Shearson/American Express Inc. v. McMahon

1987-09-21

Headline: Court enforces pre-dispute arbitration clauses, sends many securities-fraud and private RICO claims into arbitration, making it harder for brokerage customers to keep such lawsuits in federal court.

Holding: The Court held that brokerage customers who signed pre-dispute arbitration agreements must arbitrate both Exchange Act securities-fraud claims and private civil RICO claims because arbitration can adequately protect statutory rights.

Real World Impact:

Forces brokerage customers to resolve many fraud and RICO claims in arbitration, not federal court.
Affirms that SEC oversight can make exchange arbitration procedures adequate to protect investors' rights.
Reverses an appeals court and sends the case back for arbitration or further proceedings.

Topics: securities fraud, arbitration agreements, RICO claims, brokerage disputes

Summary

Background

A married couple who were customers of a large brokerage firm signed account agreements that required arbitration of disputes. They sued in federal court claiming the broker’s representative engaged in fraudulent, excessive trading and also brought a private RICO claim, along with state-law fraud and fiduciary-duty claims. The district court compelled arbitration of the securities claims but not the RICO claim; the Court of Appeals disagreed about the securities claim. The Supreme Court agreed to decide whether pre-dispute arbitration agreements must be enforced for securities-fraud claims under the Exchange Act and for civil RICO claims.

Reasoning

The Court started from the Federal Arbitration Act’s strong policy favoring enforcement of arbitration agreements. It held that Congress had not clearly said RICO or the Exchange Act require a judicial forum, so those statutes do not automatically override arbitration. For Exchange Act claims the Court relied on changes in securities regulation — especially SEC oversight of exchange arbitration rules — and on prior cases recognizing arbitration can adequately vindicate statutory rights. For RICO the Court found no text or history excluding RICO suits and relied on reasoning from earlier decisions that complex or public-interest statutes do not automatically bar arbitration. The result: both the securities and the RICO claims can be sent to arbitration under the signed agreements.

Real world impact

The decision means many customers who signed standard brokerage agreements will be required to resolve federal securities-fraud and private RICO claims in arbitration rather than in federal court. The Court reversed the appeals court and sent the case back for proceedings consistent with enforcing arbitration. This ruling does not decide the merits of the underlying fraud or RICO allegations; it decides only the proper forum.

Dissents or concurrances

Three Justices (Blackmun, Brennan, Marshall) agreed the RICO claim was arbitrable but dissented on the securities issue, arguing investor-protection concerns and precedent counseled against forcing arbitration of Exchange Act fraud claims; Justice Stevens also opposed the change from long-standing circuit practice.