Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Tuesday, September 7, 2010

Seventh Circuit Addresses Arbitrability Issues in Brokerage Customer's Agreement

The Seventh Circuit recently issued an interesting opinion on the "who decides" question in the securities arbitration context.  In Janiga v. Questar Capital Corp. (7th Cir. Aug. 2, 2010), the investor Janiga was a Polish immigrant who, despite having lived and worked in Illiniois for more than 20 years, understood only limited English.  Janiga opened an account with his brother, Hessek, who ran his own financial services company (Hessek Financial) and was a registered representative of Questar, a securities broker-dealer.  One year after opening the account, and unhappy with his returns, Janiga sued Hessek, Hessek Financial and Questar.  Defendants, in turn, sought to refer the matter to FINRA arbitration, relying on the PDAA in the customers' agreement.  Although Janiga admitted that he signed the page of the New Account Form that gave conspicuous notice of the PDAA, as required by FINRA rules, he asserted that he did not receive the other pages of the agreement and that, in any event, because of his limited understanding of English, there was no "agreement to arbitrate."  The district court denied the motion to arbitrate without prejudice, to allow for additional fact-finding on the issue.

The Seventh Circuit, acknowledging that "the division of labor between courts and arbitrators is a perennial question," agreed with the district court that the issue of whether a contract exists is a question for the court.  It noted that the Supreme Court, in both Buckeye Check Cashing and Rent-A-Center, distinguished the issue of a contract's validity from the issue whether any agreement existed at all and addressed only the first situation in those two opinions.  Moreover, in Granite Rock the Supreme Court stated that it was "well-settled that where the dispute at issue concerns contract formation, the dispute is generally for courts to decide."  Nevertheless, the Seventh Circuit disagreed with the district court that additional fact-finding was needed on this issue.  Applying the objective theory of contract law and rejecting the necessity of a subjective "meeting of the minds," the appeals court noted that Janiga signed a contract and the paper he signed refers to arbitration.  Since he admitted that he signed the document voluntarily, he was bound by its terms.  Arguments regarding the enforceablity of the contract could be raised before the arbitration panel.

The above analysis is straight forward.  What is more intriguing is that the appeals court expresses doubt about whether the arbitration agreement between Janiga and Questar also applies to Hessek and Hessek Financial.  Although recognizing that agents can receive the benefits of an arbitration agreement between their principal and a third party, the court remanded for the district court to determine (1) whether Hessek and Hessek Financial were agents of Questar and (2) whether the claims asserted were within the scope of their authority. These issues go to the arbitrabililty of the claims and so should be decided by the court.

(Thanks to William Wang for calling this opinion to my attention.)

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