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McMahon v. Shearson Case: Brokerage Account Disputes Must Be Arbitrated

In June 1987, Jeffrey L. Friedman was two years out of law school. Now a principal at Bressler, Amery & Ross, Friedman says the most significant case of his career came when the U.S. Supreme Court ruled that broker-dealer customers could not sue in court and had to arbitrate their claims.

The anniversary of the landmark case was reported in the May 31 issue of Securities Arbitration Commentator, an e-newsletter.

Friedman, an in-house lawyer for Shearson at the time of the case, helped defend the broker-dealer after a couple sued in court over issues with their securities accounts. Ted Krebsbach was lead counsel at Shearson and argued the case. Shearson successfully fought all the way to the Supreme Court. Shearson/American Express v. McMahon, 482 U.S. 220 (1987) The Court ruled 5-4 with Associate Justice Sandra Day O'Connor writing the majority decision.

"The case changed the entire manner in which these disputes were resolved," says Friedman. "It required all customers of broker-dealers to arbitrate their disputes, rather than being able to litigate in court."

"The case stands to this day.”

Background on the Case (from Securities Arbitration Commentator)
At issue in McMahon was whether claims arising out of both the Securities Exchange Act of 1934 (which in section 29(a) prohibits "any condition, stipulation, or provision binding any person to waive compliance with any provision of the Act") and the Racketeer Influenced and Corrupt Organizations Act, were arbitrable under the FAA.

1934 Act Claims
The Court's 1953 decision in Wilko v. Swan, 346 U.S. 427 (1953), had held unenforceable a pre-dispute arbitration agreement requiring arbitration of investor disputes arising out of the Securities Act of 1933, because it ran afoul of section 14's prohibition of a "stipulation" binding the customer to "waive compliance" with the Act's protections (here, the right to go to court). Given the chance to revisit the issue in light of its more recent pro-arbitration rulingsa somewhat divided Court, replete with partial concurrences and dissents, held 5-4 that claims arising out of the Securities Exchange Act of 1934 were arbitrable under the FAA. Driven in large part by the SEC's oversight of SRO arbitration, Justice O'Connor's majority Opinion, joined by Chief Justice Rehnquist and Justices Powell, Scalia, and White, stated: "We conclude, therefore, that Congress did not intend for § 29(a) to bar enforcement of all pre-dispute arbitration agreements.

In this case, where the SEC has sufficient statutory authority to ensure that arbitration is adequate to vindicate Exchange Act rights, enforcement does not effect a waiver of 'compliance with any provision' of the Exchange Act under § 29(a)." Justices Blackmun, Brennan, Marshall, and Stevens joined in parts I, II, and IV, but had problems not applying Wilko to the 1934 Act. Justice Blackmun filed an Opinion, joined by Justices Brennan and Marshall, concurring in parts I, II, and IV and dissenting from part III. Finally, Justice Stevens filed a separate Opinion similarly concurring in part and dissenting in part.

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