Merrill Lynch, Pierce, Fenner, & Smith, Inc. v. Ware, 414 U.S. 117 (1973)
Relevant Facts: A broker for the firm, Merrill Lynch, Pierce, Fenner, & Smith, Inc. (“Merrill Lynch”) was hired to sell securities. To get the job, the broker signed a NYSE broker-dealer contract that contained an arbitration clause. Upon quitting the firm to work for a competitor, Merrill Lynch refused to pay the broker vested monies due under the profit-sharing plan included in his compensation package. The broker sued under relevant state labor law, which guaranteed workers’ access to a judicial forum. Merrill Lynch moved to stay the proceedings and compel arbitration under the FAA based on the NYSE application’s arbitration clause. In particular, Merrill Lynch argued that its fiduciary obligations to investors under the Securities Exchange Act justified the enforcement of the forced arbitration clause. The state court didn’t buy it, and held the arbitration provision was unenforceable as a matter of public policy.
Question Before The Court: Whether a state law precluding compulsory arbitration of an employment claim applied by a state court is preempted under federal law.
The Opinion: The Court held the arbitration clause could not be compelled because there was no evidence that the state’s policy interfered with any federal regulatory scheme. The Court reasoned, “It is unclear why muffling a grievance in the cloakroom of arbitration would prevent lessoning of confidence of the market,” as the defense had argued (emphasis added). The Court explained NYSE Commission’s self-regulatory authority, derived from the Securities Exchange Act (SEA) is designed to insure fair dealing and to protect investors from harmful or unfair trading practices, and “there is nothing in the SEA . . . that specifies arbitration as the favored means of resolving employer disputes.” The Court found that “the relationship between compulsory employer-employee arbitration and fair dealing and investor protection is extremely attenuated and peripheral, if it exists at all.”
The Court recognized the state legislature’s right “to protect the worker from the exploitative employer who would demand that a prospective employee sign away in advance his right to resort to the judicial system for redress of an employment grievance.” Unfortunately, this view is the polar opposite of where workers and states stand today.
