Shearson/American Express Inc. v. McMahon

482 U. S. 220

June 8, 1987

The McMahons were customers of Shearson/American Express, and signed an agreement that all disputes would be subject to arbitration rather than litigation. All too typically, the McMahons changed their mind, and whined that they deserved the right to sue. As a general rule, contracts which submit disputes to arbitration are always enforceable, but they filed suit anyway under the Exchange Act, and under RICO, arguing that these particular claims were not arbitrable.

Unanimously, the Court rejected the RICO argument, and it also rejected the Exchange Act argument 5-4. O’Connor wrote the majority opinion, which found nothing in RICO’s text to suggest that its provisions were not arbitrable, and was unmoved by the contention that its purposes worked best with litigation. The Exchange Act was harder because it said that compliance with its provisions could not be waived, and it also said that District Courts would have jurisdiction over its subject matter. O’Connor said that this jurisdiction was not a duty requiring “compliance.”

In one of the very first Warren Court decisions ever, Wilko v. Swan, the Court had ruled that arbitration was forbidden for a very similar act, the Securities Act. O’Connor rather politely argued that the Wilko ruling was stupid, undermined by subsequent cases, and unduly hostile to arbitration. She also said that arbitration had come a long way since 1953, and that it was now subjected to some government oversight. While declining to overrule Wilko, she limited its reach to the case’s fact.

Blackmun, joined by Brennan and Marshall, dissented. He thought the majority exaggerated the extent to which Wilko had been undermined in subsequent cases, and the force of its logic in interpreting the Securities Act. He also disagreed that the government oversight of the arbitration was any good, and that arbitration was fair. Blackmun said that the companies still exercised a lot of control over the arbiters, and that there was insufficient review of arbitration decisions. In a brief dissent of his own, Stevens said that lower courts had thought Wilko applied to the Exchange Act, and that the Court ought to leave this consensus unchanged.

Arbitration is a wonderful thing, and I’m sorry judicial liberals loath it so much. The Bible discourages lawsuits, and wants believers to settle disputes amicably. The liberal distaste for arbitration is yet another example of valuing ‘rights’ and ‘entitlements’ over humility, forgiveness, and peacemaking.


3 thoughts on “Shearson/American Express Inc. v. McMahon

  1. Gracious Timothy

    As i understand this is related to concurrent jurisdictions between arbitration and litigation. Practically, when one party pushes litigation to resolve a dispute with the thought of resolving a dispute expediently, in comparison to arbitration, should Courts consider if the purpose is worked best with litigation?

    Since arbitration is premised on party autonomy and freedom of contract, courts in many common law jurisdictions have increasingly recognized that parties are free to delineate the boundaries for any arbitration between them. However, considering the above state of affairs, should an arbitration agreement be really given such towering status that undermines the system of courts and litigation, even where in the facts and circumstances of the case , a litigation is far more proficient?

    1. humble reviewer Post author

      I would say that the Federal Arbitration Act was passed in large part so that courts wouldn’t have to spend time wrestling with precisely those sorts of questions. I don’t doubt that many cases go to arbitration which would probably be handled by litigation. I don’t doubt that the reverse is true as well. But it’s not really the function of courts to decide whether parties to a contract made the wisest conflict-resolution choice. Realistically, most contracts are going to involve some adhesion. Courts would be clogged indeed if dispute resolution clauses could get judicially overridden based solely on what seems most ‘just’ given the particular facts and circumstances of each individual case.

  2. Pingback: 1986-1987: Conservative Victories | Vintage Bracketology

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