## Facts

- Several California municipal entities opened securities accounts with a brokerage firm in 1986 and executed standard client agreements containing broad arbitration clauses covering “all controversies” concerning account transactions or the agreements.
- Lawndale, San Marino, Palmdale, and the Palmdale Redevelopment Agency’s agreements were signed by Clarence Raymond Wood, who performed financial work for those entities.
- Three Valleys Municipal Water District’s agreement was signed by its board president, Muriel F. O’Brien.
- The arbitration clause included a sentence stating the agreement to arbitrate did not waive a judicial forum “where such a waiver would be void under the federal securities laws.”
- In 1988, plaintiffs sued in federal district court alleging wrongful account management and losses exceeding $8 million, asserting federal securities claims, RICO claims, and state-law claims.
- The brokerage firm moved to stay the case and compel arbitration.
- Plaintiffs argued (1) the agreements were void because Wood lacked authority to bind the entities, and (2) federal securities claims were outside the arbitration clause due to the non-waiver sentence.

## Issues

1. When plaintiffs dispute that an arbitration agreement was ever formed because the signatory lacked authority under state law, must the court or the arbitrator decide that formation/authority question?
2. If a valid agreement exists, does a broadly worded arbitration clause require arbitration of federal securities law claims notwithstanding a non-waiver sentence referring to waivers that would be void under federal securities laws?

## Decision

- The Ninth Circuit reversed and remanded.
- The court held that when the challenge goes to the existence of any agreement to arbitrate (including lack of authority to bind), the district court must decide the formation/authority dispute before compelling arbitration.
- The court held that, if a valid arbitration agreement is found, the clause encompasses federal securities law claims and those claims must be compelled to arbitration along with the RICO and state-law claims.

## Legal Principles

- Arbitration is based on consent; a party may not be compelled to arbitrate a dispute absent an agreement to arbitrate.
- Under the Federal Arbitration Act, disputes that go to whether an agreement to arbitrate was ever made (e.g., alleged lack of actual or apparent authority to contract) are for the court to decide as a threshold matter.
- Distinct from formation disputes, challenges to the validity or enforceability of an admittedly formed contract may be resolved in arbitration depending on the nature of the challenge.
- Broad arbitration language covering “all controversies” arising from securities account transactions generally reaches statutory claims, including federal securities claims, absent a clear congressional bar.
- A non-waiver sentence preserving a judicial forum only where a waiver would be void under federal securities laws does not exclude federal securities claims once Supreme Court precedent recognizes those claims as arbitrable.

## Conclusion

The Ninth Circuit required judicial resolution of disputed contract formation based on alleged lack of authority before arbitration can be ordered, and held that if the brokerage agreements are valid, their broad arbitration clauses require arbitration of federal securities, RICO, and state-law claims.


Three Valleys Mun. Water Dist. v. E.F. Hutton & Co., 925 F.2d 1136 (9th Cir. 1991)