Thank You For Submiting Feedback!
If a precedent of the United States Supreme Court has direct application in a case, yet appears to rest on reasons rejected in some other line of decisions, the court of appeals should follow the case which directly controls, leaving to the Supreme Court the prerogative of overruling its own decisions. The Supreme Court now concludes that Wilko v. Swan, 346 U.S. 427 (1953), was incorrectly decided and is inconsistent with the prevailing uniform construction of other federal statutes governing arbitration agreements in the setting of business transactions.
Petitioners, securities investors, signed a standard customer agreement which included an agreement to settle account disputes through binding arbitration unless the agreement was found unenforceable under federal or state law. When the investments turned sour, petitioners brought suit in the District Court against, inter alios, respondent brokerage firm, alleging that their money was lost in unauthorized and fraudulent transactions in violation of, among other things, the provisions of the Securities Act of 1933 and the Securities and Exchange Act of 1934. The District Court ordered all but the Securities Act claims to be submitted to arbitration, holding that those claims must proceed in the court action pursuant to the ruling in Wilko v. Swan, 346 U.S. 427, that an agreement to arbitrate Securities Act claims was void under § 14 of the Act, which prohibited a binding stipulation "to waive compliance with any provision" of the Act. The Court of Appeals reversed, concluding that the arbitration agreement was unenforceable because the Supreme Court’s subsequent decisions have reduced Wilko to "obsolescence."
Was a pre-dispute agreement to arbitrate claims under the Securities Act of 1933 valid and enforceable?
The Court held that a pre-dispute agreement to arbitrate claims under the 1933 Act was not generally unenforceable, so that resolution of the claims was not required only in a judicial forum, because Wilko v. Swan was being overruled as incorrectly decided and inconsistent with the prevailing uniform construction of other federal statutes (including the 1934 Act and the Arbitration Act) governing arbitration agreements in the setting of business transactions. Under the circumstances, the new rule as to the enforceability of such arbitration agreements was to be applied to the facts of the case at bar in which the new rule was announced. According to the Court, although the decision to overrule Wilko established a new principle of law, the ruling furthered the purpose and effect of the Arbitration Act without undermining those of the Securities Act; it did not produce substantial inequitable results; and resort to arbitration did not inherently undermine any of petitioners' substantive rights under the Securities Act.