Arbitration Agreement Invoking NASD Rules Not Substantively Unconscionable

A California appellate court has held that an arbitration agreement invoking NASD arbitration rules is not substantively unconscionable and is therefore enforceable. However, it remanded the case to the trial court to determine whether there was sufficient evidence of fraud in the execution of the entire contract.

In Brown v. Wells Fargo Bank, NA, No. B196258, 2008 WL 4986125 (Cal. Ct. App. Nov. 25, 2008), Brown was a customer of Wells Fargo. Wells Fargo designated a staff member to coordinate banking services provided to the Browns, including the introduction of a financial planner. Eventually, Brown sued Wells Fargo, alleging wrongdoing stemming from the financial planning services. Wells Fargo moved to compel arbitration of Brown’s claims under their agreement. The trial court denied the motion due to the “procedural unconscionability” of the agreement.

The Court reversed, noting that other courts considering the same agreement and associated NASD arbitration rules found them to be valid, enforceable, and exhibiting “much more than the requisite minimal integrity.” See, e.g.,Parr v. Superior Ct., 139 Cal.App.3d 440, 447 (Cal. Ct. App. 1983) (finding no unconscionability in NASD arbitration agreement and rules).

Furthermore, the Court observed that the trial court had only examined the agreement for procedural unconscionability and had failed to determine whether the agreement was also substantively unconscionable when denying the motion as required by California law.

The Court rejected Brown’s allegations of “unfairness” from the narrow grounds for appeal, limits on depositions, and the lack of a reasoned award. It was unconvinced that any of the provisions challenged by Brown tended to favor one side, but rather found it was bilateral and consistent with California’s public policy of “encouraging expeditious, binding, and final resolutions of dispute through arbitration.” The Court also found no evidence that the constitution of NASD panels were inherently biased or that the agreement limited the availability of punitive damages.

The Court reversed and remanded the matter for a determination of whether the agreement was void based on fraud in the execution, noting that it was a factual issue required to resolve the petition to compel arbitration and was for the trial court to decide.