Opposition Brief — Dean Witter Reynolds Inc. v. Strotz

(z) MAR 11 1991

No. 90-1300 | OFFICE OF THE CLERK

In The

Supreme Court of the United States

October Term, 1990

y

DEAN WITTER REYNOLDS, INC.

and CRAIG NELSON,

Petitioners,

LINDA STROTZ,

Respondent.

—+

Petition For A Writ Of Certiorari

To The Court Of Appeal

Of The State Of California,

Fourth Appellate District, Division Two

4

BRIEF IN OPPOSITION TO

PETITION FOR WRIT OF CERTIORARI

—

MELANIE Fiscn*

Rosert F. SCHAUER

CovincTon & CROWE

1131 West Sixth Street, Suite 300

Post Office Box 1515

Ontario, California 91762

(714) 983-9393

Counsel for Respondent Linda Strotz

*Counsel of Record

March 11, 1991

QUESTION PRESENTED

Whether arbitration clauses contained in three sepe-

rate agreements are enforceable under the Federal Arbi-

tration Act, where the agreements and the arbitration

clauses therein were procured through fraud in the exe-

cution, and where the parties seeking to enforce the arbi-

tration clauses breached their fiduciary duty to disclose

to the other party all material facts concerning the princi-

pal agreements and the arbitration clauses.

il

TABLE OF CONTENTS

Page

TEs Agi kcctmantneda cawcayek ieee twas 1

SERENE SOP ENRICO boca cotondgscnvscdande 1

MISSTATEMENTS OF FACT AND LAW IN THE

PETITION FOR WRIT OF CERTIORARi SUPPORT

a ee By 6

REASONS FOR DENYING THE PETITION......... 9

I. THE DECISION OF THE CALIFORNIA COURT

OF APPEAL IS CONSISTENT WITH THE LAN-

GUAGE OF THE ARBITRATION ACT AND

pe Sy eg 8 a ree 10

Il. THE DECISION OF THE CALIFORNIA COURT

OF APPEAL DOES NOT UNDERMINE THE

GOALS OF THE ARBITRATION ACT......... 14

II. THE DECISION OF THE CALIFORNIA COURT

OF APPEAL IS NOT PREEMPTED BY FEDERAL

LAW UNDER THE ARBITRATION ACT ...... 16

CAME 6.5 cack n vi Ns 84S ESET REaE Ree ereey JTxs 18

a ~~

iii

TABLE OF AUTHORITIES

CASES

Cancanon v. Smith Barney, Harris, Upham & Co., 805

ee ee eee eee 12, 13

Cohen v. Wedbush, Noble, Cooke, Inc., 841 F.2d 282

ecw bbueeee tz, if

Ford v. Shearson Lehman American Express, Inc., 180

Cal.App.3d 1011, 225 Cal.Rptr. 895 (1986). .6, 7, 8, 17

Main v. Merrill Lynch, Pierce, Fenner & Smith, 67

Cal.App.3d 19, 136 Cal.Rptr. 378 (1977)...... ‘, 7, 17

Moseley v. Electronic & Missile Facilities, Inc., 374

U.S. 167, 83 S.Ct. 1815, 10 L.Ed.2d 818 (1963)

CAA sREMA MAS OMERAA NED CO WA DR RES HE HSE Cede RDO 8S ats bay To

Perry v. Thomas, 482 U.S. 483, 107 S.Ct. 2332, 96

Ee ere e ee eee 16

Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S.

395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967)........ passim

Southland Corp. v. Keating, 465 U.S. 1, 104 S.Ct. 852,

ere err ee 17

Volt Information Sciences, Inc. v. Stanford University,

489 U.S. 468, 109 S.Ct. __, 103 L.Ed.2d 488

eT aba ee hee bw kueeer e's 14

STATUTES

Neen ee nn ee ac sleweematw bike's 14

ed idk ae Wacale'a'sm Rae wS 10

Tee TT aan eee ebe's Wieks 10

eS bo) ues ek ee 1

Respondent Linda Strotz respectfully prays that this

Court deny the Petition for a Writ of Certiorari (“Peti-

tion”) filed by Dean Witter Reynolds, Inc., and Craig

Nelson on February 12, 1991.

A.

v

JURISDICTION

This Court has jurisdiction in this matter pursuant to

28 U.S.C. § 1257(a).

+

STATEMENT OF THE CASE

In about November 1979, Respondent Linda Strotz

(“Strotz”) opened an investment account at Petitioner

Dean Witter Reynolds, Inc. (“DWR”). Strotz, a young

widow, opened the account with proceeds of a life insur-

ance policy she received on the death of her husband. She

had no previous experience investing money in securi-

ties. Strotz was evaluated by DWR as an unsophisticated

client whose primary investment objectives were to earn

income and safeguard her principal. Accordingly, DWR

invested her funds in conservative stocks.

Strotz’ problems began in October 1985, when she

transferred her account to DWR’s Upland office, and

Petitioner Craig Nelson (“Nelson”) became her account

executive. From the outset, DWR and Nelson (collec-

tively, “Petitioners”) urged Strotz to invest in “OEX index

options.” OEX index options are extremely risky invest-

ments, totally unsuited to an inexperienced investor who

wishes to protect principal and earn interest. However,

Petitioners misrepresented these facts and advised Strotz

that OEX index options were safe, sure, and conservative

investments. Petitioners’ representations convinced

Strotz to invest in OEX index options.

In connection with the transfer of her account, Peti-

tioners required Strotz to sign documents, including a

Customer’s Agreement and an Option Client Information

form! (“the 1985 contracts”). Unbeknownst to Strotz, both

documents were standardized, preprinted contracts of

adhesion, which were prepared, presented and imposed

on Strotz by Petitioners without any opportunity for her

to negotiate any of the terms of the contracts, including

the arbitration clauses contained therein. Petitioners

shoved the documents in front of Strotz, gave her no

opportunity to read them, affirmatively told her it was

not necessary to read them, and told her the documents

were for the sole purpose of opening her account and that

they did not affect her legal rights. Petitioners failed to

advise Strotz \t these documents were contracts, or that

they contai. arbitration clauses. Strotz, who was

untrained and inexperienced in investing, did not know

or understand that these documents, including the arbi-

tration clauses, were, in fact, contracts and not simply

forms to open her account. Had she known the true

nature and contents of the documents, she would not

have signed them. Strotz believed she was signing docu-

ments which merely opened her Upland account with

1 The title of this document gives no clue that it is in fact a

contract with legal effect. Two such forms are reprinted in Peti-

tioner’s Appendix D at 8d-14d and 15d-18d. The appearance of

these forms as shown in Appendix D is misleading and bears no

resemblance to the appearance of the actual documents

imposed on Strotz.

DWR and did not understand the intended effect of the

arbitration clauses. Strotz therefore never agreed to sub-

mit all controversies arising from the agreements to arbi-

tration. See Appendix A to Petition (“Pet.App.A”) at 3a.

Thereafter, Petitioners invested Strotz’ account in

OEX index options. Petitioners controlled Strotz’ account,

and she at all times relied on their advice, recommenda-

tions, superior knowledge and skills in making invest-

ments. Strotz placed her total confidence and trust in

Petitioners, relied on their judgment and expertise, and

believed they would deal fairly and justly with her in all

matters. Therefore, a fiduciary and/or confidential rela-

tionship existed between Strotz and Petitioners.

Petitioners made an excessive number of OEX index

options transactions for Strotz’ account without Strotz’

knowledge or consent and at times when Strotz’ account

lacked sufficient funds to cover the transactions. Peti-

tioners made these excessive transactions to earn exces-

_ sive commissions, at Strotz’ expense. Petitioners wrote

the transactions knowing that OEX index options are in

fact extremely risky investments which should not be

undertaken by anyone with inadequate net worth and

whose investment purpose is to protect principal and

earn a reasonable income.

Throughout 1985, Petitioners lost substantial funds

belonging to Strotz by investing her account in OEX

index options. Petitioners failed to inform Strotz fully of

the extent of her actual losses as a result of their invest-

ment advice and activities.

From time to time, Petitioners sent Strotz documents

and form letters in the mail. Strotz would call Nelson to

ask about the documents. Nelson always assured Strotz

the documents were just standard documents, required

by DWR in connection with its accounts, that there was

no cause to worry, that she should sign them, and that

she did not need to keep copies. Here again, Strotz did

not know that one of these documents, a second Option

Client Information,?, was a contract containing a fine-

print, boilerplate arbitration clause. She did not know or

understand the true nature and contents of this document

and did not know it contained an arbitration clause. If

she had known these facts, she would not have signed the

document. Strotz, in fact, never agreed to the arbitration

clause therein.

Throughout 1986 and 1987, Petitioners continued to

make excessive and inappropriate trades against Strotz’

account, and failed to advise her of the full extent of her

losses. In about mid-October 1987, Petitioners lost Strotz’

entire account from their investments in OEX index

options. Petitioners then sold all of Strotz’ stock and

property in their possession to cover the OEX index

option transactions. As a result, Strotz lost at least

$180,000.00.

On or about September 22, 1988, Strotz filed a veri-

fied complaint against Petitioners in the California Supe-

rior Court for the County of San Bernardino, West

District. Thereafter, on November 22, 1988, Strotz filed a

2 A box at the top of the form shows the purpose of the

document is “Account Data Update.” See Appendix D to Peti-

tion at 15d.

verified first amended complaint against Petitioners. The

first amended complaint includes causes of action for

rescission and voiding of the agreements based on, inter

alia, fraud in the inducement and fraud in the execution.

Petitioners then filed a petition to compel arbitration

and a motion to stay proceedings. Strotz filed opposition

to the petition, including two declarations of Strotz. The

declarations amplified the allegations in the verified first

amended complaint regarding the misrepresentations of

Petitioners as to the three agreements and the arbitration

clauses at issue. The declarations supported the allega-

tions of fraud in the execution and in the inducement of

both the subject agreements and the arbitration clauses

contained therein. The trial court issued an order denying

the petition to compel arbitration.

Petitioners appealed the order and argued, inter alia,

that Strotz could not avoid the agreements by failing to

read them, that the trial court’s order would lead to

“procedural gamesmanship,” and that the trial court’s

order was contrary to the “separability rule” set out by

the United States Supreme Court in Prima Paint Corp. v.

Flood & Conklin Mfg. Co., 388 U.S. 395, 87 S.Ct. 1801, 18

L.Ed.2d 1270 (1967).

Strotz filed a responding brief in which she argued

that the trial court’s order was consistent with state and

federal law, including Prima Paint, and that the order was

properly based on Strotz’ pleadings and declarations,

which sufficiently alleged fraud in the execution and

inducement of the agreements and the arbitration clauses

therein. Strotz further argued that under California law,

Petitioners had a fiduciary or confidential relationship

with Strotz which gave rise to a duty to disclose to her all

material facts about the agreements and transactions.*

The California Court of Appeal affirmed the trial court’s

order in an opinion filed on August 27, 1990. See

Pet.App.A.

Petitioners sought rehearing in the Court of Appeal,

which was denied on September 21, 1990. Petitioner’s

Petition for Review to the Supreme Court of the State of

California was denied on November 14, 1990. Petitioners

filed their Petition for Writ of Certiorari on February 12,

1991. Respondent received the Petition on February 15,

1991.

MISSTATEMENTS OF FACT AND LAW IN THE PETI-

TION FOR WRIT OF CERTIORARI SUPPORT DENIAL

OF THE PETITION

The Petition before this Court contains material mis-

statements of fact and law which mandate denial of the

Petition. Petitioners incorrectly state the substance of

Strotz’ fraud allegation is that she did not read the subject

contracts before signing them. See Petition at 3 n.1. In

fact, the substance of Strotz’ fraud allegations is that

Petitioners had a fiduciary duty to advise her of all

material facts concerning the nature and effect of the

documents she was signing, as well as the nature of the

3 This rule of law was set forth in Main v. Merrill Lynch,

Pierce, Fenner & Smith, 67 Cal.App.3d 19, 32, 136 Cal.Rptr. 378

(1977), and Ford v. Shearson Lehman American Express, Inc., 180

Cal.App.3d 1011, 1020, 225 Cal.Rptr. 895 (1968).

investments recommended, that Strotz unknowingly

signed contracts in which she waived her rights to trial of

any disputes arising therefrom, and that Petitioners

actively concealed and suppressed these material facts, in

violation of their fiduciary duty, thereby committing

fraud upon Strotz.

The California courts long ago established that a

confidential relationship exists between a securities

broker and its client. Ford v. Shearson Lehman American

Express, Inc., 180 Cal.App.3d 1011, 1020, 225 Cal.Rptr. 895

(1986); Main v. Merrill Lynch, Pierce, Fenner & Smith, 67

Cal.App.3d 19, 31-33, 136 Cal.Rptr. 378 (1977). Where a

fiduciary or confidential relationship exists, the party

with the superior knowledge has a duty to disclose all

material facts to the other party. The Main court stated, at

page 32:

It is the settled law of this state, and elsewhere,

that “ ‘[W]here there exists a relationship of

trust and confidence it is the duty of one in

whom the confidence is reposed to make full

disclosure of all material facts within his know]l-

edge relating to the transaction in question and

any concealment of material fact is a fraud.’ ”

[Citations.] “ ‘Where there is [such] a duty to

disclose, the disclosure must be full and com-

plete, and any material concealment or misrep-

resentation will amount to fraud sufficient to

entitle the party injured thereby to an action.’ ”

[Citations.]

See also Ford, 180 Cal.App.3d at 1020 (citing Main). The

existence of this relationship relieves a party from the

failure to read documents. See Pet.App.A at 14a.

The second factual misrepresentation\ is Petitioners’

claim that Strotz failed to allege in the first amended

complaint that the arbitration agreements contained in

the 1985 contracts were obtained by fraud. See Petition at

3, 4. In fact, Strotz plainly alleged in the first amended

complaint that she was not advised of the agreements to

arbitrate, and that she did not know the true nature and

effect of the documents she signed or the agresments to

arbitrate contained therein. See Pet.App.A at 3a. Strotz

also alleged that the 1985 contracts were invalid based on

fraud in the execution of the agreements and the arbitra-

tion clauses as well as fraud in the inducement. Further,

the declarations of Strotz, submitted to the trial court in

opposition to Petitioners’ petition to compel arbitration,

contained testimony going directly to the arbitration

agreements. See Pet.App.A at 3a-4a.

Third, Petitioners incorrectly argue “the alternative

theory” in the Ford case, relied on by the California Court

of Appeal herein, was not briefed or argued by the par-

ties. See Petition at 6. This theory states that if a party is

unaware he is signing any contract, and the contract

contains an arbitration clause, the party is also unaware

that he is agreeing to arbitration. Therefore, an allegation

of fraud in the inception or execution of the contract is

necessarily directed at both the principal contract and the

arbitration agreement contained therein. See Petition at

13; Pet.App.A at 12a-13a.

Contrary to Petitioners’ contention, the first amended

complaint and the declarations of Strotz set forth suffi-

cient allegations of fraud in the execution of the agree-

ments and the arbitration clauses. Strotz argued the

agreements and the arbitration clauses therein were

obtained through fraud in the execution in her opposition

to the petition to compel arbitration and responding brief

on appeal. The facts and the law on this issue were

therefore properly before the Court of Appeal.

These errors undermine the instant Petition and dem-

onstrate that no substantial unsettled federal question is

presented therein. The question presented to this Court

was properly rejected by the California courts of appeal,

in harmony with the applicable federal and state law.

Therefore, Strotz respectfully submits the Petition should

be denied.

sd.

v

REASONS FOR DENYING THE PETITION

The decision of the California Court of Appeal does

not, as Petitioners contend, seriously threaten the

enforcement of arbitration agreements. Neither does the

decision contradict the express language of the Federal

Arbitration Act and the applicable decisional law. Taken

to its logical extension, Petitioners’ theory is that all

arbitration agreements are enforceable, even where they

are procured through fraud. This contention, and not the

decision, is contrary to law.

10 i

I. THE DECISION OF THE CALIFORNIA COURT OF

APPEAL IS CONSISTENT WITH THE LANGUAGE

OF THE ARBITRATION ACT AND THE SEP-

ARABILITY RULE.

Petitioners incorrectly argue the theory of fraud in

the execution relied on by the California Court of Appeal

is contrary to the language of the Federal Arbitration Act

and the “separability rule” set forth by this Court in

Prima Paint‘. This argumeni laeks any merit. The express

language of the Federal Arbitration Act and the decision-

al law mandate enforcement of arbitration agreements

only where a valid arbitration agreement exists.

Section 2 of Title 9 of the United States Code provides

in pertinent part:

{A] written provision in . . . a contract evidenc-

ing a transaction involving commerce to settle

by arbitration a controversy thereafter arising

out of such contract . . . shall be valid, irrevoca-

ble, and enforceable, save upon such grounds that

exist at law or in equity for the revocation of any

contract.

(Emphasis added.) The “savings clause” creates a statu-

tory exception to the mandatory language in Section 2.5

In enacting the savings clause, Congress excluded

from arbitration those contracts which are revocable on

legal or equitable grounds. In Prima Paint, this Court

4 Petitioners expressly admit the California Court of

Appeal recognized this rule. See Petition at 11-12; Pet.App.A at

Sa.

5 Sections 3 and 4 of the Arbitration Act also expressly

contemplate court adjudication if the making of the arbitration

agreement is at issue. 9 U.S.C. §§ 3, 4.

11

stated, at 388 U.S. 404 n.12, 18 L.Ed.2d 177 n.12 (emphasis

added):

[T]he purpose of the Congress [in enacting the

savings clause of the Arbitration Act] in 1925

was to make arbitration agreements as enforce-

able as other contacts, but not more so. To immu-

nize an arbitration agreement from judicial challenge

on the ground of fraud in the inducement would -

to elevate it over other forms of contracts — a situa-

tien inconsistent with the “savings clause.”

Thus, the Arbitration Act, as interpreted by the

United States Supreme Court, specifically creates an

exception to the rule that arbitration is mandatory, where,

as here, the arbitration agreement is procured through

fraud.

In Prima Paint, this Court found that arbitration

clauses are separable from the contracts in which they

appear, and that if there are no allegations that the arbi-

tration clauses were procured through fraud, the arbitra-

tor should determine whether the principal contract was

induced by fraud. 388 U.S. at 402. The Prima Paint Court

stated, at 388 U.S. 403-404:

[I]f the claim is fraud in the inducement of the

arbitration clause itself - an issue which goes to

the “making” of the agreement to arbitrate —

the . . . court may proceed to adjudicate it.

The Prima Paint decision is in harmony with the

earlier decision of this Court in Moseley v. Electronic &

Missile Facilities, Inc., 374 U.S. 167, 83 S.Ct. 1815, 10

L.Ed.2d 818 (1963). In Moseley, this Court ruled that

where a complaint alleges the entire agreement, including

an arbitration clause within it, was induced or procured

by fraud, or that voluntary assent was lacking, the issues

12

of fraud and lack of assent are for the court to adjudicate.

Id. at 374 U.S. 171. In these circumstances, the court must

refuse to compel arbitration. This rule of law was

expressly approved in Prima Paint. 388 U.S. 403-404 and

n.12.

These cases teach that where there is an allegation

that an arbitration agreement was procured by fraud, the

court must adjudicate the issues of fraud and lack of

voluntary assent. As this Court stated in Moseley, at 374

U.S. 171 (emphases added):

Under . . . the Arbitration Act, it seems clear

that the issue of fraud should first be adjudicated

before the rights of the parties under the sub-

contract can be determined. It appears necessary,

therefore, that the district court proceed first to trial

of this issue... .

In Cohen v. Wedbush, Noble, Cooke, Inc., 841 F.2d 282

(9th Cir. 1988), the Court of Appeals for the Ninth Circuit

found that an allegation of a failure to advise a client of

an arbitration clause goes to the issue of the validity of

assent to the arbitration clause and not to the principal

agreement. The court stated:

The contention that Wedbush fraudulently mis-

led the Cohens by failing to inform them of the

arbitration clause is not aimed at the entire con-

tract; it bears directly on the validity of their

assent to the arbitration clause. This issue is

therefore not suitable for arbitration and the

courts “may proceed to adjudicate it.”

Cohen, 841 F.2d at 286, quoting Prima Paint, 388 U.S. at

404. Similarly, in Cancanon v. Smith Barney, Harris, Upham

& Co., 805 F.2d 998 (11th Cir. 1986), the court stated, at

page 1000:

13

Where misrepresentation of the character or

essential terms of a proposed contract occurs,

assent to the contract is impossible. In such case

there is no contract at all.

The Cancanon court concluded, at page 1000 (footnote

omitted):

[W]here the allegation is one of fraud in the

factum, i.e., ineffective assent to the contract,

the issue is not subject to resolution pursuant to

an arbitration clause contained in the contract

documents.

In the instant case, Strotz specifically alleged both the

arbitration agreements and the agreements in which they

appeared were procured through fraud in the execution and

fraud in the inducement. See Pet.App.A at 3a. On these facts,

the California Court of Appeal herein correctly found that if

a person does not even know she is signing a contract, she

cannot possibly be voluntarily assenting to any of the provi-

sions of the contract or to a “separable” arbitration agree-

ment contained therein. See Pet.App.A at 12a-13a. Therefore,

the issue of fraud is for the court, not the arbitrator. Id. at

14a. In reaching this conclusion, the Court of Appeal cor-

rectly relied on and followed federal law. Id. at 12a-13a.

Thus, the decision of the Court of Appeal is in harmony with

the language of the Arbitration Act and the separability rule

set forth in Prima~Paint. The Court cf Appeal simply fol-

lowed the reasoning stated in the concurring opinion in

Moseley, 374 U.S. at 172:

We agree with the Court that fraud in the pro-

curement of an arbitration contract, like fraud in

the procurement of any contract, makes it void

and unenforceable and that this question of

fraud is a judicial one, which must be deter-

mined by a court. To allow this question to be

a4

decided by arbitrators would be to that extent to

enforce the arbitration agreement even though

steeped in the grossest kind of fraud.

II. THE DECISION OF THE CALIFORNIA COURT OF

APPEAL DOES NOT UNDERMINE THE GOALS

OF THE ARBITRATION ACT

Petitioners erroneously contend the decision of the

California Court of Appeal undermines the goals of the

Arbitration Act by threatening the enforcement of arbitra-

tion agreements and by allegedly fostering litigation.

These concerns are illusory. In fact, the decision furthers

the goals of the Act and wiil decrease litigation by

encouraging full disclosure of all material facts to inves-

tors.

The policy of the Federal Arbitration Act is to enforce

valid arbitration agreements to which the parties genu-

inely assented. 9 U.S.C. § 2. The Act does not require.

parties to arbitrate when they have not agreed to do so.

Volt Information Sciences, Inc. v. Stanford University, 489

U.S. 468, 477, 109 S.Ct. __, 103 L.Ed.2d 488, 489 (1989).

Thus, Petitioners go too far in contending the Act

requires the enforcement of all arbitration agreements,

even those procured by fraud. Acceptance of this theory

would render meaningless the “savings clause” in Section

2 of the Act and the express statement of this Court in

Prima Paint, that arbitration agreements are not more

enforceable than any other contracts. 388 U.S. at 404 n.12.

The goals of the Act require arbitration only under valid

arbitration agreements.

Petitioners vainly argue the decision permits a party

to avoid contractual obligations by merely alleging a

15

failure to read an agreement before signing it, thereby

encouraging “procedural gamesmanship.” This argument

conveniently ignores the fact that under California law,

stockbrokers owe their clients a fiduciary duty to disclose

all material facts concerning the documents being signed

and the rights being waived. It cannot be seriously

argued that it was immateria’ that the documents which

Petitioners represented as forms to open an account were

in fact contracts, which contained arbitration clauses and

af‘ected Strotz’ legal rights. The Court of Appeal did not

approve procedural gamesmanship, but rather properly

refused to relieve stockbrokers of their duty to inform

their clients that they are signing contracts which affect

their legal rights and are not just filling out innocuous

forms.

The only arbitration agreements affected by the deci-

sion will be those where, as here, the stockbrokers

breached their fiduciary duty. Taken to its limit, Peti-

tioners’ theory would preclude all allegations of fraud in

the execution or inducement of the agreements, thereby

impermissibly enforcing all arbitration agreements, even

those procured by fraud. The Court of Appeal properly

rejected this argument.

Petitioners’ concerns respecting an alleged increase

in litigation are unfounded. The decision of the California

Court of Appeal will discourage litigation by motivating

stockbrokers to advise their clients fully concerning the

nature of the agreements they are signing and the rights

they are waiving. Contrary to Petitioners’ contentions,

the decision promotes the goals of the Arbitration Act.

16

Il. T DECISION OF THE CALIFORNIA COURT

CG APPEAL IS NOT PREEMPTED BY FEDERAL

LAv? UNDER THE ARBITRATION ACT.

Petitioners incorrectly argue the decision of the Court

of Appeal is preempted by federal law because (1) the

decision purportedly “contradicts” the separability rule

established in Prima Paint, and (2) the decision purpor-

tedly imposes an obstacle to accomplishing the goals of

the Arbitration Act. As discussed in Sections I and II,

supra, the decision of the California Court of Appeai is in

harmony with the separability rule and the goals of the

Arbitration Act.

Nevertheless, Petitioners erroneously contend the

decision places burdens on arbitration agreements that do

not apply to contracts generally. This argument was prop-

erly rejected by the California Court of Appeal. The deci-

sion does not establish a special rule for invalidating

arbitration agreements. In Perry v. Thomas, 482 U.S. 483,

107 S.Ct. 2332, 96 L.Ed.2d 428 (1987), this Court expressly

approved the application of state law principles when a

court is determining whether an arbitration agreement is

revocable. This Court stated, at 96 L.Ed.2d 437 n.8b

(emphasis in original):

An agreement to arbitrate is valid, irrevocable,

and enforceable, as a matter of federal law [cita-

tion], “save upon such grounds as exist at law or

in equity for the revocation of any contract.” 9

U.S.C. section 2 (emphases added). “hus, state

law whether of legislative or judicial origin, is

applicable if that law arose to govern issues

concerning the validity, revocability, and

enforceability of contracts generally.

17

See also Southland Corp. v. Keating, 465 U.S. 1, 17 n.11, 104

S.Ct. 852, 79 L.Ed.2d 1, 16 n.11 (1984).

The California Court of Appeal did not base its hold-

ing on state law principles that take their meaning solely

from the fact that an arbitration agreement was involved.

Nor did the Court of Appeal create or impose special

burdens on agreements to arbitrate. Rather, the Court of

Appeal looked to general contract law principles regard-

ing fraud in the execution of contracts. See Pet.App.A at

12a-14a.

Finally, Petitioners misstate the law in arguing that

no other court has created a fiduciary duty on a stock-

broker to explain the terms of a contract to a client. See

Petition at 14. This argument ignores the clear language

of the Cohen, Ford and Main cases.

The decision of the California Court of Appeal prop-

erly looked to general contract law principles. Therefore

the decision does not conflict with federal law and is not

subject to preemption.

>

18

CONCLUSION

For the foregoing reasons, Respondent Linda Strotz

respectfully requests this Court to deny the instant Peti-

tion For A Writ Of Certiorari.

Respectfully submittcd,

MELANIE Fiscn*

Rosert F. SCHAUER

CovincTon & CROWE

a 1131 West Sixth Street, Suite 300

Post Office Box 1515

Ontario, California 91762

(714) 983-9393

March 11, 1991

Counsel for Respondent Linda Strotz

*Counsel of Record