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Wilko v. Swan - 346 U.S. 427, 74 S. Ct. 182 (1953)


In unrestricted submissions, the interpretations of the law by the arbitrators in contrast to manifest disregard are not subject, in the federal courts, to judicial review for error in interpretation. The United States Arbitration Act, 9 U.S.C.S. § 1 et seq., contains no provision for judicial determination of legal issues such as is found in the English law. As the protective provisions of the Securities Act of 1933, 15 U.S.C.S. § 77a et seq., require the exercise of judicial direction to fairly assure their effectiveness, Congress must have intended § 14 of the Securities Act to apply to waiver of judicial trial and review. 


A purchaser of securities sued the seller, a securities brokerage, to recover damages under 12(2) of the Securities Act of 1933 for false representations made in inducing the sale. The seller moved to stay the action pursuant to § 3 of the United States Arbitration Act. The contract contained an arbitration clause, which ordinarily would have made the Federal Arbitration Act applicable. However, 14 of the Securities Act declared void any "condition, stipulation, or provision binding any person acquiring any security to waive compliance with any provision" of the act. The district court denied the motion to stay the action. On appeal, the Court of Appeals granted the seller's motion to stay proceedings. The purchaser sought a writ of certiorari.


Did Section 14 of the Securities Act render the arbitration agreement void?




The court reversed the Court of Appeals, concluding that a provision to arbitrate a future controversy in the parties' margin agreements was void under § 14 of the Securities Act of 1933, 15 U.S.C.S. § 77n. The court endorsed petitioner's claims that Congress' purpose in adopting § 14 was to insure that sellers could not maneuver buyers into a position that might weaken their ability to recover under the Securities Act, and that arbitration lacked the certainty of a law suit to enforce petitioner's rights. The court explained that by waiving his right to sue in court prior to any Securities Act violation, petitioner surrendered one of his advantages at a time when he was less able to judge the handicap that the Securities Act placed upon his adversary. Thus, the court held that the arbitration provisions in the margin agreements were invalid.

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