The Unclear "Clear and Unmistakable" Standard: Why Arbitrators, Not Courts, Should Determine Whether a Securities Investor's Claim Is Arbitrable

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I. INTRODUCTION

When an individual investor opens an account with a securities broker, the customer often must sign a standard-form contract as a precondition of conducting business with the broker.' This nonnegotiable contract, referred to as a Customer Agreement, generally contains an arbitration clause under which the parties agree to submit any future disputes to arbitration conducted by one of the securities industry's self-regulatory organizations ("SROs").2 Proceedings initiated under the broad and inclusive arbitration clause are subject to the arbitration guidelines established by the SROs, a group which includes all the major stock exchanges.3 Virtually all brokers are members of an SRO.4 The National Association of Securities Dealers ("NASD"), the leading SRO, conducts between eightyfive and ninety percent of all customer-broker arbitrations.5

Although the parties to a securities dispute usually submit to SRO arbitration in accordance with the terms of the agreements some parties resist arbitration.7 The resisting party (usually the securities broker)8 typically turns to the courts for an initial ruling on whether the arbitration must proceed.9 Meanwhile, the party that initially submitted its claim to arbitration (usually the customer) tends to resist resolution of the issue by the courts, arguing that the arbitrators themselves should decide whether arbitration is the appropriate means of resolving the dispute.10 The question in these cases thus becomes whether courts or arbitrators should decide if a particular dispute is arbitrable. This is referred to as the arbitrability question.ll In response to this threshold inquiry, the Supreme Court has adopted a "clear and unmistakable" standard. 12 In two separate opinions, the Court has held that unless the parties clearly and unmistakably agree to arbitrate the issue of arbitrability, the question is one for courts, not arbitrators, to decide.13 In other words, when a question of arbitrability arises, the parties will not be required to submit to arbitration unless there is clear and unmistakable evidence in the arbitration agreement itself that the parties intended to have arbitrators decide arbitrability issues.14

This "clear and unmistakable" standard, however, is not very clear at all. Indeed, the Supreme Court's articulation of the clear and unmistakable standard has been extremely unclear. Because the Court has failed to specify what contractual language satisfies the "clear and unmistakable" requirement, lower courts have been left to their own devices in defining the parameters of the standard.15 Although the lower courts almost uniformly recognize that application of the "clear and unmistakable" standard to arbitrability questions is a matter of contract interpretation, they have not reached a consensus as to which particular contract principles should be applied in the interpretation.16

Much of the controversy surrounding the "clear and unmistakable" standard has focused upon the proper interpretation of the relationship between Customer Agreements and the NASD Code of Arbitration Procedure ("NASD Code" or "Code"), particularly Rule 10324.17 Briefly stated, the disagreement over Rule 10324 is whether its language, when adopted by the parties to a Customer Agreement, provides clear and unmistakable evidence of an agreement to submit the arbitrability question to arbitration.18 The relevant language in the Rule provides that "[a]rbitrators shall be empowered to interpret and determine the applicability of all provisions under this Code and to take appropriate action to obtain compliance with any ruling by the arbitrator(s). Such interpretations and actions to obtain compliance shall be final and binding upon the parties."

Unfortunately, due to the Supreme Court's ambiguous articulation of the clear and unmistakable standard and the arguably broad language of Rule 10324, a circuit split developed, further muddling the issue. …