Wilko v. Swan, 346 U.S. 427 (1953), is a United States Supreme Court decision on the arbitration of securities fraud claims. It had originally been brought by an investor who claimed his broker at Hayden Stone had sold stock to him without disclosing that he and the firm were the primary sellers. By a 7–2 margin the Court held that the provisions of the Securities Act of 1933 barring any waiver of rights under that statute took precedence over the Federal Arbitration Act's (FAA) requirement that arbitration clauses in contracts be given full effect by federal courts. It reversed a decision to the contrary by a divided panel of the Second Circuit Court of Appeals.
Justice Stanley Forman Reed wrote the majority opinion that relied on the explicit wording in the Securities Act and expressed doubt as to whether arbitration could truly protect the rights of investors. Robert H. Jackson wrote a short concurrence distancing himself slightly from that latter opinion. Felix Frankfurter dissented, taking issue with the majority's hostility to arbitration.
Later the logic of the decision was extended by an appeals court to cover claims made under the Securities Exchange Act of 1934. The Supreme Court itself later expressed doubt as to the legal soundness of that holding, and in the 1985 case Shearson/American Express Inc. v. McMahon expressly held that it did not. This led lower courts to begin to overrule Wilko as well, and in 1989 the Court itself did so in Rodriguez de Quijas v. Shearson/American Express Inc., part of a series of decisions in the 1980s and ever since that greatly expanded the use of arbitration in dispute resolution.
Although the decision was overruled, one aspect of it survived Rodriguez de Quijas: Reed's dictum that "manifest disregard" for the law would be enough to justify a court's overturning an arbitral award. Later courts and commentators have puzzled over what that meant and whether it arose from the text of the FAA or independently. The Court itself would face that question in the 2008 Hall Street Associates, L.L.C. v. Mattel, Inc., although without resolving it to much satisfaction.
Underlying dispute The plaintiff, Anthony Wilko, alleged that he had been the victim of a pump and dump scheme perpetrated by his broker and a corporate executive. Early in 1951 he bought 1,600 shares of common stock in Air Associates, Inc., a New Jersey company, for $29,517.54 ($ in contemporary dollars). He claimed to have done so because his stockbroker at Hayden Stone, Joseph Swan, had represented to him that Air was about to conclude a merger with Borg Warner, which would likely lead to the price increasing by as much as $6Wilko v. Swan (hereafter Wilko III), , at 428, Reed, J. over what it was then trading at when the merger was announced. Swan did not tell Wilko that Haven Page, counsel for Air Associates and a director of that company, was selling a large holding of his, including some of the stock Wilko purchased.Wilko v. Swan (hereafter Wilko I), 107 F.Supp. 75 (S.D.N.Y., 1952).
No merger ever happened, and the stock did not appreciate as Swan had predicted. Left holding the bag, Wilko sold the shares at a loss two weeks later. He filed suit in federal court for the Southern District of New York under the Securities Act of 1933 (commonly known in securities law as the 1933 Act), which regulates transactions in the primary market, alleging securities fraud and seeking $3,888 ($ in contemporary dollars) in damages.
Instead of responding to his complaint, Hayden Stone sought a stay pending the outcome of arbitration, per a clause in Wilko's customer agreement mandating that both parties use that method of dispute resolution. They cited another statute, the Federal Arbitration Act (FAA), which required that courts grant stays for arbitration as long as the dispute was covered by the parties' contractual agreement and the contract was valid. In response, Wilko cited language in the 1933 Act barring any such contractual waiver of an investor's right to take such claims to court.
Lower courts The motion to stay was denied in district court, but upheld by a divided panel of the Second Circuit Court of Appeals. At all stages of the case the Securities and Exchange Commission (SEC) was granted permission to take an active role in the proceedings as an amicus curiae on Wilko's side.
District court Judge Henry W. Goddard heard the case. In 1952 he ruled on the defense motion to stay, holding that the 1933 Act's anti-waiver provision rendered the matter beyond the scope of the arbitration clause. "It is very clear that the intent of the Congress was to require that the provisions of the Securities Act should be strictly complied with so that the purchaser of securities would be protected as fully as reasonably possible," he wrote, referencing the statute's legislative history. "A collateral agreement of this nature would nullify the Act's basic purposes and allow the purposes of the Congress to be circumvented."Wilko I, at 78.
Goddard did not believe arbitration offered the same protections as the 1933 Act. While the Second Circuit, which had appellate jurisdiction over the Southern District, had been supportive of arbitration between companies in the past,Kulukundis Shipping Co., S/A v. Amtorg Trading Corp., 126 F.2d 978 (2nd Cir., 1942) it had also recognized its limitations.American Almond Products Co. v. Consolidated Pecan Sales Co., 144 F.2d 448 (2nd Cir., 1944), at 451. "Arbitration may or may not be a desirable substitute for trials in courts; as to that the parties must decide in each instance. But when they have adopted it, they must be content with its informalities; they may not hedge it about with those procedural limitations which it is precisely its purpose to avoid. They must content themselves with looser approximations to the enforcement of their rights than those that the law accords them, when they resort to its machinery." However, this was not one of those cases. "Congress in its concern for the investor's protection and the restoration of public confidence in the industry, must have been aware of the lesser bargaining position of the purchaser of securities," he wrote. "By ... barring waiver of rights it plainly meant to prevent an advantage gained from an assertion of a superior bargaining power." The defendants had pointed to arbitration allowed under the Fair Labor Standards Act (FLSA) and the Miller Act, but he distinguished those cases from the one before him by noting that the FLSA did not have the same anti-waiver provisions, nor had they concerned themselves with statutory conflicts.Wilko I, at 79.
Appeals court The defendants filed an interlocutory appeal to the Second Circuit, which heard oral arguments in the case near the end of the year. Chief Judge Thomas Walter Swan (no relation to defendant) was joined on the panel by Harrie Brigham Chase and Charles Edward Clark. They handed down their split decision early the following year. Swan and Chase had agreed, overturning the district court and holding the arbitration clause enforceable. Clark agreed with Goddard that the underlying policy considerations precluded that outcome, and did not require the specificity the majority demanded.Wilko v. Swan (hereafter Wilko II), 201 F.2d. 439 (2nd Cir., 1953).
Majority opinion "The appeal presents an interesting question of statutory construction said to be of first impression", Swan began. There was no question of the contract's validity, since there had been no argument to that effect. "[W]e must assume that the plaintiff voluntarily entered into the agreement and fully understood its terms." So he turned to the document itself.Wilko II, at 442.
While one paragraph, exempting the firm from liability for any harm caused by the representation or advice of its agents, could be seen as violating the anti-waiver provision, that did not invalidate the entire agreement due to the severability provisions elsewhere in the contract. Nor did the anti-waiver provision itself contain language that invalidated entire contracts that violated its terms, only "[a]ny condition, stipulation, or provision" of an agreement that did. "The stipulation to arbitrate is not one waiving compliance with the statute unless the statute be construed to forbid arbitration," Swan wrote, "a construction believed to be untenable for reasons hereafter stated."Wilko II, at 443.
First, the contract specified that it was governed by the 1934 Act and any future amendments to it. While that could be read to suggest that any controversies under the 1933 Act were outside the contract and thus inarbitrable, "we do not think the principle of expressio unius est exclusio alterius is here applicable," Swan wrote. It was possible that the 1934 Act could be read as including the 1933 Act, but that was immaterial since the sale of the Air stock to Wilko necessarily came under the 1933 Act as a primary-market transaction.
Swan then turned to the question of whether the statute reflected a public-policy goal of Congress. There was no such declaration to that effect in its text, and in 1941 the Supreme Court had itself said that "[t]he essential purpose of the statute is to protect investors by requiring publication of certain information concerning securities before offered for sale."A.C. Frost & Co. v. Coeur D'Alene Mines Corp., , at 40, McReynolds, J. It thus provided the buyer with a private cause of action, the choice to sue in any state or federal court and put the burden of proof on the seller if the buyer argued the purchase was fraudulently induced.
Swan considered whether each of these provisions could be read as excluding the possibility of arbitrating a claim. As the FLSA and Miller Act cases cited by the district court had held, a statutory cause of action could not be held inarbitrable on that basis. The SEC's amicus brief had not even held that, he noted. "[I]f the parties may agree to arbitrate after the action has been brought, we can conceive of no sound reason why they may not agree in advance, provided no fraud or coercion was practised upon the buyer in securing his consent to the arbitration agreement."
Nor did the choice-of-venue provision preclude arbitration, Swan found.
"The burden of proof provision," Swan wrote, "supplies the best basis for argument against recognizing an agreement to arbitrate in an action of this nature." No guarantee existed that arbitrators would apply such a provision properly. Swan agreed but noted that the court had already declared the liability release invalid, so the arbitrators would not be considering it. And "while it may be true that arbitrators do not ordinarily consider themselves bound to decide strictly according to legal rules, there can be no doubt that they are so bound if the arbitration agreement so provides." A court could always review the arbitrators' decision when it came time to enforce the award, he added.
"The Arbitration Act evidences a congressional policy to favor arbitration," Swan concluded, citing circuit precedent calling on judges to change their attitude to the procedure. "The purpose of the Securities Act of 1933 is to protect investors." He admitted that Goddard had made a strong argument to the contrary but did not find his public policy arguments sufficient. "If Congress had intended to forbid arbitration in a suit based on [the 1933 Act], we believe it would have expressed such intent."Wilko II, at 445.
Dissent Judge Clark, for his part, found Goddard's argument "very convincing":
Arbitrators, Clark felt, would have natural conflicts since they were often drawn from the business community where the disputes arose. "[This] is surely not a way of assuring the customer that objective and sympathetic consideration of his claim which is envisaged by the Securities Act," he observed.Wilko II, at 445–446.