Lewis v. Prudential-Bache Securities, Inc.

• Decision Date: 08 April 1986
• Citation: 225 Cal.Rptr. 69,179 Cal.App.3d 935
• Court: California Court of Appeals Court of Appeals
• Parties: Bernard L. LEWIS, et al., Plaintiffs and Respondents, v. PRUDENTIAL BACHE SECURITIES, INC. et al., Defendants and Appellants. DOO2107.

Page 69

225 Cal.Rptr. 69

179 Cal.App.3d 935

Bernard L. LEWIS, et al., Plaintiffs and Respondents, v. PRUDENTIAL BACHE SECURITIES, INC. et al., Defendants and Appellants.

DOO2107.

Court of Appeal, Fourth District, Division 1, California.

April 8, 1986.

Keesal, Young & Logan, Terry Ross and David Wiggins, Long Beach, for defendants and appellants.

Bernard L. Lewis, La Mesa, for plaintiffs and respondents.

WORK, Associate Justice.

Prudential Bache Securities, Inc. (Prudential) appeals a denial of its petition to compel arbitration of Lewis' class action complaint alleging Prudential fraudulently calculated interest charges on the basis of a 360-day year on margin accounts. We reverse, holding the claims should be arbitrated in accordance with the terms of the contracts underlying each margin account and that certification as a class action will not render arbitration an unworkable forum.

I

Bernard Lewis and the other named plaintiffs (jointly Lewis) maintained securities brokerage accounts in their individual names with Prudential, beginning in approximately February 1978. Between 1978 and 1979, the plaintiffs separately executed Prudential standard customer agreements to open margin accounts with Prudential. These identical agreements included a clause providing:

"Any controversy arising out of or relating to my account, to transactions with or for me or to this Agreement or the breach thereof ... shall be settled by arbitration in accordance with the rules then obtaining of either the American Arbitration Association or the Board of Governors of the New York Stock Exchange as I may elect. If I do not make such election ... within five (5) days after demand by you that I make such election, then you may make such election."

Lewis' class action alleges Prudential fraudulently charged excessive interest to its customers by calculating interest charges on the basis of a 360-day year, thus increasing the interest rates charged by 1/73 of the rate shown and overcharging the class members more than $500,000 per year. He charges Prudential deliberately concealed the higher interest rate in the monthly statements by showing interest charges in terms of an "average daily balance." Lewis also claims Prudential charged customers a fee of $1.25 to $2.50 on each transaction, fraudulently representing the charge as a tax or exchange fee where none was required, and that Prudential's conduct was a prohibited unfair trade practice. (Cal. Bus. & Prof. Code, § 17500).

Prudential asked Lewis to choose an arbitration forum pursuant to the customer agreement. Lewis declined and Prudential elected to be governed by rules adopted by the New York Stock Exchange (NYSE). Prudential demurred and petitioned to compel arbitration.

The trial court overruled the demurrer and denied the petition, reasoning this type of customer adhesion agreement is disfavored in California, and the 360-day interest year violates California public policy. It found the combination of public policy considerations and the adhesive status of the arbitration agreement supports not enforcing the arbitration clause.

II

Prudential contends the Federal Arbitration Act and federal case law preempt the field and mandate arbitration, and therefore state law principles regarding adhesion contracts and public policy are irrelevant. Alternatively, Prudential argues the arbitration clause is enforceable under California law, and there is no unconscionability or fraud in the inducement impeding enforcement of the arbitration clause.

Lewis claims both federal and state law recognize arbitration is an inappropriate forum for certain types of cases, such as this, having important public policy implications and an arbitrator cannot exercise sufficiently broad powers to adequately address the unfair trade practices and public policy issues in this action. In addition, Lewis contends the arbitration clause is unconscionable and that Prudential, by demurring to the complaint, waived its right to arbitration.

III

At the outset we dispose of the claim Prudential waived its right to arbitration by filing a demurrer as well as a petition to compel arbitration. The right to arbitration can be waived, only by choosing to litigate without attempting to enforce arbitration. In Keating v. Superior Court, 31 Cal.3d 584, 183 Cal.Rptr. 360, 645 P.2d 1192, reversed on other grounds sub nom. Southland Corp v. Keating (1984) 465 U.S. 1, 104 S.Ct. 852, 79 L. Ed.2d 1, the franchisor was held not to have waived its right to arbitration, although it had filed counterclaims and actions for unlawful detainer and participated in discovery, because it had raised arbitration as an affirmative defense in its answers to the original complaints. Similarly, Prudential responded to the original complaint by demanding the members of the class elect an arbitrator, and then filed both a petition to compel and a demurrer.

IV

The arbitration clause is also not invalidated by other allegedly invalid statements in the paragraph containing the arbitration clause. If a contract has several distinct objects, of which one at least is lawful, the contract is valid and enforceable as to the lawful object provided it is clearly severable from the rest. (Cal.Civ. Code, § 1599.) The arbitration clause here is severable from the allegedly illegal statements in this paragraph and is therefore enforceable.

V

Here the arbitration clause is part of a contract evidencing commerce and thus within the ambit of the Federal Arbitration Act. The Federal Arbitration Act, 9 United States Code section 2 provides: A written provision for arbitration in a "contract evidencing a transaction involving commerce ... shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." The act has been interpreted by the United States Supreme Court as "a congressional declaration of a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary." (Moses H. Cone Memorial Hosp. v. Mercury Const. (1983) 460 U.S. 1, 103 S.Ct. 927, 941, 74 L.Ed.2d 765.) The act creates "a body of federal substantive law of arbitrability" applicable to any agreement within its coverage, and establishes "as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration...." (Id., 103 S.Ct. at p. 941.) Thus, state laws invalidating arbitration agreements covered by the act violate the Supremacy Clause, article VI, clause 2 of the United States Constitution. (Southland Corp. v. Keating, supra, 104 S.Ct. 852.)

The Federal Arbitration Act was specifically applied to an arbitration clause in an adhesion contract between a brokerage firm and a securities customer in the recent case of Dean Witter Reynolds Inc. v. Byrd (1985) 470 U.S. 213, 105 S.Ct. 1238, 84 L.Ed.2d 158. This case concerned a securities customer who brought suit after his $160,000 account declined by more than $100,000 over a six-month period, alleging violations of federal securities laws and pendent state law claims. The court found the Arbitration Act mandated that the district court compel arbitration of all arbitrable claims even though the result could be the inefficient maintenance of separate actions. The court held the act left "no place for the exercise of discretion by a district court...." (Id., at p. 1241.)

The court in Dean Witter did not discuss whether adhesion contracts should be subjected to close judicial scrutiny (id., at p. 1240, fn. 2), but Division Three of this court, in yet another case involving a brokerage firm adhesion contract, addressed the issue. (Tonetti v. Shirley, 173 Cal.App.3d 1144, 219 Cal.Rptr. 616.) In Tonetti, the court reversed the trial court's refusal to compel arbitration of a dispute between a stockbroker and his employer, Kidder, Peabody, by the NYSE. The court found the weight of authority compelled it to conclude the act rendered state law principles regarding adhesion contracts and arbitration irrelevant. Even under state law, the clause will be upheld unless it does not fall within the reasonable expectations of the parties, or is unconscionable. (Graham v. Scissor-Tail, Inc., 28 Cal.3d 807, 819-820, 171 Cal.Rptr. 604, 623 P.2d 165.)

VI

Without specifically identifying one that is relevant, Lewis argues public policy requires removing this issue from the Federal Arbitration Act and into a judicial forum. ¹ The United States Supreme Court in Dean Witter, supra, 105 S.Ct. 1238, 1241, recognized past cases have identified a federal interest "sufficiently compelling" to outweigh the mandate of the Arbitration Act. Lewis contends the use of the 360-day year is an equivalent interest, analogizing it to arbitration in antitrust cases, which, because of "the public interest in enforcement of the antitrust laws," have been held to be "inappropriate subjects for arbitration...." (Hunt v. Mobil Oil (1977) 444 F.Supp. 68, 69.) Lewis equates the California Unfair Trade Practice Law (Bus. & Prof. Code §§ 17500 and 17535) to state antitrust law. This analogy is not apt.

In the leading case of American Safety Equipment Corp. v. J.P. Maguire & Co. (2d Cir.1968) 391 F.2d 821, the Second Circuit stated the question in antitrust cases is whether the federal statutory right to be enforced is appropriate for an arbitration forum. It found antitrust laws were for public protection, not merely private, and that the national interest in a competitive economy is substantial. Further, the arbitration clause was not only contained in a contract of adhesion, the disputed claim to be resolved was whether the contract itself was a product of monopolistic overreaching in violation of federal antitrust laws. A secondary, practical concern was that "[a]ntitrust violations can affect hundreds of thousands--perhaps millions--of people and inflict staggering economic damage" an...