Howsam v. Dean Witter Reynolds, Inc.

2002-12-10

Headline: Court lets NASD arbitrators, not courts, decide six-year time limits for investor arbitration claims, reversing the lower court and affecting how brokerage disputes are handled.

Holding: The Court ruled that questions about the NASD’s six-year time limit must be decided by NASD arbitrators rather than by a court, reversing the Tenth Circuit’s judgment.

Real World Impact:

Makes NASD arbitrators decide six-year eligibility for arbitration claims.
Affects investors and brokerages in NASD arbitration procedures.
Leaves claim merits and final outcomes to later arbitration proceedings.

Topics: arbitration rules, financial industry disputes, time limits on claims, investor-broker disputes

Summary

Background

An investor, Karen Howsam, sued her brokerage, Dean Witter, saying it gave bad investment advice when it recommended limited partnerships between 1986 and 1994. Their standard account agreement required disputes to go to arbitration and Howsam chose the NASD forum. The NASD Code contains a rule saying a dispute is not eligible for arbitration if six years have passed from the event that caused it. Dean Witter sued in federal court asking the judge to declare the claim ineligible for NASD arbitration. A district judge said the NASD arbitrator should decide. The Tenth Circuit reversed, and the Supreme Court agreed to resolve a split among courts of appeals.

Reasoning

The Court focused on who should decide whether the NASD six-year rule applies. It explained that some “gateway” questions—like whether parties agreed to arbitrate at all—are for courts, but procedural questions that arise from the dispute itself—such as time limits, waiver, or notice—are normally for arbitrators. The Court noted arbitrators are more expert about their own rules and that the NASD Code also empowers arbitrators to interpret its provisions. For those reasons, the Court held that the arbitrator, not a judge, should decide the time-limit issue and reversed the Tenth Circuit.

Real world impact

Brokerage customers and firms who use NASD arbitration should expect arbitrators to resolve whether a claim is barred by the six‑year NASD rule. This decision decides who applies the NASD time rule, not the claim’s merits, and parties can still shape outcomes by contract language.

Dissents or concurrances

Justice Thomas agreed with the outcome but rested on a different point: enforce the parties’ choice-of-law clause applying New York law, which treats the NASD time rule as for arbitrators.