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BAKER v. PAINE

April 10, 1986

Buford O. BAKER, et al.
v.
PAINE, WEBBER, JACKSON & CURTIS, INC., et al.



The opinion of the court was delivered by: STERN

 Plaintiffs are retired airline pilots who invested their retirement funds in discretionary accounts managed by brokers at Paine, Webber, Jackson & Curtis, Inc. Plaintiffs allege that defendants fraudulently induced them to invest in these accounts, that the accounts were willfully mismanaged, that the worth of the accounts was fraudulently misrepresented to them in monthly statements, and that as a result of these acts the value of their investment declined. Plaintiffs state their claims under state law, § 10(b) of the Securities Act of 1934 and Rule 10b-5, and under the RICO statute, 18 U.S.C. § 1962.

 Plaintiffs raise the following objections to arbitration: (1) the arbitration clause is unconscionable; (2) by its own terms, the clause does not apply to the dispute; (3) public policy forbids the arbitration of § 10(b) and RICO claims. The only one of these objections with any merit is the second. Certain of the claims, as discussed below, will not be remitted to arbitration, because it was evidently not the parties' intent that they should be arbitrated.

 The arbitration clause at issue reads as follows:

 
Any controversy arising out of the handling of any of the transactions referred to in this agreement shall be settled by arbitration . . .

 I. Unconscionability

 The plaintiffs' argument that the arbitration clause is unconscionable is a makeweight. Courts routinely enforce arbitration clauses in contracts between investors and brokers. Plaintiffs' assert that enforcing the clause would deny them of their right to a hearing in court. The waiver of that right, of course, is the whole point of arbitration. There is nothing unconscionable about enforcing this clause.

 II. The Terms of the Arbitration Clause

 This arbitration clause is quite narrowly drafted. It applies only to disputes "arising out of the handling of transactions referred to in this agreement."

 Most of the acts complained of concern improper investments and the fraudulent reporting of the outcomes of those investments. The claims raised by these actions fall within the language of the clause. Even if there were a question as to the clause's scope, it would be one for the arbitrator to resolve, Moses H. Cone Hospital v. Mercury Construction Corp., 460 U.S. 1, 24-25, 103 S. Ct. 927, 941-942, 74 L. Ed. 2d 765 (1983).

 However, plaintiffs also complain that they were fraudulently induced to enter into the contracts. Such fraudulent inducement has nothing to do with the transactions referred to in the agreement, which are purely brokers' transactions in securities on behalf of the plaintiffs. No portion of plaintiffs' claims concerning the alleged acts of fraudulent inducement will be remitted to the arbitrator.

 There is no contradiction with this Court's earlier ruling that the alleged acts of fraudulent inducement state a claim under § 10(b). Section 10(b) governs all actions taken "in connection with the sale or purchase of securities", language with a far broader sweep than the contract language at issue here, "arising out of the handling of transactions." ...


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