PRESIDENT’S COLUMN
By Bob Banks

November 13, 2005

Supreme Court Nominee Samuel A. Alito, Jr.

As I write this, the Senate Judiciary Committee is preparing for confirmation hearings on Judge Samuel Alito’s nomination for Justice O’Connor’s seat on the Supreme Court. Much has already been written and said about Judge Alito’s conservative judicial philosophy. The media reports suggest that this nomination does not bode well for anyone representing individuals against corporations. To try to gauge what the future might hold for investors in arbitration if the Senate confirms the nomination, I decided to read a sampling of Judge Alito’s decisions. I did not find any decisions on investors’ rights in securities arbitration, but I did find cases involving securities law and obligations to arbitrate. While the news was not all good, I was somewhat relieved by what I found.

I read several opinions on the validity and scope of arbitration provisions. In the most controversial case I read, Bazzone v. Nationwide Mutual, 123 Fed. Appx. 503 (3d Cir. 2005), an insurance agent sued Nationwide Mutual for “redlining” (refusing to write insurance policies for persons in low income areas), which he claimed hurt his homeowner’s and automobile insurance business. He was an NASD member because he also sold variable annuities. The agent sued in federal court, but the district court granted Nationwide’s motion to compel arbitration. The case was arbitrated before an NASD panel, and the agent lost. On appeal, the agent argued (and the dissent agreed) that the claims were not arbitrable because they were unrelated to the sale of securities, were not governed by NASD rules, and were simply not a part of the agent’s agreement to arbitrate as contained in the U-4.

Judge Alito joined another judge (with one judge dissenting) in affirming Bazzone’s duty to arbitrate his redlining claims with Nationwide because of the broad arbitration provision in the insurance agent’s U-4. Although the result was anti-plaintiff, the U-4 arbitration language is broad enough to allow reasonable minds to differ on its effect. It requires the arbitration of any dispute:

arising out of or in connection with the business of any member . . . or arising out of the employment or termination of employment of associated person(s) with any member, with the exception of disputes involving the insurance business of any member which is also an insurance company . . . between or among members and associated persons.

The case also affirmed an earlier ruling that the exception from arbitration of “insurance business” did not apply, because that term was ambiguous and failed to overcome the presumption favoring arbitration. The dissent agreed with that part of the outcome, but for different reasons.

The court reached a different result in Kaplan v. First Options (In re Kaplan), 143 F.3d 807, 815 (3d Cir. 1998). Judge Alito, writing for the majority, affirmed an earlier Third Circuit Kaplan ruling that an owner of a brokerage did not consent to the jurisdiction of an arbitration panel in a case brought against him and his firm by a clearing broker because he was not a party to the arbitration agreement. The case also held that res judicata principles would not bind an individual to an arbitration decision made against his firm, even if he was the sole shareholder and had controlled the firm’s arbitration.

In another case, Trippe Mfg. Co. v. Niles Audio Corp., 401 F.3d 529 (3d Cir. 2005), Judge Alito, writing for the court, reversed in part an order compelling arbitration. There, Niles signed a distributorship agreement with Weber that included an arbitration clause. Weber later sold its assets to Trippe, and as a part of the sale Trippe assumed those obligations Weber owed to Niles after August, 2001. Niles sued Trippe for breach of the distributorship agreement and to compel arbitration. The district court ordered all disputes between the parties to arbitration. Judge Alito reversed the district court in part. He held that Trippe did have a duty to arbitrate with Niles (even though it had no contract with Niles) because it assumed Weber’s obligations under the distributorship agreement. However, Trippe had a duty to arbitrate only those claims that arose after August, 2001; it had no duty to arbitrate claims unrelated to the obligations that it had assumed.

In Luden's Inc. v. Local Union No. 6 of the Bakery, Confectionery & Tobacco Workers Int'l Union, 28 F.3d 347, 364 365 (3d Cir. 1994), Judge Alito wrote a dissenting opinion, siding with the employer and arguing that the claims there were subject to arbitration. There, a 1988 collective bargaining agreement contained an arbitration provision. The agreement expired, and the majority, apparently sua sponte, found that the parties were operating under an implied in fact agreement containing the same arbitration requirement found in the 1988 agreement. While the result was in favor of the employer and against the employees, the reasoning in Judge Alito’s dissent was not illogical.

Two of Judge Alito’s opinions on the duty to arbitrate, Bazzone and Luden’s, may simply express a propensity for finding in favor of employers over employees. Based on the decisions discussed below, however, I think that would be an unduly simplistic and pessimistic analysis. I prefer to read these decisions to say that Judge Alito adheres to precedent, and that he applies a presumption in favor of arbitration. He will scrutinize contracts with arbitration clauses to determine whether the claims being asserted come within the scope of the agreement to arbitrate. In most cases (Bazzone arguably being an exception), he will strictly construe those obligations. While strict contract constructionists are not usually friends of consumers or investors, these cases do not foreshadow any bias for or against any party in the customer against brokerage firm context.

I read one Alito decision involving arbitration procedure. In Hay Group, Inc. v. E.B.S. Acquisition Corp., 360 F.3d 404 (3d Cir. 2004), Judge Alito refused to enforce a discovery subpoena duces tecum in an arbitration, writing that subpoena power under Section 7 of the FAA is limited to compelling non party witnesses to bring documents to a hearing. Although I believe discovery subpoena power is oftentimes as important for claimants as it is for respondents, many PIABA members have advocated for just such an interpretation of the FAA.

My optimistic view of Judge Alito is based on the securities class action cases that I read. There, he was not anti-investor. In In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1435 (3d Cir. 1997), and in In re Westinghouse Sec. Litig., 90 F.3d 696, 717 (3d Cir. 1996) he reversed district court decisions which had dismissed securities class actions on Rule 12(b)(6) grounds, and reinstated the cases. In an ERISA case, Dailey v. National Hockey League, 987 F.2d 172 (3d Cir. 1993), Judge Alito wrote a dissenting opinion in which he disagreed with the majority affirming a dismissal, and opined that the plaintiff had pled claims for breach of fiduciary duty and violations of his ERISA rights. In a RICO case, Kehr Packages v. Fidelcor, Inc., 926 F.2d 1406, 1419 (3d Cir. 1991) Judge Alito dissented from the majority, construed RICO provisions broadly, and disagreed with the dismissal of a case alleging investment fraud.

Only one of the Alito securities cases that I reviewed expressed an opinion against the investors. In Yang v. Odom, 392 F.3d 97 (3d Cir. 2004), a statute of limitations case, Judge Alito dissented in part. He agreed with the majority that a deficiency in a class representative will toll the statute of limitations so that an appropriate representative can appear. But, he found on the record that class certification had been based on "defects in the class itself," rather than "deficiencies" of the class representative.” In those instances, he wrote, the statute of limitations should not be tolled.

In reporting on Judge Alito’s nomination, the media has focussed its attention on cases in which he came down against abortion rights and gun control. As a citizen concerned about those issues, I have some reservations about Judge Alito. But, as a PIABA member representing investors who have been wronged by the brokerage industry, I see no cause for alarm. Given the Bush administration’s views towards lawyers representing fraud victims, we could do a lot worse.