PAINEWEBBER INCORPORATED v. ELAHI
PAINEWEBBER INCORPORATED, Plaintiff, Appellant, v. Mohamad S. ELAHI, Kokab Moarefi Elahi and Maryam Elahi, Defendants, Appellees.
95-2188. No.
-- July 03, 1996
Before BOUDIN, Circuit Judge, BOWNES, Senior Circuit Judge, and STAHL, Circuit Judge.
Steven L. Manchel, Boston, MA, with whom David A. Forman and Choate, Hall & Stewart were on brief, for appellant.Philip M. Giordano, Natick, MA, with whom Giordano & Champa, P.A. was on brief, for appellees.
Mohamad S. Elahi, his wife Kokab Moarefi Elahi, and their daughter Maryam Elahi, former clients of the investment firm PaineWebber Incorporated (“PaineWebber”), sought arbitration of several claims PaineWebber filed a complaint in stemming from ill-fated investments. federal district court seeking to stay arbitration, alleging that the claims were time-barred under the terms of the arbitration agreement. The district court dismissed PaineWebber's complaint and granted the PaineWebber appeals, and we Elahis' motion to compel arbitration. affirm.
I.
Background
The Elahis opened investment brokerage accounts with PaineWebber in 1986 and executed a “Client's Agreement” providing that:
all controversies which may arise between [the Elahis and PaineWebber] concerning any transaction in any account(s) or the construction, performance or breach of this or any other agreement between [the Any Elahis and PaineWebber] ․ shall be determined by arbitration. arbitration shall be in accordance with the rules in effect of either the New York Stock Exchange, Inc., American Stock Exchange, Inc., National Association of Securities Dealers, Inc., or where appropriate, the Chicago Board Options Exchange or National Futures Association, as the [client] may elect.
It also provided that “[t]his agreement and its enforcement shall be construed and governed by the laws of the State of New York.”
Some time in 1994, the Elahis notified PaineWebber of their intention to pursue claims that one of its brokers had sold them unsuitable and highly speculative investments, falsely guaranteed a twelve-percent minimum return, and deceptively assured them that their investments were secure when in fact they had already On August 3, lost a significant part of their initial investment. 1994, the Elahis and PaineWebber executed an agreement to toll, as of June 28, 1994, the running of all statutes of limitations and other defenses based on the passage of time, apparently hoping to reach a The effective date of the tolling agreement negotiated settlement. was more than seven years after the Elahis' last purchase of an investment from PaineWebber.
On December 29, 1994, the Elahis filed a Statement of Claim with the National Association of Securities Dealers, Inc. (“NASD”), seeking arbitration of claims arising under the federal securities laws, Massachusetts statutes, and various Massachusetts common law theories of fraud and breach of fiduciary PaineWebber responded by bringing this action for declaratory duty. and injunctive relief, seeking to bar the arbitration of the Elahis' PaineWebber asserted that the arbitration rules of the NASD claims. precluded claims filed more than six years after the purchase of the Specifically, PaineWebber pointed to Section 15 investments at issue. of the NASD Code of Arbitration Procedure (“section 15”), which provides:
Time Limitation Upon Submission
No Sec. 15. dispute, claim, or controversy shall be eligible for submission to arbitration under this Code where six (6) years have elapsed from the occurrence or event giving rise to the act or dispute, claim, or This section shall not extend applicable statutes of controversy. limitations, nor shall it apply to any case which is directed to arbitration by a court of competent jurisdiction.
PaineWebber postulated that the Elahis' claims were not “eligible for submission to arbitration” because they concerned securities purchased more than seven years before the effective date of the tolling agreement and over eight years before the claim for arbitration was filed with the NASD. The Elahis' countered by filing motions (1) to dismiss PaineWebber's complaint and (2) to compel arbitration under the Federal Arbitration 4. Act, 9 U.S.C. §
The district court granted the Elahis' The court found that the parties had signed a valid motions. arbitration agreement covering disputes over investment transactions, and consequently ruled that the applicability of the time-bar provision of section 15 was a question to be determined by the arbitrator rather than the court.1 PaineWebber appeals.
II.
Discussion
PaineWebber argues on appeal that the section 15 time bar makes the Elahis' claims ineligible for arbitration, and that the court, not the arbitrator must The issue before us, then, therefore decide the timeliness question. is whether the time-bar provision is to be construed and applied by the arbitrator or by the court.2 We are the tenth circuit court to address that question; our sister The Third, Sixth, Seventh, Tenth, circuits are split five-to-four. and Eleventh Circuits have held that the court must decide the applicability of the section 15 time bar; the Second, Fifth, and Eighth, and Ninth Circuits have held that the arbitrator decides.3 In our view, this body of appellate caselaw leaves important aspects The relevant Supreme of the problem unaddressed, as we shall explain. Court cases provide guidance, but do not point clearly to the correct Consequently, we embark on our own analysis. result in this case.
Because this appeal presents a question of law, appellate review is plenary. See McCarthy v. Azure, 22 F.3d 351, 354 (1st Cir.1994) (applying de novo review to district court's ruling on scope of arbitration agreement); Commercial Union Ins. Co. v. Gilbane Bldg. Co., 992 F.2d 386, 388 (1st Cir.1993) (explaining that determination of arbitrability depends on contract interpretation, which is a question of law).
PaineWebber presents two basic arguments: (1) that the parties' contractual choice of New York law was made with the intent to require the court, not the arbitrator, to apply the section 15 time bar, as New York caselaw requires; and (2) that, under federal law, the time bar presents a question of arbitrability to be decided by the court, in the absence of clear evidence that the parties intended to submit arbitrability We address these arguments in order. determinations to arbitration.
Effect of the Choice-of-Law Clause A.
The agreement between PaineWebber and the Elahis provides that “[t]his agreement and its enforcement shall be construed and governed by the laws of the State of New York.” Relying on that choice-of-law provision, PaineWebber argues that we must reverse the district court's order because New York courts have held that courts, not arbitrators, See, e.g., must decide the applicability of the section 15 time bar. Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Ohnuma, 630 N.Y.S.2d 724, 725 (N.Y.App.Div.1995); Merrill Lynch, Pierce, Fenner & Smith, Inc. v. DeChaine, 194 A.D.2d 472, 600 N.Y.S.2d 459, 460, leave to appeal denied, 82 N.Y.2d 657, 604 N.Y.S.2d 556, 624 N.E.2d 694 (1993).
Thus, our first task is to determine if the choice-of-law provision settles the question whether the court or the arbitrator Somewhat decides the effect of the section 15 time bar. paradoxically, federal arbitration law dictates the effect of the clause selecting New York law.
of the Federal Arbitration Act (“FAA”), Section 2 4 “is a congressional declaration of a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or Moses H. Cone Memorial Hosp. v. procedural policies to the contrary.” Mercury Constr. Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 941, 74 L.Ed.2d Although “[t]he FAA contains no express pre-emptive 765 (1983). provision,” and “[does not] reflect a congressional intent to occupy the entire field of arbitration,” Volt Info. Sciences, Inc. v. Board of Trustees of Leland Stanford, Jr. Univ., 489 U.S. 468, 477, 109 S.Ct. 1248, 1255, 103 L.Ed.2d 488 (1989), it was intended to “create a body of federal substantive law of arbitrability, applicable to any arbitration agreement within the coverage of the Act.” Moses H. Cone, There is no dispute that the 460 U.S. at 24, 103 S.Ct. at 941. agreement between these parties is within the scope of the FAA, because it is clearly one “involving commerce” as that phrase was broadly construed in Allied-Bruce Terminix Cos. v. Dobson, --- U.S. ----, And, the ---- - ----, 115 S.Ct. 834, 839-43, 130 L.Ed.2d 753 (1995). question whether a court or an arbitrator applies the section 15 time bar relates closely to “arbitrability,” so we must apply the federal common law of arbitrability that has developed pursuant to the FAA. See Moses H. Cone, 460 U.S. at 24, 103 S.Ct. at 941.
The “primary purpose” of the FAA is to ensure “that private agreements to arbitrate Volt, 489 U.S. at 479, 109 are enforced according to their terms.” “Arbitration under the Act is a matter of consent, not S.Ct. at 1256. coercion, and parties are generally free to structure their agreements Id. Thus, whether an issue is to be decided by the as they see fit.” See arbitrator is a matter of the parties' contractual intent. Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, ----, 115 S.Ct. 1212, 1216, 131 L.Ed.2d 76 (1995).
The Supreme Court has explained that the FAA “not only ‘declared a national policy favoring arbitration,’ but actually ‘withdrew the power of the states to require a judicial forum for the resolution of claims which the contracting Id. at ---- - ----, 115 parties agreed to resolve by arbitration.’ ” S.Ct. at 1215-16 (quoting Southland Corp. v. Keating, 465 U.S. 1, 10, More recently, the Supreme 104 S.Ct. 852, 858, 79 L.Ed.2d 1 (1984)). Court explained that if a state law is applicable to contracts generally, it may be applied to arbitration agreements, but a state law that is specifically and solely applicable to arbitration agreements is displaced by the FAA. Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, ---- - ----, 116 S.Ct. 1652, 1655-56, 134 L.Ed.2d 902 (1996). Therefore, New York law cannot require the parties in this case to submit the question of the section 15 time bar to a court; the question is whether the parties intended, through their general choice of New York law, to adopt for themselves the New York caselaw requiring that courts, not arbitrators, decide the time bar.
Based on the “national policy favoring arbitration,” Mastrobuono, 514 U.S. at ----, 115 S.Ct. at 1216, the Supreme Court in Mastrobuono held that the choice-of-law provision in a broker-client agreement did not indicate an intent to adopt New York caselaw barring arbitrators from awarding The 514 U.S. at ---- - ----, 115 S.Ct. at 1215-18. punitive damages. Court found that the parties' choice of New York law was not “an unequivocal exclusion of punitive damages,” id. at ----, 115 S.Ct. at 1217, and “[a]t most ․ introduce[d] an ambiguity into an arbitration Id. at agreement that would otherwise allow punitive damages awards.” The Court resolved that ambiguity both “in ----, 115 S.Ct. at 1218. favor of arbitration,” id., and “against the interest of the party that drafted it,” id. at ----, 115 S.Ct. at 1219, and found that the choice-of-law clause did not speak to the power of the arbitrator to award punitive damages, id.
Following the principles and analysis set forth in Mastrobuono, we (like the district court) find that the choice-of-law clause in this case is not an expression of intent to adopt New York caselaw requiring the courts to apply section 15. Here, the breadth of the arbitration clause-encompassing “all controversies ․ concerning any transaction” as well as the “construction, performance, or breach” of the agreement-militates against reading the choice-of-law clause as a limit on the arbitrator's Moreover, the agreement provides that “arbitration shall be in power. accordance with the rules in effect of the ․ [NASD],” which further undermines the likelihood that the parties intended to adopt In sum, we can do no arbitration rules contained in New York caselaw. better than to borrow from Mastrobuono:
We think the best way to harmonize the choice-of-law provision with the arbitration provision is to read “the laws of the State of New York” to encompass substantive principles that New York courts would apply, but not to include special Thus, the choice-of-law rules limiting the authority of arbitrators. provision covers the rights and duties of the parties, while the arbitration clause covers arbitration․
Id. at ----, 115 S.Ct. at 1219.
Thus, relying on Mastrobuono, we hold that the parties' contractual choice of New York law does not require a judicial determination of the effect of the NASD Code section 15 time bar.5 We move on to consider the arbitration clause itself (and the NASD Code of Arbitration Procedure incorporated therein) to determine, in light of federal arbitration law, whether the parties intended that the arbitrator or the court apply the time bar.
Interpreting Section 15 B.
A cardinal principle of federal arbitration law is that “ ‘arbitration is a matter of contract and a party cannot be required to submit to AT arbitration any dispute which he has not agreed so to submit.’ ” & T Technologies, Inc. v. Communications Workers of Am., 475 U.S. 643, 648, 106 S.Ct. 1415, 1418, 89 L.Ed.2d 648 (1986) (quoting United Steelworkers v. Warrior & Gulf Navig. Co., 363 U.S. 574, 582, 80 S.Ct. 1347, 1353, 4 L.Ed.2d 1409 (1960)).6 Where the parties have made clear what issues are to be arbitrated, and what issues are excluded from arbitration, it is easy to give The difficulty comes where the existence or effect to that principle. scope of the agreement to arbitrate is unclear; in that situation, federal arbitration law must provide default rules and presumptions.
Because a party will not be coerced to arbitrate an issue unless he has so agreed, the Supreme Court has held that:
the question of arbitrability-whether a[n] ․ agreement creates a duty for the parties to arbitrate the particular grievance-is undeniably a Unless the parties clearly and unmistakably judicial determination. provide otherwise, the question of whether the parties agreed to arbitrate is to be decided by the court, not the arbitrator.
Id. at 649, 106 S.Ct. at 1418, followed in First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, ---- - ----, 115 S.Ct. 1920, 1923-25, 131 In this case, if the section 15 time bar is L.Ed.2d 985 (1995). determinative of the “arbitrability” of the Elahis' claim, then, under AT & T and First Options, the district court must construe and apply the time bar, unless we find “clear and unmistakable” evidence that the parties agreed to have the arbitrator decide arbitrability.
But the presumption established in AT & T and First Options-that courts, not arbitrators, decide “arbitrability” unless the parties clearly intend otherwise-is an exception to the “liberal federal policy See Moses H. Cone, 460 U.S. at 24, 103 S.Ct. favoring arbitration.” Pursuant to that policy, the Supreme Court has established a at 941. broad presumption of arbitrability: “any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to Accordingly, if the Id. at 24-25, 103 S.Ct. at 941. arbitrability.” time bar does not control “arbitrability,” the issue of the time bar's applicability would be one for the arbitrator under the broad arbitration clause, absent a clear indication to the contrary in the See Mastrobuono, 514 U.S. at ----, 115 S.Ct. at parties' agreement. 1218 (“[A]mbiguities as to the scope of the arbitration clause itself [must be] resolved in favor of arbitration.”) (quoting Volt, 489 U.S. at 476, 109 S.Ct. at 1254); AT & T, 475 U.S. at 650, 106 S.Ct. at 1419 (explaining established rule that where broad arbitration clause is in force, presumption of arbitrability exists unless “forceful In evidence” indicates intent to exclude claim from arbitration). other words, if an “arbitrability” issue arises, it is presumptively for the court to decide; but issues other than “arbitrability” are presumptively arbitrable, that is, for the arbitrator to decide.
Because the agreement is not unmistakably clear about whether the court or the arbitrator is to apply the time bar, this case hinges on which of the two presumptions we apply: (1) issues of “arbitrability” are presumptively for the court to decide, or (2) issues other than And, which “arbitrability” are presumptively for the arbitrator. presumption we apply hinges on whether the time bar is an “arbitrability” issue, in the sense that the Supreme Court used that term in AT & Thus, we venture into a T and First Options. definitional maze to determine whether or not the NASD time bar presents an issue of “arbitrability.”
Does the time bar present an “arbitrability” issue? 1.
The Supreme Court's most recent discourse on “who decides arbitrability” appears in First Options, 514 U.S. at ---- - ----, 115 S.Ct. at In First Options, the “arbitrability” issue was whether 1923-25. Kaplan and his wife were bound to arbitrate their personal liability for the debts of their wholly owned investment corporation, given that they had not personally signed the arbitration agreement that Thus, we can glean from First undisputedly bound the corporation. Options that the issue of whether a person is a party to an arbitration agreement is an “arbitrability” issue, and presumptively for the court to decide.
In AT & T, the other Supreme Court case on “who decides arbitrability,” the “arbitrability” issue was whether the subject matter of the underlying dispute was expressly made The non-arbitrable by the terms of the arbitration agreement. arbitration clause of the collective bargaining agreement (“CBA”) in AT & T expressly did not cover disputes “excluded from arbitration by AT other provisions of this contract.” & T, 475 U.S. at 645, 106 The CBA provided further that the employer, AT S.Ct. at 1415. & T, was free to exercise certain management functions, including the termination of employment, “not subject to the provisions of the Id. Another CBA term provided that layoffs would arbitration clause.” occur in reverse order of seniority, defining layoffs as terminations resulting from “lack of work”; the “layoff” provision did not specify whether it was subject to, or excepted from, the arbitration clause. Id. The issue was whether the union could compel arbitration over certain layoffs, or, instead, whether the layoffs were non-arbitrable The Supreme Court held that the issue whether management functions. “layoffs” were an arbitrable subject matter was to be decided by the courts, not the arbitrator, given that the parties had expressly agreed that certain subjects, including “termination of employment,” were not Thus, we glean from AT Id. at 651, 106 S.Ct. at 1415. arbitrable. & T that the question whether the subject matter of the underlying dispute is within the scope of an expressly limited arbitration agreement is an “arbitrability” issue.
In the case at hand, it is without question that PaineWebber and the Elahis are parties to an arbitration agreement of broad scope, and that the underlying dispute over unsuitable investments concerns a subject matter that they Nonetheless, PaineWebber contends that the intended to arbitrate. NASD section 15 time bar prevents the arbitrator from hearing any aspect of this dispute, because the time bar is a “substantive The question before us, then, is whether eligibility requirement.” the timeliness of submission goes to the “arbitrability” of the merits of the underlying dispute, within the meaning of that term as suggested by AT & T and First Options.
The Supreme Court has twice defined “arbitrability”: in AT & T as “whether the ․ agreement creates a duty for the parties to arbitrate the particular grievance,” id. at 649, 106 S.Ct. at 1418; and in First Options as “whether they agreed to arbitrate the merits” of the dispute, 514 U.S. at ----, 115 It is not immediately obvious how to apply these S.Ct. at 1923. definitions to determine whether the NASD time bar is an arbitrability issue.
One could say here that “arbitrability” is not an issue, because the parties clearly agreed to arbitrate the merits of disputes Alternatively, one could say that the about investment transactions. parties only agreed to arbitrate investment disputes less than six years old,7 But in which case the time bar would be an “arbitrability” issue. Many a mandatory procedural rule could where does that logic take us? be called an “arbitrability” rule if the failure to comply prevented For example, one might say that, by arbitration of the merits. incorporating the NASD rules, the parties agreed to arbitrate only those disputes for which the arbitrator's fee has been paid; questions It would relating to the fee could be called “arbitrability” issues. be illogical, though, to conclude that the court, not the arbitrator, Thus, it is not must determine if the proper fee was paid. immediately clear how we should determine, at the margins at least, Seeking more light on what is and what is not an arbitrability issue. what “arbitrability” means and whether the section 15 time bar is an “arbitrability” issue, we next examine the rulings of other circuits on the question whether courts or arbitrators apply the section 15 time bar.
Decisions of other circuits a.
Five circuits conclude the court must decide i.
Five circuits (the Third, Sixth, Seventh, Tenth, and Eleventh) have interpreted the time bar of section 15 to be a substantive eligibility requirement that constitutes a jurisdictional prerequisite to arbitration, and thus for the court to apply.8 See, e.g., Cogswell v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 78 F.3d 474, 478-81 (10th Cir.1996) (collecting and discussing cases from other circuits); Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Cohen, 62 F.3d 381, 383-84 (11th Cir.1995); PaineWebber Inc. v. Hofmann, 984 F.2d 1372, 1378 (3d Cir.1993); Roney and Co. v. Kassab, 981 F.2d 894, 898-900 (6th Cir.1992); Edward D. Jones & Co. v. Sorrells, 957 F.2d 509, 512-13 (7th Cir.1992).
In essence, these decisions rest on an asserted “plain language” interpretation of section 15: because the rule provides that claims over six years old are not “eligible for submission ” to arbitration, these circuits conclude that it limits the jurisdiction of the arbitrator, and consequently, any question about the application of the rule to the Having characterized facts of a particular case is for the courts. the time bar as an “arbitrability” issue presumptively for the courts under AT & T and First Options, these circuits, examining agreements substantially identical to the Elahis', find no clear evidence of an intent to arbitrate the time-bar issue.
In our view, the language of section 15 is not plain and unambiguous. Section 15 of the NASD Code does not speak to who decides the Section 15 does not plainly create a applicability of the time bar. question of “arbitrability,” because it does not address whether the basic subject matter of the dispute is within the scope of the arbitration clause.
One could credibly view section 15 as analogous to a statute of limitations rather than a “substantive Courts have often held that timeliness eligibility requirement.” issues are for the arbitrator to decide, so the mere fact that the rule creates a time-based bar to successful assertion of a claim does not by See Moses H. itself create an “arbitrability” issue for the court. Cone, 460 U.S. at 24-25, 103 S.Ct. at 941-42 (1983); Local 285, Serv. Employees Int'l Union v. Nonotuck Resource Assocs., Inc., 64 F.3d 735, 739-40 (1st Cir.1995); O'Neel v. National Ass'n of Secs. Dealers, Inc., 667 F.2d 804, 807 (9th Cir.1982).
The Seventh Circuit's analysis relied in part on a 1988 letter written by an NASD staff attorney stating that “the NASD will not process a claim that falls wholly outside the six year period,” finding the letter to be an indication that section 15 is an eligibility requirement that must be See PaineWebber Inc. v. Farnam, 870 F.2d 1286, decided by the courts. In our view, reliance on the NASD staff 1292 (7th Cir.1989). There is no assurance that the letter attorney's letter is misplaced. More importantly, represented the position of the NASD at the time. it does not reflect the current view of the NASD. Recently, the NASD has concluded that section 15 is silent on whether courts or The NASD has proposed arbitrators decide if an action is time-barred. an amendment to section 15 which would provide that the NASD Director of Arbitration would make the eligibility determination under the 59 Fed.Reg. 39,373, 39,373-74 (July 26, 1994), six-year time-bar rule. quoted in Cogswell, 78 F.3d at 479.9 The NASD, explaining the amendment's purpose, stated that “Section 15 does not specify who has the authority to determine if a claim is Id. The NASD's 1994 statement eligible for submission to arbitration.” seriously undermines the five-circuit majority's “plain language” rationale, as well as any reliance on the staff attorney's letter as an agency opinion entitled to some deference.
In sum, we are not persuaded by the analysis of the five-circuit majority.
Four circuits say the arbitrator decides ii.
Four circuits-the Second, Fifth, Eighth, and Ninth-take the view that the While section 15 time bar is a matter for the arbitrator to decide. we agree with the result these circuits reach, in our view, their varied analyses leave important questions unanswered.
In Smith Barney Shearson, Inc. v. Boone, 47 F.3d 750, 753-54 (5th Cir.1995), the Fifth Circuit drew a distinction between issues of “substantive Given the broad arbitrability” and “procedural arbitrability.” arbitration clause between the parties in Boone, the court held that section 15 raised timeliness issues that “are issues of procedural arbitrability and must be decided by the arbitrator.” 10 Id. at 754.
The Eighth Circuit held that section 15 was for the arbitrator to apply, but declined to address whether the NASD time bar was procedural or FSC Secs. Corp. v. Freel, 14 F.3d 1310, 1312 n. 2 (8th substantive. Instead, the court in Freel determined that another Cir.1994). provision of the NASD Code of Arbitration Procedure, section 35, was a “clear and unmistakable expression” of the parties' intent to have the Id. at arbitrator decide the applicability of the section 15 time bar. Section 35 of the NASD Code of Arbitration Procedure provides 1312-13. that “[t]he arbitrators shall be empowered to interpret and determine the applicability of all provisions under this Code.” Id. at 1312.
Finally, and most recently, the Second Circuit held that the arbitrator decides In PaineWebber, Inc. v. Bybyk, 81 the applicability of the time bar. F.3d 1193, 1196, 1198-99 (2d Cir.1996), the court assumed without analysis that the section 15 time bar presented an “arbitrability” question in the sense of AT & But the court T and First Options. also found that the broad arbitration agreement (“any and all controversies which may arise concerning the account” were to be arbitrated) was clear and unmistakable evidence of the parties' intent In Id. at 1199-200. to have the arbitrator determine arbitrability. reaching the conclusion that this intent was “clear and unmistakable,” the court said, somewhat paradoxically, that it would construe any The Bybyk Id. at 1199. ambiguities against the drafter, PaineWebber. court went on to say that it did not need to decide whether the time bar was substantive or procedural, because it determined that the NASD rules were not effectively incorporated into the parties' agreement. But, the court further stated, even if the NASD rules Id. at 1201. and the time bar had been incorporated, Section 35 (discussed above with the Eighth Circuit's Freel decision) clearly “commit[ted] all issues, including issues of arbitrability and timeliness, to the Thus, the Second Circuit relied on Id. at 1202. arbitrators.” several alternative grounds to find that the time bar should be applied by the arbitrator.
The Ninth Circuit has held that “the validity of time-barred defenses to enforcement of arbitration agreements should generally be determined by the arbitrator rather than the court”. O'Neel v. National Ass'n of Secs. Dealers, Inc., 667 F.2d 804, 807 But the O'Neel court was applying a previous NASD (9th Cir.1982). five-year time limit for submission to arbitration, not the present Moreover, O'Neel contains no analysis of the issue, as section 15. the Ninth Circuit simply adopted an earlier Second Circuit case, Conticommodity Services v. Philipp & Lion, 613 F.2d 1222, 1224-26 (2d Cir.1980), which has since been supplanted by the Second Circuit's Nonetheless, it more recent analysis in Bybyk, 81 F.3d at 1193. appears that O'Neel is still good law in the Ninth Circuit, and we believe the same result would obtain in that circuit with respect to section 15.
Our analysis b.
In our view, we must determine whether the parties intended the time bar to be an “arbitrability” issue, i.e., a threshold issue that must be decided by a court before After all, the intent of the parties there can be any arbitration. AT always controls what is to be arbitrated. & T, 475 U.S. at Given the existence here of a valid and broad 648, 106 S.Ct. at 1418. arbitration clause covering “all controversies” concerning investment transactions “or the construction, performance or breach of this or any other agreement,” did the parties intend that the time bar of section 15 should determine “arbitrability” as that term is used in AT & T and First Options?
If the parties clearly intend that a particular issue must be resolved by the courts before there is any duty to submit to arbitration, then the courts must respect that intent See AT by deciding the issue. & T, 475 U.S. at 648, 106 S.Ct. at On the other hand, if it is ambiguous whether the parties 1418. intend a given issue to be an “arbitrability” issue, we must make a sensible presumption about their intent.
Thus, if t he parties have (1) entered into a valid arbitration agreement (satisfying First Options “arbitrability”), and (2) the arbitration agreement covers the subject matter of the underlying dispute between them (satisfying AT & T “arbitrability”), then we will presume that the parties have made a commitment to have an arbitrator decide all the remaining issues Put necessary to reach a decision on the merits of the dispute. differently, the signing of a valid agreement to arbitrate the merits of the subject matter in dispute presumptively pushes the parties across the “arbitrability” threshold; we will then presume that other issues relating to the substance of the dispute or the procedures of Cf. Moses H. Cone, 460 U.S. at arbitration are for the arbitrator. But, if the parties clearly and 24-25, 103 S.Ct. at 941-42. unmistakably provide that an issue is one of “arbitrability”-i.e., that the issue is a threshold matter that must be determined before any adjudicative power will be granted to the arbitrator-then the court must respect that clear expression of intent and decide that threshold issue, rather than compelling arbitration.
This presumption about whether an issue goes to “arbitrability” is consistent with both the federal policy favoring arbitration and common sense about the likely intent of parties who have agreed to arbitrate the subject matter of We believe that parties who have agreed to the underlying dispute. arbitrate a given subject most likely intend and expect that the arbitrator should resolve all issues that arise concerning that subject; if they do not, we think they would clearly express their contrary intent.
The presumption that we now adopt (i.e., that issues other than (1) the existence of an arbitration agreement between the parties and (2) whether the subject matter of the underlying dispute is within the scope of the arbitration clause are presumptively not “arbitrability” issues) must not be confused with-and in no way diminishes-the presumption, established in AT & T and First Options, that issues of arbitrability are normally to be decided by The presumption that we adopt today is about courts, not arbitrators. whether an issue is one of “arbitrability”; the AT & T /First Options presumption is about who decides issues that have been classified as “arbitrability” issues.
The Court explained in First Options that parties are unlikely to have focused on the question of who should decide arbitrability, and therefore the courts should presume that they did not intend to submit arbitrability issues to an This is 514 U.S. at ---- - ----, 115 S.Ct. at 1924-25. arbitrator. obvious where the “arbitrability” question is whether there is an agreement at all (as in First Options ); certainly a party who did not sign the agreement did not consider who should decide arbitrability. This presumption (that arbitrability issues are for the courts) also makes sense where the subject matter of the dispute may be outside the scope of an otherwise valid agreement (as in AT & T ); in such a case, the parties likely believed that it was enough to exclude certain issues from the arbitration clause, and probably did not think about the arbitrator's power to decide whether a particular close case was excluded or not.
On the other hand, where the parties have clearly agreed to arbitrate the subject of the underlying dispute between them, as the parties have here, it is unlikely that they intended other issues related to the dispute, such as the timeliness of the submission of the claim, to affect the “arbitrability” of the Such an intent is particularly unlikely where the dispute. Thus, we arbitration clause is as broad as it is in this case. presume that the parties here did not intend to make the section 15 time bar a threshold “arbitrability” question to be determined by the courts rather than an arbitrator.
Did the parties clearly and unmistakably express an intent to make the NASD time bar an “arbitrability” issue? 2.
Although we presume that the time bar was not intended to be an arbitrability issue, we do not stop there; we must look closely at the agreement between PaineWebber and the Elahis for any clear and We unmistakable expression of an intent contrary to that presumption. apply “general state-law principles of contract interpretation” to an arbitration agreement, but with “due regard” to the federal policy Volt, 489 U.S. at 475-76, 109 S.Ct. at 1254; favoring arbitration. see also First Options, 514 U.S. at ----, 115 S.Ct. at 1924; Mastrobuono, 514 U.S. at ---- & n. 9, 115 S.Ct. at 1219 & n. 9. As the parties have directed, we look to New York contract law. “[T]he court must ascertain the intent of the parties from the plain meaning of the language employed,” and a “contract should be construed American so as to give full meaning and effect to all its provisions.” Express Bank Ltd. v. Uniroyal, Inc., 164 A.D.2d 275, 562 N.Y.S.2d 613, 614 (1990), leave to appeal denied, 77 N.Y.2d 807, 569 N.Y.S.2d 611, A contract term is ambiguous if it is “capable 572 N.E.2d 52 (1991). of more than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement and who is cognizant of the customs, practices, usages, and terminology as generally understood in the particular trade Walk-In Med. Ctrs., Inc. v. Breuer Capital Corp., 818 or business.” F.2d 260, 263 (2d Cir.1987) (applying New York law).
Our analysis of the agreement reveals no clear and unmistakable expression of intent that the NASD time bar should be an arbitrability issue, nor The that the time bar's applicability should not be arbitrated. agreement simply says that “arbitration shall be in accordance with the rules in effect of ․ [the NASD].” 11 PaineWebber's argument that the time bar is an arbitrability issue centers on the “eligible for submission” language of section 15 (“No dispute, claim, or controversy shall be eligible for submission to arbitration under this Code where six (6) years have elapsed․”). PaineWebber asserts that the arbitrator is only empowered to act on claims that are “eligible for submission” to the NASD, thus someone else-the court-must decide if a claim is “eligible for submission.”
As we concluded earlier in our analysis of whether the time bar presented an arbitrability issue, PaineWebber's view is plausible, but it is not “Submission to the only plausible interpretation of this phrase. arbitration” could mean submission for full adjudication of the merits, rather than submission for preliminary determinations, such as whether the claim is time-barred, or whether the appropriate fee was paid, or The NASD itself whether the claim was submitted on the proper forms. recently stated, as we have noted, that “Section 15 does not specify who has the authority to determine if a claim is eligible for 59 Fed.Reg. 39,373, 39,373-74, quoted in submission to arbitration.” Thus, we conclude, as did the NASD Cogswell, 78 F.3d at 479-80. itself, that the “eligible for submission” language in section 15 is not a clear expression of intent to make timeliness an arbitrability issue.
A number of other considerations support our conclusion that section 15 was not clearly intended to be an arbitrability issue for judicial determination.12 First, the existence of NASD Code section 35, empowering the arbitrator to “interpret and determine the applicability of all provisions under this Code,” strongly undercuts any argument that the parties intended the section 15 time bar to be an arbitrability issue See Bybyk, 81 F.3d at 1202; Freel, to be decided only by the courts. 14 F.3d at 1312.
Second, the section 15 time bar is part of the NASD Code of Arbitration Procedure, thus one would assume it is intended to be applied by the NASD itself to control its own procedures, rather than a rule that is somehow “off-limits” for arbitrators to apply.
Third, the NASD rules only come into play Although the after the NASD has been chosen as the arbitral forum. other potential forums specified in the parties' arbitration clause appear to have a nearly identical six-year time bar, they might, in theory, have very different time-bar rules, with different time periods, or different language (perhaps phrased in terms of If other forums did have “eligibility for submission,” perhaps not). differently phrased rules, the question whether timeliness presented an “arbitrability” issue would depend on which of the potential arbitral If the parties intended to make a time bar a forums was chosen. threshold issue for judicial, rather than arbitral, determination, it seems unlikely that they would do so through such potentially unreliable means.
III.
Conclusion
Because the parties agreed to arbitrate “all controversies” concerning investment transactions, as well as controversies concerning the construction, performance, and breach of the arbitration agreement, we presume that they intended to arbitrate the timeliness of the submission of this Finding no clear expression of an intent dispute about investments. contrary to our presumption, we hold that the interpretation and application of the six-year time bar of section 15 is a matter for the Accordingly, the judgment of the district court is arbitrator. Costs to appellees. affirmed.
FOOTNOTES
1. The district court based its decision on its published opinion in a similar case, PaineWebber, Inc. v. Landay, 903 F.Supp. 193 (D.Mass.1995), which the court incorporated by reference in its unpublished memorandum and order in this case.
2. Ultimately, the arbitrator or the court will probably need to determine (1) whether the only relevant “occurrence or event” triggering the time bar was the Elahis' purchase of investments, or whether the time bar should be measured from the date of alleged subsequent acts or omissions related to the investments, and (2) We whether the time bar is absolute or subject to equitable tolling. We are faced solely with the question need not decide those issues. whether the district court correctly referred the time bar issues to the arbitrator, or should have decided them itself.
3The cases are listed and discussed infra in part II.B.1.a. .
4. Section 2 of the FAA provides in pertinent part that:A written provision in ․ a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction ․ shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation 2. of any contract.9 U.S.C. §
5. This conclusion is not inconsistent with Volt Info. Sciences, Inc. v. Board of Trustees of Leland Stanford, Jr. Univ., 489 U.S. 468, 109 In Volt, the Supreme Court S.Ct. 1248, 103 L.Ed.2d 488 (1989). deferred to the California court's finding under state contract law that the parties had intended their choice-of-law clause to adopt Id. at 476, 109 California rules governing arbitration procedures. Here, we must determine de novo what the parties S.Ct. at 1254. intended by their choice-of-law clause, and we follow Mastrobuono. See Mastrobuono, 514 U.S. at ---- n. 4, 115 S.Ct. at 1217 n. 4.
6. Earlier, one might have doubted whether appellate decisions concerning Today, there labor arbitration would apply to commercial arbitration. The Supreme Court relied heavily upon a labor is little question. arbitration case in its recent decision in First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, ---- - ----, 115 S.Ct. 1920, 1923-25, 131 L.Ed.2d 985 (1995) (applying labor arbitration precedents, particularly AT & T, to determine whether courts or arbitrators decide We believe arbitrability under a commercial arbitration agreement). it is appropriate to follow the Supreme Court's lead in applying the particular labor arbitration cases cited herein to the particular issue See, e.g., McCarthy v. Azure, 22 in this commercial arbitration case. F.3d 351, 354 (1st Cir.1994) (applying labor arbitration precedents in Cf. Finegold, Alexander commercial arbitration case). & Assocs., Inc. v. Setty & Assocs., Ltd., 81 F.3d 206, 207-08 (D.C.Cir.1996) (discussing application of labor arbitration precedents in commercial arbitration cases, and stating “there may no longer be much of a distinction between the two lines of cases ․ but precision constrains us to avoid treating them interchangeably”); Raytheon Co. v. Automated Bus. Sys., Inc., 882 F.2d 6, 10-11 (1st Cir.1989) (explaining that use of labor arbitration precedents is inappropriate in deciding whether commercial arbitrators have power to award punitive damages, given different considerations in long-term labor-management relationships and short-term, often “one-shot” commercial relationships).
7. The parties apparently agree that the NASD Code of Arbitration Procedure was incorporated by reference into their agreement, even though it was not known at the time of execution that the NASD would be Cf. PaineWebber Inc. v. Bybyk, 81 F.3d the chosen arbitral forum. 1193, 1201 (2d Cir.1996) (holding that NASD Code not incorporated into identical client-broker arbitration agreement because NASD not identifiable as actual arbitral forum at time of execution of the agreement).
8. Some of the cited cases involve an identical time-bar rule of the New York Stock Exchange, and we see no reason to distinguish the cases. Furthermore, none of the cases turn on the minor variations in the language of the arbitration clauses in the broker-client agreements.
9. The NASD withdrew the proposed amendment in October 1994 based on concerns expressed in public comments, and is apparently still working Letter “to develop a proposal acceptable to all parties concerned.” from Suzanne E. Rothwell, NASD Associate General Counsel, to Mark Barracca, Branch Chief, Division of Market Regulation of the Securities In our view, the withdrawal and Exchange Commission (Oct. 12, 1994). of the proposed amendment does not negate the significance of the NASD's statement in 1994 that section 15 does not specify who decides the applicability of the time bar.
10. The Fourth Circuit, which has not decided the question presented here, appears to embrace the “substance vs. procedure” approach of the Fifth In Miller v. Prudential Bache Secs., Inc., 884 F.2d 128, 132 Circuit. (4th Cir.1989), cert. denied, 497 U.S. 1004, 110 S.Ct. 3240, 111 L.Ed.2d 751 (1990), the court found that a clause in a broker-client agreement providing that “arbitration was to be conducted in accordance with the rules of the arbitration forum governed only arbitration The precise holding in Miller, though, was that although procedure.” the NASD's procedural rules made the NASD's anti-fraud provisions inapplicable, the NASD arbitrator was not barred from applying the anti-fraud provisions of other stock exchanges to which That result followed from the court's Prudential-Bache belonged. finding that the NASD arbitration rules related only to arbitration “procedure,” and not the “substantive rules that may bear on the merits Id. It would appear that the Fourth of the underlying dispute.” Circuit's analytical approach (i.e., that the procedural rules of the arbitral forum are incorporated into an arbitration agreement only to govern arbitration procedure) would lead to the same result with respect to the NASD time bar: the NASD Code of Arbitration Procedure, including section 15, is for the arbitrator to interpret and apply.
11. The notion of the Elahis having an intent with regard to section 15 is somewhat artificial-it seems unlikely that a small, private investor But would have any specific knowledge of the NASD arbitration rules. the parties here do not dispute that the NASD rules were effectively incorporated into their agreement, nor is there any argument that the Thus, by agreement was an unconscionable contract of adhesion. incorporation, the parties have committed to be bound by section 15, whether or not they even knew it existed, let alone understood what it See Level Export Corp. v. Wolz, Aiken meant. & Co., 305 N.Y. 82, 111 N.E.2d 218, 221 (1953) (one who accepts a contract is deemed to know its contents).
12. We choose not to rely on another line of precedent that would justify In John Wiley our decision. & Sons, Inc. v. Livingston, 376 U.S. 543, 555-59, 84 S.Ct. 909, 917-19, 11 L.Ed.2d 898 (1964), the Supreme Court held that the effect of a four-week time limit for the submission The CBA of grievances was a matter for the arbitrator, not the court. in Wiley provided that “[t]he failure by either party to file the grievance within this time limitation shall be construed and be deemed Id. at 556 n. 11, 84 S.Ct. at to be an abandonment of the grievance.” 918 n. 11. The employer argued that no duty to arbitrate had arisen Id. at because of the union's failure to timely file its grievance. The Court explained that “[o]nce it is 556, 84 S.Ct. at 918. determined, as we have, that the parties are obligated to submit the matter of a dispute to arbitration, ‘procedural’ questions which grow out of the dispute and bear on its final disposition should be left to Id. at 557, 84 S.Ct. at 918.Recently, we followed the arbitrator.” Wiley in Local 285, Serv. Employees Int'l Union v. Nonotuck Resource The CBA in Nonotuck Assocs. Inc., 64 F.3d 735, 739-40 (1st Cir.1995). required grievances to be presented within fifteen days of the occurrence, and provided that “[t]he time limits provided in this article are conditions precedent for the filing and processing of The employer argued that Id. at 739. grievances under this Article.” late-filed grievances were expressly excluded from arbitration, and that under AT & T, 475 U.S. at 650, 106 S.Ct. at 1419, the arbitrability of the grievance was a matter for the court, not the We rejected that argument, Nonotuck, 64 F.3d at 739-40. arbitrator. explaining that the employer “misapprehend[ed] the distinction between Id. We stated that “the substantive and procedural arbitrability.” fact that something is a condition precedent to arbitration does not make it any less a procedural question” to be determined by the Id. (internal quotation marks omitted).The Wiley and arbitrator. Nonotuck decisions could be neatly applied to this appeal, but we think that simply labelling timeliness issues as “procedural,” and thus for the arbitrator, does not give due regard to the parties' contractual If the parties expressly intend a timeliness issue (or other intent. procedural issue) to be an “arbitrability” issue that the arbitrator Thus, we cannot decide, then we must respect that contractual intent. think our analysis better reflects the primacy of the parties' intent.