Bass, Berry & Sims attorney Chris Lazarini examined a case in which a plaintiff filed a breach of fiduciary duty claim in federal court and opposed defendants' efforts to move the claims to arbitration. The plaintiff claimed he did not enter into an arbitration agreement and, alternatively, that the arbitration agreements relied on by defendants were unconscionable. The court rejected the plaintiff's arguments, finding that an arbitration clause existed and plaintiff did not prove the clause was both procedurally and substantively unconscionable.
Chris provided the analysis for Securities Litigation Commentator (SLC). The full text of the analysis is below and used with permission from the publication. If you would like to receive additional content from the SLC, please visit the SLC website to sign up for the newsletter.
Rogers vs. Nelson, No. 16-cv-955 (S.D. Cal., 5/1/17)
*An arbitration clause may be invalidated on such grounds as exist at law or in equity for revocation of any contract, including fraud, duress or unconscionability.
**To escape an arbitration clause on grounds of unconscionability, the challenging party must show both procedural and substantive unconscionability.
***The procedural element focuses on oppression or surprise due to unequal bargaining power, while the substantive element focuses on overly harsh or one-sided results.
Plaintiff, trustee of a family trust, sued Nelson and Morgan Stanley Smith Barney ("MSSB"), alleging breach of fiduciary duty and other claims connected to Defendants' allegedly unauthorized investment of trust funds in a Morgan Stanley hedge fund. Defendants moved to compel arbitration. Plaintiff opposed, claiming that he did not enter into an arbitration agreement in his trustee capacity and, alternatively, that the arbitration agreements relied on by Defendants were unconscionable.
The Court summarily rejects Plaintiff’s first argument because MSSB's client agreement, which Plaintiff signed when he opened the trust account, contained an arbitration clause that applies to accounts opened by Plaintiff "in any capacity." Rejecting Claimant's argument that he did not receive or notice the arbitration clause, the Court points to the bolded, boxed language just above Plaintiff's signature on the agreement, which referenced the arbitration clause and even directed Plaintiff to the page and paragraph numbers where it was located. The Court also points out that MSSB mailed a copy of the full contract to Plaintiff, and refuses to let Plaintiff escape arbitration through his own lack of diligence in reviewing it.
Turning to the unconscionability argument, the Court states that to prevail, Plaintiff must show that the arbitration clause was both procedurally and substantively unconscionable. Plaintiff's first procedural challenge was that the arbitration clause was buried in boilerplate language and was not provided to him as trustee. This argument fails because, in signing the client agreement, Plaintiff acknowledged an understanding that it contained an arbitration clause. Again, the Court declines to let Plaintiff escape arbitration through lack of diligence.
Plaintiff also argued that the arbitration clause was procedurally defective due to the parties' unequal bargaining power. Here, he makes a minimum showing of procedural unconscionability sufficient to move on to the substantive issues of whether compelling arbitration would be overly harsh or one-sided. The Court finds no unfairness, noting that the arbitration clause gives Plaintiff the right to choose the arbitration forum from any self-regulatory organization or exchange of which MSSB is a member and restricts the panel to a minimum of industry insiders. Because Plaintiff has a substantial say in the choice of the forum, rules and hearing location, the Court finds no substantive unconscionability, grants the motion to compel and stays the proceedings.
Plaintiff also had an individual account at MSSB. The Court concludes that the arbitration clause in the agreement for that account, which stated that it applied to any account opened by Plaintiff in any capacity, was sufficiently broad to capture this dispute as well.