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Kloss vs. Edward D. Jones & Co., 310 Mont. 123 (6/13/03)

Kloss v. Edward D. Jones & Co., 310 Mont. 123; 54 P.3d 1 (Mont., 6/13/02). Agreement to Arbitrate * Arbitration Agreements (Customer Agreement) * Constitutional Issues (Jury Trial) * Contractual Issues (Contract of Adhesion; Unconscionability) * Enforceability * Fiduciary Standards * Waiver * Misrepresentations/Omissions.

Under Montana law, an agreement to arbitrate will not be enforced against the weaker party where the agreement is not within the reasonable expectations of the party or when considered in its context unduly oppressive, unconscionable or against public policy.

Although this decision was rendered in June 2002, it only came to our attention recently with the January 2003 filing of a Petition for Writ of Certiorari by Edward Jones. Kloss, a 95-year-old widow, had accounts with Edward Jones containing arbitration provisions. She signed detachable signature cards acknowledging receipt of the account agreements and incorporating the agreement’s arbitration clauses by reference. The District Court compelled arbitration.

On appeal, Kloss argued that the arbitration agreement was a contract of adhesion and that a waiver of her Constitutional right to a jury trial should not be presumed from the signing of a contract of adhesion. Kloss further argued that the broker had a fiduciary duty to explain the arbitration agreement.

In reversing the District Court, the Supreme Court concludes that the arbitration agreement was in fact a contract of adhesion and that, since arbitration clauses are an industry-wide practice, Kloss would have been excluded from the securities markets unless she accepted the agreement to arbitrate. While contracts of adhesion in standardized forms of agreement are not per se unenforceable, they will not be enforced against the weaker party when arbitration is not within the reasonable expectations of the party or, if within reasonable expectations, when considered in context, the arbitration clause is unduly oppressive, unconscionable or against public policy.

Here, the Court finds the contract to be beyond Kloss’ reasonable expectation, concluding that she relied on the broker to explain everything in her account and that the broker did not explain the arbitration provisions, deeming it not to be a significant feature of the account.

The Supreme Court also holds that the broker had a fiduciary duty to explain the consequences of the arbitration provisions. Under Montana law, a fiduciary relationship is created when a broker has discretion to buy and sell in the client’s account. The Court finds that the broker had discretion, based upon the testimony of Kloss that the broker had sold securities without consulting with her.

More importantly, however, is that the Court deems this account to be discretionary based upon the “Liquidation of Collateral or Account” provision of the account agreement which states: “You may sell any or all property held in any of my accounts and cancel any open orders for the purchase or sale of any property without notice, in the event of my death or whenever in your discretion you consider it necessary for your protection.”

(EIC: a copy of Edward Jones’ Certiorari Petition (Dkt. No. 02-1112, filed 1/23/03), which runs almost 40 pages, has been included in SLC Ref. No. 2003-10-04.)



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