Caseflicks

Supreme Court of the United States • 2002

Howsam v. Dean Witter Reynolds, Inc.

537 U.S. 79 | 123 S. Ct. 588 | 154 L. Ed. 2d 491 | 2002 U.S. LEXIS 9235 | 16 Fla. L. Weekly Fed. S 20 | 2002 Cal. Daily Op. Serv. 11847 | 71 U.S.L.W. 4019 | 2002 Daily Journal DAR 13897

Full access

Unlock the video and quiz

The written brief is free to read below. Subscribe to watch the video explainer and take the quiz.

Create an account Log in

Takeaway

In short, this case distinguishes true questions of arbitrability, which courts usually decide, from procedural conditions such as arbitral time limits, which arbitrators presumptively decide.

Background

Karen Howsam alleged that Dean Witter Reynolds gave her unsuitable and misleading investment advice between 1986 and 1994, recommending that she purchase and hold interests in four limited partnerships. Their client agreement broadly required arbitration of controversies concerning their accounts, transactions, or agreements, and permitted Howsam to select the arbitral forum.

Howsam chose the National Association of Securities Dealers (NASD) and executed its Uniform Submission Agreement, which incorporated the NASD Code of Arbitration Procedure. NASD Code § 10304 provided that a dispute was not eligible for arbitration if more than six years had elapsed from the occurrence or event giving rise to it.

After Howsam initiated NASD arbitration, Dean Witter sued in federal district court, seeking a declaration and injunction on the ground that her claims were too old under § 10304. The District Court held that the arbitrator, not the court, should apply the NASD time-limit rule. The Tenth Circuit reversed, reasoning that eligibility under the rule was a question of arbitrability presumptively reserved for a court. The Supreme Court granted certiorari to resolve a conflict among the Courts of Appeals.

Issues

Issue #1

Whether application of NASD Code § 10304's six-year eligibility rule is a question of arbitrability for a court or a procedural gateway matter for an arbitrator.

Holding

It is a procedural gateway matter presumptively for the arbitrator, not a question of arbitrability that a court must decide.

Reasoning

Arbitration rests on consent: a party cannot be compelled to arbitrate a dispute it did not agree to arbitrate. Accordingly, courts ordinarily decide narrow "questions of arbitrability" unless the parties clearly and unmistakably assign them to an arbitrator. But the Court uses that phrase narrowly, rather than applying it to every threshold issue that could prevent the merits from reaching arbitration.

Questions of arbitrability generally concern whether the parties are bound by an arbitration agreement at all, or whether a concededly valid arbitration clause covers the particular category of dispute at hand. Courts decide those issues because the parties would likely expect judicial resolution and because doing so avoids compelling arbitration of a matter that may lie outside their agreement.

By contrast, procedural questions that grow out of the dispute and bear on its final disposition are presumptively for arbitrators. Prior cases treated matters such as satisfaction of grievance procedures, waiver, delay, and similar defenses as arbitral matters. The Revised Uniform Arbitration Act likewise identifies time limits and other conditions precedent to arbitration as issues for arbitrators absent contrary agreement.

The NASD six-year rule is closely analogous to these procedural matters. It operates as a time-related eligibility condition for a claim submitted to the NASD, rather than determining whether the parties agreed to arbitrate this kind of controversy. It is therefore not a question of arbitrability in the Court's specialized sense.

NASD arbitrators also possess greater expertise concerning the meaning and application of their own procedural rules. Absent a contrary contractual instruction, it is reasonable to infer that parties selecting the NASD forum expect its arbitrators to resolve such forum-specific procedural questions. That allocation also promotes fair and efficient dispute resolution.

Issue #2

Whether the word "eligible" in NASD Code § 10304 nevertheless demonstrates that the parties intended a court to decide the six-year time-limit issue.

Holding

No. The term "eligible" does not overcome the ordinary expectation that an arbitrator will decide the NASD's own procedural rule.

Reasoning

Dean Witter argued that § 10304's declaration that certain claims are not "eligible for submission to arbitration" required judicial determination before arbitration could proceed. The Court found no basis to give that single word special anti-arbitration significance.

The NASD Code separately provided that arbitrators are empowered to interpret and determine the applicability of all provisions of the Code. Read alongside that provision, the time-limit rule does not show that the parties displaced the usual rule assigning forum-specific procedural matters to the arbitrator.

Because § 10304 is not a narrow question of arbitrability, the special presumption favoring judicial resolution does not apply. Nothing in the parties' agreements otherwise established an intent to have a court interpret and apply the NASD time limit.

Concurrences

Justice Thomas

Reasoning

Justice Thomas agreed that the NASD arbitrators should decide the § 10304 issue, but he would have reached that result through contract enforcement rather than the majority's procedural-versus-substantive arbitrability framework.

The parties' agreement required that it be construed and enforced under New York law. Under Volt Information Sciences, the Federal Arbitration Act requires courts to enforce arbitration agreements according to their terms, including valid choice-of-law provisions.

The New York Court of Appeals had held, when interpreting materially identical agreements, that issues under NASD § 15—later renumbered § 10304—are for arbitrators. Justice Thomas therefore concluded that the contractual choice of New York law required the Court to permit arbitrators to resolve the timeliness question. Because the majority reached the same result by a different route, he concurred only in the judgment.