Smith Barney, Inc. v. Sacharow, 91 N.Y.2d 46 (1997)

Parties can agree to arbitrate the question of whether a claim is eligible for arbitration under the NASD Code, including the six-year time bar, and a standard New York choice-of-law provision in a customer agreement does not prevent this.

Summary

Smith Barney sought to stay arbitration proceedings initiated by customers, arguing that the claims were ineligible under Section 15 of the NASD Code because the transactions occurred more than six years before the arbitration demand. The New York Court of Appeals held that the broad arbitration clause in the customer agreement, coupled with the NASD Code’s provision empowering arbitrators to interpret the Code, demonstrated a clear intent to arbitrate all disputes, including eligibility. The court further clarified that a standard New York choice-of-law provision does not override this agreement to arbitrate arbitrability.

Facts

The Sacharow brothers, executors of their father’s estate, filed a claim with the NASD for arbitration against Smith Barney, alleging fraudulent and negligent handling of their father’s investment account. Hause, another customer, also filed a claim alleging misrepresentation. Both customer agreements contained clauses requiring arbitration of “any controversy” and specifying that New York law governs the agreement. Smith Barney sought to block arbitration in both cases, citing Section 15 of the NASD Code, which renders claims ineligible for arbitration if six years have elapsed since the event giving rise to the dispute.

Procedural History

In Sacharow, the Supreme Court initially granted Smith Barney’s stay but reconsidered and denied it, directing arbitration. The Appellate Division affirmed. In Hause, the Supreme Court granted the stay, but the Appellate Division reversed, denying the stay and compelling arbitration. The Court of Appeals granted leave to appeal in both cases.

Issue(s)

1. Whether the eligibility requirement of Section 15 of the NASD Code is a condition precedent to arbitration, thus raising a question of arbitrability.

2. Whether the parties clearly and unmistakably agreed to arbitrate the issue of arbitrability, including the Section 15 time bar.

3. Whether the New York choice-of-law provision in the customer agreements overrides the agreement to arbitrate arbitrability.

Holding

1. Yes, because the NASD Code’s language limits the subject and range of arbitrable matters.

2. Yes, because the broad language of the arbitration clause, coupled with Section 35 of the NASD Code, demonstrates a clear intent to arbitrate all issues, including arbitrability.

3. No, because the New York choice-of-law provision incorporates substantive New York principles but does not restrict the parties’ ability to contract for plenary alternative dispute resolution.

Court’s Reasoning

The court reasoned that Section 15 of the NASD Code, stating that “[n]o dispute, claim, or controversy shall be eligible for submission to arbitration under this Code where six (6) years shall have elapsed,” presents a question of arbitrability. It then addressed whether the parties intended to arbitrate this issue. The court found that the language of the arbitration clause in the agreements, providing that “any controversy… shall be settled by arbitration,” was broad enough to encompass disputes over arbitrability. Further, Section 35 of the NASD Code (now rule 10324), which empowers arbitrators to interpret the Code, was incorporated into the agreements, indicating a clear intent to leave the question of arbitrability to the arbitrators.

The court distinguished Matter of Smith Barney, Harris Upham & Co. v. Luckie, 85 N.Y.2d 193 (1995), noting that Luckie involved a statutory time limitation, whereas Sacharow and Hause involved a contractual time limitation under the NASD Code. The court also cited Mastrobuono v. Shearson Lehman Hutton, 514 U.S. 52 (1995), stating that the best way to harmonize a choice-of-law provision with an arbitration provision is to read the choice-of-law provision to encompass substantive principles but not special rules limiting the authority of arbitrators.

The court emphasized the strong public policy favoring arbitration in New York. Permitting securities firms to avoid arbitration after agreeing to it would be “ironic and anomalous.” The court concluded that parties should be free to choose arbitration and that courts should hesitate to interfere with this choice.