Scherk v. Alberto-Culver Co.

1974-10-15

Headline: International business contract ruling enforces a Paris arbitration clause, reversing lower courts and making it harder for U.S. buyers to keep cross-border securities-fraud claims in American courts.

Holding: The Court held that the parties’ written arbitration agreement in this international commercial transaction must be enforced, sending the dispute to arbitration in Paris rather than allowing the U.S. suit to proceed in court.

Real World Impact:

Makes international arbitration clauses enforceable despite U.S. securities claims.
Sends some cross-border fraud disputes to foreign arbitration tribunals.
Reduces ability to keep certain international contract disputes in U.S. courts.

Topics: international arbitration, securities fraud, forum selection, cross-border contracts

Summary

Background

An American company, organized and based in the United States, bought three foreign businesses and associated trademarks from a German owner. Their written contract, negotiated in Europe and the U.S., included a promise to resolve any disputes by arbitration in Paris and said Illinois law would govern. After learning the trademarks might be encumbered, the American buyer sued in a U.S. federal court, accusing the seller of fraud under federal securities rules; the seller sought to compel arbitration in Paris.

Reasoning

The Court addressed whether a written arbitration agreement in an international commercial sale must yield to U.S. securities claims. The majority said international commercial agreements serve important goals of predictability and orderly trade, and pointed to prior decisions and international arbitration treaties and laws supporting enforcement. It distinguished an earlier case that refused arbitration in ordinary domestic securities disputes because this contract touched multiple countries, raised conflicts about which law would apply, and expressly designated a foreign arbitral forum. The Supreme Court therefore ordered enforcement of the arbitration agreement and sent the case back for proceedings consistent with that ruling.

Real world impact

The decision means parties to truly international commercial deals who agreed to foreign arbitration can generally be sent to that forum, even when a buyer sues in the United States claiming fraud under federal securities rules. The ruling does not decide whether the fraud claims are valid on the merits; it only requires the arbitration clause be honored and the lower-court injunction lifted. Further proceedings will determine actual liability.

Dissents or concurrances

A dissent argued the Court should have followed prior securities-law precedent protecting investors from waiving judicial forum rights, warning that arbitration abroad can limit discovery, review, and federal protections for U.S. investors.