Mayer Brown's



2001 Term, Number 10 / February 25, 2002

Today the Supreme Court granted certiorari in one case of potential interest to the business community. Amicus briefs in support of the petitioner are due on Thursday, April 11, 2002, and amicus briefs in support of the respondent are due on Monday, May 13, 2002. Any questions about these cases should be directed to Eileen Penner (202-263-3242) or Miriam Nemetz (202-263-3253) in our Washington office. 

Securities — Arbitration of Investor Claims — Determination of Eligibility for Arbitration. Section 10304 of the National Association of Securities Dealers Code of Arbitration Procedures ("NASD Code") provides that "[n]o 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 controversy." The Supreme Court granted certiorari in Howsam v. Dean Witter Reynolds, Inc. (No. 01-800), to decide whether a court or the arbitrator should determine whether a claim seeking arbitration is time-barred under Section 10304.

Karen Howsam opened several securities accounts with Dean Witter Reynolds in 1986. In 1992, Howsam signed a customer agreement in which she agreed to submit for arbitration "all controversies" arising out of her accounts, including "the construction * * * of this or any other agreement." In 1997, Howsam filed a claim against Dean Witter Reynolds with the NASD. As required by the NASD, she executed a submission agreement which stated that the arbitration would be conducted according to the NASD Code. 

Dean Witter Reynolds filed a complaint seeking declaratory and injunctive relief in the United States District Court for the District of Colorado, asserting that Howsam's claim was time-barred under the NASD Code and thus non-arbitrable by the NASD. The district court granted Howsam's motion to dismiss, ruling that the arbitrators and not the court should decide whether Howsam's claim was eligible for arbitration.

The Tenth Circuit reversed. 261 F.3d 956 (2001). The court of appeals relied on First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995), in which the Supreme Court held that the issue of arbitrability is for the court to decide unless there is "clear and unmistakable evidence" that the parties agreed to have the arbitrators decide that question. According to the Tenth Circuit, Section 10304 imposes "a substantive limit on the claims that the parties have contracted to submit to arbitration." 261 F.3d at 965 (internal citations and quotation marks omitted). It thus concluded that, under First Options, the application of Section 10304 to Howsam's claim was for the court to decide because the parties had not "‘clearly and unmistakably' agreed to allow an arbitrator, rather than the courts, to decide whether specific disputes are arbitrable." Id. at 957.

The Tenth Circuit acknowledged that "the circuit courts of appeals are almost evenly divided on the issue of whether or not the limitations period set forth in NASD Code § 10304 is a substantive eligibility requirement [that constitutes a] jurisdictional prerequisite to arbitration, which must be determined in the first instance by the courts." Id. at 969-970. According to the court of appeals, the Third, Sixth, Seventh, Tenth and Eleventh Circuits have determined that the time bar is a matter of substantive arbitrability which is for the courts to decide, while the First, Second, Fifth, Eighth, and Ninth Circuits have concluded that the arbitrator should rule upon the applicability of the time bar. Id. at 970 (citing cases collected in PaineWebber Inc. v. Elahi, 87 F.3d 589, 596-599 (1st Cir. 1996)).

This case is of obvious significance to any member of the NASD. It is also of interest to any corporation or organization that employs arbitration agreements, as the decision will shed light on the breadth of the Supreme Court's decision in First Options.

This Mayer, Brown, Rowe & Maw Supreme Court Docket Report provides information and comments on legal issues and developments of interest to our clients and friends. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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