## Facts

- Twenty-four investors, many of whom were customers of a related bank, purchased mutual funds through a securities affiliate.
- Investors alleged sales representatives misrepresented their affiliation and the safety of the investments, implying protections similar to insured bank deposits or government backing.
- The mutual funds declined in value, and investors allegedly lost principal.
- Most investors signed written client agreements containing pre-dispute arbitration clauses; a few did not sign arbitration agreements.
- Investors sued in California state court for fraud and related claims and opposed arbitration, asserting fraud in the execution (i.e., deception about the essential character of the agreements) and broader fraud affecting the contracts.

## Issues

1. When an arbitration clause is governed by the Federal Arbitration Act (FAA), must California courts apply FAA § 4’s jury-trial procedure to disputes over the making of the arbitration agreement?
2. Do the California Constitution’s jury trial and due process provisions require a jury trial on the existence or validity of an arbitration agreement when arbitration is sought?
3. Did the investors present legally sufficient evidence of fraud in the execution to render the client agreements (including arbitration clauses) void, thereby defeating a petition to compel arbitration?

## Decision

- The California Supreme Court held that FAA § 4’s jury-trial procedure does not apply in California state courts.
- The court held there is no state constitutional right to a jury trial on the preliminary question whether an arbitration agreement exists or is enforceable.
- The court held that most investors failed, as a matter of law, to show fraud in the execution because they did not show reasonable reliance on misrepresentations about the essential character of what they signed.
- The court concluded that a limited subset of investors presented enough evidence of fraud in the execution to require further proceedings in the trial court under California’s summary motion procedures.
- The matter was remanded for proceedings consistent with these rulings, including trial-court factfinding where necessary.

## Legal Principles

- The FAA’s substantive arbitration rules apply to arbitration agreements involving interstate commerce, but state courts use their own procedural mechanisms to decide petitions to compel arbitration unless federal law clearly requires otherwise.
- In California, a petition to compel arbitration is decided “in a summary way” as a motion; the trial judge resolves factual disputes based on declarations and, when needed, live testimony.
- Neither FAA § 4 nor the California Constitution requires a jury trial on the formation or enforceability of an arbitration agreement at the petition-to-compel stage.
- Fraud in the execution (fraud in the inception) renders a contract void only if the signer reasonably relied on misrepresentations about the document’s essential character or contents; fraud in the inducement generally makes a contract voidable and does not, by itself, negate the existence of an arbitration agreement.
- Burdens: the proponent of arbitration must prove a written arbitration agreement by a preponderance of the evidence; the opponent must prove defenses (e.g., fraud, duress, unconscionability) that invalidate the agreement.

## Conclusion

The court held that California trial courts, applying California motion procedures, decide whether an FAA-governed arbitration agreement was made and is enforceable, without a jury. Most investors’ fraud-in-execution claims failed for lack of reasonable reliance on misrepresentations about the agreements’ essential character, but a limited subset was entitled to further trial-court factfinding on that defense.


Rosenthal v. Great W. Fin. Sec. Corp., 14 Cal. 4th 394 (Cal. 1996)