Petition for Writ of Certiorari — Edward D. Jones & Co., L. P., Dba Edward Jones v. Kloss

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OFFICE OF THE @LERK

In The

Supreme Court of the Gnited States

EDWARD D. JONES & CO., L.P. d/b/a

EDWARD JONES, AND PAUL HUSTED,

Petitioners,

ALICE P. KLOSS,

Respondent.

On Petition For Writ Of Certiorari

To The Supreme Court Of Montana

PETITION FOR WRIT OF CERTIORARI

LISA A. NIELSEN*

SANDRA B. GALLINI

; GREENSFELDER, HEMKER &

| GALE, P.C.

10 South Broadway,

Suite 2066—_

St. Louis, Missouri 63102

(314) 241-9090

*Counsel of Record

COCKLE LAW BRIEF PRINTING CO. (800) 225-6964

OR CALL COLLECT (402) 342-2831

QUESTION PRESENTED

Whether a state court decision conditioning enforce-

ment of an arbitration provision, but no other provision of

a contract, on oral explanation of the consequences of the

agreement to arbitrate is contrary to Section 2 of the

Federal Arbitration Act (9 U.S.C. §2), which makes

arbitration agreements valid, irrevocable, and enforceable,

save upon such grounds as exist at law or in equity for the

revocation of any contract.

TE TL TT a a a Ta

PARTIES TO PROCEEDINGS BELOW AND

CORPORATE DISCLOSURE STATEMENT

The parties are all listed in the caption of this case.

There are no corporate parties.

TABLE OF CONTENTS

Page

QUESTION PRESENTED...........00:.s:.vcecccseccccosesesscee i

PARTIES TO PROCEEDINGS BELOW AND COR-

PORATE DISCLOSURE STATEMENT .................. ii

po Lh ot yy.) ) . Se ae ili

BBs OF BUTTHIORITIBG oo. 5...5...ss0eccessecicecssececscess. Vv

PETITION FOR A WRIT OF CERTIORARI............. 1

ko 8 8 RICE EAS eee ee en 1

ESI ee ea ee ee 2

RELEVANT CONSTITUTIONAL, STATUTORY AND

REGULATORY PROVISIONS. ............ccccccccccsceeeceee 2

SE a a ea 3

RPRMeRMeeEeEN aS COP THEM, OAS q...n.5...sccccescccoceseescecssss 5

Statutory Backgroun................cccccccccccocoosooees, 5

Factual Background .................0..c.c..scs.ceseeeeesss 6

ENA CTS ED 9

REASONS FOR GRANTING THE PETITION ......... 12

I. THE DECISION OF THE SUPREME COURT

OF MONTANA DIRECTLY CONFLICTS WITH

SECTION 2 OF THE FEDERAL ARBITRA-

TION ACT AND THIS COURT'S PRECE-

DENT THEREUNDER ...............ccccscccscseseceeees 13

II. THIS CASE PROVIDES THE APPROPRIATE

VEHICLE TO ADDRESS THE ISSUE RAISED

BUT NOT DIRECTLY DECIDED IN PERRY

V. THOMAS AND DOCTOR’S ASSOCIATES

atic aiid waiececsaies asepessunanencan 22

TABLE OF CONTENTS - Continued

Page

III. THE DECISION BY THE SUPREME COURT

OF MONTANA RAISES ISSUES OF NA-

TIONAL IMPORTANCE. ............sssecssssssseeesseseees 25

IV. AT MINIMUM, THIS PETITION SHOULD

BE HELD PENDING THE COURT'S DECI-

SION IN GREEN TREE FINANCIAL CORP.

TABLE OF AUTHORITIES

Page

CASES

Allied-Bruce Terminix Co., Inc. v. Dobson, 513 U.S.

| BA OE TEL NTR, DTN SN Se passim

Broemmer v. Abortion Services of Phoenix, Ltd., 840

SPR MPR NR, ashi i a ta 27

Brown v. Merrill Lynch, Pierce, Fenner & Smith,

Inc., 640 P.2d 453 (Mont. 1982) ..............000.. 13, 19, 20, 21

Buraczynski v. Eyring, 919 S.W.2d 314 (Tenn. 1996)........ 25

Casarotto v. Lombardi, No. 93-488, slip op. at 3

Ns TINIE sicthenetiiilasiite dienes cieceiatii a ions 18

Circuit City Stores, Inc. v. Adams, 532 U.S. 105

Rett ivsscenistesenimneiaindeeiesisesmnitibinbiislaindmbiaaieds Tiana Ma tacit ae 25

Counterpoint, Inc. v. Essex Ins. Co., 967 P.2d 393

2 Re Pe ails 14

David L. Threlkeld & Co. v. Metallgesellschaft Ltd.,

923 F.2d 245 (2d Cir.), cert. dismissed, 50 U.S.

RET SINE osidihinesttupsssneretsitiea namin SO aoe 25

Doctor’s Assoc., Inc. v. Casarotto, 517 U.S. 681

RNa PvintessehecsnienssctteiinineaboidtiemisesinGenmnn ane passim

Ex parte McNaughton, 728 So. 2d 592 (Ala. 1998)...... 21, 22

Goodwin v. Ford Motor Credit Co., 970 F. Supp.

Se Pee YE Ri nniisivnnntccnsessisbutintentelehdcciasie 21

Green Tree Fin. Corp. v. Bazzle, No. 02-634 (cert.

granted January 10, 2003)............ccccssccssscesssesseceseees 4,27

Green Tree Fin. Corp. v. Randolph, 531 U.S. 79

GP sclis ccvesttisigpsintidininiicluainibsaleicaibcenorpa tied 3 25

McAlear v. St. Paul Ins. Co., 493 P.2d 331 (Mont.

ic ARCS DENA ML POEDCD: DENY ei ah sAO NO Mtn cet As 14

TABLE OF AUTHORITIES — Continued

Page

Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth,

Ene. GTB DB. SUE GAGS) os crceresecesescrcrescosscessevvsensonsonses 5, 22

Northcom, Ltd. v. James, 694 So. 2d 1329 (Ala.

BOT isvvidicciciovietsnititenniceinaviussisssnnnboieabiteipaabesadinns 21, 22

Perry v. Thomas, 482 U.S. 483 (1987) ........ccccccceseeeees passim

Saturn Dist. Corp. v. Williams, 905 F.2d 719 (4th

COR RI ec cntiscscacverenstrenitiarovatstersiarkitiedanmnansenebblenscins 24

Scherk v. Alberto-Culver Co., 417 U.S. 506 (1974)............. 6

Sec. Indus. Assoc. v. Connolly, 883 F.2d 1114 (1st

Claes: ROD ivcccccsvccsicnivciccsnvsisignvsiiaibiniiniionnetbeie 24

Shearson/American Express, Inc. v. McMahon, 482

CTD, BG Ce iiverc ssc snscticisseccicntinstditcnaniionianitantevenitibdesn 5

Shook v. State Farm Mut. Ins. Co., 872 F. Supp. 768

CEO, LODGED icsinsssinionscovineserstecsonnitlioniniansuenadeennn 14

Southland Corp. v. Keating, 465 U.S. 1 (1984) ......... 5, 6, 17

State ex rel Paine Webber, Inc. v. Voorhees, 891

BFF. TBS CREO. WONG SOP viccseccvenscsevesececirevnnccschoncenceses 25

Transamerica Ins. Co. v. Royle, 656 P.2d 820 (Mont.

FIED css sienssensydcndvavietintendiabipnunsiendeleseainishiaanmalaanansiiiabanastis 14

Wellcome v. Home Ins. Co., 849 P.2d 190 (Mont.

ROE isivinccssccvecatdiveactiscabarstatnuvibecdonsbhibacslabuoradadeamameinedl 14

CONSTITUTIONAL PROVISIONS

US. Camas. Gt. Fis as Gls OF eakrcvtasdanenideamenierdincenininen 2

vii

TABLE OF AUTHORITIES - Continued

Page

Statutes

Sy I I ois ceennialedubthcinancideclntetansoccceeicliatanee cake 2,19

| Ep SRP SEAR er nae EON ROR ne DED passim

RULES AND REGULATIONS

Fae Re a ee CD ernesccsnscsnecndnsisonconedeenschoncsenscteames 2,19

12 C.F.R. § 220.1(bX2) (2001)...............ccscccssscessceess pieneldiods 19

Se aI Oe I CID ceciuncencvevssvenncentuseecesnaéocesotecenaies 19

Se SNAmNINITT SEIU iicsincsiacilbcdisdestneesiciatditiepanishnesanhsianeidiabinileimiaatibiddinaa 11

OTHER AUTHORITIES

Eleventh Report, Securities Industry Conference on

Arbitration, at 106-126, July 2001, available at

http//www.nyse.com/pdfs/SICA2001.pdf (last visited

eT eicaiihoviuibicuinstsiniliccnliconatiabininisddisicNeaschadiinatediitlisiniiiieics: 26

IM-3110(f), NASD Conduct Rules, NASD Manual

CORTE) OE GEBB-O0 CIO) ovinesecescccvesescnecconsseccssvscssccconcecess 15

Montana Senate Judiciary Comm. minutes at 6

ETE NON ee a EE 17

NASD Statistics at http://www.nasdr.com/2380.asp

COOOE WP OONE GIGS) aicscceccsisciccorsscssccscsvscscsececeesescesss 26

NYSE 2000 Fact Book, available at http://www.

nyse.com/pdfs/ 08_ EXCHANGE COMMUNITY pdf

I Un cs 26

Pet. for Cert. at 13-26, Bazzle, No. 02-634 (filed

I 28

eee

TABLE OF AUTHORITIES — Continued

Page

Stephen J. Ware, Arbitration and Unconscionability

After Doctor’s Associates, Inc. v. Casarotto, 31 Wake

Forest L. Rev. 1001, 1002 (1996). ............ccccsssssssessseeeees 25

Stern, Gressman, Shapiro & Geller, Supreme Court

Practice 192-93 (7th ed. 1993)............ssscccccccscccsseesessreeees 29

PETITION FOR A WRIT OF CERTIORARI

Edward D. Jones & Co., L.P. d/b/a Edward Jones and

Paul Husted respectfully request that a writ of certiorari

issue to review the judgment of the Supreme Court of

Montana in this case.

OPINIONS BELOW

The June 13, 2002 opinion of the Supreme Court of

Montana is reported at 54 P.3d 1, and is reprinted in the

appendix to this petition at App. 1-App. 37. The September

25, 2002 order of the Montana Supreme Court granting in

part and denying in part the timely filed petition for

rehearing is reported at 2000 MT 129A and is reprinted in

the appendix to this petition at App. 67-App. 71. The

January 9, 2001 order of the Montana Supreme Court

staying appellate proceedings and remanding to the

district court for supplemental findings of fact is not

reported, but is reprinted in the appendix to this petition

at App. 38-App. 41.

The written findings of fact, conclusions of law and

order of the Montana Eighth Judicial District Court filed

March 26, 2001 is not reported. It is reprinted in the

appendix to this petition at App. 42-App. 51. The written

findings of fact, conclusions of law and order of the Mon-

tana Eighth Judicial District Court filed June 12, 2000 is

not reported. It is reprinted in the appendix to this peti-

tion at App. 52-App. 66.

JURISDICTION

The opinion of the Supreme Court of Montana was

filed on June 13, 2002. Petitioners filed a timely petition

for rehearing which was granted in part on September 25,

2002 to amend by iuterlineation paragraph 36 of the

original opinion. The remainder of the petition for rehear-

ing was denied. On December 4, 2002, Justice O’Connor

signed an order extending the time for filing this petition

for certiorari to and including January 23, 2003. The

jurisdiction of this Court is invoked pursuant to 28 U.S.C

§ 1257(a).

}

RELEVANT CONSTITUTIONAL, STATUTORY

AND REGULATORY PROVISIONS

This petition involves the Supremacy Clause of the

United States Constitution, U.S. Const. art. VI, § 2, cl. 2,

Section 2 of the Federal Arbitration Act, 9 U.S.C. §2

(“FAA” or “the Act”), Section 7 of the Securities Exchange

Act of 1934, 15 U.S.C. § 78g, and Regulation T, 12 C.ER.

§ 220.1, et seg. (2001) (“Regulation T”).

The Supremacy Clause states in pertinent part:

This Constitution and the Laws of the United

States which shall be made in pursuance thereof

... Shall be the supreme Laws of the Land; and

the Judges in every State shall be bound thereby,

any Thing in the Constitution or Laws of any

State to the contrary notwithstanding. U.S.

Const. art. VI, § 2, cl. 2.

Section 2 of the FAA provides:

A written provision in any maritime transaction

or a contract evidencing a transaction involving

commerce to settle by arbitration a controversy

thereafter arising out of such contract or transac-

tion, or the refusal to perform the whole or any

part thereof, or an agreement in writing to sub-

mit to arbitration an existing controversy arising

out of such a contract, transaction, or refusal,

shall be valid, irrevocable, and enforceable, save

upon such grounds as exist at law or in equity for

the revocation of any contract. 9 U.S.C. § 2.

Section 7 of the Securities Exchange Act and Regulation T

are reprinted in relevant part in the appendix to this

petition at App. 76-App. 77.

INTRODUCTION

This petition presents the question of whether Section

2 of the Federal Arbitration Act (9 U.S.C. § 2) prohibits

states from creating law, via judicial opinion, that imposes

an oral notice requirement on arbitration provisions, but

not any other provisions in the contract, before the court

will enforce the parties’ agreement to arbitrate. In the

decision below, the Montana Supreme Court invalidated

the arbitration agreement between the parties because the

proponent of arbitration failed to orally explain the conse-

quences of the arbitration agreement to the party now

contesting arbitration. Although no oral explanation of

contract terms is required under Montana’s general

contract law, the Montana Supreme Court required such

explanation in this case solely because the provision at

issue was an arbitration clause that precluded the signa-

tory from having the dispute heard in a Montana court.

As this Court foreclosed the use of legislative avenues

to avoid enforcement of arbitration agreements in cases

such as Doctor’s Assoc., Inc. v. Casarotto, 517 U.S. 681, 687

(1996) (striking down statutory notice requirement appli-

cable only to arbitration agreements) and Allied-Bruce

Terminix Co., Inc. v. Dobson, 513 U.S. 265, 270 (1995)

(state statute prohibiting enforcement of pre-dispute

arbitration agreements pre-empted by the FAA), the

Montana Supreme Court invoked its common law as a

mechanism to accomplish that which the state legislature

cannot: imposing heightened notice requirements solely on

arbitration agreements. The Montana Supreme Court’s

refusal to enforce the parties’ arbitration agreement based

on its suspicion that arbitration is an unfair method of

dispute resolution resurrects the old judicial hostility

towards arbitration agreements that the Federal Arbitra-

tion Act was intended to reverse.

The Montana Supreme Court’s willingness to resort to

creating discriminatory law in order to invalidate the

parties’ arbitration agreement implicates a continuing

trend of national importance. Just this term, this Court

granted a petition for certiorari raising an issue that

parallels the issue in this case. Green Tree Fin. Corp. v.

Bazzle, No. 02-634 (cert. granted January 10, 2003). The

issue raised in Bazzle is whether courts may utilize state

law to impose class arbitration on an arbitration agree-

ment silent on the issue. It relates significantly to the

“issue in this case because in both cases the state court

refused to enforce the parties’ arbitration agreement

according to its terms based on equity concerns, i.e., the

arbitration agreement, in the court’s view, did not provide

the same procedural safeguards available in court. Such

judicial suspicion of the fairness of arbitration agreements

and arbitration directly conflicts with the FAA.

STATEMENT OF THE CASE

Statutory Background

“In enacting § 2 of the federal Act, Congress declared a

national policy favoring arbitration and withdrew the

power of the states to require a judicial forum for the

resolution of claims which the contracting parties agreed

to resolve by arbitration.” Southland Corp. v. Keating, 465

U.S. 1, 10 (1984). “The [FAA] was intended to reverse

centuries of judicial hostility to arbitration agreements by

placing arbitration agreements upon the same footing as

other contracts.” Shearson/American Express, Inc. uv.

McMahon, 482 U.S. 220, 225-26 (1987) (internal auotes

and citations omitted); accord Allied-Bruce Terminix, 513

U.S. at 270; Mitsubishi Motors Corp. v. Soler Chrysler-

Plymouth, Inc., 473 U.S. 614, 625 n.14 (1985); Southland,

465 U.S. at 10.

A written arbitration provision in a contract evidenc-

ing a transaction involving commerce can be revoked only

upon “grounds as exist at law or in equity for the revoca-

tion of any contract.” 9 U.S.C. §2 (emphasis added);

Southland, 465 U.S. at 10. Thus, state laws, whether

Judicial or legislative in origin, apply to regulate arbitra-

tion agreements if they “arose to govern issues concerning

the validity, revocability, and enforceability of contracts

generally.” Perry v. Thomas, 482 U.S. 483, 492 (1987); accord

Doctor’s Assoc., 517 U.S. at 687. Courts may not refuse to

enforce arbitration agreements based on principles of law

not applicable to the enforcement of contracts generally.

Doctor’s Assoc., 517 U.S. at 687; Perry, 482 U.S. at 492;

Southland Corp., 465 U.S. at 10. Arbitration agreements

may not be construed in a manner different than that

which is used to construe nonarbitration agreements.

- Perry, 482 U.S. at 492.

“By enacting § 2, we have several times said, Congress

precluded States from singling out arbitration provisions

for suspect status, requiring instead that such provisions

be placed upon the same footing as other contracts.”

Doctor’s Assoc., 517 U.S. at 687 (internal quotes omitted);

Scherk v. Alberto-Culver Co., 417 U.S. 506, 511 (1974).

States may not “decide that a contract is fair enough to

enforce all its basic terms (price, service, credit), but not

fair enough to enforce its arbitration clause ... for that

kind of policy would place arbitration clauses on an un-

equal ‘footing,’ directly contrary to the Act’s language and

Congress’ intent.” Allied-Bruce Terminix, 513 U.S. at 281.

Yet, that is precisely what the Supreme Court of Montana

did in the decision below.

Factual Background

Petitioner Edward D. Jones & Co., L.P. d/b/a Edward

Jones (“Edward Jones”) is a limited partnership registered

to do business as a securities broker-dealer in all fifty

states and is a member of the National Association of

Securities Dealers (“NASD”) and the New York Stock

Exchange (“NYSE”). Petitioner Paul Husted (“Husted”) is,

and at all relevant times was, an Edward Jones registered

representative located at one of its branch offices in Great

Falls, Montana. In 1985, Respondent Alice Kloss (“Kloss”),

then approximately 80 years old, was referred to Husted

after she became disappointed with the services of her

previous brokerage firm.

Kloss opened three full service accounts with Edward

Jones between 1989 and 1998: one in 1989, one in 1992

and one in 1998. At the time she established each full

service account, Kloss executed a full service agreement

with Edward Jones, which was included within a master

agreement entitled “Customer Account Agreements for

Full Service and Customer Loan Accounts.” By signing the

full service agreements, Kloss agreed to arbitrate with

Edward Jones “any controversy arising out of or relating

to any of my accounts or transactions with you, your

officers, directors, agents and/or employees for me, or to

this agreement or the breach thereof.” The arbitration

clauses from the 1992 and 1998 agreements are reprinted

in full in the appendix to this petition at App. 72-App. 73

and App. 74-App. 75, respectively.

The arbitration clause in the 1992 agreement is two

paragraphs long and is located on the bottom third of the

second page of the six-page agreement. The arbitration

clause in the 1998 agreement contains the same two

paragraphs in addition to a third paragraph pertaining to

class actions. The three-paragraph clause covers roughly

one-half of the second page of the six-page agreement. In

both agreements, the arbitration clause is the only clause

or section in the agreement printed entirely in bold-face

type. Pet. App. at App. 46.

The district court found that before signing the 1992

and 1998 agreements, Kloss had the opportunity to read

the agreements, but chose not to do so. Pet. App. at App.

46, App. 54-App. 55. The district court also found that

Kloss would have understood the arbitration provisions if

she had read them. Jd. Before Kloss executed each agree-

ment, Husted explained what he considered to be the

significant features of the agreement from an investment

perspective. Jd. Husted did not point out the arbitration

provision, but the arbitration clause itself included five

numbered sentences in the first paragraph that explained

the effect of the provision. Pet. App. at App. 44, App. 46,

App. 54-App. 55.

Both agreements contained a detachable signature

card or page that was forwarded to Edward Jones’ home

office after Kloss signed the agreements. In 1992, Kloss

signed the card while it was still attached to the docu-

ment. In 1998, the signature page was detached by Ed-

ward Jones’ employee, Donna Federer, and handed to

Kloss for her signature. Both the 1992 and 1998 agree-

ments contained a bold-faced statement immediately

above the signature line notifying Kloss of the existence

and placement of the arbitration clause in the agreement,

and that by signing below the statement she acknowl-

edged receiving a copy of the agreement.’ In the 1992

" The 1992 notification and acknowledgment states in full: THE

FULL SERVICE ACCOUNT AND THE CUSTOMER LOAN

ACCOUNT AGREEMENTS CONTAIN A PRE-DISPUTE ARBI-

TRATION CLAUSE WHICH IS INCORPORATED BY REFER-

ENCE FROM THE GENERAL ACCOUNT PROVISIONS ON

PAGE TWO AT PARAGRAPH 12. BY MY SIGNATURE BELOW I

ACKNOWLEDGE THAT I HAVE RECEIVED A COPY OF THIS

DOCUMENT. Pet App. at App. 45, App. 56. The language found in the

1998 agreement is identical, except the phrase “which is incorpo-

rated by reference from the General Account provisions on

page two at paragraph 12” has been changed to read “that is

incorporated by reference from the general account provisions

on pages 1 and 2,” and the statement is printed in normal sentence

case. Pet. App. at App. 47.

agreement, the notification and acknowledgement state-

ment is located immediately above the perforated line that

allowed the signature card to be detached. In the 1998

agreement, the notification and acknowledgment state-

ment is located at the top of the signature page itself.

Procedural History

On December 28, 1998, Kloss filed suit in the Mon-

tana Eighth Judicial District Court, Cascade County,

alleging a number of causes of action arising out of the

establishment of a charitable remainder trust in May of

1998. On February 17, 1999, Edward Jones and Husted

filed a motion to stay proceedings and compel arbitration

pursuant to the arbitration provision contained in the

1992 full service agreement. After an evidentiary hearing,

the district court (Judge Johnson) stayed the proceedings

and ordered the parties to arbitrate. Pet. App. at App. 65.

Kloss appealed to the Supreme Court of Montana.

On January 9, 2001, the Montana Supreme Court

remanded the case to the district court for supplemental

findings of fact and conclusions of law after Edward Jones

located a microfiche copy of Kloss’ signature page or card

acknowledging receipt of the 1998 full service agreement.

Pet. App. at App. 40-App. 41. In the district court, Edward

Jones and Husted renewed their motion to compel arbitra-

tion based on both the 1992 and the 1998 full service

agreements, and after an evidentiary hearing, the district

court, now with Judge Macek presiding, once again or-

dered the parties to arbitrate. Pet App. at App. 51.

Kloss again appealed to the Supreme Court of Mon-

tana. Petitioners argued in their brief to the Supreme

Court of Montana that the FAA and the Montana Uniform

Arbitration Act required enforcement of the arbitration

provision at issue because general Montana contract law

presumes that a capable party who signs an agreement

has read the agreement and understands its terms. Resp.

Br. at 24-27. The petitioners directed the Court’s attention

to the public policy favoring enforcement of arbitration

agreements and to the consistent decisions by this Court

that arbitration agreements are valid and enforceable

waivers of legal rights subject only to the same defenses as

other contracts. Resp. Br. at 24, 27.

On June 13, 2002, the Montana Supreme Court

reversed the district court’s orders compelling arbitration.

Relying on the factual findings of the district court, the

Montana Supreme Court found the arbitration clause to be

an adhesion contract provision outside of Kloss’ “reason-

able expectations” because she did not read the provision

and Husted did not explain it to her. Pet. App. at App. 14.

The Court also found a fiduciary relationship between

Husted and Kloss based on its interpretation of the “Liq-

uidation of Collateral or Account” clause in the Customer

Loan Agreement section of the full service agreement’ as

giving Husted discretionary trading authority in the account.

Pet. App. at App. 17-App. 18. The Court concluded that

* Kloss executed a master agreement entitled “Customer Account

Agreements for Full Service and Customer Loan Accounts” in 1992 and

1998. The Liquidation Clause is a provision contained in the Customer

Loan Agreement within the master agreement that gives Edward Jones

discretion to liquidate a customer’s securities for its own -protection

when the customer has exceeded margin requirements. The Customer

Loan Agreement was a part of Kloss’ 1998 agreement, but not the 1992

‘agreement. However, no evidence suggests that Kloss ever actually

utilized the loan feature of her account. Pet. App. at App. 69-App. 71.

because of the fiduciary relationship, Husted “should have

explained the arbitration clause” to Kloss. Pet. App. at

App. 18. Although the Court couched its analysis in the

terms of adhesion contract and fiduciary duty law, the

Montana Supreme Court reached the same conclusion

based on the same flawed analysis violative of the FAA —

solely because an arbitration provision was at issue, the

provision would not be enforced because Husted did not

orally explain the consequences of the agreement to

arbitrate.

The Court’s requirement that one party to a contract

explain the consequences of an arbitration provision to the.

other party marked a change in the law of adhesion

contract and fiduciary duty law of Montana. Edward Jones

and Husted filed a timely petition for rehearing pursuant

to Rule 34 of the Montana Rules of Appellate Procedure.’®

The petitioners argued that the test outlined by the

Montana Supreme Court for the enforceability of arbitra-

tion provisions is contrary to, and therefore pre-empted by,

the FAA. Pet. for Reh’g. at 14-15. Citing this Court’s

decision in Doctor’s Associates, 517 U.S. at 687, the peti-

tioners argued that the Court’s analysis directly conflicts

with the FAA because it creates a test for the enforcement

of arbitration agreements that does not apply to contracts

generally. Id.

* Montana Rules of Appellate Procedure, Rule 34 states in relevant

part: “A petition for rehearing may be presented upon the following

grounds and none other: That some fact, material to the decision, or

some question decisive of the case submitted by counsel, was overlooked

by the court, or that the decision is in conflict with an express statute or

controlling decision to which the attention of the court was not directed.”

M.R.App.P. 34 (emphasis added).

The Montana Supreme Court granted in part and

denied in part the petition for rehearing. In granting the

petition in part, the Court struck the year “1992” from

paragraph 36 of the original opinion and substituted the

year “1998.” Pet. App. at App. 67-App. 68. The Court failed

to address any of the other issues raised by the petitioners,

including the contention that the Court’s opinion is in

direct conflict with the FAA and this Court’s precedent.

REASONS FOR GRANTING

THE PETITION

The Montana Supreme Court has placed arbitration

agreements on unequal footing with other contracts by

creating an oral notice requirement applicable only to

arbitration agreements. This Court has previously stated,

but not explicitly held, that courts may not rely on the

unique qualities of arbitration agreements to invalidate

such agreements under state common law “for this would

enable the court to effect what ... the state legislature

cannot.” Doctor’s Assoc., 517 U.S. at 687 n.3; accord Perry,

482 U.S. at 492 n.9. Clearly, statutory notice requirements

not applicable to contracts generally conflict with and are

pre-empted by the FAA. Doctor’s Assoc., 517 U.S. at 687.

The decision below squarely presents the issue of whether

a court, under the FAA, may refuse to enforce the terms of

the parties’ arbitration agreement based on a judicially

created oral notice requirement because the court is of the

opinion that the arbitration process is inferior to the court

system.

The decision below raises issues of national impor-

tance beceuse as this Court has foreclosed legislative

opportunities to hinder arbitration agreements, courts will

resort to applying their common law in a discriminatory

manner to continue their hostile treatment of arbitration

agreements. States have disguised this hostility in differ-

ent ways, but the issue remains the same: to what extent

may a court that is skeptical of the arbitration process rely

on public policy favoring access to judicial procedures to

strike down otherwise valid arbitration agreements.

Under the FAA, and established principles thereunder,

they cannot.

I. THE DECISION OF THE SUPREME COURT

OF MONTANA DIRECTLY CONFLICTS WITH

SECTION 2 OF THE FEDERAL ARBITRA-

TION ACT AND THIS COURT’S PRECEDENT

THEREUNDER.

This Court has repeatedly warned against

discriminatory treatment of arbitration agreements.

Doctor’s Assoc., 517 U.S. at 687 n.3; Allied-Bruce Terminix,

513 U.S. at 270; Perry, 482 U.S. at 492. Nevertheless, the

Montana Supreme Court has applied its common law in a

discriminatory manner in order to invalidate the

arbitration clause at issue in this case. The Montana

Supreme Court created a new standard and rule of law

solely applicable to arbitration provisions. This clearly

conflicts with the FAA and the long-established principles

thereunder. ;

The common law of Montana applicable to contracts

generally is clear. Montana law follows the general princi-

ple that an individual cannot avoid contractual obligations

based on ignorance of a contract term for failure to read

the contract unless the other party is guilty of some deceit

or false representation as to its contents. Brown v. Merrill

Lynch, Pierce, Fenner & Smith, Inc., 640 P.2d 453, 459-60

(Mont. 1982) (applying the general principle to enforce a

liquidation of collateral clause in a margin agreement

between a customer and securities broker-dealer). The fact

that the contract is an adhesion contract does not alter

this general rule because under Montana law, the terms of

an adhesion contract are enforceable unless such provi-

sions are not within the objectively reasonable expecta-

tions of the weaker party. Shook v. State Farm Mut. Ins.

Co., 872 F. Supp. 768, 773 (D.Mont. 1994); Counterpoint,

Inc. v. Essex Ins. Co., 967 P.2d 393, 395 (Mont. 1998);

Wellcome v. Home Ins. Co., 849 P.2d 190, 193 (Mont. 1993);

Transamerica Ins. Co. v. Royle, 656 P.2d 820, 824 (Mont.

1983); McAlear v. St. Paul Ins. Co., 493 P.2d 331, 335

(Mont. 1972). Where the written terms of an adhesion

contract are not ambiguous, however, the doctrine of

reasonable expectations does not apply, and the contract

terms are enforced as written. Counterpoint, 967 P.2d at

395-96; Stutzman, 945 P.2d at 36; Wellcome, 849 P.2d at

194. Furthermore, the “reasonable expectations” standard,

when applicable, is an objective one, and an expectation

that is contrary to the unambiguous language of a contract

term is not objectively reasonable. Shook, 872 F.Supp. at

775; Counterpoint, 967 P.2d at 396; Wellcome, 849 P.2d at

194; Transamerica Ins. Co., 656 P.2d at 824.

The Montana Supreme Court below failed to apply

these principles to the arbitration clause at issue. Instead,

the Court created new rules because it was evaluating an

arbitration clause and found the arbitration agreement

unenforceable based on a subjective analysis of Kloss’

actual expectations. Because Kloss did not read the con-

tract (although she had the opportunity to do so) and

Husted did not explain the arbitration provision to her, the

Court concluded that the arbitration provision was not

within Kloss’ “reasonable expectations.” The Court failed

to consider, as it would in other contractual contexts,

whether any ambiguity existed in the language of the

arbitration clause to determine whether the doctrine of

reasonable expectations even applied. If the Court had

analyzed the language of the arbitration clause, it would

have found five numbered paragraphs printed entirely in

bold-face type explaining the effect of the arbitration

clause in clear and unambiguous language.‘ In addition,

the Court made no mention of the general principle that,

absent fraud or misrepresentation, a party executing a

contract is presumed to have read the agreement and

understand its terms. On the contrary, the Court focused

on the finding that Husted did not explain the arbitration

provision to Kloss. In effect, the Court shifted the burden

of ensuring knowledge and comprehension of the arbitra-

tion provision to the proponent of the agreement, i.e., the

proponent must orally explain the consequences of the

arbitration agreement to ensure enforcement.

The sole reason the Montana Supreme Court found

the provision at issue to be outside of Kloss’ reasonable

expectations is because the Court was evaluating an

arbitration provision. Based on the language of the opin-

ion, it is clear that the Montana Supreme Court relied on

the unique qualities of arbitration agreements in reaching

its conclusion that the arbitration provision was not

* The five numbered sentences contain the exact language of Rule

IM-3110 of the NASD Conduct Rules, which requires members to

include the identical five numbered sentences immediately preceding

any pre-dispute arbitration clause in a customer account agreement.

IM-3110(f), NASD Conduct Rules, NASD Manual (CCH) at 4892-93

(2001). |

mre iia on

within Kloss’ reasonable expectations and therefore, |

unenforceable. The Court explained that:

the District Court’s findings clearly establish |

that the arbitration provision by which Kloss |

waived her right of access to this State’s courts,

her right to a jury trial, her right to reasonable

discovery, her right to findings of fact based on

the evidence, and her right to enforce the law |

applicable to her case by way of appeal were

clearly not within Kloss’ reasonable expectations.

Pet. App. at App. 14 (emphasis added).

The Court again explained the rights waived by Kloss

through the arbitration provision three sentences later:

However, [Husted] did not explain the arbitra-

tion provision (a provision by which Kloss waived

at least two constitutional rights, i.e., a right of

access to the courts pursuant to Article II, Sec-

tion 16, and her right to a jury trial pursuant to

Article II, Section 26 of the Montana Constitu-

tion) to Kloss. Pet. App. at App. 14.

There can be no doubt that the Court found the arbitration

provision outside Kloss’ reasonable expectations solely

because the provision at issue was an arbitration clause

which necessitated a waiver of the right to procedures

available in the court system. Furthermore, admitting

that it need not reach the issue of unconscionability, the

Court nevertheless recites an eight-factor unconscionabil-

ity test for future application to arbitration agreements.’

* The Court instructs future litigants that the following eight

factual issues should be developed in a proper record for determining

unconscionability:

(Continued on following page)

Although not applicable to the instant case, the factors

clearly evidence the Court’s rationale in creating the new

oral notice requirement for arbitration agreements. The

concurring opinion of Justice Nelson, which was joined by

all four justices of the majority, also demonstrates that the

majority's analysis finds its support based on the fact that

the clause at issue precluded Kloss from resolving her

dispute in a Montana court. Pet. App. at App. 22-App. 37.

Montana’s history of antagonistic treatment of arbi-

tration agreements is also enlightening. Montana was one

of the last states to adopt the Uniform Arbitration Act, and

it did so only after this Court’s decision in Southland. See

Montana Senate Judiciary Comm. minutes at 6 (Jan. 21,

1985). Montana’s hostility towards arbitration was also

evident in the Doctor’s Associates case previously before

1. Are potential arbitrators disproportionately employed in one or

the other party’s field of business?

2. Do arbitrators tend to favor “repeat players” as opposed to

workers or consumers who are unlikely to be involved in arbi-

tration again? In other words, is there a tendency by arbitrators

to avoid decisions which will result in the loss of future con-

tracts for their services?

3. What are the filing fees for arbitration compared to the filing

fees in Montana’s district courts?

4. What are the arbitrators’ fees? Do they make small claims

prohibitive? Do they discriminate against consumers or workers

of modest means?

5. Are arbitration proceedings shrouded in secrecy so as to conceal

illegal, oppressive or wrongful business practices?

6. To what extent are arbitrators bound by the law?

To what extent are arbitrators bound by the facts?

8. What opportunity do claimants have to discover the facts

necessary to prove a claim such as a company’s business prac-

tices? Pet. App. at App. 15-App. 16.

this Court. When the petition for certiorari in that case

first came before this Court, it was granted, vacated and

remanded to the Montana Supreme Court for reconsidera-

tion in light of this Court’s intervening decision in Allied-

Bruce Terminix Co., 513 U.S. at 281. See Doctor’s Assoc.,

515 U.S. 1129. On remand, the Montana Supreme Court

refused to allow the parties to brief the Terminix decision

or hold oral argument and concluded that nothing in the

Terminix decision related to the case. Id. at 686. After this

Court reversed the Montana Supreme Court for the second

time, two Montana Supreme Court justices dissented from

the Montana Supreme Court’s order remanding the case to

the district court stating “We cannot in good conscience be

an instrument of a policy which is as legally unfounded,

socially detrimental and philosophically misguided as the

United States Supreme Court’s decision in this and other

cases which interpret and apply the Federal Arbitration

Act.” Casarotto v. Lombardi, No. 93-488, slip op. at 3

(Mont. 1996).

Although couched in different language, the Court’s

fiduciary duty analysis suffers from the same fundamental

flaw as its adhesion contract analysis. Ostensibly applying

the law of fiduciary duty, the Court again relied on the

unique attributes of arbitration agreements to create new

rights and obligations pertaining to arbitration agree-

ments. In forming the duty to “explain the consequences of

the arbitration provision,” the Montana Supreme Court

again relied on the fact that Kloss waived her state consti-

tutional rights to a jury trial and access to Montana courts

through the arbitration clause concluding that “[ijn light

of the substantial fiduciary obligations owed to his client,

Husted should have explained the arbitration clause, a

clause which effectively waived the constitutional rights of

a 95 year old widow... .” Pet. App. at App. 18.

The length to which the Montana Supreme Court was

willing to go in order to strike down the arbitration clause

is apparent from its reliance on the Liquidation Clause to

find the discretionary authority necessary to establish a

fiduciary relationship.’ The Liquidation Clause describes

the rights and obligations granted to a broker by Section 7

of the Securities Exchange Act of 1934, 15 U.S.C. § 78g,

and <egulation T, 12 C.F.R. § 220.1 et seg. (2001), which

were enacted to prevent the excessive use of margin

(credit) to buy and hold securities. 15-U.S.C. § 78g; 12

C.F.R. § 220.1. A broker must liquidate an appropriate

amount of securities when a customer fails to satisfy a

margin deficiency within the appropriate time period. 12

C.F.R. § 220.4(d) (2001). Regulation T also expressly

authorizes a firm that extends credit to a customer to

impose additional requirements or take action for its own

protection. 12 C.F.R. § 220.1(b)(2Z) (2001). Clearly, these

federal regulations were not intended to expand the scope

of a broker’s fiduciary duties under state law.

The Montana Supreme Court recognized just that in

Brown, 640 P.2d at 459-60, when the Court evaluated a

contract provision virtually indistinguishable from the

Liquidation Clause in the account agreement between

* The Liquidation Clause in Kloss’ agreement with Edward Jones

states in pertine »t part, “You may sell any or all property held in any of

my accounts and cancel any open orders for the purchase or sale of any

property without notice, in the event of my death or whenever in your

discretion you consider it necessary for your protection.” Pet. App. at

App. 17.

Kloss and Edward Jones. In Brown, the customer held a

margin account and, in connection with the opening of the

account, signed an agreement containing a contractual

provision that, similar to the Liquidation Clause in the

instant case, gave the brokerage firm discretion to liqui-

date the customer’s securities for its own protection.’ Id.

The brokerage firm in Brown even acted on that discretion

in liquidating the customer’s securities to cover a margin

call. Id.

The customer in Brown argued that because he was

unaware of the contract provision (because he did not read

the contract), the brokerage firm should be held liable for

liquidating his securities because the firm did not bring

the contract provision specifically to his attention. Jd. The

Supreme Court of Montana emphatically disagreed, and

rather than holding that the brokerage firm had an

obligation to specifically point out the contract provision to

the customer, it relied on the general rule that a customer

cannot avoid his contractual obligations for failure to read

the contract absent fraud or misrepresentation on the part

of the broker. Jd. Ironically, in the decision below the

Montana Supreme Court used the Liquidation Clause,

which a broker does not have a duty to orally explain

" The clause at issue in Brown states in relevant part: “Merrill

Lynch shall have the right, whenever in our discretion we consider it

necessary for our protection ... to see (sic) any or all securities and

commodities in your account(s) with us (either individually or jointly

with others) . . . and to close any and all outstanding contracts ... and

it being further understood that you shall at all times be liable for the

payment of any debit balance owing in your account(s) with us upon

demand and that you shall be liable for any deficiency remaining in any

such account(s) in the event of the liquidation thereof in whole or in

part by us or by you.” Brown, 640 P.2d at 459.

under Brown, to find the fiduciary relationship that

allowed it to impose a duty to orally explain arbitration

agreements. In ostensibly applying the law of fiduciary

duty, the Montana Supreme Court has in reality created

unique requirements for arbitration agreements that do

not apply to contracts generally. The oral notice require-

ment imposed, which is applicable only to arbitration

agreements, runs afoul of the FAA by placing arbitration

agreements on unequal footing with other contracts.

This rationale is consistent with a recent decision of

the Supreme Court of Alabama which held that it would

violate the FAA to apply principles of law not applicable

under general contract law as a basis to strike down an

arbitration clause. Ex parte McNaughton, 728 So. 2d 592,

598-99 (Ala. 1998). The court rejected dicta from the case

of Northcom, Ltd. v. James, 694 So. 2d 1829, 1338 (Ala.

1997), that suggested arbitration agreements could be

found unenforceable under a combination of the common

law doctrines of unconscionability and mutuality of rem-

edy. McNaughton, 728 So.2d at 597. The Alabama Supreme

Court held that the doctrine of unconscionability/mutuality

of remedy directly conflicted with the FAA because it intro-

duced a “novel, if not revolutionary” doctrine of common law

that directly depended on arbitration for its application.

Id. at 598. (quoting Goodwin v. Ford Motor Credit Co., 970

F. Supp. 1007, 1014 (M. D. Ala. 1997)). The Court rejected

the argument suggested in the Northcom opinion that the

doctrine could apply equally in the non-arbitration context

because the Northcom opinion relied on the uniqueness of

arbitration agreements to support the doctrine: “The

element of unconscionability in the context of an arbitra-

tion clause is supplied by the fact that, by agreeing to

arbitrate, a party waives his right to a remedy by due

process of law .. . and his right of trial by jury.” McNaugh-

ton, 728 So.2d at 598 (quoting Northcom, 694 So. 2d at

1338-39.) “At bottom, this approach assigns a suspect

status to arbitration agreements. Doing so flies in the fact

of Doctor’s Assoc., 517 U.S. at 687, where the Supreme

Court of the United States explicitly stated that ‘courts

may not... invalidate arbitration agreements under state

laws applicable only to arbitration provisions.’” McNaugh-

ton, 728 So.2d at 598-99.

Clearly, the Montana Supreme Court’s view of arbitra-

tion and its concern that Kloss gave up the procedural

protections provided in court controlled its application of

state law. However, this is the very essence of arbitration

agreements — the parties agree to “trade[ ] the procedures

and opportunity for review of the courtroom for the sim-

plicity, informality, and expedition of arbitration.” Mitsubi-

shi, 473 U.S. at 628. The Montana Supreme Court relied

on the uniqueness of arbitration agreements to fashion

special standards of enforcement, which directly conflicts

with this Court’s pronouncements in Perry, 482 U.S. at

492 n.9, and Doctor’s Associates, 517 U.S. at 687 n.3.

II. THIS CASE PROVIDES THE APPROPRIATE

VEHICLE TO ADDRESS THE ISSUE RAISED

BUT NOT DIRECTLY DECIDED IN PERRY V.

THOMAS AND DOCTOR’S ASSOCIATES V.

CASAROTTO.

This case presents an issue previously addressed only

in the margins by this Court: to what extent may courts

utilize principles of state common law to invalidate arbi-

tration agreements. In Perry, 482 U.S. at 492, this Court

held that a California labor statute giving employees the

right to pursue an action to collect wages in court was

preempted by the FAA in cases where an employment

contract required arbitration of all disputes related to

termination of employment. This Court declined to reach

the alternative contention by the respondent that the

arbitration agreement was an unconscionable, unenforce-

able contract of adhesion because, although the respon-

dent raised the issue in both the California Court of

Appeals and this Court, the California Court of Appeals

based its decision sulely on the labor statute. Jd. While the

Court did not have the opportunity to specifically decide

the issue of whether courts can deny arbitration through

state common law principles, this Court did provide

guidance noting that state-law defenses would apply to

revoke an arbitration agreement only “if [the] law arose to

govern issues concerning the validity, revocability, and

enforceability of contracts generally.” Id. (emphasis origi-

nal) This Court explained:

A state-law principle that takes its meaning pre-

cisely from the fact that a contract to arbitrate is

at issue does not comport with this requirement

of § 2. A court may not, then, in assessing the

rights of litigants to enforce an arbitration

agreement, construe that agreement in a manner

different from that in which it otherwise con-

strues nonarbitration agreements under state

law.

Id. (internal cites omitted).

In Doctor’s Associates, 517 U.S. at 687 n.3, counsel

for Casarotto contended that “Montana could have

invalidated the arbitration clause in the franchise

agreement under general, informed consent principles

. .. a8 [uJnexpected provisions in adhesion contracts must

be conspicuous” under Montana law. This Court declined

to address the claim because the Montana Supreme Court

had relied upon a specific statutory notice provision,

rather than common law principles, to invalidate the

arbitration agreement. Jd. Nevertheless, this Court

warned that “i]t bears reiteration [] that a court may not

‘rely on the uniqueness of an agreement to arbitrate as a

basis for a state-law holding that enforcement would be

unconscionable, for this would enable the court to effect

what ... the state legislature cannot.’” Id. (quoting Perry,

482 USS. at 492 n.9).

Other courts have likewise noted, without holding,

that states may not burden arbitration agreements with

requirements not found in general state contract law. See

Sec. Indus. Assoc. v. Connolly, 883 F.2d 1114, 1121 (1st Cir.

1989) (“[Under the FAA, courts] may not say (judicially,

legislatively, or in a regulatory mode) that adhesion

contracts are especially bad when arbitration is included,

so we will therefore ban, or place gyves and shackles upon,

only those adhesive contracts which contain arbitration

clauses.”); Saturn Dist. Corp. v. Williams, 905 F.2d 719,

722 (4th Cir. 1990) (“Because it has no general contract

law restricting nonnegotiable provisions in standardized

contracts, Virginia may not bar automobile manufacturers

from. making arbitration provisions a nonnegotiable term

of doing business.”).

This case squarely raises the issue addressed only in

the margins in Perry and Doctor’s Associates. The Mon-

tana Supreme Court refused to enforce the parties’ arbi-

tration agreement and, using its common law, imposed the

requirement that Husted orally explain the arbitration

agreement to Kloss as a condition to enforcement. No

statutes directed to arbitration agreements were involved;

the court solely relies on, or rather creates, common law

principles to effectuate its purpose of defeating the arbi-

tration agreement. Thus, this case squarely presents the

issue that previously has been addressed only in footnotes:

whether the FAA preempts state court decisions that apply

common law contract defenses differently to arbitration

agreements based on the unique qualities of arbitration

agreements.

Ill. THE DECISION BY THE SUPREME COURT

OF MONTANA RAISES ISSUES OF NA-

TIONAL IMPORTANCE.

The decision below has national importance because

standardized arbitration agreements have become com-

mon in today’s business and consumer relationships.

Stephen J. Ware, Arbitration and Unconscionability After

Doctor’s Associates, Inc. v. Casarotto, 31 Wake Forest L.

Rev. 1001, 1002 (1996). Arbitration clauses are routinely

found in standard form agreements relating to subjects

ranging from employment to medical care to financial

institutions to pest control. Circuit City Stores, Inc. v.

Adams, 532 U.S. 105 (2001) (employment contract); Green

Tree Fin. Corp. v. Randolph, 531 U.S. 79 (2000) (agree-

ment between consumer and financing company); Doctor’s

Assoc., 517 U.S. at 681 (franchise agreement); Allied-Bruce

Terminix, 513 U.S. at 270 (contract between pest control

company and customer); David L. Threlkeld & Co. v.

Metallgesellschaft Ltd., 923 F.2d 245 (2d Cir.), cert. dis-

missed, 50 U.S. 1267 (1991) (contract between member of

foreign commodities exchange and American trader); State

ex rel Paine Webber, Inc. v. Voorhees, 891 S.W.2d 126, 130

(Mo. banc 1995); (securities contract between broker and

customer); Buraczynski v. Eyring, 919 S.W.2d 314 (Tenn.

1996) (contract between doctor and patient).

In the securities industry alone, arbitration plays a

major role in the resolution of customer disputes. In 2000,

there were 5,579 member firms in the NASD, NASD

Statistics at http://www.nasdr.com/2380.asp (last updated

01/09/03), and 1,424 members in the New York Stock Ex-

change. NYSE 2000 Fact Book, available at http://www.nyse.

com/pdfs/ 08_ EXCHANGE COMMUNITY.pdf (last visited

12/30/02). The dispute resolution arms of these two self-

regulatory organizations received the bulk of all securities

arbitrations filed in 2000. Out of 6,156 securities arbitra-

tion cases filed in 2000 with self-regulatory organizations,

5,558 were filed with the NASD and 553 were filed with

the NYSE. Eleventh Report, Securities Industry Confer-

ence on Arbitration, at 106-126, July 2001, available

at http://www.nyse.com/pdfs/SICA2001.pdf (last visited

12/30/02). Of the cases decided, 1,512 involved public cus-

tomers and 789, or 52 percent, of the cases resulted in an

award for the customer. Jd.

The Montana Supreme Court’s decision below raises

other issues of national importance. By relying on the

Liquidation Clause defining the broker’s rights and

obligations under Regulation T to find discretionary

authority, the Court renders all margin accounts “discre-

tionary.” Under the Montana Supreme Court’s reasoning,

brokers now owe a duty to explain arbitration agreements

to every customer who has a margin loan agreement with

their brokerage firm. This is true regardless of whether

the customer looks to the broker to utilize discretion to

manage the account because by federal regulation, every

broker has discretion to liquidate the customer’s securities

in a margin account for its own protection.

The opinion below exemplifies continuing judicial

hostility in the highest courts of many states towards pre-

dispute arbitration clauses. If allowed to stand, the deci-

sion will be a formidable obstacle to the federal policy of

ensuring that arbitration agreements are placed on the

same footing as other contracts. As this Court has fore-

closed legislative avenues, state courts must resort to

distortion of the common law to avoid enforcing otherwise

valid arbitration agreements. See e.g. Broemmer v. Abor-

tion Services of Phoenix, Ltd., 840 P.2d 1013 (Ariz. 1992)

(refusing to enforce an arbitration agreement between

doctor and patient because the arbitration provision was

contained within an adhesion contract and the doctor

failed to explain the provision or bring it to the patient’s

attention). As state courts stretch to find grounds for

invalidating arbitration agreements, the amount of litiga-

tion of the arbitrability issue increases exponentially,

virtually eviscerating the very benefits of pre-dispute

arbitration agreements. Arbitration was meant to benefit

both consumers and businesses alike by providing a cost-

effective alternative to the courts. See Allied-Bruce Ter-

mininx, 513 U.S. at 280. If allowed to stand, the decision

directly conflicts with Congress’ intention to equalize

enforcement of arbitration agreements and contracts

generally and elevates the potential for costly litigation

antithetical to the certainty pre-dispute arbitration

agreements were meant to produce.

IV. At Minimum, this Petition Should Be Held

Pending the Court’s Decision in Green Tree

Financial Corp. v. Bazzle.

The issue presented in this case is directly related to

the issue raised in Green Tree Financial Corp. v. Bazzle,

No. 02-634 (granted January 10, 2003): whether, under the

FAA, courts may exercise discretion to require class

arbitration in order to serve the interests of efficiency and

equity when an arbitration agreement is silent on the

issue. Pet. for Cert. at 23-26, Bazzle, No. 02-634 (filed

October 23, 2002). The lower court in Bazzle held that

“class-action procedures may be imposed [on arbitration

agreements], in the court’s discretion, if they further the

court’s notions of judicial efficiency and equity.” Pet. for

Cert. at 13, Bazzle, No. 02-634. However, the majority

position on this issue holds that courts may not, under the

FAA, impose class action procedures on a “silent” arbitra-

tion agreement because to do so would require a court to

substitute its own notions of fairness in place of the

explicit terms of the parties’ agreement. Pet. for Cert. at

16, Bazzle, No. 02-634 (internal cites omitted).

In resolving the conflict presented in Bazzle, this

Court will likely address a court’s power, or lack thereof, to

refuse enforcement of an arbitration agreement according

to its terms if the court is of the opinion that efficiency and

fairness so requires. In Bazzle, the lower court substituted

its own notions of efficiency and fairness in imposing class

action procedures on the parties’ agreement regardless of

the contractual intent of the parties. In the instant case,

the Montana Supreme Court substituted its own notions of

fairness in protecting Kloss’ state constitutional rights to

trial by jury and access to the courts at the expense of the

parties’ arbitration agreement. This Court’s determination

of a court’s power to substitute its own notions of fairness

for the parties’ contractual intent will have a direct impact

on this case. If this Court reverses Bazzle, its rationale will

certainly require reversal of the decision below by the

Montana Supreme Court. Thus, if this Court is not inclined

to grant the current petition based on the reasons set forth

in the preceding sections, at minimum this Court should

hold this petition until the resolution of Bazzle. Such

course would be consistent with this Court’s practice of

holding a petition when a case already set for argument

will likely address issues that are relevant to the pending

petition. See Stern, Gressman, Shapiro & Geller, Supreme

Court Practice 192-93 (7th ed. 1993). Therefore, if the

Court does not find a need to fully review the decision

below, it should at least hold this petition until the resolu-

tion of Bazzle.

CONCLUSION

The petition for writ of certiorari should be granted.

Respectfully submitted,

LISA A. NIELSEN*

SANDRA B. GALLINI

GREENSFELDER, HEMKER &

GALE, P.C.

2000 Equitable Building

10 South Broadway

St. Louis, MO 63102

(314) 241-9090

Dated: January 23, 2003 *Counsel of Record

App. 1

No. 00-507

IN THE SUPREME COURT OF THE

STATE OF MONTANA

2002 MT 129

ALICE P. KLOSS,

Plaintiff and Appellant,

EDWARD D. JONES & CO.,

a limited partnership, and

PAUL HUSTED,

Defendants and Respondents.

APPEAL FROM: District Court of the Eighth

Judicial District,

In and for the County of Cascade,

The Honorable Julie Macek,

Judge presiding.

COUNSEL OF RECORD:

For Appellant:

Joseph C. Engel, III, P.C., Attorney at Law,

Geat Falls, Montana

For Respondents:

Robert F. James, Ugrin, Alexander,

Zadick & Higgins, Great Falls, Montana

For Amicus (Montana Trial Lawyers Association):

Paul J. Petit, Petit and Schultz, PLLP,

Missoula, Montana

Submitted on Briefs: October 11, 2001

Decided: June 13, 2002

App. 2

Filed:

/s/ [Illegible

Clerk

Justice Terry N. Trieweiler delivered the Opinion of the

Court.

q 1 The Appellant, Alice P. Kloss, opened financial services

accounts with the Defendants, Edward D. Jones & Co. and

Paul Husted, in 1992 and 1998. The agreement between

Kloss and Jones contained pre-dispute arbitration clauses. i

After Kloss filed a complaint in the District Court for the ‘

Eighth Judicial District in Cascade County in which she

sought damages caused by Husted’s wrongful conduct,

Jones filed a Motion to Compel Arbitration. The District

Court granted the motion and Kloss appealed. While the

appeal was pending, Jones located Kloss’ 1998 brokerage |

agreement which was at issue in the District Court. This

Court remanded this matter to the District Court for :

supplemental findings of fact and conclusions of law based

on the 1998 account agreement. Following an evidentiary

hearing, the District Court granted Jones’ Motion to

Compel Arbitration. Kloss now appeals from the order

compelling arbitration. We reverse the order of the District

Court. :

q 2 Of the issues presented on appeal, we find the follow-

ing to be dispositive:

431. Did the District Court err when it concluded that

the arbitration clauses contained in the 1992 and 1998 ,

Full Service Agreements were enforceable? ;

q 4 2. Did the District Court err when it failed to con- ;

sider whether Defendants owed Kloss a fiduciary duty to

explain the arbitration agreement?

ee ee

App. 3

715 3. Did the District Court err when it denied Kloss’

motion for attorney’s fees and costs?

FACTUAL BACKGROUND

{ 6 The Appellant, Alice P. Kloss, is a 95 year old widow

who was referred to Defendant Paul Husted in 1985.

Husted has been employed by Defendant Edward D. Jones

& Co. in Great Falls, Montana, as a stockbroker since

1981. Kloss opened a full service brokerage account with

Jones on July 30, 1989, which permitted her to purchase

securities and maintain a money market account.

{ 7 Kloss established a living trust account with Jones in

April of 1992. Like the 1989 account, the living trust

account agreement contained a mandatory arbitration

provision which required that “[a]ny controversy arising

out of or relating to any of my accounts or transactions

with you, your officers, directors, agents and or/employees

. .. Shall be settled by arbitration. .. .”

{ 8 In early 1998, Kloss went to Husted’s office to discuss

investment options for a bond that had matured and

Husted informed her that she had quite a bit of money and

should set up a charitable trust with her bond proceeds.

Husted then arranged for Kloss to meet with an attorney,

who drafted the documents which created an irrevocable

charitable trust.

{ 9 On May 28, 1998, Kloss activated the charitable trust

account by executing a Customer Account Agreement for

Full Service and Customer Loan Accounts (hereinafter

1998 Agreement). The 1998 Agreement also contained a

pre-dispute arbitration clause but was not signed by Kloss.

Rather, Kloss signed a detachable signature card that

App. 4

acknowledged she received a copy of the 1998 Agreement

and incorporated the Agreement’s arbitration clause by

reference:

The Full Service Account and the Customer Loan

Account Agreements contain a pre-dispute arbi-

tration clause that is incorporated by reference

from the general account provisions on pages 1

and 2. By my signature below, I acknowledge

that I have received a copy of this document.

The agreements themselves included the following

explanations of rights waived by submission of disputes to

arbitration:

The 1992 “Customer Account Agreements for

Full Service and Customer Loan Accounts — Gen-

eral Account Provisions” contains a section as fol-

lows:

ARBITRATION

1. Arbitration is final and binding on the par-

ties. |

2. The parties are waiving their right to seek

remedies in court, including the right to jury

trial.

3. Pre-arbitration discovery is generally more

limited than and different from court proceed-

ings.

4. The arbitrators’ awards is not required to in-

clude factual findings or legal reasoning, and any

party’s right to appeal or to seek modification of

rulings by the arbitrators is strictly limited.

5. The panel of arbitrators will typically include

a minority of arbitrators who were or are affili-

ated with the securities industry. —

ED ea er er

App. 5

{1 10 After the charitable trust was executed, Husted

selected and sold assets from Kloss’ living trust to fund the

charitable trust. The assets sold for approximately

$352,000.00, which Husted deposited into a charitable

remainder trust in the name of Alice P. Kloss.

{ 11 In July 1998, Kloss began to have second thoughts

about the charitable trust. She contacted her nephew and

requested that he come to Montana, where she gave him

power of attorney and decided to revoke the charitable

trust. She then obtained counsel and filed a petition to

revoke the charitable trust. After a hearing, Judge Ken-

neth Neill granted her petition.

{ 12 Kloss then filed this complaint in the District Court

for the Eighth Judicial District in Cascade County on

December 28, 1998. Kloss alleged that Jones violated

Montana statutes regarding the sale of securities, was

negligent, committed unfair and deceptive business

practices, breached its fiduciary obligations, and commit-

ted fraud. Kloss sought attorney fees, costs, expenses, and

taxes incurred from the creation and revocation of the

charitable trust. Jones filed a Motion to Compel Arbitra-

tion and Stay Proceedings on February 17, 1999. Eviden-

tiary hearings were held on October 27, 1999, and

February 1, 2000.

7 13 On June 12, 2000, the Honorable Marge Johnson

entered an Order granting Jones’ Motion to Compel

Arbitration and Stay Proceedings, in spite of her finding

that Kloss had not been provided with a copy of the 1992

Agreement. The 1998 Agreement was not discussed in

Judge Johnson’s decision.

7 14 On July 6, 2000, Kloss appealed to the Montana

Supreme Court and filed her initial brief. During the

App. 6

course of the appeal, however, Jones located the detached

signature card that acknowledged Kloss’ receipt of the

1998 Agreement. Jones requested that the appeal be

stayed so that the District Court could make supplemental

findings of fact and conclusions of law based on the 1998

Agreement rather than the 1992 Agreement which was the

subject of Judge Johnson’s Order.

q 15 On January 9, 2001, we remanded this case to the

District Court for supplemental findings of fact and

conclusions of law based on the 1998 Agreement. We

additionally remanded Kloss’ Motion for Attorney’s Fees

and Costs.

416 The District Court, the Honorable Julie Macek

presiding, held an evidentiary hearing on March 20, 2001.

On March 26, 2001, the District Court issued an order

which granted the Defendant’s Motion to Stay Proceedings

and Compel Arbitration. On May 7, 2001, the District

Court issued an order denying Kloss’ Motion for Attorney’s

Fees and Costs. Kloss now appeals from these orders. We

affirm in part and reverse in part the orders of the District

Court.

DISCUSSION

ISSUE 1

q 17 Did the District Court err when it concluded that the

arbitration clauses contained in the 1992 and 1998 Full

Service Agreements were enforceable?

418 Both district judges concluded, based on slightly

different reasoning, that the identical arbitration clauses

found in the 1992 and 1998 contracts were binding and

should be enforced. Before we can review the correctness

Le ORO Ween ISD Kees es TT, stamnestiee

Ae TA eR REM ERA Tae

espqrareenbbener ney rae

App. 7

of those conclusions, it is necessary to set forth the find-

ings made by each district judge. Those findings are not

challenged on appeal and are, therefore, assumed to be the

determinative facts on which our opinion is based. Judge

Johnson made the following relevant findings:

7. The Full Service Agreement was drafted by

Edward Jones, and printed on an Edward Jones

form. The document at issue is a form dated

12/91.

8. Clients do not have any input on the contents

of the agreement. It is presented to them as is for

their signature and they must sign the agree-

ment as is if they wish to open an account with

the Defendants.

9. While there are certainly other investment

brokers in Great Falls, no evidence was pre-

sented which would lead me to believe Mrs. Kloss

had any meaningful choice in accepting or reject-

ing an arbitration provision of such a contract or

that other stockbrokers offered contracts at that

time for similar accounts which did not contain

an arbitration provision. I have no reason to be-

lieve that was not a fairly standard practice at

that time, and that she had no meaningful choice

regarding acceptance of the agreement if she

wished to open an investment account, which is

what I do believe and find as a fact.

10. The arbitration provision is a unilateral

provision of the brokerage houses contained in a

contract presented to clients as is with no mean-

ingful opportunity to negotiate its presence in

the contract. ... It is reasonable to assume that

such contracts commonly contain such a provision

App. 8

today, regardless of the brokerage house with

which a client is dealing.

12. Mrs. Kloss liked and trusted Mr. Husted

and expected that he would explain to her any-

thing she needed to know that was significant.

13. She did have an opportunity to read the

agreement before she signed it, and was capable

of doing so, but did not do so, relying instead

upon Mr. Husted to advise her of the significant

features of the agreement.

14. Mr. Husted, in opening accounts, such as

that which Mrs. Kloss opened with him in 1992,

explains what he believes to be the significant

features from an investment perspective,... .

15. Mr. Husted did not consider the arbitration

provision to be a significant provision of the con-

tract.

17. He [Husted] does not routinely explain and

did not explain to Mrs. Kloss the arbitration pro-

vision of the contract.

18. She did not read and was not aware of the

arbitration provision of the contract.

q 19 Judge Macek made the following findings which are

relevant to our decision:

22. The Full Service Agreement [1998 Agree-

ment] was drafted by and printed on an Edward

D. Jones form.

23. Clients do not have input on the contents of

said form. If clients wish to open a full service

App. 9

account with Defendant they must sign the

agreement.

24. Kloss had the opportunity to read the terms

of the agreement before she signed it. Kloss did

not do so.

25. Husted’s normal procedure in opening ac-

counts, which he followed with Kloss, is to ex-

plain what he believes to be the significant

features of the account from an investment per-

spective,... .

26. Husted did not consider the arbitration pro-

vision to be a significant provision of the con-

tract.

28. Husted does not routinely explain the arbi-

tration provision to clients and did not explain it

to Kloss.

36. Edward D. Jones & Co. is engaged in inter-

state commerce.

{ 20 In spite of what she found to be the facts, Judge

Johnson concluded, based on our decision in Chor v. Piper,

Jaffray & Hopwood, Inc. (1993), 261 Mont. 143, 862 P.2d

26, that Jones had no obligation to explain to Kloss the

terms of its contract with her and that even if the contract

in question was a contract of adhesion, it was not unen-

forceable because it was not unconscionable based on the

criteria set forth in Iwen v. U.S. West Direct, 1999 MT 63,

293 Mont. 512, 977 P.2d 989. Judge Johnson did not draw

any conclusion or make any finding as to whether the

arbitration provision was within Kloss’ reasonable expec-

tations.

App. 10

q 21 Following her findings, J udge Macek concluded that

Jones had no duty to explain the terms of the contract

based on our decision in Chor and that Kless is presumed

to have read and understood the terms of the contract.

Judge Macek also concluded that the agreements in

question were not contracts of adhesion because Kloss

could have done business with other brokerage houses

(Macek made no finding to contradict Johnson’s finding

that the agreements at other brokerage houses would also

have included an arbitration provision) and, finally, Judge

Macek concluded that even if the agreements in question

were contracts of adhesion, they were not unenforceable

because they were within Kloss’ reasonable expectations

and were not unconscionable pursuant to our decision in

Iwen. Judge Macek concluded that the arbitration provi-

sions were within Kloss’ reasonable expectations because

they were included within the agreements.

q 22 On appeal, Kloss argues that the arbitration clause

was part of a contract of adhesion and that waiver of her

constitutional right to jury trial should not be presumed

from signing a contract of adhesion. Jones contends that

form contracts between securities brokers and their clients

are not contracts of adhesion, nor are the arbitration

clauses contained in such contracts unconscionable.

q 23 In Iwen, we were presented with the issue of whether

an arbitration provision in an advertiser’s yellow page

directory agreement was enforceable and barred the

advertiser’s direct action in district court. We concluded

first of all that a district court’s order compelling arbitra-

tion is subject to de novo review. Iwen, 4 17 (citing Zolezzi

v. Dean Witter Reynolds, Inc, (9th Cir. 1986), 789 F.2d

1447). We acknowledged that pursuant to the Federal

Arbitration Act, found at 9 U.S.C. §§ 1-16 (1998), arbitration

App. il

provisions found in contracts affecting interstate com-

merce are valid “save upon such grounds as exist at law or

in equity for the revocation of any contract.” See 9 U.S.C.

§ 2 (1998) and Iwen, 4 23. We also noted that while gener-

ally applicable contract law defenses may be used to set

aside arbitration agreements, states may not craft special

rules which only apply to arbitration provisions for the

purpose of defeating arbitration. Iwen, J 26. Finally, we

stated that a generaliy applicable contract law defense

arises in contracts of adhesion which will not be enforced

against the weaker party when it is: (1) not within the

reasonable expectations of said party, or (2) within the

reasonable expectations of the party, but, when considered

in its context, is unduly oppressive, unconscionable or

against public policy. Iwen, | 27. We ultimately concluded

that the arbitration provision at issue in Jwen was uncon-

scionable because it lacked mutuality. In other words, U.S.

West retained the right to proceed in district court while

Iwen was precluded from doing so.

{ 24 A contract of adhesion is a contract whose terms are

dictated by one contracting party to another who has no

voice in its formulation. Corbin on Contracts, § 1.4 at 13

(1993). The law pertaining to contracts of adhesion is not

merely an academic exercise in which we engage to resolve

contract disputes. It is a recognition of the reality that

contracts do not always reflect terms that were bargained

for at arms length. Instead, terms are sometimes dictated

by one party to another who has no bargaining power and

no realistic options. The law pertaining to contracts of

adhesion recognizes that in certain circumstances, tradi-

tional assumptions associated with contract law are un-

founded. However, determining that a contract is a contract

of adhesion is not the end of the inquiry in Montana. In

App. 12

Passage v. Prudential-Bache Securities, Inc. (1986), 223

Mont. 60, 727 P.2d 1298, we described contracts of adhe-

sion in the securities context and the circumstances under

which they are unenforceable.

Contracts of adhesion arise when a standardized

form of agreement, usually drafted by the party

having superior bargaining power, is presented

to a party, whose choice is either to accept or re-

ject the contract without the opportunity to nego-

tiate its terms. Here, the investor is faced with

an industry wide practice of including Arbitra-

tion Clauses in standardized brokerage con-

tracts. As the investor faces the possibility of

being excluded from the securities market unless

he accepts a contract with such an agreement to

arbitrate, such clauses come within the adhesion

doctrine. However, mere inequality in bargaining

power does not render a contract unenforceable,

nor are all standardized contracts unenforceable.

As a consequence of current commercial realities,

form forum clauses will control, absent a strong

showing it should be set aside. For such a con-

tract or clause to be void, it must fall within judi-

cially imposed limits of enforcement. It will not

be enforced against the weaker party when it is:

(1) not within the reasonable expectations of said

party or (2) within the reasonable expectations of

the party, but, when considered in its context, is

unduly oppressive, unconscionable, or against

public policy. [Citations omitted.]

Passage, 223 Mont. at 66, 727 P.2d at 1301-02 (quoting

Finkle and Ross v. A.G. Becker Paribas, Inc. (D.C.N-Y.

1985), 622 F.Supp. 1505, 1511-12).

4 25 We enforced the arbitration agreements in Passage

because there was no evidence that they were not within

App. 13

the parties’ reasonabie expectation nor was there evidence

that they were unconscionable.

{ 26 In Chor, we were again called on to decide whether

arbitration provisions in securities agreements were

contracts of adhesion and, if so, whether the arbitration

clause is unconscionable. We concluded that the arbitra-

tion agreement was not a contract of adhesion because the

consumer had testified that she had brokerage agreements

with other firms which did not require her to arbitrate

future disputes. We also held that the arbitration provi-

sion was clearly within Chor’s reasonable expectations

based on her own testimony that she understood her

obligation to arbitrate based on her review of the agree-

ment. Finally, we concluded that the broker in that case

had no obligation to explain the effect of the arbitration

clause because a fiduciary duty had not been established.

We held that:

In the absence of discretionary authority by a

stockbroker to buy and sell in a customer’s ac-

count, no fiduciary relationship is created in a

broker-customer relationship. Caravan Mobile

Home Sales v. Lehman Bros. Kuhn Loeb (9th Cir.

1985), 769 F.2d 561, 567.

Chor, 261 Mont. at 153, 862 P.2d at 32.

{1 27 We conclude that both Passage and Chor are distin-

guishable, based on their facts, from this case. First, based

on Judge Johnson’s findings which are neither appealed

nor contradicted by Judge Macek’s findings, Kloss’ agree-

ments with Jones are clearly contracts of adhesion. They

were standardized forms prepared by Jones and presented

to Kloss who had no opportunity to negotiate the terms of the

contracts if she chose to invest through Jones. Furthermore,

App. 14

the arbitration clause was found by Judge Johnson to be

an industry-wide practice. Kloss would have been excluded

from the securities market unless she accepted the agree-

ment to arbitrate.

q 28 Furthermore, unlike the facts in Passage and Chor,

the District Court’s findings clearly establish that the

arbitration provision by which Kloss waived her right of

access to this State’s courts, her right to a jury trial, her

right to reasonable discovery, her right to findings of fact

based on the evidence, and her right to enforce the law

applicable to her case by way of appeal were clearly not

within Kloss’ reasonable expectations. Kloss relied on

Husted to explain to her anything in the contract that was

significant. Husted, in fact, admitted that his normal

practice when opening accounts was to explain significant

features of the account to the investor. However, he did not

explain the arbitration provision (a provision by which

Kloss waived at least two constitutional rights, i.e., a right

of access to the courts pursuant to Article II, Section 16,

and her right to a jury trial pursuant to Article II, Section

26 of the Montana Constitution) to Kloss. Finally, based on

the routine practice between the parties, Kloss did not

read the contract and was not aware of the arbitration

provision in the contract.

q 29 Judge Macek’s conclusion that the arbitration provi-

sion was within Kloss’ reasonable expectation simply

because it was contained in the contract that she signed

would defeat the protections provided by principles of law

pertaining to contracts of adhesion. If the only question

was whether the written terms of a contract included the

challenged provision, reasonable expectations would never

become an issue. Contracts of adhesion would always be

enforced based on their plain language without regard to

App. 15

what the consumer knew or understood. However, that is

not the law pertaining to contracts of adhesion as previ-

ously set forth in our prior decisions which apply to any

contract.

{1 30 We have also been asked to conclude on appeal that

the arbitration provisions found in Kloss’ agreements with

Jones are unconscionable. However, having concluded that

the agreements were not within Jones’ reasonable expecta-

tions, we need not reach the issue of conscionability.

Furthermore, as a guide to future litigants who raise the

issue of conscionability in the context of arbitration provi-

sions, we take this opportunity to state that that issue

cannot be decided without a more fully developed record.

We have set forth the factors to be considered in Iwen,

however, a number of factual issues should be addressed

before those factors can be appropriately applied. For

example:

1. Are potential arbitrators disproportionately

employed in one or the other party’s field of busi-

ness?

2. Do arbitrators tend to favor “repeat players”

as opposed to workers or consumers who are

unlikely to be involved in arbitration again? In

other words, is there a tendency by arbitrators to

avoid decisions which will result in the loss of fu-

ture contracts for their services?

3. What are the filing fees for arbitration com-

pared to the filing fees in Montana’s district

courts?

4. What are arbitrators’ fees? Do they make

small claims prohibitive? Do they discriminate

against consumers or workers of modest means?

App. 16

5. Are arbitration proceedings shrouded in se-

crecy so as to conceal illegal, oppressive or

wrongful business practices?

6. To what extent are arbitrators bound by the

law?

7. To what extent are arbitrators bound by the

facts?

8. What opportunity do claimants have to dis-

cover the facts necessary to prove a claim such as

a company’s business practices?

4 31 These are all issues which we consider relevant to the

ultimate issue of whether an arbitration provision in a

contract of adhesion is oppressive or unconscionable.

Therefore, we would advise future claimants not to come

to this Court with claims of oppression or unconscionabil-

ity unless the record in regard to these issues has been

adequately developed.

4 32 For these reasons we conclude, based on generally

applicable contract law defenses, that the District Court

erred when it concluded that the arbitration clauses

contained in the 1992 and 1998 Full Service agreements

were enforceable.

ISSUE 2

4 33 Did the District Court err when it failed to consider

whether Defendants owed Kloss a fiduciary duty to ex-

plain the arbitration agreement?

q 34 Kloss contends that the District Court erred when it

found that the parties were dealing at arms length and

that the Defendants consequently had no obligation to

explain the arbitration provision. According to Kloss,

App. 17

Husted had a fiduciary relationship with Kloss because he

had the discretion to trade securities in her account. The

Defendants argue that Husted did not have the discretion

to trade in Kloss’ account and that Kloss misreads the

provision which she claims gave Husted discretionary

authority.

{35 Whether Kloss and Husted, as broker and client,

enjoyed a fiduciary relationship is highly fact intensive.

“The question is not whether there is a fiduciary duty,

which there is in every broker-customer relationship;

rather, it is the scope or extent of the fiduciary obligation,

which depends on the facts of the case.” Duffy v. Cavalier

(1989), 215 Cal. App. 3d 1517, 1535, 264 Cal.Rptr. 740,

752. In Chor, we held that although § 30-10-301(1), MCA,

may create an implied code of conduct for brokers, a

violation of which may constitute a breach of the duty the

broker owes to a client, that duty is not necessarily fiduci-

ary in nature. “In the absence of discretionary authority by

a stockbroker to buy and sell in a customer’s account, no

fiduciary relationship is created in a broker-customer

relationship.” Chor, 261 Mont. at 153, 862 P2d at 32.

Therefore, pursuant to our analysis in Chor, a fiduciary

relationship is created whenever a broker has discretion to

buy and sell in the client’s account.

{1 36 Here, Jones and Husted had discretion to buy and

sell securities in Kloss’ account pursuant to the 1998

Agreement. Specifically, the “Liquidation of Collateral or

Account” section of the Agreement states:

You may sell any or all property held in any of

my accounts and cancel any open orders for the

purchase or sale of any property without notice, in

the event of my death or whenever in your discre-

tion you consider it necessary for your protection.

App. 18

Furthermore, Kloss testified that Husted exercised that

discretion when he selected and sold securities from her

account to fund the newly created charitable trust without

consulting her regarding which securities to sell.

q 37 Therefore, based on the plain language of the Agree-

ment and Husted’s selection and sale of securities in Kloss’

account, we conclude that Kloss and Husted had a fiduci-

ary relationship. In the words of Chief Judge Cardozo of

the Court of Appeals of New York, a fiduciary duty is “the

duty of the finest loyalty” and encompasses “[njot honesty

alone, but the punctilio of an honor the most sensitive.”

Meinhard v. Salmon (1928), 249 N.Y. 458, 463-64, 164

N.E. 545, 546. In light of the substantial fiduciary obliga-

tions owed to his client, Husted should have explained the

arbitration clause, a clause which effectively waived the

constitutional rights of a 95 year old widow with no

bargaining power and a relative lack of sophistication in

such matters. However, as the District Court found,

Husted did not consider the arbitration provision to be a

significant provision of the contract and therefore did not

explain the arbitration provision to Kloss. The irony of the

Defendants’ position is not lost on this Court, as the

supposedly insignificant arbitration provision they now

seek to enforce to the detriment of Kloss’ constitutionally

protected rights of access to court and trial by jury is now

squarely at the center of this appeal.

q 38 We hold that Husted owed Kloss a fiduciary duty

which included explaining the consequences of the arbitra-

tion provision Jones now seeks to enforce. Accordingly, we

conclude that the District Court erred when it failed to

consider whether a fiduciary duty existed.

RE en emerson een nO RR

App. 19

ISSUE 3

4 39 Did the District Court err when it denied Kloss’

motion for attorney’s fees and costs?

q 40 Kloss contends that the District Court erred when it

denied the claim for the opportunity to conduct discovery

in an effort to prove that Kloss was entitled to attorney

fees based on Jones’ untimely disclosure of the detachable

signature card. That issue was remanded to the District

Court, which according to Kloss, should have made the

determination of whether she was entitled to attorney

fees.

q 41 Jones responds that the District Court did not err

when it denied discovery on the attorney fee issue after

reading the entire file, including prior transcripts and

court orders. Jones contends that the District Court had

the discretion to conclude that further evidence of the

issue of attorney fees was unnecessary.

q{ 42 Attorney fees and costs may be awarded when:

An attorney or party to any court proceeding

who, in the determination of the court, multiplies

the proceedings in any case unreasonably and

vexatiously may be required by the court to sat-

isfy personally the excess costs, expenses, and at-

torney fees reasonably incurred because of such

conduct.

§ 37-61-421, MCA.

{ 43 In its May 7, 2001, Order, the District Court found

that the Defendants did not unreasonably or vexatiously

multiply the proceedings. After reviewing the record, we

conclude that the District Court’s finding was not clearly

App. 20

erroneous. Consequently, we affirm the District Court's

order denying the motion for attorney fees and costs.

q 44 This case is remanded to the District Court for

further proceedings consistent with this opinion.

/s/ Terry Trieweiler

Justice

We Concur:

/s/ Patricia Cotter

/s/ James C. Nelson

/s/ W. William Leaphart

Justices

Justice W. William Leaphart specially concurring.

q 45 I concur in the decision of the Court. I write sepa-

rately to point out an additional fact that I find significant

in determining whether or not the waivers inherent in the

arbitration agreement were within Alice Kloss’s reason-

able expectations.

q 46 The Court notes that the 1998 Agreement contained a

pre-dispute arbitration clause which was not signed by

Kloss. Rather, Kloss signed a detachable signature card

that acknowledged she received a copy of the 1998 Agree-

ment and incorporated the Agreement’s arbitration clause

by reference. I would also add that the record indicates

that the detachable signature card was signed by Kloss

before she was ever provided a copy of the Agreement. The

branch office administrator, Donna Ferderer, testified that

she filled out the Jones account number, wrote Kloss’s

App. 21

social security number on the form, wrote the type of

registration of the account, and tore the detachable card

out of the brochure. Ferderer testified that, “I gave it to

Alice and told Alice I need her signature right here. And

for her to please indicate her capacity.” Ferderer then took

the form back, gave Kloss the disclosure statement,

advised her that “these are the terms and conditions of

opening up an Edward D. Jones account, keep these for

your records. We retain this copy for our home office.”

{1 47 Although the detachable signature card states that

the Agreement “contains a pre-dispute arbitration clause,”

it does not advise Kloss that in submitting to arbitration

she waives her right to access to the courts, her right to

jury trial, her right to reasonable discovery, her right to

findings of fact based on the evidence and her right to

enforce the law applicable to her case by way of appeal.

Unless, in advance of executing the signature card, Kloss

was advised of the fact that an agreement to arbitrate

effectively waived the above rights, it cannot be said that

such waivers were within her reasonable expectations

when she signed. Reasonable expectations are, by their

very nature, prospective; they are defined before one

enters into a contract, not after. Thus the terms and

conditions governing the account should have been pro-

vided to or explained to Kloss before having her execute

the signature card. Recognizing the routine practice

between the parties, the Court notes that Kloss did not

read the contract. However, even if she had read the

Agreement, it would not have made any difference since it

was not handed to her until after she signed the detach-

able card. '

/s/ W. William Leaphart

Justice

App. 22

Justice Jim Rice joins in the concurring opinion of

Justice Leaphart.

/s/ Jim Rice

Justice

Justice James C. Nelson specially concurs.

4 48 I concur in our Opinion. However, as mentioned

briefly at 7] 21, 27 and 36 of our Opinion and at 7 47 of

Justice Leaphart’s concurrence, there is an additional

rationale supporting our decision in this case — ie.,

whether Kloss effectively waived her rights to a trial by

jury and to access to the courts’ by executing Jones’s 1992

and 1998 standard-form contracts. As far as I can determine,

this is an issue of first impression in Montana.’ It is my

intention to develop this rationale further.

1 I have limited my analysis and discussion to these two constitu-

tional rights because these are the two raised in this case. In saying

that, I recognize, however, that other constitutional rights may be

implicated in these sorts of cases, including the right to due process of

law (Article II, Section 17, Montana Constitution) and equal protection

of the laws (Article II, Section 4, Montana Constitution). Moreover, as

our Opinion points out, arbitration results in the loss of certain

procedural rights such as the right to engage in discovery and the right

to have the admissibility of evidence judged under the Montana Rules

of Evidence. Additionally, the right to judicial review of arbitration

decisions is severely restricted — i.e. effectively there is no right of

appeal from these decisions.

2? Jones relies on Passage v. Prudential-Bache Sec., Inc. (1986), 223

Mont. 60, 727 P.2d 1298; Larsen v. Opie (1989), 237 Mont. 108, 771 P.2d

977; Kingston v. Ameritrade, Inc., 2000 MT 269, 302 Mont. 90, 12 P.3d

929; and Southland v. Keating (1984), 465 U.S. 1, 104 S.Ct. 852, 79

L.Ed.2d 1, in opposing Kloss’s waiver argument. As to this Court’s

(Continued on following page)

App. 23

{ 49 Certainly, any person has the right to enter into an

agreement which includes an arbitration clause. Where

the contract and the arbitration clause has been negoti-

ated at arm’s-length between parties of equivalent sophis-

tication and bargaining power, then there is no reason why

such parties cannot also agree to settle disputes arising

under the agreement, outside the judicial process. If these

sorts of parties determine that it serves their mutual

interests to waive their Montana constitutional rights of

jury trial and access to the courts, then they have the right

to do so.

{ 50 The contrary is also true. Where parties are not of

equivalent sophistication and bargaining power and where

the agreement and the arbitration clause have not been

negotiated for at arm’s-length, then it is appropriate —

indeed, imperative — that courts closely scrutinize any

process and any contract which results in one party

forfeiting basic constitutional guarantees to the advantage

of the other party. That brings me to the case at bar.

{ 51 As stated in our Opinion, the parties here were not of

equivalent sophistication and bargaining power. The

defendant, Jones, is one of this country’s large financial

corporations; Kloss is an elderly widow. Jones is in the

opinions, while we upheld the arbitration agreements at issue in those

cases on various grounds, we did not address the argument raised here

- i.e. whether the rights to trial by jury and access to the courts under

Article II, Section 26 and Article II, Section 16, may be forfeited by

contractual waiver that is other than voluntary, knowing and intelli-

gent. Similarly, the Supreme Court did not address the waiver of the

Seventh Amendment right to jury trial in Southland. In fact, the U.S.

Supreme Court has not addressed this argument in the context of any

arbitration case.

App. 24

business of selling securities and investment advice and

services nation-wide; Kloss is an ordinary citizen with no

apparent special expertise in the stock market. Kloss did

not negotiate at arm’s-length for the contracts at issue.

Rather, she was presented with typical, standard-form,

take-it-or-leave-it contracts of adhesion that, among other

boiler-plate provisions, included arbitration clauses. Kloss

did not read the agreements but relied upon Jones's agent,

Husted, to explain the significant terms of the agreements

to her, as he had in past dealings. Furthermore, as Justice

Leaphart points out (and setting aside the question of

whether Kloss would have understood the significance of

what she was agreeing to) even if she had desired to read

the contracts before signing, Jones’s execution procedures

insured that she would not have that opportunity.

q 52 With that background, I next turn to Article II of

Montana’s Constitution. The rights included within this

“Declaration of Rights” are “fundamental rights.” Butte

Community Union v. Lewis (1986), 219 Mont. 426, 430,

712 P.2d 1309, 1311. Accord, Wadsworth v. State (1996),

275 Mont. 287, 299, 911 P.2d 1165, 1172; State v. Tapson,

2001 MT 292, 9 15, 307 Mont. 428, 4 15, 41 P.3d 305, { 15.

That means that these rights are significant components

of liberty, see Black’s Law Dictionary, 7th Edition, p. 683,

any infringement of which will trigger the highest Jevel of

scrutiny, and, thus, the highest level of protection by the

courts. Wadsworth, 275 Mont. at 302, 911 P.2d at 1174

(citing Gulbrandson v. Carey (1995), 272 Mont. 494, 502,

901 P2d 573, 579 (“The most stringent standard, strict

scrutiny, is imposed when the action complained of inter-

feres with the exercise of a fundamental right .. .”)). Two

specific fundamental rights are implicated here. The first

involves the right to trial by jury.

App. 25

753 Article II, Section 26 of Montana’s Constitution

guarantees that “[t]he right of trial by jury is secured to all

and shall remain inviolate.” That this constitutionally

guaranteed right of a jury trial is “fundamental” and,

therefore, deserving of the highest level of court scrutiny

and protection is beyond argument. See, e.g., State v.

LaMere, 2000 MT 45, 298 Mont. 358, 2 P.3d 204 (requiring

procedural exactitude for impaneling jury); Woirhaye v.

Montana Fourth Judicial Dist. Court, 1998 MT 320, 292

Mont. 185, 972 P2d 800 (striking statute that limited

right to sequential jury trials as unconstitutional); State v.

Dahlin, 1998 MT 113, 289 Mont. 182, 961 P2d 1247

(requiring waiver of right to jury trial be evinced by

written consent of both parties filed with the court in

criminal proceedings); Hammer v. Justice Court of Lewis

and Clark County (1986), 222 Mont. 35, 720 P2d 281

(abolishing prepayment of fees for civil jury trial as ob-

structive).

7 54 As we observed in LaMere, the importance of the

right of trial by jury derives from it having “developed in

harmony with our basic concepts of a democratic society

and a representative government.” LaMere, ¥ 28 (citation

omitted). “Since the time of the Magna Carta, trial by jury

has been prized as a shield against oppression ... [and]

the approaches of arbitrary power.’” LaMere, ¥ 28 (citation

omitted). This entitlement has been “long thought to be a

safeguard against tyranny.” LaMere, 28. The right to

trial by jury is a “Jealously protected safeguard against

government oppression.” LaMere, 4 29. And, “[t]he guaran-

tees of jury trial in the Federal and State Constitutions

reflect a profound judgment about the way in which the

law should be enforced and justice administered.” LaMere,

App. 26

4 29 (citation omitted). Or, as Justice William Blackstone

stated over two centuries ago,

[This right] is a privilege of the highest and most

beneficial nature and our most important guard-

ian both of public and private liberty. Our liber-

ties cannot but subsist so long as this palladium

remains sacred and inviolate, not only from all

open attacks, but also from all secret machina-

tions which may sap and undermine it.

Commentaries on the Laws of England (1765), reprinted in

Volume 2 of In Defense of Trial by Jury at ii (J. Kendall

Few, American Jury Trial Foundation, 1993).

4 55 Given the sacredness and inviolability of the funda-

mental right to trial by jury, any contract provision that

openly or subtly causes the forfeiture of the exercise of this

right must be rigorously examined by the courts. This is

all the more necessary when such a contract provision is

included in a standard-form contract of adhesion foisted

upon unsophisticated and unsuspecting ordinary citizens

and small business people as part of the intercourse of

daily life. Indeed, the use of such contractual provisions is

at one and the same time an “open attack” on the right of

jury trial and a “secret machination” causing forfeiture of

that right that Blackstone predicted would “sap and

undermine” the right, and with that our “public and

private libert[ies].”

4 56 The second fundamental right at issue in the case at

bar is the right of access to the courts.

457 Article II, Section 16 of Montana’s Constitution

guarantees that “(cJourts of justice shall be open to every

person, and speedy remedy afforded for every injury of

person, property, or character.” In my view, this right is as

App. 27

much a fundamental right as is any other Article II right.

This is so not only because the right of access to the courts

is included within the Constitution’s Declaration of Rights,

but also, and just as importantly, without the right of

access to the courts, other Article II rights would have

little protection from infringement and, thus, little mean-

ing. See, Butte Community Union, 219 Mont. at 430, 712

P.2d at 1311-13; Wadsworth, 275 Mont. at 299, 911 P.2d at

1172.

{58 Constitutional rights that cannot be e»forced are

illusory. It is as if those rights cease to exisi a legal

rights. Montanans’ fundamental rights to a jury trial, to

due process and to equal protection, among others, are

rendered meaningless absent the courts being able to

enforce these rights. Purely and simply, access to the

courts guarantees that other Article II rights are some-

thing more than mere dreams and aspirations. Access to

the courts gives real existence to other fundamental

rights. And, that makes access to the courts a fundamental

right also, for without this right other rights have no

meaning.

7159 In this conclusion, I acknowledge that we have

explicitly and implicitly held to the contrary. See, Meech v.

Hillhaven West Inc. (1989), 238 Mont. 21, 776 P.2d 488;

Peterson v. Great Falls School District (1989), 237 Mont.

376, 773 P.2d 316; Miller v. Fallon County (1989), 240

Mont. 241, 783 P.2d 419; Bieber v. Broadwater County

(1988), 232 Mont. 487, 759 P.2d 145; Linder v. Smith

(1981), 193 Mont. 20, 629 P.2d 1187; Merchants Ass’n v.

Conger (1979), 185 Mont. 552, 606 P.2d 125. Notwithstand-

ing, I do not see how these decisions can be squared with,

much less continue to exist beside, this Court’s jurisprudence

holding that other Article II rights are fundamental rights.

App. 28

{60 This Court has stated repeatedly that a right is

fundamental under Montana’s Constitution if the right is

either found in the Declaration of Rights or is a right

without which other constitutionally guaranteed rights

would have little meaning. State v. Bird, 2001 MT 2, { 25,

308 Mont. 75, 7 25, 43 P.3d 266, 7 25 (right to be present

for all court proceedings); In re Mental Health of K.G.F,

2001 MT 140, 4 30, 306 Mont. 1, ¥ 30, 29 P.3d 485, 4 30

(right to effective assistance of counsel for involuntary

commitment proceedings); Armstrong v. State, 1999 MT

261, | 34, 296 Mont. 361, J 34, 989 P.2d 364, 9 34 (right to

privacy); and MEIC v. Dept. of Environmental Quality,

1999 MT 248, 7 56, 296 Mont. 207, 7 56, 988 P.2d 1236,

{ 56 (right to a clean and healthful environment); State v.

Clark, 1998 MT 221, 4 22, 290 Mont. 479, 9 22, 964 P2d

766, ¥ 22 (right to confront and examine accusers); State v.

Weaver, 1998 MT 167, ¥ 26, 290 Mont. 58, 9 26, 964 P.2d

713, ¥ 26 (right to a unanimous verdict); Wadsworth, 275

Mont. at 299, 911 P.2d at 1172 (right to pursue employ-

ment); Matter of C.H. (1984), 210 Mont. 184, 201, 683 P.2d

931, 940 (right to physical liberty). We could never have

enforced the fundamental rights litigated in these and in

other cases where fundamental rights were at issue had

access to the courts been denied in the first instance.

Indeed, without access to the courts, these other funda-

mental rights would have had no real existence; they

would have been merely aspirations without substance.

{ 61 The instant case and others we have considered —

Chor, 261 Mont. 143, 862 P.2d 26; Casarotto, 268 Mont.

369, 886 P.2d 931; Keystone, Inc. v. Triad Systems Corpora-

tion, 1998 MT 326, 292 Mont. 229, 971 P2d 1240; and

Iwen, 1999 MT 63, 293 Mont. 512, 977 P.2d 989 - likewise

demonstrate why the right of access to the courts must be

App. 29

protected as the fundamental constitutional right it is.

These cases point inescapably to the conclusion that, for

their own obvious economic benefit, large national and

multi-national corporations are effectively privatizing an

important segment of the civil justice system in this

country by including fine-print, non-negotiable, take-it-or-

leave-it, mandatory, binding arbitration clauses in their

standard-form contracts.*

* A cursory review of the literature will reveal not only the

substantial and growing support for my conclusion but also will provide

citations to a multitude of cases which detail the horror stories of

corporate abuse of ordinary citizens and small business people by way

of the inclusion of mandatory arbitration clauses in contracts of

adhesion. See, e.g., Jean R. Sternlight, Mandatory Binding Arbitration

and the Demise of the Seventh Amendment Right to a Jury Trial (2001),

16 Ohio St. J. on Disp. Resol. 669; Margaret M. Harding, The Redefini-

tion of Arbitration by Those with Superior Bargaining Power (1999),

1999 Utah L.Rev. 857; Katherine Van Wezel Stone, Rustic Justice:

Community and Coercion Under the Federal Arbitration Act, 77 N.C.

L.Rev. 931 (1999); Reginald Alleyne, Statutory Discrimination Claims:

Right “Waived” and Lost in the Arbitration Forum (1996), 13 Hofstra

Lab. L.J. 381, to name just a few.

That said, there is also little point railing against the present state

of the law “favoring” arbitration. See, Moses H. Cone Memorial Hosp. v.

Mercury Consi.Corp. (1983), 460 U.S. 1, 103 S.Ct. 927, 74 L.Ed.2d 765. I

will note, however, that arbitration, historically, was designed as a

method of alternative dispute resolution between merchants of equal

sophistication and bargaining power (see Jerold S. Auerbach, Justice

Without Law? 101-114 (1983); Ian R. MacNeil, American Arbitration

Law 15-25 (1992)); that during the deliberations leading up’ to the

passage of the Federal Arbitration Act (FAA), the proponents, drafters

and sponsors — Senator Walsh from Montana, among others -— were

extremely concerned that the inclusion of arbitration clauses in

adhesion contracts be voluntary because of the concomitant loss of the

right of jury trial and court access (see, the excellent discussion of this

point in Allstar Homes, Inc. v. Waters (1997, Ala.), 711 So.2d 924 (Cook,

J. concurring); and that, with due all [sic] deference to the Supreme

(Continued on following page)

App. 30

{62 These are the adhesion contracts that ordinary

citizens and small business people must accept if they

want to acquire what most would consider to be basic and

necessary services and products — household appliances,

residential leases, rental cars, pest extermination, banking

services, office and business equipment, phone service,

consumer product warranties, household and commercial

insurance, employment, credit cards, consumer and small

business financing and medical attention, for example.

Likewise, these are the adhesion contracts that, as in the

case sub judice, ordinary citizens and small business

people are compelled to sign if they want to participate in

the national/global economy, the profits of which fuel the

very existence and growth of these same national and

multi-national corporations (and the election and re-

election of their benefactors in government). Bankruptcy

Judge James S. Sledge, Jr. recently brought this point

home. He observed:

Ask any reasonable man on the street, i.e.[,] a

consumer, if he thinks it is fair that he is barred

from access to the courts when he has a claim

based on a form contract which contains an arbi-

tration clause and he will respond with a re-

sounding “No!” ... The reality that the average

consumer frequently loses his/her constitutional

rights and right of access to the court when

Court of the United States, Justices Thomas’s and Scalia’s criticism of

Southland and its progeny and their conclusion that these cases should

be overruled to the extent that they apply the FAA in state court

proceedings is dead right. See, Allied-Bruce Terminix Companies v.

Dobson (1995), 513 U.S. 265, 283, 115 S.Ct. 834, 844, 130 L.Ed.2d 753

(Scalia, J. and Thomas, J., dissenting).

App. 31

he/she buys a car, a household appliance, insur-

ance policy, receives medical attention or gets a

job rises as a putrid odor which is overwhelming

the body politic.

In re Knepp, 229 B.R. 821, 827 (Bankr. N.D. Ala. 1999).

{ 63 In short, without access to the courts, there is no way

to safeguard the other fundamental rights guaranteed by

Article II of Montana’s Constitution. Indeed, to the extent

that those rights cannot be protected by the courts, Mon-

tana’s Declaration of Rights is little more than a collection

of eloquent, but unenforceable, words. Access to the courts

is a fundamental right, and our cases that hold to the

contrary are wrong.

{64 That said, my objective here is not to provide an

analysis for challenging the reasoning of Meech, Linder

and their progeny. Rather, my point is that where funda-

mental constitutional rights are involved — here, the right

of a trial by jury and, in my opinion, access to the courts —

the law is eminently clear that the waiver of such rights

will not be lightly presumed. State v. Okland (1997), 283

Mont. 10, 15, 941 P.2d 431, 434 (presuming waiver of

counsel from a silent record is impermissible); State v.

Lucero (1968), 151 Mont. 531, 538, 445 P2d 731, 735

(stating courts indulge every reasonable presumption

against waiver of constitutional rights). A waiver of a

fundamental right must be proved to have been made

voluntarily, knowingly and intelligently — typically by the

party seeking the waiver. Bird, {{ 35-36; Tapson, { 25;

Lucero, 151 Mont. at 538, 445 P.2d at 735. For a funda-

mental right to be effectively waived, the individual must

be informed of the consequences before personally consent-

ing to the waiver. Dahlin, { 22; State v. Allison (1944), 116

Mont. 352, 360, 153 P.2d 141, 145. And, the waiver will be

App. 32

narrowly construed. State v. Tiedemann (1978), 178 Mont.

394, 402, 584 P.2d 1284, 1298.

{ 65 In applying these well-settled principles of law in the

context of the issue presented here, a reviewing court

must consider a totality of overlapping and non-exclusive

factors including: whether there were any actual negotia-

tions over the waiver provision; whether the clause was

included on a take-it-or-leave-it basis as part of a stan-

dard-form contract; whether the waiver clause was con-

spicuous and explained the consequences of the provision

(e.g. waiver of the right to trial by jury and right of access

to the courts); whether there was disparity in the bargain-

ing power of the contracting parties; whether there was a

difference in business experience and sophistication of the

parties; whether the party charged with the waiver was

represented by counsel at the time the agreement was

executed; whether economic, social or practical duress

compelled a party to execute the contract (e.g. where a

consumer needs phone service and the only company or

companies providing that service require execution of an

adhesion contract with a binding arbitration clause before

service will be extended); whether the agreement was

actually signed or the waiver provision separately ini-

tialed; whether the waiver clause was ambiguous or

misleading; and whether the party with the superior

bargaining power lulled the inferior party into a belief that

the waiver would not be enforced.

{ 66 Returning to the record before us, there is no evi-

dence to support a conclusion that Kloss knowingly and

intelligently waived her rights to trial by jury and access

to the courts when she executed Jones’s standard-form

contracts containing the arbitration clauses. There is no

evidence that Kloss negotiated for any provision in the

App. 33

contracts much less the arbitration clauses. There is no

indication in the record that Kloss had counsel when she

signed the agreements. And, it can hardly be argued that

Kloss was on the same level of sophistication and expertise

as that of Jones’s agent, Husted; nor did she have any

degree of equal bargaining power.

{ 67 What the record does demonstrate, however, is that

Kloss is an ordinary citizen of advanced years; that she did

not read the agreements; that she was not given the

opportunity to read the agreements (which, however, did

contain an explanation of the consequences of the arbitra-

tion clause); and that Jones’s agent, upon whom Kloss had

historically relied to explain the significant parts of

agreements presented to her, neither pointed out the

existence of the arbitration clauses nor explained that the

clauses would bar her from exercising her fundamental

constitutional rights of access to Montana’s courts and to a

trial by jury. The record is clear. Kloss did not voluntarily,

knowingly and intelligently waive her fundamental

constitutional rights of trial by jury and access to the

courts on the facts presented here.

{ 68 It is to the consequences of this ineffective waiver

that I next turn.

{ 69 The United States Supreme Court has held that the

Federal Arbitration Act (FAA) preempts those state laws

which invalidate and are “applicable only to arbitration

provisions.” Allied-Bruce Terminix Companies v. Dobson

(1995), 513 U.S. 265, 281, 115 S.Ct. 834, 843, 130 L.Ed.2d

753. The Court has stated that in adopting Section 2 of the

FAA Congress precluded states from singling out arbitra-

tion provisions for suspect status. Rather, according to the

Court, such provisions must be placed “upon the same

App. 34

footing as other contracts.” Scherk v. Alberto-Culver Co.

(1974), 417 U.S. 506, 511, 94 S.Ct. 2449, 2453, 41 L.Ed.2d

270.

{ 70 The Supreme Court has also held, however, that if a

state law governs issues concerning the validity, revocabil-

ity and enforceability of contracts in general — see, Perry v.

Thomas (1987), 482 U.S. 483, 492, n. 9, 107 S.Ct. 2520,

2527, n. 9, 96 L.Ed.2d 426 — then generally applicable

contract defenses, such as fraud, duress or unconscionabil-

ity, may be applied to invalidate arbitration agreements

without contravening Section 2 of the FAA. Doctor’s

Associates Inc., v. Casarotto (1996), 517 U.S. 681, 687, 116

S.Ct. 1652, 1657, 134 L.Ed.2d 902 (citing Allied Bruce, 513

U.S. at 281, 115 S.Ct. at 843; Rodriguez de Quijas uv.

Shearson/American Express, Inc. (1989), 490 U.S. 477,

483-84, 109 S.Ct. 1917, 1921-22, 104 L.Ed.2d 526; Shear-

son /American Express, Inc., v. McMahon (1987), 482 U.S.

220, 226, 107 S.Ct. 2332, 2337, 96 L.Ed.2d 195).

{ 71 In this regard Montana has long subscribed to the

rule that contractual waivers of constitutional rights must

be evaluated in that light and by the tests applicable to

the waiver of constitutional rights. May v. Figgins (1980),

186 Mont. 383, 394, 607 P.2d 1132, 1138. In May, we

recognized the general rule that parties could contract in

advance to submit to in personam jurisdiction of a given

court — there, Colorado. Nonetheless, we refused to uphold

that sort of contract provision where the Colorado court

was unable to exercise in personam jurisdiction consistent

with due process. We reasoned that the contract provision

amounted to a forfeiture of the constitutional right of due

process, and that there was no “clear waiver” because the

party charged with the waiver could not have known that

the agreement he signed subjected him to the jurisdiction

App. 35

of the Colorado courts. In reaching this conclusion we

pointed out that there was nothing in the agreement that

specified the jurisdiction as to which the charged party

waived his constitutional due process rights. May, 186

Mont. at 394, 607 P.2d at 1138 (citing Fuentes v. Shevin

(1972), 407 U.S. 67, 95, 92 S.Ct. 1983, 2001, 32 L.Ed.2d

556 (The right of jury trial is fundamental and courts

indulge every reasonable presumption against waiver.)).

{72 Quoting Telephonic, Inc. v. Rosenblum (1975), 88

N.M. 532, 543 P.2d 825, 830, we observed that, “ ‘{aJn

agreement to waive this constitutional right must be

deliberately and understandingly made, and the language

relied upon to constitute such a waiver must clearly,

unequivocally and unambiguously express a waiver of this

right.’” May, 186 Mont. at 394, 607 P-2d at 1138-39. We

then went on to state that:

To accept the respondent’s argument that the de-

fendant here contractually consented to be sued

in Colorado would be to give the respondent carte

blanche to use contracts of adhesion to establish

a right to sue defendants wherever would be

most convenient to respondents, and least con-

venient to defendants. The contractual provisions

purporting to waive in personam jurisdiction are

unreasonable and unenforceable.

May, 186 Mont. at 395, 607 P.2d at 1139.

{ 73 Similarly, but with a contrary result, we upheld a

provision whereby a party contracted away his right to the

statutory exoneration of his suretyship because the waiver

of rights did not involve “a constitutional right, nor a

waiver in violation of public policy.” Montana Bank of

Circle, N.A., v. Ralph Meyers & Son, Inc. (1989), 236 Mont.

236, 241, 769 P.2d 1208, 1212.

App. 36

{ 74 As discussed above, Montana law generally applicable

to the waiver of constitutional rights, requires that the

waiver will not be lightly presumed; that it must be proved

to have been made voluntarily, knowingly and intelligently

— typically by the party seeking the waiver; and that it will

be narrowly construed. See { 64 infra. Importantly, Mon-

tana applies these same principles in cases where there is

a purported contractual waiver of constitutional rights.

Such a contractual waiver “‘must be deliberately and

understandingly made, and the language relied upon to

constitute such a waiver must clearly, unequivocally and

unambiguously express a waiver of this right.’” May, 186

Mont. at 394, 607 P.2d at 1138-39.

{ 75 In this case, as already noted, there is no evidence in

the record before us that Kloss voluntarily, knowingly and

intelligently waived her fundamental constitutional rights

to a jury trial and to access to the courts when she signed

Jones’s standard-form contracts. Rather, the record dem-

onstrates the contrary. Thus, Kloss’s purported waiver of

her rights to a jury trial and of access to the courts was not

an effective waiver in a constitutional sense.

{! 76 That being the case, and under principles of Montana

law generally applicable to all contracts, Kloss’s contract

with Jones cannot be enforced, at least to the extent of the

arbitration clause.

{ 77 Accordingly, for the reasons set forth in our Opinion

and in this separate Opinion, I concur.

/s/ James C. Nelson

Justice

App. 37

Justices Terry N. Trieweiler, W. William Leaphart and

Patricia O. Cotter join in the foregoing concurrence.

/s/ Terry Trieweiler

/s/ W. William Leaphart

/s/ Patricia Cotter

Justices

App. 38

IN THE SUPREME COURT OF

THE STATE OF MONTANA

No. 00-507

ALICE P. KLOSS, )

Plaintiff and

Appellant,

ORDER

)

v. )

EDWARD D JONES & CO., ‘ (Filed Jan. 09, 2001)

)

a limited partnership, and

PAUL HUSTED,

Defendants

and Respondents.

Respondents have moved this Court to stay the appeal

of Alice P. Kloss (Kloss) and remand the case to the

District Court to make supplemental findings based on a

controlling 1998 brokerage agreement that went undiscov-

ered until after Kloss filed her notice of appeal.

Kloss is appealing from a June 12, 2000 Order of the

Eighth Judicial District Court granting Edward D. Jones

& Co.’s (Jones) motion to stay proceedings and compel

arbitration. Kloss first opened an account with Jones in

1989. She later opened a living trust account in 1992. In

May 1998 she reorganized and opened a third account. It

is this 1998 account that is the subject of the underlying

litigation. Jones moved to compel arbitration and, when it

failed to produce a signed 1998 brokerage agreement,

contended that the 1992 brokerage agreement was control-

ling. The District Court agreed with Jones’ argument and

ordered arbitration based on the 1992 agreement and the

Montana Uniform Arbitration Act. Kloss has appealed that

decision and, on September 22, 2000, filed her opening brief

App. 39

on appeal. On November 21, 2000, during the pendency of

the appeal, Jones located Kloss’ 1998 brokerage agreement

at its home office in St. Louis, Missouri. The 1998 agree-

ment contains a detachable card that contains different

language than in the 1992 agreement. It instructs the

client (Kloss) to return the signed signature card to her

broker and retain the agreement for her files.

Having located the more recent agreement, Jones

then filed a motion bringing the 1998 agreement to the

attention of the Court, apologizing for the late discovery

and requesting that the appeal be stayed so that the

district court can make supplemental findings of fact and

conclusions of law based upon the 1998 agreement rather

than the 1992 agreement.

Kloss opposes the motion contending that Jones,

having convinced the district court that the 1992 agree-

ment governed the situation, is judicially estopped from

now arguing that the 1998 agreement controls. “The

doctrine of judicial estoppel binds a party to his or her

judicial declarations, and precludes a party from taking a

position inconsistent with them in a subsequent action or

proceeding.” Fiedler v. Fiedler (1994), 266 Mont. 133, 139,

879 P.2d 675, citing Trader’s State Bank of Poplar v.

Mann (1993), 258 Mont. 226, 242, 852 P.2d 604, 614. The

elements of judicial estoppel are as follows:

1. The estopped party must have knowledge of the

fact at the time.

2. The party must have succeeded in maintaining

the original position.

3. The position presently taken must be actually

inconsistent with the original position, and,

App. 40

4. The original position must have misled the ad-

verse party so that allowing the estopped party to change

its position would injuriously affect the adverse party.

Fiedler, 266 Mont. at 140.

In the present case, Jones initially argued that Kloss

was bound by the 1992 agreement which contained a

mandatory arbitration provision. Since the 1998 agree-

ment which Jones now advances also contains a manda-

tory arbitration agreement, it cannot be said that the two

positions are inconsistent. Furthermore, since Kloss has

contended from the start, and now contends on appeal,

that the 1992 agreement is not controlling, it cannot be

said that Kloss has been misled. We determine that the

elements of judicial estoppel have not been satisfied.

It makes no sense to proceed to address an appeal on

the issue of whether the district court was correct in

ordering arbitration under the 1992 agreement when all

parties now agree that the 1992 agreement is not control-

ling. The 1998 agreement is clearly the controlling docu-

ment with regard to litigating the 1998 transaction

between Kloss and Jones. We determine that this appeal

should be stayed while the matter is remanded to the

district court for supplemental findings of fact and conclu-

sions of law. See Simmons Oil Corp. v. Wells Fargo Bank,

1998 MT 129, 4 16, 289 Mont. 119, 9 16, 960 P.2d 291,

{ 16 (staying appeal and remanding back to the district

Court for consideration of whether to set aside an order

and consider newly discovered evidence).

THEREFORE IT IS ORDERED that the case is

remanded to District Court for supplemental findings of

fact and conclusions of law based on the 1998 account

agreement. Since this matter has been in litigation since

App. 41

December of 1998 and given the advanced age of appel-

lant/plaintiff Kloss, it is ordered that the District Court

address this matter as soon as practical.

IT IS FURTHER ORDERED that the appeal in this

matter is STAYED pending the District Court’s findings

and conclusions.

DATED this 9th day of January, 2001.

/s/ Karla M. Gray

Chief Justice

/s/ W. William Leaphart

/s/ James C. Nelson

/s/ Jim Regnier

/s/ Patricia Cotter

Justices

Justice Terry N. Trieweiler would deny the motion and

would conclude that respondent is bound by its previous

representations.

App. 42

MONTANA EIGHTH JUDICIAL DISTRICT COURT,

CASCADE COUNTY

ALICE P. KLOSS, )

ee ) Cause No.

Plaintiff ) ADV-98-1542(b)

v. ) FINDINGS OF FACT,

EDWARD D. JONES & CO., ) CONCLUSIONS OF

a limited partnership, and ) LAW, and ORDER

PAUL HUSTED, )

)

Defendants )

A Complaint and Jury Demand were filed in this

matter on December 28, 1998. A Motion to Dismiss was

filed by Defendants on February 4, 1999. A Motion to

Compel Arbitration and Stay Proceedings was filed by

Defendants on February 16, 1999. The parties briefed the

issue and hearings were held on said Motion on October

27, 1999, and February 1, 2000, with the Honorable Marge

Johnson presiding. The Court then issued its Findings of

Fact, Conclusions of Law, and Order granting Defendant’s

Motion to Compel Arbitration and Stay Proceedings on

June 12, 2000. The Plaintiff then filed a Notice of Appeal

on July 6, 2000. During the pendency of the appeal the

Defendants located Kloss’ 1998 brokerage agreement

which was at issue. The Montana Supreme Court then

Ordered that the case be remanded to District Court for

supplemental findings of fact and conclusions of law based

on the 1998 account agreement. The Defendant then

renewed its Motion to Compel Arbitration and Stay

Proceedings on February 2, 2001. After allowing briefing

on the issue the Court then set the matter for hearing.

The Defendant’s Motion to Compel Arbitration and

Stay Proceedings came on for hearing before the Court on

App. 43

March 20, 2001. The Plaintiff was present and was repre-

sented by counsel, Joseph C. Engel, III. The Defendant,

Paul Husted, was present and Defendants were repre-

sented by Robert James. After hearing and reviewing the

evidence as well as the briefs, the Court makes the follow-

ing:

FINDINGS OF FACT

1. Plaintiff, Alice Kloss, (hereinafter referred to as Kloss)

is presently 93 years old and appears to be in good

mental health.

2. Defendant, Paul Husted, (hereinafter referred to as

Husted) has been employed by Defendant Edward D.

Jones & Co. as a stockbroker since 1982.

3. Kloss was referred to Husted in 1985 after she became

dissatisfied with D.A. Davidson and sought a new

stockbroker.

4. Kloss opened a full service brokerage account on July

30, 1989, which allowed her to purchase stocks, other

securities, and maintain a money market account

from which she could purchase securities and deposit

income from investments.

5. Kloss was provided with a copy of this 1989 agree-

ment. The agreement contained a provision requiring

mandatory arbitration of disputes between the. par-

ties.

6. Kloss established a living trust account with Jones

under a full service brokerage account on or about

April 20, 1992.

7. Husted was the Jones’ employee who assisted Kloss in

opening the account.

10.

11.

App. 44

Kloss was provided with a two page “Customer Ac-

count Agreements for Full Service and Customer Loan

Accounts — General Account Provisions” document, a

two page “Customer Loan Agreement” which did not

apply to her full service account, and a one and a one-

half page “Full Service Account Agreement.” This

agreement also contained a provision requiring man-

datory arbitration of disputes between the parties.

The 1992 “Customer Account Agreements for Full

Service and Customer Loan Accounts — General Ac-

count Provisions” contains a section as follows:

ARBITRATION

1. Arbitration is final and binding on the par-

ties.

2. The parties are waiving their right to seek

remedies in court, including the right to jury

trial.

3 Pre-arbitration discovery is generally more

limited than and different from court proceed-

ings.

4. The arbitrators’ award is not required to in-

clude factual findings or legal reasoning and any

party’s right to appeal or to seek modification of

rulings by the arbitrators is strictly limited.

5. The panel of arbitrators will typically include

a minority of arbitrators who were or are affili-

ated with the securities industry.

The remainder of the headings in the 1992 above-

referenced document are not in capital letters.

The 1992 “Full Service Account Agreement” states in

capital bold letters:

12.

13.

14.

15.

16.

17.

18.

App. 45

THE FULL SERVICE ACCOUNT AND THE

CUSTOMER LOAN ACCOUNT AGREEMENTS

CONTAIN A PRE-DISPUTE ARBITRATION

CLAUSE WHICH IS INCORPORATED BY REF-

ERENCE FROM THE GENERAL ACCOUNT

PROVISIONS ON PAGE TWO AT PARAGRAPH

12. BY MY SIGNATURE BELOW I ACKNOWL-

EDGE THAT I HAVE RECEIVED A COPY OF

THIS DOCUMENT.

Kloss signed a detachable card indicating Acknowl-

edgment of Full Service Account dated April 20, 1992.

The detachable card was then sent to the Defendant’s

home office in St. Louis in order to activate the

sweeper function of the money market account.

Kloss established a charitable remainder trust with

independent counsel in May of 1998. Kloss was the

trustee of said trust.

Kloss then met with Husted several times in May of

1998 to reorganize her accounts pursuant to the chari-

table remainder trust.

Kloss again activated a full service account under a

document entitled “Customer Account Agreements for

Full Service and Customer Loan Accounts” (hereinaf-

ter referred to as Full Service Agreement).

Kloss signed the Full Service Agreement and a Living

Trust Account Form on May 28, 1998, after being pre-

sented with the documents by Donna Ferderer, an

employee of Defendant Jones.

Kloss was provided with a copy of the 1998 Full

Service Agreement by Ferderer on May 28, 1998. This

agreement also contained a provision requiring man-

datory arbitration of disputes between the parties.

19.

20.

21.

22.

23.

24.

25.

26.

27.

28.

29.

App. 46

The 1998 Full Service Agreement is a five page, single

spaced document. The document has many headings

which are bold type and the underlying text is in regu-

lar print.

The 1998 Full Service Agreement has an arbitration

provision. The paragraphs on arbitration are ap-

proximately one-half of a page long. Both the heading

and the underlying half-page of text on arbitration are

in bold print.

The arbitration portion of the 1998 Full Service

Agreement is the only underlying text which is in bold

print in the entire agreement.

The Full Service Agreement was drafted by and

printed on an Edward D. Jones form.

Clients do not have input on the contents of said form.

If clients wish to open a full service account with De-

fendant they must sign the agreement.

Kloss had the opportunity to read the terms of the

agreement before she signed it. Kloss did not do so.

Husted’s normal procedure in opening accounts, which

he followed with Kloss, is to explain what he believes

to be the significant features of the account from an

investment perspective, including the sweeper provi-

sion of the money market account.

Husted did not consider the arbitration provision to be

a significant provision of the contract.

Husted did not hide the arbitration provision from

Kloss.

Husted does not routinely explain the arbitration

provision to clients and did not explain it to Kloss.

Kloss would have been able to understand the arbitra-

tion provision had she read it.

30.

31.

32.

33.

34.

35.

36.

37.

App. 47

Donna Ferderer presented Kloss with a detachable

card acknowledging the Full Service Agreement. The

card is part of the Full Service Agreement itself and

has to be torn away from the agreement to be sent off

to the home office. The card states:

The Full Service Account and the Customer

Loan Account Agreements contain a pre-

dispute arbitration clause that is incorpo-

rated by reference from the general account

provisions on pages 1 and 2. By my signa-

ture below, I acknowledge that I have re-

ceived a copy of this document. Detach and

return signature card only. Client retains

Agreement.

Donna Ferderer witnessed Kloss sign the detachable

card on May 28, 1998.

Donna Ferderer dated the detachable card June 1 (no

year) which was the date that she faxed the card to

the home office in St. Louis.

Kloss admits signing the detachable card in 1998,

which acknowledges the arbitration provision set forth

in the Full Service Agreement.

Kloss denies that she was provided with a copy of the

1992 and 1998 Full Service Agreements although she

admits that she saw the 1998 agreement and asked

Husted questions about it.

The contract in dispute was negotiated and entered

into in Montana; the domicile of Kloss, Husted, and

Jones is Montana.

Edward Jones & Co. is engaged in interstate com-

merce.

The execution of business on Kloss’ account required

the use of interstate commerce.

App. 48

34. [sic] Husted and Ferderer have used the same process

for the signing of Full Service Agreements and

the detachable card in activating approximately

10,000 accounts.

35. [sic] Defendant and Edward D. Jones followed their

customary practice in the presenting and signing

of the Full Service Agreement and detachable

card with Kloss.

From the foregoing Findings of Fact, the Court makes

the following:

CONCLUSIONS OF LAW

1. The Court has jurisdiction of this matter.

2. The parties entered into the 1998 Ful! Service Agree-

ment, which is an enforceable contract between the

parties.

3. The Uniform Arbitration Act codified as MCA 27-5-

114(1) provides:

A written agreement to submit to arbitration

any controversy arising between she parties

after the agreement is made is valid and en-

forceable except upon grounds that exist at

law or in equity for the revocatioa of a con-

tract.

4. The Federal Arbitration Act (FAA) applies to any case

where there is a written provision in a contract evi-

dencing a transaction involving interstate commerce

to settle by arbitration a controversy arising out of

such contract. 9 U.S.C. § et seq.

5. The FAA requires courts to ‘rigorously enforce agree-

ments to arbitrate.’ Shearson/American Express, Inc.

App. 49

v. McMahon, 482 U.S. 220, 226, 107 S.Ct. 2332, 96

L.Ed.2d 185 (1987).

7. [sic] Kloss’ argument that she did not read the arbitra-

10.

tion provision and was not informed of its applica-

tion does not defeat the requirement to arbitrate.

In Chor v. Piper, Jaffray & Hopwood, 261 Mont. 143,

862 P.2d 26 (1993), the plaintiff entered into a “Co-

Owner Account Agreement” related to the purchase of

investments. The agreement contained an arbitration

provision. Chor sought to avoid arbitration by claim-

ing that she didn’t understand the arbitration provi-

sion and that the investment firm had not informed

her of the legal implications of the provisions. The

Court held the arbitration provision enforceable stat-

ing:

We are unwilling to construe ... that a

stockbroker has a duty to disclose to his cus-

tomers every possible misunderstanding

which might be reached upon signing a con-

tract.... We know of no case holding that

parties dealing at arms’ length have a duty

to explain to each other the terms of a writ-

ten contract. We decline to impose such an

obligation where the language of the con-

tract clearly and explicitly provides for

arbitration of disputes arising out of the

contractual relationship. Jd. at 152.

The principles of contract law presume that a party

who entered into a contract read the contract and un-

derstood its terms.

The Full Service Agreements of 1992 and 1998 are not

contracts of adhesion. Kloss had the ability to do busi-

ness with other brokerage houses, as she had in the

past. Even if determined to be a contract of adhesion,

11.

12.

App. 50

the Montana Supreme Court has stated that an arbi-

tration clause in an adhesion contract will not be en-

forced against the weaker party when it is: (1) not

within the reasonable expectations of said party, or (2)

within the reasonable expectations of the party, but

when considered in its context, is unduly oppressive,

unconscionable, or against public policy. Passage uv.

Prudential-Bache Sec., Inc., 223 Mont. 60, 66, 727

P.2d 1298 (1986).

The arbitration clauses contained in the 1992 and

1998 Full Service Agreements were within the rea-

sonable expectations of Kloss as they are contained

within the agreements that she signed.

The arbitration clauses contained in the 1992 and

1998 Full Service Agreements were not unconscion-

able. Unsconscionability requires a two-fold determina-

tion: (1) that the contractual terms are unreasonably

favorable to the drafter and (2) that there is no meaning-

ful choice regarding the acceptance of the agreement.

Iwen v. U.S. West, a division of U.S. West Marketing

Resources Group, Inc., 293 Mont. 512, 977 P.2d 989

(1999). Contrary to the factual situation in Jwen, the

arbitration provision at issue was a mutual restriction

placed upon both parties to the contract, not just

Kloss. Therefore, Kloss has failed to prove the first

prong of the test. Kloss further failed to satisfy the

second prong of Jwen in that she had the choice not to

enter into the agreement with Defendants if she did

not wish to as there are other brokerage houses avail-

able for her business.

Based upon the Findings of Fact and Conclusions of

Law the Court hereby enters the following:

App. 51

ORDER

IT IS THEREFORE HEREBY ORDERED that:

1. The Defendant’s Motion to Stay Proceedings and

Compel Arbitration is GRANTED.

2. The parties are ordered to arbitrate this matter as

required by the Full Service Agreement.

DATED this 26th day of March, 2001.

/s/ Julie Macek

Julie Macek

District Judge

ce: Joseph C. Engel, III

Y Robert James

App. 52

MONTANA EIGHTH JUDICIAL DISTRICT COURT,

CASCADE COUNTY

ALICE P. KLOSS, ) Cause No.

Plaintiff, ADV-98-1542(b)

- ) FINDINGS OF FACT,

: CONCLUSIONS OF LAW,

EDWARD D. JONES & CO.,) and ORDER

a limited partnership and )

PAUL HUSTED,

Defendants. )

The Defendants’ Motion to Stay Proceedings and

Compel Arbitration came on for hearing before the court

on Wednesday, October 27, 1999. A second hearing was

held on February 1, 2000. The Plaintiff was present,

represented by counsel Joseph C. Engel, III. The Defen-

dant, Paul Husted was present and Defendants were

represented by Robert James and James Donahue. After

hearing and reviewing the evidence and reviewing the

post-hearing briefs filed by the parties, I make the follow-

ing:

FINDINGS OF FACT

1. Plaintiff, Alice Kloss, is presently 93 years old and of

apparently good physical and mental health. She is a

resident of Cascade County, Montana.

2. Defendant Paul Husted is employed by Defendant

Edward D. Jones & Co. as a stock broker, and has

been employed in that capacity since 1982.

3 Paul Husted first met Alice Kloss in 1985. She had

been referred to him by one of his customers.

10.

App. 53

On or about April 20, 1992, Mrs. Kloss opened a

living trust account with Mr. Husted.

The Living Trust Account which Mrs. Kloss opened

with Mr. Husted was called a Full Service Account

Agreement. It created some new accounts, including

a charitable remainder trust, into which part of Mrs.

Kloss’ personal assets were transferred from her per-

sonal account.

The Full Service Agreement is a six-page, fine-print

document, which contains many different provisions,

including, a paragraph on page 2 which is headed all

in capital letters: “ARBITRATION.”

The Full Service Agreement was drafted by Edward

Jones, and printed on an Edward Jones form. The

document at issue is a form dated 12/91.

Clients do not have any input on the contents of the

agreement. It is presented to them as is for their sig-

nature and they must sign the agreement as is if

they wish to open an account with the Defendants.

While there are certainly other investment brokers

in Great Falls, no evidence was presented which

would lead me to believe Mrs. Kloss had any mean-

ingful choice in accepting or rejecting an arbitration

provision of such a contract or that other stock bro-

kers offered contracts at that time for similar ac-

counts which did not contain an arbitration

provision. I have no reason to believe that was not a

fairly standard practice at that time, and that she

had no meaningful choice regarding acceptance of the

agreement if she wished to open an investment ac-

count, which is what I do believe and find as a fact.

The arbitration provision is a unilateral provision of

the brokerage houses contained in a contract pre-

sented to clients as is with no meaningful opportunity

11.

12.

13.

14.

15.

App. 54

to negotiate its presence in the contract. A client

may, however, refuse to sign such an agreement and

may seek to obtain a contract without such a provi-

sion from this or competitor companies. It is reason-

able to assume that such contracts commonly contain

such a provision today, regardless of the brokerage

house with which a client is dealing.

The arbitration provision states in numbered sub-

paragraphs that arbitration is final and binding on

the parties, that the parties are waiving their right

to seek remedies in court, including the right to a

jury trial, that pre-arbitration discovery is generally

more limited than and different from court proceed-

ings, that the arbitrators’ award is not required to

include factual findings or legal reasoning and any

party’s right to appeal or to seek modification of rul-

ings by the arbitrators is strictly limited, and that

the panel of arbitrators will typically include a mi-

nority of arbitrators who were affiliated with the se-

curities industry.

Mrs. Kloss liked and trusted Mr. Husted and ex-

pected that he would explain to her anything that

she needed to know that was significant.

She did have an opportunity to read the agreement

before she signed it, and was capable of doing so, but

did not do so, relying instead upon Mr. Husted to ad-

vise her of the significant features of the agreement.

Mr. Husted, in opening accounts, such as that which

Mrs. Kloss opened with him in 1992, explains what

he believes to be the significant features from an in-

vestment perspective, including the sweeper provi-

sion which moves cash into a money market account

automatically and the loan provision of the contract.

Mr. Husted did not consider the arbitration provision

to be a significant provision of the contract.

16.

ae;

18.

19.

20.

21.

22.

23.

App. 55

Mr. Husted did not hide the arbitration provision

from Mrs. Kloss. He may well not have even been

aware of the provision as indicated by the affidavit

submitted by Plaintiff with her post-hearing brief,

which affidavit was not responded to by the Defen-

dants. If he was unaware of the provision, his failure

to point it out to Mrs. Kloss would not derive from

any desire to hide it from her or to defraud her.

He does not routinely explain and did not explain to

Mrs. Kloss the arbitration provision of the contract.

She did not read and was not aware of the arbitra-

tion provision of the contract.

Mrs. Kloss understood she had to sign the documents

presented to her in order to open the account with

Mr. Husted.

To the extent she read the agreement or had ques-

tions about the agreement or about Mr. Husted’s ex-

planation, she asked him questions, but she did not

question him about the arbitration provision.

She did not read or fully understand the agreement

or exactly what she was doing with her assets when

she opened the account, but she would have been

able to understand the arbitration provision had she

read it.

Neither Mr. Husted nor Defendant Edward D. Jones

& Co. are able to locate a signed copy of the agree-

ment or of Mrs. Kloss’ acknowledgment of the arbi-

tration provision of the contract. They have a card

signed by Mrs. Kloss which is dated 4-20-92 and

states that it is an “Acknowledgment for Full Service

Account Only Application for Daily Passport-Cash

Trust”.

The card itself does not acknowledge receipt of a copy

of the agreement or that the agreement incorporates

24.

25.

26.

27.

App. 56

an arbitration provision which waives the right to

court remedies.

The card signed by Mrs. Kloss and which is provided

for the client’s signature in opening investment ac-

counts, is routinely detached from the Agreement,

which is to be given to the client. The last sentence

on the portion which is to be retained by the client

states in larger letters and in all capital letters:

THE FULL SERVICE ACCOUNT AND THE

CUSTOMER LOAN ACCOUNT AGREE-

MENTS CONTAIN A PRE-DISPUTE ARBI-

TRATION CLAUSE WHICH IS INCORP-

ORATED BY REFERENCE FROM THE

GENERAL ACCOUNT PROVISIONS ON

PAGE TWO AT PARAGRAPH 12. BY MY

SIGNATURE BELOW I ACKNOWLEDGE

THAT I HAVE RECEIVED A COPY OF THIS

DOCUMENT.”

The parties agree that Mrs. Kloss was very careful

about her dealings, her investments, and kept careful

records. She keeps all of her investment records in a

locked drawer. She also had a notebook which Mr.

Husted gave her, in which she kept some of the

documents she received from Mr. Husted and often

brought with her when she met with him. He ar-

ranged the documents in the notebook for her.

She does not recall receiving a copy of the agreement

and her records do not include a copy of the agree-

ment to which the card, which she signed, was at-

tached.

Mr. Husted did not provide Ms. Kloss with a copy of

the agreement and she did not otherwise receive a

copy of the agreement before this dispute arose.

28.

29.

30.

31.

32.

App. 57

The original card which Ms. Kloss signed was for-

warded to Defendant Edward Jones & Co.’s office in

St. Louis, Missouri.

Neither Paul Husted nor anyone else at the local

office of Edward Jones & Co. has in their files a copy

of the card signed by Mrs. Kloss or of the agreement

to which it relates. Nor does the office in Missouri

have the agreement to which the card was originally

attached.

I do not believe, nevertheless, that Mr. Husted

presented Mrs. Kloss with just a detached card to

sign, since she testified that she recalled seeing the

agreement and that she asked Mr. Husted questions

about it which he did not answer to her satisfaction. I

believe she simply did not read the entire agreement

and Mr. Husted did not explain the entire agreement

to her or ensure that she read it through entirely,

and he did not give the agreement to her once she

signed it.

Plaintiff alleges in this lawsuit violation of statutory

duty; violation of the Montana Consumer Protection

Act; breach of fiduciary duty; fraud and negligence.

These claims arise out of factual allegations that De-

fendant Paul Husted improperly influenced the

Plaintiff to divest herself of her estate and donate it

to charity.

The Defendants seek to enforce the arbitration

clause contained in the Full Service Account docu-

ment on the basis of the detached signature card

dated April, 1992, bearing the Plaintiff’s signature,

and compel arbitration of the claims alleged by

Plaintiff in her complaint in this matter, on grounds

that the signature card is proof that Plaintiff agreed

to the terms of the Full Service Account document.

33.

34.

35.

36.

37.

38.

App. 58

The “Full Service Account” states that the law of

Missouri applies, but neither party has presented me

with law or argument indicating that Missouri law

varies from Montana law with respect to the issue of

the enforceability of the arbitration clause under the

facts found in this case. I have for that reason

reached my conclusions applying Montana law and

assuming that it is similar to Missouri law.

The place of contracting was Montana; the place of

negotiation of the contract was Montana; the place of

performance of the contract was Montana; the loca-

tion of the subject matter was Montana; and the

domicile of the plaintiff, defendant Husted, and the

office of Defendant Edward Jones & Co. where the

contract was entered into, is Montana.

Edward Jones & Co., a stock brokerage firm, is

engaged in interstate commerce.

Mrs. Kloss intended to open an investment account

with Edward D. Jones & Co. and that the conduct of

the account and its transactions would require the

use of interstate commerce.

No evidence was presented regarding the cost of

arbitration to the Plaintiff and whether such cost

renders the arbitration provision unenforceable as

argued by Plaintiff's counsel in her post-hearing

brief.

The agreement does not specify any particular rules

of arbitration that would apply to the arbitration of

this dispute. I can not for that reason rule that the

provision is unenforceable because Mrs. Kloss did not

receive a copy of the agreement incorporating that

provision, as might be required by any particular ar-

bitration rules.

App. 59

From the foregoing Findings of Fact, the Court makes

the following:

CONCLUSIONS OF LAW

1. The court has jurisdiction of this matter.

2. A fundamental public policy of this state is to protect

the substantive rights of Montana residents to seek

redress in the courts of Montana.

3. The initial inquiry of the court is to determine

whether or not the parties in fact have an agreement

to arbitrate. The court holds that the parties did

have an agreement, and the “Full Service Account”

document is enforceable as a contract between the

parties.

4. While both parties rely on Montana case law in

support of their arguments, it is appropriate for this

court to apply a mixture of Montana and federal

statutory law and court decisions construing the en-

forceability of arbitration provisions pursuant to the

Federal Arbitration Act (FAA).

5. The “Uniform Arbitration Act” found in chapter 5 of

Title 27 of the Montana Code Annotated provides:

A written agreement to submit an existing

controversy to arbitration is valid and en-

forceable except upon grounds that exist at

law or in equity for the revocation of a con-

tract.

6. The FAA applies to any case where there is a written

provision in a contract evidencing a transaction in-

volving interstate commerce to settle by arbitration a

controversy thereafter arising out of such contract. 9

U.S.C. § et seq.

10.

App. 60

The FAA creates a body of federal substantive law of

arbitrability which is applicable to any arbitration

agreement falling within the Act. Moses H. Cone

Memorial Hospital v. Mercury Construction Corp.,

460 U.S. 1, 103 S.Ct. 927, 74 L.Ed.2d 753 (1983).

The term “involving commerce” in the FAA has been

construed by the United States Supreme Court as

invoking the broadest measure of Congress’ authority

under the Commerce Clause. Allied-Bruce Terminix

Cos. v. Dobson, 513 U.S. __, 115 S.Ct. 834, 130

L.Ed.2d 753 (1995).

The Montana Supreme Court has enforced arbitra-

tion agreements although initially reluctant to do so.

In Doctor’s Associates, Inc. v. Casarotto, 517 U.S. 681,

116 S.Ct. 1652 (1996), overruling Casarotto v.

Lombardi, 274 Mont. 3, 901 P.2d 596 (1995), the

United States Supreme Court held that the FAA pre-

empted portions of Montana’s Arbitration Act. As a

result, the Montana Supreme Court’s ruling that ar-

bitration was not required under Montana law was

reversed and arbitration was required where a fran-

chisee alleged the franchisor had breached the fran-

chise contract by licensing an additional franchisee

in a location originally sought by the first franchisee.

Doctor’s Associates, 517 U.S. at 687. The Montana

Supreme Court had ruled that the arbitration clause

in the contract was unenforceable because it did not

meet the notice requirements of the Montana Arbi-

tration Act as it existed at that time. The United

States Supreme Court struck the notice requirement

because it was preempted by the FAA and ordered

arbitration.

In Downey v. Christensen, 251 Mont. 386, 825 P.2d

557 (1992), the plaintiff filed suit over the alleged

breach of a donut shop franchise agreement. After the

plaintiff served discovery requests and the defendants

11.

12.

App. 61

responded, the defendants sought to enforce an arbi-

tration clause in the franchise agreement. The Dis-

trict Court refused, holding that by answering

discovery, the defendants had waived arbitration.

The Montana Supreme Court reversed, finding that

the lack of prejudice to the plaintiff showed a lack of

waiver and ordered arbitration. Downey, 251 Mont.

at 391.

These decisions are in accord with federal policy,

which favors arbitration when a question of arbitra-

tion is raised and an arbitration agreement exists.

Shearson/American Express, Inc. v. McMahon, 482

U.S. 220, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987):

The (Federal Arbitration) Act was intended

to revers[e] centuries of judicial hostility to

arbitration agreements by plac[ing] arbitra-

tion agreements upon the same footing as

other contracts.

482 US. at 225-26 (citations omitted).

That same case further holds:

The Arbitration Act accomplishes this pur-

pose by providing that arbitration agree-

ments, ‘shall be valid, irrevocable, and

enforceable, save upon such grounds as exist

at law or in equity for the revocation of any

contract.’ 9 U.S.C. §2. The FAA requires

courts to, Tigorously enforce agreements to

arbitrate.’ Id. 482 U.S. at 226 (citations

omitted)

Absent a well-founded claim that an arbitra-

tion agreement resulted from the sort of

fraud or excessive economic power that

would provide grounds for the revocation of

any contract, the Arbitration Act provides no

13.

14,

15.

16.

App. 62

basis for disfavoring agreements to arbitrate

statutory claims by skewing the otherwise

hospitable inquiry into arbitrability. Id. (ci-

tations omitted).

I have found that Mrs. Kloss did not read the entire

agreement between the parties when it was pre-

sented to her; that Mr. Husted did not explain the

entire agreement to her or ensure that she read it

through entirely, and that he did not give the agree-

ment to her once she signed it. However, I do not find

that those facts are sufficient to invalidate the arbi-

tration provision of the parties’ agreement.

Where there is a valid arbitration agreement,

whether or not there was a meeting of the minds so

that the agreement is valid and enforceable is a sub-

ject which must itself be arbitrated.

Mrs. Kloss’ argument that she never read the arbi-

tration provision and was never informed of its im-

pact does not defeat the requirement to arbitrate.

In Chor v. Piper, Jaffray & Hopwood, 261 Mont. 143,

862 P.2d 26 (1993), the plaintiff entered into a “Co-

Owner Account Agreement” related to the purchase

of investments. The agreement included an arbitra- —

tion provision. When Chor filed suit related to her

investment relationship with Piper, Jaffray, & Hop-

wood, the investment firm filed a motion to compel

arbitration. Chor sought to avoid arbitration stating

that she did not understand the arbitration provision

and that the investment firm had not informed her of

the legal implications of the provision. The court held

the arbitration provision enforceable stating:

We are unwilling to construe ... that a

stockbroker has a duty to disclose to his cus-

tomers every possible misunderstanding

17.

18.

19.

App. 63

which might be reached upon signing a con-

tract.... We know of no case holding that

parties dealing at arm’s length have a duty

to explain to each other the terms of a writ-

ten contract. We decline to impose such an

obligation where the language of the con-

tract clearly and explicitly provides for arbi-

tration of disputes arising out of the

contractual relationship. Jd. at 152.

The principles of contract construction presume that

a party who had entered into a contract read the

agreement and understands its terms where the

party is capable of doing so, as in this case. This

principle has been applied by the federal courts and

by the Montana Supreme Court to arbitration provi-

sions in contracts of adhesion. See Passage v. Pruden-

tial-Bache Sec., Inc., 223 Mont 60, 66, 727 P.2d 1298

(1986).

Contracts of adhesion are not against the law and

are, in fact, very commonly used in commercial

transactions. The term refers to a standardized form

of agreement, usually drafted by the party having

the superior bargaining position, which that party

then presents to the other with no opportunity to ne-

gotiate its terms. Id., citing Finkle and Ross v. AG.

Becker Paribas, Inc., 622 F. Supp. 1505, 1511-12

(D.C.N.Y. 1985). An individual either accepts the

contract as presented or runs the risk of exclusion

from the market. Jd.

Contracts of adhesion, due to commercial realities,

are commonly used and generally enforced, unless

the provision attacked oversteps the bounds of the

reasonable expectations of the parties. Passage uv.

Prudential-Bache Sec., 223 Mont. 60, 727 P.2d 1298

(1986). The court held in that case that an arbitra-

tion provision in a contract of adhesion is not per se

20.

21.

App. 64

contrary to public policy and will be upheld absent a

strong showing that it should be set aside. The court

stated:

For such a contract or clause to be void, it

must fall within judicially imposed limits of

enforcement. It will not be enforced against

the weaker party when it is: 1) not within

the reasonable expectations of said party, or

2) within the reasonable expectations of the

party, but when considered in its context,

is unduly oppressive, unconscionable or

against public policy. Jd. at 66.

Mrs. Kloss has failed to prove that grounds exist at

law or equity for the revocation of the contract or in-

validation of the arbitration provision, which she was

surely capable of reading and understanding. Mrs.

Kloss was given an opportunity to read the agree-

ment before signing it. She also had the opportunity

to ask Mr. Husted any questions about the agree-

ment — and chose to ask some. Mrs. Kloss was free

not to sign the agreement and take her business to

any of several other securities dealers in Great Falls

but, very likely would have been required to sign a

contract including an arbitration agreement if she

had chosen to do so.

The agreement, and its arbitration clause, is not

unconscionable. The Montana Supreme Court has

developed a two prong test for unconscionability.

Iwen v. U.S. West, a Division of U.S. West Marketing

Resources Group, Inc., 293 Mont. 512, 977 P.2d 989

(1999). In order for Mrs. Kloss to prove that the arbi-

tration clause in unconscionable, she must show

that: 1) the clause is unreasonably favorable to Ed-

ward D. Jones & Co., and 2) there is no meaningful

choice on her part regarding acceptance of the

agreement.

22.

23.

24.

App. 65

Mrs. Kloss has failed to prove the first prong of this

test.

The terms of the arbitration clause are equally

favorable to both parties in that the clause in this

case requires both parties to submit all matters re-

garding handling of the account to arbitration. The

terms of the clause give Edward Jones & Co. abso-

lutely no advantage over Mrs. Kloss. The first prong

of the test set out in Jwen is not satisfied, and the ar-

bitration clause in [sic] not unconscionable.

This contract was offered to Mrs. Kloss as is. I do not

believe that Mrs. Kloss had a meaningful choice re-

garding acceptance of the arbitration clause, if she

wanted to do business with a brokerage firm in Great

Falls. She was free to inquire of other brokerage

firms to see if she could find a firm that would not

require her to submit any disputes to arbitration.

She did not do this and I have no evidence whether

such agreements were available. The second prong of

Iwen is not satisfied, however, and the arbitration

clause is not clearly unconscionable.

ORDER

IT IS THEREFORE HEREBY ORDERED that:

The Defendant’s Motion to Stay Proceedings and

Compel Arbitration is GRANTED.

The parties are ordered to arbitrate this matter as

required by the agreement.

DATED this 12th day of June 2000.

/s/ Marge Johnson

District Judge

Ser NE

cc:

App. 66

Joseph C. Engel, III

Robert James/James Donahue

App. 67

No. 00-507

IN THE SUPREME COURT OF THE

STATE OF MONTANA

2002 MT 129A

ALICE P. KLOSS,

Plaintiff/Appellant,

ORDER

EDWARD D. JONES & CO.,

a limited partnership, and

PAUL HUSTED,

Defendants/Respondents.

(Filed Sep. 25, 2002)

The Respondents, Edward D. Jones & Co. and Paul

Husted have petitioned this Court pursuant to Rule 34,

M.R.App.P., for rehearing. Rule 34 provides in part:

A petition for rehearing may be presented upon

the following grounds and none other: That

- Some fact, material to the decis

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