High court gives authority over "Gateway" question to arbitrators in NASD arb

Dispute Resolution Journal, Feb-Apr 2003

ADR News

Arbitrators have sole authority for deciding if claims are eligible for arbitration under the procedural rules of the National Association of Securities Dealers, the U.S. Supreme Court said in a decision that took that power away from courts.

The court's December 2002 decision in Howsam v. Dean Witter Reynolds, Inc. reversed the U.S. Court of Appeals for the 10th Circuit, which had ruled that the court should decide whether a claim is still eligible for arbitration after the NASD's filing deadline has passed. The Supreme Court disagreed, finding that this is a "gateway" or procedural question that is better suited for arbitrators to decide.

The gateway issue centered on a provision in the NASD's Arbitration Code that specifies that no claims are eligible for arbitration after six years. Karen Howsam brought an arbitration claim against Dean Witter more than 10 years after opening brokerage accounts with the firm. She claimed that the brokerage failed to recommend investments that suited her and failed to advise that her investments had become unsuitable.

Dean Witter responded by filing a complaint in federal court in Colorado to enjoin the arbitration on the ground that the NASD's six-year statute of limitations had passed. The district court concluded that the arbitrator should decide whether the claim was untimely. However, the 10th Circuit reversed, holding that courts must decide any question of arbitrability. Howsam appealed, and the Supreme Court agreed to review the case in February 2002.

In its opinion, the Supreme Court acknowledged that a dispute about whether parties are required to arbitrate a specific matter under their arbitration agreement is a decision for the courts. But this does not apply when the parties expect that an arbitrator would decide the question. In that situation, procedural questions that arise from the dispute and could have an impact on the ultimate outcome "are presumptively not for the judge, but for an arbitrator, to decide," the court explained.

The Court then found guidance in the Revised Uniform Arbitration Act, which establishes that arbitrators are responsible for deciding whether a "condition precedent to arbitrability has been fulfilled," and provides that in the absence of an agreement to the contrary, issues of procedural arbitrability (i.e., whether prerequisites such as time limits, notice, laches, estoppel have been met) are for the arbitrators to decide.

In deciding that arbitrators should decide this gateway issue, the court also considered the expertise and experience of the NASD arbitrators, saying that they are "comparatively more expert about the meaning of their own rule" and "are comparatively better able to interpret and to apply it."