Unreported / Non-Citable
Background
Doris Jean Hidey sued Gregory Mech and The Caprock Group, LLC for unfair competition, fraud, negligent misrepresentation, breach of contract, financial elder abuse, and accounting, alleging improper management fees charged on her investment account. Defendants moved to compel arbitration based on paragraph 19 of the investment advisor agreement Hidey signed in November 2016. That provision required binding arbitration in Boise, Idaho under the Securities Arbitration Rules of the American Arbitration Association, required arbitrators to render a reasoned award, and stated that arbitrators had no authority to award punitive, exemplary, or other extraordinary damages.
Hidey opposed arbitration on unconscionability grounds. She averred that she signed the agreement at Mech's office on a take-it-or-leave-it basis, believing Mech would not act as her investment advisor if she did not sign. She claimed Mech described the provisions as administrative and did not offer her time to review the agreement in detail. The trial court denied the motion to compel arbitration, determining the arbitration provision was unconscionable. Defendants timely appealed.
The Court’s Holding
The Court of Appeal affirmed. Reviewing the unconscionability determination under the standards in Nguyen v. Applied Medical Resources Corp. and Bautista v. Fantasy Activewear, Inc., the court first found that defendants met their burden to show the existence of an agreement to arbitrate, as paragraph 19 was a broad provision encompassing Hidey's claims. The court then turned to unconscionability, applying the sliding-scale framework of Armendariz v. Foundation Health Psychcare Services, Inc.
On procedural unconscionability, the court disagreed with the trial court that the agreement was adhesive, noting Hidey was a high-net-worth business owner in a relatively equal bargaining position, the arbitration provision was in boldface type, and the agreement gave her five business days to terminate without penalty. However, the court found a small amount of procedural unconscionability because the applicable AAA arbitration rules were not provided to Hidey when she signed, and her unconscionability claim depended on those rules, distinguishing Baltazar v. Forever 21, Inc.
On substantive unconscionability, the court found the degree high. It rejected the challenge to the Securities Arbitration Rules' discovery limitations, citing Ramirez v. Charter Communications, Inc., but held the Boise, Idaho forum selection clause was substantively unconscionable because Hidey entered the contract in California with a Newport Beach advisor and could not reasonably expect to arbitrate in Idaho. The court also held the punitive damages waiver substantively unconscionable under Civil Code section 1668 and Lange v. Monster Energy Co. because it would more likely benefit defendants and prohibited Hidey from pursuing the full panoply of damages available in court. Finally, the court held the trial court did not abuse its discretion in declining to sever the unconscionable provisions, as multiple unconscionable terms weighed against severance.
Key Takeaways
- A forum selection clause requiring arbitration in a distant state can be substantively unconscionable when the client signed the agreement locally and could not reasonably expect to arbitrate far from home.
- A punitive damages waiver in an investment advisor agreement may be substantively unconscionable under Civil Code section 1668 because it exempts the advisor from responsibility for fraud or willful injury and limits the client's remedies.
- Failure to provide applicable arbitration rules at signing creates only a small degree of procedural unconscionability when the unconscionability claim depends on those rules, but even a small degree can suffice when substantive unconscionability is high.
- A high-net-worth, experienced investor may not establish that an agreement is adhesive merely by claiming it was offered on a take-it-or-leave-it basis, especially when the contract allows termination without penalty within five business days.
- When an arbitration agreement contains multiple unconscionable provisions, a trial court does not abuse its discretion by declining to sever them and refusing enforcement altogether.
Why It Matters
This decision reinforces that California courts will scrutinize arbitration provisions in investment advisor agreements for substantive unconscionability, particularly forum selection clauses that impose inconvenient distant venues on clients and waivers of punitive damages that insulate advisors from accountability for fraud or elder abuse. It illustrates how the sliding-scale approach allows a finding of unconscionability even when procedural unconscionability is minimal, provided substantive unconscionability is high.
The ruling also confirms that trial courts retain discretion to refuse severance when an arbitration agreement is permeated by multiple unconscionable terms, rather than rewriting the agreement to preserve arbitration. For financial advisors and their counsel, the case signals the importance of providing applicable arbitration rules at signing, avoiding one-sided damages waivers, and selecting reasonable forum provisions that align with client expectations.