Securities Law: Buckeye Check Cashing Backs Pennsylvania Federal Court's Decision (Web)

In Fox International Relations v. Fiserv Securities Inc., No. 04-5877, 2006 WL 548854 (E.D. Pa. March 8, 2006)(available at www.paed.uscourts.gov/documents/opinions/06D0276P.pdf), plaintiffs Fox International and its general managers were ordered to arbitrate a suit they brought against the defendants alleging violations of Pennsylvania's securities laws, misrepresentation, fraud, negligent supervision and breach of fiduciary duty.

Two defendants, First Security Investments Inc., and Ilya Zamarin, filed motions to compel Fox International to arbitrate the dispute. The parties jointly stipulated that Fox International's claims against these two defendants were severable from the other claims alleged and that submitting them to arbitration would not impede any related litigation against other defendants.

In an order and memorandum, U.S. District Court Senior Judge Jan E. Dubois, of Philadelphia, found that the plaintiffs did not explicitly challenge the arbitration clause in the investment agreement at issue, but rather they challenged the "validity of the contract as a whole," echoing a standard discussed a month ago by the U.S. Supreme Court in Buckeye Check Cashing v. Cardegna, 2006 WL 386362 (Feb. 21, 2006).

As a result, the matter had to be submitted to arbitration. Id. at *6 ("[A] challenge to the validity of the contract as a whole, and not specifically to the arbitration clause, must go to the arbitrator."). The court in this case granted defendants’ motion to stay proceedings pending arbitration.

Dubois wrote:

Thus, after the Supreme Court's Buckeye decision, it appears that there are three categories of challenges to arbitration provisions. First, if a challenge is specifically to the arbitration provision, it must be decided by a court. Second, if a challenge is to the contract as a whole, it must go to arbitration. Third and finally, if a challenge is to a party's signatory power to the contract, it must be decided by a court.

As to the third category, the memorandum opinion notes that although Buckeye expressly reserves consideration of the question, all of the circuit court decisions that the Supreme Court cites in Buckeye have held that questions of signatory power were determinations for judges.

Dubois found that the challenge fell under the second category enunciated in Buckeye, and recognized that the arbitration panel may find the contract void due to “fraud in the factum,” which would mean that the court actually enforced an unenforceable agreement to arbitrate.

Although “this result may seem paradoxical,” Judge Dubois wrote, the outcome comports with Buckeye, and yields an outcome that is aligned with the policy of submitting questions about the contract as a whole to arbitrators.

–Julie Shaw, CPR Intern