Brown v. Wells Fargo Bank, N.A.

KITCHING, J., Concurring.

I agree with the majority that the arbitration provision at issue in this case was not unconscionable for the reasons stated in the majority’s opinion. I also agree with the majority that the order denying defendants’ motion to compel arbitration should be reversed, and that the matter should be remanded so that the trial court can adjudicate plaintiffs’ constructive fraud defense to defendants’ motion. I write separately to make clear my views on the scope of the duty of stockbrokers (brokers) to orally explain legal documents to their clients. I would limit this opinion to the unusual facts of this case.

Where no agency relationship has been formed, brokers generally are not required to point out to the customer the existence of an arbitration clause or to explain the consequences of the clause. (Rosenthal v. Great Western Fin. Securities Corp. (1996) 14 Cal.4th 394, 425-426 [ 58 Cal.Rptr.2d 875 , 926 P.2d 1061 ] (Rosenthal); see Rush v. Oppenheimer & Co., Inc. (S.D.N.Y. 1988) 681 F.Supp. 1045, 1052 (Rush); Castro v. Marine Midland Bank, N.A. (S.D.NY. 1988) 695 F.Supp. 1548, 1551 (Castro); Gouger v. Bear, Stearns & Co., Inc. (E.D.Pa. 1993) 823 F.Supp. 282, 286-288 (Gouger).) In Rosenthal , there was no “ongoing relationship” between a brokerage firm and its customers. Our Supreme Court stated: “Under these circumstances, we find no authority for the proposition the fiduciary obligations of a broker extend to orally alerting the customer to the existence of an arbitration clause or explaining its meaning and effect.” (Rosenthal, at p. 425.) In support of this statement, the court cited three federal cases: Rush, Castro and Gouger. (Rosenthal, at pp. 425-426.) In Rush and Castro , the issue was whether a broker was obligated to disclose or explain an arbitration clause in the initial contract between the parties. In both cases, the court held that “brokers are not required as a matter of law to disclose or explain arbitration clauses to the customer.” (Rush, at p. 1052; see Castro , at p. 1551.)

*963 In Gouger , a brokerage firm and a married couple entered into an agreement containing an arbitration clause and a choice of law clause approximately one year after the firm began providing services to the husband. (Gouger, supra, 823 F.Supp. at p. 284 .) The court nevertheless held that the failure of the brokerage firm to explain the consequences of the arbitration and choice of law clauses to the clients was not a breach of its fiduciary duty. (Id. at p. 288.) Under Gouger , even when brokers have developed a fiduciary relationship with their clients, they do not necessarily have a duty to orally explain an arbitration provision.

As a general rule, brokers should not be obligated to orally explain the meaning and effects of an arbitration clause to their clients. “The broker has a high degree of expertise regarding the investment and management of a discretionary account; the broker’s knowledge of the law is not as vast.” (Gouger, supra, 823 F.Supp. at p. 288 .) Moreover, requiring brokers to explain arbitration clauses could lead to fact-intensive litigation prior to the commencement of arbitration even when the parties clearly agreed in writing to arbitrate. Disputes could also arise as to whether the broker provided oral disclosure of the arbitration provision and, if so, the adequacy and fairness of the disclosure. 1 Opening the door to such litigation could increase the complexity, cost and uncertainty of the NASD arbitration process. This would not benefit the average investor in his or her disputes with NASD brokers. (See Jevne v. Superior Court (2005) 35 Cal.4th 935, 959-960 [ 28 Cal.Rptr.3d 685 , 111 P.3d 954 ].) Nor would it further the federal and state policies favoring resolving disputes by a relatively inexpensive and expeditious arbitration process. (See Shearson/American Express Inc. v. McMahon (1987) 482 U.S. 220, 225-226 [ 96 L.Ed.2d 185 , 107 S.Ct. 2332, 2337 ]; Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 9 [ 10 Cal.Rptr.2d 183 , 832 P.2d 899 ].)

For all of these reasons, we should be cautious before imposing a duty on brokers and their firms to orally disclose arbitration and other material clauses to their clients. When, however, the facts establish that a brokerage firm induced a vulnerable individual to repose trust in the firm regarding a wide range of financial matters, the firm’s fiduciary duty may include an obligation to fully disclose, in a manner the individual understands, the material terms of a contract between the firm and the individual. Whether such a duty to disclose arises depends on the particular facts of the case.

*964 In this case, as explained in the majority’s opinion, the relationship between defendants and plaintiffs was far more extensive than the typical relationship between a brokerage firm and its clients. Under the unique facts of this case, Wells Fargo Bank, N.A., and its professional employees had a duty to orally disclose to the Browns the material terms of the contract, including the arbitration provision.

Under the Federal Arbitration Act, 9 United States Code section 1 et seq., “[e]ven when using doctrines of general applicability, state courts are not permitted to employ those general doctrines in ways that subject arbitration clauses to special scrutiny.” (Iberia Credit Bureau, Inc. v. Cingular Wireless (5th Cir. 2004) 379 F.3d 159 , 167.) Therefore, when we adjudicate a constructive fraud defense to the enforcement of an arbitration provision of a contract, we cannot impose a duty on brokers to orally explain the arbitration provision, unless we also impose the same duty with respect to each and every other material provision of the contract.