Scherk v. Alberto-Culver Co. - 417 U.S. 506, 94 S. Ct. 2449 (1974)

Rule:

9 U.S.C.S. § 3 provides for a stay of proceedings in a case where a court is satisfied that the issue before it is arbitrable under the agreement. 9 U.S.C.S. § 4 directs a federal court to order parties to proceed to arbitration if there has been a failure, neglect, or refusal of any party to honor an agreement to arbitrate.

Facts:

Alberto-Culver Co., an American manufacturer based in Illinois, in order to expand its overseas operations, purchased from Fritz Scherk, a German citizen, three enterprises owned by him and organized under the laws of Germany and Liechtenstein, together with all trademark rights of these enterprises. The sales contract, which was negotiated in the United States, England, and Germany, signed in Austria, and closed in Switzerland, contained express warranties by Scherk that the trademarks were unencumbered and a clause providing that "any controversy or claim [that] shall arise out of this agreement or the breach thereof" would be referred to arbitration before the International Chamber of Commerce in Paris, France, and that Illinois laws would govern the agreement and its interpretation and performance. Subsequently, after allegedly discovering that the trademarks were subject to substantial encumbrances, Alberto-Culver offered to rescind the contract, but when Scherk refused, Alberto-Culver brought suit in District Court for damages and other relief, contending that Scherk’s fraudulent representations concerning the trademark rights violated § 10 (b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Scherk moved to dismiss the action or alternatively to stay the action pending arbitration, but the District Court denied the motion to dismiss and, as sought by Alberto-Culver, preliminarily enjoined petitioner from proceeding with arbitration, holding, in reliance on Wilko v. Swan, 346 U.S. 427, that the arbitration clause was unenforceable. The Court of Appeals affirmed.

Issue:

Should the agreement of the parties to arbitrate any dispute arising out of their international commercial transaction be enforced?

Answer:

Yes.

Conclusion:

The Court concluded that the forum clause should control and that both lower courts' reliance on precedent that securities law superseded the arbitration provisions was misplaced. The previous decision interpreted purely domestic contracts, whereas the contract in question was international in scope. The Court found that the forum clause was indispensable to achieve the orderliness and predictability essential to the international business transaction, discouraged parochialism, and precluded jockeying for tactical litigation advantage by either party.