Original proceedings; petition for a writ of mandate to challenge an order of the Superior Court of Orange County, Derek W. Hunt, Judge. Petition granted, writ issued. (Super. Ct. No. 30-2008-00107451).
The opinion of the court was delivered by: Fybel, J.
CERTIFIED FOR PUBLICATION
Plaintiffs and petitioners Claudio Parada and Elizabeth Garcia Parada (the Paradas), Fernando Perez and Jeanette Perez (the Perezes), and Sergio Navarrete (collectively, Petitioners) seek a writ of mandate to overturn the order compelling them to arbitrate their claims against defendants and real parties in interest Monex Deposit Company, Monex Credit Corporation (collectively, Monex), and Terry Parsons. We grant the petition and order the issuance of a writ of mandate.
Petitioners invested substantial sums of money through Monex, which deals in precious metals. When making their initial investments, Petitioners signed form agreements (referred to as Atlas Account Agreements) requiring any disputes with Monex to be arbitrated before a panel of three arbitrators from the Judicial Arbitration and Mediation Service (JAMS) and prohibiting consolidation or joinder of claims. At that time, the Paradas were school teachers, Fernando Perez worked as a driver for Federal Express, and Navarrete was a school custodian. Petitioners lost their entire investments with Monex. They sued Monex and Parsons for causes of action including constructive fraud, commodities fraud, and violation of the California unfair competition law (UCL) (Bus. & Prof. Code, § 17200 et seq.).
We hold the paragraphs in the Atlas Account Agreements requiring arbitration before a panel of three arbitrators from JAMS and prohibiting consolidation or joinder of claims are unconscionable and therefore unenforceable. Because those unconscionable paragraphs cannot be severed from the rest of the arbitration provisions, Petitioners cannot be compelled to arbitrate their claims against Monex and Parsons.
I. The Atlas Account Agreements
Monex is a precious metals dealer. According to Monex, "[i]t offers broadly two types of services: (i) customers can purchase precious metals for cash delivery; or (ii) they can buy commodities for cash storage, buy commodities on credit, or borrow commodities through so-called "Atlas Accounts.‟" Monex does not require investors to sign account agreements for cash transactions. For credit transactions, Monex requires investors to open an Atlas account and sign a Monex Atlas account agreement.
An Atlas account agreement consists of a purchase and sale agreement and a loan, security and storage agreement. Both agreements include identical 11-paragraph arbitration provisions. The first paragraph of the arbitration provisions states: "The parties agree that any and all disputes, claims or controversies arising out of or relating to any transaction between them or to the breach, termination, enforcement, interpretation or validity of this Agreement, including the determination of the scope or applicability of this agreement to arbitrate, shall be submitted to final and binding arbitration before JAMS, or its successor, in Orange County, California, in accordance with the laws of the State of California for agreements made in and to be performed in California (including, without limitation, the California Arbitration Act)."
Paragraph 15.11, subparagraph e of the purchase and sale agreement and paragraph 31.5 of the loan, security and storage agreement state: "The parties agree that the arbitration shall be heard by and determined by a panel of three (3) arbitrators. Nominations shall take place within thirty (30) days of the date that the dispute or controversy is at issue, that is, the day upon which all parties to the dispute or controversy have answered all claims and cross-claims. The parties will each select an arbitrator from JAMS list of arbitrators in Orange County, California. The selected arbitrators shall then select a third arbitrator from that list who shall act as Chairperson of the panel. The Chairperson shall be a retired judge of either the California Superior Court or any United States District Court in California." We refer to these paragraphs as the Arbitration Panel paragraphs.
Paragraph 15.11, subparagraph h of the purchase and sale agreement and paragraph 31.8 of the loan, security and storage agreement state: "Disputes and controversies between the parties to this Agreement shall not be joined or consolidated with the disputes or controversies of any person not a party to this Agreement. No party may attempt to assert claims on behalf of a class or group of persons." We refer to these paragraphs as the No Consolidation paragraphs.
The arbitration provisions state, "the arbitration shall be conducted in accordance with the provisions of JAMS Comprehensive Arbitration Rules and Procedures in effect at the time of filing the demand for arbitration." A copy of those JAMS rules and procedures are not attached to the Atlas Account Agreements. The JAMS rules and procedures require the parties to deposit the fees and expenses for arbitration before the hearing, and provide that if a party fails to deposit his or her pro rata or agreed-upon share of fees and expenses, the arbitrator may preclude that party from presenting evidence of an affirmative claim at the hearing.
Paragraph 15.11, subparagraph i of the purchase and sale agreement and paragraph 31.9 of the loan, security and storage agreement state: "The parties agree that they will share equally in the arbitration costs, subject to the arbitrators‟ discretion to allocate the costs of the arbitration, including the fees of the arbitrators and the parties[‟] reasonable attorney‟s fees, between the parties in any proportion."
Paragraph 16, subparagraph l of the purchase and sale agreement and paragraph 36, subparagraph m of the loan, security and storage agreement state: "I affirm that I have read and understand the foregoing and agree to submission of all disputes, claims or controversies arising out of or relating to my transactions with MDC [Monex] or to this Agreement to neutral arbitration in accordance with the provisions of this Agreement."
II. Petitioners Invest Through Monex
Each Petitioner opened an Atlas account with Monex in 2006. The Paradas were school teachers with a combined annual income of about $66,000 in September 2008.*fn1 They opened their Monex Atlas account on February 13, 2006 with an initial investment of $4,000 and ultimately invested over $140,000 through Monex.
When the Paradas opened their Monex Atlas account, a Monex representative (defendant and real party in interest Parsons), presented them with the purchase and sale agreement and the loan, security and storage agreement. Parsons told the Paradas, "they did not need to sign the Atlas Account Agreements if they intended on purchasing the precious metals for personal delivery." (Boldface omitted.) Parsons also explained the risks involved in investing in precious metals. Parsons told the Paradas, "they could take the Atlas Account Agreements home and review them and then call [him] with any questions before opening an account." The Paradas signed the Atlas Account Agreements at that time, and their account was opened. The Paradas alleged they purchased almost $2.5 million in metals on credit, and lost at least $113,000 in "out of pocket losses" from their Monex Atlas account.
Fernando Perez was a driver for Federal Express. He and his wife, Jeanette Perez, had a combined annual income of about $70,000 in September 2008. The Perezes opened a Monex Atlas account in March 2006 with a $30,000 check and ultimately invested a total of $43,000. They lost about $44,000 from their Monex Atlas account.
Fernando Perez first contacted Parsons about investing in precious metals through Monex in February 2006. Parsons agreed to mail Perez the purchase and sale agreement and the loan, security and storage agreement and told Perez he "did not need to sign the Atlas Account Agreements if he intended on purchasing the precious metals for personal delivery." (Boldface omitted.) The Perezes signed the Atlas Account Agreements on March 23, 2006. On March 24, 2006, Monex received signed Atlas Account Agreements from the Perezes, and, on March 29, a Monex representative signed those Atlas Account Agreements. On March 27, Parsons spoke with Fernando Perez, explained the "risks of doing business with . . . Monex," and asked him if he agreed to be bound by the Atlas Account Agreements. Fernando Perez "responded affirmatively." The Perezes made their first Atlas account purchase on March 27, 2006. Fernando Perez signed and submitted additional sets of Atlas Account Agreements on March 29 and May 16, 2006.
Navarrete opened a Monex Atlas account in April 2006. At that time, he worked as a custodian at an elementary school and had an annual salary of $55,000. On February 24, 2006, Navarrete telephoned Parsons and expressed interest in purchasing precious metals. Parsons explained the risks of investing in precious metals and investing through Monex. Parsons told Navarrete that "if he wished to finance purchases of precious metals and/or store them through Monex, he would have to review and sign the Atlas Account Agreements," but "he did not need to sign the Atlas Account Agreements if he intended on purchasing the precious metals for personal delivery" (boldface omitted). After the telephone conversation, Parsons had the Atlas Account Agreements mailed to Navarrete.
Parsons spoke by telephone with Navarrete on March 16, 2006, and further discussed investing in precious metals. Parsons met in person with Navarrete on April 11 and provided him oral disclosures of "various terms and risks associated with Atlas Account transactions." Parsons offered Navarrete another copy of the Atlas Account Agreements, and Navarrete "indicated" he had already reviewed the Atlas Account Agreements mailed to him. Parsons did not explain or discuss any of the terms of the Atlas Account Agreements.
On April 11, 2006, Navarrete made his first Monex Atlas account purchase. Navarrete signed the Atlas Account Agreements on April 14, 2006, and a Monex representative signed them on April 18.
Navarrete initially invested $30,000 through Monex. About three months after the initial investment, he followed Parsons‟s recommendation by obtaining a loan, secured by his home, for $100,000 and investing the loan proceeds through Monex. Navarrete lost "in excess of $123,000 or $130,000" in his Monex Atlas account.
PROCEEDINGS IN THE TRIAL COURT
In the complaint, filed in June 2008, Petitioners sought damages from Monex and Parsons for losses arising out of their Monex Atlas account investments. The complaint alleged causes of action against Monex and Parsons for fraudulent misrepresentation, deceit, constructive fraud, commodities fraud, breach of fiduciary duty, negligent misrepresentation, negligence, and unfair competition under the UCL.*fn2
Monex moved to compel arbitration based on the arbitration provisions of the Atlas Account Agreements. Petitioners opposed the motion, arguing, among other things, the requirement of a three-judge panel was substantively unconscionable because that requirement made arbitration so costly as to make it "difficult or impossible to vindicate a claim."
The trial court granted the motion to compel arbitration. Petitioners filed a petition for writ of mandate with this court. We issued an order to show cause, real parties in interest Monex and Parsons filed a return, Petitioners filed a reply, and the case was orally argued before us.
I. The Court Decides the Issue of Unconscionability in This Case
As a threshold matter, we must decide who-the trial court or the arbitration panel-determines whether the arbitration provisions in the Atlas Account Agreements are unconscionable. Monex argues the parties agreed the arbitration panel, not the court, must decide that issue. Petitioners argue unconscionability must always be decided by the court, notwithstanding the parties‟ agreement otherwise.
If the party resisting arbitration is claiming the arbitration clause is unconscionable, a court must decide this claim. (Discover Bank v. Superior Court (2005) 36 Cal.4th 148, 171.) It has been held the parties can agree otherwise (Murphy v. Check 'N Go of California, Inc. (2007) 156 Cal.App.4th 138, 144) on the basis that "[b]ecause the parties are the masters of their collective fate, they can agree to arbitrate almost any dispute- even a dispute over whether the underlying dispute is subject to arbitration" (Bruni v. Didion (2008) 160 Cal.App.4th 1272, 1286). We withhold our opinion whether we agree with our colleagues in Murphy v. Check 'N Go of California, Inc., supra, 156 Cal.App.4th 138 and Bruni v. Didion, supra, 160 Cal.App.4th 1272. To permit the arbitrator to decide the issue of arbitrability, even if the contract so provides, raises issues we need not reach in this case. One such issue that particularly concerns us is whether having the arbitrator decide the issue of arbitrability presents the arbitrator with a conflict of interest.
We do not reach the question whether parties to a contract can agree to have the arbitrator decide unconscionability. An agreement to arbitrate the issue whether a dispute is subject to arbitration-i.e., the question of arbitrability-must be clear and unmistakable. (Howsam v. Dean Witter Reynolds, Inc. (2002) 537 U.S. 79, 83; see also First Options of Chicago v. Kaplan (1995) 514 U.S. 938, 944 ["Courts should not assume that the parties agreed to arbitrate arbitrability unless there is "clea[r] and unmistakabl[e]‟ evidence that they did so"].) For reasons we will explain, the arbitration provisions at issue here did not meet that standard with respect to unconscionability.
The first paragraph of the arbitration provisions in the Atlas Account Agreements states: "The parties agree that any and all disputes, claims or controversies arising out of or relating to any transaction between them or to the breach, termination, enforcement, interpretation or validity of this Agreement, including the determination of the scope or applicability of this agreement to arbitrate, shall be submitted to final and binding arbitration before JAMS . . . ." (Italics added.) Monex argues that by this provision the parties agreed the arbitration panel must decide the issue of unconscionability. We disagree.
In Baker v. Osborne Development Corp. (2008) 159 Cal.App.4th 884 (Baker), the court concluded an agreement to arbitrate did not clearly and unmistakably provide that issues of enforceability would be decided by the arbitrator. The arbitration provision stated: ""Any disputes concerning the interpretation or the enforceability of this arbitration agreement, including without limitation, its revocability or voidability for any cause, the scope of arbitrable issues, and any defense based upon waiver, estoppel or laches, shall be decided by the arbitrator.‟" (Id. at pp. 888-889.) However, the agreement also contained a severability provision applicable if """any provision of this arbitration agreement shall be determined by the arbitrator or by any court to be unenforceable. . . . "‟" (Id. at p. 891.) The Baker court concluded the arbitration agreement did not ""clearly and unmistakably‟" reserve to the arbitrator the issue whether the arbitration agreement was enforceable because "although one provision of the arbitration agreement stated that issues of enforceability or voidability were to be decided by the arbitrator, another provision indicated that the court might find a provision unenforceable." (Id. at pp. 893-894.)
This case is similar to Baker. The Atlas Account Agreements include a severability provision stating, "[i]n the event that any provision of this Agreement shall be determined by a trier of fact of competent jurisdiction to be unenforceable in any jurisdiction, such provision shall be unenforceable in that jurisdiction and the remainder of this Agreement shall remain binding upon the parties as if such provision was not contained herein." (Italics added.) In contrast to Baker, the arbitration provisions of the Atlas Account Agreements refer to "arbitration" that is "heard by and determined by a panel of three (3) arbitrators." Use of the term "trier of fact of competent jurisdiction" instead of "arbitration panel" or "panel of three (3) arbitrators" suggests the trial court also may find a provision, including the arbitration provision, unenforceable. The arbitration provisions of the Atlas Account Agreements, as the one in Baker, did not ""clearly and unmistakably‟ reserve" (Baker, supra, 159 Cal.App.4th at p. 894) to the arbitration panel the issue whether those arbitration provisions were unenforceable.
II. Review by Petition for Writ of Mandate Is Appropriate
Monex argues Petitioners have failed to show unique, extraordinary, or emergency circumstances required for review by petition for writ of mandate. We ...