have the Court believe that it is we who are trying to expand the law.
Nothing could be farther from the truth.
The question is whether the convention repealed Section 29 (a) and Section 14.
And for the reasons which have been outlined already here in argument, we feel that an argument of repealer here was totally without merit.
The State Department, when they prepared a memorandum for the President, pointed out that these provisions of public policy, incapable of being enforced are intended to take account of the laws which prohibit the submission of certain questions to arbitration.
Wilko is such a holding Section 14 is such a law, Section 29 (a) is such a law.
Now, the two exceptions --
Justice William H. Rehnquist: Mr. Higgins?
Mr. Francis J. Higgins: Yes, Mr. Justice Rehnquist.
Justice William H. Rehnquist: When your client engages in considerable negotiation over where there shall be arbitrator that’s really a throw away from his point of view.
I suppose since it can never be enforced, he can get some other concession for that and still renege if it comes off?
Mr. Francis J. Higgins: Well, I think when you talk about renege, I don’t think that parties, when they are entering into negotiations of this type assume or necessarily foresee that there is going to be securities fraud committed Justice Rehnquist.
I think it’s the argument that we should say to him, “Now look if you commit fraud, there is in our country the case called Wilko or a Section 29 (a).”
That’s unreal bargaining process as I understand it.
Also, the concept of reneging.
If we call this reneging as no more reneging that when Mr. Wilko did or Mr. Boyd or Mr. Argüelles or Mr. Alexander.
Justice William H. Rehnquist: Except Wilko, I understand was a kind of a contract of adhesion where there wasn’t a very substantial bargaining process?
Mr. Francis J. Higgins: But I was attempting to point out Justice Rehnquist that that’s not what the case involved.
As the case emerged through the court system and as it got to the Supreme Court, there was no contention of any overreaching, coercion and in fact, Justice Frankfurter mentioned this, “I do not see why we are deciding this case this way because there is no disparity of bargaining power here.”
No showing that this man had designed this contract.
Justice William H. Rehnquist: Under your view of the law, would the arbitration provision and the agreement that your client signed be applicable to some disputes that arose under the Act?
Mr. Francis J. Higgins: I would assume that if there was a straight non-securities violation of breach of contract it would be applicable, yes.
But what makes this unique and different is the applicability of what Mr. Justice Douglas accurately referred to as the clear provisions of the Exchange Act.
There is no question here we have stock, we purchased stock within the meaning of 3 (a) 10.
No question about what the 6 (d), long-term promissory notes which were issued for securities.
Hence, we have a situation here which is similar to a number of domestic cases which are known to the parties here where the Securities Acts and the Securities Exchange Act have been applied to the acquisition of all the stock of a business.
They have been applied to acquisitions of interest in closed corporations and in fact, this Court expressly set in the Banker’s life case that the construction of this Act is to be liberal and that it protects corporations -- protects corporations as well as individuals.
Justice Byron R. White: Is it -- what your position precludes agreements of the parties and with respect to the applicable law as to how the contract is to be interpreted and enforced?
Mr. Francis J. Higgins: No.
I do not believe it would Justice White.
Justice Byron R. White: Because the parties here could have stipulated that the law of West Germany or the French law or something.
Mr. Francis J. Higgins: In fact they did stipulate on Illinois law.
Justice Byron R. White: Yes, yes, indeed.
Mr. Francis J. Higgins: And this is another factor here which --
Justice Byron R. White: I wondered why if you would --
Mr. Francis J. Higgins: Yes.
Justice Byron R. White: -- if that it isn't the fact of your argument.
Mr. Francis J. Higgins: It hasn’t been so far but --
Justice Byron R. White: But you would suppose that businessmen then and their lawyers could if Wilko is followed in this case, nevertheless structured their agreements to obtain the benefits of arbitration?
Mr. Francis J. Higgins: Yes, no question.
It does obtain the benefits of arbitration outside the Exchange Act and they can also select their applicable law.
Justice Byron R. White: They've stipulate to take back without the --
Mr. Francis J. Higgins: No, no if the stipulation in advance to waive the provisions of the Exchange Act is void in advance.
At least in advance.
Justice Byron R. White: Well, so they can’t stipulate out of the determination of process act you think so federal act.
Mr. Francis J. Higgins: Correct.
As I read--
Justice Byron R. White: They stipulated what the Government law apply for this case that what kind of law would you expect security has.
Mr. Francis J. Higgins: That’s correct, Your Honor.
Justice Byron R. White: [Voice Overlap]
Mr. Francis J. Higgins: Yes and the defendant is subject to the jurisdiction of the Court.
We always have this limitation that he must have done something to bring him within our power to begin with and then when he is done to that something it ceases us to be what’s called in the petitioner’s brief, “a mere international commercial transactions.”
The transaction indeed may be international, but that fraud is domestic and it is that fraud, the domestic fraud which confers both personal subject matter jurisdiction and gives the plaintiff, the injured plaintiff the right to access in the United States courts.
Under the 33 Act it would be either state or federal as he chose and under the 34 Act it would be within the exclusive jurisdiction of the district courts, but you asked about the Illinois law provision.
This is again a factor which is probably not necessary to our position under this case, but certainly it reinforces it.
As the amicus, the AAA points out in his brief when the party is selected Illinois law, they ipso facto by operation of law selected federal law to the extent that it’s applicable.
Justice Potter Stewart: You accepted -- it says the laws of the State of Illinois.
Mr. Francis J. Higgins: Right, Justice Stewart but the AAA in its amicus brief pointed out accurately, we believe, that when party selects state law they also select federal law to the extent that that is under the supremacy clause, part of the law of the state, but this is simply another quite aside from that legal argument.
This is simply another American nexus to this transaction.
That here’s a party Scherk who contracted with specific reference to the laws of this country.
Justice Lewis F. Powell: Mr. Higgins before you go on, why do you and your client insists that SEV be converted into a Lichtenstein Stock Corporation?
Mr. Francis J. Higgins: The record indicates that there were certain tax considerations which Alberto-Culver deserved.
Justice Lewis F. Powell: The benefit of your client?
Mr. Francis J. Higgins: Well, it was for the benefit of having a deal made.
It was our wish, Scherk have agreed with it, and in order to effectuate the transaction, he converted his Anstalt into a Stock Corporation.
We purchased the stock and issued the notes.
Justice Lewis F. Powell: That was the condition to the obligation to purchase the business?
Mr. Francis J. Higgins: Yes.
Zapata has been mentioned.
The Zapata is indeed an important case, but the Chief Justice’s opinion in Zapata clearly indicates room and in fact explicitly makes room for this type of case.
The opinion states that choice of forum provision should be declared void if it’s contravened statutory or judicially declared public policy.
And in support of that proposition, the Chief Justice's opinion cited Boyd versus Grand Trunk Western Railroad.
Boyd was the first of the string of cases which this Court has decided.
There, a railroad employee restricted his right of venue under the statute.
In fact it was after the dispute arose in Boyd, nevertheless, this Court held that agreement was void to the extent that it attempted to deprive this man of his right to sue wherever the statute provided the railroad could be sued.
Boyd was relied on in Wilko.
Now the Court said in Wilko, “We notice in Boyd that we declared void a post dispute agreement.
We do not have to go that far today and we are not doing so.”
And it was that I think that led to Justice Jackson’s concurring opinion, leaving open this question of a post dispute agreement.
We do not have that situation here.
If it comes before the Court, an agreement entered into after the dispute arises, different policy considerations are going to be applicable.
You have a question of whether or not this is akin or analogous to a settlement agreement.
In any event this Court has not faced or decided that issue and it does not involve in the case before the Court today.
An argument could certainly be made as a matter of statutory construction that such an agreement should be void just as this Court held the Boyd agreement was void.
So summing up, neither of the two exceptions which have been urged here by the petitioner, namely the exception based upon some concept of disparity of bargaining power or sophisticated people, or the fact that he is a foreigner who chose to come to this country and subject himself to the Act, can hold substance either under the language of Section 29 (a) or under 14.
A suggestion has been made that there is nothing unusual about a 10b-5 case.
That this is something very simple to understand, but if this Court were to hold that an arbitration agreement requires a adjudication of this matter before a foreign tribunal or it’s a virtual certainty that there will be unfamiliarity with this Act, then as this Court noted in Bernhardt, the remission of this case, the change of this case from a court to arbitration would have a very definite potential for affecting the underlying substantive right to recovery.
Arbitration is not simply in a formal matter, a procedural matter.
This Court held it in Bernhardt under the -- under an eerie question really, that arbitration versus the court is a matter of substance, and can affect and perhaps even destroy the plaintiff’s right to recovery.
Under circumstances where the power of review, the development of the record, the lack of discovery, the lack of development of unknown body of doctrine for the guidance of the public and all the other infirmities of arbitration mentioned in Wilko are equally applicable here.
So, under the circumstances we ask this Court to follow its holding in Wilko not to overrule that case because neither the statute nor the convention or any other judicial authority requires or permits it, and to affirm the judgments of the Seventh Circuit Court of Appeals and of the District Court.
Chief Justice Warren E. Burger: Thank you gentlemen.
The case is submitted.