PaineWebber Inc. v. Elahi: The First Circuit Provides a Return for Investors and Allows Them Their Day in Arbitration

Introduction: Investor Beware

Today, many investors find themselves being forced to sign a client agreement that contains an arbitration agreement clause before they are allowed to open certain accounts with an investment firm.⁽¹⁾ The effect of signing such an agreement is that parties are barred from seeking redress through the courts and required to arbitrate any dispute that arises out of the business transaction.⁽²⁾ Adopted in the agreement is the code of procedure of the arbitral forum selected by the claimant.⁽³⁾ Each arbitral forum has what is referred to as an eligibility rule that bars any claim from arbitration that is filed six years after "the date of the occurrence or event" that gives rise to the claim.⁽⁴⁾

Ostensibly, arbitration clauses are designed to avoid the high cost of litigating disputes relating to investment accounts.⁽⁵⁾ Many investors, however, after filing a claim in arbitration, often find themselves having to defend their claim in an inconvenient and distant court,⁽⁶⁾ against a suit initiated by the investment firm to either enjoin the arbitration or vacate an award.⁽⁷⁾ Thus, the very purpose of the arbitration clause is often defeated.⁽⁸⁾ Worse, some investment firms try to have it both ways--the cost-efficiency of arbitrating clients' disputes, but when they fear an unfavorable result, they challenge the "timeliness" or the ability of the client to even bring an arbitration claim in the courts.⁽⁹⁾ The firms argue that it is for the courts to decide whether a claim is more than six years old, and thus barred from being arbitrated under the forum's code of procedure.⁽¹⁰⁾ Should the court agree with the firm and declare the claim invalid, the investor is left with no forum in which to seek redress, no matter how egregious the behavior was on the part of the firm.⁽¹¹⁾ "Collateral litigation in securities cases has in fact made arbitration not an alternative form of dispute resolution . . . , but an additional form which they often do not reach [if at all] until they have engaged in extensive litigation."⁽¹²⁾

Before the First Circuit decided PaineWebber Inc. v. Elahi,⁽¹³⁾ five out of the nine circuits that have heard this issue agreed with the investment firms.⁽¹⁴⁾ This Comment discusses the First Circuit Court of Appeals' decision in PaineWebber Inc. v. Elahi, in which the court held that the intent of the parties governs the question of who applies the six-year rule.⁽¹⁵⁾ The court concluded that the arbitration agreement in dispute demonstrated an intent by the parties to have the arbitrators apply the six-year rule.⁽¹⁶⁾

Part II.A focuses on the Federal Arbitration Act and Supreme Court cases that have created a "[n]ational policy in favor of arbitration."⁽¹⁷⁾ Included in Part II.B is a history of the Self Regulatory Organizations (SROs) that provide the arbitration forums for resolving securities disputes.⁽¹⁸⁾ Part III outlines the prior judicial interpretation of the six-year rule provided by other circuit courts of appeal that have heard the issue.⁽¹⁹⁾ In addition, this part of the Comment highlights the securities industry's response to the six-year rule.⁽²⁰⁾ Part IV examines the Elahi decision, including the facts that gave rise to the dispute, and the First Circuit's analysis.⁽²¹⁾ In Part V, the reasoning behind the First Circuit's opinion is analyzed.⁽²²⁾ Finally, part VI contains a brief conclusion to this Comment, asserting that the decision in Elahi was correct.⁽²³⁾

Background

A. National Policy Favoring Arbitration

1. History of the Federal Arbitration Act

Initially there was a widespread judicial distrust of arbitration clauses in the United States.⁽²⁴⁾ When the United States adopted the English common law,⁽²⁵⁾ the judicial hostility toward arbitration clauses came with it.⁽²⁶⁾ Many courts refused to enforce mandatory arbitration clauses because it was believed that the clauses took jurisdiction away from the courts.⁽²⁷⁾

Congress, in an attempt to reverse the distrust of arbitration clauses,⁽²⁸⁾ enacted the Federal Arbitration Act (FAA).⁽²⁹⁾ Congress' intent was to put arbitration clauses "`upon the same footing as other contracts, where it belongs.'"⁽³⁰⁾ Section two of the FAA, which is considered the heart of the Act,⁽³¹⁾ states:

A written provision in any . . . contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.⁽³²⁾

The above language mandates that all arbitration agreements be enforced "as a matter of contract law" by both federal and state courts.⁽³³⁾ As a result, "[t]he FAA has succeeded in transforming arbitration into a judicially approved method of dispute resolution."⁽³⁴⁾

2. United States Supreme Court Cases

The FAA was interpreted as creating a national policy in favor of arbitration.⁽³⁵⁾ The Supreme Court, however, was not always so willing to apply the policy to all arbitration agreements.⁽³⁶⁾ As for pre-dispute arbitration agreements in securities disputes, the Court's belief that arbitration was an unsuitable forum was expressed in Wilko v. Swan.⁽³⁷⁾ Over time, "[t]he Supreme Court gradually became less suspicious of arbitration's ability to resolve securities laws claims adequately."⁽³⁸⁾ This gradual change, however, took some time before gaining a committed following.⁽³⁹⁾ It was some twenty-one years after Wilko, in Scherk v. Alberto-Culver Co.,⁽⁴⁰⁾ involving a Rule 10(b) claim arising out of an international contract, before the first piece of evidence appeared to indicate a change in the Court's view towards securities arbitration.⁽⁴¹⁾ Additionally, the Court's view towards the ability of the arbitrators to handle securities claims was changing.⁽⁴²⁾ The Court held that any advantage by favoring the courts over arbitration was lost since the parties could resort to foreign courts to block the access to American courts.⁽⁴³⁾ On the other hand, arbitration reduced any danger that the dispute would be submitted to a hostile or unfamiliar forum.⁽⁴⁴⁾ The Court, however, was still not ready to totally abandon its position regarding arbitration for all statutory based claims at this time.⁽⁴⁵⁾

It was not until 1986, in Shearson/American Express Inc. v. McMahon,⁽⁴⁶⁾ that the Supreme Court first tried to distance itself from its Wilko holding.⁽⁴⁷⁾ In Shearson, the defendant tried to compel the arbitration of McMahon's 10b-5 claim under the Exchange Act of 1934.⁽⁴⁸⁾ Rather than expressly overrule Wilko, the Court distinguished McMahon from Wilko.⁽⁴⁹⁾ The Court, however, made a strong statement when it declared that "[t]he suitability of arbitration as a means of enforcing Exchange Act rights is evident."⁽⁵⁰⁾ The McMahon decision represents the Court's new found willingness to compel securities arbitration.⁽⁵¹⁾ Finally, two years after McMahon, the Supreme Court directly overruled Wilko in Rodriguez de Quijas v. Shearson/American Express, Inc.,⁽⁵²⁾ and is now willing to compel arbitration for all enforceable securities arbitration agreements.⁽⁵³⁾ No longer are the concerns expressed in Wilko, that an arbitration forum is inadequate to protect the interests of the investor, present today.⁽⁵⁴⁾

B. Securities Arbitration: Self Regulatory Organizations

Arbitration has been an accepted method of dispute resolution in the securities industry for over 175 years.⁽⁵⁵⁾ It has not only been accepted by the Securities Exchange Commission (SEC), it has been encouraged.⁽⁵⁶⁾ This arbitration-friendly policy has generated a number of arbitration forums, established by individual self-regulatory organizations (SROs).⁽⁵⁷⁾ The dominant SROs in securities arbitration are the National Association of Securities Dealers (NASD), the New York Stock Exchange (NYSE), the American Stock Exchange (Amex), the Chicago Board Options Exchange (CBOE), the American Arbitration Association (AAA), and the Municipal Securities Rule Making Board (MSRB).⁽⁵⁸⁾ SROs have played a significant role in securities arbitration,⁽⁵⁹⁾ while the number of cases, damages sought, and complexity of cases have consistently grown since 1980.⁽⁶⁰⁾ "As one would expect in an area which has grown to real significance, there is a growing attention to [the] rules that govern and therefore an accelerated pace of noteworthy developments . . . ."⁽⁶¹⁾ One such development is who decides whether the arbitration claim is time barred under the SROs' eligibility rules.⁽⁶²⁾

All of the arbitration forums have their own codes or rules for arbitration procedure.⁽⁶³⁾ The five major SROs (NASD, NYSE, Amex, CBOE, and MSRB) formed the Securities Industry Conference on Arbitration (SICA) in 1976.⁽⁶⁴⁾ In order to have a "`uniform system of dispute grievance procedures,'"⁽⁶⁵⁾ a "Uniform Code of Arbitration"⁽⁶⁶⁾ was developed by SICA and was adopted by all the SROs in 1979.⁽⁶⁷⁾ Each of the SROs' code of arbitration contains the following "six-year `eligibility' rule" (six-year rule):

"No dispute, claim or controversy shall be eligible for submission to arbitration under this Code where six (6) years shall have elapsed from the occurrence or event giving rise to the act or dispute, claim or controversy. This section shall not extend applicable statutes of limitations, nor shall it apply to any case which is directed to arbitration by a court of competent jurisdiction."⁽⁶⁸⁾

This somewhat innocent rule has created a great deal of confusion and controversy as to who is to apply the rule.⁽⁶⁹⁾ "In general, brokerage firms, hoping to dismiss stale claims before they go to arbitration, argue that the question is for the courts to decide, while customers usually take the opposite position."⁽⁷⁰⁾ Before PaineWebber Inc. v. Elahi⁽⁷¹⁾ was decided by the First Circuit, there was a five-to-four split among the circuits in favor of courts applying section 15 of the NASD Code of Arbitration Procedure.⁽⁷²⁾ The First Circuit's decision in PaineWebber Inc. v. Elahi has evened out that split.⁽⁷³⁾

How the Six-Year Rule has been Interpreted by the Other Circuits

A. Circuits in Favor of the Courts Applying Section 15

1. The Third Circuit: PaineWebber Inc. v. Hofmann

In PaineWebber Inc. v. Hofmann,⁽⁷⁴⁾ Hofmann, on October 11, 1991, submitted a "Statement of Claim" for arbitration with the NASD alleging misconduct on the part his broker and PaineWebber.⁽⁷⁵⁾ PaineWebber, after it's motion to dismiss was rejected by the NASD's Director of Arbitration, filed suit in district court to obtain a stay of the Director's decision allowing the arbitrator to apply section 15 of the NASD Code of Arbitration Procedure.⁽⁷⁶⁾ PaineWebber then appealed the district court's grant of Hofmann's summary judgement motion.⁽⁷⁷⁾ PaineWebber argued that section "15 of the NASD Code, as incorporated into the [client] agreement . . . create[d] a substantive limit on [Hofmann's] claims" and thus was for the courts to decide.⁽⁷⁸⁾

The Third Circuit Court of Appeals agreed with PaineWebber that section 15 of the NASD Code of Arbitration Procedure created an issue of arbitrability and is therefore for the courts to apply.⁽⁷⁹⁾ The court based its decision on its belief that section "15 unequivocally establishes a substantive limitation on the claims that may be submitted to arbitration."⁽⁸⁰⁾ The Third Circuit agreed with the Seventh Circuit that the language, that all "claims `shall be eligible for submission for arbitration,'" from section 15 of the NASD Code of Arbitration Procedure, makes the six-year rule an "`eligibility requirement and not a statute of limitations.'"⁽⁸¹⁾ The court carefully noted the national policy favoring arbitration, but held that "the clear and unambiguous" language of the six-year rule was strong enough to overcome the presumption of arbitrability.⁽⁸²⁾ Furthermore, the court stated that the language of the six-year rule is clear and unmistakable evidence of the parties' intent not to submit claims older than six years to arbitration.⁽⁸³⁾ The court concluded that section 15's language made PaineWebber's argument so strong that the policy favoring arbitration could not salvage Hofmann's plausible argument in favor of the arbitrator applying section 15.⁽⁸⁴⁾

2. The Sixth Circuit: Roney and Co. v. Kassab

The Sixth Circuit, in Roney and Co. v. Kassab,⁽⁸⁵⁾ relying heavily on the Third Circuit's decision in Hartmann, adopted the view that courts and not arbitrators are to apply the six-year rule.⁽⁸⁶⁾ The Roney case has more than just its outcome in common with the Hofmann decision.⁽⁸⁷⁾ The claimants filed their statement of claim with the NASD alleging that their broker, on two separate occasions, had "wrongfully purchased" stocks that "resulted in a substantial loss."⁽⁸⁸⁾ Like in Hofmann, the claimants broker was fired by the investment firm, which failed to notify the claimant of said event.⁽⁸⁹⁾ In Roney the claimant argued that the investment firm's failure to inform them of their broker's departure "and of his alleged improper conduct amounted to fraudulent concealment and a violation of RICO."⁽⁹⁰⁾ When the claimant filed his arbitration claim, Roney & Co. commenced suit in district court to prevent the claimants from arbitrating their NASD claim.⁽⁹¹⁾ As in Hofmann, the district court rejected the investment firm's motion for stay of arbitration.⁽⁹²⁾ Roney and Co. appealed the district court's decision on the grounds that the district court erred in sending the claims back to arbitration and not deciding the applicability of the six-year rule itself.⁽⁹³⁾

The Sixth Circuit overturned the district court's decision by interpreting the NYSE six-year rule, Rule 603, as a "substantive bar" to Kassab's claims.⁽⁹⁴⁾ Because the language of the NASD's section 15 and the NYSE's Rule 603 are identical,⁽⁹⁵⁾ the court used much of the reasoning supplied by the Third Circuit in PaineWebber Inc. v. Hartmann, to justify its decision.⁽⁹⁶⁾ The Court held that "`the plain language of [the six-year rule] states that after six years from the events giving rise to the dispute have elapsed, the dispute "shall [not] be eligible for submission to arbitration."'"⁽⁹⁷⁾ Such language, the court stated, gives the court, and not the arbitrators, the authority to decide eligibility issues.⁽⁹⁸⁾ In spite of the national policy favoring arbitration, the fact that there was an enforceable agreement did not relieve Kassab of the burden of showing that the parties intended to submit "eligibility" disputes to arbitration.⁽⁹⁹⁾

3. The Seventh Circuit: Edward D. Jones & Co. v. Sorrells

In Edward D. Jones & Co. v. Sorrells,⁽¹⁰⁰⁾ the Sorrells submitted a dispute for arbitration with the NASD against Jones, their broker, and a former employee of Jones, Gary Aleff.⁽¹⁰¹⁾ Jones and Aleff were unsuccessful in their bids to have the NASD consider their motion to dismiss under section 15, and ultimately were ordered to pay an award to the Sorrells by the NASD arbitrator.⁽¹⁰²⁾ It was only after the NASD gave the award to the Sorrells that Jones and Aleff appealed to the federal courts for relief from the award.⁽¹⁰³⁾ The case was remanded to the NASD for a hearing on the section 15 motion to dismiss.⁽¹⁰⁴⁾ On remand, the NASD issued an "`Award Clarification'" which stated that the section 15 issue was decided when the original award was made.⁽¹⁰⁵⁾ Jones and Aleff immediately moved the district court to set aside the NASD award for a second time.⁽¹⁰⁶⁾ The district court granted Jones and Aleff's motion to vacate from which the Sorrells appealed.⁽¹⁰⁷⁾

On appeal, the Seventh Circuit held that section 15 defines the jurisdiction of the arbitration forums and is not a statute of limitations to be applied by the arbitrators.⁽¹⁰⁸⁾ The court held that being a jurisdictional provision, the task of applying section 15 rests with the courts.⁽¹⁰⁹⁾ Looking to AT&T Technologies, Inc. v. Communications Workers of America⁽¹¹⁰⁾ for guidance, the court held that the Sorrells had the burden of proving by clear and unmistakable evidence that the parties intended to submit eligibility disputes to the arbitrator.⁽¹¹¹⁾ Furthermore, the court pointed to the Sorrells' inability to show that their agreement met such a burden.⁽¹¹²⁾ Moreover, the court stated that section 35 of the NASD Code of Arbitration Procedure, which gives the arbitrator the authority to decide "the applicability of all the provisions under this Code," likewise was not "clear and unmistakable" proof that the parties intended for the arbitrator to apply section 15.⁽¹¹³⁾ Consequently, the court concluded that the district court did not err in setting aside the arbitrator's award for the Sorrells.⁽¹¹⁴⁾

4. The Tenth Circuit: Cogswell v. Merrill Lynch, Pierce, Fenner & Smith Inc.

In Cogswell v. Merrill Lynch, Pierce, Fenner & Smith Inc.,⁽¹¹⁵⁾ the investor, Ms. Cogswell, "opened a Cash Management Account [with] Merrill Lynch in December 1984."⁽¹¹⁶⁾ Over the course of the relationship, Ms. Cogswell invested in three limited partnerships, the last of which came on February 23, 1987.⁽¹¹⁷⁾ The value of the investments declined steadily, prompting Ms. Cogswell to submit her claim for arbitration with the NASD in August, 1993.⁽¹¹⁸⁾ Merrill Lynch sought a permanent order to stay the arbitration from the New York Supreme Court for New York County.⁽¹¹⁹⁾ When Ms. Cogswell and her attorney failed to appear for a hearing, the court granted Merrill Lynch's petition.⁽¹²⁰⁾ While the matter was still pending in New York, Ms. Cogswell and her attorney "filed an application for an order compelling arbitration in the United States District Court for the District of Colorado."⁽¹²¹⁾ Despite Merrill Lynch's pleas that the New York decision was res judicata, the district court ordered the parties to proceed with arbitration.⁽¹²²⁾ Merrill Lynch appealed the district court's order.⁽¹²³⁾

The Tenth Circuit, in overruling the district court's order, sided with the majority of the circuit courts that have held that courts are to determine whether the six year period for submitting a claim for arbitration had expired.⁽¹²⁴⁾ Having determined the application of section 15 to be a question of arbitrability, the onus was on Cogswell to provide "`"clea[r] and unmistakabl[e]"'" proof that the parties intended the arbitrator to decide the issue.⁽¹²⁵⁾ The court interpreted section 15's silence on who applies the rule to be immaterial, since silence does not meet the "`clear and unmistakable'" burden of proof.⁽¹²⁶⁾

The court also rejected the theory that section 35 of the Code provides the authority to allow arbitrators to decide eligibility because "[i]t says nothing specific about whether the arbitrator or the court should decide whether a claim is arbitrable under § 15."⁽¹²⁷⁾ Cogswell argued under a new approach that section 1 of the NASD Code,⁽¹²⁸⁾ which provides that the Code was established for any dispute arising from the business dealings of the public and any member of the association, controlled the arbitrability of her claims, not section 15.⁽¹²⁹⁾ The court dismissed this argument, stating that section 1 is controlling as to the subject matter of the claim, while section 15 controls issues regarding the timeliness of the claim.⁽¹³⁰⁾

5. The Eleventh Circuit: Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Cohen

In Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Cohen,⁽¹³¹⁾ the Cohens filed a claim for arbitration with the NASD in March, 1993, regarding transactions that took place between 1985 and 1987.⁽¹³²⁾ "Merrill Lynch responded by filing an action in Florida state court seeking to enjoin arbitration on the ground that most of the Cohens' claims were time-barred."⁽¹³³⁾ The Cohens removed Merrill Lynch's action to federal district court based on diversity jurisdiction, where the district court granted the Cohens' motion to compel arbitration and dismissed Merrill Lynch's suit.⁽¹³⁴⁾ Merrill Lynch appealed the district court's order.⁽¹³⁵⁾

The Eleventh Circuit, by siding with the circuits which hold that section 15 is a "substantive eligibility requirement" decided by the courts, reversed the district court's order and dismissal.⁽¹³⁶⁾ After determining that the parties incorporated the NASD Code of Arbitration Procedure into their agreement, the court looked at section 35.⁽¹³⁷⁾ The court stated "that, at most, section 35 creates an ambiguity as to who determines arbitrability," and is no where near being definitive in providing that the arbitrator is to apply section 15.⁽¹³⁸⁾ The court also held that the policy of favoring "arbitration is not applicable when the question to be resolved is who decides arbitrability."⁽¹³⁹⁾ The court remanded the case to the district court with the instructions to (1) determine the occurrence or event that gave rise to the Cohens' claim; and (2) determine whether said occurrence or event happened outside the six-year time period allowed under section 15.⁽¹⁴⁰⁾

B. Circuits in Favor of the Arbitrator Applying Section 15

1. The Second Circuit: PaineWebber Inc. v. Bybyk

In PaineWebber Inc. v. Bybyk,⁽¹⁴¹⁾ "the Bybyks opened an investment account with PaineWebber" in July, 1987, but did not sign a client agreement until March, 1990.⁽¹⁴²⁾ The Bybyks initiated arbitration on July 16, 1993, and submitted a statement of claim with the NASD on September 24, 1993.⁽¹⁴³⁾ Their claim alleged "that PaineWebber recommended and executed unsuitable transactions, failed to supervise the account, and breached its fiduciary duty."⁽¹⁴⁴⁾ PaineWebber "commenced a special proceeding in New York Supreme Court . . . seeking a permanent stay of arbitration" for all claims outside the six year period prior to September 24, 1993.⁽¹⁴⁵⁾ The Bybyks removed to federal district court and moved to dismiss the complaint under Federal Rule of Civil Procedure 12(b)(6), arguing that all questions, including timeliness, were left for the arbitrator.⁽¹⁴⁶⁾ The district court agreed with the Bybyks and dismissed PaineWebber's suit, from which PaineWebber appealed.⁽¹⁴⁷⁾

On appeal, the Second Circuit held that the parties' arbitration agreement provided clear and unmistakable proof of the parties' intent to submit eligibility issues to the arbitrator.⁽¹⁴⁸⁾ In doing so, the court pointed to several provisions of the agreement that led it to the conclusion that: (1) "'any and all controversies . . . shall be determined by arbitration;'" and (2) "`the parties . . . waiv[ed] their right[s] to seek remedies in court.'"⁽¹⁴⁹⁾ First, the court held that the words "any and all controversies" were "inclusive, categorical, unconditional and unlimited," and were encompassing enough to include disputes over timeliness.⁽¹⁵⁰⁾ The court accepted the Bybyks' argument that the second provision estopped PaineWebber from seeking protection from the courts concerning an untimely claim.⁽¹⁵¹⁾ The court concluded that the agreement's unqualified "broad grant of power to the arbitrators" left no room for the courts to decide timeliness issues.⁽¹⁵²⁾

Commentators have stated that the Second Circuit's decision was important for another reason as well; it renders the substantive versus procedural debate moot.⁽¹⁵³⁾ The court concluded that the arbitration agreement did not incorporate the NASD Code of Arbitration Procedure, and, in turn, held that it did not need to decide whether section 15 was substantive or procedural in nature.⁽¹⁵⁴⁾ The court stated that when the agreement was signed there was no way of knowing which forum would be selected for arbitration, thus, no one forum's rules could have been incorporated into the agreement.⁽¹⁵⁵⁾ Because the Code was not incorporated into the agreement, the court reasoned that the nature of the rule was irrelevant and would have no effect on their decision.⁽¹⁵⁶⁾

2. The Fifth Circuit: Smith Barney Shearson, Inc. v. Boone

Smith Barney Shearson, Inc. v. Boone⁽¹⁵⁷⁾ involved two separate cases, Smith Barney Shearson, Inc. v. Boone and Smith Barney Shearson, Inc. v. Sherman, that were consolidated on appeal.⁽¹⁵⁸⁾ Both claimants were former customers of Smith Barney Shearson (SBS) when their claims were submitted to their respective arbitration forums.⁽¹⁵⁹⁾ Each alleged that SBS, through its dealings with the claimants, amounted to "negligence, breach of fiduciary duty, common law fraud, as well as causes of action under the Texas Deceptive Trade Practices and Consumer Protection Act."⁽¹⁶⁰⁾ In both instances, SBS sought declaratory relief from the defendants' claim of arbitration, and filed a motion for a preliminary injunction barring the arbitration.⁽¹⁶¹⁾ The district court in both cases "refused SBS any relief, holding that under established Fifth Circuit Court precedent, the timeliness question should be decided by the arbitrator and not by a federal court."⁽¹⁶²⁾ SBS appealed the district court's denial of SBS's claims.⁽¹⁶³⁾

The Fifth Circuit held that issues of timeliness are for the arbitrator to decide.⁽¹⁶⁴⁾ The court relied heavily on the substantive versus procedural arbitrability analysis in reaching its conclusion.⁽¹⁶⁵⁾ The court defined the arbitrators role as "determin[ing] whether the proper arbitration procedures [were] followed."⁽¹⁶⁶⁾ In ruling that disputes surrounding the issue of timeliness are procedural, the court held that Supreme Court precedent required the issues to be resolved by the arbitrator.⁽¹⁶⁷⁾

3. The Eighth Circuit: FSC Securities Corp. v. Freel

FSC Securities Corp v. Freel⁽¹⁶⁸⁾ is another case in which the securities investment firm sought to vacate the investor's award granted by the arbitral forum.⁽¹⁶⁹⁾ In May, 1991, the Freels submitted their claim for arbitration claiming that the advice given by their investor, who was a "registered representative" for FSC, regarding purchases in 1984, was unsuitable and led to significant losses to the Freels.⁽¹⁷⁰⁾ FSC's motion to dismiss was denied by the Director of Arbitration and the arbitrator granted an award to the Freels.⁽¹⁷¹⁾ FSC filed an action in the federal district court seeking to have the award vacated, arguing that the arbitrators lacked the authority to hear Freel's claim since it was outside the six year period.⁽¹⁷²⁾ FSC appealed the district court's decision denying its claim.⁽¹⁷³⁾

The Eighth Circuit joined the minority of circuits that have held that section 15 does not create a jurisdictional limit on the claims that the arbitrator can hear.⁽¹⁷⁴⁾ Similar to the Second Circuit,⁽¹⁷⁵⁾ the Eighth Circuit did not apply the substantive versus procedural arbitrability analysis, but instead relied solely on section 35 of the NASD Code of Arbitration Procedure.⁽¹⁷⁶⁾ The court held that "section 35 commits interpretation of all provisions of the NASD Code to the arbitrators."⁽¹⁷⁷⁾ The court then noted that the language of the agreement stated that the parties agreed to arbitrate all disputes under the NASD Code.⁽¹⁷⁸⁾ The court ruled that the incorporation of the Code, particularly section 35, met the "`clear and unmistakable'" burden of showing that the parties intended to leave the eligibility question to the arbitrator.⁽¹⁷⁹⁾ To rule otherwise, the court stated, would make "section 35 a nullity."⁽¹⁸⁰⁾

4. The Ninth Circuit: O'Neel v. National Ass'n of Securities Dealers, Inc.

O'Neel v. National Ass'n of Securities Dealers, Inc.⁽¹⁸¹⁾ arose out of a claim against the investment firm Birr, Wilson & Co. (Birr) by a former client.⁽¹⁸²⁾ In response, Birr filed a third party claim against O'Neel, who served as the client's account executive.⁽¹⁸³⁾ In O'Neel, it was the securities firm that argued for and appeared to have benefitted from the court's decision to allow the arbitrators to decide the eligibility of an investor's claim.⁽¹⁸⁴⁾ On appeal, O'Neel argued that Birr's third party claim was time-barred, and the firm countered that the "issue [was] not properly before th[e] court because it was not raised in the District Court below."⁽¹⁸⁵⁾ The Ninth Circuit did not perform its own analysis on this issue, but instead adopted the Second Circuit's holding in Conticommodity Services Inc. v. Philipp & Lion.⁽¹⁸⁶⁾ In Conticommidity, the Second Circuit held that "[a]ny . . . questions of delay, unless expressly reserved for court determination by the arbitration agreement, were properly left `to the expertise of the arbitrators.'"⁽¹⁸⁷⁾ The Ninth Circuit added that it "specifically renounce[d] the contention that the defense of statute of limitations goes to jurisdiction of the tribunal, whether it be judicial or arbitration."⁽¹⁸⁸⁾

C. The Securities Industry's Response to the Six-Year Rule

In 1993, the NASD attempted to address the controversy surrounding its six-year rule by proposing an amendment that would: (1) authorize the director of the NASD to decide the timeliness of a claim; (2) make the directors decision final and unappealable; and (3) rename the provision from "`Time Limitation on Submission'" to "`Eligibility.'"⁽¹⁸⁹⁾ In 1994, the SEC scrutinized the proposal, upon which the NASD submitted a second proposal.⁽¹⁹⁰⁾

The second proposal would, similarly, entrust the Director with the authority to make a final decision as to the timeliness of a claim for arbitration.⁽¹⁹¹⁾ In addition, the second proposal outlined the procedure that the Director and the parties would follow in making any timeliness objections and decisions; it would have allowed a party barred from arbitrating a dispute to seek redress through the courts, and would eliminate the ability to arbitrate any dispute referred to arbitration by a court of competent jurisdiction.⁽¹⁹²⁾

The NASD's Arbitration Policy Task Force recently released the Ruder Report, which includes recommendations to reduce the costly and time-consuming litigation associated with the rule.⁽¹⁹³⁾ The Task Report calls for a three year suspension of the six-year rule, and would instead have the arbitrators apply statute of limitation provisions as early in the proceedings as "firmly and consistently" as possible.⁽¹⁹⁴⁾ Any decision made by the arbitrators would be unappealable until after the arbitration panel enters an award.⁽¹⁹⁵⁾ The Task Report, like the proposed amendments to the six-year rule, recommends allowing a party to seek redress through the courts if the arbitral panel bars their claim.⁽¹⁹⁶⁾ The NASD would apply the suspension prospectively, and after the three-year period the NASD would evaluate the results to see if such an approach would adequately serve the purpose of "eliminating time-barred claims."⁽¹⁹⁷⁾ Others within the securities industry have called for an outright elimination of the six-year rule.⁽¹⁹⁸⁾

SICA, too, has recommended changes to its six-year rule, and has gone one step further by officially adopting said changes at its meeting in July, 1996.⁽¹⁹⁹⁾ The effects of the new rule are to: (1) create a bright line test for the triggering occurrence; (2) allow the SRO arbitration administrator to determine the eligibility of claims; (3) allow a claimant foreclosed from arbitration to seek a remedy through the courts; and (4) would apply the rule "to any claim directed to arbitration by a court of competent jurisdiction, but only upon the motion of an opposing party."⁽²⁰⁰⁾ While the NASD proposal and the SICA amended rule are similar, it appeared at first that SICA's version had garnered more support from the securities industry.⁽²⁰¹⁾ However, the SICA proposal like the NASD proposal, has not been adopted by any SRO, nor does it appear like any SRO will do so soon.⁽²⁰²⁾

The National Association of Securities Dealers Regulation (NASDR), in November, 1996, through its vice-president Linda Fienberg, submitted its own proposed amendments to the six-year rule.⁽²⁰³⁾ The effects of the NASDR's proposal would be to eliminate the six-year rule prospectively, allow the Director of Arbitration to decide issues of eligibility, and require arbitrators to apply statute of limitations "rigorously."⁽²⁰⁴⁾ Like the NASD, the Task Force Report, and SICA's proposals before it, the NASDR's recommendations were not well received by the securities industry, which "vehemently opposed" the elimination of the six-year rule.⁽²⁰⁵⁾ The proposal was ultimately rejected by the NASDR Board of Governors.⁽²⁰⁶⁾ One commentator has indicated that the NASDR, after the first proposal was rejected, was prepared to submit a second proposal.⁽²⁰⁷⁾ The second set of recommendations would retain the six-year rule, but would allow the claimant to take all of its claims to court or bifuricate the claims.⁽²⁰⁸⁾ Bifurication would allow the claimant to keep all eligible claims in arbitration while claims ineligible for arbitration would be filed in court.⁽²⁰⁹⁾

The First Circuit Evens Out the Circuit Split: PaineWebber Inc. v. Elahi

A. Facts and Procedural History

Mohamad Elahi, his wife Kokab, and their daughter Maryam,⁽²¹⁰⁾ all former clients of PaineWebber Inc. (PaineWebber),⁽²¹¹⁾ opened an investment brokerage account with PaineWebber in 1986.⁽²¹²⁾ Upon opening the account, the Elahis were required to sign a "Client's Agreement" which stated in part that all controversies between the parties arising out of their business relationship would be determined by arbitration.⁽²¹³⁾ The agreement gave the Elahis the option of selecting either NYSE, ASE, NASD, CBOE, or National Futures Association's rules of arbitration to govern any dispute.⁽²¹⁴⁾ It also had a choice of law clause, which stated that the agreement was to "be construed and governed by the laws of the State of New York."⁽²¹⁵⁾

"Following the stock market crash of October 1987, the [Elahis] became concerned about the status of their investments."⁽²¹⁶⁾ Turning to their only "confidante and financial advisor," the Elahis expressed their concerns to their Broker, Ali Malihi, who "assured them that their investments were secure."⁽²¹⁷⁾ It was not until some time in 1994 that the Elahis notified PaineWebber of their intention to pursue various claims against it.⁽²¹⁸⁾ Among the claims were that PaineWebber through its broker: "had sold them unsuitable and highly speculative investments, falsely guaranteed a twelve-percent minimum return, and deceptively assured them that their investments were secure when in fact they had already lost a significant part of their initial investment."⁽²¹⁹⁾

In the hopes of settling the dispute amicably, the parties entered into an agreement on August 3, 1994, to toll any statute of limitations and any other defenses related to the issue of timeliness.⁽²²⁰⁾ The tolling period was retroactive as of June 28, 1994.⁽²²¹⁾ Unable to reach a satisfactory settlement agreement, the Elahis filed a claim with the NASD.⁽²²²⁾

In order to prevent the Elahis' claim from going to arbitration, PaineWebber brought an action in federal district court for declaratory and injunctive relief.⁽²²³⁾ PaineWebber argued that the Elahis claim was precluded by NASD's rules of arbitration because it was "filed more than six years after the purchase of the investments" which gave rise to the claim.⁽²²⁴⁾ The Elahis in turn filed motions "to dismiss PaineWebber's complaint and . . . to compel arbitration under the Federal Arbitration Act, 9 U.S.C. § 4."⁽²²⁵⁾ The Elahis' motions were granted by the district court, which found that the dispute was governed by "a valid arbitration agreement," and that the arbitrator was to decide the applicability of section 15.⁽²²⁶⁾

PaineWebber appealed the district court's order to resolve the dispute through arbitration.⁽²²⁷⁾ PaineWebber presented two arguments in favor of its position.⁽²²⁸⁾ First, PaineWebber argued that the contractual choice of law provision, which called for the laws of the state of New York to govern any dispute, required that courts apply section 15.⁽²²⁹⁾ Second, PaineWebber argued that federal law required courts to decide issues of arbitrability where there is no clear intent of the parties to allow the arbitrator to decide such issues.⁽²³⁰⁾ The First Circuit framed the issue as "whether the time-bar provision [of section 15 of the NASD Code of Arbitration Procedure] is to be construed and applied by the arbitrator or by the court."⁽²³¹⁾ The court felt compelled to perform its own analysis because the case law on the issue left "important aspects . . . unaddressed."⁽²³²⁾

B. The First Circuit's Opinion

1. The Effect of the Choice of Law Clause on the Six-Year Rule

Writing for the court, Justice Stahl held that federal arbitration law governs what effect the choice of law clause has on who applies section 15 of the NASD Code of Arbitration Procedure.⁽²³³⁾ The court recognized that "`[t]he FAA contained [sic] no express pre-emptive provision' and `[does not] reflect a congressional intent to occupy the entire field of arbitration.'"⁽²³⁴⁾ The court, nonetheless, concluded that federal common law regarding the FAA was controlling on two grounds.⁽²³⁵⁾ First, the intent behind the FAA was to create a body of substantive law that applies to any arbitration agreement that was within the scope of the Act.⁽²³⁶⁾ Second, the agreement between the Elahis and PaineWebber was clearly within the scope of the Act.⁽²³⁷⁾

After concluding that the federal common law applied to the application of the choice of law clause, the court examined the Supreme Court decisions that provided guidance.⁽²³⁸⁾ The court held that one of the goals of the FAA was to make sure that arbitration agreements "`are enforced according to their terms.'"⁽²³⁹⁾ The court then stated that the decision whether an arbitrator is to decide any particular issue is governed by the parties' intent.⁽²⁴⁰⁾ Furthermore, the court explained that the FAA has, in addition to declaring a national policy favoring arbitration, taken away the states' ability to mandate resolution through the courts where an enforceable arbitration agreement exists.⁽²⁴¹⁾ Therefore, the court held that New York law alone could not compel the parties to submit the section 15 issue to the courts.⁽²⁴²⁾ The court reasoned that a court can hear the section 15 issue only if it was the intent of the parties to allow such through the choice of law clause; otherwise, the decision rests with the arbitrator.⁽²⁴³⁾

The court ultimately rejected PaineWebber's argument that the choice of law clause was controlling and held that the section 15 issue was not governed by New York case law requiring the courts to apply the rule.⁽²⁴⁴⁾ In addition, the court relied on the language of the arbitration agreement itself to support its conclusion.⁽²⁴⁵⁾ After examining the language, the court maintained that the arbitration agreement gave the arbitrator a broad range of power because it applied to "`all controversies' arising from any transaction, `construction, performance, or breach' of the agreement."⁽²⁴⁶⁾ Therefore, it would be unlikely that the parties intended to limit such power through the choice of law clause.⁽²⁴⁷⁾ Furthermore, the court interpreted the agreement as requiring any arbitration proceeding to be in accordance with the rules of the SRO (NASD) selected by the Elahis.⁽²⁴⁸⁾ The court concluded that it was unlikely to require one set of rules and then adopt another set of rules later in the agreement.⁽²⁴⁹⁾ The court, "[f]ollowing the principles . . . of Mastrobuono," held that the "choice[] of [] law clause . . . [was] not an expression of [the parties'] intent to adopt New York caselaw requiring the courts to apply section 15."⁽²⁵⁰⁾

2. Interpreting Section 15 of the NASD Code of Arbitration Procedure

Having concluded that the choice of law clause was not intended to require courts to apply section 15, the court examined the arbitration clause of the client's agreement, and decided whether the parties' intent was to allow the court, or the arbitrator, to apply section 15.⁽²⁵¹⁾ Again, the court looked at federal arbitration law for guidance in its decision.⁽²⁵²⁾

The court asserted that the guiding principle of federal arbitration law is that a party can be compelled to arbitrate any issue only when that party has agreed to submit the issue to arbitration.⁽²⁵³⁾ The court noted, however, that when the scope of the arbitration agreement is ambiguous as to whether an issue was meant to be arbitrated, then federal arbitration law provides the necessary guidelines needed to resolve the confusion surrounding the parties' intent.⁽²⁵⁴⁾ The court explained that questions of arbitrability, such as whether a party agreed to submit an issue to arbitration, are unquestionably for the courts to decide, unless there is clear and unmistakable proof to the contrary.⁽²⁵⁵⁾ In other words, courts are to decide questions of arbitrability unless the parties agree to let the arbitrator decide such questions.⁽²⁵⁶⁾ The court noted that this rule is not the norm but is rather an exception to the federal policy espoused by the Supreme Court favoring arbitration.⁽²⁵⁷⁾ The court concluded that issues of arbitrability are presumptively for the courts to decide, but all other non-arbitrability issues fall to the arbitrator.⁽²⁵⁸⁾ Therefore, before the court could determine who applies section 15, it first had to decide whether section 15 presented an issue of arbitrability.⁽²⁵⁹⁾ Unable to resolve the issue based on the Supreme Court's definition of arbitrability, the court examined case law from its sister circuits.⁽²⁶⁰⁾

a. How Circuits Have Analyzed the Issue

i. The First Circuit's Analysis of the Majority Circuits

The Third, Sixth, Seventh, Tenth, and Eleventh Circuits have all ruled that courts are to apply section 15.⁽²⁶¹⁾ The First Circuit stated that, in sum, these circuits based their decisions on what the court labeled a "plain language" interpretation of section 15.⁽²⁶²⁾ The First Circuit court found section 15's language to be "plain and unambiguous."⁽²⁶³⁾ The court held that section 15 does not address who is to apply section 15; and more importantly, section 15 "does not create a question of `arbitrability,'" because it does not go to the basis of whether the particular issue is governed by the arbitration agreement.⁽²⁶⁴⁾ The court pointed out that the Seventh Circuit based part of its decision on a letter written by the NASD, which stated that the NASD would not accept a claim found to be wholly outside the six-year rule.⁽²⁶⁵⁾ The First Circuit criticized the Seventh Circuit for inferring that the letter was evidence that section 15 was an eligibility requirement for the courts to apply.⁽²⁶⁶⁾

To counter the plain language approach, the First Circuit court pointed to an amendment proposed by the NASD in 1994 pertaining to section 15, in which the NASD Director of Arbitration would apply the six-year rule and decide whether the claim would be eligible for submission to arbitration.⁽²⁶⁷⁾ The court opined that the NASD action "seriously undermine[d] the five-circuit majority's `plain language' rationale."⁽²⁶⁸⁾ When the NASD proposed the amendment, it announced that the purpose behind the amendment originated from the fact that section 15 did not indicate who had the authority to decide whether a claim is eligible for arbitration.⁽²⁶⁹⁾

ii. The First Circuit's Analysis of the Minority Circuits

The Second, Fifth, Eighth, and Ninth Circuits have held that the applicability of section 15 is for the arbitrator to decide.⁽²⁷⁰⁾ The First Circuit, while in agreement with these circuits, stated that their "varied analyses [left] important questions unanswered."⁽²⁷¹⁾

Next the court identified the three minority approaches taken by the Second, Fifth, Eighth, and Ninth Circuits.⁽²⁷²⁾ The court stated that the Fifth Circuit, in Smith Barney Shearson, Inc. v. Boone,⁽²⁷³⁾ adopted a substantive versus procedural arbitrability approach, and held that issues raised under section 15 were procedural in nature and were for the arbitrator to decide.⁽²⁷⁴⁾ The Eighth Circuit, in FSC Securities Corp. v. Freel,⁽²⁷⁵⁾ avoided the substantive versus procedural test and instead held that section 35 of the NASD Code of Arbitration Procedure was a "`clear and unmistakable' expression" of the parties intent to have the arbitrator decide the applicability of section 15.⁽²⁷⁶⁾ The Second Circuit, in PaineWebber Inc. v. Bybyk,⁽²⁷⁷⁾ held that section 15's time bar provision created a question of arbitrability, but it considered the parties' arbitration agreement to be a "clear and unmistakable" expression of the parties intent to have the arbitrator decide any issues of arbitrability.⁽²⁷⁸⁾ Alternatively, the court noted, the Second Circuit agreed with the Eighth Circuit when it asserted that section 35 of the NASD Code would compel all issues to be decided by the arbitrator, provided that the NASD Code of Arbitration Procedure was effectively adopted in the arbitration agreement.⁽²⁷⁹⁾ The Court stated that the Ninth Circuit, in O'Neel v. National Association of Securities Dealers, Inc.,⁽²⁸⁰⁾ adopted a previous Second Circuit decision, Conticommodity Services Inc. v. Philip & Lion,⁽²⁸¹⁾ but provided no analysis of its own in the case.⁽²⁸²⁾ In spite of this fact, the First Circuit believed that O'Neel was still good law in the Ninth Circuit and concluded that the Ninth Circuit would reach the same results if faced with the issue of who decides the applicability of section 15 today.⁽²⁸³⁾

iii. The First Circuit's Own Analysis

The First Circuit addressed the issue of "whether the parties intended the time bar to be an `arbitrability' issue . . . that must be determined by a court before there can be any arbitration."⁽²⁸⁴⁾ The court stated that it was bound by the parties' intent, and would have to settle any issue regarding the parties' duty to arbitrate, so long as arbitrability was the clear intent of the parties.⁽²⁸⁵⁾ The court, however, asserted in the alternative, that if the parties' intent was unclear, then the court's task would be to "make a sensible presumption about their intent."⁽²⁸⁶⁾

Thus, the court said it would presume that the parties intended to submit all issues necessary to resolve the merits of the claim to the arbitrator where: (1) "a valid arbitration agreement . . . [was entered into]; and (2) the arbitration agreement cover[ed] the subject matter of the underlying dispute."⁽²⁸⁷⁾ The court stated that if both criteria were met, then it would "presume that [all] . . . issues connected to the substance of the dispute or the procedure of the arbitration" would rest with the arbitrator.⁽²⁸⁸⁾ Only where the parties "clearly and unmistakably" define an issue as one of "arbitrability" will a court have a duty to decide the issue before compelling arbitration.⁽²⁸⁹⁾ Due to the presence of an arbitration agreement that contained a broad arbitration clause, the court concluded that PaineWebber and the Elahis did not intend to make section 15 an "arbitrability" issue, and therefore, the clause was left for the arbitrator to decide its applicability.⁽²⁹⁰⁾

The court expanded its analysis by examining the agreement for any "`clear and unmistakable'" statements contrary to its presumption.⁽²⁹¹⁾ The court held that the NASD Code was integrated into the agreement, and focused its analysis on the words "eligible for submission" in section 15.⁽²⁹²⁾ Because the phrase, "eligible for submission," was open to different interpretations, the court ruled that it was not a "clear and unmistakable" expression of the parties' intent to make the application of section 15 an arbitrability issue.⁽²⁹³⁾

The court pointed to several factors in support of its decision.⁽²⁹⁴⁾ First, the court noted that the NASD has stated that section 15 is silent as to whether the court or the arbitrator decides the section's applicability.⁽²⁹⁵⁾ The court interpreted such silence as an indication of the NASD's belief that section 15 does not clearly make it an arbitrability issue.⁽²⁹⁶⁾ The court then pointed to section 35 of the NASD Code and held that section 35, by authorizing arbitrators to decide the applicability of all of the Code's provisions, "strongly undercuts any argument that the parties intended the section 15 time bar to be an arbitrability issue . . . decided only by the courts."⁽²⁹⁷⁾ Third, the court stated that section 15 was a part of the NASD's own code of procedure, which makes it more likely that the NASD would apply its own provisions.⁽²⁹⁸⁾ Finally, the court maintained that the NASD Code only came "into play" once the NASD was selected as the arbitral forum by Elahi.⁽²⁹⁹⁾ The court held that providing the customer with the option of choosing the arbitration forum would make the issue of arbitrability dependent on which forum was selected.⁽³⁰⁰⁾ The court noted that if it was, in fact, the intent of the parties to make timeliness an arbitrability issue, "it seems unlikely that they would do so through such potentially unreliable means."⁽³⁰¹⁾ In affirming the district court's order that dismissed PaineWebber's claim, the court held that the parties agreed to arbitrate all disputes arising from the investments, including the timeliness of the arbitration claim, and therefore the application of section 15 was for the arbitrator to decide.⁽³⁰²⁾

Analysis

A. Section 15 of the NASD Code of Arbitration Procedure is Not an Arbitrability Issue to be Decided by the Courts

1. The First Circuit's Decision Makes the Application of Section 15 a Nonarbitrability Issue⁽³⁰³⁾

After undertaking an indepth and thorough analysis,⁽³⁰⁴⁾ the First Circuit rejected the position held by a majority of the circuit courts of appeal that courts are to determine the applicability of NASD's section 15 six-year rule.⁽³⁰⁵⁾ The circuits that hold section 15 to be applied by the courts base their decisions on the conclusion that section 15 is an arbitrability issue.⁽³⁰⁶⁾ The First Circuit, however, chose instead to rely on the fundamental principle of contract law, in which the intent of the parties governs the scope of the agreement,⁽³⁰⁷⁾ and concluded that Elahi and PaineWebber did not intend to make the application of the six-year rule an "`arbitrability'" issue for the courts to decide.⁽³⁰⁸⁾

Under Supreme Court precedent, issues of arbitrability are to be decided by the court.⁽³⁰⁹⁾ The Supreme Court has defined arbitrability as a question of whether a party has a duty to arbitrate a dispute,⁽³¹⁰⁾ and, alternatively, as a question of whether the subject matter of a dispute is covered by the arbitration agreement.⁽³¹¹⁾ The signing of a valid Client Agreement that contains a pre-dispute arbitration agreement, however, creates a duty on the parties signing such an agreement to arbitrate any disputes arising out of their business dealings.⁽³¹²⁾

The reliance on First Options by those circuits that hold section 15 to be an issue of arbitrability is questionable because such reliance is easy to factually distinguish from cases where section 15 is reviewed.⁽³¹³⁾ In First Options, one of the parties contested arbitration on the grounds that it did not sign an agreement to arbitrate, and therefore it was not bound to arbitrate its dispute.⁽³¹⁴⁾ The Supreme Court held that the courts and, not arbitrators, determine whether an individual, who had not personally executed an arbitration agreement, had agreed to arbitrate a dispute.⁽³¹⁵⁾ In Elahi, there was no dispute between the parties as to whether there was a valid agreement to arbitrate.⁽³¹⁶⁾ Once the court held that there was a valid agreement between the Elahis and PaineWebber, the presumption in favor of arbitration returned.⁽³¹⁷⁾

Furthermore, under caselaw and the FAA, a court's jurisdiction is limited in its inquiry regarding the appropriateness of arbitration.⁽³¹⁸⁾ Once an agreement to arbitrate is found, any issues relating to the scope of the agreement are left for the arbitrator.⁽³¹⁹⁾ Since a determination of the timeliness of a claim will often delve into the facts of the claim and essentially the merits thereof,⁽³²⁰⁾ "[t]he better rule" is to allow arbitrators to decide the applicability of section 15.⁽³²¹⁾

2. The First Circuit's Decision is Consistent With Supreme Court Precedent

One criticism lodged against the circuits that allow the arbitrators to apply section 15 is that they fail to adhere to a Supreme Court mandate espoused in AT&T Technologies, Inc. v. Communications Workers of America,⁽³²²⁾ in which the Court held that courts need to find "clear and unmistakable" evidence of an intent to allow arbitrators to apply section 15.⁽³²³⁾ AT&T's mandate, however, applies where there is a dispute as to whether there is an actual agreement to arbitrate the claim at hand.⁽³²⁴⁾ However, once the First Circuit court found that a valid arbitration agreement covering the subject matter of the Elahis' claim existed,⁽³²⁵⁾ the court, unlike the Second and Eighth Circuit courts,⁽³²⁶⁾ was no longer bound by AT&T's mandate.⁽³²⁷⁾

The First Circuit court's decision was consistent with, not ignorant of, the mandate of the Supreme Court in First Options and AT&T.⁽³²⁸⁾ The First Circuit court's "presumption" was that section 15 was not an issue of "arbitrability," while AT&T's "presumption" concerned who decides issues of "arbitrability."⁽³²⁹⁾ The court noted that AT&T's presumption applied where there was a dispute as to whether there was an agreement to arbitrate or where the dispute was within the scope of the agreement.⁽³³⁰⁾ Where there is no dispute concerning the validity of the agreement, and the agreement has a broad arbitration clause, such as the Elahis', then it makes more sense to assert that all disputes, including timeliness, were intended for the arbitrator to decide.⁽³³¹⁾ In fact, such a conclusion is well supported by the United States Supreme Court and other case law.⁽³³²⁾

3. There is No Evidence of a Contrary Intent to Allow the Courts to Decide the Applicability of Section 15.

Labeling section 15 as a nonarbitrability issue does not mean that section 15 can never be an issue for courts to decide.⁽³³³⁾ Rather, the First Circuit's decision would allow parties in the future to allow courts to apply section 15 provided that there is "clear and unmistakable" evidence that that is what the parties intended.⁽³³⁴⁾ Arbitration agreements are contracts, and therefore their interpretation of what is to be arbitrated hinges upon the intent of the parties.⁽³³⁵⁾ Therefore, it was necessary for the court to rule out any "clear and unmistakable" evidence of an intent on the part of the Elahis and PaineWebber to allow the courts to decide whether the six-year time limit had run.⁽³³⁶⁾ The court looked towards the parties' Agreement in order to rule out any such intent.⁽³³⁷⁾

The agreement between the Elahis and PaineWebber failed to establish any "clear and unmistakable" proof that the parties intended to have the court determine the applicability of section 15 of the NASD Code of Arbitration Procedure.⁽³³⁸⁾ The parties' agreement stated that "[a]ny arbitration shall be in accordance with the rules in effect of either the New York Stock Exchange, Inc., American Stock Exchange, Inc., National Association of Securities Dealers, Inc. . . . as the undersigned [the Elahis] may elect."⁽³³⁹⁾ In Elahi, there was no dispute among the parties whether NASD Code of Arbitration Procedure was incorporated into their agreement because both parties conceded to the issue.⁽³⁴⁰⁾ Thus, the parties were bound by the NASD's Code and the effect of all of its provisions.⁽³⁴¹⁾ PaineWebber argued that section 15 is an eligibility requirement that calls for courts to decide whether a claim is eligible for submission to arbitration.⁽³⁴²⁾ As noted previously, the language of section 15 does not speak as to who decides the six-year rule.⁽³⁴³⁾ Therefore the incorporation of section 15 could not satisfy the "clear and unmistakable" burden of demonstrating an intent to give the timeliness issue to the courts and is, therefore, ambiguous at best.⁽³⁴⁴⁾ Accordingly, common law dictates that a court is to construe any ambiguities against the drafter of such language.⁽³⁴⁵⁾ Such contract interpretation applies equally to arbitration agreements.⁽³⁴⁶⁾ After construing the ambiguities against PaineWebber, the drafter of the client agreement, the only conclusion one can reach is that the parties agreed to have the arbitrators decide the timeliness of the Elahis' claim.⁽³⁴⁷⁾

Given the breadth of the parties' agreement,⁽³⁴⁸⁾ any issue regarding arbitrability was effectively eliminated.⁽³⁴⁹⁾ Furthermore, by agreeing that the NASD Code of Arbitration Procedure was incorporated into the Client Agreement,⁽³⁵⁰⁾ section 35, which gives the arbitrator the authority to decide the applicability of all the Code's provisions, was incorporated into the agreement as well.⁽³⁵¹⁾ This incorporation, coupled with the fact that there is nothing in the NASD Code of Arbitration Procedure that takes section 15 out of the scope of section 35, makes it more likely that the parties intended to allow the arbitrator to decide the applicability of section 15 rather than the courts.⁽³⁵²⁾ Unable to find any "clear and unmistakable" evidence of the parties' intent to allow courts to apply section 15, the correct conclusion is that the issue of timeliness was for the arbitrator to decide.⁽³⁵³⁾

B. The Argument that Courts are the Proper Judicial Forums to Apply Section 15 is Seriously Undermined.

1. First Circuit Avoids the Substantive vs. Procedural Analysis Pitfall.

The Elahi court relied so heavily on the parties' intent to resolve the issue of who decides the applicability of section 15 that it avoided the "substantive" vs. "procedural arbitrability" analysis relied upon by other circuits.⁽³⁵⁴⁾ The court's discussion of the substantive vs. procedural analysis was relegated to a footnote towards the end of its opinion.⁽³⁵⁵⁾ The court reasoned that to label an issue as procedural, and then to conclude that the issue is for the arbitrator to decide, "does not give due regard to the parties' contractual intent."⁽³⁵⁶⁾

In doing so, the court effectively countered the argument used by those circuits that hold that courts are to apply section 15, and that section 15 is a substantive provision.⁽³⁵⁷⁾ By relying on such a bright line test, the majority of circuits failed to adhere to the mandate that the parties' intent governs contract interpretation.⁽³⁵⁸⁾ Should the parties to an arbitration agreement decide to make any procedural issue, such as timeliness, an issue of arbitrability, then the courts would be bound to resolve the issue.⁽³⁵⁹⁾ A court, likewise, would have to leave an arbitrability or substantive issue to the arbitrator if the intent of the parties reflected such a desire.⁽³⁶⁰⁾

2. Action by the NASD, SICA and NASDR Provides Evidence That the Arbitrators or the Arbitral Forum Should Apply Section 15 and Not the Courts.

The opinion that section 15 is for the courts to apply is further undermined by the NASD's own interpretation of section 15.⁽³⁶¹⁾ As noted previously, the NASD is of the opinion that section 15, as presently drafted, provides no guidance and is, in fact, silent as to who should apply the provision.⁽³⁶²⁾ The NASD opinion as to the lack of clarity of section 15 conflicts directly with the interpretation that the language of section 15 clearly gives the authority to apply the rule to the courts.⁽³⁶³⁾ Furthermore, in 1993, and again in 1994, the NASD submitted proposals to amend section 15 that would give the director of the NASD the power to render a final decision regarding the timeliness of all claims submitted for arbitration.⁽³⁶⁴⁾ The NASD hoped that its 1994 proposal would clarify that, by incorporating the NASD Code of Arbitration Procedure into their agreement, parties intend to have the Director of Arbitration decide the timeliness of the claim.⁽³⁶⁵⁾

Finally, SICA has taken more concrete steps in establishing that the arbitrators should decide issues generated by section 15.⁽³⁶⁶⁾ SICA created the six-year rule as part of its Uniform Code,⁽³⁶⁷⁾ "as a matter of convenience" in order to assist in the SROs in determining whether a claim was stale.⁽³⁶⁸⁾ As evidenced by the amount of litigation surrounding the six-year rule, the rule is no longer used as a "matter of convienence" by the SROs.⁽³⁶⁹⁾ SICA, in response to New York decisions that gave courts the ability to apply section 15,⁽³⁷⁰⁾ proposed to amend section 4, which contains the six-year rule, to clarify any ambiguities.⁽³⁷¹⁾ Section 4, of SICA's Uniform Code, would provide "that the decision on eligibility is to be made by the Directors of Arbitration."⁽³⁷²⁾ This proposal was subsequently passed by SICA at its July 12, 1996 meeting.⁽³⁷³⁾ The proposed amendment to the rule would prevent investment firms from attacking arbitration claims and awards on the grounds of ineligibility through the courts.⁽³⁷⁴⁾ The motivation behind SICA's amendment was to clarify the ambiguity that surrounds the original drafting, as well as to ensure that a claim barred from arbitration was not barred from a court of competent jurisdiction.⁽³⁷⁵⁾ In light of the similar approaches and concerns regarding the six-year rule by the NASD and SICA, it appears that the intent was to keep the determination of timeliness issues with the arbitrator and out of the courts.⁽³⁷⁶⁾

First, the fact that the changes by the NASD and SICA are designed to remedy the inherent ambiguities within the six-year rule contradicts the plain meaning approach used by the circuits that hold that courts are to apply section 15.⁽³⁷⁷⁾ Second, the fact that courts have held that the rule is open to more than one "plausible" interpretation further emphasizes the ambiguities contained in the rule.⁽³⁷⁸⁾ As noted previously, any ambiguities are to be construed against the drafter, which leads to the conclusion that the arbitrators have the authority to apply section 15.⁽³⁷⁹⁾

C. The First Circuit's Decision is Consistent with and Maintains the National Policy Favoring Arbitration

After presuming that the intent of the parties was not to make the application of section 15 an arbitrability issue and finding no "clear and unmistakable" intent to hand the issue to the courts, the First Circuit was able to apply the "national policy favoring arbitration," to support its decision resolving the issue in favor of the arbitrators deciding the issue of timeliness.⁽³⁸⁰⁾ Supreme Court precedent interpreting the FAA has established a national policy favoring arbitration.⁽³⁸¹⁾ The basic purpose of such a policy is to prevent courts from refusing to enforce arbitration agreements.⁽³⁸²⁾ The Supreme Court, in the late 1980s, extended this policy to cover securities arbitration.⁽³⁸³⁾

The national policy favoring arbitration comes into play only where there is an ambiguity as to whether the parties intended the arbitrator to decide any particular issue.⁽³⁸⁴⁾ A contract provision is deemed ambiguous when, after examining the entire agreement, it is open to more than one interpretation in light of the industry's customs, practices, usages, and terminology.⁽³⁸⁵⁾ The First Circuit stated that however "plausible" PaineWebber's argument may be, it is not the only viable interpretation of section 15.⁽³⁸⁶⁾ The court illustrated its point when it opined that the words `submission to arbitration' in section 15 "could mean submission for full adjudication of the merits, . . . such as whether the claim is time-barred."⁽³⁸⁷⁾ As demonstrated by the amount of litigation, the different interpretations, and the confusion that surrounds section 15, the six-year rule is anything but clear as to who should apply the provision.⁽³⁸⁸⁾ With such ambiguity, in accordance with the "national policy favoring arbitration," the correct conclusion is to have arbitrators apply section 15.⁽³⁸⁹⁾

D. The Impact of the Elahi Decision: Protection of Investors' Rights and Interests

1. The Elahi Decision Protects Investors From Court Attacks Based on the Timeliness of Their Claim

The benefits of cost effectiveness and speed have historically been associated with the arbitration of disputes.⁽³⁹⁰⁾ However, the confusion that surrounds section 15 has virtually erased any benefit(s) gained through arbitrating a dispute in the securities industry.⁽³⁹¹⁾ The collateral litigation created when a firm seeks to stay arbitration "prevents the arbitration process from . . . going forward" until the claim to stay arbitration is resolved.⁽³⁹²⁾ In addition, such attacks increase the complexity and time-consumption of resolving the claim submitted for arbitration.⁽³⁹³⁾

The court's decision in Elahi will go far in protecting the investor's rights and securing the benefits of arbitration within the First Circuit.⁽³⁹⁴⁾ Absent the requisite "clear and unmistakable" intent to allow courts to apply section 15, investment firms in the First Circuit can no longer seek to stay arbitration in the courts on the grounds that the customer's claim is untimely.⁽³⁹⁵⁾

Unconfident that arbitrators will apply the six-year rule as strictly as the courts, investment firms have sought relief from what they feel are stale claims through the courts.⁽³⁹⁶⁾ Should a court rule in favor of the investment firm, the investor will be barred from seeking relief through either arbitration or the courts.⁽³⁹⁷⁾ Many times clients have found that they have waived their right to seek relief through the courts, only to lose the ability to arbitrate because of a ruling by those same courts.⁽³⁹⁸⁾ After Elahi, investors in the First Circuit can feel secure that the invesment firms will be bound by the "Client's Agreement" to arbitrate all claims arising out of the business transaction, including issues of timeliness, unless "clear and unmistakable" evidence dictates otherwise.⁽³⁹⁹⁾

Holding that the six-year rule was open to multiple interpretations,⁽⁴⁰⁰⁾ the court correctly concluded that the provision was ambiguous.⁽⁴⁰¹⁾ Any ambiguities pertaining to an arbitration agreement are interpreted against the party that drafted the agreement.⁽⁴⁰²⁾ Thus, it would appear that the requirement of "clear and unmistakable" proof of an intent to allow courts to decide the issue of timeliness rests with the drafters of the "Client Agreement": the investment firms.⁽⁴⁰³⁾ Thus, investors are protected from the surpise and added cost of unexpected litigation through the courts.⁽⁴⁰⁴⁾ Under case law, should an investment firm desire to preserve the right to litigate the applicability of section 15, it carries the burden of drafting a specific "Client Agreement" that clearly indicates, and provides adequate notice of, the intent to allow courts to decide the applicability of section 15.⁽⁴⁰⁵⁾

2. The Elahi Decision Protects Investors From Post-Arbitration Award Collateral Attacks.

In addition to pre-arbitration collateral attacks, investment firms have looked towards courts for relief from an adverse arbitration award where an arbitration panel has rejected the firms timeliness argument.⁽⁴⁰⁶⁾ In Edward D. Jones & Co. v. Sorrells, the Seventh Circuit affirmed the district court's order to vacate an arbitration award based on the grounds that the arbitration panel did not have the authority to decide the section 15 issue.⁽⁴⁰⁷⁾ Courts are authorized, under section 10(b) of the FAA,⁽⁴⁰⁸⁾ to vacate an arbitration award "`[w]here the arbirtators exceeded their authority.'"⁽⁴⁰⁹⁾ The Seventh Circuit held that section 15 is a substantive rule and that its interpretation rests with the courts.⁽⁴¹⁰⁾ Therefore, under the Seventh Circuit's interpretation of section 15, the court determined Jones' claim to be outside the six-year period, and the arbitrators therefore exceeded their authority by deciding Jones' claim, thereby requiring the award to be vacated.⁽⁴¹¹⁾

Under Elahi, however, the arbitrators have the requisite authority to decide section 15 issues and would not exceed their authority by exercising such authority.⁽⁴¹²⁾ Thus, a party in the First Circuit cannot appeal to a court of law to have an arbitrator's award vacated on the grounds that the arbitrator exceeded its authority in deciding the eligibility of a claim.⁽⁴¹³⁾ The same reasoning used to argue against an investment firm from seeking an injuction to stay arbitration applies equally to the argument that respondents are barred from having a court vacate an arbitration award under the FAA. "To initiate a court action . . . based on another circuit's interpretation of the six-year rule, in the face of binding precedent to the contrary in the jurisdiction where brought, ought to be grounds for awards of costs and sanctions from the . . . court."⁽⁴¹⁴⁾

Conclusion

Securities firms have been far too willing to "wield the six-year rule as a club against legally viable claims."⁽⁴¹⁵⁾ Many times clients have been forced to litigate a claim in order to have the claim heard through arbitration.⁽⁴¹⁶⁾ Too often this litigation occurs in distant and inconvienent forums.⁽⁴¹⁷⁾ The negative impact of the six-year rule effects not only the investors, but the securities firms as well.⁽⁴¹⁸⁾ The First Circuit's decision in Elahi was an important triumph in protecting investors from unexpected and unfair results and in promoting the benefits associated with arbitration. Given the fractured interpretations and inconsistent applications by the circuit courts of appeals it is likely that the Supreme Court will address this issue.⁽⁴¹⁹⁾ Until then, securities arbitration will continue to be "the litigation battlefield it was intended to avoid."⁽⁴²⁰⁾

Dennis P. O'Leary^*

1. See New York Stock Exchange, Inc. Symposium on Arbitration in the Securities Industry, 63 Fordham L. Rev. 1499, 1519 (1995) [hereinafter NYSE Arbitration Symposium] (panelist Theodore G. Eppenstein). During the panel discussion, Mr. Eppenstein stated:

There are many troubling aspects concerning the manner in which the pre-dispute clauses are forced on the public. Many firms have their so-called financial consultants obtain the customer's signature on multi-page documents. Here's one example. It's an eight-page [docu]ment . . . where about ten signature lines appear throughout the document. The arbitration agreement is on page five, buried somewhere. In another customer agreement, the arbitration clause appears on the back, at the bottom . . . .Id. (panelist Theodore G. Eppenstein). The speaker acknowledged that it did not matter where the agreement was placed in the document since "the customer either signs the agreement . . . or he can't open up that account." Id. (panelist Theodore G. Eppenstein). Investors are unable to go elsewhere "because every big firm has the same policy. You either sign [the arbitration agreement], or they don't want your business." Id. (panelist Theodore G. Eppenstein). To illustrate the point, Mr. Eppenstein related a story of how a client of his, who had a fifteen million dollar portfolio, was told by an investment firm that they did not want his business unless he agreed to sign their arbitration agreement as is. See id. (panelist Theodore G. Eppenstein) (noting that his client wanted to add the American Arbitration Association as one of the possible arbitration forums); see also 3B Harold S. Bloomenthal & Samuel Wolff, Securities and Federal Corporate Law § 8.30[2][d], at 8-207 (1997) ("[I]n the wake of McMahon, . . . brokerage firms . . . were refusing to open accounts for retail customers who would not sign [predispute] agreements."); Margaret M. Harding, The Cause and Effect of the Eligibility Rule in Securities Arbitration: The Further Aggravation of Unequal Bargaining Power, 46 DePaul L. Rev. 109, 111 (1996) (noting that despite arbitration being the primary method of dispute resolution, for the majority of investors it is compulsory); William A. Gregory & William J. Schneider, Securities Arbitration: A Need for Continued Reform, 17 Nova L. Rev. 1223, 1224 (1993) (noting that most investors view forced arbitration as being unfair); Leslie William Moore, Comment, Rodriguez de Quijas v. Shearson/American Express, Inc.: Is Securities Arbitration Finally Above Suspicion?, 78 Ky. L.J. 839, 839 (1989-90).

It is worth noting that the type of investor and account opened could have an effect on whether the investor would be required to sign such an arbitration clause. See Harding, supra, at 118.

With respect to individual investors opening cash accounts after December 1, 1990, a substantial minority of small and medium firms, [thirty-seven and forty-six percent respectively] required the signing of an agreement containing an arbitration clause; a small percentage [eleven] of large firms [also] required [such a signing]. The numbers [are] significantly higher with respect to margin and options accounts: all large firms, ninety-percent of medium firms, and over seventy percent of small firms required customers to sign agreements containing predispute arbitration clauses.Id. (footnotes omitted) (citing General Accounting Office, Pub. No. GGD-92-94, Securities Arbitration: How Investors Fare 104 (May 11, 1992)).

2. See Bloomenthal & Wolff, supra note 1, § 8.30[2][d], at 8-206; see also Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477, 481 (1989) (holding that the presumptions against arbitrating securities disputes are outdated); Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 238 (1987) (arguing that the Federal Arbitration Act required the court to compel arbitration); Harding, supra note 1, at 135. The Supreme Court decision "`transformed'" arbitration "`from a voluntary procedure to a mandatory obligation.'" Id. (quoting NYSE Arbitration Symposium, supra note 1, at 1507 (panelist Professor Constantine N. Katsoris)); see also Lewis D. Lowenfels & Alan R. Bromberg, Securities Industry Arbitrations: An Examination and Analysis, 53 Alb. L. Rev. 755, 757 (1989) (arguing that after McMahon and Rodriguez, most disputes will be resolved through arbitration).

3. See PaineWebber Inc. v. Elahi, 87 F.3d 589, 601 (1st Cir. 1996). Multiple forums are listed within the arbitration agreement because the Securities Exchange Commission (SEC) bars the practice of limiting the investor to one arbitration forum. See J. Kirkland Grant, Securities Arbitration: Is Required Arbitration Fair to Investors?, 24 New Eng. L. Rev. 389, 480-81 (1989).

4. Harding, supra note 1, at 112. Although each arbitral forum has its own code of procedure, the eligibility rule is the same for each and reads as follows:

No 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. This rule shall not extend applicable statutes of limitations, nor shall it apply to any case which is directed to arbitration by a court of competent jurisdiction.National Ass'n of Sec. Dealers, Inc., Code of Arbitration Procedure, NASD Manual (CCH) 7573 (May, 1996) [hereinafter NASD Code of Arbitration Procedure]. It should be noted that the NASD has changed the number of the rule stated above to Rule 10304. See Sean M. Costello, Time Limits Under Rule 10304 of the NASD Code of Arbitration Procedure: Making Arbitrators More Like Judges or Judges More Like Arbitrators?, 52 Bus. Law. 283, 283 n.1 (1996). However, for the sake of consistency, this Comment will continue to refer to the rule as section fifteen.

5. See Harding, supra note 1, at 111 ("For many, arbitration . . . may provide the only efficient means of obtaining justice. Arbitration, at least theoretically, is less expensive, less time-consuming and simpler than litigation in a judicial forum." (footnote omitted)); see also Norman S. Poser, Making Securities Arbitration Work, 50 SMU L. Rev. 277, 278 (1996). The goal of arbitration is to resolve disputes "speedily and economically." Id.

6. See Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Lauer, 49 F.3d 323, 325-26 (7th Cir. 1995).

7. See, e.g., PaineWebber Inc. v. Elahi, 87 F.3d 589 (1st Cir. 1996); PaineWebber Inc. v. Bybyk, 81 F.3d 1193 (2d Cir. 1996); Cogswell v. Merrill Lynch, Pierce, Fenner, & Smith Inc., 78 F.3d 474 (10th Cir. 1996); Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Cohen, 62 F.3d 381 (11th Cir. 1995); Smith Barney Shearson, Inc. v. Boone, 47 F.3d 750 (5th Cir. 1995); FSC Sec. Corp. v. Freel, 14 F.3d 1310 (8th Cir. 1994); PaineWebber Inc. v. Hofmann, 984 F.2d 1372 (3d Cir. 1993); Roney & Co. v. Kassab, 981 F.2d 894 (6th Cir. 1992); O'Neel v. National Ass'n of Sec. Dealers, Inc., 667 F.2d 804 (9th Cir. 1982). For a full discussion of these cases, see infra notes 74-188 and accompanying text; see also Brief for Appellant at 16-17, PaineWebber Inc. v. Elahi, 87 F.3d 589 (1st Cir. 1996) (No. 95-2188). The district court selected by the investment firm normally lies within a circuit that is more receptive to its arguments; fortunately, though, some courts will reject an attempt to forum shop. See Harding, supra note 1, at 160 n.353; see also Lauer, 49 F.3d at 325-26.

In Lauer, a Florida couple filed a claim requesting the arbitration to be held in Tampa Bay. See id. at 325. Merrill Lynch thereafter filed an action to enjoin the arbitration in a federal court in Illinois. See id. In rejecting Merrill Lynch's motion, the court noted that Merrill Lynch's sole motivation for filing in Illinois was to get a favorable judgement. See id. at 325-26 (noting that under Florida law, potentially time-barred claims would go to the arbitrator for resolution); see also C. Thomas Mason III, Irreducible Disagreements: The Six-Year Eligibility Rule Revisited, in Securities Arbitration 1997, at 737 (PLI Corp. Law & Practice Course Handbook Series No. 951, 1997). The securities industry use of this tactic results in investors having to defend claims "often in courts thousands of miles from their home or the branch offices where the alleged wrongs occurred." Id.

8. See C. Thomas Mason III, Six-Year Eligibility Rule: State of the Controversy and Survey of Circuits, in Securities Arbitration 1996, at 686 (PLI Corp. Law & Practice Course Handbook Series No. 949, 1996) [hereinafter Mason 1996]. Interpretations of section 15 are fractured as to when it applies, how it applies, and who enforces it, generating "great expense and delay to all parties," making a "mockery" of the swiftness, cost-effectiveness, and privacy justifications for favoring arbitration. Id.; see also Poser, supra note 5, at 279.

Investors often have to fight costly and time-consuming legal battles in court before their claims can be heard by arbitrators, or . . . to get their awards confirmed. The fact that parties who signed an agreement to arbitrate future disputes find themselves forced to litigate collateral issues tends to defeat the unique advantages of arbitration.Id.; Catherine McGuire et al., Current Issues in Securities Industry Arbitration, in Broker-Dealer Regulation 45, 47 (A.L.I.-A.B.A. Course of Study No. CA14, 1996).

9. Hofmann, 984 F.2d at 1373. In Hofmann, PaineWebber brought suit in federal district court only after the Director of Arbitration allowed Hofmann's claim to go to arbitration. See id. at 1375-76; see also Poser, supra note 5, at 296.

10. See Poser, supra note 5, at 292.

11. See Mason, supra note 7, at 737 (using section fifteen to bar claims from arbitration, which "permanently bar[s] redress in any forum . . . that . . . would otherwise be viable actions in court"); Harding, supra note 1, at 112 (noting that once a claim is found to be ineligible for arbitration, "the investor is completely deprived of a forum through which to seek redress for [an] otherwise viable claim"); Poser, supra note 5, at 292 ("Even if the claim is not actually extinguished . . . the firm may dampen the claimant's desire to pursue his claim by involving him in expensive and time-consuming litigation over the applicability of the rule."). This is true notwithstanding "controlling federal law" to the contrary. Harding, supra note 1, at 112. "When the Supreme Court blessed [securities] arbitration . . . it did so partly on the presumption that customers do not give up substantive rights when agreeing in advance to arbitrate a dispute." Id. at 113 (footnote omitted). More recently, the Supreme Court has held that where an arbitration agreement results in a party's waiver of substantive rights it "`would have little hesitation in condemning the agreement as against public policy.'" Vimar Seguros Y Reaseguros, S.A. v. M/V Sky Reefer, 515 U.S. 528, 540 (1995) (quoting Mitsubishi Motors v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 673 (1985)).

12. Poser, supra note 5, at 279.

13. 87 F.3d 589 (1st Cir. 1996).

14. See id. at 592. Some commentators, however, believing that the Fourth Circuit would fall in line with the circuits that view section 15 as a procedural question for the arbitrators to decide, argued that the circuits were already evenly split before the first circuit decided Elahi. See, e.g., Mason, supra note 7, at 633. Mason points to the Fourth Circuit's decision in Miller v. Prudential Bache Securities to support his conclusion. See id.

In Miller, the investor submitted a claim for arbitration with the NASD after she "sustained losses in excess of one million dollars as a result of her trading in naked options." Miller v. Prudential Bache Sec., 884 F.2d 128, 129 (4th Cir. 1989). Prudential argued, and the arbitration panel concluded, that her claim was time-barred and dismissed the claim. See id. The panel based its decision on the fact that the claim was submitted outside of Maryland's three year statute of limitations. See id. As such, the panel held that no state's statute of limitations provision can be extended under the six year rule. See id. at 130 (citing NASD Code of Arbitration Procedure § 15 (1988)). According to the arbitration agreement, any hearing was to be conducted in accordance with the rules of the arbitration forum. See id. at 129. Miller is different in that it was the investor who was trying to persuade the court that it was the proper forum to apply section 15 and not the arbitral forum. See id. The claimant appealed the panel's decision in federal district court seeking to vacate the arbitration panel's decision. See id. The district court dismissed the investors claim, from which the investor appealed. See id. The Fourth Circuit held that the rules of the arbitration forum apply to arbitration procedure and not substantive rules that go to the merits of the claim. See id. at 132. Thus, the arbitration panel did not exceed its authority in determining the application of section 15. See id. at 130. The Miller court went on to hold that even if the arbitration panel misinterpreted or misapplied the wrong statute of limitations under the parties' agreement, "such misinterpret[ation] or misappli[cation]" would not warrant vacating the arbitrators' decision under section 10(d) of the FAA. Id. (citing Bernhardt v. Polygraphic Co. of America, Inc., 350 U.S. 198, 203 (1956)).

15. See Elahi, 87 F.3d at 599-600.

16. See id. at 600-01.

17. See infra notes 24-54 and accompanying text.

18. See infra notes 55-73 and accompanying text.

19. See infra notes 74-188 and accompanying text.

20. See infra notes 189-209 and accompanying text.

21. See infra notes 210-302 and accompanying text.

22. See infra notes 303-414 and accompanying text.

23. See infra notes 415-20 and accompanying text.

24. See Shirley A. Wiegand, Arbitration Clauses: The Good, the Bad, the Ugly, 47 Okla. L. Rev. 619, 619 (1994) ("[J]udicial response to arbitration clauses has changed from overt hostility to warm receptivity."). Today, some courts continue to refuse to follow the "national policy" favoring arbitration, and treat arbitration clauses with the same hostility as in the past. Id.

25. See C. Edward Fletcher, Practising Law Institute, Securities Arbitration in Perspective 20 (1990) (citing Bruce H. Mann, The Formalization of Informal Law: Arbitration Before the American Revolution, 59 N.Y.U. L. Rev. 443, 447 (1984)). In 1609, the doctrine of revocability was established in Vynior's Case, 77 Eng. Rep. 597, 599-600 (1609), which held that "either party may withdraw from the arbitration agreement . . . at the party's discretion." Fletcher, supra, at 15; see also Vynior, 77 Eng. Rep. at 599. As a result, 250 years of judicial limitations on the use of arbitration followed. See Fletcher, supra, at 15.

26. See Emil Bukhman, Note, Time Limits on Arbitrability of Securities Industry Disputes Under the Arbitration Rules of Self-Regulatory Organizations, 61 Brook. L. Rev. 143, 147 (1995). Even though predispute arbitration agreements and agreements to arbitrate existing disputes were treated the same under English law, American law held predispute arbitration agreements more objectionable. See Fletcher, supra note 25, at 39. Congress made its intent clear that the Federal Arbitration Act was to apply to both predispute arbitration agreements and agreements to arbitrate existing disputes. See id.

27. See Fletcher, supra note 25, at 39 (citing Scherk v. Alberto-Culver Co., 417 U.S. 506, 510 n.4 (1974))); see also United States Asphalt Ref. Co. v. Trinidad Lake Petroleum Co., 222 F. 1006, 1010-11 (6th Cir. 1911) (stating that no court would ever allow "any other body of men to . . . perform judicial work . . . unless compelled . . . by statute").

28. See Fletcher, supra note 25, at 38 ("[T]he legislative history of the Act makes it clear that the statute was enacted to reverse the judicial hostility . . . that had been dominant at least since . . . 1609." (footnote omitted)); see also Hearings on S. 4213 & 4214 Before the Subcomm. of the Senate Comm. on the Judiciary, 67th Cong. 8 (1923) (commenting on state courts unwillingness to enforce arbitration agreements); Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 220 (1985) (reasoning that the statute is more proagreement than proarbitration); Southland Corp. v. Keating, 465 U.S. 1, 13 (1984) (holding that the FAA was needed to overcome the "`jealousy of the English courts for their own jurisdiction'" (quoting H.R. Rep. No. 96, at 1-2 (1924))); cf. Legg, Mason & Co. v. Mackall & Coe, Inc., 351 F. Supp. 1367, 1372 (D.C. Cir. 1972) (holding that the "basic purpose of the [FAA was] to relieve the parties from costly litigation and help ease congested court dockets").

29. 9 U.S.C. §§ 1-16 (1994). The FAA was "reenacted and codified in 1947 as title 9 of the United States Code." Wiegand, supra note 24, at 620. The FAA was drafted by the American Bar Association in 1921, was introduced and passed by the two houses of Congress in January of 1925, and was signed into law by President Calvin Coolidge on February 12, 1925. See Fletcher, supra note 25, at 37-38.

30. Fletcher, supra note 25, at 38 (quoting H.R. Rep. No. 96, at 1 (1924)).

31. See id. at 39.

32. 9 U.S.C. § 2 (1994).

33. Carroll E. Neesemann & Maren E. Nelson, The Law of Securities Arbitration, in Securities Arbitration 1995 at 135, 140 (PLI Corp. Law & Practice Course Handbook Series No. 899, 1995) (citation omitted) [hereinafter Neesemann & Nelson PLI 899]. Should one party file a lawsuit involving an arbitrable issue, the other party has a right to make a motion for a stay, "and the court must grant the stay until the arbitration is completed." Wiegand, supra note 24, at 620 (citing 9 U.S.C. § 3 (1994)).

34. Kenneth R. Davis, Protected Right or Sacred Rite: The Paradox of Federal Arbitration Policy, 45 DePaul L. Rev. 65, 72 (1995) (footnote omitted). The federal common law disfavoring predispute arbitration agreement was followed until the FAA was passed. See Fletcher, supra note 25, at 25. It was not until the Supreme Court's decision in Southland Corp. v. Keating, however, that "[t]he extensive scope and coverage of the FAA [was] fully appreciated." Bloomenthal & Wolff, supra note 1, § 8.30[2][e], at 8-210.

35. See, e.g., Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 221 (1985) (holding that the FAA dictates that the Court "rigorously enforce" arbitration agreements); Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983) (holding that issues of arbitrability must be addressed with a strong regard for the federal policy of favoring arbitration).

36. See Wiegand, supra note 24, at 622. Arbitration was thought to be unsuitable for antitrust disputes and other federal statutory based disputes. See id.

37. 346 U.S. 427 (1953) (holding that some cases were not suitable for arbitration). Wilko involved a Security Act claim under § 12(2) of the Securities Act, whereby the Court declared that it would be improper for an arbitrator to decide such a claim without any judicial instructions, or having to explain their reasoning. See id. at 436. It was believed that the arbitration system was inadequate to protect the plaintiff's rights afforded under the Securities Act. See id. at 439 (Frankfurter, J., dissenting).

38. Bukhman, supra note 26, at 148.

39. See id.

40. 417 U.S. 506 (1974). The parties agreed to arbitrate any disputes under the rules of the international Chamber of Commerce in Paris. See id. at 508.

41. See id. at 518; see also Bukhman, supra note 26, at 148 (noting that "in Scherk v. Alberto-Culver Co., the Supreme Court retreated from its Wilko position").

42. See Scherk, 417 U.S. at 518.

43. See Wilko v. Swan, 346 U.S. 427, 434-38 (1953). Despite the fact that the international aspects of the case influenced the Court's decision, "the Court appeared to revise its distrust of securities arbitration." Bukhman, supra note 26, at 149.

44. See Scherk, 417 U.S. at 518.

45. See Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 627-28 (1985) (holding that claims governed by the Sherman Act must be arbitrated where the arbitration agreement arises from an international commercial transaction).

46. 482 U.S. 220 (1987).

47. See id. at 228-38.

48. See id. at 222.

49. See id. at 234; see also Bukhman, supra note 26, at 149. But see McMahon, 482 U.S. at 243 (Blackmun, J., dissenting) ("In today's decision . . . the Court effectively overrules Wilko . . . ."). Wilko stands for the inability of arbitration to adequately protect buyers' advantages under the Securities Act of 1933. See id. at 234. Those same concerns are not present under the Exchange Act of 1934 due to the SEC's oversight of the Self Regulatory Organization's (SRO's) arbitration forums mentioned in the arbitration agreement to ensure fairness. See id. The SEC was granted the authority to oversee the arbitration forums through the 1975 amendments to the Exchange Act. See Securities Exchange Act of 1934, 15 U.S.C. § 78 (1994), as amended by Pub. L. No. 94-29, § 1, 89 Stat. 97 (1975).

The Court stated that Wilko represented the Court's distrust of arbitration to adequately protect the buyers' advantages under the Securities Act. See McMahon, 482 U.S. at 228. The mistrust of arbitration that formed the basis for the Wilko opinion can no longer be squared with the present view of arbitration. See id. at 233. See, e.g., Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985); Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213 (1985); Southland Corp. v. Keating, 465 U.S. 1 (1984); Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1 (1983); Scherk v. Alberto-Culver Co., 417 U.S. 506 (1974).

50. McMahon, 482 U.S. at 232.

51. See Carroll E. Neesemann & Maren E. Nelson, The Law of Securities Arbitration, in Securities Arbitration 1996, at 369, 383-84 (PLI Corp. Law & Practice Course Handbook Series No. 949, 1996) [hereinafter Neesemann & Nelson PLI 949]. Unable to find any congressional intent to require a judicial forum, the Court enforced the agreement to arbitrate the securities dispute. See id.

52. 490 U.S. 477 (1989). The Wilko decision "was not . . . correct," and "has fallen far out of step with our current strong endorsement . . . favoring" arbitration for resolving disputes. Id. at 480-81. The fact patterns for the two cases were remarkably similar, with both involving the question of the enforceability of a pre-dispute arbitration agreement in relation to section 14 of the Securities Act of 1933. See id. at 480-83; see also Wilko v. Swan, 346 U.S. 427, 431 (1953).

53. See Rodriquez, 490 U.S. at 480-83.

54. See id. at 483 ("`There is nothing in the record before us, nor in the facts of which we can take judicial notice, to indicate that the arbitral system . . . would not afford the plaintiff the rights to which he is entitled.'" (quoting Wilko, 346 U.S. at 439 (Frankfurter, J., dissenting))).

55. See McGuire et al., supra note 8, at 47. Arbitration was first introduced in 1817 when the New York Stock Exchange, Inc. (NYSE) added it to its constitution to provide an alternative forum to resolve disputes among its members. See id. In 1869, the NYSE gave the public the right to arbitrate disputes with its members. See Poser, supra note 5, at 281. The National Association of Securities Dealers (NASD), however, did not offer arbitration to the public until 1968, and then only on a voluntary basis. See id.

56. See Grant, supra note 3, at 481.

57. See id. at 480.

58. See Fletcher, supra note 25, at 3. The AAA handles approximately 10% of the arbitration cases filed, SROs handle the remaining, with the NASD picking up 85% of the SRO caseload. See Martin L. Budd, Securities Industry Arbitration-Recent Developments, in Broker-Dealer Regulation 141, 143 (A.L.I.-A.B.A. Course of Study No. CA14, 1996). All the SROs, except for the AAA, are subject to SEC supervision. See Fletcher, supra note 26, at 4-5. The NASD, NYSE, Amex, and CBOE were formed under the authority of the Securities Act of 1934, while the MSRB received its authority from the Securities Act Amendments of 1975. See id. at 3. There has been discussion of consolidating all SROs and other security arbitration forums into one forum. See id. at 4; see also Deborah Masucci & Robert S. Clemente, Securities Arbitration at Self-Regulatory Organizations: NYSE and NASD Administration and Procedures, in Securities Arbitration 1996, 99, 110 (PLI Corp. Law & Practice Course Handbook Series No. 949, 1996) ("SROs studied the feasibility of a single arbitration forum."). This issue, however, is beyond the scope of this Comment.

59. See Budd, supra note 58, at 143.

60. See Masucci & Clemente, supra note 58, at 105-10. The number of cases received by all SROs combined climbed from 830 in 1980 to 7271 in 1995. See id. at 108. Large and complex cases that were normally filed in court are being filed in arbitration, while 46% of the cases handled by NASD involved disputes in excess of $100,000. See id. at 110. The increase in arbitration use is attributable to the following four reasons: "1. [a]n increasing judicial predisposition to enforce pre-dispute arbitration agreements; 2. increased use of employment contracts . . . ; 3. . . . increased trading volume and market downturns; [and] 4. [i]ncreased share ownership. . . . [and] expansion in the number of individuals who own corporate stock." Id. at 109; see also J. Stratton Shartel, Attorneys Describe Diverse Strategies in Securities Arbitration, Inside Litig., Aug. 1994, at 26 (stating that there were 318 cases filed in 1980, by 1993 the caseload rose to 5419; while damages rose from $56.9 million in 1983, to $449.6 million in 1994); Fletcher, supra note 25, at 10 ("[T]he total number of cases received increased approximately 650 percent between 1980 and 1988.").

61. Budd, supra note 58, at 144.

62. See id. at 145.

63. See McGuire et al., supra note 8, at 47. NYSE adopted its arbitration rules in 1958, while the NASD adopted its rules in 1968. See id.

64. See Fletcher, supra note 25, at 4.

65. Id. at 4-5 (quoting Exchange Act Release No. 12528, 41 Fed. Reg. 23,808 (June 9, 1976).

66. McGuire et al., supra note 8, at 48. "The Uniform Code was published as the Second Report of the Securities Industry Conference on Arbitration to the Securities and Exchange Commission on December 28, 1979." Id. at 48 n.6.

67. See Fletcher, supra note 25, at 5. The SEC has increasingly taken an aggressive role in its oversight of the SROs in order to make arbitration procedures fairer. See id. at 6. SICA continues to meet and discuss issues that arise from the administration of arbitration programs. See McGuire et al., supra note 8, at 48.

68. Mason 1996, supra note 8, at 685-86 (quoting NASD Code of Arbitration Procedure § 15 (1995); NYSE Const. & R. 603 (1995); Amex R. 605 (1995); MSRB Arbitration Code G-35, § 6 (1995); Pacific Stock Exchange R. 12.4 (1995)). Because of the controversy surrounding this rule, it is better to refer to it as the "six-year rule," to call it an "eligibility" or time bar rule "can imply a position in the debate." Id. at 685 n.2.

69. See id. at 686. Interpretations of section 15 are fractured as to "when it applies, how it applies, and by whom it is enforced," generating "great expense and delay to all parties," making a "mockery" of the swiftness, cost effectiveness, and privacy justifications for favoring arbitration. Id.; see also McGuire et al., supra note 8, at 53. The interpretations conflict as to whether the courts or an arbitrator decides whether the claim was within the six-year period. See Mason 1996, supra note 8, at 686. The rule has also spawned controversy regarding which event triggers the six-year period, and whether the six-year period can be tolled. See id. Although just as controversial, these issues are beyond the scope of this article.

70. Poser, supra note 5, at 292.

71. 87 F.3d 589 (1st Cir. 1996).

72. See id. at 592 (noting that "[w]e are the tenth circuit to address that question; our sister circuits are split five to four").

73. See Meierfeld v. Geldermann Inc., No. 95 Civ. 9911, 1996 WL 426362, at *1 (S.D.N.Y. July 30, 1996) (stating that after PaineWebber Inc. v. Elahi, the circuits are evenly divided on this issue).

74. 984 F.2d 1372 (3d Cir. 1993).

75. Id. at 1375. Hofmann's relationship with PaineWebber began in 1977, however, the client agreement that contained the arbitration clause was not signed until October, 1987. See id. at 1374-75. At the outset of his relationship with PaineWebber, Hofmann, "who had significant assets," invested in what was termed as "conservative-to-moderate risk stocks." Id. at 1374. After his original broker passed away, Hofmann's account was transferred by PaineWebber to a broker identified as Faragalli. See id. Hofmann's investments, under Faragalli's management, became concentrated in one company's stock, considered to be high risk. See id. at 1374-75. Hofmann alleged that Faragalli directed his and other customers' assets into the stock for his own financial gain. See id. at 1375.

PaineWebber, in early December, 1987, fired Faragalli. See id. at 1374 n.1. The facts surrounding Faragalli's departure were in dispute; Hofmann alleged that it was due to the "numerous complaints" PaineWebber received regarding Faragalli's conduct. Id. Hofmann followed Faragalli when he was hired by Shearson Lehmann Brothers. See id. at 1375 (noting that Shearson Lehman Brothers, Inc. was named in Hofmann's statement of claim filed with the NASD). Eventually, the company in which Hofmann's assets were concentrated in filed for bankruptcy and the stock became "worthless." Id. One of the claims against PaineWebber was that it failed to notify Hofmann of Faragalli's alleged wrongdoing when it learned of such. See id.

76. See id. at 1375-76.

77. See id. at 1376. The district court, in granting Hofmann's motion for summary judgement, stated that it was unsure "`whether Section 15 of the NASD's Code bars the claim [from] arbitration.'" Id. (quoting PaineWebber Inc. v. Hofmann, No. 92-CV-0810 (E.D. Pa. Apr. 2, 1992)).

78. Id.

79. See id. at 1376-79. Hofmann's arbitration filing consisted of a number of claims both within and outside of the six-year period. See id. at 1379. The court ultimately held that the claims that were clearly outside of the six-year period would be dismissed, and remanded the rest of the claims to the district court to determine if they were still eligible for arbitration. See id. at 1379-80.

80. Hofmann, 984 F.2d at 1378. The court relied heavily on its previous decision in PaineWebber Inc. v. Hartmann, 921 F.2d 507 (3d Cir. 1990), which "[a]t a minimum establishe[d] . . . § 15 . . . as a substantive bar to the submission of a claim to arbitration." Id. But see Mason, supra note 7, at 626 n.210 (asserting that the Third Circuit limits its substantive interpretation of time-bar issues "primarily to the securities arena"). The author goes on to state that the Third Circuit could reach the same conclusion today without "ignoring half of the Federal Circuit Court of Appeals." Id. at 626.

81. Hofmann, 984 F.2d at 1379 (emphasis added) (quoting Edward D. Jones & Co. v. Sorrells, 957 F.2d 509, 513 (7th Cir. 1992) (citing PaineWebber Inc. v. Farnam, 870 F.2d 1286, 1292 (7th Cir. 1989))).

82. Id.

83. See id. at 1378.

84. See id. at 1379 ("`[A] compelling case for nonarbitrability should not be trumped by a flicker of interpretive doubt.'" (quoting PaineWebber Inc. v. Hartmann, 921 F.2d 507, 513 (3d. Cir. 1990))). The court, quoting Hartmann, noted that any "[l]anguage less distinct than 'eligible for submission to arbitration' might well be insufficient to overcome the strong jurisprudential pull towards arbitration." Id. (quoting Hartmann, 921 F.2d at 514)).

85. 981 F.2d 894 (6th Cir. 1992). In Roney, an investment firm appealed a district court's decision to allow an arbitrator to apply NYSE's Rule 603. See id. at 896. The investment firm argued that the arbitration claim was submitted more than six years after the broker who handled their investments had left the company. See id.

86. See id. at 897-99.

87. Compare infra notes 88-99 and accompanying text with supra notes 74-84 and accompanying text.

88. Roney, 981 F.2d at 896. The alleged wrongful purchases occurred in 1982, when the broker "purchased 22,000 shares of Metropolitan Savings stock," and again in 1985 when the broker used the claimants account to purchase Bayly Corp. stock. Id. According to the agreement entered into by the parties, all controversies were governed by the "Rules of the Board of Governors of the New York Stock Exchange" and was to "be commenced within one year after the cause of action accrued." Id. at 896 n.2.

89. See id. at 896.

90. Id.

91. See id.

92. See id. at 896-97. The district court, however, enjoined the claimants from proceeding in the NASD arbitral forum and stated that, under the agreement, the claimants were limited to arbitration within the NYSE. See id. at 897.

93. See id. at 897.

94. Roney, 981 F.2d at 899.

95. See id. at 896 n.3 (citing NASD Code of Arbitration Procedure § 15; NYSE R. 603).

96. See id. at 897-99.

97. Id. at 898 (quoting PaineWebber Inc. v. Hartmann, 921 F.2d 507, 513 (3d Cir. 1990) (quoting National R.R. Passenger Corp. v. Boston & Maine Corp., 850 F.2d 756, 760-61 (D.C. Cir. 1988))).

98. See id. (noting that the language of the eligibility rule has not changed since the Third Circuit's decision in Hartmann, and that Kassab failed to present any compelling reasons to depart from the Hartmann holding).

99. Id. at 899 (citing General Drivers, Warehousemen and Helpers, Local Union 89 v. Moog Louisville Warehouse, 852 F.2d 871, 875 (6th Cir. 1988)).

100. 957 F.2d 509 (7th Cir. 1992). In Sorrells, the investors appealed a district court's decision to vacate an arbitration award on the grounds that the arbitrators exceeded their authority by awarding a claim outside the six-year period. See id. at 510. The district court based its decision on the grounds that the arbitrators lacked the authority to hear the claim because it was filed outside of the six-year period. See id. at 511. The court held that the district court had the authority to set aside an arbitration award "`[w]here the arbitrators exceeded their powers.'" Id. at 512 (quoting 9 U.S.C. § 10(d) (1994)). The district court held that by hearing a claim outside of the six-year rule, the arbitrators "exceeded their authority." Id.

101. See id. at 510. The dispute, which was submitted on August 29, 1988, arose out of a number of investments that occurred from April 29, 1981 to August 18, 1982, totalling $121,667. See id. at 510 & n.2. The Sorrells claimed that Jones and Aleff "misrepresented material information as to the nature of the investments; that Jones failed to properly supervise Aleff . . . ; and that . . . Jones and Aleff violated federal securities laws." Id. at 510.

102. See id. at 510-11. Jones and Aleff were able to argue their defense during the formal hearing on the merits and again during their closing arguments. See id.

103. See id. at 511. Under the FAA, a court may vacate an arbitrators award where the arbitrator lacked the authority to make such an award. See 9 U.S.C. § 10(a)(4) (1994). In the alternative, the respondents argued that the award should be remanded and the NASD ordered to hold a hearing on the motion to dismiss. See Sorrells, 957 F.2d at 511.

104. See Sorrells, 957 F.2d at 511.

105. Id.

106. See id.

107. See id.

108. See id. at 511-14. Similar to the Third Circuit, the Seventh Circuit relied on its prior decision in PaineWebber Inc. v. Farnum, 870 F.2d 1286 (7th Cir. 1989) to support its present decision. See id. at 512. The court rejected the Sorrells argument that section 15 was made a statute of limitations by the provision of section 15 allowing arbitrators to hear claims outside the six-year rule, provided that the claim "`is directed to arbitration by a court of competent jurisdiction.'" Id. at 513 (quoting NASD Code of Arbitration Procedure § 15 (1988)). Instead, the court held that the provision was merely an exception to the six-year rule and did not effect section 15's creation of a substantive eligibility requirement. See id.

109. See id. at 514. The Sorrels attempted to distinguish its case from Farnum, arguing that the arbitrator had already decided that the claim was within the six-year rule by deciding in favor of the Sorrells. See id. The court dismissed this argument as being irrelevant since the arbitrator lacked the authority to decide the issue of eligibility in the first place. See id.

110. 475 U.S. 643 (1986).

111. See Sorrells, 957 F.2d at 514