This appeal arises from a lawsuit alleging fraud and breach of fiduciary duty in connection with the purchase of annuities under various brokerage agreements. The defendant, Ameriprise Financial Services, LLC, moved to compel arbitration, but the district court denied the motion. The plaintiffs, John Marshall and his trust, argued that the arbitration clauses were procured by fraud in the execution. The district court had previously determined that California law governed the question of whether a valid arbitration agreement was formed. The case involves a dispute over whether the plaintiff, who claims to have dyslexia, was vulnerable enough to require the broker to specifically explain the arbitration provisions before he signed the agreements.
The Ninth Circuit began by reaffirming that under the Federal Arbitration Act, a district court must determine whether a valid agreement to arbitrate exists before ordering arbitration. The court noted that federal principles mandate the application of state-law principles of contract formation to this question. The court agreed with the district court that California law governs, as the plaintiff was a California resident, the interactions occurred in California, and the agreements were executed there. Under California law, a party can avoid arbitration by showing that their assent to the arbitration provision was procured by fraud in the execution. This requires establishing that the party was vulnerable and that the counterparty owed them a fiduciary duty to explain the existence and meaning of the arbitration provision. The court found that the record presented a genuine dispute of material fact regarding whether the plaintiff's dyslexia constituted a vulnerability substantial enough to trigger a fiduciary duty on the part of the broker. The plaintiff's declaration stated it would be 'difficult' for him to read, not that he could not do so, and the letter from his university days described his ability level as 'excellent.' Because the record is disputed as to whether the broker owed a fiduciary duty to orally communicate the arbitration provisions, the court could not resolve the issue as a matter of law.
The case is remanded to the district court for an evidentiary hearing to determine the nature of the relationship between the plaintiff and the broker and the extent of the plaintiff's disability at the time the arbitration agreements were executed. Until this factual dispute is resolved, the question of whether a binding arbitration agreement exists remains open. The decision clarifies that courts must proceed to a trial on arbitrability when there is a genuine dispute over the formation of a valid agreement, rather than dismissing the motion to compel based on incomplete factual records.
Podcast (federal-narrative-summaries): Play in new window | Download