Gloria A. Storey, Individually and As Executrix of Theestate of William D. Storey, Deceased, Plaintiff-appellee, v. Shearson-american Express and Jon Grady Deaton, Jointly Andseverally, Defendants-appellants, 928 F.2d 159 (5th Cir. 1991)

The district court refused to enforce an agreement to arbitrate a dispute over alleged commodities trading fraud on the ground that the agreement failed to conform to Commodities Futures Trading Commission regulations which the court applied retroactively. We disagree.

BACKGROUND

Gloria Storey, individually and as executrix of her husband William's estate, sued Shearson/American Express Inc. (Shearson) and Jon Deaton, Shearson's broker who handled the Storeys' account, for commodities trading fraud. William Storey had discovered illicit account activity that caused significant losses, confronted Deaton, and demanded restitution. Deaton allegedly agreed to repay the losses, but never did. In February 1983, the Storeys could not meet margin calls on several trades and suffered severe financial losses. William Storey died in April 1983. In the same month, Shearson requested payment of an $11,128 account deficit. When the Storeys failed to pay, Shearson attempted to submit the matter to arbitration, as provided in contracts with the Storeys.¹ 

Gloria Storey filed the present action, alleging (1) fraudulent misrepresentations that violated the Commodity Exchange Act and rules promulgated thereunder; (2) civil RICO violations; (3) Texas Deceptive Trade Practices Act violations; (4) common law fraud; (5) breach of contract; and (6) breach of fiduciary duty. Shearson again sought submission of the controversy to arbitration.

The district court declined to enforce the arbitration clauses. Rules promulgated by the Commodities Futures Trading Commission (CFTC) require certain procedures to ensure the voluntariness of arbitration agreements. 17 C.F.R. Sec. 180.3 (1990). The CFTC amended these rules in 1983, requiring certain language to be included in the arbitration provisions of a commodities trading contract.²  The Storey contract, executed prior to the effective date of the 1983 amendments, complied with the old regulations, but not with the amendments. The district court applied the amendments retroactively, noting that the litigation did not commence until after the effective date of the amendments, and that Shearson had apparently not informed the Storeys of their rights under the 1983 provisions. Shearson appeals.

Storey offers several bases for refusing to enforce the arbitration clauses: (1) failure to comply with the 1983 CFTC amendments; (2) failure to comply with the 1976 CFTC regulations; (3) equitable estoppel; (4) waiver of Shearson's right to arbitrate; (5) the nonexclusiveness of arbitration under the contract; and (6) failure to comply with Texas General Arbitration Act. The district court based its decision solely on the retroactivity of the 1983 CFTC amendments. We reverse the district court's judgment, and we reject all of Storey's arguments for nullifying the arbitration clauses.

DISCUSSION

1. Retroactive Application of the 1983 Amendments.

The district court followed Eighth and Ninth Circuit precedent in applying the 1983 amendments retroactively. See Gans v. Merrill Lynch Futures, Inc., 814 F.2d 493 (8th Cir. 1987) (remanding for determination whether broker notified plaintiffs of 1983 changes and thereby substituted conforming agreement); Wotkyns v. D.E. Jones Commodities, Inc., 791 F.2d 749 (9th Cir. 1986) (per curiam) (reversing district court's grant of stay pending arbitration because 1983 amendments applied retroactively). The arbitration agreements in both Wotkyns and Gans had been signed before the 1983 amendments, but the circuit courts held that the amendments applied retroactively, based primarily on an analogy to the 1976 regulations, which the CFTC expressly intended to nullify pre-existing, nonconforming agreements. One court, however, has upheld an arbitration agreement executed after the 1983 amendments but satisfying only the 1976 regulation. Olson v. Paine, Webber, Jackson & Curtis, Inc., 806 F.2d 731, 743-44 (7th Cir. 1986) (enforcing arbitration and holding that failure of the broker to comply with the 1983 amendments could not possibly have hurt the customer).

We find the argument for retroactivity unpersuasive for several reasons. First, "retroactivity is not favored in the law. Thus, congressional enactments and administrative rules will not be construed to have retroactive effect unless their language requires this result." Bowen v. Georgetown Univ. Hosp., 488 U.S. 204, 208, 109 S. Ct. 468, 471, 102 L. Ed. 2d 493 (1988); see also Walker v. United States Dep't of Housing and Urban Development, 912 F.2d 819, 831-32 (5th Cir. 1990) (rejecting argument for retroactivity of Anti-Demolition Statute); United Brotherhood of Carpenters and Joiners v. Mar-Len of Louisiana, Inc., 906 F.2d 200, 203-04 (5th Cir. 1990) (rejecting argument for retroactivity of NLRB decision).

Second, the express basis for the retroactivity of the 1976 regulation does not support the retroactivity of the 1983 amendments. The 1976 enactment of section 180.3 intended to ensure the voluntariness of arbitration agreements by requiring that such agreements be separately signed and contain disclosures in large boldface type regarding the meaning and effect of the agreement. See Felkner v. Dean Witter Reynolds, Inc., 800 F.2d 1466, 1469 (9th Cir. 1986). The CFTC expressly required retroactivity because "customers who had entered into agreements before adoption of the regulation needed and were entitled to the protection of the rule no less than those who signed agreements after November 29, 1976." Ames v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 567 F.2d 1174, 1179 (2d Cir. 1977) (citation omitted). The Storeys' Commodity Customer Agreement did comply with the 1976 regulation.

The purpose of the 1983 amendments, by contrast, was to "encourage the use of arbitration as a means of dispute resolution by participants in the commodity futures and options markets." 48 Fed.Reg. 22,136 (May 17, 1983), cited in Merrill Lynch Commodities, Inc. v. Richal Shipping Corp., 581 F. Supp. 933, 939 (S.D.N.Y. 1984) (declining to give 1983 amendments retroactive effect); see also Olson, 806 F.2d at 743 (finding it "impossible to understand" how the plaintiff was hurt by defendant's failure to advise her in the agreement that she could elect a qualified arbitration forum and that defendant would pay any incremental fees assessed by the arbitrators).³  We likewise decline to hold that the Storeys needed retroactive application of supplemental provisions designed to encourage arbitration.⁴ 

Third, the fact that the CFTC expressly provided for the retroactivity of the 1976 regulation, but failed to express the same intent as to the 1983 amendments, suggests the opposite of the district court's conclusion: the CFTC perceived no basis for retroactivity, and neither should courts imply such a basis given judicial reluctance to apply rules retroactively without a clear directive to do so.

Fourth, in this case, unlike Wotkyns and Gans, the unauthorized trading dispute had already arisen, and Shearson had notified the Storeys of its intent to arbitrate the account deficit dispute prior to the effective date of the amendments. Disputes, as opposed to agreements, that precede the effective date of the amendments ought not trigger retroactivity, which was in fact the CFTC position even as to the retroactive 1976 regulation. See Ames, 567 F.2d at 1181 (Meskill, J., dissenting) (CFTC as amicus curiae noted that "its intent to reach pre-existing agreements did not extend to cases where a dispute had already arisen at the time the regulation was adopted").

Fifth, to the extent that the foregoing creates any doubt about the arbitrability of the claims in this case, the Supreme Court has indicated the proper result. "The Arbitration Act establishes that, as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration." Moses H. Cone Memorial Hosp. v. Mercury Construction Corp., 460 U.S. 1, 24-25, 103 S. Ct. 927, 941, 74 L. Ed. 2d 765 (1983). We therefore reject the retroactive application of the 1983 Amendments and reverse the district court's judgment.

2. Violation of 1976 Regulation.

Storey admits that the arbitration agreement in the first contract executed by the parties complies with the 1976 regulation, but argues that the second contract does not.⁵  The second agreement apparently applies to securities, and revokes prior agreements "for the purchase and sale of securities and put and call options made with Shearson," but does not revoke prior agreements concerning commodities trading. While the arbitration agreement in the second contract does not comply in all respects with the 1976 regulation, neither does it nullify the Commodity Customer Agreement, which directly concerns this commodity account dispute and does comply with the 1976 regulation.

3. Equitable Estoppel.

Storey argues that Deaton admitted fraud and promised to borrow money to repay the loss, and that William Storey, relying on that representation, invoked neither arbitration nor judicial remedies. William Storey later wrote Deaton's supervisor, Richard Settle, who told Storey that the problem would be resolved.

Storey's legal argument is unclear and bereft of authority for the application of estoppel to this case. Shearson might be estopped to deny that it promised to resolve the problem, but not estopped to seek arbitration, which is, after all, precisely an attempt to resolve the problem.

4. Waiver of the Right to Arbitrate.

Storey argues that a duty to arbitrate the controversy arose at the inception of the controversy, and that Shearson failed to demand arbitration in a timely manner, thus waiving the contractual right to arbitration. The argument is meritless. Shearson had no duty to initiate arbitration proceedings at the inception of the controversy. Shearson complied with the agreement by timely seeking arbitration of the account deficit dispute, and again invoking its arbitration rights when Storey first sought a judicial remedy for the unauthorized trading dispute.

Moreover, Fifth Circuit precedent places a "heavy burden" on a party claiming waiver of arbitration rights. See Frye v. Paine, Webber, Jackson & Curtis, Inc., 877 F.2d 396, 398 (5th Cir. 1989) (waiver requires that party "substantially invoke [ ] the judicial process to the detriment or prejudice of the other party"), cert. denied, --- U.S. ----, 110 S. Ct. 1318, 108 L. Ed. 2d 493 (1990). Here, neither discovery nor motion practice occurred before Shearson invoked its arbitration right.

5. Nonexclusiveness of Arbitration Remedy.

Storey argues that the contract provides alternative remedies, and that arbitration is not the exclusive avenue for resolving controversies. Storey cites to a contract provision that covers service of process, jurisdiction, and cost issues in the event of legal action. This contingency clause does not reduce the broad scope of the arbitration clause, which mandates arbitration of "any controversy arising out of or relating to [the] account."

6. Noncompliance with Texas Arbitration Act.

Storey cites repealed Texas law requiring a party's attorney to sign any arbitration agreement for such agreement to be enforceable. Texas General Arbitration Act, ch. 689, Sec. 1, 1965 Tex.Gen.Laws 1593, amended by ch. 704, Sec. 1, 1979 Tex.Gen.Laws 1708. Even if the Federal Arbitration Act does not preempt such requirements, the amended Texas statute requires an attorney's signature only for classes of arbitration contracts unrelated to the subject of this dispute. TEX.REV.CIV.STAT.ANN. art. 224(b) (Vernon's Supp.1991).

REVERSED and REMANDED.